-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Po5uVTH2bchNM1gs59tMC/XcT7nLQm+8L87KW9GM439+jsJ5iqOzmo1O0QzBUU/f 8wWBpJGoK2XfMUp51vHsAQ== 0000912057-96-015773.txt : 19960731 0000912057-96-015773.hdr.sgml : 19960731 ACCESSION NUMBER: 0000912057-96-015773 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960531 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960730 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW IMAGE INDUSTRIES INC CENTRAL INDEX KEY: 0000853706 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 954088548 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17928 FILM NUMBER: 96600846 BUSINESS ADDRESS: STREET 1: 2283 COSMOS CT CITY: CARLSBAD STATE: CA ZIP: 92009 BUSINESS PHONE: 6199309900 MAIL ADDRESS: STREET 1: 2283 COSMOS CT CITY: CARLSBAD STATE: CA ZIP: 92009 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _______________ FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): MAY 31, 1996 NEW IMAGE INDUSTRIES, INC. -------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 0-17928 95-4088548 ---------------- ------------ -------------- (STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.) 2283 COSMOS COURT, CARLSBAD, CALIFORNIA 92009 ------------------------------------------ ------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (619) 930-9900 NONE --------------------------------------------------------------- (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) - -------------------------------------------------------------------------------- Item 2. Acquisition or Disposition of Assets. On May 31, 1996, ("Effective Date") the transactions contemplated by an Agreement and Plan of Reorganization ("Agreement"), by and among New Image Industries, Inc. (the "Company"), a Delaware corporation, Wisdom Acquisition Corp. ("Sub"), a California corporation, a subsidiary of the Company, and Insight Imaging Systems, Inc. ("Insight"), a California corporation, and the related Agreement of Merger ("Merger Agreement") were consummated by the parties (which followed a closing of such transactions on May 17, 1996). Under the Merger Agreement, Sub was merged into Insight and Insight survived as a wholly- owned subsidiary of the Company. The Company accounted for the transaction as a pooling of interests. Insight, for the twelve-month period ended March 31, 1996, had sales in excess of $13 million. Insight was a privately-owned corporation headquartered in San Carlos, California, with software operations in Richmond, Virginia, and an optical assembly operation in Mission Viejo, California. Insight designs, manufactures, and markets imaging systems for dental offices. It has had success in generating rapid revenue growth in recent years, however, increases in marketing and other expenses have exceeded revenue growth. New Image management believes efficiencies can be realized from the combination of the two companies. The current Insight product line includes intraoral and extraoral video cameras, monitors, printers, mobile carts, and video capture, periodontal and restorative charting, and cosmetic imaging software. Insight camera systems are available in a variety of models: cart, portable, or wall-mounted systems. Its MultiLink network product links individual offices with a dentistry facility. At the Effective Date, the only class of Insight's capital stock with shares outstanding was its common stock, without par value ("Insight Common Stock"). At the Effective Date, there were 6,373,764 shares of Insight Common Stock issued and outstanding. For each share of Insight Common Stock, the holder received 0.0554392 shares of the Company's Common Stock, $.001 par value, 353,356 in total. In addition, the Company issued 296,603 shares of the Company's Common Stock in exchange for each dollar of principal and interest outstanding on loans to Insight from shareholders which were made prior to March 1, 1996; and the Company assumed Insight obligations under outstanding options and warrants to purchase Insight Common Stock and in connection therewith reserved 158,040 shares of the Company's Common Stock for issuance upon exercise of such stock options and warrants. Subject to differences caused by the Company's agreement to round-up all fractional shares, if all options and warrants are exercised, the Company will have issued 807,999 shares of the Company's Common Stock to holders of Insight Common Stock, options, warrants, and shareholder loans made prior to March 1, 1996. The basis for the exchange was the evaluation by the board of directors and its advisors of the value of the Insight business on a going-forward basis. There were no common shareholders, officers, directors or holders of 10% or more of the Common Stock of the Company and Insight. The Company required additional funding in connection with the acquisition from the - -------------------------------------------------------------------------------- following sources: 1. The Company's primary line of credit was increased from $2.5 million to $4 million and is secured by all of the assets of the Company and Insight. The amount of availability under the line will be a function of the size and age of the receivables, inventory, and other assets of the combined companies. 2. The Company has borrowed $500,000 of secured subordinated debt. Under the terms of this loan, the principal sum will be subordinated to the bank's primary lending relationship and will be senior to the Series A Notes described below. The loan will bear interest at the rate of 10% per annum. In connection with this debt, the Company granted the lender a five year warrant to purchase the Company's Common Stock at $3.06 per share. The warrant will expire if not exercised by the sooner of (i) expiration of the warrant term or (ii) completion of a 20 day period where the Company's Common Stock closes at $8.00 or more per share on the exchange where the stock is primarily traded following the second year after issuance of the warrant. 