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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, 2004 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
(Exact name of Registrant as specified in its charter)
Pennsylvania 95-4091769
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1003 West 9th Avenue, Second Floor, King of Prussia, PA 19406
(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
(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 28, 2005, was $16,170,471.
The number of shares of the Registrant's common stock, $.001 par value per share
("common stock") issued and outstanding as of March 28, 2005 was 86,696,299
shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
1
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(TM), enables SMBs to increase
the profitability of their customer portfolio to improve profits and shareholder
value.
In 1999, the Board of Directors concluded that the Company would realign its
focus solely to its internet-based software product business. On July 16, 1999,
the Company sold the assets of its Tangent Imaging Systems operation (a
manufacturing line of peripheral scanning equipment), and on September 17, 1999,
the sale of the Company's Tangent Imaging Systems operation was 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 a CRM application solution 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 application solution.
Since the completion of the CIMS transaction, SEDONA has continued to enhance
its offerings with several major product milestone achievements.
o In October 2000, the Company delivered the first version of its CRM
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.
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 announced a new version 5.0 of
Intarsia, specifically designed to support multiple
lines-of-business across multiple vertical industries. The product
also provided support for a new agency management component, and
significant enhancements to other components of the product.
o In May 2004, the Company announced the availability of Intarsia
version 5.1, which added significant new features and components -
integration with Microsoft Outlook, implementation of a Web Services
framework and new process manager component - to enable
organizations with multiple lines-of-business to have an accurate
view of the overall relationships and interactions with customers
and prospects.
3
ITEM 1. BUSINESS (continued)
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.
-------------------------------------------------------------
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%
-------------------------------------------------------------
4
ITEM 1. BUSINESS (continued)
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 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 designed to be an ideal solution for community and
regional banks, credit unions, and insurance companies and agencies
to maximize profits through effective customer relationship
management, but which lack the resources required to develop,
implement and maintain a CRM program on their own.
Nevertheless, the Company continues to evaluate the opportunity of
providing a vertical CRM application solution to other vertical
markets, since according to AMR Research, the CRM market for SMBs,
including divisions of enterprises, is projected to become a $44
billion opportunity over the next 10 years.
o Marketing SEDONA's proprietary solution to target markets through
multiple sales distribution channels
Having strategically targeted a key segment of the vast CRM market
and designed and priced its CRM application solution accordingly,
SEDONA is moving aggressively to capture a significant share of the
small to mid-sized financial services industry using multiple sales
distribution channels and innovative marketing programs to garner
awareness and market leadership.
o Indirect Sales Distribution Channel
As part of SEDONA's efforts to rapidly and cost
effectively capture a significant share of the SMB
market, the Company has adopted an indirect distribution
channel strategy and has successfully signed Original
Equipment Manufacturer (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.
Under the agreements with SEDONA's current distribution
partners, which include Fiserv Solutions, Inc., Sanchez
Computer Associates, Inc., (now part of Fidelity
National Financial Inc.), Open Solutions Inc.,
Connecticut Online Computer Center, Inc, ACEncrypt
Solutions, LLC 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 maintenance
contracts from each customer using its technology, as a
component of its partner's total solution or as a
standalone offering.
5
ITEM 1. BUSINESS (continued)
o Direct Sales Distribution Channel
In fiscal year 2005, the Company plans to re-establish a
direct sales channel to promote and sell Intarsia
directly to the small to mid-size banking and insurance
vertical markets. SEDONA will target community and
regional banks and insurance companies that run bank
core systems and property and casualty, life and health
management systems, other than the ones provided by the
Company's distribution partners.
The Company has also established partnerships with a number of
proven business and technical consulting services providers such as
Paragon Consulting and Profit Resources. These partnerships provide
the Company's customers and its 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.
o Removing the barriers to purchasing and maintaining a CRM system
SEDONA offers to its prospective customer and distribution partners
three licensing and implementation models for Intarsia: Purchase,
Application Services Provider (ASP) and In-house Application Hosting
(IHH).
In-house application hosting is a viable alternative to the purchase
and ASP models because of its cost effectiveness. 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. It provides SMBs with a fully integrated system
including all the software, hardware and services required for the
deployment of a comprehensive, web-based enterprise business
application, which resides at their own site, for an affordable,
fixed monthly fee.
The in-house application hosting model is an extremely valuable
solution for SEDONA and 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 "people
ware" costs - and the resource requirements on a
customer's existing IT organization;
o Builds a 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.
6
ITEM 1. BUSINESS (continued)
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.
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, 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.
7
ITEM 1. BUSINESS (continued)
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:
o Promote and cultivate a culture of team-based development:
The research and development organization is structured into small
teams of developers, responsible for the design, development and
unit testing of each component of the Intarsia application solution.
Each project team also provides technical assistance to the system
integration group.
o Efficient and predictable software development life cycle:
SEDONA utilizes 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 $1,102,000, $878,000, and
$1,227,000, for the years ended December 31, 2004, 2003 and 2002,
respectively.
8
ITEM 1. BUSINESS (continued)
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
(Registration No. 2598107), and a second service mark for the word mark "SEDONA"
that was registered with the USPTO on March 24, 2003 (Registration No. 2700294).
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 (CCS), 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. However, as a result of the
Company's decision to re-establish a direct sales channel, beginning January
2005, SEDONA re-signed maintenance agreements with several customers from the
Fiserv CCS business unit. The agreements were re-signed during December 2004 and
SEDONA began providing services under the maintenance agreements in January
2005.
Revenues from three of the Company's major alliance partners, ACEncrypt
Solutions Inc., a related party (see "Management"), Fiserv Solutions Inc. and
Open Solutions Inc., accounted for ninety-one percent (91%) of total sales in
2004. In 2003, five alliance partners accounted for ninety-six percent (96%) of
sales compared to 2002 in which two alliance partners accounted for fifty-two
percent (52%) of total sales.
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, 2004, the Company had a revenue backlog of $517,000, substantially
all of which is expected to be recognized as revenue in 2005.
Competition
The CRM market has offerings from a variety of providers that focus on sales
force automation, call center management, contact management, marketing customer
information file systems (MCIF) and other marketing solutions that address
certain aspects of the management of customer relationships. The Company's
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
9
ITEM 1. BUSINESS (continued)
reputation. These strategic partnerships provide SEDONA with a significant
revenue opportunity and strengthen its competitive position.
SEDONA's primary competitors are John Harland Company (Harland), Harte Hanks
Inc. (Harte Hanks), Marquis Software Solutions (Marquis) and Raddon Financial
Group (Raddon).
o Harland (NYSE:JH) provides software solutions for financial
institutions, including, but not limited to, bank core systems,
deposit and loan origination, teller, mortgage, call center,
document solution and customer relationship management.
o Harte-Hanks (NYSE:HHS) provides marketing services, including, but
not limited to, sales lead management, inbound/outbound
telemarketing and web-based database marketing, to consumers and
business-to-business marketers across multiple vertical markets.
o Marquis is a privately-held company primarily focused on low cost
MCIF, sales and services and referral tracking solutions for the
financial services market.
o Raddon is a privately-held company that provides integrated
marketing solutions, including, but not limited to, research data,
strategic counsel, and analysis and MCIF system, to the financial
services market.
SEDONA believes that it maintains superior product capabilities that provide a
fully integrated, vertical 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.
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.
The results of increased competition and reduction of the Company's potential
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.
SEDONA believes that the most important competitive factor, which enables the
Company to differentiate itself from the competition, is its focus on delivering
a specifically tailored CRM solution to the SMB market through a number of
leading-edge core 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 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. (See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
10
ITEM 1. BUSINESS (continued)
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 28, 2005, the Company had 19 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 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, marketing and finance.
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 (3%). In April 2004,
the Company required additional space, and added an additional 867 square feet
of space to its King of Prussia office. The lease will extend through December
31, 2005 at an annual rate of $15,000 plus a yearly escalation charge of three
percent (3%). 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 Minnesota office serves as additional space for
engineering staff. 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.
11
ITEM 2. DESCRIPTION OF PROPERTY (continued)
The Company's property leases expire in December 2005. The Company is in the
process of renegotiating its leases. Management will evaluate the leases based
on current market conditions and the adequacy of the current facilities to meet
the Company's needs.
ITEM 3. LEGAL PROCEEDINGS
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 of March 28, 2005, no ruling by the United States District Court for the
Southern District of New York has been made with regard to this matter. 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
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 any fees
related to this obligation.
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.
12
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 28, 2005 was $0.29. At that time, there were approximately
6,905 holders of SEDONA common stock.
- --------------------------------------------------------------------------------
High Low
------------------ --------------
Year ended December 31, 2003:
- -------------------------------------------
Quarter ended March 31, 2003 $0.31 $0.12
Quarter ended June 30, 2003 0.53 0.15
Quarter ended Sept. 30, 2003 0.29 0.15
Quarter ended Dec. 31, 2003 0.69 0.19
Year ended December 31, 2004:
- -------------------------------------------
Quarter through March 31, 2004 $0.80 $0.38
Quarter ended June 30, 2004 $0.50 $0.26
Quarter ended Sept. 30, 2004 $0.34 $0.20
Quarter ended Dec. 31, 2004 $0.54 $0.17
Year ended December 31, 2005:
- -------------------------------------------
Quarter through March 28, 2005 $0.50 $0.25
- --------------------------------------------------------------------------------
Dividends
Common Stock:
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.
Preferred Stock:
The Company ceased to declare preferred stock dividends as of January 1, 2001 on
the issued and outstanding series of its Class A Convertible Preferred Stock.
Cumulative but undeclared dividends on both Series A and Series H Preferred
Stock at December 31, 2004 equaled $1,049,354 or $2.09 per share. To the extent
such dividends are declared and paid they will then be reflected appropriately
in the Company's financial statements.
