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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended 12/31/97
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from
to .
1MAGE Software, Inc.
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(Exact name of Registrant as specific in its charter)
0-12535
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(Commission File Number)
Colorado 84-0866294
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(State of Incorporation) (IRS Employer Identification Numbers)
6486 S. Quebec Street
Englewood CO 80111 (303) 694-9180
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(Address of principal (Registrant's telephone number,
executive offices) including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
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(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock - $.004 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and, (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
statements incorporated by reference in Part III of the Form 10-K or any
amendment of this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 5, 1998: $741,185.
As of March 5, 1998, there were 2,142,845 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part III, Items 10-13, are incorporated by reference from the
Registrant's definitive proxy statement for the 1998 annual meeting of
stockholders.
TABLE OF CONTENTS
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PART I
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1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
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5. Market for Registrant's Common Equity and Related Stockholders
Matters 9
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 33
PART III
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10. Directors and Executive Officers of the Registrant 33
11. Executive Compensation 33
12. Security Ownership of Certain Beneficial Owners and Management 33
13. Certain Relationships and Related Transactions 33
PART IV
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14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
PART I
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ITEM 1. BUSINESS
Introduction
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1MAGE Software, Inc., (the "Company") develops and markets a software
product called 1MAGE(R), a UNIX-based electronic document image management
and retrieval system. Electronic imaging systems like 1MAGE(R) allow any
paper document to be converted to electronic form for magnetic storage.
Magnetic storage drastically reduces the physical space needed for paper-
based filing systems and offers computer access to handwritten or non-
computer generated documents within seconds, a dramatic improvement over
traditional paper filing systems. The software has the ability to file,
route, track, archive and manage the flow of incoming and outgoing
documents throughout an organization. Using an open, client/server
architecture design, 1MAGE(R) provides a comprehensive solution for
scanning, indexing, storing and retrieving document images so that these
may be viewed, printed and faxed.
During 1997, the Company concentrated its efforts on selling
production document imaging software to its niche market, the MultiValue
Relational Data Base Management Systems ("RDBMS") market. Today's
workplace is dramatically changing with the advent of affordable
electronic document imaging. The Company has continued to make progress
toward its goal of establishing a Value Added Reseller ("VAR") network for
its imaging software. The Company seeks to partner with VARs or software
developers who provide software to their targeted vertical markets. In
1997, the Company signed up six (6) new resellers, adding expertise in
the areas of manufacturing, oil and gas, health care and the Internet.
Imaging Software Market
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The Company targets its market through VARs, systems integrators, and
other companies which market complementary software or other products.
1MAGE(R) software has an established presence in a multitude of
industries, including manufacturing, health care, oil and gas,
government, public safety, retail distribution, and transportation. In
addition to direct sales, the Company has contracts in place with VARs for
local government, manufacturing, retail distribution, health care, oil and
gas, and is actively seeking to expand its independent sales network.
The Company offers a comprehensive reseller program which provides,
in the context of a cooperative marketing effort, a broad range of sales,
marketing, and technical support. The program includes technical training
and assistance, marketing communications, sales training and assistance,
excellent support and training, lead referral services, customized product
literature, and a discounted demonstration/development system.
Products
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As noted above, the Company's principal product is 1MAGE(R), its
proprietary document imaging software package. The Company is continually
enhancing this product in order to improve its performance and expand its
possible uses.
1MAGE(R) DOCUMENT MANAGEMENT - 1MAGE(R) is a powerful electronic
image management system created for UNIX-based Multi-Value RDBMS computer
systems. It provides a comprehensive solution for the scanning, indexing,
storage and retrieval of images and is designed to file, route, track,
archive, and manage an organization's incoming and outgoing documents.
Add-on modules to 1MAGE(R) include the following:
* 1SCAN for scanning and pre-indexing
* 1FAX for inbound and outbound fax and cover sheet management
* 1COLD for Computer Output to Laser Disk (character data) management
* 1FORM for business form template administration
* 1RENDITION for merging spooled data with images
* 1WORKFLOW for electronically moving a document from one task to
another
* 1BAR for automatic indexing and data capture via bar code recognition
* 1OCR for automatic indexing and data capture via optical character
recognition
* 1OMR for automatic indexing and data capture via optical mark
recognition
The 1MAGE(R) product line is in a stable, yet growth-oriented,
development stage. Supporting the Company's product line is open
systems technology.
This product technology consists of the following:
* Open Systems compliant with UNIX Operating Systems, CCITT Group 4
Compression, TIFF, JPEG, PCX, PCL, or HPGL file formats. The server
software (1MAGE(R)) operates on UNIX servers; supporting clients include
Microsoft Windows(R) and Windows NT(TM) workstations.
* Device connectivity via Ethernet or token ring networks using TCP/IP
communication protocol.
* Compatibility with SCO Unix, IBM AIX, HP-UX, DG-UX.
* Recognition technology and scanning tasks run on Microsoft Windows(R)
3.x or Windows(R) 95.
* uniVerse(TM) and Unidata database software from Ardent Software, Inc.
1MAGE(R) includes several distinguishing features: the ability to use
many different type workstations or terminals, the ability to quickly and
easily integrate with the existing MultiValue RDBMS business application
software using application program interfaces (APIs), and the ability to
handle the needs of companies of all sizes economically. Through the use
of the UNIX operating system and open systems technology, the Company can
offer an imaging solution to its customers at substantially lower cost
than was previously available.
During 1997, sales of 1MAGE(R) software licenses (excluding annual
license fees) accounted for 26% of total revenue; in 1996, revenue from
sales of software licenses accounted for 34% of total revenue. 1MAGE(R)
utilizes the popular UNIX operating systems and Ardent Software, Inc.'s
uniVerse(TM) and Unidata's relational database software. The Company
utilizes open systems technology, making its software transportable to
numerous hardware products from varying manufacturers. Because of the
number of manufacturers using the UNIX operating system and the MultiValue
RDBMS, customers are rarely restricted in their choice of hardware
manufacturers.
The Company also markets peripheral products such as scanners,
jukeboxes, X-terminals, character terminals, personal computers, printers
and disk drives, although this aspect of the Company's business has been
de-emphasized in recent years. Because computer hardware and peripheral
products are purchased as needed to fill customer orders; no sizable
inventory is maintained. Hardware and peripheral products are generally
shipped directly from the manufacturer to the customer. The Company
purchases computer and peripheral products at discounts which range from
10% to 40% of the manufacturer's list price, depending on the manufacturer
and the volume of products sold, and retains a portion of that discount as
profit. In 1997, revenue from hardware sales accounted for $327,325 of
the Company's total revenue, as compared to $312,812 of total revenue for
1996.
Services and Annual Fees
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The Company licenses its 1MAGE(R) software to its customers and
charges an annual license fee which must be paid to continue receiving
support for the use of the software. During 1997 and 1996, annual license
fees accounted for $749,526 and $713,912, respectively, of the Company's
net sales. Annual software license fee revenue for 1997 was up 5% over
1996 levels. The Company believes recurring annual license fees from new
and existing customers will contribute to the long-term stability of the
Company. The Company also provides installation services and technical
support to its customers. Technical support includes training, consulting
services and other ongoing support. For the years ended December 31, 1997
and 1996, the revenues from these services accounted for $258,512 and
$301,341, or 14% and 15%, respectively, of the Company's net sales. The
Company does not provide service for hardware; rather, service for
computer hardware sold by the Company is provided directly by the
manufacturer.
