<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
--------- ---------
Commission File No. 0-12471
IMAGEMATRIX CORPORATION
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1313108
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 S. COLORADO BLVD. - SUITE 500, DENVER, COLORADO 80246
(Address of principal executive offices) (Zip code)
(303) 399-3700
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the past 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
The small business issuer had 9,567,678 shares of common stock
outstanding as of April 25, 1998.
Transitional Small Business Disclosure Format:
Yes No X
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
--------- --------
<S> <C> <C>
REVENUE:
Licenses $ 2,230 $ 686
Services and maintenance 417 312
Hardware and other 360 346
-------- --------
Total revenue 3,007 1,344
COST OF REVENUE:
Licenses 935 303
Services and maintenance 775 170
Hardware and other 270 215
-------- --------
Total cost of revenue 1,980 688
Gross profit 1,027 656
Selling, general and
administrative expenses 1,735 1,208
-------- --------
Operating loss (708) (552)
Other income (expense) (14) 4
-------- --------
NET LOSS (722) (548)
Accrued preferred stock dividends (1) -
-------- --------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $ (723) $ (548)
========= =======
NET LOSS PER COMMON SHARE $ (0.08) $ (0.11)
========= =======
COMMON SHARES USED IN COMPUTING NET LOSS
PER COMMON SHARE 9,568 4,880
========= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
IMAGEMATRIX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
ASSETS
Current assets
Cash $ 863
Accounts receivable 2,147
Unbilled revenues 732
Prepaid expenses and other current assets 184
-----------
Total current assets 3,926
Property and equipment at cost, less accumulated
depreciation of $478 384
Other assets, net of accumulated
amortization of $86 34
-----------
TOTAL ASSETS $ 4,344
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,261
Deferred revenue 560
Other current liabilities 331
-----------
Total current liabilities 2,152
Stockholders' equity
Preferred stock, no par value, 5,000,000
shares authorized, 100,000 shares
issued and outstanding (liquidation
preference of $100,000) 114
Common stock, no par value, 20,000,000
shares authorized, 9,567,678 shares
issued or outstanding 11,768
Accumulated deficit (9,690)
-----------
Total stockholders' equity 2,192
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,344
=========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
IMAGEMATRIX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------
1998 1997
------ ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (722) $ (548)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 138 103
Changes in operating assets and liabilities:
Accounts receivable 228 (254)
Unbilled revenues 180 (396)
Inventory 20 68
Prepaid expenses and other current assets 44 (18)
Accounts payable 643 410
Deferred revenue (407) 33
Other current liabilities 62 -
Other assets (25) 10
------ ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 161 (592)
INVESTING ACTIVITIES
Purchases of computer equipment and furniture (4) (35)
------ -----
NET CASH USED BY INVESTING ACTIVITIES (4) (35)
FINANCING ACTIVITIES
Issuance of common stock, net of
offering costs of $36 - 465
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 465
Net increase (decrease) in cash
and cash equivalents 157 (162)
Cash and cash equivalents at
beginning of period 706 324
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 863 $ 162
====== ======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IMAGEMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-
KSB for the year ended December 31, 1997. The accompanying
financial statements have been prepared in accordance with
generally accepted auditing standards and in the opinion of the
Company's management, such financial statements include all
adjustments necessary to summarize fairly the Company's financial
position and results of operations. All adjustments made to the
interim financial statements presented are of a normal, recurring
nature. The results of operations for the first quarter ended
March 31, 1998, may not be indicative of results that may be
expected for the year ending December 31, 1998.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
In first quarter 1998, the Company adopted Statement of Position
SOP 97-2, "Software Revenue Recognition." The adoption of 97-2
did not have a material affect on the results of operations in
the first quarter 1998.
