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 6/30/2002
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 specific in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
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(State of Incorporation) (IRS Employer Identification Numbers)
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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As of August 10, 2002, there were 3,146,554 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, 2002, and December 31, 2001....................3
Statements of Operations -for three months ended June 30, 2002
and June 30, 2001 ...................................................4
Statements of Operations -for six months ended June 30, 2002
and June 30, 2001 ...................................................5
Statements of Cash Flows -for six months ended June 30, 2002
and June 30, 2001 ......................................................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................8
PART II. OTHER INFORMATION
Item 1..................................................................9
Items 2-6 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,
2002 2001
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 233,208 $ 212,421
Receivables:
Trade (less allowance: 2002, $10,000; 2001, $10,000 423,652 421,977
Inventory 8,052 9,070
Deferred tax asset 50,000 50,000
Prepaid expenses and other current assets 15,960 15,597
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Total current assets 730,872 709,065
PROPERTY AND EQUIPMENT, at cost, net 58,767 57,878
OTHER ASSETS:
Software development costs, net 732,725 725,606
Other 3,058 3,058
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TOTAL ASSETS $ 1,525,422 $ 1,495,607
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 175,000 $ --
Current portion of capital lease obligations 1,629 1,784
Deferred revenue 264,000 233,000
Accounts payable 270,549 187,878
Accrued liabilities 116,912 146,510
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Total current liabilities 828,090 569,172
LONG-TERM OBLIGATIONS:
Capital lease obligations -- 1,093
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000 shares
authorized; shares outstanding:
2002 and 2001 - 3,146,554 12,586 12,586
Additional paid-in capital 7,238,658 7,238,658
Accumulated deficit (6,553,912) (6,325,902)
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Total shareholders' equity 697,332 925,342
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,525,422 $ 1,495,607
=========== ===========
See Notes to Condensed Financial Statements
3
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
2002 2001
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REVENUE
System sales and software licenses $ 253,702 $ 447,801
Services and annual fees 356,263 332,645
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Total revenue 609,965 780,446
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COST OF REVENUE:
System sales and software licenses 166,319 217,185
Services and annual fees 133,156 138,414
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Total cost of revenue 299,475 355,599
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GROSS PROFIT 310,490 424,847
% Of Revenue 51% 54%
OPERATING EXPENSES:
Selling, general & administrative 392,886 367,637
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INCOME/(LOSS) FROM OPERATIONS (82,396) 57,210
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OTHER INCOME/(EXPENSE):
Interest income
1,052 1,267
Interest expense (2,352) (1,552)
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Total other income (expense) (1,300) (285)
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INCOME/(LOSS) BEFORE INCOME TAXES (83,696) 56,925
PROVISION FOR INCOME TAXES -- --
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NET INCOME/(LOSS) $ (83,696) $ 56,925
=========== ===========
BASIC AND DILUTED INCOME/(LOSS)
PER COMMON SHARE: $ (.03) $ .02
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 3,146,554 3,146,554
=========== ===========
Diluted 3,146,554 3,374,922
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See Notes to Condensed Financial Statements
4
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30,
2002 2001
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REVENUE
System sales and software licenses $ 465,778 $ 777,010
Services and annual fees 661,451 835,833
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Total revenue 1,127,229 1,612,843
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COST OF REVENUE:
System sales and software licenses 379,157 305,638
Services and annual fees 254,854 263,939
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Total cost of revenue 634,011 569,577
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GROSS PROFIT 493,218 1,043,266
% Of Revenue 44% 65%
OPERATING EXPENSES:
Selling, general & administrative 720,183 758,131
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INCOME/(LOSS) FROM OPERATIONS (226,965) 285,135
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OTHER INCOME/(EXPENSE):
Interest income 1,855 3,022
Interest expense (2,900) (9,390)
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Total other income (expense) (1,045) (6,368)
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INCOME/(LOSS) BEFORE INCOME TAXES (228,010) 278,767
PROVISION FOR INCOME TAXES -- --
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NET INCOME/(LOSS) $ (228,010) $ 278,767
=========== ===========
BASIC AND DILUTED INCOME/(LOSS) PER
COMMON SHARE: $ (.07) $ .08
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 3,146,554 3,146,554
=========== ===========
Diluted 3,146,554 3,396,632
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See Notes to Condensed Financial Statements
5
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $(228,010) $ 278,767
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 162,305 162,089
Changes in assets and liabilities:
Receivables (1,675) (172,400)
Inventory 1,018 (1,604)
Prepaid expenses and other assets (363) 3,365
Accounts payable 82,671 50,383
Accrued liabilities and deferred revenue 1,402 47,642
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Net cash provided by operating activities 17,348 368,242
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (12,594) (12,382)
Additions to capitalized software (157,719) (132,826)
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Net cash used in investing activities (170,313) (145,208)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 175,000 135,000
Repayment of line of credit -- (335,000)
Repayment of long-term obligations (1,248) (1,009)
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Net cash provided by (used in) financing
activities 173,752 (201,009)
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DECREASE IN CASH AND CASH EQUIVALENTS 20,787 22,025
CASH AND CASH EQUIVALENTS, beginning of period 212,421 150,457
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CASH AND CASH EQUIVALENTS, end of period $ 233,208 $ 172,482
========= =========
See Notes to Condensed Financial Statements
6
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, 2001 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, 2001 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 net losses for the three and six months ended June 30, 2002,
