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 12/31/98
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)
6025 S. Quebec Street
Ste. 300
Englewood CO 80111 (303) 694-9180
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(Address of principal (Registrant's telephone number,
executive offices) 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
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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 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 12, 1999: $1,835,765.
As of March 12, 1999, there were 2,233,019 shares of the Registrant's
common stock outstanding.
TABLE OF CONTENTS
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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
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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 34
PART III
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10. Directors and Executive Officers of the Registrant 35
11. Executive Compensation 36
12. Security Ownership of Certain Beneficial Owners and Management 38
13. Certain Relationships and Related Transactions 39
PART IV
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14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
PART I
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ITEM 1. BUSINESS
INTRODUCTION
1MAGE Software, Inc., (the "Company") develops and markets a software
product called 1MAGE(R), a UNIX and Windows NT(TM)-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.
During 1998, the Company concentrated its efforts on selling production
document imaging software to its niche market, the MultiValue 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.
IMAGING SOFTWARE MARKET
The Company targets its market through VARs, systems integrators, and
other companies which market complementary software or other products.
1MAGE(R) software has an established presence in a multitude of
industries, including manufacturing, health care, oil and gas, government,
public safety, retail distribution, and transportation. In addition to
direct sales, the Company has contracts in place with VARs for local
government, manufacturing, retail automobile dealerships, health care, oil
and gas, 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 principal 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 powerful electronic image
management system created for UNIX and Windows NT(TM)-based Multi-Value
RDBMS computer systems. It provides a comprehensive solution for the
scanning, indexing, storage and retrieval of images and is designed to
file, route, track, archive, and manage an organization's incoming and
outgoing documents.
Add-on modules to 1MAGE(R) include the following:
* 1SCAN for scanning and pre-indexing
* 1FAX for inbound and outbound fax and cover sheet management
* 1COLD for Computer Output to Laser Disk (character data) management
* 1FORM for business form template administration
* 1RENDITION for merging spooled data with images
* 1WORKFLOW for electronically moving a document from one task to
another
* 1BAR for automatic indexing and data capture via bar code recognition
* 1OCR for automatic indexing and data capture via optical character
recognition
* 1OMR for automatic indexing and data capture via optical mark
recognition
* Win Client and WinQ for Windows 95, 98 and NT desktop clients
The 1MAGE(R) product line is in a stable, yet growth-oriented, development
stage. Supporting the Company's product line is open systems technology.
This product technology consists of the following:
* Open Systems compliant with UNIX Operating Systems, Windows NT(TM),
CCITT Group 4 Compression, TIFF, JPEG, PCX, PCL, or HPGL file
formats. The server software (1MAGE(R)) operates on UNIX and Windows
NT(TM) servers; supporting clients include Microsoft Windows(R) and
Windows NT(TM) workstations.
* Device connectivity via Ethernet or token ring networks using TCP/IP
communication protocol.
* Compatibility with SCO Unix, IBM AIX, HP-UX, DG-UX, and Intel-based
Windows NT(TM).
* Recognition technology and scanning tasks run on Microsoft Windows(R)
95, 98, or NT.
* UniVerse(TM) and Unidata MultiValue Relational database software from
Ardent Software, Inc.
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 MultiValue RDBMS and IBM AS/400
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 and Windows NT(TM) operating
system and open systems technology, the Company can offer an imaging
solution to its customers at a very reasonable cost.
During 1998, sales of 1MAGE(R) software licenses (excluding annual
license fees) accounted for 40% of total revenue; in 1997, revenue from
sales of software licenses accounted for 26% of total revenue. 1MAGE(R)
utilizes the popular UNIX and Windows NT(TM) operating systems and Ardent
Software, Inc.'s uniVerse(TM) and Unidata's relational database software.
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 and Windows NT(TM)
operating systems and the MultiValue RDBMS, customers are rarely
restricted in their choice of hardware manufacturers.
The Company also markets peripheral products such as scanners and
jukeboxes, 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 1998, revenue from hardware sales accounted for $191,778 (8%)
of the Company's total revenue, as compared to $327,325 (18%) of total
revenue for 1997.
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 1998 and 1997, annual license
fees accounted for $771,044 and $749,526, respectively, of the Company's
net sales. Annual software license fee revenue for 1998 was up 3% over
1997 levels. The Company believes recurring 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, 1998
and 1997, the revenues from these services accounted for $320,543 and
$258,512, or 15% and 14%, respectively, 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 six 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 software integrators 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 MultiValue RDBMS software. 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.
CUSTOMERS
The Company sells its 1MAGE(R software to businesses in a wide
variety of industries and markets, facilitated through the use of VARs.
During the years 1998 and 1997, the Company generated 28% and 12%,
respectively, of its revenue from one customer, Reynolds & Reynolds
("Reynolds"). Reynolds is a Fortune 500 company headquartered in Dayton,
Ohio. In May, 1994, the Company signed a software license agreement with
Reynolds for the exclusive right to sublicense certain modules of 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. In 1994, the Company signed an engineering and maintenance
agreement with Reynolds for the purpose of developing and providing new
products, enhancements, maintenance, consulting, and programming services
on an ongoing basis. License fees are paid to the Company for certain
modules and features subsequently available in new releases of 1MAGE(R).
These features include the Company's WinClient and WinQ products.
Management believes that the loss of this customer would have a
significantly adverse impact on the Company. Management does not believe
that there is a substantial risk of any such loss in the foreseeable
future.
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 KeyLink Systems (Dallas, Texas), which allows
for volume discounts on IBM products. This agreement was signed in 1999
and runs 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. The current dealer agreement with Ardent
Software, Inc. to remarket their proprietary database software runs
through May 15, 1999.
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 MultiValue
VAR network and its direct sales force, is expected to lessen the
historical quarterly fluctuations in the Company's operating results.
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. Because of direct delivery
of the hardware by the manufacturer, hardware sales have such short lead
times 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.
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 MultiValue RDBMS has strengthened the
Company's competitive position by making the Company's software compatible
with more types of hardware and MultiValue application software offered by
MultiValue software developers and system integrators. The Company
further believes that its principal advantage over its competitors is the
Company's utilization of a UNIX and Windows NT(TM) based open systems
architecture and the MultiValue RDBMS which can be offered at lower
prices.
LIMITED MARKETS
The reseller program targets complementary markets and allows the
Company to draw from a variety of industries with respect to its imaging
software products. 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 a strong national
economy is 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. The Company
capitalizes software development costs once technological feasibility is
established. During 1998 and 1997, the Company spent $295,267 and
$329,094, respectively, for computer software development.
EMPLOYEES
As of March 12, 1999, the Company employed nineteen (19) persons,
sixteen (16) of whom serve on a full-time basis and three (3) on a part-
time basis. Responsibilities are divided as follows: six persons in
sales and marketing, nine in technical support and programming functions,
and four 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") 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 of 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 4,181 square
feet at Plaza Quebec, 6025 South Quebec Street, Suite 300, Englewood,
Colorado, 80111 and are occupied pursuant to a sublease agreement between
the Company and Communications World International, Inc. with monthly
rental payments of $6,794. The term of the sublease commenced February 1,
1999 and will terminate on July 31, 2003. The landlord is responsible for
payment of property taxes, utilities, janitorial services, repairs, and
maintenance. 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, 1998.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the OTC Bulletin Board under
the symbol ISOL. Prior to October 16, 1998, the Company's common stock
was quoted in the NASDAQ Small Cap System. 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 or the OTC Bulletin
Board.