13
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS (continued)
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
security holders (1)................. 18,419,438 $1.19 10,011,373
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by -- -- --
security holders (2).................
- -------------------------------------------------------------------------------------------------------------------
Total................................... 18,419,438 $1.19 10,011,373
- -------------------------------------------------------------------------------------------------------------------
(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
In the fourth quarter of 2004, the Company issued two 8% convertible notes to
Mr. David R. Vey, the Company's Chairman of the Board, (see "Material Investor"
and "Management") and received aggregate proceeds of $300,000. The notes mature
on October 8, 2005 and November 5, 2005, respectively, and are convertible at
any time, at the option of the holder, into 1,476,190 shares of common stock
until such dates.
Also during the fourth quarter of 2004, the Company issued 30,347 shares of its
common stock to a consultant in lieu of $7,500 cash compensation for investor
relation services rendered. The Company issued 73,259 shares of its common stock
to an attorney in lieu of $18,300 cash compensation for services rendered in
relation to the litigation filed by the Company on May 5, 2003.
In October 2004, the Company issued 1,975,318 shares of its common stock to Mr.
David Vey who elected to convert $445,000 of convertible notes issued in June,
July and September 2003 into the Company's common stock.
In December 2004, the Company issued an aggregate of 69,125 shares of its common
stock to Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for
interest due through September 30, 2004 on convertible notes dated January and
March 2003. The Company also issued 295,589 shares to David R. Vey in lieu of
$59,117 cash payment for interest due through September 30, 2004 on convertible
notes dated December 2002, January, June, July and September 2003, respectively.
In December 2004, the Company issued 677,450 shares of its common stock to Oak
Harbor Investments, a limited liability corporation in which David Vey and
Richard T. Hartley are managing members, in lieu of $135,490 cash payment for
interest and late charges due through September 30, 2004 on promissory notes
dated January and March 2003, respectively.
14
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS (continued)
In December 2004, the Company received $13,736 and issued 76,309 shares of the
Company's common stock to employees for shares purchased through the Employee
Stock Purchase Plan.
All of the securities issued in the preceding transactions to David R. Vey,
Richard T. Hartley and Oak Harbor Investments were sold in reliance upon Rule
506 of Regulation D involving only sales to accredited investors.
The Company ceased to declare preferred stock dividends as of January 1, 2001 on
the issued and outstanding series of its Class A Convertible Preferred Stock.
Cumulative but undeclared dividends on both Series A and Series H Preferred
Stock at December 31, 2004 equaled $1,049,354 or $2.09 per share. To the extent
such dividends are declared and paid they will then be reflected appropriately
in the Company's financial statements.
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 March 28, 2005, 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 41% 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.
In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
were 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 note. In January 2003, the Company received proceeds of $820,000 in
the form of $220,000 in convertible note and a $600,000 promissory note. The
promissory note accrued interest at a rate of 7% and matured on January 15,
2004. The convertible notes accrued interest at rates ranging from 7% to 8% and
were convertible at the option of Mr. Vey into 13,000,000 shares of Company
common stock. The notes matured at various dates in December 2003 and January
2004. As of January 30, 2004, Mr. Vey elected to convert the above referenced
notes 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 note. These instruments have
terms similar to those of the earlier investment, and matured in March 2004. The
note was convertible into 10,000,000 shares of the Company's common stock. As of
February 2, 2004, Mr. Vey elected to convert the above referenced notes into an
additional 10,000,000 shares of the Company's common stock.
15
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS (continued)
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 was accreted over
the life of the promissory and term notes as additional interest expense.
Expense recognized for the years ended December 31, 2004 and 2003 was $123,000
and $1,290,000, respectively.
During 2002, 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.
From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible notes. The notes 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 October
2004, the Company issued 1,975,318 shares of its common stock to Mr. David Vey
who elected to convert $445,000 of the above referenced convertible notes into
Company common stock. The remaining $175,000 of convertible notes remains
outstanding as of March 28, 2005.
In June 2003, Mr. Vey exercised a warrant received in August 2002, as part of a
private placement transaction, 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.
In January 2004, Mr. Vey purchased 212,766 shares of the Company's common stock
for $100,000 in a private placement transaction. He was 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.
From January 1, 2004 through December 31, 2004, the Company received $1,295,000
in proceeds and issued 8% convertible notes to David R. Vey. The notes were
issued for a one-year term and are convertible at the option of Mr. Vey at
various dates from June 2005 to November 2005 into 4,784,880 shares of the
Company's common stock.
In December 2004, the Company issued an aggregate of 69,125 shares of its common
stock to Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for
interest due through September 30, 2004 on convertible notes dated January and
March 2003. The Company also issued 295,589 shares to David R. Vey in lieu of
$59,117 cash payment for interest due through September 30, 2004 on convertible
notes dated December 2002, January, June, July and September 2003, respectively.
During December 2004, the Company issued 677,450 shares of its common stock to
Oak Harbor Investments in lieu of $135,490 cash payment for interest and late
charges due through September 30, 2004 on promissory notes dated January and
March 2003, respectively.
Subsequent to December 31, 2004, the Company received an additional $250,000 in
proceeds and issued 8% convertible notes to Mr. David Vey. The notes were issued
for a one-year term and are convertible at the option of Mr. Vey at various
dates from January 2006 until March 2006 into 828,514 shares of the Company's
common stock.
All of the Company's assets are pledged as collateral for the promissory notes
referenced above.
16
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS (continued)
All of the securities issued in the preceding transactions to David R. Vey,
Richard T. Hartley and Oak Harbor Investments were sold in reliance upon Rule
506 of Regulation D involving only sales to accredited investors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Company for the year ended December 31, 2004 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.
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 2004 2003 2002 2001 2000
---------------------------------------------------------
Revenue $ 1,087 $ 1,522 $ 2,507 $ 2,157 $ 1,787
Loss from Continuing
Operations (2,922) (4,212) (6,001) (10,434) (10,826)
Gain (Loss) from Discontinued
Operations -- -- -- -- 144
Net Loss (2,922) (4,212) (6,001) (10,434) (10,682)
Preferred Dividends (299) (15) (303) 154 (889)
Net Loss applicable
To Common Stockholders (3,221) (4,227) (6,304) (10,280) (11,571)
Basic and Diluted
Net Loss per Common Share
Applicable to continuing
Operations $ (0.04) $ (0.08) $ (0.13) $ (0.28) $ (0.42)
Loss per Common Share
Applicable to discontinued
Operations -- -- -- -- --
Loss per Common Share $ (0.04) $ (0.08) $ (0.13) $ (0.28) $ (0.42)
---------------------------------------------------------
Balance Sheet Data: 2004 2003 2002 2001 2000
---------------------------------------------------------
Total Assets 641 832 1,770 3,786 8,468
Net Working Capital/(Deficit) (3,206) (2,745) (3,128) (2,462) (989)
Long-Term Obligations 1,076 999 12 1,025 1,025
Stockholders' Equity/(Deficit) (4,258) (3,288) (1,847) (302) 3,091
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, vertical Customer Relationship Management (CRM) solutions to small
and mid-size businesses (SMBs). The Company's CRM application solution,
Intarsia, enables SMBs to increase the
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
profitability of their customer portfolio. The Company has strategically
targeted small to mid-size financial services organizations as the first
vertical market to introduce its leading CRM application solution including
community and regional banks, credit unions and insurance companies.
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 Solutions, Inc., Sanchez Computer Associates, Inc., Open Solutions Inc.,
Connecticut Online Computer Center, Inc., 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.
In fiscal year 2005, the Company plans to re-establish a direct sales channel to
promote and sell Intarsia directly to the small to mid-size banking and
insurance vertical markets. SEDONA will target community and regional banks and
insurance companies that run bank core systems and property and casualty, life
and health management systems, other than the ones provided by the Company's
distribution partners.
The following is a discussion and analysis of the Company's results of
operations and financial condition for the years ended December 2004, 2003 and
2002 and should be read in conjunction with the Company's audited financial
statements as of December 31, 2004 and 2003 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 in 2002, 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. Since 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 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.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The Company primarily utilizes an indirect sales model by distributing its
product through its third party alliance partners (TPAP), for which the Company
receives a royalty payment based on a percentage of the license fee charged by
the TPAP. 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, 2004, $345,000 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. There was no
revenue from these sources in 2004.
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. During 2004, the Company capitalized no software
development costs related to the Company's Intarsia business application
solution software.
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.
As of December 31, 2004, all software development costs have been fully
amortized.
19
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, 2004, 2003, and 2002,
were $1,087,000, $1,522,000, and $2,507,000 respectively.
Net revenues decreased to $1,087,000 for the year ended December 31, 2004 from
$1,522,000 in 2003, due to a decrease in the acquisition of third party alliance
partners. 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. Service revenue, which is one
component of total revenue, increased to $742,000 in 2004, from $516,000
reported in 2003 primarily due to the additional related party revenue recorded
from ACEncrypt Solutions. In 2002, services revenue decreased from $1,753,000 to
$516,000 in 2003 due to the sale of the services base. License revenue, the
second component of total revenue, decreased to $345,000 in 2004 from $1,006,000
in 2003 due to lower sales reported by our strategic alliance partners. In
contrast, license revenues increased to $1,006,000 in 2003 from $754,000 in 2002
due to the sale of new license products in 2003.
Cost of Revenues
Total cost of revenues decreased to $427,000 for the year ended December 31,
2004 compared to $878,000 reported a year earlier due mainly to a decrease in
the amortization of capitalized software. For the year ended December 31, 2003,
total cost of revenues decreased to $878,000 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. 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 and 2004.
Operating Expenses
Total operating expenses decreased to $3,196,000 for the year ended December 31,
2004 compared to $3,341,000 for the year ended December 31, 2003, principally
reflecting savings from relocation, litigation legal expenses and listing fees.