3. An Insight shareholder had lent $650,000 and New Image had lent $200,000 to Insight all prior to or as of the Effective Date, which loans are evidenced by Insight Series A Unsecured Subordinated Notes ("Series A Notes"). The Series A Notes bear interest at the rate of ten percent (10%) per annum and are subordinated to up to $8 million of Senior Debt designated from time to time. In connection with this acquisition, the Company will be consolidating the operations of the combined companies into the Company's Carlsbad facility. The Company plans to reduce the number of employees previously involved in the Insight Operations and to consolidate certain of the Insight equipment and facilities. This consolidation effort will result in a significant restructuring charge in the Company's quarter ending June 30, 1996. Item 7. Financial Statements, PRO FORMA Financial Information and Exhibits. (a) Financial Statements of Business Acquired. FINANCIAL STATEMENTS OF INSIGHT IMAGING SYSTEMS, INC. Page - -------------------------------------------------------------------------------- Report of Independent Accountants F-1 Balance Sheets, September 30, 1994 and 1995 F-2 Statements of Operations for the years ended September 30, 1993, 1994 and 1995 F-3 Statements of Shareholders' Deficit for the years ended September 30, 1993, 1994 and 1995 F-4 Statements of Cash Flows for the years ended September 30, 1993, 1994 and 1995 F-5 Notes to Financial Statements F-6 (b) PRO FORMA Financial Information. The following unaudited pro forma financial information gives effect to the transaction described in Item 2 under the pooling of interests method of accounting. This pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred or might have been achieved had the transactions occurred as of an earlier date, nor are they necessarily indicative of operating results or financial position that may occur in the future. Further, the pro forma combined condensed financial statements exclude the transaction costs, the potential cost savings that may be achieved, and the expenses expected to be incurred in connection with the integration of New Image's and Insight's business operations. The pro forma financial statements are derived from, and should be read in conjunction with, New Image's audited consolidated financial statements and Insight's audited financial statements. PRO FORMA FINANCIAL INFORMATION Page Unaudited Pro Forma Consolidated Balance Sheet; New Image Industries, Inc. - at March 31, 1996; Insight Imaging Systems, Inc. - at March 31, 1996 F-18 Unaudited Pro Forma Statement of Operations; New Image Industries, Inc. - for the nine months ended March 31, 1996; Insight Imaging Systems, Inc. - for the nine months ended March 31, 1996 F-19 Unaudited Pro Forma Statement of Operations; New Image Industries, Inc. - for the fiscal year ended June 30, 1995; Insight Imaging Systems, Inc. - for the fiscal year ended September 30, 1995 F-20 Unaudited Pro Forma Statement of Operations; New Image Industries, Inc. - for the fiscal year ended June 30, 1994; Insight Imaging Systems, Inc. - for the fiscal year ended September 30, 1994 F-21 Unaudited Pro Forma Statement of Operations; New Image Industries, Inc. - for the fiscal year ended June 30, 1993; Insight Imaging Systems, Inc. - for the fiscal year ended September 30, 1993 F-22 Notes to Pro Forma Combined Condensed Financial Statements (Unaudited) F-23 (c) Exhibits. Exhibits filed herewith are identified in the Schedule of Exhibits appearing at page 6 hereof. - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: July 26, 1996 New Image Industries, Inc. By: /s/ Dewey F. Edmunds ---------------------------------------------- Dewey F. Edmunds, President SCHEDULE OF EXHIBITS EXHIBIT NO. DESCRIPTION PAGE 2.1 Agreement and Plan of Reorganization (including all material exhibits thereto) (previously filed as an exhibit to this Form 8-K) ___ 2.2 Undertaking Concerning Certain Registration Rights (previously filed as an exhibit to this Form 8-K) ___ 4.1 Form of Certificate for the Registrant's Common Stock, $.001 Par Value (previously filed as an exhibit to this Form 8-K) ___ 10.1 Senior Subordinated Secured Promissory Note and Common Stock Purchase Warrant between Mercury Partners and New Image Industries, Inc. (previously filed as an exhibit to this Form 8-K) ___ 10.2 Amended and Restated Loan and Security Agreement between Coast Business Credit and New Image Industries, Inc. (previously filed as an exhibit to this Form 8-K) ___ 10.3 Series A Subordinated Promissory Note (previously filed as an exhibit to this Form 8-K) ___ REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Insight Imaging Systems, Inc.: We have audited the accompanying balance sheets of Insight Imaging Systems, Inc. as of September 30, 1994 and 1995, and the related statements of operations, shareholders' deficit and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insight Imaging Systems, Inc. as of September 30, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Coopers & Lybrand LLP San Jose, California December 13, 1995, except for Note 8, for which the date is February 28, 1996 F - 1 INSIGHT IMAGING SYSTEMS, INC. BALANCE SHEETS, September 30, 1994 and 1995 ------
ASSETS 1994 1995 ---------- ---------- Current assets: Cash and cash equivalents $ 73,610 Accounts receivable, net of allowance for doubtful accounts of $20,000 in 1994 and $51,557 in 1995 $1,163,031 994,725 Other receivables 20,000 Inventories 909,165 1,371,393 Prepaid expenses and other current assets 234,290 297,832 ---------- ---------- Total current assets 2,326,486 2,737,560 Property and equipment, at cost, less accumulated depreciation and amortization 209,723 237,730 Purchased technology and other intangible assets 807,813 ---------- ---------- Total assets $2,536,209 $3,783,103 ---------- ---------- ---------- ---------- LIABILITIES Current liabilities: Bank overdraft $129,417 Bank line of credit 600,000 $878,735 Notes payable 47,985 251,321 Notes payable - related parties 550,000 1,610,000 Accounts payable 2,262,385 2,172,757 Accrued expenses 607,762 1,046,746 Customer deposits 40,200 208,277 Lease obligations - current 13,827 22,055 ---------- ---------- Total current liabilities 4,251,576 6,189,891 Notes payable - noncurrent 45,000 Lease obligation - noncurrent 15,214 28,245 ---------- ---------- Total liabilities 4,266,790 6,263,136 ---------- ---------- Commitments (Note 7). SHAREHOLDERS' DEFICIT Convertible redeemable preferred stock, no par value: Series A: Authorized: 1,500,000 shares in 1994 and 1995 Issued and outstanding: 1,493,588 shares in 1994 and 1995 1,473,685 1,473,685 (Liquidation value: $1,493,588 in 1994 and 1995) Series B: Authorized: none in 1994 and 3,500,000 shares in 1995 Issued and outstanding: none in 1994 and 2,863,264 shares in 1995 3,426,954 (Liquidation value: $3,435,917 in 1995) Common stock, no par value: Authorized: 8,000,000 shares in 1994 and 10,000,000 shares in 1995 Issued and outstanding: 1,986,920 shares in 1994 and 1,991,812 shares in 1995 193,692 194,670 Accumulated deficit (3,397,958) (7,575,342) ---------- ---------- Total shareholders' deficit (1,730,581) (2,480,033) ---------- ---------- Total liabilities and shareholders' deficit $2,536,209 $3,783,103 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these financial staements.
