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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, 2003 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 000-15864
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.)
1003 West 9th Avenue, Second Floor, King of Prussia, PA 19406
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 610-337-8400
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.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes { } No {X}
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 OTCBB
system as of March 24, 2004 was $31,298,723.
The number of shares of the Registrant's common stock, $.001 par value per share
("common stock") issued and outstanding as of March 24, 2004 was 82,958,482
shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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 "may",
"will", "should", "could", "would", "plan", "estimates", "projects", "predicts",
"potential" "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans, objectives, and expectations of
SEDONA Corporation (the "Company", "SEDONA Corp." or SEDONA") 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.
2
PART 1
ITEM 1. BUSINESS
Overview
SEDONA Corporation was incorporated in 1992 as Scan Graphics, Inc. and changed
its name to SEDONA Corporation in 1999. SEDONA Corporation is a software
application and services provider that develops and markets web-based Customer
Relationship Management (CRM) solutions to small to mid-sized businesses (SMBs).
The Company's CRM application solution, Intarsia(R), enables SMBs to increase
the profitability of their customer portfolio to boost profits and shareholder
value.
During the third quarter of 1999, the Company's Board of Directors decided to
sell two divisions that were not part of its realigned strategy of focusing on
the development of its Internet-based software products. Prior to the third
quarter of 1999, the Company was made up of three components:
o Tangent Imaging Systems (a manufacturing line of peripheral scanning
equipment);
o Technology Resource Centers, d/b/a TRC (a business service related to the
Tangent Imaging Systems technology); and
o Sedona GeoServices (a producer of software for mapping and visualization
of business data).
As a result of the Board of Directors' comprehensive review of all business
sectors, it was concluded that the Company would realign its focus to the
software business as it had the best long-term prospects. On July 16, 1999, the
sale of the assets of TRC was completed. On September 17, 1999, the sale of the
Tangent Imaging Systems operation was completed. With the realignment of
operations completed, the Company was then able to focus all efforts on the
business of providing SMBs with web-based CRM application and service solutions.
This is the only business segment from which SEDONA generates revenues.
To expedite the Company's plan of delivering CRM to its target market, on April
10, 2000, SEDONA announced its acquisition of the Customer Information
Management System (CIMS) business unit from Acxiom Corporation. The CIMS
business developed, marketed, serviced and supported CRM systems, focusing
principally on financial services markets. As a result of this transaction,
SEDONA gained a significant head start towards offering a comprehensive CRM
solution.
Since the completion of the CIMS transaction, SEDONA has continued to enhance
its offerings with several major product milestones achieved.
o In October 2000, the Company delivered the first version of its customer
relationship application solution, Intarsia, which provided a
comprehensive set of components, including a customizable portal,
profitability management, campaign management and support for wireless
devices.
o In November 2001, the Company announced availability of Intarsia version
3.2, which provided users new features to create and distribute reports
throughout the enterprise. It also provided increased functionality in
household management, as well as extended the platforms on which it
operated to the IBM eServer xSeries family.
3
ITEM 1. BUSINESS (continued)
o In December 2002, the Company announced the availability of Intarsia
version 4.0, which, among many new features, delivered support for
international markets by providing multiple-language and multiple-currency
capabilities.
o In December 2003, the Company again announced a new version of its CRM
application solution Intarsia, which delivered multiple lines-of-business
(across multiple vertical markets) support for a new agency management
component, and significant enhancements to the update manager, point of
service, report manager and campaign managers of a components of the
product.
Description Of Business Strategy
SEDONA Corporation knows that the key to selling CRM successfully and profitably
to SMBs is finding a solution that not only meets the organizations' unique
industry, business, and budget requirements, but also provides them with proven
technology and services that can be cost effectively integrated into their
business. When these needs are met, SMBs can rapidly achieve a positive return
on their CRM investment (ROI).
o Targeting SMB's with a highly verticalized CRM application solution
The Company is strategically targeting SMBs as the first vertical market to
introduce its leading CRM application solution. The SMB market represents the
largest and fastest growing opportunity for CRM applications solutions as
businesses place increasing emphasis on effectively managing the relationship
of, and interaction with, their customers. This market, characterized by
businesses with less than $250,000,000 in revenue and 500 employees, presents
the greatest opportunity for CRM providers as the large-sized business (LB)
market is becoming saturated with CRM deployments.
According to Aberdeen Group's Worldwide CRM Spending: Forecast 2002-2006
research report, the CRM spending in the LB market is expected to grow at a
2002-2006 CAGR of 4.0% compared to a much faster growth in the SMB market as
indicated in the table below.
------------------------------- ----------------------- ----------------------- ---------------------
Number of Employees 2002 CRM Spending 2006 CRM Spending CAGR
------------------------------- ----------------------- ----------------------- ---------------------
1 to 19 $577M $794M 9.3%
------------------------------- ----------------------- ----------------------- ---------------------
20 to 499 $1.28B $1.8B 8.9%
------------------------------- ----------------------- ----------------------- ---------------------
As a significant segment of the overall SMB market, small and mid-sized
financial services organizations, represented by community and regional banks,
credit unions, savings and loans, brokerage firms and insurance companies and
agencies, have identified CRM as a strategic initiative to improve the customer
retention and profitability rates in a marketplace dominated by large national
and international companies with greater resources, services and advertising
power.
Aberdeen Group, in the same report, projects that the CRM spending in the
financial services market will represent 18.8% of the overall CRM spending over
the next three years.
4
ITEM 1. BUSINESS (continued)
--------------------------------------- ----------------------------
Vertical Market % of CRM Spending
--------------------------------------- ----------------------------
Manufacturing 25.4%
--------------------------------------- ----------------------------
Financial Services 18.8%
--------------------------------------- ----------------------------
Retail and Distribution 13.6%
--------------------------------------- ----------------------------
Business Services 7.1%
--------------------------------------- ----------------------------
Government and Education 6.7%
--------------------------------------- ----------------------------
Transportation and Utilities 6.4%
--------------------------------------- ----------------------------
Healthcare 5.6%
--------------------------------------- ----------------------------
Information Technology 5.5%
--------------------------------------- ----------------------------
Telecommunications 4.7%
--------------------------------------- ----------------------------
Others 6.2%
--------------------------------------- ----------------------------
SEDONA has strategically targeted small to mid-sized financial services
organizations as the first vertical market to introduce the SEDONA CRM
application solution.
Unlike most traditional, general-purpose CRM applications, Intarsia, is a
vertical CRM application solution specifically designed and priced to meet the
needs of SMBs with multiple lines-of-business across several vertical
industries. Intarsia provides small to mid-sized financial services
organizations with a complete and accurate view of their customers'
relationships and interactions. This enables them to gain knowledge about their
customers' preferences, needs and characteristics and build the appropriate
strategies to more effectively target the right products to the right people at
the right time. Intarsia provides those organizations with the ability to
effectively identify, acquire, foster and maintain loyal, profitable customers.
Intarsia is an ideal solution for community and regional banks, credit unions,
and insurance companies and agencies to maximize profits through effective
customer relationship management, but who lack the resources required to
develop, implement and maintain a CRM program on their own.
o Marketing SEDONA's proprietary solution to target markets through an indirect
sales distribution channel
As part of SEDONA's efforts to rapidly and cost effectively capture a major
share of the SMB market, the Company has adopted an indirect distribution
channel strategy. Through a multiple sales distribution channel and innovative
marketing programs, the Company hopes to garner awareness and market leadership.
SEDONA has successfully signed OEM and reseller agreements with several leading
software and services providers for the financial services market, and continues
to work to broaden its distribution channels, expanding its market penetration
within financial services and into new verticals, both domestically and
internationally.
o Under the agreements with SEDONA's current distribution partners, which
include Fiserv Systems, Inc., Sanchez Computer Associates, Inc., Open
Solutions Inc., Connecticut Online Computer Center, Inc, Pinkerton Computer
Consultants, Inc., EastPoint Technologies, ACEncrypt Solutions, LLC,
WorldNet Consulting S.A. and American International Technology Enterprises,
Inc., a member company of AIG, the Company is paid royalty fees for every
sale of its technology, whether as a component of its partner's total
solution or as a standalone offering. The Company also collects additional
royalties for every customer maintenance contract for using its technology,
as a component of its partner's total solution or as a standalone offering.
5
ITEM 1. BUSINESS (continued)
The Company has also established partnerships with a number of proven business
and technical consulting services providers such as Paragon Consulting; these
partnerships provide the Company's distribution partners and their customers'
deep industry knowledge and expertise to assure a successful implementation of
their Intarsia-based CRM solutions.
As recognition of the robustness and completeness of SEDONA's CRM solution, in
February 2001, the Company was awarded by IBM Corporation, an Advanced Business
Partner Designation in the IBM PartnerWorld Program for Developers. This
important status provides SEDONA with additional opportunities to expand
business partnerships through the IBM channels. This relationship has already
enabled SEDONA to start working with IBM's channel partners such as Sanchez,
Fiserv and AIG.
o Removing the Barriers to Purchasing and Maintaining a CRM System
In-house application hosting is a licensing and implementation model that
provides SMBs with a fully integrated system. It includes all the software,
hardware and services required for the deployment of a comprehensive,
internet-based enterprise business application, which resides at their own site,
for an affordable, fixed monthly fee.
In-house application hosting is a viable alternative to the purchase and ASP
models because it is so cost effective. It is especially attractive for SMBs
that lack the financial resources and IT infrastructure to deploy an on-site
enterprise business application such as CRM.
The in-house application hosting model is an extremely valuable solution for all
its current and future OEM and reseller partners because it:
o Shortens the sales cycle by greatly reducing the financial barriers -
software, hardware and `peopleware' costs - and the resource requirements on
a customer's existing IT organization:
o Builds a rapidly recurring revenue stream, as the solution can immediately
be made available to an existing customer base with a low monthly fee to
stimulate volume deployment:
o Generates new revenue opportunities through the up-sell of new integration
and training services as well as software upgrades: and
o Results in achieving a positive return on investment more rapidly than
traditional software licensing. The immediate availability of the
application enables organizations to capitalize on its benefits right away.
The complete solution achieved by branding and integrating SEDONA's Intarsia
technology into its partners' core business applications, combined with their
marketing strength, broad distribution channels and strong reputation, provides
SMBs with the opportunity to enjoy all the benefits of implementing an
enterprise-wide CRM application.
o Staying in the forefront of CRM technology
Intarsia provides SMBs with a CRM solution that is tightly integrated with their
business processes and back-end systems. It enables them to optimize their
return on customer relationships by personalizing the management and interaction
with their customers and ensuring that the sales and marketing efforts are
strategically managed towards increased company profitability.
6
ITEM 1. BUSINESS (continued)
Exploiting the ubiquity of the Internet, Intarsia's comprehensive set of
components provides SMBs with a robust set of marketing analytics and
operational CRM capabilities necessary to:
o Have a 360(degree) view of the customer by integrating the front, back, and
mobile offices into one, comprehensive database of information about
customers and prospects;
o Analyze customer and prospect data enabling them to manage critical business
performance such as profitability of customers (accounts, members and policy
holders), personnel, households and products;
o Measure the effectiveness of the organization's lead generation and
marketing campaigns and ensure timely follow-up of referrals, customer
requests, and sales leads;
o Improve coordination and communication between SMBs and their customers,
greatly enhancing the ability to deliver effective service and improve
organizational productivity; and
o Automate business processes that may be critical for the effective
management and monitoring of the relationships and interactions with their
customers.
Intarsia seamlessly enhances the SMBs customer and prospect data with user
demographics, behaviors, interests and preferences information provided by
third-party content management suppliers. This enhanced data is then analyzed to
create timely and precise information-on-demand. This information is then used
by all of Intarsia's components in order to enable them to:
o Create "look-a-like" models to identify prospects effectively that share the
same characteristics as their best customers, increasing their ability to
acquire new customers;
o Help predict customer retention and make profitable cross-sell (next best
product) recommendations; and
o Develop personalized sales, marketing and services programs aimed at
retaining their most profitable customers and turn unprofitable customers
into profitable ones.
All this functionality is available to Intarsia users via a standard web
browser, over a wireline or wireless network, enabling both front- and
back-office personnel to have consistent and timely information about customers
and prospects. 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.
o Focusing on company's bottom line results
The Company is committed to providing high returns to both its distribution
partners and to its shareholders. Every investment in new products, markets and
personnel must provide a measurable return of investment and provide a clear
path to achieve profitability.
Research & Development
The main strategy of SEDONA's research and development activities is to provide
high-quality, high-value products and support services in a consistent and
predictable manner as follows:
7
ITEM 1. BUSINESS (continued)
o Promote and cultivate a culture of team-based development:
o 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 application solution. Each project team also
provides technical assistance to the system integration group.
o 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 Plan 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
four, pre-defined cycles per year resulting in two major product releases on May
1 and November 1 of each year. 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 $878,000, $1,227,000, and $383,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.
Trademarks and Copyrights
SEDONA strongly believes in copyrighting and trademarking its products and
services. The Company has a service mark for a logo design, which was registered
with the United States Patent and Trademark Office (USPTO) on July 23, 2002, and
a second service mark for the word mark "SEDONA" that was registered with the
USPTO on March 24, 2003.
The Company also filed an application for federal registration of the word mark
"INTARSIA" with the USPTO. This application was filed on March 8, 2000 and was
published for opposition on September 4, 2001. Following this publication, the
Company received a Notice of Opposition on January 17, 2002 from the Intarsia
Corporation that opposed SEDONA's "INTARSIA" mark for "computer software that
tracks and organizes customer and prospective customer data and organizes
marketing information, for use in customer relationship management."
Subsequently Intarsia Corporation agreed to accept a co-existence agreement for
the mark. SEDONA has the exclusive right to use the "Intarsia" trademark in
connection with its services, as recited in the registration thereof.
Customers
As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions, allowing SEDONA to focus on its indirect
business model and providing users of Intarsia with Fiserv's resources to
support and grow the Intarsia product line.
8
ITEM 1. BUSINESS (continued)
Five alliance partners accounted for ninety-six percent of sales in 2003. Two
alliance partners accounted for fifty-two percent of sales in 2002 and no single
customer accounted for more than ten percent of sales in 2001.
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 advanced royalties and maintenance contracts
where revenues are recognized ratably over the life of the contract. As of
December 31, 2003, the Company had a revenue backlog of $323,000, substantially
all of which is expected to be recognized as revenue in 2004.
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 management of customer relationships. The Company
offering is unique in that it combines a completely tailored CRM application
solution for the SMB market with a knowledgeable and experienced sales and
marketing distribution channel provided by the Company's partners. SEDONA's OEM
and reseller agreements with leading solution providers for the SMB market
enable the Company to leverage their marketing strength, broad distribution
channels and strong reputation, These strategic partnerships provide SEDONA with
a significant revenue opportunity and strengthen its competitive position.
SEDONA's primary competitors are John Harland Company, Harte-Hanks and Centrax
Group. Harland has historically been primarily a provider of checks and other
financial forms to financial institutions. Harte-Hanks is primarily focused on
CRM and Internet marketing of response management in many different market
areas. Centrax is a private vendor primarily focused on low cost solutions in
the financial services business. SEDONA believes that it maintains superior
product capabilities that provide a fully integrated, robust CRM solution in
contrast to the generally older technologies of its principal competitors. Also,
CRM is SEDONA's only business and the Company's focus on the SMB market enables
it to maintain a strong reputation in that market.
Because competitors can easily penetrate the software market, the Company
anticipates additional competition from other established and new companies as
the markets for CRM applications continue to develop. In addition, current and
potential competitors have established, or may in the future establish,
cooperative relationships among themselves or with third parties. Large software
companies may acquire or establish alliances with SEDONA's smaller competitors.
The Company expects that the software industry will continue to consolidate. It
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire a significant market share.
Increased competition may result from acquisitions of other customer
relationship management vendors. The results of increased competition, including
price reductions of the Company's products, and reduction of market share, could
materially and adversely affect its business, operating results and financial
condition. In several of its targeted vertical markets, the Company believes
there is a distinct trend by competitors toward securing market share at the
expense of profitability. This trend could have an impact on the mode and
success of SEDONA's ongoing business in these segments.
