SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
__X__Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the Fiscal Year Ended March 31, 1996
_____Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from ____________ to ____________
Commission File Number ___0-26336___
__________________________New Paradigm Software Corp.________________________
(Name of Small Business Issuer in Its Charter)
____________NEW YORK___________ ________13-3725764________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
___335 Madison Avenue, 11th Fl. New York, NY___ ___10017___
(Address of Principal Executive Offices) (zip code)
_______________________________(212) 557-0933______________________________
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
___________________________________________________________________________
(Title of Class)
Securities Registered under Section 12(g) of the Exchange Act:
____________________Common Stock, par value $.01 per share__________________
(Title of Class)
______________________________Redeemable Warrants___________________________
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 requirement for the past
90 days.
Yes__X__ No_____
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained within this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this form 10-KSB
Yes_____ No_____
State the issuer's revenues for its most recent fiscal year. ___$425,952___
The aggregate market value of Common stock held by non-affiliates of the
Registrant based on the closing [sale] price on the Nasdaq SmallCap
Market on June 28, 1996 was $4,395,328.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a Court.
Yes_____ No__X__Not Applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
At June 28, 1996 there were an aggregate of 2,446,729 shares of Common Stock
of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one)
Yes_______ No______
TABLE OF CONTENTS
ITEM PAGE
4PART I
1. Description of Business 4
2. Description of Property 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
7. Financial Statements 19
8. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 19
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 20
10. Executive Compensation 22
11. Security Ownership of Certain Beneficial Owners
and Management 25
12. Certain Relationships and Related Transactions 27
PART IV
13. Exhibits and Reports on Form 8-K 29
PART I
Item 1. Description of Business
General
New Paradigm is engaged in the development, marketing,
licensing and support of its COPERNICUS (a Registered Trademark)
software for large-scale computer users. Most large organizations have many
different computer systems. The need to pass information
among those often incompatible systems is growing rapidly.
Passing information among disparate computer systems is
called "systems integration." COPERNICUS automates systems
integration by converting the data entered into or generated
by one program or system into the form needed by another
program or system. The Company believes that its customers
can achieve systems integration using COPERNICUS in a more
timely and cost-effective way than the traditional approach
of writing custom software on a case-by-case basis. An
application for a United States patent on COPERNICUS is
pending. See "Description of Business -- Intellectual
Property Rights."
COPERNICUS replaces the laborious construction of custom
systems integration programs with a method of systems
integration that is activated by pointing and clicking a
"mouse" in the same manner as with widely used consumer and
business software programs. The Company believes COPERNICUS
can bring improvements in productivity to systems
integration comparable to those produced by using a personal
computer spreadsheet to replace manual calculations.
The Company is marketing COPERNICUS to large-scale computer
users, both directly with its own sales force and indirectly
through systems integrators and other software vendors.
Systems integrators may market COPERNICUS in connection with
their services, and software companies may act as value-
added resellers ("VARs") of COPERNICUS by incorporating it
into their own software products. Royalties from VARs are
based on sales of their products. COPERNICUS will allow a
VAR's software and its customers' software to work together.
The Company has entered into the following agreements to
license or distribute COPERNICUS (see "Description of
Business -- COPERNICUS" and "-- Marketing and Distribution -
- - - COPERNICUS.")
- License agreements with Marriott International, Inc.,
and its subsidiaries and affiliates (collectively
"Marriott"), New York Life Insurance Company,
Transquest Information Solutions ("Transquest"),
Massachusetts Institute of Technology ("MIT"), Bell
Atlantic and the Canadian Imperial Bank of Commerce
("CIBC"). These agreements permit the above named
entities to use COPERNICUS. The fees collected from
these licenses vary depending on the scope of the
license.
- An agreement to distribute COPERNICUS in Canada with
New Venture Technologies Ltd., a software reseller and
systems integration consulting company, an agreement
with EXEL to distribute COPERNICUS in the United
Kingdom and an agreement with Rivergate Technologies to
distribute COPERNICUS for the Company worldwide
- A License with Praxis International, Inc. ("Praxis")
to incorporate COPERNICUS into its OmniReplicator
(a Trademark) software product, which is designed to permit the
duplication of databases on different types of computer
systems.
COPERNICUS derives its productivity gains from the use of an
innovative, proprietary approach to developing computer
programs (the "New Paradigm Architecture"). The Company
plans to develop other software ("New Paradigm
Applications") by building software for, and acquiring
existing software and adapting it to, the New Paradigm
Architecture. Management believes that future New Paradigm
Applications, which could be modified by pointing and
clicking a mouse as with COPERNICUS, will continue to be
easier to adapt to meet changing business requirements than
programs created using traditional means.
The Company's strategic objective is to establish the New
Paradigm Architecture as a widely accepted approach to
developing software for large organizations. The New
Paradigm Architecture is designed so that once a customer
has installed COPERNICUS, or any other New Paradigm
Application, that customer will be able to perform
additional tasks by purchasing or developing discrete new
add-on software components. The Company believes that it can
generate significant revenue by developing these software
components for license to users of COPERNICUS or other New
Paradigm Applications. The Company does not expect to be the
exclusive source of this additional software and will
encourage its development by customers or other software
vendors in order to widen the acceptance of the New Paradigm
Architecture. No add-on software components are now
available. One of the Company's strategies to attempt to
achieve rapid growth and acceptance of the New Paradigm
Architecture is predicated upon the acquisition of one or
more software products into which the New Paradigm
Architecture could be incorporated or software companies
which could incorporate the New Paradigm Architecture into
their software products. There is no current agreement,
arrangement or understanding relating to any acquisition.
See "Description of Business -- Marketing and Distribution -
- - - New Paradigm Architecture."
The Company has also established two subsidiaries, New
Paradigm Commerce Inc. ("NPC"), formally New Paradigm Golden-Link
which provides electronic data
interchange ("EDI") services (the conveying of business
documents electronically,) and New Paradigm Inter-Link,
Inc., which was created to research and develop commercial
applications for the Internet.
History
The New Paradigm Architecture and COPERNICUS were invented
by John Brann, a director, former officer and consultant of
the Company, prior to his employment with the Company and
prior to his earlier employment with to Management
Technologies, Inc. ("MTI"). Mr. Brann assigned all of his
right, title and interest in and to COPERNICUS and the New
Paradigm Architecture to Lancer Holdings Inc. ("Lancer"),
formerly called Mark Blundell & Associates, Inc., a New York
corporation controlled by John Brann and Mark Blundell, who
is a director and principal executive officer of the
Company. Lancer was formed in July 1992. Pursuant to a
license agreement dated as of January 13, 1993, Lancer
granted to MTI, where both John Brann and Mark Blundell were
then employed, a license to distribute software
incorporating the New Paradigm Architecture to banks on an
exclusive basis and to distribute such software to other
customers on a non-exclusive basis. MTI funded the
development of a prototype of COPERNICUS and began
conducting several pilot programs in the banking industry.
The Company was organized in July 1993 to further develop
the New Paradigm Architecture and to develop and market
products outside the banking industry. The Company was
initially capitalized by Lancer.
In connection with the formation of the Company both Lancer
and MTI transferred their licenses to the Company and the
Company granted to MTI a non-exclusive license to distribute
software incorporating the New Paradigm Architecture to
banks. John Brann and Mark Blundell became executive
officers of the Company and the infrastructure and the
support for the New Paradigm Architecture and any New
Paradigm Applications were transferred from MTI to the
Company. As a part of a strategic shift in MTI's operations,
MTI determined in August 1994 to cease marketing products
using the New Paradigm Architecture and MTI's remaining
license was terminated. The Company acquired the New
Paradigm Architecture and COPERNICUS and related
intellectual property rights from Lancer as of March 22,
1995. Neither Lancer nor MTI retains any rights to the New
Paradigm Architecture or COPERNICUS. See "Certain Relationships
and Related Transactions."
On October 9, 1995 the Company acquired from Electric Magic Company
Netphone product, which permits users of Macintosh (a Registered Trademark)
to conductworldwide long distance telephone conversations over the
Internet. While the acquisition of
Netphone was not part of the Company's strategic goal of
broadening the New Paradigm Architecture, it represented an
opportunity to acquire a functional product in the expanding
Internet market. The Company subsequently received an offer
from the Camelot Corporation ("Camelot") to acquire these
assets from the Company for a package of stock and cash
comparable to the acquisition price paid by the Comapany and an agreement to
pay the Company a royalty for each unit sold by Camelot in the
future. This allows the Company to benefit from any success
Netphone may experience from the wider distribution of the
product through CamelotOs existing retail marketing
channels. There can be no assurance that the Company will
receive any significant revenues from this royalty arrangement.
NPC began operations in May 1995. NPIL began operations December 1995.
Market Need For COPERNICUS
Over the past 30 years, business organizations have
installed numerous independently developed software programs
to accomplish a myriad of business and other tasks. Often,
these various programs were not designed to exchange
information with other programs. With the increasing
reliance of businesses on computer systems, this
incompatibility has become a significant problem,
particularly for large organizations with multiple computer
systems that need to be linked. This problem has been
exacerbated by the proliferation over the past several years
of personal computers and relatively inexpensive and easy-to-
use business software products, which are often incompatible
with existing software and with each other.
As a result, a flexible and cost-effective means of
achieving systems integration or interoperability (that is,
the integration of disparate computer programs, whether on
the same or different hardware) has become vital to many
large organizations, particularly those that have sizable
amounts invested in established computer systems.
Interoperability permits new (often, "off-the-shelf")
software to be used together with existing software that
would otherwise be incompatible with the new software. The
integration of disparate computer systems and programs
allows organizations to obtain information in a less time-
consuming manner. Interoperability also eliminates the need
to enter manually the same data into different computer
systems, thereby increasing the accuracy of the information
and decreasing the risk of error. According to a survey of
146 United States information systems heads and other
business heads published in Computer World in September
1994, 75% of respondents stated that interoperability was
either of utmost importance or very important to their
organization's future information technology plans.
Traditionally, systems integration has been achieved through
the use of custom systems integration software developed by
computer programmers on a case-by-case basis. Such custom
software translates the data from the first program into a
format understood by the second program. For example, one
program may interpret the date "05.12.95" as May 12, 1995
while another may interpret it as December 5, 1995. Large
organizations typically use systems integration consultants
or other programmers to develop and test custom systems
integration software. The systems integration consultants or
other programmers first must identify precisely the position
of, and relationship between, the data to be communicated
between the programs. Then, they must develop and test
software separately for each pair of programs to be linked.
In the event of any change in the sending or receiving
programs (e.g., to respond to changing business needs), each
custom systems integration program linked to the changed
program would need to be retested and, most likely,
modified. Thus, as the number of programs needing to be
linked increases, the resources required to develop and
maintain these links increases as well, and may strain or
exceed the ability of systems integration consultants and in-
house programmers to maintain the necessary links between
programs and to integrate new products into established
computer systems.
If the two programs to be linked reside on different
computers, it will also be necessary to establish a physical
link between the two computers so that each can send and/or
receive messages from each other. This physical link is
readily achieved by using established commercially available
communications products.
The Company believes that using COPERNICUS to achieve
systems integration is less costly, less time-consuming and
more flexible than using custom software. Although there are
commercially available products that translate data for
certain specified software packages, unlike COPERNICUS, they
require programming to translate data for other software
packages. The Company is aware of no other general
application product that translates data from one program
into a format readily understood by another program without
the need to generate code.
COPERNICUS
COPERNICUS is a software product that assists customers to
achieve systems integration. The Company believes that
customers using COPERNICUS can achieve systems integration
in a more timely and cost-effective way than the traditional
approach of writing custom systems integration software on a
case by case basis. COPERNICUS converts the data input into
or generated by one program into the flow of data needed by
another program. This is accomplished by first linking
COPERNICUS to both programs using established commercially
available communications products. Through this link,
COPERNICUS can send selected data from one program to any
number of other programs. COPERNICUS receives data from the
sending program in its normal output format (by printer
output, terminal emulation, on-line files, etc.). The data
is then converted into the format required by the receiving
program for its normal input (by file input, data feed,
terminal emulation, etc.). The receiving program can then
process the data as if it were its own.
COPERNICUS permits the exchange of data between the programs
with little or no new programming and without the need to
modify the existing programs. To use COPERNICUS, it is
necessary to identify precisely the format of the data
generated by the sending program and the data required by
the receiving program and the relationship between the data,
a process that the Company believes may take up to six
months (depending on the complexity of the customer's
intended use of COPERNICUS, the documentation and resources
supplied by the customer and the number of sites at which
COPERNICUS is installed). These same steps would also be
required to design custom systems integration software if
COPERNICUS were not used. Once this information has been
obtained, the user enters this information into COPERNICUS
by selecting, with a mouse, from a list of data translation
operations on a computer screen. After this initial setup is
complete, COPERNICUS can be connected to each program to
achieve systems integration.
COPERNICUS differs from software products such as Momentum-
XIPC (Trademark), IBM MQ-Series (Trademark) and the Covia Communications
Integrator (Registered), which allow programmers to build new applications
which can communicate with each other (such products are sometimes
referred to as "middleware"). COPERNICUS allows existing
applications (which were separately constructed without
regard to the ability to exchange data with each other) to
exchange data. The Company does not believe that COPERNICUS
competes with these middleware products, and, in fact,
certain of these products are incorporated into COPERNICUS
under license from their owners.
COPERNICUS may also be used to facilitate EDI between a
computer program at one organization and a program at
another organization. In particular, several large apparel
retailers require all their suppliers to accept and confirm
orders using EDI. See "New Paradigm Commerce."
COPERNICUS can be installed on many computer hardware and
operating system configurations or environments and is
currently available for, Windows NT (Registered) , HP-UX (Registered),
Digital Unix, Solaris (Registered) and AIX (Hewlett-Packard's, Digital's,
Sun Microsystems' and IBM's implementations of UNIX). COPERNICUS
can also be installed in other UNIX implementations, DEC's
VMS (Registered) and IBM's OS/2 (Registered), among others. COPERNICUS
cannot currently be installed in all computer hardware and
operating system configurations ("Computer Environments").
The Company does not intend to develop versions of
COPERNICUS which can be installed on Computer Environments
that it believes will not be profitable (for example, on
computer hardware that it considers to be obsolete). The
Company believes that if its customer does not have a
Computer Environment in which COPERNICUS can be installed,
an appropriate Computer Environment can be acquired for
$20,000 or less, based on currently prevailing prices. The
Company believes that, once installed in an appropriate
computer environment, COPERNICUS can be used to link
programs residing in any computer environment, including
ones in which it cannot be installed.
COPERNICUS -- ONE EXAMPLE
[INSERT PICTURE]
In the upper left hand corner of the picture is a graphic of a PC
network which is running Application A. This application is a
Decision Support System which handles room rates and reservations
for a hotel chain.
In the lower right hand corner is a graphic of an IBM Mainframe which
is running the hotel management property software which is an
entirely different application, Application B.
In the center of the picture is an HP-UX computer which is running
COPERNICUS. Two bi-directional arrows point from this graphic to the
the other two graphics to illustrate COPERNIUCUS' ability to capture,
translate, and then pass information between these two disparate
applications on differing platforms. It is displayed in the picture
that COPERNICUS communicates with the applications over existing network
lines.
The foregoing example illustrates how an existing organization with
separate systems for hotel reservations and hotel property management
integrate the two using COPERNICUS. Each of the systems sits on a
different Computer Environment. Data is transferred to COPERNICUS
using the customer's existing network. COPERNICUS then formats the
data and posts that data to the appropriate system in the appropriate
format.
The Company has licensed six direct end-user licensees of
COPERNICUS. The fees from the licensing of COPERNICUS vary
with the complexity of the customer's intended use of
COPERNICUS, the documentation and resources supplied by the
customer and the number of sites at which COPERNICUS is
installed. The Company currently generates revenue from
royalties for product licenses and consulting, training and
maintenance fees. Such revenues may be structured as up-
front fees, periodic or transaction-based charges or a
combination of them. The Company expects that for each
complete end-user license of COPERNICUS aggregate royalties
and fees paid by each customer will be at least $100,000,
making COPERNICUS an appropriate product only for large-
scale computer users. There can be no assurance that factors
beyond the Company's control such as competition,
technological change or customer resistance will not prevent
the Company from achieving revenues at this level.
