FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended 12/31/2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period --------------------
------to ------------------------ .
1MAGE SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
(State of Incorporation) (IRS Employer Identification Numbers)
6025 S. QUEBEC ST. SUITE 300 ENGLEWOOD CO 80111 (303) 694-9180
(Address of principal executive offices) (Registrant's telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
---- ----
(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK - $.004 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy statements or
any amendment of this Form 10-K. X
-----
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 2001: $1,472,772.
As of February 28, 2001, there were 3,146,554 shares of the Registrant's
Common Stock outstanding.
Exhibit Index begins on Page 39
TABLE OF CONTENTS
PART I
1. Business .3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Registrant's Common Equity and Related Stockholders
Matters 9
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 33
PART III
10. Directors and Executive Officers of the Registrant 34
11. Executive Compensation 35
12. Security Ownership of Certain Beneficial Owners and Management38
13. Certain Relationships and Related Transactions 38
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 39
PART I
ITEM 1. BUSINESS
Introduction
1mage Software, Inc., (the "Company") develops and markets computer-based
document imaging systems that capture, store and display electronic files
and paper documents as graphical images. Document management systems like
1MAGE(R) offer organizations of every size the ability to deliver the
information embedded in millions of documents to their workers across
their existing computing infrastructure, as well as the tools to
efficiently manage the proliferation of digital documents for eBusiness
deployment. The modular 1MAGE system captures entire documents from a
variety of sources. Memos, letters, source documents, contracts, purchase
orders, word processing files, e-mail, fax, industry and market studies,
spreadsheets, databases, Web pages, multimedia, maps and regulatory forms
are examples of documents that are automatically converted into secure,
permanent digital images that are indexed for instantaneous retrieval.
Using an open, client/server architecture design, 1MAGE provides a
comprehensive solution for scanning, indexing, storing and retrieving
document images so that they may be viewed, printed, faxed, e-mailed or
made available for eBusiness or eCommerce applications. The 1MAGE system
is designed to integrate easily with existing IT infrastructure, using a
vast library of multi-platform APIs (Application Programming Interfaces),
rather than forcing expensive investments in re-engineered or new
computing hardware and software.
Today's workplace is dramatically changing with the advent of eBusiness,
eCommerce, and affordable electronic document imaging. During 2000, the
Company concentrated its efforts on selling production document imaging
software to its niche market, users of MultiValue Relational Data Base
Management Systems ("RDBMS"). The Company also continued to make progress
toward its goal of establishing a broad-based Value Added Reseller ("VAR")
network for its imaging software. In addition to VARs, the Company seeks
to partner with software developers and other businesses, which provide
software to their targeted vertical markets.
IMAGING SOFTWARE MARKET
The Company targets its market through VARs, systems integrators, and
other companies which market complementary software, services, or other
products. 1MAGE software has an established worldwide presence in a
multitude of industries, including automotive retail, building materials,
distribution, education, employee benefit plans, government, healthcare,
laboratories, manufacturing, oil and gas, public libraries, public safety,
retailing, transportation and utilities.
The Company offers a comprehensive reseller program which provides,
in the context of a cooperative marketing effort, a broad range of sales,
marketing, and technical support. The program includes technical training
and assistance, marketing communications, sales training and assistance,
excellent support and training, lead referral services, customized product
literature, and a discounted demonstration/development system.
PRODUCTS
As noted above, the Company's flagship product is 1MAGE(R), its
proprietary document imaging software package. The Company is continually
enhancing this product in order to improve its performance and expand its
possible uses.
1MAGE(R)DOCUMENT MANAGEMENT - 1MAGE is a powerful electronic image
management system created to operate the same on UNIX, Linux and Windows
NT(TM)-based computer systems. It provides a comprehensive solution for
the scanning, indexing, storage and retrieval of images and is designed to
file, route, track, archive, and manage an organization's incoming and
outgoing documents and electronic files.
Add-on modules to 1MAGE(R) include the following:
o 1SCAN for scanning and pre-indexing
o 1FAX for inbound and outbound fax and cover sheet management
o 1COLD for Computer Output to Laser Disk (character report data)
management
o 1FORM for business form template administration
o 1RENDITION for merging spooled data with images for billing
o 1WORKFLOW for electronically moving a document from one task to
another
o 1OCR/OMR for automatic indexing and data capture via optical and mark
character recognition
o 1SUITE for bringing images to Windows-based PC clients
o 1SERVER for accessing documents via the Internet
o 1VIEW for using standard browsers to access images over the Intranet
and Internet
A key element of the Company's product line is its open systems
technology, namely:
o Open Systems compliant with UNIX and Linux Operating Systems, Windows
NT(TM), CCITT Group 4 Compression, TIFF, JPEG, PCX, PCL, or HPGL file
formats. The server software (1MAGE) operates on UNIX, Linux and
Windows NT servers; supporting clients include Microsoft Windows,
Windows NT workstations, X-Windows, and browser clients
o Device connectivity via Ethernet or token ring networks using TCP/IP
communication protocol or over the Internet
o Compatibility with IBM AIX, HP-UX, Sun Solaris, SCO UNIX, DG-UX, Red
Hat Linux and Windows NT
o Recognition technology and scanning tasks run on Microsoft Windows
95, 98, or NT.
o UniVerse and UniData ("U2" databases) Relational Database software
from Informix Software, Inc.
1MAGE includes several distinguishing features: the ability to use
many different types of workstations or terminals, the ability to quickly
and easily integrate with the existing business application software using
application programming interfaces (APIs), and the ability to handle the
needs of companies of all sizes economically. Through the use of the UNIX,
Linux and Windows NT operating systems and open systems technology, the
Company seeks to offer its customers an imaging solution at a reasonable
cost.
During 2000, sales of 1MAGE software licenses (excluding annual
license fees) accounted for $880,906 (41% of total revenue); in 1999,
revenue from sales of software licenses accounted for $637,820 (35% of
total revenue). 1MAGE utilizes the popular UNIX, Linux and Windows NT
operating systems and Informix Software's U2 RDBMS software. The
Company's open systems technology makes its software transportable to
numerous hardware products from varying manufacturers, including IBM's
AS/400 systems. Because of the number of hardware manufacturers using the
UNIX, Linux and Windows NT operating systems, the Company's software
customers are rarely restricted in their choice of hardware manufacturers.
The Company also sells peripheral products, at the customer's
request, such as scanners and jukeboxes, although this aspect of the
Company's business has been de-emphasized in recent years. Because
computer hardware and peripheral products are purchased upon request to
fill customer orders, no inventory is maintained. Hardware is generally
shipped directly from the manufacturer to the customer. In 2000, revenue
from hardware sales accounted for $113,217 (5%) of the Company's total
revenue, as compared to $150,008 (8%) of total revenue for 1999.
SERVICES AND ANNUAL FEES
The Company licenses its 1MAGE software to its customers and charges
an annual license fee which must be paid to continue receiving support for
the use of the software. During 2000 and 1999, annual license fees
accounted for $896,376 and $751,712, respectively, of the Company's net
sales. The Company believes recurring annual license fees from new and
existing customers will contribute to the long-term stability of the
Company. The Company also provides installation services and technical
support to its customers. Technical support includes training, consulting
services and other ongoing support. For the years ended December 31, 2000
and 1999, the revenues from these services accounted for $272,164, or 13%,
and $266,808, or 15%, of the Company's net sales. The Company does not
provide service for hardware; rather, service for computer hardware sold
by the Company is provided directly by the manufacturer or the
manufacturer's authorized dealer.
MARKETING AND DISTRIBUTION
To date, the Company has signed VAR agreements for 1MAGE with ten
resellers specializing in a variety of industries, including automotive
retail, health care, public safety, utilities, employee benefit services,
and a domestic and an international ASP (Application Service Provider).
Under the business partner programs, the Company provides its 1MAGE to
independent software integrators (resellers), who in turn market products,
including or featuring 1MAGE, to each of their individual markets. The
Company's overall marketing objective is to support the current business
partners and to continue to enroll new software integrators in the
program. The Company provides training aids, an Internet demonstration
site, user instruction manuals and other documentation, and a newsletter
to keep its resellers, as well as prospective resellers and customers,
informed of new product applications and developments.
