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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from___to___
Commission file number 0-15864
SEDONA CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 95-4091769
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
455 South Gulph Road, Suite 300, King of Prussia, PA 19406
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 484-679-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the Voting Stock held by non-affiliates of the
registrant computed by reference to the closing price as reported on the NASDAQ
system as of April 10, 2001 was $30,977,000.
The number of shares of the registrant's Common Stock issued and outstanding as
of April 10, 2001 was 34,048,100 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III.
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by use of terms such as "believes",
"anticipates", "intends", or "expects". These forward-looking statements relate
to the plans, objectives, and expectations of SEDONA Corporation (the "Company"
or "SEDONA Corp.") for future operations. In light of the risks and
uncertainties inherent in all forward-looking statements, the inclusion of such
statements in this Form 10-K should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained herein as a result of certain factors including, but not limited to,
dependence on strategic relationships, ability to raise additional capital,
ability to attract and retain qualified personnel, customer acquisition and
retention and rapid technological change. These factors should not be considered
exhaustive; the Company undertakes no obligation to release publicly the results
of any future revisions it may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
General
SEDONA Corporation develops, markets, services and supports enterprise scale
Internet Customer Relationship Management (CRM) application solutions that
enable small and mid-sized businesses to optimize their return on customer
relationships by personalizing the interaction with their customers and thereby
ensuring that their sales and marketing efforts are strategically managed
towards enhancing their customer acquisition, intimacy, satisfaction and
retention capabilities.
SEDONA Corporation made significant additions to its business during 2000
through the acquisition of business and technology focusing on its core
application solution strategy. Please refer to Item 7 below for further details.
SEDONA's principal executive offices are located at 455 South Gulph Road, Suite
300, King of Prussia, Pennsylvania, 19406, and the telephone number is (484)
679-2200.
Description of Business and Principal Products
Intarsia
SEDONA's flagship application solution, Intarsia(TM), is a fully integrated and
customized CRM application solution priced specifically to bring a comprehensive
and seamlessly integrated set of customer relationship management components to
small and mid-sized financial services organizations, such as community banks,
credit unions, savings and loans, brokerage firms and insurance agencies.
Intarsia enables financial services organizations to create an effective
marketing, sales and services environment for customers, partners and suppliers.
Intarsia provides financial services organizations with a
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ITEM 1. BUSINESS (Continued)
consolidated view of their customer relationships and enables their customers to
have a complete view of the financial services organizations' businesses.
Exploiting the ubiquity of the Internet, SEDONA's Intarsia combines
state-of-the-art technologies such as JAVA, personalization, mobile computing,
natural language and speech recognition for retrieving customer or prospect data
using plain English or voice.
Intarsia's comprehensive set of front office components provides financial
services organizations with a robust set of operational, analytical and
collaborative functionality necessary to:
o Integrate the front, back and mobile offices.
o Analyze customer and prospect data in real time enabling them to manage
critical business performance such as profitability of customers,
households and products and effectiveness of lead generation programs as
well as marketing and sales promotions and campaigns.
o Improve coordination and communication between financial services
organizations and their customers, greatly enhancing the financial services
organizations ability to deliver effective customer care services.
Intarsia seamlessly enhances the financial services organizations' core banking
systems customer and prospect data with "live" user demographics, behaviors,
interests and preferences information provided by third-party content management
suppliers. This enhanced data is then filtered and analyzed to create timely and
precise "information-on-demand" or "Smart Content". This Smart Content is used
by all of Intarsia's CRM front office components in order to enable
organizations to:
o Create "look-a-like" models to identify prospects effectively who share the
same characteristics as their best customers, increasing their ability to
acquire new customers.
o Identify which are the most profitable customers, households or products in
order to improve their up-selling and cross-selling capabilities.
o Develop personalized sales, marketing and services programs aimed at
retaining their most profitable customers, and turn unprofitable customers
into profitable ones.
Intarsia includes a front-end personalized portal that allows financial service
organizations and their employees to create their own customized Web pages (and
personalized pages for select customers of the bank) using Intarsia's
components, third-party applications, and any other information that they have
been authorized to use. All this functionality is available to Intarsia users
over a wireline or wireless network using laptops and handheld PCs. With mobile
device usage on the rise, this capability will be increasingly critical as users
become less tethered to an office location and travel or conduct face-to-face
customer meetings outside their offices.
Marketing Solution Services
Introduced in February 2001, SEDONA's innovative marketing solutions services
offers customer relationship management consulting services that allow small and
mid-sized financial services organizations to outsource strategic marketing
programs such as customer retention, customer relationship expansion, new
customer acquisition, privacy management (Gramm-Leach-Bliley Act compliance) and
CRM strategy consulting. SEDONA offers a menu of services including:
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ITEM 1. BUSINESS (Continued)
o Regular reporting and analysis of the financial services organization's
customer and prospect data and the related profitability of their products,
customers, households and operations;
o Recommendations for strategic marketing programs resulting from the data
analysis of the financial services organization's strategic initiative(s);
o Implementation and tracking of the actual direct marketing programs
selected by the financial services organization using sophisticated
campaign management capabilities;
o Customer relationship management consulting to help the financial services
organization manage the cultural and process changes inherent in new CRM
implementations.
Each focus area includes detailed reporting and analysis to examine the
opportunities available to the financial organization to increase customer
satisfaction as well as overall company profitability. Based on the information
collected, SEDONA also offers services to implement and monitor recommended
marketing programs using Intarsia's campaign management software. SEDONA
provides these services in conjunction with several best-in-class partners
including Acxiom(R) Corporation; CBMS, a direct marketing company; DCMS, a
direct mail and database marketing company; and Profit Resources, a consulting
firm that specializes in assisting clients to implement and optimize
profitability management solutions.
Application Outsourcing
According to TowerGroup, a leading research and advisory firm specializing in
the impact and direction of technology in the financial services industry,
application outsourcing is emerging as a preferred business model for small and
mid-sized businesses seeking to benefit from a full-featured CRM solution
because they do not desire to incur the direct and indirect personnel and
infrastructure (hardware, software, network and hosting) costs that are required
to build and maintain these systems. SEDONA has recognized this trend, and
offers Intarsia over the Internet, as an Application Service Provider (ASP).
This reduces the cost and time required for small and mid-sized businesses to
implement and maintain these comprehensive CRM solutions.
Strategy
SEDONA has tailored its technology, services, marketing and sales strategies to
its well-defined first target audience of small to mid-sized financial services
organizations. SEDONA's overall business strategy is built upon four major
strategic initiatives:
1. Targeting CRM markets with a highly verticalized application and marketing
solutions services,
2. Marketing its unique proprietary solution to target markets through
multiple sales distribution channels,
3. Staying in the forefront of CRM technology, and
4. Achieving profitability.
A key element of the Company's strategy fulfillment is a Center of Excellence
which develops cross-trained SEDONA service personnel for optimal effectiveness
of its application solution and customer support.
The Company estimates that the market size of opportunities are large and
growing at rapid rates as businesses place increasing emphasis on knowledge
about their customer base. Having strategically targeted a key segment (there
are over 22,000 financial services organizations with less than $10
4
ITEM 1. BUSINESS (Continued)
billion in total assets, according to Thomson Financial, a leading information
resource for financial services) of the CRM market (estimated to be a $14
billion market in 2001 with a compound annual growth rate of over 30% for the
next three years, according to International Data Corporation, a leading
information technology consultant) and designed and priced its CRM application,
Intarsia, and marketing solutions services offerings accordingly, SEDONA is
moving aggressively in an attempt to capture a major share of the small to
mid-sized financial services industry. Through sales distribution channels and
innovative marketing programs, SEDONA hopes to garner awareness and market
leadership.
Research & Development (In Thousands)
The main strategy of the research and development organization is to provide
high-quality, high-value products and support services in a consistent and
predictable manner as follows:
1. Promote and cultivate a culture of team-based development. The research and
development organization is structured into small teams of developers,
responsible for the design, development and unit testing of each component
of the Intarsia(TM) application solution. Each project team also provides
technical assistance to the system integration group.
2. Implement a state-of-the-art software development process that encourages
component reusability and enhances the predictability, timeliness and
quality of the overall software process. SEDONA has adopted the Base Level
Integration Plans software development methodology, which has been designed
to promote an interactive and predictable process for the development, unit
and system integration testing and delivery of products. This methodology
breaks the development of sophisticated products into small, pre-defined
cycles of 10 weeks (Base Levels) during the delivery process. It also
allows the company to react quickly to business and technical changes
generated by the marketplace and/or new customer requirements.
Base levels serve as the fundamental planning and execution process that drives
the engineering activities for that time period, including the maintenance of
existing products and releases, training and education requirements, as well as
new product development. This process operates in the context of a development
organization where there is a set of small project teams cooperating to build a
large, complex software product.
Research and development expenses were $458, $346 and $239, for the years ended
December 31, 2000, 1999 and 1998, respectively.
Patents and Copyrights
The Company strongly believes in copyrighting and trademarking its products and
servicemarking its services. The company has been awarded or is in the process
of applying for a total of 11 copyrights, trademarks and servicemarks.
Sales and Marketing
SEDONA's sales distribution channel strategy has two major components:
1. A direct sales organization, with many years of experience in selling
application solutions to the financial services market, dispersed
across the United States and Canada in order to serve more effectively
existing customers, acquire new accounts and assist our business
partners' sales organizations in their sales initiatives.
5
ITEM 1. BUSINESS (Continued)
2. An experienced strategic alliances organization to create aggressively
new sales channel capacity, for selling SEDONA's Intarsia and marketing
solutions services. This group is responsible for leveraging and
expanding OEM (original equipment manufacturer) and VAR (value added
resellers) distribution channel partnerships with leading providers of:
o Enterprise-wide customer relationship management solutions such
as IBM, E.piphany and Acxiom Corporation,
o Core banking systems such as Jack Henry, Alltel and Fiserv
o Integration and consulting services for the financial services
market such as DataMentors, CBMS, DCMS, Sigma Analytics and
Profit Resources.
One step towards building an effective distribution channel and creating market
awareness was the December 2000 announcement of the Customer Service Agreement
(CSA) with IBM's Mid-market Banking, Finance, and Securities Group (BFS). Under
the terms of the CSA agreement, IBM will market SEDONA's Intarsia to its
customers to run on IBM eServer (formerly AS/400) systems at the customer's own
site. This agreement followed an announcement earlier in 2000 under which IBM
and the Company agreed to engineer Intarsia(TM) to run on an IBM platform that
is a widely used information technology environment in the Company's target
customer base.
SEDONA's direct sales organization and our business partners' sales groups are
responsible for selling SEDONA's application solution, Intarsia, and marketing
solutions services to community banks, credit unions, savings and loans,
brokerage firms and insurance agencies having a total asset value of $10 billion
or less.
The Company is also working with a Massachusetts-based, strategic consulting
firm, Japan Entry Corporation to establish a sales and marketing presence in
Japan. The Company also plans to pursue similar international relationships in
Europe and Latin America.
In order to insure a successful implementation of the Company's sales strategy,
SEDONA's marketing organization has developed a comprehensive set of marketing
programs and is implementing effective lead generation programs such as
telemarketing, competitive trade-in offers, reference rewards, and an overall
public relations effort to generate new sales opportunities efficiently and
effectively.
Customers
No single customer accounted for more than 10% of sales in 2000.
Backlog
Revenue backlog consists of unfulfilled purchase contracts, service contracts
such as those entered into with application service customers, as well as
deferred revenues, primarily for maintenance contracts where revenues are
recognized ratably over the life of the contract. At the end of 2000, the
Company had a revenue backlog of $1,081, substantially all of which will be
realized as sales in 2001.
6
ITEM 1. BUSINESS (Continued)
Competition
The CRM market has offerings from providers that focus on sales force
automation, call center management, contact management and other components that
address certain aspects of the customer relationship. SEDONA's offering is
unique in combining comprehensive, real-time data integration and enhancement
capability along with visualization of required business information. Further,
SEDONA delivers its capabilities on the Internet in a cost effective, usable
manner. SEDONA's principal methods of meeting competition are on the basis of
service, product functionality and attractive pricing practices.
SEDONA's strategic partnerships, either by integrating SEDONA's capabilities
into their solution or for their solution to be integrated into SEDONA's
application solution, create an overall remarketing/reselling opportunity for
both and strengthen SEDONA's competitive position.
Software Development and Services
The Company produces and services its software products from its headquarters in
King of Prussia, Pennsylvania and offices in Minneapolis, Minnesota, and
maintains a field service organization that covers all areas of the nation. In
addition, SEDONA utilizes outside contract organizations as needed to supplement
its internal resources.
Employees
As of December 31, 2000, the Company had 66 full time employees. None of these
employees are represented by a labor union. The Company believes that its
relationships with its employees are good.
