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 9/30/2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to __________________. 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 Number) 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 --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of November 8, 2002, there were 3,146,554 shares of the Registrant's common stock outstanding. Page 1 of 15 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1 Financial Statements Balance Sheets -September 30, 2002 and December 31, 2001................. 3 Statements of Income -for 3 months ended September 30, 2002 and September 30, 2001....................................................... 4 Statements of Income (loss) -for 9 months ended September 30, 2002 and September 30, 2001................................................... 5 Statements of Cash Flows -for 9 months ended September 30, 2002 and September 30, 2001................................................... 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..... 10 Item 4 Controls and Procedures........................................ 10 PART II. OTHER INFORMATION Items 1-5............................................................... 11 Item 6 Exhibits and Reports on Form 8-K............................... 11 2 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS 1MAGE SOFTWARE, INC. BALANCE SHEETS September 30, 2002 December 31, (Unaudited) 2001 ------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 226,931 $ 212,421 Receivables: Trade (less allowance: 2002, $10,000; 2001, $10,000) 499,574 421,977 Inventory 5,753 9,070 Deferred tax asset 50,000 50,000 Prepaid expenses and other current assets 14,276 15,597 ------------------------------ Total current assets 796,534 709,065 PROPERTY AND EQUIPMENT, at cost, net 53,318 57,878 OTHER ASSETS Software development costs, net 730,639 725,606 Other 3,058 3,058 ------------------------------ TOTAL ASSETS $ 1,583,549 $ 1,495,607 ============================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 175,000 $ -- Current portion of capital lease obligations 954 1,784 Accounts payable 271,185 187,878 Deferred revenue 241,000 233,000 Accrued liabilities 154,821 146,510 ------------------------------- Total current liabilities 842,960 569,172 LONG-TERM OBLIGATIONS Capital lease obligations -- 1,093 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.004 par value - 10,000,000 shares 12,586 12,586 authorized; shares outstanding: 2002 - 3,146,554; 2001 - 3,146,554 Additional paid-in capital 7,238,658 7,238,658 Accumulated deficit (6,510,655) (6,325,902) ------------------------------ Total shareholders' equity 740,589 925,342 ------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,583,549 $ 1,495,607 ============================== See Notes to Condensed Financial Statements. 3 1MAGE SOFTWARE, INC. STATEMENTS OF INCOME (UNAUDITED) Three Months Ended September 30, 2002 2001 ------------ ------------ REVENUE System sales and software licenses $ 288,711 $ 353,354 Services and annual fees 366,084 362,705 ------------ ------------ Total revenue 654,795 716,059 ------------ ------------ COST OF REVENUE Software licenses 130,767 119,358 Services and annual fees 142,225 173,026 ------------ ------------ Total cost of revenue 272,992 292,384 ------------ ------------ GROSS PROFIT 381,803 423,675 % Of Revenue 58% 59% OPERATING EXPENSES Selling, general & administrative 336,352 368,655 ------------ ------------ INCOME FROM OPERATIONS 45,451 55,020 ------------ ------------ OTHER INCOME/(EXPENSE) Interest income 1,026 1,093 Interest expense (3,220) (425) ------------ ------------ Total other income (expense) (2,194) 668 ------------ ------------ INCOME BEFORE INCOME TAXES 43,257 55,688 PROVISION FOR INCOME TAXES -- -- ------------ ------------ NET INCOME $ 43,257 $ 55,688 ============ ============ INCOME PER COMMON SHARE: BASIC $ .01 $ .02 ============ ============ DILUTED $ .01 $ .02 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC 3,146,554 3,146,554 ============ ============ DILUTED 3,163,833 3,375,405 ============ ============ See Notes to Condensed Financial Statements. 4 1MAGE SOFTWARE, INC. STATEMENTS OF INCOME (LOSS) (UNAUDITED) Nine Months Ended September 30, 2002 2001 ------------ ------------ REVENUE System sales and software licenses $ 754,489 $ 1,131,825 Services and annual fees 1,027,535 1,197,077 ------------ ------------ Total revenue 1,782,024 2,328,902 ------------ ------------ COST OF REVENUE: Software licenses 509,924 424,995 Services and annual fees 397,079 436,966 ------------ ------------ Total cost of revenue 907,003 861,961 ------------ ------------ GROSS PROFIT 875,021 1,466,941 % Of Revenue 49% 63% OPERATING EXPENSES Selling, general & administrative 1,056,536 1,126,785 ------------ ------------ INCOME/(LOSS) FROM OPERATIONS (181,515) 340,156 ------------ ------------ OTHER INCOME/(EXPENSE): Interest income 2,881 4,115 Interest expense (6,120) (9,815) ------------ ------------ Total other income (expense) (3,239) (5,700) ------------ ------------ INCOME/(LOSS) BEFORE INCOME TAXES (184,754) 334,456 PROVISION FOR INCOME TAXES -- -- ------------ ------------ NET INCOME/(LOSS) $ (184,754) $ 334,456 ============ ============ INCOME/(LOSS) PER COMMON SHARE: BASIC $ (.06) $ .11 ============ ============ DILUTED $ (.06) $ .10 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC 3,146,554 3,146,554 ============ ============ DILUTED 3,146,554 3,375,514 ============ ============ See Notes to Condensed Financial Statements. 