The Company also markets 1MAGE through its direct sales force. Its
general strategy is to (1) help its customers define the goals for their
system, (2) provide the means of achieving those goals through its
document management software and appropriately configured computer
systems, and (3) help assure the ongoing success of this collaborative
process by providing continuing support, including on-site personnel
training and classroom educational programs. In addition, the Company
markets its products and services over the Internet.
CUSTOMERS
The Company sells its 1MAGE software to businesses in a wide variety
of industries and markets, facilitated through the use of VARs.
During the years 2000 and 1999, the Company generated 35% and 29%,
respectively, of its revenue from one customer, Reynolds & Reynolds
("Reynolds"). Reynolds is a Fortune 500 company headquartered in Dayton,
Ohio. In May 1994, the Company signed a software license agreement with
Reynolds for the exclusive right to sublicense certain modules of 1MAGE
(without payment of further license fees to the Company) to businesses
primarily engaged in retail sales of new or used automobiles, trucks, or
tractors. In 1996, the Company signed an engineering and maintenance
agreement with Reynolds for the purpose of developing and providing new
products, enhancements, maintenance, consulting, and programming services
on an ongoing basis. License fees are paid to the Company for certain
products subsequently available in newer releases of 1MAGE. These
features include the Company's client software. Management believes that
the loss of this customer would have a significantly adverse impact on the
Company. Management does not believe that there is a substantial risk of
any such loss in the foreseeable future.
SOURCES OF SUPPLY
The current dealer agreement with Informix Software, Inc. to remarket
their U2 RDBMS software runs through May 15, 2002. The Company has
designed its product such that third party software can be easily
integrated into the core products with minimal difficulty and effort.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
The Company's current focus on offering its proprietary imaging
software to a broader range of customers, through its emerging MultiValue
RDBMS reseller network and its direct sales force, is expected to lessen
the historical quarterly fluctuations in the Company's operating results.
Nevertheless, large sales or groups of sales of 1MAGE licenses may cause
significant variances in quarterly results which may be difficult to
predict.
The Company's sales cycle, which generally commences at the time a
prospective customer issues a request for proposal or otherwise
demonstrates a serious interest in purchasing a system or software license
and ends upon execution of a sales contract or software license, typically
ranges from two to nine months. Operating results could vary from period
to period as a result of the length of the sales cycle, the timing of
individual system sales, resellers' performance and conditions in the
target markets and the economy in general.
TRADE SECRET AND COPYRIGHT LAWS
The Company regards its software as proprietary and relies for
protection upon trade secret and copyright laws and non-disclosure
agreements with its employees as well as restrictions on disclosure and
transferability contained in its software license agreements with its
customers. Despite these restrictions, it may be possible for competitors
or customers to copy, or reverse compile, aspects of the Company's
products or obtain information that the Company regards as proprietary.
Furthermore, there can be no assurance that others will not independently
develop software products similar to those developed or planned by the
Company. Although the Company believes its software does not infringe on
the proprietary rights of others and has not received any notice of
claimed infringement, it is possible that portions of the software
marketed by the Company could be claimed to infringe on existing
proprietary rights. In the unlikely event that any such infringements are
found to exist, there can be no assurance that any necessary licenses or
rights could be obtained, or could be obtained on terms satisfactory to
the Company. Further, in such event, the Company could be required to
modify the infringing software. There can be no assurance that the
Company would be able to do so in a timely manner, upon acceptable terms
and conditions, or at all; even though the failure to do so could have a
material adverse effect on the Company.
BACKLOG
As a practical matter, the Company's business has evolved to the
point where the Company has minimal backlog at any given point in time.
With respect to software license sales, because there is no time delay
between receipt of an order and delivery of the software, electronically
or otherwise, there is effectively no backlog. For hardware, because of
direct delivery of the hardware by the manufacturer, hardware sales have
such short lead times that unfilled firm orders seldom, if ever, build up
to significant levels.
The Company normally receives a deposit of between 25% and 50% of the
hardware and software price when an order is placed. This deposit may or
may not be returned upon cancellation, depending on the circumstances of
the cancellation.
COMPETITION
The Company experiences competition in its business from competitors
who target one or more of the same markets or market segments as the
Company. Software and systems that perform many of the same functions as
the Company's systems and software are readily available from a number of
competitors of the Company, some of which are larger and have greater
financial, technical, marketing and other resources than the Company. The
Company believes that the principal factors affecting a prospective
customer's choice of a system are the database it uses, performance,
service and price. The Company believes that usage of the popular Linux
and UNIX operating systems and the MultiValue RDBMS has strengthened the
Company's competitive position by making the Company's software compatible
with more types of hardware and with the MultiValue application software
offered by MultiValue software developers and system integrators. The
Company further believes that its principal advantage over its competitors
is the Company's utilization of the Linux, UNIX, and Windows NT-based open
systems architecture and the MultiValue RDBMS that can be offered at lower
prices.
LIMITED MARKETS
The reseller program targets complementary markets and allows the
Company to draw from a variety of industries with respect to its imaging
software products. As noted above, the Company's strategy has been to
expand the domestic and international markets for its imaging software by
engaging resellers for various industries and markets.
The Company's experience has been that economic downturns or
increased competitive pressures in its niche markets sometimes result in
reduction or deferral of capital expenditures by potential customers.
While such adverse conditions can sometimes lead to opportunities as
potential customers downsize to smaller, more cost-efficient computer
systems or replace custom designed systems that require higher levels of
support and maintenance, the Company believes that a strong national
economy is important to the success of its sales efforts.
PRODUCT DEVELOPMENT
The computer industry is characterized by rapid technological changes
in both software and hardware. In order to maintain the usefulness of its
products and their compatibility with future hardware and software, the
Company must continually modify and enhance its products. The Company
capitalizes software development costs once technological feasibility is
established. During 2000 and 1999, the Company spent $290,745 and
$302,747, respectively, for computer software development.
EMPLOYEES
As of February 28, 2001, the Company employed twenty-two persons,
nineteen of whom serve on a full-time basis and three on a part-time
basis. Responsibilities are divided as follows: nine persons in sales and
marketing, ten in technical support and programming functions, and three
in administrative positions.
Because the competition for skilled employees in the computer
industry is intense, the Company provides incentive compensation packages
to many of its employees, including its executive officers. The Company's
chief executive officer, David R. DeYoung, receives a quarterly bonus
equal to 5% of the Company's pretax profits. (See "Executive
Compensation") The Company's chief financial officer receives a quarterly
bonus equal to 4% of the Company's pretax profits. Sales personnel
receive a commission based upon sales. The Company has a policy of
encouraging the effort and loyalty of all of its employees by making all
employees eligible for the grant of stock options under its Equity
Incentive Plan, subject to vesting schedules. The Company believes that
these incentive programs are important in attracting and retaining skilled
personnel. The future success of the Company will depend in large part
upon the quality of its employees and the efforts they expend on behalf of
the Company.
None of the Company's employees are represented by a labor union, and
the Company has experienced no work stoppage. The Company believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 4,181 square
feet at Plaza Quebec, 6025 South Quebec Street, Suite 300, Englewood,
Colorado, 80111 and are occupied pursuant to a sublease agreement between
the Company and Communications World International, Inc., with monthly
rental payments of $7,442. The term of the sublease commenced February 1,
1999 and will terminate on July 31, 2003. The landlord is responsible for
property taxes, utilities, janitorial services, repairs, and maintenance.
The Company believes that its facilities and equipment are in good
condition and are satisfactory for their present uses.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
through the solicitation of proxies or otherwise during the fourth quarter
of the Company's calendar year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the OTC Bulletin Board under
the symbol ISOL. The following table sets forth, for the fiscal quarters
indicated, the high and low bid prices per share for the Common Stock as
reported on the OTC Bulletin Board.
