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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 12/31/95
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.
(Exact name of Registrant as specific in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
- ----------------------------------------- ---------------------------------------------------
(State of Incorporation) (IRS Employer Identification Numbers)
6486 S. QUEBEC STREET, ENGLEWOOD CO 80111 (303) 694-9180
- ----------------------------------------- ---------------------------------------------------
(Address of principal executive offices) (Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
- ----------------------------------------- ---------------------------------------------------
(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK - $.004 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and, (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy statements
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 20, 1996: $1,550,166.
As of March 20, 1996, there were 1,936,859 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 1996 annual meeting of stockholders.
PAGE 1 OF 37 PAGES
EXHIBIT INDEX BEGINS ON PAGE 31
TABLE OF CONTENTS
Part I
1. Business.......................................................... 3
2. Properties........................................................ 8
3. Legal Proceedings................................................. 8
4. Submission to Matters to a Vote of Security Holders............... 8
PART II
5. Market for Registrant's Common Equity and
Related Stockholders Matters...................................... 9
6. Selected Financial Data........................................... 10
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 10
8. Financial Statements and Supplementary Data....................... 13
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 31
PART III
10. Directors and Executive Officers of the Registrant................ 31
11. Executive Compensation............................................ 31
12. Security Ownership of Certain Beneficial
Owners and Management............................................. 31
13. Certain Relationships and Related Transactions.................... 31
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................... 31
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
During 1995, the Company concentrated its efforts on selling document
imaging software products into new and diverse markets. By doing so, the
Company completed its transition from two distinct businesses: its former
business of providing integrated hardware and software systems to the
transportation industry and its current business of marketing a sophisticated
software imaging product to a variety of industries, to a document imaging
software supplier. While the Company incurred significant costs in making
this transition, the Company believes it is well positioned in 1996 to
solidify and grow its imaging business.
The Company did not have the dramatic success in 1995 that it had in
1994, when the large single software license sale to Reynolds+Reynolds
accounted for 40% of its sales revenue. Nevertheless, the Company has
continued to make progress in 1995 toward its goal of establishing a strong
Value Added Reseller ("VAR") network for its imaging software. In addition,
the Company commenced operations of a scanning service bureau now serving its
first customer in the transportation industry. While the cost reductions
which began in the second half of 1995 did not have a material effect on the
financial results for 1995, the Company believes that these and other cost
cutting measures will better enable it to reestablish profitability in 1996.
1MAGE SOFTWARE, INC. 1MAGE Software, Inc., (the "Company") develops and
markets a software product called 1MAGE-TM-, a UNIX-based electronic document
image management and retrieval system. Electronic imaging systems like
1MAGE-TM- 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-TM- provides a comprehensive solution for
scanning, indexing, storing and retrieving document images so that these may
be viewed, printed and faxed.
INFORMATION SOLUTIONS Information Solutions (ISI), a division of the Company,
markets, installs and supports integrated computer systems. It packages
third party hardware and proprietary software products to meet the
information management needs of its customers. The vast majority of ISI's
business is on sales of integrated computer systems utilizing 1MAGE-TM-
software to the motor carrier industry.
A typical computer system marketed by ISI consists of computer hardware
(the computer and peripheral devices), operating system software (the program
that enables the user to supervise the computer's resources) and applications
software (the programs that manage the user's data). Complete computer
systems, including peripheral devices, may range in price from $90,000 to
$2,500,000.
IMAGING SOFTWARE MARKET
The Company targets key markets for 1MAGE-TM- through VARs, systems
integrators, and other companies which market complementary software or other
products. Significant target markets identified to date are manufacturing,
insurance, government, transportation, and healthcare. The Company has
contracts in place with VARs for the financial services, government,
manufacturing, distribution, healthcare, and systems integration markets and
is actively seeking to expand its independent sales network.
3
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, lead
referral services, customized product literature, and a discounted
demonstration/development system.
PRODUCTS
As noted above, the Company's primary product is 1MAGE-TM-, 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-TM- DOCUMENT MANAGEMENT - 1MAGE-TM- is a comprehensive, UNIX-based
electronic document imaging and management system that offers all the
capabilities needed to control incoming and outgoing documents. Its features
and functionality include scanning, facsimile, optical character recognition,
bar code recognition, workflow, and hierarchical storage management employing
optical disk storage.
1MAGE-TM- includes several distinguishing features: the ability to use
many different type workstations or terminals, the ability to quickly and
easily integrate with the existing 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.
1MAGE-TM- is sold through the Company's worldwide reseller program to
companies in other vertical markets. During 1995, sales of 1MAGE-TM-
software licenses accounted for 92% of all revenue from the Company's sales
of software licenses (excluding annual license fees) and 29% of total
revenue; in 1994, revenue from sales of 1MAGE-TM- software licenses accounted
for 97% and 53%, respectively.
The proprietary applications software packages sold by the Company
utilize the popular UNIX operating systems and both VMARK's
uniVerse-Registered Mark- database management system and Unidata's database
manager. 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,
customers are rarely restricted in their choice of hardware manufacturers and
seldom incur substantial reprogramming or conversion costs.
1MAGE FOR TRANSPORTATION - 1MAGE FOR TRANSPORTATION was introduced in 1992
to provide features necessary to store, retrieve, and manage the documents
used by the motor carrier industry. It has the ability to scan, view, print,
and fax records and can be integrated with other transportation business
application products offered by ISI. A more general version of 1MAGE FOR
TRANSPORTATION is currently being offered to other trucking software
suppliers under the Company's reseller program.
TMC - TRANSPORTATION MANAGEMENT AND CONTROL - TMC is a comprehensive on-line
transportation and financial software package consisting of 16 major modules
designed to manage a trucking company's operations and accounting functions.
