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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from___to___
Commission file number 0-15864
SEDONA CORPORATION
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(Exact name of registrant as specified in its charter)
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<S> <C>
Pennsylvania 95-4091769
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
649 North Lewis Road, Limerick, PA 19468
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code 610-495-3003
SCAN-GRAPHICS, INC.
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Former Name
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the Voting Stock held by non-affiliates of the
registrant computed by reference to the closing price as reported on the NASDAQ
system as of March 17, 2000 was $187,906,000.
The number of shares of the registrant's Common Stock issued and outstanding as
of March 17, 2000 was 26,718,398 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by use of terms such as "believes",
"anticipates", "intends", or "expects". These forward-looking statements relate
to the plans, objectives, and expectations of Sedona Corporation (the "Company"
or "Sedona Corp.") for future operations. In light of the risks and
uncertainties inherent in all forward-looking statements, the inclusion of such
statements in this Form 10-K should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained herein as a result of certain factors including, but not limited to,
dependence on operating agreements with foreign partners, significant foreign
and U.S.-based customers and suppliers, availability of transmission facilities,
U.S. and foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition and
rapid technological change. These factors should not be considered exhaustive;
the Company undertakes no obligation to release publicly the results of any
future revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
General
SEDONA Corporation develops, markets, services and supports enterprise scale
Internet application solutions that enable organizations to more quickly and
precisely visualize new and changing customer information, greatly enhancing
their customer acquisition, intimacy, satisfaction and retention capabilities.
SEDONA Corporation made significant realignments in its business in 1999 by
exiting non strategic businesses in order to focus on the core application
solution strategy. Please refer to Item 7 below for further details.
SEDONA's principal executive offices are located at 649 North Lewis Road,
Limerick, Pennsylvania 19468, and the telephone number is (610) 495-3003.
Description of Business and Principal Products
Businesses today must be able to plan, produce and react with accurate
information faster than ever before to excel in the Internet age. Historically,
companies that had great products along with experienced salespeople and strong
promotional campaigns were able to compete more effectively to gain and maintain
marketshare. Now, aggressive competitors have access to warehouses of customer
information and communication vehicles for reaching customers more effectively.
This has propelled the need for all companies to have complete and usable
information as the most valued asset for the success of the enterprise.
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ITEM 1. BUSINESS (Continued)
A new class of applications is changing the landscape of business solutions by
enabling companies to instantly transform their raw data into dynamically
created smart content from which real-time profiles can be generated over the
Internet.
The ability to visualize the smart content of these profiles, based on user's
interests, preferences and demographics, provides companies with the competitive
ability to effectively personalize their customer relationships as well as
identify otherwise unknown sales and marketing opportunities.
SEDONA has pioneered the industry's first Internet application solution for
real-time visual profiling of information. This application will be used as the
platform to provide a number of integrated solutions targeted at:
1. Major companies implementing front office Customer Relationship Management
and Decision Support System (CRM and DSS) or back office Supply Chain
Management and Enterprise Resource Planning (SCM and ERP) systems.
2. Small and mid-size financial services and Internet retailing companies
planning to implement an affordable customer relationship management
application solution.
Customer Acquisition
A high close rate and a short sales cycle characterize a sales team that knows
how to identify their ideal prospect. Customer profiles provide models to help
target new prospects. SEDONA's application solutions provide an incisive view of
sales prospects fully qualified through the filter of an ideal customer profile,
which it believes will result in a higher level of sales productivity with a
lower cost of sales.
Customer Intimacy
Through customer intimacy, SEDONA's customer can build a valuable 1-to-1
relationship with new and existing customers. When key customer variables
change, opportunities arise to sell new products and services. SEDONA's
application solutions increase knowledge of customer behavior to provide
consistent communication from marketing to customer service.
Customer Satisfaction
Greater customer understanding improves the quality of each customer
interaction. With SEDONA's application solutions, that customer interaction can
become tailored to the customer improving service, decision making and response
time. With the information presented visually, call centers become able to
promptly meet the customer need.
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ITEM 1. BUSINESS (Continued)
Customer Retention
Improving retention creates more repeat customers. Understanding customers'
needs can create new sales opportunities. With the in-depth knowledge management
provided by SEDONA's application solutions, users can visualize historical sales
and service information along with external information to identify additional
sales opportunities within their customer base. Visualization of complex data
enables marketing professionals to identify the critical elements shaping
business performance. SEDONA's application solutions can provide a valuable
feedback loop to the sales process through integration with enterprise
applications for sales force automation and marketing automation.
The Company estimates that the market size of opportunities are large and
growing at rapid rates as customers place increasing emphasis on knowledge about
their customer base.
Research & Development (In Thousands)
The main strategy of the research and development organization is to provide
high-quality, high-value products and support services in a fast, consistent and
predictable manner as follows:
1. Promote and cultivate a culture of team-based development. The research and
development organization is structured into small teams of highly
knowledgeable developers, responsible for the design, development and unit
testing of each component of the Internet visual profiling solution. Each
project team will also provide technical assistance to the system
integration group, when that phase of the product development life-cycle is
reached.
2. Implement a state-of-the-art software development process that encourages
component reusability and enhances the predictability, timeliness and
quality of the overall software process. SEDONA is adopting the Base Level
Integration Plans software development methodology, which has been designed
to promote an interactive and predictable process for the development, unit
and system integration testing and delivery of products. This methodology
breaks the development of sophisticated products into small, pre-defined
cycles of 10 weeks (Base Levels) during the delivery process. It also
allows the company to quickly react to business and technical changes
generated by the marketplace and/or new customer requirements.
Base levels serve as the fundamental planning and execution process that drives
the engineering activities for that time period, including the maintenance of
existing products and releases, training and education requirements, as well as
new product development. This process operates in the context of a development
organization where there is a set of small project teams cooperating to build a
large, complex software product.
Research and development expenses were $346, $239, and $824, for the years ended
December 31, 1999, 1998 and 1997, respectively.
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ITEM 1. BUSINESS (Continued)
Patents and Copyrights
The Company strongly believes in copyrighting and trademarking its products and
servicemarking its services. The company has been awarded or is in the process
of applying for a total of 20 copyrights, trademarks and servicemarks.
Sales and Marketing
SEDONA reaches the major company target market by establishing original
equipment manufacturer (OEM) and value added reseller (VAR) relationships with
1) enterprise application package suppliers, delivering Customer Relationship
Management (CRM), Supply Chain Management (SCM) and Enterprise Resource Planning
(ERP) solutions, 2) integrators implementing these packages in end-user
organizations, and 3) content management providers for consumer and business
data. SEDONA's strategy is to exploit these strategic partners' brand, marketing
power, and relationship with their customers implementing and deploying these
applications to best access and address the needs of the targeted professionals
within these companies.
SEDONA also reaches the small to mid-sized company market by aggressively
creating an inside sales distribution channel and a new value added reseller
channel capacity. SEDONA's strategy is to provide a secure, Internet-based
outsourced scalable, reliable and secure full-featured CRM solution, customized
to the needs of the marketing and sales professionals of these companies.
Marketing activities focus on the delivery of highly qualified leads to the
sales channels. To do this, SEDONA continues to develop a unique and memorable
brand, well-planned and tracked lead generation programs, and an aggressive set
of partner programs.
Competition
The CRM market has offerings from providers that focus on sales force
automation, call center management, contact management and the like. SEDONA's
offering is unique in combining real-time data integration and enhancement
capability along with visualization of required business information. Further,
SEDONA delivers its capabilities on the Internet in a cost effective, usable
manner.
The comprehensive CRM vendors are potential partners with SEDONA, either by
integrating SEDONA's capabilities into their solution or for their solution to
be integrated into SEDONA's application solution, creating an overall
remarketing/reselling opportunity for both.
Software Development and Services
The Company produces and services its software products from its headquarters in
Limerick, Pennsylvania as well as utilizes outside contract organizations. In
addition, a field service organization covers all areas of the nation.
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ITEM 1. BUSINESS (Continued)
Employees
As of December 31, 1999, the Company had 27 full time employees. None of these
employees are represented by a labor union. The Company believes that its
relationships with its employees are good.
Dependence Upon Key Personnel
The Company is dependent upon certain key members of its management team for the
successful operation and development of its business. The loss of the services
of one or more of its management personnel could materially and adversely affect
the operation of the Company. In addition, in order to continue its operations,
the Company must attract and retain additional technically qualified personnel
with backgrounds in engineering, production, and marketing.
There is keen competition for such highly qualified personnel and consequently
there can be no assurance that the Company will be successful in recruiting or
retaining personnel of the requisite caliber or in the numbers necessary to
enable the Company to continue to conduct its business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate offices as well as principal facilities for
operations at 649 North Lewis Road, 2nd Floor, Limerick, Pennsylvania 19468. The
lease for this facility of 12,201 square feet commenced July 1, 1996 and is
currently being leased on a short term basis as management plans a relocation
within the Philadelphia area during 2000.
Management believes that adequate facilities will be available to fulfill its
current and near-future needs.
ITEM 3. LEGAL PROCEEDINGS (In Thousands)
In March 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, PA, against the Company by a former employee, seeking damages
of $361, for termination of contract, by change of control and for convenience.
This plaintiff asserts this sum represents the excess of market value over the
exercise price of unvested warrants held by the plaintiff which the plaintiff
asserts should have been vested and thereby available for exercise and sale. The
Company believes the claim is without merit and is defending its position.
No other actions other than matters involved in the ordinary course of business
are currently known by management and none of these are believed by management
to have potential significance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The common stock is traded in the over-the-counter market and is authorized to
be quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System under the symbol "SDNA," formerly "SCNG."
The following Table sets forth the high and low sales prices of the Company's
common stock as reflected on NASDAQ for the periods indicated.
Common Stock High Sales Price Low Sales Price
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1998
1st Quarter $ 2.94 $ 1.94
2nd Quarter $ 2.56 $ 1.50
3rd Quarter $ 2.25 $ 1.00
4th Quarter $ 3.50 $ 1.13
Common Stock High Sales Price Low Sales Price
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1999
1st Quarter $ 3.13 $ 2.06
2nd Quarter $ 2.63 $ 1.16
3rd Quarter $ 3.47 $ 1.25
4th Quarter $ 3.50 $ 1.34
Common Stock High Sales Price Low Sales Price
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2000
1st Quarter through
March 17, 2000 $ 10.25 $ 2.75
As of March 17, 2000, there were approximately 2,850 Shareholders of record. On
March 17, 2000 the last reported sale price of the Company's common stock as
reported on the NASDAQ System was $7.13.
The Company has never declared or paid cash dividends on its common stock and
does not anticipate payment of cash dividends on its common stock in the
foreseeable future. It is the current intent of the Company to continue to
retain any earnings to finance the development and expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)
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The following table sets forth selected financial information regarding the
Company for the year ended December 31, 1999 and for the four previous years.
Pursuant to the realignment of operations discussed in Item 7 below, data in
following table has been adjusted to show operating results for the discontinued
operations separately. Balance sheet data in following tabulation also reflects
accounting for discontinued operations.
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ITEM 6. SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)
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This information should be read in conjunction with the financial statements and
notes thereto included in Item 8 of this Form 10-K.