F - 2 INSIGHT IMAGING SYSTEMS, INC. STATEMENTS OF OPERATIONS for the years ended September 30, 1993, 1994 and 1995 ------
1993 1994 1995 ---------- ---------- ---------- Net sales $2,251,485 $9,919,117 $12,955,953 Cost of goods sold 2,126,515 6,308,287 8,212,314 ---------- ---------- ---------- Gross profit 124,970 3,610,830 4,743,639 ---------- ---------- ---------- Costs and expenses: Research and development 22,526 180,715 767,328 Selling and marketing 1,097,910 4,348,738 6,747,578 General and administrative 493,691 840,076 975,232 ---------- ---------- ---------- 1,614,127 5,369,529 8,490,138 ---------- ---------- ---------- Operating loss (1,489,157) (1,758,699) (3,746,499) Other income, net 27,256 6,608 5,240 Interest and other expense, net 116,129 436,125 ---------- ---------- ---------- Net loss $(1,461,901) $(1,868,220) $(4,177,384) ---------- ---------- ---------- ---------- ---------- ---------- Net loss per share $ (1.26) $(0.94) $(2.10) ---------- ---------- ---------- ---------- ---------- ---------- Shares used in per share calculation 1,159,037 1,986,920 1,989,812 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements F - 3 INSIGHT IMAGING SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT for the years ended September 30, 1993, 1994 and 1995 ------
Convertible Redeemable Preferred Stock Common Stock -------------------------- ------------------------- Accumulated Shares Amount Shares Amount Deficit Total ----------- ---------- ---------- ---------- ---------- ---------- Balances, September 30, 1992 $(67,837) $(67,837) Convertible redeemable Series A preferred stock issued for cash ($30,556) and in lieu of debt repayment ($244,444), net of issuance costs in February 1993 511,110 $499,110 499,110 Common stock issued for cash ($28,334), in lieu of debt repayment ($30,556), in lieu of compensation ($1,500) and for property and equipment ($133,302) in February 1993, net of issuance costs 1,986,920 $193,692 193,692 Net loss (1,461,901) (1,461,901) ----------- ---------- ---------- ---------- ---------- ---------- Balances, September 30, 1993 511,110 499,110 1,986,920 193,692 (1,529,738) (836,936) Convertible redeemable Series A preferred stock, issued for cash, net of issuance costs of $7,903 982,478 974,575 974,575 Net loss (1,868,220) (1,868,220) ----------- ---------- ---------- ---------- ---------- ---------- Balances, September 30, 1994 1,493,588 1,473,685 1,986,920 193,692 (3,397,958) (1,730,581) Convertible redeemable Series B preferred stock issued for cash and in lieu of debt repayment ($1,900,000), net of issuance costs of $8,963 2,416,666 2,891,037 2,891,037 Convertible redeemable Series B preferred stock issued as a result of Chart-It acquisition 446,598 535,917 535,917 Common stock, issued for cash 4,892 978 978 Net loss (4,177,384) (4,177,384) ----------- ---------- ---------- ---------- ---------- ---------- Balances, September 30, 1995 4,356,852 $4,900,639 1,991,812 $194,670 $(7,575,342) $(2,480,033) ----------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. F - 4 INSIGHT IMAGING SYSTEMS, INC. STATEMENTS OF CASH FLOWS for the years ended September 30, 1993, 1994 and 1995 ------
1993 1994 1995 ------------ ------------ ------------ Cash flows from operating activities: Net loss $(1,461,901) $(1,868,220) $(4,177,384) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 117,459 45,220 143,537 Shares issued in lieu of compensation 1,500 Write-off of purchased research and development 33,432 Changes in assets and liabilities: Receivables (176,380) (1,006,652) 168,306 Inventories (16,766) (892,399) (462,228) Prepaid expenses (52,646) (181,644) (63,542) Accounts payable 605,056 1,643,433 (89,628) Accrued liabilities 148,006 459,756 438,984 Customer deposits 22,387 7,813 168,077 ------------ ------------ ------------ Net cash used in operating activities (813,285) (1,792,693) (3,840,446) ------------ ------------ ------------ Cash flows from investing activities: Additions to property and equipment (20,413) (180,584) (120,796) Additions to purchased technology and other intangibles (52,515) ------------ ------------ ------------ Net cash used in investing activities (20,413) (180,584) (173,311) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from: Bank overdraft 129,417 (129,417) Bank line of credit 600,000 278,735 Notes payable 575,000 247,985 2,958,336 Payments of capital lease obligations (7,046) (12,302) Issuance of common stock 28,334 978 Issuance of preferred stock 254,666 974,575 991,037 ------------ ------------ ------------ Net cash provided by financing activities 858,000 1,944,931 4,087,367 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents 24,302 (28,346) 73,610 Cash and cash equivalents, beginning of year 4,044 28,346 - ------------ ------------ ------------ Cash and cash equivalents, end of year $28,346 $ - $73,610 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ - $100,158 $118,094 ------------ ------------ ------------ ------------ ------------ ------------ Cash paid during the period for income taxes $800 $800 - ------------ ------------ ------------ ------------ ------------ ------------ SIGNIFICANT NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of bridge loans into common stock $30,556 ------------ ------------ Conversion of bridge loans into convertible preferred stock $244,444 $620,978 $1,900,000 ------------ ------------ ------------ ------------ ------------ ------------ Common stock issued for assets $133,302 ------------ ------------ Common stock issued in lieu of compensation $1,500 ------------ ------------ Preferred stock issued in consideration for interest in Chart-It $535,917 ------------ ------------ Note issued in consideration for interest in Chart-It $250,000 ------------ ------------ Property and equipment acquired under capital leases $33,561 ------------ ------------ Note receivable forgiven 20,000 ------------ ------------
