FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended 12/31/2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from ________ to ________.
1MAGE SOFTWARE, INC.
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(Exact name of Registrant as specified in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
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(State of Incorporation) (IRS Employer Identification Number)
6025 S. QUEBEC ST. #300 - ENGLEWOOD CO 80111 (303) 694-9180
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(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
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(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK - $.004 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy statements or any amendment
of this Form10-K. X
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes . No
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State the aggregate market value of the voting and nonvoting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
March 15, 2004: $1,698,901.
As of March 15, 2004, there were 3,287,597 shares of the Registrant's Common
Stock outstanding.
Certain information required by Part III of this report (Items 10, 11, 12, 13
and 14) is incorporated by reference from the Registrant's proxy statement
relating to the Registrant's 2004 Annual Meeting of shareholders.
Exhibit Index begins on Page 40
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TABLE OF CONTENTS
PART I
1. Business.................................................................3
2. Properties...............................................................9
3. Legal Proceedings........................................................9
4. Submission of Matters to a Vote of Security Holders ....................10
PART II
5. Market for Registrant's Common Equity and Related
Stockholders Matters....................................................11
6. Selected Financial Data.................................................12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................13
8. Financial Statements and Supplementary Data.............................16
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................................35
9A. Controls and Procedures.................................................35
PART III
10. Directors and Executive Officers of the Registrant......................36
11. Executive Compensation..................................................36
12. Security Ownership of Certain Beneficial Owners and Management..........36
13. Certain Relationships and Related Transactions..........................36
14. Principal Accounting Fees and Services...................................36
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........36
2
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)
(pronounced "one image") 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, 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 an
extensive 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 2003, the Company
concentrated its efforts on selling document imaging software to its niche
markets. This market includes users that prefer a choice of (1) operating
platforms, such as RedHat Linux, Windows, and Unix, or (2) application software
developers that wish to offer a document imaging solution as part of their
portfolio. 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, consultants, and other businesses, which provide software to their
targeted vertical markets.
IMAGING SOFTWARE MARKET
The Company markets its products through its direct sales force and its
indirect channel partners. The Company targets VARs, systems integrators,
developers, consultants, and other companies that market complementary software,
services, or other products. 1MAGE software has an established presence in a
multitude of industries, including retail, distribution, education, state and
local government, healthcare, manufacturing, energy, automotive, public safety,
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.
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1MAGE(R) DOCUMENT MANAGEMENT - 1MAGE is a powerful electronic image
management system created to operate the same on Linux, Windows(TM) and
Unix-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.
Additional products include the following:
o 1API for image-enabling an application using a toolkit
o 1SCAN for scanning, pre-indexing, and bar code reading
o 1FAX for inbound and outbound fax or e-mail and cover sheet management
o 1COLD/ERM for storing computer-generated formatted data
o 1FORM for business form template administration
o 1RENDITION for merging spooled data with supporting images for billing or
other needs
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
o 1APPROVE for electronically approving invoices and other document related
business functions
o 1ACCESS for bringing images to computers that support JAVA programming
languages
o 1SEARCH for full text/keyword retrieval of documents
o 1PUBLISH for selecting and recording images on output media such as CD or DVD
A key element of the Company's product line is its open systems technology,
namely:
o Open Systems compliant with Linux, Unix, and Windows Operating Systems.
Supports file formats in TIFF, JPEG, PCX, PCL, PDF, HTML or HPGL. The
server software (1MAGE) operates on Linux, Unix, and Windows servers.
Supporting clients include Microsoft Windows, X-Windows, ASCII, JAVA 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, RedHat Linux and
Windows
o Recognition technology and scanning tasks run on Microsoft Windows
o UniVerse and UniData ("U2") Relational Database software from IBM
1MAGE includes several distinguishing features: the ability to use many
different types of workstations, the ability to quickly and easily integrate
with the existing business application software using application programming
interfaces ("APIs"), and the scalability to handle the needs of companies of all
sizes economically. Through the use of the Linux, Unix, and Windows operating
systems and open systems technology, the Company seeks to offer its customers an
imaging solution at a reasonable cost. Because 1MAGE is a server-based product,
the Linux operating system ("O/S") has become very popular with end users of the
Company's software. In 2003, the majority of imaging systems sold through the
direct sales force were installed on servers running the Linux O/S.
During 2003, sales of 1MAGE software licenses (excluding annual license
fees) accounted for $815,000 (39% of total revenue); in 2002, revenue from sales
of software licenses accounted for $765,000 (34% of total revenue). 1MAGE
utilizes the Linux, Unix, and Windows operating systems and IBM's U2 database
software. The Company's open systems technology makes its software transportable
to numerous hardware products from varying manufacturers. Because of the number
of hardware manufacturers using the Linux, Unix, and Windows operating systems,
the Company's software customers are rarely restricted in their choice of
hardware manufacturers.
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The Company also recommends hardware and related products and sells
specialized complex peripheral products, such as high-end scanners, at the
customer's request. Computer hardware and peripheral products are purchased only
upon request to fill specific customer orders, no inventory is maintained.
Hardware is generally shipped directly from the manufacturer to the customer. In
2003, revenue from hardware sales accounted for $205,000 (10%) of the Company's
total revenue, as compared to $181,000 (7%) for 2002.
SERVICES AND ANNUAL FEES
The Company licenses its 1MAGE software to its customers and charges an
annual license and maintenance fee, which must be paid to continue receiving
support for the use of the software. During 2003 and 2002, annual license fees
accounted for $786,000 (37%) and $978,000 (44%), 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 professional services to its customers. These services
include preparation of image management plans ("IMP"), installation, training,
image enabling existing software, and consulting services for customers. For the
years ended December 31, 2003 and 2002, the revenues from these services
accounted for $299,000 (14%), and $318,000 (14%), 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 resellers
specializing in a variety of industries, including health care, construction,
collection services, and distribution/manufacturing. In addition, the Company
licenses its software and certain other products and services through agreements
with an Application Service Provider (ASP) in the healthcare industry. The
Company sells its software 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 and
consultants 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. The general
strategy is to (1) help customers define the goals for their system, (2) provide
the means of achieving those goals through our 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 training and educational programs. The Company also markets its products
and services over the Internet on its website at www.1mage.com.
CUSTOMERS
The Company sells its 1MAGE software to businesses in a wide variety of
industries and markets, facilitated through the use of VARs and its direct sales
force.
During the years 2003 and 2002, the Company generated .1% and 20%,
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 a subscription
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and maintenance agreement with Reynolds. Under that agreement, fees are to be
paid to the Company for certain products, including but not limited to the
Company's desktop client software.