SEDONA believes that the most important competitive factor, which enables it to
differentiate from the competition, is its focus on delivering a specifically
tailored CRM solution to the SMB market through a number of leading-edge core
9
ITEM 1. BUSINESS (continued)
processor providers. Because the core processor providers are responsible for
the SMB's mission-critical business applications, they have all the information
required to make the implementation of a CRM solution viable. Using the core
processor providers as a sales, marketing and distribution channel considerably
improves SEDONA's opportunity to establish itself as a leading provider of CRM
application software and services as those organizations create a formidable
barrier for other CRM providers to enter the market. There are additional core
processing providers that SEDONA is seeking to establish partnerships with and
the Company anticipates expanding its leadership in the market this way.
The Company further believes it is in a position for sustainable leadership and
business success based on the following factors:
o Management - The Company has many years of management-level experience
dealing with the SMB and software markets and has also established processes
to ensure that it can effectively deliver quality software on time;
o Market leadership - The Company has established leadership in its market
sector and believes that it has set the benchmark for others to follow; and
o Technical - The Company has a very advanced product and knowledge base
within its engineering group.
Employees
As of March 25, 2004, we had 16 full-time employees. None of these employees are
covered by a collective bargaining agreement. The Company believes that its
employee relations 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, particularly Mr. Marco A.
Emrich, who currently serves as the Company's Chief Executive Officer and
President. The loss of the services of one or more of the Company's management
personnel, including Mr. Emrich, could materially and adversely affect the
operation of the Company. The Company does not carry key man insurance on its
executives. 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
In January 2003, SEDONA entered into a lease for space at 1003 West 9th Avenue,
Second Floor, King of Prussia, Pennsylvania, 19406. The lease is for 3,403
square feet and extends until December 31, 2005 at an annual base rate of
$68,000 plus a yearly escalation charge of three percent. In approximately April
2004, the Company intends to add 867 square feet of space to its King of Prussia
10
ITEM 2. DESCRIPTION OF PROPERTY (continued)
office. The lease will extend through December 31, 2005 at an annual rate of
$15,000 plus a yearly escalation charge of three percent. The King of Prussia
office serves as the Company's corporate office.
In November 2003, SEDONA entered into a lease for a 630 square foot facility in
Plymouth, Minnesota. The lease term is two years and two months, at a base
annual rate of $5,000 plus a yearly escalation charge of three percent.
Management believes that the current facilities are adequate for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
On October 17, 2002, the Court of Common Pleas of Montgomery County,
Pennsylvania, rendered a judgment for a former employee of Scan Graphics, for
$361,000 plus interest, totaling $469,000. The suit had originally commenced in
March 1998 for alleged termination of contract. In December 2002, a settlement
was reached wherein the judgment would be satisfied by the issuance of 1,200,000
shares of the Company's common stock and related registration rights. The
aggregate charge including legal fees was $276,000, and resulted in a reduction
of $193,000, in the fourth quarter of 2002 to the previously recorded charge.
In June 2000, the Company entered into a contract with a software vendor to
incorporate a component of that vendor's software into Intarsia. By April 2001,
management determined that the project had become infeasible due to the lack of
support by the vendor and its unwillingness to meet certain contract
commitments. SEDONA notified the vendor of its concerns on several occasions and
ultimately delivered a notice of breach to the vendor in 2001, as required for
the termination of the underlying contract. As the vendor failed to respond or
cure the breach within the time permitted under the agreement, the Company
considers the contract to be terminated in accordance with its terms and the
Company has concluded that it is not appropriate to continue to accrue certain
minimum payments under the contract.
On May 5, 2003, SEDONA filed a civil action lawsuit against numerous defendants
in the United States District Court for the Southern District of New York. The
Company seeks damages from the defendants named, and other defendants yet to be
named, in the complaint for allegedly participating in the manipulation of its
common stock, fraud, misrepresentation, failure to exercise fiduciary
responsibility, and/or failure to adhere to SEC trading rules and regulations,
tortuous interference, conspiracy and other actions set forth in the complaint,
but not limited to enforcement of settlement date and affirmative determination.
As this is an on-going action, no adjustments have been made to the financial
statements related to this matter.
In January 2004, the Company notified one of its consultants, Hunter A. Carr,
that per its May 6, 2003 litigation support agreement and database participation
agreement, the consultant had not performed his duties noted therein and is in
default of the contracts. The Company is in the process of trying to resolve the
dispute and has suspended payments to the consultant starting in December 2003,
pending satisfactory resolution of the matter. Per the agreements, the Company
was obligated to pay $14,910 per month under the litigation support agreement
and $6,900 per month under the database participation agreement. The Company
believes it has a meritorious defense against this claim.
No actions other than matters involved in the ordinary course of business are
currently known by Management and such other matters are believed by Management
not to have material significance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Market Price of and Dividends of the Company's Common Stock
The following table sets forth, for the periods indicated, the high and low
closing prices of SEDONA's common stock. Until January 8, 2003, the Company's
common stock was quoted on The NASDAQ SmallCap Market under the symbol "SDNA".
Since January 9, 2003, the common stock has been available for trading on the
OTC Bulletin Board under the same symbol. The last reported sale price of SEDONA
common stock on March 24, 2004 was $0.53. At that time, there were approximately
7,800 holders of SEDONA common stock.
High Low
------------------- ------------------
Year ended December 31, 2002:
-------------------------------------------
Quarter ended March 31, 2002 $0.94 $0.58
Quarter ended June 30, 2002 1.41 0.55
Quarter ended Sept. 30, 2002 0.58 0.34
Quarter ended Dec. 31, 2002 0.40 0.15
Year ended December 31, 2003:
-------------------------------------------
Quarter ended March 31, 2003 $0.25 $0.12
Quarter ended June 30, 2003 0.51 0.17
Quarter ended Sept. 30, 2003 0.28 0.16
Quarter ended Dec. 31, 2003 0.40 0.18
Year ended December 31, 2004:
-------------------------------------------
Quarter through March 24, 2004 $0.75 $0.39
Dividends
The Company has never declared or paid any 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 future earnings, if any, to finance the expansion, development and growth
of its business. Payment of future dividends, if any, will be at the discretion
of the Board of Directors after taking into account various factors, including
the Company's financial condition, operating results, current and anticipated
cash needs and plans for expansion.
Equity Compensation Plans
Equity Compensation Plan Information
Number of Shares
Remaining Available
Weighted-Average for Future Issuance
Exercise Price of under Equity
Number of Shares to be Outstanding Compensation Plans
Issued Upon Exercise of Options, (excluding securities
Outstanding Options, Warrants and reflected in 1st
Plan Category Warrants and Rights Rights column)
- ---------------------------------------- ----------------------- ----------------- ---------------------
Equity compensation plans approved by 18,556,713 $1.23 5,940,000
security holders (1).................
Equity compensation plans not approved
by security holders (2).............. - - -
Total................................... 18,556,713 $1.23 5,940,000
(1) These plans consist of the 2000 Incentive Stock Option Plan.
(2) The Company does not maintain any equity compensation plans that have not
been approved by the stockholders.
Recent Sales of Securities
During the first quarter of 2003, there were a total of 305,000 common stock
options with exercise prices ranging from $0.17 to $0.24 granted to Directors of
the Company.
During January 2003, an agreement was reached with certain Directors of the
Company to satisfy a $211,000 liability for previously rendered services via a
grant of 1,320,854 shares of the Company's common stock. As of December 31,
2003, 568,906 shares were issued; the balance of the remaining 751,948 shares
was issued in January 2004.
During January 2003, the Company issued 37,500 shares of the Company's common
stock to a vendor in lieu of $6,000 cash payment.
12
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS (continued)
During the first quarter of 2003, the Company issued 212,789 shares of its
common stock to third parties for services rendered in the amount of $37,000;
107,369 of these shares were issued to a Director of the Company. The Company
also received $9,000 proceeds from the exercise of 90,000 common stock warrants
at $0.10 per share.
During the second quarter of 2003, the Company issued 109,336 shares of its
common stock to third parties for services rendered in the amount of $33,000;
53,770 of these shares were issued to a Director of the Company who retired in
July 2003. Also during the second quarter of 2003, the Company issued 89,500
shares of its common stock in lieu of an $18,000 cash payment on a note payable
to a related party. The Company also recognized $6,000 from the exercise of
60,000 common stock warrants.
During the second quarter of 2003, the Company issued common stock pursuant to
its Employee 401(k) Plan, whereby certain contributions are matched by the
Company for its common stock valued at $82,000, resulting in the issuance of
514,713 common shares.
In August 2003, the Company issued 1,250,000 shares of its common stock in a
private placement and issued two-year warrants to purchase 625,000 shares of its
common stock at an exercise price of $0.35 per share to investors for an
aggregate purchase price of $250,000.
During the third quarter of 2003, the Company issued 198,229 shares of its
common stock to third parties for services rendered in the amount of $45,000.
Also in the third quarter, the Company issued 50,000 shares of its common stock
in lieu of a $10,000 cash payment on a note payable to a related party. The
Company issued 591,676 shares of its common stock in lieu of $158,000 in fees
related to the litigation entered into by the Company as fully explained in Note
8.
During the fourth quarter of 2003, the Company issued 170,044 shares of its
common stock to third parties for services rendered in the amount of $33,000.
The Company also issued 351,708 shares of its common stock in lieu of a $70,000
cash payment on a note payable to a related party. The Company issued 317,017
shares of its common stock in lieu of $62,000 in fees related to the litigation
entered into by the Company as fully explained in Note 8.
All of the securities issued in the preceding trasnaction were sold in reliance
upon Rule 506 of Regulation D involving only accredited investors.
Preferred Stock
In December 2003, the Company retired its Class A, Series F, convertible
preferred stock. The holder delivered a conversion notice to the Company
requesting conversion of $780,000 principal value preferred stock plus accrued
dividends of $187,000 into shares of the Company's common stock. After
conversion, such holder received 966,950 shares of common stock.
In November 2003, the Company restructured its agreement with Acxiom
Corporation, holder of Class A Series H, convertible preferred stock. The
restructured terms included an extension of the conversion date of the Series H
preferred stock by thirty-six months, to April 1, 2006.
Material Investor
As described below, during the period December 2002 through December 2003, the
Company entered into the following transactions with a single investor, Mr.
David R. Vey, that, on an if converted basis, gave Mr. Vey a 37% ownership
interest in the Company. In March 2003, Mr. Vey became a member of the Board of
Directors. He was appointed Chairman of the Board of Directors in May 2003.
13
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS (continued)
In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
would be made available to the Company on various funding dates through March
2003. In December 2002, the Company received proceeds of $100,000 in the form of
a convertible debenture. In January 2003, the Company received proceeds of
$820,000 in the form of $220,000 in convertible debentures and a $600,000
promissory note. The promissory note bears interest at a rate of 7% and matures
on January 15, 2004. The Company may extend the maturity of the instrument for
up to three additional years subject to required pay downs. The convertible
debentures bear interest at rates ranging from 7% to 8% and are convertible at
the option of Mr. Vey into 13,000,000 shares of Company common stock. The
debentures mature at various dates in December 2003 and January 2004. As of
January 30, 2004, Mr. Vey elected to convert the above referenced debentures
into 13,000,000 shares of the Company's common stock, of which 3,000,000 shares
were received upon conversion by December 31, 2003.
Additionally, the Company received $500,000 in March 2003, in the form of a
$400,000 promissory note and a $100,000 convertible debenture. These instruments
have terms similar to those of the earlier investment, and will mature in March
2004, subject to the Company's option to extend for three additional years by
making required paydowns. The March 2003 debenture is convertible into
10,000,000 shares of our common stock. As of February 2, 2004, Mr. Vey elected
to convert the above referenced debentures into 10,000,000 shares of the
Company's common stock.
The Company has accounted for the value of the conversion feature of these
instruments, which was limited to the amount of aggregate proceeds received of
$1,420,000 ($100,000 in December 2002 and $1,320,000 in January and March 2003),
as additional paid in capital and debt discount. This amount will be accreted
over the life of the notes as additional interest expense. Expense recognized
for the year ended December 31, 2003 was $1,290,000.
The Company issued to a third party as a finder's fee in lieu of cash fees,
1,610,000 warrants at a price of $0.40 per share for the above equity
transactions and repriced a prior warrant to purchase 150,000 shares from $1.50
per share to $0.10 per share.
As of February 2, 2004, Mr. Vey elected to convert the above referenced
debentures issued in March 2003 into an additional 10,000,000 shares of the
Company's common stock.
From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible debentures. The debentures were issued for a one-year
term and are convertible at the option of Mr. Vey at various dates from June
2004 to December 2004 into 2,699,219 shares of the Company's common stock.
In June 2003, Mr. Vey exercised a warrant to purchase 500,000 shares of the
Company's common stock at an exercise price of $0.35 per share providing
$175,000 in proceeds.
All of the Company's assets are pledged as collateral for the notes referenced
above.
All of the securities issued in the preceding transactions were sold in reliance
upon Rule 506 of Regulation D involving only accredited investors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Company for the year ended December 31, 2003 and for the four previous years.
Pursuant to the realignment of operations conducted in 1999-2000, data in the
following table has been adjusted to show operating results for the discontinued
operations separately in the applicable years. Balance sheet data in the
following tabulation also reflects accounting for discontinued operations.
14
ITEM 6. SELECTED FINANCIAL DATA (continued)
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)
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
Income Statement Data 2003 2002 2001 2000 1999
----------------------------------------------------------------------
Revenue $ 1,522 $ 2,507 $ 2,157 $ 1,787 $ 244
Loss from Continuing
Operations (4,212) (6,001) (10,434) (10,826) (3,264)
Gain (Loss) from Discontinued
Operations - - - 144 (2,973)
Net Loss (4,212) (6,001) (10,434) (10,682) (6,237)
Preferred Dividends (15) (303) 154 (889) (601)
Net Loss applicable
To Common Stockholders (4,227) (6,304) (10,280) (11,571) (6,838)
Basic and Diluted
Net Loss per Common Share
Applicable to continuing
Operations $(0.08) $ (0.13) $(0.28) $(0.42) $(0.18)
Loss per Common Share
Applicable to discontinued
Operations - - - - $(0.13)
Loss per Common Share $(0.08) $ (0.13) $(0.28) $(0.42) $(0.31)
----------------------------------------------------------------------
Balance Sheet Data: 2003 2002 2001 2000 1999
----------------------------------------------------------------------
Total Assets 832 1,770 3,786 8,468 2,204
Net Working Capital/(Deficit) (2,745) (3,128) (2,462) (989) 262
Long-Term Obligations 999 12 1,025 1,025 51
Stockholders' Equity/(Deficit) (3,288) (1,847) (302) 3,091 1,431
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SEDONA is a software application and services provider that develops and markets
web-based Customer Relationship Management (CRM) solutions to small and
mid-sized businesses (SMBs). The Company's CRM application solution, Intarsia,
enables SMBs to increase profitability of their customer portfolio to boost
profits and shareholder value. The Company has strategically targeted small to
mid-sized financial services organizations as the first vertical market to
introduce its leading CRM application solution.
In an effort to rapidly and cost effectively capture a major share of the SMB
market, SEDONA adopted an indirect distribution channel strategy. The Company
licenses its CRM technology to Third Party Alliance Partners (TPAP), who market,
sell, distribute and support SEDONA's technology either as a component of its
TPAP total solution or as a standalone offering.
SEDONA has successfully signed OEM and reseller agreements with several leading
software and services providers for the financial services market, such as
Fiserv Systems, Inc., Sanchez Computer Associates, Inc., Open Solutions Inc.,
Connecticut Online Computer Center, Inc., Pinkerton Consulting, EastPoint
Technologies Inc., WorldNet Consulting S.A., ACEncrypt Solutions and American
International Technology Enterprises, Inc., a member company of AIG, and
continues to work on broadening its distribution channels, thus expanding its
market penetration both domestically and internationally.
The following is a discussion and analysis of the Company's results of
operations and financial condition for the years ended December 2003, 2002 and
2001 and should be read in conjunction with the Company's audited financial
statements as of December 31, 2003, 2002 and 2001 along with the notes to those
financial statements.