<TABLE>
<CAPTION>
1997 High Low
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<S> <C> <C>
First Quarter $1.31 $0.75
Second Quarter 1.19 0.63
Third Quarter 1.81 0.75
Fourth Quarter 1.56 0.50
1998 High Low
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First Quarter $0.63 $0.25
Second Quarter 2.31 0.28
Third Quarter 3.13 0.81
Fourth Quarter 1.91 0.34
</TABLE>
These quotations reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
On March 12, 1999, the closing bid price per share for the Common
Stock was $1.03 as reported on OTC:BB. On this same date, there were
approximately 916 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,
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT FOR PER
SHARE DATA: 1998 1997 1996 1995 1994
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales $2,151 $1,809 $2,005 $2,908 $4,663
Cost of Sales 935 918 905 2,149 2,114
Gross Profit 1,216 891 1,100 759 2,519
Selling, General &
Administrative Expenses 1,097 1,363 1,280 1,959 1,840
Income (Loss) before Income Taxes 5 (479) (91)(1,328) 636
Net Income (Loss) $ 2 $ (484) $ (96)$(1,320) $ 594
Net Income (Loss) Per Share $ 0.00 $(0.23) $(0.05)$(0.69) $0.33
Weighted Average Number of
Outstanding Shares 2,173 2,146 2,055 1,912 1,778
CONSOLIDATED BALANCE SHEETS YEARS ENDED DECEMBER 31,
IN THOUSANDS: 1998 1997 1996 1995 1994
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Working Capital $ 196 $ 43 $ 165 $ 398 $1,380
Total Assets 1,710 1,602 1,980 1,972 3,553
Long-term Obligations 154 159 8 171 33
Total Stockholders' Equity 922 860 1,200 1,296 2,469
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
The Company's net sales of $2,151,451 for the year ended December 31, 1998
were $343,000 (19%) higher than $1,808,791 reported for the same period a
year earlier, primarily due to a $394,000 increase in software sales.
Software sales to resellers increased $170,000 (141%) over the year
earlier, while software sales to end-users increased $224,000 (64%) over
1997. Total revenue from resellers comprised 34% of total revenue for
1998, compared to 22% of total revenue in 1997. Gross profit increased
$326,000 (37%) as a result of greater revenue from software sales in 1998.
Revenue from services and annual fees of $1,092,000 was $5,000 lower than
total selling, general & administrative ("SG&A") expenses of $1,097,000 in
1998. By contrast, the Company was $355,000 short of matching these
revenue and expense categories in 1997. It remains an important goal for
the Company to have all SG&A expense covered by services and recurring
annual fees so that the net effective margin on revenue from software
sales can be very high. The Company was $355,000 short of matching these
revenue and expense categories in 1997. Hardware revenue comprised 8% of
total revenue for the current year versus 18% of total revenue for the
year earlier. SG&A expenses were down $267,000 (20%) for the twelve
months ended December 31, 1998, due to cuts across the board. This
decrease would have been even greater, and the Company's profitability
enhanced, was it not for a one-time charge of $85,277 in connection with a
canceled merger transaction. Income from operations in 1998 was $120,045,
as compared to a net loss from operations of ($472,490)--an improvement of
$592,000. Net earnings of $2,380 or $.00 per share were reported for the
year ended December 31, 1998, versus a net loss of ($484,083) or ($.23)
per share for the same period in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
The Company's net sales of $1,808,791 for the year ended December 31, 1997
were $196,033 (10%) lower than $2,004,825 reported for the same period a
year earlier, primarily due to a $246,156 decrease in software sales made
through resellers. Software sales to end-users increased by $42,825 (14%)
over the earlier year. Revenue from resellers comprised 26% of total
revenue for 1997, compared to 37% of total revenue in 1996. Revenue from
system sales and software licenses constituted 44% and 49% of total
revenues in 1997 and 1996, respectively. Service and recurring annual
fees made up 56% and 51% of total revenues, respectively, in 1997 and
1996. Sales made through resellers reflect reseller mark down, and are
therefore shown in discounted (net) dollars. Revenue contribution from
maintenance/annual license fees was $749,525 or 41% of total revenue for
the year ended December 31, 1997 as compared to $713,912 or 37% of total
revenue for the year ended December 31, 1996.
Gross profit reported on 1997 revenue equals 49% of total revenue (or
$890,803), as compared to 55% of total revenue (or $1,099,721) for 1996,
due in part to higher software amortization charges in 1997. Hardware
revenue comprised 17% of total revenue for the current year versus 16% of
total revenue for the year earlier. Selling, general and administrative
expenses were up $83,161 (6%) for the twelve months ended December 31,
1997, due to increases in bad debt expense, depreciation and investor
relations of $95,681. Other income in 1996 resulting from the recovery of
a bad debt accounted for a year over year difference of $110,338. Net
loss and loss per share for the year ended December 31, 1997 were
$(484,083) and $(.23) as compared to $(96,160) and $(.05) for the year
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $27,122 during the
twelve months ended December 31, 1998, 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) and for the creation of a
Windows NT(TM) version of 1MAGE(R) software, totaled $295,267 for the year
ended December 31,1998. The Company had working capital of $195,598 on
December 31, 1998.
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. As of February 19, 1999, the Company has a
$200,000 revolving line of credit. The loan is collateralized by all
accounts and general intangibles of the Company. Borrowings outstanding
under the line of credit at March 12, 1999 were $76,238.
The Company has no material commitments for capital expenditures for
1999.
Management believes that inflation has not had a material impact on
its results of operations to date.
2000 ISSUES
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The Company has given serious attention to the potential problems
that could arise when the year 2000 arrives. Information technology
assessment is approximately 95% complete. The Company currently expects
to have all assessments and testing completed by the end of June, 1999.
The Company has acquired most of its computers and software in the past
three years. Accordingly, most of these products have incorporated Year
2000 compliant technology. The Company's business application software
has been certified Year 2000 compliant, provided that a current release is
installed. The Company is currently operating under this specified
release. The Company has begun to upgrade all PC software to the Windows
98 and Windows NT 4 operating systems, which according to Microsoft, are
Year 2000 compliant. This project is expected to be complete by September
30, 1999. The Company's document imaging software (which the Company uses
as well as markets), has been certified for the Year 2000, provided
release 5.0 or above is installed. The Company, as well as the Company's
largest business partner, have tested the software extensively and found
it to be Year 2000 compliant.
Due to the fact that the Company's hardware and software is relatively
new, the costs of Year 2000 issues have not been material. No special
expenditures have been required.
