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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 3/31/2004
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 specified in its charter)
0-12535
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(Commission File Number)
COLORADO 84-0866294
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(State of Incorporation) (IRS Employer Identification Number)
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)
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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
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As of May 9, 2004, there were 3,302,597 shares of the Registrant's Common
Stock outstanding.
Page 1
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets -March 31, 2004, and December 31, 2003................. 3
Statements of Operations -for three months ended
March 31, 2004 and March 31, 2003......................................4
Statements of Cash Flows -for three months ended
March 31, 2004 and March 31, 2003......................................5
Item 2Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................8
Item 3 Quantitative and Qualitative Disclosures About
Market Risk............................................................9
Item 4 Controls and Procedures........................................9
PART II. OTHER INFORMATION
Items 1-5.............................................................10
Item 6 Exhibits and Reports on Form 8-K...............................10
2
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
1MAGE SOFTWARE, INC.
BALANCE SHEETS
Unaudited
March 31, December 31,
2004 2003
-----------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 60,473 $ 143,505
Receivables:
Trade (less allowance: 2004, $25,000;
2003, $20,000) 630,459 609,216
Deferred tax asset 20,000 20,000
Prepaid expenses and other current assets 39,489 55,457
Inventory 15,049 11,517
Employee advances 3,419 19,631
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Total current assets 768,889 859,326
PROPERTY AND EQUIPMENT, at cost, net 43,948 43,465
OTHER ASSETS:
Software development costs, net 684,248 694,262
Loan costs, net 21,609 25,929
Deferred tax asset 40,000 40,000
Rent/security deposit 7,841 7,841
Inventory 2,958 2,958
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TOTAL ASSETS $ 1,569,493 $ 1,673,781
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 190,000 $ --
Current portion of capital lease obligations 4,161 3,663
Deferred revenue 277,000 287,000
Accounts payable 134,628 162,255
Accrued liabilities 217,183 230,958
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Total current liabilities 822,972 683,876
LONG-TERM OBLIGATIONS:
Capital lease obligations 7,898 7,105
Line of credit-Bank -- 139,314
Line of credit-Related Parties 104,600 54,600
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112,498 201,019
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SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000
shares authorized;
shares outstanding: 2004 - 3,287,597;
2003 - 3,287,597 13,150 13,150
Additional paid-in capital 7,288,455 7,288,455
Accumulated deficit (6,667,582) (6,512,719)
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Total shareholders' equity 634,023 788,886
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,569,493 $ 1,673,781
================ =================
See Notes to Condensed Financial Statements
3
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2004 2003
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REVENUE
System sales and software licenses $ 156,007 $ 151,990
Services and annual fees 287,737 276,678
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Total revenue 443,744 428,668
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COST OF REVENUE
System sales and software licenses 102,265 117,817
Services and annual fees 138,051 92,211
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Total cost of revenue 240,316 210,028
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GROSS PROFIT 203,428 218,640
% of Revenue 46% 51%
OPERATING EXPENSES:
Selling, general & administrative 349,269 309,422
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LOSS FROM OPERATIONS (145,841) (90,782)
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OTHER INCOME/(EXPENSE):
Interest expense (9,104) (4,051)
Interest income 82 594
Other income -- 138,375
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Total other income (expense) (9,022) 134,918
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INCOME/(LOSS) BEFORE INCOME TAXES (154,863) 44,136
PROVISION FOR INCOME TAXES -- --
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NET INCOME/(LOSS) $ (154,863) $ 44,136
============== ==============
BASIC AND DILUTED INCOME/(LOSS) PER
COMMON SHARE: $ (.05) .01
============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 3,287,597 3,175,738
============== ==============
See Notes to Condensed Financial Statements
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $(154,863) $ 44,136
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 84,093 79,893
Deferred revenue (10,000) (26,000)
Settlement of payable 0 (138,375)
Issuance of stock for services 0 7,000
Changes in assets and liabilities:
Receivables (21,243) 11,911
Inventory (3,532) 224
Prepaid expenses and other assets 32,180 3,656
Accounts payable (27,627) 13,366
Accrued liabilities (13,775) (25,348)
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Net cash used for operating activities (114,767) (29,537)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,963) (1,323)
Additions to capitalized software (65,286) (64,988)
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Net cash used for investing activities (68,249) (66,311)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to the line of credit- Bank 50,686 --
Additions to the line of credit- Related Party 50,000 --
Principal payments under capital lease obligations (702) (460)
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Net cash provided by (used for) financing
activities 99,984 (460)
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DECREASE IN CASH AND CASH EQUIVALENTS (83,032) (96,308)
CASH AND CASH EQUIVALENTS, beginning of period 143,505 149,738
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CASH AND CASH EQUIVALENTS, end of period $ 60,473 $ 53,430
=========== ===========
See Notes to Condensed Financial Statements
Supplemental Cash Flows Information
Capital lease obligation incurred for equipment $ 1,993 $ --
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, 2003 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, 2003 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 ended March 31, 2003 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. As
the Company incurred a net loss for the period ended March 31, 2004, the
outstanding stock options and stock purchase warrants were antidilutive and have
been excluded from the computation of diluted earnings per share.