Marketing and Distribution
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The Company has signed VAR agreements with 10 resellers. Under the
reseller program, the Company provides its imaging product (1MAGE(R)) to
independent software integrators (resellers), who in turn market 1MAGE(R)
products to each of their individual markets. The Company's overall
marketing objective is to support the current resellers and to continue to
enroll new dealers in the reseller program. The Company provides training
aids, user instruction manuals and other documentation, and a newsletter
to keep its resellers, as well as prospective resellers and customers,
informed of new product applications and developments.
In addition, the Company markets 1MAGE(R) through its direct sales
force. The Company's current direct sales efforts are focused on entities
that utilize the MultiValue RDBMS software and the Company's traditional
market of transportation companies. Its general strategy is to (1) help
its customers define the goals for their system, (2) provide the means of
achieving those goals through its document management software and
appropriately configured computer hardware, and (3) help assure the
ongoing success of this collaborative process by providing continuing
support, including on-site personnel training and classroom educational
programs.
Customers
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Historically, the Company has primarily sold integrated computer
systems to the transportation and other specialized industries. With the
development of 1MAGE(R), the Company has expanded its customer base to
businesses in a wide variety of industries and markets, facilitated
through the use of VARs.
During the years 1997 and 1996, the Company generated 12% and 13%,
respectively, of its revenue from one customer, The Reynolds & Reynolds
Company ("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 1MAGE(R)
(without payment of further license fees to the Company) to businesses
primarily engaged in retail sales of new or used automobiles, trucks, or
tractors. The Company continues to provide product enhancements,
maintenance, consulting, and programming services on an ongoing basis to
Reynolds. Management believes that the loss of this customer could have a
significant impact on the Company.
Sources of Supply
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In conjunction with the sale of its own proprietary software
products, 1MAGE Software, Inc. sells a variety of third party vendors'
software to its customers which complement 1MAGE(R) and create an
integrated software product. The amount and type of third party software
provided to a given customer depends on that customer's needs, its planned
uses for the imaging software and the configuration of its hardware and
other software. The Company believes this combination of technologies
provides the most advanced and cost-effective software product family.
A limited number of manufacturers account for a majority of 1MAGE
Software's hardware sales. Should one hardware system be unavailable for
any reason, however, a substitute system will likely be acceptable to the
customer because the software marketed by the Company functions on all of
the hardware systems that it distributes.
The Company markets IBM equipment under an "Industry Remarketer
Affiliate" agreement with Dickens Data (Dallas, Texas), which allows for
volume discounts on IBM products. This agreement was renewed in October
1997 for two years. The Company has an Independent Software Vendor (ISV)
agreement directly with Hewlett-Packard Company (HP) for remarketing its
software on HP platforms. On March 6, 1997, 1MAGE Software Inc. entered
into a business alliance with Integration Alliance Corporation (IAC) to
form a partnership that would distribute HP products and 1MAGE(R) software
through a network of resellers. This agreement renews annually. The
current dealer agreement with Ardent Software, Inc. to remarket their
proprietary database software runs through May 15, 1998.
Possible Fluctuations in Operating Results
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The Company's current focus on offering its proprietary imaging
software to a broader range of customers, through its emerging MultiValue
VAR network and its direct sales force, is expected to lessen the
historical quarterly fluctuations in the Company's operating results. In
addition, the use of multiple channels of distribution to reach these
broader markets should further diminish the reliance on limited vertical
markets. Nevertheless, large sales or groups of sales of 1MAGE(R)
licenses may cause significant variances in quarterly results which may be
difficult to predict.
The Company's sales cycle, which generally commences at the time a
prospective customer issues a request for proposal or otherwise
demonstrates a serious interest in purchasing a system or software license
and ends upon execution of a sales contract or software license, typically
ranges from four to nine months. Operating results could vary from period
to period as a result of the length of the sales cycle, the timing of
individual system sales, VARs performance and conditions in the target
markets and the economy in general.
Trade Secret and Copyright Laws
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The Company regards its software as proprietary and relies for
protection upon trade secret and copyright laws and non-disclosure
agreements with its employees as well as restrictions on disclosure and
transferability contained in its software license agreements with its
customers. Despite these restrictions, it may be possible for competitors
or customers to copy aspects of the Company's products or obtain
information that the Company regards as proprietary. Furthermore, there
can be no assurance that others will not independently develop software
products similar to those developed or planned by the Company. Although
the Company believes its software does not infringe on the proprietary
rights of others and has not received any notice of claimed infringement,
it is possible that portions of the software marketed by the Company could
be claimed to infringe on existing proprietary rights. In the unlikely
event that any such infringements are found to exist, there can be no
assurance that any necessary licenses or rights could be obtained, or
could be obtained on terms satisfactory to the Company. Further, in such
event, the Company could be required to modify the infringing software.
There can be no assurance that the Company would be able to do so in a
timely manner, upon acceptable terms and conditions, or at all; the
failure to do so could have a material adverse effect on the Company.
Backlog
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As a practical matter, the Company's business has evolved to the
point where the Company has minimal backlog at any given point in time.
With respect to software license sales, because there is no time delay
between receipt of an order and delivery of the software, electronically
or otherwise, there is effectively no backlog. Because of direct delivery
of the hardware by the manufacturer, hardware sales have such short lead
times that unfilled firm orders seldom, if ever, build up to significant
levels.
It is the Company's policy to permit customers to cancel hardware
orders prior to shipment by the vendor. The Company normally receives a
deposit of between 25% and 50% of the hardware and software price when an
order is placed. This deposit may or may not be returned upon
cancellation, depending on the circumstances of the cancellation.
Competition
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The Company experiences competition in its business from competitors
who target one or more of the same markets or market segments as the
Company. Software and systems that perform many of the same functions as
the Company's systems and software are readily available from a number of
competitors of the Company, some of which are larger and have greater
financial, technical, marketing and other resources than the Company. The
Company believes that the principal factors affecting a prospective
customer's choice of a system are the database it uses, performance,
service and price. The Company believes that usage of the popular UNIX
based operating system and the MultiValue RDBMS has strengthened the
Company's competitive position by making the Company's software compatible
with more types of hardware and MultiValue application software offered by
MultiValue software developers and system integrators. The Company
further believes that its principal advantage over its competitors is the
Company's utilization of a UNIX based open systems architecture and the
MultiValue RDBMS which can be offered at lower prices.
Limited Markets
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The reseller program targets complementary markets and allows the
Company to draw from a much larger market with respect to its imaging
software products than its traditional markets of the trucking and
transportation industries. As noted above, the Company's strategy has
been to expand the domestic and international markets for its imaging
software by engaging VARs for various industries and markets.
The Company's experience has been that economic downturns or
increased competitive pressures in its niche markets sometimes result in
reduction or deferral of capital expenditures by potential customers.
While such adverse conditions can sometimes lead to opportunities as
potential customers downsize to smaller, more cost-efficient computer
systems or replace custom designed systems that require higher levels of
support and maintenance, the Company believes that both a strong national
economy and, to a lesser extent, a strong transportation industry are
important to the success of its sales efforts.