The major modules within this system include Dispatch, Fuel, Settlements,
Equipment, Tax, Accidents, Claims and Financial Management. The first
version of TMC was introduced in 1980, and the current version is being used
by several national carriers. In 1995, sales of TMC software accounted for
8% of all revenue from the initial sale of software licenses (excluding
annual license fees) and 3% of total revenue; in 1994, sales of TMC software
accounted for or 2% and 1%, respectively.
4
ISI warrants that its software will perform substantially as specified
for 90 days following installation. Following this warranty period,
customers sign support and service agreements which extend this coverage.
ISI markets hardware and peripheral products to facilitate its software
sales. ISI also markets the hardware of IBM and Hewlett Packard. All
manufacturers' warranties on hardware are passed through to the customer. The
majority of the computers sold by ISI are RISC (reduced-instruction set
computing) processors, capable of handling from three to 2,000 terminals.
ISI also markets peripheral products such as scanners, jukeboxes,
X-terminals, character terminals, PCs, printers and disk drives. 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. ISI
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 1995, revenue from hardware sales accounted for $1,141,622 of the
Company's total revenue, as compared to $1,498,206 of total revenue for 1994.
SERVICE AND SUPPORT
The Company licenses its applications software to its customers and,
except for sublicenses to truck and automobile dealers (see "Customers"
below), charges an annual license fee which must be paid if the customer
wishes to continue using the software. During 1995 and 1994, annual license
fees accounted for $403,381 and $254,174 respectively, of the Company's net
sales. Annual software license fee revenue for 1995 was up 59% over 1994
levels as new and existing users continue to pay fees associated with the
license program. The Company believes annual licenses fees from existing
and new 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, 1995 and 1994, the
revenues from these services accounted for $447,695 and $355,410, or
approximately 15% and 8% of the Company's net sales, respectively. The
Company does not provide service for hardware. Service for computer hardware
sold by ISI is provided directly by the manufacturer.
MARKETING AND DISTRIBUTION
The Company has signed VAR agreements with 15 resellers. Under the
reseller program, the Company provides its imaging product (1MAGE-TM-) to
independent software integrators (resellers), who in turn market 1MAGE-TM-
products to each of their individual markets. The Company's marketing
objective is to support the current resellers and 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-TM- through its direct sales
force. The Company's current direct sales efforts are focused on the motor
carrier industry, as well as large entities that utilize uniVerse-Registered
Trademark- or Unidata's database. 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 applications 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.
5
SOURCES OF SUPPLY
In conjunction with the sale of its own proprietary software products,
1MAGE Software, Inc. sells a variety of third party vendors' software to its
customers which complement 1MAGE-TM- and create an integrated software
product. The amount and type of third party software provided to a given
customer depends on that customers' 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 ISI'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 proprietary software marketed by ISI functions on all of the
hardware systems that it distributes.
ISI markets IBM equipment under an "Industry Remarketer affiliate"
agreement with Pro America (Dallas, Texas), which allows for volume discounts
on IBM products. This agreement renewed January, 1996 for two years. The
current dealer agreement with VMARK Software, Inc. to remarket VMARK's
proprietary software runs through May 15, 1996.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
The Company's current focus on offering its proprietary imaging software
to a broader range of customers, through its emerging 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-TM- 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, conditions in the target markets and the economy in general.
TRADE SECRET AND COPYRIGHT LAWS
The Company regards its software as proprietary and relies for
protection upon trade secret and copyright laws and non-disclosure agreements
with its employees as well as restrictions on disclosure and transferability
contained in its software license agreements with its customers. Despite
these restrictions, it may be possible for competitors or customers to copy
aspects of the Company's products or obtain information that the Company
regards as proprietary. Furthermore, there can be no assurance that others
will not independently develop software products similar to those developed
or planned by the Company. Although the Company believes its software does
not infringe on the proprietary rights of others and has not received any
notice of claimed infringement, it is possible that portions of the software
marketed by the Company could be claimed to infringe on existing proprietary
rights. In the unlikely event that any such infringements are found to
exist, there can be no assurance that any necessary licenses or rights could
be obtained, or could be obtained on terms satisfactory to the Company.
Further, in such event, the Company could be required to modify the
infringing software. There can be no assurance that the Company would be
able to do so in a timely manner, upon acceptable terms and conditions, or at
all; the failure to do so could have a material adverse effect on the Company.
6
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 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. System sales, which include hardware and software,
made by the Company's ISI division, now have such short lead times because of
direct delivery of the hardware by the manufacturer, 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.
CUSTOMERS
Historically, the Company has primarily sold integrated computer systems
to the transportation and other specialized industries. With the development
of 1MAGE-TM-, the Company has begun to expand its customer base to businesses
in a wide variety of industries and markets, facilitated through the use of
VARs.
In May, 1994, the Company signed a software license agreement with
Reynolds+Reynolds, a Fortune 500 company headquartered in Dayton, Ohio, for
the exclusive right to sublicense 1MAGE-TM- (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 consulting services on an ongoing basis to Reynolds+Reynolds.
COMPETITION
The Company experiences intense competition in its business from numerous
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 performance, service and price. The Company
believes that usage of the popular UNIX based operating system has
strengthened the Company's competitive position by making the Company's
software compatible with more types of hardware. The Company further
believes that its principal advantage over its competitors is the Company's
utilization of a UNIX based open systems architecture which can be offered at
lower prices.
LIMITED MARKETS
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 in its niche
markets sometimes result in reduction or deferral of capital expenditures by
potential customers. While adverse economic 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
7
believes that a strong national economy, including a healthy motor carrier
industry, is important to the success of its sales efforts.
