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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended 12/31/2002
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 specified in its charter)
0-12535
(Commission File Number)
COLORADO 84-0866294
(State of Incorporation) (IRS Employer Identification Number)
6025 S. QUEBEC ST. #300 - ENGLEWOOD CO 80111 (303) 694-9180
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK - $.004 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and, (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy statements or any
amendment of this Form 10-K. X
---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes.... No X
----
State the aggregate market value of the voting and nonvoting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently
completed fiscal quarter: $681,682.
As of February 28, 2003, there were 3,146,554 shares of the Registrant's
Common Stock outstanding.
Exhibit Index begins on Page 39
1
TABLE OF CONTENTS
PART I
1. Business............................................................... 3
2. Properties..............................................................9
3. Legal Proceedings.......................................................9
4. Submission of Matters to a Vote of Security Holders ...................10
PART II
5. Market for Registrant's Common Equity and Related Stockholders
Matters................................................................11
6. Selected Financial Data................................................13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................13
8. Financial Statements and Supplementary Data............................16
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................34
PART III
10. Directors and Executive Officers of the Registrant.....................35
11. Executive Compensation.................................................36
12. Security Ownership of Certain Beneficial Owners and Management.........38
13. Certain Relationships and Related Transactions.........................39
14. Controls and Procedures................................................39
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........39
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
1mage Software, Inc., (the "Company") develops and markets computer-based
document imaging systems that capture, store and display electronic files and
paper documents as graphical images. Document management systems like 1MAGE(R)
(pronounced "one image") offer organizations of every size the ability to
deliver the information embedded in millions of documents to their workers
across their existing computing infrastructure, as well as the tools to
efficiently manage the proliferation of digital documents for eBusiness
deployment. The modular 1MAGE system captures entire documents from a variety of
sources. Memos, letters, source documents, contracts, purchase orders, word
processing files, e-mail, fax, industry and market studies, spreadsheets,
databases, multimedia, maps and regulatory forms are examples of documents that
are automatically converted into secure, permanent digital images that are
indexed for instantaneous retrieval. Using an open, client/server architecture
design, 1MAGE provides a comprehensive solution for scanning, indexing, storing
and retrieving document images so that they may be viewed, printed, faxed,
e-mailed or made available for eBusiness or eCommerce applications. The 1MAGE
system is designed to integrate easily with existing IT infrastructure, using an
extensive library of multi-platform APIs (Application Programming Interfaces),
rather than forcing expensive investments in re-engineered or new computing
hardware and software.
Today's workplace is dramatically changing with the advent of eBusiness,
eCommerce, and affordable electronic document imaging. During 2002, the Company
concentrated its efforts on selling document imaging software to its niche
markets. This market includes users that prefer a choice of (1) operating
platforms, such as RedHat Linux, Windows, and Unix, or (2) Databases such as
IBM's and Raining Data's MultiValue databases. The Company also continued to
make progress toward its goal of establishing a broad-based Value Added Reseller
("VAR") network for its imaging software. In addition to VARs, the Company seeks
to partner with software developers, consultants, and other businesses, which
provide software to their targeted vertical markets.
IMAGING SOFTWARE MARKET
The Company markets its products through its direct sales force and its
indirect channel partners. The Company targets VARs, systems integrators,
consultants, and other companies that market complementary software, services,
or other products. 1MAGE software has an established presence in a multitude of
industries, including retail, distribution, education, state and local
government, healthcare, manufacturing, energy, automotive, public safety,
transportation and utilities.
The Company offers a comprehensive reseller program, which provides, in the
context of a cooperative marketing effort, a broad range of sales, marketing,
and technical support. The program includes technical training and assistance,
marketing communications, sales training and assistance, excellent support and
training, lead referral services, customized product literature, and a
discounted demonstration/development system.
PRODUCTS
As noted above, the Company's flagship product is 1MAGE(R), its proprietary
document imaging software package. The Company is continually enhancing this
product in order to improve its performance and expand its possible uses.
3
1MAGE(R) DOCUMENT MANAGEMENT - 1MAGE is a powerful electronic image management
system created to operate the same on Linux, Windows(TM) and Unix-based computer
systems. It provides a comprehensive solution for the scanning, indexing,
storage and retrieval of images and is designed to file, route, track, archive,
and manage an organization's incoming and outgoing documents and electronic
files.
Additional products include the following:
o 1API for image-enabling an application using a toolkit
o 1SCAN for scanning, pre-indexing, and bar code reading
o 1FAX for inbound and outbound fax or e-mail and cover sheet management
o 1COLD/ERM for storing computer-generated formatted data
o 1FORM for business form template administration
o 1RENDITION for merging spooled data with supporting images for billing
or other needs
o 1WORKFLOW for electronically moving a document from one task to another
o 1OCR/OMR for automatic indexing and data capture via optical and mark
character recognition
o 1SUITE for bringing images to Windows-based PC clients
o 1SERVER for accessing documents via the Internet
o 1VIEW for using standard browsers to access images over the Intranet
and Internet
o 1APPROVE for electronically approving invoices and other document
related business functions
o 1ACCESS for bringing images to computers that support JAVA programming
languages
o 1SEARCH for full text/keyword retrieval of documents
o 1PUBLISH for selecting and recording images on output media such as CD
or DVD
A key element of the Company's product line is its open systems technology,
namely:
o Open Systems compliant with Linux, Unix, and Windows Operating Systems.
Supports file formats in TIFF, JPEG, PCX, PCL, PDF, HTML or HPGL. The
server software (1MAGE) operates on Linux, Unix, and Windows servers.
Supporting clients include Microsoft Windows, X-Windows, ASCII, JAVA and
browser clients
o Device connectivity via Ethernet or token ring networks using TCP/IP
communication protocol or over the Internet
o Compatibility with IBM AIX, HP-UX, Sun Solaris, SCO Unix, RedHat Linux
and Windows
o Recognition technology and scanning tasks run on Microsoft Windows
o UniVerse and UniData ("U2") Relational Database software from IBM
1MAGE includes several distinguishing features: the ability to use many
different types of workstations, the ability to quickly and easily integrate
with the existing business application software using application programming
interfaces (APIs), and the scalability to handle the needs of companies of all
sizes economically. Through the use of the Linux, Unix, and Windows operating
systems and open systems technology, the Company seeks to offer its customers an
imaging solution at a reasonable cost. Because 1MAGE is a server-based product,
the Linux operating system ("O/S") has become very popular with end users of the
Company's software. In 2002, the majority of imaging systems sold through the
direct sales force were installed on servers running the Linux O/S.
During 2002, sales of 1MAGE software licenses (excluding annual license
fees) accounted for $765,000 (34% of total revenue); in 2001, revenue from sales
of software licenses accounted for $1.2 million (42% of total revenue). 1MAGE
utilizes the Linux, Unix, and Windows operating systems and IBM's U2 database
software. The Company's open systems technology makes its software transportable
to numerous hardware products from varying manufacturers. Because of the number
of hardware manufacturers using the Linux, Unix, and Windows operating systems,
the Company's software customers are rarely restricted in their choice of
hardware manufacturers.
4
The Company also recommends hardware and related products and sells
specialized complex peripheral products, such as scanners, at the customer's
request. Computer hardware and peripheral products are purchased only upon
request to fill specific customer orders. Hardware is generally shipped directly
from the manufacturer to the customer. In 2002, revenue from hardware sales
accounted for $181,000 (7%) of the Company's total revenue, as compared to
$68,000 (2%) for 2001.
SERVICES AND ANNUAL FEES
The Company licenses its 1MAGE software to its customers and charges an
annual license and maintenance fee, which must be paid to continue receiving
support for the use of the software. During 2002 and 2001, annual license fees
accounted for $978,000 ( 44%) and $1.1 million ( 41%), respectively, of the
Company's net sales. The Company believes recurring annual license fees from new
and existing customers will contribute to the long-term stability of the
Company. The Company also provides professional services to its customers. These
services include preparation of image management plans ("IMP"), installation,
training, image enabling existing software, and consulting services for
customers. For the years ended December 31, 2002 and 2001, the revenues from
these services accounted for $318,000 (14%), and $407,000, (15%), of the
Company's net sales. The Company does not provide service for hardware; rather,
service for computer hardware sold by the Company is provided directly by the
manufacturer or the manufacturer's authorized dealer.
MARKETING AND DISTRIBUTION
To date, the Company has signed VAR agreements for 1MAGE with resellers
specializing in a variety of industries, including health care, construction,
collection services, and distribution/manufacturing. In addition, the Company
licenses its software and certain other products and services through agreements
with two Application Service Providers (ASPs) in the healthcare industry. The
Company provides its software to independent software integrators (resellers),
who in turn market products, including or featuring 1MAGE, to each of their
individual markets. The Company's overall marketing objective is to support the
current business partners and to continue to enroll new software integrators and
consultants in the program. The Company provides training aids, an Internet
demonstration site, user instruction manuals and other documentation, and a
newsletter to keep its resellers, as well as prospective resellers and
customers, informed of new product applications and developments.
The Company also markets 1MAGE through its direct sales force. The general
strategy is to (1) help customers define the goals for their system, (2) provide
the means of achieving those goals through our document management software and
appropriately configured computer systems, and (3) help assure the ongoing
success of this collaborative process by providing continuing support, including
on-site training and educational programs. The Company also markets its products
and services over the Internet on its website at www.1mage.com.
CUSTOMERS
The Company sells its 1MAGE software to businesses in a wide variety of
industries and markets, facilitated through the use of VARs and its direct sales
force.
During the years 2002 and 2001, the Company generated 20% and 36%,
respectively, of its revenue from one customer, Reynolds & Reynolds
("Reynolds"). Reynolds is a Fortune 500 company headquartered in Dayton, Ohio.