Product Development
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The computer industry is characterized by rapid technological changes
in both software and hardware. In order to maintain the usefulness of its
products and their compatibility with future hardware and software, the
Company must continually modify and enhance its products. The Company
capitalizes software development costs once technological feasibility is
established. During 1997 and 1996, the Company spent approximately
$329,094 and $297,060, respectively, for computer software development.
Employees
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As of March 5, 1998, the Company employed nineteen (19) persons,
fifteen (15) of whom serve on a full-time basis and four (4) on a part-
time basis. Responsibilities are divided as follows: 7 persons in sales
and marketing, 8 in technical support and programming functions, and 4 in
administrative positions.
Because the competition for skilled employees in the computer
industry is intense, the Company provides incentive compensation packages
to many of its employees, including its executive officers. The Company's
chief executive officer, David R. DeYoung, receives a quarterly bonus
equal to 5% of the Company's pretax profits. (See "Executive
Compensation" in the Company's Proxy Statement.) The Company's chief
financial officer receives a quarterly bonus equal to 4% of the Company's
pretax profits. Sales personnel receive a commission based upon sales.
The Company believes that these incentive programs are important in
attracting and retaining skilled personnel. The future success on the
Company will depend in large part upon the quality of its employees and
the efforts they expend on behalf of the Company .
None of the Company's employees are represented by a labor union, and
the Company has experienced no work stoppage. The Company believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 6,600 square
feet at Greenwood Executive Park, 6486 South Quebec Street, Englewood,
Colorado, 80111 and are occupied pursuant to a non-cancelable lease that
terminates on October 31, 1998. This space is leased from Comlease, a
partnership owned by seven of the Company's present or former
shareholders. (See "Certain Relationships and Related Transactions" in
the Company's Proxy Statement.) The Company believes that its facilities
and equipment are in good condition and satisfactory for their present
uses.
ITEM 3. LEGAL PROCEEDINGS
There were no material pending legal proceedings to which the Company
was a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
through the solicitation of proxies or otherwise during the fourth quarter
of the Company's calendar year ended December 31, 1997.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
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The Company's Common Stock is quoted in the NASDAQ Small Cap System
under the symbol ISOL. The following table sets forth, for the fiscal
quarters indicated, the high and low bid prices per share for the Common
Stock as reported on NASDAQ.
1996 High Low
First Quarter $1.31 $0.63
Second Quarter 1.88 0.75
Third Quarter 1.63 1.13
Fourth Quarter 1.25 0.75
1997 High Low
First Quarter $1.31 $0.75
Second Quarter 1.19 0.63
Third Quarter 1.81 0.75
Fourth Quarter 1.56 0.50
These quotations reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
On March 5, 1998, the closing bid price per share for the Common
Stock was $.47 as reported on NASDAQ. On this same date, there were
approximately 785 holders of record of the Common Stock.
Dividends
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The Company has never declared or paid cash dividends on its Common
Stock and has no present intention to do so. For the foreseeable future,
any earnings will be retained to finance the development and expansion of
the Company's business. The declaration and payment of future dividends
will be determined by the Company's Board of Directors in light of
conditions then existing, including the Company's earnings, financial
condition and capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data of the Company. This table should be read in conjunction
with the financial statements and notes included in Item 8 of this Form 10-
K and the section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" following this section.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except for per YEARS ENDED DECEMBER 31,
share data: 1997 1996 1995 1994 1993
------ ------ ------ ----- -----
Net Sales $1,809 $2,00 $2,90 $4,63 $3,622
Cost of Sales 918 905 2,149 2,114 1,862
Gross Profit 891 1,100 759 2,519 1,760
Selling, General &
Administrative Expenses 1,354 1,273 1,992 1,833 1,741
Income (Loss) before Income Taxes (470) (84) (1,322) 643 75
Net Income (Loss) $(475) $(89) $(1,314) $60 $75
Net Income (Loss) Per Share $(0.22) $(0.04) $(0.69) $0.3 $0.0
Weighted Average Number of
Outstanding Shares 2,146 2,055 1,912 1,778 1,548
CONSOLIDATED BALANCE SHEETS
In thousands: YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------ ------ ------ ----- -----
Working Capital $43 $165 $398 $1,380 $36
Total Assets 1,650 2,018 2,004 3,578 2,461
Long-term Obligations 159 8 171 33 155
Total Stockholders' Equity 907 1,239 1,246 2,494 1,257
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
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The Company's net sales of $1,808,791 for the year ended December 31,
1997 were $196,033 (10%) lower than $2,004,825 reported for the same
period a year earlier, primarily due to a $246,156 decrease in software
sales made through resellers. While the Company signed up six new
resellers during 1997, certain other resellers did not produce revenue in
1997 at comparable levels with 1996. The Company has dedicated increased
resources in order to work more closely with the existing resellers.
Software sales to end-users increased by $42,825 (14%) over the earlier
year. Revenue from resellers comprised 26% of total revenue for 1997,
compared to 37% of total revenue in 1996. Revenue from system sales and
software licenses constituted 44% and 49% of total revenues in 1997 and
1996, respectively. Service and recurring annual fees made up 56% and 51%
of total revenues, respectively, in 1997 and 1996. Sales made through
resellers reflect reseller markdown, and are therefore shown in discounted
(net) dollars. Revenue contribution from maintenance/annual license fees
was $749,525 or 41% of total revenue for the year ended December 31, 1997
as compared to $713,912 or 37% of total revenue for the year ended
December 31, 1996.
Gross profit reported on 1997 revenue equals 49% of total revenue
(or $890,803), as compared to 55% of total revenue (or $1,099,721) for
1996, due in part to higher software amortization charges in 1997.
Hardware revenue comprised 17% of total revenue for the current year
versus 16% of total revenue for the year earlier. Selling, general and
administrative expenses were up $81,423 (6%) for the twelve months ended
December 31, 1997, due to increases in bad debt expense, depreciation and
investor relations of $95,681. Other income in 1996 resulting from the
recovery of a bad debt accounted for a year over year difference of
$110,338. Net loss and earnings per share for the year ended December
31, 1997 were $(475,259) and $(.22) as compared to $(89,074) and $(.04)
for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
- ----------------------------------------------------------------------
The Company's net sales of $2,004,825 for the year ended December 31,
1996 were $903,119 (31%) lower than $2,907,944 reported for the same
period a year earlier, primarily due to a $828,950 decrease in hardware
sales. Although total revenue declined, gross profit increased by $340,720
(45%) due to a dramatic change in the components of total revenue. Gross
profit reported on 1996 revenue equals 55% of total revenue (or
$1,099,721), as compared to 26% of total revenue (or $759,001) for 1995.
Revenue from system sales and software licenses constituted 49% and 73% of
total revenues in 1996 and 1995, respectively. Service and annual fees
made up 51% and 27% of total revenues, respectively, in 1996 and 1995.
