FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended 12/31/96
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.
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(Exact name of Registrant as specific in its charter)
0-12535
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(Commission File Number)
Colorado 84-0866294
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- -
(State of Incorporation) (IRS Employer Identification
Numbers)
6486 S. Quebec Street, Englewood CO 80111 (303) 694-9180
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(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
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(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock - $.004 par value
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(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of the Form 10-K or any amendment of
this Form 10-K. __X__
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 5, 1997: $2,029,621.
As of March 14, 1997, there were 2,147,563 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part III, Items 10-13, are incorporated by reference from the Registrant's
definitive proxy statement for the 1997 annual meeting of stockholders.
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TABLE OF CONTENTS
PART I
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1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . .8
4. Submission of Matters to a Vote of Security Holders . . . . . . . . .8
PART II
5. Market for Registrant's Common Equity and Related Stockholders
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 11
8. Financial Statements and Supplementary Data . . . . . . . . . . . . 13
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 33
PART III
10. Directors and Executive Officers of the Registrant. . . . . . . . . 33
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 33
12. Security Ownership of Certain Beneficial Owners and Management. . . 33
13. Certain Relationships and Related Transactions. . . . . . . . . . . 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . 33
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PART I
ITEM 1. BUSINESS
Introduction
During 1996, the Company concentrated its efforts on selling
production document imaging software to its niche market, the Multi-Value
Relational Data Base Management Systems ("RDBMS") market. Today's
workplace is dramatically changing with the advent of affordable
electronic document imaging. The Company has continued to make progress
toward its goal of establishing a Value Added Reseller ("VAR") network for
its imaging software. The Company seeks to partner with VARs or software
developers who provide software to their targeted vertical markets. In
1996, the Company drastically cut administrative costs while increasing
its recurring revenue stream significantly.
1MAGE Software, Inc., (the "Company") develops and markets a software
product called 1MAGE(R), a UNIX-based electronic document image management
and retrieval system. Electronic imaging systems like 1MAGE(R) allow any
paper document to be converted to electronic form for magnetic storage.
Magnetic storage drastically reduces the physical space needed for paper-
based filing systems and offers computer access to handwritten or non-
computer generated documents within seconds, a dramatic improvement over
traditional paper filing systems. The software has the ability to file,
route, track, archive and manage the flow of incoming and outgoing
documents throughout an organization. Using an open, client/server
architecture design, 1MAGE(R) provides a comprehensive solution for
scanning, indexing, storing and retrieving document images so that these
may be viewed, printed and faxed.
Imaging Software Market
The Company targets the Multi-Value RDBMS market for 1MAGE(R) through
Multi-Value RDBMS VARs, systems integrators, and other companies which
market complementary software or other products. Significant Multi-Value
RDBMS target markets identified to date are manufacturing, insurance,
government, transportation, and health care. The Company has contracts in
place with VARs for the financial services, government, manufacturing,
distribution, health care, transportation and systems integration markets
and is actively seeking to expand its independent sales network.
The Company offers a comprehensive reseller program which provides,
in the context of a cooperative marketing effort, a broad range of sales,
marketing, and technical support. The program includes technical training
and assistance, marketing communications, sales training and assistance,
excellent support and training, lead referral services, customized product
literature, and a discounted demonstration/development system.
Products
As noted above, the Company's primary product is 1MAGE(R), its
proprietary document imaging software package. The Company is continually
enhancing this product in order to improve its performance and expand its
possible uses.
1MAGE(R) DOCUMENT MANAGEMENT - 1MAGE(R) is a comprehensive, UNIX-based
Multi-Value RDBMS electronic document imaging and management system that
offers all the capabilities needed to control incoming and outgoing
documents. Its features and functionality include scanning, facsimile,
optical character recognition, bar code recognition, workflow, and
hierarchical storage management employing optical disk storage.
1MAGE(R) includes several distinguishing features: the ability to
use many different type workstations or terminals, the ability to quickly
and easily integrate with the existing Multi-Value RDBMS business
application software using application program interfaces (APIs), and the
ability to handle the needs of companies of all sizes economically.
Through the use of the UNIX operating system and open systems technology,
the Company can offer an imaging solution to its customers at
substantially lower cost than was previously available.
1MAGE(R) is sold through the Company's worldwide reseller program to
companies in Multi-Value RDBMS vertical markets. During 1996, sales of
1MAGE(R) software licenses accounted for all revenue from the Company's
sales of software licenses (excluding annual license fees) and 36% of
total revenue; in 1995, revenue from sales of 1MAGE(R) software licenses
accounted for 92% and 30%, respectively.
The proprietary applications software packages sold by the Company
utilize the popular UNIX operating systems and both VMARK's uniVerse(TM)
database management system and Unidata's database manager, both of which
are considered to be Multi-Value RDBMS. The Company utilizes open systems
technology, making its software transportable to numerous hardware
products from varying manufacturers. Because of the number of
manufacturers using the UNIX operating system and the Multi-Value RDBMS,
customers are rarely restricted in their choice of hardware manufacturers
and seldom incur substantial reprogramming or conversion costs.
1MAGE FOR TRANSPORTATION - 1MAGE For Transportation was introduced in 1992
to provide features necessary to store, retrieve, and manage the documents
used by the motor carrier industry. It has the ability to scan, view,
print, and fax records and can be integrated with other transportation
business application products offered by the Company. A more general
version of 1MAGE For Transportation is currently being offered to other
trucking software suppliers under the Company's reseller program.
The Company also markets peripheral products such as scanners,
jukeboxes, X-terminals, character terminals, personal computers, printers
and disk drives, although this aspect of the Company's business has been
de-emphasized in recent years. Because computer hardware and peripheral
products are purchased as needed to fill customer orders; no sizable
inventory is maintained. Hardware and peripheral products are generally
shipped directly from the manufacturer to the customer. The Company
purchases computer and peripheral products at discounts which range from
10% to 40% of the manufacturer's list price, depending on the manufacturer
and the volume of products sold, and retains a portion of that discount as
profit. In 1996, revenue from hardware sales accounted for $312,672 of
the Company's total revenue, as compared to $1,141,622 of total revenue
for 1995.
Services and Annual Fees
The Company licenses its 1MAGE(R) software to its customers and
charges an annual license fee which must be paid to continue receiving
support for the use of the software. During 1996 and 1995, annual license
fees accounted for $713,912 and $349,382 respectively, of the Company's
net sales. Annual software license fee revenue for 1996 was up 104% over
1995 levels as new and existing users continue to pay fees associated with
the license program. The Company believes annual license fees from new
and existing customers will contribute to the long-term stability of the
Company. The Company also provides installation services and technical
support to its customers. Technical support includes training, consulting
services and other ongoing support. For the years ended December 31, 1996
and 1995, the revenues from these services accounted for $301,341 and
$447,695, or approximately 15% each year of the Company's net sales. The
Company does not provide service for hardware; rather, service for
computer hardware sold by the Company is provided directly by the
manufacturer.
Marketing and Distribution
The Company has signed VAR agreements with 10 resellers. Under the
reseller program, the Company provides its imaging product (1MAGE(R)) to
independent software integrators (resellers), who in turn market 1MAGE(R)
products to each of their individual markets. The Company's overall
marketing objective is to support the current resellers and to continue to
enroll new dealers in the reseller program. The Company provides training
aids, user instruction manuals and other documentation, and a newsletter
to keep its resellers, as well as prospective resellers and customers,
informed of new product applications and developments.
In addition, the Company markets 1MAGE(R) through its direct sales
force. The Company's current direct sales efforts are focused on entities
that utilize the Multi-Value RDBMS software and the Company's traditional
market of transportation companies. Its general strategy is to (1) help
its customers define the goals for their system, (2) provide the means of
achieving those goals through its document management software and
appropriately configured computer hardware, and (3) help assure the
ongoing success of this collaborative process by providing continuing
support, including on-site personnel training and classroom educational
programs.
Sources of Supply
In conjunction with the sale of its own proprietary software
products, 1MAGE Software, Inc. sells a variety of third party vendors'
software to its customers which complement 1MAGE(R) and create an
integrated software product. The amount and type of third party software
provided to a given customer depends on that customer's needs, its planned
uses for the imaging software and the configuration of its hardware and
other software. The Company believes this combination of technologies
provides the most advanced and cost-effective software product family.
A limited number of manufacturers account for a majority of 1MAGE
Software's hardware sales. Should one hardware system be unavailable for
any reason, however, a substitute system will likely be acceptable to the
customer because the software marketed by the Company functions on all of
the hardware systems that it distributes.
The Company markets IBM equipment under an "Industry Remarketer
affiliate" agreement with Pro America (Dallas, Texas), which allows for
volume discounts on IBM products. This agreement was renewed in January,
1996 for two years. The Company has an Independent Software Vendor (ISV)
agreement directly with Hewlett-Packard Company (HP) for remarketing its
software on HP platforms. On March 6, 1997, 1MAGE Software Inc. entered
into a business alliance with Integration Alliance Corporation (IAC) to
form a partnership that would distribute HP products and 1MAGE(R) software
through a network of resellers. This agreement renews annually. The
current dealer agreements with VMARK Software, Inc. and Unidata, Inc. to
remarket their Multi-Value RDBMS proprietary software run through May 15,
1997 and December 31, 1998, respectively.
Possible Fluctuations in Operating Results
The Company's current focus on offering its proprietary imaging
software to a broader range of customers, through its emerging Multi-Value
VAR network and its direct sales force, is expected to lessen the
historical quarterly fluctuations in the Company's operating results. In
addition, the use of multiple channels of distribution to reach these
broader markets should further diminish the reliance on limited vertical
markets. Nevertheless, large sales or groups of sales of 1MAGE(R)
licenses may cause significant variances in quarterly results which may be
difficult to predict.
The Company's sales cycle, which generally commences at the time a
prospective customer issues a request for proposal or otherwise
demonstrates a serious interest in purchasing a system or software license
and ends upon execution of a sales contract or software license, typically
ranges from four to nine months. Operating results could vary from period
to period as a result of the length of the sales cycle, the timing of
individual system sales, VARs performance and conditions in the target
markets and the economy in general.
Trade Secret and Copyright Laws
The Company regards its software as proprietary and relies for
protection upon trade secret and copyright laws and non-disclosure
agreements with its employees as well as restrictions on disclosure and
transferability contained in its software license agreements with its
customers. Despite these restrictions, it may be possible for competitors
or customers to copy aspects of the Company's products or obtain
information that the Company regards as proprietary. Furthermore, there
can be no assurance that others will not independently develop software
products similar to those developed or planned by the Company. Although
the Company believes its software does not infringe on the proprietary
rights of others and has not received any notice of claimed infringement,
it is possible that portions of the software marketed by the Company could
be claimed to infringe on existing proprietary rights. In the unlikely
event that any such infringements are found to exist, there can be no
assurance that any necessary licenses or rights could be obtained, or
could be obtained on terms satisfactory to the Company. Further, in such
event, the Company could be required to modify the infringing software.
There can be no assurance that the Company would be able to do so in a
timely manner, upon acceptable terms and conditions, or at all; the
failure to do so could have a material adverse effect on the Company.
Backlog
As a practical matter, the Company's business has evolved to the
point where the Company has minimal backlog at any given point in time.
With respect to software license sales, because there is no time delay
between receipt of an order and delivery of the software, electronically
or otherwise, there is effectively no backlog. Hardware sales have such
short lead times because of direct delivery of the hardware by the
manufacturer, that unfilled firm orders seldom, if ever, build up to
significant levels.
It is the Company's policy to permit customers to cancel hardware
orders prior to shipment by the vendor. The Company normally receives a
deposit of between 25% and 50% of the hardware and software price when an
order is placed. This deposit may or may not be returned upon
cancellation, depending on the circumstances of the cancellation.
Customers
Historically, the Company has primarily sold integrated computer
systems to the transportation and other specialized industries. With the
development of 1MAGE(R), the Company has begun to expand its customer base
to businesses in a wide variety of industries and markets, facilitated
through the use of VARs.