5 1MAGE SOFTWARE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Earnings/(Loss) $ (184,754) $ 334,456 Adjustments to reconcile earnings to net cash provided by operating activities: Depreciation and amortization 243,055 243,685 Changes in assets and liabilities: Receivables (77,597) (279,075) Inventory 3,317 (1,888) Prepaid expenses and other assets 1,321 7,025 Accounts payable 83,307 47,736 Accrued liabilities 16,312 75,952 ------------ ------------ Net cash provided by operating activities 84,961 427,891 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (12,595) (21,699) Additions to capitalized software (230,933) (203,918) ------------ ------------ Net cash used for investing activities (243,528) (225,617) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Additions to line of credit 175,000 185,000 Repayment of line of credit -- (385,000) Repayment of long-term obligations (1,923) (1,555) ------------ ------------ Net cash provided by (used in) financing 173,077 (201,555) activities ------------ ------------ INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 14,510 719 CASH AND CASH EQUIVALENTS, beginning of period 212,421 150,457 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 226,931 $ 151,176 ============ ============ See Notes to Condensed Financial Statements. 6 1MAGE SOFTWARE, INC. NOTES TO 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 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 nine-month period ended September 30, 2002, the outstanding stock options were antidilutive and have been excluded from the computation of diluted earnings per share. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2001 1mage Software, Inc. (the "Company") reported revenue of $655,000 for the third quarter of 2002. While this represented a $61,000 decrease, or 9%, from the $716,000 in revenue posted for the third quarter a year ago, and the 2002 figure reflects the loss of $190,000 in recurring software license revenue from a single large customer in third quarter 2001, the Company believes that it actually replaced substantially all of the revenue previously provided by that customer with revenue from new customers in the third quarter of 2002. Revenue generated from new customers for third quarter 2002 was $296,000, or 45% of total revenue, and a 101% increase over third quarter 2001. Revenue from new customers for the third quarter of 2001 was $148,000, or 21% of total revenue. Recurring Annual License Fees of $241,000 increased $25,000, or 11%, compared to the third quarter in 2001, due to the addition of new customers. Service revenues of $125,000 for the quarter ended September 30, 2002 were $21,000 less than $146,000 for the third quarter of 2001, primarily due to the completion of a large conversion and software upgrade in the third quarter 2001. SG&A expenses of $336,000 for the third quarter of 2002 were $33,000, or 9%, lower than $369,000 reported for the third quarter of 2001, due to reduced expenses in nearly every category. The reduction in various categories of SG&A expense more than offset increased legal fees attributable to the Company's dispute with its former customer, described below. As a result of the Company's effective control of these and other expenses, coupled with the quarter to quarter revenue growth ($655,000 versus $610,000, in the second quarter of 2002), the Company reported net income of $43,000 for the third quarter 2002, or $.01 per share, as compared to net income of $56,000, or $.02 per share, for the same quarter last year. RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2001 The Company reported revenue of $1.8 million for the nine months ended September 30, 2002, a decrease of $547,000, or 24%, over $2.3 million reported for the first nine months in 2001. A significant portion of this decrease can be attributed to the loss of the Company's largest customer, which accounted for $483,000 of the decrease. Revenue generated from new customers for the nine months ended September 30, 2002, was $513,000, or 29% of total revenue, as compared to $790,000, or 34% of total revenue, in 2001. Services and annual fees were lower by 14%, or $170,000, for the comparable nine-month periods. Consulting service revenue for the nine months ended September 30, 2002, decreased $70,000, or 21%, compared to the nine months ended September 30, 2001, primarily due to the timing and extent of customer installations, as well as the number of systems upgraded. For the nine months ended September 30, 2002, gross profit on revenue was 49%, as compared to 63% for the year earlier period. SG&A expenses were $70,000 lower (or 6%) for the nine months ended September 30, 2002, primarily due to across the board reductions that offset increases in legal fees and marketing expenses. The Company reported a net loss of $(185,000), or $(.06) per share, for the nine months ended September 30, 2002, as compared to net income of $334,000, or $.10 per share, for the same period in 2001. 