-----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, D0+QELIlRxHpJ9GMtA3T7fdbpidh3B1NxEWI3dqgfc52ZqfyNiG9r6A5YzvI5bR3 QIi51tZgQOcfzm1mX/i7KA== 0000936392-97-000246.txt : 19970222 0000936392-97-000246.hdr.sgml : 19970222 ACCESSION NUMBER: 0000936392-97-000246 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NONE 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17928 FILM NUMBER: 97534627 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 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-17928 NEW IMAGE INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4088548 (State or other jurisdiction (I.R.S. Employer or organization) Identification No.) 2283 COSMOS COURT CARLSBAD, CALIFORNIA 92009 (Address of principal executive offices) Registrant's telephone number, including area code: (619) 930-9900 Former name, address and fiscal year, if changed since last report 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, $.001 Par Value 5,479,911 shares outstanding as of February 11, 1997 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEW IMAGE INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
(UNAUDITED) DECEMBER 31, JUNE 30, 1996 1996 ------------ ------------ Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 1,634,000 $ 381,000 Accounts receivable, net of reserves of $1,881,000 at December 31, 1996 and $1,686,000 at June 30, 1996 . . . . . . . . . 3,699,000 3,279,000 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,067,000 5,543,000 Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . 604,000 550,000 ------------ ------------ Total current assets . . . . . . . . . . . . . . . . . . . . . . . 10,004,000 9,753,000 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 999,000 1,235,000 Intangible assets, net of accumulated amortization $2,294,000 at December 31, 1996 and $2,172,000 at June 30, 1996 . . . . . . . . . . . 278,000 792,000 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621,000 746,000 ------------ ------------ $ 11,902,000 $ 12,526,000 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,128,000 $ 3,895,000 Accrued payroll and other compensation . . . . . . . . . . . . . . . . 768,000 1,312,000 Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,751,000 2,286,000 Current portion of notes payable . . . . . . . . . . . . . . . . . . . 3,214,000 135,000 Accrued restructuring charges . . . . . . . . . . . . . . . . . . . . . 146,000 954,000 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 3,448,000 3,462,000 ------------ ------------ Total current liabilities . . . . . . . . . . . . . . . . . . . . 14,455,000 12,044,000 ------------ ------------ Long term liabilities: Notes payable, net of current portion . . . . . . . . . . . . . . . . . 650,000 1,150,000 Other long term liabilities . . . . . . . . . . . . . . . . . . . . . . 42,000 66,000 ------------ ------------ Total long term liabilities . . . . . . . . . . . . . . . . . . . 692,000 1,216,000 ------------ ------------ Shareholders' deficit: Preferred stock, par value $0.001 per share; 1,000,000 shares authorized; none outstanding . . . . . . . . . . . . . . . . . . . . -- -- Common stock, par value $0.001 per share; 10,000,000 authorized; 5,480,000 outstanding at December 31, 1996 and June 30, 1996 . . . . 5,000 5,000 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 30,449,000 30,449,000 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (33,699,000) (31,188,000) ------------ ------------ Total shareholders' deficit . . . . . . . . . . . . . . . . . . . (3,245,000) (734,000) ------------ ------------ $ 11,902,000 $ 12,526,000 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 2 3 NEW IMAGE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------- ------------------------------- 1996 1995 1996 1995 -------------- -------------- -------------- -------------- Net revenues . . . . . . . . . . . . . . . $ 6,793,000 $ 12,079,000 $ 12,986,000 $ 19,392,000 Cost of revenues . . . . . . . . . . . . . 4,158,000 7,022,000 8,084,000 11,918,000 -------------- -------------- -------------- -------------- Gross profit . . . . . . . . . . . . . . 2,635,000 5,057,000 4,902,000 7,474,000 -------------- -------------- -------------- -------------- Selling, general and administrative expenses . . . . . . . . . . . . . . . . 3,358,000 5,408,000 6,537,000 9,515,000 Research and development expenses . . . . . 259,000 287,000 542,000 695,000 -------------- -------------- -------------- -------------- Loss from Operations . . . . . . . . . . (982,000) (638,000) (2,177,000) (2,736,000) -------------- -------------- -------------- -------------- Interest expense, net . . . . . . . . . . . 155,000 85,000 272,000 143,000 Other expense, net . . . . . . . . . . . . 44,000 363,000 59,000 436,000 -------------- -------------- -------------- -------------- Net loss before taxes . . . . . . . . . . . (1,181,000) (1,086,000) (2,508,000) (3,315,000) -------------- -------------- -------------- -------------- Provision for income taxes . . . . . . . . 2,000 2,000 2,000 2,000 -------------- -------------- -------------- -------------- Net loss . . . . . . . . . . . . . . . . . $ (1,183,000) $ (1,088,000) $ (2,510,000) $ (3,317,000) ============== ============== ============== ============== Net loss per share . . . . . . . . . . . . $ (0.22) $ (0.20) $ (0.46) $ (0.61) ============== ============== ============== ============== Weighted average shares of common stock outstanding . . . . . . . . . . . . 