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 SEDONA's consideration to resolve a potential conflict of interest.
Other Income/Expense
Other expenses for the year ended December 31, 2004 decreased to $386,000
compared to $1,515,000 reported in 2003 from a decrease in the non-cash
convertible note discount amortization. Other expenses in the year ended
December 31, 2003 increased to $1,515,000 from $104,000 in 2002 primarily due to
a $1,290,000 charge related to the non-cash convertible note discount
amortization associated with the David Vey financing transactions in 2003.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity And Capital Resources
At December 31, 2004, cash and cash equivalents increased to $138,000 compared
to the December 31, 2004 amount of $59,000. For the year ended December 31,
2004, the cash flows from operating activities results in a net use of cash of
$2,125,000 compared to $2,216,000 reported in 2003. The decrease in the use of
cash for operating activities was due primarily to a reduction of operating
expenses. 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, 2004, cash flows from investing activities
resulted in a net use of $2,000 to fund the purchase of equipment compared to
the year ended December 31, 2003, in which cash flows from investing activities
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.
For the year ended December 31, 2004, the cash flows from financing activities
resulted in net cash provided of $2,206,000 compared to $2,281,000 in 2003. The
Company received $800,000 from a private placement in 2004 compared to $250,000
in 2003. In addition, the Company received proceeds of $1,295,000 for short-term
notes in 2004 compared to $1,940,000 received in 2003. 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.
The Company believes that if it can generate funds from operations and
additional sales of securities or other types of financing, such funds will be
sufficient to meet its working capital requirements for 2005. In addition to the
loss of ($2,922,000) in 2004, the Company has incurred substantial net losses of
approximately ($4,212,000), and ($6,001,000) during the years ended December 31,
2003 and 2002, respectively. The Company anticipates sales to increase but
likely will require additional financing. These factors raise substantial doubt
about our ability to continue as a going concern. The Company's plans include:
(i.) expanding the penetration and acceptance of its CRM technology into the
Company's existing indirect sales distribution channel; (ii.) expanding its
distribution channel by establishing a direct sales channel to market and sell
its CRM solution into community and regional banks, credit unions and insurance
companies; (iii.) seeking additional debt or equity financing; and (iv.)
continue its 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, 2004.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Payments Due by Period (in thousands)
----------------------------------------------------------
Less than 1 1-3 3-5 +5
Total year years years years
----------------------------------------------------------
Accounts Payable & Other Accrued $ 828 $ 653 $ 175 -- --
Liabilities
Promissory Notes - Vey 1,000 1,000 -- -- --
Long Term Debt 1,076 -- 1,076 -- --
Operating/Capital Lease 20 20 -- -- --
Obligations
Building Leases 106 106 -- -- --
------ ------ ------ ----- ----
TOTAL $3,030 $1,779 $1,251 $ -- $ --
====== ====== ====== ===== ====
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, 2004, 2003, and 2002,
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 loss per share assuming
dilution. In future periods, the debt may be converted, or the if-converted
method may be dilutive and net income per share -(assuming dilution) would be
reduced.
See Notes 3 and 6 to the financial statements for additional information with
respect to the Company's long-term debt and convertible preferred stock.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Subsequent Events
Subsequent to December 31, 2004, the Company received an additional $250,000 in
proceeds and issued 8% convertible notes to Mr. David Vey. The notes were issued
for a one-year term and are convertible at the option of Mr. Vey at various
dates from January 2006 until March 2006 into 828,514 shares of the Company's
common stock.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 123(R), Share-Based Payment, an
amendment of FASB Statements No. 123 and 95. FAS No. 123(R) replaces FAS No.
123, Accounting for Stock-Based compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This statement requires companies to
recognize the fair value of stock options and other stock-based compensation to
employees prospectively beginning with fiscal periods beginning after June 15,
2005. This means that the Company will be required to implement FAS No. 123(R)
no later than the quarter beginning July 1, 2005. The Company currently measures
stock-based compensation in accordance with APB Opinion No. 25 as discussed
above. The Company anticipates adopting the modified prospective method of FAS
No. 123(R) on July 1, 2005. The impact on the Company's financial condition or
results of operations will depend on the number and terms of stock options and
warrants outstanding on the date of change, as well as future options and
warrants that may be granted.
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.
23
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.
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.
The Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined pursuant to
Rule 13a-15(e) under the Securities Exchange Act of 1934), based on their
evaluation of such controls and procedures as of the end of the period covered
by this report, are effective to ensure that information required to be
disclosed by the Company in the reports it files under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to the
Company's Management, including its Chief Executive Officer and its Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There have been no changes in the Company's internal controls over financial
reporting identified in connection with Management's evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
24
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
28, 2005 and the length of time they have served in such positions:
- ------------------------------------------------------------------------------------------------------------
Name Age Position Since
- ------------------------------------------------------------------------------------------------------------
David R. Vey 52 Chairman of the Board 2003
Marco A. Emrich 52 President, Chief Executive Officer, and Director 1999
Scott C. Edelman 51 Director 2004
Victoria V. Looney 47 Director, Audit Committee Member 2003
Jack A. Pellicci 66 Director 1996
James C. Sargent 89 Director, Audit Committee Chairman 1992
Roger W. Scearce 55 Director 2004
Alyssa S. Dver 40 Vice President, Chief Marketing Officer 2000
Anita M. Primo 37 Vice President, Chief Financial Officer and Corporate 2003
Secretary
Timothy A. Rimlinger 41 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.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and Officers, and persons who beneficially own more than 10% of its
common stock to file reports on their ownership and changes in ownership with
the Securities and Exchange Commission and to furnish the Company with copies of
any reports that they file. Based solely on review of the copies of these
reports received or written representations that no reports on Form 5 were
required, we believe that, for the year ended December 31, 2004, all reporting
persons complied on a timely basis with the filing requirements applicable to
them, except as follows: David Vey filed a Form 4 on May 5, 2004 to report
shares of 106,383 derivative securities acquired on January 31, 2004. David Vey
filed a Form 4 on June 25, 2004 to report shares of 1,423,533 acquired on June
4, 2004. Mr. Vey also filed a Form 4 on December 2, 2004 to report shares of
1,0000,000 acquired on November 18, 2004.
On June 1, 2004, the Board of Directors adopted a Code of Conduct and Business
Ethics pursuant to Section 406 of the Sarbanes-Oxley Act that applies to the
Company's principal executive officer, principal financial officer, principal
accounting officer or controller, and any other persons performing similar
functions.
Mr. Roger Scearce is a member 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.
Sargent 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:
25
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 is a managing member in Oak Harbor Investments.
Mr. Vey holds a Bachelor of Arts, Landscape Architecture and a Bachelor of
Science, Forest Management from Louisiana State University. Mr. Vey is the
brother of Victoria V. Looney, a director.
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.
Scott C. Edelman has served as a Director of the Company since August 2004.
Since July 2002, he has served as the Chief Executive Officer of CellzDirect, a
privately held bioscience company that provides bio/pharmaceutical companies
with quality cell products and contract laboratory services focused primarily on
drug metabolism and toxicology. Mr. Edelman has managed numerous small- to
intermediate-sized technology companies with a variety of domestic and
international distribution channel strategies. Prior to CellzDirect, Mr. Edelman
served as President and Chief Executive Officer of GroupSystems.com, a
collaborative tools software vendor specializing in group dynamics and
collaborative team decision-making from January 1999 to July 2002. Mr. Edelman
holds a Bachelor of Science degree in Business Administration from Pennsylvania
State University.
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
26
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
(continued)
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 Metropolitan 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.
James C. Sargent has served as a Director since 1992. Mr. Sargent was Counsel to
the law firm of Opton, Handler, Gottlieb, Fieler & Katz from 1996 to 1997, and
was counsel to Abel Noser Corporation, a member of the New York Stock Exchange
from 1960 to 1980. He was previously a partner and counsel to Whitman Breed
Abbott & Morgan, LLP, now Winston and Strawn from 1970 to 1997. 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.
Roger W. Scearce has served as a Director of the Company since August 2004. Mr.
Scearce is a senior partner with Vanguard Advisors, LLC. Vanguard's mission is
to provide world-class advisory and consulting services to business and
government leaders. He is a founding member and has been with Vanguard since May
2003. Prior to forming Vanguard, Mr. Scearce was a Senior Vice President with
American Management Systems (AMS), from April 1999 to April 2003, where he led
their Department of Defense (DoD) Strategic Account Group. While at AMS, Mr.
Scearce also served as the Deputy Program Manager, DoD Financial Management
Enterprise Architecture as a key executive member of "Team IBM" in support of
the DoD's Business Management Modernization Program. Before joining AMS, Mr.
Scearce was a career military officer, rising to the rank of Brigadier General,
U.S. Army. His last active duty assignment was Deputy Director of the Defense
Finance and Accounting Service. Mr. Scearce managed the day-to-day finance and
accounting operations and activities of the Defense Department worldwide.
Earlier leadership roles and assignments included serving as Commandant of the
U.S. Army Finance School and Chief of the U.S. Army Finance Corps; and Commander
266th Theater Finance Command, U.S. Army, Europe. Mr. Scearce graduated from
Florida Southern College with a Bachelor of Science degree in Accounting and
earned an MBA from Syracuse University. He is a past National Vice President of
the American Society of Military Comptrollers and past President of the
Association of Syracuse Army Comptrollers. He is also an active member of the
Association of Government Accountants. Mr. Scearce is the immediate past
Chairman of the Board of Directors of Andrews Federal Credit Union, Andrews AFB,
Maryland, where he still serves as a Director.