In May, 1994, the Company signed a software license agreement with
Reynolds+Reynolds, a Fortune 500 company headquartered in Dayton, Ohio,
for the exclusive right to sublicense 1MAGE(R) (without payment of further
license fees to the Company) to businesses primarily engaged in retail
sales of new or used automobiles, trucks or tractors. The Company
continues to provide product enhancements, maintenance, consulting, and
programming services on an ongoing basis to Reynolds+Reynolds.
Competition
The Company experiences competition in its business from competitors
who target one or more of the same markets or market segments as the
Company. Software and systems that perform many of the same functions as
the Company's systems and software are readily available from a number of
competitors of the Company, some of which are larger and have greater
financial, technical, marketing and other resources than the Company. The
Company believes that the principal factors affecting a prospective
customer's choice of a system are the database it uses, performance,
service and price. The Company believes that usage of the popular UNIX
based operating system and the Multi-Value RDBMS has strengthened the
Company's competitive position by making the Company's software compatible
with more types of hardware and Multi-Value application software offered
by Multi-Value software developers and system integrators. The Company
further believes that its principal advantage over its competitors is the
Company's utilization of a UNIX based open systems architecture and the
Multi-Value RDBMS which can be offered at lower prices.
Limited Markets
The reseller program targets complementary markets and allows the
Company to draw from a much larger market with respect to its imaging
software products than its traditional markets of the trucking and
transportation industries. As noted above, the Company's strategy has
been to expand the domestic and international markets for its imaging
software by engaging VARs for various industries and markets.
The Company's experience has been that economic downturns or
increased competitive pressures in its niche markets sometimes result in
reduction or deferral of capital expenditures by potential customers.
While such adverse conditions can sometimes lead to opportunities as
potential customers downsize to smaller, more cost-efficient computer
systems or replace custom designed systems that require higher levels of
support and maintenance, the Company believes that both a strong national
economy and, to a lesser extent, a strong transportation industry are
important to the success of its sales efforts.
Product Development
The computer industry is characterized by rapid technological changes
in both software and hardware. In order to maintain the usefulness of its
products and their compatibility with future hardware and software, the
Company must continually modify and enhance its products. During 1996 and
1995, the Company spent approximately $297,060 and $380,255, respectively,
for computer software development.
Employees
As of March 5, 1997, the Company employed 20 persons on a full-time
basis, including 6 persons in sales and marketing, 10 in technical support
and programming functions, and 4 in administrative positions.
Because the competition for skilled employees in the computer
industry is intense, the Company provides incentive compensation packages
to many of its employees, including its executive officers. The Company's
chief executive officer, David R. DeYoung, receives a quarterly bonus
equal to 5% of the Company's pretax profits. (See "Executive
Compensation" in the Company's Proxy Statement. The Company's chief
financial officer receives a quarterly bonus equal to 4% of the Company's
pretax profits. Sales personnel receive a commission based upon sales.
The Company believes that these incentive programs are important in
attracting and retaining skilled personnel. The future success on the
Company will depend in large part upon the quality of its employees and
the efforts they expend on behalf of the Company .
None of the Company's employees are represented by a labor union, and
the Company has experienced no work stoppage. The Company believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 6,600 square
feet at Greenwood Executive Park, 6486 South Quebec Street, Englewood,
Colorado, 80111 and are occupied pursuant to a non-cancelable lease that
terminates on October 31, 1998. This space is leased from Comlease, a
partnership owned by seven of the Company's present or former
shareholders. (See "Certain Relationships and Related Transactions" in
the Company's Proxy Statement.) The Company believes that its facilities
and equipment are in good condition and satisfactory for their present
uses.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings to which the Company
was a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
through the solicitation of proxies or otherwise during the fourth quarter
of the Company's calendar year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock is quoted in the NASDAQ Small Cap System
under the symbol ISOL. The following table sets forth, for the fiscal
quarters indicated, the high and low bid prices per share for the Common
Stock as reported on NASDAQ.
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1995 High Low
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First Quarter $3.38 $1.88
Second Quarter 2.56 1.75
Third Quarter 2.06 1.13
Fourth Quarter 1.25 0.63
1996 High Low
First Quarter $1.31 $0.63
Second Quarter 1.88 0.75
Third Quarter 1.63 1.13
Fourth Quarter 1.25 0.75
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These quotations reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
On March 5, 1997, the closing bid price per share for the Common
Stock was $1.00 as reported on NASDAQ. On this same date, there were
approximately 668 holders of record of the Common Stock.
Dividends
The Company has never declared or paid cash dividends on its Common
Stock and has no present intention to do so. For the foreseeable future,
any earnings will be retained to finance the development and expansion of
the Company's business. The declaration and payment of future dividends
will be determined by the Company's Board of Directors in light of
conditions then existing, including the Company's earnings, financial
condition and capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data of the Company. This table should be read in conjunction
with the financial statements and notes included in Item 8 of this Form
10-K and the section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" following this section.
Consolidated Statements of Operations Years Ended December 31,
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In thousands, except for per
share data: 1996 1995 1994 1993 1992
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Net Sales $2,005 $2,908 $4,633 $3,622 $2,509
Cost of Sales 905 2,149 2,114 1,862 2,143
Gross Profit 1,100 759 2,519 1,760 366
Selling, General & Administrative
Expenses 1,273 1,992 1,833 1,741 1,634
Income (Loss) before Income Taxes (84) (1,322) 643 75 (1,438)
Net Income (Loss) $(89) $(1,314) $601 $75 $(1,438)
Net Income (Loss) Per Share $(0.04) $(0.69) $0.34 $0.05 $(1.08)
Weighted Average Number of
Outstanding Shares 2,055 1,912 1,778 1,548 1,338
Consolidated Balance Sheets Years Ended December 31,
In thousands: 1996 1995 1994 1993 1992
Working Capital $165 $398 $1,380 $36 $160
Total Assets 2,018 2,004 3,578 2,461 2,631
Long-term Obligations 8 171 33 155 150
Total Stockholders' Equity 1,239 1,246 2,494 1,257 1,134
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995. The Company's net sales of $2,004,825 for the year ended December
31, 1996 were $903,119 (31%) lower than $2,907,944 reported for the same
period a year earlier, primarily due to a $828,950 decrease in hardware
sales. Although total revenue declined, gross profit increased by
$340,720 (45%) due to a dramatic change in the components of total
revenue. Gross profit reported on 1996 revenue equals 55% of total revenue
(or $1,099,721), as compared to 26% of total revenue (or $759,001) for
1995. Revenue from system sales and software licenses constituted 49% and
73% of total revenues in 1996 and 1995, respectively. Service and annual
fees made up 51% and 27% of total revenues, respectively, in 1996 and
1995. Net sales to resellers of $741,812 (37% of total revenue) for the
twelve months ended December 31, 1996 were 20% ($123,245) higher than
$618,567 (21% of total revenue) reported for the same period a year
earlier. Sales made through resellers reflect reseller markdown, and are
therefore shown in discounted (net) dollars. Revenue contribution from
maintenance/annual license fees was up significantly (104%) for the year
over year periods: $713,912 or 36% of total revenue for the year ended
December 31, 1996 as compared to $349,382 or 13% of total revenue for the
year ended December 31, 1995. Additional software licenses, which are
needed as customers increase the number of users on their imaging system,
contributed $234,610 to software revenue for the year ended December 31,
1996 compared to $7,996 in revenue for the same period a year earlier.
Hardware revenue comprised 15% of total revenue for the current year
versus 39% of total revenue for the year earlier, due to the Company
changing its emphasis from a system integrator to a software provider.
Selling, general and administrative expenses were down sharply (35%) for
the twelve months ended December 31, 1996 as compared to the same period
in 1995, as across the board cost-cutting measures (implemented in 1995)
began to show results. The combined effect of the factors described have
resulted in a substantial improvement in the Company's effort to return to
profitability. Net loss and earnings per share for the year ended
December 31, 1996 were $(89,074) and $(.04) as compared to $(1,313,724)
and $(.69) for the year ended December 31, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31,
1994. The Company's net sales of $2,907,944 for the year ended December
31, 1995 were $1,724,929 (37%) lower than $4,632,873 reported for the same
period a year earlier. This decline in revenue is attributable largely to
a significant sale to a single customer in 1994 which comprised 40% of
that year's revenue. Revenue from system sales and software licenses
constituted 73% and 87% of total revenues in 1995 and 1994, respectively.
Service and annual fees revenue made up 27% and 13% of total revenues,
respectively, in 1995 and 1994. Sales to first-time customers in 1995
were equivalent to 74% of total revenue as compared to 64% of total
revenue for the year ended December 31, 1994. Additions to the existing
customer base should contribute to future business as these customers
increase the number of software user licenses, pay annual license fees,
upgrade equipment and require ongoing technical support services.
Excluding the single software license transaction described above,
software license revenues increased 28% in 1995 over 1994. Annual
software license fee revenue for 1995 was up 37% over 1994 levels as new
and existing users continue to pay fees associated with the license
program. The Company believes annual license fees from existing and new
customers will contribute to the long-term stability of the Company.
Selling, general and administrative (SG&A) expenses of $1,952,001 were
6.5% higher than expenses incurred during 1994. In the last six months of
1995, management implemented cost cutting measures in order to reduce
overhead expenses, as a response to lower revenue levels. Employee
headcount was reduced by 33%, year over year. The Company employed twenty
(20) persons at December 31, 1995 compared to thirty (30) employees at
December 31, 1994. The Company believes that it can significantly
increase revenue without increasing personnel. Bad debt expense resulting
from certain customers in the transportation industry contributed to the
increased SG&A expense. In addition, the Company wrote down the remaining
balance of certain software products to their future net realizable value.
Net loss for the year ended December 31, 1995 was $(1,313,724) or $(.69)
per share as compared to net income of $600,890 or $.34 earnings per share
for the year ended December 31, 1994.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased $104,253 during the
twelve months ended December 31, 1996, primarily due to net cash used for
investing activities. Cash used for capitalized software costs (primarily
for development of the new release of 1MAGE(R) software) totaled $297,060
for the year ended December 31,1996. The Company had working capital of
$165,083 on December 31, 1996. The ratio of current assets to current
liabilities was 1.2 to 1 at year end.
The Company's internal sources of liquidity are revenues from
operations and cash on hand. The Company receives most of its revenues
for software licenses and system sales upon installation and does not
maintain inventory balances. The Company has a $150,000 revolving line of
credit. The loan is collateralized by certain notes and accounts
receivable and a certificate of deposit for $25,000.
The Company has no material commitments for capital expenditures for
1997.
Management believes that inflation has not had a material impact on
its results of operations to date.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1MAGE SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
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PAGE
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . 14
BALANCE SHEETS - December 31, 1996 and 1995. . . . . . . . . . . . . . . 15
STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
STATEMENTS OF SHAREHOLDERS' EQUITY - From January 1, 1994 through
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 20
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION. . . . . . . . 31
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS. . . . . . . . . . . . 32
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INDEPENDENT AUDITORS' REPORT
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Board of Directors
Image Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of Image Software, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, the Company
understated deferred revenue at December 31, 1995 and overstated annual
fee revenue during 1995 by $54,000. The Company has restated its 1995
financial statements for the correction of this error.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Image
Software, Inc. as of December 31, 1996 and 1995, and the results of its
consolidated operations and its cash flows for the years ended December
31, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
/s/ KARSH & COMPANY, P.C.
- -------------------------
KARSH & COMPANY, P.C.