5,480,000 5,444,000 5,480,000 5,446,000 ============== ============== ============= ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 NEW IMAGE INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE SIX MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1996 1995 ------------ ------------ Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,510,000) $ (3,317,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 431,000 977,000 Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . (11,000) - Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . (420,000) (490,000) Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476,000 (452,000) Prepaid expenses and other . . . . . . . . . . . . . . . . . . . (54,000) (55,000) Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 101,000 - Increase (decrease) in: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (353,000) (344,000) Accrued payroll . . . . . . . . . . . . . . . . . . . . . . . . (181,000) 25,000 Accrued restructuring and unusual expenses . . . . . . . . . . . (715,000) (62,000) Other accrued liabilities . . . . . . . . . . . . . . . . . . . (14,000) (946,000) ------------ ------------ Net cash used by operating activities . . . . . . . . . . . . . . . . (2,250,000) (4,664,000) ------------ ------------ Cash flows from investing activities: Increase in capitalized software . . . . . . . . . . . . . . . . . (76,000) 448,000 Purchase of property and equipment . . . . . . . . . . . . . . . . (61,000) (434,000) Proceeds on sale of asset . . . . . . . . . . . . . . . . . . . . 13,000 - Cash received from sale of investments and maturities of CDs . . . - 500,000 ------------ ------------ Net cash (used in) provided by investing activities . . . . . . . . . (124,000) 514,000 ------------ ------------ Cash flows from financing activities: Net proceeds from issuance of stock . . . . . . . . . . . . . . . - 541,000 Bank Line of credit . . . . . . . . . . . . . . . . . . . . . . . 1,465,000 121,000 Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,162,000 2,723,000 ------------ ------------ Net cash provided by financing activities . . . . . . . . . . . . . . 3,627,000 3,385,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . 1,253,000 (765,000) BEGINNING CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . 381,000 1,640,000 ------------ ------------ ENDING CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . $ 1,634,000 $ 875,000 ============ ============ Supplemental disclosures: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 227,000 $ 143,000 ============ ============ Noncash financial activities: Accounts payable converted to notes payable . . . . . . . . . . . . . $ 414,000 $ - ============ ============ Writedown of liability against goodwill related to expired options granted in conjunction with an acquisition . . . . . . . . . . . $ 363,000 $ - ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 5 NEW IMAGE INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (UNAUDITED) (1) GENERAL (a) The accompanying unaudited condensed consolidated financial statements of New Image Industries, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and all such adjustments are of a normal and recurring nature. The results of operations for the three months ended are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 1996 as filed with the Securities and Exchange Commission. (b) Principles of Consolidation -- The accompanying financial statements include the accounts of the Company and its wholly owned subsidiary, Insight Imaging Systems, Inc. ("Insight"). All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents -- Cash and cash equivalents include short-term, highly liquid investments principally in bank CD's and money market funds with original maturities of three months or less. (d) Lines of Credit -- During Fiscal 1996, the Company entered into a bank line of credit agreement with Coast Business Credit. The agreement provides for maximum borrowing of $5,000,000 limited to a percentage of eligible accounts receivable and inventory as defined in the agreement. As of December 31, 1996, the Company had $3,751,000 outstanding under its line of credit agreement which included $500,000 over the eligible asset base as described in note 2. The line expires on May 1, 1997, and carries an interest rate of the greater of 10% or prime plus 2.25% (10.5% at December 31, 1996). The line is collateralized by accounts receivable, inventory, equipment and general intangibles, and requires the Company to maintain positive shareholders' equity. On December 31, 1996, the Company continued to be in violation of this financial covenant. On September 27, 1996, the Company received from the bank a letter that waived the covenant violation through January 1, 1997 and such waiver was subsequently extended by the bank through March 25, 1997. The letter also authorized an increase in the credit limit from $4 million to $5 million. (e) Inventories -- Inventories, which consist primarily of purchased components, raw materials and finished systems, are priced at the lower of cost (first-in; first-out) or market. Such amounts include the cost of material and, when applicable, labor and overhead. Appropriate consideration is given to deterioration, obsolescence and other factors in determining net realizable value. The components of inventory as of December 31, 1996 and June 30, 1996 were as follows:
DECEMBER 31, 1996 JUNE 30, 1996 ----------------- ------------- Raw materials and Purchased Components $2,777,000 $4,005,000 Finished systems 1,290,000 1,538,000 ---------- ---------- $4,067,000 $5,543,000 ========== ==========
