Nasdaq Threatens Network Imaging

Nasdaq Threatens Network Imaging

By Bob Starzynski
Staff Writer

Network Imaging Corp. was given an ultimatum by the Nasdaq National Market a month ago - get into compliance with the market's standards by year's end or be delisted.

James Leto, president and CEO of the Herndon, Va.-based developer of data management and storage software, does not seem fazed. Compared to the hurdles he has faced in his 18 months at the company, this is a minor challenge.

"When I came to [Network Imaging], it had one of the ugliest balance sheets I had ever seen," he said.

Network Imaging photo James Leto, president and chief executive officer of Network Imaging Corp.

The way Leto explains it, the delisting ultimatum does not come at a time when Network Imaging is starting to stumble, but rather when it is completing a major turnaround.

In the past two years, the company has:

Closed operations in Colorado and Washington, which cut revenue from $69 million in 1995 to $39 million last year;

Almost completely turned over its management (four of its top five officers have joined the company since March 1996);

Consolidated all software development and financial operations into the company's headquarters; and

Gotten rid of a balance sheet that was based largely on goodwill, where the prices of acquired businesses far exceeded the tangible assets of those businesses.

In reducing Network Imaging's goodwill, Leto took the company's net tangible assets below Nasdaq's $4 million minimum requirement. Nasdaq allowed the company a grace period until the end of the year not only to get into compliance but to bring its net tangible assets to $6 million to ensure long-term compliance.

Due to actions already underway, Leto believes that objective is easily attainable.

Network Imaging has two classes of preferred stock that are a drain on the company, Leto said. He wants to get rid of that drain. The first class, owned primarily by mutual funds, paid a $2 annual dividend per share, costing the company more than $3 million a year. In July, Leto suspended further dividend payment on that class of stock. He expected a major outcry. Instead, large shareholders wanted to discuss how to convert their preferred stock into some other form of ownership.

According to sources, the company came up with a resolution for those stockholders the week of Nov. 17. The resolution has not been announced yet, but will likely require approval by other shareholders.

The second class of preferred stock Leto considers a problem is owned by Credit Lyonnais, a French bank that is in receivership. Leto said that Network Imaging could realize the $6 million needed for Nasdaq compliance if it could get a fair value for the French class.

Alan Jacobs, an analyst for Avalon Research Group Inc. in Boca Raton, Fla., said Network Imaging should sell its French subsidiary, Dorotech, to solve the problem. Dorotech, which employs 100 workers and accounts for about one-third of Network Imaging's revenue, has stunted Network Imaging's revenue growth, Jacobs said. If the French business is sold, the French preferred stock will be eliminated.

Network Imaging has not indicated whether Dorotech is for sale and has not announced a resolution for the French class of stock.

Still, Leto is confident that his cards will fall into place in time for the Nasdaq deadline.

Network Imaging, which was founded in 1990 and went public two years later, made 19 problematic acquisitions through 1994, according to Leto. The acquisitions, most of which were start-up companies, created major expenses and little synergy.

"I came here to change this from a holding company to an integrated software company," he said.

But with a market that is dominated by larger players, such as FileNet Corp. of Costa Mesa, Calif., IBM Corp. of Armonk, N.Y., and Wang Laboratories Inc. of Billerica, Mass., Network Imaging has battles to fight other than one with its own history.

"It is difficult for other participants in that market to get much market share on larger competitors, unless they had a really innovative technology or business approach," said James Reynolds, an analyst with Wedbush Morgan Securities in Los Angeles.

For Leto, the proof of his plan will come with time. He anticipates that Network Imaging will turn its first profit ever in the second quarter of 1998. He has placed a lot of effort into building a sales force that understands the company's products. While some workers were displaced through the consolidation and discontinuation of certain businesses, Network Imaging has actually increased its work force slightly to 325 from 315 a year ago as consultant sales professionals have been replaced with full-time employees.

Although government work is a small percentage of Network Imaging's sales, the company has already signed contracts with the Treasury Department, Department of Defense and Department of Health and Human Services this year.

Furthermore, the company has established sales-channel alliances with Sybase Inc. of Emeryville, Calif., and Intergraph Corp. of Huntsville, Ala., Leto said that 12 other relationships are under discussion with Microsoft Corp., Oracle Corp., Sun Microsystems Inc., Digital Equipment Corp. and other companies.

Although Network Imaging's stock price has not rebounded - having fallen steadily over the past 18 months - Leto said that will come with time. The stock closed at $1.63 a share on Nov. 24, off its 52-week high of $3.25, but above its low of $.81.