The Company has signed several different types of end-user
license agreements. COPERNICUS has been licensed to three direct
end-users on a per Computer Environment per "site"
basis. Each of these licenses is expected to generate at
least $100,000 in the first 12 months of operation.
Transquest (a joint venture between AT&T and Delta Airlines), has
licensed COPERNICUS on an 'enterprise wide' basis for use in Delta
Airlines. This allows Delta to use COPERNICUS on a world
wide basis. The Company expects this license to generate
approximately $250,000 in the first 12 months and
approximately $500,000 in the next five years. MIT received
an educational license of COPERNICUS at reduced fees. In
addition MIT undertook certain development tasks for the
Company. Bell Atlantic opted to buy a portion of the
COPERNICUS product. This license generated $35,000 over the
first 12 months.
Each of the Company's end-users currently has entered into a
maintenance contract with the Company. Maintenance contracts
require annual payments of approximately $15,000 per
Computer Environment. The Company expects that such
contracts signed with its current users will generate
approximately $125,000 in the fiscal year ended March 31,
1997.
The New Paradigm Architecture
The New Paradigm Architecture is an innovative, proprietary
method of creating computer programs. It provides the tools
necessary to construct a computer program from individual
building blocks of computer software, known as "Methods."
Methods are designed to handle routine tasks, such as
storing and retrieving data from a database, or specific
business tasks, such as posting an entry to a ledger,
sending a fax or sending an instruction to another computer
system. Every New Paradigm Application consists of a
database in which the programmer identifies the Methods that
make up a New Paradigm Application (the "Metabase") and a
control program. By referring to the Metabase, the control
program determines which Methods are to be used and the
sequence in which they are to be used in the New Paradigm
Application. Information in the Metabase may be changed with
the use of a mouse in much the same manner as data is
manipulated in a spreadsheet or word processing program.
The Company believes that use of the New Paradigm
Architecture offers the following advantages over
conventional approaches:
- Methods used and tested while constructing one
computer program may be reused in constructing other
computer programs, thereby reducing the time necessary
to develop and test each new program. This is
particularly important when developing large or complex
software.
- New Paradigm Applications are easier to modify to
meet changing business requirements than programs
created using traditional program development
approaches. In many cases, a new function may be added
to an existing New Paradigm Application simply by
inserting one or more new Methods into the Metabase.
The next time the program is run, the control program
will include the new Methods. Because Methods can be
selectively added, used and reused, an organization can
adapt its New Paradigm Applications to its changing
needs.
- Use of the New Paradigm Architecture largely
eliminates the need to customize program code for
individual users or business organizations. The
characteristics unique to the organization are
specified in the program description on the Metabase,
not in the programs. This ability to customize software
without modifying the program code may offer
significant cost reduction opportunities to software
vendors who often customize their software for each
customer.
Once a company has installed one New Paradigm Application,
that company can create new programs performing additional
business tasks by reusing existing Methods and purchasing or
developing additional Methods. The Company intends to market
New Paradigm Applications and to develop and market
libraries of Methods appropriate to specific business tasks.
The Company does not expect to be the exclusive source of
Methods and will encourage the development of Methods by
customers or other software vendors in order to widen the
acceptance of the New Paradigm Architecture.
New Paradigm Commerce
Beginning in May, 1995 the Company has worked to establish a
presence in the EDI service center business. As of June 30,
1996, the Company had connections to two dozen providers of
retail goods and services to the public ("Trading Partners")
and had signed up greater than 100 suppliers (41 at March
31, 1996) to those Trading Partners ("Suppliers") as
customers. This has given the Company a growing monthly
revenue stream (over $15,000 for the month of June 1996),
a base of Trading Partners, and a base of Suppliers to whom the
Company can market additional EDI services, and the necessary experience to
develop new electronic commerce offerings.
Most Suppliers who use the Company's EDI services do so
because a Trading Partner will require that all of its
Suppliers send all invoices for its products electronically
if they are to do business. These Trading Partners are often
large corporations and seek to have the maximum possible the
expensive handling costs associated with paper
based systems. If the Supplier wished to create an EDI
capability internally, the Supplier would have to buy EDI
software, install that software on an existing or new
computer, learn the software, transmit the data generated
from the software (by modem or email), develop the proper
EDI format for the Trading Partner selected and test the
connection with the Trading Partner with which it is
connected. Many Suppliers are not able, or willing, to spend
the resources to make the connection to their Trading
Partners, particularly where they do business with several
different Trading Partners. As a result they often look to
outsource their EDI functions. NPC will take the information
for the EDI transaction via fax, letter or email and
reformat that information and transmit that information in
the appropriate EDI format.
NPC is able to offer EDI service at lower cost than most
Suppliers would spend internally because after the initial
set-up with a Trading Partner involving establishing a
connection and developing the proper forms for that Trading
Partner, each new Supplier added who wishes to communicate
with that Trading Partner requires little additional set up.
Setting up a connection with a new Trading Partner usually
requires several weeks. The Company intends to use its COPERNICUS
software to further reduce the costs of connecting and processing
transactions.
NPC charges each Supplier set up fees when the Supplier
signs the setup agreement. The set up fees vary for each
customer based upon the number of Trading Partners to which
the Customer wishes to be connected. A Supplier must be
connected to at least one trading partner. Once a Supplier
has been set up it is charged a monthly fee for each of the
Trading Partners to which it is connected. The customer also
is charged for each transaction it wishes processed and for
the length of those transactions. Based upon the needs of
the Supplier, the Company may also charge fees for storing
the Supplier's information on the Company's system and
handling the documents. Customer fees have ranged from $25
to several thousand dollars a month. The average customer
pays approximately $150 each month.
Marketing and Distribution -- COPERNICUS
The Company's approach to marketing COPERNICUS principally
consists of direct marketing to large-scale computer users
with multiple computer systems, marketing to software
companies for inclusion in their products, and marketing
through software distributors and systems integration
consultants. The direct licensing of COPERNICUS is
significant to the Company both because of the revenue
potential of such sales and because such licenses enable the
Company to establish a customer base to whom method
libraries can be marketed. The Company also believes that such licenses are
important at this stage of its develpment because they the
Company to demonstrate the efficiency and advantages of COPERNICUS
and the New Paradigm Architecture.
Direct Sales to Large Corporations and Other Organizations.
COPERNICUS is currently being directly marketed in the
United States, to large organizations with multiple computer
systems. The Company has entered into six direct end-user
license agreements. The Company expects direct sales of
Copernicus and maintenance payments by customers of
COPERNICUS to be the major source of revenue for the year
ending March 31, 1997.
Four pilot projects for COPERNICUS are currently pending for
large organizations. Pilot projects have resulted in end-
user licenses with Marriott, CIBC, New York Life and
Transquest. Two pilot projects undertaken by the Company
have been terminated without a license. The pending pilot
projects are in the banking, food, shipping and the
insurance industries. Pilot projects are expected to last up
to six months. The duration of each pilot project depends
primarily on the time required to identify precisely the
format of, and relationship between, the data to be
communicated between the programs. Pilot projects involve
installing COPERNICUS at the end-user's site and testing by
the end-user, with assistance by the Company, for selected
applications or selected portions of applications. Upon
successful completion of a pilot project and licensing of
COPERNICUS to an end-user, COPERNICUS would then be
installed at one or more sites and undergo acceptance
testing by the end-user to assure that COPERNICUS meets
specifications set forth in the license agreement for all
intended applications by the end-user.
The Company's COPERNICUS product can be sold in connection
with other software products such as middleware and database
systems. As a result of this the Company cooperates with
other vendors in jointly marketing software. In particular
the Company is an IBM Solutions Development Partner and
BESTeam member. In addition the Company is an Informix
Solution Alliance member. The Company is invited to trade
shows where the other software products are featured and the
sales representatives of these companies are encouraged to
recommend the Company's COPERNICUS product when recommending
complete integration solutions. These relationships have proven
significant in developing sales leads for direct sales of
COPERNICUS.
Software Companies/VAR Agreements. The Company intends to
enter into VAR agreements with software companies for which
integration is frequently an important marketing issue and a
key part of their installation process. These software
companies would incorporate COPERNICUS into their software
products to achieve interoperability between their products
and their customers' existing business software. Under these
agreements, a VAR would provide its customers with a limited
license to use COPERNICUS solely for the purpose of
connecting their existing programs to the software purchased
from the VAR. The Company's compensation may include both a
fixed annual license fee and a variable license fee based on
sales by the VAR. The VARs may conduct pilot projects,
independent of the Company, of their software products which
incorporate COPERNICUS before licensing such products to
their customers. A VAR's decision to conduct a pilot project
of its software product is made independently of the
Company. The Company believes that a VAR's decision to
conduct a pilot project will depend primarily upon customer
acceptance of the VAR's software product. The Company would
not expect to be involved in a VAR's pilot project.
The Company currently has a VAR agreement with Praxis.
Praxis incorporated COPERNICUS into its OmniReplicator
product (a product that is designed to permit the
duplication of databases on different types of computer
systems) that Praxis introduced and began marketing nation-
wide in June 1995. The Company has been paid fees of $41,993
by Praxis through March 1996. The Company had also entered
into VAR agreements with Financial Performance Corporation
and Benson Software Systems Inc. Benson Software Systems,
Inc. is no longer a functional company and Financial
Performance Company has changed the focus of its business
and no longer markets the product into which COPERNICUS was
incorporated. The Company received no fees from either of
these businesses and does not expect to receive any. These
agreements are non-exclusive and their continued existence
will not prevent the Company from pursuing other
opportunities. The Company is also discussing VAR
arrangements with other software companies. The Company
believes that its revenues will increase if Praxis and
other VARs successfully market their own products. However,
there can be no assurance that the development work
necessary to incorporate COPERNICUS into a VAR's product can
be completed or that any particular level of revenue or
market penetration will result from the aforementioned
agreements.
Software Distribution Agreements. The Company will seek to
develop relationships with potential software distributors,
including systems integrators, to distribute COPERNICUS. By
using software distributors, the Company hopes to increase
its overall revenue and expand its customer base while
limiting its sales, marketing and product support expenses.
To this end, the Company has entered into distribution
agreements with Paxcell Group Inc., EXEL Corporation and
Rivergate Systems, Inc.
The Company also intends to enter into distribution
agreements with systems integrators to market COPERNICUS to
their customers in connection with their services. The
Company has granted to one systems integrator in Canada, New
Venture Technologies, Ltd. ("NVT"), an exclusive license to
market COPERNICUS to end-users in Canada. NVT had agreed to
a distribution target of $500,000 for calendar year 1995. To
date no revenue has been received from NVT. The Company
believes the arrangement has continued potential to generate
revenue and discussions are underway between NVT and a
number of potential customers. The distribution agreement
had an initial term of two years. The Company currently has
the right to end the exclusivity of, shorten the term of or
terminate the agreement.
There can be no assurance that any particular level of
revenue or market penetration will result from any of the
aforementioned agreements. There can also be no assurance
that the Company can develop relationships, or enter into
distribution agreements with, systems integrators. To the
extent the Company is unable to do so, it may compete with
such systems integrators. See "Development of Business --
Competition."
Marketing and Distribution -- New Paradigm Architecture
Overview. The Company's strategic objective is to establish
the New Paradigm Architecture as a widely accepted approach
to developing software for large organizations.
At this time, the Company does not intend to market the New
Paradigm Architecture directly but rather intends to
establish the commercial viability of the New Paradigm
Architecture through the sales of New Paradigm Applications
such as COPERNICUS. New Paradigm Applications may be
developed by the Company or VARs. Other applications may be
acquired by the Company and converted to the New Paradigm
Architecture.
Once an organization has installed a New Paradigm
Application, the New Paradigm Architecture permits that
organization to create new programs performing additional
tasks by purchasing or developing additional Methods. In the
long term, the Company believes that it can generate
significant revenue by developing libraries of Methods for
license to users of COPERNICUS and any other New Paradigm
Applications. However, the Company intends to market
additional libraries of Methods only at such time as the New
Paradigm Architecture has gained market acceptance. The
Company does not expect to be the exclusive source of
Methods and will encourage the development of Methods by
customers or other software vendors in order to widen the
acceptance of the New Paradigm Architecture.
New Product Development. The Company has a second product
under development, DARWIN, which is intended to assist
businesses with the process of transferring large amounts of
data from existing hardware and software environments to new
environments. Historically, companies have incurred
significant expense in migrating data to new environments.
Development of DARWIN is substantially completed; testing
and preparation of accompanying documentation, such as
manuals, training materials and marketing materials, are in
the initial stages. Development of DARWIN is currently not
proceeding while the CompanyOs efforts are focused on
COPERNICUS. In addition there can be no assurance that
development of this product can be completed and, if
developed, successfully marketed.
Product Acquisitions. One of the Company's strategies to
attempt to achieve rapid growth and acceptance of the New
Paradigm Architecture is predicated upon the acquisition of
one or more software products into which the New Paradigm
Architecture could be incorporated or software companies
which could incorporate the New Paradigm Architecture into
their software products. The Company will seek to acquire
established products utilizing older technologies and
convert these products to New Paradigm Applications. The
Company believes that this will permit it to market New
Paradigm Applications and Methods to the established
customer base of the acquired products. There is no current
agreement, arrangement or understanding relating to any
acquisition. The Company receives and expects to continue to
receive inquiries as to its interest in acquiring products
and companies and forming other possible business
combinations. There can be no assurance that the Company
will find suitable acquisition candidates or that an
acquisition or other business combination can be completed
upon terms acceptable to the Company. Additionally, the
Company may require significant additional financing to
complete any acquisition. There can be no assurance that
financing will be available or, if it is available, that it
will be available on acceptable terms.
Marketing and Distribution -- Electronic Commerce
NPC receives the majority of its business from references
from existing Suppliers and the Trading Partners with whom it
links those Suppliers. As the Company signs more Suppliers
the Company may expand its existing sales force in this area
and begin marketing in trade magazines. The Company does
not presently intend to increase greatly its sales force in
this area. The Company intends to use COPERNICUS to link the
internal functions of NPC, to minimize labor, and offer the
services of COPERNICUS to both Suppliers and Trading
Partners to link their applications for ease in transmitting
EDI documents.
Research and Development
Since its inception, the Company has focused its internal
development efforts on COPERNICUS and the New Paradigm
Architecture. The Company is also developing other New
Paradigm Applications, including DARWIN. In addition, the
Company has employed independent consultants to perform
certain development functions. Research and development
expenses, which include salaries and other employee costs of
the Company's product development personnel, for the period
from July 20, 1993 (inception) to March 31, 1994 were
$121,702 (20% of total expenditures) and for the fiscal year
ended March 31, 1995 were $331,821 (17% of total
expenditures). Beginning July 1, 1995 the Company recognized
technological feasibility of COPERNICUS and began
capitalizing the development costs of COPERNICUS in
accordance with Statement of Accounting Standards ("FASB") No. 86,
"Accounting for the Cost of Computer Software to be Sold,
Leased or Otherwise Marketed." The Company capitalized
$218,950 of development costs relating to COPERNICUS and
expended an additional $60,344 for research and development
expenses during the year ended March 31, 1996. The Company
believes that as it develops new products using the New
Paradigm Architecture, investment in research and product
development will be critical to the Company's success. The
Company expects to incur substantially increasing research
and development expenses for the foreseeable future. As the
Company continues to license COPERNICUS the Company expects
that development expenses will drop as a percentage of total
expenses. The Company's development efforts are partially
dependent on the services of John Brann. Mr. Brann is no
longer an employee of the Company and, although currently
providing services to the Company on a consulting basis, the loss of
his services could impede the development of any new
products. For a discussion of the history of the development
of COPERNICUS and the New Paradigm Architecture, see
"Description of Business -- History."