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
27
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
(continued)
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, 2004, 2003, and 2002
for the Company's President and Chief Executive Officer, and the Company Vice
Presidents who are the only executive officer whose salary and bonus for such
years exceeded $100,000:
- --------------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
- --------------------------------------------------------------------------------------------------------------------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonys Compensation Options/Warrants Compensation
- --------------------------------------------------------------------------------------------------------------------------
Marco A. Emrich 2004 $233,654 $ 0 $ 0 0 $0
President and Chief 2003 230,353 0 0 0 13,240*
Executive Officer 2002 191,682 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Alyssa S. Dver 2004 $ + $ 0 $ 0 0 $0
Vice President and Chief 2003 + 0 0 0 8,239*
Marketing Officer 2002 119,343 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Anita M. Primo 2004 $114,230 $ 0 $ 0 0 $0
Vice President and Chief 2003 + 0 0 0 5,296*
Financial Officer 2002 + 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Timothy A. Rimlinger 2004 $135,000 $ 0 $ 0 0 $0
Vice President and Chief 2003 $133,750 0 0 0 7,650*
Technology Officer 2002 $110,750 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
* Compensation was paid by the issuance of 77,885, 48,462, 31,154 and 45,000
restricted shares, respectively, of our common stock. The restrictions
were removed effective April 1, 2003.
+ Compensation did not exceed $100,000 annually
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for recommending compensation policies
with respect to of the Company's Executive Officers, and for making decisions
about awards under the Company's stock-based compensation plans. Each member of
the Compensation Committee is a "non-employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Act"),
and an "outside Director" within the meaning of Section 162(m) of the Internal
Revenue Code. This report addresses SEDONA's compensation policies for 2003 as
they affected the Chief Executive Officer and the Company's other Executive
Officers, including the Named Executive Officers.
28
ITEM 11. EXECUTIVE COMPENSATION (continued)
Compensation Policies
The Compensation Committee's executive compensation policies are designed to
provide competitive compensation opportunities, reward executives consistent
with SEDONA's performance, recognize individual performance and responsibility,
underscore the importance of Shareholder value creation, and assist SEDONA in
attracting and retaining qualified executives. The principal elements of
compensation employed by the Compensation Committee to meet these objectives are
base salaries, annual cash incentives, and long-term stock-based incentives.
All compensation decisions are determined following a review of many of the
Company's achievements over the past year, the individual's contributions to the
Company's success, any significant changes in role or responsibility, and the
internal equity of compensation relationships.
In general, the Compensation Committee intends that the overall total
compensation opportunities provided to the Company's Executive Officers should
reflect competitive compensation for executives with corresponding
responsibilities in comparable firms providing similar products and services. To
the extent determined to be appropriate, the Compensation Committee also
considers general economic conditions, the Company's financial performance, and
the individual's performance in establishing the compensation opportunities for
the Executive Officers. Total compensation opportunities for the Executive
Officers are adjusted over time as necessary to meet this objective. Actual
compensation earned by the Executive Officers reflects both their contributions
to SEDONA's actual Shareholder value creation and the Company's actual financial
performance.
The competitiveness of the Company's total compensation program - including base
salaries, annual cash incentives, and long-term stock-based incentives - is
assessed by the Compensation Committee. Data for external comparisons may be
drawn from a number of sources, including the publicly available disclosures of
selected comparable firms with similar products and national compensation
surveys of information technology firms of similar size as the Company.
To present a reasonable comparison of the Company's performance versus the
Company's peers, the Board of Directors has determined that it would employ two
indexes in the Stock Performance Graph section of this report; (i) the Nasdaq-US
Index, and (ii) the Nasdaq Computer & Data Processing Index, since there is no
one index that exactly matches SEDONA's business. As the Company progresses with
its business development plans, many of the firms in these indexes will be
employed in the peer group to be used by the Compensation Committee to assess
the external competitiveness of compensation levels.
While the targeted total compensation levels for the Executive Officers are
intended to be competitive, compensation paid in any particular year may be more
or less than the average, depending upon the Company's actual performance.
Shareholders should be aware that given the past year's performance of the
Company, no cash bonuses were distributed to the Company's Employees or
Executive Officers. To the contrary, all of the Company's employees accepted a
10% salary decrease in effect since September 2001, which was not reinstated
until December 2003. The Chief Executive Officer's salary and compensation
package will be reviewed and re-evaluated by the Compensation Committee
annually.
29
ITEM 11. EXECUTIVE COMPENSATION (continued)
Base Salary
Base salaries for all Executive Officers, including the Company's Chief
Executive Officer, are reviewed by the Compensation Committee on an annual
basis. In determining appropriate base salaries, the Compensation Committee
considers external competitiveness, the roles and responsibilities of the
individual, the internal equity of compensation relationships, and the
contributions of the individual to the Company's success.
Annual Cash Incentive Opportunities
The Compensation Committee believes that Executives should be rewarded for their
contributions to the success and profitability of SEDONA and, as such, approves
the annual cash incentive awards. Incentive awards are linked to the achievement
of revenue and net income goals by SEDONA and/or specific business units, and
the achievement by the Executives of certain assigned objectives. The individual
objectives set for the Company's Executive Officers are generally objective in
nature and include such goals as revenue, profit and budget objectives, and
increased business unit productivity. The Compensation Committee believes that
these arrangements tie the Executive's performance closely to key measures of
the success of SEDONA or the Executive's business unit. All Executive Officers,
including the Chief Executive Officer, are eligible to participate in this
program.
Long-Term Stock-Based Incentives
The Compensation Committee also believes that it is essential to link the
interests of Executive and Shareholder together. As such, from time to time, the
Compensation Committee grants stock options to Executive Officers and other
employees under the Plan. In determining actual awards, the Compensation
Committee considers the externally competitive market, the contributions of the
individual to the Company's success, and the need to retain the individual over
time. All Executive Officers, including the Chief Executive Officer, are
eligible to participate in this program.
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction
to public companies for compensation over $1,000,000 paid to its Named Executive
Officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. Although no Named Executive
Officer received compensation exceeding this limit in 2004, the Company has
limited the number of shares of common stock subject to options, which may be
granted, to the Company's employees in a manner that complies with the
performance-based requirements of Section 162(m). While the Compensation
Committee does not currently intend to qualify its annual incentive awards as a
performance-based plan, it will continue to monitor the impact of Section
162(m).
Stock Purchase Opportunities
Option Grants
The following table sets forth information with respect to the named Executive
Officers concerning individual grants of stock purchase opportunities made
during the year ended December 31, 2004.
30
ITEM 11. EXECUTIVE COMPENSATION (continued)
Options Granted in Fiscal 2004
- -------------------------------------------------------------------------------------------------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted Exercise or Price Appreciation for
Options to Employees Base Price Expiration Option Term ($)
Name Granted (#) in 2004 ($/Sh) Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------
Marco A. Emrich 0 0 0 0 0 0
Alyssa D. Dver 0 0 0 0 0 0
Anita M. Primo 50,000 100 $0.19 12-2013 $15,500 $24,500
Timothy A. Rimlinger 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 2004 and the
unexercised options held as of December 31, 2004.
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, 2004 December 31, 2004
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
Marco A. Emrich 0 0 1,377,500 0 0 0
Alyssa S. Dver 0 0 290,000 0 0 0
Anita M. Primo 0 0 76,618 37,504 $2,374 $7,126
Timothy R. Rimlinger 0 0 133,000 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
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
31
ITEM 11. EXECUTIVE COMPENSATION (continued)
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. There were no grants of options
or warrants to non-employee directors in 2004.
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. There were no options granted in 2004.
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. 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. In addition, any
Director's
32
ITEM 11. EXECUTIVE COMPENSATION (continued)
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. As of December 31,
2004, there was a total of $115,642 accrued compensation due to current and past
members of the Board of Directors.
Employment Agreements And Change Of Control Arrangements
Agreement with Mr. Marco A. Emrich
On June 25, 2004, the Company entered into an employment agreement with Marco A.
Emrich, its Chief Executive Officer and President. The agreement has a term of
two years. Mr. Emrich serves 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 a cash bonus, subject to quarterly measurements. In addition, under Mr.
Emrich's original employment agreement signed on September 15, 1999, Mr. Emrich
received 200,000 options and 175,000 warrants each with an exercise price of
$2.25, which will vest monthly over a four-year period. In September 1999, 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.
Compensation Committee Interlocks And Insider Participation
The Company's Compensation Committee consists of Ms. Looney, Mr. Pellicci, and
Mr. Edelman. 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 28, 2005 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.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(continued)
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
- ------------------------------------------------------------------------------------------------------------
Alyssa S. Dver 340,662 (1) *
- ------------------------------------------------------------------------------------------------------------
Marco A. Emrich 1,455,385 (1) 1.67%
- ------------------------------------------------------------------------------------------------------------
Scott C. Edelman 0 (1)
- ------------------------------------------------------------------------------------------------------------
Victoria V. Looney 77,500 (1) *
- ------------------------------------------------------------------------------------------------------------
Jack Pellicci 242,868 (1) *
- ------------------------------------------------------------------------------------------------------------
Anita M. Primo 115,344 (1) *
- ------------------------------------------------------------------------------------------------------------
Timothy A. Rimlinger 293,789 (1) *
- ------------------------------------------------------------------------------------------------------------
James C. Sargent 330,348 (1) *
- ------------------------------------------------------------------------------------------------------------
Roger W. Scearce 0 (1)
- ------------------------------------------------------------------------------------------------------------
David R. Vey 39,165,842 (1,2) 41.05%
- ------------------------------------------------------------------------------------------------------------
All Executive Officers and Directors as 42,021,738 42.97%
a group, (10 persons)
============================================================================================================
* 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:
Mr. Emrich - 380,000 options and 997,500 warrants
Ms. Dver - 190,000 options and 100,000 warrants
Ms. Looney - 20,000 options
Mr. Pellicci - 221,544 options
Ms. Primo - 76,618 options
Mr. Rimlinger - 133,000 options
Mr. Sargent -278,705 options
Mr. Vey - 20,000 options and 2,331,023 warrants
(2) Mr. Vey has a right to acquire 6,337,295 shares within 60 days upon
a notice of conversion related to $1,720,000 in convertible notes
due between November 2004 and March 2006. The conversion prices of
the related notes were all issued at or above fair market value of
the underlying common stock on the date the notes were issued.