PRODUCT DEVELOPMENT
The computer industry is characterized by rapid technological changes in
both software and hardware. In order to maintain the usefulness of its
products and their compatibility with future hardware and software, the
Company must continually modify and enhance its products. During 1995 and
1994, the Company spent approximately $380,255 and $ 335,536, respectively,
for computer software development.
EMPLOYEES
As of March 20, 1996, the Company employed 20 persons on a full-time
basis, including 6 persons in sales and marketing, 10 in technical support
and programming functions, and 4 in administrative positions.
The competition for skilled employees in the computer industry is
intense. 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. 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, 1995.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the 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.
BID PRICES
-----------------------
HIGH LOW
------ ------
1994
First Quarter $ 5.31 $ .63
Second Quarter 4.75 2.50
Third Quarter 4.75 2.75
Fourth Quarter 3.75 1.81
HIGH LOW
------ ------
1995
First Quarter $ 3.38 $ 1.88
Second Quarter 2.56 1.75
Third Quarter 2.06 1.13
Fourth Quarter 1.25 .63
These quotations reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
On March 20, 1996, the closing bid price per share for the Common
Stock was $1.00 as reported on NASDAQ. On this same date, there were
approximately 935 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.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data of the Company. This table should be read in conjunction
with the financial statements and notes included in Item 8 of this Form
10-K and the section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" following this section.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------
IN THOUSANDS, EXCEPT FOR PER SHARE DATA: 1995 1994 1993 1992 1991
-------- ------ ------ ------- ------
Net Sales $ 2,962 $4,633 $3,622 $ 2,509 $5,021
Cost of Sales 2,149 2,114 1,862 2,143 3,270
-------- ------ ------ ------- ------
Gross Profit 813 2,519 1,760 366 1,751
Selling, General & Admin. Expense 1,992 1,833 1,741 1,634 1,674
Income (Loss) before Income Taxes (1,268) 643 75 (1,438) 176
-------- ------ ------ ------- ------
Net Income (Loss) $ (1,260) $ 601 $ 75 $(1,438) $ 264
Net Income (Loss) Per Share $ (.66) $ .34 $ .05 $ (1.08) $ .20
Weighted Average Number of Outstanding Shares 1,912 1,778 1,548 1,338 977
-------- ------ ------ ------- ------
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31,
---------------------------------------------
IN THOUSANDS: 1995 1994 1993 1992 1991
-------- ------ ------ ------- ------
Working Capital (Deficit) $ 452 $1,380 $ 36 $ 160 $ 248
Total Assets 2,004 3,578 2,461 2,631 3,461
Long-term Obligations 171 33 155 150 389
Total Stockholders' Equity 1,300 2,494 1,257 1,134 1,312
-------- ------ ------ ------- ------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONSOLIDATED)
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994. The Company's net sales of $2,961,944 for the year ended December
31, 1995 were $1,670,929 (36%) lower than $4,632,873 reported for the same
period a year earlier. This decline in revenue is attributable largely to
a significant sale to a single customer in 1994 which comprised 40% of
that year's revenue. Revenue from systems sales and software licenses
(which includes hardware, operating systems software and both initial and
annual renewals of applications software licenses) constituted 85% and 92%
of total revenues in 1995 and 1994, respectively. Service and other
revenue made up 15% and 8% of total revenues, respectively, in 1995 and
1994. Sales to first-time customers in 1995 were equivalent to 75% of
total revenue as compared to 64% of total revenue for the year ended
December 31, 1994. Additions to the existing customer base should
contribute to future business as these customers increase the number of
software user licenses, pay annual license fees, upgrade equipment and
require ongoing technical support services.
Excluding the single software license transaction described above, software
license revenues increased 28% in 1995 over 1994. Annual software license
fee revenue for 1995 was up 59% over 1994 levels as new and existing
users continue to pay fees associated with the license program. The
Company believes annual license fees from existing and new customers will
contribute to the long-term stability of the Company.
10
Selling, general and administrative (SG&A) expenses of $1,952,001 were 6.5%
higher than expenses incurred during 1994. In the last six months of 1995,
management implemented cost cutting measures in order to reduce overhead
expenses, as a response to lower revenue levels. Employee headcount was
reduced by 33%, year over year. The Company employed twenty (20) persons
at December 31, 1995 compared to thirty (30) employees at December 31,
1994. The Company believes that it can significantly increase revenue
without increasing personnel. Bad debt expense resulting from certain
customers in the transportation industry contributed to the increased SG&A
expense. In addition, the Company wrote down the remaining balance of
certain software products to their future net realizable value.
Net loss for the year ended December 31, 1995 was $(1,259,724) or $(.66)
per share as compared to net income of $600,890 or $.34 earnings per share
for the year ended December 31, 1994. Future profitability is dependent
upon reducing SG&A expense while increasing sales to at least 1993 levels.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993. The
Company's net sales of $4,632,873 for the year ended December 31, 1994,
increased $1,011,247 (28%) from net sales of $3,621,626 for the year ended
December 31, 1993. Software license sales for 1994 totaled $2,518,065 (54% of
total revenue) compared to hardware sales of $1,498,206 (32% of total
revenue); versus 1993 software license sales of $1,635,529 (45% of total
revenue) and hardware sales of $1,249,516 (34.5% of total revenue) for 1993.
This upturn in profits was primarily due to sales generated from IMAGE-TM-, a
document imaging software product introduced in late 1992. Sales of software
licenses and integrated computer systems utilizing IMAGE-TM- applications
software products accounted for 81% ($3,747,057) of the Company's revenue in
1994, as compared to 42% ($1,518,927) of total revenue in 1993. Sales of
transportation applications software, computer hardware and related services
to the motor carrier industry comprised 19% ($885,775) of the Company's total
revenue for 1994, compared to 51% ($1,835,165) of total revenue during 1993.
