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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended 12/31/2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from___ to___ .
1mage Software, Inc.
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(Exact name of Registrant as specified in its charter)
0-12535
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(Commission File Number)
Colorado 84-0866294
(State of Incorporation) (IRS Employer Identification Number)
6025 S. Quebec St. #300 - Englewood CO 80111 (303) 773-1424
- -------------------------------------------- ---------------------------------------------------
(Address of principal executive offices) (Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE NONE
(Title of Class) (Name of Exchange)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock - $.004 par value
------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy statements or any amendment
of this Form10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes|_| No |X|
State the aggregate market value of the voting and nonvoting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
March 11, 2005: $362,467.
As of March 31, 2005, there were 3,302,597 shares of the Registrant's Common
Stock outstanding.
Exhibit Index begins on Page 40
TABLE OF CONTENTS
PART I
1. Business..........................................................................................3
2. Properties........................................................................................9
3. Legal Proceedings.................................................................................9
4. Submission of Matters to a Vote of Security Holders ..............................................10
PART II
5. Market for Registrant's Common Equity and Related Stockholders Matters............................11
6. Selected Financial Data...........................................................................12
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............13
8. Financial Statements and Supplementary Data.......................................................16
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............39
9A. Controls and Procedures...........................................................................39
9B. Other Information.................................................................................39
PART III
10. Directors and Executive Officers of the Registrant............................................... 40
11. Executive Compensation............................................................................40
12. Security Ownership of Certain Beneficial Owners and Management....................................40
13. Certain Relationships and Related Transactions....................................................40
14. Principal Accounting Fees and Services............................................................40
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................40
2
PART I
ITEM 1. BUSINESS
Introduction
1mage Software, Inc., (the "Company") develops and markets computer-based
document management systems that capture, store and display electronic files and
paper documents as graphical images. Document management systems like 1MAGE(R)
(pronounced "one image") offer organizations of every size the ability to
deliver the information embedded in their documents to employees, customers, and
authorized persons across their existing computing infrastructure. In addition,
the Company provides the tools to efficiently manage the proliferation of
digital documents for eBusiness deployment. The modular 1MAGE system captures
entire documents from a variety of sources. Memos, letters, source documents,
contracts, purchase orders, word processing files, e-mail, computer reports,
faxes, industry and market studies, spreadsheets, databases, multimedia, maps
and regulatory forms are examples of documents that are automatically captured
into secure, permanent digital images that are indexed for instantaneous
retrieval. Using an open, client/server architecture design, 1MAGE provides a
comprehensive solution for scanning, indexing, storing and retrieving document
images so that they may be viewed, printed, faxed, e-mailed or made available
for eBusiness or eCommerce applications. The 1MAGE system is designed to
integrate easily with existing IT infrastructure, using an extensive library of
multi-platform APIs (Application Programming Interfaces), rather than forcing
expensive investments in re-engineered or new computing hardware and software.
Today's workplace is dramatically changing with the advent of eBusiness,
eCommerce, and affordable electronic document management. During 2004, the
Company concentrated its efforts on selling document imaging software to its
niche markets. These markets include users that prefer a choice of (1) operating
platforms, such as RedHat Linux, Windows, and UNIX, or (2) application software
developers that wish to offer a document imaging solution as part of their
portfolio. The Company also changed its sales strategy in 2004. Instead of
selling its products primarily through a direct sales organization, the Company
made a concerted effort to establish a broad-based independent sales network for
its imaging software. In addition to Value Added Resellers ("VARs") , the
Company seeks to partner with Value Added Dealers ("VAD") such as software
developers, consultants, and other businesses which provide software to their
targeted markets in specific geographical territories. While the Company
recognizes that its increased efforts to utilize an outside sales network had a
detrimental effect on its sales during 2004, the Company believes this is a
short term issue and that the Company's best long-term strategy is to fully
develop that independent sales network.
Imaging Software Market
Historically, the Company marketed its products through its direct sales
force but, as noted above, has recently changed that strategy, to place a
greater emphasis on its distribution channel partners. The Company now focuses
its sales and marketing efforts on VARs, VADs, systems integrators, developers,
consultants, and other companies that market complementary software, services,
or other products. The Company's decision to build this outside sales network
was based, in part, on its recognition that 1MAGE software has an established
presence in a multitude of industries, including retail, distribution,
education, state and local government, healthcare, manufacturing, energy,
automotive, public safety, transportation and utilities, that should support
such a "partnering' approach.
The Company offers a comprehensive channel partner program, which
provides, in the context of a cooperative marketing effort, a broad range of
sales, marketing, and technical support. The program includes technical training
and assistance, marketing communications, sales training and assistance,
excellent support and training, lead referral services, customized product
literature, and a discounted demonstration/development system.
3
Products
As noted above, the Company's flagship product is 1MAGE(R), its
proprietary document management software package. The Company is continually
enhancing this product portfolio in order to improve its performance and expand
its possible uses.
1MAGE(R) Document Management - 1MAGE is a powerful electronic document
management system created to operate the same on Linux, Windows(TM) and
Unix-based computer systems. It provides a comprehensive solution for the
scanning, indexing, storage and retrieval of images and is designed to file,
route, track, archive, and manage an organization's incoming and outgoing
documents and electronic files.
Additional products include the following:
o 1API for image-enabling an application using a toolkit
o 1SCAN for scanning, pre-indexing, and bar code reading
o 1FAX for inbound and outbound fax or e-mail and cover sheet
management
o 1COLD/ERM for storing computer-generated formatted data
o 1FORM for business form template administration
o 1RENDITION for merging spooled data with supporting images for
billing or other needs
o 1WORKFLOW for electronically moving a document from one task to
another
o 1OCR/OMR for automatic indexing and data capture via optical and
mark character recognition
o 1SUITE for bringing images to Windows-based PC clients
o 1SERVER for accessing documents via the Internet
o 1VIEW for using standard browsers to access images over the Intranet
and Internet
o 1ACCESS for bringing images to desktop computers that support JAVA
programming languages
o 1SEARCH for full text/keyword retrieval of documents
o 1PUBLISH for selecting and recording images on output media such as
CD or DVD
o 1BRIDGE - JAVA API tools for accessing foreign databases for data
verification and retrieval
o 1GATEWAY - JAVA API tools for managing workflows associated with
business process management requirements
o 1MAGEwf - for managing business process workflows utilizing "open
source" technologies
A key element of the Company's product line is its open systems technology,
namely:
o Open Systems compliant with Linux, Unix, and Windows Operating
Systems
o Supports file formats in most common formats such as; TIFF, JPEG,
PCX, PCL, WAV, PDF, HTML or HPGL
o The server software (1MAGE) operates the same on Linux, Unix, and
Windows servers
o Supporting clients include Microsoft Windows, Linux, X-Windows,
ASCII, JAVA and browser clients
o Device connectivity via Ethernet or token ring networks using TCP/IP
communication protocol
o Compatibility with IBM AIX, HP-UX, Sun Solaris, RedHat Linux and
Windows
o Recognition technology and scanning tasks run on Microsoft Windows
o UniVerse and UniData ("U2") Relational Database software from IBM
o Support for J2EE technologies including JBoss(R), MaxDB(R) (MySQL),
WfmOpen(R), Combined to form 1mage's open source workflow
applications: 1MAGEwf
4
1MAGE includes several distinguishing features: the ability to use many
different types of workstations, the ability to quickly and easily integrate
with the existing business application software using application programming
interfaces ("APIs"), and the scalability to handle the needs of companies of all
sizes economically. Through the use of the Linux, UNIX, and Windows operating
systems and open systems technology, the Company seeks to offer its customers an
imaging solution at a reasonable cost. Because 1MAGE is a server-based product,
the Linux operating system ("O/S") has become very popular with end users of the
Company's software.
1MAGE utilizes the Linux, UNIX, and Windows operating systems and IBM's U2
database software. The Company's open systems technology makes its software
transportable to numerous hardware products from varying manufacturers. Because
of the number of hardware manufacturers using the Linux, UNIX, and Windows
operating systems, the Company's software customers are rarely restricted in
their choice of hardware manufacturers.
During 2004, sales of 1MAGE software licenses (excluding annual license
fees) accounted for $412,000 (30% of total revenue); in 2003, revenue from sales
of software licenses accounted for $815,000 (39% of total revenue).
Services and Annual Fees
The Company licenses its 1MAGE software to its customers and charges an
annual license and maintenance fee, which must be paid to continue receiving
support, updates and add-on products for the software. During 2004 and 2003,
annual license fees accounted for $703,000 (50%) and $786,000 (37%),
respectively, of the Company's net sales. The Company believes recurring annual
license fees from new and existing customers are important to the stability of
the Company. The Company also provides professional services to its customers
and business partners. These services include preparation of image management
plans ("IMP"), installation, training, image enabling existing software, and
consulting services for customers. The Company believes that its new workflow
product 1MAGEwf will increase the need by its customers for additional
professional services as they automate business processes associated with
document management. For the years ended December 31, 2004 and 2003, the
revenues from these services accounted for $244,000 (17%), and $299,000 (14%),
of the Company's net sales.
Hardware Sales
The Company also recommends hardware and related products, but typically
only sells specialized peripheral products, such as high-end scanners, at the
customer's request. Computer hardware and peripheral products are purchased only
upon request to fill specific customer orders, no inventory is maintained.
Hardware is generally shipped directly from the manufacturer to the customer.
During 2004, hardware sales accounted for $37,000 (3% of total revenue); in
2003, revenue from sales of hardware accounted for $205,000 (10% of total
revenue).
Marketing and Distribution
In 2004, the Company radically changed its sales strategy from one
primarily focused on direct sales to end-users through its employee sales
organization to a distribution channels approach, where sales of the Company's
products will be primarily through business partners. By that change, the cost
associated with maintaining a dedicated employee based end-user sales force was
eliminated. To date, the Company has signed partnering agreements for 1MAGE with
a variety of resellers (VARs), dealers (VADs), and marketing alliance partners
(MAPs) specializing in a number of different industries, including retail,
healthcare, construction, human resources, and distribution/manufacturing. In
addition, the Company licenses its software and certain other products and
services through agreements with Application Service Providers (ASP) in the
healthcare industry. In 2004, the Company also began to license its products to
5
end-users through twelve independent sales representatives. The Company's
overall marketing and sales objective is to support the current business
partners and to continue to enroll new software integrators, independent sales
representatives, and consultants in the program. The Company provides training
aids, an Internet demonstration site, user instruction manuals and other
documentation, and a newsletter to keep its partners, as well as prospective
resellers and customers, informed of new product applications and developments.
In 2004 the Company established a consulting certification program to train and
educate outside consultants on the support of the Company's products. As a
result of this program the Company expects to outsource some of its technical
service and support projects when needed.
The general strategy is to assist its partners to (1) help customers
define the goals for their system, (2) provide the means of achieving those
goals through document management software, workflow processes, and
appropriately configured computer systems, and (3) help assure the ongoing
success of this collaborative process by providing continuing support, including
on-site training and educational programs, and ongoing maintenance. The Company
also markets its products and services over the Internet on its website at
www.1mage.com.
Customers
The Company sells its 1MAGE software primarily through its distribution
channels to businesses in a wide variety of industries and markets.
Sources of Supply
The Company has a Value Add Reseller (VAR) Software Agreement with IBM
Corp. to sublicense their UniVerse and UniData database programs. The agreement
authorizes the Company to include certain IBM database programs as part of their
imaging solution. This agreement currently runs until September 28, 2005 and it
may be automatically renewed for additional one (1) year terms. The Company has
designed its product such that, through the use of its Application Program
Interfaces ("API"s), third party software can be easily integrated into the core
products with minimal difficulty and effort.
Possible Fluctuations in Operating Results
The Company's sales cycle, which generally commences at the time a
prospective distribution partner or customer demonstrates a serious interest in
purchasing a system or software license, and ends upon execution of a sales
contract, is lengthy and not predictable with any degree of certainty. Prior
sales and implementation cycles are not necessarily an indication of future
cycles. Operating results could vary from period to period as a result of the
length of the sales cycle, the timing of individual system sales, business
partners' performance and conditions in the target markets and the economy in
general.