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
28, 2005. 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
were 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 a
convertible note. In January 2003,
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
the Company received proceeds of $820,000 in the form of $220,000 in convertible
note and a $600,000 promissory note. The promissory note accrued interest at a
rate of 7% and matured on January 15, 2004. The convertible notes accrued
interest at rates ranging from 7% to 8% and were convertible at the option of
Mr. Vey into 13,000,000 shares of Company common stock. The notes matured at
various dates in December 2003 and January 2004. As of January 30, 2004, Mr. Vey
elected to convert the above referenced convertible notes 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 note. These instruments have
terms similar to those of the earlier investment, and matured in March 2004. The
$100,000 note was convertible into 10,000,000 shares of the Company's common
stock. As of February 2, 2004, Mr. Vey elected to convert the above referenced
note 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 notes. The notes 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 October
2004, the Company issued 1,975,318 shares of its common stock to Mr. David Vey
who elected to convert $445,000 of the above referenced convertible notes into
Company common stock. The remaining $175,000 of convertible notes remains
outstanding as of March 28, 2005.
In June 2003, Mr. Vey exercised a warrant received in August 2002, as part of a
private placement transaction, 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.
From January 1, 2004 through December 31, 2004, the Company received $1,295,000
in proceeds and issued 8% convertible notes. The notes were issued for a
one-year term and are convertible at the option of Mr. Vey at various dates from
June 2005 to November 2005 into 4,784,880 shares of the Company's common stock.
In January 2004, Mr. Vey purchased 212,766 shares of the Company's common stock
for $100,000 in a private placement transaction. He was 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.
In December 2004, the Company issued 69,125 shares of its common stock to
Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for interest
due through September 30, 2004 on convertible notes dated January and March
2003. The Company also issued 295,589 shares to David R. Vey in lieu of $59,117
cash payment for interest due through September 30, 2004 on convertible notes
dated December 2002, January, June, July and September 2003, respectively.
The Company issued 677,450 shares of its common stock to Oak Harbor Investments
in lieu of $135,490 cash payment for interest and late charges due through
September 30, 2004 on promissory notes dated January and March 2003,
respectively.
Subsequent to December 31, 2004, the Company received an additional $250,000 in
proceeds and issued 8% convertible notes to Mr. David Vey. The notes were issued
for a one-year term and are convertible at the option of Mr. Vey at various
dates from January 2006 until March 2006 into 828,514 shares of the Company's
common stock.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
All of the Company's assets are pledged as collateral for the promissory notes
referenced above.
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, the Company 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 was $1,000,000,
which included 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 recognized $475,000 of revenue
from this transaction in the third quarter of 2003 related to sale of Intarsia,
in accordance with SOP 97-2. The balance of the contract has been recognized as
revenue in 2004 based upon the delivery of the remaining milestones in the
agreement. The Company has also recognized $6,000 of services revenue related to
maintenance services in 2003. The balance of $19,000 has been recognized as
revenue in 2004 as services were 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 the agreement during
the third quarter of 2003. As of December 31, 2004, all royalty obligations have
been satisfied. 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 former
Corporate Secretary and one of its former 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.
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
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
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 2004 2003 Total
- -----------------------------------------------------------------------------
Audit Fees $95,554 $133,919 $229,473
- -----------------------------------------------------------------------------
Audit-Related Fees 6,386 -- 6,386
- -----------------------------------------------------------------------------
Tax Fees 31,150 9,750 40,900
- -----------------------------------------------------------------------------
All Other Fees -- -- --
- -----------------------------------------------------------------------------
All audit and related fees are pre-approved by the Company's audit committee on
an annual basis.
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, 2004 and 2003; 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.
37
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, March
18, 2004, May 25, 2004, August 30, 2004, November 24, 2004, December
17, 2004 and March 17, 2005.
(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 Note 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 Notes 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)
38
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 Notes 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)
10.48 Addendum dated March 31, 2004 to Master Software License Agreement by
and between the Company and Fiserv Solutions Inc. dated March 28, 2002
(15)
10.49 Office lease agreement dated 12-24-02
10.47 Convertible note dated June 4, 2004 (16)
10.54 Convertible note by the Company in favor of David R. Vey dated June 4,
2004 (16)
10.55 Convertible note by the Company in favor of David R. Vey dated July 7,
2004 (17)
10.56 Convertible note by the Company in favor of David R. Vey dated
September 15, 2004 (17)
10.57 Convertible note by the Company in favor of David R. Vey dated October
8, 2004 (17)
10.58 Convertible note by the Company in favor of David R. Vey dated November
18, 2004 (18)
10.59 Convertible note by the Company in favor of David R. Vey dated January
13, 2005 (18)
10.60 Convertible note by the Company in favor of David R. Vey dated January
31, 2005 (18)
39
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(continued)
10.61 Convertible note by the Company in favor of David R. Vey dated March
16, 2005 (18)
10.62+# Employment Agreement dated June 25, 2004 between Company and Marco A.
Emrich
10.63+# Employment Agreement dated July 7, 2004 between Company and Alyssa S.
Dver
10.64+# Employment Agreement dated July 20, 2004 between Company and Anita M.
Primo
10.65+# Employment Agreement dated July 20, 2004 between Company and Timothy
Rimlinger
14.1+ Code of Conduct and Business Ethics, adopted by Board of Directors,
June 21, 2004
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Ernst & Young LLP
31.1* Statement Under Oath of Principal Executive Officer of the Company
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2* Statement Under Oath of Principal Financial Officer of the Company
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1* Statement Under Oath of Principal Executive Officer of the Company
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2* Statement Under Oath of Principal Financial Officer of the Company
Pursuant to Section 906 of 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.
40
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(continued)
(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 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.
(15) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal
quarter ended Mach 31, 2004.
(16) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004.
(17) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004.
(18) Filed as an Exhibit to the 8-K on March 17, 2005.
41
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, 2005 /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, 2005
------------------------------------------------
David R. Vey
Chairman of the Board
BY /S/ Marco A. Emrich Date March 29, 2005
------------------------------------------------
Marco A. Emrich
President, Chief Executive Officer and
Director
BY /S/ Scott C. Edelman Date March 29, 2005
------------------------------------------------
Scott C. Edelman
Director
BY /S/ Victoria V. Looney Date March 29, 2005
------------------------------------------------
Victoria V. Looney
Director
BY /S/ Jack A. Pellicci Date March 29, 2005
------------------------------------------------
Jack A. Pellicci
Director
BY /S/ Anita M. Primo Date March 29, 2005
------------------------------------------------
Anita M. Primo
Chief Financial Officer and Vice President
Principal Financial and Accounting Officer
BY /S/ James C. Sargent Date March 29, 2005
------------------------------------------------
James C. Sargent
Director
BY /S/ Roger W. Scearce Date March 29, 2005
------------------------------------------------
Roger W. Scearce
Director
42
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, 2005 /s/ Marco A. Emrich
------------------------------------------
Marco A. Emrich
President and Chief Executive Officer
43
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, 2005 /s/Anita M. Primo
------------------------------------------
Anita M. Primo
Vice President and Chief Financial Officer
44
Index to Financial Statements and Schedule
Contents
Reports of Independent Registered Public Accounting Firms....................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004 and 2003.................F-4
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2004.......................F-5
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2004.......................F-6
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2004.......................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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
SEDONA Corporation
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheets of SEDONA
Corporation and its subsidiary as of December 31, 2004 and December 31, 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2004 and December 31, 2003, and the
results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
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
2005, 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 25, 2005
F-2
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
SEDONA Corporation and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 consolidated results of their operations
and their cash flows for the year ended December 31, 2002, in conformity with US
generally accepted accounting principles.