Sales revenue from the commercial/government market sector was less than 1%
of total revenue during 1994, versus 6% of total revenue for 1993.
During 1994, sales to a single customer accounted for 40% of the
combined Company's revenue, as compared to 12% for a different largest
customer in 1993. Revenue from first-time customers accounted for 64% of
the Company's total 1994 revenue, compared to 69% of total 1993 revenue.
The Company's gross profit as a percentage of sales increased from 49% to
54% for the year ended December 31, 1994, compared to the year ended
December 31, 1993. The increase is attributable to the 53% ($871,549)
increase in software license sales year over year.
The Company incurred selling, general and administrative expenses of
$1,832,941 during 1994, which was $92,175 higher (5%) than such expenses
for 1993 primarily due to an increase in bad debt expense. Interest expense
increased $37,655 during 1994 as compared to 1993, primarily due to an
adjustment for compounded interest on notes payable due to related parties.
For the year ended December 31, 1994, the Company earned income of $600,890,
or $.34 per share, compared to net income of $75,307 or $.05 per share for
the year ended December 31, 1993. For the second consecutive year, the
Company's software license sales exceeded hardware sales as a percent of
total revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $302,862 during the
twelve months ended December 31, 1995, primarily due to net cash used
for investing activities. Cash used for capitalized software costs
(primarily for development of the new release of IMAGE-TM- software) totaled
$380,255 for the year ended December 31, 1995. In addition, the Company
invested $100,000 in a joint venture to create ScanUSA, LLC,
11
a document scanning service bureau. The Company had working capital of
$451,746 on December 31, 1995. The ratio of current assets to
current liabilities was 1.8:1 at year end.
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 $110,000 revolving line of credit.
The loan is secured by certain notes and accounts receivable.
The Company has no material commitments for capital expenditures for
1996.
Management believes that inflation has not had a material impact on
its results of operations to date.
12
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IMAGE SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT 14
CONSOLIDATED BALANCE SHEETS - December 31, 1995 and 1994 15
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 1995, 1994 and 1993 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - From
January 1, 1993 through December 31, 1995 17
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1995, 1994 and 1993 18
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS 20
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION 29
SCHEDULE VIII - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS 30
13
INDEPENDENT AUDITORS' REPORT
Board of Directors
Image Software, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Image
Software, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1995, 1994 and 1993. 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
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 consolidated financial position of
Image Software, Inc. as of December 31, 1995 and 1994, and the results of
its consolidated operations and its consolidated cash flows for the years
ended December 31, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
/s/ KARSH & COMPANY, P.C.
- --------------------------------------
KARSH & COMPANY, P.C.
Denver, Colorado
March 4, 1996
14
IMAGE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
1995 1994
ASSETS ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 345,852 $ 648,714
Receivables:
Trade (less allowance: 1995, $96,925; 1994, $35,020) 561,720 1,494,379
Current portion of notes receivable (less allowance: 1995, none;
1994, $29,659) 15,210 79,608
Employee advances 6,919 10,138
Inventory 28,642 57,981
Prepaid expenses 25,839 140,267
----------- -----------
Total current assets 984,182 2,431,087
NOTES RECEIVABLE (less allowance: 1995, none; 1994, $75,841) - 100,653
PROPERTY AND EQUIPMENT, net 268,550 259,972
OTHER ASSETS:
Purchased computer software, net - 81,710
Software development costs, net 708,360 679,430
Investment in SCAN:USA 13,939 -
Other 28,502 25,549
----------- -----------
TOTAL ASSETS $ 2,003,533 $ 3,578,401
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 100,477 $ 45,850
Notes payable to related parties - 98,548
Current portion of capital lease obligations 11,347 26,828
Accounts payable 221,401 392,451
Income taxes payable - 37,000
Accrued sales commissions 29,468 85,764
Accrued liabilities 169,743 364,954
----------- -----------
Total current liabilities 532,436 1,051,395
----------- -----------
LONG-TERM OBLIGATIONS:
Convertible notes payable 150,000 -
Notes payable to related parties 21,461 32,808
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Common stock, $.004 par value - 10,000,000 shares authorized; shares
outstanding: 1995 - 1,936,859; 1994 - 1,892,272 7,748 7,569
Additional paid-in capital 6,619,758 6,590,507
Accumulated deficit (5,327,870) (4,068,146)
Less cost of common stock held in treasury (1995 - none;
1994 - 2,575) - (35,732)
----------- -----------
Total shareholders' equity 1,299,636 2,494,198
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,003,533 $ 3,578,401
----------- -----------
----------- -----------
See notes to consolidated financial statements.
15
IMAGE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
1995 1994 1993
----------- ---------- ----------
REVENUE:
System sales and software licenses $ 2,514,249 $4,269,370 $3,167,185
Services and other 447,695 363,503 454,441
----------- ---------- ----------
Total revenue 2,961,944 4,632,873 3,621,626
----------- ---------- ----------
COST OF REVENUE:
System sales and software licenses 1,457,620 1,553,156 1,319,639
Services and other 691,323 561,041 542,121
----------- ---------- ----------
Total cost of revenue 2,148,943 2,114,197 1,861,760
----------- ---------- ----------
GROSS PROFIT 813,001 2,518,676 1,759,866
----------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative 1,952,001 1,832,941 1,740,766
Write-down of software 40,030 - -
----------- ---------- ----------
Total operating expenses 1,992,031 1,832,941 1,740,766
----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,179,030) 685,735 19,100
----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (21,040) (67,924) (30,269)
Equity in earnings of affiliates (86,061) - -
Interest income 27,377 26,946 13,612
Gain on sales of assets - - 13,093
Other (8,970) (1,867) 59,771
----------- ---------- ----------
Total other income (expense) (88,694) (42,845) 56,207
----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (1,267,724) 642,890 75,307
PROVISION FOR INCOME TAXES 8,000 (42,000) -
----------- ---------- ----------
NET INCOME (LOSS) $(1,259,724) $ 600,890 $ 75,307
----------- ---------- ----------
----------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE $ (0.66) $ 0.34 $ 0.05
----------- ---------- ----------
----------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,911,731 1,778,014 1,547,591
----------- ---------- ----------
----------- ---------- ----------
See notes to consolidated financial statements.