SOFTWARE DEVELOPMENT COSTS
The Company recognizes software and system development expenses
at the time of occurrence for all software and system conceptual
design, writing, programming, and production prior to a Beta-site
test at a customer site. Once a product has been installed at a
customer Beta-site and functionality and conceptual design has
been proved, the Company capitalizes all expenses associated with
the development of that software until general release to the
public. If upon review of the costs incurred during the period
from initial Beta-site testing until general release to the
public the Company determines that the costs incurred were
immaterial, such costs will be expensed in that period. At March
31, 1998, all capitalized software has been amortized.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ImageMatrix Corporation (the Company) designs, sells and installs
software that improves productivity and customer service for
health maintenance organizations (HMOs), health insurance
companies, workers compensation organizations, dental providers
and preferred provider organizations and third-party
administrators (TPAs). These organizations are collectively
known as Managed Care Organizations (MCOs). The Company's
systems utilize the Company's proprietary software as well as
components manufactured by third party software, hardware and
peripheral vendors. The Company has developed a suite of
software products including CaptureMatrix (TM), ClaimMatrix (TM)
and ServiceMatrix (TM). CaptureMatrix (TM) is a document
capture, storage and retrieval system. ClaimMatrix (TM) performs
imaging-based workflow claims processing. ServiceMatrix (TM) was
released on June 30, 1997 and enables customer service
departments to process customer inquiries in a rapid, cost-
efficient manner.
RESULTS OF OPERATIONS
REVENUE
Total revenue for the quarter ended March 31, 1998, was
$3,007,000 an increase of $1,663,000 or 123.7% over the
$1,344,000 reported in first quarter 1997. This increase was
primarily the result of more customers and an increase in
transaction size in 1998. As yet, the Company does not believe
that it is in a position to reliably predict continued quarterly
or annual growth. Further, the Company believes that it will
continue to experience significant quarterly variations in
revenue, either positively or negatively, until the number of
sales increases to the point where the presence or absence of a
larger order, or the timing of revenue recognition of portions of
such orders, will not significantly impact revenues from period
to period.
Sales to the MCO industry increased $1,766,000 or 147.0% from
$1,202,000 in first quarter 1997 to $2,968,000 in the 1998
period. In first quarter 1998, sales to the MCO industry as a
percent of total sales were 98.7% compared to 89.4% in the same
1997 period. Although such sales may fluctuate from quarter to
quarter, the Company believes that sales to the MCO industry will
remain a significant percentage of total revenue in the future
due to the Company's extensive focus of its selling efforts on
that industry.
LICENSES REVENUE
For the quarter ended March 31, 1998, revenue from sales of
software licenses (including third party software) rose from
$686,000 in 1997 to $2,230,000 in 1998; an increase of $1,544,000
or 225.1%. This increase is the result of a smaller number of
larger transactions for the Company's proprietary and third party
software entered into during 1998.
SERVICES AND MAINTENANCE REVENUE
Revenue from services and maintenance increased $105,000 or 33.7%
from $312,000 in the 1997 first quarter to $556,000 in the first
three months of 1998. The increase experienced in first quarter
1998 was the result of the increase in licenses revenue described
above due to the fact that the Company typically performs
implementation services in conjunction with the sale of such
software licenses.
HARDWARE AND OTHER REVENUE
Revenue from sales of hardware and other in the first quarter
1998 remained relatively unchanged from that reported in the
first quarter 1997.
COST OF REVENUE
COST OF LICENSES REVENUE
Cost of licenses revenue includes third party software costs and
amortization of capitalized software. Cost of licenses revenue
increased from $303,000 in the first quarter of 1997 to $935,000
in the first
<PAGE>
quarter of 1998. This increase of $632,000 or
208.6% is directly related to the increase in the license revenue
experienced in the first quarter of 1998. Gross margin on
license sales (gross profit as a percent of sales) increases
slightly to 58.0% in 1998 compared to 55.8% in 1997.
COST OF SERVICES AND MAINTENANCE REVENUE
Cost of services and maintenance revenue includes the personnel
and related overhead costs for training and customer support
services combined with fees paid to third party subcontractors.
Cost of services and maintenance increased $605,000 or 355.9%
from $170,000 in first quarter 1997 to $775,000 in first quarter
1998. Gross margin on cost of services and maintenance sales
declined from 45.5% in the 1997 period to a negative 85.8% in the
first three months of 1998. Several items continue to adversely
impact gross margin in this revenue category. Third party
subcontractor costs increased and longer than anticipated
implementation periods continued in first quarter 1998. The
Company has defined a strategy to reduce costs of implementation
and believes that this strategy will result in improvements in
this area in future quarters.