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YEAR ENDED DECEMBER 31,
Income Statement 1999 1998 1997 1996 1995
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Data:
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Revenue $ 244 $ 15 $ 260 $ 190 $ 0
Loss from Continuing
Operations (3,264) (3,879) (5,301) (1,516) (151)
Loss from Discontinued
Operations (2,973) (1,633) (2,216) (2,754) (1,086)
Loss from Continuing and
Discontinued Operations
before extraordinary item (6,237) (5,512) (7,517) (4,270) (1,237)
Extraordinary item - - (300) - -
Net Loss (6,237) (5,512) (7,817) (4,270) (1,237)
Preferred Dividends (601) (1,592) (182) (220) (158)
Net Loss applicable
to Common Stockholders (6,838) (7,104) (7,999) (4,490) (1,395)
Net Loss per share applicable
to Common Stockholders
Before Extraordinary Item $ (.18) $ (.28) $ (.34) $ (.15) $ (.03)
Extraordinary Item
per share $ - $ - $ (.02) $ - $ -
Basic and Diluted
Net Loss per Common Share
applicable to continuing
operations $ (.18) $ (.28) $ (.36) $ (.15) $ (.03)
Loss per Common Share
Applicable to discontinued
operations $ (.13) $ (.08) $ (.13) $ (.24) $ (.11)
Loss per Common Share $ (.31) $ (.36) $ (.49) $ (.39) $ (.14)
AT DECEMBER 31,
Balance Sheet Data: 1999 1998 1997 1996 1995
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Total Assets $ 2,204 $4,435 $ 4,403 $2,566 $2,587
Net Working Capital 262 179 902 749 7
Long-Term Obligations 51 215 59 - -
Stockholders' Equity $1,431 3,457 3,514 2,556 2,105
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Realignment of Operations
As earlier reported in Form 8-K filed on October 4, 1999, the Company's Board of
Directors decided in July, 1999 to sell the two divisions of the Company which
were not part of its realigned strategy of focusing on the development of its
Internet application solutions business. In connection with this decision, the
Company recorded $719 in charges and reserves primarily for inventory,
receivables and severance related to the discontinued operations. In the third
quarter 1999, the Company completed the sale of the assets of the Technology
Resource Centers to Diversified Technologies, Inc. for a $35 note receivable and
the sale of the Tangent Imaging Systems operation to Colortrac, Inc. was
completed for consideration of $105 in cash an assumption of $61 in liabilities.
These transactions resulted in an additional loss of $235. The Company may
receive additional proceeds related to future sales of products and technology
in connection with these transactions. As of December 31, 1999, the Company had
remaining inventory with a realizable value of $82 (net of a valuation allowance
of $623), accounts receivable of $336 (net of a bad debt allowance of $75), and
remaining liabilities of $235 related to severance and miscellaneous payables.
The Company believes these reserves are sufficient to cover all remaining
liabilities or inventory valuations.
Revenues from the discontinued operations were $2,567, $6,162 and $4,567,
respectively, for the years ended December 31, 1999, 1998 and 1997 and
represented substantially all of the Company's revenues in those periods. Losses
for 1999, 1998 and 1997 were $2,973, $1,633, and $2,216, respectively. The
increased losses from discontinued operations in 1999 reflect the transaction
charges and reserves associated the decision to discontinue operations and the
with completion of their sales as well as substantially lower sales activity in
1999 periods when compared to 1998.
For all periods presented, these financial statements reflect the results of the
Tangent Imaging Systems and Technology Resource Centers as discontinued
operations.
With the realignment of operations completed, the Company is now able to focus
all efforts on its business of providing enterprises with Internet application
solutions, enabling marketing and sales organizations to more quickly and
precisely identify and visualize new market opportunities to improve sales
results and market penetration.
The remainder of management's discussion and analysis of financial condition and
results of operations reflects principally the continuing operations of the
Company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (In Thousands)
Revenues from continuing operations for the years ended December 31, 1999, 1998
and 1997 were $244, $15 and $260, respectively.
During the periods reported, gross margins and other data relating to operations
were not meaningful as the Financial Statements reflect the realignment of the
Company's continuing operations. Expenses overall in continuing operations in
1999 compared to 1998 and 1997 were lower principally reflecting lower
reorganizational costs and to some extent higher capitalization of certain
software development costs in 1999.
Liquidity and Capital Resources (In Thousands Except Per Share and Share Data)
At December 31, 1999, cash and cash equivalents increased to $893, a $95
increase from the December 31, 1998 amount of $798. The above change in cash and
cash equivalents are explained in the discussion of cash flows from operating,
investing and financing activities.
For the year ended December 31, 1999, the cash flows used in operating
activities resulted in a net use of cash of $3,439 compared to the year ended
December 31, 1998 amount of $5,034.
The decrease in use of cash for operating activities was primarily due to lower
operating losses principally from lower general and administrative expenses and
from decreased cash use in discontinued operations, as such operations were only
in place for a portion of the year, lower operating expenditures and liquidation
of working capital.
For the year ended December 31, 1999 the cash flows from investing activities
resulted in a net use of cash of $433 compared to the year ended December 31,
1998 amount of $557. The use of cash decreased $124 on account of decreased
purchases of property and equipment offset by increases in capitalized software
development.
For the year ended December 31, 1999, cash flows from financing activities
provided $3,967 compared to the fiscal December 31, 1998 amount of $5,079. The
decrease in cash from financing activities in 1999 was due principally to the
decreased issuance of preferred stock offset by increased warrant and option
exercises.
During March 1999, the Company's chief executive officer agreed to loan up to
$500 to the Company on a short-term basis bearing interest at the rate of 1.5%
per month. Maximum advances under this loan arrangement amounted to $185 and
were repaid to the officer in March 1999. At December 31, 1999, there were no
borrowings outstanding from the chief executive officer.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
On March 30, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Series B convertible
preferred stock. After a period of 12 months from March 30, 1999 (anniversary
date), the investor can convert the preferred stock to common stock at the lower
of: 1) $2.30 (the "Closing Price"), or 2) 100% of the common stock's average
last trade price during the 25 trading days preceding the Conversion Date (the
"Conversion Date Price"). In no event can the conversion price be below $1.15.
The conversion amount shall be the principal amount of the preferred stock being
converted, plus an 8% premium accruing from the closing date to the conversion
date. In addition, if the common stock's average last trade price during the 25
days preceding the anniversary date is less than 145% of the Closing Price or
$3.34, the investor shall also be entitled to five year warrants under a
variable formula such that the lower the conversion price, the higher the number
of warrants. Additional warrants may be issued to a maximum of 1,873,749 under
this agreement. Mandatory conversion of the preferred stock shall occur on the
third anniversary after closing. As of March 17, 2000, the 25 day average
closing price was $5.69.
On May 24, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Series F convertible
preferred stock. After a period of 12 months from May 24, 1999 (anniversary
date), the investor can convert the preferred stock to common stock at the lower
of: 1) $1.41 (the "Closing Price"), or 2) 100% of the common stock's average
last trade price during the 25 trading days preceding the Conversion Date (the
"Conversion Date Price"). In no event can the conversion price be below $1.00.
The conversion amount shall be the principal amount of the preferred stock being
converted, plus an 8% premium accruing from the closing date to the conversion
date. In addition, if the common stock's average last trade price during the 25
days preceding the anniversary is less than 145% of the Closing Price or $2.04,
the investor shall also be entitled to five year warrants under a variable
formula such that the lower the conversion price, the higher the number of
warrants. Additional warrants may be issued to a maximum of 1,646,178 under this
agreement. Mandatory conversion of the preferred stock shall occur on the third
anniversary after closing. At March 17, 2000 the preceding 25 day average
closing price was $5.69.
On August 25, 1999, Sedona issued 1,142,858 shares of its common stock through a
negotiated partial exercise of an outstanding warrant by its holder and realized
total net proceeds of approximately $2,000. The outstanding warrant originally
permitted the holder to acquire 2,100,000 shares of our common stock at an
exercise price of $4.00 per share. After considering needs for working capital
and additional funds that were required to repurchase the Series E preferred
stock described below, Sedona negotiated with the warrant holder to permit
partial exercise of the warrant at an exercise prices of $1.75 per share. The
portion of the proceeds not used to repurchase the series E preferred stock will
be used for working capital needs.
During 1999, $2,172 of Series E Preferred and accrued dividends were converted
into 1,271,832 shares of common stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
On September 16, 1999, Sedona completed the repurchase of all remaining class A,
Series E convertible preferred stock, plus one-third of associated warrants to
purchase shares of common stock exercisable at $2.25 per share, and one-third of
associated warrants to purchase shares of common stock exercisable at $4.00 per
share. The purchase price for each share of the Series E preferred stock and the
associated warrants equaled 110% of the principal amount of $1,000 per share of
Series E preferred stock plus all of the dividends that had accrued through
September 15, 1999. All of the shares underlying the remaining 914,263 warrants
exercisable at $4.00 per share were registered for resale under a Form S-3
filing in October 1999.
The Company funded the majority portion of the repurchase of the series E
preferred stock, with the proceeds of $2,376 related to private placement of
23.76 units of $100. Each unit sold in the private placement consisted of 50,000
shares of common stock and warrants to purchase 44,444 shares of common stock at
an exercise price of $2.25 per share.
A promissory note of a former officer of the Company in the amount of $53
reflects the balance of amount provided in exchange for exercise of warrants and
options and matures in July 2000.
The Company has received in excess of $5.8 million during the first Quarter 2000
related to option and warrant exercises, resulting in approximately 2.6 million
additional common shares being issued.
The Company believes that the proceeds from these private placements and other
sources noted above, and funds generated from operations and/or additional
equity contributions will be sufficient to meet the Company's working capital
requirements for 2000.
On January 14, 2000, SEDONA signed a letter of intent to acquire Acxiom
Corporation's Customer Information Management System (CIMS) application software
unit. The CIMS operation, based in Minneapolis, Minnesota, is a provider of
Customer Relationship Management (CRM) software to the financial services
industry, with a particular emphasis on the retail banking industry. SEDONA
assumed responsibility for management of the CIMS unit effective February 1,
2000 under an operating agreement which will terminate at the acquisition
transaction closing.
On February 9, 2000, the Company committed to acquire a 10% equity interest for
a total of $140 payable at various times in the future, in a start-up company
which designs, builds, and markets computer software and services to aid sales
and marketing persons with their customer prospecting. This lead generation and
management product will be integrated with SEDONA's visual CRM profiling and
CIMS application solutions to provide further value to its customers.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
On February 28, 2000, the Company closed a $3.0 million private placement
purchase agreement for the issuance of 3,000 shares of Series G convertible
preferred stock. The investors can convert the preferred stock to common stock
at the lower of: 1) 130% of the closing bid price of the Company's common stock
as of the closing date, or 2) 95% of the low three day average closing bid price
of the Company's common stock for the twenty trading days prior to the notice of
conversion. The conversion amount shall be the principal amount of the preferred
stock being converted, plus a 3% premium accruing from the closing date to the
conversion date. In addition, the investors received a total of 100,000,
three-year warrants which shall be exercisable at 130% of the closing bid price
of the Company's common stock on the closing date. Mandatory conversion of the
preferred stock shall occur on the second anniversary after closing. The Company
shall have a right to redeem any portion of the Series G preferred stock upon a
30-day written notice.
Inflation
Although inflation has resulted in an increase in certain operating costs during
the past three years, management believes it has not had a material effect on
the Company's results of operations or financial condition.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK Not
Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
NONE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth-certain information regarding the directors and
executive officers of the Company.
Name Age Position
- ---- --- --------
Laurence L. Osterwise 52 Chairman of the Board
R. Barry Borden 60 Vice Chairman of the Board
Marco A. Emrich 47 CEO, President and Director
Michael A. Mulshine 60 Secretary and Director
David S. Hirsch 64 Director
Jack Pellicci 61 Director
James C. Sargent 84 Director
Robert M. Shapiro 54 Director
James T. Womble 57 Director
David Blackledge 38 Vice President of Sales
William K. Williams 57 Vice President, Chief Financial Officer
All Directors hold office until the next annual meeting of the Shareholders of
the Company and until their successors are elected and qualified.
All officers serve at the discretion of the Board of Directors subject to the
terms of their employment agreements.