Dependence Upon Key Personnel
The Company is dependent upon certain key members of its management team for the
successful operation and development of its business. The loss of the services
of one or more of its management personnel could materially and adversely affect
the operation of the Company. In addition, in order to continue its operations,
the Company must attract and retain additional technically qualified personnel
with backgrounds in engineering, production, and marketing.
There is keen competition for such highly qualified personnel and consequently
there can be no assurance that the Company will be successful in recruiting or
retaining personnel of the requisite caliber or in the numbers necessary to
enable the Company to continue to conduct its business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate offices as well as principal facilities for
operations at 455 South Gulph Road, Suite 300, King of Prussia, Pennsylvania,
19406. The lease for this facility of 16,500 square feet commenced in November
2000 and extends until 2007. The Company also leases a 6,500 square foot
facility in Minneapolis, Minnesota, principally for development and professional
services personnel, which commenced in April 2000 and extends through October
2003.
Management believes that the current facilities are adequate for the foreseeable
future.
7
ITEM 3. LEGAL PROCEEDINGS (In Thousands)
In March 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, PA, against the Company by a former employee, seeking damages
of $361, principally for alleged termination of contract. This plaintiff asserts
this sum represents the excess of market value over the exercise price of
unvested warrants held by the plaintiff which the plaintiff asserts should have
been vested and thereby available for exercise and sale. The Company believes
this claim is without merit and is defending its position.
No other actions other than matters involved in the ordinary course of business
are currently known by Management and none of these are believed by Management
to have potential significance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The Common Stock is quoted on the NASDAQ SmallCap Market under the symbol
"SDNA."
The following table sets forth the high and low sales prices of the Company's
Common Stock as reflected on the NASDAQ SmallCap Market for the periods
indicated.
Common Stock High Sales Price Low Sales Price
1999
1st Quarter $ 3.13 $ 2.06
2nd Quarter $ 2.63 $ 1.16
3rd Quarter $ 3.47 $ 1.25
4th Quarter $ 3.50 $ 1.34
Common Stock High Sales Price Low Sales Price
2000
1st Quarter $ 10.25$ 2.75
2nd Quarter $ 7.25$ 2.41
3rd Quarter $ 3.69$ 1.34
4th Quarter $ 1.84$ 0.63
Common Stock High Sales Price Low Sales Price
2001
1st Quarter $ 1.94 $ 0.69
As of April 10, 2001, there were approximately 13,000 Shareholders of record. On
April 10, 2001 the last reported sale price of the Company's Common Stock as
reported on the NASDAQ System was $.92.
The Company has never declared or paid cash dividends on its Common Stock and
does not anticipate payment of cash dividends on its Common Stock in the
foreseeable future. It is the current intent of the Company to continue to
retain any earnings to finance the development and expansion of its business.
8
ITEM 6. SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)
The following table sets forth selected financial information regarding the
Company for the year ended December 31, 2000 and for the four previous years.
Pursuant to the realignment of operations discussed in Item 7 below, data in the
following table has been adjusted to show operating results for the discontinued
operations separately. Balance sheet data in the following tabulation also
reflects accounting for discontinued operations.
This information should be read in conjunction with the financial statements and
notes thereto included in Item 8 of this Form 10-K.
In Thousands Except Per Share Data)
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YEAR ENDED DECEMBER 31,
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Income Statement Data 2000 1999 1998 1997 1996
Revenue $ 1,787 $ 244 $ 15 $ 260 $ 190
Loss from Continuing
Operations (10,826) (3,264) (3,879) (5,301) (1,516)
Loss from Discontinued
Operations (10,682) (2,973) (1,633) (2,216) (2,754)
Loss from Continuing and
Discontinued Operations
before extraordinary item (10,682) (6,237) (5,512) (7,517) (4,270)
Extraordinary item - - - (300) -
Net Loss (10,682) (6,237) (5,512) (7,817) (4,270)
Preferred Dividends (889) (601) (1,592) (182) (220)
Net Loss applicable
to Common Stockholders (11,571) (6,838) (7,104) (7,999) (4,490)
Net Loss per share applicable
to Common Stockholders
before Extraordinary Item (.42) $ (.18) $ (.28) $ (.34) $ (.15)
Extraordinary Item
per share - $ - $ - $ (.02) $ -
Basic and Diluted
Net Loss per Common Share
applicable to continuing
operations (.42) $ (.18) $ (.28) $ (.36) $ (.15)
Loss per Common Share
applicable to discontinued
operations .01 $ (.13) $ (.08) $ (.13) $ (.24)
Loss per Common Share (.42) $ (.31) $ (.36) $ (.49) $ (.39)
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AT DECEMBER 31,
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Balance Sheet Data: 2000 1999 1998 1997 1996
Total Assets $ 8,468 $ 2,204 $ 4,435 $ 4,403 $ 2,566
Net Working Capital (989) 262 179 902 749
Long-Term Obligations 1,025 51 215 59 -
Stockholders' Equity 3,091 $ 1,431 3,457 3,514 2,556
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Realignment of Operations
During the third quarter of 1999, the Company's Board of Directors decided to
sell the two divisions of the Company which were not part of its realigned
strategy of focusing on the development of its Internet-based software products.
Accordingly, on July 16, 1999 the sale of the assets of
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the Technology Resource Centers to Diversified Technologies, Inc. was completed.
On September 17, 1999, the sale of the Tangent Imaging Systems operation to
Colortrac, Inc. was completed.
On April 10, 2000, the Company announced that it had acquired the Customer
Information Management System (CIMS) business unit from Acxiom Corporation. The
CIMS business develops, markets, services and supports CRM systems, focusing
principally on financial services markets. As a result of this transaction,
SEDONA enhanced the development of its Internet-based CRM strategy by obtaining
a comprehensive CRM product suitable for small to mid-sized businesses.
The purchase price for the acquired assets included issuance of $1,300(with face
value of $1,500) in Series H preferred stock yielding an 8% dividend and
convertible, at the Company's option, for the first 33 months of the preferred
stock's 36 month life; five-year warrants to purchase up to 247,934 shares of
Common Stock at an exercise price of $3.025 per share; payment by the Company of
a 10% royalty fee on collections of CIMS license fees, such royalties to be not
less than $1,000 over the three year period following closing; and assumption of
certain liabilities related principally to the service and warranty contracts
assigned by Acxiom to the Company.
With the realignment of operations completed, the Company is now able to focus
all efforts on its business of providing enterprises with Internet-based
application solutions that assist marketing and sales organizations to identify
and visualize more quickly and precisely new market opportunities that improve
sales results and market penetration.
The remainder of Management's discussion and analysis of financial condition and
results of operations reflects principally the continuing operations of the
Company.
Results of Operations (In Thousands)
Revenues from continuing operations for the years ended December 31, 2000, 1999
and 1998 were $1,787, $244 and $15 respectively.
During the periods reported, gross margins and other data relating to operations
were not meaningful as the Financial Statements reflect the realignment of the
Company's continuing operations. In 2000, expenses from continuing operations
were higher when compared to 1999 and 1998 principally reflecting higher sales
and marketing efforts. Also in 2000, general and administrative costs were
higher principally due to increased personnel cost as well as significant
financial and legal expenses related to the realignment of operations.
On February 9, 2000, the Company committed to acquire a 10% equity interest for
a total of $140, payable at various times in the future, in Lead Factory, Inc.,
a Boston-based start-up company which designs, builds, and markets computer
software and services to aid sales and marketing persons with customer
prospecting. Lead Factory was founded by Ms. Alyssa Dver, who was appointed a
Vice President and Chief Marketing Officer of the Company in April 2000. The
Lead Factory product has been integrated with SEDONA's Intarsia(TM) and is
provided as an additional component or may be sold as a separate application by
SEDONA to its customer base. In this regard, the Company signed a license and
remarketing agreement with Lead Factory whereby SEDONA was granted a
non-exclusive license to use and sell the product in return for royalty payments
and support costs reimbursement. No payments have been made to date under this
license and remarketing agreement. During 2000, management determined that their
investment in Lead Factory was other than temporarily impaired and have
therefore recorded a reserve against their investment.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (In Thousands Except Per Share and Share Data)
At December 31, 2000, cash and cash equivalents increased to $2,189, a $1,296
increase from the December 31, 1999 amount of $893. The above change in cash and
cash equivalents are explained in the discussion of cash flows from operating,
investing and financing activities.
For the year ended December 31, 2000, the cash flows used in operating
activities resulted in a net use of cash of $8,460 compared to the year ended
December 31, 1999 amount of $3,439.
The increase in use of cash for operating activities was primarily due to higher
operating losses principally as a result of higher sales, marketing and general
and administrative expenses.
For the year ended December 31, 2000 the cash flows from investing activities
resulted in a net use of cash of $2,599 compared to the year ended December 31,
1999 amount of $433. The use of cash increased $2,166 principally due to
increased capitalization of software development costs.
For the year ended December 31, 2000, cash flows from financing activities
provided $12,355 compared to the fiscal December 31, 1999 amount of $3,967. The
increase in cash from financing activities in 2000 was due principally to the
increased warrant and option exercises as well as the sale of Company
securities.
The Company received $6,731 during 2000 related to option and warrant exercises,
resulting in 3,247,848 additional common shares being issued.
In February 2000, the Company closed a $3,000 private placement by issuing 3,000
shares of Series G convertible preferred stock. The then outstanding Series G
convertible preferred stock was redeemed in November 2000 in connection with the
issuance of the $3,000 principal amount convertible Debenture discussed below.
In August 2000 the Company sold 476,190 shares of Common Stock to an outside
investor for an aggregate purchase price of $1,000. The Company also issued to
the purchaser of these shares of Common Stock a four year warrant to purchase
47,619 shares of Common Stock at an exercise price of $2.96 per share. The
Company paid a $60 sales commission to Ladenburg Thalmann, as placement agent in
connection with this offering and issued a warrant to purchase 33,333 shares of
Common Stock at an exercise price of $2.38 per share.
In October 2000 the Company sold 952,380 shares of Common Stock to an outside
investor for an aggregate purchase price of $1,000. The Company also issued to
the purchaser of these shares of Common Stock a four year warrant to purchase
95,238 shares of Common Stock at an exercise price of $1.47 per share. The
Company paid a $60 sales commission to Ladenburg Thalmann & Co., Inc., as
placement agent in connection with this offering and issued a warrant to
purchase 66,667 shares of Common Stock at an exercise price of $1.16.
On November 22, 2000, the Company closed a $3,000 private placement purchase
agreement for the issuance of Debentures convertible into its Common Stock. The
net proceeds were approximately $2,320, of which $2,246 was used to redeem the
outstanding shares of the Series G convertible preferred stock with the
remaining net proceeds used for working capital purposes. The Debentures are due
and payable 120 days from issuance or, at the Company's request, may be extended
for subsequent 30 day periods. The convertible Debentures bear interest
quarterly in arrears on the outstanding principal at the rate of 5% per annum.
Prior to maturity, the Debentures may be exercised at a strike price of $1.13
per share at any
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
time the Common Stock price exceeds $2.00. In the event that the Debentures are
not paid at the time of maturity, the actual purchase price of the convertible
Debenture may be converted at the option of the holder at the lesser of $1.41
and 85% of the volume-weighted average price of the Company's Common Stock over
the five trading days immediately preceding the date on which a notice of
conversion is delivered to the Company. In connection with the issuance of the
convertible Debenture, the Company also issued a warrant to the Debenture
holders to purchase up to 400,000 shares of Common Stock at an exercise price of
$1.37 and a fair value of $472, which was treated as deferred financing costs
and additional paid in capital. The Company also issued a warrant to purchase up
to 266,667 shares of Company Common Stock at the same exercise price, which will
only be exercisable if the convertible Debenture is not paid in full within 120
days of the original issuance.
In December 2000 the Company sold 1,030,928 shares of Common Stock to an
investor for an aggregate purchase price of $1,000. The Company also issued to
the purchaser of these shares of Common Stock a four year warrant to purchase
103,092 shares of Common Stock at an exercise price of $1.35 per share. The
Company paid a $70 sales commission to Ladenburg Thalmann, as placement agent in
connection with this offering and issued a warrant to purchase 72,165 shares of
Common Stock at an exercise price of $1.07 per share.
In January 2001, the Company sold 1,538,462 shares of Common Stock to an outside
investor for an aggregate purchase price of $1,000. The Company also issued to
the purchaser of these shares of Common Stock a four year warrant to purchase
153,846 shares of Common Stock at an exercise price of $0.91 per share. The
Company paid a $70 sales commission to Ladenburg Thalmann & Co., Inc., as
placement agent in connection with this offering and issued a warrant to
purchase 107,692 shares of Common Stock at an exercise price of $0.72.