COST OF HARDWARE AND OTHER
Cost of hardware and other revenue includes third party hardware
sold to proprietary software customers. Cost of hardware and
other revenue increased $55,000 or 25.6% in first quarter 1998
from first quarter 1997. Related gross margin declined from
37.9% in the three months ended March 31, 1997 to 25.0% in the
comparable 1998 period. The change is the result of lower margin
realized on hardware sales in first quarter 1998 when compared to
the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
In first quarter 1998, selling general and administrative costs
increased $527,000 or 43.6% over the $1,208,000 reported in first
quarter 1997 to $1,735,000. The increase is primarily the result
of increases in administrative costs related to an increased
number of employees in 1998 compared to 1997. Additionally,
implementation services departmental expenses increased as the
Company increased its project management and training staff.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is generated from both internal and
external sources and is used to fund short-term working capital
needs. Internally generated liquidity is measured by working
capital and operating cash flow as discussed below. At March 31,
1998, net working capital was $1,774,000. The Company believes
that the cash generated from future operations and its $2,000,000
line of credit (whereby the Company is allowed to borrow up to
80% of approved accounts receivable balances) is sufficient to
finance its short-term working capital needs for the next six
months. Historically, the Company has successfully raised over
$15.4 million in gross proceeds by selling its Common and
Preferred Stock. The Company believes that it has access to
capital markets and if the need arises will utilize these markets
as necessary. However, there can be no assurance that this will
occur.
At March 31, 1998, no amount was outstanding under the line of
credit. At April 29, 1998, $1.4 million was outstanding.
The Company's short-term and long-term capital requirements will
depend on many factors, including, but not limited to, product
revenues from operations, gross profit levels, working capital
requirements, research and development expenses, capital
expenditures, successful project management, timely system
installations and variability of quarterly operations. The
Company's market development efforts are still relatively young
and changes in the anticipated business development of the
Company which extend the Company's time to achieve profitability
could cause the Company to issue debt, additional equity or a
combination thereof. There can be no assurance that additional
financing will be available, or, if available, the terms of such
financing will be favorable to the Company or its shareholders
without substantial dilution of their ownership rights. If
adequate funds are not available, or are not available on terms
acceptable to the Company, the Company may be required to curtail
its operations significantly, forego market opportunities, or
obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish material rights
to certain of its technologies or potential markets. The Company
believes that with improved project management personnel and
increased installation and project management experience, it can
shorten the installation time lines and thereby reduce working
capital needs. However, there can be no assurance that this will
occur.
<PAGE>
Net cash provided by operating activities during the three months
ended March 31, 1998 was $161,000. Contributing to this was the
decrease in accounts receivable and unbilled revenue, the
increase in accounts payable and the decrease in deferred
revenue. Offsetting these changes was the loss experienced
during first quarter 1998.
YEAR 2000 ISSUE
Many currently installed computer systems and software products
in use by businesses and government organizations are coded to
accept two digits, rather than four, to specify the year. As a
result, in less than two years, computer systems and/or software
used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in
the software industry concerning the potential effects associated
with such compliance.
The Company's proprietary software, upon which its operations are
significantly dependent, was originally designed to be Year 2000
compliant. As such, the Company expects future costs related to
Year 2000 compliance issues to be minimal. In addition, other
third party software used internally is Year 2000 compliant. The
Company will continue to monitor its third party software vendors
for compliance. Based upon the above facts, the Company believes
that costs related to the Year 2000 issue will be minimal.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The statements contained in this report which are not historical
facts are forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking
statements, including, but not limited to, the risk that the
market for imaging-based claims processing may not develop as
expected, the degree of success of the Company's market
initiatives, expansion of sales in the MCO industry, the success
of the Company in forecasting demand for the ClaimMatrixT and
ServiceMatrixT system, the success of the Company in increasing
ClaimMatrixT and ServiceMatrixT system sales as a percentage of
overall revenues to increase gross profit margins and decrease
general, administration and sales costs as a percentage of
overall gross profit, the risk that the Company will not be able
to achieve pricing levels or installation time lines sufficient
to increase gross margins, the risk that the long length of the
Company's sales cycle could delay revenues, the risk of
variability of quarterly operations, the risk that the Company
will not achieve profitability, the risk that the Company will
not be able to raise future required capital and those risks and
uncertainties discussed more completely in the Company's Form S-3
Registration Statement filed October 3, 1997 and its Form 10-KSB
for the year ended December 31, 1997.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
3.1 Amended and Restated Articles of Incorporation. (1).
3.2 Bylaws of Registrant. (1).
3.3 Articles of Amendment to Articles of Incorporation, creating
Series A Convertible Preferred Stock. (2).