The business experience, principal occupation and employment of the directors
and executive officers have been as follows:
Laurence L. Osterwise was appointed Chairman of the Board in September 1999,
after having been Chief Executive Officer, President and a Director of the
Company since April 1997. Mr. Osterwise came to the Company in November 1996 as
its Chief Operating Officer and President of Sedona GeoServices, Inc., a
subsidiary. Before joining the Company, he was President of the Communications
Division of General Instrument Corporation, now a division of Motorola. Prior to
joining General Instrument, Mr. Osterwise was with IBM Corporation for 25 years,
where he held positions as President of Production Industries, U.S. Vice
President and Corporate Director of Market Driven Quality, and IBM Rochester
General Manager and Director of Application Business Systems. Under his
leadership, IBM Rochester was awarded the Malcomb Baldridge National Quality
Award. Mr. Osterwise received a BS in Mathematics from Duke University in 1969
and an MS in Computer Sciences from Syracuse University in 1973.
-15-
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
R. Barry Borden, Vice Chairman of the Board since September 1999, was Chairman
and a Director of the Company since June 1996. He has founded and managed
businesses in the computer hardware and software industry for the past 30 years.
Since August 1997, he has served as President of Nettech Systems, Inc., a
supplier of software for wireless data communications. Prior to that he has
served as Chairman and CEO of Mergent International, a supplier of software for
data security on PC Desktops and enterprise wide networks.
Mr. Borden also serves on the Board of Directors of FASTNET, Corporation, an
Internet Software Service provider and AM Communications, a provider of
monitoring systems for Cable TV companies. Since 1984, Mr. Borden has been
President of LMA Group Inc., a general management consulting firm. From 1968 to
1980, Mr. Borden was the founder, President and CEO of Delta Data Systems, a CRT
Terminal manufacturer, and from 1981 to 1984 he was founder, Chairman and CEO of
Franklin Computer Corp., a manufacturer of microcomputers. In 1989 he served as
President and CEO of Cricket Software, Inc., a supplier of graphics software.
Mr. Borden received a BSEE degree from the University of Pennsylvania in 1961.
Marco A. Emrich has been Chief Executive Officer, President and a Director of
the Company since September 1999. He has over 20 years of software industry
experience. Most recently, he served as President and CEO of Cambridge-based
e-commerce application service provider Empresa Inc. Prior to joining Empresa
Inc., Mr. Emrich was President, CEO and Chairman of CenterLine Software, Inc.,
where he created and launched a web-based application that enables businesses to
monitor, manage and report on network-centric or multi-tier distributed business
applications. Prior to CenterLine, he held positions as Senior Director of
Cincom Systems, Inc.'s Advanced Technology Group and Manager, NAS Information
Network Technology at Digital Equipment Corporation. Mr. Emrich holds a
Bachelor's degree in Electrical Engineering with specialization in Systems
Engineering.
Michael A. Mulshine has been a Director and Secretary of the Company since May
1985 and has been associated with the Company on a management consulting basis
since 1979. He has been the President of Osprey Partners, a management
consulting firm, since 1977. In addition, he is a Director of VASCO Data
Security International, Inc., a leading provider of Internet and computer
network hardware and software security solutions for financial institutions,
industry and government. Mr. Mulshine received a BSEE degree from the Newark
College of Engineering in 1961.
David S. Hirsch, a Director of the Company since January 1992, retired in 1991
from Schroder & Co., Incorporated and its predecessor firms where he was a
principal during the five years preceding his retirement. Mr. Hirsch received a
BA degree from Cornell University in 1957 and a MBA degree from Harvard
University in 1959.
-16-
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Jack A. Pellicci, a Director of the Company since October 1996, is Oracle
Corporation's Vice President of Global Service Industries where he is
responsible for knowledge management, strategy, market development and spatial
solutions for Oracle's major service industries -- Health, Financial Services,
Communications, Utilities and Public Services, in over 140 countries. Prior to
joining Oracle in 1992, Mr. Pellicci retired as a Brigadier General with 30
years in the U.S. Army, where he was the Commanding General of the Personnel
Information Systems Command. Mr. Pellicci is a member of the Board of Directors
of the Open GIS Consortium (OGC), an organization of over 70 commercial,
governmental, and educational entities dedicated to open systems approaches to
geoprocessing.
He is also a member of the Board of Directors of OGETA Services, the Fairfax
County Chamber of Commerce and the United Services Organization (USO). He
currently serves as a Corporate Fellow for the National Governors Association.
He is a graduate of the U.S. Military Academy at West Point with a Bachelor of
Engineering degree, and received a Master of Mechanical Engineering degree from
Georgia Institute of Technology.
James C. Sargent, a Director of the Company since January 1992, is Counsel to
the law firm of Opton, Handler, Gottlieb, Fieler & Katz, and is counsel to Abel
Noser Corporation, a member of the New York Stock Exchange. He was previously a
partner and counsel to Whitman Breed Abbott & Moran, LLP. He was New York
Regional Administrator from 1955 to 1956, and Commissioner of the Securities and
Exchange Commission from 1956 to 1960.
Robert M. Shapiro, a Director of the Company since November 1998, is Vice
President of Global Sales and Business Development for Autoweb.com, a major
online automotive retailer. From 1995 to 1997 Mr. Shapiro was Senior Vice
President of R. L. Polk & Company, a privately owned $400 million global
information services company, where he directed worldwide marketing, product
management, and business development activities for all software products sold
to the transportation, insurance, finance, retail, fundraising, and publishing
industries. Prior to joining R. L. Polk, Mr. Shapiro was Senior Vice President,
Commercial Marketing for Prodigy, where he created the first commercially viable
interactive service including product positioning and branding. He is noted as a
pioneer in building online business-to-consumer commercial sites. Prior to
joining Prodigy, Mr. Shapiro gained his early marketing and sales experience
during seventeen years with IBM Corporation and Proctor & Gamble. Mr. Shapiro
served on the board of Directors of Blackburn Polk Marketing Services of Canada,
and Carfax, USA. He received his BA degree from the University of San Diego in
1967.
-17-
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
James T. Womble, a Director of the Company since April 1999, has been a Director
of Acxiom Corporation since 1975, and is Division Leader of its Financial
Services Division. This division has locations in Conway and Little Rock,
Arkansas, Chicago, Phoenix, and Memphis and manages relationships around the
world with Acxiom's clients in the credit card, retail banking and insurance
industries. Prior to joining Acxiom, Mr. Womble worked for IBM as a systems
engineer and marketing representative. He holds a degree in civil engineering
from the University of Arkansas.
David Blackledge was appointed Vice President of Sales in December 1999. Prior
to joining the Company, he was Business Development Manager of VERITAS Software
Corporation, an industry leading enterprise-class application storage management
software provider. Before VERITAS, he served as International Development
Manager of Triteal Corporation, a start-up systems provider. He also has served
as Albuquerque District Manager, Sun Microsystems, Inc. and Senior Account
Manager with Federal Data of Bethesda, Md. Mr. Blackledge received a BS degree
(with honors) in Management/Marketing from Pennsylvania State University and an
MBA degree (with honors) in Finance/International Business from George
Washington University.
William K. Williams was appointed Vice President and Chief Financial Officer in
April 1998. Prior to his joining the Company, Mr. Williams worked as an
independent financial consultant with emerging growth companies, served as Vice
President of Business Development for a Fortune 500 company and held various
financial management positions at DuPont, including four years as Director of
Finance for Japan operations. Mr. Williams joined DuPont upon earning an MBA
degree in Finance at the University of Maryland.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information under the caption "Compensation of Executive Officers and Directors"
in the Company's definitive proxy statement for the 1999 annual meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Company's proxy statement for the 1999 annual meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Company's proxy statement for the 1999 annual meeting of Shareholders.
-18-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a) 1 and 2 Financial Statements and Schedules.
See "Index to Financial Statements and Schedule" on F-1.
(b) Reports on Form 8-K
October 5, 1999 and amended November 1, 1999
(c) Exhibits
The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parenthesis.
3.1 Articles of incorporation (2) (Exhibit 3.1).
3.2 Bylaws (2) (Exhibit 3.2).
3.3 Amendment to Articles of Incorporation. (7)
4.1 Specimen copy of stock certificate for shares
of Common Stock of the Registrant. (5)
4.2 Specimen copy of stock certificate for shares of Class A
Convertible Preferred Stock Series A (1) (Exhibit 4.2).
4.3 Specimen copy of stock certificate for shares of Class B
Preferred Stock (1) (Exhibit 4.3).
4.4 Restricted Common Stock Registration Rights
(1) (Exhibit 4.1).
4.5 Form of Common Stock Warrant (1) (Exhibit 4.4).
4.6 Form of Redeemable Common Stock Purchase Warrant
and Subscription Agreement (1) (Exhibit 4.5).
4.8 Specimen copy of stock certificate for shares
of Class A Convertible Preferred Stock Series C. (7)
**10.1 Employment Contract - Andrew E. Trolio (1) (Exhibit 10.1).
**10.1.1 Addendum to Employment Agreement - Andrew E. Trolio
Exhibit (8) Exhibit (10.1.1).
**10.1.2 Retirement Settlement Agreement - Andrew E. Trolio (10)
Exhibit (10.1.2).
**10.1.3 Modification to Retirement Settlement Agreement-Andrew E.
Trolio (10) Exhibit (10.1.3).
**10.4 Form of Common Stock Option (1) (Exhibit 10.6).
-19-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
**10.5 Sedona Corporation 1992 Long Term Incentive Plan
(3) (Exhibit 2.1 - Annex E).
10.7 Form of Selling Shareholder Agreement (4)(Exhibit 10.2).
10.9 Agreement between Sedona Corporation and
Michael A. Mulshine and Osprey Partners.)(6)(Exhibit 10.9)
10.9.1 Agreement between Sedona Corporation and
Michael A. Mulshine and Osprey Partners. (8)
(Exhibit 10.9.1)
10.9.2 Agreement between Sedona Corporation and
Michael A. Mulshine and Osprey Partners. (8)
(Exhibit 10.9.2)
10.9.3 Finders Fee Agreement between Sedona Corporation and Osprey
Partners and C&F Global Enterprises. (8)(Exhibit 10.9.3)
10.10 Facility Lease, 649 N. Lewis Rd., Limerick, PA.(8)
(Exhibit 10.10)
10.10.1 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA.
(8) (Exhibit 10.10.1)
10.10.2 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA.
(9) (Exhibit 10.10.2)
10.10.3 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA.
(10) (Exhibit 10.10.3)
**10.11 Employment Contract - Laurence L. Osterwise (8)
(Exhibit 10.11)
**10.12 Employment Contract - Richard L. Rex (8) (Exhibit 10.12)
**10.17 Employment Contract - Robert J. Griffin (9)
(Exhibit 10.17)
10.18 Promissory Note - Laurence L. Osterwise (10)
(Exhibit 10.18)
*10.19 Customer Information Management Systems Operating Agreement
Systems Operating Agreement (11) (Exhibit 10.19)
*23.1 Consent of Ernst & Young LLP (11) (Exhibit 23.1)
*23.2 Consent of BDO Seidman, LLP (11) (Exhibit (23.2)
*25.1 Power of attorney (included on the signature page to this
(Form 10-K) (11).
*99.1 Report of BDO Seidman, LLP (11) (Exhibit 99.1)
* Filed herewith.
** Executive Compensation Plans and Arrangements.
-20-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, as amended by Amendment
No. 1 on Form 8 dated June 12, 1992 and Amendment No. 2 on
Form 8 dated July 27, 1992.
(2) Filed as an Exhibit to the Company's Current report on Form
8-K dated June 15, 1992.
(3) Filed as an Exhibit to the Registration Statement on Form 8-K, filed
under the Securities Exchange Act of 1934, dated June 19, 1992.
(4) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 33-47127)
filed on July 2, 1992.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
(10) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
(11) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 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.
SEDONA CORPORATION
March 30, 2000 /S/ Marco A. Emrich
- ----------------------- -----------------------------------
DATE Marco A. Emrich
CHIEF EXECUTIVE OFFICER AND 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, in
the capacities and on the dates indicated.