The accompanying notes are an integral part of these financial statements F- 5 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS ------ 1. BUSINESS OPERATIONS: Insight Imaging Systems, Inc. (Insight) was formed in 1992 for the purpose of designing, manufacturing and marketing a family of intraoral video cameras for the dental industry. Insight has introduced to the market high resolution extraoral and intraoral video cameras integrated with high intensity light sources, monitors and printers. In September 1995, the Company acquired all of the issued and outstanding common stock of Chart-It, Inc., a Virginia Corporation, for total consideration of $805,917 comprising: Issuance of 446,598 shares of convertible redeemable Series B preferred stock at $1.20 per share $ 535,917 Note payable due December 13, 1996 250,000 Note receivable forgiven 20,000 --------- $ 805,917 --------- --------- Expenses incurred in relation to the acquisition totaled $48,318. The purchase price and capitalized expenses were allocated on the basis of their estimated fair market value as follows: Purchased technology $ 725,000 Goodwill 100,000 Purchased research and development 33,432 Net current liabilities (4,196) --------- $ 854,236 --------- --------- The technological feasibility of the purchased research and development had not been established and the technology being developed has no alternative future use. Therefore the amount has been charged to operations. The results of operations of Chart-It subsequent to its September 1995 acquisition date have been recorded in the Company's results of operations for the year ended September 30, 1995. If the acquisition had occurred on October 1, 1994, the Company's results of operations for fiscal 1995 would not have been materially different. F-6 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following is a summary of the Company's significant accounting policies: GOING CONCERN: The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained recurring losses from operations and at September 30, 1995 had a working capital deficiency and shareholders' deficit of $2,480,033. Management is pursuing additional debt and equity financing as well as seeking strategic corporate partners; however, there is no assurance that any of these activities would be sufficient to ensure the Company's continued existence. These factors among others, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION: Revenue from equipment sales is recognized at the time products are shipped, net of an allowance for estimated returns. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. F - 7 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, generally three to five years. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are charged to operations as incurred. CONCENTRATION OF CREDIT RISK: All of the Company's cash at September 30, 1995 is held at one financial institution. INCOME TAXES: The Company accounts for income taxes under Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using current tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. PURCHASED TECHNOLOGY AND INTANGIBLE ASSETS: Purchased technology and other intangible assets acquired (see Note 1) are amortized over the estimated useful lives of the assets on a straight-line basis. The estimated useful lives are as follows: Purchased technology 4 years Goodwill 4 years Goodwill represents the excess of the total purchase price over the assets and liabilities acquired. F - 8 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: RECENT ACCOUNTING PRONOUNCEMENTS: During March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 will be effective for the Company's fiscal year 1997. The Company has studied the implications of the statement and, based on its initial evaluation, does not expect it to have a material impact on the Company's financial condition or results of operations. During October 1995, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This accounting standard permits the use of either a fair value based method or the current Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) when accounting for stock-based compensation arrangements. Companies that do not follow the new fair value based method will be required to disclose pro forma net income and earnings per share computed as if the fair value based method had been applied. The disclosure provisions of SFAS No. 123 are effective for fiscal years beginning after December 15, 1995. Management has not determined if it will adopt the fair value based method of accounting for stock-based compensation arrangements nor the impact of SFAS No. 123 on the Company's financial statements. COMPUTATION OF EARNINGS PER SHARE: Earnings per share is computed by dividing the net loss (income) by the weighted average number of common and common equivalent (when dilutive) shares outstanding during the period. F - 9 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 3. INVENTORIES: Inventories consist of: September 30, ------------------------------- 1994 1995 ---------- ---------- Raw materials $356,209 $515,020 Finished goods 552,956 856,373 ---------- ---------- $909,165 $1,371,393 ---------- ---------- ---------- ---------- 4. PROPERTY AND EQUIPMENT: Property and equipment comprise: September 30, ------------------------------- 1994 1995 ---------- ---------- Office and computer equipment $87,888 $152,447 Manufacturing equipment 127,360 147,023 Leased office equipment 36,086 69,647 Leasehold improvements 18,332 31,462 Sales and marketing equipment 23,444 ---------- ---------- 269,666 424,023 Less accumulated depreciation 59,943 186,293 ---------- ---------- $209,723 $237,730 ---------- ---------- ---------- ---------- Depreciation expense totaled $117,459, $45,220 and $126,350 for the years ended September 30, 1993, 1994 and 1995, respectively. At September 30, 1994 and 1995, property and equipment included assets acquired under capitalized leases with a cost of $36,086 and $69,647, respectively. Related accumulated amortization totaled $5,829 and $19,378, respectively. F - 10 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 5. PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS: At September 30, 1995, purchased technology and other intangible assets are stated net of accumulated amortization as follows: Purchased technology $725,000 Goodwill 100,000 ------- 825,000 Less accumulated amortization (17,187) ------- $807,813 ------- ------- Amortization for the year ended September 30, 1995 totaled $17,187 and none for the years ended September 30, 1994 and 1993. 