Denver, Colorado
February 11, 1997
IMAGE SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 241,599 $ 345,852
Certificate of deposit 25,000 -
Receivables:
Trade (less allowance: 1996, $90,952; 1995,
$96,925) 507,808 561,720
Current portion of notes receivable - 15,210
Related parties 32,683 6,919
Inventory 104,232 28,642
Prepaid expenses and other current assets 24,814 25,839
---------- ----------
Total current assets 936,136 984,182
PROPERTY AND EQUIPMENT, net 244,617 268,550
OTHER ASSETS:
Software development costs, net 789,365 708,360
Investment in ScanUSA - 13,939
Other 48,203 28,502
---------- ----------
TOTAL ASSETS $2,018,321 $2,003,533
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 150,000 $ 100,477
Current portion of convertible notes payable
to related parties 150,000 -
Current portion of capital lease obligations 12,983 11,347
Accounts payable 225,341 221,401
Accrued liabilities 232,729 253,211
---------- ----------
Total current liabilities 771,053 586,436
LONG-TERM OBLIGATIONS:
Convertible notes payable to related parties - 150,000
Capital lease obligations 8,489 21,461
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000 shares
authorized; shares outstanding:
1996 - 2,147,563; 1995 - 1,936,859 8,590 7,748
Additional paid-in capital 6,850,533 6,619,758
Notes receivable for common stock (149,400) -
Accumulated deficit (5,470,944) (5,381,870)
---------- ----------
Total shareholders' equity 1,238,779 1,245,636
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,018,321 $2,003,533
========== ==========
See notes to financial statements.
</TABLE>
IMAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUE:
System sales and software licenses $ 989,572 $ 2,110,867 $4,016,271
Services and annual fees 1,015,253 797,077 616,602
---------- ----------- ----------
Total revenue 2,004,825 2,907,944 4,632,873
---------- ----------- ----------
COST OF REVENUE:
System sales and software licenses 514,595 1,457,620 1,553,156
Services and annual fees 390,509 691,323 561,041
---------- ----------- ----------
Total cost of revenue 905,104 2,148,943 2,114,197
---------- ----------- ----------
GROSS PROFIT 1,099,721 759,001 2,518,676
---------- ----------- ----------
OPERATING EXPENSES:
Selling, general and
administrative 1,273,046 1,952,001 1,832,941
Write-down of software - 40,030 -
---------- ----------- ----------
Total operating expenses 1,273,046 1,992,031 1,832,941
---------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS (173,325) (1,233,030) 685,735
---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense (27,826) (21,040) (67,924)
Equity in earnings of affiliates (13,939) (86,061) -
Interest income 18,782 27,377 26,946
Other 112,234 (8,970) (1,867)
---------- ----------- ----------
Total other income (expense) 89,251 (88,694) (42,845)
---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (84,074) (1,321,724) 642,890
PROVISION FOR INCOME TAXES (5,000) 8,000 (42,000)
---------- ----------- ----------
NET INCOME (LOSS) $ (89,074) $(1,313,724) $ 600,890
========== =========== ==========
EARNINGS (LOSS) PER COMMON SHARE $(0.04) $(0.69) $0.34
========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,054,632 1,911,731 1,778,014
========== =========== ==========
See notes to financial statements.
</TABLE>
IMAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN NOTES
SHARES AMOUNT CAPITAL RECEIVABLE
<S> <C> <C> <C> <C>
BALANCES, January 1, 1994 1,549,116 $6,196 $5,955,435 $ -
Issuance of common stock for
services 107,000 429 229,259 -
Issuance of common stock in
connection with retirement
of debt 111,112 445 49,555 -
Accrued liabilities converted
to common stock 4,307 16 6,444 -
Exercise of incentive
common stock options 20,737 83 20,974 -
Exercise of non-qualified
common stock options 100,000 400 328,840 -
Net income - - - -
--------- ------ ---------- ---------
BALANCES, December 31, 1994 1,892,272 7,569 6,590,507 -
Issuance of common stock in
connection with retirement
of debt 20,000 80 23,670 -
Issuance of common stock for
services 27,162 109 41,303 -
Cancellation of treasury stock (2,575) (10) (35,722) -
Net loss - - - -
--------- ------ ---------- ---------
BALANCES, December 31, 1995 1,936,859 7,748 6,619,758 -
Accrued liabilities converted
to common stock 1,867 7 1,860 -
Issuance of common stock
for inventory and services 62,087 248 82,752 -
Sale of common stock 150,000 600 149,400 (149,400)
Cancellation of common stock
related to employee
termination (3,250) (13) (3,237) -
Net loss - - - -
--------- ------ ---------- ---------
BALANCES, December 31, 1996 2,147,563 $8,590 $6,850,533 $(149,400)
========= ====== ========== =========
</TABLE>
<TABLE>
<CAPTION>
ACCUM. TREASURY STOCK
DEFICIT SHARES AMOUNT TOTAL
<S> <C> <C> <C> <C>
BALANCES, January 1, 1994 $(4,669,036) 2,575 $(35,732) $1,256,863
Issuance of common stock for
services - - - 229,688
Issuance of common stock
in connection with
retirement of debt - - - 50,000
Accrued liabilities converted
to common stock - - - 6,460
Exercise of incentive
common stock options - - - 21,057
Exercise of non-qualified
common stock options - - - 329,240
Net income 600,890 - - 600,890
---------- ------ -------- ----------
BALANCES, December 31, 1994 (4,068,146) 2,575 (35,732) 2,494,198
Issuance of common stock in
connection with retirement
of debt - - - 23,750
Issuance of common stock for
services - - - 41,412
Cancellation of treasury stock - (2,575) 35,732 -
Net loss (1,313,724) - - (1,313,724)
---------- ------ -------- ----------
BALANCES, December 31, 1995 (5,381,870) - - 1,245,636
Accrued liabilities converted
to common stock - - - 1,867
Issuance of common stock
for inventory and services - - - 83,000
Sale of common stock - - - 600
Cancellation of common stock
related to employee
termination - - - -
employee termination - - - (3,250)
Net loss (89,074) - - (89,074)
----------- ------ -------- ----------
BALANCES, December 31, 1996 $(5,470,944) - $ - $1,238,779
=========== ====== ======== ==========
See notes to financial statements.
</TABLE>
IMAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (89,074) $(1,313,724) $ 600,890
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 295,132 516,585 484,338
Allowance for doubtful accounts (5,973) 152,300 123,520
Write-down of notes receivable - - 176,507
Issuance of stock for services 30,750 41,412 229,688
Compensation expense related to
non-qualified stock options - - 131,840
Write-down of capitalized software - 40,030 -
Equity in loss of affiliate 13,939 86,061 -
Changes in assets and liabilities:
Receivables 34,121 914,522 (773,808)
Inventory (57,297) (13,515) 274
Prepaid expenses and other current
assets 1,025 114,428 (128,744)
Accounts payable 3,940 (208,050) (155,172)
Accrued liabilities (18,615) (197,507) 193,700
--------- ----------- ---------
Net cash provided by operating
activities 207,948 132,542 883,033
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (24,437) (89,304) (81,954)
Additions to capitalized software (297,060) (380,255) (335,536)
Payments from notes receivable 15,210 34,107 67,003
Purchase of certificate of deposit (25,000) - -
Investment in affiliate - (100,000) -
Increase in other assets (19,701) (2,953) (8,879)
--------- ----------- ---------
Net cash used for investing
activities (350,988) (538,405) (359,366)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 438,948 255,000 247,500
Repayment of line of credit (389,425) (200,373) (271,012)
Repayment of long-term obligations (11,336) (101,626) (78,426)
Proceeds from issuance of convertible
debt - 150,000 -
Proceeds from issuance of common stock 600 - -
Proceeds from exercise of common stock
options - - 218,457
--------- ----------- ---------
Net cash provided by financing
activities 38,787 103,001 116,519
--------- ----------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (104,253) (302,862) 640,186
CASH AND CASH EQUIVALENTS,
beginning of year 345,852 648,714 8,528
--------- ----------- ---------
CASH AND CASH EQUIVALENTS,
end of year $ 241,599 $ 345,852 $ 648,714
========= =========== =========
See notes to financial statements.
</TABLE>
IMAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 12,907 $75,403 $26,060
======== ======= =======
Income taxes paid $ 5,000 $29,000 $ 5,000
======== ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Debt and accrued interest retired in
exchange for common stock $ - $23,750 $50,000
======== ======= =======
Inventory reclassified to equipment $ 30,707 $42,854 $45,754
======== ======= =======
Reclassification of trade receivables
to notes receivable $ - $ - $32,437
======== ======= =======
Accrued liabilities converted to
common stock $ 1,867 $ - $ 6,460
======== ======= =======
Common stock issued for notes
receivable $149,400 $ - $ -
======== ======= =======
Common stock issued for inventory $ 49,000 $ - $ -
======== ======= =======
See notes to financial statements.
</TABLE>
1MAGE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - 1MAGE Software, Inc. (formerly Information Solutions,
Inc. (the "Company")), was incorporated in Colorado in December 1981.
In June 1994, Information Solutions, Inc. changed its name to 1MAGE
Software, Inc. Simultaneously, its subsidiary, 1MAGE Software, Inc.
changed its name to Information Solutions, Inc.
From June of 1994 until December of 1995, the Company operated as two
(2) distinct entities. 1MAGE Software, Inc. developed and marketed a
UNIX-based electronic document image management and retrieval system.
Information Solutions, Inc. marketed, installed, and supported
integrated computer systems in the motor carrier industry. The
Company earns the majority of its revenues in the United States.
On December 31, 1995, Information Solutions, Inc. was merged into
1MAGE Software, Inc.
Principles of Consolidation - During 1995 and 1994 the financial
statements included the accounts of 1MAGE Software, Inc. and its
wholly-owned subsidiary, Information Solutions, Inc.(formerly 1MAGE
Software, Inc.) All material intercompany transactions have been
eliminated.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity of ninety days or less to be
cash equivalents.
Inventories consist of finished goods and are stated at the lower of
cost (specific identification method) or market (net realizable
value).
Investments - During 1995, the Company purchased a 50% interest in
ScanUSA, LLC. This investment has been accounted for using the
equity method of accounting.
Property and Equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful lives (generally five years) of the assets or the
lease term, if shorter. The Company capitalizes all expenditures for
property and equipment in excess of $500.
Software Development Costs are capitalized when technological
feasibility is established. Such costs are stated at the lower of
unamortized cost or net realizable value. Amortization is computed
using either the straight-line method based on estimated economic
lives of the products (five years) or the ratio that current product
revenues bear to the total of current and anticipated future product
revenues, whichever is greater. The amounts capitalized for the
years ended December 31, 1996, 1995 and 1994 were $297,060, $380,255,
and $335,536 respectively. Amortization of these costs totaled
$216,053, $311,295, and $312,660, respectively. During 1995, the
Company wrote down $40,030 of software development costs to net
realizable value. The net realizable value of such capitalized costs
is reviewed by management on a periodic basis, and costs in excess of
net realizable value, if any, are charged to operations.
Purchased Software is stated at cost less accumulated amortization.
For the years ending December 31, 1996, 1995 and 1994 accumulated
amortization was $1,001,987, $1,001,987, and $920,277, respectively.
Purchased software is amortized using the straight-line method over
the estimated useful life of the software (ten years). The net
realizable value of such capitalized costs is reviewed by management
on a periodic basis, and costs in excess of net realizable value, if
any, are charged to operations. The net realizable value at December
31, 1996 and 1995 was $0.
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.
The Company performs credit evaluations of its customers' financial
condition and generally does not require collateral. The Company
retains a security interest in the equipment and software sold until
they are paid in full. Receivables are generally due within 30 days,
with those customers not meeting those requirements being subject to
stricter credit policies. In 1995, the Company charged $246,444 of
notes receivable to bad debts for a customer who filed bankruptcy.
In March 1996, the Company recovered $110,838 of income from
receivables which had previously been recorded as bad debt. This
amount is included in other income. Credit losses to customers have
generally been within management's expectations.
In 1993, a specific contract provided for the right to return the
software. During 1994, the Company charged $150,040 to sales returns
for the return of software sold.
One customer accounted for 13% of 1996 revenues. A certain reseller
accounted for 12% of revenue during 1996. Two customers accounted for
25% and 12% of accounts receivable at December 31, 1996.