2000
----
High Low
---- ---
First Quarter $4.19 $1.19
Second Quarter 3.00 1.13
Third Quarter 1.50 .88
Fourth Quarter 1.06 .63
1999
----
High Low
---- ---
First Quarter $ .97 $.53
Second Quarter 2.03 .97
Third Quarter 1.56 .94
Fourth Quarter 1.22 .66
These quotations reflect interdealer prices, without retail mark-up,
mark down or commission and may not necessarily represent actual
transactions.
On February 28, 2001, the closing bid price per share for the Common
Stock was $.65 as reported on OTC:BB. On that same date, there were
approximately 1,326 holders of record of the Common Stock.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common
Stock and has no present intention to do so. For the foreseeable future,
any earnings will be retained to finance the development and expansion of
the Company's business. The declaration and payment of future dividends
will be determined by the Company's Board of Directors in light of
conditions then existing, including the Company's earnings, financial
condition and capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data of the Company. This table should be read in conjunction
with the financial statements and notes included in Item 8 of this Form 10-
K and the section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" following this section.
STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
In thousands, except for per share data:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Sales $2,163 $1,806 $2,151 $1,809$2,005
Cost of Sales 934 987 935 918 905
Gross Profit 1,229 819 1,216 891 1,100
Gross Profit (as a % of Net Sales) 57% 45% 57% 49% 55%
Selling, General & Administrative
expenses 1,211 1,163 1,097 1,363 1,280
Income(Loss) before Income Taxes 11 (365) 5 (479) (91)
Net Income(Loss) 8 (367) 2 (484) (96)
Net Income(loss) Per Share .00 (.16) .00 (0.23) (0.05)
Weighted Average Number of
Outstanding Shares 3,056 2,330 2,173 2,146 2,055
BALANCE SHEETS YEARS ENDED DECEMBER 31,
In thousands:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Working Capital/(Deficit) $ (93) $ (186) $ 196 $ 43$ 165
Total Assets 1,428 1,364 1,710 1,602 1,980
Long Term Obligations 3 1 154 159 8
Total Stockholders Equity 714 654 922 860 1,200
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31,
1999.
The Company's revenue for the year ended December 31, 2000 of $2,162,663
was 20% greater than $1,806,348 reported for the year earlier. The
increase in revenue is attributable to the combination of a $243,000 (38%)
increase in software sales and a $145,000 (19%) increase in recurring
annual license fees. Management believes these two components of revenue
are crucial for the long-term success of the Company. Hardware sales
comprise just 5% of the total revenue, as compared to 8% a year ago. The
professional service group increased consulting revenue by 2% for the
year, posting revenue of $272,000. Sales through reseller channels
increased $220,000, or 33%, from the year earlier. Gross profit on
revenue for the year 2000 increased to 57%, as compared to 45% for 1999,
as a direct result of the significant increase in software sales.
Selling, general and administrative expenses increased just 4% (or
$48,000) for the year over year periods. Sales and marketing expenses
increased $61,000 as the Company made concerted efforts to expand its
presence in targeted markets. Net income of $8,154 for 2000 reflects a
$375,000 gain over the previous year, when the Company experienced a
significant slowdown in sales due to the Y2K situation. Earnings per
share for the year 2000 were $.00, as compared to a loss per share of
($.16) for 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31,
1998.
The Company's net sales of $1,806,348 for the year ended December 31, 1999
were $345,000 (16%) lower than $2,151,451 reported for the same period a
year earlier. The decrease in revenue is attributable to extremely slow
software sales in the fourth quarter, as customers held back purchases of
new technology in anticipation of Y2K problems. Revenue for the first
nine months of 1999 was slightly ahead of the comparable period in 1998.
While total revenue does not reflect the number of systems sold, the
Company licensed 213 1MAGE software systems to a single reseller during
1999, as compared to 90 in 1998, an increase of 136%. Due to a licensing
arrangement signed back in 1994, minimal royalty payments are due for
these systems. Software sales to resellers increased $64,000 (22%) over
the year earlier, as the Company recognized first-time revenue from new
resellers. Total revenue from resellers comprised 36% of total revenue for
1999, compared to 34% of total revenue in 1998.
Gross profit decreased $398,000 (33%) as a result of lower revenue from
software sales in 1999. Revenue from services and annual fees of
$1,018,520 was $144,000 less than total selling, general & administrative
("SG&A") expenses of $1,163,000 in 1999. It remains an important goal for
the Company to have all SG&A expense covered by services and recurring
annual fees so the net effective margin on revenue from software sales can
be very high. SG&A expenses increased $66,000 (6%) for the twelve months
ended December 31, 1999, as a result of slight increases in sales and
marketing efforts. Loss from operations in 1999 was ($343,978), as
compared to income from operations of $120,045 (before merger expenses) in
1998. Net loss of ($367,193) or ($.16) per share were reported for the
year ended December 31, 1999, versus net income of $2,380 or ($.00) per
share for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $103,473 during the
twelve months ended December 31, 2000 due to timing of collections on
accounts receivable. Accounts receivable on December 31, 2000 were
$407,251, an increase of $203,144 from December 31, 1999. Cash of
$290,745 was used for software development costs incurred primarily to
develop new client, server and workflow products that facilitate viewing
images via the Internet. The Company had working capital of ($92,704) on
December 31, 2000. Deferred income of $213,000 is recorded as a current
liability and represents pro-rated revenue for software licenses billed in
2000.
The Company's internal sources of liquidity are revenues from
operations and cash on hand. The Company receives most of its revenues
for software licenses and system sales upon installation and does not
maintain inventory balances. The Company has a $200,000 revolving line of
credit. The loan is collateralized by all accounts and general
intangibles of the Company. Borrowings outstanding under the line of
credit at February 28, 2001 were $150,000.
The Company has no material commitments for capital expenditures for
2001.
Management believes that inflation has not had a material impact on
its results of operations to date.
FORWARD LOOKING STATEMENTS
Some of the statements made herein are not historical facts and may be
considered "forward looking statements." All forward-looking statements
are, of course, subject to varying levels of uncertainty. In particular,
statements which suggest or predict future events or state the Company's
expectations or assumptions as to future events may prove to be partially
or entirely inaccurate, depending on any of a variety of factors, such as
adverse economic conditions, new technological developments, competitive
developments, competitive pressures, changes in the management, personnel,
financial condition or business objectives of one or more of the Company's
customers, increased governmental regulation or other actions affecting
the Company or its customers as well as other factors.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1MAGE SOFTWARE, INC.
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
INDEPENDENT ACCOUNTANTS' REPORT 16
BALANCE SHEETS - December 31, 2000 and 1999 17
STATEMENTS OF OPERATIONS - For the Years Ended December 31, 2000, 1999
and 1998 18
STATEMENTS OF SHAREHOLDERS' EQUITY - For the Years Ended
December 31, 2000, 1999 and 1998 19
STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 2000, 1999
and 1998 20
NOTES TO FINANCIAL STATEMENTS 22
INDEPENDENT ACCOUNTANTS' REPORT ON FINANCIAL STATEMENT SCHEDULES 34
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS 35
INDEPENDENT ACCOUNTANTS' REPORT
--------------------------------
To the Board of Directors and Shareholders of
1mage Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of 1mage Software, Inc. as
of December 31, 2000 and 1999, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 1mage Software, Inc.
as of December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December
31, 2000, in conformity with generally accepted accounting principles.