Each person in so signing also makes and constitutes Laurence L. Osterwise,
Chairman of the Board of Directors, his true and lawful attorney-in-fact, in his
name, place and stead, to execute and caused to be filed with the Securities and
Exchange Commission, any or all amendments to this report.
<TABLE>
<CAPTION>
Signatures
<S> <C>
BY/S/ Laurence L. Osterwise Date March 30, 2000
-------------------------------------------------------- --------------
Chairman of the Board of Directors
BY /S/ R. Barry Borden Date March 30, 2000
---------------------------------------------- --------------
R. Barry Borden
Vice Chairman of the Board of Directors
BY /S/ Marco A. Emrich Date March 30, 2000
---------------------------------------------- --------------
Chief Executive Officer and President
BY /S/ William K. Williams Date March 30, 2000
-------------------------------------------------------- --------------
Chief Financial Officer and Vice President
Principal Financial and Accounting Officer
BY /S/ Michael A. Mulshine Date March 30, 2000
-------------------------------------------------------- --------------
Michael A. Mulshine
Director and Secretary
BY /S/ David S. Hirsch Date March 30, 2000
---------------------------------------------- --------------
David S. Hirsch
Director
BY /S/ Jack Pellicci Date March 30, 2000
---------------------------------------------- --------------
Jack Pellicci
Director
BY /S/ James C. Sargent Date March 30, 2000
---------------------------------------------- --------------
James C. Sargent
Director
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C>
BY /S/ Robert M. Shapiro Date March 30, 2000
-------------------------------------------------------- --------------
Robert M. Shapiro
Director
BY /S/ James T. Womble Date March 30, 2000
----------------------------------------------------------- --------------
James T. Womble
Director
</TABLE>
-23-
<PAGE>
Index to Financial Statements and Schedule
Contents
Report of Independent Auditors...............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998...............F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1999.....................F-4
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1999.....................F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1999.....................F-9
Notes to Consolidated Financial Statements..................................F-11
All schedules have been omitted because they are inapplicable, not required, or
the required information is included elsewhere in the financial statements and
notes thereto.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
SEDONA Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of SEDONA
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of SEDONA Corporation and subsidiaries for the year ended December 31, 1997,
were audited by other auditors whose report dated March 13, 1998, except for
Note 14, which is dated March 27, 1998, expressed an unqualified opinion on
those statements prior to reclassification (see below).
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform our
audits 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 presentation of
the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of SEDONA
Corporation and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.
We also audited the reclassification of the 1997 statements of operations and
cash flows as a result of the discontinued operations described in Note 2. In
our opinion, the reclassification adjustments are appropriate and have been
properly applied.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 16, 2000
F-2
<PAGE>
SEDONA Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash $ 893 $ 798
Accounts receivable -- 5
Prepaid expenses and other current assets 91 139
-------- --------
Total current assets 984 942
Property and equipment, net of accumulated depreciation
and amortization 377 465
Software development costs, net 660 325
Net assets of discontinued operations 183 2,703
-------- --------
Total assets $ 2,204 $ 4,435
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 508 $ 431
Dividend payable 139 259
Deferred revenue 24 2
Current maturities of long-term debt 51 71
-------- --------
Total current liabilities 722 763
Long-term debt, less current maturities 51 60
Deferred revenue and other -- 155
-------- --------
Total long-term liabilities 51 215
-------- --------
Total liabilities 773 978
Stockholders' equity:
Class A convertible preferred stock
Authorized shares - 1,000,000 (liquidation preference
$3,000,000and $5347)
Series A, par value $2.00,
Issued and outstanding 500,000 shares 1,000 1,000
Series B, par value $2.00,
Issued and outstanding shares - 1,000 and none in 1999
and 1998, respectively 1,000 --
Series E, par value $1,000,
Issued and outstanding shares - none and 4,347 in 1999
and 1998, respectively -- 4,347
Series F, par value $2.00
Issued and outstanding shares - 1,000 and none in 1999
and 1998, respectively 1,000 --
Common stock, par value $0.001
Authorized shares - 50,000,000
Issued and outstanding shares - 24,086,450 and 19,927,789
in 1999 and 1998, respectively 24 20
Additional paid-in-capital 31,531 24,977
Accumulated deficit (33,071) (26,834)
Notes receivable, related parties (53) (53)
-------- --------
Total stockholders' equity 1,431 3,457
-------- --------
Total liabilities and stockholders' equity $ 2,204 $ 4,435
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SEDONA Corporation and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Licenses and related services $ 244 $ 15 $ 260
------------ ------------ ------------
Total revenues 244 15 260
Cost of goods sold 204 387 996
------------ ------------ ------------
Gross profit/(loss) 40 (372) (736)
Expenses:
General and administrative 2,084 2,447 2,301
Sales and marketing 919 881 1,350
Research and development 346 239 824
------------ ------------ ------------
Total operating expenses 3,349 3,567 4,475
------------ ------------ ------------
(3,309) (3,939) (5,211)
Other income (expense):
Interest income 80 122 218
Interest expense (35) (53) (294)
Other -- (9) (14)
------------ ------------ ------------
Total other income (expense) 45 60 (90)
------------ ------------ ------------
Loss from continuing operations before provision
for income taxes (3,264) (3,879) (5,301)
Income taxes -- -- --
------------ ------------ ------------
Loss from continuing operations (3,264) (3,879) (5,301)
Discontinued operations:
Loss from operations of discontinued Tangent
Imaging Systems and Technology Resource
Centers (2,973) (1,633) (2,216)
------------ ------------ ------------
Net loss from continuing and discontinued
operations before extraordinary item (6,237) (5,512) (7,517)
Extraordinary item
Loss on early extinguishment of debt (net of
tax of $0) -- -- (300)
------------ ------------ ------------
Net loss (6,237) (5,512) (7,817)
Preferred stock dividends (601) (419) (182)
Preferred stock issuance charges -- (1,173) --
------------ ------------ ------------
Net loss applicable to common stockholders $ (6,838) $ (7,104) $ (7,999)
============ ============ ============
Basic and diluted loss from continuing
operations applicable to common shares $ (0.18) $ (0.28) $ (0.34)
Extraordinary items per share -- -- (.02)
Basic and diluted net loss from discontinued
operations applicable to common shares
(0.13) (0.08) (0.13)
------------ ------------ ------------
$ (0.31) $ (0.36) $ (0.49)
============ ============ ============
Basic and diluted weighted average common shares
outstanding 22,307,342 19,497,493 16,288,296
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
SEDONA Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A Preferred Class A Preferred
Stock Series A Stock Series B
Shares Amount Shares Amount
------- -------- ----- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 500,000 $ 1,000 -- $ --
Stock warrants/options issued for consulting services -- -- -- --
Conversion of debt into common stock -- -- -- --
Conversion of debt into preferred stock -- -- -- --
Conversion of preferred stock into common stock -- -- -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Expenses incurred related to conversion of convertible debt -- -- -- --
Expenses incurred related to issuance of common stock -- -- -- --
Preferred stock dividends -- -- -- --
Repayment of notes receivable -- -- -- --
Issuance of stock warrants - convertible debt -- -- -- --
Net loss, year ended December 31, 1997 -- -- -- --
------- -------- ----- --------
Balance, December 31, 1997 500,000 1,000 -- --
Stock warrants/options issued for consulting services -- -- -- --
Issuance of preferred stock -- -- -- --
Conversion of debt into common stock -- -- -- --
Conversion of preferred stock into common stock -- -- -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Cancellation of common stock -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- -- --
Preferred stock dividends -- -- -- --
Repayment of notes receivable -- -- -- --
Net loss, year ended December 31, 1998 -- -- -- --
------- -------- ----- --------
Balance, December 31, 1998 500,000 1,000 -- --
Stock warrants/options issued for consulting services -- -- -- --
Issuance of preferred stock -- -- 1,000 1,000
Redemption on preferred stock with cash -- -- -- --
Conversion of preferred stock into common stock -- -- -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Issuance of common stock -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- -- --
Expenses incurred related to issuance of common stock
Preferred stock dividends -- -- -- --
Net loss, year ended December 31, 1999 -- -- -- --
------- -------- ----- --------
Balance, December 31, 1999 500,000 $ 1,000 1,000 $ 1,000
======= ======== ===== ========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Class A Preferred Class A Preferred
Stock Series C Stock Series D
Shares Amount Shares Amount
----- -------- ----- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 125,000 $ 1,250 -- $ --
Stock warrants/options issued for consulting services -- -- -- --
Conversion of debt into common stock -- -- -- --
Conversion of debt into preferred stock -- -- 2,990 2,990
Conversion of preferred stock into common stock (125,000) (1,250) -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Expenses incurred related to conversion of convertible debt -- -- -- --
Expenses incurred related to issuance of common stock -- -- -- --
Preferred stock dividends -- -- -- --
Repayment of notes receivable -- -- -- --
Issuance of stock warrants - convertible debt -- -- -- --
Net loss, year ended December 31, 1997 -- -- -- --
----- -------- ----- --------
Balance, December 31, 1997 -- -- 2,990 2,990
Stock warrants/options issued for consulting services -- -- -- --
Issuance of preferred stock -- --
Conversion of debt into common stock -- -- -- --
Conversion of preferred stock into common stock -- -- (2,990) (2,990)
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Cancellation of common stock -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- -- --
Preferred stock dividends -- -- -- --
Repayment of notes receivable -- -- -- --
Net loss, year ended December 31, 1998 -- -- -- --
----- -------- ----- --------
Balance, December 31, 1998 -- -- -- --
Stock warrants/options issued for consulting services -- -- -- --
Issuance of preferred stock -- --
Redemption on preferred stock with cash -- -- -- --
Conversion of preferred stock into common stock
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Issuance of common stock -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- -- --
Expenses incurred related to issuance of common stock
Preferred stock dividends -- -- -- --
Net loss, year ended December 31, 1999 -- -- -- --
----- -------- ----- --------
Balance, December 31, 1999 -- $ -- -- $ --
===== ======== ===== ========
</TABLE>
F-6
<PAGE>
SEDONA Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A Preferred Class A Preferred
Stock Series E Stock Series F
Shares Amount Shares Amount
------ --------- ----- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 -- $ -- -- $ --
Stock warrants/options issued for consulting services -- -- -- --
Conversion of debt into common stock -- -- -- --
Conversion of debt into preferred stock -- -- -- --
Conversion of preferred stock into common stock -- -- -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Expenses incurred related to conversion of convertible debt -- -- -- --
Expenses incurred related to issuance of common stock -- -- -- --
Preferred stock dividends -- -- -- --
Repayment of notes receivable -- -- -- --
Issuance of stock warrants - convertible debt -- -- -- --
Net loss, year ended December 31, 1997 -- -- -- --
------ --------- ----- -----------
Balance, December 31, 1997 -- -- -- --
Stock warrants/options issued for consulting services -- -- -- --
Issuance of preferred stock 5,200 5,200 -- --
Conversion of debt into common stock -- -- -- --
Conversion of preferred stock into common stock (853) (853) -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Cancellation of common stock -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- -- --
Preferred stock dividends -- -- -- --
Repayment of notes receivable -- -- -- --
Net loss, year ended December 31, 1998 -- -- -- --
------ --------- ----- -----------
Balance, December 31, 1998 4,347 4,347 -- --
Stock warrants/options issued for consulting services -- -- -- --
Issuance of preferred stock -- -- 1,000 1,000
Redemption on preferred stock with cash (2,313) (2,313) -- --
Conversion of preferred stock into common stock (2,034) (2,034) -- --
Exercise of common stock options -- -- -- --
Exercise of common stock warrants -- -- -- --
Issuance of common stock -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- -- --
Expenses incurred related to issuance of common stock -- -- -- --
Preferred stock dividends -- -- -- --
Net loss, year ended December 31, 1999 -- -- -- --
------ --------- ----- -----------
Balance, December 31, 1999 -- $ -- 1,000 $ 1,000
====== ========= ===== ===========
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Notes
Additional Receivable,
Common Stock Paid-In Accumulated Related
Shares Amount Capital Deficit Parties
---------- ------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 14,780,766 $ 15 $15,295 $ (13,323) $(1,681)
Stock warrants/options issued for consulting services -- -- 124 -- --
Conversion of debt into common stock 683,020 1 1,954 -- --
Conversion of debt into preferred stock -- -- -- -- --
Conversion of preferred stock into common stock 949,352 1 1,451 -- --
Exercise of common stock options 182,917 -- 295 -- --
Exercise of common stock warrants 1,474,264 1 2,864 -- --
Expenses incurred related to conversion of convertible debt -- -- (45) -- --
Expenses incurred related to issuance of common stock -- -- (183) -- --
Preferred stock dividends -- -- -- (182) --
Repayment of notes receivable -- -- -- -- 354
Issuance of stock warrants - convertible debt -- -- 400 -- --
Net loss, year ended December 31, 1997 -- -- -- (7,817) --
---------- ------- ------ -------- ------
Balance, December 31, 1997 18,070,319 18 22,155 (21,322) (1,327)
Stock warrants/options issued for consulting services -- -- 149 -- --
Issuance of preferred stock -- -- -- -- --
Conversion of debt into common stock 139,246 -- 324 -- --
Conversion of preferred stock into common stock 2,198,321 2 3,998 -- --
Exercise of common stock options 68,333 -- 68 -- --
Exercise of common stock warrants 143,750 -- 156 -- --
Cancellation of common stock (15,000) -- -- -- --
Expenses incurred related to issuance of preferred stock -- -- (200) -- --
Preferred stock dividends -- -- (419) -- --
Repayment of notes receivable (677,180) -- (1,254) -- 1,274
Net loss, year ended December 31, 1998 -- -- -- (5,512) --
---------- ------- ------ -------- ------
Balance, December 31, 1998 19,927,789 20 24,977 (26,834) (53)
Stock warrants/options issued for consulting services -- -- 95 -- --
Issuance of preferred stock -- -- -- -- --
Redemption on preferred stock with cash -- -- -- -- --
Conversion of preferred stock into common stock 1,271,832 1 2,171 -- --
Exercise of common stock options 181,666 -- 146 -- --
Exercise of common stock warrants 1,441,919 2 2,259 -- --
Issuance of common stock 1,263,244 1 2,525 -- --
Expenses incurred related to issuance of preferred stock -- -- (30) -- --
Expenses incurred related to issuance of common stock -- -- (11) --
Preferred stock dividends -- -- (601) -- --
Net loss, year ended December 31, 1999 -- -- -- (6,237) --
---------- ------- ------ -------- ------
Balance, December 31, 1999 24,086,450 $ 24 $ 31,53 $(33,071) $ (53)
========== ======= ======= ======== ======
</TABLE>
F-8
See accompanying notes.