One customer accounted for 14% of 1995 revenues. Three different
customers accounted for 17%, 13% and 12% of accounts receivable at
December 31, 1995, respectively.
One customer accounted for 40% of 1994 revenues and 43% of accounts
receivable at December 31, 1994. This receivable was collected in
February 1995.
Income (Loss) per Share is computed by dividing net income (loss) by
the weighted average number of common and equivalent shares. Common
stock equivalents were not included in the weighted average number of
shares outstanding for loss periods as their effect was anti-
dilutive. Fully diluted earnings per share are either anti-dilutive
or not materially different from primary earnings per share.
Income Taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between the
basis of depreciation, capitalized software development costs and
allowance for doubtful accounts for financial and income tax
reporting. The Company currently has substantial net operating loss,
research credit and investment tax credit carry forwards.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," which required a change from the deferred method to the asset
and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities.
Reclassifications - Certain items in the 1995 and 1994 financial
statements have been reclassified to conform with the 1996
presentation. Such reclassifications had no effect on net income or
loss.
Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that can affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
2. RESTATEMENT OF FINANCIAL INFORMATION
The Company has restated its financial statements for the year ended
December 31, 1995. This action was taken to correct the accounting
for deferred revenues related to annual fees. The impact of this
adjustment on the Company's financial statement for the year ended
December 31, 1995 was to increase deferred revenue by $54,000 and to
decrease annual fee revenue and net income by $54,000.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment $ 689,592 $ 642,768
Leasehold Improvements 78,169 78,169
Furniture 74,762 66,441
--------- ---------
842,523 787,378
Less: Accumulated depreciation
and amortization (597,906) (518,828)
--------- ---------
$ 244,617 $ 268,550
========= =========
</TABLE>
4. NOTES RECEIVABLE - TRADE
Notes receivable at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Trade receivable, receivable in
monthly installments of $4,055
through April 1996 $ - $ 12,164
Notes receivable, receivable in
monthly installments of $1,533,
including interest at 8%,
through April 1996 - 3,046
------- --------
- 15,210
Less: Current portion - (15,210)
------- --------
Non-current portion $ - $ -
======= =========
</TABLE>
5. NOTES RECEIVABLE FOR COMMON STOCK
On May 31, 1996, the Company sold 150,000 shares of common stock for
$1.00 per common share in exchange for $600 cash and $149,400 notes
receivable which mature on August 18, 1997. The notes receivable
bear interest at 8.25% per year and have been assigned as collateral
on the line of credit. Interest receivable of $5,804 has been
included in receivables - related parties at December 31, 1996.
Interest income from related parties was $5,804 in 1996. The notes
receivable are due from the same related parties as the convertible
notes payable at Note 8.
6. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred revenue $ 50,000 $ 54,000
Sales tax payable 43,241 84,371
Accounting and audit fees 29,900 24,400
Accrued interest - related party 26,586 11,667
Accrued customer support 21,242 17,850
Accrued compensation 17,800 15,534
Accrued sales commissions 8,372 29,468
Other 35,588 15,921
---------- ----------
$ 232,729 $ 253,211
========== ==========
</TABLE>
7. LINE OF CREDIT
The Company has a $150,000 revolving bank line of credit which
expires September 5, 1997 and bears interest at prime (8.25% at
December 31, 1996) plus 1% and is collateralized by the Company's
notes and accounts receivable and a certificate of deposit for
$25,000. Total borrowings outstanding under the line of credit were
$150,000 at December 31, 1996.
8. CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
Convertible notes payable to related parties at December 31, consist
of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
10% Notes Payable, due
January 15, 1997 $100,000 $100,000
10% Notes Payable, due
August 18, 1997 50,000 50,000
-------- --------
Total Notes Payable $150,000 $150,000
======== ========
</TABLE>
The principal and interest are convertible into common stock at $1.50
per common share for the $100,000 notes due January 15, 1997 and
$.9375 per common share for the $50,000 notes due August 18, 1997.
Attached to the convertible notes are options to purchase 66,668 and
53,332 common shares at an exercise price of $1.50 and $.9375,
respectively. These options expired on July 31, 1996.
In January 1997, the $100,000 notes were amended, extending the
maturity date to August 18, 1997 and amending the conversion rate to
$.9375 per common share. The notes payable are due to the same
related parties as the notes receivable for common stock at Note 5.
Interest expense for the years ended December 31, 1996, 1995 and 1994
was $27,826, $21,040, and $67,294, and includes amounts to related
parties of $15,000, ($3,364), and $44,865, respectively.
9. SHAREHOLDERS' EQUITY
COMMON STOCK
In 1995, one note holder converted $23,750 of accrued interest into
shares of common stock at $1.1875 per common share. In 1994, in
accordance with the conversion terms, one officer converted his note
to common stock at $.45 per common share.
In 1995, the Company canceled the 2,575 shares of common stock held
in treasury.
STOCK COMPENSATION PLANS
At December 31, 1996, the Company has three stock based compensation
plans, which are described below. The Company applies Accounting
Principles Board (APB) Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its 1996, 1994 or 1993 Stock Option Plans. Had
compensation cost for the Company's two stock-based compensation
plans been determined based on the fair value at the rates of awards
under those plans consistent with the method of FASB Statement 123,
the Company's net loss and loss per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net Loss:
As reported $ (89,074) $ (1,313,724)
Pro forma $ (254,074) $ (1,462,724)
Loss per common share:
As reported $ (0.04) $ (0.69)
Pro forma $ (0.12) $ (0.77)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Dividend Yield 0% 0%
Expected Volatility 75% 75%
Risk-Free Interest Rate 8.25% 8.5%
Expected Lives 3.75 years 4.5 years
1996 EQUITY INCENTIVE PLAN
In September 1966, the Board of Directors authorized 1,000,000 shares
of common stock for issuance under its 1996 Equity Incentive Plan
("1996 Plan") as incentive or non-qualified stock options. The
Company grants non-qualified and incentive stock options and
restricted stock to officers and directors who are employees of the
Company.
The options are granted to purchase common stock at the fair market
value on the grant date or at other prices as determined by the Board
of Directors. The option vesting period is determined at the time of
each grant, and all options expire two to ten years from the grant
date.
A summary of the 1996 Plan stock option activity follows:
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING
SHARES VALUE PER SHARE TOTAL
<S> <C> <C> <C>
Granted 90,000 $.84 $75,942
------- -------
Balances,
December 31, 1996 90,000 $.84 $75,942
======= =======
</TABLE>
At December 31, 1996, options for 30,000 shares were exercisable
under the 1996 Plan. There were 910,000 shares available for future
grant.
1994 STOCK OPTION AND GRANT PLAN
In April 1994, the Company authorized 700,000 shares of common stock
for issuance under its 1994 Stock Option and Grant Plan ("1994 Plan")
to employees, consultants, advisors, and independent contractors.
The options are granted to purchase common stock at the fair market
value on the date of grant or at other prices as determined by the
Board of Directors. Options issued under the 1994 Plan become
exercisable in one or more installments during its term and the right
to exercise may be cumulative, as determined by the Board. Options
expire as determined by the Board of Directors, but not more than 10
years after the date of grant.
The terms and conditions of stock awards granted under the 1994 Plan
may differ from one grant to another as the Board of Directors
determines. During 1994, the Company paid financial advisory fees
with non-qualified stock options granted at less than fair market
value. Financial advisory fees totaling $34,640 and $97,200 were
expensed in 1995 and 1994, respectively.
Details of activity under the 1994 Plan are as follows:
<TABLE>
<CAPTION>
OUTSTANDING
STOCK OPTIONS OPTIONS VALUE PER SHARE TOTAL
<S> <C> <C> <C>
Granted 700,000 $2.75 - $3.50 $2,360,500
Canceled (250,000) $3.70 (925,000)
Exercised (100,000) $2.97 - $3.70 (348,000)
--------- ----------
Balances, December 31, 1994 350,000 $2.75 - $3.25 1,087,500
Granted 12,000 $.75 - $1.38 15,250
Canceled (350,000) $2.75 - $3.25 (1,087,500)
--------- ----------
Balances, December 31, 1995 12,000 $.75 - $1.38 15,250
Granted 86,495 $.77 - $1.49 80,176
Canceled (14,000) $.75 - $1.49 (18,225)
--------- ----------
Balances, December 31, 1996 84,495 $.77 - $1.12 $77,201
========= ==========
</TABLE>
<TABLE>
<CAPTION>
STOCK GRANTS SHARES GRANT PRICE TOTAL
<S> <C> <C> <C>
500 $3.62 $ 1,812
15,000 $2.63 39,375
2,500 $3.20 8,001
---------- ---------
Balances, December 31, 1994 18,000 49,188
6,500 $1.00 6,500
27,526 $1.19 32,663
533 $1.87 999
4,155 $1.93 8,000
4,051 $1.97 8,000
3,926 $2.04 7,999
471 $2.12 1,001
---------- ---------
Balances, December 31, 1995 65,162 114,350
2,783 $1.44 4,000
8,000 $1.44 11,500
20,000 $1.12 22,500
Canceled (3,250) $1.00 (3,250)
---------- ----------
Balances, December 31, 1996 92,695 $149,100
========== ==========
</TABLE>
At December 31, 1996 options to purchase 1,247 shares of common stock
were exercisable and 422,810 shares were available for future grant.
1993 STOCK OPTION PLAN
In May 1994, the Company authorized 235,000 shares of common stock
for issuance under its 1993 Stock Option Plan ("1993 Plan") as
incentive or non-qualified stock options. The Company grants non-
qualified stock options to officers, directors, employees and
consultants. Incentive stock options may be granted to employees.
The options are granted to purchase common stock at the fair market
value on the grant date or at other prices as determined by the Board
of Directors. The option vesting period is determined at the time
of each grant, and all options expire two to ten years from the grant
date.
A summary of the 1993 Plan stock option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING
SHARES VALUE PER SHARE TOTAL
<S> <C> <C> <C>
Balances, January 1, 1994 41,125 $.36 - $2.50 $41,839
Exercised (20,737) $.36 - $2.50 (21,057)
Canceled (5,675) $1.24 - $1.94 (8,997)
Granted 50,250 $1.81 - $2.87 108,078
-------- --------
Balances, December 31, 1994 64,963 $1.24 - $2.87 119,863
Canceled (23,750) $1.81 - $2.87 (48,182)
Granted 151,500 $1.12 - $2.06 170,963
-------- --------
Balances, December 31, 1995 192,713 $.97 - $2.87 242,644
Canceled (24,938) $1.24 - $2.87 (53,157)
Granted 61,500 $.77 - $2.87 62,463
-------- --------
Balances, December 31, 1996 229,275 $.77 - $1.37 $251,950
======== ========
</TABLE>
At December 31, 1996, options for 218,075 shares were exercisable
under the 1993 Plan. There were options for 19,500 shares available
for grant.
COMMON STOCK WARRANTS
In conjunction with a corporate development and financial advice
agreement (Note 12), the Company granted a warrant to the advisors to
acquire 107,378 shares of common stock at an exercise price of $1.00.
The warrants vest at the following rate:
December 16, 1996 50,000
Upon successful completion of a
capital transaction 57,378
-------
107,378
=======
On January 28, 1994, the Board of Directors granted 100,000 warrants
to an officer to purchase shares of common stock at an exercise price
of $1.5625 per share, expiring on January 31, 1999.