In May 1994, the Company signed a software license agreement with Reynolds for
the exclusive right to sublicense certain modules of 1MAGE (without payment of
further license fees to the Company) to businesses
5
primarily engaged in retail sales of new or used automobiles, trucks, or
tractors. In 1996, the Company signed a subscription and maintenance agreement
with Reynolds. Under that agreement, fees are to be paid to the Company for
certain products, including but not limited to the Company's desktop client
software.
On January 18, 2002, Reynolds notified the Company of its intent to
terminate the 1996 subscription and maintenance agreement effective April 22,
2002. Reynolds had installed the 1MAGE document management software in
approximately 1,000 of its customer sites in the United States and Canada. As a
result of various disputes arising out of the termination of the 1996 agreement,
including Reynolds' decision to continue sublicensing the Company's software
notwithstanding such termination, the Company and Reynolds are currently
involved in litigation. (See "Legal Proceedings".) While it is conceivable that
the Company could enter into new agreements with Reynolds to govern
future-licensing arrangements, as of the date hereof, no such new agreement is
planned or likely. The loss of Reynolds as a customer has already had a
significantly adverse impact on the Company. (See "Management's Discussion and
Analysis of Results of Operations and Financial Condition".) The Company has not
yet replaced the bulk of the revenue lost as a result of the termination of the
1996 contract by Reynolds and Reynolds' subsequent actions but it is possible
that some portion of that lost revenue will be awarded to the Company in the
ongoing litigation between the Company and Reynolds. Naturally, the Company
cannot predict the outcome of that litigation nor can there be any assurance
that the Company will ever obtain a meaningful recovery from Reynolds.
SOURCES OF SUPPLY
The Company has an OEM Software Agreement with IBM Corp. to sublicense
their UniVerse and UniData database programs. The agreement authorizes the
Company to include certain IBM database programs as part of their imaging
solution. This agreement currently runs until September 28, 2003 and it may be
renewed for additional one (1) year terms. The Company has designed its product
such that, through the use of its APIs, third party software can be easily
integrated into the core products with minimal difficulty and effort.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
The Company's sales cycle, which generally commences at the time a
prospective customer issues a request for proposal or otherwise demonstrates a
serious interest in purchasing a system or software license and ends upon
execution of a sales contract, is lengthy and not predictable with any degree of
certainty. Prior sales and implementation cycles are not necessarily an
indication of future cycles. Operating results could vary from period to period
as a result of the length of the sales cycle, the timing of individual system
sales, resellers' performance and conditions in the target markets and the
economy in general.
It has been the Company's expectation that its recent focus on offering its
proprietary imaging software to a broader range of customers, through its
reseller network and its direct sales force, would lessen the historical
quarterly fluctuations in the Company's operating results. Unfortunately, larger
events, such as Reynolds's termination of the 1996 contract and subsequent
actions, as well as the dramatic downturn in the national economy, especially in
the technology sector, have continued to cause significant variations in those
results. In addition, large volume sales or groups of sales of 1MAGE licenses
may cause significant variances in quarterly results that may be difficult to
predict.
6
TRADE SECRET AND COPYRIGHT LAWS
The Company regards its software as proprietary and relies for protection
upon trade secret and copyright laws and non-disclosure agreements with its
employees as well as restrictions on disclosure and transferability contained in
its software license agreements with its customers. Despite these restrictions,
it may be possible for competitors or customers to copy, or reverse compile,
aspects of the Company's products or obtain information that the Company regards
as proprietary. Furthermore, there can be no assurance that others will not
independently develop software products similar to those developed or planned by
the Company.
Although the Company believes its software does not infringe on the
proprietary rights of others and has not received any notice of claimed
infringement, it is possible that portions of the software marketed by the
Company could be claimed to infringe on existing proprietary rights. In the
unlikely event that any such infringements are found to exist, there can be no
assurance that any necessary licenses or rights could be obtained, or could be
obtained on terms satisfactory to the Company. Further, in such event, the
Company could be required to modify the infringing software. There can be no
assurance that the Company would be able to do so in a timely manner, upon
acceptable terms and conditions, or at all; even though the failure to do so
could have a material adverse effect on the Company.
The Company has brought suit against Reynolds & Reynolds for, among other
things, copyright infringement. (See "Legal Proceedings".)
BACKLOG
As a practical matter, the Company's business has evolved to the point
where the Company has minimal backlog at any given point in time. With respect
to software license sales, because there is no time delay between receipt of an
order and delivery of the software, electronically or otherwise, there is
effectively no backlog. For hardware, because of direct delivery of the hardware
by the manufacturer, hardware sales have such short lead times that unfilled
firm orders seldom, if ever, build up to significant levels.
The Company normally receives a deposit of between 25% and 50% of the
hardware and software price when an order is placed. This deposit may or may not
be returned upon cancellation, depending on the circumstances of the
cancellation.
COMPETITION
The Company experiences intense competition in its business from
competitors who target one or more of the same markets or market segments as the
Company. Software and systems that perform many of the same functions as the
Company's systems and software are also available from a number of competitors
of the Company. Some of these competitors are larger and have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
than we do. As a result, these competitors may be able to respond more quickly
to emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
we can.
The Company believes that usage of the popular Linux and Windows operating
systems and the IBM U2 databases has strengthened the Company's competitive
position by making the Company's software compatible with more types of hardware
and with the IBM U2 application software offered by software developers and
system integrators. The Company further believes that its principal advantage
over its competitors is the Company's ability
7
to give its customers a choice in selecting a Linux, Unix, or Windows-based open
systems architecture and the IBM U2 database that can be offered at lower
prices.
LIMITED MARKETS
The reseller program targets complementary markets and allows the Company
to draw from a variety of industries with respect to its imaging software
products. As noted above, the Company's strategy has been to expand the domestic
and international markets for its imaging software by engaging resellers for
various industries and markets.
The Company's experience has been that economic downturns or increased
competitive pressures in its niche markets sometimes result in reduction or
deferral of capital expenditures by potential customers. Certain adverse
conditions can sometimes lead to opportunities as potential customers downsize
to smaller, more cost-efficient computer systems or replace custom designed
systems that require higher levels of support and maintenance.
PRODUCT DEVELOPMENT
The software and services market in which we compete is characterized by
(1) rapid technological change, (2) frequent introduction of new products and
enhancements, and (3) changing customer needs. Our future success depends on our
ability to support existing products and develop new products. The Company
capitalizes software development costs once technological feasibility is
established. During 2002, the Company developed a new release of 1MAGE(C) which
employs new technologies, including Application Service Provider (ASP)
requirements and three JAVA systems (i.e. 1APPROVE, 1ACCESS and 1ADMIN) which
will operate on any platform that supports JAVA programming language. In
addition, improvements were made to the hardware/software compatibility
offerings available for Linux users. During 2002 and 2001, the Company spent
$297,000 and $271,000, respectively, for computer software development.
EMPLOYEES
As of February 28, 2003, the Company employed eighteen persons, seventeen
of whom serve on a full-time basis and one on a part-time basis.
Responsibilities are divided as follows: six persons in sales and marketing,
nine in technical support and programming functions, and three in administrative
positions.
The Company provides incentive compensation packages to many of its
employees, including its executive officers. The Company's chief executive
officer, David R. DeYoung, receives a quarterly bonus equal to 5% of the
Company's pretax profits. (See "Executive Compensation") The Company's chief
financial officer receives a quarterly bonus equal to 4% of the Company's pretax
profits. Sales personnel receive a commission based upon sales. The Company has
a policy of encouraging the effort and loyalty of all of its employees by making
all employees eligible for the grant of stock options under its Equity Incentive
Plan, subject to vesting schedules. The Company believes that these incentive
programs are important in attracting and retaining skilled personnel. The future
success of the Company will depend in large part upon the quality of its
employees and the efforts they expend on behalf of the Company.
None of the Company's employees are represented by a labor union, and the
Company has experienced no work stoppage. The Company believes that its employee
relations are good.
8
ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 4,181 square feet
at Plaza Quebec, 6025 South Quebec Street, Suite 300, Englewood, Colorado, 80111
and are occupied pursuant to a lease agreement between the Company and Trammel
Crow, Inc. with monthly rental payments of $7,442. The term of the lease
commenced February 1, 1999 and will terminate on July 31, 2003. Management
anticipates signing a new lease prior to July 31, 2003 for a similar location
under terms that are slightly more favorable than the current lease. The Company
is currently engaged in negotiations with Mack-Cali Realty Corporation regarding
a new five-year lease. Management anticipates that the new office space will
consist of approximately 5,162 square feet and the monthly rental payment will
be reduced by approximately 20%. The landlord is responsible for property taxes,
utilities, janitorial services, repairs, and maintenance. The Company believes
that its facilities and equipment are in good condition and are satisfactory for
their present uses.
ITEM 3. LEGAL PROCEEDINGS
In May 1994, the Company entered into a software license agreement (the
"1994 Agreement") with The Reynolds and Reynolds Company ("Reynolds"), which
provides software as well as other products and services to automobile dealers
and other customers. In 1996, the Company entered into a subscription and
maintenance agreement with Reynolds (the "1996 Agreement") providing for the
payment of annual subscription and maintenance fees to the Company for
subsequent releases of the Company's software not covered by the 1994 Agreement.
On January 18, 2002, Reynolds notified the Company of its intent to terminate
the 1996 Agreement on April 22, 2002. Reynolds and the Company subsequently
entered into negotiations aimed at determining what amounts would be payable to
the Company for post-termination licenses of certain products and for the
continuation of existing licenses. When the parties failed to reach agreement on
these issues, on April 10, 2002, Reynolds demanded mediation before the American
Arbitration Association in Dayton, Ohio pursuant to the 1994 Agreement. The
Company declined to submit to mediation on the grounds that the parties' dispute
related to the 1996 Agreement, which agreement did not require mediation or
arbitration.