Critical Accounting Policies
Revenue Recognition
The Company's software arrangements currently consist of license fees, and
maintenance. Prior to the sale of the customer base, revenue also included fees
from installation services. The Company has established vendor specific
objective evidence (VSOE) of fair value for its maintenance contracts based on
the price of renewals of existing maintenance contracts. The remaining value of
the software arrangement is allocated to license fee and professional services
based on contractual terms agreed upon by the customer and based on
Company-maintained list prices.
Product License Revenue
Revenues from the sale of product licenses are recognized upon delivery and
acceptance of the software when persuasive evidence of an arrangement exists,
collection is probable and the fee is fixed or determinable. Although the
Company's software product can be implemented on the Company's customer's
systems without significant alterations to the features and the functionality of
the software, or without significant interfacing, the Company's license
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
agreements are written so that formal written acceptance of the product is
received when installation is complete. Therefore, the timing of license fee
revenue recognition coincides with the completion of the installation and
acceptance of the software by the customer.
The Company primarily utilizes an indirect sales model by distributing its
product through third party alliance partners (TPAP). Through its TPAP, the
Company receives a royalty payment based on a percentage of the license fee
charged by the strategic partner. The royalty fee is recognized by SEDONA when
the Company receives written acknowledgement from the TPAP that royalties have
been earned and monies are owed to SEDONA. For the year ended December 31, 2003,
$421,000 of royalty revenue was recognized.
Services Revenue
Services revenue includes revenue from professional services (primarily
installation and training services) and maintenance revenue over periods not
exceeding one year. Installation service revenue, which consists of
implementation planning, hardware and software set-up, data integration
including data aggregation, conversion, cleansing and analysis, and testing and
quality assurance, is accounted for as a separate element of a software
arrangement. Additionally, in certain circumstances, the Company may partner
with third parties to implement its software. In those instances, the
contractual fee for professional services may be paid directly from the customer
to the third party, and the Company recognizes the license fee revenue component
upon installation and acceptance by the customer.
We recognize service revenue as follows:
o Installation revenue is recognized upon completed installation and
customer acceptance and is based on a contractual hourly rate. Training
revenue is not a material element of a contract and revenue is
recognized as training services are provided.
o Maintenance revenue is recognized ratably over the life of the related
contract. The Company establishes the value of maintenance revenue based
on the price quoted and received for renewals of existing maintenance
contracts.
Software Development 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 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 charge in its operating results if the carrying value exceeds the
future estimated undiscounted cash flows of the related assets.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations
Revenues from operations for the years ended December 31, 2003, 2002, and 2001
were $1,522,000, $2,507,000, and $2,157,000 respectively.
Net revenues decreased to $1,522,000 for the year ended December 31, 2003 from
$2,507,000 in 2002, due to the sale of the Company's customer service base and
related services in December 2002. Services revenue, which is one component of
total revenue, decreased from $1,753,000 in 2002 to $516,000 in 2003 due to the
sale of the services base. License revenue, the second component of total
revenue, increased to $1,006,000 in 2003 from $754,000 in 2002 due to the sale
of new license products in 2003. Revenue increased to $2,507,000 for the year
ended December 31, 2002, from $2,157,000 for the year ended December 31, 2001.
The growth in revenues was primarily due to sales of the Intarsia application
licenses to the Company's alliance partners.
Cost of Revenues
Total cost of revenues decreased to $878,000 for the year ended December 31,
2003, compared to $1,729,000 for the year ended December 31, 2002. The savings
were a direct result of a reduction in workforce in December 2002 that reduced
the full-time employee count to 15 from 39 in 2002. Total cost of revenue
decreased from $3,995,000 for the year ended December 31, 2001 to $1,729,000,
principally reflecting decreased service and staff cost due the Company's move
to an indirect sales model where alliance partners are the primary sales
channel, as well as a significant reduction to write-off certain capitalized and
purchased software. During 2002, the Company wrote off $133,000 of capitalized
software that was deemed impaired because a major component of the Company's
software had been retired. The Company does not believe that the impact of the
write-off of software will be significant to future operations because its
latest product, Intarsia, has begun to gain market acceptance throughout 2003.
Operating Expenses
Total operating expenses decreased to $3,341,000 in the year ended December 31,
2003 from $6,675,000 in the year ended December 31, 2002. The savings were a
direct result of the Company's aggressive cost control measures and savings from
moving to an indirect sales model. The Company also recognized savings from
$153,000 in legal fees payable that was forgiven by its former counsel in lieu
of its consideration to resolve a potential conflict of interest. Total
operating expenses decreased to $6,675,000 in 2002 from $7,638,000 in the year
ended December 31, 2001 reflecting principally savings from staff reductions,
offset by a charge to expense of $276,000 to settle a judgment against the
Company by a former employee and a charge of $189,000 reflecting a stock bonus
given to employees. Additionally, 2001 included a $475,000 write-off of a note
receivable. Research and development costs increased by $844,000 due to the
ceasing of capitalizing software development costs in 2001.
Other Income (Expense)
Other expenses in the year ended December 31, 2003 increased to $1,362,000 from
$104,000 in 2002 primarily due to a $1,290,000 charge related to the non-cash
convertible note discount accretion associated with the David Vey financing
transactions in 2003. Other expenses decreased to ($104,000) from ($958,000) for
the year ended December 31, 2001 principally reflecting lower debt financing
costs.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity And Capital Resources
At December 31, 2003, cash and cash equivalents increased to $59,000, compared
to the December 31, 2002 amount of $0. For the year ended December 31, 2003, the
cash flows from operating activities resulted in a net use of cash of $2,216,000
compared to the December 31, 2002 net use of cash of $3,185,000. This use of
cash was primarily due to the reduction of accounts payable and accrued
expenses. For the year ended December 31, 2002, the cash flows used in operating
activities resulted in a net use of cash of $3,185,000 compared to the year
ended December 31, 2001 amount of $4,663,000. The decrease in use of cash for
operating activities in 2002 was primarily due to savings from reductions in
force and other operating expenses.
The cash flows from investing activities during the year ended December 31, 2003
resulted in a net use of cash of $6,000 to fund the purchase of equipment. For
the year ended December 31, 2002 the cash flows from investing activities
resulted in a net use of cash of $0 compared to the year ended December 31, 2001
amount of $1,698,000. The use of cash in 2002 decreased $1,698,000 principally
due to the fact that the Company did not capitalize any software development
costs during 2002.
For the year ended December 31, 2003, the cash flows from financing activities
resulted in net cash provided by financing activities of $2,281,000. The
principal increase in cash was due to proceeds from the issuance of our common
stock and convertible notes and the exercise of common stock warrants. For the
year ended December 31, 2002, cash flows from financing activities provided
$3,082,000 compared to the year ended December 31, 2001 amount of $4,275,000.
The decrease in cash from financing activities in 2002 was due principally to
lower proceeds from issuances of Company securities.
The Company believes that if it can generate funds from operations and
additional sales of securities, such funds will be sufficient to meet its
working capital requirements for 2004. In addition to the loss of ($4,212,000)
in 2003, the Company has incurred substantial net losses of approximately
($6,001,000) and ($10,434,000) during the years ended December 31, 2002 and
2001, respectively. Funding for current needs or those in the foreseeable future
may not be available. These factors raise substantial doubt about our ability to
continue as a going concern. The Company's plans include expanding the sale and
acceptance of its current and future strategic partnerships; targeting new
application solutions; and seeking additional debt or equity financing in
addition to aggressive cost containment measures.
Obligations And Commitments
The Company has various short term (within 12 months) and long term (greater
than 12 months) contractual and trade obligations. Below summarizes the timing
of such obligations as of December 31, 2003.
Payments Due by Period (in thousands)
----------------------------------------------------------------
Less than 1 1-3 3-5 +5
Total year years years years
---------------------------------------------------------------
Accounts Payable & Other Accrued $1,090 $950 140 - -
Liabilities
Promissory Notes - Vey 1,000 250 328 422 -
Long Term Debt 999 - 999 - -
Operating/Capital Lease Obligations 20 20 - - -
Building Leases 179 86 93 - -
----------------------------------------------------------------
TOTAL $3,288 $1,306 $1,560 $ 422 $-
================================================================
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
o This table assumes that short-term convertible debentures outstanding of
$620 as of March 25, 2004, due between June 2004 and December 2004,
will be converted into 2,699,219 shares of the Company's common stock.
The holder has the option of either a cash payment or share conversion.
In June 2000, the Company entered into a contract with a software vendor to
incorporate a component of that vendor's software into Intarsia. By April 2001,
Management determined that the project had become infeasible due to the lack of
support by the vendor and its unwillingness to meet certain contract
commitments. We notified the vendor of our concerns on several occasions and
ultimately delivered a notice of breach to the vendor in 2001, as required for
the termination of the underlying contract. As the vendor failed to respond or
cure the breach within the time permitted under the agreement, we consider the
contract to be terminated in accordance with its terms and we have concluded
that it is not appropriate to continue to accrue certain minimum payments under
the contract. Management's assessment is that we have a meritorious defense
against any vendor claim in this regard.
Should the dispute end unfavorably, it would result in minimum royalty payments
of $2,850,000. These amounts are not included in the above table.
Inflation
Although there can be no assurance that SEDONA's business will not be affected
by inflation in the future, Management believes inflation did not have a
material effect on the Company's results of operations or financial condition
during the periods presented herein.
Financial Risk Management
The Company invests its cash in variable rate money market securities, which are
not subject to interest rate or market risk.
From time to time the Company also has issued fixed-rate debt and preferred
stock, which is convertible into its common stock at a predetermined conversion
price. Convertible debt has characteristics that give rise to both interest-rate
risk and market risk because the fair value of the convertible security is
affected by both the current interest-rate environment and the price of the
underlying common stock. For the years ended December 31, 2003, 2002 and 2001,
the Company's convertible debt, on an if-converted basis, was not dilutive and,
as a result, had no impact on the Company's net income per share assuming
dilution. In future periods, the debt may be converted, or the application of
the if-converted method of calculating earnings per share may result in
additional shares outstanding in the diluted share count, resulting in net
income per share assuming dilution would be reduced. See Notes 5 and 6 to the
financial statements for additional information with respect to the Company's
long-term debt and convertible preferred stock.
Subsequent Events
The Company issued 14,593 shares of its common stock in lieu of $6,000 in fees
related to the litigation entered into by the Company as fully explained in Note
8. The Company also issued 10,248 shares of its common stock to a third party
for services rendered in the amount of $5,000.
On February 1, 2004, the Company issued 1,702,128 shares of its common stock to
investors in a private placement transaction for proceeds of $800,000. The
Company also issued 851,064 two-year warrants at an exercise price of $0.70 per
share.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
In February 2004, the Company received $40,000 in proceeds and issued 100,000
shares of its common stock from the exercise of 100,000 common stock warrants.
The Company also issued 20,000,000 shares of its common stock to Mr. David Vey
who elected to convert his outstanding debentures of $200,000.
Recent Accounting Pronouncements
The Company adopted SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity on July 1, 2003. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of SFAS No. 150 had no effect on
the financial statement presentation for the year ended December 31, 2003.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides guidance for entities
that voluntarily change from the intrinsic value method of accounting for stock
based compensation under APB 25 to the fair value method of accounting under
SFAS No. 123. Additional disclosures are required under SFAS No. 148 on both an
annual and interim basis.
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations ("SFAS No. 143") SFAS 143 addresses financial
accounting and reporting for legal obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and normal operation of a long-lived asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset and subsequently allocated
to expense over the asset's useful life. Adoption of SFAS No. 143 had no effect
on the company's consolidated financial position, consolidated results of
operations, or liquidity.
Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS No. 146") SFAS No. 146
addresses the accounting for costs associated with disposal activities covered
by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
and with exit and restructuring activities previously covered by Emerging Issues
Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146
supercedes EITF No. 94-3 in its entirety and requires that a liability for all
costs be recognized when the liability is incurred. SFAS No. 146 also
establishes a fair value objective for initial measurement of the liability.
SFAS No. 146 will be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
Effective July 1, 2003, the Company adopted SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 addresses the standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity that have been presented either entirely as equity or between the
liabilities section and equity section of the statement of financial position.
Adoption of SFAS No. 150 had no effect on the Company's financial statement
presentation for the year ended December 31, 2003.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).
This interpretation clarifies existing accounting principles related to the
preparation of consolidated financial statements when the equity investors in an
entity do not have the characteristics of a controlling financial interest or
when the equity at risk is not sufficient for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 requires a company to evaluate all existing arrangements to identify
situations where a company has a "variable interest" (commonly a thinly
capitalized entity) and further determine when such variable interests require a
company to consolidate the variable interest entities' financial statements with
its own. The Company is required to perform this assessment by March 31, 2004
and consolidate any variable interest entities for which it will absorb a
majority of the entities' expected losses or receive a majority of the expected
residual gains. Management has performed this assessment, and it is not aware of
any material variable interest entity that it may be required to consolidate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
See "Financial Risk Management" in Item 7, "Management's Discussion
and Analysis".
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
On June 20, 2003, Ernst & Young LLP ("E&Y") informed SEDONA Corporation (the
"Company) that E&Y was resigning from its role as the Company's independent
auditors, effective as of June 20, 2003.
The audit report of E&Y on the Company's consolidated financial statements for
the years ended December 31, 2002 and December 31, 2001, did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles, except that, in their
report dated April 8, 2003, E&Y's opinion was modified to include an uncertainty
about the Company's ability to continue as a going concern.
During its audit for the fiscal year ended December 31, 2002 and December 31,
2001, and for the subsequent interim period through the date of the Form 8-K
filing, June 26, 2003, (i) the Company had no disagreements with E&Y on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope and procedure, which, if not resolved to E&Y's satisfaction,
would have caused E&Y to make reference to the matter in their report, and (ii)
there have been no "reportable events" as defined in Item 304 (a)(1)(v) of
Regulation S-K.
The Company's Audit Committee accepted E&Y's resignation, effective June 20,
2003.
Effective August 29, 2003, McGladrey & Pullen, LLP, a member firm of RSM
International, was engaged as the principal accountant to audit the Company's
financial statements beginning with the fiscal year ended December 31, 2003.
21
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is
designed to ensure that information required to be disclosed by the Company in
this Form 10-K, and in other reports required to be filed under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported within the
time periods specified in the rules and forms for such filings.
Management of the Company, under the direction of the Company's Chief Executive
Officer and Chief Financial Officer, reviewed and performed an evaluation of the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Report. Based on that review and evaluation, the
Chief Executive Officer and Chief Financial Officer, along with other key
Management personnel of the Company, have determined that the disclosure
controls and procedures were and are effectively designed to ensure that
material information relating to the Company and its consolidated subsidiary
would be made known to them on a timely basis. There have been no significant
changes in internal controls subsequent to the date of such review and
evaluation.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE
REGISTRANT
The following table presents the names and positions of the persons who serve as
SEDONA's directors, executive officers and key employees, their ages as of March
19, 2004 and the length of time they have served in such positions:
===========================================================================================================
Name Age Position Since
-----------------------------------------------------------------------------------------------------------
David R. Vey 51 Chairman of the Board 2003
Marco A. Emrich 51 President, Chief Executive Officer, and Director 1999
Victoria V. Looney 46 Director, Audit Committee Member 2003
Jack Pellicci 65 Director 1996
James C. Sargent 88 Director, Audit Committee Chairman 1992
Robert M. Shapiro 58 Director, Audit Committee Member 1998
Alyssa S. Dver 39 Vice President, Chief Marketing Officer 2000
Anita M. Primo 36 Vice President, Chief Financial Officer and Corporate 2003
Secretary
Timothy A. Rimlinger 39 Vice President, Chief Technology Officer 2000
===========================================================================================================
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.
Information required under Rule 405 regarding disclosure about late or missing
Form 3, 4 or 5 filings is herein incorporated by reference to the Company's
PROXY STATEMENT.
Information required under Rule 406 regarding the Code of Ethics is herein
incorporated by reference to the Company's PROXY STATEMENT.
Mr. James C. Sargent is the Chairman of the Audit Committee and serves as the
Audit Committee's financial expert, as such term is defined in the rules and
regulations of the Securities and Exchange Commission. Ms. Looney and Mr.