In April 2001, the Company sold to an outside investor a $500 principal amount
note convertible into its Common Stock bearing interest at a rate of 8% per
year. Principal and accrued and unpaid interest on the note are due and payable
on April 1, 2002. Prior to maturity, the note is convertible, at any time the
Company's Common Stock price exceeds $1.00 per share, into a number of shares
equal to 95% of the average of the average high and low sales price of a share
of the Company's Common Stock on the Nasdaq SmallCap Market (the "Average Daily
Price") over the five trading days prior to conversion. After the maturity date,
outstanding principal and accrued interest may be converted at the option of the
holder at the lesser of (i) 115% of the closing price of a share of the
Company's Common Stock on the maturity date and (ii) 95% of the average of the
Average Daily Price over the five trading days immediately preceding the date on
which a notice of conversion is delivered to the Company.
In connection with the issuance of the convertible note, the Company also issued
a warrant to the noteholder to purchase up to 350,000 shares of Common Stock at
an exercise price of $0.75 per share.
During the third quarter of 2000, the Company entered into a licensing agreement
with ZipFinancial, Inc., a national alliance of community banks, which had
selected SEDONA's Intarsia(TM) application solution to expand its online
marketing and Internet banking offerings. Receipts under this agreement and
certain reimbursements of SEDONA expenses total $85. During the fourth quarter
of 2000, the Company entered into an agreement to loan up to $1,000 to
ZipFinancial upon ZipFinancial reaching certain sales milestones and committing
to meet certain minimum payments pursuant to the licensing agreement. In January
2001, SEDONA lent $475 to ZipFinancial under this agreement, which amount is
secured by ZipFinancial's intellectual property. In February 2001, ZipFinancial
announced it was
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ceasing operations and liquidating its assets. It is unknown what the
probability of collection of the $475 from Zip Financial, Inc. is, or the value
of any of the collateral and, accordingly, the Company recorded a charge in the
first quarter of 2001 to reserve for the entire $475.
The Company believes that the proceeds from these sales of securities, funds
generated from operations and/or additional sales of securities will be
sufficient to meet the Company's working capital requirements for 2001. The
Company has incurred substantial losses from operations of approximately $10,811
and $6,237 during the years ended December 31, 2000 and 1999, respectively.
Losses from operations are continuing through 2001 and the Company anticipates
that it will require additional financing in 2001, which may not be readily
available. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company's plans include expanding the sale and
acceptance of its business solutions through its strategic partnerships;
targeting new application solutions; continuation of aggressive marketing of its
proprietary product through multiple sales distribution channels; and
maintaining leadership of its application, and seeking additional debt or equity
financing.
Inflation
Although inflation has resulted in an increase in certain operating costs during
the past three years, management believes it has not had a material effect on
the Company's results of operations or financial condition.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
13
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
The following table sets forth-certain information regarding the directors,
executive officers and key employees of the Company.
Name Age Position
- ---- --- --------
Directors and
Executive Officers
Laurence L. Osterwise 53 Chairman of the Board
R. Barry Borden 61 Vice Chairman of the Board
Marco A. Emrich 48 CEO, President and Director
Michael A. Mulshine 61 Secretary and Director
David S. Hirsch 65 Director
Jack Pellicci 62 Director
James C. Sargent 85 Director
Robert M. Shapiro 55 Director
James T. Womble 57 Director
William K. Williams 59 Vice President, Chief Financial Officer
Key Employees
Alyssa S. Dver 36 Vice President, Chief Marketing Officer
Michael Crofts 46 Vice President, Sales
Robert Griffin 54 Vice President, Strategic Alliances and
Partnerships
Timothy A. Rimlinger 37 Vice President, Engineering
Jim Henley 54 Vice President, Professional Services
All Directors hold office until the next Annual Meeting of the Shareholders of
the Company and until their successors are elected and qualified.
All officers serve at the discretion of the Board of Directors subject to the
terms of their employment agreements.
The business experience, principal occupation and employment of the directors
and executive officers have been as follows:
Laurence L. Osterwise was appointed Chairman of the Board in September 1999,
after having been Chief Executive Officer, President and a Director of the
Company since April 1997. Mr. Osterwise came to the Company in November 1996 as
its Chief Operating Officer and President of SEDONA GeoServices, Inc., a
subsidiary. Before joining the Company, he was President of the Communications
Division of General Instrument Corporation, now a division of Motorola. Prior to
joining General Instrument, Mr. Osterwise was with IBM Corporation for 25 years,
where he held positions as President of Production Industries, U.S. Vice
President and Corporate
14
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
(continued)
Director of Market Driven Quality, and IBM Rochester General Manager and
Director of Application Business Systems. Under his leadership, IBM Rochester
was awarded the Malcomb Baldridge National Quality Award. Mr. Osterwise received
a BS in Mathematics from Duke University in 1969 and an MS in Computer Sciences
from Syracuse University in 1973.
R. Barry Borden, Vice Chairman of the Board since September 1999, was Chairman
from June 1998 to September 1999 and has been a Director of the Company since
June 1996. He has founded and managed businesses in the computer hardware and
software industry for the past 30 years. He currently serves as President of LMA
Group, a management consulting firm he founded in 1984. He also serves as
Executive Chairman of TradeAccess Corporation of Boston, MA, a supplier of
enterprise software.
From 1997 until 2001, Mr. Borden served as President of Broadbeam Corporation of
Princeton, NJ, a supplier of software for wireless data communications. Prior to
that he served as Chairman and CEO of Mergent International, a supplier of
software for data security on PC desktops and enterprise wide networks. Mr.
Borden also serves on the Board of Directors of FASTNET Corporation, an Internet
service provider, and AM Communications, a provider of technology for managing
and monitoring of broadband systems. From 1968 to 1980, Mr. Borden was the
founder, President and CEO of Delta Data Systems, a CRT Terminal manufacturer,
and from 1981 to 1984 he was founder, Chairman and CEO of Franklin Computer
Corp., a manufacturer of microcomputers. In 1989, he served as President and CEO
of Cricket Software, Inc., a supplier of graphics software. Mr. Borden received
a BSEE degree from the University of Pennsylvania in 1961.
Marco A. Emrich has been Chief Executive Officer, President and a Director of
the Company since September 1999. He has over 20 years of software industry
experience. Most recently, he served as President and CEO of Cambridge-based
e-commerce application service provider Empresa Inc. Prior to joining Empresa
Inc., Mr. Emrich was President, CEO and Chairman of CenterLine Software, Inc.,
where he created and launched a web-based application that enables businesses to
monitor, manage and report on network-centric or multi-tier distributed business
applications. Prior to CenterLine, he held positions as Senior Director of
Cincom Systems, Inc.'s Advanced Technology Group and Manager of NAS Information
Network Technology Group at Digital Equipment Corporation. Mr. Emrich holds a
Bachelor's degree in Electrical Engineering with specialization in Systems
Engineering from Pontifical Catholic University of Rio De Janeiro, Brazil.
Michael A. Mulshine has been a Director and Secretary of the Company since May
1985 and has been associated with the Company on a management consulting basis
since 1979. He has been the President of Osprey Partners, a management
consulting firm, since 1977. In addition, he is a Director of VASCO Data
Security International, Inc., a global provider of enterprise-wide security
solutions that support e-business and e-commerce. Mr. Mulshine received a BSEE
degree from Newark College of Engineering in 1961.
David S. Hirsch, a Director of the Company since January 1992, retired in 1991
from Schroder & Co., Incorporated and its predecessor firms where he was a
principal during the five years preceding his retirement. Mr. Hirsch received a
BA degree from Cornell University in 1957 and a MBA degree from Harvard
University in 1959.
Jack A. Pellicci, a Director of the Company since October 1996, is Group Vice
President of Oracle Service Industries where he leads the Global Business
Development Group. He is responsible for generating new business for six
industries: Public Sector, Financial Services, Communications, Utilities, Health
and Higher Education in over 140 countries. Prior to joining Oracle in 1992, Mr.
Pellicci retired as a Brigadier General with 30 years in the U.S. Army, where he
was the Commanding General of the
15
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
(continued)
Personnel Information Systems Command. Mr. Pellicci is a member of the Board of
Directors of the Open Geospatial Consortium (OGC), a worldwide organization
leading the initiative for interoperability of geospatial information and
location based services. He serves as a Director on the Boards of the Fairfax
County Chamber of Commerce, the United Services Organization (USO) and is a
corporate fellow of the National Governors Association. He also serves on the
Board of Directors of eShare Communications, a leading provider of electronic
Customer Relationship Management (eCRM) collaboration solutions. He is a
graduate of the U.S. Military Academy at West Point with a Bachelor of
Engineering degree, and received a Master of Mechanical Engineering degree from
Georgia Institute of Technology. He is also a member of the Board of Directors
of OGETA Services, the Fairfax County Chamber of Commerce and the United
Services Organization (USO). He currently serves as a Corporate Fellow for the
National Governors Association.
James C. Sargent, a Director of the Company since January 1992, was Counsel to
the law firm of Opton, Handler, Gottlieb, Fieler & Katz, and was counsel to Abel
Noser Corporation, a member of the New York Stock Exchange. He was previously a
partner and counsel to Whitman Breed Abbott & Morgan, LLP, now Winston and
Strawn. He was New York Regional Administrator from 1955 to 1956, and
Commissioner of the Securities and Exchange Commission from 1956 to 1960.
Robert M. Shapiro, a Director of the Company since November 1998, is Vice
President of Global Sales and Business Development for Autoweb.com, a major
online automotive retailer. From 1995 to 1997 Mr. Shapiro was Senior Vice
President of R. L. Polk & Company, a privately owned $400 million global
information services company, where he directed worldwide marketing, product
management, and business development activities for all software products sold
to the transportation, insurance, finance, retail, fundraising, and publishing
industries. Prior to joining R. L. Polk, Mr. Shapiro was Senior Vice President,
Commercial Marketing for Prodigy, where he created the first commercially viable
interactive service including product positioning and branding. He is noted as a
pioneer in building online business-to-consumer commercial sites. Prior to
joining Prodigy, Mr. Shapiro gained his early marketing and sales experience
during seventeen years with IBM Corporation and Proctor & Gamble. Mr. Shapiro
served on the Board of Directors of Blackburn Polk Marketing Services of Canada,
and Carfax, USA. He received his BA degree from the University of San Diego in
1967.
James T. Womble, a Director of the Company since April 1999, has been a Director
of Acxiom Corporation since 1975, and is Division Leader of its Services
Division. This Division has locations in Conway and Little Rock, Arkansas,
Chicago, Atlanta, and Memphis and manages relationships around the world with
Acxiom's clients in the credit card, retail banking and retail industries. Prior
to joining Acxiom, Mr. Womble worked for IBM as a systems engineer and marketing
representative. He holds a degree in civil engineering from the University of
Arkansas.
William K. Williams was appointed Vice President and Chief Financial Officer in
April 1998. Prior to his joining the Company, Mr. Williams worked as an
independent financial consultant with emerging growth companies, served as Vice
President of Business Development for a Fortune 500 company and held various
financial management positions at DuPont, including four years as Director of
Finance for Japan operations. Mr. Williams joined DuPont upon earning an MBA
degree in Finance at the University of Maryland.
16
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
(continued)
Alyssa Dver was appointed Vice President and Chief Marketing Officer upon
joining the Company in April 2000. Ms. Dver founded Lead Factory, Inc., a
Boston-based start-up for web-based lead tracking solutions. Prior to founding
Lead Factory, she was Vice President of Marketing and Customer Care for Empresa,
Inc., a company delivering electronic commerce solutions for financial services
and e-tailing organizations. She previously held senior management positions at
CenterLine Software, Cincom Systems and Digital Equipment Corporation. She has a
B.S. degree in Economics from The Wharton School, University of Pennsylvania.
Michael Crofts was appointed Vice President of Sales in February 2001 and has
more than 14 years of experience in the banking software industry, having joined
SEDONA in March 1999. Prior to joining SEDONA, he was Vice President at The John
H. Harland Company, where he sold database marketing software and direct
marketing consulting services in the southwest United States and Canada. Mr.
Crofts was also Managing Director for Latin America at Olivetti North America,
where he restructured and managed a bank branch automation software distribution
network throughout Latin America and the Caribbean. He holds a Juris Doctor from
Gonzaga University School of Law and a Bachelor of Arts from the University of
Idaho.
Robert Griffin joined SEDONA in 1997 and was appointed Vice President of
Strategic Alliances and Partnerships in February 2001. In that role, he is
responsible for developing and leveraging partnerships, which create new
marketing and sales distribution channels for SEDONA's CRM solution. Prior to
joining SEDONA, he worked 28 years at IBM Corporation, where he directed a
variety of aspects of marketing and sales, including market and brand
management, business partner recruiting and support, and field sales management.