Reynolds then informed the Company for the first time that it would be
taking the position that it had a perpetual license to all software previously
provided by the Company to Reynolds or its licensees notwithstanding the
termination of the 1996 Agreement. Shortly thereafter, the Company filed a civil
action in Colorado state district court for the City and County of Denver, 1MAGE
SOFTWARE, INC. v. THE REYNOLDS & REYNOLDS CO., ET AL., No. 02-CV-3268 (the
"Declaratory Judgment Action"), seeking a declaratory judgment against Reynolds
and certain of its Colorado automobile dealership licensees to the effect that,
contrary to Reynolds' claims, Reynolds and its licensees do not have a perpetual
license to the software provided by the Company pursuant to the 1996 Agreement.
Reynolds subsequently filed an action in federal district court in Colorado
seeking to remove the Company's declaratory judgment action from state court to
federal court in Colorado. 1MAGE SOFTWARE, INC. v. THE REYNOLDS & REYNOLDS CO.,
ET AL., Civ. No. 02-K-780. (the "Removal Action") The Company opposed Reynolds'
removal petition in the Removal Action and asked the federal court to remand the
case back to state court, which it did on April 23, 2002.
On May 3, 2002, Reynolds filed an action in federal district court in Ohio
seeking an order compelling the Company to mediate and, if necessary, arbitrate
its dispute with Reynolds pursuant to the 1994 Agreement and staying the
declaratory action brought by the Company in Colorado state court. THE REYNOLDS
& REYNOLDS CO. v. 1MAGE SOFTWARE, INC., No. C 3-02-206, S.D. Ohio (Dayton
Division) (the "Compulsory Arbitration Action").
9
On June 21, 2002, the Company filed a new civil action seeking monies owed
by The Reynolds and Reynolds Company under its 1996 subscription and maintenance
agreement with the Company in Colorado district court for the City and County of
Denver. 1MAGE SOFTWARE, INC. v. THE REYNOLDS & REYNOLDS Co. Case No.:02-CV-4701,
Courtroom 19 ("the "Collection Action"). In its complaint in the Collection
Action, the Company demands immediate payment of $193,611 currently due under
that contract plus interest and penalties. Reynolds deposited the $193,610.90
with the court clerk, pending order of the court as to its disposition and filed
an answer denying liability. The Company has since filed a Motion for Summary
Judgment to which Reynolds has responded, denying liability and stating that in
any event, the disputed amount is $166,740.51.
On July 11, 2002, the Company filed a motion in the Declaratory Judgment
Action seeking partial summary judgment against Reynolds and certain of its
Colorado licensees who continue to use the Company's software on the grounds
that both the 1996 agreement and the 1994 agreement provide that annual fees
must be paid and Reynolds paid those annual licensing and subscription fees for
six years, without protest. Prior to any ruling on that motion, however, the
Declaratory Judgment Action was dismissed without prejudice at the Company's
instance. In its stead, a new action was filed by the Company in the United
States District Court for the District of Colorado. 1MAGE SOFTWARE, INC. V. THE
REYNOLDS AND REYNOLDS CO., ET AL., No. 02-K-1688 (OES) (the "Federal Action").
In the Federal Action, the Company makes all of the same claims as were
originally asserted in the Declaratory Judgment Action but also seeks to recover
all profits earned by Reynolds as a result of the infringing use of the
Company's software under the Copyright Infringement Act of 1976. The Company
seeks a substantial amount of damages for copyright infringement resulting from
the continuing use of 1mage software without any license or authority by
Reynolds and its automobile dealer customers. The Federal Action has not been
set for trial.
Each of the above cases arises from Reynolds' continued use of 1mage
software subsequent to its termination of a 1996 agreement licensing that use.
1mage contends that this continued use is an infringement of copyrighted
software entitling it to damages under various legal theories, including the
Federal Copyright Act, and seeks recovery of any profits enjoyed by Reynolds and
Reynolds from its unauthorized use of the Company's software in addition to
other direct and consequential damages. In the Federal case pending in Colorado,
1mage is seeking damages for unauthorized use to date in the amount of
approximately $2 million dollars plus additional damages expected from Reynolds'
continued use.
In the Compulsory Arbitration Action, Reynolds contends that all of these
disputes should be arbitrated pursuant to the 1994 Agreement. The Company
expects that there will be a judicial determination whether arbitration is in
fact compelled. The Company intends to pursue its claims in arbitration if
necessary. No claims are made against the Company in any of the other actions.
The Company cannot predict the results of any litigation or arbitration with
Reynolds but the burden imposed by these legal proceedings, including the direct
and indirect costs and the diversion of the Company's other limited resources,
may continue to have an adverse effect on the Company's results of operations.
This burden may prove to be material to the Company's financial condition or
results of operation in future reporting periods. It is also possible; however,
that the litigation could result in a substantial judgment in favor of the
Company, or a significant settlement, which could positively affect the
Company's financial condition. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".)
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, 2002.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the OTC Bulletin Board under the
symbol ISOL. The following table sets forth, for the fiscal quarters indicated,
the high and low bid prices per share for the Common Stock as reported on the
OTC Bulletin Board.
2002
-------------------------------------------
High Low
-------------------------------------------
First Quarter $ 0.80 $ 0.54
-------------------------------------------
Second Quarter 0.66 0.30
-------------------------------------------
Third Quarter 0.48 0.30
-------------------------------------------
Fourth Quarter 1.00 0.35
-------------------------------------------
2001
-------------------------------------------
High Low
-------------------------------------------
First Quarter $ 1.00 $ 0.63
-------------------------------------------
Second Quarter 0.95 0.63
-------------------------------------------
Third Quarter 1.00 0.55
-------------------------------------------
Fourth Quarter 0.75 0.55
-------------------------------------------
These quotations reflect interdealer prices, without retail mark-up, mark
down or commission and may not necessarily represent actual transactions.
On February 28, 2003, the closing bid price per share for the Common Stock
was $.30 as reported on OTC: BB. On that same date, there were approximately 985
holders of record of the Common Stock.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock
and has no present intention to do so. For the foreseeable future, any earnings
will be retained to finance the development and expansion of the Company's
business. The declaration and payment of future dividends will be determined by
the Company's Board of Directors in light of conditions then existing, including
the Company's earnings, financial condition and capital requirements.
11
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity Compensation Plan Information
- ---------------------------------------------------------------------------------------------
(a) (b) (c)
- ---------------------------------------------------------------------------------------------
Plan Category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding future issuance under
outstanding options, options, warrants equity compensation plans
warrants and rights and rights (excluding securities
reflected in column (a) )
- ---------------------------------------------------------------------------------------------
Equity compensation
plans approved by 844,300 $ .58 37,500
security holders
- ---------------------------------------------------------------------------------------------
Equity compensation
plans not approved 258,250 $ .46 62,599
by security holders
(1)
- ---------------------------------------------------------------------------------------------
Total 1,102,550 $ .55 100,099
- ---------------------------------------------------------------------------------------------
(1) The 1994 Stock Option and Grant Plan, which was adopted by the Company
but not approved by the Company's securities holders, was intended to provide
incentives for selected persons to promote the financial success and progress
of the Company by granting such persons options to purchase shares of Common
Stock of the Company, or through the award of shares of the Company's Common
Stock. The maximum aggregate number of shares of Common Stock subject to the
Plan is 700,000. The Plan is administered by the Board of Directors of the
Company. The Plan was amended in 2002 to permit grants to employees who were
also members of the Board.
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data of the Company. This table should be read in conjunction with the
financial statements and notes included in Item 8 of this Form 10-K and the
section entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" following this section.
STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
In thousands, except for per share data: 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------
Net Sales $2,242 $2,776 $2,163 $1,806 $2,151
Cost of Sales 1,153 1,109 934 987 935
Gross Profit 1,089 1,667 1,229 819 1,216
Gross Profit (as a % of Net Sales) 49% 60% 57% 45% 57%
Selling, General & Administrative expenses 1,365 1,500 1,211 1,163 1,097
Income (Loss) before Income Taxes (282) 161 11 (365) 5
Net Income (Loss) (282) 211 8 (367) 2
Net Income (Loss) Per Share (.09) .07 .00 (.16) .00
Weighted Average Number of Outstanding Shares 3,146 3,146 3,056 2,330 2,173
Shares
- --------------------------------------------------------------------------------------
BALANCE SHEETS YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
In thousands: 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------
Working Capital/(Deficit) $ 28 $ 140 $ (93) $ (186) $ 196
Total Assets 1,562 1,496 1,428 1,364 1,710
Long Term Obligations 207 1 3 1 154
Total Stockholders Equity 643 925 714 654 922
- --------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
The Company's total revenue was $2.2 million for the year ended December
31, 2002 compared to $2.8 million for the year ended December 31, 2001,
representing a decrease of $534,000 (19%). The Company's revenue decreased
$547,000 as a result of the loss of the Company's largest customer, Reynolds and
Reynolds, during the year as total revenue from Reynolds declined from $988,000
to $441,000. The Company does not anticipate any significant revenue from
Reynolds in 2003. In addition, continued slow economic conditions worldwide,
particularly in the technology sector contributed to slower than anticipated
revenue growth.
The Company's revenue is derived from four sources: software licenses,
annual maintenance/license fees, consulting services, and hardware sales.
In 2002, software license revenue decreased 35%, or $391,000, from 2001
levels, of which $301,000 was
13
attributable to the loss of this single customer. Annual license fees decreased
15%, or $167,000, of which a decrease of $223,000 was attributable to the loss
of business from this large customer. Without the loss of this large customer,
annual license fees would have increased $56,000. The professional service
group's revenue decreased by $89,000 (22%,) for the year primarily due to
decreased consulting/programming services provided to existing customers.
Hardware sales of $181,000 increased $113,000 (168%) over $68,000 for 2001.