Shapiro also serve on the Committee.
The business experience, principal occupation and employment of the Company's
Directors, Executive Officers and Key Employees have been as follows:
22
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE
REGISTRANT (continued)
David R. Vey has served as Chairman of the Board since May 2003 and has been a
Director of the Company since March 2003. Mr. Vey founded Vey Development, Inc.
a privately held residential and commercial real estate development company,
with primary real estate holdings in Louisiana and California, and has served as
President since 1983. Mr. Vey holds a Bachelor of Arts, Landscape Architecture
and a Bachelor of Science, Forest Management from Louisiana State University.
Marco A. Emrich served as Chief Executive Officer and President since September
1999. He has over 20 years of software industry experience. From 1998 to 1999,
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.
Victoria V. Looney has served as a Director of the Company since March 2003. Ms.
Looney co-founded ACEncrypt, LLC, a privately-held technology solutions
marketing firm providing expert security solution software and hardware
applications, consulting services and support to Corporate and Government
approved buyers. She has served as President of ACEncrypt Solutions since 2001.
Prior to founding ACEncrypt, Ms. Looney was Vice President of Sales at
GroupSystems.com from 1999 to 2001 and earlier held positions with IDCertify, as
Vice President of Business Development, from 1998 to 1999. She also served as
Vice President of Sales & Marketing from 1997 to 1998 for Dakotah Direct (a unit
of Genesis Teleserv Corporation.) Ms. Looney is a graduate of The School of
International Service, College of Public and International Affairs, of the
American University in Washington, DC where she received Baccalaureate in
International Studies. Mr. Vey, appointed Ms. Looney to the Board pursuant to
our financing agreement with Mr. Vey, in which he is entitled to appoint up to
30% of the members of the Board of Directors within 90 days of March 8, 2003.
Ms. Looney is the sister of the Chairman of the Board, Mr. David Vey.
Jack A. Pellicci has served as a Director since 1996; Mr. Pellicci is Group Vice
President of Business Development, for Oracle's Government, Education and Health
Industries, where he leads the Business Development Group for Oracle's Federal
and State/Local Governments, Education, Health and Aerospace/Defense Industries.
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
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 also serves as a Director on the Board of the
Fairfax County Chamber of Commerce, the United Services Organization (USO) of
Metroplitan Washington, and serves on the External Research Advisory Committee
for the University of Texas at Dallas and the Homeland Security Institute
Advisory Board at Purdue University. He currently serves as a Corporate Fellow
for the National Governors Association, and is a Fellow with the Council on
Excellence in Government and serves as a member of the council's CIO-SAGE
Program. 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.
23
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE
REGISTRANT (continued)
James C. Sargent has served as a Director since 1992. Mr. Sargent 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 served as New York Regional Administrator from 1955 to 1956, and
Commissioner of the Securities and Exchange Commission from 1956 to 1960. He
received his BA and LLB degrees from the University of Virginia.
Robert M. Shapiro has served as a Director since 1998. Mr. Shapiro is currently
Team Leader for Keller Williams Real Estate. From 1999 to 2002, he served as
Vice President of Global Sales and Business Development for Autoweb.com, a major
online automotive retailer. From 1995 to 1999, 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, (1984-1995). 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 17 years with IBM Corporation and Proctor & Gamble (1968 to
1984). 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.
Alyssa S. Dver has served as Vice President and Chief Marketing Officer since
April 2000. Prior to joining the Company, she founded Lead Factory, Inc., a
Massachusetts-based start-up company for web-based lead tracking solutions, from
January 2000 to February 2002. Prior to founding Lead Factory, Inc., Ms. Dver
was Vice President of Marketing and Customer Care for Empresa, Inc from November
1998 to September 1999. Empresa delivers electronic commerce solutions for
financial services and e-tailing organizations.
Anita M. Primo has served as Chief Financial Officer since December 2003. She
also serves as Corporate Secretary since the retirement of Michael Mulshine in
July 2003. Ms. Primo previously served as the Company's Controller since
December 2000. Prior to joining SEDONA, Ms. Primo was Vice President of Finance
and Administration for the Zoological Society of Philadelphia from 1998 to 2000.
She also served as Controller and Treasurer for Action Manufacturing, a major
manufacturer of precision ordnance products for the U.S. Government, U.S.
approved foreign governments and numerous domestic and international commercial
firms from 1989 to 1998.
Timothy A. Rimlinger served as Vice President of Engineering since July 2000 and
Chief Technology Officer since December 2003. Mr. Rimlinger is responsible for
the design, implementation and delivery for all of our products. Previously, he
served as Director of Technology Development since joining the Company in
January 1996. Before joining SEDONA, he was Senior Development Engineer at
Lockheed Martin from 1985 to 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information awarded to,
earned by, or paid for services rendered to the Company and its subsidiary in
all capacities during the three years ended December 31, 2003, 2002, and 2001
for the Company's President and Chief Executive Officer, who is the only
executive officer whose salary and bonus for such years exceeded $100,000:
24
ITEM 11. EXECUTIVE COMPENSATION (continued)
- --------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation
Compensation Awards
- --------------------------------------------------------------------------------------------------------------------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/Warrants Compensation
- --------------------------------------------------------------------------------------------------------------------------
Marco A. Emrich 2003 $230,353 $ 0 $ 0 0 $13,240*
President and Chief 2002 191,682 0 0 0 0
Executive Officer 2001 216,923 45,250 0 652,500 0
- --------------------------------------------------------------------------------------------------------------------------
* Compensation of $13,240 was paid by the issuance of 77,885 restricted
shares of our common stock. The restrictions were removed effective
April 1, 2003
The Compensation Committee's report on CEO compensation is herein incorporated
by reference to the Company's PROXY STATEMENT.
Stock Purchase Opportunities
Option Grants
The following table sets forth information with respect to the named Executive
Officers concerning individual grants of stock purchase opportunities made
during the year ended December 31, 2003.
Options Granted in Fiscal 2003
- ----------------------- --------------- ------------------- ------------ -------------- ------------ ------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted Exercise or Price Appreciation for
Options to Employees Base Price Expiration Option Term ($)
Name Granted (#) in 2003 ($/Sh) Date 5% 10%
- ----------------------- --------------- ------------------- ------------ -------------- ------------ ------------
Marco A. Emrich 0 0 0 0 0 0
- ----------------------- --------------- ------------------- ------------ -------------- ------------ ------------
Options Exercised and Unexercised
The following table sets forth information with respect to the named Executive
Officers concerning the exercise of options for the ended 2003 and the
unexercised options held as of December 31, 2003.
Aggregate Option Exercises In Last Fiscal Year
And Fiscal Year End Option Value
- --------------------- --------------- ------------ ---------------------------------- --------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options and Warrants at Options at
Acquired on Value December 31, 2003 December 31, 2003
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --------------- ------------ ---------------- ----------------- -------------- -----------------
Marco A. Emrich 0 0 1,377,500 0 0 0
- --------------------- --------------- ------------ ---------------- ----------------- -------------- -----------------
25
ITEM 11. EXECUTIVE COMPENSATION (continued)
Compensation Of Directors
Under the Company's 1992 Long-Term Incentive Plan, on the first business day of
January 1998 and on the first business day of January in each succeeding year
through January 2001, each of the Company's non-employee Directors received a
grant of an option to purchase shares of the Company's common stock at the
then-current fair market value, as determined in accordance with the 1992 Plan,
as follows: an option to purchase 15,000 shares of common stock for service on
the Company's Board of Directors during the preceding year, plus an option to
purchase 2,500 shares of common stock for serving as the Chairman of the Board
of Directors or Chairman of a Committee of the Board of Directors during the
preceding year. If, however, a Director became eligible for an option grant
after the first regularly scheduled meeting of the Company's Board of Directors
during any calendar year, the Compensation Committee of the Company's Board of
Directors determined the size of such option grant by multiplying 15,000 shares
(and/or 2,500 shares) by a fraction which was determined by dividing the number
of regularly scheduled Board of Directors meetings remaining in the calendar
year by six.
In addition, under the terms of the 1992 Plan, any new Director elected to the
Board of Directors was granted an option to purchase 25,000 shares of common
stock at the then-current fair market value. The shares underlying these options
were to vest at the rate of 5,000 shares per year for five years, commencing on
the first anniversary date of his election to the Board of Directors and on each
subsequent anniversary date thereafter.
Further, commencing in 1998, on or before January 31 in each year, each of the
Company's non-employee Directors would receive an annual retainer of $5,000 as
cash compensation for his services as a Director for the preceding year. Also,
each of the Company's non-employee Directors would receive $500 for attendance
at each Board of Directors and committee meeting, with multiple meetings held on
the same day to count as one. For services to the Board in 2001, Directors
received common stock in lieu of cash compensation, as authorized by the Board
in March 2002.
Certain revisions to non-employee Director compensation were made in 2002. Under
the Company's 2000 Incentive Stock Option Plan, each of the Company's
non-employee Directors, on the first business day of January of 2002 and on the
first business day of January in each succeeding year, shall receive as
compensation for service to the Board of Directors, a grant of an option to
purchase common stock, at the then current fair market value, as determined in
accordance with the Plan, as follows: a 30,000 share option grant for service to
the Board of Directors during the preceding year; plus, a 5,000 share option
grant for serving as the Chairman of the Board of Directors or of a Committee of
the Board of Directors during the preceding year. If, however, an Eligible
Director shall become eligible for an option grant after the first regularly
scheduled Meeting to the Board of Directors during any calendar year, the
Compensation Committee shall determine the size of such option grant by
multiplying 30,000 shares (and/or 5,000 shares) by a fraction which is
determined by dividing the number of regularly scheduled Board of Directors
meetings remaining in the calendar year by four. The non-employee directors were
issued the following option grants in January 2003 for service to our Board of
Directors in 2002: Mr. Pellicci and Mr. Sargent, 35,000 shares; Mr. Shapiro,
30,000 shares.
In addition, any new Director elected to the Company's Board of Directors will
be granted an option to purchase 50,000 shares of common stock, at the then
current fair market value. The option was adjusted from 25,000 shares by action
of the Board in March 2002. The shares underlying this option will vest at the
rate of 10,000 shares per year for five years, on the anniversary date of the
new Director's election to the Company's Board of Directors. In February 2003,
Ms. Looney was granted options to purchase 50,000 shares of our common stock. In
March 2003, Mr. Vey was also granted options to purchase 50,000 shares of our
common stock.
26
ITEM 11. EXECUTIVE COMPENSATION (continued)
If unexercised, each option shall expire on the tenth anniversary of the date of
grant and shall vest and become fully exercisable upon grant, with the exception
that the new Directors' options shall vest over five years. Once vested, options
shall remain fully exercisable until the earlier of: (i) the expiration of their
ten-year term; (ii) three years following the optionee's separation from Board
of Directors service for any reason; or (iii) one year following the death of
the optionee.
In March 2002, the Board increased the annual retainer to be paid to each of the
Company's non-employee Directors, beginning in January 2003 and thereafter, from
$5,000 to $10,000 as cash compensation for such Director's services for the
preceding year. At the same time, the Board increased the fee to be paid to each
of the Company's non-employee Directors for attendance at Board of Directors and
Committee Meetings for 2002 and thereafter from $500 to $750, with multiple
meetings held on the same day to count as one. The amounts were subject to
annual review and possible adjustment at the discretion of the Board of
Directors. In addition, any Director's cash compensation obligations that may
accrue would be paid in cash only if the Company is current in all of its cash
obligations, or on a change of control, assuming that all current cash
obligations had been met.
By action of the Board on January 9, 2003, the non-employee Directors' annual
retainer fee for services to the Board in 2002 was reduced to its prior level of
$5,000, and the fees to be paid to non-employee Directors for each attendance at
Board of Directors and Committee Meetings for 2002 and thereafter was reduced to
its prior level of $500 per meeting.
Employment Agreements And Change Of Control Arrangements
Agreement with Mr. Marco A. Emrich
On September 15, 1999, the Company entered into an employment agreement with
Marco A. Emrich, its Chief Executive Officer and President. The agreement had a
term of two years and three months. Pending renewal, Mr. Emrich continues to
serve under the terms of this agreement with an annual base salary of $225,000.
Mr. Emrich can also earn up to $100,000 annually in the form of cash bonus,
subject to quarterly measurements. In addition, under the agreement, Mr. Emrich
received 200,000 options and 175,000 warrants with an exercise price of $2.25,
which will vest monthly over a four-year period. He also was granted 350,000
warrants with an exercise price of $2.25, which will vest monthly over a
four-year period, and certain acceleration provisions based on stock price
performance. In the event of "Change of Control", as defined in the employment
agreement, within 12 months of the date of such Change of Control 33% of any
unvested options and warrants will accelerate, and after 12 months of such date,
50% of any unvested options and warrants will accelerate. In July 2001, Mr.
Emrich was granted 472,500 warrants with an exercise price of $1.03, which will
vest based on the same schedule as the warrants listed above. Also in July 2001,
Mr. Emrich received 180,000 options with an exercise price of $1.03, which will
vest based on the same schedule as the options listed above.
27
ITEM 11. EXECUTIVE COMPENSATION (continued)
Compensation Committee Interlocks And Insider Participation
The Company's Compensation Committee consists of Ms. Looney, Mr. Pellicci, and
Mr. Shapiro. None of the executive officers has served as a director or member
of the compensation committee (or other committee serving an equivalent
function) of any other entity, whose executive officers served as a director of
or member of our Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the common stock as of March 24, 2004 with respect to:
o Each person or group known to the Company who beneficially owns five
percent or more of the outstanding shares of the Company's common stock;
o Each Director and named Executive Officer; and
o The Company's Executive Officers and Members of its Board of Directors
as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares
beneficially owned. The business address of each person named in the table below
is c/o SEDONA Corporation, 1003 West Ninth Avenue, Second Floor, King of
Prussia, Pennsylvania 19406.
Beneficial ownership is determined in accordance with SEC rules and generally
includes voting or investment power with respect to securities. Shares of common
stock subject to options that are currently exercisable or exercisable within 60
days of the date of this prospectus are deemed outstanding for the purpose of
computing the percentage ownership of any person. These shares, however, are not
considered outstanding when computing the percentage ownership of any other
person.
- ------------------------------------------ ---------------------------------------- ------------------------
Name of Beneficial Owner Amount and Nature of Beneficial Percent of Class
Ownership
- ------------------------------------------ --------------------- ------------------ ------------------------
Marco A. Emrich 1,377,500 (1) 1.53%
- ------------------------------------------ --------------------- ------------------ ------------------------
Victoria V. Looney 67,500 (1) *
- ------------------------------------------ --------------------- ------------------ ------------------------
Jack Pellicci 242,868 (1) *
- ------------------------------------------ --------------------- ------------------ ------------------------
Anita M. Primo 91,700 (1) *
- ------------------------------------------ --------------------- ------------------ ------------------------
James C. Sargent 330,348 (1) *
- ------------------------------------------ --------------------- ------------------ ------------------------
Robert M. Shapiro 209,309 (1) *
- ------------------------------------------ --------------------- ------------------ ------------------------
David R. Vey 33,163,504 (1,2) 36.83%
- ------------------------------------------ --------------------- ------------------- -----------------------
All Executive Officers and Directors as
a group, (7 persons) 35,482,729 39.40%
========================================== ===================== =================== =======================
* Owner holds less than 1% of the class.
(1) Unless otherwise, indicated, each person possesses sole voting and
investment power with respect to the shares identified in the table as
beneficially owned. The table includes shares which the following
directors and executive officers have a right to acquire within 60
days upon the exercise of outstanding options and warrants:
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (continued)
Mr. Emrich - 380,000 options and 997,500 warrants
Ms. Looney - 10,000 options
Mr. Pellicci - 221,544 options
Ms. Primo - 52,974 options
Mr. Sargent -278,705 options
Mr. Shapiro - 187,250 options
Mr. Vey - 10,000 options and 2,281,023 warrants
(2) Mr. Vey has a right to acquire 2,699,219 shares within 60 days upon a
notice of conversion related to $620,000 in convertible debentures due
between June 2004 and December 2004. The related debentures were all
issued at or above fair market value on the date of the debenture
agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into the following financing agreements to provide working
capital with Mr. David R. Vey, Chairman of the Board of Directors as of March
20, 2004. Mr. Vey is a selling shareholder who owned more than 5% of the
Company's outstanding common stock.