/S/ BAIRD, KURTZ & DOBSON
Denver, Colorado
February 2, 2001
1MAGE SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
ASSETS ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 150,457 $ 253,930
Receivables:
Trade (less allowance: 2000, $10,000;
1999, $10,000) 407,251 204,107
Related parties - 1,635
Inventory 38,654 49,207
Prepaid expenses and other current assets 21,233 13,428
---------- ----------
Total current assets 617,595 522,307
PROPERTY AND EQUIPMENT, at cost, net 55,177 69,263
OTHER ASSETS:
Software development costs, net 754,734 771,919
Other 100 100
---------- ----------
TOTAL ASSETS $1,427,606 $1,363,589
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 200,000 $ 168,235
Current portion of capital lease
obligations 1,785 3,857
Deferred revenue 213,494 210,000
Accounts payable 185,468 209,882
Accrued liabilities 109,450 116,647
---------- ----------
Total current liabilities 710,197 708,621
LONG-TERM OBLIGATIONS:
Capital lease obligations 3,224 521
SHAREHOLDERS' EQUITY:
Common Stock, $.004 par value
- - 10,000,000 shares authorized;
shares outstanding: 2000 -
3,146,554; 1999 - 2,642,493 12,586 10,569
Additional paid-in capital 7,238,658 7,189,091
Accumulated deficit (6,537,059) (6,545,213)
---------- -----------
Total shareholders' equity 714,185 654,447
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,427,606 $1,363,589
========== ===========
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---- ----- ----
REVENUE:
System sales and software
licenses $ 994,123 $ 787,828 $1,059,864
Services and annual fees 1,168,540 1,018,520 1,091,587
---------- ---------- ----------
Total revenue 2,162,663 1,806,348 2,151,451
---------- ---------- ----------
COST OF REVENUE:
System sales and software
licenses 558,016 596,128 608,895
Services and annual fees 375,356 391,277 325,963
---------- ---------- ----------
Total cost of revenue 933,372 987,405 934,858
---------- ---------- ----------
GROSS PROFIT 1,229,291 818,943 1,216,593
OPERATING EXPENSES:
Selling, general &
administrative 1,211,288 1,162,921 1,096,548
---------- ---------- ----------
INCOME/(LOSS) FROM OPERATIONS 18,003 (343,978) 120,045
---------- ---------- ----------
OTHER INCOME/(EXPENSE):
Interest income 8,059 9,665 5,724
Canceled merger costs - - (85,277)
Interest expense (15,408) (32,140) (34,046)
Other - 1,760 (1,566)
Total other income ---------- ---------- ----------
(expense) (7,349) (20,715) (115,165)
---------- ---------- ----------
INCOME/(LOSS) BEFORE INCOME
TAXES 10,654 (364,693) 4,880
PROVISION FOR INCOME TAXES 2,500 2,500 2,500
---------- ---------- ----------
NET INCOME/(LOSS) $ 8,154 $ (367,193) $ 2,380
========== ========== ==========
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE $ 0.00 $ (.16) $ 0.00
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,055,600 2,329,818 2,172,932
========== ========== ==========
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Additional
Common Stock Paid-In
Shares Amount Capital
----------------- ----------
Balances, January 1, 1998 2,142,845 $ 8,571 $ 6,845,100
Exercise of incentive stock
options 60,174 240 59,147
Net income - - -
--------------------------------------------------------------------
Balances, December 31, 1998 2,203,019 8,811 6,904,247
Conversion of notes payable
into Common Stock 326,474 1,306 201,180
Exercise of incentive stock
options 113,000 452 65,618
Issuance of non-qualified
stock options - - 18,046
Net loss
--------------------------------------------------------------------
Balances, December 31, 1999 2,642,493 10,569 7,189,091
Exercise of incentive stock
options 447,375 1,790 196,047
Surrender shares for exercise of
incentive stock options (32,294) (129) (128,078)
Exercise of Class A Warrants 100,000 400 43,350
Surrender shares for exercise of
Class A Warrants (11,020) (44) (43,706)
Cancellation of non-qualified
stock options - - (18,046)
Net income - - -
--------------------------------------------------------------------
Balances, December 31, 2000 3,146,554 $12,586 $7,238,658
====================================================================
Accumulated
Deficit Total
------------ -----
Balances, January 1, 1998 (6,180,400) $673,271
Exercise of incentive stock
options - 59,387
Net income 2,380 2,380
--------------------------------------------------------------------
Balances, December 31, 1998 (6,178,020) 735,038
Conversion of notes payable
into Common Stock - 202,486
Exercise of incentive stock
options - 66,070
Issuance of non-qualified
stock options - 18,046
Net loss (367,193) (367,193)
--------------------------------------------------------------------
Balances, December 31, 1999 (6,545,213) 654,447
Exercise of incentive stock options - 197,837
Surrender shares for exercise of
incentive stock options - (128,207)
Exercise of Class A Warrants - 43,750
Surrender shares for exercise of
Class A Warrants - (43,750)
Cancellation of non-qualified
stock options - (18,046)
Net income 8,154 8,154
--------------------------------------------------------------------
Balances, December 31, 2000 $(6,537,059) $ 714,185
====================================================================
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---- ---- ---
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) $ 8,154 $(367,193) $ 2,380
Adjustments to reconcile earnings/
(loss) to net cash provided
by operating activities:
Depreciation and amortization 342,338 367,838 398,806
(Cancellation)/Issuance of stock
options for services (18,046) 18,046 -
Changes in assets and liabilities:
Receivables (201,509) 328,083 (265,923)
Inventory 10,553 6,597 37,919
Prepaid expenses and other assets (7,805) (3,707) (2,048)
Accounts payable (24,414) (83,001) 101,345
Accrued liabilities and deferred
income (3,703) 6,519 (43,667)
--------- -------- --------
Net cash provided by
by operating activities 105,568 273,182 228,812
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (14,125) (25,870) (7,908)
Additions to capitalized software (290,745) (302,747) (295,266)
Redemption of certificate of deposit - 25,000 -
Increase in other assets - - (100)
--------- -------- --------
Net cash used for investing
activities (304,870) (303,617) (303,274)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 300,000 68,235 60,000
Repayment of line of credit (268,235) (50,000) (60,000)
Repayment of long-term obligations (5,566) (4,611) (12,047)
Proceeds from exercise of Common
Stock options 69,630 66,070 59,387
---------- -------- --------
Net cash provided by financing
activities 95,829 79,694 47,340
---------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (103,473) 49,259 (27,122)
CASH AND CASH EQUIVALENTS, beginning
of year 253,930 204,671 231,793
---------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 150,457 $253,930 $204,671
========== ======== ========
See notes to financial statements
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $15,408 $15,820 $16,204
======= ======= =======
Income taxes paid $ 2,500 $ 2,500 $ 2,500
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
ACTIVITIES:
Acquisition of property and equipment
by assuming capital lease obligations $ 6,197 $ - $ -
======= ======= =======
1MAGE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
ORGANIZATION AND NATURE OF BUSINESS - 1mage Software, Inc. (the
"Company") was incorporated in Colorado in December 1981.
The Company develops and markets a UNIX, Linux and Windows NT-based
electronic document image management and retrieval system. The
Company earns the majority of its revenues in the United States.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or
less to be cash equivalents.
INVENTORIES consist of finished goods and are stated at the lower of
cost (specific identification method) or market (net realizable
value).
PROPERTY AND EQUIPMENT are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful lives (generally five years) of the assets or the
lease term, if shorter. The Company capitalizes all expenditures for
property and equipment in excess of $500.
SOFTWARE DEVELOPMENT COSTS are capitalized when technological
feasibility is established. Such costs are stated at the lower of
unamortized cost or net realizable value. Amortization is computed
using either the straight-line method based on estimated economic
lives of the products (five years) or the ratio that current product
revenues bear to the total of current and anticipated future product
revenues, whichever is greater.
It is reasonably possible that those estimates of anticipated future
gross revenues, the remaining estimated economic life of the
products, or both will be reduced significantly in the near term due
to competitive pressure. As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near
term. The amounts capitalized for the years ended December 31, 2000,
1999, and 1998 were $290,745, $302,747, and $295,266, respectively.
Amortization of these costs totaled $307,930, $317,400, and $322,319,
respectively. The net realizable value of such capitalized costs is
reviewed by management on a periodic basis, and costs in excess of
net realizable value, if any, are charged to operations.
REVENUE RECOGNITION - Revenue from the sale of software licenses,
computer equipment, and existing application software packages is
recognized when the software and computer equipment are shipped to
the customer, remaining vendor obligations are insignificant, there
are no significant uncertainties about customer acceptance and
collectibility is probable. Revenue from related services, including
installation and software modifications, is recognized upon
performance of services. Maintenance revenue is recognized ratably
over the maintenance period.