On January 18, 2002, Reynolds notified the Company of its intent to
terminate the 1996 subscription and maintenance agreement effective April 22,
2002. Reynolds had installed the 1MAGE document management software in
approximately 1,000 of its customer sites in the United States and Canada. As a
result of various disputes arising out of the termination of the 1996 agreement,
including Reynolds' decision to continue sublicensing the Company's software
notwithstanding such termination, the Company and Reynolds are currently
involved in litigation. (See "Legal Proceedings".) While it is conceivable that
the Company could enter into new agreements with Reynolds to govern
future-licensing arrangements, as of the date hereof, no such new agreement is
planned or likely. The loss of Reynolds as a customer has already had a
significantly adverse impact on the Company. (See "Management's Discussion and
Analysis of Results of Operations and Financial Condition".) While the Company
has now nearly replaced the bulk of the revenue lost as a result of the wrongful
termination of the 1996 contract by Reynolds and Reynolds' subsequent actions
the Company's opportunity for growth has been severely damaged. It is possible
that some portion of the revenue lost by the Company will be awarded to the
Company in the ongoing litigation between the Company and Reynolds. Naturally,
the Company cannot predict the outcome of that litigation nor can there be any
assurance that the Company will ever obtain a meaningful recovery from Reynolds.
SOURCES OF SUPPLY
The Company has an OEM Software Agreement with IBM Corp. to sublicense
their UniVerse and UniData database programs. The agreement authorizes the
Company to include certain IBM database programs as part of their imaging
solution. This agreement currently runs until September 28, 2004 and it may be
renewed for additional one (1) year terms. The Company has designed its product
such that, through the use of its Application Program Interfaces ("API"s), third
party software can be easily integrated into the core products with minimal
difficulty and effort.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
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, is lengthy and not predictable with any degree of
certainty. Prior sales and implementation cycles are not necessarily an
indication of future cycles. 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.
It has been the Company's expectation that its recent focus on offering
its proprietary imaging software to a broader range of customers, through its
reseller network and its direct sales force, would lessen the historical
quarterly fluctuations in the Company's operating results. Unfortunately, larger
events, such as Reynolds's termination of the 1996 contract and subsequent
actions, as well as the downturn in the national economy, especially in the
technology sector, have continued to cause significant variations in those
results. In addition, large volume sales or groups of sales of 1MAGE licenses
may cause significant variances in quarterly results that may be difficult to
predict.
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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.
The Company has brought suit against Reynolds & Reynolds for, among other
things, copyright infringement. (See "Legal Proceedings".)
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 significant 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 intense 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 also available from a number of competitors
of the Company. Some of these competitors are larger and have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
than we do. As a result, these competitors may be able to respond more quickly
to emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
we can.
The Company believes that usage of the popular Linux and Windows operating
systems and the IBM U2 databases has strengthened the Company's competitive
position by making the Company's software compatible with more types of hardware
and with the IBM U2 application software offered by software developers and
system integrators. The Company further believes that its principal advantage
over its competitors is the Company's ability
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to give its customers a choice in selecting a Linux, Unix, or Windows-based open
systems architecture and the IBM U2 database that can be offered at lower
prices.
LIMITED MARKETS
The Company's 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. Certain 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.
PRODUCT DEVELOPMENT
The software and services market in which we compete is characterized by
(1) rapid technological change, (2) frequent introduction of new products and
enhancements, and (3) changing customer needs. Our future success depends on our
ability to support existing products and develop new products. The Company
capitalizes software development costs once technological feasibility is
established. During 2003, the Company developed a new release of 1MAGE(C) which
employs new technologies, including Application Service Provider (ASP)
requirements and two JAVA systems (i.e. 1APPROVE and 1ACCESS) which will operate
on most platforms. In addition, improvements were made to the hardware/software
compatibility offerings available for Linux users. During 2003 and 2002, the
Company spent $261,000 and $297,000, respectively, for computer software
development.
EMPLOYEES
As of February 28, 2004, the Company employed twenty-one persons, twenty
of whom serve on a full-time basis and one on a part-time basis.
Responsibilities are divided as follows: eight persons in sales and marketing,
ten in technical support and programming functions, and three in administrative
positions.
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. 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.
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ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 5,464 square feet
at Plaza Quebec, 6025 South Quebec Street, Suite 300, Englewood, Colorado, 80111
and are occupied pursuant to a lease agreement between the Company and Trammel
Crow, Inc. with monthly rental payments of $5,226, initially, and scaling to
$7,741 by the end of the lease term. The term of the lease commenced May 1, 2003
and will terminate on August 31, 2008. 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
On June 21, 2002, the Company filed a civil action seeking monies owed by
The Reynolds and Reynolds Company under its 1996 subscription and maintenance
agreement with the Company in the District Court for the City and County of
Denver, Colorado, 1MAGE SOFTWARE, INC. V. THE REYNOLDS AND REYNOLDS CO. Case
No.: 02-CV-4701 ("the "Collection Action"). In its complaint in the Collection
Action, the Company demands immediate payment of $193,611 currently due under
that contract plus interest and costs. Reynolds deposited the $193,611 with the
court clerk, pending order of the court as to its disposition and has filed an
answer denying liability. The Company filed a Motion for Summary Judgment to
which Reynolds has responded, denying liability and stating that in all events,
the amount due is $166,741. The Court then referred the matter to arbitration
which is pending (see below).
A lawsuit was filed by the Company in the United States District Court for
the District of Colorado, 1MAGE SOFTWARE, INC. V. THE REYNOLDS AND REYNOLDS CO.,
ET AL., No. 02-K-1688 (OES), (the "Infringement Action"), in which 1mage is
seeking damages for copyright infringement resulting from continuing use of
1mage software without any license or authority by Reynolds and Reynolds and
approximately 1,000 automobile dealers throughout the United States. The
Infringement Action has now been referred to arbitration, along with the
Collection Action, which arbitration is pending. In the arbitration, Reynolds
has asserted a counterclaim for $580,000, alleging that 1mage, without
justification or privilege, advised customers and/or prospects of Reynolds that
Reynolds no longer had a license to distribute 1mage software. 1mage does
contend that Reynolds has no such rights but denies it improperly informed
Reynolds' dealers. To 1mage's knowledge, no dealer has terminated its
relationship with Reynolds because of the licensing dispute.
The arbitration is scheduled for hearing commencing on May 24, 2004 for
one week in Cleveland, Ohio, at which time a determination whether Reynolds has
any perpetual license will be made. In the event it is found that Reynolds has
no license, 1mage seeks to recover as damages all profits earned by Reynolds and
Reynolds as a result of infringing use of its software, as provided by the
Copyright Infringement Act of 1976, which profits are believed to be
substantial. In any event, 1mage will seek an award for amounts now due under
the 1996 agreement, as described above. The damages hearing is scheduled to
commence October 11, 2004.
The Company cannot predict the results of any litigation or arbitration
with Reynolds but the burden imposed by these legal proceedings, including the
direct and indirect costs and the diversion of the Company's other limited
resources, may continue to have an adverse effect on the Company's results of
operations. This burden may prove to be material to the Company's financial
condition or results of operation in future reporting periods. It is also
possible, however, that the litigation could result in a substantial judgment in
favor of the Company, or a significant settlement, which could positively affect
the Company's financial condition. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".)