16
IMAGE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- ---------------------------------------------------------------------------
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------- PAID-IN ACCUM. ------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
--------- ------ ----------- ----------- ------ --------- ----------
BALANCES, January 1, 1993 1,534,340 $6,137 $ 5,908,203 $(4,744,343) 2,575 $ (35,732) $1,134,265
Issuance of common stock for services 3,077 12 4,988 - - - 5,000
Issuance of common stock in connection
with retirement of debt 11,699 47 23,450 - - - 23,497
Compensation expense related to
nonqualified stock options - - 18,794 - - - 18,794
Net income - - - 75,307 - - 75,307
--------- ------ ----------- ----------- ------ --------- ----------
BALANCES, December 31, 1993 1,549,116 6,196 5,955,435 (4,669,036) 2,575 (35,732) 1,256,863
Issuance of common stock for services 107,000 429 229,259 - - - 229,688
Issuance of common stock in connection
with retirement of debt 111,112 445 - - - - 50,000
Accrued liabilities converted to common stock 4,307 16 6,444 - - - 6,460
Exercise of incentive common stock options 20,737 83 20,974 - - - 21,057
Exercise of nonqualified common stock options 100,000 400 328,840 - - - 329,240
Net income - - - 600,890 - - 600,890
--------- ------ ----------- ----------- ------ --------- ----------
BALANCES, December 31, 1994 1,892,272 7,569 6,590,507 (4,058,146) 2,575 (35,732) 2,494,198
Issuance of common stock in connection
with retirement of debt 20,000 80 23,670 - - - 23,750
Issuance of common stock for services 27,162 109 41,303 - - - 41,412
Cancellation of treasury stock (2,575) (10) (35,722) - (2,575) 35,732 -
Net loss - - - (1,259,724) - - (1,259,724)
--------- ------ ----------- ----------- ------ --------- ----------
BALANCES, December 31, 1995 1,936,859 $7,748 $ 6,619,758 $(5,327,870) - $ - $1,299,636
--------- ------ ----------- ----------- ------ --------- ----------
--------- ------ ----------- ----------- ------ --------- ----------
See notes to consolidated financial statements.
17
IMAGE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- ---------------------------------------------------------------------------
1995 1994 1993
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,259,724) $ 600,890 $ 75,307
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 516,585 484,338 410,821
Allowance for doubtful accounts 152,300 123,520 (3,591)
Gain on sale and abandonment of assets - - (13,093)
Write-down of notes receivable - 176,507 -
Issuance of stock for services 41,412 229,688 5,000
Compensation expense related to nonqualified stock options - 131,840 18,794
Write-down of capitalized software 40,030 - -
Equity in loss of affiliate 86,061 - -
Changes in assets and liabilities:
Short-term investments - - 107,184
Receivables 914,522 (773,808) (156,742)
Inventory (13,515) 274 39,379
Prepaid expenses 114,428 (128,744) 15,558
Accounts payable (208,050) (155,172) (285,843)
Accrued liabilities (251,507) 193,700 64,147
------------ ---------- ----------
Net cash provided by operating activities 132,542 883,033 276,921
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (89,304) (81,954) (29,244)
Additions to capitalized software (380,255) (335,536) (378,688)
Payments from notes receivable 34,107 67,003 137,304
Proceeds from sale of property and equipment - - 1,775
Proceeds from sale of securities - - 42,301
Investment in affiliate (100,000) - -
Increase in other assets (2,953) (8,879) (7,357)
------------ ---------- ----------
Net cash used for investing activities (538,405) (359,366) (233,909)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 255,000 247,500 329,000
Repayment of line of credit (200,373) (271,012) (304,638)
Additions to long-term obligations - - 50,000
Repayment of long-term obligations (101,626) (78,426) (176,094)
Proceeds from issuance of convertible debt 150,000 - -
Proceeds from exercise of common stock options - 218,457 -
------------ ---------- ----------
Net cash provided by (used for) financing activities 103,001 116,519 (101,732)
------------ ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (302,862) 640,186 (58,720)
CASH AND CASH EQUIVALENTS, beginning of year 648,714 8,528 67,248
------------ ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 345,852 $ 648,714 $ 8,528
------------ ---------- ----------
------------ ---------- ----------
See notes to consolidated financial statements.
18
IMAGE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- ---------------------------------------------------------------------------
1995 1994 1993
--------- --------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 75,403 $ 26,060 $ 24,442
--------- --------- --------
--------- --------- --------
Income taxes paid $ 29,000 $ 5,000 $ -
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Debt and accrued interest retired in exchange for common stock $ 23,750 $ 50,000 $ 23,497
--------- --------- --------
--------- --------- --------
Inventory reclassified to equipment $ 42,854 $ 45,754 $ -
--------- --------- --------
--------- --------- --------
Reclassification of trade receivables to notes receivable $ - $ 32,437 $355,605
--------- --------- --------
--------- --------- --------
Accrued commissions converted to common stock $ - $ 6,460 $ -
--------- --------- --------
--------- --------- --------
Purchase of equipment under capital lease $ - $ - $ 54,600
--------- --------- --------
--------- --------- --------
See notes to consolidated financial statements.
19
1MAGE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- ---------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - 1MAGE Software, Inc. (formerly Information Solutions, Inc.
