SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Quarter Ended July 31, 1996 Commission File Number 0-8354
IMGE, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 95-2094565
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Century Blvd.
West Palm Beach, FL 33417
(Address of principal executive office)
(561) 640-3133
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
Number of shares outstanding of the Registrant's Common Stock,
par value $.05 per share, as of September 10, 1996: 17,600,477
This report contains a total of 12 pages.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have
been prepared by the registrant, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations; however, the registrant believes that
the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and
the notes thereto included in the registrant's annual report on
Form 10-K for the fiscal year ended October 31, 1995.
The condensed financial statements for the interim
periods included herein, which are unaudited, include, in the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial
position and results of operations of the registrant for the
periods presented. The results of operations for interim periods
should not be considered indicative of results to be expected for
the full year.
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) (Note 2)
July 31, Oct. 31,
ASSETS 1996 1995
------ --------- ---------
Current assets:
Cash and cash equivalents $10,903 $ 15
Accounts receivable 1,187 16
Inventories (Note 4) 934 -
Investment in IMNET Systems, Inc. (Note 3) - 12,023
------- -------
Total current assets 13,024 12,054
Property and equipment, net of $11
accumulated depreciation 535 -
Intellectual property, net of $6 amortization 517 -
Other 75 -
------- -------
$14,151 $12,054
======= =======
LIABILITIES
-----------
Current liabilities:
Accounts payable and other $ 894 $ 17
Accrued warranty expense 352 -
Royalty liability (Note 2) 800 -
Notes payable by subsidiary (including
$280 and $251 of accrued interest) 658 629
------- -------
Total current liabilities 2,704 646
Convertible notes due 2000 (including
$195 and $189 of accrued interest) 501 476
Minority interest 87 -
------- -------
Total liabilities 3,292 1,122
------- -------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par-shares
authorized 1,000,000; outstanding none - -
Common stock, $.05 par-shares authorized
24,000,000; outstanding 17,600,477 879 879
Additional paid-in capital 29,295 29,295
Net unrealized gain on securities
available for sale - 12,023
Deficit (19,315) (31,265)
------- -------
Total stockholders' equity 10,859 10,932
------- -------
$14,151 $12,054
======= =======
_______
See accompanying notes to consolidated financial statements.
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data) (Note 2)
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Sales $ 2,059 $ - $ 2,059 $ -
Cost of sales 1,480 - 1,480 -
------- ------- ------- -------
Gross profit 579 - 579 -
Operating expenses (696) (24) (821) (72)
Gain from sale of IMNET
Systems, Inc. stock
(Note 3) 2,315 - 11,955 -
Interest and other income,
net of interest expense 144 7 224 21
Minority interest 13 - 13 -
------- ------- ------- -------
Net income (loss) $ 2,355 ($ 17) $11,950 ($ 51)
======= ======= ======= =======
Net income (loss) per
common share $0.13 ($0.00) $0.68 ($0.00)
====== ====== ====== ======
Average number of common
shares outstanding 17,600,477 17,600,477 17,600,477 17,600,477
========== ========== ========== ==========
_______
See accompanying notes to consolidated financial statements.
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Note 2)
Nine Months Ended
July 31,
-------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,950 ($ 51)
Adjustments to reconcile net income
to net cash provided by
operating activities:
Gain from sale of IMNET Systems,
Inc. stock (11,955) -
Depreciation and amortization 17 -
Minority interest (13) -
Changes in assets and liabilities,
net of effects from acquisition:
Increase in accounts receivable (1,171) (24)
Increase in inventories (39) -
Increase in other assets (75) -
Increase in accounts payable
and other 873 5
Increase in accrued interest
on notes payable 54 51
------- -------
Net cash used by operating activities (359) (19)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of
IMNET Systems, Inc. stock 11,955 -
Payment for acquisition (500) -
Additions to property and equipment (208) -
------- -------
Net cash provided by investing activities 11,247 -
------- -------
Net increase (decrease) in cash during
the period 10,888 (19)
Cash at the beginning of the period 15 26
------- -------
Cash at the end of the period $10,903 $ 7
======= =======
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Note 2)
(concluded)
Nine Months Ended
July 31,
-------------------
1996 1995
-------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Acquisition of nStor:
Inventories $ 895 $ -
Property and equipment 338 -
Intellectual property 523 -
Accrued warranty expense (356) -
Royalty liability (800) -
Minority interest (100) -
------- -------
Cash paid $ 500 $ -
======= =======
_______
See accompanying notes to consolidated financial statements.
IMGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
Since June 3, 1996, IMGE, Inc. (the "Company"), through a newly-formed 80%
owned subsidiary, nStor Corporation, Inc. ("nStor" -
Note 2) has been engaged in the production and marketing of a full
line of robust, fault tolerant storage devices known as RAID
subsystems (Redundant Array of Independent Disks) which provide
users with high capacity storage and uninterrupted access to data.
nStor's products are sold through a network of original equipment
manufacturers and distributors located worldwide.
(2) ACQUISITION
Effective June 3, 1996, nStor (Note 1) acquired certain assets and
assumed certain liabilities of Seagate Peripherals, Inc.
("Seagate") for a purchase price of $1,300,000, consisting of
$500,000 in cash and an estimated $800,000 royalty liability to the
seller, payable based upon sales of certain storage systems by
nStor during the period from October 1, 1996 through December 31,
1997.
The acquisition has been accounted for as a purchase, with assets
acquired and liabilities assumed recorded at estimated fair values
and the results of nStor's operations included in the Company's
consolidated financial statements from the effective date of
acquisition.
(3) INVESTMENT IN IMNET SYSTEMS, INC. ("IMNET")
Prior to October 1992, the Company, through a wholly-owned
subsidiary (the "Subsidiary"), was engaged in the design,
manufacture, marketing and servicing of PC based document image
processing systems. In October 1992, the assets of the Subsidiary
were exchanged for an investment interest and certain other rights
and payments in IMNET, a privately owned corporation. During 1993,
the Company wrote off its entire investment in IMNET.
As a result of an initial public offering by IMNET, the Company's
investment, consisting of 473,813 shares of IMNET common stock,
became actively tradeable on the NASDAQ National Market commencing
in January 1996. As part of a secondary public offering, on
February 15, 1996, the Company sold 400,000 shares of IMNET and
recognized a gain during the second quarter of $9,640,000, based on
the receipt of net proceeds of that amount. During the third
quarter of 1996, the Company sold its remaining 73,813 shares of
IMNET and recognized a gain of $2,315,000.
(4) INVENTORIES
Inventories at July 31, 1996 are summarized as follows (in
thousands):
Raw materials $ 609
Work-in-process 321
Finished goods 105
------
1,035
Less reserve for
inventory obsolescence 101
------
$ 934
======
(5) INCOME TAXES
As of December 31, 1995, the Company's most recent tax year end,
there were unused net operating loss carryforwards (the "NOL's")
for tax purposes of approximately $13.1 million for which no
financial statement benefit had been recognized. As a result, no
provision for income tax expense has been recorded on the Company's
fiscal 1996 income since the Company expects to be able to utilize
the NOL's to offset year to date taxable income. The remaining
NOL's, approximating $1.2 million, principally expire in 2006. In
addition, the Company has research and development tax credit
carryforwards of $452,000 which expire from 2002 through 2005.
(6) CONTINGENCIES
See Part II, Item 1 for a discussion of the Company's Legal
Proceedings.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Results for the 1996 periods include the operations of nStor from
June 3, 1996, the effective date of nStor's acquisition of certain
net assets from Seagate (see Note 2 to Consolidated Financial
Statements). As a result of the acquisition, nStor currently
produces and markets a full line of robust, fault tolerant storage
devices known as RAID subsystems (Redundant Array of Independent
Disks) which provide users with high capacity storage and
uninterrupted access to data. Allocations have been made to
reflect the estimated fair values of the net assets acquired
resulting in asset bases which differ from the previous owner. In
addition, certain of nStor's operating policies and accounting
procedures are different from those of the previous owner.
Accordingly, comparative financial data of nStor's business for
periods prior to June 3, 1996 are not presented since they would be
neither comparable nor informative.
From the date the Company disposed of its imaging business in
October 1992 for shares in IMNET (see Note 3 to Consolidated
Financial Statements) until the nStor acquisition in June 1996, the
Company's only activities consisted of monitoring its investment in
IMNET and evaluating potential business opportunities.
Accordingly, operating results for the 1995 periods consist of
administrative and interest expense, partially offset by revenues
from financial support which IMNET had agreed to provide for
minimal operational costs and essential activities of the Company.
This financial support ceased when the Company was able to sell its
shares in IMNET.
Results of Operations
During the third quarter ended July 31, 1996, the Company reported
net income of $2,355,000, compared to a net loss of $17,000 during
the corresponding quarter in 1995. For the nine months ended July
31, 1996, the Company's net income amounted to $11,950,000,
compared to a net loss of $51,000 during the same period last year.
Results for the 1996 periods include gains of $2,315,000 and
$11,955,000 during the three and nine months ended July 31, 1996,
respectively, from sales of 100% of the Company's investment in
IMNET.