6. CAPITAL LEASE OBLIGATIONS: At September 30, 1995, future minimum lease payments under capital lease obligations are summarized as follows: FISCAL YEAR 1996 $ 28,445 1997 21,611 1998 10,911 ------- Total minimum lease payments 60,967 Less amounts representing interest at annual interest rates ranging from 7% to 16% (10,667) ------- 50,300 Less current portion (22,055) ------- Long-term capital lease obligations $ 28,245 ------- ------- F - 11 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 7. COMMITMENTS: On October 26, 1993, the Company entered into a four-year lease for office facilities. The Company is responsible for insurance and property taxes. The lease term began on December 1, 1993 and runs through November 30, 1997. The Company also leases its Southern California manufacturing facilities under a two-year operating lease expiring in April 1996. Future minimum rental payments under these leases, as of September 30, 1995, are as follows: FISCAL YEAR 1996 $ 89,254 1997 80,472 1998 13,412 ------- $183,138 ------- ------- Rent expense was $31,648, $57,832 and $93,787 in fiscal years September 30, 1993, 1994 and 1995, respectively. 8. BANK LINE OF CREDIT: The Company has available a $1,000,000 revolving line of credit with a bank collateralized by all assets. At September 30, 1995, $878,735 was outstanding under the line of credit with $121,265 remaining available for future use. Borrowings under the line of credit bear interest at 11% per annum and are due no later than September 18, 1996. The agreement requires the Company to comply with certain covenants including, among others, net loss before taxes for the quarter ending December 31, 1995. The line of credit is guaranteed by a director of the Company. At December 31, 1995, the Company was in default of the net loss and quick ratio covenant restrictions. On February 28, 1996, the Company obtained a waiver of its violation of these covenants. F - 12 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 9. NOTES PAYABLE AND NOTES PAYABLE - RELATED PARTIES: Notes payable at September 30, 1994 and 1995 consist of the following: 1994 1995 -------- -------- Note payable by monthly installments of $15,000 bearing no interest $225,000 Borrowings under advance lease funding agreement bearing no interest, due on demand $47,985 55,325 Other 15,996 -------- -------- 47,985 296,321 Less noncurrent portion of note payable 45,000 -------- -------- $47,985 $251,321 -------- -------- -------- -------- Notes payable - related parties at September 30, 1994 and 1995 comprise various notes payable to officers of the Company and shareholders. The notes bear interest at rates ranging from 0% to 10%, and borrowings and accrued interest are payable in full one year from the date of the notes. The notes are repayable at various dates prior to September 30, 1996. The notes payable include the right to purchase warrants at $0.001 per share, which entitle the holder to purchase common stock of the Company at $0.50 per share. The number of shares that can be purchased under the warrants equals 5% of the original principal of the note, increased by 2% for each complete 30 day period in which the note remains unpaid. The warrants expire five years from the date of the note (see Note 10). F - 13 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 10. SHAREHOLDERS' DEFICIT: CONVERTIBLE REDEEMABLE PREFERRED STOCK: The Company is authorized to issue 5,000,000 shares of preferred stock of which 1,500,000 shares are designated Series A and 3,500,000 are designated Series B. The Company's Board of Directors is authorized to determine the rights, preferences and privileges of any authorized but undesignated preferred stock. The rights, preferences and privileges of the Series A and Series B preferred stock are as follows: DISTRIBUTIONS: Holders of Series A and Series B preferred stock are entitled to the payment of dividends in preference to any distribution to the holders of common stock at the rate of $0.08 and $0.10 per share, respectively. Dividends are not cumulative and are only payable when declared by the Board of Directors. At September 30, 1995, no dividends had been declared. After payment of such dividends, any additional dividends or distributions are distributed among the holders of Series A and Series B preferred stock and common stock in proportion to the number of shares of common stock into which each could be converted. LIQUIDATION: In the event of liquidation of the Company, holders of Series A and Series B preferred shares are entitled to a distribution in preference to common shareholders of $1.00 and $1.20 per share, respectively, plus any dividends declared but unpaid on such shares. After payments have been made to preferred shareholders, the holders of common stock are entitled to receive the remaining assets of the Company pro rata, based upon the number of shares of common stock then outstanding. A consolidation or merger of the Company with or into any other corporation is deemed a liquidation. F - 14 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 10. SHAREHOLDERS' DEFICIT, continued: CONVERTIBLE REDEEMABLE PREFERRED STOCK, continued: CONVERSION: The preferred stock is convertible at the option of the holder, at any time into common stock on a one-to-one basis. Each share