Gross profit on revenue for the year 2002 was 49%, as compared to 60% for
2001, primarily due to the decrease in software license revenue. In 2002,
selling, general and administrative expenses decreased $135,000 (9%). This
decrease resulted from tight expense controls throughout the Company; offset by
a $94,000 increase in legal fees as a result of the legal proceedings with
Reynolds. For the year ended December 31, 2002 the Company reported a net loss
of $282,000, or $.09 per share, as compared to net income of $211,000, or $.07
per share, for the previous year.
See the discussion of the effect of the loss of Reynolds and Reynolds in
"Liquidity and Capital Resources" below.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000.
The Company's total revenue was $2.8 million for the year ended December
31, 2001 compared to $2.2 million for the year ended December 31, 2000,
representing an increase of $613,000 or 28%. The increase in revenue was
primarily due to the combination of a 31% increase, or $276,000, in software
license revenue and a 28% increase, or $248,000, in annual license fees. The
number of systems sold through our direct sales force in 2001 was more than
double the number sold in 2000, as customers seemed to be scrutinizing their
budgets for technology upgrades more closely in light of the global economic
weakness. The increase in annual license fees was due to the growing size of the
Company's installed base of customers. The professional service group increased
service revenue by 50% for the year due to support and technical services
provided to existing customers and expanded pre-installation offerings to new
customers. Hardware sales comprised 2% of the total revenue, as compared to 5% a
year earlier. Gross profit on revenue for the year 2001 increased to 60%, as
compared to 57% for 2000, as a result of the increase in software license
revenue. Selling, general and administrative expenses increased 23% or $
284,000, in 2001. This increase was attributed to higher salaries and benefits,
sales commissions, and various marketing expenses. In addition, the Company
wrote off inventory in 2001 that was deemed to be obsolete. Net income of
$211,000 for 2001 reflected a significant gain over the $8,000 net income posted
for the previous year. Earnings per share for the year 2001 were $.07, as
compared to $.00 per share for 2000.
Sales through reseller channels increased 28%, or $246,000 to $1.1 million in
2001 from $923,000 reported for 2000. Revenue from indirect channels for any
period is subject to significant variations. As a result, the Company believes
that period-to-period comparisons of indirect revenue are not necessarily
meaningful and should not be relied upon to predict future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased approximately $63,000
during the twelve months ended December 31, 2002 as compared to December 31,
2001. During 2002, the Company used cash of $292,000 for deferred
development expenses. The Company had working capital of $28,000 as of
December 31, 2002. Included in current liabilities is $281,000 for Deferred
Revenue, which will be earned throughout 2003. The Company's $200,000 bank
line of credit was fully drawn at December 31, 2002, as opposed to $ 0 drawn
as of December 31, 2001. The line is collateralized by all accounts
receivable and general intangibles of the Company. At this time,
14
the Company has no plans to seek an increase in the line of credit. The
Company's line of credit agreement with the bank expires annually on February 24
of each year. The line of credit has been extended through February 24, 2004. A
shortfall in expected revenues would require the Company to make commensurate
reductions in expenses, which reductions could adversely affect the Company's
operations going forward.
As noted above in "Results of Operations", the termination by Reynolds and
Reynolds ("Reynolds") of its 1996 Subscription and Maintenance Agreement and the
resulting loss of Reynolds as a customer has already had a significantly adverse
impact on the Company's revenue in 2002. There has been a corresponding adverse
impact on cash flow and liquidity. The Company has not yet replaced the bulk of
the revenue lost as a result of the termination of the 1996 contract by Reynolds
and Reynolds' subsequent actions but it is possible that some portion of that
lost revenue will be awarded to the Company in the ongoing litigation between
the Company and Reynolds. Naturally, the Company cannot predict the outcome of
that litigation nor can there be any assurance that the Company will ever obtain
a meaningful recovery from Reynolds.
If the Company's ongoing efforts to replace the lost revenue and cash flow
from Reynolds with revenue from new customers or its installed base of customers
are ultimately unsuccessful and the Company fails to recover significant damages
out of the pending litigation with Reynolds, there will be a significantly
adverse effect on the long-term cash flow and liquid resources of the Company.
Since the Company has no current availability under its line of credit, it
must rely on its internal sources of liquidity, namely revenues from operations
and cash on hand. The Company receives its revenues from software licenses,
recurring annual maintenance/license fees, consulting services and hardware
sales. The Company maintains minimal inventory balances in order to obtain
volume discounts associated with third party software products. Notwithstanding
the burdens imposed by Reynolds' actions, the Company believes that its existing
cash, and the cash flows generated from operations, will be sufficient however,
to meet its anticipated cash needs for working capital for at least the next
twelve months. Toward that end, the Company implemented both temporary and
permanent payroll reductions in January 2003, in an effort to bring expenses in
line with revenues.
The Company has no material commitments for capital expenditures for 2003.
Management believes that overall sales for 2002 were negatively affected by
the significant global economic slowdown in the technology sector. Our customers
typically make a discretionary decision to implement our products based upon
their individual resources and budget constraints. As a result, the loss or
delay of individual orders could have a significant impact on quarterly
operating results and revenue. Due to poor visibility of customers and potential
customers as to the availability of funds for software purchases stemming from
the currently unstable economic and political environment, management is unable
to assess the likely trend of software revenue in future periods.
RISKS TO FUTURE FINANCIAL PERFORMANCE
VARIABLE OPERATING RESULTS. Our future operating results may vary
significantly and are difficult to predict due to a number of factors, of
which many are beyond our control. These factors include:
o Demand for our products;
o The level of product and price competition;
o The length of our sales cycle;
o The size and timing of individual license transactions;
o The delay or deferral of customer implementations;
o Our success in expanding our customer support organization, direct
sales force and indirect distribution channels;
15
o The timing of new product introductions and product enhancements;
o Changes in our pricing policy;
o The mix of products and services sold;
o Our ability to develop and market new products and control costs;
o Current economic and political conditions; and
o The outcome of the pending litigation against Reynolds & Reynolds
CURRENT ECONOMIC AND POLITICAL CONDITIONS MAY AFFECT RESULTS. The general
economic slowdown of the country may or may not persist for some time into the
future. The slowdown has increased the risk to our revenue stream. Additionally,
the political landscape has significantly changed and could have a material
impact on results going forward. We believe that there has been an industry-wide
slowdown in IT spending. Due to the discretionary nature of our customers'
budget and purchase cycles and the absence of long-term customer purchase
commitments, it is expected to remain difficult to avoid significant
fluctuations in quarterly operating results.
FORWARD LOOKING STATEMENTS
Some of the statements made herein are not historical facts and may be
considered "forward looking statements." All forward-looking statements are, of
course, subject to varying levels of uncertainty. In particular, statements
which suggest or predict future events or state the Company's expectations or
assumptions as to future events may prove to be partially or entirely
inaccurate, depending on any of a variety of factors, such as adverse economic
conditions, new technological developments, competitive developments, results of
pending litigation, competitive pressures, changes in the management, personnel,
financial condition or business objectives of one or more of the Company's
customers, increased governmental regulation or other actions affecting the
Company or its customers as well as other factors.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1MAGE SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS PAGE
INDEPENDENT ACCOUNTANTS' REPORT..............................................17
BALANCE SHEETS - December 31, 2002 and 2001..................................18
STATEMENTS OF OPERATIONS - For the Years Ended December 31, 2002, 2001 and
2000.........................................................................19
STATEMENTS OF SHAREHOLDERS' EQUITY - For the Years Ended December 31, 2002,
2001 and 2000................................................................20
STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 2002, 2001 and
2000.........................................................................21
NOTES TO FINANCIAL STATEMENTS................................................23
INDEPENDENT ACCOUNTANTS' REPORT ON FINANCIAL STATEMENT SCHEDULES.............33
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS............................34
16
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
1mage Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of 1mage Software, Inc. as of
December 31, 2002 and 2001, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 1mage Software, Inc. as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
BKD, LLP
Denver, Colorado
January 20, 2003
17
1MAGE SOFTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 149,738 $ 212,421
Receivables:
Trade (less allowance: 2002, $10,000; 2001, $10,000) 549,455 421,977
Inventory 16,500 9,070
Deferred tax asset -- 50,000
Prepaid expenses and other current assets 16,374 15,597
Employee advances 7,029 --
------------- --------------
Total current assets 739,096 709,065
PROPERTY AND EQUIPMENT, at cost, net 48,577 57,878
OTHER ASSETS:
Software development costs, net 720,916 725,606
Deferred tax asset 50,000 --
Inventory 2,958 2,958
Other 100 100
------------- --------------
TOTAL ASSETS $ 1,561,647 $ 1,495,607
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 3,903 $ 1,784
Deferred revenue 281,000 233,000
Accounts payable 278,174 187,878
Accrued liabilities 148,260 146,510
------------- --------------
Total current liabilities 711,337 569,172
------------- --------------
LONG-TERM OBLIGATIONS:
Capital lease obligations 7,325 1,093
Line of credit 200,000 --
------------- --------------
207,325 1,093
------------- --------------
SHAREHOLDERS' EQUITY:
Common Stock, $.004 par value - 10,000,000 shares authorized;
shares outstanding: 2001 and 2000- 3,146,554 12,586 12,586
Additional paid-in capital 7,238,658 7,238,658
Accumulated deficit (6,608,259) (6,325,902)
------------- --------------
Total shareholders' equity 642,985 925,342
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,561,647 $ 1,495,607
============= ==============
See notes to financial statements.