(the "Company")), was incorporated in Colorado in December 1981.
In June 1994, Information Solutions, Inc. changed its name to 1MAGE
Software, Inc. Simultaneously, its subsidiary, 1MAGE Software, Inc.
changed its name to Information Solutions, Inc.
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.
On December 31, 1995, Information Solutions, Inc. was merged into 1MAGE
Software, Inc.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of 1MAGE Software, Inc. and its wholly-owned subsidiary,
Information Solutions, Inc.(formerly 1MAGE Software, Inc.) All material
intercompany transactions have been eliminated.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with a maturity of ninety days or less to be cash equivalents.
MARKETABLE EQUITY SECURITIES - The portfolio of marketable equity
securities was sold during 1993 for a gain of $34,543. The cost of the
securities was determined on a specific identification basis.
INVENTORIES consist of finished goods and are stated at the lower of
cost (specific identification method) or market (net realizable value).
INVESTMENTS - During 1995, the Company purchased a 50% interest in ScanUSA,
LLC. This investment has been accounted for using the equity method of
accounting.
PROPERTY AND EQUIPMENT are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful
lifes (generally five years) of the assets or the lease term, if shorter.
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, 1995, 1994 and
1993 were $380,255, $335,536, and $378,688 respectively. Amortization of
these costs totaled $311,295, $312,660, and $251,286, 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.
PURCHASED SOFTWARE is stated at cost less accumulated amortization. For
the years ending December 31, 1995, 1994 and 1993 accumulated amortization
was $1,001,987, $920,277, and $818,437 and respectively. Purchased
software is amortized using the straight-line method over the estimated
useful life of the software (ten years). 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.
20
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - (Continued)
REVENUE RECOGNITION - Revenue from the sale of software licenses and
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. Credit losses to customers have generally
been within management's expectations.
In 1993, a specific contract provided for the right to return the software.
During 1994, the Company charged $150,040 to sales returns for the return
of software sold.
In March 1996, the Company recovered $110,838 of income from receivables
which had previously been recorded as bad debt.
One customer accounted for 14% of 1995 revenues. Three different customers
accounted for 17%, 13% and 12% of accounts receivable at December 31, 1995,
respectively.
One customer accounted for 40% of 1994 revenues and 43% of accounts
receivable at December 31, 1994. This receivable was collected in
February 1995.
One customer accounted for 12% of 1993 revenues and 25% of the accounts
receivable at December 31, 1993. A different customer accounted for 17%
of revenue during 1993. Two other customers each accounted for 26% of
accounts receivable at December 31, 1993.
INCOME (LOSS) PER SHARE is computed by dividing net income (loss) by the
weighted average number of common and equivalent shares. Common stock
equivalents were not included in the weighted average number of shares
outstanding for loss periods as their effect was anti-dilutive. Fully
diluted earnings per share are either anti-dilutive or not materially
different from primary earnings per share.
INCOME TAXES are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of depreciation,
capitalized software development costs and allowance for doubtful accounts
for financial and income tax reporting. The Company currently has
substantial net operating loss, research credit and investment tax credit
carryforwards.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," which required a change from the deferred method to the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
RECLASSIFICATIONS - Certain items in the 1994 and 1993 financial statements
have been reclassified to conform with the 1995 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.
21
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
1995 1994
---------- ----------
Equipment $ 642,768 $ 511,370
Leasehold Improvements 78,169 78,169
Furniture 66,441 65,684
---------- ----------
787,378 655,223
Less: Accumulated depreciation and amortization (518,828) (395,251)
---------- ----------
$ 268,550 $ 259,972
---------- ----------
---------- ----------
3. NOTES RECEIVABLE
Notes receivable at December 31 consist of the following:
1995 1994
--------- ---------
Trade receivable, receivable installments of $4,055
through April 1996 $ 12,164 $ 28,382
Notes receivable, receivable in monthly installments of
$1,533, including interest at 8%, through April 1996 3,046 20,938
Trade note receivable, charged to bad debt in 1995 - 108,367
Trade note receivable, net of allowance: 1995, none;
1994, $105,500 charged to bad debt in 1995 - 22,574
--------- ---------
15,210 180,261
Less: Current portion (15,210) (79,608)
--------- ---------
Non-current portion $ - $ 100,653
--------- ---------
--------- ---------
4. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following:
1995 1994
-------- --------
Sales tax payable $ 84,371 $102,364
Accrued compensation 15,534 3,500
Accrued interest 11,667 66,029
Customer deposits 2,527 143,851
Other 55,644 49,210
-------- --------
$169,743 $364,954
-------- --------
-------- --------
22
5. LINE OF CREDIT
The Company has a $110,000 revolving bank line of credit which expires
June 11, 1996 and bears interest at prime (8.5% at December 31, 1995)
plus 1% and is secured by the Company's notes and accounts receivable.
Total borrowings outstanding under the line of credit were $100,477 at
December 31, 1995.
6. LONG-TERM OBLIGATIONS - RELATED PARTIES
The principal and interest payable to directors/ former director
outstanding at December 31, 1994 and 1993 were convertible into common
stock at $4.50 per common share. During 1995, the Company repaid the
notes payable totaling $161,213 including accrued interest of $62,665.
Interest expense for the years ended December 31, 1995, 1994 and 1993
was $21,040, $67,924, and $30,269, and includes amounts to related parties
of ($3,364), $44,865, and $13,408, respectively.
7. CONVERTIBLE NOTES PAYABLE
Convertible notes payable at December 31, consist of the following:
1995
----------
10% Notes Payable, due January 15, 1997 $ 100,000
10% Notes Payable, due August 18, 1997 50,000
----------
$ 150,000
----------
----------
The principal and interest are convertible into common stock at $1.50 per
common share for the notes due January 15, 1997 and $.9375 per common share
for the notes due August 18, 1997. Attached to the convertible notes
payable are options to purchase 66,668 and 53,332 common shares at an
exercise price of $1.50 and $.9375, respectively. These options will expire
on July 31, 1996.
