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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 6/30/2004
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
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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
---- ----
As of August 16, 2004, there were 3,302,597 shares of the Registrant's Common
Stock outstanding.
Page 1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets -June 30, 2004, and December 31, 2003...................3
Statements of Operations -for three months ended June 30, 2004
and June 30, 2003......................................................4
Statements of Operations -for six months ended June 30, 2004
and June 30, 2003......................................................5
Statements of Cash Flows -for six months ended June 30, 2004
and June 30, 2003 .....................................................6
Item 2 Management'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
ITEM 1. FINANCIAL STATEMENTS
1MAGE SOFTWARE, INC.
BALANCE SHEETS
Unaudited
June 30, December 31,
ASSETS 2004 2003
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 35,093 $ 143,505
Receivables:
Trade (less allowance: 2004, $25,000; 2003, $20,000) 511,741 609,216
Deferred tax asset 20,000 20,000
Prepaid expenses and other current assets 13,843 55,457
Inventory 16,335 11,517
Employee advances 5,592 19,631
------------- -------------
Total current assets 602,604 859,326
PROPERTY AND EQUIPMENT, at cost, net 41,093 43,465
OTHER ASSETS:
Software development costs, net 671,946 694,262
Loan costs, net 17,289 25,929
Deferred tax asset 40,000 40,000
Rent/security deposit 7,841 7,841
Inventory 2,508 2,958
------------- -------------
TOTAL ASSETS $ 1,383,281 $ 1,673,781
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit-Bank $ 190,000 $ --
Line of credit-Related Party 213,600 --
Current portion of capital lease obligations 4,161 3,663
Deferred revenue 272,000 287,000
Accounts payable 112,062 162,255
Accrued liabilities 209,810 230,958
------------- -------------
Total current liabilities 1,001,633 683,876
------------- -------------
LONG-TERM OBLIGATIONS:
Capital lease obligations 7,096 7,105
Line of credit-Bank -- 139,314
Line of credit-Related Party -- 54,600
------------- -------------
7,096 201,019
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000
shares authorized; shares outstanding:
2004: 3,302,597 and 2003: 3,287,597 13,210 13,150
Additional paid-in capital 7,294,838 7,288,455
Accumulated deficit (6,933,496) (6,512,719)
------------- -------------
Total shareholders' equity 374,552 788,886
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,383,281 $ 1,673,781
============= =============
See Notes to Condensed Financial Statements
3
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
2004 2003
-------------- ------------
REVENUE
System sales and software licenses $ 93,434 $ 246,294
Services and annual fees 240,488 261,066
-------------- ------------
Total revenue 333,922 507,360
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COST OF REVENUE
System sales and software licenses 94,951 133,819
Services and annual fees 116,665 93,494
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Total cost of revenue 211,616 227,313
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GROSS PROFIT 122,306 280,047
% of Revenue 37% 55%
OPERATING EXPENSES:
Selling, general & administrative 378,552 313,195
-------------- ------------
LOSS FROM OPERATIONS (256,246) (33,148)
-------------- ------------
OTHER INCOME/(EXPENSE):
Interest expense (9,800) (4,041)
Interest income 31 1,143
Other income 101 --
-------------- ------------
Total other income (expense) (9,668) (2,898)
-------------- ------------
LOSS BEFORE INCOME TAXES (265,914) (36,046)
PROVISION FOR INCOME TAXES -- --
-------------- ------------
NET LOSS $ (265,914) $ (36,046)
============== ============
BASIC AND DILUTED LOSS PER
COMMON SHARE: $ (.08) $ (.01)
============== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 3,300,125 3,244,927
============== ============
See Notes to Condensed Financial Statements
4
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30,
2004 2003
------------- ------------
REVENUE
System sales and software licenses $ 249,441 $ 398,284
Services and annual fees 528,225 537,744
------------- ------------
Total revenue 777,666 936,028
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COST OF REVENUE:
System sales and software licenses 197,216 251,636
Services and annual fees 254,716 185,705
------------- ------------
Total cost of revenue 451,932 437,341
------------- ------------
GROSS PROFIT 325,734 498,687
% Of Revenue 42% 53%
OPERATING EXPENSES:
Selling, general & administrative 727,821 622,617
------------- ------------
LOSS FROM OPERATIONS (402,087) (123,930)
------------- ------------
OTHER INCOME/(EXPENSE):
Interest income 113 1,593
Interest expense (18,904) (8,092)
Other income 101 138,519
------------- ------------
Total other income (expense) (18,690) 132,020
------------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES (420,777) 8,090
PROVISION FOR INCOME TAXES -- --
------------- ------------
NET INCOME/(LOSS) $ (420,777) $ 8,090
============= ============
BASIC AND DILUTED INCOME/(LOSS) PER
COMMON SHARE: $ (0.13) $ 0.00
============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 3,293,860 3,197,062
============= ============
Diluted 3,293,860 3,203,950
============= ============
See Notes to Condensed Financial Statements
5
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2004 2003
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $ (420,777) $ 8,090
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 168,168 164,052