Net sales to resellers of $741,812 (37% of total revenue) for the twelve
months ended December 31, 1996 were 20% ($123,245) higher than $618,567
(21% of total revenue) reported for the same period a year earlier. Sales
made through resellers reflect reseller markdown, and are therefore shown
in discounted (net) dollars. Revenue contribution from maintenance/annual
license fees was up significantly (104%) for the year over year periods:
$713,912 or 36% of total revenue for the year ended December 31, 1996 as
compared to $349,382 or 13% of total revenue for the year ended December
31, 1995. Additional software licenses, which are needed as customers
increase the number of users on their imaging system, contributed $234,610
to software revenue for the year ended December 31, 1996 compared to
$7,996 in revenue for the same period a year earlier. Hardware revenue
comprised 15% of total revenue for the current year versus 39% of total
revenue for the year earlier, due to the Company changing its emphasis
from a system integrator to a software provider. Selling, general and
administrative expenses were down sharply (35%) for the twelve months
ended December 31, 1996 as compared to the same period in 1995, as across
the board cost-cutting measures (implemented in 1995) began to show
results. The combined effect of the factors described have resulted in a
substantial improvement in the Company's effort to return to
profitability. Net loss and earnings per share for the year ended
December 31, 1996 were $(89,074) and $(.04) as compared to $(1,313,724)
and $(.69) for the year ended December 31, 1995.
Liquidity and Capital Resources
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The Company's cash and cash equivalents decreased $9,806 during the
twelve months ended December 31, 1997, primarily due to net cash used for
investing activities. Cash used for capitalized software costs (primarily
for development of the new release of 1MAGE(R) software) totaled $329,095
for the year ended December 31,1997. The Company had working capital of
$42,772 on December 31, 1997.
The Company's internal sources of liquidity are revenues from
operations and cash on hand. The Company receives most of its revenues
for software licenses and system sales upon installation and does not
maintain inventory balances. The Company has a $150,000 revolving line of
credit. The loan is collateralized by the Company's notes and accounts
receivable and a certificate of deposit for $25,000.
The Company has no material commitments for capital expenditures for
1998.
Management believes that inflation has not had a material impact on
its results of operations to date. While the Company has not experienced
downward pressure on software prices to date, it is not possible to
predict if that will change in the future.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1MAGE SOFTWARE, INC.
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INDEX TO FINANCIAL STATEMENTS
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PAGE
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INDEPENDENT AUDITORS' REPORT 14
BALANCE SHEETS - December 31, 1997 and 1996 16
STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 1997, 1996 and 1995 17
STATEMENTS OF SHAREHOLDERS' EQUITY - From January 1, 1995 through
December 31, 1997 18
STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1997,
1996 and 1995 19
NOTES TO FINANCIAL STATEMENTS 21
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION 30
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS 32
INDEPENDENT AUDITORS' REPORT
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To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheet of 1MAGE Software,
Inc. as of December 31, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe our audit
provides 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, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ Cribari & Gustafson, LLP
- ----------------------------
Cribari & Gustafson, LLP.
Denver, Colorado
February 6, 1998
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheet of 1MAGE Software,
Inc. as of December 31, 1996, and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996
and 1995. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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 audit
provides 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, 1996, and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
/s/ KARSH & COMPANY, P.C.
- -------------------------
KARSH & COMPANY, P.C.
Denver, Colorado
February 11, 1997
1MAGE SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------
ASSETS 1997 1996
- ------ ------------ ------------
CURRENT ASSETS;
Cash and cash equivalents $ 231,793 $ 241,599
Certificate of deposit 25,000 25,000
Receivables:
Trade (less allowance: 1997,
$20,000; 1996, $90,952) 240,085 507,808
Related parties 27,817 32,683
Inventory 93,723 104,232
Prepaid expenses and other current assets 7,673 24,814
----------- -----------
Total current assets 626,091 936,136
PROPERTY AND EQUIPMENT, at cost, net 162,410 244,617
OTHER ASSETS:
Software development costs, net 813,625 789,365
Other 47,511 48,203
----------- -----------
TOTAL ASSETS $ 1,649,637 $ 2,018,321
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit $ 150,000 $ 150,000
Current portion of convertible notes
payable to related parties -- 150,000
Current portion of capital lease obligations 12,186 12,983
Accounts payable 191,538 225,341
Accrued liabilities 229,595 232,729
----------- -----------
Total current liabilities 583,319 771,053
LONG-TERM OBLIGATIONS:
Convertible notes payable to related parties 150,000 --
Capital lease obligations 8,850 8,489
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value -
10,000,000 shares authorized;
shares outstanding: 1997 -
2,142,845; 1996 - 2,147,563 8,571 8,590
Additional paid-in capital 6,845,100 6,850,533
Notes receivable for common stock -- (149,400)
Accumulated deficit (5,946,203) (5,470,944)
----------- -----------
Total shareholders' equity 907,468 1,238,779
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,649,637 $ 2,018,321
=========== ===========
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
---------- ---------- ----------
REVENUE:
System sales and software
licenses $ 800,754 $ 989,572 $ 2,110,867
Services and annual fees 1,008,037 1,015,253 797,077
----------- ----------- -----------
Total revenue 1,808,791 2,004,825 2,907,944
----------- ----------- -----------
COST OF REVENUE:
System sales and software licenses 603,781 514,595 1,457,620
Services and annual fees 314,207 390,509 691,323
----------- ----------- -----------
Total cost of revenue 917,988 905,104 2,148,943
----------- ----------- -----------
GROSS PROFIT 890,803 1,099,721 759,001
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and
administrative 1,354,469 1,273,046 1,952,001
Write-down of software -- -- 40,030
----------- ----------- -----------
Total operating expenses 1,354,469 1,273,046 1,992,031
----------- ----------- -----------
LOSS FROM OPERATIONS (463,666) (173,325) (1,233,030)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 24,742 18,782 27,377
Other 1,896 112,234 (8,970)
Equity in earnings of affiliates -- (13,939) (86,061)
Interest expense (33,231) (27,826) (21,040)
----------- ----------- -----------
Total other income (expense) (6,593) 89,251 (88,694)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (470,259) (84,074) (1,321,724)
PROVISION FOR INCOME TAXES (5,000) (5,000) 8,000
----------- ----------- -----------
NET LOSS $ (475,259) $ (89,074) $(1,313,724)
----------- ----------- -----------
LOSS PER COMMON SHARE $ (0.22) $ (0.04) $ (0.69)
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,146,331 2,054,632 1,911,731
----------- ----------- -----------
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- -------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
------------- PAID-IN NOTES
SHARES AMOUNT CAPITAL RECEIVABLE
---------- -------- ----------- ----------
BALANCES, January 1, 1995 1,892,272 $ 7,569 $ 6,590,507 $ --
Issuance of common stock
in connection with
retirement of debt 20,000 80 23,670 --
Issuance of common stock
for services 27,162 109 41,303 --
Cancellation of treasury
stock (2,575) (10) (35,722) --
Net loss - - - --
--------- ------- ----------- ---------
BALANCES, December 31, 1995 1,936,859 7,748 6,619,758 --
Accrued liabilities converted
to common stock 1,867 7 1,860 --
Issuance of common stock for
inventory and services 62,087 248 82,752 --
Sale of common stock 150,000 600 149,400 (149,400)
Cancellation of common stock
related to employee
termination (3,250) (13) (3,237) --
Net loss - - - --
--------- ------- ----------- ---------
BALANCES, December 31, 1996 2,147,563 8,590 6,850,533 (149,400)
Cancellation of common stock
related to employee
termination (10,000) (40) (11,210) --
Exercise of incentive common
stock options 4,811 19 5,382 --
Payment of note received for
common stock - - - 149,400
Issuance of common stock for
services 471 2 395 --
Net loss - - - --
--------- ------- ----------- ---------
BALANCES, December 31, 1997 2,142,845 $ 8,571 $ 6,845,100 $ --
========= ======= =========== =========
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
ACCUM. TREASURY STOCK
DEFICIT SHARES AMOUNT TOTAL
----------- ------ --------- ----------
BALANCES, January 1, 1995 $(4,068,146) 2,575 $(35,732) $ 2,494,198
Issuance of common stock
in connection with
retirement of debt -- -- -- 23,750
Issuance of common stock
for services -- -- -- 41,412
Cancellation of treasury
stock -- (2,575) 35,732 --
Net loss (1,313,724) -- -- (1,313,724)
---------- ------ ------- ----------
BALANCES, December 31, 1995 (5,381,870) -- -- 1,245,636
Accrued liabilities
converted to common
stock -- -- -- 1,867
Issuance of common stock
for inventory and
services -- -- -- 83,000
Sale of common stock -- -- -- 600
Cancellation of common stock
related to employee
termination -- -- -- (3,250)
Net loss (89,074) -- -- (89,074)
---------- ------ ------- ----------
BALANCES, December 31, 1996 (5,470,944) -- -- 1,238,779
Cancellation of common stock
related to employee
termination -- -- -- (11,250)
Exercise of incentive common
stock options -- -- -- 5,401
Payment of note received for
common stock -- -- -- 149,400
Issuance of common stock for
services -- -- -- 397
Net loss (475,259) -- -- (475,259)
---------- ------ ------- ----------
BALANCES, December 31, 1997 $(5,946,203) -- $ -- $ 907,468
=========== ====== ======= ===========
See notes to financial statements.