<PAGE>
SEDONA Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net loss from continuing operations $(3,264) $(3,879) $(5,601)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 343 177 144
Increase inventory reserves -- 297 --
Stock option based compensation 95 149 124
Loss on a disposition of property and
equipment, net -- 16 --
Interest expense and write-off of deferred
debt costs -- -- 419
Changes in operating assets and liabilities:
Accounts receivable 5 4 (5)
Inventories -- (197) (114)
Prepaid expenses and other current
assets 48 127 (218)
Other noncurrent assets -- (2) --
Accounts payable and accrued expenses 77 139 478
Deferred revenue and other (148) 153 (119)
------- ------- -------
Net cash used in continuing operating activities
(2,844) (3,016) (4,892)
Net loss from discontinued operations (2,973) (1,633) (2,216)
Adjustments to reconcile income from discontinued
operations to net cash used in discontinued
operations:
Cash flow related to results of
discontinued operations 1,568 (1,064) (401)
Loss on sale of discontinued operations 235 -- --
Other reconciling items 575 679 176
------- ------- -------
Net cash used in discontinued operations (595) (2,018) (2,441)
------- ------- -------
Net cash used in operating activities (3,439) (5,034) (7,333)
Investing activities
Purchase of property and equipment (31) (231) (591)
Proceeds from sale of property and equipment -- 7 --
Proceeds from disposal of certain assets of
discontinued operations 105 -- --
Increase in capitalized software development costs (507) (333) --
------- ------- -------
Net cash used in investing activities (433) (557) (591)
</TABLE>
F-9
<PAGE>
SEDONA Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
1999 1998 1997
------- ------- -------
Financing activities
Proceeds from issuance of convertible
debt and warrants $ -- $ -- $ 5,200
Payment of preferred stock dividends (583) (135) (289)
Repayments of notes receivable, related parties -- 29 324
Changes in long-term obligations, net (29) (40) (112)
Proceeds from issuance of preferred
stock, net 1,970 5,000 (183)
Repurchase of Series E preferred stock
for cash (2,313) -- --
Payment of expenses, convertible debt -- -- (45)
Proceeds from the issuance of common stock, net 2,515 -- --
Proceeds from exercise of common stock
warrants/options 2,407 225 3,162
Proceeds from issuance of long-term debt -- -- 96
------- ------- -------
Net cash provided by financing activities 3,967 5,079 8,153
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 95 (512) 229
Cash and cash equivalents, beginning
of year 798 1,310 1,081
------- ------- -------
Cash and cash equivalents, end of year $ 893 $ 798 $ 1,310
======= ======= =======
See accompanying notes.
F-10
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Years ended December 31, 1999, 1998 and 1997
1. Accounting Policies
Description of Business
SEDONA Corporation develops, markets, services and supports enterprise scale
Internet application solutions that enable organizations to more quickly and
precisely visualize new and changing customer information, greatly enhancing
their customer acquisition, intimacy, satisfaction and retention capabilities.
During April 1999, the Company announced a name change of the corporation to
SEDONA Corporation from Scan-Graphics, Inc. and began trading under the NASDAQ
Symbol "SDNA."
Principles of Consolidation
The Company's consolidated financial statements include the accounts of its
wholly owned subsidiaries, SEDONA(R)GeoServices, Inc. and Technology Resource
CentersSM, Inc. During 1999, the Company discontinued and subsequently sold the
operations related to Tangent Imaging Systems, Inc. and Technology Resource
Centers, Inc., two wholly-owned subsidiaries. The financial condition and
results from operations of these entities are reflected in the financial
statements as discontinued operations for all years presented. See Note 2. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-11
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Inventories
Inventories are included in discontinued operations and are valued at the lower
of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
respective assets which range from three to seven years.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents, accounts receivable and notes receivable. The
Company's policy is to limit the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as being
creditworthy. Concentration of credit risk, with respect to accounts and notes
receivable, is limited due to the Company's credit evaluation process. The
Company does not generally require collateral from its customers. The Company's
customers consist primarily of corporate entities.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts and notes
receivable, accounts payable and short-term debt approximate fair value because
of the immediate or short-term maturity of these financial instruments.
F-12
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Software Development Costs
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. All costs incurred in the
research and development of new software products are expensed as incurred until
technological feasibility has been established. The costs incurred for testing
and coding of the new software products are capitalized. Amortization of such
costs is the greater of the amount capitalized using (a) the ratio that current
gross revenues for a product bear to the total of current and anticipated future
gross revenues of that product or (b) the straight-line method over the
remaining estimated economic life of the product not to exceed three years.
Amortization commences when the product is available for general release to
customers.
During 1999 and 1998, the Company capitalized $507 and $333 of software
development costs related to the Company's business geographics software. No
software development costs were capitalized in 1997. During 1999 and 1998, this
software became available for sale. During 1999, 1998 and 1997, $166, $18, and
$0 was charged to expense relating to amortization of software development
costs.
Revenue Recognition
Revenues from the sale of software licenses are recognized upon shipment of
software when persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Revenue from royalty agreements is recorded when earned. Revenue from Services
are recognized as the services performed.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax
liabilities are recognized for taxable temporary differences and deferred tax
assets are recognized for deductible temporary differences and tax loss and
credit carryforwards. A valuation allowance is established to reduce deferred
tax assets if some, or all, of such deferred tax assets are not likely to be
realized.
F-13
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Net Loss Per Common Share
Basic loss per share is calculated by dividing the net loss by the weighted
average common shares outstanding for the period. Diluted earnings per share is
calculated by dividing the net loss by the weighted average common shares
outstanding plus the dilutive effect of stock options, warrants and convertible
securities. As the Company incurred losses in 1999, 1998 and 1997, the effect of
stock options, warrants and convertible securities were antidilutive and
therefore not included in the calculation of diluted earnings per share.
Stock-Based Compensation
The Company follows APB Opinion No. 25, Accounting for Stock Issued to
Employees, ("APB 25") and the related interpretations in accounting for its
stock-based compensation plans. Note 8 includes required disclosures and pro
forma information provided under FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123").
Under APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying common stock at the date of
grant, no compensation expense is recognized.
F-14
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of a Business Enterprise ("SFAS 131"), which
establishes standards for public enterprises' reporting of information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate financial
information is available and that is evaluated regularly by the chief operating
decisionmaker in deciding how to allocate resources and in assessing
performance. At December 31, 1999, substantially all of the Company's continuing
operations revenues were derived from the sale of its application solutions
software.
2. Discontinued Operations
As earlier reported in Form 8-K filed on October 1, 1999, the Company's Board of
Directors decided in July 1999 to sell the two divisions of the Company which
were not part of its realigned strategy of focusing on the development of its
Internet application solutions business. In connection with this decision, the
Company recorded $719 in charges and reserves primarily for inventory,
receivables and severance. In the third quarter 1999, the Company completed the
sale of the assets of the Technology Resource Centers to Diversified
Technologies, Inc. for a $35 note receivable and the sale of the Tangent Imaging
Systems operation to Colortrac, Inc. was completed for consideration of $105 in
cash and assumption of $61 in liabilities. These transactions resulted in an
additional loss of $235.
The Company may receive additional proceeds related to future sales of products
and technology in connection with these transactions.
As of December 31, 1999, the Company had remaining inventory with a realizable
value of $82 (net of a valuation allowance of $623, accounts receivable of $336
(net of a bad debt allowance of $75), and remaining liabilities of $235 related
to severance and miscellaneous payables. The Company believes these reserves are
sufficient to cover all remaining liabilities or asset valuations.
F-15
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
2. Discontinued Operations (continued)
Revenues from the discontinued operations were $2,567, $6,162 and $4,567,
respectively, for the years ended December 31, 1999, 1998 and 1997 and
represented substantially all of the Company's revenues in those periods. Losses
for 1999, 1998 and 1997 were $2,973, $1,633 and $2,216, respectively. The
increased losses from discontinued operations in 1999 reflect the transaction
charges and reserves associated with the decision to discontinue the operations
and the completion of their sales as well as substantially lower sales activity
in 1999 periods when compared to 1998.
For all periods presented, these financial statements reflect the results of the
Tangent Imaging Systems and Technology Resource Centers as discontinued
operations.
3. Property and Equipment
Property and equipment in continuing operations consist of the following:
December 31
1999 1998
----------------
Machinery and equipment $636 $605
Equipment under capital lease 94 36
Furniture and fixtures 72 72
Leasehold improvements 9 9
Purchased software 76 76
----------------
887 798
Less accumulated depreciation and amortization 510 333
----------------
$377 $465
================
Depreciation and amortization expense related to property and equipment and
equipment under capital lease was $177 in 1999, $155 in 1998, and $145 in 1997.
F-16
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
4. Long-Term Debt
Long-term debt consists of the following:
December 31
1999 1998
----------------
Capital lease obligations $ 69 $ 26
Other 33 105
----------------
102 131
Less current maturities 51 71
----------------
Long-term debt $ 51 $ 60
================
Contractual maturities of the long-term debt are as follows: 2000 - $51; 2001 -
$19; 2002 - $16; 2003 - $15; thereafter $1.