8 LIQUIDITY AND CAPITAL RESOURCES The Company's largest customer for the past nine years, The Reynolds & Reynolds Company, 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 nine months 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 and, based on 2001 results, would have provided an aggregate of $483,000 in cash flow to the Company in the nine months ended September 30, 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, 2002, 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 September 30, 2002, cash on hand increased $14,510 to $226,931 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 September 30, 2002, as compared to no borrowings as of December 31, 2001. 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 in the principal amount of $200,000, subject to the calculation of borrowing base by formula, which expires February 24, 2003 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, 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 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................................Not Applicable ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and participation of the Company's Chief Executive Officer and Chief Financial Officer (the "Officers") of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Officers concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings, including this report. Internal Controls There were no significant changes made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Please see Part II, Item 1. Legal Proceedings, in the Company's Forms 10-Q for the periods ended March 31 and June 30, 2002. In 1MAGE SOFTWARE, INC. V. THE REYNOLDS AND REYNOLDS Co. Case No.: 02-CV-4701 ("the "Collection Action"), the Company filed suit to obtain immediate payment of $193,611 due under a subscription and maintenance agreement plus interest and costs. Reynolds previously deposited the $193,610.90 with the court clerk, pending order of the court as to its disposition and filed an answer denying liability. The Company has since filed a Motion for Summary Judgment to which Reynolds has responded, denying liability and stating that in any event, the disputed amount is $166,740.51. Trial in the Collection Action is currently set for May 19-21, 2003. 1MAGE SOFTWARE, INC. V. THE REYNOLDS AND REYNOLDS CO., ET AL., No. 02-CV-3268 (the "Declaratory Judgment Action"), has been dismissed without prejudice at the Company's instance. In its stead, a new action was filed by the Company in the United States District Court for the District of Colorado. 1MAGE SOFTWARE, INC. V. THE REYNOLDS AND REYNOLDS CO., ET AL., No. 02-K-1688 (OES) (the "Federal Action"). The Company seeks damages for copyright infringement resulting from the continuing use of 1mage software without any license or authority by Reynolds and approximately 985 automobile dealers throughout the United States who are Reynolds' customers. The Company makes all of the same claims in the Federal Action as were originally made in the Declaratory Judgment Action but also seeks to recover all profits earned by Reynolds as a result of the infringing use of the Company's software under the Copyright Infringement Act of 1976. The Federal Action has not been set for trial. 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 have an adverse effect on the Company's results of operations. This burden could 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 CEO 99.2 Certification of Periodic Report for CFO (B) Reports on Form 8-K There were no reports filed on Form 8-K for the quarter ended September 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: 11/13/2002 /S/ DAVID R. DEYOUNG -------------------- David R. DeYoung President, Principal and Chief Executive Officer Date: 11/13/2002 /S/ MARY ANNE DEYOUNG --------------------- Mary Anne DeYoung Vice President Finance and Principal Financial Officer 11 CERTIFICATIONS I, David R. DeYoung, certify that: 1. I have reviewed this quarterly report on Form 10-Q of 1mage Software, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/13/2002 /S/ DAVID R. DEYOUNG -------------------- David R. DeYoung President and Principal and Chief Executive Officer 12 CERTIFICATIONS I, Mary Anne DeYoung, certify that: 1. I have reviewed this quarterly report on Form 10-Q of 1mage Software, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/13/2002 /S/ MARY ANNE DEYOUNG --------------------- Mary Anne DeYoung Vice President, Finance and Principal Financial Officer 12