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,
2004 2003
--------------------
Assets
Current assets:
Cash and cash equivalents $ 138 $ 59
Accounts receivable, net of allowance for doubtful accounts of $0 334 179
and $13
Prepaid expenses and other current assets 145 138
--------------------
Total current assets 617 376
Property and equipment, net of accumulated depreciation and amortization 21 66
Software development costs, net of accumulated amortization of $3,883 and $3,531 -- 351
Non-current assets - other 3 39
--------------------
Total non-current assets 24 456
--------------------
Total assets $ 641 $ 832
====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 166 $ 425
Accrued expenses and other current liabilities 662 665
Deferred revenue 517 314
Current maturities of long-term debt 8 20
Short-term debt - notes 2,470 1,697
--------------------
Total current liabilities 3,823 3,121
Long-term debt, less current maturities 953 953
Interest Payable 123 46
--------------------
Total long-term liabilities 1,076 999
--------------------
Total liabilities 4,899 4,120
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 H, par value $2.00, Issued and outstanding shares - 1,500 3 3
Common stock, par value $0.001
Authorized shares -175,000,000, Issued and outstanding shares -
86,640,561 and 61,131,513 in 2004 and 2003, respectively 86 61
Additional paid-in-capital 61,975 60,048
Accumulated deficit (67,322) (64,400)
--------------------
Total stockholders' deficit (4,258) (3,288)
--------------------
Total liabilities and stockholders' equity/(deficit) $ 641 $ 832
====================
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,
--------------------------------------------
2004 2003 2002
--------------------------------------------
Revenues:
Product licenses - unrelated parties $ 345 $ 531 $ 754
Product licenses - related parties -- 475 --
Services-unrelated parties 223 516 1,753
Services- related parties 519 -- --
--------------------------------------------
Total revenues 1,087 1,522 2,507
Cost of revenues:
Product licenses 351 699 1,199
Services 76 179 397
Write-off of capitalized and purchased software -- -- 133
--------------------------------------------
Total cost of revenues 427 878 1,729
--------------------------------------------
Gross profit 660 644 778
Expenses:
General and administrative 1,665 2,275 4,256
Sales and marketing 429 341 1,192
Research and development 1,102 878 1,227
Legal fees payable forgiven in lieu of other consideration -- (153) --
--------------------------------------------
Total operating expenses 3,196 3,341 6,675
--------------------------------------------
Loss from operations (2,536) (2,697) (5,897)
Other income (expense):
Interest expense (258) (204) (47)
Convertible debenture expense (123) (1,290) --
Other (5) (21) (57)
--------------------------------------------
Total other expenses (386) (1,515) (104)
--------------------------------------------
Net Loss (2,922) (4,212) (6,001)
Deemed dividends applicable to preferred stockholders (299) (15) (303)
--------------------------------------------
Loss applicable to Common Stockholders $ (3,221) $ (4,227) $ (6,304)
============================================
Basic and diluted net loss per share applicable to common shares $ (0.04) $ (0.08) $ (0.13)
============================================
Basic and diluted weighted average common shares outstanding 79,257,088 54,807,551 48,376,941
============================================
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, 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
=============================================================
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 -- -- -- -- -- --
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, 2004 -- -- -- -- -- --
--------------------------------------------------------------
Balance, December 31, 2004 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, 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)
============================================================
Common stock issued for consulting services 92,735 -- 30 --
Common stock issued for legal expenses related to litigation 228,562 -- 73 --
Conversion of debenture into common stock 21,975,318 22 623 --
Exercise of common stock warrants 200,000 -- 100 --
Issuance of common stock 1,834,044 2 855 --
Common stock issued for accrued interest expense on convertible
notes 1,042,164 1 207
Common stock issued for employee stock purchase plan 136,225 -- 23 --
Fair value of options & warrants -- -- 16 --
Preferred stock dividends -- -- -- --
Net loss, year ended December 31, 2004 -- -- -- (2,922)
-------------------------------------------------------------
86,640,561 $ 86 $ 61,975 $ (67,322)
============================================================
See accompanying notes.
F-7
SEDONA Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
2004 2003 2002
-----------------------------
Operating activities:
Net loss $(2,922) $(4,212) $(6,001)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 47 165 267
Amortization 351 697 1,173
Net loss on retirement of property, plant and equipment -- 13 16
Charge for employer 401(K) stock contribution 55 82 97
Common stock issued for legal and consulting services 103 583 --
Option or warrant based compensation 16 27 148
Amortization of deferred financing fees and debt discount 123 1,290 7
Impairment loss on capitalized software -- -- 133
Charge for employee stock award -- -- 189
Changes in operating assets and liabilities:
Restricted cash -- 238 51
Accounts receivable (155) (126) 278
Prepaid expenses and other current assets (7) 48 (21)
Other non-current assets 36 (31) 17
Accounts payable and accrued expenses 25 (910) 576
Deferred revenue and other 203 (80) (115)
-----------------------------
Net cash used in operating activities (2,125) (2,216) (3,185)
Investing activities:
Purchase of property and equipment (2) (24) --
Proceeds from the sale of property and equipment -- 18 --
-----------------------------
Net cash used in investing activities (2) (6) --
Financing activities:
Repayments of long-term obligations (12) (49) (57)
Issuance of common stock, net 823 250 2,292
Proceeds from exercise of common stock warrants/options 100 190 1,246
Proceeds from issuance of short-term debenture and notes 1,295 1,940 --
Repayment of note payable to related party -- (50) --
Repayment of short-term debentures -- -- (399)
-----------------------------
Net cash provided by financing activities 2,206 2,281 3,082
-----------------------------
Net increase (decrease) in cash and cash equivalents 79 59 (103)
Cash and cash equivalents, beginning of year 59 -- 103
-----------------------------
Cash and cash equivalents, end of year $ 138 $ 59 $ 0
=============================
See accompanying notes.
F-8
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
1. Accounting Policies
Description of Business
SEDONA is a software application and services provider that develops and markets
web-based, vertical Customer Relationship Management (CRM) solutions to small
and mid-size businesses (SMBs). The Company's CRM application solution,
Intarsia, enables SMBs to increase the profitability of their customer portfolio
and enhance shareholder value. The Company has strategically targeted small to
mid-size financial services organizations as the first vertical market to
introduce its leading CRM application solution including community and regional
banks, credit unions and insurance companies.
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. However, as a result of
the Company's decision to re-establish a direct sales channel, beginning January
2005, SEDONA re-signed maintenance agreements with several customers from the
Fiserv CCS business unit. The agreements were re-signed during December 2004 and
SEDONA began providing services under the maintenance agreements in January
2005.
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 ($2,922,000), ($4,212,000)
and ($6,001,000) during the years ended December 31, 2004, 2003 and 2002,
respectively. The Company anticipates sales to increase but likely will require
additional financing. These factors raise substantial doubt about our ability to
continue as a going concern. The Company's plans include: (i.) expanding the
penetration and acceptance of its CRM technology into the Company's existing
indirect sales distribution channel; (ii.) expanding its distribution channel by
establishing a direct sales channel to market and sell its CRM solution into
community and regional banks, credit unions and insurance companies; (iii.)
seeking additional debt or equity financing; and (iv.) continue its 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. All significant intercompany
accounts and transactions have been eliminated.
F-9
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all 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. As of December 31, 2004, accounts receivable include $302,600 for
2005 maintenance services which is included with deferred revenue. The amount
will be amortized over the maintenance period and recognized as revenue on a
monthly basis in 2005.
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.
F-10
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
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.
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 2004, 2003 and 2002, the Company capitalized no software development
costs related to the Company's Intarsia business application solution software.
During 2004, 2003 and 2002, $351,000, $697,000 and $1,173,000, respectively,
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, 2004, the Company recognized $345,000 in product
license revenues compared to $1,006,000 and $754,000 in the years ended December
31, 2003 and 2002, 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. Typically, maintenance contracts are entered into
for initial three year terms and are renewable annually thereafter.
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 applicable to common
stockholders 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
2004, 2003, and 2002, 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 freely 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 vesting
period of the awards, net loss would have been (in thousands, except per unit
information):
- --------------------------------------------------------------------------------
Year Ended December 31
------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Net loss
As reported $ (2,922) $ (4,212) $ (6,001)
Pro forma $ (2,973) $ (4,951) $ (7,448)
- --------------------------------------------------------------------------------
Net loss applicable to common
shares
As reported $ (0.04) $ (0.08) $ (0.13)
Pro forma $ (0.04) $ (0.09) $ (0.16)
- --------------------------------------------------------------------------------
Assumptions used in calculating the fair value of the options and warrants
granted in 2004, 2003 and 2002 are as follows:
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Risk-free interest rate: 1.67% - 4.27% 1.60% - 4.07% 2.4% - 5.1%
- --------------------------------------------------------------------------------
Expected average volatility: 114% 125% 121%
- --------------------------------------------------------------------------------
Expected holding period: 2-10 years 2-10 years 3-10 years
- --------------------------------------------------------------------------------
Expected dividend yield: 0% 0% 0%
- --------------------------------------------------------------------------------
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 123(R), Share-Based Payment, an
amendment of FASB Statements No. 123 and 95. FAS No. 123(R) replaces FAS No.
123, Accounting for Stock-Based compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This statement requires companies to
recognize the fair value of stock options and other stock-based compensation to
employees prospectively beginning with fiscal periods beginning after
F-13
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
June 15, 2005. This means that the Company will be required to implement FAS No.
123(R) no later than the quarter beginning July 1, 2005. The Company currently
measures stock-based compensation in accordance with APB Opinion No. 25 as
discussed above. The Company anticipates adopting the modified prospective
method of FAS No. 123(R) on July 1, 2005. The impact on the Company's financial
condition or results of operations will depend on the number and terms of stock
options and warrants outstanding on the date of change, as well as future
options and warrants that may be granted.
2. Property and Equipment
Property and equipment consist of the following (in thousands, except per unit
information):
December 31,
2004 2003
-------------------
Machinery and equipment $ 1,005 $ 1,005
Equipment under capital lease -- 209
Furniture and fixtures 13 46
Leasehold improvements 33 40
Purchased software for internal use 177 193
--------------------
1,228 1,493
Less accumulated depreciation and amortization 1,207 1,427
--------------------
$ 21 $ 66
====================
3. 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,
2004 2003
---------------
Note payable - CIMS acquisition Due 2006 (Note 14) $ 953 $ 953
Interest payable 123 46
Capital lease obligations (Note 11) 8 20
---------------
1,084 1,019
Less current maturities 8 20
---------------
Long-term debt $1,076 $ 999
===============
4. Convertible Notes
Material Investor
As described below, during the period December 2002 through March 28, 2005, 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 41% 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.
F-14
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
4. Convertible Notes (continued)
In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
were 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 note. In January 2003, the Company received proceeds of $820,000 in
the form of $220,000 in convertible notes and a $600,000 promissory note. The
promissory note accrued interest at a rate of 7% and matured on January 15,
2004. The convertible notes accrued interest at rates ranging from 7% to 8% and
were convertible at the option of Mr. Vey into 13,000,000 shares of Company
common stock. The notes matured at various dates in December 2003 and January
2004. As of January 30, 2004, Mr. Vey elected to convert $100,000 of the above
referenced convertible notes into 10,000,000 shares of the Company's common
stock. During December 2003, Mr. Vey elected to convert $220,000 of the above
referenced convertible notes into 3,000,000 shares of the Company's common
stock.