The Company intends to develop both its internal EDI systems
and to examine the viability of offering to the market place
EDI translation software built using COPERNICUS. The Company
intends to recruit an additional research and development
software engineer for this purpose.
Competition
COPERNICUS competes primarily with custom systems
integration programs developed for large organizations on a
case-by-case basis by in-house development teams or by
systems integration consultants. These teams and consultants
seek to create custom systems integration software to enable
programs to work together by modifying the source and target
programs so that they can send and receive data. While
management believes that COPERNICUS will accomplish this
objective at significant cost and time savings over this
method, these teams and consultants often have well
established positions in the organizations to which the
Company intends to market COPERNICUS. Accordingly, these
teams and consultants may resist the introduction of
COPERNICUS because they prefer their traditional approach to
solving systems integration issues, which may be more
familiar to decision makers at these organizations than New
Paradigm's approach. In addition, for systems integration
problems relating to integration of certain computer
programs, other software companies in specific industry
sectors, particularly health care, offer products which
compete with COPERNICUS. These products are custom designed
to integrate specific computer systems commonly used in the
particular industry and unlike COPERNICUS, they cannot be
used to integrate other systems. COPERNICUS will compete
with these industry-specific products which may have a more
established market presence within a particular industry.
COPERNICUS is not industry-specific.
Management expects the range of products able to compete
with COPERNICUS to continue to increase and anticipates that
other companies, some of which will have significantly
greater financial resources than the Company and established
market positions, will attempt to develop products which
compete with COPERNICUS in the near future. No assurance can
be given that the Company will be able to compete
successfully against current or future sources of
competition to COPERNICUS.
The New Paradigm Architecture, which is a method of creating
computer programs, competes with numerous other products
available today that enable users to create computer
programs. These products are marketed by well established
software suppliers that have large customer bases, more
financial resources and larger sales forces than the
Company. While the Company believes that computer programs
created with the New Paradigm Architecture are more
efficient, easier to adapt to changing business requirements
and faster to test, there is no assurance that other
software companies are not developing, or will not develop,
an architecture or architectures similar to or more
effective than the New Paradigm Architecture. In addition,
to the extent that computer hardware and software producers
jointly adopt any "open systems" standard (software and
hardware configurations that offer interoperability among
the products of a variety of producers) and the jointly
adopted system becomes generally accepted, the usefulness of
and market for the New Paradigm Architecture will be
diminished. The Company believes that other companies with
significantly greater financial resources than the Company
and established market positions are also attempting, and
will continue to attempt, to develop competing products and
architectures. In addition, if the Company is successful in
establishing the New Paradigm Architecture as a widely
accepted approach to constructing software for large
organizations, it is likely that other companies will offer
products that could be substituted for the Methods (and
libraries of Methods) that the Company intends to offer. No
assurance can be given that the Company will be able to
compete successfully against current or future sources of
competition.
Intellectual Property Rights
On March 23, 1995, the Company acquired the intellectual
property rights to COPERNICUS and the New Paradigm
Architecture from Lancer. See "Directors and Executive
Officers of the Registrant" and "Certain Relationships and
Related Transactions -- Acquisition of the New Paradigm
Architecture."
The intellectual property rights acquired from Lancer
include one application for a United States patent relating
to COPERNICUS, which application is now pending in the
USPTO, and corresponding applications (or the right to file
corresponding applications) in 24 foreign countries. While
there can be no assurance when or if the patent will be
granted, management believes that COPERNICUS is patentable.
The Company relies upon a combination of trade secret,
nondisclosure and other contractual arrangements, and
patent, copyright and trademark laws to protect its rights
to intellectual property. The Company generally enters into
confidentiality agreements with its employees, consultants,
distributors, value-added resellers and potential customers
and limits access to and distribution of proprietary
information to licensed users. There can be no assurance
that the steps taken by the Company will be adequate to
deter misappropriation of proprietary information, that the
Company will be able to detect unauthorized use of
proprietary information or that the Company can afford the
high cost required to enforce its intellectual property
rights. Further, no assurance can be given that
nondisclosure and other contractual arrangements to protect
the Company's proprietary rights will not be breached, that
the Company will have adequate remedies for any breach or
that trade secrets will not otherwise become known to or be
independently developed by competitors. The failure or
inability of the Company to protect proprietary information
could have a material adverse effect on the Company's
business, operating results and financial condition.
Item 2. Description of Property
The Company's corporate headquarters is located on the 11th
floor of 335 Madison Avenue, New York, New York (the
"Premises"). The Premises are currently being sublet from
MCI Telecommunications, Inc. ("MCI").
MCI's master lease expires on December 31, 1996. The Company
intends to move its principal offices before that time and
is currently seeking space in the area. Based upon its
preliminary discussions with real estate brokers, the
Company believes that alternative office space will be
available if needed and that it could move to alternative
office space with minimal disruption of its operations and
moving expenses of approximately $50,000.
The Company's Atlanta sales office is leased on a
month-to-month basis.
Employees
As of June 15, 1996, the Company employed 34 full-time
employees. None of the Company's employees is represented by
a labor union or is subject to a collective bargaining
agreement. The Company believes that its employee relations
are satisfactory.
Item 3. Legal Proceedings
The Company is not involved in any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
(a) Principal Market
The Registrant's Common Stock and Redeemable Warrants are
quoted on NASDAQ SmallCapsm Market.
(b) Approximate Number of Holders of Equity.
The number of record holders of the Common Stock was
approximately 77 and the number of record holders of
Redeemable Warrants was 45 as of March 31, 1996.
(c) Frequency and Amount of Dividends.
To date, the Company has not paid any cash dividends. The
Company does not anticipate paying any dividends in the
foreseeable future. The Company intends to retain any future
earnings to finance the growth and development of its
business. Any future determination as to the payment of
dividends will be at the discretion of the Board of
Directors and will depend on the Company's operating
results, financial condition, capital requirements and such
other factors as the Board of Directors may deem relevant.
The following table sets forth, for the periods indicated,
the high and low sale prices for the Common Stock and
Redeemable Warrants as reported by the NASDAQ SmallCap
Market:
Common Stock Redeemable Warrants
1996 Fiscal Quarter High Low High Low
Second Quarter Commencing
August 11, 1995)(1) $7.50 $5.00 $2.00 $0.75
Third Quarter $6.50 $4.50 $1.675 $0.75
Fourth Quarter $6.125 $4.75 $1.675 $1.125
(1) The initial public offering of the Common Stock and
Redeemable Warrants commenced on August 11, 1995. The
initial public offering prices of the Common Stock and
Redeemable Warrants were $6.50 per share and $.10 per
Redeemable Warrant.
The foregoing quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not
represent actual transactions.
Item 6. ManagementOs Discussion and Analysis of Financial
Condition and Results of Operations
The selected financial data of the Company presented below
for, and as of the end of, the period from July 20, 1993
(inception) to March 31, 1994, the fiscal years ended March
31, 1995 and 1996 and the period from July 20, 1993
(inception) to March 31, 1996 have been derived from the
financial statements of the Company, which financial
statements have been audited by BDO Seidman LLP, independent
certified public accountants. The Company was incorporated
in July 1993 and commenced operations in November 1993. The
data set forth below should be read in conjunction with the
Company's financial statements, related notes thereto and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
Statement of Operations Data
Period from Period from
July 20, 1993 July 20, 1993
(inception) to Year Ended Year Ended (inception) to
March 31, 1994 March 31, 1995 July 20, 1993 March 31, 1994
________________________________________________________________________________
Revenues $5,750 $64,600 $425,952 $496,102
Expenses 606,330 1,976,89 3,684,09 6,267,318
________________________________________________________________
Loss from
operations (600,580) (1,912,498) (3,258,138) (5,771,216)
Other income
(expense) 7,263 (68,085) (302,154) (362,976)
________________________________________________________________
Net Loss $(593,317) $(1,980,583) $(3,560,292) $(6,134,192)
Net Loss per
common Share (1) $(.52) $(1.69) $(2.01)
Weighted average
common shares
outstanding (1) 1,149,661 1,174,749 1,743,472
Balance Sheet Data
March 31, 1994 March 31, 1995 March 31, 1996
________________________________________________________________________________
Total assets $812,819 $1,051,892 $3,113,868
Total current
assets 671,557 423,812 2,284,095
Total current
liabilities 189,434 432,629 237,841
Long-term debt 0 1,820,175 0
Total
liabilities 189,434 2,252,804 237,841
Deficit
accumulated during
the development
stage (593,317) (2,573,900) (6,134,192)
Total
shareholders'
equity $623,385 $(1,200,912) $2,876,027
(1) See Notes to Financial Statements for an explanation of
the determination of the number of shares and share
equivalents used in computing share amounts.
Overview
The Company was formed in July 1993 and the results of
operations for the period from July 20, 1993 (inception) to
March 31, 1994 and for the years ended March 31, 1995 and
March 31, 1996 reflect start-up costs and the costs of
developing and commercializing the Company's software. The
Company had net losses of $1,980,583 for the year ended
March 31, 1995 and $3,560,292 for the year ended March 31,
1996. The Companys revenues for the fiscal year ended March
31, 1996 were $425,952. These revenues were primarily due to
the licensing of COPERNICUS to Marriott, Canadian Imperial
Bank of Commerce and New York Life. The CompanyOs
subsidiary, NPC, also had 41 EDI customers in the year ended
March 31, 1996.
Following the CompanyOs initial public offering ("IPO") in
August 1995, the Company significantly expanded its sales
operation. Five additional staff were recruited and the
sales operation moved to Atlanta.
The Company's revenues and profitability may vary
significantly both in the case of consecutive quarters and
in the case of a quarter compared to the corresponding
quarter of the preceding year. Such variations may result
from, among other factors, lengthy pilot testing for
COPERNICUS and any other New Paradigm Application that the
Company might develop, timing of new product and service
introductions by the Company and its competitors, changes in
levels of the Company's operating expenditures, including
the Company's expenditures on research and development, the
size and timing of customer orders, the amount and timing of
royalty payments and license fees by licensees, as well as
consulting, training and maintenance fees, increased
competition, reduced prices, the effect of currency exchange
rate fluctuations, delays in the development of new
products, the costs associated with the introduction of new
products and the general state of national and global
economies. The Company expects to derive substantially all
of its revenues from royalties and license fees, and
consulting, training and maintenance fees. Accordingly, the
Company's revenues will vary with the demand for its
products and services. In addition, the Company expects that
it typically will require significant up-front payments from
customers upon establishing a new license arrangement.
Accordingly, the timing of receipt of payments and the
recognition of revenues in a given period could result in
significant periodic fluctuations in liquidity and financial
results. As a result of such factors, the Company's revenues
and profitability for any particular quarter are not
necessarily indicative of any future results. Fluctuations
in quarterly results may also result in volatility in the
price of the CompanyOs securities.
Although the Company has a pending application for a patent
filed in the USPTO relating to COPERNICUS and corresponding
applications (or the right to file corresponding
applications) in 24 other countries, no patent has been
awarded to date and the assignments of the foreign
applications to the Company have not been recorded. In the
event that the patent applications are not granted and the
Company is not able to otherwise protect its proprietary
information, there could be a material adverse effect on the
Company's business, operating results and financial
condition.
Results of Operations
Revenues. Revenues during the fiscal year ended March 31,
1996 increased by $361,552 (561%) over the year ended March
31, 1995. These revenues primarily consisted of revenue from
the licensing of COPERNICUS to direct end-users. The Company
was paid $41,993 in royalties from Praxis, and recognized
$50,000 in license fees from Petra Copr. ("Petra") both VARs of the
Company.
Expenses. The Company's expenses primarily comprise
salaries and related employee costs, research and
development costs, professional fees, marketing expenses,
general and administrative expenses, occupancy expenses and
depreciation and amortization.
Expenses during the fiscal year ended March 31, 1996
increased by $1,707,192 (86%) over the fiscal year ended
March 31, 1995.
Employee costs increased by 179% to $1,535,056 in the fiscal
year ended March 31, 1996, compared to $550,389 in the
fiscal year ended March 31, 1995. This was primarily due to
the increase in staff employed by the Company.
Research and development expenses decreased by 82% to
$60,344 in the fiscal year ended March 31, 1996, compared to
$331,821 in the fiscal year ended March 31, 1995. This
decrease is due to the fact that the Company recognized
technological feasibility of its COPERNICUS product on July
1, 1995. According to FASB # No. 86, "Accounting for Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company believes it is now required to
capitalize its COPERNICUS research and development expenses.
Capitalized software expenses consist principally of
salaries and certain other expenses related to development
and modifications of COPERNICUS capitalized in accordance
with the provisions of FASB No. # 86. Amortization of
capitalized software costs is provided at the greater of the
ratio of current product revenue to the total of current and
anticipated product revenue or on a straight-line basis over
the estimated economic life of the software, which is not
more than five years. $218,950 was capitalized during the
year ended March 31, 1996.
Professional fees increased by 95% to $620,198 in the fiscal
year ended March 31, 1996, compared to $318,514 in the
period ended March 31, 1995. Most of the increase represents
costs related but not directly attributable to the IPO and
compliance with the reporting obligations that are
applicable to the Company when it became a public company
following the Company's IPO. In addition, the Company
incurred significant legal fees during the fiscal year ended
March 31, 1996 negotiating value-added reseller, distributor
and end-user license agreements.
Marketing expenses increased by 209% to $612,085 in the
fiscal year ended March 31, 1996 compared to $198,034 in the
fiscal year ended March 31, 1995. This is principally due to
the increase in sales and marketing staff during the period.
There were an average of 2 employees in this area in the
fiscal year ended March 31,1995 and an average of 6
employees in the fiscal year ended March 31, 1996.
General and administrative expense increased by 31% to
$503,904 in the fiscal year ended March 31, 1996, compared
to $385,928 in the fiscal year ended March 31, 1995. This
was due to the increased costs in running a public company
and increased expenditures due to higher staff numbers.
Occupancy costs increased by 99% to $218,365 in the fiscal
year ended March 31, 1996 from $109,608 in the fiscal year
ended March 31, 1995. This increase was primarily due to the
increase in the amount of employees and the opening of the
Atlanta sales office.
Depreciation and amortization expenses increased by 62% to
$134,138 in the fiscal year ended March 31, 1996 compared to
$82,604 in the fiscal year ended March 31, 1995.
Depreciation and amortization increased because of an
increase in fixed assets from March 31, 1995 to March 31,
1996 and the amortization on the capitalization of the
COPERNICUS software product.
The Company has made no material capital commitments.
The Company's net operating loss carryforwards and deferred tax
asset account are approximately as follows:
Period or Year Net operating Net
ended Year of loss deferred
March 31, expiration carryforward tax asset
- - -----------------------------------------------------------------------
1994 2009 $ 589,000 $ -
1995 2010 1,954,000 -
1996 2111 3,542,000 -
- - -----------------------------------------------------------------------
$6,085,000 $ -
- - -----------------------------------------------------------------------
The tax benefit of these losses (approximately $1,200,000 and $2,786,000 at
March 31, 1995 and 1996 respectively) is subject to significant limitations
due to the change in control for income tax purposes resulting from the
Company's IPO in August 1995. The tax benefit of these losses has been fully
reserved by a valuation allowance of the same amount due to the uncertainty
of its realization.
Foreign Exchange. The Company currently has no exposure to
foreign currency exchange rate fluctuations. The Company may
seek to minimize its exposure to foreign currency exchange
rate fluctuations by requesting that its customers,
distributors, including systems integrators, and VARs enter
into contracts denominated in United States dollars or by
entering into transactions to attempt to hedge some of the
risks of foreign currency exchange rate fluctuations.