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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, 2003.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the OTC Bulletin Board under the
symbol ISOL. 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.
2003
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High Low
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First Quarter $ 0.51 $ 0.23
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Second Quarter 0.56 0.21
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Third Quarter 0.40 0.21
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Fourth Quarter 0.55 0.25
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2002
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High Low
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First Quarter $ 0.80 $ 0.54
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Second Quarter 0.66 0.30
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Third Quarter 0.48 0.30
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Fourth Quarter 1.00 0.35
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These quotations reflect interdealer prices, without retail mark-up, mark
down or commission and may not necessarily represent actual transactions.
On February 27, 2004, the closing bid price per share for the Common Stock
was $.85 as reported on OTCBB. On that same date, there were approximately 985
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.
ISSUER REPURCHASES OF REGISTERED EQUITY SECURITIES
There were no shares repurchased during the fourth quarter of 2003.
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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,
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In thousands, except for per share data: 2003 2002 2001 2000 1999
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Net Sales $2,104 $2,242 $2,776 $2,163 $1,806
Cost of Sales 915 1,153 1,109 934 987
Gross Profit 1,189 1,089 1,667 1,229 819
Gross Profit (as a % of Net Sales) 57% 49% 60% 57% 45%
Selling, General & Administrative expenses 1,215 1,365 1,500 1,211 1,163
Income (Loss) before Income Taxes 86 (282) 161 11 (365)
Net Income (Loss) 96 (282) 211 8 (367)
Net Income (Loss) Per Share .03 (.09) .07 .00 (.16)
Weighted Average Number of Outstanding 3,237 3,146 3,146 3,056 2,330
Shares
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Balance Sheets Years Ended December 31,
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In thousands: 2003 2002 2001 2000 1999
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Working Capital/(Deficit) $ 175 $ 28 $ 140 $(93) $(186)
Total Assets 1,674 1,562 1,496 1,428 1,364
Long Term Obligations 201 207 1 3 1
Total Stockholders Equity 789 643 925 714 654
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management must make estimates and
judgments that effect the carrying values of the Company's assets and
liabilities as well as recognition of revenue and expenses. Management's
estimates and judgments are based on the Company's historical experience and
management's knowledge and understanding of current facts and circumstances. The
policy discussed below is considered by management to be critical to an
understanding of the Company's financial statements. The application of this
policy places significant demands on management's judgment, with financial
reporting results relying on estimations about the effect of the matter that is
inherently uncertain. For this policy, management cautions that future events
rarely develop as a forecast, and estimates routinely require adjustment and may
require material adjustment. There have been no significant changes in critical
accounting policies in the past year.
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 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.
OVERVIEW
Management believes that sales for the first three quarters of 2003 were
negatively affected by the general economic slowdown in the technology sector.
On the other hand, fourth quarter revenue increased 64% over the year earlier
corresponding quarter, which may signal the beginning of a rebound for this type
of business. Because our customers typically make a discretionary decision to
implement our products based upon their individual resources and budget
constraints, however, it is possible that the fourth quarter 2003 improvement in
sales will ultimately prove to be a one-time or seasonal event that is not
carried into future periods. Moreover, as a small company which receives only a
few relatively large orders in a given quarter, the loss or delay of individual
orders could have a significant impact on quarterly operating results and
revenue. Thus, discerning trends in the Company's performance is especially
difficult. While interest in the Company's products remains relatively strong,
there can be no assurance that the Company's software sales for the first
quarter of 2004 will keep pace with the fourth quarter of 2003. The Company
believes that, with revenues from operations and its lines of credit with U.S.
Bank and DEMALE, LLC, it has sufficient resources to fund its operations for the
foreseeable future without a significant infusion of capital. Naturally,
however, considering the Company's size and the tumultuous political and
financial events of the past few years, there can be no assurance that the
Company will continue to generate sufficient cash from these sources or that, if
the Company does seek additional capital, any such capital will be made
available to it.
13
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
The Company's total revenue was $2.1 million for the year ended
December 31, 2003, compared to $2.2 million for the year ended December 31,
2002, representing a decrease of $138,000 (6%). The Company's revenue
decreased $428,000 as a result of the loss of the Company's largest customer,
Reynolds and Reynolds, during the year as total revenue from Reynolds declined
from $441,000 to $13,000. The Company does not anticipate any significant
revenue from Reynolds in 2004.
The Company's revenue is derived from four sources: software licenses,
annual maintenance/license fees, consulting services, and hardware sales.
In 2003, software license revenue increased 6%, or $49,000 from 2002
levels, of which a decrease of $121,000 was attributable to the loss of this
single customer. Without the loss of this large customer, software license
revenue would have increased $170,000. Annual license fees decreased 20%, or
$192,000 of which a decrease of $307,000 was attributable to the loss of
business from this large customer. Without the loss of this large customer,
annual license fees would have increased $115,000. The professional service
group's revenue decreased by $20,000 (6%) for the year primarily due to
decreased consulting programming services provided due to the timing of year-end
contracts. Hardware sales of $205,000 increased $24,000 (13%) over $181,000 for
2002.
Gross profit on revenue for the year ended 2003 was 57%, as compared to
49% for 2002, primarily due to the increase in software sales. In 2003, selling,
general and administrative expenses decreased $151,000 (11%) due to tight
expense controls across all departments of the Company. In addition, during
2003, the Company settled a payable of $138,000 that was due to a vendor in
connection with a software purchase for an earlier period. For the year ended
December 31, 2003, the Company reported net income of $96,000 or $.03 per share,
an improvement of $378,000 over a net loss of $282,000 or $(.09) per share for
the previous year.
See the discussion of the effect of the loss of Reynolds and Reynolds in
"Liquidity and Capital Resources" below.
----------------------------------------------------------------------------------
Year Ended Year Ended Increase/ Increase/
12/31/03 12/31/02 (Decrease)(Decrease)
$ %
----------------------------------------------------------------------------------
Revenue, as reported $ 2,104,367 $ 2,242,089 $ (137,722) (6%)
----------------------------------------------------------------------------------
Less: Reynolds Revenue 13,318 441,152 (427,834) (97%)
----------------------------------------------------------------------------------
Revenue excluding Reynolds $ 2,091,049 $ 1,800,937 $ 290,112 16%
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
The Company's total revenue was $2.2 million for the year ended
December 31, 2002 compared to $2.8 million for the year ended December 31, 2001,
representing a decrease of $534,000 (19%). The Company's revenue decreased
$547,000 as a result of the loss of the Company's largest customer, Reynolds and
Reynolds, during the year as total revenue from Reynolds declined from $988,000
to $441,000. In addition, continued slow economic conditions worldwide,
particularly in the technology sector contributed to slower than anticipated
revenue growth.