Despite the negative short-term results during the transition period in
2004, it is the Company's expectation that its recent decision to focus on
offering its proprietary imaging software to a broader range of business
partners and customers, through its distribution channel could lessen the
historical quarterly fluctuations in the Company's operating results. In any
event, however, large volume sales, special product packaging, or groups of
sales of software licenses may still cause significant variances in quarterly
results that may be difficult to predict.
Trade Secret and Copyright Laws
The Company regards its software as proprietary and relies for protection
upon trade secret and copyright laws and non-disclosure agreements with its
employees as well as restrictions on disclosure and transferability contained in
its software license agreements with its customers. Despite these restrictions,
it may be possible for competitors or customers to copy, or reverse compile,
aspects of the Company's products or obtain information that the Company regards
as proprietary. Furthermore, there can be no assurance that others will not
independently develop software products similar to those developed or planned by
the Company.
6
Although the Company believes its software does not infringe on the
proprietary rights of others and has not received any notice of claimed
infringement, it is possible that portions of the software marketed by the
Company could be claimed to infringe on existing proprietary rights. In the
unlikely event that any such infringements are found to exist, there can be no
assurance that any necessary licenses or rights could be obtained, or could be
obtained on terms satisfactory to the Company. Further, in such event, the
Company could be required to modify the infringing software. There can be no
assurance that the Company would be able to do so in a timely manner, upon
acceptable terms and conditions, or at all; even though the failure to do so
could have a material adverse effect on the Company.
Backlog
As a practical matter, the Company's business has evolved to the point
where the Company has minimal backlog at any given point in time. With respect
to software license sales, because there is no significant time delay between
receipt of an order and shipment of the software, electronically or otherwise,
there is effectively no backlog. For hardware, because of direct delivery of the
hardware by the manufacturer, hardware sales have such short lead times that
unfilled firm orders seldom, if ever, build up to significant levels.
The Company normally receives a deposit of between 25% and 50% of the
hardware and software price when an order is placed. This deposit may or may not
be returned upon cancellation, depending on the circumstances of the
cancellation.
Competition
The Company experiences intense competition in its business from
competitors who target one or more of the same markets or market segments as the
Company. Software and systems that perform many of the same functions as the
Company's systems and software are also available from a number of competitors
of the Company. Some of these competitors are larger and have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
than we do. As a result, these competitors may be able to respond more quickly
to emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
we can.
The Company believes that usage of the Linux and Windows operating systems
and the IBM U2 databases has strengthened the Company's competitive position by
making the Company's software compatible with more types of hardware and with
the IBM U2 application software offered by other software developers and system
integrators. The Company further believes that its principal advantage over its
competitors is the Company's ability to give its customers and partners a choice
in selecting a Linux, UNIX, or Windows-based open systems architecture and the
IBM U2 database that can be offered at lower prices.
Limited Markets
The Company's channels program targets complementary markets and allows
the Company to draw from a variety of industries with respect to its imaging
software products. As noted above, the Company's strategy is to expand the
domestic and international markets for its imaging software by placing more
emphasis on its distribution channel network of partners.
7
The Company's experience has been that economic downturns or increased
competitive pressures in its niche markets sometimes result in reduction or
deferral of capital expenditures or large purchases, like software licenses, by
potential customers. On the other hand, certain adverse conditions can sometimes
lead to opportunities as potential customers downsize to smaller, more
cost-efficient computer systems or replace custom designed systems that require
higher levels of support and maintenance.
Product Development
The software and services market in which the Company competes is
characterized by (1) rapid technological change, (2) frequent introduction of
new products and enhancements, and (3) changing customer needs. Accordingly, the
Company's future success depends on its ability to support existing products and
develop new products.
During 2004, the Company developed a new release of 1MAGE(C) which employs
new technologies, including workflow and business process management (1MAGEwf)
requirements and significant development on creating JAVA and J2EE integration
and application integration tools. In addition, improvements were made to the
hardware/software compatibility offerings available for Linux and Windows users.
During 2004 and 2003, the Company spent $267,000 and $261,000, respectively, for
computer software development. The Company capitalizes its software development
costs once technological feasibility is established.
Employees
As of March 11, 2005, the Company employed sixteen persons, thirteen of
whom serve on a full-time basis and three on a part-time basis. Responsibilities
are divided as follows: four persons in channel sales and marketing, eight in
technical support and programming functions, and four in administrative
positions. In addition, the Company established a certification program in 2004
for outside technical contractors and independent sales representatives. This
program is expected to facilitate outsourcing of some of the Company's technical
service and support requirements when necessary and to decrease the dependency
on employing additional personnel to do such work.
The Company provides incentive compensation packages to many of its
employees, including its executive officers. The Company's chief executive
officer, David R. DeYoung, receives a quarterly bonus equal to 5% of the
Company's pretax profits. Sales and Consulting personnel receive a commission
based upon sales. The Company has a policy of encouraging the effort and loyalty
of all of its employees by making all employees eligible for the grant of stock
options under its Equity Incentive Plan, subject to vesting schedules. The
Company believes that these incentive programs are important in attracting and
retaining skilled personnel. The future success of the Company will depend in
large part upon the quality of its employees and the efforts they expend on
behalf of the Company.
None of the Company's employees are represented by a labor union, and the
Company has experienced no work stoppage. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 5,464 square feet
at Plaza Quebec, 6025 South Quebec Street, Suite 300, Englewood, Colorado, 80111
and are occupied pursuant to a lease agreement between the Company and Trammel
Crow, Inc. with monthly rental payments of $7,058, currently, and scaling to
$7,741 by the end of the lease term. The term of the lease commenced May 1, 2003
and will terminate on August 31, 2008. The landlord is responsible for property
taxes, utilities, janitorial services, repairs, and maintenance. The Company
believes that its facilities and equipment are in good condition and are
satisfactory for their present uses. As a condition of renewing the lease, the
Company requested and received two months free rent in 2004 at $6,830 per month
and two months free rent in 2005 at $7,058 per month. Rent is expensed under the
straight-line method over the term of the lease at $6,822 per month. Deferred
rent at 12/31/04 is $12,636.
8
ITEM 3. LEGAL PROCEEDINGS
In May 1994, the Company signed a software license agreement (the "1994
Agreement") with Reynolds and Reynolds, Inc. ("Reynolds")for the exclusive right
to sublicense certain modules of 1MAGE (without payment of further license fees
to the Company) to businesses primarily engaged in retail sales of new or used
automobiles, trucks, or tractors (the "Licensed Software"). In 1996, the Company
signed a subscription and maintenance agreement with Reynolds (the "1996
Agreement") under which annual subscription fees are to be paid to the Company.
On January 18, 2002, Reynolds notified the Company of its intent to
terminate the 1996 Agreement effective April 22, 2002. Reynolds had installed
the 1MAGE document management software in approximately 1,000 of its customer
sites in the United States and Canada. As a result of various disputes arising
out of the termination of the 1996 agreement, including Reynolds' decision to
continue sublicensing the Company's software notwithstanding such termination,
the Company and Reynolds became involved in litigation.
On June 21, 2002, the Company filed a civil action seeking monies owed by
Reynolds under its 1996 Agreement with the Company in the District Court for the
City and County of Denver, Colorado, 1mage Software, Inc. v. The Reynolds and
Reynolds Co. Case No.: 02-CV-4701 ("the "Collection Action"). In its complaint
in the Collection Action, the Company demanded immediate payment of $193,611
currently due under that contract plus interest and costs. Reynolds deposited
the $193,611 with the court clerk, pending order of the court as to its
disposition and has filed an answer denying liability. The Company filed a
Motion for Summary Judgment to which Reynolds responded, denying liability and
stating that in all events, the amount due was only $166,741. The Court then
referred the matter to arbitration before the American Arbitration Association.
A lawsuit was filed by the Company in the United States District Court for
the District of Colorado, 1mage Software, Inc. v. The Reynolds and Reynolds Co.,
et al., No. 02-K-1688 (OES), (the "Infringement Action"), in which the Company
sought damages for copyright infringement resulting from continuing use of the
Company's software without any license or authority by Reynolds and
approximately 1,000 automobile dealers throughout the United States. The
Infringement Action was also referred to arbitration.
In the Arbitration, besides the claims raised by the Company in the
Collection Action and the Infringement Action, Reynolds asserted a counterclaim
for $580,000, alleging that the Company, without justification or privilege,
advised customers and/or prospects of Reynolds that Reynolds no longer had a
license to distribute the Company software. The Company denied that it
improperly informed Reynolds' dealers.
On June 17, 2004, the Company received notification from the American
Arbitration Association that all of the Company's claims against Reynolds had
been dismissed and a second hearing would be held, as previously scheduled, on
October 11, 2004, for consideration of Reynolds' counterclaims against the
Company. In this first phase of the arbitration, the Arbitrator determined that
Reynolds has a perpetual license under the 1994 Agreement to all software listed
therein and to all software related to updates, upgrades and enhancements
9
provided under the 1996 Agreement, with one exception, the Flex LM software in
use at Reynolds' facilities. The Flex LM software provides the Company with a
means by which it could control the software's features, user count and time
periods within which its licensees would be enabled to operate their copies of
the Company's Licensed Software and shut down that software unless additional
fees for future periods were paid. The Arbitrator found that the Flex LM
software provides no benefit to Reynolds and was either surplusage or provided
an actual impediment, inconsistent with the 1994 Agreement, to Reynolds' use of
the Licensed Software. He also found that there was no basis for the Company's
claim that Reynolds either breached any agreement or infringed any of its
copyright rights. Since the 1994 Agreement prohibits the Arbitrator from
awarding costs or attorneys' fees, he did not address those issues and no award
was made. The Arbitrator also noted that the 1994 Agreement did not appear to
speak to the allocation or award of arbitration fees paid to the American
Arbitration Association but whether any such award would be made would be
reserved for the second phase of the arbitration.
A second hearing was held on October 11 and 12, 2004, for consideration of
Reynolds' counterclaims seeking $836,643 in damages from the Company. Among the
counterclaims considered by the arbitrator were those based upon Reynolds'
claimed damages from having to replace 39 copies of the Company's DocVantage
software product that expired after only a 1 year license with Reynolds' new
choice of software, EDM. It was the Company's contention that all but
approximately $40,000 of Reynolds' damage claims were barred by a limitation of
remedies clause contained in the 1996 agreement. Reynolds claimed that the 1996
agreement did not apply to the counterclaims but admitted that the Company is
entitled to the $193,611 in accounts receivable previously deposited by Reynolds
with the court in a related case. The Company also argued that $597,000 in
hardware costs claimed by Reynolds was unproven because the hardware in question
was returned to Reynolds and reused for other purposes by Reynolds. The November
12, 2004 decision of the arbitrator concerning Reynolds' counterclaims was
issued on November 17, 2004. The arbitrator ruled in favor of Reynolds on
substantially all of its counterclaims, finding that the Company breached both
the 1994 and 1996 agreements with Reynolds by delivering only 1 year DocVantage
licenses to 39 Reynolds customers after Reynolds terminated its agreement with
the Company. The arbitrator refused to uphold the limitation of remedies clause
in the 1996 agreement on the grounds that it was unconscionable as applied to
the Company's decision to provide Reynolds with only 1 year DocVantage licenses.
While admitting that it was "not simple" to devise a fair method of assessing
damages for the breach beyond the undisputed $40,131 attributable to the 39
software licenses, the arbitrator nevertheless allowed $36,205 for installation,
$40,725 for training, and $275,000 of the total $577,273 Reynolds was found to
have spent for new equipment, for a total of $392,061 in damages to be paid by
the Company.
Reynolds subsequently obtained a judgment on the arbitrator's award
against the Company on the counterclaims and denial of the Company's claims in
the United States District Court for the District of Colorado, which had
retained jurisdiction of the dispute pending resolution of the arbitration.
Since the parties no longer disputed the Company's entitlement to the $193,611
deposited with the court, the net result of the judgment was that Reynolds took
the $193,611 deposited with the court and applied that deposit to the judgment,
so that the Company still owed the balance of $198,450 to Reynolds.