5. Convertible Debentures
In connection with a $3,100 private placement purchase agreement in March 1996,
the Company sold 62 units of convertible debentures. Each unit consisted of a
$50, 8% convertible note due March 28, 1997, 19,355 "A" warrants and 19,355 "B"
warrants. The warrants, which were immediately exercisable, had an estimated
value, based on an appraisal, of $270, which was reflected as a debt discount.
During 1996, all of the debentures were converted into 2,259,056 shares of
common stock. The $270 debt discount was charged to interest expense. The "A"
warrants were exercisable at $3.00 per share or, if less, the lowest price per
share at which any conversion shall have occurred under any of the convertible
notes. The "B" warrants were exercisable at $4.00 per share. All of the
1,200,010 "A" warrants were exercised by December 31, 1998. During 1998 and
1997, -0-, and 437,558, respectively, of the total 1,200,010 "B" warrants were
exercised. All remaining "B" warrants expired on March 26, 1999.
F-17
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
5. Convertible Debentures (continued)
In connection with a $5,200 private placement purchase agreement completed
during June 1997, the Company sold 52 units of convertible debentures. Each unit
consisted of a $100, 7% convertible note due between May and June 1999 and a
warrant to purchase 17,308 shares of common stock. The notes and any accrued
interest were convertible within 90 days at a price per share equal to the
lesser of $7.00 per share or the average closing bid price for the five days
preceding conversion, or if the conversion price was less than $4.00 per share,
at a 10% discount to the average closing bid price for the five days prior to
conversion. If the conversion was greater than $4.00, but less than $7.00, the
discount was increased by 1% for every $.20 increase in the conversion price.
Debenture conversions were limited to $520 in any month. The warrants were
exercisable immediately at $4.00 per share and expire June 1, 2001. The warrants
had an estimated fair value, based on an appraisal of $400. This amount was
reflected as a debt discount. Upon the conversion of the notes to stock, $100 of
this amount was charged to interest expense in the 1997 statement of operations
while the remaining $300 was reflected as extraordinary loss on early
extinguishment of debt. From August 1997 through December 1997, note holders
converted $1,900 or 19 units of convertible debentures, plus accrued interest
thereon, into 683,020 shares of common stock. During December 1997, note holders
converted $2,990 or 29.9 units of convertible debentures, plus accrued interest
thereon, into 2,990 shares of Class A Series D preferred stock. Additionally,
during January 1998, note holders converted the remaining $311 or 3.1 units of
convertible debentures, plus accrued interest thereon, into 139,246 shares of
common stock.
F-18
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity
Class A Convertible Preferred Stock
Series A, B, C, D, E and F
Class A preferred stock is issuable in various series and is convertible in
accordance with the terms of the issued series. The Board of Directors has the
authority to fix by resolution all other rights. The Class A Series A preferred
shares pay quarterly dividends at the rate of twelve percent (12%) per annum,
have cumulative rights and have a liquidation preference at the par value of the
preferred shares. Each share is convertible at the election of the holder into
one share of common stock at any time. Each holder has the same right to vote
each share on all corporate matters as the holder of one share of common stock.
On March 30, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Series B convertible
preferred stock. After a period of 12 months from March 30, 1999 (anniversary
date), the investor can convert the preferred stock to common stock at the lower
of: (1) $2.30 (the "Closing Price"), or (2) 100% of the common stock's average
last trade price during the 25 trading days preceding the Conversion Date (the
"Conversion Date Price"). In no event can the conversion price be below $1.15.
The conversion amount shall be the principal amount of the preferred stock being
converted, plus an 8% premium accruing from the closing date to the conversion
date. In addition, if the common stock's average last trade price during the 25
days preceding the anniversary date is less than 145% of the Closing Price or
$3.34, the investor shall also be entitled to five-year warrants under a
variable formula such that the lower the conversion price, the higher the number
of warrants. Additional warrants may be issued to purchase a maximum of
1,873,749 Common Shares under this agreement. Mandatory conversion of the
preferred stock shall occur on the third anniversary after closing using the
conversion terms referenced above. As of March 17, 2000, the 25-day average
price was $5.69.
During 1997, the remaining 125,000 shares of Class A Series C preferred stock
and the related dividends payable of $202 were converted to 949,352 shares of
common stock.
F-19
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity (continued)
During 1998, the remaining 2,990 shares of Class A Series D preferred stock and
the related accrued dividends payable of $3,122 were converted into 1,672,267
shares of common stock.
During March and April 1998, the Company issued a $5,200 private placement of
its securities which consisted of 52 units of $100, 7% Class A Series E
convertible preferred stock (Series E Preferred) and a warrant to purchase
28,850 shares of common stock, exercisable at $3.00. The Series E Preferred and
any accrued dividends were convertible at a price per share equal to the lesser
of $3 per share or at a 15% discount to the average closing bid price for the
five days preceding conversion. If the conversion price is $2 a share or less,
the Company may elect to redeem all or part of the Series E Preferred and
accrued dividends at the par value of the Series E Preferred, plus the
conversion discount. Conversions were restricted to 10% per month on a
cumulative monthly basis.
In connection with the Series E Preferred offering, the Company recorded an
initial noncash dividend of $917 as a result of the difference between the
conversion price and the quoted market price of the Company's common stock at
the date of issuance. This imputed noncash dividend has been included in the net
loss applicable to common stockholders.
On August 7, 1998, the Series E Preferred investors agreed to new terms
providing for no conversions of Series E Preferred from August 1, 1998 through
January 31, 1999. Thereafter, up to 25% of the remaining Series E Preferred may
be converted per month per holder. Additionally, the Company agreed to adjust
the exercise price of the 1,500,200 warrants issued to the investors from $3.00
per share to $2.25 per share. The warrants could not be exercised prior to
February 1, 1999. In addition, the Company issued 1,254,132 new warrants to the
investors at an exercise price of $4.00 per share. These new warrants became
exercisable on February 1, 1999. The Company recorded a noncash dividend of $256
as a result of the value of the consideration given to the Series E Preferred
investors. This noncash dividend has been included in the net loss applicable to
common stockholders. Previous to these new terms, $532 of Series E Preferred and
accrued dividends were converted into 410,324 shares of common stock.
F-20
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity (continued)
On May 24, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Series F convertible
preferred stock. After a period of 12 months from May 24, 1999 (anniversary
date), the investor can convert the preferred stock to common stock at the lower
of: (1) $1.41 (the "Closing Price"), or (2) 100% of the common stock's average
last trade price during the 25 trading days preceding the Conversion Date (the
"Conversion Date Price"). In no event can the conversion price be below $1.00.
The conversion amount shall be the principal amount of the preferred stock being
converted plus an 8% premium accruing from the closing date to the conversion
date. In addition, if the common stocks average last trade price during the
25 days preceeding the anniversary is less than 145%of the Closing Price or
$2.04, the investor shall also be entitled to five year warrants under a
variable formula such that the lower the conversion price, the higher the number
of warrants. Additional warrants may be issued to purchase a maximum of
1,646,178 Common Shares under this agreement. Mandatory conversion of the
preferred stock shall occur on the third anniversary after closing. At
March 17, 2000 the preceding 25 day average closing price was $5.69.
During 1999, 2,034 shares of Class A Series E preferred stock and the related
dividends payable of $139 were converted to 1,271,832 shares of common stock. On
September 16, 1999, SEDONA redeemed of all remaining Class A, Series E
convertible preferred stock, plus one-third of associated warrants to purchase
shares of common stock exercisable at $2.25 per share, and one-third of
associated warrants to purchase shares of common stock.
The redemption price for each share of the Series E preferred stock and the
associated warrants equaled 110% of the principal amount of $1,000 per share of
the series E preferred stock plus all of the dividends that had accrued through
September 15, 1999. The Company recorded a non-cash dividend of $138 as a result
of the 10% premium paid to the Series E holders. This non-cash dividend has been
included in the net loss applicable to common shareholders. All of the shares
underlying the remaining 914,263 warrants exercisable at $4.00 per share were
registered for resale under this an S-3 filing in October 1999.
In total, cash of $2,776 was utilized in this program to redeem the final
remaining 2,313 shares and pay $463 in accrued dividends and redemption premium
regarding the retirement of the Class A Series E preferred stock referenced
above. The Company funded the majority portion of the repurchase of the Series E
preferred stock with proceeds of a private placement of $2,376 of the
securities. Each unit sold in the private placement consisted of 50,000 shares
of common stock and warrants to purchase 44,444 shares of common stock at an
exercise price of $2.25 per share. All of these shares of common stock, as well
as the shares of common stock issuable upon the exercise of these warrants, were
registered for resale under an October 1999 S-3 filing.
F-21
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity (continued)
Common Equity
On August 25, 1999, SEDONA sold 1,142,858 shares of its common stock through a
negotiated partial exercise of an outstanding warrant by its holder and realized
total net proceeds of approximately $2,000. The outstanding warrant originally
permitted the holder to acquire 2,100,000 shares of our common stock at an
exercise price of $4.00 per share. After considering needs for working capital
and additional funds that were required to repurchase the Class A Series E
preferred stock described above, SEDONA negotiated with the warrant holder to
permit partial exercise of the warrant at an exercise price of $1.75 per share.
The portion of the proceeds not used to repurchase the Class A Series E
preferred stock was used for working capital needs.
7. Promissory Notes
During December 1996, 1,099,300 options and warrants were exercised for $1,681
by certain officers and directors of the Company in exchange for promissory
notes and promissory demand notes aggregating $1,681. The notes bear an annual
interest rate of 8.25%. The promissory notes, together with accrued interest,
have maturity dates ranging from July 1998 through July 2000. The notes are
secured by shares of the Company's common stock. During 1998 and 1997,
promissory demand notes totaling $1,274 and $354, respectively, were satisfied
by either cash payments to the Company or return of the shares.
8. Stock Options and Warrants
Long-Term Incentive Plan
During 1992, the stockholders of the Company approved a Long-Term Incentive Plan
for the issuance of options for the purchase of up to 1,000,000 restricted
common stock shares in the aggregate, or such other number of shares as are
subsequently approved by the Company's stockholders. The shares, which were
related to the unexercised or undistributed portion of any terminated, expired
or forfeited award, will also be made available for distribution in connection
with future grants under the Plan. During 1997, the Plan was amended to increase
the number of options available for future grants to
F-22
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants
3,000,000. The Long-Term Incentive Plan provides for the granting of both
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986, and nonqualified stock options which do not so qualify.
Unless the Plan is terminated earlier by the Board of Directors, the Plan will
terminate in March 2002. At December 31, 1999, 1998 and 1997, there were 90,190,
939,251, and 915,502 options available for future grant.
Options outstanding under the Long-Term Incentive Plan have been granted to
officers, directors, employees, and others and expire between July 2000 and
December 2009. All options were granted at or above the fair market value on the
grant date.
