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 6/30/2003
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
---- ----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
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As of August 11, 2003, there were 3,274,597 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, 2003, and December 31, 2002.....................3
Statements of Operations -for three months ended June 30, 2003 and
June 30, 2002..........................................................4
Statements of Operations -for six months ended June 30, 2003 and
June 30, 2002..........................................................5
Statements of Cash Flows -for six months ended June 30, 2003 and
June 30, 2002..........................................................6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................9
Item 3 Quantitative and Qualitative Disclosures About Market Risk...........11
Item 4 Controls and Procedures..............................................11
PART II OTHER INFORMATION
Item 1......................................................................11
Items 2-6 Exhibits and Reports on Form 8-K..................................12
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
1MAGE SOFTWARE, INC.
BALANCE SHEETS
Unaudited
June 30, December 31
2003 2002
------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 98,108 $ 149,738
Trade receivables (less allowance: 2003, $22,000; 2002, $10,000) 517,085 549,455
Inventory 14,755 16,500
Prepaid expenses and other current assets 23,654 16,374
Employee advances 3,468 7,029
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Total current assets 657,070 739,096
PROPERTY AND EQUIPMENT, at cost, net 41,690 48,577
OTHER ASSETS:
Software development costs, net 701,179 720,916
Deferred tax asset 50,000 50,000
Loan costs, net 34,569 --
Inventory: long-term 2,958 2,958
Rent/Security deposits 7,841 100
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TOTAL ASSETS $ 1,495,307 $ 1,561,647
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit - bank $ 190,000 $ --
Current portion of capital lease obligations 3,663 3,903
Deferred revenue 270,000 281,000
Accounts payable 166,973 278,174
Accrued liabilities 120,602 148,260
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Total current liabilities 751,238 711,337
LONG-TERM OBLIGATIONS:
Capital lease obligations 7,105 7,325
Line of credit - related party 40,000 200,000
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47,105 207,325
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000 shares authorized;
shares outstanding: 2003: 3,274,597; 2002: 3,146,554 13,098 12,586
Additional paid-in capital 7,284,035 7,238,658
Accumulated deficit (6,600,169) (6,608,259)
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Total shareholders' equity 696,964 642,985
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,495,307 $ 1,561,647
============= =============
See Notes to Condensed Financial Statements
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1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
2003 2002
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REVENUE
System sales and software licenses $ 246,294 $ 253,702
Services and annual fees 261,066 356,263
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Total revenue 507,360 609,965
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COST OF REVENUE:
System sales and software licenses 133,819 166,319
Services and annual fees 93,494 133,156
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Total cost of revenue 227,313 299,475
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GROSS PROFIT 280,047 310,490
% Of Revenue 55% 51%
OPERATING EXPENSES:
Selling, general & administrative 313,195 392,886
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INCOME/(LOSS) FROM OPERATIONS (33,148) (82,396)
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OTHER INCOME/(EXPENSE):
Interest income 1,143 1,052
Interest expense (4,041) (2,352)
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Total other income (expense) (2,898) (1,300)
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INCOME/(LOSS) BEFORE INCOME TAXES (36,046) (83,696)
PROVISION FOR INCOME TAXES -- --
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NET INCOME/(LOSS) $ (36,046) $ (83,696)
============ ============
BASIC AND DILUTED INCOME/(LOSS) PER COMMON SHARE: $ (.01) $ (.03)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 3,244,927 3,146,554
============ ============
Diluted 3,244,927 3,146,554
============ ============
See Notes to Condensed Financial Statements
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1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30,
2003 2002
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REVENUE
System sales and software licenses $ 398,284 $ 465,778
Services and annual fees 537,744 661,451
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Total revenue 936,028 1,127,229
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COST OF REVENUE:
System sales and software licenses 251,636 379,157
Services and annual fees 185,705 254,854
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Total cost of revenue 437,341 634,011
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GROSS PROFIT 498,687 493,218
% Of Revenue 53% 44%
OPERATING EXPENSES:
Selling, general & administrative 622,617 720,183
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INCOME/(LOSS) FROM OPERATIONS (123,930) (226,965)
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OTHER INCOME/(EXPENSE):