The Company performs credit evaluations of its customers' financial
condition and generally does not require collateral. The Company
retains a security interest in the equipment and software sold until
they are paid in full. Receivables are generally due within 30 days,
with those customers not meeting those requirements being subject to
stricter credit policies. Credit losses to customers have generally
been within management's expectations.
One customer accounted for 35% of 2000 revenues. One customer
accounted for 28% of accounts receivable at December 31, 2000.
One customer accounted for 29% of 1999 revenues. Two different
customers accounted for 11% and 10% of accounts receivable at
December 31, 1999.
One customer accounted for 28% of 1998 revenues. Two different
customers accounted for 42% and 15% of accounts receivable at
December 31, 1998.
EARNINGS (LOSS) PER SHARE is computed by dividing net income (loss)
by the weighted average number of common and equivalent shares
outstanding during the year. The potential dilution from Common
Stock equivalents is not material. Fully diluted earnings per share
are either anti-dilutive or not materially different from primary
earnings per share.
INCOME TAXES The Company follows the liability method of accounting
for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes
are recorded based upon differences between the financial reporting
and tax bases of assets and liabilities and are measured using
enacted tax rates and laws that will be in effect when the underlying
assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all
deferred tax assets due to the uncertainty of ultimate realizability.
ESTIMATES -The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
income and expenses during the reporting periods. Actual results
could differ from those estimates.
RECLASSIFICATION -The Company has reclassified certain amounts from
prior years to conform with the current year presentation. These
reclassifications had no effect on net income.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
2000 1999
---- ----
Equipment $ 626,656 $ 606,333
Furniture 43,313 43,313
Leasehold improvements 8,262 8,262
--------- ---------
678,231 657,908
Less: accumulated
depreciation (623,054) (588,645)
--------- ---------
$ 55,177 $ 69,263
========= =========
3. ACCRUED LIABILITIES
Accrued liabilities at December 31 consists of the following:
2000 1999
---- -----
Sales tax payable $ 22,949 $ 38,465
Accounting and audit fees 15,486 21,000
Accrued compensation 32,124 9,773
Other 38,891 47,409
-------- --------
$109,450 $116,647
======== ========
4. LINE OF CREDIT
The Company has a $200,000 revolving bank line of credit which is due
February 24, 2001 and bears interest at prime plus 1.5% (total rate
of 11.0% at December 31, 2000) and is collateralized by all accounts
and general intangibles of the Company. Total borrowings outstanding
under the line of credit were $200,000 and $168,235 at December 31,
2000 and 1999, respectively.
5. CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
The Company had convertible notes payable to related parties
(shareholders) at December 31, 1998 of $150,000 plus accrued interest
of $52,486. The principal and interest amounts were converted into
326,474 shares of Common Stock during 1999.
Interest expense for the years ended December 31, 2000, 1999, and
1998 to related parties was $0, $16,321, and $17,842, respectively.
6. SHAREHOLDERS' EQUITY
STOCK COMPENSATION PLANS
At December 31, 2000, the Company has three stock-based compensation
plans, which are described below. The Company applies Accounting
Principles Board (APB) Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value at the
dates of awards under those plans consistent with the method of FASB
Statement 123, the Company's net income (loss) and earnings (loss)
per share would have been as indicated below:
2000 1999 1998
---- ---- ----
Net income (loss):
As reported $ 8,154 $(367,193) $ 2,380
Pro forma $ (147,361) $(518,211) $(127,196)
Loss per common share:
As reported $ 0.00 $ (0.16) $ 0.00
Pro forma $ (0.05) $ (0.22) $ (0.06)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Dividend Yield 0% 0% 0%
Expected Volatility 135% 144% 151%
Risk-Free Interest Rate 5.00% 6.00% 6.00%
Expected Lives 3.2 years 8.7 years 8.9 years
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are freely transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
1996 EQUITY INCENTIVE PLAN
In September 1996, the Board of Directors authorized 1,000,000 shares
of Common Stock for issuance under its 1996 Equity Incentive Plan
("1996 Plan") as incentive stock options ("ISOs") or non-qualified
stock options ("NQSOs"). The Company grants ISOs only to employees.
The Company grants NQSOs and restricted stock to persons who are
employees of the Company and to non-employee directors.
The options are granted to purchase Common Stock at the fair market
value on the grant date or at other prices as determined by the Board
of Directors. The option-vesting period is determined at the time of
each grant, and all options expire two to ten years from the grant
date.
A summary of the 1996 Plan stock option activity follows:
Outstanding Value Per Weighted Avg.
Shares Share Total Exercise Price
----------- --------- ----- --------------
Balances, January
1, 1998 275,000 $.44 - $1.47 $131,219 $.48
Canceled (235,000) $.63 - $1.25 (175,003) (.74)
Granted 413,000 $.34 - $.78 239,702 .58
------- -----------------
Balances, December
31, 1998 453,000 195,918 .43
Granted 375,000 $.33-$1.29 233,100 .62
------- -----------------
Balances, December
31, 1999 828,000 429,018 .52
Granted 192,500 $.63-$1.44 126,813 .66
Canceled (189,000) $.33-$.66 (105,976) (.56)
Exercised (198,000) $.34-$1.47 (79,137) (.40)
Balances, December ======== =================
31, 2000 633,500 $370,71 $.59
======== =================
---------------------------------------------------------------------
The following table summarizes information about stock options under
the plan at December 31, 2000.
Outstanding Exercisable
---------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Average
Exercise Out- Contractual Exercise Number Exercise
Prices standing Life Price Exercisable Price
------------ -------- ----------- --------- ----------- ---------
0.34 to 0.44 235,000 6.5 years 0.44 235,000 0.44
0.63 to 0.84 382,500 8.6 years 0.64 292,000 0.65
1.28 to 2.06 16,000 9.0 years 1.36 16,000 1.36
At December 31, 2000, options for 543,000 shares were exercisable
under the 1996 Plan. There were 168,500 shares available for future
grant.
The weighted-average fair value of options granted during the year
totaled $.52, $.65, and $.36, per share for the years ended December
31, 2000, 1999, and 1998 respectively.
1994 STOCK OPTION AND GRANT PLAN
In April 1994, the Company authorized 700,000 shares of Common Stock
for issuance under its 1994 Stock Option and Grant Plan ("1994 Plan")
to employees and directors.
The options are granted to purchase Common Stock at the fair market
value on the date of grant or at other prices as determined by the
Board of Directors ("the Board"). Options issued under the 1994 Plan
become exercisable in one or more installments during its term and
the right to exercise may be cumulative, as determined by the Board.
Options expire as determined by the Board, but not more than 10 years
after the date of grant.
Details of activity under the 1994 Plan are as follows:
--------------------------------------------------------------------
Stock Options Outstanding Value Per Total Weighted Avg.
Share Exercise Price
--------------------------------------------------------------------
Balances,
January 1, 1998 281,175 $.63 - $1.44 $ 189,264 $ .67
Granted 200,500 $.34 68,972 .34
Canceled (50,000) $.63 - $ .88 (33,100) (.66)
Exercised (10,174) $.63 - $1.44 (9,388) (.92)
--------- ---------------------
Balances,
December 31, 1998 421,501 215,748 .51
Granted 104,000 $.66 68,245 .66
Canceled (13,501) $.34 - $1.44 (7,956) (.59)
Exercised (113,000) $.34 - $ .78 (66,070) (.58)
--------- ---------------------
Balances,
December 31, 1999 399,000 209,967 .53
Granted 9,500 $.63 5,939 .63
Canceled (5,250) $.34 - $1.28 (4,614) (.88)
Exercised (86,000) $.34 - $1.28 (45,974) (.53)
========= =====================
Balances,
December 31, 2000 317,250 $ 165,318 $ .52
-------------------------------------------------------------------------
Stock Grants Grant Price Total Weighted
Average
Exercise
Price
------------- ----------- ----- ----------
Balances, January 1, 1998 83,166 $.84 - $1.13 $138,247 $1.66
Granted/Canceled - - - -
Balances, December 31, 1998 83,166 138,247 1.66
Granted/Canceled - - - -
------- ---------------------
Balances, December 31, 1999 83,166 138,247 1.66
Granted/Canceled - - - -
------- ---------------------
Balances, December 31, 2000 83,166 $138,247 $1.66
-------------------------------------------------------------------------
The following table summarizes information about stock options under
the plan at December 31, 2000.