In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
would be made available to the Company on various funding dates through March
2003. In December 2002, the Company received proceeds of $100,000 in the form of
a convertible debenture. In January 2003, the Company received proceeds of
$820,000 in the form of $220,000 in convertible debentures and a $600,000
promissory note. The promissory note bears interest at a rate of 7% and matures
on January 15, 2004. The Company may extend the maturity of the instrument for
up to three additional years subject to required pay downs. The convertible
debentures bear interest at rates ranging from 7% to 8% and are convertible at
the option of Mr. Vey into 13,000,000 shares of Company common stock. The
debentures mature at various dates in December 2003 and January 2004. As of
January 30, 2004, Mr. Vey elected to convert the above referenced debentures
into 13,000,000 shares of the Company's common stock, of which 3,000,000 shares
were received upon conversion by December 31, 2003.
Additionally, the Company received $500,000 in March 2003, in the form of a
$400,000 promissory note and a $100,000 convertible debenture. These instruments
have terms similar to those of the earlier investment, and will mature in March
2004, subject to the Company's option to extend for three additional years by
making required pay downs. The March 2003 debenture is convertible into
10,000,000 shares of our common stock. As of February 2, 2004, Mr. Vey elected
to convert the above referenced debentures into 10,000,000 shares of the
Company's common stock.
From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible debentures. The debentures were issued for a one-year
term and are convertible at the option of Mr. Vey at various dates from June
2004 to December 2004 into 2,699,219 shares of the Company's common stock.
In June 2003, Mr. Vey exercised a warrant to purchase 500,000 shares of the
Company's common stock at an exercise price of $0.35 per share providing
$175,000 in proceeds.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
In January 2004, Mr. Vey purchased 212,766 shares of the Company's common stock
for $100,000 in a private placement transaction. He is also granted common stock
warrants to purchase an additional 106,383 shares of the Company's common stock
at an exercise price of $0.70 per share.
Mr. Vey was also entitled to appoint up to 30% of the members our Board of
Directors within 90 days after the date of the financing arrangement in March
2003. Ms. Looney who is the sister of David Vey was appointed to the Board at
the request of Mr. Vey.
In September 2003, we sold a licensing agreement to ACEncrypt Solutions, LLC.
The President of ACEncrypt Solutions LLC, Victoria Looney, is a member of the
Board of Directors of SEDONA Corporation. David R. Vey, Chairman of the Board of
Directors of SEDONA Corporation also has a financial interest in ACEncrypt
Solutions. The total fee for the license agreement is $1,000,000, which includes
delivery of the current version of Intarsia plus the cost of other contract
defined milestones related to the development of derivative products for the
healthcare market. The Company has recognized $475,000 of revenue from this
transaction in the third quarter of 2003 related to sale of Intarsia, the
balance of the contract has been deferred until delivery of the remaining
milestones in accordance with SOP 97-2. The Company has also recognized $6,000
of services revenue related to maintenance services during the year. The balance
of $19,000 has been deferred and will be amortized through 2004 as services are
performed.
In March 2002, we entered into an agreement to purchase substantially all of the
assets of Lead Factory, Inc. for a combination of stock warrants and cash. The
Company's Chief Marketing Officer, Alyssa Dver, founded Lead Factory. The terms
of the sale included issuance of 100,000, ten-year warrants, at an exercise
price of $0.72 per share upon the signing of the agreement. The Company also
accrued $50,000 in royalties earned under the terms of this agreement during the
third quarter of 2003. Lead Factory, a Boston-based company which designs,
builds, and markets computer software and services to aid sales and marketing
persons with customer prospecting, initially became a partner in 2000 when we
acquired a 10% equity interest, which interest we had subsequently fully
reserved. This purchase agreement supercedes all earlier agreements with Lead
Factory.
In December 2001, the Company amended its consulting agreement with Osprey
Partners, a company that is owned by Michael A. Mulshine, the Company's
Secretary and one of its Directors. Under that agreement, Osprey was to provide
services to the Company with regard to shareholder and investor relations
activities and for management consulting services. Under the agreement, Osprey
was issued warrants to purchase up to 64,620 shares of common stock, with such
warrants to vest at the rate of 5,385 shares on the first of each month for the
twelve months starting January 1, 2002, and such warrants are exercisable for up
to ten years at an exercise price of $0.72 per warrant. Under the agreement,
Osprey was also to be paid a monthly retainer in the amount of $3,500 through
December 2002. By action of the Board, effective September 2002 and through
December 2002, Mr. Mulshine's compensation was amended to a monthly cash
retainer of $10,000 in lieu of the prior cash and warrants compensation
schedule.
In September 2002, the Company's Board of Directors approved the retention of
Mr. Barry Borden, then one of the Company's Directors, as a Management
Consultant for a term of three months expiring December 31, 2002. Pursuant to
this retention arrangement, the Company agreed to pay Mr. Borden a monthly
amount of $5,000 for each month including an additional $5,000 for previous
services.
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
In October 2001, Laurence L. Osterwise, a former Director, loaned $48,000 and
$100,000 to SEDONA pursuant to convertible note and warrant agreements. The
notes bear interest at 7% per annum and were originally due on December 3 and
11, 2001, respectively, but were extended to March 3 and 11, 2002. The notes are
convertible into 240,000 and 500,000 shares of common stock, respectively, if
not repaid at maturity. Mr. Osterwise was also granted warrants to acquire up to
24,000 and 50,000 shares of common stock at $.40 per share until October 4 and
12, 2005, in connection with the respective notes. As of December 31, 2003, the
obligation has been fully satisfied.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
----------------------------- --------------- ---------------- --------------
Type of Service 2003 2002 Total
----------------------------- --------------- ---------------- --------------
Audit Fees $133,919 $103,545 $244,092
----------------------------- --------------- ---------------- --------------
Audit-Related Fees - - -
----------------------------- --------------- ---------------- --------------
Tax Fees - 24,750 24,750
----------------------------- --------------- ---------------- --------------
All Other Fees 9,750 0 3,878
----------------------------- --------------- ---------------- --------------
Total Fees $143,669 $128,295 272,720
----------------------------- --------------- ---------------- --------------
All audit and related fees are pre-approved by the Company's audit committee on
an annual basis. Discussion under Rule 2.01 of Regulation S-X is herein
incorporated by reference to the Company's PROXY STATEMENT.
Audit Fees. This category includes: The audit of the Company's Annual Financial
Statements; the timely review of the interim financial statements included in
the Company's quarterly reports on Form 10-Q for the periods ended March 31,
June 30 and September 30, 2003 and 2002; and services that are normally provided
by the independent auditors in connection with engagements for those fiscal
periods. This category may also include advice on audit and accounting matters
that arose during, or as a result of, the audit or review of interim financial
statements. This category also includes services in connection with statutory
and regulatory filings or engagements.
Audit-Related Fees. This category consists of assurance and related services by
the independent auditors that are reasonably related to the performance of the
audit or review of the Company's financial statements and are not reported above
under "Audit Fees". The services for the fees disclosed under this category
include financial information systems design and implementation services
rendered by the independent auditor.
Tax Fees. This category consists of professional services rendered by the
independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.
All Other Fees. This category includes services rendered by the independent
auditors other than for services reported above.
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 15(a) 1 and 2 Financial Statements and Schedules.
See "Index to Financial Statements and Schedule" on F-1.
(b) Reports on Form 8-K filed June 27, 2003, September 4, 2003 and
March 18, 2004
(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.
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)
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 4.0)
10.12 Convertible Debentures and Warrants Purchase Agreement, dated
November 22, 2000 (7) (Exhibit 99.2)
10.22 Lease between Teachers Insurance and Annuity Association and the
Company (9) (Exhibit 99.1)
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)
10.30 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 (14) (Exhibit 10.30)
10.31 Finder's Fee Agreement between the Company and Osprey Partners, dated
February 24, 1999 (8) (Exhibit 10.31)
10.35 Warrant issued to Acxiom Corporation Dated April 4, 2001 (8)
(Exhibit 10.35)
32
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(continued)
10.36 Form of Common Stock and Warrants Purchase Agreements used in August
2001 to September 2002 private placements by and among the Company and
the investors signatory thereto (12) (Exhibit 10.1)
10.37 Form of Registration Rights Agreements used in August 2001 to September
2002 private placements by and among the Company and the investors
signatory thereto. (12) (Exhibit 10.2)
10.38 Form of Notes dated September and October 2001 by and among the Company
and investors signatory thereto. (12) (Exhibit 10.3)
10.38 Form of Warrants issued to investors used in August 2001 to September
2002 private sales of common stock and notes. (12) (Exhibit 10.4)
10.39 Agreement and related Promissory Note dated February 14, 2002 related
to retirement of November 2000 Convertible Debentures and Warrants.(13)
10.40 Agreement for purchase of assets of Lead Factory, Inc. dated March 29,
2002. (13)
10.42 Convertible note dated December 6, 2002 (14)
10.43 Convertible note dated January 03, 2003 (14)
10.44 Convertible note dated January 10, 2003 (14)
10.45 Promissory note dated January 10, 2003 (14)
10.46 Convertible note dated March 13, 2003 (14)
10.47 Promissory note dated March 13, 2003 (14)
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Ernst & Young LLP
24.1 Power of attorney (included on the signature page to this Form 10-K)
99.1 Statement Under Oath of the Company's Chief Executive and Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
* Filed herewith.
# Executive Compensation Plans and Arrangements.
(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.
33
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(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 Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999.
(7) Filed as an Exhibit to the Current Report on Form 8-K filed November
28, 2000.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 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 Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2001.
(13) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
(14) Filed as an Exhibit to the Annual Report on Form 10-K/A for the fiscal
year ended December 31, 2002.
34
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEDONA CORPORATION
March 29, 2004 /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
amendment has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
Signatures
BY /S/ David R. Vey Date March 29, 2004
------------------------------------------- --------------------------
David R. Vey
Chairman of the Board
BY /S/ Marco A. Emrich Date March 29, 2004
------------------------------------------- --------------------------
Marco A. Emrich
President, Chief Executive Officer and
Director
BY /S/ Victoria V. Looney Date March 29, 2004
------------------------------------------- --------------------------
Victoria V. Looney
Director
BY /S/ Jack Pellicci Date March 29, 2004
------------------------------------------- --------------------------
Jack Pellicci
Director
BY /S/ Anita M. Primo Date March 29, 2004
------------------------------------------- --------------------------
Anita M. Primo
Chief Financial Officer and Vice President
Principal Financial and Accounting Officer
BY /S/ James C. Sargent Date March 29, 2004
------------------------------------------- --------------------------
James C. Sargent
Director
BY /S/ Robert M. Shapiro Date March 29, 2004
------------------------------------------- --------------------------
Robert M. Shapiro
Director
35
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Marco A. Emrich, the principal Executive Officer of SEDONA Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of SEDONA Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying Officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying Officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves Management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying Officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 29, 2004 /s/ Marco A. Emrich
-------------- -------------------------------------
Marco A. Emrich
President and Chief Executive Officer
36
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Anita M. Primo, the principal Financial Officer of SEDONA Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of SEDONA Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying Officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying Officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves Management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying Officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 29, 2004 /s/Anita M. Primo
-------------- -------------------------------------
Anita M. Primo
Chief Financial Officer
37
Index to Financial Statements and Schedule
Contents
Reports of Independent Auditors..............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and 2002.................F-4
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2003.......................F-5
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2003.......................F-6
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2003.......................F-8
Notes to Consolidated Financial Statements...................................F-9
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
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
SEDONA Corporation
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheet of SEDONA
Corporation and its subsidiary as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SEDONA Corporation
and its subsidiary as of December 31, 2003, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that SEDONA
Corporation will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred substantial
operating losses, has negative working capital and stockholders' equity and
anticipates that it will require additional debt and/or equity financing in
2004, 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/ McGladrey & Pullen, LLP
Bethesda, Maryland
February 20, 2004
F-2
Report of Independent Auditors
Board of Directors and Stockholders
SEDONA Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of SEDONA
Corporation and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 2002. 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, 2002 and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2002, 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
consolidated financial statements, the Company has incurred substantial
operating losses, has negative working capital and stockholders' equity and
anticipates that it will require additional debt and/or equity financing in
2003, 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
Philadelphia, Pennsylvania
April 8, 2003
F-3
SEDONA Corporation and Subsidiary
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31,
2003 2002
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 59 $ -
Restricted cash - 238
Accounts receivable, net of allowance for doubtful accounts of $13
and $16 179 53
Prepaid expenses and other current assets 138 186
---------------------------
Total current assets 376 477
Property and equipment, net of accumulated depreciation and amortization 66 238
Software development costs, net of accumulated amortization of $3,531 and $2,834 351 1,048
Non-current assets - other 39 7
---------------------------
Total non-current assets 456 1,293
---------------------------
Total assets $ 832 $ 1,770
===========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 425 $ 820
Accrued expenses and other current liabilities 665 1,226
Deferred revenue 314 394
Note payable to related party - 148
Current maturities of long-term debt 20 1,010
Short-term debt - debentures 1,697 7
---------------------------
Total current liabilities 3,121 3,605
Long-term debt, less current maturities 953 12
Interest Payable 46 -
---------------------------
Total long-term liabilities 999 12
---------------------------
Total liabilities 4,120 3,617
Stockholders' equity/(deficit):
Class A convertible preferred stock (Liquidation Preference $2,500)
Authorized shares - 1,000,000
Series A, par value $2.00, Issued and outstanding - 500,000 1,000 1,000
Series F, par value $2.00, Issued and outstanding shares -
Issued 0 at 12/31/03 and 780 at 12/31/02 - 2
Series H, par value $2.00, Issued and outstanding shares - 1,500 3 3
Common stock, par value $0.001
Authorized shares -125,000,000, Issued and outstanding shares -
61,131,513 and 51,301,197 in 2003 and 2002, respectively 61 51
Additional paid-in-capital 60,048 57,285
Accumulated deficit (64,400) (60,188)
---------------------------
Total stockholders' equity/(deficit) (3,288) (1,847)
---------------------------
Total liabilities and stockholders' equity/(deficit) $ 832 $ 1,770
===========================
See accompanying notes.
F-4
SEDONA Corporation and Subsidiary
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
For years ended December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
Revenues:
Product licenses - unrelated parties $ 531 $ 754 $ 645
Product licenses - related parties 475 - -
Services 516 1,753 1,512
-------------------------------------------
Total revenues 1,522 2,507 2,157
Cost of revenues:
Product licenses 699 1,199 1,544
Services 179 397 1,219
Write-off of capitalized and purchased software - 133 1,232
-------------------------------------------
Total cost of revenues 878 1,729 3,995
-------------------------------------------
Gross profit (loss) 644 778 (1,838)
Expenses:
General and administrative 2,275 4,256 3,408
Sales and marketing 341 1,192 3,372
Charge for note receivable - - 475
Research and development 878 1,227 383
Legal fees payable forgiven in lieu of other consideration (153) - -
-------------------------------------------
Total operating expenses 3,341 6,675 7,638
-------------------------------------------
Loss from operations (2,697) (5,897) (9,476)
Other income (expense):
Interest income - 5 54
Interest expense (204) (52) (1,012)
Convertible debenture expense (1,290) - -
Other (21) (57) -
-------------------------------------------
Total other income (expense) (1,515) (104) (958)
-------------------------------------------
Net Loss (4,212) (6,001) (10,434)
Preferred stock dividends (15) (303) 154
-------------------------------------------
Loss applicable to Common Stockholders $ (4,227) $ (6,304) $ (10,280)
===========================================
Basic and diluted net loss per share applicable to common shares
$ (0.08) $ (0.13) $ (0.28)
===========================================
Basic and diluted weighted average common shares outstanding 54,807,551 48,376,941 36,838,317
===========================================
See accompanying notes.