1MAGE SOFTWARE INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (475,259) $ (89,074) $(1,313,724)
Adjustments to reconcile loss to net
cash provided by operating
activities:
Depreciation and amortization 408,652 295,132 516,585
Allowance for doubtful accounts (70,952) (5,973) 152,300
Issuance of stock for services 398 30,750 41,412
Cancellation of stock issued for
services (11,250) -- --
Gain on sale of property and
equipment (117) -- --
Write-down of capitalized
software -- -- 40,030
Equity in loss of affiliate -- 13,939 86,061
Changes in assets and liabilities:
Receivables 343,541 34,121 914,522
Inventory 10,509 (57,297) (13,515)
Prepaid expenses and other
current assets 17,141 1,025 114,428
Accounts payable (33,803) 3,940 (208,050)
Accrued liabilities (3,134) (18,615) (197,507)
----------- ----------- -----------
Net cash provided by operating
activities 185,726 207,948 132,542
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,856) (24,437) (89,304)
Additions to capitalized software (329,095) (297,060) (380,255)
Payments from notes receivable 149,400 15,210 34,107
Purchase of certificate of deposit -- (25,000) --
Investment in affiliate -- -- (100,000)
Increase in other assets 692 (19,701) (2,953)
----------- ----------- -----------
Net cash used for investing
activities (186,859) (350,988) (538,405)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 176,158 438,948 255,000
Repayment of line of credit (176,158) (389,425) (200,373)
Repayment of long-term obligations (14,073) (11,336) (101,626)
Proceeds from issuance of convertible
debt -- -- 150,000
Proceeds from issuance of common
stock -- 600 --
Proceeds from exercise of common
stock options 5,400 -- --
----------- ----------- -----------
Net cash (used for) provided by
financing activities (8,673) 38,787 103,001
----------- ----------- -----------
DECREASE IN CASH AND CASH
EQUIVALENTS (9,806) (104,253) (302,862)
CASH AND CASH EQUIVALENTS,
beginning of year 241,599 345,852 648,714
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 231,793 $ 241,599 $ 345,852
=========== =========== ===========
See notes to financial statements.
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------
1997 1996 1995
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 18,358 $ 12,907 $ 75,403
=========== =========== ===========
Income taxes paid $ 5,000 $ 5,000 $ 29,000
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Debt and accrued interest retired
in exchange for common stock $ -- $ -- $ 23,750
=========== =========== ===========
Inventory reclassified to
equipment $ -- $ 30,707 $ 42,854
=========== =========== ===========
Reclassification of trade
receivables to notes receivable $ -- $ -- $ --
=========== =========== ===========
Accrued liabilities converted to
common stock $ -- $ 1,867 $ --
=========== =========== ===========
Common stock issued for notes
receivable $ -- $ 149,400 $ --
=========== =========== ===========
Common stock issued for inventory $ -- $ 49,000 $ --
=========== =========== ===========
Acquisition of property and
equipment by assuming capital
lease obligations $ 13,637 $ -- $ --
=========== =========== ===========
See notes to financial statements.
1MAGE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
ORGANIZATION AND NATURE OF BUSINESS - 1MAGE Software, Inc. (the
"Company"), formerly Information Solutions, Inc., was incorporated in
Colorado in December 1981.
From June of 1994 until December of 1995, the Company operated as two (2)
distinct entities. 1MAGE Software, Inc. developed and marketed a UNIX-
based electronic document image management and retrieval system.
Information Solutions, Inc. marketed, installed, and supported integrated
computer systems in the motor carrier industry. The Company earns the
majority of its revenues in the United States.
On December 31, 1995, Information Solutions, Inc. was merged into 1MAGE
Software, Inc.
PRINCIPLES OF CONSOLIDATION - During 1995 the financial statements
included the accounts of 1MAGE Software, Inc. and its wholly-owned
subsidiary, Information Solutions, Inc. All material intercompany
transactions have been eliminated.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
INVENTORIES consist of finished goods and are stated at the lower of cost
(specific identification method) or market (net realizable value).
INVESTMENTS - In 1995, the Company purchased a 50% interest in ScanUSA,
LLC. This investment was accounted for using the equity method of
accounting. During 1996, ScanUSA, LLC ceased operations and the remaining
investment value was written down to zero.
PROPERTY AND EQUIPMENT are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful
lives (generally five years) of the assets or the lease term, if shorter.
The Company capitalizes all expenditures for property and equipment in
excess of $500.
SOFTWARE DEVELOPMENT COSTS are capitalized when technological feasibility
is established. Such costs are stated at the lower of unamortized cost or
net realizable value. Amortization is computed using either the straight-
line method based on estimated economic lives of the products (five years)
or the ratio that current product revenues bear to the total of current
and anticipated future product revenues, whichever is greater. The
amounts capitalized for the years ended December 31, 1997, 1996 and 1995
were $329,094, $297,060, and $380,255 respectively. Amortization of these
costs totaled $304,835, $216,053, and $311,295 respectively. During 1995,
the Company wrote down $40,030 of software development costs to net
realizable value. The net realizable value of such capitalized costs is
reviewed by management on a periodic basis, and costs in excess of net
realizable value, if any, are charged to operations.
REVENUE RECOGNITION - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when
the software and computer equipment are shipped to the customer, remaining
vendor obligations are insignificant, there are no significant
uncertainties about customer acceptance and collectibility is probable.
Revenue from related services, including installation and software
modifications, is recognized upon performance of services.