Forward Looking Statements
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Some of the statements made herein are not historical facts and may be
considered "forward looking statements." All forward looking statements
are, of course, subject to varying levels of uncertainty. In particular,
statements which suggest or predict future events or state the Company's
expectations or assumptions as to future events may prove to be partially
or entirely inaccurate, depending on any of a variety of factors, such as
adverse economic conditions, new technological developments, competitive
developments, competitive pressures, changes in the management, personnel,
financial condition or business objectives of one or more of the Company's
customers, increased governmental regulation or other actions affecting
the Company or its customers as well as other factors.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1MAGE SOFTWARE, INC.
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INDEX TO FINANCIAL STATEMENTS
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PAGE
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INDEPENDENT AUDITORS' REPORT 14
BALANCE SHEETS - December 31, 1998 and 1997 16
STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 1998, 1997 and 1996 17
STATEMENTS OF SHAREHOLDERS' EQUITY - From January 1, 1996 through
December 31, 1998 18
STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1998,
1997 and 1996 19
NOTES TO FINANCIAL STATEMENTS 21
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION 32
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS 34
INDEPENDENT AUDITORS' REPORT
-----------------------------
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheet of 1MAGE Software, Inc. as
of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. 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 our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 1MAGE Software, Inc as
of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 11 to the financial statements, certain errors
resulting in an understatement of the net loss and accumulated deficit as
of December 31, 1997 were discovered during 1998. Accordingly, an
adjustment has been made to net loss and accumulated deficit as of
December 31, 1997 to correct the error.
/s/ Cribari & Gustafson, LLP
- - ----------------------------
Cribari & Gustafson, LLP.
Denver, Colorado
February 22, 1999
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
We have audited the accompanying statements of operations, shareholders'
equity, and cash flows of 1MAGE Software, Inc. for the year ended December
31, 1996. 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.
In our opinion, the statements of operations, shareholders' equity and
cash flows referred to above present fairly, in all material respects, the
results of operations and cash flows of 1MAGE Software, Inc. for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the financial statements, certain errors
resulting in an understatement of the net loss and accumulated deficit as
of December 31, 1996 were discovered during 1998. Accordingly, an
adjustment has been made to net loss and accumulated deficit as of
December 31, 1996 to correct the error.
/s/ KARSH & COMPANY, P.C.
- - -------------------------
KARSH & COMPANY, P.C.
Denver, Colorado
February 11, 1997
(Except for Note 11, as to which the date is March 28, 1999)
1MAGE SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- - ---------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 204,671 $ 231,793
Certificate of deposit 25,000 25,000
Receivables:
Trade (less allowance: 1998,
$15,000; 1997, $20,000) 526,684 240,085
Related parties 7,141 27,817
Inventory 55,804 93,723
Prepaid expenses and other current assets 9,721 7,673
----------- ---------
Total current assets 829,021 626,091
PROPERTY AND EQUIPMENT, at cost, net 93,831 162,410
OTHER ASSETS:
Software development costs, net 786,572 813,625
Other 100 --
----------- ---------
TOTAL ASSETS $ 1,709,524 $ 1,602,126
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 150,000 $ 150,000
Current portion of capital
lease obligations 4,610 12,186
Accounts payable 292,883 191,538
Accrued liabilities 185,928 229,595
----------- ----------
Total current liabilities 633,421 583,319
LONG-TERM OBLIGATIONS:
Convertible notes payable to
related parties 150,000 150,000
Capital lease obligations 4,379 8,850
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value -
10,000,000 shares authorized;
shares outstanding: 1998 -
2,203,019; 1997 - 2,147,845 8,811 8,571
Additional paid-in capital 6,904,247 6,845,100
Accumulated deficit (5,991,334) (5,993,714)
----------- ---------
Total shareholders' equity 921,724 859,957
----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,709,524 $ 1,602,126
=========== ==========
</TABLE>
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
REVENUE:
<S> <C> <C> <C>
System sales and software
licenses $1,059,864 $ 800,754 $ 989,572
Services and annual fees 1,091,587 1,008,037 1,015,253
---------- ----------- -----------
Total revenue 2,151,451 1,808,791 2,004,825
---------- ----------- ----------
COST OF REVENUE:
System sales and software
licenses 608,895 603,781 514,595
Services and annual fees 325,963 314,207 390,509
---------- ----------- ----------
Total cost of revenue 934,858 917,988 905,104
---------- ----------- ----------
GROSS PROFIT 1,216,593 890,803 1,099,721
---------- ----------- ----------
OPERATING EXPENSES:
Selling, general and
administrative 1,096,548 1,363,293 1,280,132
---------- ----------- ----------
INCOME/(LOSS) FROM OPERATIONS 120,045 (472,490) (180,411)
---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest income 5,724 24,742 18,782
Other (1,566) 1,896 98,295
Interest expense (34,046) (33,231) (27,826)
Canceled merger costs (85,277) - -
---------- ----------- ----------
Total other income
(expense) (115,165) (6,593) 89,251
---------- ----------- ----------
INCOME LOSS BEFORE
INCOME TAXES 4,880 (479,083) (91,160)
PROVISION FOR INCOME TAXES (2,500) (5,000) (5,000)
---------- ----------- ----------
NET INCOME/(LOSS) $ 2,380 $ (484,083) $ (96,160)
========== =========== ==========
INCOME/(LOSS PER
COMMON SHARE $ 0.00 $ (0.23) $ (0.05)
========== =========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,172,932 2,146,331 2,054,632
========== =========== ==========
</TABLE>
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- - ---------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN
SHARES AMOUNT CAPITAL
------ ------ ----------
<S> <C> <C> <C>
BALANCES, January 1, 1996 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
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
Cancellation of common stock
related to employee
termination (10,000) (40) (11,210)
Exercise of incentive
common stock options 4,811 19 5,382
Payment of note received
for common stock -- -- --
Issuance of common stock
for services 471 2 395
Net loss -- -- --
--------- ------- ----------
BALANCES, December 31, 1997 2,142,845 8,571 6,845,100
Exercise of incentive
stock options 60,174 240 59,147
Net income -- -- --
--------- ------- ----------
BALANCES, December 31, 1998 2,203,019 $ 8,811 $6,904,247
========= ======= ==========
</TABLE>
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
NOTES ACCUM.
RECEIVABLE DEFICIT TOTAL
---------- ------- ------
<S> <C> <C> <C>
BALANCES, January 1, 1996 -- (5,413,471) 1,214,035
Accrued liabilities
converted to common stock -- -- 1,867
Issuance of common stock for
inventory and services -- -- 83,000
Sale of common stock (149,400) -- 600
Cancellation of common stock
related to employee
termination -- -- (3,250)
Net loss -- (96,160) (96,160)
-------- ----------- ---------
BALANCES, December 31, 1996 (149,400) (5,509,631) 1,200,092
Cancellation of common stock
related to employee
termination -- -- (11,250)
Exercise of incentive
common stock options -- -- 5,401
Payment of note received
for common stock 149,400 -- 149,400
Issuance of common stock
for services -- -- 397
Net loss -- (484,083) (484,083)
--------- ----------- ---------
BALANCES, December 31, 1997 $ -- $(5,993,714) $859,957
Exercise of incentive
stock options -- -- 59,387
Net income -- 2,380 2,380
--------- ------------ ---------
BALANCES, December 31, 1998 $ -- $(5,991,334) $921,724
========= ============ =========
</TABLE>
See notes to financial statements.