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ ----------- ------------ -------- ----------- --------
0.34 to 0.44 126,750 5.5 years 0.34 78,500 0.34
0.63 to 0.84 190,500 4.5 years 0.64 125,000 0.63
The weighted-average fair value of options granted during the year
totaled $.48, $.64, and $.33, per share for the years ended December
31, 2000, 1999, and 1998, respectively.
At December 31, 2000, options to purchase 203,500 shares of Common
Stock were exercisable and 3,599 shares were available for future
grant.
1993 STOCK OPTION PLAN
In May 1994, the Company authorized 235,000 shares of Common Stock
for issuance under its 1993 Stock Option Plan ("1993 Plan") as
incentive or non-qualified stock options. The Company grants non-
qualified stock options to officers, directors and employees.
Incentive stock options may be granted to employees.
The options are granted to purchase Common Stock at the fair market
value on the grant date or at other prices as determined by the Board
of Directors. The option-vesting period is determined at the time of
each grant, and all options expire two to ten years from the grant
date.
A summary of the 1993 Plan stock option activity follows:
Outstanding Weighted Avg.
Shares Value Per Share Total Exercise Price
------------ ------------- ----- --------------
Balances,
January 1, 1998 245,275 $.77 - $1.37 $ 261,950 $ 1.07
Canceled (236,275) $.63 - $1.81 (254,231) (1.08)
Granted 230,675 $.34 - $ .44 100,593 .44
--------- ---------------------
Balances,
December 31, 1998 239,675 108,312 .45
Canceled/Granted - - -
-------- ---------------------
Balances,
December 31, 1999 239,675 108,312 .45
Granted - - -
Exercised (163,375) $.44 - $.75 (72,727) ( .45)
-------- ---------------------
Balances,
December 31, 2000 76,300 $35,585 $ .47
======== =====================
The following table summarizes information about stock options under
the plan at December 31, 2000.
Outstanding Exercisable
---------------------------------- ----------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------- ---------- -------- ----------- -----
0.34 to 0.44 71,300 5.6 years 0.43 69,550 0.44
0.63 to 0.84 4,000 6.0 years 0.75 4,000 0.75
1.28 to 2.06 1,000 5.5 years 1.72 1,000 1.72
The weighted-average fair value of options granted during the year
totaled $.44 for the year ended December 31, 1998.
At December 31, 2000, options for 74,550 shares were exercisable
under the 1993 Plan. There were options for 3,500 shares available
for grant.
COMMON STOCK WARRANTS
On January 28, 1994, the Board of Directors granted 100,000 warrants
to an officer to purchase shares of Common Stock at an exercise price
of $1.5625 per share, expiring on January 31, 1999. In January 1998,
these warrants were repriced to $.44 per share and the term was
extended until January 28, 2004. In March 2000, the officer
exercised these warrants. There are no common stock warrants
outstanding as of December 31, 2000.
COMMON STOCK RESERVED
Common Stock reserved at December 31, 2000 was as follows:
1996 Equity Incentive Plan 802,000
1994 Stock Option and Grant Plan 320,849
1993 Stock Option Plan 79,800
---------
1,202,649
=========
7. INCOME TAXES
The provisions for income taxes for the years ended December 31,
consists of:
Current: 2000 1999 1998
---- ---- -----
Federal $ - $ - $ -
State 2,500 2,500 2,500
------ ------ ------
Total current 2,500 2,500 2,500
------ ------ ------
Deferred:
Federal - - -
State - - -
------ ------ ------
Total deferred $2,500 $2,500 $2,500
====== ====== ======
The following is a reconciliation of statutory federal income taxes to the
actual provision for income taxes:
2000 1999 1998
---- ---- ----
Federal income taxes at statutory rate $ 3,600 $(124,845) $ 1,659
Increase(decrease) in taxes resulting
from state income taxes (800) (16,380) 107
Increase(decrease) in deferred tax
asset valuation allowance (133,000) 76,000 (20,000)
Expiration of business tax credits 121,000 61,000 30,000
Other, net 11,700 6,725 (9,266)
--------- -------- -------
Provision for income taxes $ 2,500 $ 2,500 $ 2,500
========= ======== ========
The components of the net deferred tax liability recognized in the
accompanying balance sheets are as follows:
2000 1999
----- ----
Deferred tax liability $2,000 $1,000
Deferred tax asset (2,286,000) (2,418,000)
Valuation allowance 2,284,000 2,417,000
----------- -----------
$ - $ -
================================
The types of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts that give rise
to a significant portion of the deferred tax asset and their
approximate tax effects are as follows:
2000 1999
---- ----
Future income (deductions):
Net operating loss $(2,242,000) $(2,234,000)
Allowance for doubtful accounts (4,000) (4,000)
General business tax credits (14,000) 135,000)
Depreciation (18,000) (30,000)
Stock options (5,000) (12,000)
Other (1,000) (2,000)
----------- -----------
$(2,284,000) $(2,417,000)
=========== ===========
The Company has net operating loss carry forwards for federal income
tax purposes of approximately $5,561,000. General business tax
credits carry forwards of approximately $14,000 are available to
reduce future federal income taxes. These carry forwards expire on
varying dates from 2001 through 2013.
8. EMPLOYEE BENEFIT PLAN
The Company has a Cash or Deferred Profit Sharing Plan ("the 401(k)
Plan"). The 401(k) Plan is designed to qualify under Section 401(k)
of the Internal Revenue Code and allows the Company to make
discretionary contributions as determined by the Company's Board of
Directors. For the years ended December 31, 2000, 1999, and 1998,
the Company contributed $3,988, $2,476, and $1,289 to the 401(k)
Plan.
9. COMMITMENTS AND CONTINGENCIES
At December 31, 2000 and 1999, equipment with a net book value of
$10,735 and $7,635, net of accumulated amortization of $9,626 and
$6,002, respectively, has been leased under capital leases.
The Company leases its executive offices under a noncancelable
operating lease which expires in July 2003.
Future minimum payments for lease obligations are as follows:
Capital Operating
------ ---------
2001 $ 3,574 $ 89,304
2002 3,060 89,304
2003 510 52,094
-------- ---------
Total minimum lease payments 7,144 $ 230,702
=========
Amount representing interest (2,135)
--------
Present value of min. lease
payments 5,009
Current portion (1,785)
--------
Long-term portion $ 3,224
========
The Company has bonus agreements with two officers that provide for
quarterly bonuses of 5% and 4%, respectively, of the Company's pre-
tax profits. The Company expensed bonuses of $15,968, $1,312, and
$9,536 under these agreements for the years ended December 31, 2000,
1999, and 1998, respectively.
11. FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading.
The following methods and assumptions were used to estimate the fair
value of each financial instrument for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short
maturity of those instruments.
DEBT
The fair value of the Company's debt is estimated based on borrowing
rates currently available to the Company for bank loans with similar
terms and maturities.
The estimated fair values of the Company's financial instruments at
December 31, 2000 are as follows:
Carrying Amount Fair Value
---------------------------
Assets
------
Cash and cash equivalents $ 150,457 $ 150,457
Receivables $ 407,251 $ 407,251
Liabilities
-----------
Accounts payable $ 185,468 $ 185,468
Line of credit $ 200,000 $ 200,000
The estimated fair values of the Company's financial instruments at
December 31, 1999 are as follows:
Carrying Amount Fair Value
--------------- ----------
Assets
------
Cash and cash equivalents $ 253,930 $ 253,930
Receivables (including $1,635
from related parties) $ 205,742 $ 205,742
Liabilities
-----------
Accounts payable $ 209,882 $ 209,882
Line of credit $ 168,235 $ 168,235
12. SEGMENT INFORMATION
The Company operates in one industry segment consisting of the
development and marketing of electronic document image management and
retrieval systems. The Company's technologies are managed as one
segment because it offers similar products in similar markets and the
factors determining strategic decisions are comparable for all
products and markets.