the outstanding stock options were antidilutive and have been excluded from the
computation of diluted earnings per share.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001
1mage Software, Inc. (the "Company") reported revenue of $610,000 for the second
quarter of 2002, a 22% decrease from $780,000 posted for the second quarter in
2001. Sales of systems and software licenses (including related hardware)
decreased 59% or $254,000, which the Company attributes to the global economic
slowdown in the technology sector. Recurring Annual License Fees of $266,000
increased 18% compared to the second quarter in 2001, due to the addition of new
customers. Service revenues for the quarter ended June 30, 2002 were $17,000
less than $108,000 for the second quarter of 2001 as a result of decreased
revenue from new installations. SG&A expenses of $393,000 for the second quarter
were 7% higher than $368,000 reported for the second quarter of 2001, primarily
due to a $49,000 increase in legal expenses associated with the legal
proceedings against The Reynolds and Reynolds Company. See Part II, Item 1,
Legal Proceedings below. The Company reported a second quarter 2002 net loss of
$(83,000), or $(.03) per share, as compared to net earnings of $57,000, or $.02
per share, for the same quarter last year.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001
The Company reported revenue of $1.1 million for the six months ended June 30,
2002, a decrease of $486,000, or 30%, over $1.6 million reported for the first
six months in 2001. Revenue generated from the Company's largest customer, The
Reynolds and Reynolds Company ("Reynolds"), was $293,000 less for the six months
ended June 30, 2002 than it was for the first six months of 2001. Sales of
systems and software licenses (including related hardware) decreased 53% or
$404,000 for the comparable six-month periods. Annual license fees decreased
$125,000 due to the cancellation of a Subscription & Maintenance agreement with
Reynolds that previously required a lump sum payment of $203,000 in the first
quarter. Consulting service revenue for the first half of 2002 decreased $50,000
compared to the six months ended June 30, 2001. For the six months ended June
30, 2002, gross profit on revenue was 44%, as compared to 65% for the year
earlier period. SG&A expenses were 5% lower for the six months ended June 30,
2002, primarily due to decreased commissions and reductions in salaries and
bonuses offsetting increases in legal fees and marketing expenses. The Company
reported a net loss of $(228,000) or $(.07) per share for the six months ended
June 30, 2002, as compared to net income of $279,000 or $.08 per share for the
same period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
Reynolds terminated its 1996 Subscription and Maintenance Agreement with the
Company in the first quarter of 2002. Reynolds and the Company are currently
involved in various legal proceedings to determine the effect of that
termination on Reynolds' rights, if any, to continue licensing the Company's
software to its customers and the amount of licensing and other fees to be paid
to the Company on account of such licenses. See Part II, Item 1, Legal
Proceedings below.
While the Company cannot predict the outcome of its various legal proceedings
with Reynolds, Reynolds' decision to terminate the 1996 Agreement had a material
adverse effect on the Company's cash flow and liquid assets in the first six
months of 2002 and may have a similar
8
effect in future periods. In the absence of its termination of the 1996
agreement, Reynolds would have made a payment to the Company of $203,000 in the
first quarter of 2002. On June 22, 2002, the Company filed a summons and a
complaint for monies owed in Denver District Court for, among other things, a
payment of $193,611 due upon termination of the 1996 agreement. On July 23,
3002, Reynolds deposited that sum with the clerk of the district court, pending
court order as to its disposition. See Part II, Item 1, Legal Proceedings below.
As previously disclosed, the direct and indirect expenses of the legal
proceedings between the Company and Reynolds may have a material adverse impact
on the Company's operating results and financial condition.
As of June 30, 2002, cash on hand increased $20,787 from $212,421 at December
31, 2001, primarily due to cash advances on the line of credit. There were
borrowings of $175,000 against the line of credit at June 30, 2002.
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's line of credit expires February 24,
2003 and bears interest at prime plus 1.5% and is secured by the Company's
accounts receivables and general intangibles.
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, unanticipated results or costs of ongoing litigation,
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.
9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Please see Part II, Item 1. Legal Proceedings in the Company's Form 10-Q for the
period ended March 31, 2002. On June 21, 2002, the Company filed a new civil
action seeking monies owed by The Reynolds and Reynolds Company under its 1996
subscription and maintenance agreement with the Company in Colorado district
court for the City and County of Denver. 1MAGE SOFTWARE, INC. v. THE REYNOLDS
AND REYNOLDS CO. Case No.: 02-CV-4701 ("the "Collection Action"). In its
complaint in the Collection Action, the Company demands immediate payment of
$193,611 currently due under that contract plus interest and costs. Reynolds
deposited the $193,610.90 with the court clerk, pending order of the court as to
its disposition and has filed an answer denying liability.
On June 6, 2002, in 1MAGE SOFTWARE, INC. v. THE REYNOLDS AND REYNOLDS CO., ET
AL., No. 02-CV-3268 (the "Declaratory Judgment Action"), the court referred the
case to mediation to be held in Colorado on August 16, 2002. On July 11, 2002,
the Company filed a motion in the Declaratory Judgment Action seeking partial
summary judgment against Reynolds and certain of its Colorado licensees who
continue to use the Company's software on the grounds that both the 1996
agreement and the 1994 agreement provide that annual fees must be paid and
Reynolds paid those annual licensing and subscription fees for six years,
without protest.
The Company cannot predict the results of any mediation, arbitration or
litigation with Reynolds but the burden imposed by these legal proceedings,
including the direct and indirect costs and the diversion of the Company's other
limited resources, may continue to have an adverse effect on the Company's
results of operations. This burden may prove to be material to the Company's
financial condition or results of operation in future reporting periods.
10
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
99.1 Certification of Periodic Report for Chief Executive Officer
99.2 Certification of Periodic Report for Chief Financial Officer
(B) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended June 30, 2002.
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: August 14, 2002 By: /S/ MARY ANNE DEYOUNG
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Mary Anne DeYoung
Chief Financial Officer
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