Transactions under this Plan were as follows:
Weighted
Average
Shares Exercise Price
-------------------------
Outstanding at December 31, 1996 1,364,309 $2.20
Canceled or expired (112,750) 2.30
Granted 573,717 3.09
Exercised (182,917) 1.62
-------------------------
Outstanding at December 31, 1997 1,642,359 2.57
Canceled or expired (422,000) 2.94
Granted 445,250 2.22
Exercised (68,333) 1.00
-------------------------
Outstanding at December 31, 1998 1,597,276 2.44
Canceled or expired (335,939) 2.46
Granted 1,085,000 1.71
Exercised (181,666) .80
-------------------------
Outstanding at December 31, 1999 2,164,671 $2.19
=========================
F-23
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
<TABLE>
<CAPTION>
Weighted
Exercise Price Average
Options Shares Range Per Share Exercise Price
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Exercisable at year-end
1997 912,360 $0.47 to $4.00 $2.30
1998 1,003,944 $0.47 to $4.00 $2.36
1999 1,051,089 $1.00 to $4.00 $2.61
The following table summarizes information about stock options outstanding at
December 31, 1999:
</TABLE>
<TABLE>
<CAPTION>
Ranges Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Range of exercise prices $1.00 to $1.75 $2.00 to $2.69 $3.00 to $4.00 $1.00 to $4.00
Options outstanding 892,663 625,250 646,758 2,164,671
Weighted average remaining
contractual life (years) 8.4 7.4 4.4 6.9
Weighted average exercise price $1.41 $2.32 $3.13 $2.19
Exercisable 149,914 346,917 554,258 1,051,089
Weighted average exercise price $1.18 $2.40 $3.14 $2.61
</TABLE>
F-24
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
Warrants
Warrants outstanding have been granted to officers, directors, stockholders and
others to purchase common stock at prices ranging from $1.00 to $4.00 per share
and expiring between July 2000 and November 2009. All warrants were granted at
or above the fair market value on the grant date. Transactions under the plan
were as follows:
Weighted
Average
Shares Exercise Price
-------------------------------
Outstanding at December 31, 1996 4,989,726 $2.30
Canceled or expired (793,598) 3.13
Granted 3,626,473 3.94
Exercised (1,474,264) 1.94
-------------------------------
Outstanding at December 31, 1997 6,348,337 3.22
Canceled or expired (24,500) 2.00
Granted 3,691,332 2.88
Exercised (187,500) 1.07
-------------------------------
Outstanding at December 31, 1998 9,827,669 3.11
Canceled or expired (1,225,936) 3.36
Granted 2,322,872 2.20
Exercised (1,395,169) 1.59
-------------------------------
Outstanding at December 31, 1999 9,529,436 $2.58
===============================
<TABLE>
<CAPTION>
Weighted
Exercise Price Average
Warrant Shares Range Per Share Exercise Price
-------------------------------------------------------------
<S> <C> <C> <C>
Exercisable at year-end
1997 4,698,731 $0.38 to $4.00 $3.56
1998 7,308,457 $0.38 to $4.00 $3.23
1999 7,673,072 $1.00 to $4.00 $2.78
</TABLE>
F-25
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
During 1999, 1998 and 1997, 85,000, 387,000 and 311,457 warrants, respectively,
were issued to non-employees for certain consulting services, and in some
instances, had contingent vesting provisions based on achievement of certain
performance service levels. The 1999, 1998 and 1997 statements of operations
reflects charges of $95, $149, and $124, respectively, for those non-employee
stock warrants and options where such service levels were performed.
During 1999, 1998 and 1997, 668,888, 550,000 and 315,000 warrants, respectively,
were issued to employees in lieu of compensation. These warrants were issued at
exercise prices at or above fair market value at the date of grant and therefore
there were no charges to earnings.
The following table summarizes information about stock warrants outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Ranges Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Range of exercise prices $1.00 to $1.75 $2.00 to 2.38 $2.50 to $4.00 $1.00 to $4.00
Outstanding 1,938,238 3,557,962 4,033,236 9,529,436
Weighted average remaining
contractual life (years) 1.7 4.7 3.0 3.4
Weighted average exercise price $1.41 $2.22 $3.47 $2.58
Exercisable 1,139,642 2,732,962 3,800,468 7,673,072
Weighted average exercise price $1.66 $2.22 $3.51 $2.78
</TABLE>
The Company is obligated to purchase 422,270 warrants from five (5) employees of
the Company in the event of change of control of the Company or termination of
employment for breach of contract or convenience at a cash purchase price equal
to the amount of the aggregate fair market value of the shares, less the
aggregate warrant price of such shares. As of December 31, 1999, the market
value exceeded the aggregate warrant price by approximately $1,029.
F-26
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
The Company estimates the fair value of each stock option and warrant at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively: no dividends paid for all years; expected volatility of 35% for
years 1998 and 1997; 93% for 1999; risk-free interest rates range from 5.25% to
7.81%; and expected lives range from 1.00 to 10.00 years.
Utilizing the above assumptions, the weighted average fair market value of
employee stock options and warrants granted is as follows:
Year ended December 31
1999 1998 1997
---------------------------------
Stock options $1.54 $.98 $1.48
Warrants $1.01 $.94 $1.31
In accordance with SFAS 123, the estimated fair value of the Company's options
and warrants is amortized over the vesting period. Had this expense been charged
to operations, the Company's pro forma net loss and net loss per common share
would have been as follows:
Year ended December 31
1999 1998 1997
----------------------------------
Net loss
As reported $(6,237) $(5,512) $(7,817)
Pro forma $(7,328) $(6,326) $(8,959)
Net loss applicable to
common shares
As reported $ (.31) $ (.36) $ (.49)
Pro forma $ (.36) $ (.41) $ (.55)
F-27
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
Options to directors and officers
Included in the options and warrants granted above are the following:
1,598,888 shares of the Company's common stock granted to certain officers and
directors of the Company for services rendered during 1999. The options and
warrants were issued at or above the fair market value of the common stock on
the grant date at exercise prices ranging between $1.31 and $2.50 per share,
expiring through November 19, 2009. As of December 31, 1999, none of these
options or warrants were exercised.
877,250 shares of the Company's common stock granted to directors of the Company
for services rendered during 1998. The options and warrants were issued at or
above the fair market value of the common stock on the grant date at exercise
prices ranging between $1.16 and $3.36 per share, expiring through December 16,
2008. As of December 31, 1999, none of these options or warrants were exercised.
54,300 shares of the Company's common stock granted to directors of the Company
for services rendered during 1997. The options and warrants were issued with
exercise prices ranging between $3.69 and $3.98 per share, expiring through
December 31, 2006. The options and warrants were issued at the fair market value
of the common stock or warrants on the grant date. As of December 31, 1999, none
of these options or warrants were exercised.
Shares reserved for future issuance of common stock approximately $14,200,000.
F-28
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
9. Contingencies
In March, 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, Pennsylvania, against the Company by a former employee,
seeking damages of $361, for termination of contract, by change of control and
for convenience. This plaintiff asserts this sum represents the excess of market
value over the exercise price of unvested warrants held by the plaintiff which
the plaintiff asserts should have been vested and thereby available for exercise
and sale. The Company believes the claim is without merit and is defending its
position. Accordingly, no provision has been made in the accompanying financial
statements.
10. Related Party Transactions
Through August 31, 1997, the Company leased its principal office and one of its
manufacturing facilities from a corporation which is owned by the former chief
executive officer of the Company. Rent expense charged to discontinued
operations was $64 for the year ended December 31, 1997.
The Company incurred consulting and commission fees, and out-of-pocket expenses
of $11, $27 and $60, for the years ended December 31, 1999, 1998 and 1997,
respectively, to a company whose president is a director of the Company.
11. Profit-Sharing Plan
Prior to 1999, certain operations that have subsequently been discontinued had a
qualified profit-sharing 401(k) plan (the Plan) available to all eligible
employees. Contributions to the 401(k) portion of the Plan were matched by the
Company equal to 100% of voluntary contributions by individual participants,
limited to 3% of the individual participant's annual pay. Annual profit-sharing
contributions to the Plan were made at the discretion of the Board of Directors.
The total amount charged to discontinued operations under the plan was $0, $38
and $72 for the years ended December 1999, 1998 and 1997, respectively.
Subsequent to year-end 1998, the Plan was made available to all eligible SEDONA
employees. At the same time, matches to the Plan by the Company were suspended
but may be reinstated at such time as determined appropriate by the Board of
Directors.
F-29
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
12. Commitments
The Company has employment agreements with certain key employees which expire at
various dates through 2002. The agreements provide for minimum salary levels,
plus any additional compensation as directed by the Board of Directors.
The Company leases certain office equipment under various noncancelable
operating and capital lease arrangements which expire from 2000 to 2004. Future
minimum lease payments under capital lease obligations consist of the following:
Year ending December 31:
Capital Lease Obligations
-------------------------
2000
2001 $ 27
2002 26
2003 19
2004 17
1
Total minimum lease payments ----
Less amount representing interest 90
Present value of net minimum capital (21)
lease payments ----
$ 69
====
Gross payments made under capital and operating lease obligations for 1999 and
1998 were $276 and $364, respectively.
13. Income Taxes
No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses through December 31, 1999.
At December 31, 1999 and 1998, the Company recorded a deferred tax asset of
$10.9 million and $8.7 million, respectively, which primarily related to net
operating loss carryforwards for federal and state tax purposes and certain
other reserves. The Company provided valuation allowances for the full amount of
the deferred tax assets as the Company believes sufficient uncertainty exists
regarding its realization.
F-30
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
13. Income Taxes (continued)
At December 31, 1999 and 1998, the Company had approximately $29.8 million and
$24.1 million, respectively, in federal net operating loss carryforwards that
expire in various years beginning in 2000 through 2019. Additionally, the
Company has approximately $8.5 million and $5.2 million, respectively, of state
net operating loss carryforwards that expire in various years beginning in 2005
through 2009.
The timing and manner in which the Company will utilize the net operating loss
carryforwards in any year, or in total, may be limited by the provision of the
Internal Revenue Service Code regarding changes in ownership of a company. Such
limitation may have an impact on the ultimate realization and timing of these
net operating loss carryforwards.
14. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Cash paid during the year for interest $ 35 $ 53 $ 294
Cash expenses incurred relative to issuance
of stock 41 200 45
Noncash investing and financing
activities are as follows:
Conversion of debentures into
common stock - 324 1,954
Conversion of preferred stock dividends into
common stock 138 158 182
Preferred stock issued in lieu of payment of
preferred dividends - - 201
Conversion of debentures
into preferred stock - - 2,990
Conversion of preferred stock to common stock
2,034 2,990 -
Dividends payable offset against
notes receivable - related party - 45 30
Fixed asset purchases through assumption of
capital lease obligation
58 - 34
</TABLE>
F-31
<PAGE>
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
15. Subsequent Events
On January 14, 2000, SEDONA signed a letter of intent to acquire Acxiom
Corporation's Customer Information Management System (CIMS) application software
unit. The CIMS operation, based in Minneapolis, Minnesota, is a provider of
Customer Relationship Management (CRM) software to the financial services
industry, with a particular emphasis on the retail banking industry. SEDONA
assumed responsibility for management of the CIMS unit effective February 1,
2000 under an operating agreement which will terminate at the acquisition
transaction closing.
On February 9, 2000, the Company committed to acquire a 10% equity interest for
a total of $140, payable at various times in the future, in a start-up company
which designs, builds, and markets computer software and services to aid sales
and marketing persons with their customer prospecting. This lead generation and
management product will be integrated with SEDONA's visual CRM profiling and
CIMS application solutions to provide further value to its customers.
On February 28, 2000, the Company closed a $3.0 million private placement
purchase agreement for the issuance of 3,000 shares of Series G convertible
preferred stock. After a period of 120 days from February 28, 2000 (closing
date), the investors can convert the preferred stock to common stock at the
lower of: (1) 130% of the closing bid price of the Company's common stock as of
the closing date, or (2) 95% of the low three-day average closing bid price of
the Company's common stock for the twenty trading days prior to the notice of
conversion. The conversion amount shall be the principal amount of the preferred
stock being converted, plus a 3% premium accruing from the closing date to the
conversion date. In addition, the investors received a total of 100,000,
three-year warrants which shall be exercisable at 130% of the closing bid price
of the Company's common stock on the closing date. Mandatory conversion of the
preferred stock shall occur on the second anniversary after closing. The Company
shall have a right to redeem any portion of the Series G preferred stock upon a
30-day written notice.
The Company has received in excess of $5.8 million during the first quarter 2000
related to option and warrant exercises, resulting in approximately 2.6 million
additional common shares being issued.