Instead of satisfying the balance of the judgment, the Company filed an
appeal from the court's judgment to the United States Court of Appeals for the
Tenth Circuit and in April, 2005 filed a cash bond in the amount of the
remaining judgment pending appeal. The Company obtained the money needed to post
that bond by borrowing approximately $180,000 in additional funds from the
private line of credit extended to the Company by DEMALE, LLC. DEMALE is owned
and controlled by members of the Company's Board of Directors. In connection
with DEMALE's loan of the additional $180,000 to the Company, which increased
the total amount loaned under that private line of credit to $468,000 plus
interest, the Company and DEMALE agreed to change the price for DEMALE's
conversion right for the principal amount of, and unpaid interest on, the line
of credit. The conversion price was previously equal to 80% of the fair market
value on the date that DEMALE's written notice of such conversion to the
Company's Common Stock is received by the Company. The amendment changed the
conversion price to $0.14 per share, or 80% of the fair market value on the date
of the written notice, whichever is lower. As a result of the increase in the
amount owed to DEMALE under the line of credit to $500,000 and the fixing of the
maximum conversion price at $0.14 per share, DEMALE is now the beneficial owner
of at least 3,571,429 shares, or 52.0% of the Company's outstanding shares of
common stock, as calculated under Securities Exchange Act Rule 13d-3(a). In
connection with the amendment of the line of credit agreement, DEMALE also
agreed to extend the expiration date of the line of credit from June 30, 2005 to
June 30, 2007
10
The Company intends to vigorously pursue its appeal of the adverse
judgment of the district court confirming (a) the arbitrator's award against the
Company and (b) the arbitrator's denial of all of the Company's claims against
Reynolds. There can be no assurance that the Company will succeed in all or any
portion of its appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
through the solicitation of proxies or otherwise during the fourth quarter of
the Company's calendar year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is quoted in the OTC Bulletin Board under the
symbol ISOL. The following table sets forth, for the fiscal quarters indicated,
the high and low bid prices per share for the Common Stock as reported on the
OTC Bulletin Board.
2004
----------------------- --- ---------- ------- --- ----------
High Low
----------------------- --- ---------- ------- --- ----------
First Quarter $ 0.97 $ 0. 31
----------------------- --- ---------- ------- --- ----------
Second Quarter 0.90 0.51
----------------------- --- ---------- ------- --- ----------
Third Quarter 0.52 0.15
----------------------- --- ---------- ------- --- ----------
Fourth Quarter 0.23 0.15
----------------------- --- ---------- ------- --- ----------
2003
----------------------- --- ---------- ------- --- ----------
High Low
----------------------- --- ---------- ------- --- ----------
First Quarter $ 0.51 $ 0.23
----------------------- --- ---------- ------- --- ----------
Second Quarter 0.56 0.21
----------------------- --- ---------- ------- --- ----------
Third Quarter 0.40 0.21
----------------------- --- ---------- ------- --- ----------
Fourth Quarter 0.55 0.25
----------------------- --- ---------- ------- --- ----------
These quotations reflect interdealer prices, without retail mark-up, mark
down or commission and may not necessarily represent actual transactions.
11
On March 25, 2005, the closing bid price per share for the Common Stock
was $0.17 as reported on the OTC Bulleting Board. On that same date, there were
approximately 131 holders of record of the Common Stock.
Dividends
The Company has never declared or paid cash dividends on its Common Stock
and has no present intention to do so. For the foreseeable futurethe Company's
earnings, if any, will be utilized to pay down its bank and private lines of
credit and, if additional funds are available, will be retained to finance the
development and expansion of the Company's business. The declaration and payment
of future dividends will be determined by the Company's Board of Directors in
light of conditions then existing, including the Company's earnings, financial
condition and capital requirements.
Issuer Repurchases of Registered Equity Securities
There were no shares repurchased during the fourth quarter of 2004.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
financial data of the Company. This table should be read in conjunction with the
financial statements and notes included in Item 8 of this Form 10-K and the
section entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" following this section.
Statements of Operations Years Ended December 31,
- ---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
In thousands, except for per share data: 2004 2003 2002 2001 2000
- ---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
Net Sales $1,396 $2,104 $2,242 $2,776 $2,163
Cost of Sales 770 915 1,153 1,109 934
Gross Profit 626 1,189 1,089 1,667 1,229
Gross Profit (as a % of Net Sales) 45% 57% 49% 60% 57%
Selling, General & Administrative expenses 1,605 1,215 1,365 1,500 1,211
Income (Loss) before Income Taxes (1,064) 86 (282) 161 11
Net Income (Loss) (1,124) 96 (282) 211 8
Net Income (Loss) Per Share (.34) .03 (.09) .07 .00
Weighted Average Number of Outstanding Shares 3,298 3,237 3,146 3,146 3,056
- ---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
Balance Sheets Years Ended December 31,
- ---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
In thousands: 2004 2003 2002 2001 2000
- ---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
Working Capital/ (Deficit) $(776) $ 175 $ 28 $ 140 $(93)
Total Assets 871 1,674 1,562 1,496 1,428
Long Term Obligations 216 201 207 1 3
Total Stockholders Equity(Deficit) (261) 789 643 925 714
- ---------------------------------------------------------------- ----------- ------------ ----------- ----------- ------------
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Management believes that operating performance of the Company during 2004
was negatively affected by the short-term impact of the Company's change in
sales strategy from internal direct sales by Company employees, to a partnering
or indirect sales strategy through a network of VARs, VADs, and other
independent sales representatives. In addition, a significant portion of the
losses in 2004 are the result of the $392,000 award against the Company on the
counterclaims brought against it by Reynolds & Reynolds in the arbitration
brought by the Company against Reynolds. Besides the general economic slowdown
in the technology sector, the extent to which the Company's limited resources
were dedicated to the Reynolds litigation probably contributed to the poor sales
performance. Thus, identifying specific trends based on the Company's
performance in 2004 is particularly difficult.
While interest in the Company's products remains positive, there can be no
assurance that the Company's revenue for 2005 will expand beyond current levels.
As such, the Company has implemented stringent cost cutting measures. There is
no certainty that the Company will in fact be profitable in 2005 but the Company
believes that its recurring annual license fee revenue, tight expense controls,
and the maturation of its re-directed sales strategy will help return the
Company to profitability by the end of the year.
Results of Operations
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The Company's total revenue was $1.4 million for the year ended December
31, 2004, compared to $2.1 million for the year ended December 31, 2003,
representing a decrease of $709,000 (34%). Mid-year 2004, the Company changed
its sales strategy from selling through a direct sales force to selling through
business partnerships in various markets. Unfortunately, establishing these
relationships takes time both in signing up new partners and then securing
business through those relationships. As a result, the Company's revenue from
new business dropped 56% in 2004 as compared to 2003, primarily due to a decline
in new software licenses caused by the transition to an outside sales network.
The Company's 2004 and 2003 revenue was derived from four sources:
software licenses, annual maintenance/license fees, consulting services, and
hardware sales.
In 2004, software license revenue decreased 49%, or $403,000 from 2003
levels, primarily due to the drop in new business. Annual license fees decreased
11%, or $83,000 due to a few customers going out of business or electing not to
renew maintenance. The professional service group's revenue decreased by $55,000
(18%) for the year primarily due to decreased services typically generated from
new installations. Hardware sales decreased 82%, or $168,000, from 2003 levels,
as the Company has changed its distribution strategy from a direct sales force
to that of a business partner network, where most partners sell their own
hardware solutions.
Gross profit on revenue for the year ended 2004 was 45%, as compared to
57% for 2003, primarily due to the decrease in high profit margin software
sales. In 2004, selling, general and administrative expenses increased $390,000
(32%) due to a $112,000 increase in legal fees plus a litigation judgment of
$392,000 offset by tight expense controls across all departments and the
elimination of its direct sales force. For the year ended December 31, 2004, the
Company reported a net loss of $1.1 million, or $(.34) per share, a decrease of
$1.21 million over net income of $96,000 or $.03 per share for the previous
year.
13
The more pressing challenge faced by the Company today, however, is that
of liquidity. Because the Company has limited capital resources, namely an
undrawn balance of around $32,000 on its private convertible line of credit from
DEMALE, LLC, it cannot sustain future losses without an adverse effect on its
liquidity and operations. In addition, the Company's potential inability to
satisfy the bank's request for a gradual pay down on its credit line could have
severe consequences for the Company.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002.
The Company's total revenue was $2.1 million for the year ended December
31, 2003, compared to $2.2 million for the year ended December 31, 2002,
representing a decrease of $138,000 (6%). The Company's revenue decreased
$428,000 as a result of the loss of the Company's largest customer, Reynolds and
Reynolds, during the year as total revenue from Reynolds declined from $441,000
to $13,000. The Company does not anticipate any significant revenue from
Reynolds in 2004.
The Company's revenue for 2003 and 2002 was derived from four sources:
software licenses, annual maintenance/license fees, consulting services, and
hardware sales.
In 2003, software license revenue increased 6%, or $49,000 from 2002
levels, of which a decrease of $121,000 was attributable to the loss of this
single customer. Without the loss of this large customer, software license
revenue would have increased $170,000. Annual license fees decreased 20%, or
$192,000 of which a decrease of $307,000 was attributable to the loss of
business from this large customer. Without the loss of this large customer,
annual license fees would have increased $115,000. The professional service
group's revenue decreased by $20,000 (6%) for the year primarily due to
decreased consulting services provided due to the timing of year-end contracts.
Hardware sales of $205,000 increased $24,000 (13%) over $181,000 for 2002.
Gross profit on revenue for the year ended 2003 was 57%, as compared to
49% for 2002, primarily due to the increase in software sales. In 2003, selling,
general and administrative expenses decreased $151,000 (11%) due to tight
expense controls across all departments of the Company. In addition, during
2003, the Company settled a payable of $138,000 that was due to a vendor in
connection with a software purchase for an earlier period. For the year ended
December 31, 2003, the Company reported net income of $96,000 or $.03 per share,
an improvement of $378,000 over a net loss of $282,000 or $(.09) per share for
the previous year.
- ---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
Year Ended Year Ended Increase/ Increase/
12/31/03 12/31/02 (Decrease) (Decrease)
$ %
- ---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
Revenue, as reported $ 2,104,367 $ 2,242,089 $ (137,722) (6%)
- ---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
Less: Reynolds Revenue 13,318 441,152 (427,834) (97%)
- ---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
Revenue excluding Reynolds $ 2,091,049 $ 1,800,937 $ 290,112 16%
- ---------------------------------------- --- ----------------- -- ----------------- --- -------------- -------------
14
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased approximately $93,000
during the twelve months ended December 31, 2004 as compared to December 31,
2003. During 2004, the Company used cash of $267,000 for deferred development
expenses. The Company had deficit working capital of $776,000 as of December 31,
2004. Included in current liabilities is $310,000 for Deferred Revenue, which
will be earned throughout 2005 from its annual license and maintenance
contracts. The Company had drawn $172,000 on its bank line of credit at December
31, 2004, as compared to $139,000 drawn at December 31, 2003. The line is
collateralized by all accounts receivable, assets, and general intangibles of
the Company. The Company's line of credit agreement with its bank expired
February 24, 2005 and will not be renewed. On March 31, 2005 the bank line was
advanced $162,000. The Company is currently in negotiations with the bank to
implement a payment plan that will amortize the debt over a 48-month period,
with a new maturity date of April 15, 2006. The bank has granted the Company an
extension of time to repay the promissory note underlying the line of credit,
which was due in full on March 31, 2005, until April 15, 2005. There can be no
assurance that the bank will agree to any additional extension or to any plan to
retire the debt over time or to any other resolution that is acceptable to the
Company.
In April, 2003, the Company established an additional line of credit with
DEMALE, LLC, a limited liability corporation owned and controlled by the
principal shareholders and members of the Board of Directors of the Company. The
initial line provided for borrowings of up to $300,000 and is secured by
substantially all of the Company's assets and is expressly subordinated to the
bank's line of credit. Under the terms of the agreement with DEMALE, the
outstanding balance, including unpaid principal and accrued but unpaid interest
can be converted by DEMAL:E to equity at any time. The conversion price is the
lower of $.14 or 80% of the fair market value, of the Company's stock at the
time of conversion. At December 31, 2004, DEMALE had advanced $223,600, as
compared to $54,600 at December 31, 2003. On March 31, 2005, DEMALE agreed to
increase the line to $500,000 in order to fund the Company's appeal bond in the
litigation challenging the results of the Reynolds & Reynolds arbitration
proceeding. As of March 31, 2005, the Company had advanced $468,000 on the line
of credit. DEMALE also agreed to extend the expiration date of the line of
credit from June 30, 2005 to June 30, 2007.
As noted above in "Results of Operations", the termination by Reynolds and
Reynolds ("Reynolds") of its 1996 Agreement and the resulting judgement had a
significantly adverse impact on the Company's 2004 financial results.
The Company has developed a new, lower cost, strategy for the distribution
of its products and services. The downturn in revenue associated with this
change in strategy, however, has required the Company to bring its cost
structure in line with its available revenue. As a result, the Company
implemented new stringent cost cutting measures throughout 2004 and into 2005
that are expected to help improve its results of operations in 2005.
The Company receives its revenues from software licenses, recurring annual
maintenance/license fees, consulting services and minimal hardware sales.
Notwithstanding the burdens imposed by the Reynolds' judgement, the Company
believes that its continued relationship with DEMALE, and the cash flows
generated from current operations, may be sufficient to meet its immediate needs
for working capital.
The Company has no material commitments for capital expenditures for 2005.
Contractual obligations at December 31, 2004 are as follows:
15
- --------------------- -------------------- ---------------------- --------------------- -------------------
Lines of Credit (1) Capital Lease (2) Operating Lease Total
- --------------------- -------------------- ---------------------- --------------------- -------------------
Year
- --------------------- -------------------- ---------------------- --------------------- -------------------
2005 172,300 5,668 71,487 249,455
- --------------------- -------------------- ---------------------- --------------------- -------------------
2006 - 5,250 88,335 93,585
- --------------------- -------------------- ---------------------- --------------------- -------------------
2007 223,600 658 91,067 315,325
- --------------------- -------------------- ---------------------- --------------------- -------------------
2008 - 55 61,925 61,980
- --------------------- -------------------- ---------------------- --------------------- -------------------
2009 - - - -
- --------------------- -------------------- ---------------------- --------------------- -------------------
Thereafter - - - -
------- ------- --------- --------
- --------------------- -------------------- ---------------------- --------------------- -------------------
$395,900 $11,631 $,312,814 $720,345
======= ======= ========= ========
- --------------------- -------------------- ---------------------- --------------------- -------------------
(1) Lines of credit, consist of two revolving line of credit agreements, one
with the bank that expired on February 24, 2005 and one with related
parties that will expire on June 30, 2007. The Company is negotiating with
the bank to pursue the option of making monthly payments over the next 48
months. DEMALE is entitled to monthly interest payments and the
outstanding principal balance is due at maturity. DEMALE, at their option,
can elect to convert the debt to equity.
(2) Amounts shown under capital lease arise under leases for office equipment
expiring in 2006 and 2008 with monthly lease payments of approximately
$418 and $55.
Risks to Future Financial Performance
Severely Limited Capital Resources. As a result of the Company's operating
losses in 2004 and the $392,000 award against it in the Reynolds arbitration,
the Company's capital resources have been stretched to unprecedented lengths.
The Company cannot bear any significant operating or other losses in 2005 if it
is to survive. While preliminary indications are that the Company has not
incurred such a significant loss in the first quarter of 2005, the Company still
requires the continuing forbearance of its bank, which has already declined to
renew the $162,000 owed on its line of credit, and the continued support of
DEMALE, LLC, which the Company owes $468,000 as of March 31, 2005. There is no
assurance that such forbearance or support will continue or that the Company
will not incur additional operating losses. Accordingly, unless the Company can
obtain additional capital to cover future losses, if the Company incurs
additional losses or otherwise experiences negative cash flow, there is a
substantial risk that the Company will not be able to continue as a going
concern.
Variable operating results. Our future operating results may vary significantly
and are difficult to predict due to a number of factors, of which many are
beyond our control. These factors include:
o Demand for our products;
o Productivity of our business partners;
o The level of product and price competition;
o The length of our sales cycle;
o The size and timing of individual license transactions;
o The delay or deferral of customer implementations;
o Our success in expanding our customer support organization, direct
sales force and indirect distribution channels;
o The timing of new product introductions and product enhancements;
o Changes in our pricing policy;
o The mix of products and services sold;
o Our ability to develop and market new products and control costs;
and
o Current economic and political conditions
16
Current Economic and Political Conditions May Affect Results. Due to the
discretionary nature of our customers' budget and purchase cycles and the
absence of long-term customer purchase commitments, it is expected to remain
difficult for the Company to avoid significant fluctuations in quarterly
operating results. On the other hand, if the overall economy continues to
improve, of which there can be no certainty, the Company believes that such
improvement will assist it in its return to profitability.
CRITICAL ACCOUNTING POLICIES
In preparing financial statements, management must make estimates and
judgments that affect the carrying values of the Company's assets and
liabilities as well as recognition of revenue and expenses. Management's
estimates and judgments are based on the Company's historical experience and
management's knowledge and understanding of current facts and circumstances. The
policy discussed below is considered by management to be critical to an
understanding of the Company's financial statements. The application of this
policy places significant demands on management's judgment, with financial
reporting results relying on estimations about the effect of the matter that is
inherently uncertain. For this policy, management cautions that future events
rarely develop as a forecast, and estimates routinely require adjustment and may
require material adjustment. There have been no significant changes in critical
accounting policies in the past year.
Software Development Costs are capitalized when technological feasibility
is established. Such costs are stated at the lower of unamortized cost or net
realizable value. Amortization is computed using either the straight-line method
based on estimated economic lives of the products (five years) or the ratio that
current product revenues bear to the total of current and anticipated future
product revenues, whichever is greater. It is reasonably possible that those
estimates of anticipated future gross revenues, the remaining estimated economic
life of the products, or both will be reduced significantly in the near term due
to competitive pressure. As a result, the carrying amount of the capitalized
software costs may be reduced materially in the near term. The net realizable
value of such capitalized costs is reviewed by management on a periodic basis,
and costs in excess of net realizable value, if any, are charged to operations.
Revenue Recognition - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when the
software and computer equipment are shipped to the customer, remaining vendor
obligations are insignificant, there are no significant uncertainties about
customer acceptance and collectibility is probable. Revenue from related
services, including installation and software modifications, is recognized upon
performance of services. Maintenance revenue is recognized ratably over the
maintenance period.
Forward Looking Statements
Some of the statements made in this Form 10-K are not historical facts and may
be considered "forward looking statements." All forward-looking statements are,
of course, subject to varying levels of uncertainty. In particular, statements
which suggest or predict future events or state the Company's expectations or
assumptions as to future events may prove to be partially or entirely
inaccurate, depending on any of a variety of factors, such as the availability
of additional capital, the actions of the Company's creditor, including but not
limited to the Company's bank and DEMALE, LLC, the success of its recently
implemented cost cutting, the results of the Reynolds appeal, economic
conditions generally, new technological developments, competitive developments,
results of pending litigation, competitive pressures, changes in the management,
personnel, financial condition or business objectives of one or more of the
Company's customers, increased governmental regulation or other actions
affecting the Company or its customers as well as other factors.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1mage Software, Inc.
- --------------------
INDEX TO FINANCIAL STATEMENTS PAGE
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................19
BALANCE SHEETS - December 31, 2004 and 2003................................20
STATEMENTS OF OPERATIONS - For the Years Ended
December 31, 2004, 2003, and 2002 ......................................21
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - For the Years Ended
December 31, 2004, 2003, and 2002.......................................22
STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 2004, 2003, and 2002.......................................23
NOTES TO FINANCIAL STATEMENTS..............................................25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE............................... ...............38
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS..........................39
18
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
1mage Software, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of 1mage Software, Inc. as of
December 31, 2004 and 2003, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 1mage Software, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 11, the Company has
suffered recurring losses from operations and has a net capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 11. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BKD, LLP
Denver, Colorado
February 25, 2005, except for Note 4 as to which the date is April 6, 2005
19
1mage Software, Inc.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
- ----------------------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,503 $ 143,505
Receivables:
Trade(less allowance: 2004, $3,750; 2003, $20,000) 81,851 609,216
Inventory 5,756 11,517
Prepaid expenses and other current assets 2,033 55,457
Employee advances 393 19,631
Deferred tax asset -- 20,000
----------- -----------
Total current assets 140,536 859,326
PROPERTY AND EQUIPMENT, at cost, net 33,816 43,465
OTHER ASSETS:
Software development costs, net 680,613 694,262
Loan costs, net 8,649 25,929
Deferred tax asset -- 40,000
Rent/Security deposit 7,841 7,841
Inventory -- 2,958
----------- -----------
TOTAL ASSETS $ 871,455 $ 1,673,781
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 4,124 $ 3,663
Deferred revenue 310,403 287,000
Line of credit - Bank 172,300 --
Accounts payable 60,002 162,255
Accrued liabilities 370,040 230,958
----------- -----------
Total current liabilities 916,869 683,876
----------- -----------
LONG-TERM OBLIGATIONS:
Capital lease obligations 5,311 7,105
Deferred rent 12,636 --
Line of credit - Bank -- 139,314
Line of credit - Related Parties, net of discount 197,772 54,600
----------- -----------
215,719 201,019
----------- -----------
SHAREHOLDERS' EQUITY(DEFICIT):
Common Stock, $.004 par value - 10,000,000 shares authorized;
shares outstanding: 2004 and 2003- 3,302,597 and 3,287,597 13,210 13,150
Additional paid-in capital 7,361,988 7,288,455
Accumulated deficit (7,636,331) (6,512,719)
----------- -----------
Total shareholders' equity(deficit) (261,133) 788,886
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY(DEFICIT) $ 871,455 $ 1,673,781
=========== ===========
See notes to financial statements.
20
1mage Software, Inc.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
REVENUE:
System sales and software licenses $ 448,994 1,019,708 $ 946,071
Services and annual fees 946,595 1,084,659 1,296,018
----------- ----------- -----------
Total revenue 1,395,589 2,104,367 2,242,089
----------- ----------- -----------
COST OF REVENUE:
System sales and software licenses 366,001 537,623 623,242
Services and annual fees 403,571 377,380 529,791
----------- ----------- -----------
Total cost of revenue 769,572 915,003 1,153,033
----------- ----------- -----------
GROSS PROFIT 626,017 1,189,364 1,089,056
OPERATING EXPENSES:
Selling, general & administrative 1,605,201 1,214,577 1,365,214
----------- ----------- -----------
LOSS FROM OPERATIONS (979,184) (25,213) (276,158)
----------- ----------- -----------
OTHER INCOME/(EXPENSE):
Interest income 395 1,701 3,396
Interest expense (85,016) (29,467) (9,595)
Other Income 193 138,519 --
----------- ----------- -----------
Total other income (expense) (84,428) 110,753 (6,199)
----------- ----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES (1,063,612) 85,540 (282,357)
PROVISION/(CREDIT) FOR INCOME TAXES 60,000 (10,000) --
----------- ----------- -----------
NET INCOME/(LOSS) $(1,123,612) 95,540 $ (282,357)
=========== =========== ===========
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE $ (0.34) .03 $ (.09)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,298,241 3,236,610 3,146,554
=========== =========== ===========
See notes to financial statements.
21
1mage Software, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
- --------------------------------------------------------------------------------
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
---------------------------------------------------------------------
Balances, January 1, 2002 3,146,554 $ 12,586 $ 7,238,658 $(6,325,902) $ 925,342
Net loss -- -- -- (282,357) (282,357)
Balances, December 31, 2002 3,146,554 $ 12,586 $ 7,238,658 $(6,608,259) $ 642,985
Issuance of stock for services 38,043 152 6,848 7,000
Issuance of stock for loan origination fee 90,000 360 20,340 20,700
Issuance of warrants for loan origination fee 0 0 18,189 18,189
Issuance of stock for exercise of stock options 13,000 52 4,420 4,472
Net income 95,540 95,540
Balances, December 31, 2003 3,287,597 13,150 7,288,455 (6,512,719) 788,886
Issuance of stock for exercise of stock options 15,000 60 6,383 6,443
Discount recorded on DEMALE line of credit -- -- 67,150
Net loss (1,123,612) (1,123,612)
---------------------------------------------------------------------
Balances, December 31, 2004 3,302,597 $ 13,210 $ 7,361,988 $(7,636,331) $ (261,133)
=====================================================================
See notes to financial statements.
