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 9/30/2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____ to
_____.
1mage Software, Inc.
--------------------
(Exact name of Registrant as specified in its charter)
0-12535
-------
(Commission File Number)
Colorado 84-0866294
-------- ----------
(State of Incorporation) (IRS Employer
Identification Number)
6025 S. Quebec St. Suite 300 Englewood Co 80111 (303) 694-9180
----------------------------------------------- --------------
(Address of principal executive offices) (Registrant's telephone
number, including area
code)
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 Exchange Act). Yes No X
---- ----
As of November 7, 2003, there were 3,274,597 shares of the Registrant's common
stock outstanding.
Page 1
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets-September 30, 2003 and December 31, 2002........................................3
Statements of Income (loss)-for three months ended September 30, 2003 and
September 30, 2002.............................................................................4
Statements of Income (loss)-for nine months ended September 30, 2003 and
September 30, 2002.............................................................................5
Statements of Cash Flows-for nine months ended September 30, 2003 and
September 30, 2002.............................................................................6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................9
Item 3 Quantitative and Qualitative Disclosures About Market Risk...........................11
Item 4 Controls and Procedures..............................................................11
PART II. OTHER INFORMATION
Items 1-5.....................................................................................12
Item 6 Exhibits and Reports on Form 8-K.....................................................12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1mage Software, Inc.
BALANCE SHEETS
September 30,
ASSETS 2003 December 31,
(Unaudited) 2002
CURRENT ASSETS
Cash and cash equivalents $ 72,690 $ 149,738
Receivables:
Trade (less allowance: 2003, $33,000; 2002, $10,000) 479,129 549,455
Inventory 9,660 16,500
Prepaid expenses and other current assets 17,658 16,374
Employee advances 10,176 7,029
----------- -----------
Total current assets 589,313 739,096
PROPERTY AND EQUIPMENT, at cost, net 40,787 48,577
OTHER ASSETS
Software development costs, net 691,908 720,916
Deferred tax asset 50,000 50,000
Loan costs, net 30,249 --
Inventory: long-term 2,958 2,958
Rent deposits 7,841 100
----------- -----------
TOTAL ASSETS $ 1,413,056 $ 1,561,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - bank $ 169,018 $ --
Current portion of capital lease obligations 3,663 3,903
Accounts payable 146,074 278,174
Deferred revenue 260,000 281,000
Accrued liabilities 145,715 148,260
----------- -----------
Total current liabilities 724,470 711,337
LONG-TERM OBLIGATIONS
Line of credit-bank -- 200,000
Line of credit-related party 79,600 --
Capital lease obligations 7,105 7,325
----------- -----------
86,705 207,325
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.004 par value - 10,000,000 shares 13,098 12,586
authorized; shares outstanding:
2003-3,274,597; 2002-3,146,554
Additional paid-in capital 7,284,035 7,238,658
Accumulated deficit (6,695,252) (6,608,259)
----------- -----------
Total shareholders' equity 601,881 642,985
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,413,056 $ 1,561,647
=========== ===========
See Notes to Condensed Financial Statements.
3
1mage Software, Inc.
STATEMENTS OF INCOME/(LOSS)
(Unaudited)
Three Months Ended September 30,
2003 2002
----------- --------------
REVENUE
System sales and software licenses $ 197,940 $ 288,711
Services and annual fees 214,422 366,084
----------- -----------
Total revenue 412,362 654,795
----------- -----------
COST OF REVENUE
Software licenses 111,589 130,767
Services and annual fees 71,389 142,225
----------- -----------
Total cost of revenue 182,978 272,992
----------- -----------
GROSS PROFIT 229,384 381,803
% Of Revenue 56% 58%
OPERATING EXPENSES
Selling, general & administrative 320,782 336,352
----------- -----------
INCOME/(LOSS) FROM OPERATIONS
(91,398) 45,451
----------- -----------
OTHER INCOME/(EXPENSE)
Interest income 45 1,026
Interest expense (3,730) (3,220)
----------- -----------
Total other income (expense) (3,685) (2,194)
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES (95,083) 43,257
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET INCOME/(LOSS) $ (95,083) $ 43,257
=========== ===========
INCOME PER COMMON SHARE:
BASIC $ (.03) $ .01
=========== ===========
DILUTED $ (.03) $ .01
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 3,274,597 3,146,554
=========== ===========
DILUTED 3,274,597 3,163,833
=========== ===========
See Notes to Condensed Financial Statements.
4
1mage Software, Inc.