F-32
<PAGE>
Execution Copy
OPERATING AGREEMENT
THIS OPERATING AGREEMENT ("Agreement") is made and entered into
effective February 1, 2000 (the "Effective Date"), by Acxiom Corporation
("Acxiom"), a Delaware corporation, and Sedona Corporation ("Sedona"), a
Pennsylvania corporation.
RECITALS
WHEREAS, Acxiom and Sedona entered into a Letter of Intent dated
January 11, 2000 and are negotiating and finalizing the definitive Asset
Purchase and Sale Agreement (the "Asset Purchase Agreement"), pursuant to which
Acxiom has agreed to sell, and Sedona has agreed to purchase substantially all
the assets of Acxiom's business unit located in Minneapolis, Minnesota, which
utilizes the assets in designing and implementing Customer Information
Management Systems (the "Business");
WHEREAS, Sedona has effectively assumed the operations of the Business
as of February 1, 2000;
WHEREAS, during the continued negotiations of the Asset Purchase
Agreement and finalization thereof, Sedona has assumed the responsibilities and
risk of loss for the Business.
NOW THEREFORE, in exchange for the mutual promises, covenants and
Agreements contained herein, the parties hereto, intending to be legally bound,
agree as follows:
1. Delegation and Assumption of Responsibilities. Acxiom hereby
delegates all responsibilities to Sedona to operate the Business, and Sedona
hereby assumes all responsibilities from Acxiom to operate the Business during
the term of this Agreement.
2. Operating Agreement Fee. For all the rights and powers granted to
Sedona under this Agreement and commencing as of the Effective Date, Acxiom
shall share with Sedona ninety-five percent (95%) of any net profit or net loss
of the Business. "Net profit" or "net loss" are defined as net billings less all
costs and expenses incurred in the Business consistent with past practices, for
each month Sedona operates the Business.
Acxiom shall continue to collect all Business accounts receivable and
pay all Business payables during the term of this Agreement. Sedona shall not be
responsible for expenses resulting from problems arising out of existing
software configuration which is being acquired as part of the Asset Purchase
Agreement and referred to as Customer Information Management Systems ("CIMS").
<PAGE>
3. Invoicing Procedures. By the 10th of each month, (a) Sedona shall
invoice to Acxiom an amount equal to the gross billings for the previous month
and (b) Acxiom shall invoice Sedona for the expenses incurred in the operating
of the Business for the previous month and further reflect on such invoice the
amount due from Sedona or the amount due to Sedona for the Net Profit or Net
Loss for the same month. The parties agree to share information with one another
as may be reasonably necessary in order to properly prepare each parties'
respective invoice. Furthermore, each party agrees to allow the other party
reasonable access to review and examine accounting records that may be used to
support invoices pursuant to this agreement. Expenses attributed to the Business
shall not include any corporate overhead or other allocations which are not
directly attributable to Business. Acxiom designates Jeff Stalnaker, and Sedona
designates Bill Williams to coordinate and resolve any issues regarding the
above calculation.
4. Responsibility for Cost and Expenses. During the term of this
Agreement, Sedona will bear responsibility for (i) all operating costs to
maintain the Business; (ii) the cost of leasing any space for the Business;
(iii) all personnel necessary for operation of the business unit and will be
responsible for the salaries, taxes, insurance and related costs for all such
personnel; (iv) property and casualty insurance for the business as hereinafter
provided; (v) maintenance of the facilities and any cost related to the
replacement of any equipment necessary to carry out the intent of this
Agreement; and (iv) all other costs consistent with Acxiom's past operation of
the Business, provided that all costs shall be recorded in accordance with
generally accepted accounting principles ("GAAP"). For purposes hereof, Acxiom
agrees that the costs of the Business shall not include any corporate overhead
or other allocated costs which are not directly attributable to the Business.
5. Sedona's Insurance. At all times while this Agreement remains in
effect, Sedona shall maintain liability insurance with coverage of at least
$1,000,000 per occurrence, workers compensation insurance and commercial general
liability insurance with a combined single limit of $3,000,000 with insurance
companies that have a Best rating of A- or better. Sedona shall deliver
certificates of insurance periodically to Acxiom evidencing that such insurance
remains in effect and such policies shall name Acxiom as an additional insured.
6. Term. The term of this Agreement shall commence on the Effective
Date and continue for a period of four (4) months unless terminated sooner as
provided for herein. Notwithstanding the foregoing, this Agreement shall
terminate upon the earlier of (i) the failure of the parties to execute and
deliver the Asset Purchase Agreement not later than March 20, 2000; (ii) the
closing of the Asset Purchase Agreement; (iii) the termination of the Asset
Purchase Agreement pursuant to the terms of the Asset Purchase Agreement; or(iv)
termination pursuant to Section 10 of this Agreement.
7. Trade Creditors. Sedona and Acxiom shall pay their respective trade
creditors in a timely fashion consistent with good business practices.
<PAGE>
8. Operation of Business. Sedona shall have full authority and power
over the operation of the Business during the term of this Agreement, including
but not limited to hiring and firing employees, hiring and firing sales
associates and all other aspects of the Business. At all times during the term,
all personnel shall be subject to the supervision and the direction of Sedona's
manager or supervisors. Sedona shall comply with all laws, regulations and the
like in discharging its operational authority hereunder, and it shall notify
Acxiom of any material adverse changes to the Business or any other material
events relating thereto which may happen during the Term of this Agreement.
9. Events of Default. The following shall, after expiration of the
applicable cure periods, constitute events of default under this Agreement:
(a) Failure for Sedona to run the Business consistent with past
practices;
(b) Failure for Sedona to reimburse Acxiom for any undisputed loss
pursuant to Paragraph 2; or
(c) Any other material breach of the spirit and intent or warrants
of this Agreement.
10. Cure Periods. An Event of Default shall not be deemed to have
occurred until fifteen (15) days (or in the event of payment default, five (5)
days) after the non-defaulting party has provided the defaulting party with
written notice specifying the event or events that if not cured would constitute
an Event of Default and specifying the actions necessary to cure within such
period. This period shall be extended for a reasonable period of time if the
defaulting party is acting in good faith to cure and such delays are not
materially adverse to the non-defaulting party.
11. Termination. In the event of an occurrence of an Event of Default,
the non-defaulting party may terminate this Agreement provided that such party
is not then also in default. Upon termination, Sedona's operational rights
granted hereunder should terminate and full control of the Business shall revert
to Acxiom. Within twenty (20) days of any termination, Acxiom shall prepare and
deliver a final accounting of all activity hereunder and invoices resulting
therefrom shall be immediately paid.
12. Indemnification Rights. Each party will indemnify and hold harmless
the other party, and the directors, officers, partners, employees, agents and
affiliates of such other party from and against any and all liability, including
without limitation reasonable attorney's fees arising out of or incident to (i)
any breach by such party of a representation, warranty or covenant made herein;
and (ii) the conduct of such party, its employees, contractors and agents
(including negligence) in performing its obligations hereunder. Without limiting
the generality of the foregoing, each party will indemnify and hold harmless the
other party, and the directors, officers, partners, employees, agents and
affiliates of such other party, from and against all liability arising out of
its actions under this Agreement except to the extent that such liability or
loss arises under the general operations and is accounted for pursuant to
hereof. The parties indemnification obligations hereunder shall survive any
termination or expiration of this Agreement for a period of one (1) year.
13. Representations. Both Acxiom and Sedona hereby represent that
they are legally qualified, empowered, and authorized to execute this Agreement
and carry out the activities contemplated hereby.
<PAGE>
14. Public Announcement. Neither party shall make any further public
announcements without first having obtained written approval of the other party.
15. Miscellaneous.
(a) Assignment. This agreement and the rights, obligations and
duties of the Acxiom shall not be assignable or otherwise transferable unless
agreed to in writing by both parties.
(b) Modification. No term or provision contained herein may be
modified, amended or waived except by written agreement signed by the party to
be bound thereby.
(c) Binding Effect and Benefit. This agreement shall inure to
the benefit of, and shall be binding upon, the parties hereto, and their
respective heirs, executors, administrators, personal representatives,
successors and permitted assigns.
(d) Headings and Captions. Subject headings and captions are
included for convenience purposes only and shall not affect the interpretation
of this agreement.
(e) Notice. All notices, requests, demands and other
communications permitted or required hereunder shall be in writing, and either
(i) delivered in person, (ii) sent by express mail or other overnight delivery
service providing receipt of delivery, (iii) mailed by certified or registered
mail, postage prepaid, return receipt requested or (iv) sent by facsimile
transmission as follows:
If to the Seller, addressed or delivered in person to:
Acxiom Corporation
#1 Information Way
Little Rock, AR 72202
Attn: General Counsel
Telecopy No.: (501) 252-5610
With copy to:
Friday Eldredge & Clark
400 W. Capitol, Suite 2000
Little Rock, AR 72201
Attn: Carla G. Spainhour, Esq.
Telecopy No.: (501) 376-2147
<PAGE>
If to Buyer, addressed or delivered in person to:
Sedona Corporation
649 North Lewis Rd.
Limerick, PA 19468
Attn: Marco Emrich, President & CEO
Telecopy No.: (610) 495-3092
With copy to:
Dale Goodfriend, Esq.
617 Southwest 9th Ave.
Rochester, MN 55902
Telecopy No.: (507) 281-3672
or to such other address as either party may designate by notice in the manner
provided above.
Any such notice or communication, if properly given or made by prepaid,
registered or certified mail or by recorded express delivery, shall be deemed to
have been made when actually received, but not later than three (3) business
days after the same was posted or given to such express delivery service, and if
made properly facsimile transmission such notice or communication shall be
deemed to have been made at the time of dispatch and receipt of proof of
transmission.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ACXIOM CORPORATION
-----------------------------------
Jeff D. Stalnaker, Finance and Accounting Leader,
Financial Services Division
SEDONA CORPORATION
----------------------------------
Marco Emrich, President & CEO
<PAGE>
Consent of Independent Auditors
We hereby consent to the incorporation by reference into Registration Statements
on Form S-3 (Nos. 333-31983, 33-47127, 333-03719, 333-71457 and 333-52973) and
related prospectuses and the Registration Statement on Form S-8 (No. 333-53051)
of our report dated March 16, 2000, relating to the consolidated financial
statements of Sedona Corporation included in the Company's Annual Report on Form
10-K for the year-ended December 31, 1999.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 27, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Certified Public Accountants
Sedona Corporation
Limerick, Pennsylvania
We hereby consent to the incorporation by reference into Registration Statements
of Form S-3 (Nos. 333-71457, 333-31983, 33-47127, 333-03719, 333-52973) and
related prospectuses and the Registration Statement on Form S-8 (No. 333-53051)
of our report dated March 13, 1998, except for Note 14 which is dated March 27,
1998, relating to the consolidated balance sheet as of December 31, 1997, and
the related statements of operations, stockholders' equity, and cash flows and
schedule for the year then ended, of Sedona Corporation (formerly Scan-Graphics,
Inc.) included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectuses.
BDO Seidman, LLP
Philadelphia, Pennsylvania
March 30, 2000
<PAGE>
EXHIBIT 99.1
Report of Independent Certified Public Accountants
Scan-Graphics, Inc.
and Subsidiaries
Limerick, Pennsylvania
We have audited the accompanying consolidated statements of operations,
stockholder's equity, and cash flows of Scan-Graphics, Inc. and subsidiaries for
the year ended December 31, 1997, prior to the reclassification for discontinued
operations described in Note 2 to the consolidated financial statements included
in Form 10-K for the year ended December 31, 1999. 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 audit.
We conducted our audit 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 and schedule are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and schedule.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and schedule. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the results of
operations and cash flows of Scan-Graphics, Inc. and subsidiaries for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 13, 1998, except for Note 14,
which is dated March 27, 1998
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