18
1MAGE SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- ------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
REVENUE:
System sales and software licenses $ 946,071 $ 1,224,057 $ 994,123
Services and annual fees 1,296,018 1,551,874 1,168,540
----------- ----------- -----------
Total revenue 2,242,089 2,775,931 2,162,663
----------- ----------- -----------
COST OF REVENUE:
System sales and software licenses 623,242 520,299 558,016
Services and annual fees 529,791 589,122 375,356
----------- ----------- -----------
Total cost of revenue 1,153,033 1,109,421 933,372
----------- ----------- -----------
GROSS PROFIT 1,089,056 1,666,510 1,229,291
OPERATING EXPENSES:
Selling, general & administrative 1,365,214 1,500,038 1,211,288
----------- ----------- -----------
INCOME/(LOSS) FROM OPERATIONS (276,158) 166,472 18,003
----------- ----------- -----------
OTHER INCOME/(EXPENSE):
Interest income 3,396 4,891 8,059
Interest expense (9,595) (10,206) (15,408)
----------- ----------- -----------
Total other income (expense) (6,199) (5,315) (7,349)
----------- ----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES (282,357) 161,157 10,654
PROVISION/(CREDIT) FOR INCOME TAXES -- (50,000) 2,500
----------- ----------- -----------
NET INCOME/(LOSS) $ (282,357) $ 211,157 $ 8,154
=========== =========== ===========
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE $ (.09) $ .07 $ 0.00
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,146,554 3,146,554 3,055,600
=========== =========== ===========
See notes to financial statements.
19
1MAGE SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- -----------------------------------------------------------------------------------------------------------------
Common Stock Additional
------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------------------------------------------------------------
Balances, January 1, 2000 2,642,493 10,569 7,189,091 (6,545,213) 654,447
Exercise of incentive stock options 447,375 1,790 196,047 -- 197,837
Surrender shares for exercise of incentive
stock options (32,294) (129) (128,078) -- (128,207)
Exercise of Class A Warrants 100,000 400 43,350 -- 43,750
Surrender shares for exercise of Class A
Warrants (11,020) (44) (43,706) -- (43,750)
Cancellation of non-qualified stock options -- -- (18,046) -- (18,046)
Net income -- -- -- 8,154 8,154
---------------------------------------------------------------------
Balances, December 31, 2000 3,146,554 $ 12,586 $ 7,238,658 $(6,537,059) $ 714,185
---------------------------------------------------------------------
Net income -- -- -- 211,157 211,157
---------------------------------------------------------------------
Balances, December 31, 2001 3,146,554 $ 12,586 $ 7,238,658 $(6,325,902) $ 925,342
---------------------------------------------------------------------
Net loss -- -- -- (282,357) (282,357)
---------------------------------------------------------------------
Balances, December 31, 2002 3,146,554 $ 12,586 $ 7,238,658 $(6,608,259) $ 642,985
=====================================================================
See notes to financial statements.
20
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- ------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) $ (282,357) $ 211,157 $ 8,154
Adjustments to reconcile earnings/(loss) to net cash
provided by operating activities:
Depreciation and amortization 323,096 327,663 342,338
Deferred tax asset -- (50,000) --
Deferred revenue 48,000 19,506 --
(Cancellation)/Issuance of stock options for services -- -- (18,046)
Changes in assets and liabilities:
Receivables (127,478) (14,726) (201,509)
Inventory (7,430) 26,626 10,553
Prepaid expenses and other assets 5,636 (7,805)
(7,806)
Accounts payable 90,296 2,410 (24,414)
Accrued liabilities and deferred income 1,750 37,060 (3,703)
------------ ----------- -----------
Net cash provided by operating activities 38,071 565,332 105,568
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,103) (30,263) (14,125)
Additions to capitalized software (292,015) (270,973) (290,745)
------------ ----------- -----------
Net cash used for investing activities (298,118) (301,236) (304,870)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to line of credit 200,000 185,000 300,000
Repayment of line of credit -- (385,000) (268,235)
Repayment of long-term obligations (2,636) (2,132) (5,566)
Proceeds from exercise of Common Stock options -- -- 69,630
------------ ----------- -----------
Net cash provided by (used for) financing activities 197,364 (202,132) 95,829
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (62,683) 61,964 (103,473)
CASH AND CASH EQUIVALENTS, beginning of year 212,421 150,457 253,930
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 149,738 $ 212,421 $ 150,457
============ =========== ===========
See notes to financial statements
21
1MAGE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,595 $ 10,206 $ 15,408
======== ========= ========
Income taxes paid $ 2,500 $ 2,500 $ 2,500
======== ========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Acquisition of property and equipment by assuming capital
lease obligations $ 10,987 $ -- $ 6,197
======== ========= ========
22
1MAGE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION ORGANIZATION
AND NATURE OF BUSINESS - 1mage Software, Inc. (the "Company") was
incorporated in Colorado in December 1981.
The Company develops and markets a Linux, Unix, and Windows-based
electronic document image management and retrieval system. The Company
earns the majority of its revenues in the United States.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES consist of finished goods and are stated at the lower of cost
(specific identification method) or market (net realizable value).
PROPERTY AND EQUIPMENT is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives
(generally five years) of the assets or the lease term, if shorter. The
Company capitalizes all expenditures for property and equipment in excess
of $500.
ADVERTISING COSTS are expensed as incurred. Advertising expenses totaled
$118,373, $121,718, and $103,621 in 2002, 2001 and 2000, respectively.
SOFTWARE DEVELOPMENT COSTS are capitalized when technological feasibility
is established. Such costs are stated at the lower of unamortized cost or
net realizable value. Amortization is computed using either the
straight-line method based on estimated economic lives of the products
(five years) or the ratio that current product revenues bear to the total
of current and anticipated future product revenues, whichever is greater.
It is reasonably possible that those estimates of anticipated future gross
revenues, the remaining estimated economic life of the products, or both
will be reduced significantly in the near term due to competitive pressure.
As a result, the carrying amount of the capitalized software costs may be
reduced materially in the near term. The amounts capitalized for the years
ended December 31, 2002, 2001, and 2000 were $296,510, $270,973, and
$290,745, respectively. Amortization of these costs totaled $301,200,
$300,101, and $307,930, respectively. The net realizable value of such
capitalized costs is reviewed by management on a periodic basis, and costs
in excess of net realizable value, if any, are charged to operations.
REVENUE RECOGNITION - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when
the software and computer equipment are shipped to the customer, remaining
vendor obligations are insignificant, there are no significant
uncertainties about customer acceptance and collectibility is probable.
Revenue from related services, including installation and software
modifications, is recognized upon performance of services. Maintenance
revenue is recognized ratably over the maintenance period.
A single customer accounted for 20%, 36%, and 35% of revenues in 2002,
2001, and 2000, respectively.
ACCOUNTS RECEIVABLE - Accounts receivable are stated at the amount billed
to customers. The Company provides an allowance for doubtful accounts,
which is based upon a review of outstanding accounts receivable, historical
collection information and existing economic conditions. The Company
performs
23
credit evaluations of its customers' financial condition and generally does
not require collateral. The Company retains a security interest in the
equipment and software sold until they are paid in full. Accounts
receivable are ordinarily due 30 days after the issuance of the invoice,
with those customers not meeting those requirements being subject to
stricter credit policies. Delinquent receivables are written off based on
individual credit evaluation and specific circumstances of the customer.
Three different customers accounted for 32%, 12% and 11% of accounts
receivable at December 31, 2002.
Two different customers accounted for 18% and 10% of accounts receivable at
December 31, 2001. One customer accounted for 28% of accounts receivable at
December 31, 2000.
EARNINGS (LOSS) PER SHARE is computed by dividing net income (loss) by the
weighted average number of common and equivalent shares outstanding during
the year. The potential dilution from Common Stock equivalents is not
material. Fully diluted earnings per share are either anti-dilutive or not
materially different from basic earnings per share. As the Company incurred
a net loss for the year ended December 31, 2002, the outstanding stock
options were anti-dilutive and have been excluded from the computation of
diluted earnings per share.
INCOME TAXES The Company follows the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109. Under this method, deferred income taxes are recorded based
upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using enacted tax rates and laws that will
be in effect when the underlying assets or liabilities are received or
settled.
The Company has recorded a valuation allowance against the deferred tax
assets due to the uncertainty of ultimate realizability.
STOCK-BASED COMPENSATION At December 31, 2002, the Company has three
stock-based employee compensation plans, which are described more fully in
Note 5. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the company had applied
the fair value provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
24
YEAR ENDED DECEMBER 31
2002 2001 2000
---- ---- ----
Net income (loss), as reported $ (282,357) $ 211,157 $ 8,154
Less: Total stock-based employee compensation cost
determined under the fair value based method,
net of income taxes (97,166) (98,808) (155,515)
---------- --------- ---------
Pro forma net income (loss) $ (379,523) $ 112,349 $(147,361)
========== ========= =========
Earnings per share:
Basic and Diluted - as reported $ (0.09) $ 0.07 $ 0.00
========== ========= =========
Basic and Diluted - pro forma $ (0.12) $ 0.04 $ (0.05)
========== ========= =========
ESTIMATES -The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting periods. Actual results could differ from those estimates.
RECLASSIFICATION -The Company has reclassified certain amounts from
prior years to conform to the current year presentation. These
reclassifications had no effect on net income.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
2002 2001
---- ----
Equipment $ 656,748 $ 651,055
Furniture 56,078 49,177
Leasehold improvements 8,262 8,262
--------- ---------
721,088 708,494
Less: accumulated depreciation (672,511) (650,616)
--------- ---------
$ 48,577 $ 57,878
========= =========
3. ACCRUED LIABILITIES
Accrued liabilities at December 31 consists of the following:
2002 2001
---- ----
Sales tax payable $ 40,458 $ 36,694
Accounting and audit fees 10,575 14,481
Accrued compensation 37,695 39,036
Other 59,532 56,299
--------- ---------
$ 148,260 $ 146,510
========= =========
25
4. LINE OF CREDIT
The Company has a $200,000 annual revolving bank line of credit, which has
been extended until February 24, 2004 and bears interest at the greater of
7.0% or prime plus 1.5% (rate of 7% at December 31, 2002) not to
exceed 18%, and is collateralized by all accounts receivable and general
intangibles of the Company. Total borrowings outstanding under the line of
credit were $200,000 and $0 at December 31, 2002 and 2001, respectively.