1MAGE SOFTWARE INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- - ---------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings/(loss) $ 2,380 $(484,083) $ (96,160)
Adjustments to reconcile
earnings/(loss) to net
cash provided by operating
activities:
Depreciation and amortization 398,806 408,662 295,132
Issuance of stock for services -- 398 30,750
Cancellation of stock issued
for services -- (11,250) --
Gain on sale of asset -- (117) --
Equity in loss of affiliate -- -- 13,939
Changes in assets and liabilities:
Receivables (265,923) 272,589 28,148
Inventory 37,919 10,509 (57,297)
Prepaid expenses and
other assets (2,048) 25,965 8,111
Accounts payable 101,345 (33,803) 3,940
Accrued liabilities (43,667) (3,134) (18,615)
--------- ---------- --------
Net cash provided by
operating activities 203,136 185,726 207,948
--------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property
and equipment (7,908) (7,856) (24,437)
Additions to capitalized
software (295,266) (329,095) (297,060)
Payments from notes receivable -- 149,400 15,210
Purchase of certificate
of deposit -- -- (25,000)
Increase in other assets (100) 692 (19,701)
--------- ---------- --------
Net cash used for investing
activities (303,274) (186,859) (350,988)
--------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit (60,000) 176,158 438,948
Repayment of line of credit 60,000 (176,158) (389,425)
Repayment of long-term
obligations (12,047) (14,073) (11,336)
Proceeds from issuance of
common stock -- -- 600
Proceeds from exercise of
common stock options 59,387 5,400 --
--------- ---------- ---------
Net cash (used for) provided
by financing activities 47,340 (8,673) 38,787
--------- ---------- --------
DECREASE IN CASH AND CASH
EQUIVALENTS (27,122) (9,806) (104,253)
CASH AND CASH EQUIVALENTS,
beginning of year 231,793 241,599 345,852
--------- ---------- ---------
CASH AND CASH EQUIVALENTS,
end of year $ 204,671 $ 231,793 $ 241,599
========= ========== =========
</TABLE>
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- - ---------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 16,204 $ 18,358 $ 12,907
======== ======== ========
Income taxes paid $ 2,500 $ 5,000 5,000
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Inventory reclassified to
equipment $ -- $ -- $ 30,707
======== ======== ========
Accrued liabilities converted to
common stock $ -- $ -- $ 1,867
======== ======== ========
Common stock issued for notes
receivable $ -- $ -- $149,400
======== ======== ========
Common stock issued for inventory $ -- $ -- $ 49,000
======== ======== ========
Acquisition of property and
equipment by assuming capital
lease obligations $ -- $ 13,637 $ --
======== ======== ========
</TABLE>
See notes to financial statements.
1MAGE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
- - ---------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
-----------------------------------------------------------
ORGANIZATION AND NATURE OF BUSINESS - 1MAGE Software, Inc. (the
"Company"), was incorporated in Colorado in December 1981.
The Company develops and markets a UNIX and Windows NT(TM)-based
electronic document image management and retrieval system. The Company
earns the majority of its revenues in the United States.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months 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 - In 1995, the Company purchased a 50% interest in ScanUSA,
LLC. This investment was accounted for using the equity method of
accounting. During 1996, ScanUSA, LLC ceased operations and the remaining
investment value was written down to zero.
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, 1998, 1997 and 1996
were 295,266, $329,094, and $297,060 respectively. Amortization of these
costs totaled $322,319, $304,835, and $216,053 respectively. 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.
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 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.
One customer accounted for 28% of 1998 revenues. Two different customers
accounted for 42% and 15% of accounts receivable at December 31, 1998.
One customer accounted for 12% of 1998 revenues. Three different
customers accounted for 20%, 17% and 11% of accounts receivable at
December 31, 1997.
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.
EARNINGS (LOSS) PER SHARE is computed by dividing net income(loss) by the
weighted average number of common and equivalent shares outstanding during
the year. The potential dilution from common stock equivalents is not
material. Fully diluted earnings per share are either anti-dilutive or
not materially different from primary earnings per share.
INCOME TAXES The Company follows the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax
bases of assets and liabilities and are measured using enacted tax rates
and laws that will be in effect when the underlying assets or liabilities
are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly,
no income tax expense/benefit has been recorded for the current year
losses.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting periods. Actual results could differ from
those estimates.
COMPREHENSIVE INCOME - SFAS No. 130, "Reporting Comprehensive Income,"
requires the display of comprehensive income, if applicable, in all
financial statements with fiscal years beginning after December 15, 1997.
The statement does not apply to enterprises that have no items of
comprehensive income for any period presented. The Company has no items
of comprehensive income and is not subject to SFAS No. 130.
RECLASSIFICATIONS - Certain items in the 1996 financial statements have
been reclassified to conform with the 1997 and 1998 presentation. Such
reclassifications had no effect on net income or loss.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Equipment $ 710,437 $ 710,766
Furniture 73,278 75,081
Leasehold Improvements -- 78,169
---------- ----------
783,715 864,016
Less: Accumulated
depreciation and
amortization (689,884) (701,606)
---------- ----------
$ 93,831 $ 162,410
========== ==========
</TABLE>
3. 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 in cash and notes
receivable of $149,400. The principal balances due on these notes
were paid off in November 1997. Interest receivable of $21,788 and
$5,804 is included in receivables - related parties at December 31,
1997 and 1996, respectively. Interest income from related parties
was $15,983 and $5,804 in 1997, and 1996, respectively. The notes
receivable are from the same related parties as the convertible notes
payable at Note 6.
4. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Sales tax payable $ 36,329 $ 51,958
Accrued interest-related party 37,512 41,458
Accounting and audit fees 23,500 27,400
Deferred revenue 28,314 25,781
Accrued compensation 24,069 15,400
Accrued customer support -- 7,000
Other 36,204 60,598
--------- ---------
$ 185,928 $ 229,595
========= =========
</TABLE>
5. LINE OF CREDIT
The Company has a $150,000 revolving bank line of credit which is due
on demand and bears interest at prime plus 1% (total rate of 8.75% at
December 31, 1998) 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, 1998 and 1997, respectively.
On February 19, 1999, the Company entered into a new $200,000 line of
credit agreement with a bank. A portion of the proceeds was used to
retire the existing $150,000 line of credit. The note bears interest
at prime plus 1.5% (an initial rate at 9.25%) and is collateralized
by all accounts and general intangibles of the Company. The note
matures on February 24, 2000.
6. CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
Convertible notes payable to related parties at December 31, consist
of the following:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
10% Notes Payable,
due February 18, 2000 $ 100,000 $ 100,000
10% Notes Payable,
due February 18, 2000 50,000 50,000
--------- -------
Total Convertible
Notes Payable $ 150,000 $ 150,000
========= =========
</TABLE>
The principal and interest are convertible into common stock at $.625
per common share. Attached to the convertible notes were 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.