The Company performs credit evaluations of its customers' financial
condition and generally does not require collateral. The Company retains a
security interest in the equipment and software sold until they are paid
in full. Receivables are generally due within 30 days, with those
customers not meeting those requirements being subject to stricter credit
policies. In 1995, the Company charged $246,444 of notes receivable to
bad debts for a customer who filed bankruptcy. In March 1996, the
Company recovered $110,838 of income from receivables which had previously
been recorded as bad debt. This amount is included in other income.
Credit losses to customers have generally been within management's
expectations.
One customer accounted for 12% of 1997 revenues. Three different
customers accounted for 20%, 17% and 11% of accounts receivable at
December 31, 1997.
One customer accounted for 13% of 1996 revenues. A certain reseller
accounted for 12% of revenue during 1996. Two customers accounted for 25%
and 12% of accounts receivable at December 31, 1996.
One customer accounted for 14% of 1995 revenues. Three different
customers accounted for 17%, 13% and 12% of accounts receivable at
December 31, 1995.
LOSS PER SHARE is computed by dividing net loss by the weighted average
number of common and equivalent shares. The potential dilution from
common stock equivalents is not material. Fully diluted earnings per
share are either anti-dilutive or not materially different from primary
earnings per share.
INCOME TAXES The Company follows the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax
bases of assets and liabilities and are measured using enacted tax rates
and laws that will be in effect when the underlying assets or liabilities
are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly,
no income tax benefit has been recorded for the current year losses.
RECLASSIFICATIONS - Certain items in the 1996 and 1995 financial
statements have been reclassified to conform with the 1997 presentation.
Such reclassifications had no effect on net income or loss.
ESTIMATES -The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that can affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
1997 1996
-------- ---------
Equipment $710,766 $689,592
Leasehold Improvements 78,169 78,169
Furniture 75,081 74,762
-------- ---------
864,016 842,523
Less: Accumulated
depreciation and
amortization (701,606) (597,906)
-------- --------
$162,410 $244,617
======== ========
3. NOTES RECEIVABLE FOR COMMON STOCK
On May 31, 1996, the Company sold 150,000 shares of common stock for
$1.00 per common share in exchange for $600 in cash and notes
receivable of $149,400. The principal balances due on these notes
were paid off in November 1997. Interest receivable of $21,788 and
$5,804 is included in receivables - related parties at December 31,
1997 and 1996, respectively. Interest income from related parties
was $15,983 and $5,804 in 1997 and 1996, respectively. The notes
receivable are from the same related parties as the convertible notes
payable at Note 6.
4. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following:
1997 1996
------ -------
Sales tax payable $51,958 $43,241
Accrued interest-
related party 41,458 26,586
Accounting and audit fees 27,400 29,900
Deferred revenue 25,781 50,000
Accrued compensation 15,400 17,800
Accrued customer support 7,000 21,242
Other 60,598 43,960
--------- ----------
$229,595 $232,729
========= ==========
5. LINE OF CREDIT
The Company has a $150,000 revolving bank line of credit which
expires September 10, 1998 and bears interest at prime (8.5% at
December 31, 1997) plus 1% and is collateralized by the Company's
notes and accounts receivable and a certificate of deposit for
$25,000. Total borrowings outstanding under the line of credit were
$150,000 at December 31, 1997.
6. CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
Convertible notes payable to related parties at December 31, consist
of the following:
1997 1996
------ -------
10% Notes Payable,
due February 18, 2000 $100,000 $100,000
10% Notes Payable,
due February 18, 2000 50,000 50,000
--------- -------
$150,000 $150,000
========= =======
The principal and interest are convertible into common stock at $.625 per
common share. Attached to the convertible notes were options to purchase
66,668 and 53,332 common shares at an exercise price of $1.50 and $.9375,
respectively. These options expired on July 31, 1996.
Interest expense for the years ended December 31, 1997, 1996 and 1995 was
$33,231, $27,826, and $21,040, and includes amounts to related parties of
$15,000, $15,000, and $(3,364), respectively.
7. SHAREHOLDERS' EQUITY
STOCK COMPENSATION PLANS
At December 31, 1997, the Company has three stock based compensation
plans, which are described below. The Company applies Accounting
Principles Board (APB) Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its 1996, 1994 or 1993 Stock Option Plans. Had
compensation cost for the Company's two stock-based compensation
plans been determined based on the fair value at the rates of awards
under those plans consistent with the method of FASB Statement 123,
the Company's net loss and loss per share would have been reduced to
the pro forma amounts indicated below:
1997 1996
------ -------
Net Loss:
As reported $(475,259) $ (89,074)
Pro forma $(645,259) $(254,074)
Loss per common share:
As reported $ (0.22) $ (0.04)
Pro forma $ (0.31) $ (0.12)
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 1997 and 1996:
1997 1996
------- --------
Dividend Yield 0% 0%
Expected Volatility 75% 75%
Risk-Free Interest Rate 6.00% 8.25%
Expected Lives 3.8 years 3.8 years
1996 EQUITY INCENTIVE PLAN
In September 1996, the Board of Directors authorized 1,000,000 shares of
common stock for issuance under its 1996 Equity Incentive Plan ("1996
Plan") as incentive or non-qualified stock options. The Company grants
non-qualified and incentive stock options and restricted stock to officers
and directors who are employees of the Company.
The options are granted to purchase common stock at the fair market value
on the grant date or at other prices as determined by the Board of
Directors. The option vesting period is determined at the time of each
grant, and all options expire two to ten years from the grant date.
A summary of the 1996 Plan stock option activity follows:
OutstandingValue per
Shares Share Total
------ ---------- --------
Granted 90,000 $.84 $75,942
------- --------
Balances, December 31, 1996 90,000 $.84 75,942
Granted 185,000 $.63-$1.47 119,031
------- -------
Balances, December 31, 1997 275,000 $194,973
======= =======
At December 31, 1997, options for 243,000 shares were exercisable under
the 1996 Plan. There were 725,000 shares available for future grant.
1994 STOCK OPTION AND GRANT PLAN
In April 1994, the Company authorized 700,000 shares of common stock for
issuance under its 1994 Stock Option and Grant Plan ("1994 Plan") to
employees, consultants, advisors, and independent contractors.
The options are granted to purchase common stock at the fair market value
on the date of grant or at other prices as determined by the Board of
Directors ("the Board"). Options issued under the 1994 Plan become
exercisable in one or more installments during its term and the right to
exercise may be cumulative, as determined by the Board. Options expire as
determined by the Board, but not more than 10 years after the date of
grant.
Details of activity under the 1994 Plan are as follows:
Outstanding Value Per
Stock Options Options Share Total
- -------------- ----------- ---------- -------
Balances, January 1, 1995 350,000 $2.75 - $3.25 1,087,500
Granted 12,000 $.75 - $1.38 15,250
Canceled (350,000) $2.75 - $3.25 (1,087,500)
----------- -----------
Balances, December 31, 1995 12,000 $.75 - $1.38 15,250
Granted 86,495 $.77 - $1.49 80,176
Canceled (14,000) $.75 - $1.49 (18,225)
----------- -----------
Balances, December 31, 1996 84,495 $.77 - $1.12 77,201
Granted 255,807 $.63 - $1.44 227,565
Canceled (44,316) $.63 - $1.19 (123,500)
Exercised (4,811) $1.06 - $1.19 (5,401)
----------- ------------
Balances, December 31, 1997 291,175 $ 175,865
=========== ============
Stock Grants Shares Grant Price Total
- ------------ ------ ----------- -----
Balances, January 1, 1995
18,000 $49,188
6,500 $1.00 6,500
27,526 $1.19 32,663
533 $1.87 999
4,155 $1.93 8,000
4,051 $1.97 8,000
3,926 $2.04 7,999
471 $2.12 1,001
------- ---------
Balances, December 31, 1995 65,162 114,350
2,783 $1.44 4,000
8,000 $1.44 11,500
20,000 $1.12 22,500
Canceled (3,250) $1.00 (3,250)
-------- ---------
Balances, December 31, 1996 92,695 149,100
471 $0.84 397
Canceled (10,000) $1.13 (11,250)
-------- --------
Balances, December 31, 1997 83,166 $138,247
======== ========
At December 31, 1997 options to purchase 27,083 shares of common stock
were exercisable and 220,848 shares were available for future grant.
