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 9/30/2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to ______ to ______.
1MAGE SOFTWARE, INC.
--------------------
(Exact name of Registrant as specified in its charter)
0-12535
-------
(Commission File Number)
COLORADO 84-0866294
(State of Incorporation) (IRS Employer Identification Number)
6025 S. Quebec St. #300 Englewood CO 80111 (303) 694-9180
------------------------------------------ --------------
(Address of principal executive offices) (Registrant's telephone
incl. 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 15, 2004, there were 3,302,597 shares of the Registrant's common
stock outstanding.
Page 1 of 13
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets -September 30, 2004 and December 31, 2003................................................3
Statements of Operations -for three months ended September 30, 2004 and September 30, 2003.............4
Statements of Operations -for nine months ended September 30, 2004 and September 30, 2003...............5
Statements of Cash Flows -for nine months ended September 30, 2004 and September 30, 2003...............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
Items 1-5..............................................................................................12
Item 6 Exhibits .....................................................................................12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1MAGE SOFTWARE, INC.
BALANCE SHEETS
September 30,
ASSETS 2004 December 31,
(Unaudited) 2003
------------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 6,875 $ 143,505
Receivables:
Trade (less allowance: 2004, $25,000; 2003, $20,000) 207,773 609,216
Inventory 18,663 11,517
Prepaid expenses and other current assets 4,139 55,457
Deferred tax asset -- 20,000
Employee advances 5,387 19,631
----------- -----------
Total current assets 242,837 859,326
PROPERTY AND EQUIPMENT, at cost, net 36,734 43,465
OTHER ASSETS
Software development costs, net 659,237 694,262
Deferred tax asset -- 40,000
Loan costs, net 12,969 25,929
Inventory: long-term 2,958 2,958
Rent deposits 7,841 7,841
----------- -----------
TOTAL ASSETS $ 962,576 $ 1,673,781
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - bank $ 180,000 $ --
Line of credit - related party 213,600 --
Current portion of capital lease obligations 4,161 3,663
Accounts payable 89,799 162,255
Deferred revenue 270,848 287,000
Accrued liabilities 360,116 230,958
----------- -----------
Total current liabilities 1,118,524 683,876
LONG-TERM OBLIGATIONS
Line of credit-bank -- 139,314
Line of credit-related party -- 54,600
Capital lease obligations 5,965 7,105
----------- -----------
5,965 201,019
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.004 par value - 10,000,000 shares
authorized; shares outstanding:
2004 - 3,302,597; 2003 - 3,274,597 13,210 13,150
Additional paid-in capital 7,294,838 7,288,455
Accumulated deficit (7,469,961) (6,512,719)
----------- -----------
Total shareholders' equity (161,913) 788,886
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 962,576 $ 1,673,781
=========== ===========
See Notes to Condensed Financial Statements.
3
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
2004 2003
------------- ------------
REVENUE
System sales and software licenses $ 106,326 $ 197,940
Services and annual fees 234,232 214,422
----------- -----------
Total revenue 340,558 412,362
----------- -----------
COST OF REVENUE
Software licenses 91,084 111,589
Services and annual fees 95,871 71,389
----------- -----------
Total cost of revenue 186,955 182,978
----------- -----------
GROSS PROFIT 153,603 229,384
% Of Revenue 45% 56%
OPERATING EXPENSES
Selling, general & administrative 617,583 320,782
----------- -----------
LOSS FROM OPERATIONS
(463,980) (91,398)
----------- -----------
OTHER INCOME/(EXPENSE)
Interest income 129 45
Interest expense (12,473) (3,730)
Other expense (141) --
----------- -----------
Total other income/(expense) (12,485) (3,685)
----------- -----------
LOSS BEFORE INCOME TAXES (476,465) (95,083)
PROVISION FOR INCOME TAXES 60,000 --
----------- -----------
NET LOSS $ (536,465) $ (95,083)
=========== ===========
LOSS PER COMMON SHARE:
BASIC $ (.16) $ (.03)
=========== ===========
DILUTED $ (.16) $ (.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 3,302,597 3,274,597
=========== ===========
DILUTED 3,302,597 3,274,597
=========== ===========
See Notes to Condensed Financial Statements.