5. SHAREHOLDERS' EQUITY STOCK
COMPENSATION PLANS
At December 31, 2002, the Company has three stock-based compensation plans,
which are described below. The Company applies Accounting Principles Board
(APB) Opinion 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized. Had compensation
cost for the Company's three stock-based compensation plans been determined
based on the fair value at the dates of awards under those plans consistent
with the method of FASB Statement 123, the Company's net income (loss) and
earnings (loss) per share would have been as indicated below:
Net Income (Loss): 2002 2001 2000
---- ---- ----
As Reported $ (282,357) $ 211,157 $ 8,154
Pro Forma $ (379,523) $ 112,349 $ (147,361)
Earnings (Loss) Per Common Share:
As Reported $ (0.09) $ 0.07 $ 0.00
Pro Forma $ (0.12) $ 0.04 $ (0.05)
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 2002, 2001, and 2000:
2002 2001 2000
---- ---- ----
Dividend Yield 0% 0% 0%
Expected Volatility 128%% 124% 135%
Risk-Free Interest Rate 4.25%% 4.75% 5.00%
Expected Lives 8.8 years 8.4 years 3.2 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and
are freely transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
1996 EQUITY INCENTIVE PLAN
In September 1996, the Board of Directors authorized 1,000,000 shares of
Common Stock for issuance under its 1996 Equity Incentive Plan ("1996
Plan") as incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"). The Company grants ISOs only to employees. The Company grants
NQSOs and restricted stock to persons who are employees of the Company and
to non-employee directors under the 1996 Plan.
26
The options are granted to purchase Common Stock at the fair market value
on the grant date or at other prices as determined by the Board of
Directors. The option-vesting period is determined at the time of each
grant, and all options expire five to ten years from the grant date.
A summary of the 1996 Plan stock option activity follows:
-------------------------------------------------------------------
Outstanding Exercise Weighted
Shares Price Avg. Exercise
Price
-------------------------------------------------------------------
Balances, January 1, 2000 828,000 $ .52
Granted 192,500 $.63-$1.44 .66
Canceled (189,000) $.33-$.66 (.56)
Exercised (198,000) $.34-$1.47 (.40)
--------
Balances, December 31, 2000 633,500 .59
Granted 145,000 $.56 - $.75 .60
Canceled (8,500) $.63 - $.66 .65
--------
Balances, December 31, 2001 770,000 .59
Granted 8,000 $.51 .51
Canceled (13,500) $.56 - $.70 .66
--------
Balances, December 31, 2002 764,500 .59
========
The following table summarizes information about stock options under the
plan at December 31, 2002:
Outstanding Exercisable
---------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- --------
0.34 to 0.44 235,000 4.5 years 0.44 235,000 0.44
0.56 to 0.84 513,500 7.0 years 0.64 437,347 0.64
1.29 to 1.44 16,000 7.0 years 1.36 16,000 1.36
At December 31, 2002, options for 688,347 shares were exercisable under
the 1996 Plan. There were 37,500 shares available for future grant.
The weighted-average grant-date fair value of options granted during
2002, 2001, and 2000 were $.51, $.60, and $.66, respectively.
27
1994 STOCK OPTION AND GRANT PLAN
In April 1994, the Company authorized 700,000 shares of Common Stock for
issuance under its 1994 Stock Option and Grant Plan ("1994 Plan") to
employees, consultants and contractors of the Company. The Plan was amended
in 2002 to permit grants to employees who were also members of the board of
directors.
The options are granted to purchase Common Stock at the fair market value
on the date of grant or at other prices as determined by the Board of
Directors ("the Board"). Options issued under the 1994 Plan become
exercisable in one or more installments during its term and the right to
exercise may be cumulative, as determined by the Board. Options expire as
determined by the Board, but not more than 10 years after the date of
grant.
Details of activity under the 1994 Plan are as follows:
---------------------------------------------------------------------------
Stock Options Outstanding Exercise Price Weighted Average
Exercise Price
--------------------------------------------------------------------------
Balances, January 1, 2000 399,000 $ .53
Granted 9,500 $.63 .63
Canceled (5,250) $.34 - $1.28 (.88)
Exercised (86,000) $.34 - $1.28 (.53)
---------
Balances, December 31, 2000 317,250 .52
Granted 4,500 $.56 .56
Canceled (1,000) $.625 (.63)
---------
Balances, December 31, 2001 320,750 .52
Granted 34,000 $.35 .35
Canceled (96,500) $.625 (.63)
---------
Balances, December 31, 2002 258,250 .46
=========
--------------------------------------------------------------------------
Stock Grants Grant Price Weighted Average
Exercise Price
--------------------------------------------------------------------------
Balances, January 1, 2000 83,166 $.84 - $1.13 $1.66
Granted/Canceled -- -- --
---------
Balances, December 31, 2000 83,166 1.66
Granted/Canceled -- -- --
---------
Balances, December 31, 2001 83,166 1.66
Granted/Canceled -- -- --
---------
Balances, December 31, 2002 83,166 1.66
=========
28
The following table summarizes information about stock options under the
1994 Plan at December 31, 2002:
Outstanding Exercisable
--------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- --------
0.34 to 0.44 160,750 4.5 years 0.35 133,750 0.34
0.56 to 0.84 97,500 5.2 years 0.65 82,791 0.65
The weighted-average grant-date fair value of options granted during
2002, 2001, and 2000 were $.35, $.56, and $.63, respectively.
At December 31, 2002, options to purchase 216,541 shares of Common
Stock were exercisable and 62,599 shares were available for future grant
under the 1994 Plan.
1993 STOCK OPTION PLAN
In May 1994, the Company authorized 235,000 shares of Common Stock for
issuance under its 1993 Stock Option Plan ("1993 Plan") as incentive or
non-qualified stock options. The Company grants nonqualified stock options
to officers, directors and employees and incentive stock options may be
granted to employees under the 1993 Plan.
The options are granted to purchase Common Stock at the fair market
value on the grant date or at other prices as determined by the Board of
Directors. The option-vesting period is determined at the time of each
grant, and all options expire two to ten years from the grant date.
A summary of the 1993 Plan stock option activity follows:
------------------------------------------------------------------------
Outstanding Weighted Avg.
Shares Exercise Price Exercise Price
------------------------------------------------------------------------
Balances, January 1, 2000 239,675 $ .45
Exercised (163,375) $.44 - $.75 (.45)
---------
Balances, December 31, 2000 76,300 .47
Granted 3,500 $.56 .56
---------
Balances, December 31, 2001 79,800 .47
Granted/Canceled/Exercised 0 $ -- --
---------
Balances, December 31, 2002 79,800 .47
=========
The following table summarizes information about stock options under the plan
at December 31, 2002.
Outstanding Exercisable
--------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- --------
0.34 to 0.44 71,300 3.3 years 0.43 71,300 0.43
0.56 to 0.84 7,500 6.3 years 0.66 7,500 0.66
1.38 to 2.06 1,000 3.0 years 1.72 1,000 1.72
29
There were no options granted during 2002. At December 31, 2002,
options for 79,800 shares were exercisable under the 1993 Plan. There
are no shares available for future grant under the 1993 Plan.
COMMON STOCK WARRANTS
On January 28, 1994, the Board of Directors granted 100,000 warrants
to an officer to purchase shares of Common Stock at an exercise price
of $1.5625 per share, expiring on January 31, 1999. In January 1998,
all of these warrants were repriced to $.44 per share and the term was
extended until January 28, 2004. In March 2000, the officer exercised
these warrants. There are no common stock warrants outstanding as of
December 31, 2002.
COMMON STOCK RESERVED
Common Stock reserved at December 31, 2002 was as follows:
1996 Equity Incentive Plan 802,000
1994 Stock Option and Grant Plan 320,849
1993 Stock Option Plan 79,800
-------------
1,202,649
=============
6. INCOME TAXES
The provisions (credit) for income taxes for the years ended December 31,
consists of:
Current: 2002 2001 2000
---- ---- -----
Federal $ -- $ -- $ --
State -- -- 2,500
-------- -------- --------
Total current -- -- 2,500
-------- -------- --------
Deferred:
Federal -- -- --
State -- -- --
-------- -------- --------
Total deferred -- (50,000) --
-------- -------- --------
$ -- $(50,000) $ 2,500
======== ======== ========
The following is a reconciliation of statutory federal income taxes to the
actual provision (credit) for income taxes:
2002 2001 2000
---- ---- ----
Federal income taxes at statutory rate $ (96,000) $ 65,000 $ 3,600
Non-deductible expenses 7,000 -- --
Increase (decrease) in taxes resulting
from state income taxes (9,000) 6,300 (800)
Increase (decrease) in deferred tax asset
valuation allowance 101,000 (141,000) (133,000)
Expiration of business tax credits -- 14,000 121,000
Other, net (3,000) 5,700 11,700
--------- --------- ---------
Provision/(credit)for income taxes $ -- $ (50,000) $ 2,500
========= ========= =========
30
The components of the net deferred tax (liability) asset recognized in the
accompanying balance sheets are as follows:
2002 2001
---- ----
Deferred tax liability $ (2,000) $ (2,000)
Deferred tax asset 2,188,000 2,109,000
Valuation allowance (2,136,000) (2,057,000)
----------- -----------
$ 50,000 50,000
=========== ===========
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax asset and their approximate
tax effects are as follows:
2002 2001
---- ----
Future income (deductions):
Net operating loss $ 2,174,000 $ 2,090,000
Allowance for doubtful accounts 4,000 4,000
Depreciation 10,000 12,000
Other, net (2,000) 1,000
----------- -----------
$ 2,186,000 $ 2,107,000
=========== ===========
The Company has net operating loss carry forwards for federal income
tax purposes of approximately $5,608,000. These carry forwards expire
on varying dates from 2006 through 2022.