The Company's revenue is derived from four sources: software licenses,
annual maintenance/license fees, consulting services, and hardware sales.
14
In 2002, software license revenue decreased 35%, or $391,000, from 2001
levels, of which $301,000 was attributable to the loss of this single customer.
Annual license fees decreased 15%, or $167,000, of which a decrease of $223,000
was attributable to the loss of business from this large customer. Without the
loss of this large customer, annual license fees would have increased $56,000.
The professional service group's revenue decreased by $89,000 (22%) for the year
primarily due to decreased consulting/programming services provided to existing
customers. Hardware sales of $181,000 increased $113,000 (168%) over $68,000 for
2001.
Gross profit on revenue for the year 2002 was 49%, as compared to 60% for
2001, primarily due to the decrease in software license revenue. In 2002,
selling, general and administrative expenses decreased $135,000 (9%). This
decrease resulted from tight expense controls throughout the Company; offset by
a $94,000 increase in legal fees as a result of the legal proceedings with
Reynolds. For the year ended December 31, 2002 the Company reported a net loss
of $282,000, or $.09 per share, as compared to net income of $211,000, or $.07
per share, for the previous year.
See the discussion of the effect of the loss of Reynolds and Reynolds in
"Liquidity and Capital Resources" below.
---------------------------------------------------------------------------------
Year Ended Year Ended Increase/ Increase/
12/31/02 12/31/01 (Decrease)(Decrease)
$ %
---------------------------------------------------------------------------------
Revenue, as reported $ 2,242,089 $ 2,775,931 $ (533,842) (19%)
---------------------------------------------------------------------------------
Less: Reynolds Revenue 441,152 988,649 (547,497) (55%)
---------------------------------------------------------------------------------
Revenue excluding Reynolds $ 1,800,937 1,787,282 13,655 (1%)
---------------------------------------------------------------------------------
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased approximately $6,000
during the twelve months ended December 31, 2003 as compared to December 31,
2002. During 2003, the Company used cash of $261,000 for deferred development
expenses. The Company had working capital of $175,000 as of December 31, 2003.
Included in current liabilities is $287,000 for Deferred Revenue, which will be
earned throughout 2004. The Company had drawn $139,000 on its bank line of
credit at December 31, 2003, as compared to $200,000 drawn at December 31, 2002.
The line is collateralized by all accounts receivable and general intangibles of
the Company. The Company's line of credit agreement with a prior bank expired on
February 24, 2004. The Company changed its banking relationship and has
established a similar new banking relationship with U.S. Bank, including a new
$200,000 line of credit that is secured by accounts receivable and general
intangibles of the Company.
In April, 2004 the Company established an additional line of credit with
DEMALE, LLC, a partnership comprised of three principal shareholders of the
Company. The line provides for borrowings of up to $300,000 and is secured by
substantially all of the Company's assets and is subordinate to the bank line of
credit. At December 31, 2003, DEMALE had advanced $55,000, leaving a balance
available of $245,000.
As noted above in "Results of Operations", the termination by Reynolds and
Reynolds ("Reynolds") of its 1996 Subscription and Maintenance Agreement and the
resulting loss of Reynolds as a customer has already had a significantly adverse
impact on the Company's revenue in 2003. The Company has nearly replaced the
bulk of the revenue lost as a result of the termination of the 1996 contract by
Reynolds and Reynolds' subsequent actions but it is possible that some portion
of that lost revenue will be awarded to the Company in the ongoing litigation
between the Company and Reynolds. Naturally, the Company cannot predict the
outcome of that litigation nor can there be any assurance that the Company will
ever obtain a meaningful recovery from Reynolds.
The Company made significant progress in its ongoing efforts to replace
the lost revenue and cash flow previously provided by Reynolds during the year
ended December 31, 2003. Nevertheless, if the Company ultimately fails to
recover significant damages from its claims in the pending arbitration
proceeding against Reynolds, there could still be a significantly adverse effect
on the long-term cash flow and liquid resources of the Company.
The Company receives its revenues from software licenses, recurring annual
maintenance/license fees, consulting services and hardware sales. The Company
maintains minimal inventory balances of third party software products.
Notwithstanding the burdens imposed by Reynolds' actions, the Company believes
that its existing cash, and the cash flows generated from operations, will be
sufficient however, to meet its anticipated cash needs for working capital for
at least the next twelve months.
The Company has no material commitments for capital expenditures for 2004.
Contractual obligations at December 31, 2003 are as follows:
----------------------------------------------------------------------------------------------
Lines of Credit (1) Capital Lease (2) Operating Lease Total
----------------------------------------------------------------------------------------------
Year
----------------------------------------------------------------------------------------------
2004 $139,314 $5,010 $82,871 $227,195
----------------------------------------------------------------------------------------------
2005 54,600 5,010 85,602 145,212
----------------------------------------------------------------------------------------------
2006 - 4,593 88,335 92,928
----------------------------------------------------------------------------------------------
2007 - - 91,067 91,067
----------------------------------------------------------------------------------------------
2008 - - 61,925 61,925
----------------------------------------------------------------------------------------------
Thereafter - - - -
------- ------ ------- -------
----------------------------------------------------------------------------------------------
$193,914 $14,613 $409,800 $618,327
======= ====== ======= =======
----------------------------------------------------------------------------------------------
16
(1) Lines of credit consist of two revolving line of credit agreements
expiring in 2004 and 2005 with monthly payments of interest and the
outstanding principal balance due at maturity.
(2) Amounts shown under capital lease arise under a lease for office
equipment expiring in 2006 with monthly lease payments of approximately
$418.
Risks to Future Financial Performance
VARIABLE OPERATING RESULTS. Our future operating results may vary significantly
and are difficult to predict due to a number of factors, of which many are
beyond our control. These factors include:
o Demand for our products;
o The level of product and price competition;
o The length of our sales cycle;
o The size and timing of individual license transactions;
o The delay or deferral of customer implementations;
o Our success in expanding our customer support organization, direct sales
force and indirect distribution channels;
o The timing of new product introductions and product enhancements;
o Changes in our pricing policy;
o The mix of products and services sold;
o Our ability to develop and market new products and control costs;
o Current economic and political conditions; and
o The outcome of the pending litigation against Reynolds & Reynolds
CURRENT ECONOMIC AND POLITICAL CONDITIONS MAY AFFECT RESULTS. The general
economic slowdown may persist for some time into the future. The slowdown has
increased the risk to our revenue stream. Additionally, the political landscape
has significantly changed and could have a material impact on results going
forward. We also believe that there has been an industry-wide slowdown in
spending, or at least for the imaging software and systems category. Due to the
discretionary nature of our customers' budget and purchase cycles and the
absence of long-term customer purchase commitments, it is expected to remain
difficult to avoid significant fluctuations in quarterly operating results.
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, results of
pending litigation, 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.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1MAGE SOFTWARE, INC.