STOCK-BASED COMPENSATION - At December 31, 2003, the Company has three
stock-based employee compensation plans. 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
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For the three months ended
March 31
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2004 2003
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Net income (loss), as reported $ (154,863) $ 44,136
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Less: Total stock-based employee compensation (5,807) (15,073)
cost determined under the fair value
based method, net of income taxes
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Pro forma net income (loss) $ (160,670) $ 29,063
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Earnings/(loss) per share:
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Basic and Diluted - as reported $ (0.05) $ 0.01
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Basic and Diluted - pro forma $ (0.05) $ 0.01
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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. The line expires on June
30, 2005 and requires the Company, among other things, to maintain certain
financial conditions. At March 31, 2004, there was $104,600 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 senior lien on the
same assets. Interest is accrued and payable quarterly at prime plus 1 1/2%
(6.5% at March 31, 2004) but may not be less than 7%; therefore, at March 31,
2004, interest was being accrued at 7%.
7
OVERVIEW
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1mage Software, Inc. (the "Company") continues to face the challenge of
consistently generating revenues at or above the level it achieved prior to the
termination by Reynolds & Reynolds, Inc., its largest customer, of the 1996
Subscription and Maintenance Agreement with the Company. As a result of
Reynolds' actions, which included the continued use by Reynolds' customers of
the Company's software notwithstanding the termination of the contract and the
cessation of payments by Reynolds to the Company for such use, the Company's
revenues were dramatically reduced. Revenues from the Company's new customers
since that time, which would have otherwise represented business growth, have
been used instead to sustain operations. While the Company has brought legal
action against Reynolds on various grounds, a successful resolution of that
legal action is uncertain. Accordingly, the Company has focused on the
development of new customers and new markets over the past few years, with mixed
success.
The Company's $155,000 net loss for the recent quarter represents a setback
for the Company's efforts to achieve a consistent record of profitability in the
post-Reynolds era. Because the Company has limited capital resources, namely a
bank line of credit and a private line of credit from its shareholders, it
cannot sustain such losses indefinitely without an adverse effect on its
liquidity and operations. Thus, the Company plans to redouble its sales efforts
and reduce non-essential expenses as part of its efforts to re-establish a
consistent record of profitability.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2004 VERSUS MARCH 31,
2003
The Company reported revenue of $444,000 for the first quarter of 2004, a
$15,000 increase (4%) from $429,000 posted for the first quarter in 2003. This
increase was due to a $35,000 (33%) increase in revenue from software licenses
and a $36,000 (50%) increase in service revenue. However, due to higher
compensation expenses and no other income in the first quarter of 2004, the
Company posted a net loss of $155,000 or $(.05) per share, as compared to net
income of $44,000, or $.01 per share, for the same quarter a year ago. In the
first quarter 2003, the Company received $138,000 settlement of a disputed
claim, which amount was reported as other income, that related to a volume
purchase from a prior year that was tied to the acquisition of future software
licenses.
Annual license fee revenue of $179,000 for the first quarter was 12% lower than
the $204,000 reported in the preceding year due to the timing of revenue
recognition for certain customers. Revenue from hardware sales of $13,000
decreased $31,000 (71%) over the same quarter in 2003. SG&A expenses of $349,000
were $40,000 (13%) greater than the same quarter in 2003, primarily due to
increases in compensation expenses, travel and legal expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $60,000 decreased approximately
$84,000 during the three months ended March 31, 2004 as compared to December 31,
2003. During 2004, the Company used cash of $65,000 for deferred development
expenses. The Company had a working capital deficit of $54,000 as of March 31,
2004, versus working capital of $175,450 as of December 31, 2003 and a working
capital deficit of $108,000 as of March 31, 2003. The decline in working capital
during the quarter is attributable to the reclassification of the Company's bank
line of credit as short term debt since it matures in February 2005. Included in
current
8
liabilities is $277,000 for Deferred Revenue, which represents payments on
annual maintenance contracts that will be earned over the next twelve months.
The Company had drawn $190,000 on its bank line of credit as of March 31, 2004.
The $200,000 bank line matures in February, 2005 and is collateralized by all
accounts receivable and general intangibles of the Company. In addition, as of
March 31, 2004, the Company had drawn $104,600 on its line of credit with
DEMALE, a related party. This private line of credit has a cap of $300,000,
expires in June, 2005, and is secured by a second lien on the same assets as the
bank line of credit.
As noted above, the termination by Reynolds of its 1996 Subscription and
Maintenance Agreement and the resulting loss of Reynolds as a customer has had a
material adverse impact on the Company's revenue. There has been a corresponding
adverse impact on cash flow and liquidity. While the Company has not replaced
all of the revenue lost as a result of the termination of the 1996 contract and
Reynolds' subsequent actions, 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. Such an award could provide a meaningful addition to the
Company's capital resources. 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
Internal Controls
As of the end of the period reported on in this report, the company has
undertaken an evaluation under the supervision and with the participation of
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective, in all material respects, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act.
There have been no significant changes in the Company's internal controls during
the quarter ended March 31, 2004, or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation described
above.
9
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 March 31, 2004.
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: 5/17/2004 /S/ DAVID R. DEYOUNG
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David R. DeYoung
President, Principal and Chief
Executive Officer
Date: 5/17/2004 /S/ MARY ANNE DEYOUNG
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Mary Anne DeYoung
Vice President, Finance and
Principal Financial Officer