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 3/31/2002
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 specific in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
(State of Incorporation) (IRS Employer Identification Numbers)
6025 S. QUEBEC ST. SUITE 300 ENGLEWOOD CO 80111 (303) 694-9180
(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
---- ---
As of May 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 -March 31, 2002, and December 31, 2001..................... 3
Statements of Operations - for three months ended March 31, 2002 and March
31, 2001.................................................................. 4
Statements of Cash Flows -for three months ended March 31, 2002 and
March 31, 2001 ........................................................... 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 7
PART II. OTHER INFORMATION
Items 1-5................................................................ 8
Item 6 Exhibits and Reports on Form 8-K......................... ...... 8
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
1MAGE SOFTWARE, INC.
BALANCE SHEETS
Unaudited
March 31, December 31,
2002 2001
-----------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 138,330 $ 212,421
Receivables:
Trade (less allowance: 2002, $10,000; 2001,
$10,000 387,668 421,977
Inventory 10,197 9,070
Deferred tax asset 50,000 50,000
Prepaid expenses and other current assets 19,226 15,597
---------------- ----------------
Total current assets 605,421 709,065
PROPERTY AND EQUIPMENT, at cost, net 62,043 57,878
OTHER ASSETS:
Software development costs, net 736,089 725,606
Other 3,058 3,058
---------------- ----------------
TOTAL ASSETS $ 1,406,611 $ 1,495,607
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ --
Current portion of capital lease obligations 1,784 1,784
Deferred revenue 246,000 233,000
Accounts payable 264,764 187,878
Accrued liabilities 112,550 146,510
---------------- ----------------
Total current liabilities 625,098 569,172
LONG-TERM OBLIGATIONS:
Capital lease obligations 485 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 (6,470,216) (6,325,902)
---------------- ----------------
Total shareholders' equity 781,028 925,342
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,406,611 $ 1,495,607
================ ================
See Notes to Condensed Financial Statements
3
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2002 2001
--------------- ---------------
REVENUE
System sales and software licenses $ 212,075 $ 329,209
Services and annual fees 305,189 503,188
--------------- ---------------
Total revenue 517,264 832,397
--------------- ---------------
COST OF REVENUE:
System sales and software licenses 212,838 88,453
Services and annual fees 121,698 125,525
--------------- ---------------
Total cost of revenue 334,536 213,978
--------------- ---------------
GROSS PROFIT 182,728 618,419
% of Revenue 35% 74%
OPERATING EXPENSES:
Selling, general & administrative 327,297 390,494
--------------- ---------------
INCOME/(LOSS) FROM OPERATIONS (144,569) 227,925
--------------- ---------------
OTHER INCOME/(EXPENSE):
Interest income 803 1,755
Interest expense (548) (7,838)
--------------- ---------------
Total other income (expense) 255 (6,083)
--------------- ---------------
INCOME/(LOSS) BEFORE INCOME TAXES (144,314) 221,842
PROVISION FOR INCOME TAXES -- --
--------------- ---------------
NET INCOME/(LOSS) $ (144,314) $ 221,842
=============== ===============
BASIC AND DILUTED INCOME/(LOSS) PER $ (.05) $ .07
COMMON SHARE: =============== ===============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 3,146,554 3,146,554
=============== ===============
See Notes to Condensed Financial Statements
4
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2002 2001
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $ (144,314) $ 221,842
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 80,968 82,269
Changes in assets and liabilities:
Receivables 34,309 (206,588)
Inventory (1,127) (1,725)
Prepaid expenses and other assets (3,629) 2,808
Accounts payable 76,886 (11,686)
Accrued liabilities and deferred revenue (20,960) 34,081
--------------- ---------------
Net cash provided by operating activities 22,133 121,001
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,833) (6,867)
Additions to capitalized software (85,783) (66,407)
--------------- ---------------
Net cash used for investing activities (95,616) (73,274)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit -- (50,000)
Repayment of long-term obligations (608) (491)
--------------- ---------------
Net cash used for financing activities (608) (50,491)
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (74,091) (2,764)
CASH AND CASH EQUIVALENTS, beginning of period 212,421 150,457
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 138,330 $ 147,693
=============== ===============
See Notes to Condensed Financial Statements
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, 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.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2002 VERSUS MARCH 31,
2001
1mage Software, Inc. (the "Company") reported revenue of $517,264 for the first
quarter of 2002, a 38% decrease from $832,397 posted for the first quarter in
2001. Sales of software licenses decreased 45% or $149,239, which the Company
attributes to the global economic slowdown in the technology sector since
September 11, 2001. Annual license fees decreased 38% or $165,730 compared to
the first quarter in 2001 due to the cancellation of a Subscription &
Maintenance agreement with the Company's largest customer that previously
required a lump sum payment of $203,000 in the first quarter. Service revenues
for the quarter ended March 31, 2002 were $32,269 less than $71,500 for the
first quarter of 2001 due to the decrease in software license revenue. The cost
of system sales and software licenses exceeded the revenue earned from this
category due to the higher sales of low-margin third party software and $75,300
of fixed amortization costs for deferred software development. SG&A expenses of
$327,297 for the first quarter were 16% lower than the first quarter of 2001,
primarily due to decreased commissions and bonuses. The Company posted a first
quarter 2002 net loss of $(144,314), or $(.05) per share, as compared to net
earnings of $221,842, or $.07 per share, for the same quarter last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's largest customer, The Reynolds and Reynolds Company ("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 quarter
of 2002 and may have a similar 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. In addition, the out-of-pocket
costs and other indirect expenses of the legal proceedings between the Company
and Reynolds may have a material adverse impact on the Company's financial
resources, liquid assets, and operating results in one or more future reporting
periods.