COMMON STOCK RESERVED
Common stock reserved at December 31, 1996 was as follows:
1996 Equity Incentive Plan 1,000,000
1994 Stock Option and Grant Plan 507,305
1993 Stock Option Plan 248,775
Warrants 207,378
Convertible Notes Payable 141,269
---------
2,104,727
=========
10. INCOME TAXES
The provisions for income taxes for the years ended December 31,
consist of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 323,700
State 5,000 (8,000) 55,600
--------- --------- ---------
Total current 5,000 (8,000) 379,300
--------- --------- ---------
Deferred:
Federal - - (127,000)
State - - (21,800)
--------- --------- ---------
Total deferred - - (148,800)
--------- --------- ---------
5,000 (8,000) 230,500
Utilization of net
operating loss
carry forward - - (188,500)
--------- --------- ---------
$5,000 $(8,000) $42,000
========= ========= =========
</TABLE>
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal tax rate 34.0% 34.0% 34.0%
Increase (decrease) in
taxes resulting from:
State income tax, net
of federal tax benefit 3.6% 3.6% 3.6%
Use of net operating loss
carry forward (33.0)% (37.5)% (29.3)%
Permanent differences (4.6)% (0.1)% (1.8)%
Other, net (5.9)% (0.6)% -%
--------- --------- ---------
Effective tax rate (5.9)% (0.6)% 6.5 %
========= ========= =========
</TABLE>
The components of the net deferred tax liability recognized in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Deferred tax liability $ 8,000 $ 3,000
Deferred tax asset (2,066,000) (2,082,000)
Valuation allowance 2,058,000 2,079,000
---------- ----------
$ - $ -
========== ==========
</TABLE>
The types of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts that give rise
to a significant portion of the deferred tax asset and their
approximate tax effects are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Future income (deductions):
Net operating loss $(1,710,000) $(1,688,000)
Allowance for doubtful accounts (34,000) (36,000)
Research and development credit (206,000) (206,000)
Depreciation (56,000) (63,000)
Investment tax credit (35,000) (35,000)
Capitalized software development
costs (2,000) 3,000
Other (15,000) (54,000)
----------- -----------
$(2,058,000) $(2,079,000)
=========== ===========
</TABLE>
The Company has net operating loss carry forwards for federal and
Colorado income tax purposes of approximately $4,547,000 and
$2,178,000, respectively. Investment tax credit carry forwards of
approximately $35,000 and research and development tax credit carry
forwards of approximately $206,000 are available to reduce future
federal income taxes. These carry forwards expire on varying dates
from 1997 through 2011.
11. EMPLOYEE BENEFIT PLAN
The Company has a Cash or Deferred Profit Sharing Plan ("the 401(k)
Plan"). The 401(k) Plan is designed to qualify under Section 401(k)
of the Internal Revenue Code and allows the Company to make
discretionary contributions as determined by the Company's Board of
Directors. For the years ended December 31, 1996 and 1995, the
Company contributed $1,410 and $1,867 to the 401(k) Plan. There were
no Company contributions to the 401(k) Plan for the year ended
December 31, 1994.
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, and 1995, equipment with a net book value of
$16,380 and $29,114 (net of accumulated amortization of $38,220 and
$25,474), respectively, has been leased under capital leases.
The Company leases its executive offices from an affiliated
partnership under a noncancelable operating lease which expires in
October 1998. Payments to this partnership for each of the years
ended December 31, 1996, 1995 and 1994 pursuant to this lease were
$85,400, $85,200 and $85,200 respectively.
Future minimum payments for lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
<S> <C> <C>
1997 $15,161 $89,952
1998 8,843 75,752
1999 - 4,752
2000 - 4,752
2001 - 4,752
--------- ---------
Total minimum lease payments 24,004 $179,960
=========
Amount representing interest (2,532)
---------
Present value of minimum
lease payments 21,472
Current portion (12,983)
---------
Long-term portion $8,489
=========
</TABLE>
Equipment rent expense for the years ended December 31 totaled: 1996,
$2,600; 1995, $6,500; 1994, $9,500.
The Company has bonus agreements with certain officers which provide
for quarterly bonuses of 5% and 4% of the Company's pre-tax profits.
The Company expensed bonuses of $10,532, $0, and $54,586 under these
agreements for the years ended December 31, 1996, 1995 and 1994,
respectively.
In December 1996, the Company entered into an agreement to receive
corporate development and financial advice through January 31, 1998.
The company will pay $6,000 per month throughout the duration of the
contract. The Company will be charged a contingent advisory fee of
5% of the total capital or debt procured as a result of the
agreement. The monthly fees may be offset against such contingent
advisory fees.
13. FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading.
The following methods and assumptions were used to estimate the fair
value of each financial instrument for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short
maturity of those instruments.
DEBT
The fair value of the Company's debt is estimated based on borrowing
rates currently available to the Company for bank loans with similar
terms and maturities.
The estimated fair values of the Company's financial instruments at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
ASSETS CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
Cash and cash equivalents $ 241,599 $ 241,599
Certificate of deposit $ 25,000 $ 25,000
Receivables (including $32,683
from related parties) $ 540,491 $ 540,491
LIABILITIES
Accounts payable (including
$14,200 to related parties) $ 225,341 $ 225,341
Line of credit $ 150,000 $ 150,000
Convertible notes payable to
related parties $ 150,000 $ 150,000
</TABLE>
The estimated fair values of the Company's financial instruments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
ASSETS CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
Cash and cash equivalents $ 345,852 $ 345,852
Receivables (including $6,919
from related parties) $ 583,849 $ 583,849
LIABILITIES
Accounts payable $ 221,401 $ 221,401
Line of credit $ 100,477 $ 100,477
Convertible notes payable to
related parties $ 150,000 $ 150,000
</TABLE>
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
Board of Directors
Image Software, Inc.
Englewood, Colorado
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules to the financial
statements referred to in the accompanying index are presented for the
purposes of additional information for the years ended December 31, 1996,
1995 and 1994 and have been subjected to the auditing procedures applied
in the audit of the basic financial statements. In our opinion, such
information for the years ended December 31, 1996, 1995 and 1994 is fairly
stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ KARSH & COMPANY, P.C.
KARSH & COMPANY, P.C.
Denver, Colorado
February 11, 1997
1MAGE SOFTWARE, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Additions Charged to: Balance
Beginning Costs and Other At End
of Period Expenses Accounts Deductions of Period
--------- -------- --------- ---------- ---------
FOR THE YEAR ENDED
DECEMBER 31, 1996:
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts $ 96,925 $ 27,606 $ - $ 33,579 $ 90,952
FOR THE YEAR ENDED
DECEMBER 31, 1995:
Allowance for
Doubtful Accounts $140,520 $273,235 $ - $316,830 $ 96,925
FOR THE YEAR ENDED
DECEMBER 31, 1994:
Allowance for
Doubtful Accounts $ 17,000 $155,138 $ - $ 31,618 $140,520
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1997 annual meeting of
stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1997 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1997 annual meeting of
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1997 annual meeting of
stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Financial Statement Index on Page 13
2. Financial Statement Schedules
See Financial Statement Index on Page 13
3. List of Exhibits
EXHIBIT NUMBER DESCRIPTION AND INCORPORATION BY REFERENCE
3.1* - Restated Articles of Incorporation of the Company,
as amended.
3.2* - Bylaws of the Company, as amended.
3.3* - Articles of Amendment to the Articles of
Incorporation of the Company dated April 18, 1991
3.4** - Articles of Amendment to the Articles of
Incorporation dated May 21, 1993.
3.4** - Articles of Amendment to the Articles of
Incorporation dated June 28, 1994.
10.1* - IBM Agreement for Authorized Dealers and industry
Remarketers between IBM and the Company dated March 1,
1993.
10.5* - UniVerse -TM- Distributor Agreement between VMARK
Software, Inc. and the Company dated May 15, 1991
10.6* - Business Agreement between Information Solutions of
MidAmerica, Ltd. and the Company dated February 1,
1988.
10.7* - Authorized Dealer Agreement between Information
Solutions of MidAmerica, Ltd. and the Company dated
March 26, 1988.
10.8* - Authorized Distributor Agreement between Information
Solution of MidAmerica, Ltd., and the Company dated
March 26, 1988, as amended by the Territory Rider
dated November 11, 1988.
10.11* - 1983 Stock Option Plan dated June 27, 1983, as
amended by the First Amendment to the 1983 Stock
Option Plan dated September 6, 1991.
10.12* - Form of Non-qualified Stock Option Agreement.
10.13* - Form of Incentive Stock Option Agreement.
10.14 - President Employment Agreement between David R.
DeYoung and the Company dated November 1, 1996.
10.15 - Chief Financial Officer Employment Agreement between
Mary Anne DeYoung and the Company dated September 1,
1996
10.16* - Assignment Agreement between Investment
Opportunities Group and the Company dated November 20,
1991.
10.17* - Buy-Out Agreement between Insi Corporation and the
Company dated March 1, 1991, and the Promissory Note,
Security Agreement and Bill of Sale in connection
therewith.
10.19* - Promissory Note dated September 14, 1987, payable by
the Company to Daniel N. Warner in the principal
amount of $58,000, as amended by the rider dated June
6, 1989.
10.20* - Statement of Registrants Rights for Series 1990
Preferred Stock dated January 30, 1990.
10.21* - Independent Software Vendor Agreement dated December
12, 1991 between Data General Corporation and the
Company.
10.22**** - Software License Agreement between Reynolds+Reynolds
and the Company. This exhibit is subject to a grant of
confidential treatment filed separately with the
Securities and Exchange Commission.
10.23*** - 1994 Stock Option and Grant Plan.
10.24** - 1993 Stock Option Plan.
10.25 - Equity Incentive Plan
11.1 - Calculation of Primary Earnings per Share.
11.2 - Calculation of Fully Diluted Earnings per Share.
23.1 - Consent of Karsh & Company, P.C.
27 - Financial Data Schedule
* Filed as an Exhibit to Form S-1 Registration
Statement No. 33-44717, on December 23, 1991.
See Financial Statement Index on Page F-1
** Filed as an Exhibit to Form S-8 Registration
Statement No. 33-86760, on November 29, 1994
*** Filed as an Exhibit to Form S-8 Registration
Statement No. 33-78096, on April 22, 1994.
**** Filed as an Exhibit to Form 10-K for the period
ended December 31, 1994.
(b) The Company did not file any reports on Form 8-K for the quarter
ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 1MAGE Software, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
1MAGE SOFTWARE, INC.
By: /s/ David R. DeYoung Date: March 14, 1997
------------------------- -------------------
David R. DeYoung
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: /s/ David R. DeYoung Date: March 14, 1997
------------------------- -------------------
David R. DeYoung, President
and Principal Chief
Executive Officer
By: /s/ Charles E. Burns Date: March 14, 1997
------------------------- -------------------
Charles E. Burns
Director
By: /s/ Robert Wiegand, II Date: March 14, 1997
------------------------- -------------------
Robert Wiegand, II
Director and Secretary
By: /s/ Mary Anne DeYoung Date: March 14, 1997
------------------------- -------------------
Mary Anne DeYoung,
Vice President, Finance
Principal and Accounting Officer
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT METHOD OF FILING
- ------- ----------------
<S> <C> <C>
10.14 President Employment Agreement
between David R. DeYoung and
the Company dated November 1,
1996 Filed herewith electronically
10.15 Chief Financial Officer
Employment Agreement between
Mary Anne DeYoung and the
Company dated September 1, 1996 Filed herewith electronically
10.25 Equity Incentive Plan Filed herewith electronically
11.1 Calculation of Primary
Earnings per Share Filed herewith electronically
11.2 Calculation of Diluted
Earnings per Share Filed herewith electronically
23.1 Consent of Karsh &
Company, P.C. Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
of 1MAGE Software, Inc. of our report dated February 11, 1997, which
appears on page 14 of the 1996 Annual Report to Shareholders of 1MAGE
Software, Inc.
/s/ Karsh & Company, P.C.
Karsh & Company, P.C.