--------------------
INDEX TO FINANCIAL STATEMENTS PAGE
--------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS' REPORT.............................................. 19
BALANCE SHEETS - December 31, 2003 and 2002.................................. 20
STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 2003, 2002 and 2001........................................... 21
STATEMENTS OF SHAREHOLDERS' EQUITY - For the Years Ended
December 31, 2003, 2002 and 2001........................................... 22
STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 2003, 2002, and 2001.......................................... 23
NOTES TO FINANCIAL STATEMENTS................................................ 25
INDEPENDENT ACCOUNTANTS' REPORT ON FINANCIAL STATEMENT SCHEDULES............. 38
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS............................ 39
18
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Board of Directors and Stockholders of
1mage Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of 1mage Software, Inc. as of
December 31, 2003 and 2002, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
BKD, LLP
Denver, Colorado
January 22, 2004, except for Note 4.
19
1MAGE SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
------------------------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 143,505 $ 149,738
Receivables:
Trade (less allowance: 2003, $20,000; 2002, 609,216 549,455
$10,000)
Inventory 11,517 16,500
Prepaid expenses and other current assets 55,457 16,374
Employee advances 19,631 7,029
Deferred tax asset 20,000 --
-------------- ---------------
Total current assets 859,326 739,096
PROPERTY AND EQUIPMENT, at cost, net 43,465 48,577
OTHER ASSETS:
Software development costs, net 694,262 720,916
Loan costs, net 25,929 --
Deferred tax asset 40,000 50,000
Rent/Security deposit 7,841 100
Inventory 2,958 2,958
-------------- ---------------
TOTAL ASSETS $ 1,673,781 $ 1,561,647
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 3,663 $ 3,903
Deferred revenue 287,000 281,000
Accounts payable 162,255 278,174
Accrued liabilities 230,958 148,260
-------------- ---------------
Total current liabilities 683,876 711,337
-------------- ---------------
LONG-TERM OBLIGATIONS:
Capital lease obligations 7,105 7,325
Line of credit - Bank 139,314 200,000
Line of credit - Related Parties 54,600 --
-------------- ---------------
201,019 207,325
-------------- ---------------
SHAREHOLDERS' EQUITY:
Common Stock, $.004 par value - 10,000,000
shares authorized; shares outstanding:
2003 and 2002-3,287,597 and 3,146,554 13,150 12,586
Additional paid-in capital 7,288,455 7,238,658
Accumulated deficit (6,512,719) (6,608,259)
-------------- ---------------
Total shareholders' equity 788,886 642,985
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,673,781 $ 1,561,647
============== ===============
See notes to financial statements.
20
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
--------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------
REVENUE:
System sales and software licenses $ 1,019,708 $ 946,071 $ 1,224,057
Services and annual fees 1,084,659 1,296,018 1,551,874
------------- ------------- ------------
Total revenue 2,104,367 2,242,089 2,775,931
------------- ------------- ------------
COST OF REVENUE:
System sales and software licenses 537,623 623,242 520,299
Services and annual fees 377,380 529,791 589,122
------------- ------------- ------------
Total cost of revenue 915,003 1,153,033 1,109,421
------------- ------------- ------------
GROSS PROFIT 1,189,364 1,089,056 1,666,510
OPERATING EXPENSES:
Selling, general & administrative 1,214,577 1,365,214 1,500,038
------------- ------------- ------------
INCOME/(LOSS) FROM OPERATIONS (25,213) (276,158) 166,472
------------- ------------- ------------
OTHER INCOME/(EXPENSE):
Interest income 1,701 3,396 4,891
Interest expense (29,467) (9,595) (10,206)
Other Income 138,519 -- --
------------- ------------- ------------
Total other income (expense) 110,753 (6,199) (5,315)
------------- ------------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES 85,540 (282,357) 161,157
PROVISION/(CREDIT) FOR INCOME TAXES
(10,000) -- (50,000)
------------- ------------- ------------
NET INCOME/(LOSS) $ 95,540 $ (282,357) $ 211,157
============= ============= ============
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE $ .03 $ (.09) $ .07
============= ============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,236,610 3,146,554 3,146,554
============= ============= ============
See notes to financial statements.
21
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------------------------------------------------------------------------
Balances, January 1, 2001 3,146,554 $ 12,586 7,238,658 (6,537,059) $ 714,185
------------------------------------------------------------------------------
Net income -- -- -- 211,157 211,157
------------------------------------------------------------------------------
Balances, December 31, 2001 3,146,554 $ 12,586 7,238,658 (6,325,902) $ 925,342
------------------------------------------------------------------------------
Net loss -- -- -- (282,357) (282,357)
------------------------------------------------------------------------------
Balances, December 31, 2002 3,146,554 $ 12,586 7,238,658 (6,608,259) $ 642,985
------------------------------------------------------------------------------
Issuance of stock for services 38,043 152 6,848 7,000
------------------------------------------------------------------------------
Issuance of stock for loan origination fee 90,000 360 20,340 20,700
------------------------------------------------------------------------------
Issuance of warrants for loan origination fee 0 0 18,189 18,189
------------------------------------------------------------------------------
Issuance of stock for exercise of stock options 13,000 52 4,420 4,472
------------------------------------------------------------------------------
Net income 95,540 95,540
------------------------------------------------------------------------------
Balances, December 31, 2003 3,287,597 $ 13,150 7,288,455 (6,512,719) $ 788,886
==============================================================================
See notes to financial statements.
22
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
--------------------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) $ 95,540 $(282,357) $ 211,157
Adjustments to reconcile earnings/(loss) to net cash
provided by operating activities:
Depreciation and amortization 319,252 323,096 327,663
Settlement of payable (138,375) -- --
Deferred revenue 6,000 48,000 19,506
Deferred tax asset (10,000) -- (50,000)
Issuance of stock options for services 7,000 -- --
Changes in assets and liabilities:
Receivables (59,761) (127,478) (14,726)
Inventory 4,983 (7,430) 26,626
Prepaid expenses and other assets (59,426) (7,806) 5,636
Accounts payable 22,456 90,296 2,410
Accrued liabilities 82,698 1,750 37,060
---------- ---------- ----------
Net cash provided by operating activities 270,367 38,071 565,332
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,180) (6,103) (30,263)
Additions to capitalized software (261,346) (292,015) (270,973)
---------- ---------- ----------
Net cash used for investing activities (274,526) (298,118) (301,236)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 54,600 200,000 185,000
Repayment of line of credit (60,686) -- (385,000)
Repayment of long-term obligations (460) (2,636) (2,132)
Proceeds from exercise of Common Stock options 4,472 -- --
---------- ---------- ----------
Net cash provided by (used for) financing activities (2,074) 197,364 (202,132)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(6,233) (62,683) 61,964
CASH AND CASH EQUIVALENTS, beginning of year 149,738 212,421 150,457
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 143,505 $ 149,738 $ 212,421
========== ========== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION
Issuance of stock and stock purchase warrants
for deferred loan origination fees related to the
DEMALE, LLC line of credit $ 38,889 $ -- $ --
See notes to financial statements
23
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
----------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 14,774 $ 9,595 $ 10,206
=========== =========== ===========
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 $ -- $ 10,987 --
=========== =========== ===========
24
1MAGE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002, AND 2001
---------------------------------
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 Linux, Unix, and Windows-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 third party software and are stated at the lower of
cost (specific identification method) or market (net realizable value).