Liquidity and Capital Resources
The Company has financed its operations to date primarily
through public and private sales of its debt and equity
securities. The Company has raised a total of approximately
$9,845,433 from these
securities. Of this total, $50,000 was raised in connection
with the initial capitalization of the Company, $1,141,000
was raised in a private placement of equity securities in
October 1993; $450,000 in a private placement of equity
securities and promissory notes in October 1994 (the "1994
Financing"), $1,312,500 in a private placement of equity
securities and promissory notes in March 1995 and April 1995
(collectively, the "1995 Financing") and $6,891,933 in the
Company's IPO. Of the funds raised in the 1994 Financing,
$130,000 of promissory notes were repaid out of the proceeds
of the 1995 Financing, and the remaining principal of and
interest on the notes issued in the 1994 Financing and the
1995 Financing were repaid from the net proceeds of the
Company's IPO.
In the fiscal years ended March 31, 1994 and March 31, 1995,
the Company borrowed $466,409 from a shareholder, MTI (MTI
is no longer a shareholder of the Company), pursuant to a
subordinated financing agreement. This subordinated debt was
canceled pursuant to a Settlement Agreement with MTI dated
as of May 26, 1995.
Pursuant to a certain Accounts Receivable Purchase and Sale
Agreement between the Company and MTB Bank dated June 19,
1995 (the "Factoring Agreement"), the Company sold,
transferred and assigned all of its right, title and
interest in certain receivables due to the Company in
consideration of the payment of approximately $100,000 by
MTB Bank to the Company. The Company used the proceeds of
this factoring arrangement for working capital and other
general corporate purposes. This loan was repaid with
interest from the proceeds of the IPO.
Accounts payable and accrued expenses decreased to $220,341
at March 31, 1996 from $364,678 at March 31, 1995. Such
decrease in accounts payable and accrued expenses is
primarily due to the ability of the Company to pay its
creditors in a timely manner following the IPO. At March 31,
1996, the Company had working capital of $2,096,254.
Investment of cash by the Company is currently in money
market accounts and short-term certificates of deposit.
Based on the Company's current plan of operations it is
anticipated that the remaining net proceeds from the IPO
and the Company's expected operating revenues
will provide sufficient working capital until late 1996. The
Company will need additional financing prior to late 1996
and thereafter if demand for COPERNICUS is sufficiently
great to require expansion at a faster rate than
anticipated, or if research and development expenditures or
the extent of service and customer support that the Company
is required to provide are greater than expected or other
opportunities arise which require significant investment.
Additionally, the Company may require significant additional
financing to complete any acquisition. If financing is
required, such financing may be raised through additional
equity offerings, joint ventures or other collaborative
relationships, borrowings and other sources. There can be no
assurance that additional financing will be available or, if
it is available, that it will be available on acceptable
terms. If adequate funds are not available to satisfy either
short or long-term capital requirements, the Company may be
required to limit its operations significantly and may be
unable to carry out its plan of operations. See Note 1 to
the Company's financial statements and "Report of
Independent Certified Public Accountants on Audited
Financial Statements."
New Paradigm intends to seek to raise additional capital by the
issuance of further equity securities. Negotiations are
currently underway with investment bankers to this end.
However, there can be no assurances that any such financing
will be available or, if it is available, that it will be
available on acceptable terms. Unless the market price of
the CompanyOs Common Stock increases significantly over its
market price on June 28, 1996 additional issuances of equity
security could cause significant dilution to purchasers of
Common Stock in the IPO.
Plan of Operation
During the fiscal year ending March 31, 1997, the Company
intends to continue to develop COPERNICUS, carry out
research and development on other potential New Paradigm
Applications and market COPERNICUS to large scale computer
users and VARs.
The Company intends to arrange for the distribution of
COPERNICUS in overseas markets by signing agreements with
foreign software distributors. Negotiations are underway
with such distributors in some countries. The Company
intends to market to other prospective distributors during
the course of the year.
Additionally the Company intends to deploy COPERNICUS
directly by entering markets where it would provide
significant competitive advantage. To date, two such
opportunities have been identified: EDI, through NPC and
the Internet through NPIL. The Company
intends to continue to market to potential users of its EDI
service bureau directly, and by arrangements with
significant EDI hubs. The Company believes that
opportunities to create new software products using
COPERNICUS to service the EDI market exist, and it intends
to research and develop such products in the fiscal year
ending March 31, 1997. Through NPIL the
Company intends to offer to corporate customers the
provision of Web pages on the Internet as a prelude to
offering to link those pages to customers' existing systems
using COPERNICUS.
Item 7. Financial Statements and Supplementary Data
Financial statements are included herein following Part IV,
Item 13.
Item 8. Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers Promoters and Control
Persons: Compliance with Section 16(a) of the Exhange Act Of
The Registrant
There are currently six members and there is one vacancy on
the Company's Board of Directors. The Company's By-Laws
authorize the Board of Directors to fix the number of
authorized directors. The By-Laws also authorize the Board
of Directors to fill any vacancy on the Board of Directors.
The Company has agreed that Mr. Robert S. Trump, an investor
in a private placement of the CompanyOs securities for which
a closing was held on October 20, 1994 (the O1994
FinancingO), may nominate for election one person to serve
on the Board of Directors. Mr. Trump has orally advised the
Company that he does not currently intend to nominate anyone
to serve on the Board of Directors.
The following table sets forth the names, ages and positions
with the Company of the Company's directors, executive
officers and key employees:
Name Age Position
- - ---------------------------- --- -----------------------------
Mark Blundell 38 Chief Executive Officer,
President, Chief Financial
Officer, and Director
John Brann 35 Chief Technologist Secretary,
Treasurer and Director
Beverly Brown 51 Director
Daniel A. Gordon 56 Chairman of the Board of
Directors
Jeff Kahn 38 Director
Michael Taylor 54 Director
Philip V. Caltabiano 54 Senior Vice President of
Sales and Marketing
Nicholas D. Field 32 Vice President of Production
Mark Blundell is the Chief Executive Officer, President,
Chief Financial Officer and a director of the Company and
has served in these capacities since the Company's
inception. From October 1991 until December 1993, Mr.
Blundell was initially the Chief Executive Officer of MTI's
European subsidiary and then the Chief Operating Officer and
Chief Financial Officer of MTI in New York. He was also a
director of MTI from December 1993 to March 1994. From May
1988 to October 1991, Mr. Blundell was the Chief Executive
Officer of London Fox, the futures and options exchange,
where he introduced the first international electronic
trading system. He is also a director and President of Lancer,
a company initially formed to hold the intellectual property
rights relating to the New Paradigm Architecture and which
currently conducts no business. Lancer is a principal
shareholder of the Company. Mr. Blundell received an M.A. in
Politics, Philosophy and Economics from Pembroke College,
Oxford.
John Brann is the Treasurer, Secretary and a director of
the Company and has served in these capacities since the
Company's inception. From July 1993 until March 18, 1996 he
was the Vice President of Technology of the Company. Mr.
Brann's employment as Vice President of Technology was
terminated by mutual agreement on March 18, 1996 when his visa to work in the
United States expired. Mr. Brann's application for permanent
resident status is pending and the Company intends to
offer to reemploy him as Vice President of Technology if and
when his application is granted. In the interim he will be
provide consulting services to the Company on an as
needed basis. From 1990 to December 1993, Mr. Brann was the
Vice President of Research and Development at MTI, where he
was responsible for the development of new systems. In 1990,
Mr. Brann was an outside consultant to The First Boston
Corporation, consulting on building real time information
systems. From 1989 to 1990, Mr. Brann was employed by Extel
Financial, a major information vendor in London engaged in
the construction of electronic data feeds. He is also a
director and Vice President of Lancer. Mr. Brann received a
B.A. in Chemistry from Pembroke College, Oxford.
Beverly Brown has been a director of the Company since
September 20, 1995. She is the President of the Bruce Group,
a consulting and investment company, since September 1994.
Ms. Brown was Executive Vice President at Praxis
International, Inc., a software development company
specializing in database and data replication tools, where
she had operational responsibility for sales, marketing,
business development, professional services and education,
from 1994 to 1996. Ms. Brown served as Vice President-
Marketing at INGRES, a division of The ASK Group from 1992
to 1994. INGRES is a database software development company.
Prior to her employment at INGRES, Ms. Brown served IBM for
24 years in various executive and management positions.
Daniel A. Gordon, an attorney, has been a director and
Chairman of the Board of Directors of the Company since
November 1993. He has been a principal with Corporate Growth
Services since 1992. Corporate Growth Services provides
consulting support services to businesses in the early
stages of development. From 1989 to 1992, Mr. Gordon served
as President of COIN Banking Systems, Inc., which had been
the banking systems division of COIN Financial Systems Inc.
Mr. Gordon had served as Chairman and Chief Executive
Officer of COIN Financial Systems Inc. from 1984 to 1989. He
received a B.A. in English from Dartmouth College and an
L.L.B. from George Washington University.
Jeff Kahn has been a director of the Company since November
1993. In 1991, Mr. Kahn founded and began serving as
president of Kahn Communications Group Inc. ("KCG"), a
marketing communications firm which specializes in
telecommunications, high technology, consumer, financial and
manufacturing industries. KCG is now a division of Ruder
Finn. He presently serves as President of KCG. Prior to
forming KCG, Mr. Kahn was President of Schoenfeld Kahn from
1988 to 1991 and from 1987 to 1988 was Executive Vice
President of Schoenfeld Strauss, an advertising agency,
where he established that company's public relations
division. Mr. Kahn received a bachelor's degree in Political
Science from Brooklyn College.
Michael Taylor has been a director of the Company since
April 26, 1996. He has been a Managing Director of
Investment Banking at Laidlaw Equities since March 1996. He
was Associate Director of Investment Banking for Josephthal
Lyon & Ross from June 1989 to March 1996. From early 1980
until joining Josephthal, he was President of Mostel &
Taylor Securities, Inc., a NASD-member investment banking
and brokerage firm. He has been involved in the securities
industry since 1966, when he joined Lehman Brothers as an
analyst. He has been a director of NDE Environmental, Inc.
since July 1992. He is also Chairman of the Board of
Jennifer Muller/The Works, a contemporary dance company. He
attended Amherst College and Columbia University. In 1991,
the Securities and Exchange Commission entered an
administrative order finding that, in 1988 and 1989, Mr.
Taylor aided Mostel & Taylor Securities, Inc. in connection
with certain violations of the net capital requirements for
securities broker-dealers imposed by the Securities Exchange
Act of 1934, and suspended him from associating with a
broker, dealer, investment company, investment adviser or
municipal securities dealer in any capacity for 90 days and
in a proprietary or supervisory capacity for an indefinite
period with the right to apply for removal of such
suspension after two years. He has applied to remove the
suspension. Mr. Taylor consented to the order without
admitting or denying its findings.
Philip V. Caltabiano has been Senior Vice President of Sales
and Marketing of the Company since November 1993. From July
to November 1993, Mr. Caltabiano was a paid consultant to
the Company. From 1991 to July 1993, Mr. Caltabiano was a
principal at Structured Solutions, Inc., a life-cycle
application development methodology vendor in Atlanta,
Georgia. From 1986 to 1991, Mr. Caltabiano held various
senior management positions at Knowledgeware, Inc.,
including Vice President of U.S. Sales and Vice President of
International Sales.
Nicholas Field is the Vice President of Implementation,
responsible for the implementation of the Company's
products. He has served in this capacity since October 1994.
During 1993 and until October 1994 he acted as the head of
development for the Company. From 1986 to 1993, Mr. Field
was employed by MTI in New York and London and engaged in
the development and implementation of credit management and
commercial lending computer systems. Mr. Field holds a B.Sc.
in Computer Science from Bristol University.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16(a)")
requires the Company's directors, executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities,
to file with the Securities and Exchange Commission reports on Forms 3, 4, 5
concerning their ownership of the Common Stock and other equity securities
of the Company
Based solely on the Compnay's review of compies of such reports and
written representations that no other reports were required, the Company
believes that all its officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them
with respect to transactions during the fiscal year ended March 31, 1996,
except that the Forms 3 of directors Kahn and Brown were filed late and
Forms 4 of directors and executive officers Blundell and Brann, directors
Brown, Gordon and Kahn and executive officers Caltabiano and Field in respect
of options granted to them under the Company's Stock Option Plan were
filed late.
Item 10. Executive Compensation
The following table sets forth information concerning the
compensation of the Company's chief executive officer and
each of the other executive officers (the "Named Officers")
for services rendered in all capacities to the Company. The
Company has only four executive officers.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- --------------------------------------
Securities Restricted All
Name and Fiscal Year Other Annual underlying Stock Other
Principle Position Ended March 31, Salary Bonus Compensation options Awards Compensation
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark Blundell- Chief
Executive Officer, 1994(*)
Chief Financial 1995 $150,000 $0 $45,000(1) 0 $0 $1,456(2)
Officer & President 1996 $150,000 $20,000 $9,000(1) 38,666 $0 $1,100(2)
John Brann- 1994(*)
Vice President - 1995 $100,000 $0 $0 0 $0 $0
Technology 1996 $100,000 $0 $25,000(3) 38,666 $0 $810(2)
Philip V. Caltabiano- 1994(*)
Senior Vice President 1995 $100,000 $0 $0 0 $188(4) $0
Sales and Marketing 1996 $100,000 $0 $0 33,333 $188(4) $0
Nicholas Field- 1994(*)
Vice President - 1995 $70,000 $0 $0 0 $100(5) $0
Implementation 1996 $80,000 $0 $0 22,500 $50(5) $0
<FN>
<F1>
(1) Reflects an accommodation allowance of $4,000 per month
which terminated in December 1994 and consisted of costs
associated with Mr. Blundell's relocation to the United
States from England, and a car allowance of $750 per month paid to Mr.
Blundell.
<F2>
(2) Reflects the insurance premium paid by the Company for
term life insurance for Mr. Blundell and Mr. Brann.
<F3>
(3) Reflects severance pay paid to Mr. Brann when his employment terminated
on March 18, 1996 upon expiration of his visa to work in the United States.
<F4>
(4) Upon first joining the Company in 1993, the Company
awarded Mr. Caltabiano a stock grant of 20,000 shares of
Common Stock, 15,000 of which have vested. 5,000 shares of
Common Stock will vest on December 31, 1996, unless his
employment is terminated earlier. The amount included in the
table reflects 5,000 shares of Common Stock that vested in
each of the fiscal years ended March 31, 1995 and March 31,
1996. These shares were awarded in connection with the
organization of the Company and have been valued at par
value ($.01 per share) before giving effect to a reverse
split of the Company's Common Stock that was approved by the
Company's shareholders on April 18, 1995.
<F5>
(5) Upon first joining the Company in 1993, the Company
awarded Mr. Field a stock grant of 8,000 shares of Common
Stock, all of which have vested. The amount included in this
table reflects 2,667 shares that vested during the year
ended March 31, 1995 and 1,333 shares that vested during the
year ended March 31, 1996. These shares were awarded in
connection with the organization of the Company and have
been valued at par value ($.01 per share) before giving effect
to a reverse split of the Company's Common Stock that was
approved by the Company's shareholders on April 18, 1995.
* Pursuant to Item 402(b) of Regulation S-B, no information
for the fiscal year ended March 31, 1994 is required to be
presented.
</FN>
</TABLE>
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 1996
The following table sets forth all grants of stock options
made during the fiscal year ended March 31, 1996 pursuant to
the Company's Stock Option Plan to the Named Officers:
Individual Grants
------------------------------
Number of % of Total Average
Securities Options Granted Exercise
Underlying to Employees in or Base
Options Fiscal Year Ended Price (b) Expiration
Name Granted March 31, 1996 (a) Per Share Date
Mark Blundell 38,666 19% $4.82 (c)
John Brann 38,666 19% $4.82 (c)
Philip V.Caltabiano 33,333 16% $4.88 (c)
Nicholas Field 22,200 11% $4.92 (c)
All Shareholders N/A N/A N/A N/A
All Optionees 263,466 N/A $4.89 (c)
(a) Excludes 40,666 shares of Common Stock issuable upon
exercise of options granted to outside directors.
(b) Two groups of options were granted in the fiscal year
ended March 31, 1996. Options exercisable for 99,466 shares
of Common Stock were granted in April 1995 and options
exercisable for 164,000 shares of Common Stock were granted
in November 1995.
(c) The options which were granted in April 1995 expire in
April 2000. The options granted in November 1996 expire in
November 2000.