Mr. Griffin achieved widespread recognition for his work in introducing the
first and second generation of AS/400 systems to the worldwide marketplace. Mr.
Griffin attended DePaul University and the University of Iowa and majored in
Finance and Pre-Law.
Timothy Rimlinger was appointed Vice President of Engineering in July 2000 and
is responsible for the design, implementation and delivery of all SEDONA's
products. He served as Director of Technology Development since joining the
Company in January 1996. Before joining the Company, he was Senior Development
Engineer at Lockheed Martin. Prior to that, he was Senior Development Engineer
for GE Aerospace. He received his BS degree in Electrical Engineering from
Pennsylvania State University and his MS in Electrical Engineering from
Villanova University.
Jim Henley was appointed Vice President of Professional Services in October
2000. Mr. Henley is responsible for identifying, partnering, and managing
services partner's relationships, which augments and complements SEDONA's
services offerings. Mr. Henley has over thirty years of experience in the
computer and banking industries and has been directly involved in database
implementation, customization, and services bureau operations since 1993. Prior
to joining SEDONA, Mr. Henley was Business Unit Leader for the Acxiom Solvitur
CIMS. Prior to Acxiom, he was Implementation and Customization Director at
DeLuxe MarketWise and Worth Information Treasury Services Corporation. He was
also Vice President of Firstar Bank in Cedar Rapids, Iowa. Mr. Henley holds a
degree from the Stonier Graduate School of Banking.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information under the caption "Compensation of Executive Officers and Directors"
in the Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Company's proxy statement for the 2000 Annual Meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Company's proxy statement for the 2000 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a) 1 and 2 Financial Statements and Schedules.
See "Index to Financial Statements and Schedule" on F-1.
(b) Reports on Form 8-K
April 25, 2000 and amended June 23, 2000
August 7, 2000
August 31, 2000
November 28, 2000
(c) Exhibits
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K. Where indicated by footnote, exhibits which have been previously
filed are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parenthesis.
1.1 Placement Agent Agreement with Ladenburg Thalmann & Co., Inc., dated
January 24, 2000 (1) (Exhibit 1.1)
1.2 Amendment dated March 8, 2000 to Placement Agent Agreement with
Ladenburg Thalmann & Co., Inc. (1) (Exhibit 1.2)
3.1 Articles of Incorporation (2) (Exhibit 3.1)
3.2 Bylaws (2) (Exhibit 3.2)
3.3 Amendment to Articles of Incorporation (3)
4.1 Statement of Designation of Class A, Series F Convertible Preferred
Stock (4) (Exhibit 4.0)
4.2 Certificate of Designations, Preferences and Rights of Class A, Series
H Preferred Stock (5) (Exhibit 4.1)
4.3 5% Convertible Debenture due March 22, 2001 (8) (Exhibit 99.3)
4.4* 8% Convertible Note due April 1, 2002
10.1 Series F Convertible Preferred Stock and Warrants Purchase Agreement,
dated May 24, 1999, by and between the Company, Oscar Tang,
individually, and The Tang Fund (6) (Exhibit 10.2)
10.2 Form of Warrant to purchase shares of Common Stock of the Company
issued to the investors signatory to the Series G Convertible Preferred
Stock and Warrants Purchase Agreement (6) (Exhibit 10.4)
18
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
10.3 Series H Convertible Preferred Stock and Warrants Purchase Agreement,
dated May 5, 2000, by and between the Company and Acxiom Corporation
(5) (Exhibit 10.1)
10.4 Warrant to purchase shares of Common Stock of the Company issued to
Acxiom Corporation (5) (Exhibit 10.2)
10.5 Asset Purchase and Sale Agreement between Acxiom Corporation and the
Company, dated April 9, 2000 (7) (Exhibit 2)
10.6* Stock Purchase Agreement between Roseworth Group Limited and the
Company, dated August 22, 2000
10.7* Stock Purchase Warrant issued to Roseworth Group Limited, dated August
22, 2000
10.8* Warrant issued to Ladenburg Thalmann & Co., Inc., dated August 22, 2000
10.9* Stock Purchase Agreement between Roseworth Group Limited and the
Company, dated October 19, 2000
10.10* Stock Purchase Warrant issued to Roseworth Group Limited, dated October
23, 2000
10.11* Warrant issued to Ladenburg Thalmann & Co., Inc., dated October 23,
2000
10.12 Convertible Debentures and Warrants Purchase Agreement, dated November
22, 2000 (8) (Exhibit 99.2)
10.13 Commitment Warrant, dated November 22, 2000 (8) (Exhibit 99.4)
10.14 Additional Warrant, dated November 22, 2000 (8) (Exhibit 99.5)
10.15 Warrant issued to Ladenburg Thalmann & Co., Inc., dated November 22,
2000 (8) (Exhibit 99.6)
10.16* Stock Purchase Agreement between Cambois Finance Inc. and the Company,
dated December 5, 2000
10.17* Stock Purchase Warrant issued to Cambois Finance Inc., dated December
5, 2000
10.18* Warrant issued to Ladenburg Thalmann & Co., Inc., dated December 5,
2000
10.19* Stock Purchase Agreement between AMRO International S.A. and the
Company, dated January 23, 2001
10.20* Stock Purchase Warrant issued to AMRO International S.A., dated January
23, 2001
10.21* Warrant issued to Ladenburg Thalmann & Co., Inc., dated January 23,
2001
10.22 Lease between Teachers Insurance and Annuity Association and the
Company (9) (Exhibit 99.1)
10.23* Finder's Fee Arrangement between Dutchess Advisors, Ltd. and the
Company, dated February 1, 2001
19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
10.24# SEDONA Corporation 1992 Long Term Incentive Plan (3) (Exhibit 2.1 -
Annex E)
10.25# 2000 Incentive Stock Plan (10) (Appendix A)
10.26# 2000 Employee Stock Purchase Plan (10) (Appendix B)
10.27# Employment Agreement, dated September 15, 1999, between the Company and
Marco A. Emrich (11) (Exhibit 10.1)
10.28*# Employment Agreement, dated January 1, 2000, between the Company and
William K. Williams
10.29 Asset Purchase Agreement between Colortrac, Inc. and SEDONA
Corporation, dated September 17, 1999 (13) (Exhibit 2.0)
10.30* Shareholder/Investor Relations Compensation Agreement between the
Company and Osprey Partners, dated January 3, 1997, with amendments
dated January 27, 2000 and December 13, 2000
10.31* Finder's Fee Agreement between the Company and Osprey Partners, dated
February 24, 1999
10.32* Disbursement Agreement between the Company and ZipFinancial.com, Inc.,
dated December 29, 2000
10.33* Promissory Note payable to the Company by ZipFinancial.com, Inc., dated
December 29, 2000
10.34* Security Agreement between the Company and ZipFinancial.com, Inc.,
dated December 29, 2000
10.35* Warrant issued to Acxiom Corporation dated April 4, 2001
23.1* Consent of Ernst & Young, LLP
24.1 Power of attorney (included on the signature page to this Form 10-K)
* Filed herewith.
# Executive Compensation Plans and Arrangements.
20
(1) Filed as an Exhibit to the Registration Statement on Form S-3, filed
May 23, 2000 (File No. 333-37678).
(2) Filed as an Exhibit to the Company's Current report on Form 8-K, dated
June 15, 1992.
(3) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
(4) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1999.
(5) Filed as an Exhibit to the Registration Statement on Form S-3 filed
June 5, 2000 (File No. 333-38578).
(6) Filed as an Exhibit to the Registration Statement on Form S-3 filed
April 10, 2000 (File No. 333-34412).
(7) Filed as an Exhibit to the Current Report on Form 8-K filed April 24,
2000.
(8) Filed as an Exhibit to the Current Report on Form 8-K filed November
28, 2000.
(9) Filed as an Exhibit to the Current Report on Form 8-K filed August 31,
2000.
(10) Filed as an Appendix to the Company's Definitive Proxy Statement for
the 2000 Annual Meeting of Shareholders filed May 17, 2000.
(11) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1999.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
(13) Filed as an Exhibit to the Current Report on Form 8-K filed October 4,
1999.
21
SIGNATURES
Pursuant to the requirements of Sections 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.
SEDONA CORPORATION
April 17, 2001 /S/ Marco A. Emrich
- ---------------- -------------------------------------
DATE Marco A. Emrich
CHIEF EXECUTIVE OFFICER AND 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, in
the capacities and on the dates indicated.
Each person in so signing also makes and constitutes Laurence L. Osterwise,
Chairman of the Board of Directors, his true and lawful attorney-in-fact, in his
name, place and stead, to execute and caused to be filed with the Securities and
Exchange Commission, any or all amendments to this report.
Signatures
- ----------
BY /S/ Laurence L. Osterwise Date April 17, 2001
----------------------------------------- ---------------------
Chairman of the Board of Directors
BY /S/ R. Barry Borden Date April 17, 2001
----------------------------------------- ---------------------
R. Barry Borden
Vice Chairman of the Board of Directors
BY /S/ Marco A. Emrich Date April 17, 2001
----------------------------------------- ---------------------
Chief Executive Officer and President
BY /S/ William K. Williams Date April 17, 2001
----------------------------------------- ---------------------
Chief Financial Officer and Vice President
Principal Financial and Accounting Officer
BY /S/ Michael A. Mulshine Date April 17, 2001
----------------------------------------- ---------------------
Michael A. Mulshine
Director and Secretary
BY /S/ David S. Hirsch Date April 17, 2001
----------------------------------------- ---------------------
David S. Hirsch
Director
BY /S/ Jack Pellicci Date April 17, 2001
----------------------------------------- ---------------------
Jack Pellicci
Director
BY /S/ James C. Sargent Date April 17, 2001
----------------------------------------- ---------------------
James C. Sargent
Director
BY /S/ Robert M. Shapiro Date April 17, 2001
----------------------------------------- ---------------------
Robert M. Shapiro
Director
BY /S/ James T. Womble Date April 17, 2001
----------------------------------------- ---------------------
James T. Womble
Director
22
Index to Financial Statements and Schedule
Contents
Report of Independent Auditors.............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 1999..............F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2000....................F-4
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2000....................F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2000....................F-9
Notes to Consolidated Financial Statements................................F-11
All other schedules have been omitted because they are inapplicable, not
required, or the required information is included elsewhere in the financial
statements and notes thereto.
F-1
Report of Independent Auditors
Board of Directors and Stockholders
SEDONA Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of SEDONA
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. The 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. Those standards require that we plan and perform our
audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SEDONA
Corporation and subsidiaries at December 31, 2000 and December 31, 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that SEDONA
Corporation will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred substantial operating losses, has
negative working capital and anticipates that it will require additional debt
and/or equity financing in 2001, which may not be readily available. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans relating to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
March 30, 2001
Philadelphia, Pennsylvania
F-2
SEDONA Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31
2000 1999
---------------------
Assets
Current assets:
Cash and cash equivalents $2,189 $ 893
Restricted cash 105 --
Accounts receivable, net of allowance for doubtful accounts of $102 566 --
and $0
Prepaid expenses and other current assets 503 91
---------------------
Total current assets 3,363 984
Property and equipment, net of accumulated depreciation
and amortization 733 377
Restricted cash 383 --
Software development costs, net 2,299 660
Purchased software, net 1,660 --
Non-current assets - other 30 --
Net assets of discontinued operations -- 183
---------------------
Total non-current assets 5,105 1,220
---------------------
Total assets 8,468 $2,204
=====================
Liabilities and stockholders' equity Current liabilities:
Accounts payable 602 134
Accrued expenses and other current liabilities 304 374
Dividend payable 184 139
Deferred revenue 562 24
Current maturities of long-term debt 37 51
Short-term debt - debenture 2,663 --
---------------------
Total current liabilities 4,352 722
Long-term debt, less current maturities 1,025 51
---------------------
Total long-term liabilities 1,025 51
---------------------
Total liabilities 5,377 773
Stockholders' equity:
Class A convertible preferred stock
Authorized shares - 1,000,000 (liquidation preference $3,000
and $5,347)
Series A, par value $2.00, Issued and outstanding 500,000 shares 1,000 1,000
Series B, par value $2.00, Issued and outstanding shares - none and
1,000 in 2000 and 1999, respectively -- 2
Series F, par value $2.00, Issued and outstanding shares - 780 and
1,000 in 2000 and 1999, respectively 2 2
Series H, par value $2.00, Issued and outstanding shares - 1,500
and none in 2000 and 1999, respectively 3 --
(continued)
F-3
SEDONA Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(continued) December 31
2000 1999
-------------------------
Common stock, par value $0.001
Authorized shares - 50,000,000, Issued and outstanding shares -
31,225,442 and 24,086,450 in 2000 and 1999, respectively 31 24
Additional paid-in-capital 45,808 33,527
Subscription receivable-related party 0 (53)
Accumulated deficit (43,753) (33,071)
-------------------------
Total stockholders' equity 3,091 1,431
-------------------------
Total liabilities and stockholders' equity $ 8,468 $ 2,204
=========================
See accompanying notes.