Interest income 1,593 1,855
Interest expense (8,092) (2,900)
Other income 138,519 --
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Total other income (expense) 132,020 (1,045)
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INCOME/(LOSS) BEFORE INCOME TAXES 8,090 (228,010)
PROVISION FOR INCOME TAXES -- --
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NET INCOME/(LOSS) $ 8,090 $ (228,010)
============ ============
BASIC AND DILUTED INCOME/(LOSS) PER COMMON SHARE: $ 0.00 $ (.07)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 3,197,062 3,146,554
============ ============
Diluted 3,203,950 3,146,554
============ ============
See Notes to Condensed Financial Statements
Page 5
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $ 8,090 $ (228,010)
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 164,052 162,305
Settlement of payable (138,375) --
Deferred revenue (11,000) 31,000
Issuance of stock for services or fees 7,000 --
Changes in assets and liabilities:
Trade receivables 32,370 1,779
Inventory 1,745 1,018
Prepaid expenses and other assets (11,460) (3,817)
Accounts payable 27,174 82,671
Accrued expenses (27,658) (29,598)
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Net cash provided by operating activities 51,938 17,348
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,245) (12,594)
Additions to capitalized software (130,863) (157,719)
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Net cash used in investing activities (133,108) (170,313)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 40,000 175,000
Repayment of line of credit (10,000) --
Repayment of long-term obligations (460) (1,248)
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Net cash provided by financing activities 29,540 173,752
DECREASE IN CASH AND CASH EQUIVALENTS (51,630) 20,787
CASH AND CASH EQUIVALENTS, beginning of period 149,738 212,421
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CASH AND CASH EQUIVALENTS, end of period $ 98,108 $ 233,208
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Issuance of stock and stock purchase warrants
for deferred loan origination fees related to
the DEMALE, LLC line of credit $ 38,889 $ --
See Notes to Condensed Financial Statements
Page 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, 2002 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, 2002 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 and stock purchase
warrants are treated as common stock equivalents for purposes of computing
diluted earnings per share. As the Company incurred net losses for the three
months ended June 30, 2003 and for the three and six months ended June 30, 2003,
the outstanding stock options are antidilutive and have been excluded from the
computation of diluted earnings per share. For the six months ended June 30,
2003, approximately 7,000 outstanding stock options are considered dilutive and
are included in the denominator for the computation of diluted earnings per
share. As the exercise price for the stock purchase warrants issued on April 1,
2003 is less than the average market price for the three and six months ended
June 30, 2003, the stock purchase warrants are considered antidilutive and have
been excluded from the computation of diluted earnings per share.
Page 7
For the Six Months Ended For the Three Months Ended
June 30, June 30,
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2003 2002 2003 2002
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Net income (loss), as reported $ (36,046) $ (83,696) $ 8,090 $ (228,010)
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Less: Total stock-based employee
compensation cost determined under
the fair value based method, net
of income taxes (28,281) (22,953) (43,354) (45,905)
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Pro forma net income (loss) $ (64,327) $(106,649) $(35,264) $ (273,915)
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Earnings per share:
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Basic and Diluted - as reported $ (.01) $ (.03) $ .00 $ (.07)
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Basic and Diluted - pro forma $ (.02) $ (.03) $ (.01) $ (.09)
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LINE OF CREDIT - RELATED PARTY - On April 1, 2003, the Company entered into a
$300,000 revolving line-of-credit agreement (the Agreement) with DEMALE, LLC, an
entity owned by certain stockholders of the Company. In connection with the
Agreement, the Company issued 90,000 shares of restricted common stock and stock
purchase warrants to purchase an additional 90,000 shares of restricted common
stock as payment for loan origination costs. The line expires on June 30, 2005
and requires the Company, among other things, to maintain certain financial
conditions. At June 30, 2003, there was $40,000 borrowed against this line. The
line is secured by substantially all of the Company's assets and is subordinate
to the bank line of credit. Interest is accrued at prime plus 1 1/2% (6.75% at
June 30, 2003) but may not be less than 7%; therefore, at June 30, 2003,
interest was being accrued at 7%.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2003 VERSUS JUNE 30, 2002
The Company's revenue for second quarter 2003 was $507,000 compared to $610,000
for the second quarter 2002, representing a decrease of $103,000 (17%). The
Company's revenue decreased $101,000 for the second quarter as a result of the
loss of the Company's largest customer, Reynolds and Reynolds ("Reynolds"). The
Company does not anticipate any significant revenue from Reynolds in 2003.