1993 STOCK OPTION PLAN
In May 1994, the Company authorized 235,000 shares of common stock for
issuance under its 1993 Stock Option Plan ("1993 Plan") as incentive or
non-qualified stock options. The Company grants non-qualified stock
options to officers, directors, employees and consultants. Incentive stock
options may be granted to employees.
The options are granted to purchase common stock at the fair market value
on the grant date or at other prices as determined by the Board of
Directors. The option vesting period is determined at the time of each
grant, and all options expire two to ten years from the grant date.
A summary of the 1993 Plan stock option activity follows:
Outstanding
Shares Value Per Share Total
------------- --------------- ------
Balances, January 1, 1995 64,963 $1.24 - $2.87 119,863
Canceled (23,750) $1.81 - $2.87 (48,182)
Granted 151,500 $1.12 - $2.06 170,963
---------- ---------
Balances,
December 31, 1995 192,713 $.97 - $2.87 242,644
Canceled (24,938) $1.24 - $2.87 (53,157)
Granted 61,500 $.77 - $2.87 62,463
--------- ---------
Balances,
December 31, 1996 229,275 $.77 - $1.37 251,950
Granted 16,000 $0.63 10,000
---------- ---------
Balances,
December 31, 1997 245,275 $261,950
========== =========
At December 31, 1997, options for 245,275 shares were exercisable under
the 1993 Plan. There were options for 3,500 shares available for grant.
COMMON STOCK WARRANTS
On January 28, 1994, the Board of Directors granted 100,000 warrants to an
officer to purchase shares of common stock at an exercise price of $1.5625
per share, expiring on January 31, 1999.
COMMON STOCK RESERVED
Common stock reserved at December 31, 1997 was as follows:
1996 Equity Incentive Plan 1,000,000
1994 Stock Option and Grant Plan 512,023
1993 Stock Option Plan 248,775
Warrants 200,000
Convertible Notes Payable 309,333
---------
2,270,131
=========
8. INCOME TAXES
The provisions for income taxes for the years ended December 31, consist
of:
1997 1996 1995
----- ----- -----
Current:
Federal -- -- --
State 5,000 5,000 (8,000)
------- ------- -------
Total current 5,000 5,000 (8,000)
------- ------- -------
Deferred:
Federal -- -- --
State - - -
------- ------- -------
Total deferred -- -- --
------- ------- -------
5,000 5,000 (8,000)
======= ======= =======
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
Percent of pretax income 1997 1996 1995
----- ----- -----
Federal tax rate 34.0% 34.0% 34.0%
Increase(decrease) in taxes
resulting from State income
tax, net of federal tax benefit 3.6% 3.6% 3.6%
Use of net operating loss carry
forward (34.8)% (33.0)% (37.5)%
Permanent differences (2.8)% (4.6)% (0.1)%
Other, net 1.1% 5.9% (0.6)%
------- ------- -------
Effective tax rate 1.1% 5.9% (0.6)%
======= ======= =======
The components of the net deferred tax liability recognized in the
accompanying balance sheets are as follows:
1997 1996
------- ---------
Deferred tax liability $ 2,000 $ 8,000
Deferred tax asset (2,322,000) (2,066,000)
Valuation allowance 2,320,000 2,058,000
----------- -----------
$ -- $ --
=========== ===========
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:
1997 1996
----- ------
Future income (deductions):
Net operating loss $(2,003,000) $(1,710,000)
Allowance for doubtful accounts (8,000) (34,000)
Research and development credit (206,000) (206,000)
Depreciation (59,000) (56,000)
Investment tax credit (35,000) (35,000)
Capitalized software
development costs 2,000 (2,000)
Other (11,000) (15,000)
------------ ------------
$(2,320,000) $(2,058,000)
============ ============
The Company has net operating loss carry forwards for federal and
Colorado income tax purposes of approximately $5,135,000 and
$2,460,000, respectively. Investment tax credit carry forwards of
approximately $35,000 and research and development tax credit carry
forwards of approximately $206,000 are available to reduce future
federal income taxes. These carry forwards expire on varying dates
from 1998 through 2012.
9. EMPLOYEE BENEFIT PLAN
The Company has a Cash or Deferred Profit Sharing Plan ("the 401(k)
Plan"). The 401(k) Plan is designed to qualify under Section 401(k)
of the Internal Revenue Code and allows the Company to make
discretionary contributions as determined by the Company's Board of
Directors. For the years ended December 31, 1997, 1996, and 1995,
the Company contributed $1,683, $1,410 and $1,867 to the 401(k) Plan.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, and 1996, equipment with a net book value of
$18,550 and $16,380 (net of accumulated amortization of $49,687 and
$38,220), respectively, has been leased under capital leases.
The Company leases its executive offices from an affiliated
partnership under a noncancelable operating lease which expires in
October 1998. Payments to this partnership for each of the years
ended December 31, 1997, 1996 and 1995 pursuant to this lease were
$85,200.
Future minimum payments for lease obligations are as follows:
Capital Operating
-------- -----------
1998 $14,836 $71,000
1999 5,992 --
2000 4,535 --
-------- -------
Total minimum lease payments 25,363 $71,000
=======
Amount representing interest (4,327)
--------
Present value of minimum
lease payments 21,036
Current portion (12,186)
--------
Long-term portion $8,850
========
Equipment rent expense for the years ended December 31 totaled: 1997,
$2,400; 1996, $2,600; 1995, $6,500.
The Company has bonus agreements with certain officers which provide
for quarterly bonuses of 5% and 4% of the Company's pre-tax profits.
The Company expensed bonuses of $0, $10,532, and $0 under these
agreements for the years ended December 31, 1997, 1996 and 1995,
respectively.
11. FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading.
The following methods and assumptions were used to estimate the fair
value of each financial instrument for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short
maturity of those instruments.
Debt
The fair value of the Company's debt is estimated based on borrowing
rates currently available to the Company for bank loans with similar
terms and maturities.