F-4
SEDONA Corporation and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
At December 31,
--------------------------------------------
2000 1999 1998
--------------------------------------------
Revenues:
Product licenses $ 700 $ -- $ --
Services 1,087 244 $ 15
--------------------------------------------
Total revenues 1,787 244 15
Cost of revenues
Product licenses 1,129 -- --
Services 1,767 -- --
--------------------------------------------
Total cost of revenues 2,896 204 387
--------------------------------------------
Gross profit (loss) (1,109) 40 (372)
Expenses:
General and administrative 3,894 2,084 2,447
Sales and marketing 5,258 919 881
Research and development 458 346 239
--------------------------------------------
Total operating expenses 9,610 3,349 3,567
--------------------------------------------
Income/(loss) from operations (10,719) (3,309) (3,939)
Other income (expense):
Interest income 245 80 122
Interest expense (343) (35) (53)
Other (9) -- (9)
--------------------------------------------
Total other income (expense) $ (107) 45 60
--------------------------------------------
Loss from continuing operations before (10,826)
provision for income taxes (3,264) (3,879)
Income taxes -- -- --
--------------------------------------------
Loss from continuing operations (10,826) (3,264) (3,879)
Income /(loss) from discontinued operations 144 (2,973) (1,633)
--------------------------------------------
Net loss from continuing and discontinued (10,682)
operations (6,237) (5,512)
Preferred stock dividends (889) (601) (419)
Preferred stock issuance charges -- -- (1,173)
--------------------------------------------
Net loss applicable to Common Stockholders (11,571) ($ 6,838) ($ 7,104)
============================================
Basic and diluted net loss per share from
continuing operations applicable to common (.42) $ $ (0.28)
shares (0.18)
Basic and diluted net loss per share from
discontinued operations applicable to -- $ $ (0.08)
common shares (0.13)
--------------------------------------------
(.42) $ (0.31) $ (0.36)
============================================
Basic and diluted weighted average common shares
outstanding 27,680,785 22,307,342 19,497,493
============================================
See accompanying notes.
F-5
SEDONA Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
CLASS A PREFERRED
--------------------------------------------------------------------------
Stock Series A Stock Series B Stock Series D Stock Series E
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------
Balance, December 31, 1997 500,00 $ 1,000 $ - - 2,990 $ 2,990 $ - -
--------------------------------------------------------------------------
Stock warrants/options issued for
consulting services - - - - - - - -
Issuance of preferred stock - - - - - - 5,200 5,200
Conversion of debt into Common Stock - - - - - - - -
Conversion of preferred stock into Common Stock - - - - (2,990) (2,990) (853) (853)
Exercise of Common Stock options - - - - - - - -
Exercise of Common Stock warrants - - - - - - - -
Cancellation of Common Stock - - - - - - - -
Expenses incurred related to issuance of preferred
stock - - - - - - - -
Preferred stock dividends - - - - - - - -
Repayment of notes receivable - - - - - - - -
Net loss, year ended December 31, 1998 - - - - - - - -
--------------------------------------------------------------------------
Balance, December 31, 1998 500,000 1,000 - - - - 4,347 4,347
Stock warrants/options issued for consulting
services - - - - - - - -
Issuance of preferred stock - - 1,000 2 - - - -
Redemption on preferred stock with cash - - - - - - (2,313) (2,313)
Conversion of preferred stock into Common Stock - - - - - - (2,034) (2,034)
Exercise of Common Stock options - - - - - - - -
Exercise of Common Stock warrants - - - - - - - -
Issuance of Common Stock - - - - - - - -
Expenses incurred related to issuance of preferred
stock - - - - - - - -
Expenses incurred related to issuance of Common
Stock - - - - - - - -
Preferred stock dividends - - - - - - - -
Net loss, year ended December 31, 1999 - - - - - - - -
--------------------------------------------------------------------------
Balance, December 31, 1999 500,000 1,000 1,000 2 - - -
Stock warrants/options issued for consulting
services - - - - - - - -
Issuance of preferred stock - - - - - - - -
Redemption of preferred stock with cash - - - - - - - -
Conversion of preferred stock into Common Stock - - (1,000) (2) - - - -
Exercise of Common Stock options - - - - - - - -
Exercise of Common Stock warrants - - - - - - - -
Issuance of Common Stock - - - - - - - -
Expenses incurred related to issuance of preferred
stock - - - - - - - -
Expenses incurred related to issuance of Common
Stock - - - - - - - -
Preferred stock dividends - - - - - - - -
Net loss, year ended December 31, 2000 - - - - - - - -
--------------------------------------------------------------------------
Balance, December 31, 2000 500,00 $1,000 $ - - $ - - $ - -
==========================================================================
See accompanying notes.
F-6
SEDONA Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
CLASS A PREFERRED
------------------------------------------------------------
Stock Series F Stock Series G Stock Series H
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------
Balance, December 31, 1997 - - - - - -
------------------------------------------------------------
Stock warrants/options issued for consulting services - - - - - -
Issuance of preferred stock - - - - - -
Conversion of debt into Common Stock - - - - - -
Conversion of preferred stock into Common Stock - - - - - -
Exercise of Common Stock options - - - - - -
Exercise of Common Stock warrants - - - - - -
Cancellation of Common Stock - - - - - -
Expenses incurred related to issuance of preferred stock - - - - - -
Preferred stock dividends - - - - - -
Repayment of notes receivable - - - - - -
Net loss, year ended December 31, 1998 - - - - - -
------------------------------------------------------------
Balance, December 31, 1998 - - - - - -
Stock warrants/options issued for consulting services - - - - - -
Issuance of preferred stock 1,000 2
Redemption on preferred stock with cash - - - - - -
Conversion of preferred stock into Common Stock - - - - - -
Exercise of Common Stock options - - - - - -
Exercise of Common Stock warrants - - - - - -
Issuance of Common Stock - - - - - -
Expenses incurred related to issuance of preferred stock - - - - - -
Expenses incurred related to issuance of Common Stock
Preferred stock dividends - - - - - -
Net loss, year ended December 31, 1999 - - - - - -
------------------------------------------------------------
Balance, December 31, 1999 1,000 2
Stock warrants/options issued for consulting services - - - - - -
Issuance of preferred stock - - 3,000 6 1,500 3
Redemption of preferred stock with cash - - (1,725) (4) - -
Conversion of preferred stock into Common Stock (220) 0 (1,275)(2) - -
Exercise of Common Stock options - - - - - -
Exercise of Common Stock warrants - - - - - -
Issuance of Common Stock - - - - - -
Expenses incurred related to issuance of preferred stock - - - - - -
Expenses incurred related to issuance of Common Stock - - - - - -
Preferred stock dividends - - - - - -
Net loss, year ended December 31, 2000 - - - - - -
------------------------------------------------------------
Balance, December 31, 2000 780 $2 $ - 1,500 $ 3 -
============================================================
See accompanying notes.
F-7
SEDONA Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
------------------------------------------------------------------------
Additional Notes
Common Stock Paid-In Accumulated Receivable,
Shares Amount Capital Deficit Related
Parties
------------------------------------------------------------------------
Balance, December 31, 1997 18,070,319 18 22,155 (21,322) (1,327)
Stock warrants/options issued for consulting services - - 149 - -
Issuance of preferred stock - - - - -
Conversion of debt into Common Stock 139,246 - 324 - -
Conversion of preferred stock into Common Stock 2,198,321 2 3,998 - -
Exercise of Common Stock options 68,333 - 68 - -
Exercise of Common Stock warrants 143,750 - 156 - -
Cancellation of Common Stock (15,000) - - - -
Expenses incurred related to issuance of preferred stock - - (200) - -
Preferred stock dividends - - (419) - -
Repayment of notes receivable (677,180) - (1,254) - 1,274
Net loss, year ended December 31, 1998 - - - (5,512) -
-------------------------------------------------------------------------
Balance, December 31, 1998 19,927,789 20 24,977 (26,834) (53)
Stock warrants/options issued for consulting services - - 95 - -
Issuance of preferred stock - - 1,996 - -
Redemption on preferred stock with cash - - - - -
Conversion of preferred stock into Common Stock 1,271,832 1 2,171 - -
Exercise of Common Stock options 181,666 - 146 - -
Exercise of Common Stock warrants 1,441,919 2 2,259 - -
Issuance of Common Stock 1,263,244 1 2,525 - -
Expenses incurred related to issuance of preferred stock - - (30) - -
Expenses incurred related to issuance of Common Stock - - (11) -
Preferred stock dividends - - (601) - -
Net loss, year ended December 31, 1999 - - - (6,237) -
-------------------------------------------------------------------------
Balance, December 31, 1999 24,086,450 24 33,527 (33,071) (53)
Stock warrants/options issued for consulting services - - 123 - -
Issuance of preferred stock - - 4,491 - -
Warrants issued in conjunction with preferred stock - - 550 - -
Discount on preferred stock issuance - - (200) - -
Warrants issued in conjunction with debenture issue - - 472 - -
Redemption of preferred stock with cash - - (1,725) - -
Conversion of preferred stock into Common Stock 1,431,626 2 139 - -
Exercise of Common Stock options 309,347 - 726 - -
Exercise of Common Stock warrants 2,938,501 3 6,001 - -
Issuance of Common Stock 2,459,498 2 2,998 - -
Expenses incurred related to issuance of preferred stock - - (195) - -
Expenses incurred related to issuance of Common Stock - - (210) - -
Preferred stock dividends - - (889) - -
Repayment of notes receivable - - - - 53
Net loss, year ended December 31, 2000 - - - (10,811) -
------------------------------------------------------------------------
Balance, December 31, 2000 31,225,442 $ 31 45,808 $ (43,882) $ 0
========================================================================
See accompanying notes.
F-8
SEDONA Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
---------------------------------------
2000 1999 1998
---------------------------------------
Operating activities
Net loss from continuing operations $(10,826) $ (3,264) $ (3,879)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,362 343 177
Provision for doubtful accounts 102 -- --
Increase inventory reserves -- -- 297
Increase impairment reserve for cost investment 140 -- --
Stock option based compensation -- 95 149
Loss on a disposition of property and equipment, net -- -- 16
Amortization of deferred financing fees and debt
discount 316 -- --
Changes in operating assets and liabilities:
Restricted cash (488) -- --
Accounts receivable (251) 5 4
Inventories -- -- (197)
Prepaid expenses and other current assets (94) 48 127
Other noncurrent assets (30) -- (2)
Accounts payable and accrued expenses 527 77 139
Deferred revenue and other 538 (148) 153
---------------------------------------
Net cash used in continuing operating activities (8,704) (2,844) (3,016)
Net income(loss) from discontinued operations 144 (2,973) (1,633)
Adjustments to reconcile income from discontinued
operations to net cash used by discontinued operations:
Cash flow related to results of discontinued operations -- 1,568 (1,064)
Loss on sale of discontinued operations -- 235 --
Other reconciling items 100 575 679
---------------------------------------
Net cash provided by/(used in) discontinued operations 244 (595) (2,018)
---------------------------------------
Net cash used in operating activities (8,460) (3,439) (5,034)
Investing activities
Purchase of property and equipment (308) (31) (231)
Proceeds from sale of property and equipment -- -- 7
Proceeds from disposal of certain assets of discontinued
operations -- 105 --
Increase in equity investment (140) -- --
Increase in capitalized software development costs (2,151) (507) (333)
---------------------------------------
Net cash used in investing activities (2,599) (433) (557)
F-9
SEDONA Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Year ended December 31
--------------------------------------------
2000 1999 1998
--------------------------------------------
Financing activities
Payment of preferred stock dividends (180) (583) (135)
Repayments of notes receivable, related parties 53 - 29
Repayments in long-term obligations (98) (29) (40)
Proceeds from issuance of preferred stock, net 2,805 1,970 5,000
Repurchase of preferred stock for cash (2,246) (2,313) -
Proceeds from the issuance of Common Stock, net 2,790 2,515 -
Proceeds from exercise of Common Stock warrants/options 6,731 2,407 225
Proceeds from issuance of short-term debenture 2,500 - -
--------------------------------------------
Net cash provided by financing activities 12,355 3,967 5,079
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,296 95 (512)
Cash and cash equivalents, beginning of year 893 798 1,310
--------------------------------------------
Cash and cash equivalents, end of year $ 2,189 $ 893 $ 798
============================================
See accompanying notes.