Sales to foreign markets totaled $57,911, $102,831, and $35,003 for
the years ending December 31, 2000, 1999, and 1998, respectively.
INDEPENDENT ACCOUNTANTS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of
1mage Software, Inc.
Englewood, Colorado
In connection with our audit of the financial statements of 1mage
Software, Inc. for each of the three years in the period ended December
31, 2000, we have also audited the following financial statement schedule.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits of the basic financial statements.
The schedule is presented for purposes of complying with the Securities
and Exchange Commission's rules and regulations and is not a required part
of the financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
/s/ Baird, Kurtz & Dobson
Denver, Colorado
February 2, 2001
1mage Software, Inc.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------------------------------
Additions
Balance at charged to: Additions Balance
beginning Costs and charged to: at end of
of period expenses deductions period
For the Year Ended
December 31, 2000
Allowance for
Doubtful Accounts $10,000 $31,403 $31,403 $10,000
For the Year Ended
December 31, 1999
Allowance for
Doubtful Accounts $15,000 $39,485 $44,485 $10,000
For the Year Ended
December 31, 1998
Allowance for
Doubtful Accounts $20,000 $41,984 $46,984 $15,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information concerning the Company's
Executive Officers and Directors:
FIRST YEAR AS
EXECUTIVE
OFFICER OR POSITION
NAME AGE DIRECTOR WITH COMPANY
---- -- ------------- --------------
David R. DeYoung 55 1981 President, Chief Executive
Officer and Director
Robert Wiegand II 54 1992 Secretary and Director
Mary Anne DeYoung 47 1994 Treasurer, Chief Financial
Officer, Asst. Secretary and
Director
Richard A. Knapp 55 1997 Director
James J. Capeless 61 2000 Director
DAVID R. DEYOUNG - CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Mr. DeYoung has been President, Chief Executive Officer and a
Director of the Company since its formation in 1981. He served in similar
capacities with the Company's predecessor corporation from 1979 to 1981.
He holds a Bachelor of Science Degree in Business Administration and
Computer Science from California State Polytechnic University. Mr.
DeYoung is the spouse of Mary Anne DeYoung.
ROBERT WIEGAND II - SECRETARY AND DIRECTOR
Mr. Wiegand was elected to the Board of Directors in July 1992. Mr.
Wiegand was appointed to the office of Secretary of the Company on March
1, 1994. Mr. Wiegand is presently a lawyer in private practice. From
January 15, 1992 to December 26, 1992, he was Vice-President of
Administration for Rose Manufacturing Co., a privately held manufacturer
of safety equipment based in Englewood, Colorado. Mr. Wiegand has
practiced law for 23 years, and prior to joining Rose Manufacturing, was
special counsel with Pendleton & Sabian, P.C., a law firm in Denver. Mr.
Wiegand graduated Phi Beta Kappa from the Tulane University of Louisiana
in 1970 and went on to receive a law degree and was admitted to practice
in Louisiana in 1972 and Colorado in 1977. Since 1976, Mr. Wiegand's
practice has been limited to securities offerings, estate planning,
business organizations and tax law. In addition to membership in six bar
Associations, Mr. Wiegand has been admitted to practice before the U.S.
District Court (Colorado and ED-Louisiana) and before the U.S. Court of
Appeals (5th Circuit).
MARY ANNE DEYOUNG - TREASURER, CHIEF FINANCIAL OFFICER, ASSISTANT
SECRETARY AND DIRECTOR
Ms. DeYoung was elected to the Board of Directors in April 1996. Ms.
DeYoung was appointed Treasurer, Chief Financial Officer and Assistant
Secretary of the Company on December 15, 1994. Ms. DeYoung has served as
Vice President, Finance and Administration since July 1986. Ms. DeYoung
joined the Company as Controller in April 1981. From 1975 to 1981, Ms.
DeYoung was a systems analyst with Arthur Andersen LLP, a financial
analyst, and an independent financial consultant. Ms. DeYoung holds a
Bachelor of Science Degree in Accounting from the University of Santa
Clara. Ms. DeYoung is the spouse of David R. DeYoung.
RICHARD A. KNAPP - DIRECTOR
Mr. Knapp was elected to the Board of Directors in May 1997. Mr.
Knapp is currently the President and CEO of Lease Capital Corporation and
has served in that capacity since 1990. From 1984 until 1990, Mr. Knapp
was a regional manager for both Paccom Leasing Corporation and Security
Pacific Business Finance. In total, Mr. Knapp has been associated with
the banking/finance industry for nearly thirty years. He holds a Bachelor
of Science degree in Finance from the University of Arizona.
JAMES J. CAPELESS - DIRECTOR
Mr. Capeless was elected to the Board of Directors in May 2000. Mr.
Capeless currently serves as a consultant to small and medium size
businesses in the high technology sector. Mr. Capeless served as CEO of
VMARK Software, Inc. (VMARK) in Westborough, MA from 1988 until 1996.
Under his leadership, VMARK achieved seven-plus years of revenue and
profit growth from business operations, including a string of 25
consecutive quarters. From 1985 until 1988, he served as Vice President,
Marketing for VMARK. From 1983 until 1985, Mr. Capeless served as Vice
President, Marketing Development for Infinet, Inc. in Andover, MA. He
served as Director of International Marketing for Prime Computer (Natick,
MA) from 1980-1983. Prior to that, Mr. Capeless served in various
capacities at Honeywell Information Systems in Waltham, MA from 1962 until
1980. Mr. Capeless holds both BA and MA degrees from the University of
Massachusetts.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the executive compensation of two of
the Company's Executive Officers for each of the Company's last three
fiscal years. There were no other Executive Officers serving at the end
of the last fiscal year whose compensation was greater than $100,000.
ANNUAL LONG TERM ALL OTHER
COMPENSATION* COMPENSATION** COMPENSATION
------------- -------------- ------------
SALARY BONUS AWARDS ***
------ ------ -------------- ------------
NAME AND SECURITIES
PRINCIPAL UNDERLYING
POSITION YEAR ($) ($) OPTIONS (#) ($)
---------- ---- ------ ------ ------------ ------------
David R. DeYoung 2000 144,435 8,872 50,000 3,767
President, CEO 1999 132,053 730 60,000 4,812
1998 129,820 4,817 432,375** 5,772
Mary Anne DeYoung 2000 102,898 7,096 50,000 2,187
CFO, Treasurer, 1999 95,214 582 60,000 2,155
Asst. Secretary 1998 93,246 3,854 199,800*** 2,155
* Neither Mr. DeYoung nor Ms. DeYoung received additional compensation
other than noted above, the aggregate amount of which was the lesser of
either $50,000 or 10% of their annual salary and bonus.
** For 1998, includes 337,375 stock options which were repriced to fair
market value on January 15, 1998.
*** For 1998, includes 124,800 stock options which were repriced to fair
market value on January 15, 1998.
**** Includes insurance premiums paid by the Company for term life and
disability insurance, as well as premiums paid for a key-man life
insurance policy which has the death benefit assigned to the Company
and the cash value of the policy intended to accrue for the benefit of
Mr. DeYoung.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named Executive
Officers:
INDIVIDUAL GRANTS
% of Total
Number of Options
Name Securities Granted to Exercise
Underlying Employees or Base Expiration
Options in Fiscal Price Date
Granted(#) Year ($/Share)
D.R. DeYoung 50,000 25% .625 12/04/10
Mary Anne 50,000 25% .625 12/04/10
DeYoung
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning each exercise
of stock options during the last fiscal year by the named Executive
Officers and the fiscal year-end value of unexercised options:
Number of Value of
securities unexercised
underlying in-the-money
unexercised options at
Shares options at fiscal
acquired on Value fiscal year-end
Name exercise(#) Realized($) year-end(#) ($)*
D.R. DeYoung 254,375 $907,462 288,000/0 $190,080/0
Mary Anne 75,000 $271,950 234,800/0 $154,968/0
DeYoung
*Based upon the fair market value of the Common Stock on December 31, 2000
of $.66, being the closing price as quoted on the OTC:BB.