8. SHAREHOLDERS' EQUITY
COMMON STOCK
On March 10, 1993, the Board of Directors approved a 4-for-1 reverse stock
split of the Company's common stock effective March 24, 1993. On May 17,
1994, the shareholders of the Company's common stock ratified the reverse
stock split, and approved an amendment to the Articles of Incorporation to
reduce the number of authorized shares of common stock to 10,000,000 and
change the par value to $.004. All references in the accompanying financial
statements as to the number of common shares and per share amounts have
been restated to reflect the reverse stock split and the amendment.
In 1995, one note holder received $23,750 of accrued interest in shares of
common stock at $1.1875 per common share. In 1994, in accordance with the
conversion terms, one officer converted his principal to common stock at
$.45 per common share. In 1993, one noteholder converted his principal and
interest to common stock at $2.00 per common share.
In 1995, the Company canceled the 2,575 shares of common stock held in
the treasury.
STOCK COMPENSATION PLANS
At December 31, 1995, the Company has two 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 1994
or 1993 Stock Option Plans.
23
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:
1995
------------
Net Loss: As reported ($1,259,724)
Pro forma ($1,316,724)
Loss per common share: As reported ($.66)
Pro forma ($.69)
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. 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 of Directors, but not more than 10 years after the date of grant.
The terms and conditions of stock awards granted under the 1994 Plan may
differ from one grant to another as the Board of Directors determines.
During 1994, the Company paid financial advisory fees with nonqualified
stock options granted at less than fair market value. Financial advisory
fees totaling $34,640 and $97,200 were expensed in 1995 and 1994
respectively.
Details of activity under the 1994 Plan are as follows:
OUTSTANDING VALUE PER
STOCK OPTIONS OPTIONS SHARE TOTAL
------------- ----------- ------------- -----------
Granted 700,000 $2.75 - $3.50 $ 2,360,500
Canceled (250,000) $3.70 (925,000)
Exercised (100,000) $2.97 - $3.70 (348,000)
-------- -----------
Balances, December 31, 1994 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
-------- -----------
-------- -----------
STOCKS GRANTS SHARES GRANT PRICE TOTAL
------------- ------- ------------- -----------
500 $3.62 $ 1,812
15,000 $2.63 39,375
2,500 $3.20 8,001
------- -----------
Balances, December 31, 1994 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
------- -----------
------- -----------
24
At December 31, 1995 options to purchase 12,000 shares of common
stock were exercisable and 522,838 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 nonqualified stock options. The Company grants
nonqualified 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. Compensation related to stock options granted at
less than fair market value totaling $18,794 was expensed in 1993.
A summary of the 1993 Plan stock option activity follows:
SHARES VALUE PER SHARE TOTAL
------- --------------- --------
Balances, January 1, 1993 25,875 $.36 - $4.00 $ 43,685
Canceled (5,625) $4.00 (22,500)
Granted 20,875 $.97 - $1.24 20,654
------- --------
Balances, December 31, 1993 41,125 $.36 - $2.50 41,839
Exercised (20,737) $.36 - $2.50 (21,057)
Canceled (5,675) $1.24 - $1.94 (8,997)
Granted 50,250 $1.81 - $2.87 108,078
------- --------
Balances, December 31, 1994 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
------- --------
------- --------
At December 31, 1995, options for 189,013 shares were exercisable
under the 1993 Plan. There were options for 42,287 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, 1995 was as follows:
1994 Stock Option and Grant Plan 534,838
1993 Stock Option Plan 214,263
Convertible Notes Payable 128,652
Investor Options 120,000
Warrants 100,000
---------
1,097,753
---------
---------
25
9. INCOME TAXES
The provisions for income taxes for the years ended December 31,
consist of:
1995 1994 1993
-------- --------- --------
Current:
Federal $ - $ 323,700 $106,800
State (8,000) 55,600 17,800
------- --------- --------
Total current (8,000) 379,300 124,600
------- --------- --------
Deferred:
Federal - (127,000) (77,100)
State - (21,800) (12,900)
------- --------- --------
Total deferred - (148,800) (90,000)
------- --------- --------
(8,000) 230,500 34,600
Utilization of net operating
loss carryforward - (188,500) (34,600)
------- --------- --------
Provision for income taxes $(8,000) $ 42,000 $ -
------- --------- --------
------- --------- --------
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
PERCENT OF PRETAX INCOME 1995 1994 1993
------------------------ ----- ----- -----
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 (29.3) (42.1)
carryforward 36.9
Other, net .1 (1.8) 4.5
----- ----- -----
Effective tax rate (.6)% 6.5% -
----- ----- -----
----- ----- -----
The components of the net deferred tax liability recognized in the
accompanying balance sheets are as follows:
1995 1994
----------- -----------
Deferred tax liability $ 3,000 $ 89,000
Deferred tax asset (2,059,000) (1,683,000)
Valuation allowance 2,056,000 1,594,000
----------- -----------
$ - $ -
----------- -----------
----------- -----------
26
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:
1995 1994
----------- -----------
Future income (deductions)
Net operating loss $(1,685,000) $(1,275,000)
Allowance for doubtful accounts (36,000) (55,000)
Research and development credit (206,000) (206,000)
Depreciation (63,000) (45,000)
Investment tax credit (35,000) (35,000)
Capitalized software development costs 3,000 72,000
Other (34,000) (50,000)
----------- -----------
$(2,056,000) $(1,594,000)
----------- -----------
----------- -----------
The Company has net operating loss carryforwards for federal
and Colorado income tax purposes of approximately $4,482,000
and $2,577,000, respectively. Investment tax credit
carryforwards of approximately $35,000 and research and
development tax credit carryforwards of approximately $206,000
are available to reduce future federal income taxes. These
carryforwards expire on varying dates from 1996 through 2010.