Deferred revenue (15,000) (11,000)
Settlement of payable -- (138,375)
Issuance of stock for services -- 7,000
Changes in assets and liabilities:
Receivables 97,475 32,370
Inventory (4,368) 1,745
Prepaid expenses and other assets 55,653 (11,460)
Accounts payable (50,193) 27,174
Accrued liabilities (21,148) (27,658)
------------- ------------
Net cash provided by (used for)
operating activities (190,190) 51,938
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,563) (2,245)
Additions to capitalized software (128,284) (130,863)
------------- ------------
Net cash used for investing activities (132,847) (133,108)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions (repayments) to the line
of credit-Bank 50,686 (10,000)
Additions to the line of credit- Related Party 159,000 40,000
Principal payments under capital lease obligations (1,504) (460)
Proceeds from exercise of stock options 6,443 --
------------- ------------
Net cash provided by financing activities 214,625 29,540
------------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (108,412) (51,630)
CASH AND CASH EQUIVALENTS, beginning of period 143,505 149,738
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 35,093 $ 98,108
============= ============
See Notes to Condensed Financial Statements
6
Supplemental Cash Flows Information
Issuance of stock and stock purchase warrants
for deferred loan origination fees
related to the DEMALE, LLC line of credit $ -- $ 38,889
Capital lease obligation incurred for equipment 1,993 --
7
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
Company incurred a net loss for the three and six months ended June 30, 2004 and
for the three months ended June 30, 2003, the outstanding stock options and
stock purchase warrants were antidilutive and have been excluded from the
computation of diluted earnings per share. For the six months ended June 30,
2003, approximately 7,000 outstanding stock options are considered dilutive and
are included in the denominator for the computation of diluted earnings per
share.
STOCK-BASED COMPENSATION - 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.
8
- --------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
- --------------------------------------------------------------------------------------------
Net income (loss), as reported $ (265,914) $ (36,046) $ (420,777) $ 8,090
- --------------------------------------------------------------------------------------------
Less: Total stock-based
employee compensation cost
determined under the fair value
based method, net of income taxes (5,806) (28,281) (11,613) (43,354)
- --------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (271,720) $ (64,327) $ (432,390) $ (35,264)
- --------------------------------------------------------------------------------------------
Earnings per share:
- --------------------------------------------------------------------------------------------
Basic and Diluted - as reported $ (.08) $ (.01) $ (.13) $ .00
- --------------------------------------------------------------------------------------------
Basic and Diluted - pro forma $ (.08) $ (.02) $ (.13) $ (.01)
- --------------------------------------------------------------------------------------------
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 June 30, 2004, there was $213,600 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
June 30, 2004) but may not be less than 7%; therefore, at June 30, 2004,
interest was being accrued at 7%.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
In the quarter ended June 30, 2004, 1mage Software, Inc. (the "Company")
generated only $334,000 in revenue, a 34% drop from year ago levels. The
quarterly results were another setback for the Company as it seeks to
consistently generate revenues comparable to those generated prior to the
termination by Reynolds & Reynolds, Inc., its largest customer, of its 1996
Subscription and Maintenance Agreement with the Company. Since Reynolds'
termination in April 2002, the Company's revenues have been 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. Similarly, the Company's $266,000 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. In addition, while the Company brought
various legal actions against Reynolds on various grounds, the recent dismissal
of the Company's claims by an arbitrator means that a successful resolution of
those legal actions is now unlikely. Accordingly, the Company will be
rededicating itself to the development of new customers and new markets in the
future.
The more pressing challenge faced by the Company today, however, is that of
liquidity. 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. As a result, the Company implemented across the board pay cuts of
10% effective June 30 and has reduced headcount to 15 employees. Moreover,
preliminary indications are that, with the distraction of the Reynolds
arbitration hearing and decision no longer before it, the Company's sales should
be stronger in the third quarter.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2004 VERSUS JUNE 30, 2003
The Company reported revenue of $334,000 for the second quarter of 2004, a
$173,000 decrease (34%) from $507,000 posted for the second quarter in 2003.
This decrease was due to a $125,000 (61%) decrease in revenue from software
licenses and a $38,000 (17%) decrease in annual license fee revenue. In
addition, legal expenses of $76,000 for the quarter represented a 176% increase
over the second quarter of 2003, contributing to a $65,000 increase in Selling,
General and Administrative expenses. Consequently, the Company posted a net loss
of $266,000 or $(.08) per share, as compared to a net loss of $36,000, or $(.01)
per share, for the same quarter a year ago.