F-5
SEDONA Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
Class A Preferred
------------------------------------------------------------
Stock Series A Stock Series F Stock Series H
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------
------------------------------------------------------------
Balance, December 31, 2000 500,000 $1,000 780 $ 2 1,500 $ 3
------------------------------------------------------------
Stock warrants/options issued for consulting services - - - - - -
Warrants issued in conjunction with debenture issue - - - - - -
Conversion of debenture into common stock - - - - - -
Exercise of common stock warrants - - - - - -
Issuance of common stock - - - - - -
Common stock issued for employee stock purchase plan - - - - - -
Expenses incurred related to issuance of common stock - - - - - -
Repricing of warrants - - - - - -
Preferred stock dividends - - - - - -
Net loss, year ended December 31, 2001 - - - - - -
------------------------------------------------------------
Balance, December 31, 2001 500,000 1,000 780 2 1,500 3
------------------------------------------------------------
Stock warrants/options issued for consulting services - - - - - -
Fair value of convertible feature of debt obligation - - - - - -
Warrants issued in conjunction with debenture issue - - - - - -
Conversion of debenture into common stock - - - - - -
Exercise of common stock warrants - - - - - -
Issuance of common stock - - - - - -
Common stock issued for employee stock purchase plan - - - - - -
Expenses incurred related to issuance of common stock - - - - - -
Exercise of common stock options - - - - - -
Preferred stock dividends - - - - - -
Net loss, year ended December 31, 2002 - - - - - -
------------------------------------------------------------
Balance, December 31, 2002 500,000 1,000 780 2 1,500 3
------------------------------------------------------------
Common stock issued for consulting services - - - - - -
Common stock issued for legal expenses related to litigation - - - - - -
Conversion of debenture into common stock - - - - - -
Exercise of common stock warrants - - - - - -
Issuance of common stock - - (780) (2) - -
Conversion of preferred stock and related dividends into common - - - - - -
stock
Fair value of options & warrants - - - - - -
Fair value of convertible feature of debentures - - - - - -
Preferred stock dividends - - - - - -
Net loss, year ended December 31, 2003 - - - - - -
------------------------------------------------------------
Balance, December 31, 2003 500,000 $1,000 - - 1,500 $ 3
============================================================
See accompanying notes.
F-6
SEDONA Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
--------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
------------------------------------------------------
Balance, December 31, 2000 31,225,422 $ 31 $45,808 $ (43,753)
------------------------------------------------------
Stock warrants/options issued for consulting services - - 275 -
Warrants issued in conjunction with debenture issue - - 180 -
Conversion of debenture into common stock 2,498,401 2 2,116 -
Exercise of common stock warrants 56,666 - - -
Issuance of common stock 7,506,016 8 4,444 -
Common stock issued for employee stock purchase plan 76,036 - 25 -
Expenses incurred related to issuance of common stock - - (215) -
Repricing of warrants - - 52 -
Preferred stock dividends - - 154 -
Net loss, year ended December 31, 2001 - - - (10,434)
------------------------------------------------------
Balance, December 31, 2001 41,362,541 41 52,839 (54,187)
------------------------------------------------------
Stock warrants/options issued for consulting services - - 148 -
Fair value of convertible feature of debt obligation - - 100 -
Conversion of debenture into common stock 679,925 1 480 -
Exercise of common stock warrants 2,693,307 3 1,236 -
Issuance of common stock 6,386,760 6 2,551 -
Common stock issued for employee stock purchase plan 172,672 - 53 -
Expenses incurred related to issuance of common stock - - (129) -
Exercise of common stock options 5,992 - 7 -
Preferred stock dividends - - - -
Net loss, year ended December 31, 2002 - - - (6,001)
------------------------------------------------------
Balance, December 31, 2002 51,301,197 51 57,285 (60,188)
------------------------------------------------------
Common stock issued for consulting services 2,048,752 2 363 -
Common stock issued for legal expenses related to litigation 908,693 1 219 -
Conversion of debenture into common stock 3,000,000 3 217 -
Exercise of common stock warrants 650,000 1 189 -
Issuance of common stock 2,255,921 2 428 -
Conversion of preferred stock and related dividends into common 966,950 1 - -
stock
Fair value of options & warrants - - 27 -
Fair value of convertible feature of debentures - - 1,320 -
Preferred stock dividends - - - -
Net loss, year ended December 31, 2003 - - - (4,212)
------------------------------------------------------
Balance, December 31, 2003 61,131,513 $ 61 $ 60,048 $ (64,400)
======================================================
See accompanying notes.
F-7
SEDONA Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
2003 2002 2001
---------------------------------------
Operating activities:
Net loss $ (4,212) $ (6,001) $ (10,434)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 165 267 382
Amortization 697 1,173 1,523
Net loss on retirement of property, plant and equipment 13 16 -
Charge for employer 401(K) stock contribution 82 97 -
Charge for legal and consulting services 583 - -
Charge for note receivable - - 475
Option or warrant based compensation 27 148 457
Amortization of deferred financing fees and debt discount 1,290 7 656
Impairment loss on capitalized software - 133 1,232
Charge for employee stock award - 189 -
Changes in operating assets and liabilities:
Restricted cash 238 51 199
Accounts receivable (126) 278 235
Prepaid expenses and other current assets 48 (21) 19
Other non-current assets (31) 17 6
Accounts payable and accrued expenses (910) 576 640
Deferred revenue and other (80) (115) (53)
---------------------------------------
Net cash used in operating activities $ (2,216) $ (3,185) $ (4,663)
Investing activities:
Purchase of property and equipment $ (24) $ - $ (74)
Proceeds from the sale of property and equipment 18
Increase in notes receivable - - (475)
Increase in capitalized software development costs - - (1,149)
---------------------------------------
Net cash used in investing activities $ (6) $ - $ (1,698)
Financing activities:
Payment of preferred stock dividends $ - $ - $ (30)
Repayments of long-term obligations (49) (57) (105)
Issuance of common stock, net 250 2,292 4,262
Proceeds from exercise of common stock warrants/options 190 1,246
-
Proceeds from issuance of short-term debenture and notes 1,940 - 248
Repayment of note payable to related party (50) - -
Repayment of short-term debentures - (399) (100)
---------------------------------------
Net cash provided by financing activities 2,281 3,082 4,275
---------------------------------------
Net increase (decrease) in cash and cash equivalents 59 (103) (2,086)
Cash and cash equivalents, beginning of year - 103 2,189
---------------------------------------
Cash and cash equivalents, end of year $ 59 $ 0 $ 103
=======================================
See accompanying notes.
F-8
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years ended December 31, 2003, 2002, and 2001
1. Accounting Policies
Description of Business
SEDONA Corporation is a software application and service provider that develops,
markets and delivers Internet-based Customer Relationship Management (CRM)
application solutions for the small to mid-sized financial services market. The
Company's CRM solution, named Intarsia, provides financial services
organizations with the ability to effectively identify, acquire, foster, and
maintain loyal, profitable customers.
As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions, allowing the Company to focus on its end
user indirect business model and providing users of Intarsia with Fiserv's
resources to support and grow the Intarsia product line.
As of December 31, 2002, SEDONA has implemented an indirect sales distribution
model, under which the Company licenses its CRM technology to Third Party
Alliance Partners (TPAP), who market, sell, distribute and support SEDONA's
technology either as a component of the Company's TPAP total solution or as a
standalone offering.
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 net losses of approximately $4,212,000, $6,001,000 and
$10,434,000 during the years ended December 31, 2003, 2002 and 2001,
respectively. If the TPAP do not distribute SEDONA's Intarsia product at sales
levels projected, and the Company does not license its CRM technology to other
TPAP's, the Company will require additional financing in 2004, 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 current and future
strategic alliances; targeting new application solutions; and seeking additional
debt or equity financing in addition to aggressive cost containment measures.
Principles of Consolidation
The Company's consolidated financial statements include the accounts of its
wholly owned subsidiary, SEDONA(R)GeoServices, Inc., and Technology Resource
Centers, Inc. All significant intercompany accounts and transactions have been
eliminated.
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.
F-9
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all unencumbered highly liquid investments with maturity
of three months or less when purchased to be cash equivalents.
Accounts Receivable
Trade receivables are generated primarily from our alliance partners.
Receivables are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. A valuation allowance is provided for known and anticipated credit
losses, as determined by Management in the course of regularly evaluating
individual customer receivables. Receivables are written off when deemed
uncollectible. Recoveries of receivables previously written off are recorded
when received.
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. The
carrying amounts of the Company's long-term debt is also estimated to
approximate fair value due to the relatively short maturity period and interest
rate being charged.
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 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.
F-10
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
The Company periodically reviews for impairment the carrying value of both
internally developed and purchased software costs. The Company will record
impairment in its operating results if the carrying value exceeds the future
estimated undiscounted cash flows of the related assets. In 2002 the Company
wrote-off $133,000 of capitalized software that was deemed impaired because a
major component of the Company's software had been retired. The Company does not
believe that the impact of the write-off of software will be significant to
future operations.
During the third quarter of 2001, the Company completed a review of its
capitalized and purchased software to determine if any of its products were
impaired. Based on the reduction in the overall level of expected software
revenue levels in certain product categories, management prioritized where
marketing and future development dollars would be spent. Since revenues were
significantly less in the purchased software acquired in the CIMS acquisition,
management decided to re-focus its available resources and develop and market
newer technology. Therefore, the expected future level of revenues from the
majority of the acquired CIMS products is not expected to materialize because,
although still maintained for customers that have not upgraded to Intarsia, the
CIMS products will no longer be marketed to new customers. As a result of the
expected future decline in revenues from the CIMS product, the Company wrote-off
$1,232,000 of capitalized and purchased software in 2001.
During 2003, 2002, and 2001, the Company capitalized $0, $0, and $1,149,000,
respectively, of software development costs related to the Company's Intarsia
business application solution software. During 2003, 2002, and 2001, $697,000,
$1,173,000, and $1,523,000 were charged to expense relating to amortization of
software development costs.
Revenue Recognition
The Company's software arrangements currently consist of license fees, and
maintenance. Prior to the sale of the customer base, revenue also included fees
from installation services. The Company has established vendor specific
objective evidence (VSOE) of fair value for its maintenance contracts based on
the price of renewals of existing maintenance contracts. The remaining value of
the software arrangement is allocated to license fees and professional services
based on contractual terms agreed upon by the customer and based on
Company-maintained list prices.
Product License Revenue
Revenues from the sale of product licenses are recognized upon delivery and
acceptance of the software when persuasive evidence of an arrangement exists,
collection is probable, and the fee is fixed or determinable. Although the
Company's software product can be implemented on its customers' systems without
significant alterations to the features and the functionality of the software,
or without significant interfacing, the Company's license agreements are written
so that formal written acceptance of the product is received when installation
is complete. Therefore, the timing of license fee revenue recognition coincides
with the completion of the installation and the customer has accepted the
software.
F-11
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Through its strategic alliance partners, the Company receives a royalty payment
based on a percentage of the license fee charged by the strategic partner. The
Company recognizes the royalty fee when it receives written acknowledgement from
the TPAP that royalties have been earned and monies are owed to the Company. For
the year ended December 31, 2003, the Company recognized $1,006,000 in product
license revenues compared to $754,000 and $645,000 in the years ended December
31, 2002 and 2001, respectively.
Services Revenue
Services revenue includes professional services (primarily installation and
training services) and maintenance revenue over periods not exceeding one year.
Installation service revenue, which consists of implementation planning,
hardware and software set-up, data integration including data aggregation,
conversion, cleansing and analysis, and testing and quality assurance, is
accounted for as a separate element of a software arrangement.
Additionally, in certain circumstances, the Company may partner with third
parties to implement its software. In those instances, the contractual fee for
professional services may be paid directly from the customer to the third party,
and the Company recognizes the license fee revenue component upon installation
and acceptance by the customer.
o Installation revenue is recognized upon completed installation and
customer acceptance and is based on a contractual hourly rate.
Installation is usually completed in 100 hours or less. Training
revenue is not a material element of a contract and revenue is
recognized as training services are provided.
o Maintenance revenue is recognized ratably over the life of the related
contract. The Company establishes the value of maintenance revenue
based on the price quoted and received for renewals of existing
maintenance contracts.
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 convertible
securities. As the Company incurred losses in 2003, 2002, and 2001, 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.
F-12
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Stock-Based Compensation
The Company uses the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, for options
granted to employees. Accordingly, compensation cost related to option grants to
employees is measured as the excess, if any, of the fair value of the Company's
shares at the data of the grant over the option exercise price and such cost is
charged to operations over the related option vesting period. SFAS No. 123,
Accounting for Stock-Based Compensation, requires that companies record
compensation cost for equity-based compensation to non-employees based on fair
values. Accordingly the Company records compensation cost for options granted to
non-employees using a fair value based method over the related option vesting
period.
SFAS No. 123 requires the disclosure of pro forma net income (loss) and earnings
(loss) per share had the Company adopted the fair value method since the
Company's inception. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of feely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. If the computed values of the Company's
stock-based awards to employees had been amortized to expense over the besting
period of the awards, net loss would have been (in thousands, except per unit
information):
- -------------------------------------------------------------------------------
Year Ended December 31
--------------------------------------------
2003 2002 2001
--------------------------------------------
Net loss
As reported $ (4,212) $ (6,001) $ (10,434)
Pro forma $ (4,951) $ (7,448) $ (11,946)
Net loss applicable to common
shares
As reported $ (.08) $ (0.13) $ (0.28)
Pro forma $ (.09) $ (0.16) $ (0.32)
- -------------------------------------------------------------------------------
Assumptions used in calculating the fair value of the options and warrants
granted in 2003, 2001 and 2001 are as follows:
- ---------------------------------- --------------------- ----------------- -------------------
2003 2002 2001
- ---------------------------------- --------------------- ----------------- -------------------
Risk-free interest rate: 1.60% - 4.07% 2.4%-5.1% 6%
- ---------------------------------- --------------------- ----------------- -------------------
Expected volatility: 125% 121% 93%
- ---------------------------------- --------------------- ----------------- -------------------
Expected holding period: 2-10 years 3-10 years 2-10 years
- ---------------------------------- --------------------- ----------------- -------------------
Expected dividend yield: 0% 0% 0%
- ---------------------------------- --------------------- ----------------- -------------------
New Accounting Pronouncements
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 requires an impairment loss to be recognized
only if the carrying amounts of long-lived assets to be held and used are not
recoverable from their expected undiscounted future cash flows.
F-13
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Adoption of SFAS No. 144 had no effect on the company's consolidated financial
position, consolidated results of operations, or liquidity.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides guidance for entities
that voluntarily change from the intrinsic value method of accounting for stock
based compensation under APB 25 to the fair value method of accounting under
SFAS No. 123. Additional disclosures are required under SFAS No. 148 on both an
annual and interim basis.
Effective January 1, 2003, Sedona adopted SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS No. 143") SFAS 143 addresses financial accounting
and reporting for legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
over the asset's useful life. Adoption of SFAS No. 143 had no effect on the
company's consolidated financial position, consolidated results of operations,
or liquidity.
Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS No. 146") SFAS No. 146
addresses the accounting for costs associated with disposal activities covered
by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," and with exit and restructuring activities previously covered by
Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS
No. 146 supercedes EITF No. 94-3 in its entirety and requires that a liability
for all costs be recognized when the liability is incurred. SFAS No. 146 also
establishes a fair value objective for initial measurement of the liability.
SFAS No. 146 will be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
Effective July 1, 2003, the Company adopted SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 addresses the standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity that have been presented either entirely as equity or between the
liabilities section and equity section of the statement of financial position.
Adoption of SFAS No. 150 had no effect on the Company's financial statement
presentation for the year ended December 31, 2003.
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).
This interpretation clarifies existing accounting principles related to the
preparation of consolidated financial statements when the equity investors in an
entity do not have the characteristics of a controlling financial interest or
when the equity at risk is not sufficient for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 requires a company to evaluate all existing arrangements to identify
situations where a company has a "variable interest" (commonly a thinly
capitalized entity) and further determine when such variable interests require a
company to consolidate the variable interest entities' financial statements with
its own. The Company is required to perform this assessment by March 31, 2004
and consolidate any variable interest entities for which it will absorb a
majority of the entities' expected losses or receive a majority of the expected
residual gains. Management has performed this assessment, and it is not aware of
any material variable interest entity that it may be required to consolidate.