Denver, CO
February 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 241,599
<SECURITIES> 0
<RECEIVABLES> 540,491
<ALLOWANCES> 90,952
<INVENTORY> 104,232
<CURRENT-ASSETS> 936,136
<PP&E> 244,617
<DEPRECIATION> 597,906
<TOTAL-ASSETS> 2,018,321
<CURRENT-LIABILITIES> 771,053
<BONDS> 0
0
0
<COMMON> 8,590
<OTHER-SE> 1,230,189
<TOTAL-LIABILITY-AND-EQUITY> 2,018,321
<SALES> 2,004,825
<TOTAL-REVENUES> 2,004,825
<CGS> 905,104
<TOTAL-COSTS> 1,273,046
<OTHER-EXPENSES> (89,251)
<LOSS-PROVISION> 27,606
<INTEREST-EXPENSE> 27,826
<INCOME-PRETAX> (84,074)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (89,074)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (89,074)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
EMPLOYMENT AGREEMENT
This Agreement made this 1st day of November, 1996, by and between
1MAGE Software, Inc. (hereinafter "ISI"), employed at ISI located at 6486
S. Quebec St., Englewood, Colorado and David R. DeYoung (hereinafter
"Employee").
RECITALS
WHEREAS, ISI desires to assure itself of the service of Employee and
to that end desires to enter into a contract of employment with him, upon
the terms and conditions herein set forth, and
WHEREAS, Employee is desirous of entering into such a contract of
employment as ISI President and CEO;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein set forth, the parties hereto agree as follows:
1. EMPLOYMENT. ISI hereby employs Employee and the Employee hereby
accepts employment upon the terms and conditions hereinafter set forth.
2. TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin on the date of this
Agreement and shall terminate on October 31, 1999. This Agreement can
then be modified annually by mutual consent of both parties.
3. COMPENSATION. For all services rendered by the Employee under
this Agreement, ISI shall compensate the Employee annually with an
executive compensation package in accordance with the recommendations of
the Compensation Committee of the Board of Directors (hereinafter the
"Board") of ISI. ISI agrees that the annual salary as defined by the
Compensation Committee will not be less than the amount authorized in the
minutes of the meeting held on 9/4/1996 during the term of this Agreement
unless stipulated by the Employee. ISI further agrees that the
Compensation Committee will review the executive compensation package
annually, in accordance with the anniversary date of the Agreement.
a. The Board or the Compensation Committee shall grant a
sufficient number of ten-year options to the Employee under the 1996
Equity Incentive Plan or otherwise as are necessary to permit him to
retain the same percentage of beneficial ownership interest in ISI as held
on December 16, 1996.
b. The options granted are to have an exercise price equal to
the fair market value of ISI's shares on the date such terms are approved
by the Board. The details of this provision are further outlined in the
resolutions to the minutes of the Board of Directors meeting held on
December 16, 1996.
c. Employee will be paid a quarterly bonus based on the
financial performance of the Company. This bonus will be paid at the rate
of 5% of the Company's accumulative pre-tax profit. An annual bonus may
be paid to the Employee, based on the performance of the Company and at
the discretion of the Board of Directors.
4. EXPENSES. ISI shall reimburse Employee for all business
expenses incurred in pursuit of the business of ISI, upon presentation by
the Employee from time to time of an itemized account of such
expenditures.
5. VACATION. Employee shall be entitled each year to a vacation of
six weeks, which shall be taken on a pre-scheduled basis.
6. FRINGE BENEFITS. ISI shall pay for the Employee in the regular
fringe benefit plan available to ISI employees, including medical
disability, and life insurance. Benefits incurred during the previous
term of the previous Employment Agreement will not be reduced by this
Agreement.
7. EXTENT OF SERVICES. Employee shall devote his time, attention
and energies to managing ISI and shall not during the term of this
Agreement be engaged in any other business activity whether or not such
business activity is pursued for gain, profit, or other pecuniary
advantage; but this shall not be construed as preventing the Employee from
investing his assets in such form or manner as will not require full time
service on the part of the Employee in the operation of the affairs of the
companies in which investments are made.
8. DEATH DURING EMPLOYMENT. If the Employee dies during the term
of this employment, ISI shall pay to the estate of the Employee the
compensation which would otherwise be payable to the Employee for the
three months after the date on which his death occurs. In addition, all
bonuses earned prior to Employee's date of death shall be paid to
Employee's estate.
9. TERMINATION. ISI may terminate this Agreement at any time:
a. Because of Employee's fraud, misappropriation, embezzlement
or similar act,
b. If Employee shall have breached any provision of this
Agreement, without having cured said default within thirty days after
receipt of written notice thereof.
c. Should ISI terminate his employment for any reason other
than cause, the Employee shall receive immediate vesting of any and all
outstanding options and warrants, and subsequent to the term of this
Agreement, a cash severance package equal to one year's cash compensation
(including bonus). Also, should termination occur within two years of a
change in control of ISI, such termination will be deemed to be not for
cause, regardless of the reasons for termination.
10. NOTICES. Any notice required or permitted to this Agreement
must be in writing and delivered by certified US mail to the parties of
this Agreement.
11. WAIVER OF BREACH. The waiver by ISI of a breach of any
provision of this Agreement by the Employee shall not operate or be
construed as a waiver of any subsequent breach by the Employee.
12. ASSIGNMENT. The rights and obligations of ISI under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of ISI. The rights and obligations of the Employee
under its Agreement shall inure to the benefit of and shall be binding
upon the Employee's heirs, successors and assigns, except that Employee's
obligation to perform such further services and rights to receive payment
therefore are expressly declared to be non-assignable and non-
transferable.
13. ENTIRE AGREEMENT. This instrument contains the entire Agreement
of the parties. It may not be changed orally but only by an agreement in
writing signed by the party against whom enforcement of any waiver,
change, modification, extension or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
Accepted: /s/ David R. DeYoung ISI:
/s/ David R. DeYoung
President
Ratified by the Compensation Committee:
/s/ Robert Wiegand II Dated: Nov. 1, 1997
/s/ Charles E. Burns
EMPLOYMENT AGREEMENT
This Agreement made this 1st day of September, 1996, by and between
1MAGE Software, Inc. (hereinafter "ISI"), employed at ISI located at 6486
S. Quebec St., Englewood, Colorado and Mary Anne DeYoung (hereinafter
"Employee").
RECITALS
WHEREAS, ISI desires to assure itself of the service of Employee and
to that end desires to enter into a contract of employment with her, upon
the terms and conditions herein set forth, and
WHEREAS, Employee is desirous of entering into such a contract of
employment as Vice President and CFO of ISI;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein set forth, the parties hereto agree as follows:
1. EMPLOYMNET. ISI hereby employs Employee and the Employee hereby
accepts employment upon the terms and conditions hereinafter set forth.
2. TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin on the date of this
Agreement and shall terminate on August 31, 1999. This Agreement can then
be modified annually by mutual consent of both parties.
3. COMPENSATION. For all services rendered by the Employee under
this Agreement, ISI shall compensate the Employee annually with an
executive compensation package in accordance with the recommendations of
the Compensation Committee of the Board of Directors of ISI. ISI agrees
that the annual salary as defined by the Compensation Committee will not
be less than the amount authorized in the minutes of the meeting held on
9/4/1996 during the term of this Agreement unless stipulated by the
Employee. ISI further agrees that the Compensation Committee will review
the executive compensation package annually, in accordance with the
anniversary date of the Agreement.
a. Employee will be paid a quarterly bonus based on the
financial performance of the Company. This bonus will be paid at the rate
of 4% of the Company's accumulative pre-tax profit.
4. EXPENSES. ISI shall reimburse Employee for all business
expenses incurred in pursuit of the business of ISI, upon presentation by
the Employee from time to time of an itemized account of such
expenditures.
5. VACATION. Employee shall be entitled each year to a vacation of
four weeks, which shall be taken on a pre-scheduled basis.
6. FRINGE BENEFITS. ISI shall pay for the Employee in the regular
fringe benefit plan available to ISI employees, including medical
disability and life insurance.
7. EXTENT OF SERVICES. Employee shall devote her time, attention
and energies to managing ISI and shall not during the term of this
Agreement be engaged in any other business activity whether or not such
business activity is pursued for gain, profit, or other pecuniary
advantage; but this shall not be construed as preventing the Employee from
investing her assets in such form or manner as will not require full time
service on the part of the Employee in the operation of the affairs of the
companies in which investments are made.
8. DEATH DURING EMPLOYMENT. If the Employee dies during the term
of this employment, ISI shall pay to the estate of the Employee the
compensation which would otherwise be payable to the Employee for the
three months after the date on which her death occurs. In addition, all
bonuses earned prior to Employee's date of death shall be paid to
Employee's estate.
9. TERMINATION. ISI may terminate this Agreement at any time:
a. Because of Employee's fraud, misappropriation, embezzlement
or similar act,
b. If Employee shall have breached any provision of this
Agreement, without having cured said default within thirty days after
receipt of written notice thereof.
c. Should ISI terminate her employment for any reason other
than cause, the Employee shall receive immediate vesting of any and all
outstanding options and warrants, and subsequent to the term of this
Agreement a cash severance package equal to one year's cash compensation
(including bonus). Also, should termination occur within two years of a
change in control of ISI, such termination will be deemed to be not for
cause, regardless of the reasons for termination.
10. NOTICES. Any notice required or permitted to this Agreement
must be in writing and delivered by certified US mail to the parties of
this Agreement.
11. WAIVER OF BREACH. The waiver by ISI of a breach of any
provision of this Agreement by the Employee shall not operate or be
construed as a waiver of any subsequent breach by the Employee.
12. ASSIGNMENT. The rights and obligations of ISI under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of ISI. The rights and obligations of the Employee
under its Agreement shall inure to the benefit of and shall be binding
upon the Employee's heirs, successors and assigns, except that Employee's
obligation to perform such further services and rights to receive payment
therefore are expressly declared to be non-assignable and non-
transferable.
13. ENTIRE AGREEMENT. This instrument contains the entire Agreement
of the parties. It may not be changed orally but only by an agreement in
writing signed by the party against whom enforcement of any waiver,
change, modification, extension or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
Accepted: /s/ Mary Anne DeYoung ISI: /s/ David R. DeYoung
President
Ratified by the Compensation Committee:
/s/ Robert Wiegand II Dated: 9-2-96
/s/ Charles E. Burns
IMAGE SOFTWARE, INC.
EQUITY INCENTIVE PLAN
AS ADOPTED DECEMBER 16, 1996
1. PURPOSE. Image Software, Inc. (the "Company") hereby
establishes its Equity Incentive Plan (the "Plan"). The purpose of the
Plan is to advance the interests of the Company and its stockholders by
providing a means by which the Company shall be able to attract and retain
competent officers and directors by providing them with an opportunity to
participate in the increased value of the Company which their effort,
initiative, and skill have helped produce.
2. GENERAL PROVISIONS.
(a) The Plan will be administered by the Compensation Committee
of the Board of Directors of the Company (the "Committee"). The Committee
shall be comprised of two or more directors designated by the Board of
Directors (the "Board") and the Committee members shall qualify as "Non-
Employee Directors" within the meaning of Securities Exchange Act Rule
16b-3. (In the event Rule 16b-3 is amended, modified or repealed, the
requirements for being a member of the Committee shall reflect the then
current requirements of Rule 16b-3 or successor rule, if any.) Committee
members are not required to be "outside directors" within the meaning of
Treasury Regulation Section 1.162-27(e)(3). Accordingly, options granted
under the Plan may not qualify for the "qualified performance based
compensation" exception to Internal Revenue Code Section 162(m).
Notwithstanding the foregoing, if it would be consistent with all
applicable laws, including without limitation Rule 16b-3, then the Plan
may be administered by the Board of Directors, and if so administered all
subsequent references to the Committee shall be read as referring to the
Board of Directors.
(b) The Committee shall have full power to construe and
interpret the Plan and to establish and amend rules and regulations for
its administration. Any action of the Committee with respect to the Plan
shall be taken by majority vote or by the unanimous written consent of the
Committee members.
(c) The Committee shall determine, in its sole discretion,
which participants under the Plan shall be granted restricted stock, stock
options or stock appreciation rights, the time or times at which stock,
options and rights are granted, as well as the number of shares and the
duration of the options or rights which are granted to participants;
provided, however, that no participant may be granted more than 500,000
options under the Plan.
(d) The Committee shall also determine any other terms and
conditions relating to restricted stock, options and rights granted under
the Plan as the Committee may prescribe, in its sole discretion.