Revenue from new business for the second quarter of 2003 was $273,000, an
increase of $113,000 (71%), as compared to new business revenue of $160,000 for
the second quarter of 2002. Revenue from sales of software licenses was $205,000
in 2003, a 14% increase over $180,000 in 2002. This increase was offset by a
$33,000 decrease in low-margin hardware sales. Consulting services of $38,000
were significantly lower than $90,000 reported for second quarter 2002 due to
fluctuations in customers requiring these services, which may vary from quarter
to quarter. Recurring license fees decreased 16% or $43,000, of which a decrease
of $101,000 was attributable to the loss of Reynolds; however, without the loss
of this customer, annual license fees would have increased 35% or $58,000. SG&A
expenses of $313,000 for the second quarter were $80,000 (20%) lower than the
$393,000 reported for the second quarter of 2002, primarily due to decreased
expenses across the board. The Company reported a second quarter 2003 net loss
of $(36,000), or $(.01) per share, as compared to a net loss of $(84,000), or
$(.03) per share, for the same quarter last year.
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Three Three Increase/ Increase/
Months Months Decrease) (Decrease)
Ended Ended $ %
6/30/03 6/30/02
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Revenue (as reported) $ 507,360 $ 609,965 $(102,605) (17%)
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Less: Reynolds revenue 0 101,222 (101,222) (100%)
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Revenue excluding Reynolds $ 507,360 $ 508,743 $ (1,383) 0%
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RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2003 VERSUS JUNE 30, 2002
The Company reported revenue of $936,000 for the six months ended June 30, 2003,
a decrease of $191,000, or 17%, from the $1.1 million reported for the first six
months in 2002. The year to date revenue decreased $326,000 in 2003 as the
result of the loss of Reynolds as a customer. Without the loss of Reynolds,
revenue would have increased $121,000, or 15%. The combination of revenue and
cost of revenue components, however, caused the gross profit to decrease only
$5,500 for the comparable year to date periods. Software sales decreased
$46,000, or 13%, of which $121,000 is attributable to Reynolds. Hardware sales
decreased $21,000, or 20% as a result of customers' varying needs for equipment.
Annual license fees decreased $104,000, or 20%, of which $192,000 was
attributable to Reynolds. Without the loss of this customer, annual license fees
would have increased $88,000, or 27%. For the six months ended June 30, 2003,
gross profit as a percent of revenue was 53%, as compared to 44% for the year
earlier period. SG&A expenses of $623,000 for the second quarter 2003 were
$97,000 or 13% lower than $720,000 for the six months ended June 30, 2003,
primarily due to decreased salaries, marketing costs and travel expenses. The
Company reported net income of $8,000, or $.00 per share, for the
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six months ended June 30, 2003, as compared to a net loss of $(228,000), or
$(.07) per share, for the same period one year ago.
In first quarter 2003, the Company settled a liability of $139,000, which is
included in other income, that related to a volume sale from a prior year that
was tied to the purchase of future software licenses.