Additionally, the Company received $500,000 in March 2003, in the form of a
$400,000 promissory note and a $100,000 convertible note. These instruments have
terms similar to those of the earlier investment, and matured in March 2004. The
$100,000 note was convertible into 10,000,000 shares of the Company's common
stock. As of February 2, 2004, Mr. Vey elected to convert the above referenced
convertible note into an additional 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 was accreted
over the life of the notes as additional interest expense. Expense recognized
for the years ended December 31, 2004 and 2003 was $123,000 and $1,290,000,
respectively.
During 2002, 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.
From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible notes. The notes 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 October
2004, the Company issued 1,975,318 shares of its common stock to Mr. David Vey
who elected to convert $445,000 of the above referenced convertible notes into
Company common stock. The remaining $175,000 of convertible notes remains
outstanding as of March 28, 2005.
In June 2003, Mr. Vey exercised a warrant received in August 2002, as part of a
private placement transaction, 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.
In January 2004, Mr. Vey purchased 212,766 shares of the Company's common stock
for $100,000 in a private placement transaction. He was 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.
F-15
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
4. Convertible Notes (continued)
From January 1, 2004 through December 31, 2004, the Company received $1,295,000
in proceeds and issued 8% convertible notes to David R. Vey. The notes were
issued for a one-year term and are convertible at the option of Mr. Vey at
various dates from June 2005 to November 2005 into 4,784,880 shares of the
Company's common stock.
In December 2004, the Company issued 69,125 shares of its common stock to
Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for interest
due through September 30, 2004 on convertible notes dated January and March
2003. The Company also issued 295,589 shares to David R. Vey in lieu of $59,117
cash payment for interest due through September 30, 2004 on convertible notes
dated December 2002, January, June, July and September 2003, respectively.
During December 2004, the Company issued 677,450 shares of its common stock to
Oak Harbor Investments in lieu of $135,490 cash payment for interest and late
charges due through September 30, 2004 on promissory notes dated January and
March 2003, respectively.
Subsequent to December 31, 2004, the Company received an additional $250,000 in
proceeds and issued 8% convertible notes to Mr. David Vey. The notes were issued
for a one-year term and are convertible at the option of Mr. Vey at various
dates from January 2006 until March 2006 into 828,514 shares of the Company's
common stock.
All of the Company's assets are pledged as collateral for the promissory notes
referenced above.
All of the securities issued in the preceding transactions to David R. Vey,
Richard T. Hartley and Oak Harbor Investments were sold in reliance upon Rule
506 of Regulation D involving only sales to accredited investors.
5. 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.
F-16
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
5. Stockholders' Equity (continued)
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 14 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.
Also, upon thirty (30) day written notice any time after the Original Issuance
Date, or the closing of a consolidation, merger or mandatory share exchange in
which the Corporation is not the surviving entity and in which the only
consideration to be received by the holders of the Corporation's common stock is
cash, the Corporation may, in its sole discretion, but shall not be obligated to
redeem, in whole but not in part, the then issued and outstanding shares of
Series H Convertible Preferred Stock, at a price equal to one hundred and
twenty-eight percent (128%) of the Stated Value, plus all accrued but unpaid
dividends, provided that a registration statement permitting resale of any
shares of Common Stock issuable upon conversion by the holder is then effective.
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.
Cumulative but undeclared dividends on both Series A and Series H Preferred
Stock at December 31, 2004 equaled $1,049,354 or $2.09 per share. To the extent
such dividends are declared and paid they will then be reflected appropriately
in the Company's financial statements.
Common Equity
During the first quarter of 2004, the Company issued 19,424 shares of its common
stock to a consultant in lieu of $10,000 cash compensation for investor relation
services rendered. The Company also issued 35,130 shares of its common stock to
an attorney in lieu of $18,300 cash compensation for services rendered in
relation to the litigation filed by the Company on May 5, 2003. (See Note 7 to
the Consolidated Financial Statements).
In January 2004, the Company issued 1,702,128 shares of its common stock to
investors in exchange for cash proceeds from a private placement of $800,000.
The Company also issued to the same investors 851,064 two-year warrants to
purchase shares of its common stock at $0.70 per share.
During the first quarter, the Company received $100,000 and issued 200,000
shares of its common stock from the exercise of 200,000 common stock warrants.
F-17
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
5. Stockholders' Equity (continued)
In March 2004, the Company issued 20,000,000 shares of its common stock to Mr.
David Vey who elected to convert $200,000 of convertible notes issued in January
and March 2003 into the Company's common stock.
During the second quarter of 2004, the Company issued 7,225 shares of its common
stock to a consultant in lieu of $2,500 cash compensation for investor relation
services rendered to the Company. The Company also issued 14,455 shares of its
common stock to an attorney in lieu of $6,100 cash compensation for services
rendered in relation to the litigation filed by the Company on May 5, 2003.
The Company received $8,987 and issued 59,916 shares of the Company's common
stock to employees for shares purchased through the Employee Stock Purchase
Plan.
During the third quarter of 2004, the Company issued 35,739 shares of its common
stock to a consultant in lieu of $10,000 cash compensation for investor relation
services rendered. The Company also issued 105,718 shares of its common stock to
an attorney in lieu of $30,500 cash compensation for services rendered in
relation to the litigation filed by the Company on May 5, 2003.
In August 2004, the Company issued common stock pursuant to its employee 401(k)
plan, whereby certain contributions are matched by the Company in company stock
valued at $56,000, resulting in the issuance of 131,916 shares of common stock.
Also during the fourth quarter of 2004, the Company issued 30,347 shares of its
common stock to a consultant in lieu of $7,500 cash compensation for investor
relation services rendered. The Company issued 73,259 shares of its common stock
to an attorney in lieu of $18,300 cash compensation for services rendered in
relation to the litigation filed by the Company on May 5, 2003.
In October 2004, the Company issued 1,975,318 shares of its common stock to Mr.
David Vey who elected to convert $445,000 of convertible notes issued in June,
July and September 2003 into the Company's common stock.
F-18
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
5. Stockholders' Equity (continued)
In December 2004, the Company issued 69,125 aggregate shares of its common stock
to Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for
interest due through September 30, 2004 on convertible notes dated January and
March 2003. The Company also issued 295,589 shares to David R. Vey in lieu of
$59,117 cash payment for interest due through September 30, 2004 on convertible
notes dated December 2002, January, June, July and September 2003, respectively.
During December 2004, the Company issued 677,450 shares of its common stock to
Oak Harbor Investments in lieu of $135,490 cash payment for interest and late
charges due through September 30, 2004 on promissory notes dated January and
March 2003, respectively.
In December 2004, the Company received $13,736 and issued 76,309 shares of the
Company's common stock to employees for shares purchased through the Employee
Stock Purchase Plan.
All of the securities issued in the preceding transactions to David R. Vey,
Richard T. Hartley and Oak Harbor Investments were sold in reliance upon Rule
506 of Regulation D involving only sales to accredited investors.
6. 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
March 2005 and December 2013. All options were granted at or above the fair
market value on the grant date. Transactions under this Plan were as follows:
F-19
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
6. Stock Options and Warrants (continued)
--------------------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
---------------------------------------------
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
Canceled or expired (295,345) 1.77
Granted 50,000 0.19
Exercised -- --
---------------------------------------------
Outstanding at December 31, 2004 2,984,712 $1.46
--------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Exercisable at Exercise Price Weighted Average
Year-end Options Range Per Share Exercise Price
------------------------------------------------------------------------------------------------------
2002 2,933,875 $0.39 to $6.00 $ 1.66
2003 3,015,011 $0.17 to $5.13 $ 1.56
2004 2,813,964 $0.17 to $5.13 $ 1.55
------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2004:
--------------------------------------------------------------------------
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 1,867,731 562,750 554,231 2,984,712
Weighted average remaining
contractual life (years) 4.18 4.22 3.06 3.73
Weighted average exercise price $0.82 $1.86 $3.20 $1.46
Exercisable 1,701,984 557,750 554,230 2,813,964
Weighted average exercise price $0.90 $1.87 $3.20 $1.55
--------------------------------------------------------------------------------------------------------------
F-20
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
6. Stock Options and Warrants (continued)
Warrants
Warrants outstanding have been granted to Officers, Directors, Stockholders and
others to purchase common stock at prices ranging from $0.30 to $3.75 per share
and expiring between January 2005 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, 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
Canceled or expired (542,993) 1.74
Granted 851,064 0.70
Exercised (200,000) 0.50
-------------------------------------------------
Outstanding at December 31, 2004 15,434,727 $ 1.14
--------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Exercisable at Exercise Price Weighted Average
Year-end Warrant Shares Range Per Share Exercise Price
------------------------------------------------------------------------------------------------------
2002 13,960,095 $0.30 to $5.04 $1.30
2003 15,087,830 $0.30 to $3.75 $1.17
2004 15,195,900 $0.30 to $3.75 $1.13
------------------------------------------------------------------------------------------------------
The following table summarizes information about common stock warrants
outstanding at December 31, 2004:
-----------------------------------------------------------------------------
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 11,404,471 2,464,116 1,566,140 15,434,727
Weighted average remaining
contractual life (years) 1.9 2.9 2.1 2.2
Weighted average exercise price $0.74 $1.84 $3.00 $1.14
Exercisable 11,264,494 2,464,116 1,467,290 15,195,900
Weighted average exercise price $0.73 $1.84 $3.03 $1.13
------------------------------------------------------------------------------------------------------------------
F-21
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
6. Stock Options and Warrants (continued)
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 2004, 2003, and 2002 respectively: no dividends paid for all years;
average expected volatility of 114% for 2004, 125% for 2003 and 121% for 2002;
risk-free interest rates range from 1.0% to 5%, 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,
---------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------
Stock options and
warrants $0.67 $0.24 $0.38
------------------------------------------------------------------------
During 2004, there were a total of 50,000 common stock options with an exercise
price of $0.19 per share granted to an Officer of the Company. The exercise
price of this option equaled the fair market value or more of the common stock
at the time of such grant. Additionally, 851,064 warrants were issued related to
investors; as described in Note 4, 106,383 were granted on behalf of a material
investor and as described in Note 5, 744,681 were granted to other investors.