of Series A preferred stock shall automatically be converted into one share of common stock with the consent of the holders of at least 67% of the outstanding preferred stock or immediately upon the closing of a public offering of the Company's common stock for which the aggregate gross proceeds exceed $7,500,000. Holders of preferred shares stock are entitled to vote on an "as converted" basis along with common shareholders. REDEMPTION: The preferred stock is redeemable at the election of holders of 67% of the then outstanding Series A and Series B preferred stock by paying in cash a sum per share equal to $1.00 and $1.20, respectively, plus any declared but unpaid dividends. COMMON STOCK: The Company is authorized to issue 10,000,000 shares of common stock. The Company has sold common stock to the founders, officers and employees of the Company subject to executed stockholder agreements. The agreements provide the Company the right of first refusal on all sales of common stock by the holders. Each stockholder is entitled to one vote for every share of stock. Dividends may be issued, when and if declared by the Board of Directors. No dividends have been declared to date. At September 30, 1995, 1,493,588 and 2,863,264 shares of common stock have been reserved for conversion of the Series A and Series B preferred stock, respectively. STOCK OPTION PLAN: The Board of Directors has reserved 1,350,000 shares of common stock under its 1994 Stock Option Plan (the Plan) for issuance to employees and directors of the Company. Under the terms of the Plan, options may not be granted at prices lower than 85% of the fair market value (100% for incentive stock options). F - 15 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 10. SHAREHOLDERS' DEFICIT, continued: STOCK OPTION PLAN, continued: Under the terms of the Plan options may be exercised before they are fully vested. Any unvested shares are subject to repurchase by the Company at the exercise price paid per share. At the vesting commencement date, 25% of the shares are fully vested. The Company's repurchase right shall lapse, and the optionee acquires a vested interest in an additional 25% of the option shares after completion of one year's service as measured from the vesting commencement date. The remaining balance vests, and the repurchase option lapses in two equal successive annual installments upon the completion of the next two years of service. Activity under the plan is as follows:
Shares Available Number Exercise Aggregate For Grant of Shares Price Price ---------- ---------- ---------- ---------- Balance, October 1, 1993 - - - $- Shares authorized 1,165,000 - - - Options granted (158,000) 158,000 $0.20 31,600 Options canceled 1,500 (1,500) $0.20 (300) Options exercised - - - - ---------- ---------- ---------- ---------- Balance, September 30, 1994 1,008,500 156,500 $0.20 31,300 Options granted (773,700) 773,700 $0.20 154,740 Options canceled 77,708 (77,708) $0.20 (15,542) Options exercised (4,892) $0.20 (978) Additional shares authorized 185,000 - - - ---------- ---------- ---------- ---------- Balance, September 30, 1995 497,508 847,600 $0.20 $169,520 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
As of September 30, 1995, 568,675 options were subject to repurchase. The Company has the right to first refusal in the event a shareholder decides to sell or transfer a share acquired under the Plan. The Company has also issued stock options outside the Plan. At both September 30, 1995 and 1994, options to purchase 640,000 shares at a price of $0.20 had been granted outside the Plan. No options have been exercised. The options vest in the same manner as these issued under the Plan, except in the event of the Company being acquired, all options vest immediately. At September 30, 1995, 217,500 options were subject to repurchase. F - 16 INSIGHT IMAGING SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------ 10. SHAREHOLDERS' DEFICIT, continued: WARRANTS: In connection with borrowings under several notes, the Company has issued options to purchase warrants at $0.001 per warrant. The warrants entitle the holder to purchase shares of common stock at $0.50 per share. The number of shares of common stock that may be exercised under the warrants will be increased by the product of the initial amount of principal of each note multiplied by the product of $.02 and the number of complete 30-day periods that the principal under the notes remains outstanding. The warrants expire five years from the date of each note. At September 30, 1995, warrants to purchase 622,993 shares of common stock were outstanding at $0.50 per share and expire through September 2000, if not exercised. 11. INCOME TAXES: There is no provision for income taxes for fiscal year 1993, 1994 or 1995. The provision for income taxes at the Company's effective tax rate differed from the benefit from income taxes at the statutory rate due to the increase in valuation allowance and net operating losses not being benefited. The federal and state tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below: September 30, ------------------------------- 1994 1995 ---------- ---------- Net operating loss carryforward $1,035,088 $2,472,850 Accruals, reserves and allowances 226,232 289,291 Valuation allowance (1,261,320) (2,762,141) ---------- ---------- Net deferred tax asset $ - $ - ---------- ---------- ---------- ---------- The Company has placed a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. At September 30, 1995, the Company had federal and state income tax net operating loss carryforwards for tax purposes of approximately $6,600,000 and $3,300,000, respectively. These federal and state carryforwards expire in the years 2008 and 2000, respectively. F - 17 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ------------------------------------------------------------ NEW IMAGE INDUSTRIES, INC. AND INSIGHT IMAGING SYSTEMS, INC.