(f) Intangible Assets -- On December 28, 1996, certain options to purchase Common Stock expired. These options were granted as part of the purchase of Aerospace Optics. Since they were at an exercise price which represented a $2.85 per share discount from the then market price, this value was originally included in goodwill. A total of $363,375, which remained as a liability on the books, was eliminated and credited to the goodwill. 5 6 (g) Accrued Liabilities -- Other accrued liabilities as of December 31, 1996 and June 30, 1996 are comprised of the following:
DECEMBER 31, 1996 JUNE 30, 1996 ----------------- ------------- State sales tax $1,173,000 $ 952,000 Litigation settlements and legal expenses 1,423,000 1,489,000 Acquisition costs 226,000 354,000 Warranty 293,000 319,000 Customer Advances 105,000 119,000 Other 228,000 229,000 ---------- ---------- $3,448,000 $3,462,000 ========== ==========
(h) Major Customers -- No customer accounted for more than ten percent of revenues in any of the periods presented. The majority of the Company's current customers consist of dental professionals. (i) Revenue Recognition -- The Company recognizes revenue primarily from sales of systems and supplies at the time of shipment, net of estimated sales returns and allowances. Revenues from warranty, maintenance and service contracts, which have not been significant, are recognized ratably over the life of the contract. (j) Income Taxes -- The Company accounts for income taxes based on FASB Statement No. 109 "Accounting for Income Taxes, SFAS No. 109" under which deferred tax assets and liabilities are provided on temporary differences between financial reporting and tax reporting using the enacted tax rates. (k) 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. (l) Loss Per Common Share -- Loss per common share for the 1996 and 1995 periods are based on the weighted average number of common shares outstanding and does not include the dilutive effect of common share equivalents as the dilution was not material in 1995 and are anti- dilutive in 1996. (m) Certain prior period balances have been reclassed to conform to the current period presentation. (2) MERGER AGREEMENT On December 24, 1996, the Company and DENTSPLY International, Inc. ("DENTSPLY") entered into a Letter of Intent under which DENTSPLY agreed to acquire the Company for $2.00 per share, subject to due diligence. Pursuant to the Letter of Intent, the Company and DENTSPLY entered into a Credit Agreement whereby DENTSPLY agreed to provide up to an aggregate principal amount of $3,000,000 of which $2,500,000 was funded on December 24, 1996. At the same time, Coast Business Credit loaned an additional $500,000, which was used to pay off Mercury Partners, LLP, holder of the second lien position. All of DENTSPLY indebtedness under the Credit Agreement is subordinated to the extent provided in the Subordination and Intercreditor Agreement with Coast. As of February 11, 1997, $500,000 additional borrowing capacity is available under the DENTSPLY Credit Agreement. Each advance is, and will be, evidenced by a note and is reported in notes payable on the Consolidated Balance Sheets. Advances bear interest on the unpaid principal balance at any time at the floating interest rate of 4% per annum in excess of prime. The Credit Agreement will terminate and balance will be due and payable on March 25, 1997 unless earlier by terms and conditions of a definitive merger agreement. In addition, Coast executed and delivered to the Company and DENTSPLY a letter, dated December 24, 1996, in which Coast agreed to forbear from exercising any of its default rights and remedies in connection with the violation of any and all covenants of which the Company may have been in breach at the time, and any and all covenant violations that might occur subsequent through March 25, 1997. On January 28, 1997, the Company entered into a definitive merger agreement under which DENTSPLY will commence a cash tender offer for all of the outstanding shares of the Company at a price of $2.00 per share. Under the merger agreement, which was approved by the board of directors of each company, a newly created subsidiary of DENTSPLY, Image Acquisition Corporation, will be merged into the Company following completion of the tender offer and the Company will become a wholly owned subsidiary of DENTSPLY. DENTSPLY entered into agreements with certain stockholders of the Company, including its directors and senior executive officers, and the William W. Stevens and Virda J. Stevens Trust, who in the aggregate own approximately 10% of the Company's shares outstanding, whereby each has agreed to tender his or her shares in the offer. The shareholders (including outstanding option holders) will receive approximately $11,400,000. 