Options to Directors and Officers
Included in the options and warrants granted above are the following:
During 2004, 50,000 options of the Company's common stock were granted to an
Officer of the Company. These options were issued at or above fair market value
of the common stock on the grant date at a weighted average exercise price of
$0.19 per share, expiring no later than December 2013. As of December 31, 2004,
none of these options were exercised.
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, 2004, none of these options were exercised.
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, 2004, none of these options were exercised.
Shares reserved for future issuance of common stock approximate 10,011,373 as of
December 31, 2004.
F-22
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
7. 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 the vendors 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 $2,850,000.
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 of March 28, 2005, no ruling by the United States District
Court for the Southern District of New York has been made with regard to this
matter. 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
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 any fees
related to this obligation.
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
8. Related Party Transactions
In September 2003, the Company 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, in accordance with SOP 97-2. The balance of the contract has been
recognized as revenue in 2004 based upon the delivery of the remaining
milestones in the agreement. The Company has also recognized $6,000 of services
revenue related to maintenance services in 2003. The balance of $19,000 has been
recognized as revenue in 2004 as services were 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 of 2003. As of December 31, 2004, all royalty
obligations have been satisfied. 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.
The Company incurred consulting and commission expenses, and out-of-pocket
expenses of $0, $70,000 and $75,000, for the years ended December 31, 2004,
2003, and 2002, respectively, to certain of its Directors and to an organization
whose President was a Director of the Company through June 2003.
9. 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. In 2004, the Board approved a matching contribution
which was valued at $56,000 and resulted in the issuance of 131,916 shares of
the Company's common stock to participants, valued at a closing price of $0.42
per share.
F-24
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
10. Commitments
The Company has employment agreements with certain key employees, which expire
at various dates through 2006. 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 six 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. In April 2004, the
Company expanded 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 total $106,107 and are all
due in 2005.
Rent expense for 2004 was $101,000. Rent expense for 2003 was $165,000 and in
addition the Company received rental income $63,000 from a subtenant. Rent
expense for 2002 was $815,000.
Future minimum lease payments under capital lease obligations consist of $9,000
due in 2005 of which $1,000 is related to interest.
11. 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):
- ------------------------------------------------------------------------------------------
Year ending December 31,
2004 2003
--------------------------------
Accrued payroll, benefits and severance $ 132 $ 125
Accrued rent 3 4
Accrued fees and other expenses to Directors 176 -
for professional services and other expenses
Accrued legal expenses related to Litigation (see Note 104 177
7, contingencies)
Note payable, general insurance 116 113
Interest due on convertible notes 78 110
Miscellaneous includes Lead Factory accrual 53 136
--------------------------------
Total $ 662 $ 665
- ------------------------------------------------------------------------------------------
F-25
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
12. 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, 2004, 2003
and 2002 and the Company has provided a valuation allowance against all net
operating loss carryforwards.
At December 31, 2004 and 2003, the Company had a recorded deferred tax asset of
$24.8 million and $22.4 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, 2004 and 2003, the Company had recorded current deferred tax
assets of $293,000 and 30,000, respectively, which related primarily to accruals
which may be recognized in the future for tax purposes. Additionally, at
December 31, 2004 and 2003, the Company had recorded non-current deferred tax
liabilities of $6,000 and $35,000, respectively, which related primarily to
basis differences in capitalized software and property, plant and equipment.
At December 31, 2004 and 2003, the Company had approximately $61.3 million and
$58.8 million, respectively, in federal net operating loss carryforwards that
expire in various years through 2024. Additionally, the Company has
approximately $40.4 million and $39.0 million respectively, of state net
operating loss carryforwards that expire in various years beginning in 2005
through 2012.
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.
13. Supplemental Disclosures of Cash Flow Information (in thousands)
- ---------------------------------------------------------------------------------------------
Year Ended December 31
2004 2003 2002
------------------------------------------
Cash paid during the year for interest $ 6 $ 51 $ 45
Cash expenses incurred relative to issuance
of stock -- -- 130
Conversion of preferred stock dividends and
note interest into common stock -- 187 --
Conversion of preferred stock debenture to
common stock -- 780 399
Conversion of debenture and accrued
interest into common stock 853 220 --
Common stock issued for repayment of note
payable to related party -- 98 --
Fixed asset purchases through assumption of
capital lease obligation -- -- --
- ---------------------------------------------------------------------------------------------
F-26
SEDONA Corporation and Subsidiary
Notes to Consolidated Financial Statements
14. 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. Five-year warrants amounting to an
aggregate of $550,000 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 Contingent Payment"). Through March 2004, the
Company had paid $47,000 related to the Required Payment. There was no
contingent payment of $1,500,000 due based on performance of the business unit
acquired. 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: extension of the
conversion date of the Series H Preferred Stock by thirty-six months, until
April 1, 2006; payment of trade payables due totaling $132,000, which are
accrued net of a credit due back to the Company of $78,000, all of which has
been paid; and agreement to provide $262,000 worth of services to Acxiom, if
requested by Acxiom. The Company believes that there is a remote possibility
that the Company may have to provide future services related to this agreement.
15. Major Customer Transactions
As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions (CCS), 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. However, as a result of the
Company's decision to re-establish a direct sales channel, beginning January
2005, SEDONA re-signed maintenance agreements with several customers from the
Fiserv CCS business unit. The agreements were re-signed during December 2004 and
SEDONA began providing services under the maintenance agreements in January
2005.
Revenues from three of the Company's major alliance partners, ACEncrypt
Solutions, a related party, Fiserv Solutions Inc. and Open Solutions Inc.,
accounted for ninety-one percent (91%) of total sales in 2004. In 2003, five
alliance partners accounted for ninety-six percent (96%) of sales compared to
2002 in which two alliance partners accounted for fifty-two percent (52%) of
total sales.
16. Subsequent Events
Subsequent to December 31, 2004, the Company received an additional $250,000 in
proceeds and issued 8% convertible notes to Mr. David Vey. The notes were issued
for a one-year term and are convertible at the option of Mr. Vey at various
dates from January 2006 until March 2006 into 828,514 shares of the Company's
common stock.
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)
4.3.1 5% Convertible Note 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 Notes 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 Notes 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)
10.48 Addendum dated March 31, 2004 to Master Software License Agreement by
and between the Company and Fiserv Solutions Inc. dated March 28, 2002
(15)
F-29
EXHIBIT INDEX (continued)
10.49 Office lease agreement dated 12-24-02
10.48 Convertible note dated June 4, 2004 (16)
10.54 Convertible note by the Company in favor of David R. Vey dated June 4,
2004 (16)
10.55 Convertible note by the Company in favor of David R. Vey dated July 7,
2004 (17)
10.56 Convertible note by the Company in favor of David R. Vey dated
September 15, 2004 (17)
10.57 Convertible note by the Company in favor of David R. Vey dated October
8, 2004 (17)
10.58 Convertible note by the Company in favor of David R. Vey dated
November 18, 2004 (18)
10.59 Convertible note by the Company in favor of David R. Vey dated January
13, 2005 (18)
10.60 Convertible note by the Company in favor of David R. Vey dated January
31, 2005 (18)
10.61 Convertible note by the Company in favor of David R. Vey dated March
16, 2005 (18)
10.62+# Employment Agreement dated June 25, 2004 between Company and Marco A.
Emrich
10.63+# Employment Agreement dated July 7, 2004 between Company and Alyssa S.
Dver
10.64+# Employment Agreement dated July 20, 2004 between Company and Anita M.
Primo
10.65+# Employment Agreement dated July 20, 2004 between Company and Timothy
Rimlinger
14.1+ Code of Conduct and Business Ethics, Adopted by the Board of
Directors, June 21, 2004
23.1 Consent of McGladrey & Pullen LLP
23.2 Consent of Ernst & Young LLP
31.1* Statement Under Oath of Principal Executive Officer of the Company
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2* Statement Under Oath of Principal Financial Officer of the Company
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1* Statement Under Oath of Principal Executive Officer of the Company
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2* Statement Under Oath of Principal Financial Officer of the Company
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
* Filed herewith.
# Executive Compensation Plans and Arrangements.
F-30
EXHIBIT INDEX (continued)
(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 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.
(15) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2004.
(16) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2004.
(17) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2004.
(18) Filed as an Exhibit to the 8-K on March 17, 2005.
F-31
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 in order
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-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based upon such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrants'
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting 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.
Dated: March 29, 2005 /s/ MARCO A. EMRICH
-------------------
Marco A. Emrich
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 in order
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-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based upon such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrants'
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting 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.
Dated: March 29, 2005 /s/ ANITA M. PRIMO
------------------
Anita M. Primo
Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SEDONA Corporation on Form 10-K
for the year ending December 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the "Annual Report"), I, Marco A. Emrich, Chief
Executive Officer of SEDONA Corporation certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Annual Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of SEDONA
Corporation.
Dated: March 29, 2005 /s/ MARCO A. EMRICH
-------------------
Marco A. Emrich
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SEDONA Corporation on Form 10-K
for the year ending December 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the "Annual Report"), I, Anita M. Primo, Chief
Financial Officer of SEDONA Corporation certify, pursuant Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Annual Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of SEDONA
Corporation.
Dated: March 29, 2005 /s/ ANITA M. PRIMO
------------------
Anita M. Primo
Vice President and Chief Financial Officer
(Principal Financial Officer)