During its initial two months of operations, nStor's sales amounted
to $2,059,000 (net of returns), principally through a network of
original equipment manufacturers ("OEM's") and distributors located
worldwide. nStor has recently entered into agreements with three
new major OEM's. Based on preliminary forecasts received pursuant
to these agreements, future sales growth opportunities are expected
to be realized.
Gross margins during the period amounted to 28%. nStor's gross
margins are dependent, in part, on product mix which is anticipated
to fluctuate from quarter to quarter. However, nStor expects to
report increased gross margins in future quarters based on a
greater emphasis on selling higher margin enhanced storage devices.
The Company's operating expenses during the 1996 periods include
$645,000 incurred by nStor during its initial two month period.
nStor's operating expenses consist of research, development and
other engineering costs and, sales, marketing and administrative
costs. Operating expenses are expected to experience slight
increases in future quarters as nStor continues to focus on
improvements and innovations to its product line and expansion of
its customer base.
Interest and other income, net of interest expense, increased by
$137,000 during the three months ended July 31, 1996 as compared to
the corresponding quarter of 1995 and by $203,000 during the
corporate nine month periods. The increases reflect additional
interest income earned on the net proceeds received on the sale of
IMNET during fiscal 1996.
Liquidity and Capital Resources
At July 31, 1996, the Company's cash and cash equivalent amounted
to $10.9 million of which $10.6 million was invested in high
quality short-term corporate securities. The Company expects to
pursue this investment strategy while it continues to evaluate
potential acquisitions and other business opportunities. In the
event the Company effects one or more acquisitions or other
business transactions, financing thereof may require utilization of
the Company's cash balances and additional sources of capital may
be required.
Net cash used by operating activities increased to $359,000 during
the nine months ended July 31, 1996, compared to $19,000 during the
corresponding period of fiscal 1995, principally attributable to
$1,171,000 of accounts receivable, partially offset by $873,000 of
accounts payable and other liabilities as of July 31, 1996. nStor
did not acquire any accounts receivable nor assume any accounts
payable as a result of the acquisition from Seagate. Net cash
provided by investment activities amounted to $11,247,000 during
the current period, primarily as a result of $11,955,000 of net
proceeds received on the sale of IMNET, less $500,000 paid in
connection with the acquisition from Seagate.
Pursuant to an agreement with nStor, on June 18, 1996 (the "Closing
Date"), the Company acquired 80% of nStor's outstanding shares of
capital stock from nStor for $500,000 in cash. On the Closing
Date, nStor remitted this amount to Seagate in payment of the cash
portion of the purchase price of the net assets acquired from
Seagate. R. Daniel Smith, president of nStor, owns the remaining
20% of the outstanding shares of capital stock of nStor.
On the Closing Date, the Company loaned $316,000 to nStor pursuant
to a Promissory Note, which matures on September 17, 1996, in order
to acquire certain additional inventory from Seagate. The Company
also provided a $1,500,000 revolving line of credit (the "Line of
Credit") pursuant to a Promissory Note, which matures on June 17,
1999. As of July 31, 1996, the outstanding principal balance under
the Line of Credit amounted to $590,000. Management believes that
nStor's cash flow generated from operations, funds available under
the Line of Credit and obtainable bank credit lines will be
sufficient to satisfy nStor's working capital and capital
expenditure needs for at least the next twelve months.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-Q, that are not related to historical
results, are forward looking statements. Actual results may differ
materially from those projected or implied in the forward looking
statements. Further, certain forward looking statements are based
upon assumptions of future events which may not prove to be
accurate. These forward looking statements involve risks and
uncertainties including but not limited to nStor's future cash
flows, gross margins and operating costs, the effect of conditions
in the technology industry and the economy in general, legal
proceedings, as well as certain other risks. Subsequent written
and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere
described in this Form 10-Q.
Part II. Other Information
Item 1 - Legal Proceedings
In June and August 1996, the Company, its Chairman of the Board,
nStor and its president were served with two separate Complaints,
in which the plaintiffs claim to have contractual and proprietary
interests in the prospect of a transaction to purchase certain net
assets acquired by nStor (see Note 2 to Consolidated Financial
Statements) and to have an investment agreement with nStor. The
plaintiffs seek damages, punitive damages, and equitable relief for
alleged interference with the plaintiffs' alleged rights. Both
cases are in preliminary stages; however, the Company is unaware of
any facts that would support any of the plaintiff's claims and,
accordingly, the Company believes that the claims are without
merit.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits:
There are no exhibits to be filed with this Report.
(b) Reports on Form 8-K:
On July 2, 1996, the registrant filed a Form 8K to report
Item 2 - Acquisition or Disposition of Assets, regarding
the acquisition of certain net assets.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registration has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
IMGE, INC.
(Registrant)
September 13, 1996 /s/ Mark Levy
Mark Levy, President
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