This software is ultimately integrated into the Company's products.
PROPERTY AND EQUIPMENT is 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. For the years ended December 31, 2003, 2002 and 2001,
depreciation expense totaled $18,292, $21,896 and $27,562, respectively.
ADVERTISING COSTS are expensed as incurred. Advertising expenses totaled
$63,552, $118,373, and $121,718, in 2003, 2002 and 2001, respectively.
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, 2003, 2002, and 2001 were $261,346,
$296,510, and $270,973, respectively. Amortization of these costs totaled
$288,000, $301,200, and $300,101, 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.
LOAN COSTS are amortized using the effective interest method over the term
of the debt agreement.
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.
25
A single customer, Reynolds and Reynolds, accounted for .1%, 20%, and 36%
of revenues in 2003, 2002, and 2001, respectively. No other customer
accounted for more than 10% of revenue for 2003, 2002 or 2001.
ACCOUNTS RECEIVABLE - Accounts receivable are stated at the amount billed
to customers. The Company provides an allowance for doubtful accounts,
which is based upon a review of outstanding accounts receivable,
historical collection information and existing economic conditions. 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.
Accounts receivable are ordinarily due 30 days after the issuance of the
invoice, with those customers not meeting those requirements being subject
to stricter credit policies. Delinquent receivables are written off based
on individual credit evaluation and specific circumstances of the
customer.
One customer accounted for 31% of accounts receivable at December 31,
2003. Three different customers accounted for 32%, 12% and 11% of accounts
receivable at December 31, 2002. Two different customers accounted for 18%
and 10% of accounts receivable at December 31, 2001.
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 basic 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 valuation allowance against the deferred tax
assets due to the uncertainty of ultimate realizability.
STOCK-BASED COMPENSATION At December 31, 2003, the Company has three
stock-based employee compensation plans, which are described more fully in
Note 5. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the company had applied
the fair value provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
26
Year Ended December 31
2003 2002 2001
---- ---- ----
Net income (loss), as reported $ 95,540 $(282,357) $ 211,157
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes (105,885) (97,166) (98,808)
-------- ------- -------
Pro forma net income (loss) $ 10,345 $(379,523) $ 112,349
======== ======= =======
Earnings per share:
Basic and Diluted - as reported $ 0.03 $ (0.09) $ 0.07
======== ======= =======
Basic and Diluted - pro forma $ -- $ (0.12) $ 0.04
======== ======= =======
ESTIMATES -The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 to 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:
2003 2002
---- ----
Equipment $ 666,277 $ 656,748
Furniture 57,088 56,078
Leasehold improvements 10,903 8,262
----------- ------------
734,268 721,088
Less: accumulated depreciation (690,803) (672,511)
----------- ------------
$ 43,465 $ 48,577
=========== ============
3. ACCRUED LIABILITIES
Accrued liabilities at December 31 consists of the following:
2003 2002
---- ----
Sales tax payable $ 73,770 $ 40,458
Accounting and audit fees 9,521 10,575
Accrued compensation 80,873 37,695
Other 66,794 59,532
----------- ------------
$ 230,958 $ 148,260
=========== ============
4. LINES OF CREDIT
BANKS
The Company has a $200,000 annual revolving bank line of credit which
expires on February 24, 2004 and bears interest at the greater of 7% or
prime plus 1.5% (total rate of 7.0% at December 31, 2003) not to
27
exceed 18%, and is collateralized by all accounts receivable and general
intangibles of the Company. Total borrowings outstanding under the line of
credit were $139,314 and $200,000 at December 31, 2003 and 2002,
respectively.
The bank line of credit expired on February 24, 2004 and was not renewed.
On February 24, 2004, the Company entered into a $200,000 annual revolving
line-of-credit agreement with U.S. Bank, which expires February 24, 2005
and bears interest at prime plus 1.75% not to exceed 18%, and is
collateralized by all accounts receivable and general intangibles of the
Company. The proceeds from the new line of credit were used to pay-off the
line of credit existing at December 31, 2003.
RELATED PARTIES
On April 1, 2003, the Company entered into a $300,000 revolving
line-of-credit agreement (the Agreement) which expires June 30, 2005, with
DEMALE, LLC, an entity owned by certain stockholders of the Company. In
connection with the Agreement, the Company issued 90,000 shares of
restricted common stock and stock purchase warrants to purchase an
additional 90,000 shares of restricted common stock as payment for loan
origination costs. The line expires on June 30, 2005 and requires the
Company, among other things, to maintain certain financial conditions. At
December 31, 2003, there was $54,600 borrowed against this line. The line
is secured by substantially all of the Company's assets and is subordinate
to the bank line of credit. Interest is accrued and payable quarterly at
the greater of 7% or prime plus 1.5% (total interest rate of 7.0% at
December 31, 2003).
5. SHAREHOLDERS' EQUITY
STOCK COMPENSATION PLANS
At December 31, 2003, 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:
Net Income (Loss): 2003 2002 2001
---- ---- ----
As Reported $ 95,540 $ (282,357) $ 211,157
Pro Forma $ (10,345) $ (379,523) $ 112,349
Earnings (Loss) Per Common Share:
As Reported $ 0.03 $ (0.09) $ 0.07
Pro Forma $ -- $ (0.12) $ 0.04
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 2003, 2002, and 2001:
2003 2002 2001
---- ---- ----
Dividend Yield 0% 0% 0%
Expected Volatility 132% 128% 124%
Risk-Free Interest Rate 4.25% 4.25% 4.75%
Expected Lives 9.0 years 8.8 years 8.4 years
28
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 under the 1996 Plan.
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 five to ten years from the grant date.
A summary of the 1996 Plan stock option activity follows:
--------------------------------- -------------- -------------- ---------------
Outstanding Exercise Weighted Avg.
