<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________________ to ____________________
Commission file number 0-12535
IMAGE SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-0866294
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6486 SOUTH QUEBEC STREET, ENGLEWOOD, COLORADO 80111
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(Address of principal executive officers)
(303) 773-1424
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(Registrant's telephone number, including area code)
N/A
------------------------------------------
(Former name, former address and former
Fiscal year, if changed since last report)
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF STOCK NO. SHARES OUTSTANDING DATE
- -------------- ---------------------- ----
Common 2,129,563 July 17, 1996
Page 1 of 11
Exhibit Index Begins on Page 9
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IMAGE SOFTWARE, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Balance Sheets - June 30, 1996, and December 31, 1995 3
Statements of Operations - for three months
ended June 30, 1996 and June 30, 1995 4
Statements of Operations - for six months
ended June 30, 1996 and June 30, 1995 5
Statements of Cash Flows - for six months
ended June 30, 1996 and June 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Items 1-5 9
Item 6 Exhibits and Reports on Form 8-K 9
Page 2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IMAGE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, December 31,
Assets 1996 1995
- ---------------------------------------------------- ----------- ------------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 348,158 $ 345,852
Trade accounts receivable, net 518,493 568,639
Inventory, at lower of cost or market 125,392 28,642
Current portion of notes receivable 154,536 15,210
Prepaid expenses 44,176 25,839
----------- -----------
Total current assets 1,190,755 984,182
Property and equipment, net 240,042 268,550
Deferred computer software development costs, net 713,058 708,360
Investment in affiliate 0 13,939
Other assets 29,267 28,502
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TOTAL ASSETS $ 2,173,122 $ 2,003,533
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----------- -----------
Liabilities and Stockholders' Equity
- ----------------------------------------------------
Current Liabilities:
Current portion of long-term debt:
Other $ 150,000 $ 0
Capital lease obligations 8,571 11,347
Trade accounts payable 161,140 221,401
Line of credit 109,000 100,477
Accrued expenses and other liabilities 136,035 199,211
----------- ------------
Total current liabilities 564,746 532,436
Long-term obligations:
Capital lease obligations 18,768 21,461
Other 0 150,000
----------- -----------
Total liabilities 583,514 703,897
Stockholders' Equity:
Common stock, par value $.004 - 10,000,000
shares authorized; shares outstanding:
1996, 2,130,813; 1995, 1,932,934 8,518 7,748
Paid-in capital 6,830,121 6,619,758
Accumulated deficit (5,249,031) (5,327,870)
----------- -----------
Total stockholders' equity 1,589,608 1,299,636
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,173,122 $ 2,003,533
----------- -----------
----------- -----------
</TABLE>
Page 3
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IMAGE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Three Months Ended June 30,
---------------------------
1996 1995
--------- ---------
REVENUE:
System sales $ 517,071 $ 652,289
Services and other 68,152 132,869
--------- ---------
Total Revenue 585,223 785,158
COST OF REVENUE:
System sales 104,008 470,685
Services and other 94,379 194,529
--------- ---------
Total Cost of Revenue 198,387 665,214
GROSS PROFIT 386,836 119,944
% of Revenue 66.1% 15.3%
EXPENSES:
Selling, general & administrative 267,935 493,185
--------- ---------
Total Operating Expenses 267,935 493,185
INCOME (LOSS) FROM OPERATIONS 118,901 (373,241)
OTHER INCOME:
Equity in earnings/(loss) of
affiliate (8,900) 0
Interest expense (6,667) (3,498)
Interest income 3,569 8,679
Other (66) 500
--------- ---------
Total other income (expense) (12,064) 5,681
NET INCOME (LOSS) BEFORE INCOME TAXES 106,837 (367,560)
PROVISION FOR INCOME TAXES 0 0
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NET INCOME (LOSS) $ 106,837 $(367,560)
--------- ---------
--------- ---------
EARNINGS (LOSS) PER COMMON SHARE $0.05 ($0.19)
--------- ---------
--------- ---------
WTD AVG NUMBER OF SHARES OUTSTANDING 1,969,986 1,901,250
--------- ---------
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Page 4
<PAGE>
IMAGE SOFTWARE INC.
STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Six Months Ended June 30,
--------------------------
1996 1995
--------- ----------
REVENUE:
System sales $ 807,423 $1,734,456
Services and other 162,536 249,676
--------- ----------
Total Revenue 969,959 1,984,132
COST OF REVENUE:
System sales 207,575 1,054,042
Services and other 207,843 382,379
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Total cost of revenue 415,418 1,436,421
GROSS PROFIT 554,541 547,711
% OF REVENUE 57% 28%
EXPENSES:
Selling, general & administrative 575,483 967,857
--------- ----------
Total operating expenses 575,483 967,857
INCOME (LOSS) FROM OPERATIONS (20,942) (420,146)
OTHER INCOME:
Equity in earnings/(loss) of affiliate (13,939) 0
Interest expense (13,628) (7,177)
Interest income 7,360 14,260
Other 119,988 500
--------- ----------
Total other income (expense) 99,781 7,583
NET INCOME (LOSS) BEFORE INCOME TAXES 78,839 (412,563)
PROVISION FOR INCOME TAXES 0 0
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NET INCOME (LOSS) $ 78,839 $ (412,563)
--------- ----------
--------- ----------
EARNINGS (LOSS) PER COMMON SHARE $ 0.04 $ (0.22)
--------- ----------
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WTD. AVG. NUMBER OF SHARES OUTSTANDING 2,003,481 1,899,025
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Page 5
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IMAGE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Six Months Ended June 30,
-------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 106,837 $(412,563)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 178,467 268,040
Equity in (earnings) loss of affiliate 13,939 0
Allowance for doubtful accounts (35,000) 6,500
Compensation expense related to
nonqualified stock options 32,000
Issuance of stock for services 11,244 64,616
Write-down of notes receivable 0 22,574
Changes in operating assets/liabilities:
Receivables 40,072 570,584
Inventory (15,000) (10,710)
Prepaid expenses (29,581) 52,076
Accounts payable (60,261) (100,861)
Accrued liabilities (66,116) (240,064)
Income taxes payable 0 (27,658)
--------- ---------
Net cash provided by operating activities 144,601 224,534
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (15,772) (66,677)
Increase in capitalized software (138,885) (200,340)
Investment in affiliate 0 (50,000)
Increase in other assets (765) 0
Payments from notes receivable 10,074 16,968
--------- ---------
Net cash used for investing activities (145,348) (300,049)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of line of credit (155,927) (145,850)
Additions to line of credit 164,450 100,000
Repayment of long-term debt (5,470) (142,853)
Issuance of convertible notes 0 100,000
--------- ---------
Net cash provided by (used for)
financing activities 3,053 (88,703)
--------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,306 (164,218)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 345,852 648,714
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 348,158 $ 484,496
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Page 6
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IMAGE SOFTWARE, INC.
Notes to Consolidated Financial Statements
GENERAL:
Management has elected to omit substantially all notes to the consolidated
unaudited interim financial statements. Reference should be made to the
Company's annual report on From 10-K for the year ended December 31, 1995 as
this report incorporates the Notes to the Company's year-end financial
statements.
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 and 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.
INCOME TAXES:
Income Taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of depreciation,
capitalized software development cost and allowance for doubtful accounts for
financial and income tax reporting. The Company currently has substantial
net operating loss, research credit and investment tax credit carry forwards.
INCOME/LOSS PER SHARE:
Income (Loss) per share is computed by dividing net income (loss) by the
weighted average number of common and equivalent shares. Common stock
equivalents were not included in the weighted weighted average number of
shares outstanding for loss periods as their effect was anti-dilutive. Fully
diluted earnings per share are either anti-dilutive or not materially
different from primary earnings per share.
COMMON STOCK:
On March 10, 1993, the Board of Directors approved a 4-for-1 reverse stock
split of the Company's common stock effective March 24, 1993. On May 17,
1993, the shareholders of the Company's common stock ratified the reverse
stock split and approved an amendment to the Articles of Incorporation to
reduce the number of authorized shares of common stock to 10,000,000 and
change the par value to $.004. All references in the accompanying financial
statements as to the number of common shares and per share amounts have been
restated to reflect the reverse stock split and the amendment.