4
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30,
2004 2003
------------ ------------
REVENUE
System sales and software licenses $ 355,767 $ 596,224
Services and annual fees 762,457 752,166
----------- -----------
Total revenue 1,118,224 1,348,390
----------- -----------
COST OF REVENUE:
Software licenses 288,300 363,225
Services and annual fees 350,587 257,094
----------- -----------
Total cost of revenue 638,887 620,319
----------- -----------
GROSS PROFIT 479,337 728,071
% Of Revenue 43% 54%
OPERATING EXPENSES
Selling, general & administrative 1,345,404 943,399
----------- -----------
LOSS FROM OPERATIONS (866,067) (215,328)
----------- -----------
OTHER INCOME/(EXPENSE): 242 1,638
Interest expense (31,377) (11,822)
Other income/(expense) (40) 138,519
----------- -----------
Total other income (expense) (31,175) 128,335)
----------- -----------
LOSS BEFORE INCOME TAXES (897,242) (86,993)
PROVISION FOR INCOME TAXES (60,000) --
----------- -----------
NET LOSS $ (957,242) $ (86,993)
=========== ===========
LOSS PER COMMON SHARE:
BASIC $ (.29) $ (.03)
=========== ===========
DILUTED $ (.29) (.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 3,296,794 3,223,192
=========== ===========
DILUTED 3,296,794 3,223,192
=========== ===========
See Notes to Condensed Financial Statements
5
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2004 2003
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(957,242) $ (86,993)
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 252,147 248,139
Defered taxes 60,000 --
Settlement of payable -- (138,375)
Deferred revenue (16,152) (21,000)
Issuance of stock for services or fees -- 7,000
Changes in assets and liabilities:
Trade receivables 401,443 70,326
Inventory (7,146) 6,840
Prepaid expenses and other assets 65,562 (12,172)
Accounts payable (72,456) 6,275
Accrued expenses 129,158 (2,545)
--------- ---------
Net cash provided by/(used for) operating (144,686) 77,495
activities --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,563) (5,809)
Additions to capitalized software (190,875) (196,892)
--------- ---------
Net cash used for investing activities (195,438) (202,701)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit - related party 159,000 79,600
Net borrowings (payments) on line of credit - bank 40,686 (30,982)
Repayment of long-term obligations (2,635) (460)
Proceeds from exercise of stock options 6,443 0
--------- ---------
Net cash provided by financing activities 203,494 48,158
--------- ---------
DECREASE IN CASH AND CASH (136,630) (77,048)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 143,505 149,738
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 6,875 $ 72,690
========= =========
See Notes to Condensed Financial Statements
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
Capital lease obligation incurred for equipment $ 1,993 $ --
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, 2003 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,
2003 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 three and
nine months ended September 30, 2004 and 2003, the outstanding stock
options are considered antidilutive and have been excluded from the
computation of diluted earnings per share. As the Company incurred net
losses for the three and nine months ended September 30, 2004 and 2003,
the outstanding stock purchase warrants are considered antidilutive and
have been excluded from the computation of diluted earnings per share.
7
STOCK-BASED COMPENSATION - The Company has three stock-based employee
compensation plans. The Company accounts for these plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the grant date. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
- --------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $(536,465) $ (95,083) $ (957,242) $ (86,993)
- --------------------------------------------------------------------------------------------------------------
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net
of income taxes (10,394) (23,032) (22,007) (66,386)
- --------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $(546,859) $ (118,115) $ (979,249) $ (153,379)
- --------------------------------------------------------------------------------------------------------------
Earnings per share:
- --------------------------------------------------------------------------------------------------------------
Basic and Diluted - as reported $ (.16) $ (.03) $ (.29) $ (.03)
- --------------------------------------------------------------------------------------------------------------
Basic and Diluted - pro forma $ (.17) $ (.04) $ (.30) $ (.05)
- --------------------------------------------------------------------------------------------------------------
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 September 30, 2004, there was $213,600 borrowed against this
line. The line is secured by substantially all of the Company's assets but is
subordinated to the bank line of credit, which holds a senior lien on the same
assets. Interest is accrued and payable quarterly at prime plus 1 1/2% (7.25% at
September 30, 2004) but may not be less than 7%; therefore, at September 30,
2004, interest was being accrued at 7.25%.
SUBSEQUENT EVENTS - On November 17, 2004, the Company learned that an
arbitration award in the amount of $392,061.22 had been entered against the
Company, of which $198,450.32 is unfunded. A judgment against the Company on
this award could render the Company insolvent and cause it to file bankruptcy or
take other, similar actions. As a result, there is substantial doubt about the
Company's ability to continue as a going concern.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In the quarter ended September 30, 2004, 1mage Software, Inc. (the
"Company") generated only $341,000 in revenue, a 17% drop from year ago levels.