Interest expense for the years ended December 31, 1998, 1997, and
1996 was $34,046, $33,231, $and 27,826, and includes amounts to
related parties of $17,842, $15,000, and $15,000, respectively.
7. SHAREHOLDERS' EQUITY
STOCK COMPENSATION PLANS
At December 31, 1998, 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>
1998 1997
---- ----
<S> <C> <C> <C>
Net Income (Loss):
As reported $ 2,380 $ (475,259)
Pro forma $(101,720) $ (645,259)
Loss per common share:
As reported $ 0.00 $ (0.22)
Pro forma $ (0.05) $ (0.31)
</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 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Dividend Yield 0% 0%
Expected Volatility 75% 75%
Risk-Free Interest Rate 6.00% 6.00%
Expected Lives 8.9 years 3.8 years
</TABLE>
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are freely transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
1996 EQUITY INCENTIVE PLAN
In September 1996, 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>
<CAPTION>
Outstanding Value per
Shares Share Total
----------- --------- -----
<S> <C> <C> <C>
Granted 90,000 $.84 $ 75,942
------- ---------
Balances, December 31, 1996 90,000 $.84 75,942
Granted 185,000 $.63 - $1.47 119,031
------- ---------
Balances, December 31, 1997 275,000 194,973
Canceled (235,000) $.63 - $1.25(175,003)
Granted 413,000 $.34 - $.78 175,948
------- ---------
Balances, December 31, 1998 453,000 $ 195,918
======= =========
</TABLE>
Included in balances at December 31, 1996 and December 31, 1997 were
90,000 and 145,000 options, respectively, issued to the Chief
Executive Officer and the Chief Financial Officer which were repriced
to fair market value on January 15, 1998.
At December 31, 1998, options for 453,000 shares were exercisable
under the 1996 Plan. There were 547,000 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 ("the Board"). 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, but not more than 10 years
after the date of grant.
Details of activity under the 1994 Plan are as follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Value Per Share Total
------------- ----------- --------------- -----
<S> <C> <C> <C>
Balances, January 1, 1996 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
Granted 255,807 $.63 - $1.44 169,814
Canceled (54,316) $.63 - $1.19 (52,350)
Exercised (4,811) $1.06 - $1.19 (5,401)
-------- ---------
Balances, December 31, 1997 281,175 189,264
Granted 200,500 $.34 68,972
Canceled (50,000) $.63 - $.88 (33,100)
Exercised (10,174) $.63 - $1.44 (9,388)
-------- ---------
Balances, December 31, 1998 421,501 $ 215,748
======== =========
Stock Grants Shares Grant Price Total
------------ ------ ----------- -----
Balances, January 1, 1996 65,162 $1.00 - $2.12 $ 114,350
Granted 10,783 $1.44 15,500
Granted 20,000 $1.13 22,500
Canceled (3,250) $1.00 (3,250)
-------- ---------
Balances, December 31, 1996 92,695 149,100
Granted 471 $0.84 397
Canceled (10,000) $1.13 (11,250)
-------- ---------
Balances, December 31, 1997 83,166 138,247
Granted/Canceled -- -- --
-------- ---------
Balances, December 31, 1998 83,166 $ 138,247
======== =========
</TABLE>
At December 31, 1998, options to purchase 170,001 shares of common
stock were exercisable and 98,348 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, 1996 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
Granted 16,000 $.63 10,000
-------- ---------
Balances, December 31, 1997 245,275 261,950
Canceled (236,275) $.63 - $1.81 (254,231)
Granted 230,675 $.34 - $.44 100,593
-------- ---------
Balances, December 31, 1998 239,675 $ 108,312
======== =========
</TABLE>
Included in balances at January 1, 1996, December 31, 1996 and
December 31, 1997 were 158,175, 53,000 and 16,000 options,
respectively, issued to the Chief Executive Officer and the Chief
Financial Officer which were repriced to fair market value on January
15, 1998.
At December 31, 1997, options for 236,175 shares were exercisable
under the 1993 Plan. There were options for 3,500 shares available
for grant.
COMMON STOCK WARRANTS
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. In January 1998,
these warrants were repriced to $.44 per share and the term was
extended until January 28, 2004.
COMMON STOCK RESERVED
Common stock reserved at December 31, 1997 was as follows:
1996 Equity Incentive Plan 1,000,000
1994 Stock Option and Grant Plan 319,849
1993 Stock Option Plan 243,175
Warrants 150,000
Convertible Notes Payable 300,000
---------
2,213,044
=========
8. INCOME TAXES
The provisions for income taxes for the years ended December 31,
consist of:
<TABLE>
<CAPTION>
Current: 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 2,500 5,000 5,000
------- ----- -----
Total current 2,500 5,000 5,000
------- ----- -----
Deferred:
Federal -- -- --
State -- -- --
------- ----- -----
Total deferred -- -- --
------- ----- -----
$ 2,500 $ 5,000 $ 5,000
======= ======= =======
</TABLE>
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
<TABLE>
<CAPTION>
Amount of pretax income 1998 1997 1996
------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income taxes
at statutory rate $ 1,659 $162,888 $(32,694)
Increase in taxes resulting
from state income tax 2,500 5,000 5,000
Use of net operating loss
carry forward (24,735) 129,560 19,790
Permanent differences 6,177 5,049 6,510
Other, net ------- -------- --------
Provision for income taxes $2,500 $5,000 $5,000
======= ======== ========
</TABLE>
The components of the net deferred tax liability recognized in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability $ 3,000 $ 2,000
Deferred tax asset (2,303,000) (2,322,000)
Valuation allowance 2,300,000 2,320,000
------------ -----------
$ -- $ --
============ ===========
</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>
1998 1997
---- ----
<S> <C> <C>
Future income (deductions):
Net operating loss $ (2,014,000) $(2,003,000)
Allowance for doubtful accounts (6,000) (8,000)
General business tax credits (211,000) (241,000)
Depreciation (56,000) (59,000)
Capitalized software
development costs 2,000 2,000
Other (15,000) (11,000)
------------ -----------
$ (2,300,000) $(2,320,000)
============ ===========
</TABLE>
The Company has net operating loss carry forwards for federal and
Colorado income tax purposes of approximately $5,163,000 and
$5,135,000, respectively. General business tax credits carry
forwards of approximately $211,000 are available to reduce future
federal income taxes. These carry forwards expire on varying dates
from 1999 through 2012.
9. 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, 1998, 1997, and 1996,
the Company contributed $1,289, $1,683 and $1,410 to the 401(k) Plan.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, and 1997, equipment with a net book value of
$10,362 and $18,550, net of accumulated amortization of $3,275 and
$49,687, respectively, has been leased under capital leases.
The Company leases its executive offices under a noncancelable
operating lease which expires in July 2003.
Future minimum payments for lease obligations are as follows:
<TABLE>
<CAPTION>
Capital Operating
-------- -----------
<S> <C> <C>
1999 $ 5,992 $ 81,530
2000 4,535 81,530
2001 -- 81,530
2002 -- 81,530
2003 -- 47,559
-------- -------
Total minimum lease payments 10,527 $ 373,679
=========
Amount representing interest (1,538)
--------
Present value of minimum
lease payments 8,989
Current portion (4,610)
--------
Long-term portion $4,379
========
</TABLE>
Equipment rent expense for the years ended December 31 totaled: 1998,
$1,285; 1997, $2,400; 1996, $2,600.