New Image Industries, Inc. - At March 31, 1996 Insight Imaging Systems, Inc. - At March 31, 1996 Historical Historical Pro Forma Pro Forma New Image Insight Adjustments Combined ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 916,000 $ 5,000 $ - $ 921,000 Restricted cash 300,000 - - 300,000 Accounts receivable, net 3,802,000 1,093,000 - 4,895,000 Inventories 4,697,000 1,379,000 - 6,076,000 Prepaid expenses and other current assets 603,000 151,000 - 754,000 ------------ ------------ ------------ ------------ Total current assets 10,318,000 2,628,000 - 12,946,000 Property and equipment, net 1,246,000 220,000 - 1,466,000 Purchased technology and other intangible assets, net 967,000 29,514 - 996,514 Other assets 456,000 - - 456,000 ------------ ------------ ------------ ------------ Total assets $ 12,987,000 $ 2,877,514 $ - $ 15,864,514 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES Current liabilities: Accounts payable $ 3,237,000 $ 2,817,000 $ - $ 6,054,000 Bank line of credit - 1,000,000 - 1,000,000 Accrued expenses 2,092,000 1,614,000 - 3,706,000 Notes payable 90,000 307,000 - 397,000 Notes payable - related parties - 2,110,000 (2,110,000) - ------------ ------------ ------------ ------------ Total current liabilities 5,419,000 7,848,000 (2,110,000) 11,157,000 Long term liabilities 87,000 214,000 - 301,000 ------------ ------------ ------------ ------------ Total liabilities 5,506,000 8,062,000 (2,110,000) 11,458,000 Shareholders' equity: Common stock 5,000 5,100,329 (5,099,679) 5,650 Capital in excess of par value 22,898,000 - 7,209,679 30,107,679 Accumulated deficit (15,422,000) (10,284,815) - (25,706,815) ------------ ------------ ------------ ------------ Total shareholders' equity (deficit) 7,481,000 (5,184,486) 2,110,000 4,406,514 Total liabilities and shareholders' equity (deficit) $ 12,987,000 $ 2,877,514 $ - $ 15,864,514 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-18 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ------------------------------------------- NEW IMAGE INDUSTRIES, INC. AND INSIGHT IMAGING SYSTEMS, INC. New Image Industries, Inc. - For The Nine Months Ended March 31, 1996 Insight Imaging Systems, Inc. - For The Nine Months Ended March 31, 1996
Historical Historical Pro Forma Pro Forma New Image Insight Adjustments Combined ---------- ---------- ----------- -------- Net sales $ 17,810,000 $ 10,760,143 $ - $ 28,570,143 Cost of revenues 11,201,000 6,801,923 - 18,002,923 ------------ ------------ ----------- ------------ Gross profit 6,609,000 3,958,220 - 10,567,220 Selling, general and administrative expenses 7,452,000 6,822,221 - 14,274,221 Research and development expenses 552,000 510,484 - 1,062,484 Legal/litigation expenses 43,000 - - 43,000 Interest & other expense (income), net (27,000) 223,803 - 196,803 ------------ ------------ ----------- ------------ (Loss) before income taxes (1,411,000) (3,598,288) - (5,009,288) Provision for income taxes 1,000 800 - 1,800 ------------ ------------ ----------- ------------ Net (loss) $ (1,412,000) $ (3,599,088) $ - $ (5,011,088) ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Net (loss) per common share $ (0.92) ------------ ------------ Weighted Average number of common shares outstanding 5,442,959 ------------ ------------
F - 19 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ------------------------------------------- NEW IMAGE INDUSTRIES, INC. AND INSIGHT IMAGING SYSTEMS, INC. New Image Industries, Inc. - For The Fiscal Year Ended June 30, 1995 Insight Imaging Systems, Inc. - For The Fiscal Year Ended September 30, 1995
Historical Historical Pro Forma Pro Forma New Image Insight Adjustments Combined ---------- ------- ----------- --------- Net sales $ 31,623,000 $ 12,955,953 $ - $ 44,578,953 Cost of revenues 21,319,000 8,212,314 - 29,531,314 ------------ ------------ ------------ ------------ Gross profit 10,304,000 4,743,639 - 15,047,639 Selling, general and administrative expenses 12,105,000 7,722,810 - 19,827,810 Research and development expenses 1,220,000 767,328 - 1,987,328 Legal/litigation expenses 349,000 - - 349,000 Restructuring and unusual charges 4,350,000 - - 4,350,000 Interest & other expense (income), net (85,000) 430,885 - 345,885 Loss on sale of assets 38,000 - - 38,000 ------------ ------------ ------------ ------------ (Loss) before income taxes (7,673,000) (4,177,384) - (11,850,384) Provision for income taxes - - - - ------------ ------------ ------------ ------------ Net (loss) $ (7,673,000) $ (4,177,384) $ - $(11,850,384) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net (loss) per common share $ (2.19) ------------ ------------ Weighted Average number of common shares outstanding 5,411,959 ------------ ------------
F - 20 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ------------------------------------------- NEW IMAGE INDUSTRIES, INC. AND INSIGHT IMAGING SYSTEMS, INC. New Image Industries, Inc. - For The Fiscal Year Ended June 30, 1994 Insight Imaging Systems, Inc. - For The Fiscal Year Ended September 30, 1994