F-10
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Years ended December 31, 2000, 1999 and 1998
1. Accounting Policies
Description of Business
SEDONA Corporation develops, markets, services and supports enterprise scale
Internet Customer Relationship Management (CRM) application solutions that
enable small and mid-sized businesses to optimize their return on customer
relationships by personalizing the interaction with their customers and thereby
ensuring that their sales and marketing efforts are strategically managed
towards enhancing their customer acquisition, intimacy, satisfaction and
retention capabilities.
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments that might
be necessary should the Company be unable to continue in existence. The Company
has incurred substantial losses from operations of approximately $10,682 and
$6,237 during the years ended December 31, 2000 and 1999, respectively. Losses
from operations are continuing through 2001 and the Company anticipates that it
will require additional financing in 2001, which may not be readily available.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company's plans include expanding the sale and acceptance
of its business solutions through its strategic partnerships; targeting new
application solutions; continuation of aggressive marketing of its proprietary
product through multiple sales distribution channels; and maintaining leadership
of its application, and seeking additional debt or equity financing.
Principles of Consolidation
The Company's consolidated financial statements include the accounts of its
wholly owned subsidiaries, SEDONA(R)GeoServices, Inc., Tangent Imaging Systems
and Technology Resource CentersSM, Inc. During 1999 the Company discontinued and
subsequently sold the operations related to Tangent Imaging Systems, Inc. and
Technology Resource Centers, Inc., two wholly-owned subsidiaries. The financial
condition and results from operations of these entities are reflected in the
financial statements as discontinued operations for all years presented. See
Note 2. All significant intercompany accounts and transactions have been
eliminated.
F-11
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
respective assets which range from three to seven years.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents, accounts receivable and notes receivable. The
Company's policy is to limit the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as being
creditworthy. Concentration of credit risk, with respect to accounts and notes
receivable, is limited due to the Company's credit evaluation process. The
Company does not generally require collateral from its customers. The Company's
customers consist primarily of corporate entities.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts and notes
receivable, accounts payable and short-term debt approximate fair value because
of the immediate or short-term maturity of these financial instruments.
Software Development and Purchased Software Costs
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." All costs incurred in the
research and development of new software products are expensed as incurred until
technological feasibility has been established. The costs incurred for testing
and coding of
F-12
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
the new software products are capitalized. Amortization of such costs is the
greater of the amount capitalized using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues of that product or (b) the straight-line method over the remaining
estimated economic life of the product not to exceed three years. Amortization
commences when the product is available for general release to customers. The
company capitalizes costs related to purchased software used for developmental
purposes and amortizes such value over three years consistent with the
amortization and capitalization policy discussed above related to capitalized
software costs.
The Company periodically reviews for impairment the carrying value of both
internally developed and purchased software costs. The Company will record an
impairment in its operating results if the carrying value exceeds the future
estimated undiscounted cash flows of the related assets.
During 2000 and 1999, the Company capitalized $2,151 and $507 of software
development costs related to the Company's business geographics software. During
2000 and 1999, this software became available for sale. Additionally, the
Company purchased $2.2 million of software in the CMS transaction and of other
developmental licenses. During 2000, 1999 and 1998, $1,066, $166, and $18 was
charged to expense relating to amortization of software development costs.
Revenue Recognition
Revenue from the sale of software licenses are recognized upon shipment of
software when persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Revenue from royalty agreements are recorded when earned. Revenue from services
are recognized as the services are performed. Revenues from application service
provider (ASP) and maintenance agreements are recognized ratably over the life
of the related contract.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax
liabilities are recognized for taxable temporary differences and deferred tax
assets are recognized for deductible temporary differences and tax loss and
credit carryforwards. A valuation allowance is established to reduce deferred
tax assets if some, or all, of such deferred tax assets are not likely to be
realized.
Net Loss Per Common Share
Basic loss per share is calculated by dividing the net loss by the weighted
average common shares outstanding for the period. Diluted earnings per share is
calculated by dividing the net loss by the weighted average common shares
outstanding plus the dilutive effect of stock options, warrants and
F-13
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
convertible securities. As the Company incurred losses in 2000, 1999 and 1998
the effect of stock options, warrants and convertible securities were
anti-dilutive and were therefore not included in the calculation of diluted
earnings per share.
Stock-Based Compensation
The Company follows APB Opinion No. 25, Accounting for Stock Issued to
Employees, ("APB 25") and the related interpretations in accounting for its
stock-based compensation plans. Note 7 includes the required disclosures and
pro-forma information provided under FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123").
Under APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying Common Stock at the date of
grant, no compensation expense is recognized.
Impact of Recent Accounting Pronouncements
During fiscal year 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition" (SAB 101). The SAB provides
examples of how the staff applies the criteria to specific fact patterns such as
bill-and-hold transactions, up-front fees when the seller has significant
continuing involvement, and contingent income. The SAB also addresses whether
revenue should be presented on a gross or net (e.g., a commission) basis for
certain transactions, such as sales on the Internet. In addition, the SAB
provides guidance on the disclosures registrants should make about their revenue
recognition policies and the impact of events and trends on revenue. The Company
adopted the provisions of SAB 101 in the fourth quarter of 2000. The adoption of
SAB 101 did not have a significant impact on the Company's results of
operations.
2. Discontinued Operations
The Company's Board of Directors decided in July, 1999 to sell the two divisions
of the Company which were not part of its realigned strategy of focusing on the
development of its Internet application solutions business. In connection with
this decision, the Company recorded $719 in charges and reserves primarily for
inventory, receivables and severance. In the third quarter 1999, the Company
completed the sale of the assets of the Technology Resource Centers to
Diversified Technologies, Inc. for a $35 note receivable
F-14
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
2. Discontinued Operations (continued)
and the sale of the Tangent Imaging Systems operation to Colortrac, Inc. was
completed for consideration of $105 in cash and assumption of $61 in
liabilities. These transactions resulted in an additional loss of $235.
Revenues from the discontinued operations were $144, $2,567 and $6,162
respectively, for the years ended December 31, 2000, 1999 and 1998.
Income/(Losses) for 2000, 1999, and 1998 were $144, $(2,973), and $(1,633)
respectively.
3. Property and Equipment
Property and equipment in continuing operations consist of the following:
December 31
2000 1999
----------------------
Machinery and equipment $ 1,004 $ 636
Equipment under capital lease 152 94
Furniture and fixtures 199 72
Leasehold improvements 64 9
Purchased software for internal use 120 76
----------------------
1,539 887
Less accumulated depreciation and amortization 806 510
----------------------
$ 733 $ 377
======================
Depreciation and amortization expense related to property and equipment and
equipment under capital lease was $296 in 2000, $177 in 1999, and $155 in 1998.
4. Long-Term Debt
Long-term debt consists of obligations with original maturities of one year or
more, as follows:
December 31
2000 1999
-------------------------
Note payable - CIMS acquisition (Note 14) $ 961 $ -
Capital lease obligations (Note 11) 101 69
Other - 33
-------------------------
1,062 102
Less current maturities 37 51
-------------------------
Long-term debt $ 1,025 $ 51
=========================
Contractual maturities of the long-term debt are as follows: 2001 - $37; 2002 -
$36; 2003 - $988; 2004 - $1; thereafter $0.
F-15
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
5. Convertible Debentures
On November 22, 2000, the Company issued a $3,000 private placement Debenture
convertible into its Common Stock. The net proceeds were approximately $2,320,
of which $2,246 was used to redeem the outstanding shares of the Series G
convertible preferred stock with the remaining net proceeds used for working
capital purposes. The Debentures are due and payable 120 days from issuance or,
at the Company's request, may be extended for subsequent 30 day periods. The
convertible Debentures bear interest quarterly in arrears on the outstanding
principal at the rate of 5% per annum. Prior to maturity, the Debentures may be
exercised at a strike price of $1.13 per share at any time the Common Stock
price exceeds $2.00. In the event that the Debentures are not paid at the time
of maturity, the actual purchase price of the convertible Debenture may be
converted at the option of the holder at the lesser of $1.41 or 85% of the
volume-weighted average price of the Company's Common Stock over the five
trading days immediately preceding the date on which a notice of conversion is
delivered to the Company. In connection with the issuance of the convertible
Debenture, the Company also issued a warrant to the Debenture holders to
purchase up to 400,000 shares of Common Stock at an exercise price of $1.37 and
a fair value of $472, which was recorded as deferred financing costs. The
Company also issued a warrant to purchase an additional 266,667 shares of
Company Common Stock at the same exercise price, which will only be exercisable
if the convertible Debenture is not paid in full within 120 days of the original
issuance. The Company also issued a warrant to purchase 167,576 shares of Common
Stock at an exercise price of $1.13 to the placement agent for this transaction.
The aggregate discount and debt issuance costs of $972 is being accreted into
interest expense over the 120 day life of the Debentures. At December 31, 2000,
$316 has been recognized as interest expense.
On March 22, 2001, the Company obtained an extension until April 22, 2001,
related to this Convertible Debenture.
6. Stockholders' Equity
Class A Convertible Preferred Stock
Series A, B, D, E, F, G and H
Class A preferred stock is issuable in various series and is convertible in
accordance with the terms of the issued series. The Board of Directors has the
authority to fix by resolution all other rights. The Class A Series A preferred
shares pay quarterly dividends at the rate of twelve percent (12%) per annum,
have cumulative rights and have a liquidation preference at the par value of the
preferred shares. Each share is convertible at the election of the holder into
one share of Common Stock at any time. Each holder has the same right to vote
each share on all corporate matters as the holder of one share of Common Stock.
During 2000, all 1,000 shares of Class A Series B convertible preferred stock
and the related accrued dividends of $88 were converted into 473,091 shares of
Common Stock.
F-16
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity (continued)
During 1998, the remaining 2,990 shares of Class A Series D convertible
preferred stock and the related accrued dividends payable of $133 were converted
into 1,672,267 of Common Stock.
During 1999, all remaining 4,347 shares of Class A Series E convertible
preferred stock and the related accrued dividends were redeemed for cash or
converted into shares of Common Stock. Of the total remaining shares, 2,034 and
related accrued dividends payable of $139 were converted to 1,271,832 shares of
Common Stock. In total, cash of $2,776 was utilized to redeem the final
remaining 2,313 shares of Class A Series E convertible preferred shares and pay
$463 in accrued dividend and redemption premium regarding the retirement.
On May 24, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Class A Series F
convertible preferred stock. After a period of 12 months from May 24, 1999
(anniversary date), the investor can convert the preferred stock to Common Stock
at the lower of: 1) $1.41 (the "Closing Price"), or 2) 100% of the Common
Stock's average last trade price during the 25 trading days preceding the
Conversion Date (the "Conversion Date Price"). In no event can the conversion
price be below $1.00. The conversion amount shall be the principal amount of the
preferred stock being converted, plus an 8% premium accruing from the closing
date to the conversion date. Mandatory conversion of the preferred stock shall
occur on the third anniversary after closing using the conversion terms
referenced above. During 2000, 220 shares of Class A Series F convertible
preferred stock and the related accrued dividends payable of $24 were converted
into 172,500 shares of Common Stock.
In February 2000, the Company closed a $3,000 private placement by issuing 3,000
shares of Series G convertible preferred stock. The then outstanding Series G
convertible preferred stock was redeemed in November 2000 in connection with the
issuance of the $3,000 principal amount Convertible Debenture.
During the remainder of 2000, all of the Class A Series G convertible preferred
stock shares and the related accrued dividends were redeemed for cash or
converted into shares of Common Stock. Of the total remaining shares, 1,275 and
related accrued dividends payable of $40 were converted to 786,035 shares of
Common Stock. In total, cash proceeds from the Debenture issue (Note 5 above) of
$2,246 were utilized to redeem the final remaining 1,725 shares of Class A
Series G convertible preferred shares and pay $519 in accrued dividends and
redemption premium.
In conjunction with the CIMS acquisition transaction completed in April 2000
(see Note 14 below), 1,500 shares of Class A Series H preferred stock with a
face value of $1,500 (book value $1,300) were issued as part of the transaction
consideration. The series H preferred stock yields 8% in semi-annual cash
dividends and is convertible at the Company's option for the first 33 months of
its 36 month life.
F-17
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity (continued)
Common Equity
On August 22, 2000 the Company sold 476,190 shares of Common Stock to an
investor for an aggregate purchase price of $1,000. The Company also issued to
the purchaser of these shares of Common Stock a four year warrant to purchase
47,619 shares of Common Stock at an exercise price of $2.96 per share. The
Company paid a $60 sales commission to Ladenburg Thalmann, as placement agent in
connection with this offering and issued a warrant to purchase 33,333 shares of
Common Stock at an exercise price of $2.38 per share.