The estimated fair values of the Company's financial instruments at
December 31, 1997 are as follows:
Assets
------- Carrying Fair Value
---------- ----------
Cash and cash equivalents $231,793 $ 231,793
Certificate of deposit $ 25,000 $ 25,000
Receivables (including
$27,817 from related
parties) $267,902 $267,902
Liabilities
-----------
Accounts payable (including
$21,300 to related $191,538 $191,538
Line of credit $150,000 $150,000
Convertible notes payable to
related parties $150,000 $150,000
The estimated fair values of the Company's financial instruments at
December 31, 1996 are as follows:
Assets
------- Carrying Fair Value
---------- ----------
Cash and cash equivalents $241,599 $ 241,599
Certificate of deposit $ 25,000 $ 25,000
Receivables (including
$32,683 from related
parties) $540,491 $540,491
Liabilities
-----------
Accounts payable $225,341 $225,341
Line of credit $150,000 $150,000
Convertible notes payable to
related parties 150,000 $150,000
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules to the financial
statements referred to in the accompanying index are presented for the
purposes of additional information for the year ended December 31, 1997,
and has been subjected to the auditing procedures applied in the audit of
the basic financial statements. In our opinion, such information for the
year ended December 31, 1997, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ Cribari & Gustafson, LLP
- ----------------------------
Cribari & Gustafson, LLP
Denver, Colorado
February 6, 1998
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
To the Board of Directors and Stockholders of
1MAGE Software, Inc.
Englewood, Colorado
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules to the financial
statements referred to in the accompanying index are presented for the
purposes of additional information for the years ended December 31, 1996
and 1995 and have been subjected to the auditing procedures applied in the
audit of the basic financial statements. In our opinion, such information
for the years ended December 31, 1996 and 1995 is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ KARSH & COMPANY, P.C.
- -------------------------
KARSH & COMPANY, P.C.
Denver, Colorado
February 11, 1997
1MAGE SOFTWARE, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------
Balance at Additions charged to: Balance at
Beginning Costs and Other Deductions End
of Period Expenses Accounts of Period
FOR THE YEAR ENDED
DEC. 31, 1997:
Allowance for Doubtful
Accounts $90,952 $68,681 $ 0 $139,633 $20,000
FOR THE YEAR ENDED
DEC. 31, 1996:
Allowance for Doubtful
Accounts $96,925 $27,606 $ 0 $33,579 $90,952
FOR THE YEAR ENDED
DEC. 31, 1995:
Allowance for Doubtful
Accounts $140,520 $273,235 $ 0 $316,830 $96,925
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 10, 1997, the Company informed its independent certified
public accountants, Karsh & Company, P.C. ("Karsh"), that it had been
dismissed because Karsh had increased its fees over the amount paid in
fiscal 1996. The decision was made by the Company's Audit Committee.
Karsh had served as the Company's independent auditors since 1992.
The reports of Karsh on the financial statements of the Company for each
of the two fiscal years in the period ended December 31, 1996 did not
contain any adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting
principles.
In the opinion of management of the Company, the financial statements
contained in the Company's reports on Form 10-Q for the first, second and
third quarters of 1997 appropriately reflect all business transactions and
all adjustments necessary for a fair presentation of the financial
position and the results of operations of the Company for the periods
presented.
During the Company's two most recent audited fiscal years (1995 and 1996)
and the current unaudited interim year (1997), there were no
"disagreements" (as that term is used in Item 304 of Regulation S-K)
between Karsh and the Company on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
The Company has authorized Karsh to respond fully to the inquiries of the
Company's successor accountant. The Company has asked for and Karsh has
provided a letter to the SEC indicating their concurrence with the above
statements. This letter was filed as an exhibit to Form 8-K filed
December 17, 1997.
On January 15, 1998, after review of the bids solicited from several
public accounting firms, the Audit Committee of the Board of Directors of
the Company approved the engagement of Cribari & Gustafson, LLP as the
independent auditors for the year ended December 31, 1997.
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 1998 annual meeting of
stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1998 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1998 annual meeting of
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1998 annual meeting of
stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Financial Statement Index on Page 13
2. Financial Statement Schedules
See Financial Statement Index on Page 13
3. List of Exhibits
EXHIBIT NUMBER DESCRIPTION AND INCORPORATION BY REFERENCE
3.1* - Restated Articles of Incorporation of the Company, as
amended.
3.2* - Bylaws of the Company, as amended.
3.3* - Articles of Amendment to the Articles of
Incorporation of
the Company dated April 18, 1991
3.4** - Articles of Amendment to the Articles of Incorporation
dated May 21, 1993.
3.4** - Articles of Amendment to the Articles of Incorporation
dated June 28, 1994.
4.1******* - Form 1994 Class A Warrant issued to David R. DeYoung
dated February 1, 1995.
4.2******* - Form of Warrant to Purchase Shares of Common Stock issued
to each of Copeland Consulting Group, Inc. and Transition
Partners, Limited dated December 16, 1996.
4.3******* - Form of Two Year Warrant to Purchase Shares of Common
Stock dated August 14, 1997.
4.4******* - Form of Six Month Warrant to Purchase Shares of Common
Stock dated August 14, 1997.
4.5******* - Consulting Agreement between the Company and BurchMont
Equities Group, Inc. dated July 28, 1997
10.5* - UniVerse(TM) Distributor Agreement between ARDENT
SOFTWARE, INC. and the Company dated May 15, 1991
10.14***** - President Employment Agreement between David R. DeYoung
and the Company dated November 1, 1996.
10.15***** - Chief Financial Officer Employment Agreement between Mary
Anne DeYoung and the Company dated September 1, 1996
10.21* - Independent Software Vendor Agreement dated December 12,
1991 between Data General Corporation and the Company.
10.22**** - Software License Agreement between Reynolds+Reynolds and
the Company. This exhibit is subject to a grant of
confidential treatment filed separately with the Securities
and Exchange Commission.
10.23*** - 1994 Stock Option and Grant Plan.
10.24** - 1993 Stock Option Plan.
10.25****** - Equity Incentive Plan
23.1 - Consent of Karsh & Company, P.C.
23.2 - Consent of Cribari & Gustafson, LLP
27 - Financial Data Schedule
See Index to Financial Statements on Page 13
* Filed as an Exhibit to Form S-1 Registration Statement No.
33-44717, on December 23, 1991.
** Filed as an Exhibit to Form S-8 Registration Statement No.
33-86760, on November 29, 1994
*** Filed as an Exhibit to Form S-8 Registration Statement No.
33-78096, on April 22, 1994.
**** Filed as an Exhibit to Form 10-K for the period ended
December 31, 1994.
***** Filed as an Exhibit to Form 10-K for the period ended
December 31, 1996.
****** Filed as an Exhibit to Form S-8 Registration Statement No.
333-3078, on July 3, 1997.
******* Filed as an Exhibit to Form S-3 Registration Statement No.
333-35265, on September 10, 1997.
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 27, 1998
- ------------------------- -------------------
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 27, 1998
--------------------- ---------------
David R. DeYoung,
President
and Principal Chief
Executive Officer
By: /s/ Charles E. Burns Date: March 27, 1998
--------------------- ---------------
Charles E. Burns
Director
By: /s/ Robert Wiegand, II Date: March 27, 1998
--------------------- ---------------
Robert Wiegand, II
Director and Secretary
By: /s/ Mary Anne DeYoung Date: March 27, 1998
--------------------- ---------------
Mary Anne DeYoung,
Vice President, Finance
Principal and Accounting
Officer
By: /s/ Richard A. Knapp Date: March 27, 1998
--------------------- ---------------
Richard A. Knapp
Director
EXHIBIT INDEX
No. Description Method of Filing
23.1 Consent of Karsh & Co. P.C. Filed herewith electronically
23.2 Consent of Cribari &
Gustafson, LLP Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically