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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, 1998 or
Transition report pursuant to section 13 or 15(d) of the
- - --- Securities Exchange
Act of 1934 for the transition period from___to___
Commission file number 0-15864
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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.)
649 North Lewis Road, Limerick, PA 19468
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code) 610-495-3003
-----------------------
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 __.
The aggregate market value of the Voting Stock held by non-affiliates of the
registrant computed by reference to the closing price as reported on the NASDAQ
system as of March 31, 1999 was $45,826,704
The number of shares of the registrant's Common Stock issued and outstanding as
of March 31, 1999 was 20,944,563 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III.
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by use of terms such as "believes",
"anticipates", "intends", or "expects". These forward-looking statements relate
to the plans, objectives, and expectations of Sedona Corporation (the "Company"
or "Sedona Corp.") for future operations. In light of the risks and
uncertainties inherent in all forward-looking statements, the inclusion of such
statements in this Form 10-K should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained herein as a result of certain factors including, but not limited to,
dependence on operating agreements with foreign partners, significant foreign
and U.S.-based customers and suppliers, availability of transmission facilities,
U.S. and foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition and
rapid technological change. These factors should not be considered exhaustive;
the Company undertakes no obligation to release publicly the results of any
future revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
General
Founded in 1972, Sedona(R) Corporation (formerly Scan-Graphics(R), Inc.)
pioneered and remains a leader in large document scanners and image processing
technology. Further, this group has developed and is developing Internet enabled
business geographics and data visualization software and solutions, imaging
software and systems and backfile conversion services. The Company has key
product development and marketing alliances with Oracle Corporation and Sun
Microsystems, Inc. as well as other database, application and content vendors.
Its products are marketed internationally by a variety of systems integrators
and distributors, especially its Tangent Imaging Systems(TM) products. With
principal locations in suburban Philadelphia, Pennsylvania and Englewood,
Colorado, the Company is comprised of three business units: Tangent Imaging
Systems(TM), (TIS), Sedona(R) GeoServices, Inc., and the Technology Resource
CentersSM, Inc. (TRC).
Tangent Imaging Systems(TIS) provides large format color scanning and
reprographics systems, servicing among others, the reprographics, fine arts,
geographic mapping, engineering, and cinematography markets. The scanners and
related software are produced in and distributed from a facility in Englewood,
Colorado.
Sedona GeoServices, Inc. develops and markets business intelligence software
products that provide business users the capability to better access, visualize
and understand the information stored in their corporate data stores. These
products focus on ease of use, interoperability, Internet accessibility and
intuitive visualization of enterprise data and are designed to extend the
capability of line-of-business applications in providing advanced decision
support services for the data warehouse or data mart.
1
ITEM 1. BUSINESS (Continued)
The vision of the Sedona GeoServices business unit is to enable business clients
to turn warehoused data into relevant visual information from which informed,
real-time, decisions are made to swiftly improve bottom-line results.
Technology Resource Centers, Inc. (TRC) was incorporated in February of 1996
with the purpose of providing an integrated approach to clients' needs for
document scanning, conversion services, imaging systems consulting, systems
integration and technical training. The TRC is concentrating on services that
support imaging and document management technologies and the integration of
these applications with other processes in engineering and Geographic
Information Systems (GIS).
Financial Information (In Thousands)
The percentages of total revenue for scanners and related software and services
for years ended 1998, 1997 and 1996 were 91%, 94%, and 96%, respectively. The
percentages of total revenues for conversion and consulting services for years
ended 1998, 1997, and 1996 were 9%, 6%, and 4%, respectively.
Financial Information Relating to Domestic and International Sales
(In Thousands)
1998 1997 1996
---- ---- ----
Sales to unaffiliated customers:
United States $4,363 $2,700 $3,760
Export 1,815 2,127 1,300
Gross Profit
United States 1,165 $ (429) $ 553
Export 977 711 494
Exports were sold principally into Western Europe.
Description of Business and Principal Products
Tangent Imaging Systems Division
Tangent Imaging Systems is a leading provider of high performance color scanners
for large documents. Its products are manufactured at a facility in Englewood,
Colorado. It produces a line of wide format scanners, including a range of high
accuracy drum scanners, flatbed scanners, and sheetfeed scanners ranging from
24" wide to 70" wide. This complement of color scanners is enhanced with its
easy to use "closed-loop" color system software for calibrating the scanner,
plotter and the user's choice of inks and paper to give color copies of great
fidelity. Marketed under the brand name Reproworks(TM), these products are
targeted toward reprographics, fine arts, archiving, and automated mapping.
The key challenges facing the Tangent Imaging Systems as it positions its
products going forward include a fuller exploitation of the high price and high
quality niche markets for wide format color scanners, development of a mid range
line of scanners, and a broadening of its international distribution systems. In
addition, the Company will continue to re-orient the marketing focus of its
scanner products from the defense to the commercial and industrial sectors.
Finally, the leading edge Windows NT operating system Reproworks(TM) will
continue to be made more robust by adding ICC proofing and Internet
capabilities.
2
ITEM 1. BUSINESS (Continued)
Sedona GeoServices, Inc.
Sedona offers software products designed for the business user that provide
valuable business intelligence through innovative implementation of spatial
information management. These products support ERP (Enterprise Resource
Planning) efforts by vastly improving the comprehension of current business
conditions and trends. Such applications expedite business performance
management and decision support thereby improving customer intelligence to
respond more rapidly to changing market conditions. The ultimate EVA (Economic
Value Add) is delivered through improved bottom line results and customer
relationship management. Our mission is to develop industry-leading software
products for the business intelligence and spatial information management
markets as applied to Internet-based applications, data warehousing and
enterprise line-of-business applications. Spatial information management is the
management of multi-dimensional geographic information as an integral part of
the overall corporate information system using spatially enabled database, data
access and application development tools. The requirements for successful
implementation of spatial information management include component technology,
Internet support, open database support and a standards-based development
environment.
Sedona's GeoServices SpatialVision(TM) was developed as the first in a series of
products to address the spatial information management and business intelligence
markets. The product was introduced in November 1998 at Oracle Open World.
SpatialVision is 100% Java-based using Sun Microsystems' Java2 development
environment and is an information management application that supports
geospatial data query, visualization and analysis. The use of Web-enabled, Java
technology allows SpatialVision to provide direct query, access and
visualization for Oracle's Spatial Cartridge. This enables users to easily
exploit the spatial data components of enterprise data stores. An easy to use
GUI (Graphical User Interface) permits simple construction and execution of
complex queries. Integrated mapping and imaging tools allow for customization of
the geospatial data to meet display, analysis and output requirements. All
functions are supported by a context sensitive HTML hyper help capability.
Sedona's GeoServices strategies in the near term involve exploiting existing
channels of distribution for its software products; (e.g., customers of major
database providers such as Oracle) creating software product demand through an
expanded sales force partnering with database and other value-added vendors; and
developing new technologies for the generation, visualization and distribution
of market-driven data requirements.
Technology Resource Centers, Inc.
TRC provides a wide range of imaging and document management services via
computer technologies with a special emphasis on large format documents such as
engineering drawings, construction drawings, and maps. Integration of these
documents with related data is one of the fastest growing market segments in
imaging and document management. The services provided by TRC include document
conversion, consulting and systems implementation and training.
The TRC has partnership alliances with key vendors to maximize its penetration
into the large format document markets related to manufacturing, engineering,
and geographic information systems within the local and federal governments and
the commercial sector.
3
ITEM 1. BUSINESS (Continued)
In addition, contracts for training services have been secured from the
Department of Defense and TRC is working with agencies in two states to develop
a jobs oriented training program in technical areas. TRC has secured a number of
conversion and consulting contracts and has established a conversion center with
a training program employing military veterans returning to the job market.
Research & Development (In Thousands)
The Company's engineering groups are engaged in continuing research and
development programs for its software and scanner products. The Tangent Imaging
Systems efforts will be centered on development of lower cost, higher
performance hardware, and expanding color management and Internet connectivity
on existing NT software. Sedona's GeoServices product development is focused on
application of existing programming tools to spatial applications.
Research and development expenses were $1,191, $1,327, and $744 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Patents and Copyrights
The Company is the sole owner of two patents entitled "High Speed, High
Resolution Image Processing System," Patent Number 4,631,598 issued December 23,
1986 and Patent Number 4,972,273, issued November 20, 1990. Patents are
effective for seventeen years from date of issuance.
The Company applied for a patent for its color matching solution technology
during 1997. The patent is pending. The Company has no reason to believe that
this patent will not be awarded.
The Company believes that the technology contained in these patents is very
important to electronic document scanner and/or digital copier products and to
the Company's competitive position. The Company's internally developed software
programs are covered by copyrights.
The Company strongly believes in trademarking its products and servicemarking
its services. The Company has been awarded or is in the process of applying for
a total of 26 trademarks and servicemarks.
Marketing
Each of the Company's business units markets and sells its products and services
through independent, yet complimentary distribution systems, looking to leverage
synergistic opportunities across business unit channels.
Tangent Imaging Systems sells its solutions through an expanding network of
distributors, value-added resellers, system integrators, manufacturers'
representatives, and direct sales personnel. In addition, Tangent Imaging
Systems is actively working to expand its distribution capabilities through
strategic alliances.
Sedona's GeoServices initial market opportunity is targeted at business
intelligence applications tied to customer relationship management in the
financial industries. This activity is significantly enhanced by our strategic
partnership with Acxiom Corporation. A secondary target of opportunity is in the
decision support arena for supply chain solutions in manufacturing and
logistics. This effort is supported by our strategic partnership with Oracle
Corporation.
4
ITEM 1. BUSINESS (Continued)
The channel model for SpatialVision is focused on OEM (Original Equipment
Manufacturer)distribution through application providers and VARs (Value Added
Resellers) offering solutions in business intelligence in key vertical
industries. These efforts will likely result in the compilation of unique
SpatialVision packages (SixPak's) aimed at specific and targeted business
solutions.