As of March 31, 2002, cash on hand decreased $74,091 from $212,421 at December
31, 2001, primarily due to cash flows from operating activities falling short of
cash used for additions to capitalized software. On February 24, 2002, the
Company's $200,000 line of credit agreement was extended for another year. There
were no borrowings against the line of credit at March 31, 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.
7
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.
8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In May 1994, the Company entered into a software license agreement (the "1994
Agreement") with The Reynolds and Reynolds Company ("Reynolds") which provides
software as well as other products and services to automobile dealers and other
customers. In 1996, the Company entered into a subscription and maintenance
agreement with Reynolds (the "1996 Agreement") providing for the payment of
annual subscription and maintenance fees to the Company for subsequent releases
of the Company's software not covered by the 1994 Agreement.
On January 18, 2002, Reynolds notified the Company of its intent to terminate
the 1996 Agreement on April 22, 2002. Reynolds and the Company subsequently
entered into negotiations aimed at determining what amounts would be payable to
the Company for post-termination licenses of certain products and for the
continuation of existing licenses. When the parties failed to reach agreement
on these issues, on April 10, 2002, Reynolds demanded mediation before the
American Arbitration Association in Dayton, Ohio pursuant to the 1994 Agreement.
The Company declined to submit to mediation on the grounds that the parties'
dispute related to the 1996 Agreement, which agreement did not require mediation
or arbitration. Reynolds then informed the Company for the first time that it
would be taking the position that it had a perpetual license to all software
previously provided by the Company to Reynolds or its licensees
notwithstanding the termination of the 1996 Agreement. Shortly thereafter, the
Company filed a civil action in Colorado state district court for the City and
County of Denver, 1MAGE SOFTWARE, INC. v. THE REYNOLDS & REYNOLDS CO., ET
AL., No. 02-CV-3268, seeking a declaratory judgment against Reynolds and certain
of its Colorado licensees to the effect that, contrary to Reynolds' claims,
Reynolds and its licensees, do not have a perpetual license to the software
provided by the Company pursuant to the 1996 Agreement.
Reynolds subsequently filed an action in federal district court in Colorado
seeking to remove the Company's declaratory judgment action from state court to
federal court in Colorado. 1MAGE SOFTWARE, INC. v. THE REYNOLDS & REYNOLDS CO.,
ET AL., Civ. No. 02-K-780. The Company opposed Reynolds' removal petition and
asked the federal court to remand the case back to state court, which it did on
April 23, 2002.
On May 3, 2002, Reynolds filed an action in federal district court in Ohio
seeking an order compelling the Company to mediate and, if necessary, arbitrate
its dispute with Reynolds pursuant to the 1994 Agreement and staying the
declaratory action brought by the Company in Colorado state court. THE REYNOLDS
& REYNOLDS CO. v. 1MAGE SOFTWARE, INC., No. C 3-02-206, S.D. Ohio (Dayton
Division).
While the Company does not believe it is required to submit its dispute with
Reynolds to mediation or arbitration because it arises from the 1996 Agreement
rather than the 1994 Agreement, it may elect to do so in order to control the
costs of litigation, which are already substantial. The Company cannot predict
the results of any mediation, arbitration or litigation with Reynolds but it is
likely that the license fees or other revenues paid to the Company by Reynolds
over the next few years will be less than in recent years. It is also possible,
however, that those revenues will increase in the short term, particularly if
the Company ultimately prevails in the various legal proceedings against
Reynolds. On the other hand, the burden imposed by these legal proceedings,
including the out of pocket costs and the diversion of the Company's other
limited resources, is likely to have a material adverse effect on the Company's
results of operations so long as the dispute remains unresolved.
9
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 Inapplicable
(B) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended March
31, 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: 5/16/2002 /S/ MARY ANNE DEYOUNG
--------------------------------
Mary Anne DeYoung
Chief Financial Officer
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