On October 23, 2000 the Company sold 952,380 shares of Common Stock for an
aggregate purchase price of $1,000. The Company also issued to the purchaser of
these shares of Common Stock a four year warrant to purchase 95,238 shares of
Common Stock at an exercise price of $1.47 per share. The Company paid a $60
sales commission to Ladenburg Thalmann & Co., Inc., as placement agent in
connection with this offering and issued a warrant to purchase 66,667 shares of
Common Stock at an exercise price of $1.16 per share.
On December 5, 2000 the Company sold 1,030,928 shares of Common Stock to an
investor for an aggregate purchase price of $1,000. The Company also issued to
the purchaser of these shares of Common Stock a four year warrant to purchase
103,092 shares of Common Stock at an exercise price of $1.35 per share. The
Company paid a $90 sales commission to Ladenburg Thalmann, as placement agent in
connection with this offering and issued a warrant to purchase 72,165 shares of
Common Stock at an exercise price of $1.07 per share.
7. Stock Options and Warrants
Long-Term Incentive Plans
During 1992, the stockholders of the Company approved a Long-Term Incentive Plan
for the issuance of options for the purchase of up to 1,000,000 restricted
Common Stock shares in the aggregate, or such other number of shares as are
subsequently approved by the Company's stockholders. The shares, which were
related to the unexercised or undistributed portion of any terminated, expired
or forfeited award, will also be made available for distribution in connection
with future grants under the Plan. During 1997, the Plan was amended to increase
the number of options available for future grants to 3,000,000. The Long-Term
Incentive Plan provides for the granting of both incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986, and
nonqualified stock options which do not so qualify. Unless the Plan is
terminated earlier by the Board of Directors, the Plan will terminate in March
2002. At December 31, 2000, 1999 and 1998, there were -0- , 90,190 and 939,251
options available for future grant.
F-18
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
7. Stock Options and Warrants (continued)
During 2000, the stockholders of the Company approved the 2000 Incentive Stock
Option Plan (the "2000 Plan"). This plan has replaced the 1992 Long-Term
Incentive Plan (the "1992 Plan) under which no further options will be issued.
Significant changes in the 2000 Plan when compared to the 1992 Plan include;
reserving 15% of the outstanding shares for awards that may be outstanding at
any one time, rather than the 3 million shares currently set aside for issuance
throughout the life of the 1992 Plan; authorizing restricted stock, deferred
stock, stock appreciation rights, performance awards settleable in cash or
stock, and other types of awards based on stock or factors influencing the value
of stock; adding provisions so that options and other performance-based awards
will qualify for tax deductions; and, specifying obligations relating to
non-competition and proprietary information that may be imposed on optionees.
Options outstanding under the Long-Term Incentive Plan have been granted to
officers, directors, employees, and others and expire between November 2001 and
November 2010. All options were granted at or above the fair market value on the
grant date.
F-19
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
7. Stock Options and Warrants (continued)
Transactions under this Plan were as follows:
Weighted Average
Shares Exercise Price
--------------------------------------
Outstanding at December 31, 1997 1,642,359 $ 2.57
Canceled or expired (422,000) 2.94
Granted 445,250 2.22
Exercised (68,333) 1.00
--------------------------------------
Outstanding at December 31, 1998 1,597,276 $ 2.44
Canceled or expired (335,939) 2.46
Granted 1,085,000 1.71
Exercised (181,666) .80
--------------------------------------
Outstanding at December 31, 1999 2,164,671 $ 2.19
Canceled or expired (165,499) 2.75
Granted 807,000 3.58
Exercised (309,347) 2.58
--------------------------------------
Outstanding at December 31, 2000 2,496,825 $ 2.59
======================================
Exercise Price Weighted Average
Options Range Per Share Exercise Price
------------------ -------------------- ------------------
Exercisable at year-end
1998 1,003,944 $0.47 to $4.00 $ 2.36
1999 1,051,089 $1.00 to $4.00 $ 2.61
2000 1,143,381 $1.16 to $9.13 $ 2.66
The following table summarizes information about stock options outstanding at
December 31, 2000:
Ranges Total
------------------------------------------------------------------------
Range of exercise prices $1.16 to $2.00 $2.06 to $3.00 $3.13 to $9.13 $1.16 to $9.13
------------------------------------------------------------------------
Options outstanding 927,750 706,000 863,075 2,496,825
Weighted average remaining contractual 8.6 7.7 8.8 8.5
life (years)
Weighted average exercise price $1.52 $2.53 $3.81 $2.59
Exercisable 304,110 454,689 384,542 1,143,381
Weighted average exercise price $1.61 $2.63 $3.51 $2.66
------------------------------------------------------------------------
F-20
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
7. Stock Options and Warrants (continued)
Warrants
Warrants outstanding have been granted to officers, directors, stockholders and
others to purchase Common Stock at prices ranging from $1.16 to $5.04 per share
and expiring between March 2001 and November 2009. All warrants were granted at
or above the fair market value on the grant date. Transactions under the plan
were as follows:
Weighted Average
Shares Exercise Price
--------------------------------------
Outstanding at December 31, 1997 6,348,337 $ 3.22
Canceled or expired (24,500) 2.00
Granted 3,691,332 2.88
Exercised (187,500) 1.07
--------------------------------------
Outstanding at December 31, 1998 9,827,669 $ 3.11
Canceled or expired (1,225,936) 3.36
Granted 2,322,872 2.20
Exercised (1,395,169) 1.59
--------------------------------------
Outstanding at December 31, 1999 9,529,436 $ 2.58
Canceled or expired (470,377) 1.74
Granted 524,122 3.08
Exercised (2,938,501) 2.04
--------------------------------------
Outstanding at December 31, 2000 6,644,680 $ 2.94
======================================
Weighted
Exercise Price Average
Warrant Shares Range Per Share Exercise Price
------------------- -------------------- -----------------
Exercisable at year-end
1998 7,308,457 $0.38 to $4.00 $3.23
1999 7,673,072 $1.00 to $4.00 $2.78
2000 5,713,757 $1.16 to $5.04 $3.02
F-21
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
7. Stock Options and Warrants (continued)
During 2000, 1999 and 1998, 0, 85,000, and 387,000 warrants, respectively, were
issued to non-employees for certain consulting services, and in some instances,
had contingent vesting provisions based on achievement of certain performance
services levels. The 2000, 1999 and 1998 statements of operations reflects
charges of $36, $95, and $149, respectively, for those non-employee stock
warrants and options where such service levels were performed.
During 2000, 1999 and 1998, 0, 668,888 and 550,000 warrants, respectively, were
issued to employees in lieu of compensation. These warrants were issued at
exercise prices at or above fair market value at the date of grant and therefore
there were no charges to earnings.
The following table summarizes information about stock warrants outstanding at
December 31, 2000:
Ranges Total
--------------------------------------------------------------------------
Range of exercise prices $1.16 to $2.00 $2.03 to $3.00 $3.03 to $5.04 $1.16 to $5.04
Outstanding 538,738 3,609,997 2,495,945 6,644,680
Weighted average remaining 7.2 4.9 2.3 3.7
contractual life (years)
Weighted average exercise price $1.77 $2.46 $3.88 $2.94
Exercisable 528,738 2,779,897 2,405,122 5,713,757
Weighted average exercise price $1.77 $2.52 $3.88 $3.02
The Company estimates the fair value of each stock option and warrant at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998,
respectively: no dividends paid for all years; expected volatility of 35% for
year 1998; 93% for 1999; 93% for 2000; risk-free interest rates range from 5.25%
to 7.81%; and expected lives range from 1.00 to 10.00 years.
Utilizing the above assumptions, the weighted average fair market value of
employee stock options and warrants granted are as follows:
Year ended December 31
2000 1999 1998
------------------------------------------------
Stock options $ 3.19 $ 1.54 $ .98
Warrants $ n/a $ 1.01 $ .94
F-22
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
7. Stock Options and Warrants (continued)
In accordance with SFAS 123, the estimated fair value of the Company's options
and warrants is amortized over the vesting period. Had this expense been charged
to operations, the Company's pro-forma net loss and net loss per common share
would have been as follows:
Year ended December 31
2000 1999 1998
----------------------------------------------
Net loss
As reported $ (10,682) $ (6,237) $ (5,512)
Pro forma $ ( 1,707) $ (7,328) $ (6,326)
Net loss applicable to
common shares
As reported $ (.42) $ (.31) $ (.36)
Pro forma $ (.44) $ (.36) $ (.41)
Options to Directors and Officers
Included in the options and warrants granted above are the following:
During 2000, 117,500 options of the Company's Common Stock were granted to
certain officers and directors of the Company for services. These options were
issued at or above the fair market value of the Common Stock on the grant date
at an exercise price of $3.16 per share, expiring on January 3, 2010. As of
December 31, 2000, none of these options was exercised.
During 1999, 1,598,888 options and warrants of the Company's Common Stock were
granted to directors of the Company for services. The options and warrants were
issued at or above the fair market value of the Common Stock on the grant date
at exercise prices ranging between $1.31 and $2.59 per share, expiring through
November 19, 2009. As of December 31, 2000, none of these options or warrants
was exercised.
During 1998, 877,250 options and warrants of the Company's Common Stock were
granted to directors of the Company for services. The options and warrants were
issued with exercise prices ranging between $1.16 and $3.36 per share, expiring
through December 16, 2008. The options and warrants were issued at the fair
market value of the Common Stock or warrants on the grant date. As of December
31, 2000, 20,000 of these options or warrants were exercised.
Shares reserved for future issuance of Common Stock approximate 14,200,000.
F-23
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Contingencies
In March 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, PA, against the Company by a former employee, seeking damages
of $361, principally for alleged termination of contract. This plaintiff asserts
this sum represents the excess of market value over the exercise price of
unvested warrants held by the plaintiff which the plaintiff asserts should have
been vested and thereby available for exercise and sale. The Company believes
this claim is without merit and is defending its position. Accordingly, no
provision has been made in the accompanying financial statements.
9. Related Party Transactions
The Company incurred consulting and commission fees, and out-of-pocket expenses
of $42, $11, and $27, for the years ended December 31, 2000, 1999, and 1998,
respectively, to a company whose president is a director of the Company.
On February 9, 2000, the Company committed to acquire a 10% equity interest for
a total of $140, of which $122 has been advanced, payable at various times in
the future in Lead Factory, Inc., a Boston-based start-up company which designs,
builds, and markets computer software and services to aid sales and marketing
persons with customer prospecting. Lead Factory was founded by the Chief
Marketing Officer of the Company in April 2000. The Lead Factory product has
been integrated with SEDONA's Intarsia(TM) and is provided as an additional
component or may be sold as a separate application by SEDONA to its customer
base. In this regard, the Company signed a license and remarketing agreement
with Lead Factory whereby SEDONA was granted a non-exclusive license to use and
sell the product in return for royalty payments and support costs reimbursement.
No payments have been made to date under this license and remarketing agreement.
During 2000, management determined that their investment in Lead Factory
required an impairment reserve of $122.
10. Profit Sharing Plan
Prior to 1999, certain operations that have subsequently been discontinued had a
qualified profit sharing 401(k) plan (the Plan) available to all eligible
employees. Contributions to the 401(k) portion of the Plan were matched by the
Company equal to 100% of voluntary contributions by individual participants,
limited to 3% of the individual participant's annual pay. Annual profit sharing
contributions to the Plan were made at the discretion of the Board of Directors.
The total amount charged to discontinued operations under the plan was $0, $0
and $38 for the years ended December 2000, 1999, and 1998, respectively.
Subsequent to year-end 1998, the Plan was made available to all eligible SEDONA
employees. At the same time, matches to the Plan by the Company were suspended
but may be reinstated at such time as determined appropriate by the Board of
Directors.
F-24
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
11. Commitments
The Company has employment agreements with certain key employees which expire at
various dates through 2002. The agreements provide for minimum salary levels,
plus any additional compensation as directed by the Board of Directors.
The Company leases certain and office equipment under various noncancelable
operating and capital lease arrangements which expire from 2000 to 2007. In
August 2000, the Company entered into a long-term operating lease agreement
commencing in October 2000, for office space in King of Prussia, Pennsylvania.
In April 2000, the Company entered into a long-term operating lease agreement in
Bloomington, Minnesota. Future minimum lease payments under these lease
obligations consist of the following:
2001 $ 583
2002 594
2003 577
2004 536
2005 531
Thereafter 949
-------------
Total minimum lease payments $ 3,770
=============
The terms of the lease agreement require the Company to maintain a letter of
credit agreement with a financial institution as a security deposit on the
leased property for the entire term of the lease agreement. The Company has
fully funded this letter of credit and has recorded restricted cash of $488,
which represents the cash on deposit at the financial institution as of December
31, 2000. The agreement allows for annual reductions of the letter of credit
requirement. The amount that will be reduced within one year has been classified
as a current asset.