STATEMENTS OF INCOME (LOSS)
(Unaudited)
Nine Months Ended September 30,
2003 2002
----------- -----------
REVENUE
System sales and software licenses $ 596,224 $ 754,489
Services and annual fees 752,166 1,027,535
----------- -----------
Total revenue 1,348,390 1,782,024
----------- -----------
COST OF REVENUE:
Software licenses 363,225 509,924
Services and annual fees 257,094 397,079
----------- -----------
Total cost of revenue 620,319 907,003
----------- -----------
GROSS PROFIT 728,071 875,021
% Of Revenue 54% 49%
OPERATING EXPENSES
Selling, general & administrative 943,399 1,056,536
----------- -----------
INCOME/(LOSS) FROM OPERATIONS (215,328) (181,515)
----------- -----------
OTHER INCOME/(EXPENSE):
Interest income 1,638 2,881
Interest expense (11,822) (6,120)
Other income 138,519 --
----------- -----------
Total other income (expense) 128,335 (3,239)
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES (86,993) (184,754)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET INCOME/(LOSS) $ (86,993) $ (184,754)
=========== ===========
INCOME/(LOSS) PER COMMON SHARE:
BASIC $ (.03) $ (.06)
=========== ===========
DILUTED $ (.03) $ (.06)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 3,223,192 3,146,554
=========== ===========
DILUTED 3,223,192 3,146,554
=========== ===========
See Notes to Condensed Financial Statements.
5
1mage Software, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2003 2002
--------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings/(Loss) $ (86,993) $(184,754)
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 248,139 243,055
Settlement of payable (138,375) --
Deferred revenue (21,000) 8,000
Issuance of stock for services or fees 7,000 --
Changes in assets and liabilities:
Trade receivables 70,326 (70,274)
Inventory 6,840 3,317
Prepaid expenses and other assets (12,172) (6,002)
Accounts payable 6,275 83,307
Accrued expenses (2,545) 8,312
--------- ---------
Net cash provided by operating activities 77,495 84,961
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (5,809) (12,595)
Additions to capitalized software (196,892) (230,933)
--------- ---------
Net cash used for investing activities (202,701) (243,528)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit-related party 79,600 --
Net borrowings (payments) on line of credit-bank (30,982) 175,000
Repayment of long-term obligations (460) (1,923)
--------- ---------
Net cash provided by financing activities 48,158 173,077
--------- ---------
INCREASE/(DECREASE) IN CASH AND CASH (77,048) 14,510
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 149,738 212,421
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 72,690 $ 226,931
========= =========
See Notes to Condensed Financial Statements.
6
1mage Software, Inc.
NOTES TO 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 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
Company incurred net losses for the three and nine months ended September 30,
2003 and for the nine months ended September 30, 2002, the outstanding stock
options are considered antidilutive and have been excluded from the computation
of diluted earnings per share. For the three months ended September 30, 2002
approximately 17,000 outstanding stock options are considered dilutive and are
included in the denominator for the computation of diluted earnings per share.
As the Company incurred net losses for the three and nine months ended
September 30, 2003, the outstanding stock purchase warrants are considered
antidilutive and have been excluded from the computation of diluted earnings per
share.
7
- -------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ (95,083) $ 43,257 $ (86,993) $(184,754)
- -------------------------------------------------------------------------------------------------------
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net
of income taxes (23,032) (25,630) (66,386) (71,535)
- -------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $(118,115) $ 17,627 $(153,379) $(256,289)
- -------------------------------------------------------------------------------------------------------
Earnings per share:
- -------------------------------------------------------------------------------------------------------
Basic and Diluted - as reported $ (.03) $ .01 $ (.03) $ (.06)
- -------------------------------------------------------------------------------------------------------
Basic and Diluted - pro forma $ (.04) $ .01 $ (.05) $ (.08)
- -------------------------------------------------------------------------------------------------------
LINE OF CREDIT - RELATED PARTY - On April 1, 2003, the Company entered into a
$300,000 revolving line-of-credit agreement (the "Agreement") with DEMALE, LLC,
an entity owned by certain stockholders of the Company. In connection with the
Agreement, the Company issued 90,000 shares of restricted common stock and stock
purchase warrants to purchase an additional 90,000 shares of restricted common
stock as payment for loan origination costs. The line expires on June 30, 2005
and requires the Company, among other things, to maintain certain financial
conditions. At September 30, 2003, there was $79,600 borrowed against this line.
The line is secured by substantially all of the Company's assets but is
subordinated to the bank line of credit, which holds a prior lien on the same
assets. Interest is accrued and payable quarterly at prime plus 1 1/2% (6.5% at
September 30, 2003) but may not be less than 7%; therefore, at September 30,
2003, interest was being accrued at 7%.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 2002
1mage Software, Inc. (the "Company") reported revenue of $412,000 for the third
quarter of 2003. This represented a $243,000 decrease, or 37%, from the $655,000
in revenue posted for the third quarter a year ago. Revenue was down in every
category, primarily due to the general economic slowdown. Revenue generated from
new customers for third quarter 2003 was $172,000, or 41% less than $291,000
reported for the third quarter of 2002. In addition, revenue from consulting
services was $53,000, a 58% decrease from the third quarter last year. Recurring
license fees decreased $80,000 or 33%, of which a decrease of $75,000 was
attributable to the loss of the Company's largest customer, Reynolds & Reynolds
("Reynolds").
The Company's quarterly revenue of $412,000 does not reflect $139,000 in
contracts which were received at the end of the quarter but could not be
fulfilled until after the quarter ended. A delay between the receipt of a
significant amount of customer orders and fulfillment of those orders by the
Company which bridges the end of a quarter is somewhat unusual because of the
short time needed to fill orders. The $139,000 in revenue will be recognized in
the fourth quarter.