Sedona GeoServices is a program member in the Oracle Partner Program. Sedona
supports Oracle's efforts to expand the use of spatial beyond the data store to
become a key component of all mission critical business applications. Sedona is
working in conjunction with Oracle in several marketing and product programs
consistent with Oracle's Network Computing Architecture and commitment to
Internet delivered data access.
Most recently Sedona GeoServices completed reciprocal VAR agreements with Acxiom
Corporation. Acxiom is one of the largest providers to Fortune 500 companies of
consumer and business information and database and data warehouse services.
Through these agreements, Acxiom has become Sedona's GeoServices first volume
SpatialVision reseller and via the reciprocal agreement Sedona GeoServices has
the right to distribute Acxiom ADN data products. This agreement contributes
significantly to Sedona's GeoServices ability to penetrate key industry
verticals, particularly mid-tier banking, by facilitating packaged solutions to
be marketed.
TRC markets its conversion, software, and consulting through numerous federal,
state, and local government agencies and commercial organizations. Targets of
opportunity are based on TRC expertise with large format documents such as
engineering drawings and maps. The TRC coordinates marketing programs with the
Tangent Imaging Systems and Sedona GeoServices to capitalize on the large niche
markets related to manufacturing, engineering, and geographic information
systems. TRC has also developed marketing and reseller alliances with a number
of document management and conversion software providers as well as conversion
hardware manufacturers.
Major Customers
The Company had sales to one customer during the years ended December 31, 1998,
and 1997 which accounted for 14% in 1998 and 22% in 1997 of total revenues. The
Company sales to a different customer which accounted for 14% of total revenues
in 1996.
Competition
Tangent Imaging Systems' hardware and software solutions compete in a worldwide
market estimated at $100 million. Two competitors, Contex and Vidar, dominate a
significant share of that market. The balance of market share is divided among
the Company and a number of other significant hardware manufacturers.
Tangent Imaging Systems color products comprise a portion of a rapidly expanding
worldwide market which is primarily shared with four other color scanner
manufacturers. In the areas of large document color imaging and color image
processing software, the Company competes with two providers. In all cases, the
Company's market niche remains large document scanning and digital file
manipulation and color management processing.
5
ITEM 1. BUSINESS (Continued)
Sedona GeoServices, Inc. competes in an emerging market for enterprise data
visualization and spatial information management. Many of the companies offering
related products such as ESRI, MapInfo, Intergraph, Autodesk and Formida compete
in the broader market for Geographic Information Systems (GIS). However,
traditional GIS products are generally more oriented towards the mapping or
engineering specialist in heavy-weight back-office applications in the public
sector, utilities, energy and telecommunications and require higher skill levels
to utilize.
Sedona's GeoServices product and market positioning is targeted to the
lightweight client end of the business spectrum and is specifically designed to
be used by the typical business user in any enterprise department. In this
market space, competition is more limited. However, the announcement of
Microsoft Mappoint 200 is expected to shift attention to business applications
and the business user.
As this segment grows, Sedona GeoServices is well positioned to compete through
its business partnerships with Oracle and Acxiom as well as through its
web-based Java component product architecture.
There are a number of organizations which offer services similar to those
offered by the TRC. However, the focus of TRC on large format documents and the
emphasis on job training programs with conversion services has created a very
strong competitive leverage in a very large market segment that has little
competitive penetration. The trend toward outsourcing of computer services
because of the shortage of technically skilled workers has created a very strong
market for the types of services provided by TRC.
Suppliers
The Company is not dependent on any single supplier for components and
subassemblies in the manufacture of its products.
Manufacturing, Software Development, and Services
The Company manufactures its large format scanners, scanner interfaces, and
related software products at its Englewood, Colorado facility. Sedona
GeoServices, Inc. and TRC maintain their facilities in Limerick, Pennsylvania.
Employees
As of December 31, 1998, the Company had 74 full time employees. None of these
employees are represented by a labor union. The Company believes that its
relationships with its employees are satisfactory.
Dependence Upon Key Personnel
The Company is dependent upon certain key members of its management team for the
successful operation and development of its business. The loss of the services
of one or more of its management personnel could materially and adversely affect
the operation of the Company. In addition, in order to continue its operations,
the Company must attract and retain additional technically qualified personnel
with backgrounds in engineering, production, and marketing.
6
There is keen competition for such highly qualified personnel and consequently
there can be no assurance that the Company will be successful in recruiting or
retaining personnel of the requisite caliber or in the numbers necessary to
enable the Company to continue to conduct its business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate offices as well as principal facilities for
operations at 649 North Lewis Road, 2nd Floor, Limerick, Pennsylvania 19468. The
lease for this facility of 12,201 square feet commenced July 1, 1996 and expires
September 30, 1999 with a two-year renewal option. Three addendums to this lease
have been made to reflect the consolidation of certain operations in Limerick,
PA.
The Tangent Imaging Systems Division manufacturing facilities are located at 14
Inverness Drive East, Suite A-100, Englewood, Colorado 80012 in a 8,126 square
foot facility. The current lease has a term of five years beginning in June 1994
and ending May 31, 1999.
Management believes that its facilities are adequate to fulfill its current and
near-future needs.
ITEM 3. LEGAL PROCEEDINGS (In Thousands)
On March 11, 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, PA, against the Company by a former employee, seeking damages
of $361, for termination of contract, by change of control and for convenience.
This plaintiff asserts this sum represents the excess of market value over the
exercise price of unvested warrants held by the plaintiff which the plaintiff
asserts should have been vested and thereby available for exercise and sale. The
Company has categorically denied the plaintiff claims and is defending its
position.
During 1998, the Company concluded two suits for patent infringement against two
competitors who produce electronic image scanning equipment in negotiated
out-of-court settlements. The Company received a total of $172 in connection
with the settlement of these matters.
No other actions other than matters involved in the ordinary course of business
are currently known by management and none of these are believed by management
to have potential significance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The common stock is traded in the over-the-counter market and is authorized to
be quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System under the symbol "SDNA," formerly "SCNG."
The following Table sets forth the high and low sales prices of the Company's
common stock as reflected on NASDAQ for the periods indicated.
Common Stock High Sales Price Low Sales Price
------------ ---------------- ---------------
1997
1st Quarter $ 4.75 $ 2.50
2nd Quarter $ 4.06 $ 2.50
3rd Quarter $ 5.13 $ 2.56
4th Quarter $ 4.97 $ 2.50
Common Stock High Sales Price Low Sales Price
------------ ---------------- ---------------
1998
1st Quarter $ 2.94 $ 1.94
2nd Quarter $ 2.56 $ 1.50
3rd Quarter $ 2.25 $ 1.00
4th Quarter $ 3.50 $ 1.13
Common Stock High Sales Price Low Sales Price
------------ ---------------- ---------------
1999
1st Quarter through
March 31, 1999 $ 3.13 $ 2.13
As of March 31, 1999 there were approximately 2,300 Shareholders of record. On
March 31, 1999 the last reported sale price of the Company's common stock as
reported on the NASDAQ System was $2.19.
The Company has never declared or paid cash dividends on its common stock and
does not anticipate payment of cash dividends on its common stock in the
foreseeable future. It is the current intent of the Company to continue to
retain any earnings to finance the development and expansion of its business.
8
ITEM 6. SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)
The following table sets forth selected financial information regarding the
Company for the year ended December 31, 1998 and for the four previous years.
This information should be read in conjunction with the financial statements and
notes thereto included in Item 8 of this Form 10-K.
YEAR ENDED DECEMBER 31,
-----------------------
Income Statement Data: 1998 1997 1996 1995 1994(1)
---- ---- ---- ---- ----
Revenue $ 6,178 $ 4,827 $ 5,060 $ 4,987 $ 5,067
Net Income(Loss)before
Extraordinary item (5,512) (7,517) (4,271) (1,237) (889)
Extraordinary item - (300) - - -
Net Loss (5,512) (7,817) (4,271) (1,237) (889)
Preferred Dividends (1,592) (182) (220) (158) (120)
Net Loss applicable
to Common Shares (7,104) (7,999) (4,491) (1,395) (1,009)
Net Loss applicable to
Common Shares
Before Extraordinary
Item $ (.36) $ (.47) $ (.39) $ (.14) $ (.10)
Extraordinary Item $ - $ (.02) - - -
Basic and Diluted
Net Loss Per
Common Share $ (.36) $ (.49) $ (.39) $ (.14) $ (.10)
AT DECEMBER 31,
---------------
Balance Sheet Data: 1998 1997 1996 1995 1994(1)
---- ---- ---- ---- ----
Total Assets $5,245 $5,217 $4,092 $4,084 $4,358
Net Working Capital $2,284 $2,435 $1,804 $ 952 $ 465
Long-Term
Obligations 287 175 150 231 417
Stockholders' Equity 3,457 3,514 2,556 2,105 1,876
(1) Restated due to acquisition of Tangent Engineering, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (In Thousands)
Total revenue for the year ended December 31, 1998 increased to $6,178, a 28%
increase when compared to the year ended December 31, 1997 amount of $4,827 and
a 22% increase when compared to year ended December 31, 1996 amount of $5,060.
This increase is reflective principally of growth in the Tangent Imaging Systems
and Technology Resource Center divisions.
The percentages of total revenue for scanners and related software and services
for years ended 1998, 1997 and 1996 were 91%, 94%, and 96%, respectively. The
percentages of total revenues for conversion and consulting services for years
ended 1998, 1997, and 1996 were 9%, 6%, and 4%, respectively.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The gross margin increased to $2,142 for the year ended December 31, 1998 from
$282 and $1,047 for the years ended December 31, 1997 and 1996, respectively.
This increase of $1,860 between the years ended December 31, 1998 and 1997 was a
result of re-establishing more normal gross profit margins in 1998 versus 1997,
which was impacted by a combination of low sales volume in Tangent Imaging
Systems and higher costs in Sedona GeoServices.
The Company's gross profit margin percentages were 35%, 6%, and 21% for the
years ended December 31, 1998, 1997, and 1996, respectively.
Operating, General and Administrative Expenses: General and Administrative
expenses for the years-ended December 31, 1998, 1997 and 1996 totaled $3,512,
$3,375, and $2,263, respectively. The increase in year ended December 31, 1998
expenses compared to the year ended December 31, 1997 resulted principally from
increased expenses in the corporate division stemming from a retirement
agreement of approximately $400 with the Company's founder.
The increase in year ended December 31, 1997 expenses compared to the year ended
December 31, 1996 resulted principally from the addition of executive level
personnel in Corporate and Tangent Imaging Systems Divisions.
General and Administrative expenses as percentages of revenue for the years
ended December 31, 1998, 1997 and 1996 were 56.8%, 69.9%, and 44.7%,
respectively.
Sales and Marketing Expenses: Sales and Marketing expenses for years ended
December 31, 1998, 1997 and 1996 totaled $3,015, $2,773, and $1,665,
respectively. Sales and marketing expenses as a percentage of revenue in 1998,
1997 and 1996 were 48.8%, 57.4%, and 32.9%, respectively.
The percentage decrease in 1998 stemmed from the higher sales dollars. The
higher dollar expenditure in 1998 resulted from higher expenditures in Tangent
Imaging Systems, offset to some extent by decreases in Sedona GeoServices.
Increased spending in 1997 over 1996 stemmed principally from increased spending
in Sedona GeoServices and Tangent Imaging Systems.
Research and Development Expenses: In the years ended December 31, 1998, 1997
and 1996, the Company had research and development expenses of $1,191, $1,327,
and $744, respectively. Research and development expenses as a percentage of
revenue for 1998, 1997 and 1996 were 19.3%, 27.5%, and 14.7%, respectively. The
1998 decrease from 1997 in research and development was principally the result
of lower dollar expenditures in this category as the Company refocused on core
competencies. The 1997 increase from 1996 levels in research and development was
the result of increased personnel engaged in the design of Sedona GeoServices
geospatial software products as well as increased expenditures in the Tangent
Imaging Systems division.
Interest expense for years ended December 31, 1998, 1997 and 1998 was $88, $326
and $432, respectively. In 1997, the Company incurred $100 of non-cash interest
expense for the issuance of warrants to note holders of the $5,200 private
placement in April of 1997. Interest expense of $193 was incurred on the $5,200
in private placement debentures prior to their conversion at the year ended
December 31, 1997 into a new series of preferred stock.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (In Thousands Except Per Share and Share Data)
At December 31, 1998, cash and cash equivalents decreased to $798, a $512
decrease compared to the December 31, 1997 amount of $1,310. The above changes
in cash and cash equivalents are explained as follows in the discussion of cash
flows from operating, investing and financing activities.
For the year ended December 31, 1998, the cash flows from operating activities
resulted in a net use of cash of $5,034 compared to the year ended December 31,
1997 amount of $7,333.
The decrease in use of cash of $2,299 was primarily due to lower operating
losses sustained by all divisions offset by increasing net working capital
requirements, principally for receivables funding in Tangent Imaging Systems as
it faced certain competitive pressures.
For the year ended December 31, 1998 the cash flows from investing activities
resulted in a net use of cash of $557 compared to the year ended December 31,
1997 amount of $591. The use of cash decreased $34 as of December 31, 1998,
compared to December 31, 1997. Purchasers of fixed assets for the year ended
December 31, 1998 decreased $360 when compared to the year ended December 31,
1997 and was due to reduced purchases of property and equipment for ongoing
operations and development activities, but was offset by $333 of capitalized
software development costs.
For the year ended December 31, 1998, cash flows from financing activities
provided $5,079 compared to the fiscal December 31, 1997 amount of $8,153. The
decrease in cash from finance activities in 1998 was due principally to the
lower receipts from exercises of options and warrants.
During March and April, 1998 the Company issued a $5,200 private placement of
its securities which consisted of 52 units of $100, 7% Class A Series E
convertible preferred stock (Series E Preferred) and a warrant to purchase
28,850 shares of common stock, exercisable at $3.00. The Series E Preferred and
any accrued dividends were convertible at a price per share equal to the lesser
of $3 per share or at a 15% discount to the average closing bid price for the
five days preceding conversion. If the conversion price is $2 a share or less,
the Company may elect to redeem all or part of the Series E Preferred and
accrued dividends at the par value of the Series E Preferred, plus the
conversion discount. Conversions were restricted to 10% per month on a
cumulative monthly basis. In connection with the Series E Preferred offering,
the Company recorded a one-time non-cash dividend of $917 as a result of the
difference between the conversion price and the quoted market price of the
Company's common stock at the date of issuance. This imputed non-cash dividend
has been included in the net loss applicable to common stockholders.
On August 7, 1998, the Series E Preferred investors agreed to new terms
providing for no conversions of Series E Preferred from August 1, 1998 through
January 31, 1999. Thereafter, up to 25% of the remaining Series E Preferred may
be converted per month per holder. Additionally, the Company agreed to adjust
the exercise price of the 1,500,200 warrants issued to the investors from $3.00
per share to $2.25 per share. The warrants could not be exercised prior to
February 1, 1999. In addition, the Company issued 1,254,132 new warrants to the
investors at an exercise price of $4.00 per share. These new warrants became
exercisable on February 1, 1999. The Company recorded a non-cash dividend of
$256 as a result of the value of the consideration given to the Series E
Preferred investors. This non-cash dividend has been included in the net loss
applicable to common stockholders. Previous to these new terms, $532 of Series E
Preferred and accrued dividends were converted into 410,324 shares of common
stock. As of March 31, 1999, a total of $2,388 in Series E Preferred and accrued
dividends had been converted into 1,208,101 shares of common stock.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
A promissory note of a certain former officer of the Company in the amount of
$54 reflects the balance of amount provided in exchange for exercise of warrants
and options and matures in July 2000.
During March 1999, the Company's chief executive officer agreed to loan up to
$500 to the Company on a short-term basis bearing interest at the rate of 1.5%
per month. Maximum advances under this loan arrangement amounted to $185 and
were repaid to the officer in March 1999.
On March 31, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Series B convertible
preferred stock. After a period of 12 months from March 31, 1999 (anniversary
date), the investor can convert the preferred stock to common stock at the lower
of: 1) $2.30 (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 $1.15.
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. In addition, if the common stock's average last trade price during the 25
days preceding the anniversary is less than 145% of the Closing Price, the
investor shall also be entitled to five year warrants under a variable formula
such that the lower the conversion price, the higher the number of warrants.
Additional warrants may be issued to a maximum of 1,875,749 under this
agreement. Mandatory conversion of the preferred stock shall occur on the third
anniversary after closing.
The Company believes that the proceeds from this private placement, officer
advances, and funds generated from operations will be sufficient to meet the
Company's working capital requirements for 1999.
Year 2000
The Company has and is continuing to conduct exhaustive reviews of the Year 2000
issue with all key executives participating, but does not currently believe that
there will be any negative impact. These reviews include all software produced
by the Company for use by its customers as well as the principal internally used
management information systems. As a result of these reviews management has
concluded that there is no Year 2000 issue of significance regarding either
software produced by the Company or used internally. Nevertheless, management
plans to continue exhaustive compliance testing and will develop a comprehensive
plan to address any issues which may arise.
Inflation
Although inflation has resulted in an increase in certain operating costs during
the past three years, management believes it has not had a material effect on
the Company's results of operations or financial condition.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
Refer to Form 8-K filed July 2, 1998 (filed as Exhibit 16 to this
10-K).
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth-certain information regarding the directors and
executive officers of the Company.
Name Age Position
- - ---- --- --------
R. Barry Borden 59 Chairman of the Board
Laurence L. Osterwise 51 CEO, President and Director
Michael A. Mulshine 59 Secretary and Director
David S. Hirsch 63 Director
Jack Pellicci 60 Director
James C. Sargent 83 Director
Robert M. Shapiro 53 Director
Andrew E. Trolio* 69 Director
Bruce D. Downing 58 Vice President
Robert J. Griffin 52 Vice President
Colin B. Matthews 44 Vice President
William K. Williams 56 Vice President, Chief Financial Officer
*Retired 3/99
All Directors hold office until the next annual meeting of the Shareholders of
the Company and until their successors are elected and qualified.
All officers serve at the discretion of the Board of Directors subject to the
terms of their employment agreements.
The business experience, principal occupation and employment of the directors
and executive officers have been as follows:
R. Barry Borden, Chairman of the Board and a Director of the Company since June
1996, has founded and managed businesses in the computer hardware and software
industry for the past 30 years. Since August 1997, he has served as President of
Nettech Systems, Inc., a supplier of software for wireless data communications.
Prior to that he has served as Chairman and CEO of Mergent International, a
supplier of software for data security on PC Desktops and enterprise wide
networks. Mr. Borden also serves on the Board of Directors of congruency, a next
generation Internet based equipment communications company. Since 1984, Mr.
Borden has been President of LMA Group Inc., a general management consulting
firm. From 1968 to 1980, Mr. Borden was the founder, President and CEO of Delta
Data Systems, a CRT Terminal manufacturer, and from 1981 to 1984 he was founder,
Chairman and CEO of Franklin Computer Corp., a manufacturer of microcomputers.
In 1989 he served as President and CEO of Cricket Software, Inc., a supplier of
graphics software. Mr. Borden received a BSEE degree from the University of
Pennsylvania in 1961.
13
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Laurence L. Osterwise was appointed Chief Executive Officer, President and a
Director of the Company by action of the Board of Directors on April 23, 1997.
Mr. Osterwise began his employment with the Company on November 1, 1996, as its
Chief Operating Officer and President of Sedona GeoServices, Inc., a subsidiary.
He was most recently President of the $1.5+ billion Communications Division of
General Instruments Corporation. Prior to joining General Instruments
Corporation, Mr. Osterwise spent 25 years with IBM Corporation, where he held
positions as President of Production Industries, U.S. Vice President and
Corporate Director of Market Driven Quality, and IBM Rochester General Manager
and Director of Application Business Systems. Under his leadership, IBM
Rochester was awarded the Malcomb Baldridge National Quality Award. Mr.
Osterwise received a BS in Mathematics from Duke University in 1969 and a MS in
Computer Sciences from Syracuse University in 1973.
Michael A. Mulshine has been a Director and Secretary of the Company since May
1985 and has been associated with the Company on a management consulting basis
since 1979. He has been the President of Osprey Partners, a management
consulting firm, since 1977. In addition, he is a Director of Vasco Data
Security International, Inc., an OTC traded company and provider of internet and
computer network hardware and software security products for financial
institutions, industry and government. Mr. Mulshine received a BSEE degree from
the Newark College of Engineering in 1961.
David S. Hirsch, a Director of the Company since January 1992, retired in 1991
from Schroder & Co., Incorporated and its predecessor firms where he was a
principal during the five years preceding his retirement. Mr. Hirsch received a
BA degree from Cornell University in 1957 and a MBA degree from Harvard
University in 1959.
Jack Pellicci, a Director of the Company since October 1996, is Oracle
Corporation's Vice President of Global Public Services and Transportation. Prior
to joining Oracle in 1992, Mr. Pellicci retired as a Brigadier General with 30
years in the U.S. Army, where he was the Commanding General of the Personnel
Information Systems Command. Mr. Pellicci is a member of the Board of Directors
of the Open GIS Consortium (OGC), an organization of over 70 commercial,
governmental, and educational entities dedicated to open systems approaches to
geoprocessing. He is the Vice-Chairman of the High Performance Computing and
Communications Consortium (HPCCC). In addition, Mr. Pellicci serves on the Armed
Forces Communications and Electronics Association (AFCEA) International
Technical Committee, and is a Corporate Fellow for the National Governors
Association. He also serves on the Board of Advisors for the Club of Rome. 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, a Director of the Company since January 1992, is Counsel to
the law firm of Opton, Handler, Gottleib, Fieler & Katz, and is counsel to Abel
Noser Corporation, a member of the New York Stock Exchange. He was previously a
partner and counsel to Whitman & Ransom. He was Regional Administrator from 1955
to 1956, and Commissioner from 1956 to 1960, of the Securities and Exchange
Commission.
14
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Robert M. Shapiro, a Director of the Company since November 1998, is Vice
President of Business Development and Advertising Sales for Autoweb.com, a major
online automotive retailer. From 1995 to 1997 Mr. Shapiro was Senior Vice
President of R. L. Polk & Company, a privately owned $400 million global
information services company, where he directed worldwide marketing, product
management, and business development activities for all software products sold
to the transportation, insurance, finance, retail, fundraising, and publishing
industries. Prior to joining R. L. Polk, Mr. Shapiro was Senior Vice President,
Commercial Marketing for Prodigy, where he created the first commercially viable
interactive service including product positioning and branding. He is noted as a
pioneer in building online business-to-consumer commercial sites. Prior to
joining Prodigy, Mr. Shapiro gained his early marketing and sales experience
during seventeen years with IBM Corporation and Proctor & Gamble. Mr. Shapiro
served on the board of Directors of Blackburn Polk Marketing Services of Canada,
and Carfax, USA. He received his BA degree from the University of San Diego in
1967.
Andrew E. Trolio, a Director of the Company, was its Chairman until he stepped
down in April 1998. He founded the Company in 1972. From 1961 to 1971 he was
President, Director and Founder of KDI Adtrol, Inc., a company which
manufactured photo-optical recording and reading devices for motion picture
cameras. He is also credited with several patents as inventor or co-inventor.
Mr. Trolio is a Trustee Emeritus of Cabrini College. Mr. Trolio has served as
Chairman of the Finance and Audit Committee and is currently a Fellow of the
International Society of Optical Engineers. Mr. Trolio received an Honorary
Doctor of Science degree from Cabrini College in 1997.
Bruce Downing has been the President of the Technology Resource Centers, Inc.
since July 1996 and was appointed Company Vice President in March 1998. Mr.
Downing has more than 30 years experience in computer systems management and
business development. His computer industry experience includes positions as a
marketing manager and systems consultant for Systems and Computer Technology
Corporation, Director of Industry Marketing for Commodore Computers covering
education and government markets and as a founding officer and Senior Vice
President of Intelligent Electronics. Prior to joining the Company, Mr. Downing
was involved in the startup of software and systems consulting companies. Mr.
Downing received a BA degree from Grinnel College in 1962 and a MA and PhD
degree from the University of Colorado in 1966.
Robert J. Griffin was appointed a Company Vice President in March 1998. He
joined the Company as Senior Vice President of Sales and Distribution in the
Company's Tangent Imaging Systems Division in September 1997 and in January 1998
Mr. Griffin was appointed President of that unit. Prior to joining the Company,
Mr. Griffin directed a broad array of marketing and sales initiatives with
International Business Machines Corporation including: market and brand
management, customer satisfaction, business partner recruitment and support,
sales training and field sales management. Most recently, Mr. Griffin served as
Director, Worldwide Competitive Marketing and Sales for IBM, a position directly
responsible to the CEO and senior executive team.
15
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Colin B. Matthews has been President of Sedona GeoServices, Inc., since April
1997 and was appointed Company Vice President in March 1998. Prior to his
joining the Company, Mr. Matthews was President, COO and a Director of Denbridge
Capital Corporation, a Toronto Stock Exchange listed venture capital/ merchant
bank to high technology and junior resource companies. Mr. Matthews became a
part of the Denbridge organization in 1994 when a company he co-founded in 1992,
RMSL Traffic Systems, Ltd., was acquired by the Denbridge organization in a $50
million transaction. Mr. Matthews received a BSC degree in Electronic
Engineering in 1975 from Robert Gordons University in Aberdeen, Scotland.
William K. Williams was appointed Vice President and Chief Financial Officer in
April 1998. Prior to his joining the Company, Mr. Williams worked as an
independent financial consultant with emerging growth companies, served as Vice
President of Business Development for a Fortune 500 company and held various
financial management positions at DuPont, including four years as Director of
Finance for Japan operations. Mr. Williams joined DuPont upon earning an MBA
degree in Finance at the University of Maryland.
During March 1999, Andrew E. Trolio, the founder of the Company and former
Chairman of the Board, announced his resignation from the Board. Also during
March 1999, the Board extended an invitation to James T. Womble to join the
Board. Mr. Womble is on the Board of Acxiom Corporation and heads their
Financial Services Division.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
information under the caption "Compensation of Executive Officers and Directors"
in the Company's definitive proxy statement for the 1998 annual meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Company's proxy statement for the 1998 annual meeting
of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Company's proxy statement for the 1998 annual meeting of Shareholders.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a) 1 and 2 Financial Statements and Schedules.
See "Index to Financial Statements and Schedule" on F-1.
(b) Reports on Form 8-K
None filed in the last quarter of the period covered by this report.
(c) Exhibits
The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were 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. (7)
4.1 Specimen copy of stock certificate for shares
of Common Stock of the Registrant. (5)
4.2 Specimen copy of stock certificate for shares
of Class A Convertible Preferred Stock Series
A (1) (Exhibit 4.2).
4.3 Specimen copy of stock certificate for shares of Class B
Preferred Stock (1) (Exhibit 4.3).
4.4 Restricted Common Stock Registration Rights
(1) (Exhibit 4.1).
4.5 Form of Common Stock Warrant (1) (Exhibit 4.4).
4.6 Form of Redeemable Common Stock Purchase Warrant
and Subscription Agreement (1) (Exhibit 4.5).
4.8 Specimen copy of stock certificate for shares
of Class A Convertible Preferred Stock Series C. (7)
**10.1 Employment Contract - Andrew E. Trolio (1) (Exhibit 10.1).
**10.1.1 Addendum to Employment Agreement - Andrew E. Trolio Exhibit (8)
Exhibit (10.1.1).
**10.1.2 Retirement Settlement Agreement - Andrew E. Trolio (10)
Exhibit (10.1.2).
*,**10.1.3 Modification to Retirement Settlement Agreement - Andrew E.
Trolio (10) Exhibit (10.1.3).
**10.4 Form of Common Stock Option (1) (Exhibit 10.6).
**10.5 Sedona Corporation 1992 Long Term Incentive Plan (3)
(Exhibit 2.1 - Annex E).
17
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
10.7 Form of Selling Shareholder Agreement (4) (Exhibit 10.2).
10.9 Agreement between Sedona Corporation and Michael A. Mulshine and
Osprey Partners. (6) (Exhibit 10.9
10.9.1 Agreement between Sedona Corporation and Michael A. Mulshine and
Osprey Partners. (8) (Exhibit 10.9.1)
10.9.2 Agreement between Sedona Corporation and Michael A. Mulshine and
Osprey Partners. (8) (Exhibit 10.9.2)
10.9.3 Finders Fee Agreement between Sedona Corporation and Osprey
Partners and C&F Global Enterprises. (8) (Exhibit 10.9.3)
10.10 Facility Lease, 649 N. Lewis Rd., Limerick, PA. (8)
(Exhibit 10.10)
10.10.1 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA. (8)
(Exhibit 10.10.1)
10.10.2 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA. (9)
(Exhibit 10.10.2)
*10.10.3 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA. (10)
(Exhibit 10.10.3)
**10.11 Employment Contract - Laurence L. Osterwise (8)(Exhibit 10.11)
**10.12 Employment Contract - Richard L. Rex (8) (Exhibit 10.12)
**10.13 Employment Contract - Bruce Downing (8) (Exhibit 10.13)
**10.13.1 Employment Contract - Bruce Downing (9) (Exhibit 10.13.1)
**10.16 Employment Contract - Colin M. Matthews (9) (Exhibit 10.16)
**10.17 Employment Contract - Robert J. Griffin (9) (Exhibit 10.17)
*10.18 Promissory Note - Laurence L. Osterwise (10) (Exhibit 10.18)
*23.1 Consent of Ernst & Young LLP (10) (Exhibit 23.1)
*23.2 Consent of BDO Seidman, LLP (10) (Exhibit 23.2)
*25.1 Power of attorney (included on the signature page to this
Form 10-K).
*99.1 Report of BDO Seidman, LLP (10) (Exhibit 99.1)
* Filed herewith.
** Executive Compensation Plans and Arrangements.
18
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1991, as amended by Amendment No. 1 on Form 8
dated June 12, 1992 and Amendment No. 2 on Form 8 dated July 27, 1992.
(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 Registration Statement on Form 8-K, filed
under the Securities Exchange Act of 1934, dated June 19, 1992.
(4) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 33-47127)
filed on July 2, 1992.
(5) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1993
(6) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
(10) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
19
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to the be signed on its
behalf by the undersigned, thereunto duly authorized.
SEDONA CORPORATION
April 15, 1999 Laurence L. Osterwise
- - -------------- ---------------------------
DATE LAURENCE L. OSTERWISE
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant, in
the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and R. Barry Borden, Chairman
of the Board of Directors, his true and lawful attorney-in-fact, in his name,
place and stead, to execute and caused to be filed with the Securities and
Exchange Commission, any or all amendments to this report.
Signatures
- - ----------
BY /S/ R. Barry Borden Date April 15, 1999
---------------------------- ---------------------------
R. Barry Borden
Chairman of the Board of Directors
BY /S/ Laurence L. Osterwise Date April 15, 1999
---------------------------- ---------------------------
Chief Executive Officer and President
BY /S/ William K. Williams Date April 15, 1999
---------------------------- ---------------------------
William K. Williams
Chief Finacial Officer, Vice President
Principal Financial and Accounting Officer
BY /S/ Michael A. Mulshine Date April 15, 1999
---------------------------- ---------------------------
Michael A. Mulshine
Director and Secretary
BY /S/ David S. Hirsch Date April 15, 1999
---------------------------- ---------------------------
David S. Hirsch
Director
BY /S/ Jack Pellicci Date April 15, 1999
---------------------------- ---------------------------
Jack Pellicci
Director
BY /S/ James C. Sargent Date April 15, 1999
---------------------------- ---------------------------
James C. Sargent
Director
BY /S/ Robert M. Shapiro Date April 15, 1999
---------------------------- ---------------------------
Robert M. Shapiro
Director
20
Index to Financial Statements and Schedule
Contents
Report of Independent Auditors..............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets for the years ended December 31, 1998 and 1997..F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1998.....................F-4
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1998.....................F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1998.....................F-6
Notes to Consolidated Financial Statements..................................F-8
Schedule II - Valuation and Qualifying Accounts and
reserves for each of the three years in the period
ended December 31, 1998......................................F-28
All other schedules have been omitted because they are inapplicable, not
required, or the required information is included elsewhere in the financial
statements and notes thereto.
F-1
Report of Independent Auditors
Board of Directors and Stockholders
Sedona Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Sedona
Corporation (formerly Scan-Graphics, Inc.) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. The consolidated financial
statements and schedule of Sedona Corporation and subsidiaries for the years
ended December 31, 1997 and 1996, were audited by other auditors whose report
dated March 13, 1998, except for Note 14, which is dated March 27, 1998,
expressed an unqualified opinion on those statements and schedule.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sedona
Corporation and subsidiaries at December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 31, 1999
Philadelphia, Pennsylvania
F-2
Sedona Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31
1998 1997
-------------------------------------
Assets
Current assets:
Cash $ 798 $ 1,310
Accounts and notes receivable,
less allowable for doubtful accounts of $226 and $91 1,916 696
Inventories 932 1,690
Prepaid expenses and other current assets 139 267
-------- -------
Total current assets 3,785 3,963
Property and equipment, net of accumulated depreciation
and amortization 1,115 1,226
Software development costs, net, and other assets 345 28
-------- -------
Total assets $ 5,245 $ 5,217
======== =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 1,070 $ 1,013
Dividend payable 259 30
Deferred revenue 47 33
Current maturities of long-term debt 125 452
-------- -------
Total current liabilities 1,501 1,528
Long-term debt, less current maturities 132 156
Deferred revenue and other 155 19
-------- -------
Total long-term liabilities 287 175
-------- -------
Total liabilities 1,788 1,703
Stockholders' equity:
Class A convertible preferred stock
Authorized shares - 1,000,000
Series A, par value $2.00,
Issued and outstanding 500,000 shares 1,000 1,000
Series B, par value $2.00,
Issued and outstanding shares - none - -
Series D, par value $1,000,
Issued and outstanding shares - none and 2,990 in
1998 and 1997, respectively - 2,990
Series E, par value $1,000,
Issued and outstanding shares 4,347 and none in
1998 and 1997, respectively 4,347 -
Common stock, par value $0.001
Authorized shares - 50,000,000
Issued and outstanding shares - 19,927,789 and
18,070,319 in 1998 and 1997, respectively 20 18
Additional paid-in-capital 25,396 22,155
Notes receivable, related parties (53) (1,327)
Accumulated deficit (27,253) (21,322)
-------- -------
Total stockholders' equity 3,457 3,514
-------- -------
Total liabilities and stockholders' equity $ 5,245 $ 5,217
======== =======
See accompanying notes.
F-3
Sedona Corporation and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
Years ended December 31
1998 1997 1996
----------------------------------------------------------
Revenues:
Sales $ 6,016 $ 4,791 $ 4,935
License and royalty fees 162 36 125
-------------- -------------- --------------
Total revenues 6,178 4,827 5,060
Cost of goods sold 4,036 4,545 4,013
-------------- -------------- --------------
Gross profit 2,142 282 1,047
Expenses:
General and administrative 3,512 3,375 2,263
Sales and marketing 3,015 2,773 1,665
Research and development 1,191 1,327 744
-------------- -------------- --------------
Total operating expenses 7,718 7,475 4,672
-------------- -------------- --------------
(5,576) (7,193) (3,625)
Other income (expense):
Interest income 120 218 51
Interest expense (88) (326) (432)
Other 32 (29) (86)
Litigation legal fees - (187) (179)
-------------- -------------- --------------
Total other income (expense) 64 (324) (646)
-------------- -------------- --------------
Loss before provision for income taxes (5,512) (7,517) (4,271)
Income taxes - - -
-------------- -------------- --------------
Loss before extraordinary item (5,512) (7,517) (4,271)
Extraordinary item
Loss on early extinguishment of debt (net of tax
of $0) - (300) -
-------------- -------------- --------------
Net loss (5,512) (7,817) (4,271)
Preferred stock dividends (419) (182) (220)
Preferred stock issuance charges (1,173) - -
-------------- -------------- --------------
Net loss applicable to common stockholders $ (7,104) $ (7,999) $ (4,491)
============== ============== ==============
Basic and diluted net loss applicable to common
shares before extraordinary item $ (.36) $ (.47) $ ( .39)
Extraordinary item - (.02) -
-------------- -------------- --------------
Basic and diluted net loss per common share $ (.36) $ (.49) $ ( .39)
============== ============== ==============
Basic and diluted weighted average common shares
outstanding 19,497,493 16,288,296 11,490,332
============== ============== ==============
See accompanying notes.
F-4
Sedona Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
Class A Preferred Class A Preferred Class A Preferred Class A Preferred
Stock Series A Stock Series C Stock Series D Stock Series E
-----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------
Balance, December 31, 1995 500,000 $1,000 125,000 $1,250 - $ - - $ -
Stock warrants/options issued for consulting
services - - - - - - - -
Conversion of debt into common stock - - - - - - - -
Conversion of debt into preferred stock - - - - - - - -
Exercise of common stock
options/warrants - stock subscription - - - - - - - -
Exercise of common stock options - - - - - - - -
Exercise of common stock warrants - - - - - - - -
Expenses incurred related to conversion of
convertible debt - - - - - - - -
Expenses incurred related to issuance of common
stock - - - - - - - -
Preferred stock dividends - - - - - - - -
Issuance of stock warrants - convertible debt - - - - - - - -
Net loss, year ended December 31, 1996 - - - - - - - -
-------- ------ -------- ------ ---- ---- ---- -----
Balance, December 31, 1996 500,000 1,000 125,000 1,250 - - - -
Stock warrants/options issued for consulting
services - - - - - - - -
Conversion of debt into common stock - - - - - - - -
Conversion of debt into preferred stock - - - - 2,990 2,990 - -
Conversion of preferred stock into common stock - - (125,000) (1,250) - - - -
Exercise of common stock options - - - - - - - -
Exercise of common stock warrants - - - - - - - -
Expenses incurred related to conversion of
convertible debt - - - - - - - -
Expenses incurred related to issuance of common
stock - - - - - - - -
Preferred stock dividends - - - - - - - -
Repayment of notes receivable - - - - - - - -
Issuance of stock warrants - convertible debt - - - - - - - -
Net loss, year ended December 31, 1997 - - - - - - - -
-------- ------ -------- ------ ---- ---- ---- -----
Balance, December 31, 1997 500,000 1,000 - - 2,990 2,990 - -
Stock warrants/options issued for consulting
services - - - - - - - -
Issuance of preferred stock - - - - - - 5,200 5,200
Conversion of debt into common stock - - - - - - - -
Conversion of preferred stock into common stock - - - - (2,990) (2,990) (853) (853)
Exercise of common stock options - - - - - - - -
Exercise of common stock warrants - - - - - - - -
Cancellation of common stock - - - - - - - -
Expenses incurred related to issuance of
preferred stock - - - - - - - -
Preferred stock dividends - - - - - - - -
Repayment of notes receivable - - - - - - - -
Net loss, year ended December 31, 1998 - - - - - - - -
-------- ------ -------- ------ ---- ---- ---- -----
Balance, December 31, 1998 500,000 $1,000 - $ - - $ - 4,347 $4,347
======== ====== ======== ====== ==== ====== ===== ======
See accompanying notes.
Sedona Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
(RESTUBBED TABLE)
Notes
Common Stock Additional Receivable
------------------------ Paid-In Accumulated Related
Shares Amount Capital Deficit Party
-----------------------------------------------------------------
Balance, December 31, 1995 10,188,812 $ 10 $ 8,677 $(8,832) $ -
Stock warrants/options issued for consulting
services - - 283 - -
Conversion of debt into common stock 2,259,056 2 3,105 - -
Conversion of debt into preferred stock - - - - -
Exercise of common stock
options/warrants - stock subscription 1,099,300 1 1,680 - (1,681)
Exercise of common stock options 264,222 1 330 - -
Exercise of common stock warrants 969,376 1 1,309 - -
Expenses incurred related to conversion of
convertible debt - - (300) - -
Expenses incurred related to issuance of common
stock - - (59) - -
Preferred stock dividends - - - (220) -
Issuance of stock warrants - convertible debt - - 270 - -
Net loss, year ended December 31, 1996 - - - (4,271) -
---------- ------ ------- -------- -------
Balance, December 31, 1996 14,780,766 15 15,295 (13,323) (1,681)
Stock warrants/options issued for consulting
services - - 124 - -
Conversion of debt into common stock 683,020 1 1,954 - -
Conversion of debt into preferred stock - - - - -
Conversion of preferred stock into common stock 949,352 1 1,451 - -
Exercise of common stock options 182,917 - 295 - -
Exercise of common stock warrants 1,474,264 1 2,864 - -
Expenses incurred related to conversion of
convertible debt - - (45) - -
Expenses incurred related to issuance of common
stock - - (183) - -
Preferred stock dividends - - - (182) -
Repayment of notes receivable - - - - 354
Issuance of stock warrants - convertible debt - - 400 - -
Net loss, year ended December 31, 1997 - - - (7,817) -
---------- ------ ------- -------- -------
Balance, December 31, 1997 18,070,319 18 22,155 (21,322) (1,327)
Stock warrants/options issued for consulting
services - - 149 - -
Issuance of preferred stock - - - - -
Conversion of debt into common stock 139,246 - 324 - -
Conversion of preferred stock into common stock 2,198,321 2 3,998 - -
Exercise of common stock options 68,333 - 68 - -
Exercise of common stock warrants 143,750 - 156 - -
Cancellation of common stock (15,000) - - - -
Expenses incurred related to issuance of
preferred stock - - (200) - -
Preferred stock dividends - - - (419) -
Repayment of notes receivable (677,180) - (1,254) - 1,274
Net loss, year ended December 31, 1998 - - - (5,512) -
---------- ------ ------- -------- -------
Balance, December 31, 1998 19,927,789 $ 20 $25,396 $(27,253) $ (53)
========== ====== ======= ======== =======
See accompanying notes.
F-5
Sedona Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
1998 1997 1996
------------------------------
Operating activities
Net loss $(5,512) $(7,817) $(4,271)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 370 384 344
Increase inventory reserves 647 - -
Non-cash consulting expense 149 124 283
Provision (recovery) for losses on
accounts receivable 135 (98) 143
Loss on disposition of property and
equipment 16 - 23
Writeoff of software development costs - - 556
Interest expense and write-off of deferred
debt costs - 454 270
Decrease in deferred income taxes - - 34
Changes in operating assets and
liabilities:
Accounts receivable (1,355) 246 3
Inventories 80 (644) 280
Prepaid expenses and other current
assets 128 (176) (55)
Other noncurrent assets (2) (17) 30
Accounts payable and accrued
expenses 160 396 (335)
Deferred revenue and other 150 (185) 74
------- ----- ------
Net cash used in operating activities (5,034) (7,333) (2,621)
Investing activities
Purchase of property and equipment (231) (591) (557)
Increase in capitalized software development
costs (333) - -
Proceeds from sale of property and equipment 7 - 228
------- ----- ------
Net cash used in investing activities (557) (591) (329)
See accompanying notes.
F-6
Sedona Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Year ended December 31
1998 1997 1996
--------------------------------
Financing activities
Proceeds from issuance of convertible debt
and warrants $ - $ 5,200 $ 3,100
Payment of preferred stock dividends (135) (289) (10)
Repayments of notes receivable, related
parties 29 324 -
Proceeds from notes payable, officers - - (34)
Payment of notes payable, officers - - (284)
Changes in long-term obligations, net (40) (112) (212)
Payment of expenses, preferred stock issuance (200) (183) (59)
Payment of expenses, convertible debt - (45) (300)
Proceeds from issuance of preferred stock 5,200 - -
Proceeds from exercise of common stock
warrants/options 225 3,162 1,641
Proceeds from issuance of long-term debt - 96 -
------ ------ ------
Net cash provided by financing activities 5,079 8,153 3,842
------ ------ ------
Net (decrease) increase in cash and cash
equivalents (512) 229 892
Cash and cash equivalents, beginning of year 1,310 1,081 189
------ ------ ------
Cash and cash equivalents, end of year $ 798 $1,310 $1,081
====== ====== ======
See accompanying notes.
F-7
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Years ended December 31, 1998, 1997 and 1996
1. Accounting Policies
Description of Business
Sedona Corporation designs, manufactures and markets a line of electronic image
scanning products and provides related software and services. The Company also
performs selected conversion and document management services. In addition, the
Company develops, produces, markets and services business geographic and data
visualization software and solutions.
Subsequent to December 31, 1998, the Company announced a name change of the
corporation to Sedona Corporation from Scan-Graphics, Inc. and began trading
under the NASDAQ Symbol "SNDA."
Principles of Consolidation
The Company's consolidated financial statements include the accounts of its
wholly owned subsidiaries, Tangent Engineering(TM), Inc., Tangent Financial(TM)
Corporation, Sedona(R) GeoServices, Inc. and Technology Resource Centers(SM),
Inc. All significant intercompany accounts and transactions have been
eliminated. Effective December 31, 1998, Tangent Engineering(TM), Inc. and
Tangent(TM) Financial Corporation were merged with Sedona Corporation.
Use of Estimates
The preparation of financial statements in conformity with 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 highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-8
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
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 and accounts 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 receivable, is limited
due to the Company's credit evaluation process. The Company does not require
collateral from its customers with the exception of certain foreign customers
from which prepayments or letters of credit are required. Although the Company
has a diversified client base, its customers consist primarily of distributors
and 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.
F-9
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
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 five years.
Amortization commences when the product is available for general release to
customers.
During 1998, the Company capitalized $333 of software development costs related
to the Company's business geographics software. No software development costs
were capitalized in 1997 or 1996. During 1998, this software became available
for sale. During 1998, 1997 and 1996, $18, $0 and $566 was charged to expense
relating to amortization or writedown of software development costs. The $566 in
1996 related to amounts written down to their net realizable value.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment and substantial
acceptance by the customer. Revenue from services is recorded as performed.
Deferred revenue from maintenance contracts is recognized over the service
period of the contract. Revenue from royalty and licensing agreements is
recorded when earned.
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.
F-10
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
Net Loss Per Common Share
Basic loss per share is calculated by dividing the net loss by the weighted
average common shares outstanding for the period. Diluted earnings per share is
calculated by dividing the net loss by the weighted average common shares
outstanding plus the dilutive effect of stock options, warrants and convertible
securities. As the Company incurred losses in 1998, 1997 and 1996 the effect of
stock options, warrants and convertible securities were anti-dilutive and
therefore not included in the calculation of diluted earnings per share.
Stock-Based Compensation
The Company follows APB Opinion No. 25, Accounting for Stock Issued to
Employees, ("APB 25") and the related interpretations in accounting for its
stock-based compensation plans. Note 8 includes required disclosures and
pro-forma information provided under FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123").
Under APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying common stock at the date of
grant, no compensation expense is recognized.
Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 established the standards
for reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. The adoption of SFAS 130 had no impact on the Company's results of
operations or financial position.
F-11
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
1. Accounting Policies (continued)
In June 1997, the Financial Account Standards Board issued Statement No. 131,
Disclosure about Segments of a Business Enterprise ("SFAS 131"), establishes
standards for public enterprises reporting of information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available and that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. At December 31, 1998, substantially all of the Company's business
was derived from the sale of wide-width color scanners.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivatives and Hedging Activities ("SFAS 133"). SFAS 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
is effective for fiscal years beginning after June 15, 1999. Because the Company
has never used and currently does not intend to use derivatives, management does
not anticipate that adoption of this new standard will have a significant impact
on the results of operations or the financial position of the Company.
2. Inventories
Inventories consist of the following:
December 31
1998 1997
----------------------
Raw materials $ 389 $ 904
Work-in-process 135 414
Finished goods 408 372
-------- --------
$ 932 $ 1,690
======== ========
F-12
3. Property and Equipment
Property and equipment consist of the following:
December 31
1998 1997
--------------------
Machinery and equipment $ 3,215 $ 3,139
Equipment under capital lease 507 387
Furniture and fixtures 199 158
Automobiles and trucks 12 12
Leasehold improvements 88 116
Purchased software 290 282
------- --------
4,311 4,094
Less accumulated depreciation and amortization 3,196 2,868
------- --------
$ 1,115 $ 1,226
======= ========
Depreciation and amortization expense related to property and equipment was $370
in 1998, $384 in 1997 and $344 in 1996.
4. Long-Term Debt
Long-term debt consists of the following:
December 31
1998 1997
----------------
7% convertible debentures payable, originally maturing
between May and June 1999. The debentures were
converted into common stock during January 1998. $ - $ 311
Note payable, payable in monthly installments of $6,
including interest at 8.75% through July 1999. The note
payable is collateralized by equipment. 40 107
Capital lease obligations 217 99
Other - 91
----- -----
257 608
Less current maturities 125 452
----- -----
Long-term debt $ 132 $ 156
===== =====
F-13
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
5. Convertible Debentures
In connection with a $3,100 private placement purchase agreement in March 1996,
the Company sold 62 units of convertible debentures. Each unit consisted of a
$50, 8% convertible note due March 28, 1997, 19,355 "A" warrants and 19,355 "B"
warrants. The warrants, which were immediately exercisable, had an estimated
value, based on an appraisal, of $270, which was reflected as a debt discount.
During 1996, all of the debentures were converted into 2,259,056 shares of
common stock. The $270 debt discount was charged to interest expense. The "A"
warrants were exercisable at $3.00 per share or, if less, the lowest price per
share at which any conversion shall have occurred under any of the convertible
notes. The "B" warrants were exercisable at $4.00 per share. During 1998, 1997
and 1996, -0-, 657,169 and 542,841, respectively, of the total 1,200,010 "A"
warrants were exercised. During 1998, 1997 and 1996, -0-, 437,558 and -0-,
respectively, of the total 1,200,010 "B" warrants were exercised. All remaining
"B" warrants expired on March 26, 1999.
In connection with a $5,200 private placement purchase agreement completed
during June 1997, the Company sold 52 units of convertible debentures. Each unit
consisted of a $100, 7% convertible note due between May and June 1999 and a
warrant to purchase 17,308 shares of common stock. The notes and any accrued
interest were convertible within 90 days at a price per share equal to the
lesser of $7.00 per share or the average closing bid price for the five days
preceding conversion, or if the conversion price was less than $4.00 per share,
at a 10% discount to the average closing bid price for the five days prior to
conversion. If the conversion was greater than $4.00, but less than $7.00, the
discount was increased by 1% for every $.20 increase in the conversion price.
Debenture conversions were limited to $520 in any month. The warrants were
exercisable immediately at $4.00 per share and expire June 1, 2001. The warrants
had an estimated fair value, based on an appraisal of $400. This amount was
reflected as a debt discount. Upon the conversion of the notes to stock, $100 of
this amount was charged to interest expense in the 1997 statement of operations
while the remaining $300 was reflected as extraordinary loss on early
extinguishment of debt. From August 1997 through December 1997, note holders
converted $1,900 or 19 units of convertible debentures, plus accrued interest
thereon, into 683,020 shares of common stock. During December 1997, note holders
converted $2,990 or 29.9 units of convertible debentures, plus accrued interest
thereon, into 2,990 shares of Class A Series D preferred stock. Additionally,
during January 1998, note holders converted the remaining $311 or 3.1 units of
convertible debentures, plus accrued interest thereon, into 139,246 shares of
common stock.
F-14
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity
Class A Convertible Preferred Stock
Series A, B, C, D and E
Class A preferred stock is issuable in various series and is convertible in
accordance with the terms of the issued series. The Board of Directors has the
authority to fix by resolution all other rights. The Class A Series A preferred
shares pay quarterly dividends at the rate of twelve percent (12%) per annum,
have cumulative rights and have a liquidation preference at the par value of the
preferred shares. Each share is convertible at the election of the holder into
one share of common stock at any time. Each holder has the same right to vote
each share on all corporate matters as the holder of one share of common stock.
In connection with a private placement offering in March, 1999, the Company
issued 1,000 shares of Class A Series B preferred stock. The Series B has the
same rights as the Series A (See Note 15).
During 1998, 2,990 shares of Class A Series D preferred stock and the related
accrued dividends payable of $3,122 were converted into 1,672,267 shares of
common stock.
During 1997, 125,000 shares of Class A Series C preferred stock and the related
dividends payable of $202 were converted to 949,352 shares of common stock.
During March and April, 1998 the Company issued a $5,200 private placement of
its securities which consisted of 52 units of $100, 7% Class A Series E
convertible preferred stock (Series E Preferred) and a warrant to purchase
28,850 shares of common stock, exercisable at $3.00. The Series E Preferred and
any accrued dividends were convertible at a price per share equal to the lesser
of $3 per share or at a 15% discount to the average closing bid price for the
five days preceding conversion. If the conversion price is $2 a share or less,
the Company may elect to redeem all or part of the Series E Preferred and
accrued dividends at the par value of the Series E Preferred, plus the
conversion discount. Conversions were restricted to 10% per month on a
cumulative monthly basis. In connection with the Series E Preferred offering,
the Company recorded a one-time
F-15
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
6. Stockholders' Equity (continued)
non-cash dividend of $917 as a result of the difference between the conversion
price and the quoted market price of the Company's common stock at the date of
issuance. This imputed non-cash dividend has been included in the net loss
applicable to common stockholders.
On August 7, 1998, the Series E Preferred investors agreed to new terms
providing for no conversions of Series E Preferred from August 1, 1998 through
January 31, 1999. Thereafter, up to 25% of the remaining Series E Preferred may
be converted per month per holder. Additionally, the Company agreed to adjust
the exercise price of the 1,500,200 warrants issued to the investors from $3.00
per share to $2.25 per share. The warrants could not be exercised prior to
February 1, 1999. In addition, the Company issued 1,254,132 new warrants to the
investors at an exercise price of $4.00 per share. These new warrants became
exercisable on February 1, 1999. The Company recorded a non-cash dividend of
$256 as a result of the value of the consideration given to the Series E
Preferred investors. This non-cash dividend has been included in the net loss
applicable to common stockholders. Previous to these new terms, $532 of Series E
Preferred and accrued dividends were converted into 410,324 shares of common
stock. As of March 31, 1999, a total of $2,388 in Series E Preferred and accrued
dividends had been converted into 1,208,101 shares of common stock.
7. Promissory Notes
During December 1996, 1,099,300 options and warrants were exercised for $1,680
by certain officers and directors of the Company in exchange for promissory
notes and promissory demand notes aggregating $1,680. The notes bear an annual
interest rate of 8.25%. The promissory notes, together with accrued interest,
have maturity dates ranging from July 1998 through July 2000. The notes are
secured by shares of the Company's common stock. During 1998 and 1997,
promissory demand notes totaling $1,274 and $354, respectively, were satisfied
by either cash payments to the Company or return of the shares.
F-16
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants
Long-Term Incentive Plan
During 1992 the stockholders of the Company approved a Long-Term Incentive Plan
for the issuance of options for the purchase of up to 1,000,000 restricted
common stock shares in the aggregate, or such other number of shares as are
subsequently approved by the Company's stockholders. The shares, which were
related to the unexercised or undistributed portion of any terminated, expired
or forfeited award, will also be made available for distribution in connection
with future grants under the Plan. As of December 31, 1996, the Company
over-issued stock options under their 1992 Plan. During 1997, the Plan was
amended to increase the number of options available for future grants to
3,000,000. The Long-Term Incentive Plan provides for the granting of both
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986, and nonqualified stock options which do not so qualify.
Unless the Plan is terminated earlier by the Board of Directors, the Plan will
terminate in March 2002. At December 31, 1998, 1997 and 1996, there were
939,251, 915,502 and (616,531) options available for future grant.
Options outstanding under the Long-Term Incentive Plan have been granted to
officers, directors, employees, and others and expire between May 1999 and
November 2008. All options were granted at or above the fair market value on the
grant date. Transactions under this Plan were as follows:
Weighted
Average
Shares Exercise Price
---------- ----------------
Outstanding at December 31, 1995 708,888 $ 1.21
Canceled or expired - -
Granted 782,643 2.89
Exercised (127,222) 1.04
---------- ------
Outstanding at December 31, 1996 1,364,309 2.20
Canceled or expired (112,750) 2.30
Granted 573,717 3.09
Exercised (182,917) 1.62
---------- ------
Outstanding at December 31, 1997 1,642,359 2.57
Canceled or expired (422,000) 2.94
Granted 445,250 2.22
Exercised (68,333) 1.00
---------- ------
Outstanding at December 31, 1998 1,597,276 $ 2.44
========== ======
F-17
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
Weighted
Exercise Average
Options Price Range Exercise
Shares Per Share Price
------- ----------- ----------
Exercisable at year-end
1996 984,309 $.47 to $3.00 $ 2.03
1997 912,360 $.47 to $4.00 $ 2.30
1998 1,003,944 $.47 to $4.00 $ 2.36
The following table summarizes information about stock options outstanding at
December 31, 1998:
Ranges Total
-----------------------------------------------------------------------------
Range of exercise prices $.47 to $1.00 $2.00 to $2.50 $3.00 to $4.00 $.47 to $4.00
Options outstanding 286,666 475,250 835,361 1,597,276
Weighted average
remaining contractual
life (years) 1.0 6.5 6.3 5.8
Weighted average
exercise price $0.83 $2.08 $3.12 $2.44
Exercisable 246,666 242,750 474,528 1,003,944
Weighted average
exercise price $0.83 $2.34 $3.16 $2.36
F-18
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. 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 $.38 to $5.29 per share
and expiring between March 1999 and December 2008. 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, 1995 3,912,392 $ 1.61
Canceled or expired (510,000) 2.57
Granted 3,396,010 2.68
Exercised (1,808,676) 1.45
----------- ----------
Outstanding at December 31, 1996 4,989,726 2.30
Canceled or expired (793,598) 3.13
Granted 3,626,473 3.94
Exercised (1,474,264) 1.94
------------ ----------
Outstanding at December 31, 1997 6,348,337 3.22
Canceled or expired (24,500) 2.00
Granted 3,691,332 2.88
Exercised (187,500) 1.07
------------ ----------
Outstanding at December 31, 1998 9,827,669 $ 3.11
============ ==========
Weighted
Exercise Average
Warrant Price Range Exercise
Shares Per Share Price
---------- -------------- ----------
Exercisable at year-end
1996 3,236,294 $.38 to $4.00 $2.58
1997 4,698,731 $.38 to $4.00 $3.56
1998 7,308,457 $.38 to $4.00 $3.23
F-19
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
During 1998, 1997 and 1996, 387,000, 311,457 and 374,999 warrants, respectively,
were issued to non-employees for certain consulting services, and in some
instances, had contingent vesting provisions based on achievement of certain
performance services levels. The 1998, 1997 and 1996 statements of operations
reflects charges of $149, $124, and $283, respectively, for those non-employee
stock warrants and options where such service levels were performed.
During 1998, 1997 and 1996, 550,000, 315,000 and 620,991 warrants, respectively,
were issued to employees in lieu of compensation. These warrants were issued at
exercise prices at or above fair market value at the date of grant and therefore
there were no charges to earnings.
The following table summarizes information about stock warrants outstanding at
December 31, 1998:
Ranges Total
--------------------------------------------------------------------------
Range of exercise prices $.38 to $1.00 $1.31 to 2.38 $2.30-$4.00 $.38 to $4.00
Outstanding 965,096 2,290,518 6,572,055 9,827,669
Weighted average
remaining contractual
life (years) 1.4 3.3 2.6 2.7
Weighted average exercise
price $.92 $2.19 $3.75 $3.11
Exercisable 234,000 1,979,518 5,094,939 7,308,457
Weighted average exercise
price $.66 $2.23 $3.73 $3.23
The Company is obligated to purchase 452,270 warrants from five (5) employees of
the Company in the event of change of control of the Company or termination of
employment for breach of contract or convenience at a cash purchase price equal
to the amount of the aggregate fair market value of the shares, less the
aggregate option/warrant price of such shares. As of December 31, 1998 the
market value exceeded the aggregate option/warrant price by approximately $622.
F-20
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
The Company estimates the fair value of each stock option and warrant at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: no dividends paid for all years; expected volatility of 35% for
all years; risk-free interest rates range from 5.25% to 7.81%; and expected
lives range from 1.00 to 10.00 years.
Utilizing the above assumptions, the weighted average fair market value of
employee stock options and warrants granted are as follows:
Year ended December 31
1998 1997 1996
---------- -------- --------
Stock options $ .98 $ 1.48 $ 1.67
Warrants $ .94 $ 1.31 $ .86
In accordance with SFAS 123, the estimated fair value of the Company's options
and warrants is amortized over the vesting period. Had this expense been charged
to operations, the Company's pro-forma net loss and net loss per common share
would have been as follows:
Year ended December 31
1998 1997 1996
---------- ---------- ----------
Net loss
As reported $ (5,512) $ (7,817) $ (4,271)
Pro forma $ (6,326) $ (8,959) $ (5,121)
Net loss applicable to
common shares
As reported $ (.36) $ (.49) $ (.39)
Pro forma $ (.41) $ (.55) $ (.46)
The Company issued stock options and warrants to purchase 877,250 shares of the
Company's common stock to directors of the Company for services rendered during
1998. The options and warrants were issued at or above the fair market value of
the common stock on the grant date at exercise prices ranging between $1.16 and
$3.36 per share, expiring through December 16, 2008. As of December 31, 1998,
none of these options or warrants were exercised.
F-21
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
8. Stock Options and Warrants (continued)
The Company issued stock options and warrants to purchase 54,300 shares of the
Company's common stock to directors of the Company for services rendered during
1997. The options and warrants were issued with exercise prices ranging between
$3.69 and $3.98 per share, expiring through December 31, 2006. The options and
warrants were issued at the fair market value of the common stock or warrants on
the grant date. As of December 31, 1998 none of these options or warrants were
exercised.
The Company issued stock warrants to purchase 170,000 shares of the Company's
common stock to directors of the Company for services rendered during 1996. The
warrants were issued with an exercise price of $3.00 per share, expiring through
April 30, 2001 with immediate vesting upon issuance. Of the 170,000 warrants,
20,000 were issued at an exercise price below the Company's market value. As of
December 31, 1998 none of these warrants were exercised.
In consideration for the Company's 1995 acquisition of Sedona GeoServices, Inc.
of Pennsylvania, the Company issued warrants to purchase up to 1,210,000 shares
of the Company's common stock at an exercise price of $1.00 per share of which
160,000 vested immediately, and the balance will vest when cumulative revenues
from future sales of the software reach levels as specified in the acquisition
agreement. As of December 31, 1998, such levels had not been attained. Warrants
which do not vest by July 28, 2000 will be canceled.
F-22
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
9. Revenues
The Company had one customer during the years ended December 31, 1998 and 1997
which accounted for 14% in 1998 and 22% in 1997 of total revenues. The Company
had a different customer which accounted for 14% of total 1996 revenues. The
Company's operations are exclusively in North America, however it has both
domestic and export sales. A summary of domestic and export sales and gross
profits for the years ended December 31, 1998, 1997 and 1996 are as follows:
1998
Total Domestic Export
------- --------- -------
Revenues $ 6,178 $ 4,363 $ 1,815
Cost of sales 4,036 3,198 838
------- ------- -------
Gross profit $ 2,142 $ 1,165 $ 977
======= ======= =======
1997
Total Domestic Export
------- --------- -------
Revenues $ 4,827 $ 2,700 $ 2,127
Cost of sales 4,545 3,129 1,416
------- ------- -------
Gross profit $ 282 $ (429) $ 711
======= ======= =======
1996
Total Domestic Export
------- --------- -------
Revenues $ 5,060 $ 3,760 $ 1,300
Cost of sales 4,013 3,207 806
------- -------- -------
Gross profit $ 1,047 $ 553 $ 494
======= ======== =======
Exports were sold principally into Western Europe.
F-23
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
10. Contingencies
On March 11, 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, Pennsylvania, against the Company by a former employee,
seeking damages of $361, for termination of contract, by change of control and
for convenience. This plaintiff asserts this sum represents the excess of market
value over the exercise price of unvested warrants held by the plaintiff which
the plaintiff asserts should have been vested and thereby available for exercise
and sale. The Company believes the claim is without merit and is defending its
position. Accordingly, no provision has been made in the accompanying financial
statements.
During 1998, the Company concluded two suits for patent infringement against two
competitors who produce electronic image scanning equipment in negotiated
out-of-court settlements. The Company received a total of $172 in connection
with the settlement of these matters.
11. Related Party Transactions
Through August 31, 1997, the Company leased its principal office and one of its
manufacturing facilities from a corporation which is owned by the former chief
executive officer of the Company. Rent expense charged to operations was $0, $64
and $96 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company incurred consulting and commission fees, and out-of-pocket expenses
of $27, $60, and $259 for the years ended December 31, 1998, 1997 and 1996,
respectively, to a company whose president is a director of the Company.
12. Profit Sharing Plan
During 1998 and in earlier periods, a subsidiary of the Company had a qualified
profit sharing 401(k) plan (the Plan) available to all eligible employees.
Contributions to the 401(k) portion of the Plan were matched by the Company
equal to 100% of voluntary contributions by individual participants, limited to
3% of the individual participant's annual pay. Annual profit sharing
contributions to the Plan are made at the discretion of the Board of Directors.
Subsequent to year-end 1998, the Plan was made available to all eligible Sedona
employees. At the same time, matches to the Plan by the Company were suspended
but may be reinstated at such time as determined appropriate by the Board of
Directors. The total amount charged to operations under the plan was $38, $72
and $35 for the years ended December 31, 1998, 1997 and 1996, respectively.
F-24
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
13. Commitments
The Company has employment agreements with certain key employees which expire at
various dates through December 2000. The agreements provide for minimum salary
levels, plus any additional compensation as directed by the Board of Directors.
The Company leases certain office space and office equipment under various
noncancelable operating and capital lease arrangements which expire from 1999 to
2003. Future minimum lease payments under capital and operating lease
obligations consist of the following:
Year ending December 31: Capital Operating Total
--------- ----------- ---------
1999 $ 125 $ 208 $ 333
2000 82 44 126
2001 41 - 41
2002 32 - 32
2003 18 - 18
------ ------- ------
Total minimum lease payments 298 $ 252 $ 550
======= ======
Less amount representing interest (81)
------
Present value of net minimum
capital lease payments $ 217
======
Gross payments made under capital and operating lease obligations for 1998 were
$364.
14. Income Taxes
No provision for federal and State income taxes has been recorded as the Company
has incurred net operating losses through December 31, 1998.
As of December 31, 1998 the Company recorded a deferred tax asset of $8.7
million which primarily relates to net operating loss carryforwards for federal
and state tax purposes and certain other reserves. The Company provided a
valuation allowance for the full amount of the deferred tax asset as the Company
believes sufficient uncertainty exists regarding its realization. Deferred tax
assets at December 31, 1997 and 1996 also had a 100% valuation allowance.
F-25
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
14. Income Taxes (continued)
At December 31, 1998, the Company had approximately $24.1 million in federal net
operating loss carryforwards that expire in various years beginning in 1999
through 2018. Additionally, the Company has approximately $5.2 million of state
net operating loss carryforwards that expire in various years beginning in 2005
through 2008.
The timing and manner in which the Company will utilize the net operating loss
carryforwards in any year, or in total, may be limited by the provision of the
Internal Revenue Service Code regarding changes in ownership of a Company. Such
limitation may have an impact on the ultimate realization and timing of these
net operating loss carryforwards.
15. Subsequent Events
On March 31, 1999, the Company entered into a $1.0 million private placement
purchase agreement for the issuance of 1,000 shares of Series B convertible
preferred stock. After a period of 12 months from March 31, 1999 (anniversary
date), the investor can convert the preferred stock to common stock at the lower
of: 1) $2.30 (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 $1.15.
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. In addition, if the common stock's average last trade price during the 25
days preceding the anniversary is less than 145% of the Closing Price, the
investor shall also be entitled to five year warrants under a variable formula
such that the lower the conversion price, the higher the number of warrants.
Additional warrants may be issued to a maximum of 1,875,749 under this
agreement. Mandatory conversion of the preferred stock shall occur on the third
anniversary after closing.
During March 1999, the Company's chief executive officer agreed to loan up to
$500 to the Company on a short-term basis bearing interest at the rate of 1.5%
per month. Maximum advances under this loan arrangement amounted to $185 and
were repaid to the officer in March 1999.
F-26
Sedona Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share and Per Share Amounts)
16. Supplemental Disclosures of Cash Flow Information
Year ended December 31
1998 1997 1996
-------- -------- --------
Cash paid during the year for interest $ 191 $ 223 $ 166
Noncash investing and financing
activities are as follows:
Conversion of debentures into
common stock 324 1,954 3,107
Conversion of preferred stock dividends
into common stock 158 182 210
Transfer of inventory to
equipment in fixed assets 31 128 -
Preferred stock issued in lieu of
payment of preferred dividends - 201 -
Conversion of debentures
into preferred stock - 2,990 -
Dividends payable offset against
notes receivable - related party 45 30 -
Issuance of common stock in
exchange for notes receivable, related
party - - 1,681
F-27
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning of Costs and Charged to Reductions - Balance at End
Period Expenses Other Accounts Describe of Period
------------- ---------- --------------- ------------ ----------------
Year ended December 31, 1998
Allowance for doubtful accounts $ 90 $ 190 $ - $ 54(A) $ 226
Year ended December 31, 1997
Allowance for doubtful accounts 189 1 - 99(A) 91
Year ended December 31, 1996
Allowance for doubtful accounts 46 155 - 12(A) 189
(A) Accounts receivable written-off.
F-28