F-14
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
2. Restricted Cash
In December 2002, the Company negotiated a cancellation of its executive office
lease for facilities at 455 South Gulph Road, Suite 300, King of Prussia, PA
19406 and entered into a new lease for smaller space at 1003 West Ninth Avenue,
Second Floor, King of Prussia, PA 19406. In January 2003, the Company paid
$104,000 of accrued rent and a $134,000 termination charge from restricted cash
to settle the obligation at its former leased facility. The balance of
restricted cash at December 31, 2003 is $0.
3. Property and Equipment
Property and equipment consist of the following (in thousands, except per unit
information):
December 31,
2003 2002
---------------------
Machinery and equipment $ 1,005 $ 1,003
Equipment under capital lease 209 227
Furniture and fixtures 46 152
Leasehold improvements 40 62
Purchased software for internal use 193 193
---------------------
1,493 1,637
Less accumulated depreciation and amortization 1,427 1,399
---------------------
$ 66 $ 238
=====================
4. Long-Term Debt
Long-term debt consists of obligations with original maturities of one year or
more, as follows (in thousands, except per unit information):
December 31,
2003 2002
-----------------------
Note payable - CIMS acquisition Due 2006 (Note 16) $ 953 $ 955
Interest payable 46 -
Capital lease obligations (Note 11) 20 67
-----------------------
1,019 1,022
Less current maturities 20 1,010
-----------------------
Long-term debt $ 999 $ 12
=======================
F-15
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
5. Convertible Debentures
On November 22, 2000, the Company issued a $3,000,000 private placement
Debenture convertible into its common stock. The net proceeds were approximately
$2,320,000, of which $2,246,000 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 were originally due and payable 120
days from issuance or, at the Company's request, but could 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 could 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 were 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 $472,000, 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 were only exercisable if the convertible Debenture was 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 $972,000 were accreted into interest expense over the 120-day life of
the Debentures. At December 31, 2000, $316,000 had been recognized as interest
expense, and the remaining amount was recognized as interest expense during
2001.
On March 22, 2001, the Company obtained an extension until April 22, 2001
related to this Convertible Debenture and on April 30, 2001 a further extension
agreement was negotiated which extended maturity until January 2002 by
increasing the interest prospectively to 8.5% and by repricing 56,666 warrants
held by the investor from an earlier transaction to $0.001 per share. A charge
of $52,000 has been recorded in the 2001 financial statements related to this
repricing. Through December 31, 2001, $2,196,000 in principal value and interest
of $49,000 regarding this debenture has been converted into 2,498,401 shares of
common stock. In February 2002, a restructuring agreement was finalized which
retired this Debenture in its entirety by allowing for conversion of $400,000 in
principal and payoff of accrued interest and remaining principal of $399,000 by
cash payment of $50,000 at closing, and a promissory note of $349,000 payable in
installments over the following 7 months to retire the remainder. As of December
31, 2002 the debenture was retired.
During the period September through October 2001, the Company sold 60-day notes
with a face value of $248,000 and issued 124,000 four-year warrants at an
exercise price of $0.40 per share to investors for an aggregate purchase price
of $248,000. The Company allocated a fair value of $32,000 to the warrants,
which was treated as a debt discount and an addition to additional paid in
capital. The shares underlying the warrants may not be resold or otherwise
transferred until the later of: (a) the effectiveness of a registration
statement registering the common stock underlying the warrants and (b) six
months from the issuance of the warrants. If not redeemed at maturity, these
notes would become convertible into shares of common stock at a price of $0.20
per share at the option of the shareholder. At maturity, $100,000 of the
aggregate $248,000 was paid off. The remaining $148,000 became convertible into
740 shares of common stock. Upon maturity of the note, the fair value of the
Company's common stock was $0.67. Consequently, the intrinsic value of the
conversion feature, capped at the face amount of the debt outstanding, or
$148,000, was treated as a beneficial conversion feature and is reflected as
additional interest expense and additional paid in capital. The $148,000 of
notes remaining at December 31, 2002 is issued to the former Chairman of the
Board. The $148,000 note was paid and retired in 2003.
F-16
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
5. Convertible Debentures (continued)
Material Investor
As described below, during the period from December 2002 through February 2004,
the Company entered into the following transactions with a single investor, Mr.
David R. Vey, that, on an if converted basis, gave Mr. Vey a 37% ownership
interest in the Company. In March 2003, Mr. Vey became a member of the Board of
Directors.
In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
would be made available to the Company on various funding dates through March
2003. In December 2002, the Company received proceeds of $100,000 in the form of
a convertible debenture. In January 2003, the Company received proceeds of
$820,000 in the form of $220,000 in convertible debentures and a $600,000
promissory note. The promissory note bears interest at a rate of 7% and matures
on January 15, 2004. The Company may extend the maturity of the instrument for
up to three additional years subject to required pay downs. The convertible
debentures bear interest at rates ranging from 7% to 8% and are convertible at
the option of Mr. Vey into 13,000,000 shares of Company common stock. The
debentures mature at various dates in December 2003 and January 2004. As of
January 30, 2004, Mr. Vey elected to convert the above referenced debentures
into 13,000,000 shares of the Company's common stock, of which 3,000,000 shares
were received upon conversion by December 31, 2003.
Additionally, the Company received $500,000 in March 2003, in the form of a
$400,000 promissory note and a $100,000 convertible debenture. These instruments
have terms similar to those of the earlier investment, and will mature in March
2004, subject to the Company's option to extend for three additional years by
making required paydowns. The March 2003 debenture is convertible into
10,000,000 shares of our common stock.
The Company has accounted for the value of the conversion feature of these
instruments, which was limited to the amount of aggregate proceeds received of
$1,420,000, ($100,000 in December 2002 and $1,320,000 in January and March
2003), as additional paid in capital and debt discount. This amount will be
accreted over the life of the notes as additional interest expense. Expense
recognized for the year ended December 31, 2003 was $1,290,000.
The Company issued to a third party as a finder's fee in lieu of cash fees,
1,610,000 warrants at a price of $0.40 per share for the above equity
transactions and repriced a prior warrant to purchase 150,000 shares from $1.50
per share to $0.10 per share.
As of February 2, 2004, Mr. Vey elected to convert the above referenced
debentures issued in March 2003 into an additional 10,000,000 shares of the
Company's common stock.
From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible debentures. The debentures were issued for a one-year
term and are convertible at the option of Mr. Vey at various dates from June
2004 to December 2004 into 2,699,219 shares of the Company's common stock.
F-17
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
5. Convertible Debentures (continued)
In June 2003, Mr. Vey exercised a warrant to purchase 500,000 shares of the
Company's common stock at an exercise price of $0.35 per share providing
$175,000 in proceeds.
All of the Company's assets are pledged as collateral for the notes referenced
above.
All of the securities issued in the preceding transaction were sold in reliance
upon Rule 506 of Regulation D involving only accredited investors.
6. Stockholders' Equity
Class A Convertible Preferred Stock
Series A, F 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, when declared, 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.
On May 24, 1999, the Company entered into a $1,000,000 private placement
purchase agreement for the issuance of 1,000 shares, 8% dividend 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 $24,000 were
converted into 172,500 shares of common stock. In 2003, the remaining 780 shares
of Class A Series F convertible preferred stock and the related accrued
dividends payable of $187,000 were converted into 966,950 shares of the
Company's common stock. The Company also reversed $100,000 of previously accrued
dividends based on the mandatory conversion date of the preferred stock.
In conjunction with the CIMS acquisition transaction completed in April 2000
(see Note 16 below), 1,500 shares of Class A Series H preferred stock with a
face value of $1,500,000 (book value $1,300,000) were issued as part of the
transaction consideration. The series H preferred stock yields 8% in semi-annual
cash dividends, when declared, and is convertible at the Company's option for
the first 33 months of its 36-month life. In November 2003, the Company
restructured the terms of the Class A Series H preferred stock. The new terms
extend the conversion date of the Series H Preferred Stock by thirty-six months,
until April 1, 2006.
The Company ceased to declare preferred stock dividends as of January 1, 2001 on
the outstanding series of its Class A, Series A, Convertible Preferred Stock.
Additionally, there are undeclared dividends on the Series H preferred stock.
Cumulative but undeclared dividends at December 31, 2003 equaled $360,000 ($.72
per share) and $390,000 ($.26 per share), respectively for the Series A and H
preferred stock. In 2001, the Company paid $30,000 of dividends and reversed
$154,000 of previously accrued but undeclared dividends.
F-18
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
6. Stockholders' Equity (continued)
Common Equity
During the first quarter of 2003, there were a total of 305,000 common stock
options with exercise prices ranging from $0.17 to $0.24 granted to Directors of
the Company.
During January 2003, an agreement was reached with certain Directors of the
Company to satisfy a $211,000 liability for previously rendered services via a
grant of 1,320,854 shares of the Company's common stock. As of December 31,
2003, 568,906 shares were issued; the balance of the remaining 751,948 shares
was issued in January 2004.
During January 2003, the Company issued 37,500 shares of the Company's common
stock to a vendor in lieu of $6,000 cash payment.
During the first quarter of 2003, the Company issued 212,789 shares of its
common stock to third parties for services rendered in the amount of $37,000;
107,369 of these shares were issued to a Director of the Company. The Company
also received $9,000 proceeds from the exercise of 90,000 common stock warrants
at $0.10 per share.
During the second quarter of 2003, the Company issued 109,336 shares of its
common stock to third parties for services rendered in the amount of $33,000;
53,770 of these shares were issued to a Director of the Company who retired in
July 2003. Also during the second quarter of 2003, the Company issued 89,500
shares of its common stock in lieu of an $18,000 cash payment on a note payable
to a related party. The Company also recognized $6,000 from the exercise of
60,000 common stock warrants.
During the second quarter of 2003, the Company issued common stock pursuant to
its Employee 401(k) Plan, whereby certain contributions are matched by the
Company for its common stock valued at $82,000, resulting in the issuance of
514,713 common shares.
In August 2003, the Company issued 1,250,000 shares of its common stock in a
private placement and issued two-year warrants to purchase 625,000 shares of its
common stock at an exercise price of $0.35 per share to investors for an
aggregate purchase price of $250,000.
During the third quarter of 2003, the Company issued 198,229 shares of its
common stock to third parties for services rendered in the amount of $45,000.
Also in the third quarter, the Company issued 50,000 shares of its common stock
in lieu of a $10,000 cash payment on a note payable to a related party. The
Company issued 591,676 shares of its common stock in lieu of $158,000 in fees
related to the litigation entered into by the Company as fully explained in Note
8.
During the fourth quarter of 2003, the Company issued 170,044 shares of its
common stock to third parties for services rendered in the amount of $33,000.
The Company also issued 351,708 shares of its common stock in lieu of a $70,000
cash payment on a note payable to a related party. The Company issued 317,017
shares of its common stock in lieu of $62,000 in fees related to the litigation
entered into by the Company as fully explained in Note 8.
All of the securities issued in the preceding transactions were sold in reliance
upon Rule 506 of Regulation D involving only accredited investors.
F-19
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
7. Stock Options and Warrants
Long-Term Incentive Plans
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 provisions of the 2000 Plan include: reserving 15% of the
outstanding shares for awards that may be outstanding at any one time, rather
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 and the 2000 Plan have
been granted to Officers, Directors, Employees, and others and expire between
May 2003 and March 2013. All options were granted at or above the fair market
value on the grant date. Transactions under this Plan were as follows:
---------------------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
----------------------------------------------
Outstanding at December 31, 2000 2,496,825 $ 2.59
Canceled or expired (687,500) 2.91
Granted 2,169,232 1.03
Exercised - -
----------------------------------------------
Outstanding at December 31, 2001 3,978,557 $ 1.69
Canceled or expired (458,008) 2.60
Granted 212,500 0.73
Exercised (5,992) 1.03
----------------------------------------------
Outstanding at December 31, 2002 3,727,057 $ 1.63
Canceled or expired (802,000) 2.41
Granted 305,000 0.18
Exercised - -
----------------------------------------------
Outstanding at December 31, 2003 3,230,057 $1.45
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Exercisable at Exercise Price Weighted Average
Year-end Options Range Per Share Exercise Price
---------------------------------------------------------------------------------------------
2001 2,104,027 $0.72 to $6.00 $ 1.79
2002 2,933,875 $0.39 to $6.00 $ 1.66
2003 3,015,011 $0.17 to $5.13 $ 1.56
---------------------------------------------------------------------------------------------
F-20
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
7. Stock Options and Warrants (continued)
The following table summarizes information about stock options outstanding at
December 31, 2003:
------------------------------------------------------- -----------------
Ranges Total
----------------------------------- ------------------------------------------------------- -----------------
Range of exercise prices $0.17 to $1.16 $1.35 to $2.25 $2.35 to $5.13 $0.17 to $5.13
----------------------------------- ------------------ ----------------- ------------------ -----------------
Options outstanding 1,922,731 652,750 654,576 3,230,057
Weighted average remaining
contractual life (years) 5.13 5.14 3.6 4.44
Weighted average exercise price $0.75 $1.80 $3.15 $1.45
Exercisable 1,726,942 642,026 646,043 3,015,011
Weighted average exercise price $0.87 $1.80 $3.15 $1.56
----------------------------------- ------------------ ----------------- ------------------ -----------------
Warrants
Warrants outstanding have been granted to Officers, Directors, Stockholders and
others to purchase common stock at prices ranging from $0.30 to $3.75 per share
and expiring between August 2004 and March 2012. 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, 2000 6,644,680 $ 2.94
Canceled or expired (863,368) 3.91
Granted 8,708,437 1.09
Exercised (56,666) 0.00
----------------------------------------------
Outstanding at December 31, 2001 14,433,083 $ 1.75
Canceled or expired (917,132) 1.03
Granted 4,275,224 0.57
Exercised (2,693,307) 0.46
----------------------------------------------
Outstanding at December 31, 2002 15,097,868 $ 1.34
Canceled or expired (1,356,212) 1.94
Granted 2,235,000 0.38
Exercised (650,000) 0.29
----------------------------------------------
Outstanding at December 31, 2003 15,326,656 $1.18
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Exercisable at Exercise Price Weighted Average
Year-end Warrant Shares Range Per Share Exercise Price
---------------------------------------------------------------------------------------------
2001 12,922,971 $0.40 to $5.04 $1.75
2002 13,960,095 $0.30 to $5.04 $1.30
2003 15,087,830 $0.30 to $3.75 $1.17
---------------------------------------------------------------------------------------------
F-21
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
7. Stock Options and Warrants (continued)
The following table summarizes information about common stock warrants
outstanding at December 31, 2003:
--------------------------------------------------------- -------------------
Ranges Total
------------------------------------ --------------------------------------------------------- -------------------
Range of exercise prices $0.30 to $1.25 1.31 to $2.25 $2.38 to $3.75 $0.30 to $3.75
------------------------------------ -------------------- ----------------- ------------------ -------------------
Outstanding 10,924,383 2,672,162 1,730,111 15,326,656
Weighted average remaining
contractual life (years) 3.0 3.8 2.9 3.2
Weighted average exercise price $0.74 $1.81 $2.99 $1.18
Exercisable 10,784,407 2,672,162 1,631,261 15,087,830
Weighted average exercise price $0.73 $1.81 $3.02 $1.17
------------------------------------ -------------------- ----------------- ------------------ -------------------
The Company estimates the fair value of each common stock option and warrant to
purchase common stock at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 2003, 2002, and 2001 respectively: no dividends paid for all years;
expected volatility of 125% for 2003, 121% for 2002 and 93% for 2001; risk-free
interest rates range from 1.60% to 6%, expected lives range from 2.00 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,
-------------------- ---------------------------------------------------
2003 2002 2001
-------------------- ---------------- ----------------- ----------------
Stock options and
warrants $0.24 $0.38 $ 0.72
-------------------- ---------------- ----------------- ----------------
During 2003, there were a total of 305,000 common stock options with exercise
prices ranging from $0.17 to $0.24 per share granted to Employees and Directors
of the Company. The exercise prices of these options equaled the fair market
value or more of the common stock at the time of such grants. Additionally,
2,235,000 warrants were issued related to investors; as described in Note 5,
1,610,000 were granted on behalf of a material investor and as described in Note
6, 625,000 were granted to other investors.