Pursuant to an Underwriting Agreement dated August 11, 1995
(the "Underwriting Agreement")
between the Company and First Allied Securities, Inc., as
representative (the "Representative") of the underwriters in
the Company's initial public offering, the Company has
agreed that until September 11, 1996 it would not issue any
options to any director or officer of the Company without
the prior written consent of the Representative. The
Representative agreed to the issuance of the options granted
in November 1995.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31,
1996 AND YEAR-END OPTION VALUES
The following table sets forth information with respect to
options exercised by each of the Named Officers during the
fiscal year ended March 31, 1996 and the number and value of
unexercised options as of March 31, 1996:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the Money
Shares Options at March 31, 1996 Options at March 31, 1996(a)
Acquired on Value --------------------------- ----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Mark Blundell 0 $0 18,666 20,000 $18,666 $7,500
John Brann 0 0 18,666 20,000 18,666 7,500
Philip V. Caltabiano 0 0 13,333 20,000 13,333 7,500
Nicholas Field 0 0 7,200 15,000 7,200 5,625
<FN>
<F1>
(a) Based on the closing sale price of New Paradigm Software
Corp. Common Stock on March 31, 1996 of $5.50 as reported on
NASDAQ SmallCap Market.
</FN>
</TABLE>
Employment Contracts
The Company has entered into employment contracts with
Messrs. Blundell, Brann and Caltabiano. The employment
contracts of Messrs. Blundell, Brann and Caltabiano contain
the following principal features.
Mr. Blundell: Term: Five years with a remaining term of
approximately three years; Base Salary: $200,000 per annum
(Mr. Blundell has waived $50,000 per annum of this Base
Salary (which is not being accrued) until such time as the
Company would otherwise be able to report a pre-tax annual
profit in excess of $75,000); Common Stock Award: Mr.
Blundell received 26,667 shares of Common Stock. If the
Company achieves at least $2.5 million in sales in any
period of twelve consecutive months, Mr. Blundell will be
paid a bonus of $50,000. Mr. Blundell's employment contract
provides that if such bonus target is achieved and such
bonus paid, he and the Company will negotiate a new bonus
arrangement. Mr. Blundell is entitled to receive a death
benefit of $1,000,000 payable to a beneficiary named by him.
The Company has obtained a life insurance policy to fund
this benefit. Mr. Blundell's employment agreement will renew
automatically from year to year unless Mr. Blundell or the
Company gives notice of termination to the other on or
before May 1 of any year beginning in 1999.
Mr. Brann: Term: Three years with a remaining term of
approximately one year; Base Salary: $125,000 per annum (Mr.
Brann has waived $25,000 per annum of this Base Salary
(which is not being accrued) until such time as the Company
would otherwise be able to report a pre-tax annual profit in
excess of $75,000); Common Stock Award: Mr. Brann received
26,667 shares of Common Stock. Mr. Brann is entitled to a
death benefit of $1,000,000 payable to a beneficiary named
by him. The Company has obtained a life insurance policy to
fund this benefit. Mr. Brann's employment agreement will
renew automatically from year to year unless Mr. Brann or
the Company gives notice of termination to the other on or
before May 1 of any year beginning in 1999. Mr. BrannOs
employment as Vice President of Technology was terminated on
March 21, 1996 when his visa to work in the United States
expired.
Mr. Caltabiano: Term: Three years with a remaining term of
approximately three years; Base Salary: $100,000 per annum plus
commissions on sales; Common Stock Award: Mr. Caltabiano
received 20,000 shares of Common Stock, 15,000 of which have
vested. Rights to receive an additional 5,000 shares of
Common Stock will vest on December 31, 1996, unless his
employment is terminated before then.
The directors of the Company currently receive a retainer of
$1,000 per quarter and a fee of $1,000 for each meeting of
the Board of Directors that they attend. They are also
reimbursed by the Company for their direct costs for
attending meetings. On December 8, 1993, Messrs. Kahn,
Gordon and two former directors were each granted, as
remuneration for service on the Board of Directors, an
option ("Directors' Options") to acquire, at a price of
$5.00 per unit, 10,000 units, each unit consisting of one
share of Common Stock and one warrant to purchase one share
of Common Stock at an exercise price of $6.00 per share
("1993 Warrant"). These options will expire on November 1,
1998. On April 26, 1995 Messrs. Blundell, Brann, Kahn,
Gordon and one former director were granted options under
the Company's Stock Option Plan to purchase 5,333 shares of
Common Stock each at an exercise price of $4.50 per share.
These options became exercisable on April 26, 1996 and
expire on April 26, 2005. On November 30, 1995 Messrs. Kahn,
Gordon and Ms. Brown were each granted options under the
Company's Stock Option Plan to purchase 10,000 shares of
Common Stock at an exercise price of $5.125 per share.
Messrs. Blundell and Brann were granted options under the
Company's Stock Option Plan to purchase 20,000 shares of
Common Stock at the same exercise price. These options
become exercisable on November 30, 1996 and expire on
November 30, 2000. On April 24, 1996, Mr. Taylor was granted
options under the Company's Stock Option Plan to purchase
10,000 shares of Common Stock at an exercise price of $5.125
per share. These options become exercisable on April 24,
1997 and expire on April 24, 2001.
Pursuant to the Underwriting Agreement the Company has
agreed that until September 11, 1996 it would not issue any
options to any director or officer of the Company without
the prior written consent of the Representative. The
Representative agreed to the issuance of the options granted
in November 1995 and April 1996.
Item 12. Security Ownership of Certain Beneficial Owners
And Management
The following table indicates the beneficial ownership of
the Company's Common Stock as of May 1, 1996, by (1) each of
the directors, (2) each of the executive
officers of the Company, (3) all directors, and
executive officers of the Company as a group and (4) each
person or entity which beneficially owned in excess of five
percent of the Common Stock, based upon information supplied
by each of the directors, nominees, executive officers and
five percent beneficial owners:
Right to Right to Total Percent of
Sole Shared Number of Common
Voting and Voting and Shares Stock
Name of Investment Investment Beneficially Beneficially
Beneficial Owner Power Power Owned Owned
- - -----------------------------------------------------------------------------
Beverly Brown 0(b) 0 0 0%
Mark Blundell 50,666(c) 199,999(d) 250,665 10%
John Brann 49,333(e) 199,999(d) 249,332 10%
Philip V. Caltabiano 37,733(f) 0 37,733 2%
Nicholas Field 17,733(g) 0 17,733 (h)
Daniel Gordon 25,333(i) 0 25,333 1%
Jeff Kahn 25,333(j) 0 25,333 1%
Lancer Holdings 199,999(k) 0 199,999 8%
Midland Associates 619,999(l) 0 619,999 24%
Michael Taylor 0(m) 0 0 0%
Robert Trump 200,000(n) 619,999(o) 819,999 29%
All Directors 267,631(p) 199,999(q) 467,630 16%
and Executive
Officers of the
Company as a
group (a total
of 8 persons)
(a) The shares of Common Stock beneficially owned by each
person or by all directors and executive officers as a
group, and the shares included in the total number of shares
of Common Stock outstanding used to determine the percentage
of shares of Common Stock beneficially owned by each person
and such group, have been adjusted in accordance with Rule
13d-3 under the Securities Exchange Act of 1934 to reflect
the ownership of shares issuable upon exercise of
outstanding options, warrants or other common stock
equivalents which are exercisable within 60 days. As
provided in such Rule, such shares issuable to any holder
are deemed outstanding for the purpose of calculating such
holderOs beneficial ownership but not any other holderOs
beneficial ownership.
(b) Excludes 10,000 shares of Common Stock granted under the
Company's Stock Option Plan (the "SOP") which will not
become exercisable until November 1996.
(c) Consists of (i) 26,667 shares of Common Stock, (ii)
5,333 shares of Common Stock issuable upon exercise of
warrants issued in a 1994 private placement of the CompanyOs
securities (the "1994 Warrants"), and (iii) 18,666 shares of
Common Stock issuable upon exercise of options granted under
the SOP that are currently exercisable. Excludes 20,000
shares of Common Stock issuable upon exercise of options
granted under the SOP which will not become exercisable
until November 1996 and up to 149,999 shares of Common Stock
underlying stock options proposed to be granted under the
Executive Stock Option Plan proposed to be adopted at the annual
meeting of shareholders. All of these securities are subject to an
agreement with the Company and the Representative of the
(or an affiliate of the Representative), pursuant to which the
holder of such securities has agreed not to sell such
securities prior to September 11, 1996, except with the
prior written consent of the Company and the Representative
("Lock-Up Agreement").
(d) Represents the holdings of Lancer Holdings of which Mr.
Blundell and Mr. Brann are each 33% owners and directors and
officers. Consists of 166,666 shares of Common Stock and
33,333 shares of Common Stock issuable upon exercise of
warrants held by Lancer Holdings. All of these securities
are subject to a Lock-Up Agreement until September 11, 1996.
(e) Consists of (i) 26,667 shares of Common Stock, (ii)
4,000 shares of Common Stock issuable upon exercise of 1994
Warrants, and (iii) 18,666 shares of Common Stock issuable
upon exercise of options granted under the SOP that are
currently exercisable. Excludes 20,000 shares of Common
Stock issuable upon exercise of options granted under the
SOP which will not become exercisable until November 1996
and up to 149,999 shares of Common Stock underlying stock
options proposed to be granted under the Executive Stock
Option Plan proposed to be adopted at the annual meeting
of shareholders. All of these securities are subject to a
Lock-Up Agreement until September 11, 1996.
(f) Consists of (i) 20,400 shares of Common Stock, (ii)
4,000 shares of Common Stock issuable upon exercise of 1994
Warrants, and (iii) 13,333 shares of Common Stock issuable
upon exercise of options granted under the SOP that are
currently exercisable. Excludes 20,000 shares of Common
Stock issuable upon exercise of options granted under the
SOP which will not become exercisable until November 1996
and up to 100,000 shares of Common Stock underlying stock
options proposed to be granted under the Executive Stock
Option Plan proposed to be adopted at the annual meeting
of shareholders. All of
these securities are subject to a Lock-Up Agreement until
September 11, 1996.
(g) Consists of 10,533 shares of Common Stock and 7,200
shares of Common Stock issuable upon exercise of options
granted under the SOP that are currently exercisable.
Excludes 15,000 shares of Common Stock issuable upon
exercise of options granted under the SOP which will not
become exercisable until November 1996 and up to 66,000
shares of Common Stock underlying stock options proposed to
be granted under the Executive Stock Option Plan proposed to be
adopted at the annual meeting of shareholders. All of these securities are
subject to a Lock-Up Agreement until September 11, 1996.
(h) Less than 1%.
(i) Consists of (i) 10,000 shares of Common Stock and 10,000
shares of Common Stock underlying 1993 Warrants issuable
upon exercise of DirectorsO Options granted in 1993 to non-
employee directors of the Company and (ii) 5,333 shares of
Common Stock issuable upon exercise of options granted under
the SOP that are currently exercisable. Excludes 10,000
shares of Common Stock issuable upon exercise of options
granted under the SOP which will not become exercisable
until November 1996. All of these securities are subject to
a Lock-Up Agreement until September 11, 1996.
(j) Consists of (i) 10,000 shares of Common Stock and 10,000
shares of Common Stock underlying 1993 Warrants issuable
upon exercise of Director's Options and (ii) 5,333 shares of
Common Stock issuable upon exercise of options granted under
the SOP that are currently exercisable. Excludes 10,000
shares of Common Stock issuable upon exercise of options
granted under the SOP which will not become exercisable
until November 1996. All of these securities are subject to
a Lock-Up Agreement until September 11, 1996.
(k) Consists of 166,666 shares of Common Stock and 33,333
shares of Common Stock issuable upon exercise of warrants
held by Lancer Holdings. All of these securities are subject
to a Lock-Up Agreement until September 11, 1996.
(l) Consists of 439,999 shares of Common Stock and 180,000
shares of Common Stock issuable upon exercise of warrants.
These securities were previously owned by Management
Technologies, Inc. (OMTIO) and transferred to Midland
Associates in satisfaction of a loan to MTI by Midland
Associates.
(m) Excludes 10,000 shares of Common Stock issuable upon
exercise of options granted under the SOP which will not
become exercisable until April 1997.
(n) Consists of 200,000 shares of Common Stock issuable upon
exercise of 1994 Warrants.
(o) Represents the holdings of Midland Associates. Consists
of the securities listed in note l above.
(p) Consists of all of the above securities in notes b-g, j
& m and excludes all of the securities issued under the SOP
and all securities do not become exercisable within 60 days
proposed to be issued under the Executive Stock Option Plan.
Item 12. Certain Relationships and Related Transactions
General
The following is a discussion of certain transactions
entered into by the Company with officers, directors,
security holders and affiliates thereof. The Company
believes that the terms of these transactions were no less
favorable to the Company than would have been obtained
from a non-affiliated third party for similar transactions
at the time of entering into such transactions.
The Company has adopted a policy whereby any future
transactions, including loans, between the Company and
its directors, officers, principal shareholders and other
affiliates, will be on terms no less favorable to the
Company than could be obtained from unaffiliated third
persons on an arm's-length basis at the time that the
transaction was entered into and will be reviewed and
approved by a majority of the Company directors,
including a majority of the Company's independent
disinterested directors.
Issuance of Securities to Directors, Executive Officers and
Their Affiliates
In a private placement of the Company's securities for
which a closing was held on October 20, 1994 (the "1994
Financing"), Mr. Blundell purchased for $15,000 a fractional
unit comprised of (i) a two-year promissory note with an
increasing interest rate starting at 10% per annum (a "1994
Note") in the principal amount of $15,000 and (ii) 1994
Warrants exercisable for 12,000 shares of Common Stock; Mr.
Brann purchased for $5,000 a fractional unit comprised of
(i) a 1994 Note in the principal amount of $5,000 and (ii)
1994 Warrants exercisable for 4,000 shares of Common Stock;
Mr. Caltabiano purchased for $5,000 a fractional unit
comprised of (i) a 1994 Note in the principal amount of
$5,000 and (ii) 1994 Warrants exercisable for 4,000 shares
of Common Stock. Mr. Blundell subsequently transferred 1994
Warrants exercisable for 6,667 shares of Common Stock. The
shares of Common Stock issuable upon exercise of the 1994
Warrants purchased in the 1994 Financing by the foregoing
directors and executive officers are registered for sale
under the Securities Act of 1933 but are subject to Lock-Up
Agreements.
On March 22, 1995, 33,333 shares of Common Stock and
warrants (the "MBA Warrants"), which are exercisable for
33,333 shares of Common Stock at an exercise price of $5.63
per share, subject to adjustment under certain
circumstances, were issued to Mark Blundell and Associates
(now known as Lancer) in connection with the
Company's acquisition of the New Paradigm Architecture.
See "New Paradigm Architecture." The MBA Warrants will
expire on March 21, 2000 and are not redeemable.
On June 30, 1995 Mr. Field exercised 2,000 1993 Warrants for
an aggregate of $980.
See "Executive Compenstion - Directors Compensation" and "Options
Grants in Fiscal Year Ended March 31, 1996" with respect to options granted
to directors and executive officers of the Corporation
during the fiscal year ended March 31, 1996 and in April 1996.
New Paradigm Architecture
The Company acquired the rights to its proprietary
approach to developing computer programs (the "New Paradigm
Architecture") used to develop its COPERNICUS software and
related intellectual property rights from Lancer as
of March 22, 1995 for a consideration equal to 33,333 shares
of Common Stock and the MBA Warrants. Lancer no
longer holds any right, title or interest in COPERNICUS or
the New Paradigm Architecture. Prior to the acquisition of
the New Paradigm Architecture, the Company held an
exclusive, perpetual license to use the New Paradigm
Architecture from Lancer. The Company acquired
the license pursuant to a license agreement with Lancer
Holdings dated as of July 20, 1993. Pursuant to the July 20,
1993 license agreement, the Company made a one-time
payment of 133,333 shares of Common Stock in 1993 and annual
license fee payments of $10,000 in 1993 and 1994.
The Company's Chief Executive Officer and President,
Mark Blundell, and its former Vice President of Technology,
John Brann, collectively own 66% of the voting stock of
Lancer. Messrs. Blundell and Brann have no direct
or indirect interest in the remaining 34% of the voting
stock of Lancer Holdings. Messrs. Blundell and Brann are the
only directors of Lancer Holdings and are both directors of
the Corporation.
Other Transactions
Mr. Jeff Kahn, a director, is the President of Kahn
Communications Group Inc.("KCG"), a division of Ruder Finn.
Kahn Communications Group provides public relations services
to the Company for which it receives a monthly fixed fee
from the Company of $5,000. KCG also provides special
event related marketing services to the Company for
which it receives additional fees on a per engagement basis.
In the fiscal year ended March 31, 1995, KCG received
$36,000 in such fees and in the fiscal year ended March 31,
1996, KCG received $72,182 in such fees.
On September 1, 1995 the Company entered into a
consulting contract with Corporate Growth Services, a
corporation owned by Mr. Gordon, Chairman of the Board of
Directors. Corporate Growth Services provides small
development stage companies with management consulting.
Under the terms of the contract Corporate Growth Services
receives a consulting fee of $2,000 per month over and above
any fees Mr. Gordon receives for attending meetings of the
Board of Directors. In the fiscal year ended March 31, 1995,
Corporate Growth Services received $11,400 in such fees and
in the fiscal year ended March 31, 1996, Corporate Growth
Services received $18,000 in such fees.
Effective March 31, 1996, the Company entered into a five-year value
added reseller agreement with Petra. Petra's president is a consultant
to and a former director of the company. The Company granted to Petra
the right to license and distribute the company's COPERNICUS software
program integrated with Petra's products.
In exchange for granting this license, the company will receive $100,000
within 180 days of the effective date of this agreement and $100,000 within
90 days of the delivery date of a second platform of COPERNICUS software
The Company has verbally agreed to pay a fee of $100,000 to another
company if a second platform is licensed. In addition, Petra agreed to pay
the Company an annual royalty fee for each license sold in the future.
At March 31, 1996, the Company recorded revenue (included in software and
licensing fees) and a related receivable of $50,000 in connection with
this agreement.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
A EXHIBITS
3.1 Restated Certificate of Incorporation of the Company, as
amended by a Certificate of Amendment dated August 14,
1995 and as corrected by a Certificate of Corrections dated August 24,
1995 (incorporated by reference to Exhibit 2 to Form 10-
QSB for the Quarterly Period ended June 30, 1995 "the June
1995 Form 10-QSB"))3.2 By-laws of the Company (incorporated by
reference to
Exhibit 3.2 to Amendment No. 1 to the Registration
Statement on Form SB-2 (File No. 33-92988NY (the Registration
Statement")).
4.1 Form of Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company (incorporated
by reference to Exhibit 4 to the June 1995 Form 10-QSB)
4.2 Form of Representative's Warrant Agreement (incorporated
by reference to Exhibit 4.2 to Amendment No. 1 to the
Registration Statement).
4.3 Form of 1993 Warrant (incorporated by reference to Exhibit
4.3 to Amendment No. 1 to the Registration Statement).
4.4 Letter dated December 8, 1993 from the Company to
Barrington J. Fludgate granting Directors Options to
purchase shares of Common Stock and 1993 Warrants.
Substantially identical grants were made to Anthony J.
Cataldo, Daniel A. Gordon and Jeff Kahn (incorporated by
reference to Exhibit 4.4 to Amendment No. 1 to the
Registration Statement).
4.5 Form of 1994 Warrant (incorporated by reference to Exhibit
4.5 to Amendment No. 1 to the Registration Statement).
4.6 Form of 1995 Warrant (incorporated by reference to Exhibit
4.6 to Amendment No. 1 to the Registration Statement).
4.7 Form of Lancer Warrant. (incorporated by reference to
Exhibit 4.7 to the Registration Statement).
4.8 Form of Financial Advisory and Investment Banking
Agreement with Representative (incorporated by reference
to Exhibit 4.8 to Amendment No. 3 to the Registration
Statement).
4.9 Form of Midland Warrant (incorporated by reference to
Exhibit 4.9 to the Registration Statement).
4.10 Form of Agreement between the Company and Josephthal Lyon
& Ross incorporated regarding termination of certain
warrants (incorporated by reference to Exhibit 4.10 to
Amendment No. 2 to the Registration Statement).
4.11 Option Agreement dated October 9, 1995 between the Company
and the Electric Magic Company (incorporated herein by
reference to Exhibit 4.11 to Form 10-QSB for the Quarterly
Period ended September 30, 1995 (the "September 1995 Form
10-QSB")).
4.12 Warrant issued to Omotsu Holdings Limited (incorporated by
reference to Exhibit 4.12 to the September 1995 Form 10-
QSB).
10.1.1 Blundell Employment Contract, as amended (incorporated by
reference to Exhibit 10.1.1 to the Registration
Statement).
10.1.2 Brann Employment Contract, as amended (incorporated by
reference to Exhibit 10.1.2 to the Registration
Statement).
10.1.3 Caltabiano Employment Contract, as amended (incorporated
by reference to Exhibit 10.1.3 to the Registration
Statement).
10.2 MBA Rights Purchase Agreement dated March 22, 1995
(incorporated by reference to Exhibit 10.2 to the
Registration Statement).
10.3 Voting Trust Agreement (incorporated by reference to
Exhibit 10.3 to Amendment No. 1 to the Registration
Statement).
10.4 MTI Settlement Agreement dated as of May 26, 1995
(incorporated by reference to Exhibit 10.4 to the
Registration Statement).
10.5.1 Paxcell, Inc. Distribution Agreement dated March 31, 1994
(incorporated by reference to Exhibit 10.5.1 to the
Registration Statement).
10.5.2 Rivergate Systems, Inc. Distribution Agreement dated June
23, 1994 (incorporated by reference to Exhibit 10.5.2 to
the Registration Statement).
10.5.3 New Venture Technologies Distribution Agreement dated
January 11, 1995 (incorporated by reference to Exhibit
10.5.3 to Amendment No. 1 to the Registration Statement).
10.6.1 Financial Performance Corporation Value-Added Reseller
Agreement dated April 29, 1994 (incorporated by reference
to Exhibit 10.6.1 to the Registration Statement).
10.6.2 Benson Software Systems, Inc. Value-Added Reseller
Agreement dated October 25, 1994 (incorporated by
reference to Exhibit 10.6.2 to the Registration
Statement).
10.6.3 Praxis Value-Added Reseller Agreement dated January 9,
1995 (incorporated by reference to Exhibit 10.6.3 to the
Registration Statement).
10.7 Novell Inc. Co-marketing Letter Agreement dated December
2, 1994 (incorporated by reference to Exhibit 10.7 to the
Registration Statement).
10.8 Publicitas Letter Agreement dated January 31, 1995
(incorporated by reference to Exhibit 10.8 to the
Registration Statement).
10.9 Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.9 to the Registration Statement).
10.10 Accounts Receivable Purchase and Sale Agreement between
the Company and MTB Bank (incorporated by reference to
Exhibit 10.10 to Amendment No.1 to the Registration
Statement).
10.11 Software License Agreement dated May 31, 1995 between the
Company and Marriott International, inc. (incorporated by
reference to Exhibit 10.11 to Amendment No.1 to the
Registration Statement).
10.13 Marriott Acceptance Certificate, dated June 8, 1995
(incorporated by reference to Exhibit 10.13 to Amendment
No.2 to the Registration Statement).
10.14 Agreement dated October 9, 1995 between the Company and
Electric Magic Company (incorporated by reference to
Exhibit 10.14 to the September 1995 Form 10-QSB).
10.15 Agreement dated October 31, 1995 between the Company and
Camelot Corporation (incorporated by reference to Exhibit
10.15 to the September 1995 Form 10-QSB).
11 Statement re: computation of per share earnings (losses)
24 Power of Attorney.
B. Reports on Form 8-K
The following reports have been filed on Form 8-K since
February 15, 1996.
1) February 20, 1996, New York Life and Bell Atlantic
License New ParadigmOs Copernicus.
2) June 21, 1996, New Paradigm Announces $500,000
Enterprise License for Delta Airlines through
Transquest.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NEW PARADIGM SOFTWARE CORP.
(Registrant)
Date: June 29, 1996 _/s/ ______Mark Blundell________________
Mark Blundell
President & Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the
registrant and in the capabilities and on the dates
indicated.
Signature Title Date
------------ --------- --------
_/s/ Mark Bludell_ CHIEF EXECUTIVE OFFICER AND June , 1996
Mark Blundell PRESIDENT (PRINCIPAL
EXECUTIVE OFFICER, PRINCIPAL
FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
AND DIRECTOR
_/s/John Brann_ SECRETARY AND DIRECTOR June , 1996
John Brann
_/s/Beverly Brown_ DIRECTOR June , 1996
Beverly Brown
_/s/Daniel A. Gordon_ CHAIRMAN OF THE BOARD OF June , 1996
Daniel A. Gordon DIRECTORS
_/s/Jeff Kahn_ DIRECTOR June , 1996
Jeff Kahn
_/s/Michael Taylor_ DIRECTOR June , 1996
Michael Taylor
Note: Signatures of Daniel A. Gordon, Jeff Kahn and Michael Taylor
by Arthur M. Mitchell Attorney In Fact.
AUDITED FINANCIAL STATEMENTS
NEW PARADIGM SOFTWARE CORP.. AND SUBSIDIARIES
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 1994
AND YEARS ENDED MARCH 31, 1996 AND 1995
Report of independent certified public accountants F-2
Consolidated financial statements:
Balance sheets F-3
Statements of operations F-4
Statements of shareholders' equity (capital deficit) F-5 - F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-20
Report of Independent Certified Public Accountants
New Paradigm Software Corp.
and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets
of New Paradigm Software Corp. and Subsidiaries (a
corporation in the development stage) as of March 31, 1995
and 1996, and the related consolidated statements of
operations, shareholders' equity (capital deficit), and cash
flows for the period from July 20, 1993 (inception) to
March 31, 1994, the years ended March 31, 1995 and 1996 and
the period from July 20, 1993 (inception) to March 31, 1996.
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 generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of New Paradigm Software Corp. and
Subsidiaries at March 31, 1995 and 1996, and the results of
their operations and their cash flows for the period from
July 20, 1993 (inception) to March 31, 1994, the years ended
March 31, 1995 and 1996 and the period from July 20, 1993
(inception) to March 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As disclosed in Note 1 to the consolidated
financial statements, the Company is in the development
stage and has incurred significant losses since its inception that raise
substantial doubt about its ability to carry out its
business plan and continue as a going concern. Management's
plans in regard to these matters are described in Note 1.
These consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
New York, New York
May 31, 1996
NEW PARADIGM SOFTWARE CORP. and subsidiaries
(a corporation in the development stage)
Consolidated Balance Sheets
March 31,
1995 1996
-----------------------
Assets
Current:
Cash and cash equivalents $394,293 $2,017,472
Accounts receivable 29,519 108,063
Receivable from related party (Note 14) - 50,000
Other receivables and prepayments - 108,560
Total current assets 423,812 2,284,095
Property and equipment, less accumulated
depreciation and amortization (Note 3) 144,429 352,964
Deferred registration and financing costs, less
accumulated amortization (Note 4) 403,687 -
Investment in restricted common stock at
market value (Note 12) - 185,543
Other assets, less accumulated amortization (Note 5) 79,964 291,266
------------------------
$1,051,892 $3,113,868
------------------------
Liabilities and Shareholders' Equity
(Capital Deficit)
Current:
Accounts payable and accrued expenses $364,678 $220,341
Deferred revenue - 17,500
Due to shareholder (Note 6) 67,951 -
------------------------
Total current liabilities 432,629 237,841
Long-term debt:
Due to shareholder -- subordinated (Note 6) 488,174 -
Promissory notes (net of unamortized discount
of $218,489) at discounted amount (face value
of $1,532,500 and none) (Note 7) 1,332,001 -
--------------------------
Total liabilities 2,252,804 237,841
--------------------------
Commitments and contingencies (Note 9)
Shareholders' equity (capital deficit) (Notes 2,
10 and 12)):
Preferred stock, $.01 par value: shares
authorized 10,000,000:
Series A shares authorized, 1,000,000; issued
and outstanding 28,000 and none 280 -
Series B shares authorized, 2,000,000; issued
and outstanding 1,212,500 and none 12,125 -
Common stock, $.01 par value - shares authorized
50,000,000; issued and outstanding 693,323
and 2,446,729 6,933 24,467
Additional paid-in capital 1,353,650 9,150,209
Unrealized loss on investment in restricted
common stock - (164,457)
Deficit accumulated during the development stage (2,573,900) (6,134,192)
-------------------------
Total shareholders' equity (capital deficit) (1,200,912) 2,876,027
-------------------------
$1,051,892 $3,113,868
See accompanying notes to consolidated financial statements
<TABLE>
NEW PARADIGM SOFTWARE CORP. and subsidiaries
(a corporation in the development stage)
Consolidated Statements of Operation
<CAPTION>
Period from Period from
July 20, 1993 July 20, 1993
(inception) to Year Ended Year Ended (inception to
March 31 1994 March 31, 1995 March 31, 1996 March 31, 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Software fees, royalties and
licensing fees (Notes 14 and 15) $ - $ - $ 372,541 $ 372,541
Consulting, maintenance and other fees 5,750 64,400 53,411 123,561
-------------------------------------------------------------------
5,750 64,400 425,952 496,102
-------------------------------------------------------------------
Expenses:
Employee costs 175,547 550,389 1,535,056 2,260,992
General and administrative 143,831 385,928 503,904 1,033,663
Professional fees 26,679 318,514 620,198 965,391
Marketing 71,297 198,034 612,085 881,416
Research and development 121,702 331,821 60,344 513,867
Occupancy 39,116 109,608 218,365 367,089
Depreciation and amortization 28,158 82,604 134,138 244,900
-------------------------------------------------------------------
606,330 1,976,898 3,684,090 6,267,318
-------------------------------------------------------------------
Loss from operations (600,580) (1,912,498) (3,258,216) (5,771,216)
-------------------------------------------------------------------
Other income (expense):
Interest income 7,263 7,564 112,251 127,078
Gain on sale of assets (Note 12) - - 24,865 24,865
Interest expense - (46,263) (63,724) (109,987)
Amortization of debt discount and
deferred financing costs (Note 4) - (29,386) (375,546) (404,932)
-------------------------------------------------------------------
7,263 (68,085) (302,154) (362,976)
-------------------------------------------------------------------
Net loss $(593,317) $(1,980,583) $(3,560,292) $(6,134,192)
___________________________________________________________________
Net loss per share $ (.52) $ (1.69) $ (2.04)
_________________________________________________
Weighted average common shares
outstanding 1,149,661 1,174,749 1,743,472
See accompanying notes to consolidated financial statements
</TABLE>
NEW PARADIGM SOFTWARE CORP. and subsidiaries
(a corporation in the development stage)
Consolidated Statements of Shareholders' Equity (Capital Deficit)
Period from July 20, 1993 (inception) to March 31, 1996
<TABLE>
<CAPTION>
Unrealized Total
loss on Deficit share-
investment accumulated holders'
Preferred Preferred Unrealized Total
Stock Stock loss on Deficit share-
Series A Series B Common Stock Ad- investment accumulated holders'
-------------- ----------------- --------------- ditional in during the equity
Shares Par Shares Par Shares Par paid-in restricted development (capital
value value value capital stock stage deficit)
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 20,
1993 (inception) - $- - $- - $- $- $- $- $-
Initial
capitalization,
July 1993 @
$3.75 per share - - - - 13,333 133 49,867 - - 50,000
Issuance of
common stock
for services
rendered,
October 1993
@ $1.68 per
share - - - - 1,600 16 2,670 - - 2,686
Issuance of common
stock for MTI
license
agreement,
October 1993 @
$.04 per share
(Note 6) - - - - 373,333 3,734 10,266 - - 14,000
Issuance of common
stock to Lancer
for software
rights,
October 1993 @
$.04 per share
(Note 9(c)) - - - - 133,333 1,333 3,667 - - 5,000
Sale of common
stock in private
placement,
October 1993
@ $18.67 per
share - - - - 61,162 612 1,140,653 - - 1,141,265
Issuance of common
stock to
employees,
February 1994 @
$.04 per share
(Note 10(e)) - - - - 64,201 642 1,765 - - 2,407
Issuance of common
stock for
services
rendered, March
1994 @ $1.68 per
share - - - - 800 8 1,336 - - 1,344
Net loss for the
period - - - - - - - - (593,317) (593,317)
- - ----------------------------------------------------------------------------------------------------------------------------
Balance, March 31,
1994 - - - - 647,762 $6,478 $1,210,224 - $(593,317) $623,385
Issuance of Series
A preferred
stock and
warrants
in private
placement, net
of costs of
$43,423,
October 1994 28,000 280 - - - - 10,297 - - 10,577
Issuance of common
stock to
employees,
January 1995 @
$.04 per share
(Note 10(e)) - - - - 12,228 122 337 - - 459
Issuance of Series
B preferred stock
and warrants, in
private
placement, net of
costs of $50,000,
March 1995 - - 1,212,500 12,125 - - 131,875 - - 144,000
Issuance of common
stock to Lancer
Holdings, Inc.