4.1 Form of Certificate for Shares of Common Stock. (1).
4.2 Form of Warrant Agreement and Redeemable Warrant. (1).
4.3 Form of Stock Purchase Warrant A. (2).
4.4 Form of Stock Purchase Warrant B. (2).
10.1 Employment Agreement dated December 29, 1995 by and
between ImageMatrix Corporation and Gerald E.
Henderson. (1).
10.2 Severance Agreement dated December 29, 1995 by and
between ImageMatrix Corporation and Dennis C. Hefter.
(1).
10.3 Letter Agreement dated December 21, 1995 by and between
ImageMatrix Corporation and Blair W. McNea. (1).
10.4 ImageMatrix Corporation Founders and Consultants Stock
Option Plan. (1).
10.5 ImageMatrix Corporation 1996 Stock Option Plan. (1).
10.6 ImageMatrix Corporation Stock Option Plan for Non-
Employee Directors. (1).
10.7 Asset Purchase Agreement dated August 30, 1995 by and
among Documatrix Acquisition Corporation, Random
Access, Inc. and Gerald E. Henderson. (1).
10.8 Authorized Reseller Agreement dated February 21, 1996
by and between ImageMatrix Corporation and Optika
Imaging Systems, Inc. (1).
10.9 Reseller Agreement dated January 8, 1996 by and between
ImageMatrix Corporation and FileNet Corporation. (1).
10.10 Asset Purchase Agreement dated February 15, 1995 by and
among Random Access, Inc., Documatrix Corporation and Gerald E.
Henderson. (1).
10.11 Change in Terms Agreement dated December 27, 1995
by and among Bank One Colorado, N.A., Gerald E.
Henderson, Carolyn Lee Henderson and Documatrix
Corporation, as amended by Change in Terms Agreement
dated February 29, 1996 by and among Bank One Colorado,
N.A., Gerald E. Henderson, Carolyn Lee Henderson,
Documatrix Corporation and ImageMatrix Corporation.
(1).
<PAGE>
10.12 Form of Securities Purchase Agreement dated April
14, 1997. (2).
10.13 Warrant Exercise Agreement dated September 4, 1997 by
and between ImageMatrix Corporation and Mueller Trading L.P. of
Lakewood. (3)
10.14 Warrant Exercise Agreement dated October 24, 1997 by
and between ImageMatrix Corporation and Mueller Trading L.P. of
Lakewood. (3)
10.15 Agreement dated October 27, 1997 by and between
ImageMatrix Corporation and Treuhand,
Inc. (4)
27 Financial Data Schedule.
- ---------------------------------
(1) Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (File No. 333-1990).
(2) Incorporated by reference from the Registrant's Form 10-QSB
for the quarter ended March 31, 1997.
(3) Incorporated by reference from the Registrant's Form 10-QSB
for the quarter ended September 30, 1997.
(4) Incorporated by reference from the Registrant's Form 10-KSB
for the year ended December 31, 1997.
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended
March 31, 1998.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMAGEMATRIX CORPORATION
Date: April 29, 1998 By: /s/ Gerald E. Henderson
-----------------------
Gerald E. Henderson, Chief
Executive Officer (Principal
Executive Officer)
Date: April 29, 1998 By: /s/ Cathy A. Lewis
-----------------------
Cathy A. Lewis, Controller and
Secretary
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 863
<SECURITIES> 0
<RECEIVABLES> 2147
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3926
<PP&E> 384
<DEPRECIATION> 478
<TOTAL-ASSETS> 4344
<CURRENT-LIABILITIES> 2152
<BONDS> 0
0
114
<COMMON> 11768
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4344
<SALES> 3007
<TOTAL-REVENUES> 3007
<CGS> 1980
<TOTAL-COSTS> 1980
<OTHER-EXPENSES> 1735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14)
<INCOME-PRETAX> (722)
<INCOME-TAX> 0
<INCOME-CONTINUING> (722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (723)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