Future minimum lease payments under capital and operating lease obligations
consist of the following:
Year ending December 31: Capital
------------
2001 $ 51
2002 44
2003 29
2004 1
Total minimum lease payments 125
------------
Less amount representing interest (24)
------------
Present value of net minimum capital lease payments $101
============
Gross payments made under capital and operating lease obligations for 2000 and
1999 were $333 and $276, respectively.
F-25
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
11. Commitments (continued)
In June 2000, the company signed an agreement with E.piphany, a provider of
customer interaction software, whereby the company would integrate E.piphany's
campaign management application as a new component of Intarsia(TM), the
Company's Internet customer relationship management solution for small and
mid-sized financial services companies. Starting in 2001 there are future
minimum royalty payments required to be paid to E.piphany related to expected
resales of the E.piphany product, as follows:
2001 $ 450
2002 900
2003 1,500
-------------
Total $ 2,850
=============
These payments will begin to be expensed ratably starting January 2001 through
the end of the contract term.
12. Income Taxes
No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses through December 31, 2000.
At December 31, 2000 and 1999 the Company had a recorded deferred tax asset of
$15.6 million and $10.9 million, respectively, which primarily related to net
operating loss carryforwards for federal and state income tax purposes and
certain other reserves. The Company provided valuation allowances for the full
amount of the deferred tax assets as the Company believes sufficient uncertainty
exists regarding its realization.
At December 31, 2000 and 1999, the Company had approximately $40.3 million and
$29.8 million, respectively, in federal net operating loss carryforwards that
expire in various years beginning in 2001 through 2020. Additionally, the
Company has approximately $26.2 million and $15.4 million, respectively, of
state net operating loss carryforwards that expire in various years beginning in
2005 through 2010.
The timing and manner in which the Company will utilize the net operating loss
carryforwards in any year, or in total, may be limited by the provision of the
Internal Revenue Service Code. Such limitation may have an impact on the
ultimate realization and timing of these net operating loss carryforwards.
F-26
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
13. Supplemental Disclosures of Cash Flow Information
Year ended December 31
2000 1999 1998
-----------------------------------------------------
Cash paid during the year for interest $ 27 $ 35 $ 53
Cash expenses incurred relative to issuance of stock
405 41 200
Noncash investing and financing activities are as follows:
Conversion of preferred stock dividends into
Common Stock 139 138 158
Conversion of preferred stock to Common
Stock 1,499 2,034 2,990
Dividends payable offset against
notes receivable - related party - - 45
Fixed asset purchases through assumption of
capital lease obligation 58 58 -
14. CIMS Purchase
In April 2000, the Company consummated a transaction to purchase the Customer
Information Management Systems (CIMS) business unit of Acxiom Corporation for
total potential consideration of $4,350, $1,300 (with face value of $1,500) of
which was paid in preferred stock, $1,000 of which will be paid by the third
anniversary of the transaction, and the remainder of which will be paid
contingent on the future performance of the business unit acquired. In addition,
247,934 five-year warrants valued at $550 with an exercise price of $3.025 per
share were issued in connection with this transaction. The series H preferred
stock issued as part of the transaction yields 8% and is convertible at the
Company's option for the first 33 months of the 36 month life.
In February 2000, the Company signed an operating agreement with the Acxiom
Corporation pursuant to which SEDONA assumed the management of all the
operations of the CIMS business unit. Under the terms of the operating
agreement, the Company earned revenue based on the gross billings of the unit
during the term of the operating agreement. The Company deferred the portion of
the revenues that relate to maintenance and services to be performed in future
periods. Such portion is amortized into revenue as services are performed or in
the case of the maintenance contracts, ratably over the life of the maintenance
agreement. SEDONA also was responsible for all direct expenses associated with
the CIMS unit, and was required to reimburse Acxiom for such expenses. During
the quarter ended March 31, 2000, the Company recorded revenues of $695,
deferred revenue of $59, and incurred expenses of $893 related to the operating
agreement.
F-27
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
14. CIMS Purchase (continued)
The total purchase price of the CIMS acquisition has been allocated to acquired
assets based on estimates of their fair values. The purchase price of
approximately $2,850 has been assigned to the assets acquired as follows (in
thousands):
Accounts receivable (net of certain
receivables retained by Acxiom) $ 344
Furniture and equipment 291
-
Capitalized software 2,215
-----
$2,850
The following pro forma financial information has been developed from SEDONA
data and financial statements from the CIMS business unit.
SEDONA CIMS Adjustments Combined
------------------ ----------- --------
(historical)
Twelve months ended December 31, 2000
Revenue $ 1,787 $ 559 $ (443)(A) $ 1,903
Net Income $ (11,700) (619) $ 276 (A) $ (12,043)
Twelve months ended December 31, 1999
Revenue $ 244 $ 2,405 - $ 2,649
Net Income $ (3,264) $ (1,264) $ (601)(B) $ (5,129)
The adjustments to the pro forma combined condensed statements of operations for
the years ended December 31, 1999 and 2000 assume the acquisition occurred as of
January 1, 1999 and are as follows (in thousands):
(A) To reflect adjustments from an operating agreement with Acxiom
Corporation whereby SEDONA assumed the management of the CIMS business
unit in February 2000. These adjustments eliminate intercompany revenue
and expenses that were included in the results of the CIMS business unit
and SEDONA operations and the amortization related to the purchased
software acquired.
(B) To reflect the amortization related to $2,215 of purchased software
acquired in the acquisition. The purchased software will be amortized
ratably over an estimated useful life of 3 years.
F-28
SEDONA Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
15. Subsequent Events
On January 23, 2001 the company sold 1,538,462 shares of Common Stock for an
aggregate purchase price of $1,000. The Company also issued to the purchaser of
these shares of Common Stock a four year warrant to purchase 153,846 shares of
Common Stock at an exercise price of $0.91 per share. The Company paid a $70
sales commission to Ladenburg Thalmann & Co., Inc. and issued a warrant to
purchase 107,692 shares of Common Stock at an exercise price of $0.72 per share
in connection with this offering.
During the third quarter of 2000, the Company entered into an agreement with
ZipFinancial, Inc., a national alliance of community banks, which had selected
SEDONA's Intarsia(TM) application solution to expand its online marketing and
Internet banking offerings. Further, the Company entered into agreements to loan
funds to ZipFinancial, Inc. under certain conditions of sales achievements and
ZipFinancial, Inc. committing to meet certain minimum payments pursuant to the
initial licensing agreement. $475 was advanced to ZipFinancial, Inc. During
February 2001, the ZipFinancial, Inc. Board of Directors decided to conclude
operations of that organization. The Company recorded a charge in the first
quarter of 2001 to reserve for the entire $475.
In April 2001, the Company sold to an outside investor a $500 principal amount
note convertible into its Common Stock bearing interest at a rate of 8% per
year. Principal and accrued and unpaid interest on the note are due and payable
on April 1, 2002. Prior to maturity, the note is convertible, at any time the
Company's Common Stock price exceeds $1.00 per share, into a number of shares
equal to 95% of the average of the average high and low sales price of a share
of the Company's Common Stock on the Nasdaq SmallCap Market (the "Average Daily
Price") over the five trading days prior to conversion. After the maturity date,
outstanding principal and accrued interest may be converted at the option of the
holder at the lesser of (i) 115% of the closing price of a share of the
Company's Common Stock on the maturity date and (ii) 95% of the average of the
Average Daily Price over the five trading days immediately preceding the date on
which a notice of conversion is delivered to the Company.
In connection with the issuance of the convertible note, the Company also issued
a warrant to the noteholder to purchase up to 350,000 shares of Common Stock at
an exercise price of $0.75 per share.
F-29
EXHIBIT INDEX
1.1 Placement Agent Agreement with Ladenburg Thalmann & Co., Inc., dated
January 24, 2000 (1) (Exhibit 1.1)
1.2 Amendment dated March 8, 2000 to Placement Agent Agreement with
Ladenburg Thalmann & Co., Inc. (1) (Exhibit 1.2)
3.1 Articles of Incorporation (2) (Exhibit 3.1)
3.2 Bylaws (2) (Exhibit 3.2)
3.3 Amendment to Articles of Incorporation (3)
4.1 Statement of Designation of Class A, Series F Convertible Preferred
Stock (4) (Exhibit 4.0)
4.2 Certificate of Designations, Preferences and Rights of Class A, Series
H Preferred Stock (5) (Exhibit 4.1)
4.3 5% Convertible Debenture due March 22, 2001 (8) (Exhibit 99.3)
4.4* 8% Convertible Note due April 1, 2002
10.1 Series F Convertible Preferred Stock and Warrants Purchase Agreement,
dated May 24, 1999, by and between the Company, Oscar Tang,
individually, and The Tang Fund (6) (Exhibit 10.2)
10.2 Form of Warrant to purchase shares of Common Stock of the Company
issued to the investors signatory to the Series G Convertible Preferred
Stock and Warrants Purchase Agreement (6) (Exhibit 10.4)
10.3 Series H Convertible Preferred Stock and Warrants Purchase Agreement,
dated May 5, 2000, by and between the Company and Acxiom Corporation
(5) (Exhibit 10.1)
10.4 Warrant to purchase shares of Common Stock of the Company issued to
Acxiom Corporation (5) (Exhibit 10.2)
10.5 Asset Purchase and Sale Agreement between Acxiom Corporation and the
Company, dated April 9, 2000 (7) (Exhibit 2)
10.6* Stock Purchase Agreement between Roseworth Group Limited and the
Company, dated August 22, 2000
10.7* Stock Purchase Warrant issued to Roseworth Group Limited, dated August
22, 2000
10.8* Warrant issued to Ladenburg Thalmann & Co., Inc., dated August 22, 2000
10.9* Stock Purchase Agreement between Roseworth Group Limited and the
Company, dated October 19, 2000
10.10* Stock Purchase Warrant issued to Roseworth Group Limited, dated October
23, 2000
10.11* Warrant issued to Ladenburg Thalmann & Co., Inc., dated October 23,
2000
10.12 Convertible Debentures and Warrants Purchase Agreement, dated November
22, 2000 (8) (Exhibit 99.2)
10.13 Commitment Warrant, dated November 22, 2000 (8) (Exhibit 99.4)
10.14 Additional Warrant, dated November 22, 2000 (8) (Exhibit 99.5)
10.15 Warrant issued to Ladenburg Thalmann & Co., Inc., dated November 22,
2000 (8) (Exhibit 99.6)
10.16* Stock Purchase Agreement between Cambois Finance Inc. and the Company,
dated December 5, 2000
10.17* Stock Purchase Warrant issued to Cambois Finance Inc., dated December
5, 2000
10.18* Warrant issued to Ladenburg Thalmann & Co., Inc., dated December 5,
2000
10.19* Stock Purchase Agreement between AMRO International S.A. and the
Company, dated January 23, 2001
10.20* Stock Purchase Warrant issued to AMRO International S.A., dated January
23, 2001
10.21* Warrant issued to Ladenburg Thalmann & Co., Inc., dated January 23,
2001
10.22 Lease between Teachers Insurance and Annuity Association and the
Company (9) (Exhibit 99.1)
10.23* Finder's Fee Arrangement between Dutchess Advisors, Ltd. and the
Company, dated February 1, 2001
10.24# SEDONA Corporation 1992 Long Term Incentive Plan (3) (Exhibit 2.1 -
Annex E)
10.25# 2000 Incentive Stock Plan (10) (Appendix A)
10.26# 2000 Employee Stock Purchase Plan (10) (Appendix B)
10.27# Employment Agreement, dated September 15, 1999, between the Company and
Marco A. Emrich (11) (Exhibit 10.1)
10.28*# Employment Agreement, dated January 1, 2000, between the Company and
William K. Williams
10.29 Asset Purchase Agreement between Colortrac, Inc. and SEDONA
Corporation, dated September 17, 1999 (13) (Exhibit 2.0)
10.30* Shareholder/Investor Relations Compensation Agreement between the
Company and Osprey Partners, dated January 3, 1997, with amendments
dated January 27, 2000 and December 13, 2000
10.31* Finder's Fee Agreement between the Company and Osprey Partners, dated
February 24, 1999
10.32* Disbursement Agreement between the Company and ZipFinancial.com, Inc.,
dated December 29, 2000
10.33* Promissory Note payable to the Company by ZipFinancial.com, Inc., dated
December 29, 2000
10.34* Security Agreement between the Company and ZipFinancial.com, Inc.,
dated December 29, 2000
10.35* Warrant issued to Acxiom Corporation dated April 4, 2001
23.1* Consent of Ernst & Young, LLP
24.1 Power of attorney (included on the signature page to this Form 10-K)
- -------------
* Filed herewith.
# Executive Compensation Plans and Arrangements.