Page 7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE
MONTHS ENDED JUNE 30, 1995
IMAGE Software, Inc.'s (the "Company") revenue of $585,223 for the second
quarter of 1996 was 25% lower than $785,158 reported for the same period a
year ago. For the three months ended June 30, 1996, the Company posted net
income of $106,837 versus a net loss of ($367,560) for the same period in
1995. Earnings per share for the three months ended June 30, 1996 were $.05
compared to a net loss per share of ($.19) for the three months ended June
30, 1995. The decrease in revenue is largely attributable to a 94% decline
in low-margin hardware sales, resulting from the Company's efforts to focus
on proprietary software sales and related services. Revenue generated from
recurring annual software license fees comprised 50% of revenue reported for
the second quarter of 1996, compared to 7% of total revenue for the same
quarter in 1996. As a result of cost-cutting measures implemented during
1995, costs associated with providing technical support, including salaries,
were 51% lower for the three months ended June 30, 1996 compared to the same
period in 1995. Selling, general, and administrative ("SG&A") expenses of
$267,935 for the quarter ended June 30, 1996 were 46% lower than SG&A
expenses for the same quarter in 1995. This decrease in expenses is
attributable to lower costs in nearly every area as measures were taken in
the second half of 1995 across the board to reduce costs to a level
commensurate with revenue.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS
ENDED JUNE 30, 1995
IMAGE Software, Inc.'s (the "Company") revenue of $969,959 for the six months
ended June 30, 1996 was 51% lower than $1,984,132 reported for the same
period a year ago. For the six months ended June 30, 1996, the Company posted
net income of $78,839 versus a net loss of ($412,563) for the same period in
1995. Earnings per share for the six months ended June 30, 1996 were $.04
compared with net loss per share of ($.22) for the six months ended June
30, 1995. The $1,014,173 decrease in revenue is primarily the result of
$773,101 less hardware sales for comparable year over year periods. Recurring
annual license fees for the six months ended June 30, 1996 accounted for
$409,476 (42% of total revenue), compared to $193,757 (11% of total revenue)
for the same period in 1995. In addition, SG&A expenses were $392,374 (41%)
lower for the second quarter 1996 as compared to the second quarter of 1995.
In March, 1996, the Company recovered $110,838 of other income by collecting
receivables which had previously been written off as bad debt.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, cash on hand increased $2,306 from $345,852 at December
31, 1995. Additions to capitalized software used cash of $138,885 as research
and development costs were incurred in order to continue to enhance the
document imaging software product offerings. In addition, cash was used to
obtain third party software licenses which are resold to our customers.
The Company's financial resources include cash on hand, revenues from
operations, and management of funds available on its revolving line of
credit. In the Company's judgment, sufficient financial resources are
available to meet current working capital needs. The Company has a $110,000
revolving line of credit which bears interest at Prime +1% and is secured by
the Company's notes and accounts receivable. On July 15, 1996, there were
$49,000 borrowings against the line of credit.
Page 8
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings Inapplicable
Item 2. Changes in Securities 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
Financial Data Schedule 27
(B) Reports on Form 8-K
Form 8-K dated May 31, 1996 reported Item 5. Other Events was filed on
June 5, 1996.
Form 8-K/A for the Form 8-K dated May 31, 1996 was filed July 1, 1996.
Page 9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Excahnge Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunti duly authorized.
IMAGE Software, Inc.
--------------------
(Registrant)
Date: July 24, 1996 /s/ Mary Anne DeYoung
------------------- ----------------------------------
Mary Anne DeYoung
Chief Financial Officer
EXHIBIT INDEX
Exhibit Method of Filing
------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
Page 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 348,158
<SECURITIES> 0
<RECEIVABLES> 580,901
<ALLOWANCES> 62,408
<INVENTORY> 125,392
<CURRENT-ASSETS> 1,190,755
<PP&E> 1,507,032
<DEPRECIATION> 1,266,990
<TOTAL-ASSETS> 2,173,122
<CURRENT-LIABILITIES> 564,746
<BONDS> 0
8,518
0
<COMMON> 0
<OTHER-SE> 6,830,121
<TOTAL-LIABILITY-AND-EQUITY> 2,173,122
<SALES> 585,223
<TOTAL-REVENUES> 585,223
<CGS> 198,387
<TOTAL-COSTS> 267,935
<OTHER-EXPENSES> 5,397
<LOSS-PROVISION> (35,000)
<INTEREST-EXPENSE> 6,667
<INCOME-PRETAX> 106,837
<INCOME-TAX> 0
<INCOME-CONTINUING> 106,837
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,837
<EPS-PRIMARY> $0.05
<EPS-DILUTED> $0.05
</TABLE>