(e) The Committee may, in its discretion, delegate its
administrative duties with respect to the Plan to an officer or employees,
or to a committee composed of officers or employees, of the Company.
(f) The Committee shall make all other determinations and take
all other actions which it deems necessary or advisable for the
administration of the Plan.
(g) All decisions, determinations and interpretations made by
the Committee shall be binding and conclusive on all participants in the
Plan and on their legal representatives, heirs and beneficiaries.
(h) The Board of Directors (with members of the Committee
abstaining) shall have the authority to make grants under this Plan to
members of the Committee or the Board may create a formula by which grants
will automatically be made to members of the Committee. The Committee
shall have the authority to make grants hereunder to members of the Board
other than Committee members and may also establish a formula by which
grants will automatically be made to Board members.
3. ELIGIBILITY. Officers and directors of the Company shall be
eligible to participate in the Plan and to receive restricted stock,
options and rights hereunder, provided, however, that Incentive Stock
Options may only be granted to officers and directors who are employees of
the Company or its subsidiaries at all times during the period beginning
on the date of granting of the option and ending on the day three months
before the date of exercise.
4. NUMBER OF SHARES SUBJECT TO PLAN. The aggregate number of
shares of the Company's no par value Common Stock which may be granted to
participants shall be 1,000,000 shares, subject to adjustment only as
provided in Sections 5(h) and 8 hereof. These shares may consist of
shares of the Company's authorized but unissued Common Stock or shares of
the Company's authorized and issued Common Stock reacquired by the Company
and held in its treasury or any combination thereof. If an option granted
under this Plan is surrendered, or for any other reason ceases to be
exercisable in whole or in part, the shares as to which the option ceases
to be exercisable shall be available for options to be granted to the same
or other participants under the Plan, except to the extent that an option
is deemed surrendered by the exercise of a tandem stock appreciation right
and that right is paid by the Company in stock, in which event the shares
issued in satisfaction of the right shall not be available for new options
or rights under the Plan.
5. STOCK OPTIONS.
(a) TYPE OF OPTIONS. Options granted may be either
Nonqualified Stock Options or Incentive Stock Options as determined by the
Committee in its sole discretion and as reflected in the Notice of Grant
issued by the Committee. "Incentive Stock Option" means an option
intended to qualify as an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986 (the "Code").
"Nonqualified Stock Option" means an option not intended to qualify as an
Incentive Stock Option or an Incentive Stock Option which is converted to
a Nonqualified Stock Option under Section 5(f) hereof.
(b) OPTION PRICE. The price at which options may be granted
under the Plan shall be determined by the Committee at the time of grant
as follows:
(i) For Incentive Stock Options the option price shall be
equal to 100% of the Fair Market Value of the stock on the date the option
is granted; provided, however, that for Incentive Stock Options granted to
any person who, at the time such option is granted, owns (as defined in
Section 422 of the Code) shares possessing more than 10% of the total
combined voting power of all classes of shares of the Company or its
parent or subsidiary corporation, the Option Price shall be 110% of the
Fair Market Value.
(ii) For Nonqualified Stock Options the option price may be
less than the Fair Market Value of the stock on the date of grant, but in
no event shall the option price be less than fifty percent (50%) of the
Fair Market Value of the stock on the date of the grant.
(iii) For purposes of this Plan, and except as otherwise
set forth herein, "Fair Market Value" shall mean: (a) if there is an
established market for the Company's Common Stock on a stock exchange, in
an over-the-counter market or otherwise, the mean of the highest and
lowest quoted selling prices on the valuation date, or (b) if there were
no such sales on the valuation date, then in accordance with Treas. Reg.
Section 20.2031-2 or successor regulations. Unless otherwise specified by
the Committee at the time or grant (or in the formula proposed for such
grant, if applicable), the valuation date for purposes of determining Fair
Market Value shall be the date of grant. The Committee (or the Board of
Directors with respect to grants to Committee members pursuant to Section
5(g) hereof) may specify in any grant of an Option or Stock Appreciation
Right that, instead of the date of grant, the valuation date shall be a
valuation period of up to ninety (90) days prior to the date of grant, and
Fair Market Value for purposes of such grant shall be the average over the
valuation period of the mean of the highest and lowest quoted selling
prices on each date on which sales were made in the valuation period,
provided, however, that if the Committee (or the Board of Directors) fails
to specify a valuation period and there were no sales on the date of grant
then Fair Market Value shall be determined as if the Committee had
specified a thirty (30) day valuation period for such determination,
unless there is no established market for the Company's Common Stock in
which case the determination of Fair Market Value shall be in accordance
with clause (b) above.
(c) EXERCISE OF OPTION. The right to purchase shares covered
by any option or options under this Plan shall be exercisable only in
accordance with the terms and conditions of the grant to the participant.
Such terms and conditions may include a time period or schedule whereby
some of the options granted may become exercisable, or "vested", over time
and certain conditions, such as continuous service or specified
performance criteria or goals, must be satisfied for such vesting. The
determination as to whether to impose any such vesting schedule or
performance criteria, and the terms of such schedule or criteria, shall be
within the sole discretion of the Committee. These terms and conditions
may be different for different participants so long as all options satisfy
the requirements of the Plan.
The exercise of options shall be paid for in cash or in
shares of the Company's Common Stock, or any combination thereof. Shares
tendered as payment for option exercises shall be valued at the Fair
Market Value of the shares on the date of exercise. The Committee may, in
its discretion, agree to a loan by the Company to one or more participants
of a portion of the exercise price (not to exceed the exercise price minus
the par value of the shares to be acquired, if any) for up to three (3)
years with interest payable at the prime rate quoted in the Wall Street
Journal on the date of exercise. Members of the Committee may receive
such loans from the Company for the exercise of their options, if any,
without Committee or Board approval or ratification.
The Committee may also permit a participant to effect a net
exercise of an option without tendering any shares of the Company's stock
as payment for the option. In such an event, the participant will be
deemed to have paid for the exercise of the option with shares of the
Company's stock and shall receive from the Company a number of shares
equal to the difference between the shares that would have been tendered
and the number of options exercised.
The Committee may also cause the Company to enter into
arrangements with one or more licensed stock brokerage firms whereby
participants may exercise options without payment therefor but with
irrevocable orders to such brokerage firm to immediately sell the number
of shares necessary to pay the exercise price for the option and the
withholding taxes, if any, and then to transmit the proceeds from such
sales directly to the Company in satisfaction of such obligations.
(d) DURATION OF OPTIONS. Unless otherwise prescribed by the
Committee or this Plan, options granted hereunder shall expire ten (10)
years from the date of grant, subject to early termination as provided in
Section 5(f) hereof.
(e) INCENTIVE STOCK OPTIONS LIMITATIONS. In no event shall an
Incentive Stock Option be granted to any person who, at the time such
option is granted, owns (as defined in Section 422 of the Code) shares
possessing more than 10% of the total combined voting power of all classes
of shares of the Company or of its parent or subsidiary corporation,
unless the option price is at least 110% of the Fair Market Value of the
stock subject to the Option, and such Option is by its terms not
exercisable after the expiration of five (5) years from the date such
Option is granted. Moreover, the aggregate Fair Market Value (determined
as of the time that option is granted) of the shares with respect to which
Incentive Stock Options are exercisable for the first time by any
individual employee during any single calendar year under the Plan shall
not exceed $100,000. In addition, in order to receive the full tax
benefits of an Incentive Stock Option, the employee must not resell or
otherwise dispose of the stock acquired upon exercise of the Incentive
Stock Option until two (2) years after the date the option was granted and
one (1) year after it was exercised.
(f) EARLY TERMINATION OF OPTIONS. In the event a participant's
employment with or service to the Company shall terminate as the result of
total disability, as defined below, or the result of retirement at 65
years of age or later, then any options granted to such participant shall
expire and may no longer be exercised three (3) months after such
termination. If the participant dies while employed or engaged by the
Company, to the extent that the option was exercisable at the time of the
participant's death, such option may, within one year after the
participant's death, be exercised by the person or persons to whom the
participant's rights under the option shall pass by will or by the
applicable laws of descent and distribution; provided, however, that an
option may not be exercised to any extent after the expiration of the
option as originally granted. In the event a participant's employment or
engagement by the Company shall terminate as the result of any
circumstances other than those referred to above, whether terminated by
the participant or the Company, with or without cause, then all options
granted to such participant under this Plan shall terminate and no longer
be exercisable as of the date of such termination, provided, however, that
if an employee with an Incentive Stock Option terminates employment prior
to its exercise, but notwithstanding such termination becomes or remains a
non-employee officer or director eligible for Nonqualified Stock Options
hereunder, then the Incentive Stock Option shall be converted to a
Nonqualified Stock Option on the date the Incentive Stock Option would
otherwise have terminated.
An employee who is absent from work with the Company
because of total disability, as defined below, shall not by virtue of such
absence alone be deemed to have terminated such participant's employment
with the Company. All rights which such participant would have had to
exercise options granted hereunder will be suspended during the period of
such absence and may be exercised cumulatively by such participant upon
his return to the Company so long as such rights are exercised prior to
the expiration of the option as originally granted. For purposes of this
Plan, "total disability" shall mean disability, as a result of sickness or
injury, to the extent that the participant is prevented from engaging in
any substantial gainful activity and is eligible for and receives a
disability benefit under Title II of the Federal Social Security Act.
(g) GRANTS TO COMMITTEE MEMBERS. In accordance with Section
2(g) hereof, the Committee shall have no authority to make grants to its
members hereunder, rather the Board of Directors (with members of the
Committee abstaining) shall have the authority to make grants under this
Plan to members of the Committee. Any designation of such grants may be
by means of a formula specified by the Board of Directors to award grants
automatically at a stated time. The option price of any such option shall
be calculated in accordance with the grant or formula designation based on
the Fair Market Value (determined in accordance with Section 3(b) above)
on the valuation date or valuation period specified by the Board of
Directors in the grant or designation. Nothing in this Section 5(g) shall
be interpreted to prohibit the Board of Directors from granting restricted
stock, options or rights to its members if the Board of Directors is
administering the Plan in accordance with Section 2(a) above.
(h) RELOAD BY PAYMENT IN SHARES. To the extent that a
participant pays for the exercise of an option with shares of the
Company's stock rather than cash, the tendered shares shall be deemed to
be added back to the Plan, increasing the total number of shares subject
to and reserved for the Plan by that amount.
6. STOCK APPRECIATION RIGHTS.
(a) GRANT. Stock appreciation rights may be granted by the
Committee under this Plan upon such terms and conditions as it may
prescribe. A stock appreciation right may be granted in connection with
an option previously granted to or to be granted under this Plan or may be
granted by itself. Each stock appreciation right related to an option (a
"Tandem Right") shall become nonexercisable and be forfeited if the option
to which it relates (the "Related Option") is exercised. "Stock
appreciation right" as used in this Plan means a right to receive the
excess of Fair Market Value, on the date of exercise, of a share of the
Company's Common Stock on which an appreciation right is exercised over
the option price provided for in the related option and is issued in
consideration of services performed for the Company or for its benefit by
the participant. Such excess is hereafter called "the differential."
(b) EXERCISE OF STOCK APPRECIATION RIGHTS. Stock appreciation
rights shall be exercisable and be payable in the following manner:
(i) A stock appreciation right not issued with a Related
Option (a "Separate Right") shall be exercisable at the time or times
prescribed by the Committee. A Tandem Right shall be exercisable by the
participant at the same time or times that the Related Option could be
exercised. A participant wishing to exercise a stock appreciation right
shall give written notice of such exercise to the Company. Upon receipt
of such notice, the Company shall determine, in its sole discretion,
whether the participant's stock appreciation rights shall be paid in cash
or in shares of the Company's Common Stock or any combination of cash and
shares and thereupon shall, without deducting any transfer or issue tax,
deliver to the person exercising such right an amount of cash or shares of
the Company's Common Stock or a combination thereof with a value equal to
the differential. The date the Company receives the written notice of
exercise hereunder is the exercise date. The shares issued upon the
exercise of a stock appreciation right may consist of shares of the
Company's authorized but unissued Common Stock or of its authorized and
issued Common Stock reacquired by the Company and held in its treasury or
any combination thereof. No fractional share of Common Stock shall be
issued; rather, the Committee shall determine whether cash shall be given
in lieu of such fractional share or whether such fractional share shall be
eliminated.