The quarterly results were another setback for the Company as it seeks to
consistently generate revenues comparable to those generated prior to the
termination by Reynolds & Reynolds, Inc., its largest customer, of its 1996
Subscription and Maintenance Agreement with the Company. Since Reynolds'
termination in April 2002, the Company's revenues have been dramatically
reduced. Revenues from the Company's new customers since that time, which would
have otherwise represented business growth, have been used instead to sustain
operations. Similarly, the Company's $536,000 net loss for the recent quarter
represents a setback for the Company's efforts to achieve a consistent record of
profitability in the post-Reynolds era. In addition, while the Company brought
various legal actions against Reynolds on various grounds, the recent dismissal
of the Company's claims by an arbitrator means that a successful resolution of
those legal actions is now unlikely. Moreover, the Company is faced with the
prospect of having to pay almost $400,000 (of which $193,610.90 is held in
excrow) to Reynolds on account of its counterclaims when its resources are very
likely to be insufficient to satisfy a judgment on these counterclaims. See
Legal Proceedings. Accordingly, the Company has rededicated itself to the
development of new customers and new markets for its products and services.
The more pressing challenge faced by the Company today, however, is that of
liquidity. Because the Company has limited capital resources, namely a bank line
of credit and a private line of credit from its shareholders, it cannot sustain
such losses indefinitely without an adverse effect on its liquidity and
operations. As a result, the Company implemented across the board pay cuts of
10% effective June 30 and has reduced headcount to 15 employees. Moreover,
preliminary indications are that, with the distraction of the Reynolds
arbitration hearing and decision no longer before it, the Company's sales should
be stronger in the fourth quarter and beyond. On the other hand, the
Company's potential inability to satisfy a judgment on the arbitrator's award
against it in the Reynolds arbitration could have severe consequences for the
Company, including but not limited to a risk of bankruptcy reorganization or
liquidation. See Legal Proceedings.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 2003
The Company reported revenue of $341,000 for the third quarter of 2004. This
represented a $ 71,000 decrease, or 17%, from the $412,000 in revenue posted for
the third quarter a year ago. While software revenue decreased $75,000 or 43%,
recurring license fees increased $23,000, or 14%. In addition, revenue from
consulting services was $50,000, a 6% decrease from the third quarter last year.
SG&A expenses of $618,000 for the third quarter of 2004 were 93% higher, or
$297,000, than the $321,000 reported for the third quarter of 2003, due to an
approximate $392,000 amount for settlement of Reynolds counterclaims, partially
affected by reduced expenses in nearly every category. The Company reported a
net loss of $(536,000) for the third quarter 2004, or $(.16) loss per share, as
compared to a net loss of $(95,000), or $(.03) per share, for the same quarter
last year.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS NINE
MONTHS ENDED SEPTEMBER 30, 2003
The Company reported revenue of $1.1 million for the nine months ended
September 30, 2004, a decrease of $230,000, or 17%, from the $1.3 million
reported for the first nine months in 2003. Gross profit decreased $249,000 for
the comparable year-to-date periods. Software sales decreased $165,000 or 34%.
Hardware sales decreased $76,000, or 71%, as a result of customers' varying
needs for equipment.
SG&A expenses of $1,345,000 were $401,000 or 42% higher than $943,000 for the
nine months ended September 30, 2003, primarily due to an approximate $392,000
amount for settlement of Reynolds counterclaims. The Company reported a net loss
of $(957,000) or $(.29) per share, for the nine
9
month period ended September 30, 2004, as compared to a net loss of $(87,000) or
$(.03) 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.
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 $7,000 decreased approximately
$137,000 during the nine months ended September 30, 2004 as compared to
December 31, 2003. During 2004, the Company used cash of $191,000 for deferred
development expenses. The Company had a working capital deficit of $876,000 as
of September 30, 2004, versus working capital of $175,000 as of December 31,
2003 and a working capital deficit of $135,000 as of September 30, 2003. The
decline in working capital during the nine months is attributable to the
reclassification of the Company's bank and private lines of credit as short-term
debt since they mature in February and June 2005, respectively and due to an
approximate $392,000 accrued for settlement of Reynolds counterclaims. Included
in current liabilities is $271,000 for Deferred Revenue, which represents
payments on annual maintenance contracts that will be earned over the next
twelve months. The Company had drawn $180,000 on its bank line of credit as of
September 30, 2004. The $200,000 bank line matures in February, 2005 and is
collateralized by all accounts receivable and general intangibles of the
Company. In addition, as of September 30, 2004, the Company had drawn $213,600
on its line of credit with DEMALE, a related party. This private line of credit
has a cap of $300,000 and expires in June, 2005 and is secured by a second lien
on the same assets as the bank line of credit.
As noted above, the termination by Reynolds of its 1996 Subscription and
Maintenance Agreement and the resulting loss of Reynolds as a customer has had a
material adverse impact on the Company's revenue. There has been a corresponding
adverse impact on cash flow and liquidity. If the Company does not replace more
of the revenue lost as a result of the termination of the 1996 contract and
Reynolds' subsequent actions, its ability to obtain credit and other capital
necessary to run its business could be seriously threatened.