Historical Historical Pro Forma Pro Forma New Image Insight Adjustments Combined ---------- ------- ----------- --------- Net sales $ 31,569,000 $ 9,919,117 $ - $ 41,488,117 Cost of revenues 17,069,000 6,308,287 - 23,377,287 ------------- ------------- ------------- ------------ Gross profit 14,500,000 3,610,830 - 18,110,830 Selling, general and administrative expenses 11,517,000 5,188,814 - 16,705,814 Research and development expenses 604,000 180,715 - 784,715 Legal/litigation expenses 2,710,000 - - 2,710,000 Interest & other expense (income), net (4,000) 109,521 - 105,521 ------------- ------------- ------------- ------------ (Loss) before income taxes (327,000) (1,868,220) - (2,195,220) Provision for income taxes 20,000 - - 20,000 ------------- ------------- ------------- ------------ Net (loss) $ (347,000) $ (1,868,220) $ - $ (2,215,220) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Net (loss) per common share $(0.42) ------------ ------------ Weighted Average number of common shares outstanding 5,261,959 ------------ ------------
F - 21 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ------------------------------------------------------------ NEW IMAGE INDUSTRIES, INC. AND INSIGHT IMAGING SYSTEMS, INC. New Image Industries, Inc. - For The Fiscal Year Ended June 30, 1993 Insight Imaging Systems, Inc. - For The Fiscal Year Ended September 30, 1993
Historical Historical Pro Forma Pro Forma New Image Insight Adjustments Combined ---------- ------- ----------- --------- Net sales $ 30,589,000 $ 2,251,485 $ - $ 32,840,485 Cost of revenues 14,705,000 2,126,515 - 16,831,515 ------------ ------------ ------------- ------------ Gross profit 15,884,000 124,970 - 16,008,970 Selling, general and administrative expenses 9,044,000 1,591,601 - 10,635,601 Research and development expenses 375,000 22,526 - 397,526 Legal/litigation expenses 217,000 - - 217,000 Interest & other expense (income), net (35,000) (27,256) - (62,256) ------------ ------------ ------------- ------------ Income (loss) before income taxes 6,283,000 (1,461,901) - 4,821,099 Provision for income taxes 675,000 - - 675,000 ------------ ------------ ------------- ------------ Net income (loss) $ 5,608,000 $ (1,461,901) $ - $ 4,146,099 ------------ ------------ ------------- ------------ ------------ ------------ ------------- ------------ Net income (loss) per common share $ 0.82 ------------ ------------ Weighted Average number of common shares outstanding 5,078,959 ------------ ------------
F - 22 NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION 1. The unaudited pro forma combined condensed balance sheet reflects the issuance of 353,356 shares of New Image Common Stock in exchange for 6,373,764 shares of Insight Common Stock and the issuance of 296,603 shares of New Image Common Stock in exchange for the outstanding balance of principal and interest at March 31, 1996 on loans to Insight from its shareholders. 2. Earnings per common share for each period is based on the weighted average number of shares of New Image Common Stock outstanding plus the 649,959 shares of New Image Common Stock issued to Insight as stated in the above note. An additional 158,040 shares of New Image Common Stock are reserved for outstanding Insight options and warrants but are not included in the earnings per common share calculation because the effect the outstanding options and warrants are antidilutive. 3. The pro forma combined condensed financial statements of New Image and Insight exclude any nonrecurring costs and expenses associated with combining the operations of the companies and also excludes anticipated savings associated with the elimination of redundant operations and expenses. The costs of combining operations, including transaction costs, are expected to result in a charge to New Image's earnings. New Image's management anticipates the charge to earnings will approximate $1.5 million to $2.0 million. Such charge may be increased by unanticipated additional expenses incurred in connection with the Merger which would have a negative impact on New Image's results of operations in the period the charge is recorded. Of the expected charge, approximately $500,000 is anticipated to be incurred in connection with transaction costs and approximately $1.0 million to $1.5 million is anticipated to be incurred in connection with costs associated with the combination of operations and related activities, all of which will be incurred to eliminate duplicate facilities, excess manufacturing capacity and duplicative selling, general and administrative expenses. The exact timing of this charge cannot be determined but management expects the majority to be recorded in the quarter in which the Merger was consummated. 4. The pro forma combined condensed financial information contains no adjustments to conform the accounting policies of New Image and Insight, because any such adjustments are estimated to be immaterial by the management of New Image. F - 23 -----END PRIVACY-ENHANCED MESSAGE-----