Options to Directors and Officers
Included in the options and warrants granted above are the following:
During 2003, 305,000 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 a weighted average exercise price of $0.18 per share, expiring no later than
March 2013. As of December 31, 2003, none of these options or warrants were
exercised.
F-22
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
7. Stock Options and Warrants (continued)
During 2002, 213,350 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 $0.75 per share, expiring no later than on February
2012. As of December 31, 2003, none of these options was exercised.
During 2001, 2,448,232 options and warrants 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 a weighted average exercise price of $0.99 per share, expiring no
later than January 2011. As of December 31, 2003, none of these options or
warrants were exercised.
Shares reserved for future issuance of common stock approximate 5,940,000 of
December 31, 2003.
8. Contingencies
In June 2000, the Company entered into a contract with a software vendor to
incorporate a component of that vendor's software into SEDONA's Intarsia(R). By
April 2001, management determined that the project had become infeasible due to
the lack of support by the vendor and its unwillingness to meet certain contract
commitments. The Company notified the vendor of its concerns on several
occasions and ultimately delivered a notice of breach to the vendor, as required
for the termination of the underlying contract. As the vendor failed to respond
or cure the breach within the time permitted under the agreement, the Company
considers the contract to be terminated in accordance with its terms and has
concluded that it is not appropriate to continue to accrue certain minimum
payments under the contract. Should the dispute end unfavorably, it would result
in minimum royalty payments of $2,380,000.
On October 17, 2002, the Court of Common Pleas of Montgomery County,
Pennsylvania, rendered a judgment for a former employee for $361,000 plus
interest for a total amount of $469,000, which was recorded during the quarter
ended September 30, 2002. This suit had originally been commenced in March 1998
for alleged termination of contract. In December 2002, a settlement was reached
wherein the judgment would be satisfied by the issuance of 1,200,000 shares of
the Company's common stock, and certain related registration rights. The
aggregate charge to the Company was $276,000, and resulted in a reduction of
$193,000 to the previously recorded charge. This reduction was recorded in the
4th quarter 2002.
On May 5, 2003, the Company filed a civil action lawsuit against numerous
defendants in the United States District Court for the Southern District of New
York. The Company seeks damages from the defendants named, and other defendants
yet to be named, in the complaint for allegedly participating in the
manipulation of its common stock, fraud, misrepresentation, failure to exercise
fiduciary responsibility, and/or failure to adhere to SEC trading rules and
regulations, tortuous interference, conspiracy and other actions set forth in
the complaint, but not limited to enforcement of settlement date and affirmative
determination. As this is an on-going action, no adjustments have been made to
the financial statements related to this matter.
In January 2004, the Company notified one of its consultants, Hunter A. Carr,
that per its May 6, 2003 litigation support agreement and database participation
agreement, the consultant had not performed his duties noted therein and is in
default of the contracts. The Company is in the process of trying to resolve the
dispute and has suspended payments to the consultant starting in December 2003,
pending satisfactory resolution of the matter. Per the agreements, the Company
was obligated to pay $14,910 per month under the litigation support agreement
and $6,900 per month under the database participation agreement. The Company
believes it has a meritorious defense against this claim.
No actions other than matters involved in the ordinary course of business are
currently known by Management and such other matters are believed by Management
not to have material significance.
F-23
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
9. Related Party Transactions
In September 2003, the Company sold a licensing agreement to ACEncrypt
Solutions, LLC. The President of ACEncrypt Solutions, Victoria Looney, is a
member of the Board of Directors of SEDONA Corporation. David R. Vey, Chairman
of the Board of Directors of SEDONA Corporation also has a financial interest in
ACEncrypt Solutions. The total fee for the license agreement is $1,000,000,
which includes delivery of the current version of Intarsia plus the cost of
other contract defined milestones related to the development of derivative
products for the healthcare market. The Company has recognized $475,000 of
revenue from this transaction in the third quarter of 2003 related to the sale
of Intarsia, the balance of the contract has been deferred until delivery of the
remaining milestones in accordance with SOP 97-2. The Company has also
recognized $6,000 of services revenue related to maintenance services during the
year. The balance of $19,000 has been deferred and will be amortized through
2004 as services are performed.
In March 2002, the Company entered into an agreement to purchase substantially
all of the assets of Lead Factory, Inc. for a combination of stock warrants and
cash. The Company's Chief Marketing Officer, Alyssa Dver, founded Lead Factory.
The terms of the sale included issuance of 100,000 ten-year warrants, at an
exercise price of $0.72 per share upon the signing of the agreement. The Company
also accrued $50,000 in royalties earned under the terms of this agreement
during the third quarter 2003. Lead Factory, a Boston-based company which
designs, builds, and markets computer software and services to aid sales and
marketing persons with customer prospecting, initially became a partner in 2000
when the Company acquired a 10% equity interest, which interest the Company had
subsequently fully reserved. The purchase agreement supercedes all earlier
agreements with Lead Factory.
The Company incurred consulting and commission expenses, and out-of-pocket
expenses of $70,000, $75,000, and $245,000, for the years ended December 31,
2003, 2002, and 2001, respectively, to certain of its Directors and to an
organization whose President was a Director of the Company through June 2003.
10. Profit Sharing Plan
Starting in fiscal year 1999, a 401(k) Plan was made available to all eligible
SEDONA employees, but there were no contribution matches by the Company.
During 2001, the plan was modified to allow the Board of Directors to consider,
on an annual basis, a discretionary match for the Plan participants in the form
of Company stock at a rate of up to 50% of employee contributions but not in
excess of 3% of employee base compensation.
At the February 2002 Board meeting, a decision was made to make such a match
with regards to the 2001 contributions, which the match was valued at $97,000
and resulted in the issuance of 122,852 shares to participants, valued at the
year end closing price of $0.79. In 2003, the Board approved matching the 2002
contributions, which was valued at $82,000 and resulted in the issuance of
514,713 shares of the Company's common stock to participants, valued at a
closing price of $0.16.
F-24
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
11. Commitments
The Company has employment agreements with certain key employees, which expired
at various dates through 2002. The agreements have automatic renewal provisions,
which allow the contracts to continue from year-to-year until either party gives
notice to the other, at least three months prior to expiration. The agreements
provide for minimum salary levels, plus any additional compensation as directed
by the Board of Directors.
The Company leases certain office equipment under various noncancelable
operating and capital lease arrangements, which expire from 2002 to 2005. The
Company entered into a lease for its corporate headquarters in December 2002,
which commenced January 1, 2003 for a three-year term. On approximately April 1,
2004 the Company intends to expand its lease space at its corporate
headquarters, as fully described in Item 2 - Description of Property, above. The
cost of the expansion is included in the table below. In November 2003, the
Company entered into a three-year lease for an engineering facility in Plymouth,
Minnesota. Future minimum lease payments under these lease obligations consist
of the following (in thousands, except per unit information):
2004 $86
2005 $93
--------------
Total minimum lease payments $179
==============
Rent expense for 2003 was $165,000, in addition the Company received rental
income of $63,000 from a subtenant. Rent expense for 2002 and 2001 was $815,000
and $673,000, respectively.
Future minimum lease payments under capital lease obligations consist of $21,000
due in 2004 of which $1,000 is related to interest.
12. Other Accrued Liabilities and Accounts Payable
During the year ended December 31, 2003, the Company reversed a previously
recorded trade payable of $153,000 for legal fees due to its former legal
counsel, as a result of a conflict of interest settlement.
Other accrued liabilities comprise the following (in thousands, except per unit
information):
--------------------------------------------------------------------------------------------
Year ending December 31: 2003 2002 2001
--------------------------------------------------------------------------------------------
Accrued payroll, benefits and severance $ 125 $ 533 $ 158
Accrued rent 4 281 32
Accrued fees to Directors for professional services - 199 -
Accrued legal expenses related to Litigation (see note 177 - -
8, contingencies)
Note payable, general insurance 113 213 257
Interest due on convertible notes 110 - -
Miscellaneous includes Lead Factory accrual 136 - -
----------------------------------
Total $ 665 $ 1,226 $ 447
--------------------------------------------------------------------------------------------
F-25
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
13. Income Taxes
No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses for the years ended December 31, 2003, 2002
and 2001 and the Company has provided a valuation allowance against all net
operating loss carryforwards.
At December 31, 2003, 2002 and 2001, the Company had a recorded deferred tax
asset of $22.4 million, $20.8 million and $19.7 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, 2003 and 2002, the Company had recorded current deferred tax
assets of $30,000 and $16,000, respectively, which related primarily to accruals
which may be recognized in the future for tax purposes. Additionally, at
December 31, 2003 and 2002, the Company had recorded non-current deferred tax
liabilities of $35,000 and $225,000, respectively, which related primarily to
basis differences in capitalized software and property, plant and equipment.
At December 31, 2003, 2002 and 2001, the Company had approximately $57.9
million, $54.3 million and $50.5 million, respectively, in federal net operating
loss carryforwards that expire in various years through 2023. Additionally, the
Company has approximately $39.0 million, $36.6 million and $26.2 million,
respectively, of state net operating loss carryforwards that expire in various
years beginning in 2005 through 2011.
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 Internal Revenue
Service Code section 382. Such limitations may have an impact on the ultimate
realization and timing of these net operating loss carryforwards.
14. Supplemental Disclosures of Cash Flow Information (in thousands, except
per unit information)
---------------------------------------------------------------
Year Ended December 31
2003 2002 2001
---------------------------------------------------------------
Cash paid during the year for interest $ 51 $ 45 $ 2
Cash expenses incurred relative to issuance
of stock - 130 215
Conversion of preferred stock dividends and
debenture interest into Common stock 187 - 49
Conversion of preferred stock debenture to
common stock 780 399 2,196
Conversion of debenture into common stock 220 - -
Common stock issued for repayment of note
payable to related party 98 - -
Fixed asset purchases through assumption of
capital lease obligation - - 75
15. 2000 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 $4,350,000. $550,000 in five-year warrants were
issued, $1,300,000 (with face value of $1,500,000) was paid in preferred stock,
a minimum of $1,000,000 due in October 2003 (the "Required Payment"), or
earlier, if certain performance hurdles were met, and the remaining $1,500,000
will be paid contingent on the performance of the business unit acquired ("the
F-26
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
15. 2000 CIMS Purchase (continued)
Contingent Payment"). Through June 30, 2003, the Company had paid $47,000
related to the Required Payment. There was no contingent payment of $1,500,000
due based on performance. The performance period for both the Required Payment
and the Contingent Payment expired in April 2003. In November 2003, the Company
restructured the agreement with Acxiom. The Company has issued a promissory note
for the $953,000 Required Payment, at an interest rate of 8% per annum. All
unpaid principal and interest are due no later than May 26, 2006. The
restructured terms include, 1.) Extension of the conversion date of the Series H
Preferred Stock by thirty-six months, until April 1, 2006. 2.) Payment of trade
payables due totaling $132,000, which are accrued net of a credit due back to
the Company of $78,000; and 3.) Agreement to provide $262,000 worth of services
to Acxiom, if requested by Acxiom. Company Management believes that there is a
remote possibility of having to provide any future services related to this
agreement.
16. Major Customer Transactions
As of December 2002, SEDONA sold its existing customer base to Fiserv Customer
Contact Solutions, allowing the Company to focus on its end user indirect
business model and providing users of Intarsia with Fiserv's resources to
support and grow the Intarsia product line.
Five alliance partners accounted for ninety-six percent of sales in 2003. Two
alliance partners accounted for fifty-two percent of sales in 2002. No single
customer accounted for more than 10% of sales in 2001.
17. Subsequent Events
The Company issued 14,593 shares of its common stock in lieu of $6,000 in fees
related to the litigation entered into by the Company as fully explained in Note
8. The Company also issued 10,248 shares of its common stock to a third party
for services rendered in the amount of $5,000.
On February 1, 2004, the Company issued 1,702,128 shares of its common stock to
investors in a private placement transaction for proceeds of $800,000. The
Company also issued 851,064 two-year warrants at an exercise price of $0.70 per
share.
In February 2004, the Company received $40,000 in proceeds and issued 100,000
shares of its common stock from the exercise of 100,000 common stock warrants.
The Company also issued 20,000,000 shares of its common stock to Mr. David Vey
who elected to convert his outstanding debentures of $200,000.
F-27
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)
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 4.0)
10.12 Convertible Debentures and Warrants Purchase Agreement, dated November
22, 2000 (7) (Exhibit 99.2)
10.13 Commitment Warrant, dated November 22, 2000 (7) (Exhibit 99.4)
10.14 Additional Warrant, dated November 22, 2000 (7) (Exhibit 99.5)
10.15 Warrant issued to Ladenburg Thalmann & Co., Inc., dated November 22,
2000 (7) (Exhibit 99.6)
10.19 Stock Purchase Agreement between AMRO International S.A. and the
Company, dated January 23, 2001 (8) (Exhibit 10.19)
10.20 Stock Purchase Warrant issued to AMRO International S.A., dated January
23, 2001 (8) (Exhibit 10.20)
10.21 Warrant issued to Ladenburg Thalmann & Co., Inc., dated January 23,
2001 (8) (Exhibit 10.21)
10.22 Lease between Teachers Insurance and Annuity Association and the
Company (9) (Exhibit 99.1)
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)
F-28
EXHIBIT INDEX (continued)
10.28# Employment Agreement, dated January 1, 2000, between the Company and
William K. Williams (8) (Exhibit 10.28)
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 (14) (Exhibit 10.30)
10.31 Finder's Fee Agreement between the Company and Osprey Partners, dated
February 24, 1999 (8) (Exhibit 10.31)
10.32 Disbursement Agreement between the Company and ZipFinancial.com, Inc.
dated December 29, 2000. (8) (Exhibit 10.32)
10.33 Promissory Note payable to the Company by ZipFinancial.com, Inc. dated
December 29, 2000. (8) (Exhibit 10.34)
10.32 Security Agreement between the Company and ZipFinancial.com, Inc. dated
December 29, 2000. (8) (Exhibit 10.32)
10.35 Warrant issued to Acxiom Corporation Dated April 4, 2001 (8) (Exhibit
10.35)
10.39 Form of Common stock and Warrants Purchase Agreements used in August
2001 to September 2002 private placements by and among the Company and
the investors signatory thereto. (12) (Exhibit 10.1)
10.40 Form of Registration Rights Agreements used in August 2001 to September
2002 private placements by and among the Company and the investors'
signatory thereto. (12) (Exhibit 10.2)
10.38 Form of Notes dated September and October 2001 by and among the Company
and investors signatory thereto. (12) (Exhibit 10.3)
10.41 Form of Warrants issued to investors used in August 2001 to September
2002 private sales of common stock and notes. (12) (Exhibit 10.4)
10.39 Agreement and related Promissory Note dated February 14, 2002 related
to retirement of November 2000 Convertible Debentures and Warrants.(13)
10.40 Agreement for purchase of assets of Lead Factory, Inc. dated March 29,
2002. (13)
10.42 Convertible note dated December 6, 2002 (14)
10.43 Convertible note dated January 03, 2003 (14)
10.44 Convertible note dated January 10, 2003 (14)
10.45 Promissory note dated January 10, 2003 (14)
10.46 Convertible note dated March 13, 2003 (14)
10.47 Promissory note dated March 13, 2003 (14)
F-29
EXHIBIT INDEX (continued)
23.1* Consent of McGladrey & Pullen LLP
23.2* Consent of Ernst & Young LLP
24.1 Power of attorney (included on the signature page to this Form 10-K)
99.1 Statement Under Oath of the Company's Chief Executive and Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
* Filed herewith.
# Executive Compensation Plans and Arrangements.
(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 Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999.
(7) Filed as an Exhibit to the Current Report on Form 8-K filed November
28, 2000.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 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 Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2001.
(13) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
(14) Filed as an Exhibit to the Annual Report on Form 10-K/A for the fiscal
year ended December 31, 2002.
F-30