SG&A expenses of $321,000 for the third quarter of 2003 were 4% lower, or
$15,000, than $336,000 reported for the third quarter of 2002, due to reduced
expenses in nearly every category. The Company reported a net loss of $(95,000)
for the third quarter 2003, or $(.03) per share, as compared to net income of
$43,000, or $.01 per share, for the same quarter last year.
The total downturn of $(137,000) or $(.04) per share, can be attributed to the
$243,000 decrease in revenues offset by reduced SG&A and other expenses.
- ---------------------------------------------------------------------------------------
Three Three
Months Months Increase/ Increase/
Ended Ended (Decrease) (Decrease)
9/30/03 9/30/02 $ %
- ---------------------------------------------------------------------------------------
Revenue (as reported) $ 412,362 $ 654,795 $ (242,433) (37%)
- ---------------------------------------------------------------------------------------
Less: Reynolds revenue 0 (74,755) (74,755) (100%)
- ---------------------------------------------------------------------------------------
Revenue excluding Reynolds $ 412,362 $ 580,040 $ (167,678) (29%)
- ---------------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS NINE
MONTHS ENDED SEPTEMBER 30, 2002
The Company reported revenue of $1.3 million for the nine months ended
September 30, 2003, a decrease of $434,000, or 24%, over $1.8 million reported
for the first nine months in 2002. A significant portion of this decrease can be
attributed to the loss of the Company's largest customer, which accounted for
$387,000 of the decrease. Without the loss of this customer, total revenue for
2003 would have decreased by only 3%. Revenue from consulting services was
$163,000 or 36% lower than the $255,000 in consulting revenue reported for the
nine months in 2002. Most of this decline resulted from the timing of the third
quarter business, which may vary from quarter to quarter. While the software
revenue was included in the quarter, significant consulting services could not
be
9
recognized until the service is performed. However, total revenue generated from
new customers for the nine months ended September 30, 2003, was $550,000, a 5%
increase compared to $523,000 in 2002. Gross profit on revenue for the first
three quarters of 2003 is 54%, as compared to 49% for the same period last year.
SG&A expenses were $113,000 lower (or 11%) for the nine months ended
September 30, 2003, primarily due to across the board reductions. The Company
reported a net loss of $(87,000), or $(.03) per share for the nine months ended
September 30, 2003, as compared to a net loss of $(185,000), or $(.06) per
share, for the same period in 2002.
The reduced loss for the first nine months of 2003, an improvement of $98,000,
is attributable to SG&A expense reductions and other cost savings which more
than offset the $(434,000) reduction in revenues for the period.
In first quarter 2003, the Company settled a liability of $139,000, 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.
- -------------------------------------------------------------------------------------------
Nine Months Nine Months Increase/ Increase/
Ended Ended (Decrease) (Decrease)
9/30/03 9/30/02 $ %
- -------------------------------------------------------------------------------------------
Revenue (as reported) $ 1,348,390 $ 1,782,024 $ (433,634) (24%)
- -------------------------------------------------------------------------------------------
Less: Reynolds revenue 13,318 400,651 (387,333) (97%)
- -------------------------------------------------------------------------------------------
Revenue excluding Reynolds $ 1,335,072 $ 1,381,373 $ (46,301) (3%)
- -------------------------------------------------------------------------------------------
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 $73,000 at September 30, 2003
represented a decrease of approximately $77,000, as compared to December 31,
2002. During 2003, the Company used cash of $197,000 for deferred development
expenses. The Company had a working capital deficit of $135,000 as of
September 30, 2003. The Company believes there is sufficient working capital to
operate the business because the "Deferred Revenue" liability consists of
$260,000 that is not immediately due and payable; rather it represents payments
on annual maintenance contracts that will be earned over the next twelve months.
As the ongoing litigation between the Company and Reynolds is being handled by
legal counsel on a contingency basis plus direct expenses, legal fees incurred
by the Company related to the Reynolds litigation are not due or payable until
the litigation has been settled, at which time the fees will be deducted from
the proceeds, if any. Management believes that the Company has the liquidity to
fund the direct expenses related to the litigation.
The Company's bank line of credit was $169,018 at September 30, 2003, compared
to $200,000 at December 31, 2002. The line matures in February 2004 and is
collateralized by all accounts receivable and general intangibles of the
Company.
In addition, the Company has a line of credit of up to $300,000 with DEMALE,
LLC. As of September 30, 2003, there were borrowings of $79,600 against this
line. The loan is secured by a junior interest in the collateral backing the
bank line of credit.
10
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 yet replaced all of the revenue lost as a result
of the termination of the 1996 contract and 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.
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.
11
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
31.1 Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certificate of CEO and CFO pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(B) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended September 30,
2003.
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: 11/14/2003 /s/ DAVID R. DEYOUNG
--------------------
David R. DeYoung
President, Principal and Chief Executive Officer
Date: 11/14/2003 /s/ MARY ANNE DEYOUNG
---------------------
Mary Anne DeYoung
Vice President, Finance and Principal Financial Officer
12