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 $9,536, $0, and $10,532 under these
agreements for the years ended December 31, 1998, 1997, and 1996,
respectively.
11. PRIOR PERIOD ADJUSTMENT
In prior years, the Company recognized an asset for the cash value
build-up in an officer's life insurance policy. The recording of
this asset was subsequently determined to be an error, which resulted
in both the overstatement and the understatement of previously
reported other assets and operating expenses. This error was
retroactively corrected in 1998, resulting in the following changes
to retained earnings as of December 31, 1997 and 1996, and the
related statements of operations for the years ended December 31,1997
and 1996. The effect on loss per common share is negligible.
<TABLE>
<CAPTION>
Accumulated Net
Deficit Loss
----------- -----
<S> <C> <C>
As previously reported,
December 31, 1996 $(5,470,944) $(89,074)
Correction for years ended
prior to December 31, 1996 (31,601) --
Removal of recorded cash value
build-up in officers life
insurance (7,086) (7,086)
----------- --------
As adjusted, December 31, 1996 $(5,509,631) $(96,160)
=========== ========
As previously reported,
December 31, 1997 $(5,946,203) $(475,259)
Correction for years ended
prior to December 31, 1997 (38,687) --
Removal of recorded cash value
build-up in officers life
insurance (8,824) (8,824)
----------- ---------
As adjusted, December 31, 1997 $(5,993,714) $(484,083)
=========== =========
</TABLE>
12. 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, 1998 are as follows:
<TABLE>
<CAPTION>
Assets
------- Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Cash and cash equivalents $ 204,671 $ 204,671
Certificate of deposit $ 25,000 $ 25,000
Receivables (including
$7,141 from related
parties) $ 533,825 $ 533,825
Liabilities
-----------
Accounts payable $ 292,883 $ 292,833
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, 1997 are as follows:
<TABLE>
<CAPTION>
Assets
------- Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Cash and cash equivalents $ 231,793 $ 231,793
Certificate of deposit $ 25,000 $ 25,000
Receivables (including
$27,817 from related
parties) $ 267,902 $ 267,902
Liabilities
-----------
Accounts payable $ 191,538 $ 191,538
Line of credit $ 150,000 $ 150,000
Convertible notes payable
to related parties $ 150,000 $ 150,000
</TABLE>
13. SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are
defined as components of an enterprise about which separate financial
information is evaluated regularly by the chief operating decision
maker, or decision making group, in deciding how to allocate
resources and in assessing their performance. The Company's chief
operating decision maker is the Chief Executive Officer.
The Company operates in one industry segment consisting of the
development and marketing of electronic document image management and
retrieval systems. The Company's technologies are managed as one
segment because it offers similar products in similar markets and the
factors determining strategic decisions are comparable for all
products and markets.
Sales to foreign markets totaled $35,000, $30,768, and $51,129 for
the years ending December 31, 1998, 1997 and 1996.
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
Our audits were 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, 1998
and 1997 and have been subjected to the auditing procedures applied in the
audits of the basic financial statements. In our opinion, such
information for the years ended December 31, 1998 and 1997, is fairly
stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Cribari & Gustafson, LLP
- - ----------------------------
Cribari & Gustafson, LLP
Denver, Colorado
February 22, 1999
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Board of Directors and Stockholders of
1MAGE 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 year ended December 31, 1996
and have been subjected to the auditing procedures applied in the audit of
the basic financial statements. In our opinion, such information for the
year ended December 31, 1996 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 at Additions charged to:
Beginning Costs and Other
of Period Expenses Accounts
<S> <C> <C> <C>
For the Year Ended
December 31, 1998:
Allowance for Doubtful
Accounts $ 20,000 $ 41,984 $ --
For the Year Ended
December 31, 1997:
Allowance for Doubtful
Accounts: $ 90,952 $ 68,681 $ --
For the Year Ended
December 31, 1997:
Allowance for Doubtful
Accounts: $ 96,925 $ 27,606 $ --
</TABLE>
<TABLE>
<CAPTION>
Balance
at end
Deductions of Period
<S> <C> <C>
For the Year Ended
December 31, 1998:
Allowance for Doubtful
Accounts $ 46,984 $ 15,000
For the Year Ended
December 31, 1997:
Allowance for Doubtful
Accounts: $ 139,633 $ 20,000
For the Year Ended
December 31, 1997:
Allowance for Doubtful
Accounts: $ 33,579 $ 90,952
</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 following sets forth certain information concerning the Company's
Executive Officers and Directors:
<TABLE>
<CAPTION>
FIRST YEAR
AS EXECUTIVE
OFFICER OR
NAME AGE DIRECTOR POSITION WITH COMPANY
- - ---- --- ------------ ---------------------
<S> <C> <C> <C>
David R. DeYoung 54 1981 President, Chief
Executive Officer and
Director
Robert Wiegand III 52 1992 Secretary and
Director
Mary Anne DeYoung 45 1994 Treasurer, Chief
Financial Officer, Asst.
Secretary and Director
Richard A. Knapp 53 1997 Director
</TABLE>
DAVID R. DEYOUNG - CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Mr. DeYoung has been President, Chief Executive Officer and a
Director of the Company since its formation in 1981. He served in similar
capacities with the Company's predecessor corporation from 1979 to 1981.
During 1979, Mr. DeYoung was employed by ESCOM/Mountain States, a Prime
dealer, as Vice President of Sales. From 1972 to 1979, Mr. DeYoung was
employed by NCR Corporation and, during part of that time, was a District
Manager in the division of Commercial, Industrial, Medical, Educational
and Governmental systems. He holds a Bachelor of Science Degree in
Business Administration and Computer Science from California State
Polytechnic University. Mr. DeYoung is the spouse of Mary Anne DeYoung.
ROBERT WIEGAND II - SECRETARY AND DIRECTOR
Mr. Wiegand was elected to the Board of Directors in July 1992. Mr.
Wiegand was appointed to the office of Secretary of the Company on March
1, 1994. Mr. Wiegand is presently a lawyer in private practice. From
January 15, 1992 to December 26, 1992, he was Vice-President of
Administration for Rose Manufacturing Co., a privately held manufacturer
of safety equipment based in Englewood, Colorado. Mr. Wiegand has
practiced law for 23 years, and prior to joining Rose Manufacturing, was
special counsel with Pendleton & Sabian, P.C., a law firm in Denver. Mr.
Wiegand graduated Phi Beta Kappa from the Tulane University of Louisiana
in 1970 and went on to receive a law degree and was admitted to practice
in Louisiana in 1972 and Colorado in 1977. Since 1976, Mr. Wiegand's
practice has been limited to securities offerings, estate planning,
business organization and tax law. In addition to membership in six bar
Associations, Mr. Wiegand has been admitted to practice before the U.S.
District Court (Colorado and ED-Louisiana) and before the U.S. Court of
Appeals (5th Circuit).