(ii) The exercise of a Tandem Right shall automatically
result in the surrender of the Related Option by the participant on a
share for share basis. Likewise, the exercise of a stock option shall
automatically result in the surrender of the related Tandem Right. Shares
covered by surrendered options shall be available for granting further
options under this Plan except to the extent and in the amount that such
rights are paid by the Company with shares of stock, as more fully
discussed in Section 4 hereof.
(iii) The Committee may impose any other terms and
conditions it prescribes upon the exercise of a stock appreciation right,
which conditions may include a condition that the stock appreciation right
may only be exercised in accordance with rules and regulations adopted by
the Committee from time to time.
(c) LIMITATION ON PAYMENTS. Notwithstanding any other
provision of this Plan, the Committee may from time to time determine,
including at the time of exercise, the maximum amount of cash or stock
which may be given upon exercise of any stock appreciation right in any
year; provided, however, that all such amounts shall be paid in full no
later than the end of the year immediately following the year in which the
participant exercised such stock appreciation rights. Any determination
under this paragraph may be changed by the Committee from time to time
provided that no such change shall require the participant to return to
the Company any amount theretofore received or to extend the period within
which the Company is required to make full payment of the amount due as
the result of the exercise of the participant's stock appreciation rights.
(d) EXPIRATION OR TERMINATION OF STOCK APPRECIATION RIGHTS.
(i) Each Tandem Right and all rights and obligations
thereunder shall expire on the date on which the Related Option expires or
terminates. Each Separate Right shall expire on the date prescribed by
the Committee.
7. RESTRICTED STOCK.
(a) The Committee may grant shares of the Company's Common
Stock to persons eligible for grants under this Plan, subject to such
restrictions, if any, as may be determined by the Committee, including but
not limited to that person's continuous employment by or service to the
Company for a specified period of time or the attainment of specified
performance goals or objectives by that person, a group of persons or the
Company as a whole. The determination as to whether to impose any such
vesting schedule or performance criteria, and the terms of such schedule
or criteria, shall be within the sole discretion of the Committee. These
terms and conditions may be different for different participants so long
as all options satisfy the requirements of the Plan.
(b) VOTING RIGHTS. A participant will have all voting,
dividend, liquidation and other rights with respect to the shares of
restricted stock in accordance with its terms upon becoming the holder of
record of such stock; provided, however, that the participant shall have
the right to sell, encumber or otherwise transfer such stock only to the
extent that vesting and performance criteria have been satisfied. Such
limitations may be enforced, in the sole discretion of the Committee, by
placing of a restrictive legend on the stock certificates, or making
certain custodial arrangements for the stock certificates.
(c) EARLY TERMINATION. In the event of the death or total
disability of a participant, or the retirement of a participant at age 65
or later, all employment period and other restrictions applicable to
restricted stock then held by him will lapse, and such stock will become
fully nonforfeitable. Subject to provisions in the Plan concerning
reorganization, liquidation or change in control of the Company, in the
event of a participant's termination of employment for any other reason,
any restricted stock as to which the employment period or other
restrictions have not been satisfied will be forfeited.
8. CAPITAL ADJUSTMENTS. The aggregate number of shares of the
Company's Common Stock subject to this Plan, the maximum number of shares
as to which options may be granted to any one participant hereunder, and
the number of shares and the price per share subject to outstanding
options, shall be appropriately adjusted by the Committee for any increase
or decrease in the number of shares of Common Stock which the Company has
issued resulting from any stock split, reverse stock split, stock
dividend, combination of shares or any other change, or any exchange for
other securities or any reclassification, merger, reorganization,
consolidation, redesignation, recapitalization, or otherwise. Similar
adjustments shall be made to the terms of stock appreciation rights.
9. NONTRANSFERABILITY. During a participant's lifetime, a right or
an option may be exercisable only by the participant. Options and rights
granted under the Plan and the rights and privileges conferred thereby
shall not be subject to execution, attachment or similar process and may
not be transferred, assigned, pledged or hypothecated in any manner
(whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution. Notwithstanding the
foregoing, to the extent permitted by applicable law and, if the Company
has a class of securities registered under the Exchange Act, by Exchange
Act Rule 16b-3, the Committee may, in its sole discretion, (i) permit a
recipient of a Nonqualified Stock Option to designate in writing during
the participant's lifetime a beneficiary to receive and exercise the
participant's Nonqualified Stock Options in the event of such
participant's death (as provided in Section 5(f)), (ii) grant Nonqualified
Stock Options that are transferable to the immediate family or a family
trust of the participant, and (iii) modify existing Nonqualified Stock
Options to be transferable to the immediate family or a family trust of
the participant. Any other attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of any option or right under the Plan, or
of any right or privilege conferred thereby, contrary to the provisions of
the Plan shall be null and void.
10. AMENDMENT, SUSPENSION, OR TERMINATION OF PLAN. The Committee
may at any time suspend or terminate the Plan and may amend it from time
to time in such respects as the Committee may deem advisable in order that
options and rights granted hereunder shall conform to any change in the
law, or in any other respect which the Committee may deem to be in the
best interests of the Company; provided, however, that no such amendment
shall, without the participant's consent, alter or impair any of the
rights or obligations under any option or stock appreciation rights
theretofore granted to him under the Plan; and provided further that no
such amendment shall, without shareholder approval: (a) increase the total
number of shares available for grants of options or rights under the Plan
(except as provided by Section 8 hereof); or (b) effect any change to the
Plan which is required by law, including without limitation the
regulations promulgated under Section 422 of the Code, to be approved by
shareholders.
11. EFFECTIVE DATE. The effective date of the Plan shall be
December 16, 1996.
12. TERMINATION DATE. Unless this Plan shall have been previously
terminated by the Committee, this Plan shall terminate on December 15,
2016, except as to stock, options and rights theretofore granted and
outstanding under the Plan at that date, and no stock, option or right
shall be granted after that date.
13. RESALE OF SHARES PURCHASED. Except as provided in Section 7
with respect to restricted stock, all shares of stock acquired under this
Plan may be freely resold, subject to applicable state and federal
securities laws restricting their transfer. As a condition to exercise of
an option, however, the Company may impose various conditions, including a
requirement that the person exercising such option represent and warrant
that, at the time of such exercise, the shares of Common Stock being
purchased are being purchased for investment and not with a view to resale
or distribution thereof. In addition, the resale of shares purchased upon
the exercise of Incentive Stock Options may cause the employee to lose
certain tax benefits if the employee fails to comply with the holding
period requirements described in Section 5(e) hereof.
14. ACCELERATION OF RIGHTS AND OPTIONS. If the Company or its
shareholders enter into an agreement to dispose of all or substantially
all of the assets or stock of the Company by means of a sale, merger or
other reorganization, liquidation, or otherwise, any right or option
granted pursuant to the Plan shall become immediately and fully
exercisable during the period commencing as of the date of the agreement
to dispose of all or substantially all of the assets or stock of the
Company and ending when the disposition of assets or stock contemplated by
that agreement is consummated or the option is otherwise terminated in
accordance with its provisions or the provisions of the Plan, whichever
occurs first; provided that no option or right shall be immediately
exercisable under this Section on account of any agreement of merger or
other reorganization where the shareholders of the Company immediately
before the consummation of the transaction will own 50% or more of the
total combined voting power of all classes of stock entitled to vote of
the surviving entity (whether the Company or some other entity)
immediately after the consummation of the transaction. In the event the
transaction contemplated by the agreement referred to in this section is
not consummated, but rather is terminated, canceled or expires, the
options and rights granted pursuant to the Plan shall thereafter be
treated as if that agreement had never been entered into.
15. WRITTEN NOTICE REQUIRED; TAX WITHHOLDING. Any option or right
granted pursuant to the Plan shall be exercised when written notice of
that exercise by the participant has been received by the Company at its
principal office and, with respect to options, when full payment for the
shares with respect to which the option is exercised has been received by
the Company. Participant agrees that, if and to the extent required by
law, the Company shall withhold or require the payment by participant of
any state, federal or local taxes resulting from the exercise of an option
or right; provided, however, that to the extent permitted by law, the
Committee may in its discretion, permit some or all of such withholding
obligation to be satisfied by the delivery by the participant of, or the
retention by the Company of, shares of its Common Stock.
16. COMPLIANCE WITH SECURITIES LAWS. Shares shall not be issued
with respect to any option or right granted under the Plan unless the
exercise of that option and the issuance and delivery of the shares
pursuant thereto shall comply with all relevant provisions of state and
federal law, including without limitation the Securities Act of 1933, as
amended, the rules and regulations promulgated thereunder and the
requirements of any stock exchange or automated quotation system upon
which shares of the Company's stock may then be listed or traded, and
shall be further subject to the approval of counsel for the Company with
respect to such compliance. Further, each participant must consent to the
imposition of a legend on the certificate representing the shares of
Common Stock issued upon the exercise of the option or right restricting
their transferability as may be required by law, the option or right, or
the Plan.
17. WAIVER OF VESTING RESTRICTIONS BY COMMITTEE. Notwithstanding
any provision of the Plan, in the event a participant dies, becomes
totally or partially disabled, retires (before or after the age of 65) as
an employee, officer or director of the Company, the Committee shall have
the discretion to waive any vesting restrictions on the retiree's
restricted stock, options or rights, or the early termination thereof.
18. REPORTS TO PARTICIPANTS. The Company shall furnish to each
participant a copy of the annual report, if any, sent to the Company's
shareholders. Upon written request, the Company shall furnish to each
participant a copy of its most recent annual report and each quarterly
report to shareholders issued since the end of the Company's most recent
fiscal year.
19. NO EMPLOYEE CONTRACT. The grant of restricted stock or an
option or right under the Plan shall not confer upon any participant any
right with respect to continuation of employment by, or the rendition of
advisory or consulting services to, the Company, nor shall it interfere in
any way with the Company's right to terminate the participant's employment
or services at any time.
Adopted by the Board of Directors of the Company on December 16, 1996.
As proposed to be adopted by the Shareholders of the Company on May 12, 1997.
1MAGE SOFTWARE, INC. Exhibit 11.1
CALCULATION OF PRIMARY EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
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<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
NET INCOME(LOSS) $ (89,074) $(1,313,724) $ 600,890
========== ============ ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,054,632 1,911,731 1,767,014
Add weighted average
number of common stock
equivalents (options)
using the trading price * * 11,000
---------- ------------ ----------
Total weighted average
number of common shares
outstanding used for
per share calculation 2,054,632 1,911,731 1,778,014
=========== =========== ==========
FULLY DILUTED EARNINGS
(LOSS) PER COMMON SHARE $ (0.04) $ (0.69) $ 0.34
=========== =========== ==========
* Anti-dilutive
</TABLE>
1MAGE SOFTWARE, INC. Exhibit 11.2
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
NET INCOME(LOSS) $ (89,074) $ (1,313,724) $ 600,890
Add interest on
convertible notes * * *
----------- -------------- ----------
Adjusted net income used
for per share calculation $ (89,074) $ (1,313,724) $ 600,890
=========== ============== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,054,632 1,911,731 1,767,014
Add weighted average number
of common stock equivalents
(options) using the closing
trading price * * 11,000
Add shares assumed issued
upon conversion of the
convertible notes * * *
----------- -------------- ----------
Total weighted average
number of common shares
outstanding used for
per share calculation 2,054,632 1,911,731 1,778,014
============ ============= ==========
FULLY DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ (0.04) $ (0.69) $ 0.34
============ ============ ==========
* Anti-dilutive
</TABLE>