10. 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 year ended December 31,
1995, the Company contributed $1,867 to the 401(k) Plan. There
were no Company contributions to the 401(k) Plan for the years
ended December 31, 1994 and 1993.
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, and 1994, equipment with a net book
value of $29,114 and $79,479 (net of accumulated amortization
of $25,474 and $85,830), 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, 1995, 1994 and 1993 pursuant to these
leases were $85,200.
Future minimum payments for lease obligations are as follows:
CAPITAL OPERATING
-------- ---------
1996 $ 15,161 $ 85,200
1997 15,161 85,200
1998 8,843 71,000
-------- --------
Total minimum lease payments 39,165 $241,400
Amount representing interest (6,357) --------
-------- --------
Present value of minimum lease payments 32,808
Current portion (11,347)
--------
Long-term portion $ 21,461
--------
--------
27
Equipment rent expense for the years ended December 31, 1995, 1994
and 1993, totaled: 1995, $6,500; 1994, $9,500; 1993, $33,700.
The Company has a bonus agreement with a certain officer which
provides for a quarterly bonus of 5% of the Company's pre-tax
profits. The Company expensed bonuses of $0, $54,586, and
$11,998 under these agreements for the years ended December 31,
1995, 1994 and 1993, respectively.
12. LITIGATION
A former director of the Company filed suit against the
Company in 1994 for alleged breach of contract involving the
issuance of 39,707 shares of stock which had been canceled as
erroneously issued. During 1995, this suit was settled. There was
no material effect on net loss at December 31, 1995.
28
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTARY INFORMATION
Board of Directors
Image 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, 1995,
1994 and 1993 has 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, 1995, 1994 and 1993 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
March 4, 1996
29
1MAGE SOFTWARE, INC.
SCHEDULE VIII
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS CHARGED TO:
BALANCE AT --------------------- BALANCE
BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
--------- -------- -------- ---------- ---------
FOR THE YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts $140,520 $273,235 - $316,830 $ 96,925
FOR THE YEAR ENDED DECEMBER 31, 1994:
Allowance for Doubtful Accounts $ 17,000 $155,138 - $ 31,618 $140,520
FOR THE YEAR ENDED DECEMBER 31, 1993:
Allowance for Doubtful Accounts $ 20,591 $ 10,787 - $ 14,378 $ 17,000
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from the
Company's definitive Proxy Statement for the 1996 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 1996 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 1996 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 1996 annual meeting of
stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Consolidated 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.
10.1* - IBM Agreement for Authorized Dealers and industry Remarketers
between IBM and the Company dated March 1, 1993.
31
10.5* - UniVerse Distributor Agreement between VMARK Software, Inc. and
the Company dated May 15, 1991
10.6* - Business Agreement between Information Solutions of MidAmerica,
Ltd. and the Company dated February 1, 1988.
10.7* - Authorized Dealer Agreement between Information Solutions of
MidAmerica, Ltd. and the Company dated March 26, 1988.
10.8* - Authorized Distributor Agreement between Information Solution
of MidAmerica, Ltd., and the Company dated March 26, 1988, as
amended by the Territory Rider dated November 11, 1988.
10.11* - 1983 Stock Option Plan dated June 27, 1983, as amended by the
First Amendment to the 1983 Stock Option Plan dated
September 6, 1991.
10.12* - Form of Nonqualified Stock Option Agreement.
10.13* - Form of Incentive Stock Option Agreement.
10.14* - President Employment Agreement between David R. DeYoung and the
Company dated November 1, 1991.
10.16* - Assignment Agreement between Investment Opportunities Group and
the Company dated November 20, 1991.
10.17* - Buy-Out Agreement between Insi Corporation and the Company dated
March 1, 1991, and the Promissory Note, Security Agreement and
Bill of Sale in connection therewith.
10.19* - Promissory Note dated September 14, 1987, payable by the Company
to Daniel N. Warner in the principal amount of $58,000, as
amended by the rider dated June 6, 1989.
10.20* - Statement of Registrants Rights for Series 1990 Preferred Stock
dated January 30, 1990.
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.
10.23*** - 1994 Stock Option and Grant Plan.
10.24** - 1993 Stock Option Plan.
11.1 - Calculation of Primary Earnings per Share.
11.2 - Calculation of Fully Diluted Earnings per Share.
21.1 - Subsidiaries of the Registrant.
23.1 - Consent of Karsh & Company, P.C.
27 - Financial Data Schedule
* Filed as an Exhibit to Form S-1 Registration Statement
No. 33-44717, on December 23, 1991. See Financial
Statement Index on Page F-1
** 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.
(b) The Company did not file any reports on Form 8-K for the quarter ended
December 31, 1995.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants 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, 1996
------------------------------------- --------------
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, 1996
------------------------------------- --------------
David R. DeYoung, President
and Principal Chief Executive Officer
By: /s/ Charles E. Burns Date: March 27, 1996
------------------------------------- --------------
Charles E. Burns
Director
By: /s/ Daniel N. Warner Date: March 27, 1996
------------------------------------- --------------
Daniel N. Warner
Director
By: /s/ Robert Wiegand, II Date: March 27, 1996
------------------------------------- --------------
Robert Wiegand, II
Director and Secretary
By: /s/ Mary Anne DeYoung Date: March 27, 1996
------------------------------------- --------------
Mary Anne DeYoung,
Vice President, Finance
Principal and Accounting Officer
33