6 7 On January 31, 1997, DENTSPLY, through its wholly owned subsidiary, commenced the cash tender offer. The offer is conditioned upon, among other things, the tender of 55% of the outstanding shares (as of the date of commencement of the offer) of New Image's common stock and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The offer and withdrawal rights are scheduled to expire at 12:00 Midnight on Monday, March 3, 1997, unless extended. (3) ACQUISITION AND RESTRUCTURING In May 1996, the Company acquired Insight, a competitor engaged in the business of designing, manufacturing and marketing of intraoral video cameras. A plan of restructuring was adopted during the fourth quarter of fiscal year 1996 which included Insight's operations being relocated to Carlsbad, California in July 1996. A restructuring reserve of $962,000 was recorded in fiscal year 1996 to cover estimated costs for personnel termination and severance, relocation and other costs associated with Insight's facilities and operations, inventory write-down for product integration and miscellaneous items. The Company's management believes that this acquisition has placed the Company in a leading market position with respect to intraoral cameras for the dental industry. Management also believes that as a result of the acquisition, significant cost reductions can be achieved because of consolidation of operating facilities and deletion of duplicative Selling, General and Administrative ("SG&A") expenses. The acquisition of Insight has been accounted for as a pooling of interests and accordingly, the Company's consolidated financial statement and discussion and analysis of such statements reflect the combined results of the pooled business. The Company's December 1995 financial statements have been restated to include the result of Insight's operations. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues Revenues decreased $5,286,000 or 44% for the three month period ended December 31, 1996 when compared to the same period in 1995. This decrease was due to 1) lack of working capital to purchase raw materials, 2) demand for Concept III exceeded forecast and required lead time for component deliveries compounded by the lack of working capital negatively impacted shipments, 3) demand for some of the Company's older products declined. The Company's backlog increased to $2,175,000 as of December 31, 1996 because of parts shortages. Cost of Revenues Cost of revenues increased as a percentage of revenues from 58% to 61% in the three month period ended December 31, 1995 and 1996 respectively. The 61% cost of revenue is an improvement from the first quarter results of 63% and is the same as the prior year six month results even though revenues are significantly lower. The Company implemented a five (5%) percent price increase in December 1996 and has lowered fixed manufacturing costs. Management anticipates improved gross profit percentages with higher sales levels since the working capital constraint will be eliminated by the merger with DENTSPLY. Operating Expenses SG&A expenses decreased by $2,050,000 or 38% for the three month period ended December 31, 1996 when compared to the same period in 1995. This decrease in expenses is primarily due to a reduction in costs as defined in the Insight acquisition plan of restructuring initiated during the fourth quarter of fiscal year 1996. Another contributing factor to the decrease in expenses was that lower commission expenses were incurred in proportion to the lower sales revenue. As a percentage of revenues, SG&A expenses increased from 45% to 49% when compared to the 1995 three month period. The lower sales revenue in this period contributed to this result. Research and development expenses decreased from $287,000 for the three month period ended December 31, 1995 to $259,000 for the three month period ended December 31, 1996. The decrease is due primarily to the reduction in costs as defined in the Insight restructuring plan. Loss from Operations Loss from operations for the three months ending December 31 increased from $638,000 in 1995 to $982,000 in 1996. This increased loss is primarily caused by the drop in revenues. In addition, the Company wrote off aproximately $250,000 of demonstration inventory during the quarter and established an additional $70,000 reserve for potential product obsolescence. The loss from operations from the first six months of fiscal 1997 was $2,177,000 compared to a loss of $2,736,000 for the same period in the prior year. Cash Flow At the end of December 1996, the Company obtained a $2,500,000 advance as a note payable under a Credit Agreement with DENTSPLY. See discussion under Notes to Consolidated Financial Statements (Note 2). Accounts receivable increased $420,000 at December 31, 1996 when compared to June 30, 1996. The increase was due in part to a large volume of foreign shipments during September 1996 which had 120 day terms and a high volume of sales shipped during the last week of December. Accounts payable decreased by $767,000 when compared to June 30, 1996. The decrease is primarily due to negotiated payment terms in the form of notes payable with certain major vendors and a decrease in material purchases on credit terms. Inventory decreased from $5,543,000 on June 30, 1996 to $4,067,000 on December 31, 1996. Approximately $400,000 of this represents demonstration equipment inventory which was either written off or reserved at values less than cost. The remaining reduction of slightly over $1,000,000 is the result of not being able to purchase an adequate supply of raw materials due to a lack of working capital and restricted credit from vendors. The line of credit with the Company's bank has been increased to the maximum amount possible. As a result, amounts owing under the lines of credit have increased from $2,286,000 on June 30, 1996 to $3,751,000 on December 31, 1996. Likewise, the current portion of notes payable has increased from $135,000 on June 30, 1996 to $3,214,000 on December 31, 1996. This amount consists of $2,500,000 owed to DENTSPLY and the remaining amount to major vendors supplying either material components or services to the Company. The restructuring reserve associated with the Insight merger has decreased to $146,000 from $954,000 on June 30, 1996, reflecting payments for the integration of management and discontinuance of duplicative manufacturing and marketing activities as defined in the Insight restructuring plan. The reserve appears to be adequate to accommodate the remaining restructuring costs. 