Shares Price Exercise Price
--------------------------------- -------------- -------------- ---------------
Balances, January 1, 2001 633,500 .59
Granted 145,000 $.56 - $.75 .60
Canceled (8,500) $.63 - $.66 (.65)
--------------
Balances, December 31, 2001 770,000 .59
Granted 8,000 $.51 .51
Canceled (13,500) $.56 - $.70 (.66)
--------------
Balances, December 31, 2002 764,500 .59
Granted 112,000 $.31-$.39 .34
Canceled (74,500) $.51-$1.43 (.67)
--------------
Balances, December 31, 2003 802,000 .55
==============
The following table summarizes information about stock options under the
plan at December 31, 2003:
Outstanding Exercisable
---------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ------------ ------------ ----------- ----------- -----------
0.31 to 0.44 347,000 5.3 years 0.41 321,500 0.41
0.51 to 0.84 443,000 6.1 years 0.64 421,165 0.64
1.29 to 1.44 12,000 5.8 years 1.34 12,000 1.34
At December 31, 2003, options for 754,665 shares were exercisable under
the 1996 Plan. There were no shares available for future grant.
29
The weighted-average grant-date fair value of options granted during 2003,
2002, and 2001 were $.34, $.51, and $.60, respectively.
In addition, options for 20,000 shares exercisable at $.34 per share were
granted outside of the 1996 Plan by the Board of Directors on December 31,
2003. Those options are treated in all respects as to terms and conditions
as if they were granted under the 1996 Plan.
30
1994 STOCK OPTION AND GRANT PLAN
In April 1994, the Company authorized 700,000 shares of Common Stock for
issuance under its 1994 Stock Option and Grant Plan ("1994 Plan") to
employees, consultants and contractors of the Company. The Plan was
amended in 2002 to permit grants to employees who were also members of the
board of 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 Exercise Price Weighted Average
Exercise Price
-------------------------------- ---------------- ----------------- ---------------------
Balances, January 1, 2001 317,250 $ .52
Granted 4,500 $.56 .56
Canceled (1,000) $.63 (.63)
----------------
Balances, December 31, 2001 320,750 .52
Granted 34,000 $.35 .35
Canceled (96,500) $.63 (.63)
----------------
Balances, December 31, 2002 258,250 .46
Granted 78,849 $.31-$.35 .34
Exercised (13,000) $.34 (.34)
Canceled (34,250) $.34-$.66 (.51)
----------------
Balances, December 31, 2003 289,849 .43
================
-------------------------------- ---------------- ----------------- ---------------------
Stock Grants Grant Price Weighted Average
Exercise Price
-------------------------------- ---------------- ----------------- ---------------------
Balances, January 1, 2001 83,166 $.84 - $1.13 $1.66
Granted/Canceled -- -- --
----------------
Balances, December 31, 2001 83,166 1.66
Granted/Canceled -- -- --
----------------
Balances, December 31, 2002 83,166 1.66
Granted/Canceled -- -- --
----------------
Balances, December 31, 2003 83,166 1.66
================
31
The following table summarizes information about stock options under the
1994 Plan at December 31, 2003:
Outstanding Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ------------ ------------ ----------- ----------- ------------
0.31 to 0.35 211,349 5.6 years 0.34 115,960 0.34
0.56 to 0.66 78,500 4.3 years 0.65 75,750 0.65
The weighted-average grant-date fair value of options granted during
2003, 2002, and 2001 were $.34, $.35, and $.56, respectively.
At December 31, 2003, options to purchase 191,710 shares of Common
Stock were exercisable and no shares were available for future grant under
the 1994 Plan.
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 nonqualified stock options
to officers, directors and employees and incentive stock options may be
granted to employees under the 1993 Plan.
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 Exercise Price Exercise Price
-----------------------------------------------------------------------------
Balances, January 1, 2001 76,300 .47
-------------
Granted 3,500 $.56 .56
-------------
Balances, December 31, 2001 79,800 .47
Granted/Canceled/Exercised 0 $ - --
-------------
Balances, December 31, 2002 79,800 .47
Granted 11,675 $.31 .31
Canceled (11,675) $.44-$2.06 (.52)
------------- ---------------
Balances, December 31, 2003 79,800 $.44
=============
32
The following table summarizes information about stock options under the plan at
December 31, 2003.
Outstanding Exercisable
---------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ------------ ------------ ----------- ----------- -----------
0.31 to 0.44 74,800 3.2 years 0.41 63,125 0.43
0.56 to 0.75 4,500 3.6 years 0.73 4,500 0.73
1.38 to 2.06 500 2.0 years 1.72 500 1.72
There were 11,675 options granted during 2003. At December 31, 2003,
options for 68,125 shares were exercisable under the 1993 Plan. There are
no shares available for future grant under the 1993 Plan.
COMMON STOCK WARRANTS
On April 1, 2003, in connection with obtaining the line of credit -
related party, the Company issued warrants to the owners of the lender to
purchase 90,000 shares of Common Stock at an exercise price of $0.18 per
share, that price being equal to 80% of the fair market value of the
Common Stock on March 31, 2003. These warrants expire on April 1, 2008.
COMMON STOCK RESERVED
Common Stock reserved at December 31, 2003 was as follows:
1996 Equity Incentive Plan 822,000
1994 Stock Option and Grant Plan 289,849
1993 Stock Option Plan 79,800
============
1,191,649
============
6. INCOME TAXES
The provisions (credit) for income taxes for the years ended December 31,
consists of:
Current: 2003 2002 2001
---- ---- ----
Federal $ -- $ -- $ --
State -- -- --
--------- --------- ----------
Total current -- -- --
--------- --------- ----------
Deferred:
Federal (10,000) -- (50,000)
State -- -- --
--------- --------- ----------
Total deferred (10,000) -- (50,000)
--------- --------- ----------
$ (10,000) $ -- $ (50,000)
========= ========= ==========
33
The following is a reconciliation of statutory federal income taxes to
the actual provision (credit) for income taxes:
2003 2002 2001
---- ---- ----
Federal income taxes at statutory rate 29,000 $ (96,000) $ 65,000
Non-deductible expenses 7,000 7,000 --
Increase (decrease) in taxes resulting
from state income taxes 3,000 (9,000) 6,300
Increase (decrease) in deferred tax asset
valuation allowance (52,000) 101,000 (141,000)
Expiration of business tax credits -- -- 14,000
Other, net 3,000 (3,000) 5,700
---------- ------------ ------------
Provision/(credit) for income taxes (10,000) $ -- $ (50,000)
========== ============ ============
The components of the net deferred tax (liability) asset recognized in the
accompanying balance sheets are as follows:
2003 2002
---- ----
Deferred tax liability $ (12,000) $ (2,000)
Deferred tax asset 2,156,000 2,188,000
Valuation allowanc (2,084,000) (2,136,000)
------------ --------------
$ 60,000 $ 50,000
============ ==============
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:
2003 2002
---- ----
Future income (deductions):
Net operating loss $ 2,147,000 $ 2,174,000
Allowance for doubtful accounts 8,000 4,000
Depreciation 1,000 10,000
Other, net (12,000) (2,000)
------------- ------------
$ 2,144,000 $ 2,186,000
============= ============
The Company has net operating loss carry forwards for federal income tax
purposes of approximately $5,540,000. These carry forwards expire on
varying dates from 2006 through 2022.
7. 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, 2003, 2002, and 2001, the Company contributed
$3,225, $4,923, and $4,650 to the 401(k) Plan.