MARY ANNE DEYOUNG - TREASURER, CHIEF FINANCIAL OFFICER, ASSISTANT
SECRETARY AND DIRECTOR
Ms. DeYoung was elected to the Board of Directors in April 1996. Ms.
DeYoung was elected Treasurer, Chief Financial Officer and Assistant
Secretary on December 15, 1994. Ms. DeYoung has served as Vice President,
Finance and Administration since July 1986. Ms. DeYoung joined the
Company as Controller in April 1981. From 1975 to 1981, Ms. DeYoung was a
systems analyst with Arthur Andersen LLP, a financial analyst, and an
independent financial consultant. Ms. DeYoung holds a Bachelor of Science
Degree in Accounting from the University of Santa Clara. Ms. DeYoung is
the spouse of David R. DeYoung.
RICHARD A. KNAPP - DIRECTOR
Mr. Knapp was elected to the Board of Directors in May 1997. Mr.
Knapp is currently the President and CEO of Lease Capital Corporation and
has served in that capacity since 1990. From 1984 until 1990, Mr. Knapp
was a regional manager for both Paccom Leasing Corporation and Security
Pacific Business Finance. In total, Mr. Knapp has been associated with
the banking/finance industry for nearly thirty years. He holds a Bachelor
of Science degree in Finance from the University of Arizona.
Mr. Charles E. Burns resigned as a Director on March 12, 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the executive compensation of the
Company's Chief Executive Officer for each of the Company's last three
fiscal years. There were no other Executive Officers serving at the end
of the last fiscal year whose compensation was greater than $100,000.
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
* ** ***
------------- ------------ ------------
Salary Bonus Awards
------ ----- ------ ------------
Securities
Name and Principal Underlying
Position Year ($) ($) Options(#) ($)
- - ----------------- ---- ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
D.R. DeYoung 1998 129,820 4,817 432,375 5,772
President, CEO 1997 129,820 0 88,000 7,982
1996 93,188 4,520 94,000 7,244
</TABLE>
* Mr. DeYoung did not receive additional compensation other than noted
above, the aggregate amount of which was the lesser of either $50,000 or
10% of the total of his annual salary and bonus.
** For 1998, includes 337,375 stock options which were repriced to fair
market value on January 15, 1998.
*** Includes insurance premiums paid by the Company for term life and
disability insurance, as well as premiums paid for a key-man life
insurance policy which has the death benefit assigned to the Company and
the cash value of the policy intended to accrue for the benefit of Mr.
DeYoung.
- - ---------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named Executive
Officer.
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number Percent
of of Total Exercise
Securities Options or
Underlying Granted to Base
Options Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Share) Date
- - ------------------ ---------- ------------ -------- ----------
<S> <C> <C> <C> <C>
D.R. DeYoung 95,000 25% 0.344 12/18/08
D.R. DeYoung 5,375 * 1% 0.4375 05/28/03
D.R. DeYoung 150,000 * 32% 0.4375 08/18/05
D.R. DeYoung 30,000 * 6% 0.4375 08/31/06
D.R. DeYoung 60,000 * 13% 0.4375 12/18/06
D.R. DeYoung 4,000 * 1% 0.4375 12/16/06
D.R. DeYoung 8,000 * 2% 0.4375 06/26/07
D.R. DeYoung 80,000 * 17% 0.4375 11/26/07
</TABLE>
* Includes stock options repriced to fair market value on January 15,
1998. Percent of total options granted is a percent of total options
repriced on January 15, 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning each exercise
of stock options during the last fiscal year by the named Executive
Officer and the fiscal year-end value of unexercised options:
<TABLE>
<CAPTION>
Number of Value of
Shares Securities Unexercised
Acquired underlying in-the-money
on Value unexercised options at
Exercise Realized options at fiscal fiscal
Name (#) ($) year-end (#) year-end ($)
- - ---------- -------- -------- ----------------- ------------
Exercisable/ Exercisable/
unexercisable unexercisable
----------------- ------------
<S> <C> <C> <C> <C>
D.R. DeYoung 0 $0 432,375 / 0 $40,229/ $0
</TABLE>
EMPLOYMENT CONTRACT
Mr. DeYoung, the Company's President and Chief Executive Officer, is
employed pursuant to a three year employment contract between the Company
and Mr. DeYoung, which expires on October 31, 1999. Since November 1,
1996, the compensation of Mr. DeYoung has been established under the terms
of this employment contract. The contract calls for an annual base
salary, in an amount determined annually by the Board of Directors,
payable semimonthly, plus expenses and normal fringe benefits. Mr. DeYoung
earns a bonus of 5% of the Company's pretax earnings, calculated on a
quarterly basis. An annual bonus may be paid to Mr. DeYoung based on the
performance of the Company and at the discretion of the Board of
Directors, Mr. DeYoung's employment contract provides that should his
employment be terminated for any reason other than for cause, he is
entitled to a cash severance package equal to one year's cash
compensation. In addition, Mr. DeYoung is entitled to receive a grant of
a sufficient number of ten year options as are necessary to permit him to
retain the same percentage of beneficial ownership interest in the Company
as he held on December 16, 1996. These grants would be made from the
Company's Equity Incentive Plan at the fair market value of the common
stock on the date of grant.
Ms. DeYoung, the Company's Vice President of Finance and Chief
Financial Officer, is employed pursuant to a three-year employment
contract between the Company and Ms. DeYoung which was effective September
1, 1996. Her compensation is established under the terms of this
employment contract. The contract calls for an annual base salary of at
least $90,000, expenses, normal fringe benefits, as well as a bonus equal
to 4% of the Company's pretax earnings, calculated on a quarterly basis,
In addition, Ms. DeYoung's employment contract provides that should her
employment be terminated for any reason other than for cause, she is
entitled to a cash severance package equal to one year's cash
compensation.
COMPENSATION OF DIRECTORS
The Company currently pays non-employee Directors $1,000 per quarter
plus specific hourly fees for special meetings or additional
participation. Pursuant to the 1996 Stock Option Plan (the "1996 Plan"),
members of the compensation committee of the Board of Directors are
automatically granted an option on the last trading day in June to
purchase 4,000 shares of Common Stock at 100% of the fair market value on
such date. On June 30, 1998 each member of the compensation committee
received an automatic grant to purchase 4,000 shares of common stock at
$.7774, the fair market value on that date. In addition to the automatic
grants, the Company granted each non-employee director stock options to
purchase shares of common stock at $0.344 per share, the fair market value
on December 18, 1998. The non-employee directors were granted options to
purchase 15,000, 10,000 and 3,500 shares, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth the number of shares of Common Stock owned
be each Executive Officer and Director of the Company, by all persons
known to the Company to be the beneficial owner of more than 5% of any
class of the Company's voting securities, and by all Executive Officers
and Directors as a group. Unless otherwise noted, the share ownership
specified in the following table represents both record and beneficial
ownership as of March 30, 1999.
