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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended 3/31/2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from
to
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1MAGE SOFTWARE, INC.
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(Exact name of Registrant as specific in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
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(State of Incorporation) (IRS Employer Identification Numbers)
6025 S. QUEBEC ST. SUITE 300 ENGLEWOOD CO 80111 (303) 694-9180
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(Address of principal executive offices) (Registrant's telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
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(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK - $.004 PAR VALUE
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(Title of Class)
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
---- ----
As of May 9, 2003, there were 3,274,597 shares of the Registrant's Common
Stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets -March 31, 2003, and December 31, 2002.............. 3
Statements of Operations -for three months ended March 31, 2003
and March 31, 2002..................................................4
Statements of Cash Flows -for three months ended March 31, 2003
and March 31, 2002..................................................5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................7
Item 3 Quantitative and Qualitative Disclosures About Market
Risk................................................................8
Item 4 Controls and Procedures......................................8
PART II. OTHER INFORMATION
Items 1-5...........................................................9
Item 6 Exhibits and Reports on Form 8-K.............................9
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1MAGE SOFTWARE, INC.
BALANCE SHEETS
Unaudited
March 31, December 31,
2003 2002
------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53,430 $ 149,738
Receivables:
Trade (less allowance: 2003, $10,000; 2002, $10,000) 537,544 549,455
Inventory 16,276 16,500
Prepaid expenses and other current assets 13,984 16,374
Employee advances 5,763 7,029
----------- -----------
Total current assets 626,997 739,096
PROPERTY AND EQUIPMENT, at cost, net 45,307 48,577
OTHER ASSETS:
Software development costs, net 710,604 720,916
Inventory 2,958 2,958
Deferred tax asset 50,000 50,000
Other 100 100
----------- -----------
TOTAL ASSETS $ 1,435,966 $ 1,561,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 200,000 $ --
Current portion of capital lease obligations 3,663 3,903
Deferred revenue 255,000 281,000
Accounts payable 153,165 278,174
Accrued liabilities 122,912 148,260
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Total current liabilities 734,740 711,337
LONG-TERM OBLIGATIONS:
Capital lease obligations 7,105 7,325
Line of credit -- 200,000
----------- -----------
7,105 207,325
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000
shares authorized;
shares outstanding: 2003 - 3,184,597; 2002 - 3,146,554 12,738 12,586
Additional paid-in capital 7,245,506 7,238,658
Accumulated deficit (6,564,123) (6,608,259)
----------- -----------
Total shareholders' equity 694,121 642,985
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,435,966 $ 1,561,647
=========== ===========
See Notes to Condensed Financial Statements
3
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
---------- ----------
REVENUE
System sales and software licenses $ 151,990 $ 212,075
Services and annual fees 276,678 305,189
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Total revenue 428,668 517,264
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COST OF REVENUE
System sales and software licenses 117,817 212,838
Services and annual fees 92,211 121,698
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Total cost of revenue 210,028 334,536
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GROSS PROFIT 218,640 182,728
% of Revenue 51% 35%
OPERATING EXPENSES:
Selling, general & administrative 309,422 327,297
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INCOME/(LOSS) FROM OPERATIONS (90,782) (144,569)
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OTHER INCOME/(EXPENSE):
Interest expense (4,051) (548)
Interest income 594 803
Other income 138,375 --
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Total other income (expense) 134,918 255
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INCOME/(LOSS) BEFORE INCOME TAXES 44,136 (144,314)
PROVISION FOR INCOME TAXES -- --
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NET INCOME/(LOSS) $ 44,136 $ (144,314)
========== ==========
BASIC AND DILUTED INCOME/(LOSS) PER
COMMON SHARE: $ .01 $ (.05)
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 3,175,738 3,146,554
========== ==========
See Notes to Condensed Financial Statements
4
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $ 44,136 $ (144,314)
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 79,893 80,968
Deferred revenue (26,000) 13,000
Settlement of payable (138,375) --
Issuance of stock for services 7,000 --
Changes in assets and liabilities:
Receivables 11,911 34,309
Inventory 224 (1,127)
Prepaid expenses and other assets 3,656 (3,629)
Accounts payable 13,366 76,886
Accrued liabilities and expenses (25,348) (33,960)
--------- ----------
Net cash provided by (used for) operating activities (29,537) 22,133
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,323) (9,833)
Additions to capitalized software (64,988) (85,783)
--------- ----------
Net cash used for investing activities (66,311) (95,616)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit -- --
Repayment of long-term obligations (460) (608)
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Net cash used for financing activities (460) (608)
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DECREASE IN CASH AND CASH EQUIVALENTS (96,308) (74,091)
CASH AND CASH EQUIVALENTS, beginning of period 149,738 212,421
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 53,430 $ 138,330
========= ==========
See Notes to Condensed Financial Statements
5
1MAGE SOFTWARE, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
GENERAL:
Management has elected to omit substantially all notes to the unaudited interim
financial statements. Reference should be made to the Company's annual report on
Form 10-K for the year ended December 31, 2002 as this report incorporates the
Notes to the Company's year-end financial statements. The condensed balance
sheet of the Company as of December 31, 2002 has been derived from the audited
balance sheet of the Company as of that date.