7. EMPLOYEE BENEFIT PLAN
The Company has a Cash or Deferred Profit Sharing Plan ("the 401(k)
Plan"). The 401(k) Plan is designed to qualify under Section 401(k) of
the Internal Revenue Code and allows the Company to make discretionary
contributions as determined by the Company's Board of Directors. For
the years ended December 31, 2002, 2001, and 2000, the Company
contributed $4,923, $4,650, and $3,988 to the 401(k) Plan.
8. COMMITMENTS AND CONTINGENCIES
At December 31, 2002 and 2001, equipment with a net book value of
$9,072 and $6,663, net of accumulated amortization of $18,191 and
$13,698, respectively, has been leased under capital leases.
The Company leases its executive offices under a
noncancelable-operating lease, which expires in July 2003.
Future minimum payments for lease obligations are as follows:
Capital Operating
-------- ---------
2003 $ 7,490 $ 52,094
2004 7,241 --
-------- --------
Total minimum lease payments 14,731 $ 52,094
========
Amount representing interest (3,503)
--------
Present value of min. lease payments 11,228
Current portion (3,903)
--------
Long-term portion $ 7,325
========
31
The Company has bonus agreements with two officers that provide for
quarterly bonuses of 5% and 4%, respectively, of the Company's pre-tax
profits. The Company expensed bonuses of $0, $33,352, and $15,968
under these agreements for the years ended December 31, 2002, 2001,
and 2000, respectively.
The Company is currently engaged in various legal proceedings
involving one of its former customers. Included in the legal
proceedings is litigation pertaining to accounts receivable owed to
the Company, of which, approximately $194,000 is held in escrow by the
court and is included in accounts receivable at December 31, 2002.
9. FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading.
The following methods and assumptions were used to estimate the fair
value of each financial instrument for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short
maturity of those instruments.
DEBT
The fair value of the Company's debt is estimated based on borrowing
rates currently available to the Company for bank loans with similar
terms and maturities.
The estimated fair values of the Company's financial instruments at
December 31, 2002 are as follows:
Carrying
Amount Fair Value
------------- -----------
Assets:
Cash and cash equivalents $ 149,738 $ 149,738
Receivables $ 556,484 $ 556,484
Accounts Payable $ 278,174 $ 278,174
Line of Credit $ 200,000 $ 200,000
The estimated fair values of the Company's financial instruments at
December 31, 2001 are as follows:
Carrying
Amount Fair Value
------------- -----------
Assets:
Cash and cash equivalents $ 212,421 $ 212,421
Receivables $ 421,977 $ 421,977
Liabilities:
Accounts Payable $ 187,878 $ 187,878
Line of Credit $ -- $ --
32
10. SEGMENT INFORMATION
The Company operates in one industry segment consisting of the development
and marketing of electronic document image management and retrieval
systems. The Company's technologies are managed as one segment because it
offers similar products in similar markets and the factors determining
strategic decisions are comparable for all products and markets.
Sales to foreign markets totaled $38,197, $67,846, and $57,911 for the
years ending December 31, 2002, 2001, and 2000, respectively.
11. LIQUIDITY
During 2002, the Company suffered operating losses and negative cash flow
as a result of losing its largest customer. In order to improve
profitability and cash flows, the Company has implemented both temporary
and permanent payroll reductions starting in January 2003 and has extended
their line of credit through February 2004. Management believes that
implementation of these measures will provide sufficient cash flows to meet
the Company's liquidity needs for the foreseeable future.
33
INDEPENDENT ACCOUNTANTS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
1mage Software, Inc.
Englewood, Colorado
In connection with our audit of the financial statements of 1mage Software, Inc.
for each of the three years in the period ended December 31, 2002, we have also
audited the following financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits of the basic financial statements. The schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and regulations
and is not a required part of the financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
BKD, LLP
Denver, Colorado
January 20, 2003
34
1MAGE SOFTWARE, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------
Additions
Balance at charged to: Additions Balance at
beginning Costs and charged to: end of
of period expenses Deductions period
------------- -------------- -------------- -------------
For the Year Ended December 31, 2002:
Allowance for Doubtful Accounts $ 10,000 $ 34,850 $ 34,850 $ 10,000
For the Year Ended December 31, 2001:
Allowance for Doubtful Accounts $ 10,000 $ 62,888 $ 62,888 $ 10,000
For the Year Ended December 31, 2000:
Allowance for Doubtful Accounts $ 10,000 $ 31,403 $ 31,403 $ 10,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information concerning the Company's Executive
Officers and Directors:
First Year As
Executive
Officer or Position
Name Age Director With Company
- ---- --- ----------- ------------
David R. DeYoung 57 1981 President, Chief Executive Officer and Director
Mary Anne DeYoung 49 1994 Treasurer, Chief Financial Officer, Asst. Secretary and Director
Robert Wiegand II 56 1992 Secretary and Director
Richard A. Knapp 57 1997 Director
John G. Mazza 57 2003 Director
DAVID R. DEYOUNG - CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. DeYoung has been President, Chief Executive Officer and a Director of
the Company since its formation in 1981. He served in similar capacities with
the Company's predecessor corporation from 1979 to 1981. He holds a Bachelor of
Science Degree in Business Administration and Computer Science from California
State Polytechnic University. Mr. DeYoung is the spouse of Mary Anne DeYoung.
MARY ANNE DEYOUNG - TREASURER, CHIEF FINANCIAL OFFICER, ASSISTANT SECRETARY AND
DIRECTOR
Ms. DeYoung was elected to the Board of Directors in April 1996.
Ms. DeYoung was appointed Treasurer, Chief Financial Officer and Assistant
Secretary of the Company on December 15, 1994. Ms. DeYoung has served as Vice
President, Finance and Administration since July 1986. Ms. DeYoung joined the
Company as Controller in April 1981. From 1975 to 1981, Ms. DeYoung was a
systems analyst with Arthur Andersen LLP, a financial analyst, and an
independent financial consultant. Ms. DeYoung holds a Bachelor of Science Degree
in Accounting from the University of Santa Clara. Ms. DeYoung is the spouse of
David R. DeYoung.
ROBERT WIEGAND II - SECRETARY AND DIRECTOR
Mr. Wiegand was elected to the Board of Directors in July 1992.
Mr. Wiegand was appointed to the office of Secretary of the Company on March 1,
1994. Mr. Wiegand is presently a lawyer in private practice. From January 15,
1992 to December 26, 1992, he was Vice-President of Administration for Rose
Manufacturing Co., a privately held manufacturer of safety equipment based in
Englewood, Colorado. Mr. Wiegand has practiced law for 30 years, and prior to
joining Rose Manufacturing, was special counsel with Pendleton & Sabian, P.C., a
law firm in Denver. Mr. Wiegand graduated Phi Beta Kappa from the Tulane
University of Louisiana in 1970 and went on to receive a law degree and was
admitted to practice in Louisiana in 1972 and Colorado in 1977. Since 1976, Mr.
Wiegand's practice has been limited to securities offerings, estate planning,
business organizations and tax law. In addition to membership in six bar
Associations, Mr. Wiegand has been admitted to practice before the U.S. Supreme
Court, the U.S. District Court (Colorado and ED-Louisiana) and before the U.S.
Court of Appeals (5th Circuit).
RICHARD A. KNAPP - DIRECTOR
Mr. Knapp was elected to the Board of Directors in May 1997. Mr. Knapp is
currently the President and CEO of Lease Capital Corporation, a Colorado company
located in Castle Rock, Colorado, and has served in that capacity since 1990.
From 1984 until 1990, Mr. Knapp was a regional manager for both Paccom Leasing
Corporation and Security Pacific Business Finance. In total, Mr. Knapp has been
associated with the banking/finance industry for nearly thirty years. He holds a
Bachelor of Science degree in Finance from the University of Arizona.
36
JOHN G. MAZZA - DIRECTOR
Mr. Mazza was elected to the Board of Directors in March 2003. Mr. Mazza
is currently the President of Drake Holding Corp. and Drake Energy Corp., both
Nevada corporations located in Malibu, California, and had served in that
capacity since 1984 and 1990, respectively. Mr. Mazza is a founder and former
Secretary and Board Member of Aoptix Technologies Inc. From 1969 to 1984 Mr.
Mazza held various senior management positions with William O'Neil and Co.
Incorporated, a New York Stock Exchange member firm and O'Neil Data Systems,
Inc. In total, Mr. Mazza has been associated with the securities industry for
over thirty years. Mr. Mazza holds a Bachelor of Science degree from Claremont
McKenna College and a Masters of Business Administration from the University of
southern California.
James J. Capeless resigned from the Board of Directors on February 26, 2003.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the executive compensation of two of the
Company's Executive Officers for each of the Company's last three fiscal years.
There were no other Executive Officers serving at the end of the last fiscal
year whose compensation was greater than $100,000.
- --------------------------------------------------------------------------------------------------------------------------
Long Term All Other
Annual Compensation * Compensation Compensation
----------------------------------------------
Salary Bonus Awards **
- --------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Securities
Underlying
Year ($) ($) Options (#) ($)
- --------------------------------------------------------------------------------------------------------------------------
David R. DeYoung 2002 145,578 0 0 3,068
President, CEO 2001 145,260 18,529 25,000 3,156
2000 144,435 8,872 50,000 3,767
Mary Anne DeYoung 2002 103,708 0 2,188
CFO, Treasurer, Asst. Secretary 2001 103,586 14,823 25,000 2,187
2000 102,898 7,096 50,000 2,187
- --------------------------------------------------------------------------------------------------------------------------
* Neither Mr. DeYoung nor Ms. DeYoung received additional compensation other than noted above, the aggregate amount of
which was the lesser of either $50,000 or 10% of their annual salary and bonus.