<TABLE>
<CAPTION>
Beneficial Percent
Name and Address of Beneficial Owner Ownership(1) of Class
- - ------------------------------------ ------------ --------
<S> <C> <C>
David R. DeYoung 716,416(2),(3) 25.9%
6025 So. Quebec Street #300,
Englewood, Colorado 80111
Robert Wiegand II 61,500(4) 2.7%
5261 South Quebec Street,
Greenwood Village, Colorado 80111
Mary Anne DeYoung 203,700(5) 8.4%
6025 So. Quebec Street #300,
Englewood, Colorado 80111
Richard A. Knapp 11,500(6) 0.5%
19590 E. Mainstreet, Suite 207,
Parker, Colorado 80134
Spencer D. Lehman 253,323(7) 10.6%
1250 4th Street,
Santa Monica, California 90401
John G. Mazza 275,754(8) 11.6%
6613 Zumirez Drive,
Malibu, California 90265
All Executive Officers and
Directors as a Group - 4 Persons 993,106(9) 32.9%
</TABLE>
(1) Beneficial owners are believed to have sole voting and investment
power with respect to the shares shown unless otherwise indicated.
(2) Includes: 432,375 options to purchase Common Stock; and 100,000
warrants to purchase Common Stock. See EXECUTIVE COMPENSATION -
Employment Contract.
(3) Excludes: any shares attributable to Mr. DeYoung's right under his
employment contract to maintain his proportional ownership of the
Company under certain circumstances. See EXECUTIVE COMPENSATION -
Employment Contract.
(4) Includes 39,500 options to purchase Common Stock
(5) Includes 199,800 options to purchase Common Stock
(6) Consists of 11,500 options to purchase Common Stock
(7) Includes two convertible promissory notes plus accrued interest which
are convertible into 153,754 shares of Common Stock.
(8) Includes two convertible promissory notes plus accrued interest which
are convertible into 153,754 shares of Common Stock.
(9) Includes 683,175 options to purchase Common Stock and 100,000
warrants to purchase Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased its executive offices (6,600 square feet)from a
partnership, Comlease, from May 1,1982 until March 31, 1998. Mr. DeYoung,
an Executive Officer and Director of the Company, owned a partnership
interest in Comlease of 11.75% and Comlease owned 51,701 shares of the
Company's stock. Lease payments to the partnership were $21,300 for the
quarter ended March 31, 1998. On April 1, 1998, the Company signed a lease
with Graphic Network Properties for 4,400 square feet at the same location
at the previous rental rate of $12.90 per square foot. The shares of the
Company held by Comlease were distributed to the partners on August 3,
1998. The partnership was dissolved in March, 1999. Management of the
Company believes that the terms of the lease were as favorable to the
Company as could have been obtained from third parties at the time the
lease was signed.
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 29, 1994.
4.1******* - Form 1994 Class A Warrant issued to David R.
DeYoung dated February 1, 1995.
4.2******* - Form of Warrant to Purchase Shares of Common Stock
issued to each of Copeland Consulting Group, Inc. and
Transition Partners, Limited dated December 16, 1996.
4.3******* - Form of Two Year Warrant to Purchase Shares of
Common Stock dated August 14, 1997.
4.4******* - Form of Six Month Warrant to Purchase Shares of
Common Stock dated August 14, 1997.
4.5******* - Consulting Agreement between the Company and
BurchMont Equities Group, Inc. dated July 28, 1997.
10.5* - UniVerse Distributor Agreement between ARDENT
SOFTWARE, INC. and the Company dated May 15, 1991.
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.
10.21* - 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
23.1 - Consent of Karsh & Company, P.C.
23.2 - Consent of Cribari & Gustafson, LLP
27 - Financial Data Schedule
See Index to Financial Statements on Page 13
* Filed as an Exhibit to Form S-1 Registration
Statement No. 33-44717, on December 23, 1991.
** 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.
***** Filed as an Exhibit to Form 10-K for the
period ended December 31, 1996.
****** Filed as an Exhibit to Form S-8 Registration
Statement No. 333-3078, on July 3, 1997.
******* Filed as an Exhibit to Form S-3 Registration
Statement No. 333-35265, on September 10, 1997.
There were no reports filed on Form 8-K for the quarter ended December 31,
1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
1MAGE SOFTWARE, INC.
By: /s/ David R. DeYoung Date: March 31, 1999
- - ------------------------- -------------------
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 31, 1999
--------------------- ---------------
David R. DeYoung,
President
and Principal Chief
Executive Officer
By: /s/ Robert Wiegand, II Date: March 31, 1999
--------------------- ---------------
Robert Wiegand, II
Director and Secretary
By: /s/ Mary Anne DeYoung Date: March 31, 1999
--------------------- ---------------
Mary Anne DeYoung,
Vice President, Finance
Principal and Accounting
Officer
By: /s/ Richard A. Knapp Date: March 31, 1999
--------------------- ---------------
Richard A. Knapp
Director
EXHIBIT INDEX
No. Description Method of Filing
- - --- ----------- ----------------
23.1 Consent of Karsh & Company,
P.C. Filed herewith electronically
23.2 Consent of Cribari &
Gustafson, LLP Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference of our report dated February
11, 1997, on the financial statements as of December 31, 1996 and for the
year then ended, included this Form 10-K of 1MAGE Software, Inc. which
appears on page 15, into the Registration Statements on Form S-3 (File No.
333-35625) and Forms S-8 (File Nos. 33-78096, 33-86760 & 333-30787) for
1MAGE Software, Inc.
We also consent to the restatement of net loss and accumulated deficit as
of December 31, 1996 as discussed in Note 11 of the financial statements.
/s/ Karsh & Company, P.C.
- - -------------------------
Karsh & Company, P.C.
Denver, Colorado
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 204,671
<SECURITIES> 25,000
<RECEIVABLES> 548,825
<ALLOWANCES> 15,000
<INVENTORY> 55,804
<CURRENT-ASSETS> 829,021
<PP&E> 783,715
<DEPRECIATION> 689,883
<TOTAL-ASSETS> 1,709,524
<CURRENT-LIABILITIES> 633,421
<BONDS> 0
0
0
<COMMON> 8,811
<OTHER-SE> 921,724
<TOTAL-LIABILITY-AND-EQUITY> 1,709,524
<SALES> 2,151,451
<TOTAL-REVENUES> 2,151,451
<CGS> 934,858
<TOTAL-COSTS> 1,096,548
<OTHER-EXPENSES> (115,165)
<LOSS-PROVISION> 41,984
<INTEREST-EXPENSE> 34,046
<INCOME-PRETAX> 4,880
<INCOME-TAX> 2,500
<INCOME-CONTINUING> 2,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,380
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
Exhibit 23.2
Independent Auditors' Consent
As independent public accountants, we hereby consent to the incorporation
of our report on the financial statements as of December 31, 1998 and
1997, and for the years then ended, included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-3 (File No.
333-35265) and Forms S-8 (File Nos. 33-78096, 33-86760 & 333-30787).
We also consent to the restatement of net loss and accumulated deficit as
of December 31, 1997 as discussed in Note 11 of the financial statements.
/s/ Cribari & Gustafson, LLP
- - -------------------------
Cribari & Gustafson, LLP
Denver, CO
February 22, 1999