8 9 Product Development The Company introduced the Concept III intraoral camera system in the late Spring of 1996. This product, with a price of $9,495 for a single operatory, accounted for approximately 30% of sales for the quarter ended December 31, 1996. In late September, the Concept III intraoral camera system received the highest rating from the leading independent review agency for dental industry products. Since that time, sales have exceeded forecast. In June 1996, the Company entered into a 15-month private label contract with Sunrise Technologies to become an OEM remarketer of its air abrasion cavity preparation system, under the tradename Soft PrepTM. The Company began selling the product in late-September. The sales cycle for the product is fairly long; therefore, it is too early to ascertain the level of market acceptance. However, the market for air abrasion systems is forecasted by an independent research organization to grow 30-35% annually for the next three years. During the quarter, the Company has received favorable response from its marketing efforts, but a lack of working capital has restricted our ability to equip our sales force with an adequate supply of demonstration units. The Company is continuing it's development efforts for its Digital X-ray product and has obtained FDA approval for the Digital X-Ray. Market introduction is expected early February 1997. A survey by Dental Practice & Finance indicates a market potential of 6,000-8,000 digital x-ray systems could be sold domestically by all manufacturers during the next year. To date, about 3,000 systems have been sold in the U.S. by three competitors. Liquidity and Capital Resources At December 31, 1996, the Company had cash on hand of $1,634,000, up $1,253,000 from the June 30, 1996 amount of $381,000. The increase was the result of obtaining a $2,500,000 advance from DENTSPLY in conjunction with a letter of intent to merge, certain bank agreements, and a Credit Agreement. The Company's previous constraints on liquidity have been temporarily resolved by the Credit Agreement with DENTSPLY. If, however, the planned merger with DENTSPLY is not completed, then the Company would not be able to pay back the note to DENTSPLY when due without infusion of additional debt or equity capital. In management's opinion, prospects for raising such funds from other sources is very doubtful and would not be timely. Such a series of events would once again raise substantial doubt as to the Company's ability to continue as a going concern. For these reasons, and those further described in the Company's Schedule 14D-9 filed on January 31, 1997, the Board of Directors unanimously approved the Merger Agreement and recommended that each shareholder tender their shares. This report contains forward-looking statements that involve substantial risks and uncertainties. The Company's actual results could differ materially from those discussed herein. 9 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Steven P. Hill v. New Image Industries, Inc. et al This case is a securities class action alleging violation of certain securities laws by prior management. An agreement has been reached to settle this matter on terms that will have no impact on the Company's financial condition. A final written agreement between the parties has been approved by the court. Notice thereof has been given the class and the settlement fund has been deposited in the plaintiff's trust account by the Company's insurance carrier. New Image Industries, Inc. v. New Image Industries Pty. Ltd. and International Imaging Company, Ltd.; New Image Industries Pty. Ltd. and International Imaging Company, Ltd. v. New Image Industries, Inc. On April 11, 1996, the Company filed suit to collect a debt in the sum of $370,215 for goods sold to the foreign distributors New Image Industries Pty., Ltd. and International Imaging Company, Ltd. On September 25, 1996, the Company began discussions to settle the suit. If the suit ultimately settles according to the terms under discussion, no additional reserves will be required. The settlement discussions have been placed on hold to accommodate the Company's acquisition by DENTSPLY. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27 Financial Data Schedule (b) Reports on Form 8-K During the Company's second fiscal quarter of 1997, it filed one report on Form 8-K dated January 27, 1997 to report that the Company had entered into an Agreement and Plan of Merger with DENTSPLY International, Inc., a Delaware corporation ("Parent") and Image Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW IMAGE INDUSTRIES, INC. Date: February 14, 1997 /s/ HAROLD R. ORR ------------------------------------- Harold R. Orr Chief Financial Officer 10 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 1,634,000 0 5,580,000 (1,881,000) 4,067,000 10,004,000 2,786,000 (1,787,000) 11,902,000 14,455,000 0 0 0 5,000 (3,250,000) 11,902,000 6,793,000 6,793,000 4,158,000 4,158,000 3,617,000 132,000 155,000 (1,181,000) 2,000 (1,183,000) 0 0 0 (1,181,000) .22 0
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