UNAUDITED INTERIM INFORMATION:
The unaudited interim financial statements contain all necessary adjustments
(consisting of only normal recurring adjustments), which, in the opinion of
Management, are necessary for a fair statement of the results for the interim
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of those expected for the year.
REVENUE RECOGNITION - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when the
software and computer equipment are shipped to the customer, remaining vendor
obligations are insignificant, there are no significant uncertainties about
customer acceptance and collectibility is probable. Revenue from related
services, including installation and software modifications, is recognized upon
performance of services. Maintenance revenue is recognized ratably over the
maintenance period.
INCOME TAXES - The Company follows the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred income taxes are recorded based upon
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the underlying assets or liabilities are received or settled.
The Company has recorded a valuation allowance against the deferred tax assets
due to the uncertainty of ultimate realizability.
EARNINGS (LOSS) PER SHARE - Earnings/ (Loss) per share is computed by dividing
net income (loss) by the weighted average number of common and equivalent shares
outstanding during the period. Outstanding stock options are treated as common
stock equivalents for purposes of computing diluted earnings per share. As the
average market price during the period was less than the lowest exercisable
option price, the outstanding stock options were antidilutive and have been
excluded from the computation of diluted earnings per share.
STOCK-BASED COMPENSATION - At December 31, 2002, the Company has three
stock-based employee compensation plans, which are described more fully in Note
5. The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the grant date. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
6
For the Three Months Ended March 31
2002 2001
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Net income (loss), as reported $ 44,136 $ (144,314)
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes (15,073) (22,952)
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Pro forma net income (loss) $ 29,063 $ (167,266)
======== ==========
Earnings per share:
Basic and Diluted - as reported $ 0.01 $ (0.05)
======== ==========
Basic and Diluted - pro forma $ 0.01 $ (0.05)
======== ==========
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2003 VERSUS MARCH 31,
2002
1mage Software, Inc. (the "Company") reported revenue of $429,000 for the first
quarter of 2003, an $88,000 decrease (17%) from $517,000 posted for the first
quarter in 2002. As a result of the various revenue components, the gross profit
on sales in first quarter 2003 increased $36,000 (20%) over the first quarter of
2002. As a result, the Company posted net income of $44,000 or $.01 per share,
for the first quarter 2003, as compared to a net loss of $(144,000), or $(.05)
per share, for the same quarter a year ago.
The Company's revenue for direct sales of software licenses of $106,000
increased $54,000 (102%) from $53,000 in 2002, while the revenue for indirect
channel software sales decreased $125,000 (99%) to $1,000 due to the loss of the
Company's largest customer, Reynolds & Reynolds ("Reynolds"). Service revenues
for the quarter ended March 31, 2003 were $72,000, an 84% increase over $39,000
for the first quarter of 2002 due to revenue from installations and
customization services. Revenue from hardware sales of $44,000 increased $12,000
(36%) over the same quarter in 2002.
Revenue from recurring annual license fees in the direct sales channel increased
$29,000 (21%), while annual license fee revenue from indirect channels decreased
$90,000, attributable to the loss of Reynolds. Excluding sales to Reynolds of
$212,000 during the first quarter of 2002, total first quarter revenues
increased $123,000 (40%) for the comparable periods.
In first quarter 2003, the Company settled a liability of $138,000, which is
included in other income, that related to a volume sale from a prior year
that was tied to the purchase of future software licenses. SG&A expenses of
$309,000 were $18,000 (6%) less than the same quarter in 2002, primarily due
to tight expense controls throughout the Company; offset by a $17,000 increase
in legal expenses as a result of the legal proceedings with Reynolds.