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Six Months Six Months Increase/ Increase/
Ended Ended (Decrease) (Decrease)
6/30/03 6/30/02 $ %
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Revenue (as reported) $ 936,028 $ 1,127,229 $ (191,201) (17%)
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Less: Reynolds revenue 13,318 325,896 (312,578) (96%)
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Revenue excluding Reynolds $ 922,710 $ 801,333 $ 121,377 15%
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See the discussion of the effect of the loss of Reynolds in "Liquidity and
Capital Resources" below.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $98,000 at June 30, 2003 represented
a decrease of approximately $52,000, as compared to December 31, 2002. During
2003, the Company used cash of $131,000 for deferred development expenses. The
Company had a working capital deficit of $94,000 as of June 30, 2003. The
Company believes there is sufficient working capital to operate the business
because the "Deferred Revenue" liability consists of $270,000 that is not
immediately due and payable; rather it represents payments on annual maintenance
contracts that will be earned over the next twelve months. As the ongoing
litigation between the Company and Reynolds is being handled by legal counsel on
a contingency basis plus direct expenses, legal fees incurred by the Company
related to the Reynolds litigation are not due or payable until the litigation
has been settled, at which time the fees will be deducted from the proceeds, if
any. Management believes that the Company has the liquidity to fund the direct
expenses related to the litigation.
The Company's bank line of credit was $190,000 at June 30, 2002, compared to
$200,000 at December 31, 2002. The line matures in February 2004 and is
collateralized by all accounts receivable and general intangibles of the
Company.
In addition, the Company has a line of credit of up to $300,000 with DEMALE,
LLC. As of June 30, 2003, there were borrowings of $40,000 against this line.
The loan is secured by a junior interest in the collateral backing the bank line
of credit.
As noted above in "Results of Operations", the termination by Reynolds of its
1996 Subscription and Maintenance Agreement and the resulting loss of Reynolds
as a customer has already had a significantly adverse impact on the Company's
revenue. There has been a corresponding adverse impact on cash flow and
liquidity. The Company has not yet replaced all of the revenue lost as a result
of the termination of the 1996 contract and by Reynolds' subsequent actions.
Page 10
However, it is possible that some portion of that lost revenue will be awarded
to the Company in the ongoing litigation between the Company and Reynolds.
Naturally, the Company cannot predict the outcome of that litigation nor can
there be any assurance that the Company will ever obtain a meaningful recovery
from Reynolds.
The Company's financial resources include cash on hand, revenues from
operations, and management of funds available on its revolving lines of credit.
In the Company's judgment, sufficient financial resources are available to meet
current working capital needs.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
INAPPLICABLE
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
In the pending civil action brought by the Company in federal district
court in Colorado against the Reynolds & Reynolds Company ("Reynolds") and
certain automobile dealer-customers of Reynolds for infringing use of the
Company's software, Reynolds filed a motion to compel arbitration of the
Company's claims against Reynolds on the grounds that it was required by the
1994 Software Licensing Agreement between the parties. 1MAGE SOFTWARE, INC.
V. THE REYNOLDS AND REYNOLDS COMPANY, ET AL., U.S.D.C., D.Colo., Civ. No.
02-K-1688. On July 13, 2003, Judge John L. Kane granted Reynolds' motion and
the automobile dealer defendants' related motion to stay the civil action
against them pending the results of mediation or arbitration between the
Company and Reynolds. While the court retained jurisdiction over the case
and is requiring quarterly status reports, Judge Kane's ruling means that the
Company will at least
Page 11
initially be pursuing its claims against Reynolds in arbitration. Further
judicial proceedings against the automobile dealers and Reynolds remain a
possibility, however, depending on the outcome of the arbitration.
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
31.1 CERTIFICATE OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
31.2 CERTIFICATE OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
32 CERTIFICATE OF CEO AND CFO PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
(B) REPORTS ON FORM 8-K
A Form 8-K dated April 30, 2003 under Item 5 was filed May 2, 2003.
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: 8/14/2003 /S/ DAVID R. DEYOUNG
--------------------
David R. DeYoung
President, Principal and Chief Executive Officer
Date: 8/14/2003 /S/ MARY ANNE DEYOUNG
---------------------
Mary Anne DeYoung
Vice President, Finance and Principal Financial Officer
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