for software
rights, March
1995 @ $.04 per
share (Note 9(c)) - - - - 33,333 333 917 - - 1,250
Net loss for the
year - - - - - - - - (1,980,583) (1,980,583)
- - ----------------------------------------------------------------------------------------------------------------------------
Balance, March
31, 1995
(carried
forward) 28,000 $280 1,212,500 $12,125 693,323 $6,933 $1,353,650 $- $(2,573,900) $(1,200,912)
____________________________________________________________________________________________________________________________
Balance, March
31, 1995
(brought
forward) 28,000 $280 1,212,500 $12,125 693,323 $6,933 $1,353,650 $- $(2,573,900) $(1,200,912)
Issuance of Series
B preferred stock
and warrants in
private
placement, net of
costs of $11,000,
April 1995
(Note 7(b)) - - 100,000 1,000 - - 12,400 - - 13,400
Conversion of MTI
debt to paid-in
capital May 1995
(Note 6) - - - - - - 491,284 - - 491,284
Vesting of 1,333
shares issued to
an employee
pursuant to a
restricted
grant, June
1995 - - - - 1,333 13 37 - - 50
Exercise of 1993
warrants at an
exercise price
of $.49 per
share pursuant
to a special
exercise offer,
July 1995 - - - - 29,250 293 14,040 - - 14,333
Conversion of
Series A
preferred stock
to common,
August 1995
(Note 10(a)) (28,000) (280) - - 28,000 280 - - - -
Conversion of
Series B
preferred stock
to common,
August 1995
(Note 10(a)) - - (1,312,500) (13,125) 201,916 2,019 11,106 - - -
Sale of common
stock and
warrants in the
Company's
initial public
offering,
August 1995,
@ $6.50 per
share, net of
underwriters'
discount,
underwriters'
expense
allowance and
other expenses
of the offering
(Note 2) - - - - 1,200,000 12,000 5,813,703 - - 5,825,703
Issuance of common
stock upon
exercise of the
underwriters'
overallotment
option,
September 1995,
net of
underwriters'
discount and
expenses (Note 2) - - - - 180,000 1,800 1,064,430 - - 1,066,230
Issuance of common
stock for the
purchase of
Netphone,
November 1995
(Note 12) - - - - 80,000 800 239,200 - - 240,000
Issuance of
options for the
purchase of
Netphone,
November 1995
(Note 12) - - - - - - 500 - - 500
Issuance of common
stock for
settlement of
legal fees @
$5.38 per share,
December 1995
(Note 10(d)) - - - - 27,907 279 149,721 - - 150,000
Vesting of 5,000
shares issued to
an employee
pursuant to a
restricted grant,
December 1995 - - - - 5,000 50 138 - - 188
Unrealized loss on
investment in
restricted stock
(Note 12) - - - - - - - (164,457) - (164,457)
Net loss for the
year - - - - - - - - (3,560,292) (3,560,292)
___________________________________________________________________________________________________________________________
Balance, March
31, 1996 - $- - $- 2,446,729 $24,467 $9,150,209 $(164,457) $(6,134,192) $2,876,027
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
NEW PARADIGM SOFTWARE CORP. and subsidiaries
(a corporation in the development stage)
Consolidated Statements of Cash Flows
(Note 11)
Period from Period from
July 20, 1993 July 20, 1993
(inception) to Year Ended Year Ended (inception) to
March 31, 1994 March 31, 1995 March 31, 1996 March 31, 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Loss $(593,317) $(1,980,583) $(3,510,292) $(6,134,192)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 28,158 82,604 134,138 244,900
Gain on sale of assets - - (24,482) (24,482)
Issuance of common stock for
various expenses 16,407 459 - 16,866
Issuance of common stock to employee
pursuant to a restricted grant - - 238 238
Amortization of debt discount and
deferred financing costs - 29,386 375,546 404,932
Noncash interest expense - 39,755 3,110 42,865
Changes in assets and liabilities:
Increase in:
Accounts receivable (4,000) (25,519) (78,544) (108,063)
Receivable from related party - - (50,000) (50,000)
Other receivables and prepayments - - (108,560) (108,560)
Other assets - - (5,950) (5,950)
Increase (decrease) in:
Accounts payable and accrued
expenses - 364,678 (144,337) 220,341
Deferred revenue 3,751 (3,751) 17,500 17,500
__________________________________________________________________
Total adjustments 44,316 487,612 118,659 650,587
__________________________________________________________________
Net cash used in operating
activities (549,001) (1,492,971) (3,441,633) (5,483,605)
__________________________________________________________________
Cash flows from investing activities:
Purchases of property and equipment (143,254) (103,172) (324,940) (571,366)
COPERNICUS development costs - - (218,950) (218,950)
Sale of property and equipment - - 3,300 3,300
Purchase of Netphone software - - (280,000) (280,000)
Sale of Netphone software - - 193,532 193,532
Patents, trademarks and organization
costs (17,136) (60,000) (5,985) (83,121)
__________________________________________________________________
Net cash used in investing
activities: (160,390) (163,172) (633,043) (956,605)
__________________________________________________________________
Cash flows from financing activities:
Proceeds from sale of common stock
to founding shareholders 1,191,265 - - 1,191,265
Proceeds from private placements - 1,662,500 100,000 1,762,500
Borrowings from shareholder 185,683 348,676 107,283 641,642
Repayment of debt - (130,000) (1,632,500) (1,762,500)
Proceeds from bank loan - - 100,000 100,000
Repayment of bank loan - - (100,000) (100,000)
Repayment of shareholder loans - - (175,234) (175,234)
Proceeds from exercise of 1993 warrants - - 14,333 14,333
Proceeds from Initial Public Offering
of common stock and warrants, net - - 6,891,933 6,891,933
Registration and financing costs - (498,297) 392,040 (106,257)
___________________________________________________________________
Net cash provided by
financing activities 1,376,948 1,382,879 5,697,855 8,457,682
___________________________________________________________________
Net increase (decrease) in cash
and cash equivalents 667,557 (273,264) 1,623,179 2,017,472
Cash and cash equivalents, beginning
of period - 667,557 394,293 -
___________________________________________________________________
Cash and cash equivalents, end
of period $667,557 $394,293 $2,017,472 $2,017,472
___________________________________________________________________
See accompanying notes to consolidated financial statements
</TABLE>
New Paradigm Software Corp. and Subsidiaries
(a corporation in the development stage)
Notes to Consolidated Financial Statements
1. Organization
and Summary of
Accounting
Policies Organization
New Paradigm Software Corp. (a
corporation in the development stage)
(the "Company"), a New York corporation,
was founded in July 1993 (originally
capitalized by Management Technologies,
Inc. - see Note 6) and commenced
operations on November 1, 1993. The
Company is engaged in the research,
development and marketing of computer
software based upon a software
architecture acquired from Lancer
Holdings, Inc. ("Lancer"), a related
party (see Note 9(c)).
In December 1995, the Company
incorporated two wholly-owned
subsidiaries, New Paradigm Commerce
(formerly known as New Paradigm Golden-
Link, Inc.), consisting of its former
electronic data interchange ("EDI")
division, and New Paradigm Inter-Link,
Inc. a subsidiary created to research and
develop commercial applications for the
Internet.
The Company had no significant revenues
through March 31, 1996 and its activities
had been limited to finalization of
domestic and foreign patent agreements,
organizational and initial capitalization
activities, research and development of
computer software products, initial
marketing activities and pilot projects.
The Company completed its first direct
end-user license of its COPERNICUS
software on May 31, 1995 and, on
February 15, 1996, signed contracts with
two additional customers. In addition,
pilot projects are underway at several
large organizations.
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and
its wholly-owned subsidiaries. All
material intercompany accounts and
transactions are eliminated.
Basis of Presentation
The accompanying consolidated financial
statements have been prepared assuming
that the Company will continue as a going
concern. The Company is in the
development stage and has incurred
significant losses since its inception
that raise substantial doubt about the
Company's ability to carry out its
business plan and continue as a going
concern without additional financing or
equity. Although there can be no
assurance of its success, management is
aggressively seeking new business. The
consolidated financial statements do not
include any adjustments that might result
from the outcome of this uncertainty.
Cash Equivalents
Cash equivalents are comprised of highly
liquid debt instruments with original
maturities of three months or less,
principally money market accounts.
Investment in Equity Securities
Investment in restricted common stock is
accounted for in accordance with
Statement of Financial Accounting
Standards No. 115, "Accounting for
Certain Investments in Debt and Equity
Securities". Under Statement No. 115,
debt and marketable equity securities are
required to be classified in one of three
categories: trading, available-for-sale
or held to maturity. The Company's
investment in restricted common stock
qualifies under the provisions of
Statement No. 115 as available-for-sale.
Such securities are recorded at fair
value, and unrealized holding gains and
losses, net of the related tax effect,
are not reflected in earnings but are
reported as a separate component of
shareholders' equity until realized.
Property, Equipment and Depreciation
Property and equipment are stated at
cost. Depreciation is computed using
accelerated methods over the estimated
useful lives of the assets, ranging from
5-7 years for financial and tax reporting
purposes.
Deferred Costs and Intangible Assets
Deferred registration costs were charged
to equity upon consummation of the
CompanyOs initial public offering (the
"IPO") (see Note 2).
The unamortized portion of deferred
financing costs in connection with the
Company's private placements outstanding
at March 31, 1995 was written off since
the debt was paid upon consummation of
the IPO.
Patents and related trademarks are
amortized using the straight-line method
over 17 years, which is the estimated
useful life of the patents.
Software rights are amortized using the
straight-line method over 5 years.
Copernicus development costs are
amortized using the straight-line method
over 5 years (see Product Development).
Organization costs are amortized using
the straight-line method over 5 years.
Revenue Recognition
Revenue from software products is
recognized upon delivery to the customer.
The Company's contracts with its
customers provide for payment to be made
on specified schedules which may differ
from the timing of recognition of
revenue. Customer advances are recorded
as cash payments received in advance of
delivery.
Maintenance fees are recognized
proportionately over the term of the
maintenance agreement. Customer service
fees represent fees charged to customers
for installation, configuration and
modification of standard software to
customer specifications. Revenue is
recorded as work is performed under the
relevant arrangement.
Use of Estimates
The preparation of the financial
statements in conformity with generally
accepted accounting principles requires
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts
receivable, receivables from related
party, other receivables and prepayments
and accounts payable approximate fair
value because of the short maturity of
these items.
Recent Accounting Standards
In October 1995, the Financial Accounting
Standards Board issued Statement of
Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123 encourages
entities to adopt the fair value method
in place of the provisions of Accounting
Principles Board Opinion No. 25.
OAccounting for Stock Issued to
Employees' ("APB No. 25"), for all
arrangements under which employees
receive shares of stock or other equity
instruments of the employer or the
employer incurs liabilities to employees
in amounts based on the price of the
stock. The Company does not anticipate
adopting the fair value method encouraged
by SFAS No. 123 but will disclose such amounts
on a proforma basis in the future. This statement will
not affect the Company's financial position,
operating results or liquidity.
Product Development
Costs associated with product development
subsequent to establishment of
technological feasibility, including
enhancements to software products, are
capitalized and amortized as required by
Statement of Financial Accounting
Standards No. 86, "Accounting for the
Cost of Computer Software to Be Sold,
Leased, or Otherwise Marketed" ("SFASENo.
86"). Costs incurred prior to achieving
technological feasibility are expensed as
incurred. On July 1, 1995, the Company
established technological feasibility for
its COPERNICUS software product and
capitalized all enhancement and upgrade
costs since that date as provided by SFAS
No. 86.
Income Taxes
Income taxes are computed in accordance
with the provisions of Statement of
Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS
109"), which requires, among other
things, a liability approach to
calculating deferred income taxes. SFAS
No. 109 requires a company to recognize
deferred tax liabilities and assets for
the expected future tax consequences of
temporary differences between the
carrying amounts of assets and
liabilities for financial reporting
purposes and the amounts used for income
tax purposes. Deferred tax assets must be
reduced by a valuation allowance to
amounts expected to be realized.
Net Loss Per Share
Net loss per share is based on the
weighted average number of common shares
outstanding and dilutive common stock
equivalents during the periods. For the
year ended March 31, 1995 and periods
ending previously, net loss per share has
been calculated pursuant to Securities
and Exchange Commission Staff Accounting
Bulletin No. 83, whereby common stock
issued for consideration below the
expected IPO price during the
twelve-month period preceding the
intended IPO, together with common stock
options and warrants issued during such
period with exercise prices below the
expected IPO price, have been included in
the calculation of common shares using
the treasury stock method as if they were
outstanding for all periods presented.
For the year ended March 31, 1996, common
stock options and warrants outstanding
are not included in the calculation of
weighted average number of common shares
outstanding as their effect is
antidilutive.
A portion of the proceeds from the
Company's IPO of common stock was used to
repay long-term debt. If such debt had
been repaid at the beginning of the
fiscal year ended March 31, 1996, with a
portion of such proceeds, the Company's
loss per share would have been $(1.76).
2. Initial Public The registration statement for the
Offering Company's IPO became effective on August
11, 1995. The Company consummated the IPO
on August 16, 1995 and issued 1,200,000
shares of common stock and 1,200,000
redeemable warrants ("Redeemable
Warrants"), each entitling the holder to
purchase one share of common stock at an
initial exercise price of $7.80 per
share. In September 1995, the
underwriters in the IPO exercised the
overallotment option granted to them by
the Company and purchased 180,000
additional shares of common stock and
180,000 Redeemable Warrants upon the same
terms and conditions as listed above. The
Company raised proceeds of $6,891,933,
net of underwriters' discount,
underwriters' expense allowance and other
expenses of the IPO.
Each Redeemable Warrant entitles the
holder to purchase one share of common
stock (subsequently adjusted to 1.029
common shares per Redeemable Warrant) at
an exercise price of $7.80 per Redeemable
Warrant (subsequently adjusted to $7.58
per Redeemable Warrant) during a
four-year exercise period commencing on
August 11, 1996, one year after the
anniversary of the IPO. The Redeemable
Warrants may be redeemed by the Company
after November 11, 1996, upon 30 days'
prior written notice, at a price of $.10
per warrant, provided that the average
closing bid quotation of the common stock
as reported on the over-the-counter
market or the closing sale price, if
listed on a national securities exchange,
during a period of 20 consecutive trading
days ending within 10 days prior to the
date of such notice shall be not less
than $9.75, subject to adjustment in
certain circumstances (subsequently
adjusted to $9.48). The Company also
issued to the representative of the
underwriters warrants to purchase 120,000
shares of common stock (subsequently
adjusted to 123,480 common shares) at an
exercise price of $7.80 per share
(subsequently adjusted to $7.58 per
share) and 120,000 Redeemable Warrants at
an exercise price of $.12 per Redeemable
Warrant.