EMPLOYMENT CONTRACTS
Mr. DeYoung, the Company's President and Chief Executive Officer, is
employed pursuant to a three-year employment contract between the Company
and Mr. DeYoung, which expires on October 31, 2002. Since November 1,
1999, the compensation of Mr. DeYoung has been established under the terms
of this employment contract. The contract calls for an annual base
salary, in an amount determined annually by the Board of Directors,
payable semi-monthly, plus expenses and normal fringe benefits. Mr.
DeYoung earns a bonus of 5% of the Company's pretax earnings, calculated
on a quarterly basis. An annual bonus may be paid to Mr. DeYoung based on
the performance of the Company and at the discretion of the Board of
Directors. Mr. DeYoung's employment contract provides that should his
employment be terminated for any reason other than for cause, he is
entitled to a cash severance package equal to one year's cash
compensation. In addition, Mr. DeYoung is entitled to receive a grant of
a sufficient number of ten-year options as are necessary to permit him to
retain the same percentage of beneficial ownership interest in the Company
as he held on December 16, 1996. These grants would be made from the
Company's Equity Incentive Plan at the fair market value of the Common
Stock on the date of grant.
Ms. DeYoung, the Company's Vice President of Finance and Chief
Financial Officer, is employed pursuant to a three-year employment
contract between the Company and Ms. DeYoung which was effective September
1, 1999. Her compensation is established under the terms of this
employment contract. The contract calls for an annual base salary,
expenses, normal fringe benefits, as well as a bonus equal to 4% of the
Company's pretax earnings, calculated on a quarterly basis. In addition,
Ms. DeYoung's employment contract provides that should her employment be
terminated for any reason other than for cause, she is entitled to a cash
severance package equal to one year's cash compensation.
COMPENSATION OF DIRECTORS
The Company currently pays non-employee Directors $1,000 per quarter
plus specific hourly fees for special meetings or additional
participation. In lieu of cash compensation for directors' services, Mr.
Capeless was granted a stock option for 15,000 shares of the Company's
common stock. Pursuant to the 1996 Stock Option Plan (the "1996 Plan"),
members of the compensation committee of the Board of Directors are
automatically granted an option on the last trading day in June to
purchase 4,000 shares of Common Stock at 100% of the fair market value on
such date. On June 30, 2000 each member of the compensation committee
received an automatic grant to purchase 4,000 shares of Common Stock at
$1.4375, the fair market value on that date. In addition to the automatic
grants, the Board of Directors granted each non-employee director 5,000
stock options to purchase shares of Common Stock at $0.625 per share, the
fair market value on December 4, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth the number of shares of Common Stock owned
be each Executive Officer and Director of the Company, by all persons
known to the Company to be the beneficial owner of more than 5% of any
class of the Company's voting securities, and by all Executive Officers
and Directors as a group. Unless otherwise noted, the share ownership
specified in the following table represents both record and beneficial
ownership as of February 23, 2001.
Beneficial Percent of
Name and Address of Beneficial Owner Ownership(1) Class
David R. DeYoung 777,591 (2),(3) 22.6%
6025 So. Quebec Street #300,
Englewood, Colorado 80111
Robert Wiegand II 73,500 (4) 2.3%
5261 So. Quebec Street,
Greenwood Village, Colorado 80111
Mary Anne DeYoung 305,301 (5) 9.0%
6025 So. Quebec Street #300,
Englewood, Colorado 80111
Richard A. Knapp 18,500 (6) 0.6%
900 W. Castleton Rd, #120,
Castle Rock, Colorado 80104
James J. Capeless 24,000 (7) .8%
2 Nadine Road
Acton, MA 01720
Spencer D. Lehman 280,606 8.9%
1250 4th Street,
Santa Monica, California 90401
John G. Mazza 302,937 9.6%
6613 Zumirez Drive,
Malibu, California 90265
All Executive Officers and Directors
as a Group - 5 persons 1,198,892 (8) 31.8%
(1) Beneficial owners are believed to have sole voting and investment
power with respect to the shares shown unless otherwise indicated.
(2) Includes: 288,000 options to purchase Common Stock. See EXECUTIVE
COMPENSATION - Employment Contract.
(3) Excludes: any shares attributable to Mr. DeYoung's right under his
employment contract to maintain his proportional ownership of the
Company under certain circumstances. See EXECUTIVE COMPENSATION -
Employment Contract.
(4) Includes 53,500 options to purchase Common Stock
(5) Includes 234,800 options to purchase Common Stock
(6) Consists of 18,500 options to purchase Common Stock
(7) Consists of 24,000 options to purchase Common Stock
(8) Includes 618,800 options to purchase Common Stock
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related transactions for the year ended December
31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Financial Statement Index on Page 13
2. Financial Statement Schedules
See Financial Statement Index on Page 13
3. List of Exhibits
Exhibit Number Description and Incorporation by Reference
-------------- ----------------------------------------
3.1* - Restated Articles of Incorporation of the Company, as
amended.
3.2* - Bylaws of the Company, as amended.
3.3* - Articles of Amendment to the Articles of
Incorporation of the Company dated April 18, 1991
3.4** - Articles of Amendment to the Articles of
Incorporation dated May 21, 1993.
3.4** - Articles of Amendment to the Articles of
Incorporation dated June 28, 1994.
4.1******* - Form 1994 Class A Warrant issued to David R. DeYoung
dated February 1, 1995.
10.5* - UniVerse(TM) Distributor Agreement between INFORMIX
SOFTWARE, INC. and the Company dated May 15, 1991
10.14 - President Employment Agreement between David R.
DeYoung and the Company dated November 1, 1999.
10.15 - Chief Financial Officer Employment Agreement between
Mary Anne DeYoung and the Company dated September 1,
1999.
10.21**** - Software License Agreement between Reynolds+Reynolds
and the Company. This exhibit is subject to a grant
of confidential treatment filed separately with the
Securities and Exchange Commission.
10.22*** - 1994 Stock Option and Grant Plan.
10.23** - 1993 Stock Option Plan.
10.24****** - Equity Incentive Plan
23 - Consent of Baird, Kurtz and Dobson
See Index to Financial Statements on Page 13
* Filed as an Exhibit to Form S-1 Registration Statement
No. 33-44717, on December 23, 1991.
** Filed as an Exhibit to Form S-8 Registration Statement
No. 33-86760, on November 29, 1994
*** Filed as an Exhibit to Form S-8 Registration Statement
No. 33-78096, on April 22, 1994.
**** Filed as an Exhibit to Form 10-K for the period ended
December 31, 1994.
****** Filed as an Exhibit to Form S-8 Registration Statement
No. 333-3078, on July 3, 1997.
******* Filed as an Exhibit to Form S-3 Registration Statement
No. 333-35265, on September 10, 1997.
There were no reports filed on Form 8-K for the quarter ended December 31,
2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
1MAGE SOFTWARE, INC.
By: /s/ David R. DeYoung Date: March 14, 2001
David R. DeYoung
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: /s/ David R. DeYoung Date: March 14, 2001
David R. DeYoung, President
and Principal Chief Executive Officer
By: /s/ Robert Wiegand, II Date: March 14, 2001
Robert Wiegand, II
Director and Secretary
By: /s/ Mary Anne DeYoung Date: March 14, 2001
Mary Anne DeYoung
Vice President, Finance
Principal and Accounting Officer
By: /s/ Richard A. Knapp Date: March 14, 2001
Richard A. Knapp
Director
By: /s/ James J. Capeless Date: March 14, 2001
James J. Capeless
Director
EXHIBIT INDEX
No. Description
--- -----------
23 Consent of Baird, Kurtz and Dobson