22
1mage Software, Inc.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
- -----------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) $(1,123,612) $ 95,540 $ (282,357)
Adjustments to reconcile earnings/(loss) to net cash provided by operating
activities:
Depreciation and amortization 297,226 306,292 323,096
Amortization of deferred loan costs 17,280 12,960 --
Amortization of debt discount 41,322 -- --
Deferred rent 12,636 -- --
Settlement of payable -- (138,375) --
Deferred revenue 23,403 6,000 48,000
Deferred tax asset 60,000 (10,000) --
Issuance of stock options for services -- 7,000 --
Changes in assets and liabilities:
Receivables 527,365 (59,761) (127,478)
Inventory 8,719 4,983 (7,430)
Prepaid expenses and other assets 72,662 (59,426) (7,806)
Accounts payable (102,253) 22,456 90,296
Accrued liabilities 139,082 82,698 1,750
----------- ----------- -----------
Net cash provided by (used for) operating activities (26,170) 270,367 38,071
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,584) (13,180) (6,103)
Additions to capitalized software (267,351) (261,346) (292,015)
----------- ----------- -----------
Net cash used for investing activities (271,935) (274,526) (298,118)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit - related parties 169,000 54,600 --
Net borrowings (repayments) on line of credit - bank 32,986 (60,686) 200,000
Repayment of long-term obligations (3,326) (460) (2,636)
Proceeds from exercise of Common Stock options 6,443 4,472 --
----------- ----------- -----------
Net cash provided by (used for) financing activities 205,103 (2,074) 197,364
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(93,002) (6,233) (62,683)
CASH AND CASH EQUIVALENTS, beginning of year 143,505 149,738 212,421
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 50,503 $ 143,505 $ 149,738
----------- ----------- -----------
SUPPLEMENTAL CASH FLOWS INFORMATION
Issuance of stock and stock purchase warrants
for deferred loan origination fees related to the
DEMALE, LLC line of credit $ -- $ 38,889 $ --
Beneficial conversion option associated with DEMALE
line of credit $ 67,150 $ -- $ --
See notes to financial statements
23
1mage Software, Inc.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
|---------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 15,160 $ 14,774 $ 9,595
============= ============= =============
Income taxes paid $ 2,500 $ 2,500 $ 2,500
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Acquisition of property and equipment by assuming capital
lease obligations $ 1,993 $ -- $ 10,987
============= ============= =============
24
1mage Software, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
Organization and Nature of Business - 1mage Software, Inc. (the "Company")
was incorporated in Colorado in December 1981.
The Company develops and markets a Linux, UNIX, and Windows-based
electronic document image management and retrieval system. The Company
earns the majority of its revenues in the United States.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
Inventories consist of third party software and are stated at the lower of
cost (specific identification method) or market (net realizable value).
This software is ultimately integrated into the Company's products.
Property and Equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful
lives (generally five years) of the assets or the lease term, if shorter.
The Company capitalizes all expenditures for property and equipment in
excess of $500. For the years ended December 31, 2004, 2003, and 2002,
depreciation expense totaled $16,226, $18,292, and $21,896, respectively.
Advertising Costs are expensed as incurred. Advertising expenses totaled
$40,522, $63,552, and $118,373, in 2004, 2003 and 2002, respectively.
Software Development Costs are capitalized when technological feasibility
is established. Such costs are stated at the lower of unamortized cost or
net realizable value. Amortization is computed using either the
straight-line method based on estimated economic lives of the products
(five years) or the ratio that current product revenues bear to the total
of current and anticipated future product revenues, whichever is greater.
It is reasonably possible that those estimates of anticipated future gross
revenues, the remaining estimated economic life of the products, or both
will be reduced significantly in the near term due to competitive
pressure. As a result, the carrying amount of the capitalized software
costs may be reduced materially in the near term. The amounts capitalized
for the years ended December 31, 2004, 2003, and 2002 were $267,351,
$261,346, and $296,510, respectively. Amortization of these costs totaled
$281,000, $288,000, and $301,200, respectively. The net realizable value
of such capitalized costs is reviewed by management on a periodic basis,
and costs in excess of net realizable value, if any, are charged to
operations.
Loan Costs are amortized using the effective interest method over the term
of the debt agreement.
Revenue Recognition - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when
the software and computer equipment are shipped to the customer, remaining
vendor obligations are insignificant, there are no significant
uncertainties about customer acceptance and collectibility is probable.
Revenue from related services, including installation and software
modifications, is recognized upon performance of services. Maintenance
revenue is recognized ratably over the maintenance period.
25
A single customer, Reynolds and Reynolds, accounted for 0%, 0.1%, and 20%
of revenues in 2004, 2003, and 2002, respectively. No other customer
accounted for more than 10% of revenue for 2004, 2003, or 2002.
Debt Discount - is amortized using the effective interest method over the
term of the debt agreement.
Accounts Receivable - Accounts receivable are stated at the amount billed
to customers. The Company provides an allowance for doubtful accounts,
which is based upon a review of outstanding accounts receivable,
historical collection information and existing economic conditions. The
Company performs credit evaluations of its customers' financial condition
and generally does not require collateral. The Company retains a security
interest in the equipment and software sold until they are paid in full.
Accounts receivable are ordinarily due 30 days after the issuance of the
invoice, with those customers not meeting those requirements being subject
to stricter credit policies. Delinquent receivables are written off based
on individual credit evaluation and specific circumstances of the
customer.
Three customers accounted for 41%, 13% and 11% of accounts receivable at
December 31, 2004. One customer accounted for 31% of accounts receivable
at December 31, 2003. Three different customers accounted for 32%, 12% and
11% of accounts receivable at December 31, 2002.
Earnings (Loss) per Share is computed by dividing net income (loss) by the
weighted average number of common and equivalent shares outstanding during
the year. Fully diluted earnings per share are either anti-dilutive or not
materially different from basic earnings per share.
Income Taxes The Company follows the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax
bases of assets and liabilities and are measured using enacted tax rates
and laws that will be in effect when the underlying assets or liabilities
are received or settled.
The Company has recorded a valuation allowance against the deferred tax
assets due to the uncertainty of ultimate realizability.
Stock-based Compensation At December 31, 2004, the Company has three
stock-based employee compensation plans, which are described more fully in
Note 5. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the company had applied
the fair value provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
26
Year Ended December 31
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Net income (loss), as reported $(1,123,612) $ 95,540 $ (282,357)
Less: Total stock-based employee compensation cost
determined under the fair value based method,
net of income taxes (28,415) (105,885) (97,166)
----------- ----------- -----------
Pro forma net income (loss) $(1,152,027) $ 10,345 $ (379,523)
=========== =========== ===========
Earnings per share:
Basic and Diluted - as reported $ (0.34) $ 0.03 $ (0.09)
=========== =========== ===========
Basic and Diluted - pro forma $ (0.35) $ -- $ (0.12)
----------- =========== ===========
Estimates -The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
2004 2003
--------- ---------
Equipment $ 340,425 $ 666,277
Furniture 57,035 57,088
Leasehold improvements 10,903 10,903
--------- ---------
408,363 734,268
Less: accumulated depreciation (374,547) (690,803)
--------- ---------
$ 33,816 $ 43,465
========= =========
3. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following:
2004 2003
-------- --------
Sales tax payable $ 52,475 $ 73,770
Accounting and audit fees 6,500 9,521
Accrued compensation 16,140 80,873
Litigation 198,389 0
Deferred rent 12,636 0
Other 96,536 66,794
-------- --------
382,676 230,958
Less: Deferred rent - long-term 12,636 0
-------- --------
$370,040 $230,958
======== ========
4. LINES OF CREDIT
Bank
On February 24, 2004, the Company entered into a $200,000 annual revolving
bank line of credit that expired on February 24, 2005 and had borne
interest at prime plus 1.75% (total rate of 7.0% at December 31, 2004) not
to exceed 18%, and was collateralized by all accounts receivable, assets,
and general intangibles of the Company. The proceeds from this bank line
of credit were used to payoff the bank line of credit that existed at
December 31, 2003. Total borrowings outstanding under the line of credit
were $172,300 at December 31, 2004. The bank has informed the Company that
the line will not be renewed. On March 25, 2005, the bank line of credit
was amended to extend the due date until April 15, 2005 and reduce the
line to $162,300. The Company is currently in negotiations with the bank
to implement a payment plan that will amortize the debt over a 48-month
period, with a new maturity date of April 15, 2006.
The Company had a $200,000 annual revolving bank line of credit which
expired on February 24, 2004 and had borne interest at the greater of 7%
or prime plus 1.5%, not to exceed 18%, and was collateralized by all
accounts receivable and general intangibles of the Company. Total
borrowings outstanding under the line of credit were $139,314 at December
31, 2003.
Related Parties
On April 1, 2003, the Company entered into a $300,000 convertible
revolving line-of-credit agreement (the Agreement) with DEMALE, LLC, an
entity owned by certain stockholders of the Company. The lender may elect
to convert all or any portion of the unpaid principal and interest owed
under the line at the termination of the Agreement into shares of the
Company's common stock at a conversion price equal to 80% of the fair
market value on that date. The estimated fair value of the beneficial
conversion terms related to this convertible line of credit amounted to
$67,150 and was recorded as a discount on the line of credit with an
offsetting credit to additional paid-in capital. In connection with the
Agreement, the Company issued 90,000 shares of restricted common stock and
stock purchase warrants to purchase an additional 90,000 shares of
restricted common stock as payment for loan origination costs. The line
expires on June 30, 2005 and requires the Company, among other things, to
maintain certain financial conditions. At December 31, 2004 and 2003,
there was $223,600 and $54,600, respectively, borrowed against this line.
The line is secured by substantially all of the Company's assets and is
subordinated to the bank line of credit. Interest is accrued and payable
quarterly at the greater of 7% or prime plus 1.5% (total interest rate of
7.0% at December 31, 2004). At December 31, 2004 and 2003, accrued and
unpaid interest was $12,560 and $1,733, respectively, and is included in
the balance under the heading "Accrued liabilities." On February 7, 2005,
the Board of Directors voted to amend the line and, effective March 31,
2005, the line was amended to increase the line to $500,000 and extend the
due date until June 30, 2007 or such earlier date as is mutually agreed
upon by the Company and DEMALE. Additionally, in connection with the
amendment, DEMALE right to convert any or all of the unpaid principal and
interest into shares of the Company's common stock was set at the lesser
of $0.14 per share, that price being equal to 80% of the fair market value
as of the date of the amendment, or 80% of the fair market value as of the
date of the actual conversion.
5. SHAREHOLDERS' EQUITY
Stock Compensation Plans
At December 31, 2004, the Company has three stock-based compensation
plans, which are described below. The Company applies Accounting
Principles Board (APB) Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value at the dates of
awards under those plans consistent with the method of FASB Statement 123,
the Company's net income (loss) and earnings (loss) per share would have
been as indicated below:
28
2004 2003 2002
------------ ----------- -------------
Net Income (Loss):
As Reported $ (1,123,612) $ 95,540 $ (282,357)
Pro Forma $ (1,152,027) $ (10,345) $ (379,523)
Earnings (Loss) Per Common Share:
As Reported $ (0.34) $ 0.03 $ (0.09)
Pro Forma $ (0.35) $ -- $ (0.12)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 2004, 2003, and 2002:
2004 2003 2002
------------ ----------- -------------
Dividend Yield 0% 0% 0%
Expected Volatility 134% 1328% 128%
Risk-Free Interest Rate 5.00% 4.25% 4.25%
Expected Lives 5.0 years 9.0 years 8.8 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and
are freely transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
1996 Equity Incentive Plan
In September 1996, the Board of Directors authorized 1,000,000 shares of
Common Stock for issuance under its 1996 Equity Incentive Plan ("1996
Plan") as incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"). On June 7, 2004, the Board of Directors voted to amend the 1996
Plan to increase the number of authorized shares of Common Stock available
for issuance from 1,000,000 shares to 1,200,000 shares. The Company grants
ISOs only to employees. The Company grants NQSOs and restricted stock to
persons who are employees of the Company and to non-employee directors
under the 1996 Plan.
The options are granted to purchase Common Stock at the fair market value
on the grant date or at other prices as determined by the Board of
Directors. The option-vesting period is determined at the time of each
grant, and all options expire five to ten years from the grant date.
29
A summary of the 1996 Plan stock option activity follows:
-----------------------------------------------------------------------------------------------------
Outstanding Exercise Weighted Avg.
Shares Price Exercise Price
-----------------------------------------------------------------------------------------------------
Balances, January 1, 2002 770,000 .59
Granted 8,000 $.51 .51
Canceled (13,500) $.56 - $.70 (.66)
-----------------
Balances, December 31, 2002 764,500 .59
Granted 112,000 $.31 - $.39 .34
Canceled (74,500) $.51 - $1.43 (.67)
-----------------
Balances, December 31, 2003 802,000 .55
Granted 63,151 $.15 - $.59 .32
Exercised (9,000) $.31 - $.63 (.48)
Canceled (65,000) $.31 - $1.29 (.60)
-----------------
Balances, December 31, 2004 791,151 .53
=================
The following table summarizes information about stock options under the
plan at December 31, 2004:
Outstanding Exercisable
-------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ -------------- -------------- --------------- ----------- -----------
0.15 to 0.44 387,151 4.5 years 0.39 342,041 0.41
0.51 to 0.84 396,000 5.5 years 0.64 383,665 0.64
1.29 to 1.44 8,000 5.0 years 1.36 8,000 1.36
At December 31, 2004, options for 733,706 shares were exercisable under
the 1996 Plan. There were 201,849 shares available for future grant.
The weighted-average grant-date fair value of options granted during 2004,
2003, and 2002 were $0.32, $0.34, and $0.51, respectively.
1994 Stock Option and Grant Plan
In April 1994, the Company authorized 700,000 shares of Common Stock for
issuance under its 1994 Stock Option and Grant Plan ("1994 Plan") to
employees, consultants and contractors of the Company. The Plan was
amended in 2002 to permit grants to employees who were also members of the
board of directors.
The options are granted to purchase Common Stock at the fair market value
on the date of grant or at other prices as determined by the Board of
Directors ("the Board"). Options issued under the 1994 Plan become
exercisable in one or more installments during its term and the right to
exercise may be cumulative, as determined by the Board. Options expire as
determined by the Board, but not more than 10 years after the date of
grant.
30
Details of activity under the 1994 Plan are as follows:
-----------------------------------------------------------------------------------------------------------
Weighted Average
Stock Options Outstanding Exercise Price Exercise Price
-----------------------------------------------------------------------------------------------------------
Balances, January 1, 2002 320,750 .52
Granted 34,000 $.35 .35
Canceled (96,500) $.63 (.63)
--------------------
Balances, December 31, 2002 258,250 .46
Granted 78,849 $.31 - $.35 .34
Exercised (13,000) $.34 (.34)
Canceled (34,250) $.34 - $.66 (.51)
--------------------
Balances, December 31, 2003 289,849 .43
Granted 14,849 $.15 .15
Exercised (6,000) $.34 - $.35 .35
Canceled (14,849) $.31 - $.63 .37
--------------------
Balances, December 31, 2004 283,849 .42
====================
-----------------------------------------------------------------------------------------------------------
Weighted Average
Stock Grants Grant Price Exercise Price
-----------------------------------------------------------------------------------------------------------
Balances, January 1, 2002 83,166 $.84 - $1.13 $1.66
Granted/Canceled -- -- --
--------------------
Balances, December 31, 2002 83,166 1.66
Granted/Canceled -- -- --
--------------------
Balances, December 31, 2003 83,166 1.66
Granted/Canceled -- -- --
--------------------
Balances, December 31, 2004 83,166 1.66
====================
The following table summarizes information about stock options under the
1994 Plan at December 31, 2004:
Outstanding Exercisable
-------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ -------------- -------------- --------------- ----------- -----------
0.15 to 0.35 207,349 4.6 years 0.33 178,783 0.35
0.56 to 0.66 76,500 3.3 years 0.65 75,875 0.65
The weighted-average grant-date fair value of options granted during 2004,
2003, and 2002 were $.15, $.34, and $.35, respectively.
At December 31, 2004, options to purchase 254,658 shares of Common Stock
were exercisable and no shares were available for future grant under the
1994 Plan.
1993 Stock Option Plan
In May 1994, the Company authorized 235,000 shares of Common Stock for
issuance under its 1993 Stock Option Plan ("1993 Plan") as incentive or
non-qualified stock options. The Company grants nonqualified stock options
to officers, directors and employees and incentive stock options may be
granted to employees under the 1993 Plan.
31
The options are granted to purchase Common Stock at the fair market value
on the grant date or at other prices as determined by the Board of
Directors. The option-vesting period is determined at the time of each
grant, and all options expire two to ten years from the grant date.
A summary of the 1993 Plan stock option activity follows:
-------------------------------------------------------------------------------------------------------
Outstanding Weighted Avg.
Shares Exercise Price Exercise Price
-------------------------------------------------------------------------------------------------------
Balances, January 1, 2002 79,800 .47
Granted/Canceled/Exercised 0 $ - --
-----------------
Balances, December 31, 2002 79,800 .47
Granted 11,675 $.31 .31
Canceled (11,675) $.44 - $2.06 (.52)
-----------------
Balances, December 31, 2003 79,800 .44
Canceled (13,500) $.31 - $.34 .32
-----------------
Balances, December 31, 2004 66,300 .46
=================
32
The following table summarizes information about stock options under the plan at
December 31, 2004.
Outstanding Exercisable
-------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------ -------------- -------------- --------------- ----------- -----------
0.31 to 0.44 61,300 2.0 years 0.43 60,463 0.44
0.56 to 0.75 4,500 2.6 years 0.73 4,500 0.73
1.38 to 2.06 500 1.0 years 1.72 500 1.72
There were no options granted during 2004. At December 31, 2004, options
for 64,683 shares were exercisable under the 1993 Plan. There were no
shares available for future grant under the 1993 Plan.
Common Stock Warrants
On April 1, 2003, in connection with obtaining the line of credit -
related parties, the Company issued warrants to the owners of the lender
to purchase 90,000 shares of Common Stock at an exercise price of $0.18
per share, that price being equal to 80% of the fair market value of the
Common Stock on March 31, 2003.
Common Stock Reserved
Common Stock reserved at December 31, 2004 was as follows:
1996 Equity Incentive Plan 993,000
1994 Stock Option and Grant Plan 283,849
1993 Stock Option Plan 65,800
---------
1,342,649
=========
6. INCOME TAXES
The provisions (credit) for income taxes for the years ended December 31,
consists of:
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ -- $ -- $ --
State -- -- --
------------ ------------ ------------
Total current -- -- --
------------ ------------ ------------
Deferred:
Federal 60,000 (10,000) --
State -- -- --
------------ ------------ ------------
Total deferred 60,000 (10,000) --
------------ ------------ ------------
60,000 $ (10,000) $ --
============ ============ ============
33
The following is a reconciliation of statutory federal income taxes to the
actual provision (credit) for income taxes:
2004 2003 2002
--------- --------- ---------
Federal income taxes at statutory rate $(362,000) $ 29,000 $ (96,000)
Non-deductible expenses 7,000 7,000 7,000
Increase (decrease) in taxes resulting
from state income taxes (33,000) 3,000 (9,000)
Increase (decrease) in deferred tax
asset valuation allowance 465,000 (52,000) 101,000
Other, net (17,000) 3,000 (3,000)
--------- --------- ---------
Provision/(credit) for income taxes $ 60,000 $ (10,000) $ --
========= ========= =========
The components of the net deferred tax (liability) asset recognized in the
accompanying balance sheets are as follows:
2004 2003
----------- -----------
Deferred tax liability $ (4,000) $ (12,000)
Deferred tax asset 2,554,000 2,156,000
Valuation allowance (2,550,000) (2,084,000)
----------- -----------
$ 0 $ 60,000
=========== ===========
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax asset and their approximate tax
effects are as follows:
2004 2003
----------- -----------
Future income
(deductions):
Net operating loss $ 2,553,000 $ 2,147,000
Allowance for
doubtful accounts 1,000 8,000
Depreciation 0 1,000
Other, net (4,000) (12,000)
----------- -----------
$ 2,550,000 $ 2,144,000
=========== ===========
The Company has net operating loss carry forwards for federal income tax
purposes of approximately $6,584,000. These carry forwards expire on
varying dates through 2024.
7. EMPLOYEE BENEFIT PLAN
The Company has a Cash or Deferred Profit Sharing Plan ("the 401(k)
Plan"). The 401(k) Plan is designed to qualify under Section 401(k) of the
Internal Revenue Code and allows the Company to make discretionary
contributions as determined by the Company's Board of Directors. For the
years ended December 31, 2004, 2003, and 2002, the Company contributed
$2,954, $3,225, and $4,923 to the 401(k) Plan.
34
8. COMMITMENTS AND CONTINGENCIES
At December 31, 2004 and 2003, equipment with a net book value of $2,254
and $7,436, net of accumulated amortization of $8,863 and $19,827,
respectively, has been leased under capital leases.
The Company leases its executive offices under a noncancelable-operating
lease, which expires in August 2008. Total rent expense for the years
ended December 31, 2004, 2003 and 2002 was $81,847, $76,352, and $89,306
respectively.
Future minimum payments for lease obligations are as follows:
Capital Operating
--------- ---------
2005 5,668 71,487
2006 5,250 88,335
2007 658 91,067
2008 55 61,925
--------- ---------
Total minimum lease payments 11,631 $ 312,814
=========
Amount representing interest (2,196)
---------
Present value of min. lease payments 9,435
Current portion (4,124)
---------
Long-term portion $ 5,311
=========
The Company has bonus agreements with two officers that provide for
quarterly bonuses of 5% and 4%, respectively, of the Company's pre-tax
profits. The Company expensed bonuses of $0, $9,449, and $0, under these
agreements for the years ended December 31, 2004, 2003, and 2002,
respectively.
9. FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
following methods and assumptions were used to estimate the fair value of
each financial instrument for which it is practicable to estimate that
value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
Debt
The fair value of the Company's debt is estimated based on borrowing rates
currently available to the Company for bank loans with similar terms and
maturities.
35
The estimated fair values of the Company's financial instruments at
December 31, 2004 are as follows:
Carrying
Amount Fair Value
----------- -----------
Assets:
Cash and cash equivalents $ 50,503 $ 50,503
Receivables $ 82,244 $ 82,244
Liabilities:
Accounts Payable $ 60,002 $ 60,002
Line of Credit-bank $ 172,300 $ 172,300
Line of Credit-related parties $ 197,772 $ 223,600
The estimated fair values of the Company's financial instruments at
December 31, 2003 are as follows:
Carrying
Amount Fair Value
----------- -----------
Assets:
Cash and cash equivalents $ 143,505 $ 143,505
Receivables $ 628,848 $ 628,848
Liabilities:
Accounts Payable $ 162,255 $ 162,255
Line of Credit-bank $ 139,314 $ 139,314
Line of Credit-related parties $ 54,600 $ 54,600
10. SEGMENT INFORMATION
The Company operates in one industry segment consisting of the development
and marketing of electronic document image management and retrieval
systems. The Company's technologies are managed as one segment because it
offers similar products in similar markets and the factors determining
strategic decisions are comparable for all products and markets.
Sales to foreign markets totaled $35,471, $35,556, and $38,197 for the
years ending December 31, 2004, 2003, and 2002, respectively.
36
11. LIQUIDITY
The Company's cash and cash equivalents decreased $93,002 during the year
ended December 31, 2004 to approximately $51,000 at December 31, 2004.
During 2004, the Company incurred cash expenditures for deferred
development costs of approximately $267,000. As of December 31, 2004, the
Company had deficit working capital of approximately $789,000. At December
31, 2004, current liabilities included deferred revenue of approximately
$310,000, which will be earned throughout calendar year 2004 and does not
require additional direct cash flow needs to be earned.
At December 31, 2004, the Company's line of credit with a bank had a
balance of $172,300 and the Company's line of credit with a related party
had a balance of $223,600. Subsequent to December 31, 2004, the bank
notified the Company that it would not be renewing the line of credit in
February, 2005. The line is collateralized by accounts receivable and
general intangibles of the Company and bears interest at prime plus 1.75%
not to exceed 18%. During March 2005, the bank line of credit was amended
to extend the due date until April 15, 2005 and reduce the line to
$162,300. Currently, the Company is in negotiations with the bank to
implement a payment plan that will amortize the debt over a 48-month
period, with a new maturity date of April 15, 2006.
Additionally, during March 2005, the related party line of credit was
amended to extend the due date until June 30, 2007, or an earlier date as
mutually agreed upon by the Company and DEMALE, and increase the line to
$500,000. The line is collateralized by all accounts receivable and
general intangibles of the Company. As of December 31, 2004, the Company
had no material commitments for capital expenditures to be made during
calendar 2005.
As a result of the Company's operating losses in 2004 and the $392,000
award against it in the Reynolds arbitration, the Company's capital
resources have been stretched to unprecedented lengths. The Company cannot
bear any significant operating or other losses in 2005 if it is to
survive. While preliminary indications are that the Company has not
incurred such a significant loss in the first quarter of 2005, the Company
still requires the continuing forbearance of its bank, which has already
declined to renew the $162,000 owed on its line of credit, and the
continued support of DEMALE, LLC, which the Company owes $468,000 as of
March 31, 2005. There is no assurance that such forbearance or support
will continue or that the Company will not incur additional operating
losses. Accordingly, unless the Company can obtain additional capital to
cover future losses, if the Company incurs additional losses or otherwise
experiences negative cash flow, there is a substantial risk that the
Company will not be able to continue as a going concern.
37
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
Audit Committee, Board of Directors and Shareholders
1mage Software, Inc.
Englewood, Colorado
In connection with our audit of the financial statements of 1mage Software, Inc.
for each of the three years in the period ended December 31, 2004, we have also
audited the following financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits of the basic financial statements. The schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and regulations
and is not a required part of the financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
BKD, LLP
Denver, Colorado
February 25, 2005
38
1mage Software, Inc.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Deductions
Additions Accounts
Balance at charged to: charged to:
beginning of Costs and Balance at end
period expenses Allowance of period
-------------- -------------- ---------------- --------------
For the Year Ended December 31, 2004:
Allowance for Doubtful Accounts $ 20,000 $ 45,956 $ 62,206 $ 3,750
For the Year Ended December 31, 2003:
Allowance for Doubtful Accounts $ 10,000 $ 43,450 $ 33,450 $ 20,000
For the Year Ended December 31, 2002:
Allowance for Doubtful Accounts $ 10,000 $ 34,850 $ 34,850 $ 10,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period reported on in this report, the Company
has undertaken an evaluation under the supervision and with the
participation of management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant
to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective, in all material respects, with respect to the recording,
processing, summarizing and reporting, within the time periods specified
in the SEC's rules and forms, of information required to be disclosed by
the Company in the reports that it files or submits under the Exchange
Act.
There have been no significant changes in the Company's internal
controls during the quarter ended December 31, 2004, or in other factors
that could significantly affect internal controls subsequent to the date
of the evaluation described above.
39
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the Company,
Executive Officers and Directors:
Period Served as All Positions and
Director of the Offices Held
Name Age Company With the Company
- --------------------------------------------------------------------------------
David R. DeYoung 60 Since 1981 President, Chief Executive
Officer and Director
Mary Anne DeYoung 51 Since 1994 Treasurer, Chief Financial
Officer, Asst. Secretary
and Director
Robert Wiegand II 58 Since 1992 Secretary and Director
John G. Mazza 59 Since 2003 Director
Spencer D. Lehman 69 Since 2004 Director
David R. DeYoung - Chairman, President, Chief Executive Officer and Director
Mr. DeYoung has been President, Chief Executive Officer and a Director of
the Company since its formation in 1981. He served in similar capacities with
the Company's predecessor corporation from 1979 to 1981. He holds a Bachelor of
Science Degree in Business Administration and Computer Science from California
State Polytechnic University. Mr. DeYoung is the spouse of Mary Anne DeYoung.
Mr. DeYoung owns a one fourth membership interest in DEMALE, LLC, which has
extended a $500,000 convertible line of credit to the Company, under which the
Company owed DEMALE $468,000 plus interest as of March 31, 2005.
Mary Anne DeYoung - Treasurer, Chief Financial Officer, Assistant Secretary and
Director
Ms. DeYoung was elected to the Board of Directors in April 1996. Ms.
DeYoung was appointed Treasurer, Chief Financial Officer and Assistant Secretary
of the Company on December 15, 1994. Ms. DeYoung has served as Vice President,
Finance and Administration since July 1986. Ms. DeYoung joined the Company as
Controller in April 1981. From 1975 to 1981, Ms. DeYoung was a systems analyst
with Arthur Andersen LLP, a financial analyst, and an independent financial
consultant. Ms. DeYoung holds a Bachelor of Science Degree in Accounting from
the University of Santa Clara. Ms. DeYoung is the spouse of David R. DeYoung.
Robert Wiegand II - Secretary and Director
Mr. Wiegand was elected to the Board of Directors in July 1992. Mr.
Wiegand was appointed to the office of Secretary of the Company on March 1,
1994. Mr. Wiegand is presently a lawyer in private practice. From January 15,
1992 to December 26, 1992, he was Vice-President of Administration for Rose
Manufacturing Co., a privately held manufacturer of safety equipment based in
Englewood, Colorado. Mr. Wiegand has practiced law for 23 years, and prior to
joining Rose Manufacturing, was special counsel with Pendleton & Sabian, P.C., a
law firm in Denver. Mr. Wiegand graduated Phi Beta Kappa from the Tulane
University of Louisiana in 1970 and went on to receive a law degree and was
admitted to practice in Louisiana in 1972 and Colorado in 1977. Since 1976, Mr.
Wiegand's practice has been limited to securities offerings, estate planning,
business organizations and tax law. In addition to membership in six bar
Associations, Mr. Wiegand has been admitted to practice before the U.S. Supreme
Court, the U.S. District Court (Colorado and ED-Louisiana) and before the U.S.
Court of Appeals (5th Circuit). Mr. Wiegand is a minority interest holder in
Gold King Investments LLC, who owns a one fourth membership interest in DEMALE,
LLC.
40
John G. Mazza - Director
Mr. Mazza was elected to the Board of Directors in March 2003. Mr. Mazza
is currently the President of Drake Holding Corp. and Drake Energy Corp., both
Nevada corporations and brokerage firms, located in Malibu, California, and has
served in that capacity since 1984 and 1990, respectively. From 1999 to 2001,
Mr. Mazza was a founder, Secretary and director of Aoptix Technologies Inc., a
manufacturer of free space optical laser data and telecommunication transmission
systems. From 1969 to 1984 Mr. Mazza held various senior management positions
with William O'Neil and Co. Incorporated, a New York Stock Exchange member firm
and O'Neil Data Systems, Inc., a brokerage company. In total, Mr. Mazza has been
associated with the securities industry for over 30 years. Mr. Mazza holds a
Bachelor of Science degree from Claremont McKenna College and a Masters of
Business Administration from the University of Southern California. Mr. Mazza
owns a one fourth membership interest in DEMALE, LLC.
Spencer D. Lehman - Director
Mr. Lehman was elected to the Board of Directors in February 2004. Mr.
Lehman has been a securities broker with the Shemano Group in Los Angeles,
California since 2002. From 1987 until 2002, Mr. Lehman held various positions
with Drake Capital, another brokerage firm. From 1962 to 1987, Mr. Lehman held
positions at PaineWebber, Dean Witter and Shearson. From 1958 to 1960, Mr.
Lehman served as an officer in the United States Navy. Mr. Lehman holds a degree
in Geology from the University of California- Los Angeles (U.C.L.A.). Mr. Lehman
owns a one fourth membership interest in DEMALE, LLC.
There is no arrangement or understanding between any of the executive
officers and any other persons pursuant to which he or she was or is to be
selected as an executive officer.
Audit Committee Expert
The Company does not have a "financial expert", as defined by the SEC's
rules under Sarbanes-Oxley, serving on the Committee because the Board of
Directors believes that all of the members of the Board, including but not
limited to those serving on the Audit Committee, have sufficient financial
knowledge, experience and sophistication to comprehend and critically analyze
the Company's financial statements and the audit thereof. Accordingly, the Board
has determined that adding a "financial expert" to the Board and the Audit
Committee at this time is not a necessary or productive expenditure of the
Company's limited resources.
Codes of Ethics
The Company has not yet adopted a code of ethics for its principal
executive officer and principal financial officer since they are the Company's
only two executive officers. The Board of Directors will continue to evaluate,
from time to time, whether a code of ethics should be developed and adopted. If
the Company does adopt a code of ethics in the future, in light of the Company's
modest size, it is likely to apply to all employees rather than only executive
officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of the Common
Stock of the Company, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and the exchange on which the Common
Stock is listed for trading. Those persons are required by regulations
promulgated under the Exchange Act to furnish the Company with copies of all
reports filed pursuant to Section 16(a). The Company believes that all Section
16(a) Securities and Exchange Commission filing requirements applicable to the
Company's executive officers and directors for calendar 2004 were timely met.
41
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following sets forth in summary form the compensation received during
each of the Company's last three completed fiscal years by the Chief Executive
Officer of the Company. There were no other Executive Officers serving at the
end of the last fiscal year whose compensation was greater than $100,000.
- ----------------------------------------------------------------------------------------------------------
Long Term All Other
Annual Compensation * Compensation Compensation**
----------------------- ------------- --------------
Salary Bonus Awards
------- ------- -------------
Securities
Underlying
Name and Principal Position Year ($) ($) Options (#) ($)
- ----------------------------------------------------------------------------------------------------------
David R. DeYoung 2004 132,687 0 0 3,792
President, CEO 2003 132,408 5,250 0 1,767
2002 145,578 0 0 3,068
- ----------------------------------------------------------------------------------------------------------
* Mr. DeYoung did not receive additional compensation other than noted above,
the aggregate amount of which was the lesser of either $50,000 or 10% of his
annual salary and bonus.
** Includes insurance premiums paid by the Company for term life and disability
insurance, as well as premiums paid for a key-man life insurance policy which
has the death benefit assigned to the Company and the cash value of the policy
intended to accrue for the benefit of Mr. DeYoung.
Option Grants for Fiscal Year Ended December 31, 2004
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named Executive
Officers:
- ----------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Percent of Total Exercise
Options Options Granted or Base
Granted to Employees in Price Grant Date
Name (#)(1) Fiscal Year ($/Share) Expiration Date Present Value(2)
- ----------------------------------------------------------------------------------------------------------------------------
David R. DeYoung 0 0% $.00 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
(1) There were no option grants to Messr. DeYoung during the fiscal year ended
December 31, 2004.
42
Aggregated Option Exercises For Fiscal Year Ended December 31, 2004
and Year-End Option Values
The following table sets forth information concerning each exercise of
stock options during the last fiscal year by the named Executive Officer and the
fiscal year-end value of unexercised options:
- ----------------------------------------------------------------------------------------------------------------------------
Number of securities underlying Value of unexercised
Shares acquired Value unexercised options at fiscal in-the-money options at
Name on exercise (#) Realized ($) year-end (#) fiscal year-end ($)*
- ----------------------------------------------------------------------------------------------------------------------------
Exercisable/unexercisable Exercisable/unexercisable
- ----------------------------------------------------------------------------------------------------------------------------
D.R. DeYoung 0 $ 0 393,000/0 $ 0/$ 0
- ----------------------------------------------------------------------------------------------------------------------------
*For all the unexercised options held as of December 31, 2004, the aggregate
dollar value is the excess of the market value of the stock underlying those
options over the exercise price of those unexercised options. The price used to
calculate these figures is the closing price as of December 31, 2004 as reported
on the OTCBB, which was $.15 per share.
Equity Compensation Plan Information as of Year End December 31, 2004
Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities
Number of securities to be Weighted average exercise remaining available for future
issued upon exercise of price of outstanding issuance under equity compensation
outstanding options, warrants options, warrants and plans (excluding securities
and rights rights reflected in column (a) )
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,059,300 $ .63 201,849
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders (1) 283,849 $ .37 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,343,149 $ .51 0
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The 1994 Stock Option and Grant Plan, which was adopted by the Company but
not approved by the Company's securities holders, was intended to provide
incentives for selected persons to promote the financial success and progress of
the Company by granting such persons options to purchase shares of Common Stock
of the Company, or through the award of shares of the Company's Common Stock.
The maximum aggregate number of shares of Common Stock subject to the Plan is
700,000. The Plan is administered by the Board of Directors of the Company. The
Plan was amended in 2002 to permit grants to employees who were also members of
the Board. In addition, options for 20,000 shares were granted outside of the
1996 Equity Incentive Plan (which was approved by the shareholders) by the Board
of Directors on December 31, 2003. Those options are treated in all respects as
to terms and conditions as if they were granted under the 1996 Plan.
43
Employment Contracts
Mr. DeYoung, the Company's President and Chief Executive Officer, is
employed pursuant to a three-year employment contract between the Company and
Mr. DeYoung, which has been extended and will expire on October 31, 2005. Since
November 1, 1999, the compensation of Mr. DeYoung has been established under the
terms of this employment contract. The contract calls for an annual base salary,
in an amount determined annually by the Board of Directors, payable
semi-monthly, plus expenses and normal fringe benefits. Mr. DeYoung earns a
bonus of 5% of the Company's pretax earnings, calculated on a quarterly basis.
An annual bonus may be paid to Mr. DeYoung based on the performance of the
Company and at the discretion of the Board of Directors. Mr. DeYoung's
employment contract provides that should his employment be terminated for any
reason other than for cause, he is entitled to a cash severance package equal to
one year's cash compensation. In addition, Mr. DeYoung is entitled to receive a
grant of a sufficient number of ten-year options as are necessary to permit him
to retain the same percentage of beneficial ownership interest in the Company as
he held on December 16, 1996. These grants would be made from the Company's
Equity Incentive Plan at the fair market value of the Common Stock on the date
of grant.
Ms. DeYoung, the Company's Vice President of Finance and Chief Financial
Officer, is employed pursuant to three-year employment contract between the
Company and Ms. DeYoung which has been extended and will expire on October 31,
2005. Her compensation is established under the terms of this employment
contract. The contract calls for an annual base salary, expenses, normal fringe
benefits, as well as a bonus equal to 4% of the Company's pretax earnings,
calculated on a quarterly basis. In addition, Ms. DeYoung's employment contract
provides that should her employment be terminated for any reason other than for
cause, she is entitled to a cash severance package equal to one year's cash
compensation.
DIRECTORS' REMUNERATION
The Company currently pays non-employee Directors $1,500 per quarter plus
specific hourly fees for special meetings or additional participation as a
director. Any director who serves on the Compensation Committee automatically
receives 4,000 options on the last trading day in June pursuant to the Company's
1996 Equity Incentive Option Plan. Accordingly, on June 30, 2004, Messrs.
Wiegand & Lehman, as members of the Compensation Committee, received fully
vested ten year options to purchase 4,000 shares of Common Stock at an exercise
price of $0.59 per share, the closing price on the date of grant.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
.STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth, as far as is known to the Board of
Directors or the management of the Company, the only persons owning on April 1,
2005 more than five percent of the outstanding shares of the Company's Common
Stock. For purposes of this disclosure, the amount of the Company's Common Stock
beneficially owned by each person or entity is the aggregate number of shares of
the Common Stock outstanding on such date plus an amount equal to the aggregate
amount of Common Stock which could be issued upon the exercise of stock options
and warrants within 60 days of such date.
- ----------------------------------------------------------------------------------------------------------------
Beneficial
Name and Address of Beneficial Owner Ownership(1) Percent of Class
- ------------------------------------ ------------ ----------------
David R. DeYoung 1,882,283 (2),(3) 40.3%
6025 So. Quebec Street #300, Englewood, Colorado 80111
Mary Anne DeYoung 402,501 (4) 11.1%
6025 So. Quebec Street #300, Englewood, Colorado 80111
Robert Wiegand II 260,214 (5) 7.3%
5261 So. Quebec Street, Greenwood Village, Colorado 80111
John G. Mazza 1,315,004 (6) 30.7%
6613 Zumirez Drive, Malibu, California 90265
Spencer D. Lehman 1,313,705 (7) 30.7%
26671 Latigo Shores Drive, Malibu, California 90265
DEMALE, LLC 3,740,057 53.1%
26671 Latigo Shores Drive, Malibu, California 90265
Gold King Investments LLC 732,143 (8) 18.1%
5261 So. Quebec Street, Greenwood Village, Colorado 80111
All Executive Officers and Directors as a Group - 5 persons 5,905,849 (9) 74.4%
- ----------------------------------------------------------------------------------------------------------------
(1) Beneficial owners are believed to have sole voting and investment power
with respect to the shares shown unless otherwise indicated.
(2) Includes: 387,625 options and 30,000 warrants to purchase Common Stock.
Also includes 25.4% membership interest in DEMALE, LLC or 949,067 shares.
See EXECUTIVE COMPENSATION - Employment Contract
(3) Excludes: any shares attributable to Mr. DeYoung's right under his
employment contract to maintain his proportional ownership of the Company
under certain circumstances. See EXECUTIVE COMPENSATION - Employment
Contract.
(4) Includes 332,000 options to purchase Common Stock
(5) Includes 79,500 options to purchase Common Stock. Also includes 4.3%
membership interest in DEMALE, LLC or 160,713 shares.
(6) Includes 3,000 options and 30,000 warrants to purchase Common Stock. Also
includes 25.4% membership interest in DEMALE, LLC or 949,067 shares.
(7) Includes 4,000 options and 30,000 warrants to purchase Common Stock. Also
includes 25.4% membership interest in DEMALE, LLC or 949,067 shares.
45
(8) Includes 19.5% membership interest in DEMALE, LLC or 732,143 shares.
(9) Includes 806,125 options and 90,000 warrants to purchase Common Stock.
Also includes 100% membership of DEMALE, LLC or 3,740,057 shares.
Change of Control
As a result of transaction described in the following Item 13. Certain
Relationships and Related Transactions, and in the Company's Form 8-K filed on
April 7, 2005, describing the Amendment to the Company's Revolving Credit
Agreement with DEMALE, LLC, the private lender controlled by affiliates of the
Company, to increase the line of credit by $200,000 to $500,000 and the fixing
of the maximum conversion price at $0.14 per share, DEMALE is now the beneficial
owner of at least 3,571,429 shares, or 52.0% of the outstanding shares as
calculated under Rule 13d-3(a).
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 30, 2003, the Company closed on a Revolving Credit Loan Agreement
dated effective April 1, 2003 (the "Agreement") with DEMALE, LLC, a Colorado
limited liability company ("DEMALE"), under which DEMALE agreed to provide the
Company with a line of credit up to $300,000. At that time, DEMALE had three
members, David R. DeYoung, the Company's President and Chief Executive Officer,
and John G. Mazza and Spencer D. Lehman, both Directors and more than 10%
shareholders. At closing, each of Messrs. DeYoung, Mazza and Lehman received
30,000 shares of Common Stock based on the closing bid price of $0.23 on April
1, 2003, and a warrant to purchase up to an additional 30,000 shares of Common
Stock at $0.18 per share, which price was set by reference to 80% of the closing
bid price on April 1, 2003. In addition, the amount of any outstanding and
unpaid principal and interest on the line of credit could be converted, at
DEMALE's option, into shares of the Company's common stock at a conversion price
equal to 80% of the fair market value of the Company's stock on the date of
conversion. At December 31, 2004, the Company had been advanced $223,600 under
the DEMALE line of credit. On March 31, 2005 Gold King Investments LLC became an
equal member of DEMALE. Mr. Robert Wiegand II, a member of the Company's Board
of Directors, holds a minority interest in Gold King Investments LLC. On March
31, 2005, DEMALE agreed to raise the line to $500,000 and extend the due date to
June 30, 2007. In addition, the conversion price of the debt has been changed to
the lesser of $.14 or 80% of the fair market value. Conversion of the debt into
equity is at the option of DEMALE.
As a result of the amendment of the DEMALE line of credit agreement and
the increase of the amount drawn by the Company under that line of credit to
$468,000 plus interest as of March 31, 2005, DEMALE is now the beneficial owner
of at least 3,571,429 shares, or 52.0% of the outstanding shares as calculated
under Rule 13d-3(a).
Management of the Company is of the opinion that the terms and conditions
of the foregoing transactions were no less favorable for the Company than could
be obtained from unaffiliated third parties.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees paid to BKD, LLP
For the calendar years ended December 31, 2004 and December 31, 2003, BKD,
LLP provided services in the following categories and amounts:
Calendar Year Calendar Year
Ended Ended
12/31/04 12/31/03
-------- --------
Audit Fees(1) $28,050 $24,300
All Other Fees $ 0 $ 0
(1) Represents the aggregate fees billed for professional services rendered
for the audit and/or reviews of the Company's financial statements and in
connection with the Company's statutory and regulatory filings or
engagements.
There were not any non-audit services rendered to the Company by BKD, LLP
in calendar 2004 and 2003. While the Audit Committee has not established formal
policies and procedures concerning pre-approval of audit or non-audit services,
the Company's officers have been informed that all audit and non-audit services
must be approved in advance by the Audit Committee. The establishment of any
such formal policies or procedures in the future is subject to the approval of
the Audit Committee.
47
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
See Financial Statement Index on Page 13
2. Financial Statement Schedules
See Financial Statement Index on Page 13
3. List of Exhibits
Exhibit Number Description and Incorporation by Reference
- -------------- ------------------------------------------
3.1* - Restated Articles of Incorporation of the Company, as
amended.
3.2* - Bylaws of the Company, as amended.
3.3* - Articles of Amendment to the Articles of Incorporation of
the Company dated April 18, 1991
3.4** - Articles of Amendment to the Articles of Incorporation
dated May 21, 1993.
3.4** - Articles of Amendment to the Articles of Incorporation
dated June 28, 1994.
10.5* - UniVerse(TM) Distributor Agreement between INFORMIX
SOFTWARE, INC. and the Company dated May 15, 1991
10.14******* - President Employment Agreement between David R. DeYoung
and the Company dated November 1, 1999.
10.15******* - Chief Financial Officer Employment Agreement between Mary
Anne DeYoung and the Company dated September 1, 1999.
10.21**** - Software License Agreement between Reynolds+Reynolds and
the Company. The grant of confidential treatment for this
exhibit filed separately with the Securities and Exchange
Commission has been agreed to.
10.22*** - 1994 Stock Option and Grant Plan.
10.23** - 1993 Stock Option Plan.
10.24****** - Equity Incentive Plan
10.25******** - Revolving Credit Loan Agreement and Revolving Credit
Master Note dated April 1, 2003 with DEMALE, LLC
10.26********* - Revolving Credit Agreement, Revolving Credit Note and
Business Security and Corporate Resolution for Borrowing
with U.S. Bank, N.A. dated February 24, 2003
23 - Consent of BKD, LLP
31.1 - Certificate of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 - Certificate of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 - Certificate of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
See Index to Financial Statements on Page 13
48
* Filed as an Exhibit to Form S-1 Registration Statement No.
33-44717, on December 23, 1991.
** Filed as an Exhibit to Form S-8 Registration Statement No.
33-86760, on November 29, 1994
*** Filed as an Exhibit to Form S-8 Registration Statement No.
33-78096, on April 22, 1994.
**** Filed as an Exhibit to Form 10-K for the period ended
December 31, 1994.
****** Filed as an Exhibit to Form S-3 Registration Statement No.
333-35265, on September 10, 1997.
******* Filed as an Exhibit to Form 10-K for the period ended
December 31, 2001
******** Filed as an Exhibit to Form 8-K dated April 30, 2003
********* Filed as an Exhibit to Form 10-K for the period ended
December 31, 2003.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
1MAGE SOFTWARE, INC.
By: /s/ David R. DeYoung Date: April 15, 2005
-------------------- --------------
David R. DeYoung
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By: /s/ David R. DeYoung Date: April 15, 2005
-------------------- --------------
David R. DeYoung, President
and Principal Chief Executive Officer
By: /s/ Mary Anne DeYoung Date: April 15, 2005
--------------------- --------------
Mary Anne DeYoung
Vice President, Finance
Principal and Accounting Officer
By: /s/ Robert Wiegand, II Date: April 15, 2005
---------------------- --------------
Robert Wiegand, II
Director and Secretary
By: /s/ John G. Mazza Date: April 15, 2005
----------------- --------------
John G. Mazza
Director
By: /s/ Spencer D. Lehman Date: April 15, 2005
--------------------- --------------
Spencer D. Lehman
Director
50