** Includes insurance premiums paid by the Company for term life and disability insurance, as well as premiums paid for
a key-man life insurance policy which has the death benefit assigned to the Company and the cash value of the policy
intended to accrue for the benefit of Mr. DeYoung.
- --------------------------------------------------------------------------------------------------------------------------
37
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named Executive
Officers:
- --------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------
Name Number of Percent of Total Exercise or Expiration
Securities Options Granted Base Date
Underlying to Employees in Price
Options Fiscal ($/Share)
Granted Year
(#)
- --------------------------------------------------------------------------------
David R. DeYoung 0 0% $.00 N/A
- --------------------------------------------------------------------------------
Mary Anne DeYoung 0 0% $.00 N/A
- --------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning each exercise of
stock options during the last fiscal year by the named Executive Officers and
the fiscal year-end value of unexercised options:
- -----------------------------------------------------------------------------------------------
Shares Number of securities Value of
acquired underlying unexercised unexercised
on Value options at in-the-money
exercise Realized fiscal year-end options at fiscal
Name (#) ($) (#) year-end ($)*
- -----------------------------------------------------------------------------------------------
Exercisable/unexercisable Exercisable/unexercisable
- -----------------------------------------------------------------------------------------------
D.R. DeYoung 0 $ 0 313,000 / 0 $ 0 / $ 0
- -----------------------------------------------------------------------------------------------
Mary Anne DeYoung 0 $ 0 259,800 / 0 $ 0 / $ 0
- -----------------------------------------------------------------------------------------------
*Based upon the fair market value of the Common Stock on December 31, 2002 of
$.35, being the closing price as quoted on the OTC: BB.
EMPLOYMENT CONTRACTS
Mr. DeYoung, the Company's President and Chief Executive Officer, is
employed pursuant to a three-year employment contract between the Company and
Mr. DeYoung, which has been extended one year and will expire on September 30,
2003. Since November 1, 1999, the compensation of Mr. DeYoung has been
established under the terms of this employment contract. The contract calls for
an annual base salary, in an amount determined annually by the Board of
Directors, payable semi-monthly, plus expenses and normal fringe benefits.
Mr. DeYoung earns a bonus of 5% of the Company's pretax earnings, calculated on
a quarterly basis. An annual bonus may be paid to Mr. DeYoung based on the
performance of the Company and at the discretion of the Board of Directors.
Mr. DeYoung's employment contract provides that should his employment be
terminated for any reason other than for cause, he is entitled to a cash
severance package equal to one year's cash compensation. In addition,
Mr. DeYoung is entitled to receive a grant of a sufficient number of ten-year
options as are necessary to permit him to retain the same percentage of
beneficial ownership interest in the Company as he held on December 16, 1996.
These grants would be made from the Company's Equity Incentive Plan at the fair
market value of the Common Stock on the date of grant.
38
Ms. DeYoung, the Company's Vice President of Finance and Chief Financial
Officer, is employed pursuant to a three-year employment contract between the
Company and Ms. DeYoung which has been extended one year and will expire on
September 30, 2003. Her compensation is established under the terms of this
employment contract. The contract calls for an annual base salary, expenses,
normal fringe benefits, as well as a bonus equal to 4% of the Company's pretax
earnings, calculated on a quarterly basis. In addition, Ms. DeYoung's employment
contract provides that should her employment be terminated for any reason other
than for cause, she is entitled to a cash severance package equal to one year's
cash compensation.
COMPENSATION OF DIRECTORS
The Company currently pays non-employee Directors $1,500 per quarter plus
specific hourly fees for special meetings or additional participation. Pursuant
to the 1996 Stock Option Plan (the "1996 Plan"), members of the compensation
committee of the Board of Directors are automatically granted an option on the
last trading day in June to purchase 4,000 shares of Common Stock at 100% of the
fair market value as defined in the Plan on such date. On June 30, 2002 each
member of the compensation committee received an automatic grant to purchase
4,000 shares of Common Stock at $.51, the fair market value on that date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth the number of shares of Common Stock owned by
each Executive Officer and Director of the Company, by all persons known by the
Company to be the beneficial owner of more than 5% of any class of the Company's
voting securities, and by all Executive Officers and Directors as a group.
Unless otherwise noted, the share ownership specified in the following
table represents both record and beneficial ownership as of February 28, 2003.
- ----------------------------------------------------------------------------------------------
Beneficial Percent of
Name and Address of Beneficial Owner Ownership(1) Class
- ------------------------------------ ------------ ----------
David R. DeYoung 848,591 (2),(3) 24.2%
6025 So. Quebec Street #300, Englewood, Colorado 80111
Mary Anne DeYoung 380,301 (4) 11.0%
6025 So. Quebec Street #300, Englewood, Colorado 80111
Robert Wiegand II 88,500 (5) 2.8%
5261 So. Quebec Street, Greenwood Village, Colorado 80111
Richard A. Knapp 20,500 (6) 0.6%
7505 Village Square Dr. #200, Castle Rock, Colorado 80104
John G. Mazza 302,937 9.6%
6613 Zumirez Drive, Malibu, California 90265
Spencer D. Lehman 300,638 9.6%
3874 Puerco Canyon, Malibu, California 90265
All Executive Officers and Directors as a Group - 5 persons 1,640,829 (7) 42.0%
- -----------------------------------------------------------------------------------------------
(1) Beneficial owners are believed to have sole voting and investment power
with respect to the shares shown unless otherwise indicated.
39
(2) Includes: 363,000 options to purchase Common Stock. See EXECUTIVE
COMPENSATION - Employment Contract.
(3) Excludes: any shares attributable to Mr. DeYoung's right under his
employment contract to maintain his proportional ownership of the Company
under certain circumstances. See EXECUTIVE COMPENSATION - Employment
Contract.
(4) Includes 309,800 options to purchase Common Stock
(5) Includes 68,500 options to purchase Common Stock
(6) Consists of 20,500 options to purchase Common Stock
(7) Includes 761,800 options to purchase Common Stock
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related transactions for the year ended December 31,
2002.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure Controls and procedures Within 90 days prior to the
date of this report, the Company carried out an evaluation, under
the supervision and participation of the company's Chief
Executive Officer and Chief Financial Officer ("the Officers') of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-14. Based upon that evaluation, the
Officers concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company required to be included in
the Company's annual SEC filings, including this report.
Internal Controls
There were no significant changes made in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Financial Statement Index on Page 13
2. Financial Statement Schedules
See Financial Statement Index on Page 13
3. List of Exhibits
Exhibit Number Description and Incorporation by Reference
- -------------- ------------------------------------------
3.1* - Restated Articles of Incorporation of the Company, as amended.
3.2* - Bylaws of the Company, as amended.
3.3* - Articles of Amendment to the Articles of Incorporation of the
Company dated April 18, 1991
3.4** - Articles of Amendment to the Articles of Incorporation dated
May 21, 1993.
3.4** - Articles of Amendment to the Articles of Incorporation dated
June 28, 1994.
10.5* - UniVerse(TM)Distributor Agreement between INFORMIX SOFTWARE,
INC. and the Company dated May 15, 1991
10.14*******- President Employment Agreement between David R. DeYoung and
the Company dated November 1, 1999.
10.15*******- Chief Financial Officer Employment Agreement between Mary
Anne DeYoung and the Company dated September 1, 1999.
40
10.21**** - Software License Agreement between Reynolds+Reynolds and the
Company. This exhibit is subject to a grant of confidential
treatment filed separately with the Securities and Exchange
Commission.
10.22*** - 1994 Stock Option and Grant Plan.
10.23** - 1993 Stock Option Plan.
10.24****** - Equity Incentive Plan
23 - Consent of BKD, LLP
99.1 - Certification of Annual Report for CEO
99.2 - Certification of Annual Report for CFO
See Index to Financial Statements on Page 13
* Filed as an Exhibit to Form S-1 Registration Statement No. 33-44717, on
December 23, 1991.
** Filed as an Exhibit to Form S-8 Registration Statement No. 33-86760, on
November 29, 1994
*** Filed as an Exhibit to Form S-8 Registration Statement No. 33-78096, on
April 22, 1994.
**** Filed as an Exhibit to Form 10-K for the period ended December 31, 1994.
****** Filed as an Exhibit to Form S-3 Registration Statement No. 333-35265, on
September 10, 1997.
******* Filed as an Exhibit to Form 10-K for the period ended December 31, 1999
There were no reports filed on Form 8-K for the quarter ended December 31, 2002.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
1MAGE SOFTWARE, INC.
By: /s/ DAVID R. DEYOUNG Date: March 17, 2003
-------------------- --------------
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 17, 2003
-------------------- ---------------
David R. DeYoung, President
and Principal Chief Executive Officer
By: /s/ MARY ANNE DEYOUNG Date: March 17, 2003
--------------------- ---------------
Mary Anne DeYoung
Vice President, Finance
Principal and Accounting Officer
By: /s/ ROBERT WIEGAND, II Date: March 17, 2003
---------------------- ---------------
Robert Wiegand, II
Director and Secretary
By: /s/ RICHARD A. KNAPP Date: March 17, 2003
-------------------- --------------
Richard A. Knapp
Director
By: /s/ JOHN G. MAZZA Date: March 17, 2003
----------------- --------------
John G. Mazza
Director
42
CERTIFICATIONS
I, David R. DeYoung, certify that:
1. I have reviewed this annual report on Form 10-K of 1mage Software, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 03/17/2003 /s/DAVID R. DEYOUNG
-----------------------------------
David R. DeYoung
President and Principal and
Chief Executive Officer
43
CERTIFICATIONS
I, Mary Anne DeYoung, certify that:
1. I have reviewed this annual report on Form 10-K of 1mage Software, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 03/17/2003 /s/ MARY ANNE DEYOUNG
---------------------
Mary Anne DeYoung
Vice President, Finance and
Principal Financial Officer
44