See the discussion of the effect of the loss of Reynolds in "Liquidity and
Capital Resources" below.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $53,000 decreased approximately
$96,000 during the three months ended March 31, 2003 as compared to December 31,
2002. During 2003, the Company used cash of $65,000 for deferred development
expenses. The Company had deficit working capital of $108,000 as of March 31,
2003. Included in current liabilities is $255,000 for Deferred Revenue, which
represents payments on annual maintenance contracts that will be earned over the
next twelve months. The Company's $200,000 bank line of credit was fully drawn
at March 31, 2003 and on December 31, 2002. The line matures in February, 2004
and is collateralized by all accounts receivable and general intangibles of the
Company.
On April 30, 2003, the Company closed on a Revolving Credit Loan Agreement dated
effective April 1, 2003 with DEMALE, LLC, a Colorado limited liability company,
under which DEMALE agreed to provide the Company with a line of credit of up to
$300,000 at 1 1/2% above prime rate as published by U.S. Bank. DEMALE has three
members, David R. DeYoung, the Company's President and Chief Executive Officer,
John G. Mazza, a Director and a more than 5% shareholder of the Company, and
Spencer D. Lehman, a more than 5% shareholder of the Company. The Company
8
issued a total of 90,000 shares of its common stock to DEMALE's members and also
granted them warrants to purchase 90,000 shares of common stock at an exercise
price of $.18 per share. The loan matures on June 30, 2005 and is secured by a
junior security interest in the collateral backing the bank line of credit.
Principal and interest on the loan is convertible into shares of common stock at
maturity and, under certain circumstances, the Company can force conversion of
the outstanding balance on the loan. As of May 14, 2003 there were no borrowings
outstanding on the line.
As noted above in "Results of Operations", the termination by Reynolds of its
1996 Subscription and Maintenance Agreement and the resulting loss of Reynolds
as a customer has already had a significantly adverse impact on the Company's
revenue. There has been a corresponding adverse impact on cash flow and
liquidity. The Company has not replaced all of the revenue lost as a result of
the termination of the 1996 contract by Reynolds' subsequent actions. However,
it is possible that some portion of that lost revenue will be awarded to the
Company in the ongoing litigation between the Company and Reynolds. Naturally,
the Company cannot predict the outcome of that litigation nor can there be any
assurance that the Company will ever obtain a meaningful recovery from Reynolds.
The Company's financial resources include cash on hand, revenues from
operations, and management of funds available on its revolving lines of credit.
In the Company's judgment, sufficient financial resources are available to meet
current working capital needs.
9
FORWARD LOOKING STATEMENTS
Some of the statements made herein are not historical facts and may be
considered "forward looking statements." All forward-looking statements are, of
course, subject to varying levels of uncertainty. In particular, statements
which suggest or predict future events or state the Company's expectations or
assumptions as to future events may prove to be partially or entirely
inaccurate, depending on any of a variety of factors, such as adverse economic
conditions, new technological developments, competitive developments,
competitive pressures, changes in the management, personnel, financial condition
or business objectives of one or more of the Company's customers, increased
governmental regulation or other actions affecting the Company or its customers
as well as other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INAPPLICABLE
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and participation of the Company's Chief
Executive Officer and Chief Financial Officer (the "Officers") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Officers concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
filings, including this report.
Internal Controls
There were no significant changes made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS INAPPLICABLE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS INAPPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES INAPPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS INAPPLICABLE
ITEM 5. OTHER INFORMATION INAPPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT TABLE
99.1 CERTIFICATION OF PERIODIC REPORT FOR CEO
99.2 CERTIFICATION OF PERIODIC REPORT FOR CFO
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended March
31, 2003.
10
SIGNATURES
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.
1MAGE SOFTWARE, INC.
(Registrant)
Date: 5/14/2003 /S/ DAVID R. DEYOUNG
--------------------
David R. DeYoung
President, Principal and Chief
Executive Officer
Date: 5/14/2003 /S/ MARY ANNE DEYOUNG
---------------------
Mary Anne DeYoung
Vice President, Finance and Principal
Financial Officer
11
CERTIFICATIONS
I, David R. DeYoung, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 1mage Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 5/14/2003 /S/ DAVID R. DEYOUNG
--------------------
David R. DeYoung
President and Principal and Chief Executive Officer
12
CERTIFICATIONS
I, Mary Anne DeYoung, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 1mage Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 5/14/2003 /S/ MARY ANNE DEYOUNG
---------------------
Mary Anne DeYoung
Vice President, Finance and
Principal Financial Officer
13