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 except that, if Reyolds successfully obtains a
judgment confirming the arbitrator's award against it, its financial resources
will be severely constrained. As a result of the arbitrator's award, there is
substantial doubt about the Company's ability to continue as a going concern.
See Legal Proceedings.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...............................................Inapplicable
10
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
As previously reported, after all of the Company's claims against the Reynolds
and Reynolds Company ("Reynolds") submitted for arbitration before the American
Arbitration Association were dismissed by the arbitrator, a second hearing was
held on October 11 and 12, 2004, for consideration of Reynolds' counterclaims
seeking $836,643 in damages from the Company. The counterclaims were based upon
Reynolds' claimed damages from having to replace 39 copies of the Company's
DocVantage software product that expired after only a 1 year license with
Reynolds' new choice of software, EDM. It was the Company's contention that all
but approximately $40,000 of Reynolds' damage claims were barred by a limitation
of remedies clause contained in the 1996 agreement. Reynolds claimed that the
1996 agreement did not apply to the counterclaims but admitted that the Company
is entitled to the $193,610.90 in accounts receivable previously deposited by
Reynolds with the court in a related case. The Company also argued that $597,000
in hardware costs claimed by Reynolds were unproven because the hardware in
question was returned to Reynolds and reused for other purposes by Reynolds. The
November 12, 2004 decision of the arbitrator concerning Reynolds' counterclaims
was issued on November 17, 2004. The arbitrator ruled in favor of Reynolds on
substantially all of its counterclaims, finding that the Company breached both
the 1994 and 1996 agreements with Reynolds by delivering only 1 year DocVantage
licenses to 39 Reynolds customers after Reynolds terminated its agreement with
the Company. The arbitrator refused to uphold the limitation of remedies clause
in the 1996 agreement on the grounds that it was unconscionable as applied to
the Company's decision to provide Reynolds with only 1 year DocVantage licenses.
While admitting that it was "not simple" to devise a fair method of assessing
damages for the breach beyond the undisputed $40,131 attributable to the 39
software licenses, the arbitrator nevertheless allowed $36,204.95 for
installation, $40,725.27 for training, and $275,000 of the total $577,273.44
Reynolds was found to have spent for new equipment, for a total of $392,061.22
in damages to be paid by the Company. Since the parties no longer dispute the
Company's entitlement to the $193,610.90 deposited with the court, the net
result of the arbitrator's decision is that, if Reynolds successfully obtains a
judgment on the arbitrator's award and denial of the Company's claims, and the
Company successfully obtains a release of the $193,610.90 deposited with the
court, then, assuming that the Company applies that deposit to the judgment, the
Company would still owe $198,450.32 to Reynolds.
If Reynolds is successful in obtaining a judgment on the award, it is highly
unlikely that the Company would be able to satisfy any such judgment in cash, as
its credit lines are currently almost completely extended and it has no other
ready sources for the required funds. Accordingly, if Reynolds obtains such a
judgment and insists upon satisfaction of it in cash, the Company will be forced
to consider all alternatives, including but not limited to seeking additional
debt or equity capital, a bankruptcy reorganization or liquidation. Because
(i) Reynolds still has numerous customers who are using the Company's software
notwithstanding the various legal disputes between the parties and (ii) the
amount of cash that would be ultimately collected by Reynolds in the event of a
judgment is relatively immaterial to Reynolds, the Company believes that
Reynolds may be willing to consider a non-cash business resolution of the matter
in lieu of a cash settlement. On the other hand, there can be no assurance that
Reynolds will choose a non-cash settlement and there is therefore a substantial
risk that a judgment against the Company on this matter could render the Company
insolvent and cause it to file bankruptcy or take other, similar actions.
As a result of the arbitrator's award, there is substantial doubt about the
Company's ability to continue as a going concern. See Legal Proceedings.
11
In the absence of a consensual resolution of this matter, considering the
magnitude of the potential judgment to the Company, the Company is very likely
to actively defend any action by Reynolds to obtain a judgment on the
arbitrator's award in favor of Reynolds on the counterclaims and his denial of
the Company's claims. In the event of an adverse ruling in that action, the
Company is also likely to appeal the ruling to a higher court. There can be no
assurance that the Company will succeed in any such defense or appeal, or that
it will be able to obtain a stay of judgment pending appeal in the event of an
adverse ruling by the lower court
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES Inapplicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable
ITEM 5. OTHER INFORMATION Inapplicable
ITEM 6. EXHIBITS
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
12
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: 11/19/2004 /s/ DAVID R. DEYOUNG
----------------------
David R. DeYoung
President, Principal and Chief Executive Officer
Date: 11/19/2004 /s/ MARY ANNE DEYOUNG
----------------------
Mary Anne DeYoung
Vice President, Finance and Principal Financial Officer
13