34
8. COMMITMENTS AND CONTINGENCIES
At December 31, 2003 and 2002, equipment with a net book value of $7,436
and $9,072, net of accumulated amortization of $19,827 and $18,191,
respectively, has been leased under capital leases.
The Company leases its executive offices under a noncancelable-operating
lease, which expires in August 2008. Total rent expense for the years
ended December 31, 2003, 2002 and 2001 was $76,352, $89,306 and $89,306,
respectively.
Future minimum payments for lease obligations are as follows:
Capital Operating
------------ ----------
2004 $ 5,010 $ 82,871
2005 5,010 85,602
2006 4,593 88,335
2007 -- 91,067
2008 -- 61,925
------------ ----------
Total minimum lease payments 14,613 $ 409,800
==========
Amount representing interest (3,845)
------------
Present value of min. lease payments 10,768
Current portion (3,663)
------------
Long-term portion $ 7,105
============
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 $9,449, $0, and $33,352, under
these agreements for the years ended December 31, 2003, 2002, and 2001,
respectively.
The Company is currently engaged in various legal proceedings involving
one of its former customers. Included in the legal proceedings is
litigation pertaining to accounts receivable owed to the Company, of
which, approximately $194,000 is held in escrow by the court and is
included in accounts receivable at December 31, 2003.
9. 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.
35
The estimated fair values of the Company's financial instruments at
December 31, 2003 are as follows:
Carrying Amount Fair Value
------------------ --------------
Assets:
Cash and cash equivalents $ 143,505 $ 143,505
Receivables $ 628,848 $ 628,848
Liabilities:
Accounts Payable $ 162,255 $ 162,255
Line of Credit-bank $ 139,314 $ 139,314
Line of Credit-related parties $ 54,600 $ 54,600
The estimated fair values of the Company's financial instruments at
December 31, 2002 are as follows:
Carrying Amount Fair Value
------------------ --------------
Assets:
Cash and cash equivalents $ 149,738 $ 149,738
Receivables $ 556,484 $ 556,484
Liabilities:
Accounts Payable $ 278,174 $ 278,174
Line of Credit $ 200,000 $ 200,000
10. 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 $35,556, $38,197, and $67,846 for the
years ending December 31, 2003, 2002, and 2001, respectively.
36
11. LIQUIDITY
The Company's cash and cash equivalents decreased $6,233 during the year
ended December 31, 2003 to approximately $144,000 at December 31, 2003.
During 2003, the Company incurred cash expenditures for deferred
development costs of approximately $261,000. As of December 31, 2003, the
Company had working capital of approximately $175,000. At December 31,
2003, current liabilities included deferred revenue of approximately
$287,000, which will be earned throughout calendar year 2004 and does not
require additional direct cash flow needs to be earned.
At December 31, 2003, the Company's line of credit with a bank had a
balance of $139,314 and the Company's line of credit with a related party
had a balance of $54,600. Subsequent to December 31, 2003, the bank
notified the Company that it would not be renewing the line of credit in
February, 2004. The line is collateralized by accounts receivable and
general intangibles of the Company. Subsequent to December 31, 2003, the
Company obtained a $200,000 annual revolving line of credit from a new
bank, which expires on February 24, 2005 and bears interest at prime plus
1.75% not to exceed 18%, and is collateralized by all accounts receivable
and general intangibles of the Company. As of December 31, 2003, the
Company had no material commitments for capital expenditures to be made
during calendar 2004.
37
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, 2003, 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.
BKD, LLP
Denver, Colorado
January 22, 2004
38
1MAGE SOFTWARE, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------------------------------------------------------
Additions Deductions
Balance charged Accounts
at to: Costs charged Balance
beginning and to: at end of
of period expenses Allowance period
----------- ----------- ----------- -----------
For the Year Ended December 31, 2003:
Allowance for Doubtful Accounts $ 10,000 $ 43,450 $ 33,450 $ 20,000
For the Year Ended December 31, 2002
Allowance for Doubtful Accounts $ 10,000 $ 34,850 $ 34,850 $ 10,000
For the Year Ended December 31, 2001:
Allowance for Doubtful Accounts $ 10,000 $ 62,888 $ 62,888 $ 10,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period reported on in this report, the
Company has undertaken an evaluation under the supervision and with
the participation of management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, in all material respects,
with respect to the recording, processing, summarizing and
reporting, within the time periods specified in the SEC's rules and
forms, of information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
There have been no significant changes in the Company's
internal controls during the quarter ended December 31, 2003, or in
other factors that could significantly affect internal controls
subsequent to the date of the evaluation described above.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2004 annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2004 annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2004 annual meeting of
shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2004 annual meeting of
shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2004 annual meeting of
shareholders.
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Financial Statement Index on Page 13
2. Financial Statement Schedules
See Financial Statement Index on Page 13
3. List of Exhibits
Exhibit Number Description and Incorporation by Reference
-------------- ------------------------------------------
3.1* - Restated Articles of Incorporation of the Company, as amended.
3.2* - Bylaws of the Company, as amended.
3.3* - Articles of Amendment to the Articles of Incorporation of the
Company dated April 18, 1991
3.4** - Articles of Amendment to the Articles of Incorporation dated
May 21, 1993.
3.4** - Articles of Amendment to the Articles of Incorporation dated
June 28, 1994.
10.5* - 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. The grant of confidential treatment for this exhibit
filed separately with the Securities and Exchange Commission has
been agreed to.
40
10.22*** - 1994 Stock Option and Grant Plan.
10.23** - 1993 Stock Option Plan.
10.24****** - Equity Incentive Plan
10.25 - Revolving Credit
10.25A. Revolving Credit Note and Business Security and Corporate
Resolution for Borrowing with U.S. Bank, N.A. dated February 24,
2004
23 - Consent of BKD, LLP
31.1 - Certificate of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 - Certificate of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 - Certificate of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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-3 Registration Statement No. 333-35265, on
September 10, 1997.
******* Filed as an Exhibit to Form 10-K for the period ended December 31, 2001
(b) There were no reports filed on Form 8-K for the quarter ended December 31,
2003.
41
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 29, 2004
-------------------- --------------
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 29 2004
-------------------- -------------
David R. DeYoung, President
and Principal Chief Executive Officer
By: /s/ MARY ANNE DEYOUNG Date: March 29, 2004
-------------------- --------------
Mary Anne DeYoung
Vice President, Finance
Principal and Accounting Officer
By: /s/ ROBERT WIEGAND, II Date: March 29, 2004
---------------------- ---------------
Robert Wiegand, II
Director and Secretary
By: /s/ JOHN G. MAZZA Date: March 29, 2004
----------------- --------------
John G. Mazza
Director
By: /s/ SPENCER D. LEHMAN Date: March 29, 2004
--------------------- --------------
Spencer D. Lehman
Director
42