Annual license fee revenue of $185,000 for the second quarter was 17% lower than
the $223,000 reported in the preceding year due to the timing of revenue
recognition for certain customers. Revenue from hardware sales of $13,000
decreased $28,000 (69%) over the same quarter in 2003. SG&A expenses of $379,000
were $65,000 (21%) greater than the same quarter in 2003, primarily due to
increases in legal and compensation expenses.
10
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2004 VERSUS JUNE 30, 2003
The Company reported revenue of $778,000 for the six months ended June 30, 2004,
a decrease of $158,000, or 17%, from the $936,000 reported for the first six
months in 2003. Gross profit decreased $173,000 for the comparable year to date
periods. Software sales decreased $89,000, or 29%. Hardware sales decreased
$60,000, or 70%, as a result of customers' varying needs for equipment. Annual
license fees decreased $63,000, or 15%. For the six months ended June 30, 2004,
gross profit as a percent of revenue was 42%, as compared to 53% for the year
earlier period. SG&A expenses of $728,000 for the second quarter 2004 were
$105,000 or 17% higher than $623,000 for the six months ended June 30, 2003,
primarily due to increased salaries, legal expenses, and travel costs. The
Company reported a net loss of $421,000, or $(.13) per share, for the six months
ended June 30, 2004, as compared to net income of $8,090, or $.00 per share, for
the same period one year ago.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $35,000 decreased approximately
$108,000 during the six months ended June 30, 2004 as compared to December 31,
2003. During 2004, the Company used cash of $128,000 for deferred development
expenses. The Company had a working capital deficit of $399,000 as of June 30,
2004, versus working capital of $175,000 as of December 31, 2003 and a working
capital deficit of $94,000 as of June 30, 2003. The decline in working capital
during the six months is attributable to the reclassification of the Company's
private line of credit as short term debt since it matures in June, 2005.
Included in current liabilities is $272,000 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 on
June 30, 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 June 30, 2004, the Company had drawn $213,600 on its
line of credit with DEMALE, a related party. This private line of credit has a
cap of $300,000 and 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. The Company has failed to replace all
of the revenue lost as a result of the termination of the 1996 contract and
Reynolds' subsequent actions. At this point in time, in light of the
arbitrator's decision to dismiss the Company's claims against Reynolds, it is
unlikely that a significant amount of that lost revenue will be awarded to the
Company in the ongoing litigation between the Company and Reynolds. Based on the
arbitrator's decision, it is possible that the Company will never 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.
11
FORWARD LOOKING STATEMENTS
Some of the statements made herein that are not historical facts may be
considered "forward looking statements," including but not limited to the
statements made in the Overview section of this Management's Discussion and
Analysis. 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 June 30, 2004, or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation described
above.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 17, 2004, the company received notification from the American
Arbitration Association that all of the Company's claims against the Reynolds
and Reynolds Company ("Reynolds") submitted for arbitration had been dismissed
and a second hearing would be held, as previously scheduled, on October 11, 2004
for consideration of Reynolds' counterclaims against the Company.
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
The Registrant's annual meeting of shareholders was held on June 7, 2004.
At the meeting, David R. DeYoung, Mary Anne DeYoung, Robert Wiegand II, John G.
Mazza and Spencer D. Lehman were elected as directors. The shareholders approved
and ratified the appointment of BKD, LLP as the Company's independent
accountants for the year ending
12
December 31, 2004, and approved an amendment to the Company's Equity Incentive
Plan to increase the number of shares available under the Plan.
The number of votes cast for or withheld for each director was as follows:
NOMINEE FOR WITHHELD
David R. DeYoung 3,187,281 10,458
Mary Anne DeYoung 3,187,281 10,458
Robert Wiegand II 3,187,309 10,430
John G. Mazza 3,187,366 10,373
Spencer D. Lehman 3,187,366 10,373
The number of votes cast for, against and abstentions for ratification of the
auditors was as follows:
FOR AGAINST ABSTAIN
3,169,719 27,745 275
The number of votes cast for, against and abstentions for approval of the
amendment to the Company's Equity Incentive Plan was as follows:
FOR AGAINST ABSTAIN
1,900,963 24,110 525
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
A report on Form 8-K dated June 17, 2004 under Item 5 was filed with
the Commission on June 24, 2004.
13
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: 8/16/2004 /S/ DAVID R. DEYOUNG
--------------------
David R. DeYoung
President, Principal and Chief Executive Officer
Date: 8/16/2004 /S/ MARY ANNE DEYOUNG
---------------------
Mary Anne DeYoung
Vice President, Finance and Principal
Financial Officer