3. Property and Property and equipment consists of the
Equipment following:
March 31, 1995 1996
__________________________________________
Computer equipment $101,204 $273,800
Software 87,627 182,028
Furniture and fixtures 30,787 74,200
Telephone system 26,925 37,262
------------------
246,543 567,290
Less: Accumulated
depreciation and
amortization 102,114 214,326
-----------------
$144,429 $352,964
__________________________________________
4. Deferred As of March 31, 1995, the Company had
Registration deferred registration costs of $140,000
and Financing relating to expenses (primarily
Costs professional fees) in connection with the
IPO and deferred financing costs of
$265,000 ($263,687 net of amortization)
related to the financings discussed in
Note 7. Upon consummation of the IPO, on
August 16, 1995, the aggregate deferred
registration costs were charged to
additional paid-in capital and the
unamortized deferred financing costs were
written off.
5. Other Assets Other assets are summarized as follows:
March 31, 1995 1996
------------------------------------------
Copernicus
development costs $ - $218,950
Patents 65,304 70,890
Trademarks 11,375 11,375
Software rights 6,250 6,250
Organization costs 4,487 4,487
Security deposits - 6,350
__________________________________________
87,416 318,302
Less: Accumulated
amortization 7,452 27,036
------------------------------------------
$79,964 $291,266
------------------------------------------
6. Due to In September 1994, the Company entered
Shareholder into a subordinated financing agreement
with Management Technologies, Inc.
("MTI"), pursuant to which $466,409 due
to MTI became a long-term subordinated
liability. The principal and accrued
interest on this subordinated debt
aggregated $488,174 on March 31, 1995.
The remaining balance due to shareholder
of $67,951 on March 31, 1995 represented
accrued rent owed to MTI.
The Company and MTI entered into a
settlement agreement dated as of May 26,
1995 which provided for the cancellation
of the principal of and accrued interest
on the subordinated notes ($491,284 as of
May 26, 1995) and MTI's 200,000 warrants
issued in connection with an October 1993
private placement. This cancellation was
in exchange for warrants to purchase
180,000 shares of common stock at an
exercise price on $3.75 per share.
The warrants are exercisable until three
years after completion of the IPO and are
redeemable at a nominal consideration if
the market price of the common stock
exceeds $7.50 for 20 consecutive days.
7. Notes Payable (a) On October 20, 1994, the Company
completed a private placement of
notes, warrants and 28,000 shares of
Series A preferred stock, on a
post-split basis (see Note 10(a)).
Notes sold in the private placement
bore interest at 10% per annum to
April 24, 1995, 12% per annum to
October 1995, 14% per annum to
April 1996 and 16% per annum until
maturity. The notes matured at the
earlier of October 20, 1996 or the
closing of certain transactions,
including a merger or an IPO. On
March 23, 1995, $130,000 of this
debt, with accrued interest thereon
of $6,508, was repaid. The face value
of the remaining debt on March 31,
1995 was $320,000. The unamortized
original issue discount ("OID") based
on an imputed interest rate of 24%
was $28,800 as of March 31, 1995. At
March 31, 1995, accrued interest of
$13,450 remained unpaid on these
notes.
(b) On March 24, 1995, the Company
completed a second private placement
of notes, warrants and 1,212,500
shares of SeriesEB preferred stock
(see Note 10(b)).
Notes sold in the second private
placement bore interest at 10% per
annum and matured at the earlier of
March 24, 1997 or the completion of
the IPO. The unamortized OID based on
an imputed interest rate of 48% was
$189,689 as of March 31, 1995. At
March 31, 1995, accrued interest of
$4,540 remained unpaid on these
notes.
On April 13, 1995 the Company
received a further $100,000 with
respect to this second private
placement and issued notes, warrants
and 100,000 shares of SeriesEB
preferred stock.
The notes issued in 1994 and 1995 were
repaid from the proceeds of the IPO.
These notes were secured by a security
interest in all assets of the Company.
This security interest terminated upon
repayment of the notes.
The costs associated with the above
private placements totaled $358,423 and
these costs were allocated to deferred
financing costs ($265,000 - Note 4) and
costs of issuance of Series A Preferred
Stock ($43,423) and Series B Preferred
Stock ($50,000).
8. Income Taxes The Company's net operating loss
carryforwards and deferred tax asset
account are approximately as follows:
Net
Period operating Net
ended Year of loss on deferred
March 31, expiration carryforward tax asset
_________________________________________________
1994 2009 $ 589,000 $ -
1995 2010 1,954,000 -
1996 2011 3,542,000 -
-------------------------------------------------
$6,085,000 $ -
The tax benefit of these losses
(approximately $1,200,000 and $2,786,000
at March 31, 1995 and 1996 respectively)
is subject to significant limitations due
to the change in control for income tax
purposes resulting from the Company's IPO
in August 1995. The tax benefit of these
losses has been fully reserved by a
valuation allowance of the same amount
due to the uncertainty of its
realization.
9. Commitments (a)Leases
and
Contingencies
As of March 31, 1995, the Company was
leasing its New York sales and office
space on a monthly basis from MTI.
Effective September 1, 1995, the
arrangement with MTI was terminated
and the Company is presently
negotiating lease terms directly with
the landlord. The Company's Atlanta
sales office is leased on a
month-to-month basis.
Rent expense for the years ended
March 31, 1995 and 1996 amounted to
approximately $102,000 and $202,000,
respectively.
(b)Employment Agreements
The Company entered into employment
agreements with two of its executive
officers, including its chief
executive officer. The agreements
provide for aggregate annual salaries
of $325,000 through 1999 plus bonuses
based on net earnings of the Company.
The executives agreed to waive an
aggregate of $75,000 of their annual
base salaries (which is not being
accrued) until such time as the
Company is able to report a pre-tax
annual profit in excess of $75,000. In
connection with the employment
agreements, the Company issued certain
common stock and other options to the
officers (see Note 9(d)). In addition,
the Company has agreed to pay death
benefits aggregating $2,000,000 to the
beneficiaries of the two officers. The
Company has obtained life insurance
policies to fund these death benefits.
Further, the Company has obtained "key
man" insurance policies for which it
is the beneficiary aggregating
$2,500,000. The employment agreement
of the chief executive officer has
been amended so that he will be paid a
bonus if certain sales levels are
attained.
The employment of one of the executive officers
was terminated in march 1996 when his visa to work in the United States
expired. The company expects to reemploy this executive officer if and when
his appplication for permanent resident status is granted.
The Company has entered into an
employment agreement with another
officer. The agreement provides for a
minimum annual compensation of
$100,000, plus commissions through
1997.
The Company had entered into an
employment agreement with an officer
to serve as president of a division of
the Company. The agreement provided
for a minimum annual compensation of
$85,000 through 1999 and incentive
compensation dependent on achievement
of gross revenue levels for the
division. Subsequent to March 31,
1996, this officer left the Company
and the employment agreement was
terminated and a termination fee of
$50,000 was paid to this officer.
(c)License Agreement
In August 1993, the Company entered
into a licensing agreement with Lancer
Holdings, Inc. ("Lancer") (formerly
known as Mark Blundell & Associates),
of which Mark Blundell, the President
and Chief Executive Officer and a
director, and John Brann, a director
and consultant and former executive
officer of the Company are controlling
shareholders. On October 27, 1993,
133,333 shares of common stock were
issued to Lancer and valued at
Lancer's basis (nominal value) and
recorded at the par value of the
shares issued (500,000 common shares,
pre-split, at $0.01 per share). Lancer
was the owner of certain intellectual
property rights including rights
relating to certain computer software
and documentation (the "Lancer
rights"). The agreement granted the
Company the exclusive worldwide
license to sublicense software in
return for royalty payments to the
licensor.
In March 1995, the Company acquired
the Lancer rights for 33,333 shares of
common stock and 33,333 noncallable,
transferable warrants to purchase
shares of common stock, subject to
adjustment under certain
circumstances. The common stock was
valued at Lancer's basis (nominal
value) and recorded at the par value
of the shares issued (125,000 common
shares pre-split, at $0.01 per share).
Such warrants will expire five years
after their issue date. These warrants
include a cashless exercise provision
which allows Lancer to surrender
warrants in payment for the exercise
thereof.
(d)Loss of Key Employee
On March 18, 1995, the employment of
an executive of the Company was
terminated due to the fact that his
visa expired and he was no longer
eligible to work in the U.S. The
Company paid him a severance payment
aggregating $25,000.
10. Shareholders'
Equity
(Capital
Deficit) (a) Preferred Stock
The Company's Certificate of
Incorporation authorizes issuance of
10,000,000 shares of preferred stock.
In September 1994, the Board of
Directors subdivided the preferred
stock to create a Series A preferred
stock with 1,000,000 shares
authorized. On October 24, 1994,
105,000 shares of Series A convertible
preferred stock ("A Preferred"), each
convertible into one share of
commonEstock, were issued in
connection with the October 1994
private placement (see Note 7(a)). On
April 18, 1995, the common
shareholders and the A Preferred
shareholders approved a 1-for-3.75
reverse stock split of the common
stock and the A Preferred. As a result
of this reverse stock split, the
outstanding shares of A Preferred were
reduced to 28,000. Upon completion of
the IPO, these shares of A Preferred
were converted into shares of common
stock on a one-for-one basis and all
of the shares of A Preferred were
retired and restored to the status of
authorized but unissued shares of
Preferred Stock.
In February 1995, the Board of
Directors subdivided the preferred
stock to create a Series B preferred
stock with 2,000,000 shares
authorized. On March 23, 1995,
1,212,500 shares of SeriesEB preferred
stock ("B Preferred "), par value $.01
per share, were issued (see Note
7(b)). On April 13, 1995, an
additional 100,000 shares of Series B
Preferred Stock were issued (see Note
7(b)). The shares of B Preferred were
convertible into a number of shares of
common stock equal to the number of
shares of B Preferred to be converted
multiplied by $1.00 divided by the
price at which common stock is sold by
the Company in an IPO. Upon completion
of the IPO, these shares of B
Preferred were converted into shares
of common stock on a 1-for-3.75 basis
and all of the shares of B Preferred
were retired and restored to the
status of authorized but unissued
shares of preferred stock.
(b)Warrants
At March 31, 1995 and 1996, the
Company has outstanding warrants as
follows:
Number of common Exercise
Warrants issued shares issuable price Expiration
in connection with March 31, per share date
1995 1996
- - -------------------------------------------------------------------------
October 1993
private placement 229,250 - $6.00 December 1998
October 1994
private placement 310,668 310,668 $3.75 October 1999
March 1995
private placement 145,500 149,720 $7.58 August 11, 2000(i)
March 1995
private placement 14,400 14,400 $4.88 March 2000(ii)
March 1995 software
rights acquisition 33,333 33,333 $5.63 March 2000
April 1995 private
placement 12,000 12,348 $7.58 August 11, 2000(i)
May 1995 settlement
agreement with MTI - 180,000 $3.75 August 11, 1998
August 1995 initial
public offering
Redeemable Warrants - 1,234,000 $7.58 August 11, 2000
August 1995
representative warrants - 123,480 $7.58 August 11, 2000
August 1995
Redeemable Warrants
issuable upon exercise
of representative's
warrants - 123,480 $7.58 August 11, 2000(iii)
September 1995
exercise of
underwriters'
overallotment option
for Redeemable
Warrants - 185,220 $7.58 August 11, 2000
October 1995
Electric Magic Options - 50,000 $6.00 October 9, 1998
October 1995
Omotsu Warrants - 80,000 $7.80 August 11, 2000
(i) Effective upon completion of the
IPO, these warrants were exchanged by
the holders for Redeemable Warrants
exercisable for an equal number of
shares and the warrants will expire
upon the fifth anniversary of the IPO.
(ii) These warrants were exercisable
at $.75 per warrant for an additional
14,400 warrants with an exercise price
of $11.25 per share. Prior to the IPO,
they were surrendered by the holder
for cancellation.
(iii) The representativeOs warrants
require payment of an exercise price
of $.12 per Redeemable Warrant
issuable upon exercise of the
representativeOs warrants.
(c)Common Stock
On incorporation (July 1993), the
Company granted employees rights to
stock at par value that would vest
based on future employment. The total
number of shares offered under such
agreements was 87,762, of which 64,201
were issued during the period ended
March 31, 1994, 12,228 were issued
during the year ended March 31, 1995,
6,333 were issued during the year
ended March 31, 1996 and 5,000 remain
to be issued as of March 31, 1996.
On April 18, 1995, the shareholders of
the Company approved a 1-for-3.75
reverse stock split of the common
stock. This reverse stock split has
been retroactively reflected in the
accompanying consolidated financial
statements as of inception.
(d)Issuance of Common Stock for Legal
Fees
On November 21, 1995, the Company
entered into an agreement with its
corporate counsel, Chadbourne & Parke
LLP ("C&P"), to settle its then
outstanding legal fees. The Company
settled $450,000 of the outstanding
balance to C&P by payment to C&P of
$300,000 in cash and 27,907 shares of
common stock valued at $150,000.
(e)Stock Option Plan
The Company adopted a stock option
plan (the "Option Plan"), effective
AprilE8, 1994, which was approved by
the shareholders on SeptemberE3, 1994.
The Option Plan provides for the grant
of options to qualified employees
(including officers and directors) of
the Company to purchase up to an
aggregate of 266,667 shares of common
stock. The Option Plan is administered
by a committee (the "Committee")
appointed by the Board of Directors.
The Committee may, from time to time,
grant options under the Option Plan to
such key employees as the Committee
may determine, provided, however, that
the Committee may not grant incentive
stock options ("Incentive Options") to
any key employee who is not in the
regular full-time employment of the
Company. Options granted under the
Option Plan may or may not be
"incentive stock options" as defined
in the Internal Revenue Code,
depending upon the terms established
by the Committee at the time of grant.
The exercise price shall not be less
than the fair market value of the
Company's common stock as of the date
of the grant (110% of the fair market
value if the grant is an Incentive
Option to an employee who owns more
than 10% of the total combined voting
power of all classes of stock of the
Company). Options granted under the
Option Plan are subject to a maximum
term of 10 years.
In April 1995, options to purchase
99,466 shares of common stock at an
exercise price of $4.50 per share were
granted and became exercisable in
April 1996.
In November 1995, options to purchase
124,400 shares of common stock at an
exercise price of $5.125 per share
were granted. Such options will vest
and become exercisable on November 30,
1996.
(f)Directors' Stock Options
Two current and two former directors
have received options to purchase
10,000 units, each at an exercise
price of $5 per unit, each unit
consisting of one share of common
stock and a warrant to purchase one
share of common stock at an exercise
price of $6 per share. The options are
outstanding and exercisable at
March 31, 1995 and 1996.
In November 1995, the Company issued
to each of its outside directors
options to purchase 10,000 shares of
common stock at an exercise price of
$5.125 per share exercisable on or
after November 30, 1996. These options
expire on November 30, 2000
In April 1996, the Company issued to a
current director options to purchase
10,000 shares of common stock at an
exercise price of $5.125 per share
exercisable on or after April 24,
1997.
(g) Pursuant to the terms of the aquisition
agreement on October 9, 1995 with Electric Magic Co. for Netphone
(see Note 12), the company issued to Electric Magic options to purchase
50,000 shares of common stock at an exercise price of $6.00 per share,
expiring in October 1998. In addition, the Company issued to a third
party (Omotsu Holdings Limited), in consideration of its surrender
of rights to acquire Netphone, warrants to buy 80,000 shares of
common stock at an exercise price of $7.80 per share expiring
August 11, 2000. (See Note 12)
11. Supplemental
Disclosures
of Cash Flow
Information
Period from Period from
July 20, 1993 July 20, 1993
(inception) to Year Ended (inception) to
March 31, 1994 March 31, March 31, 1996
1995 1996
- - -----------------------------------------------------------------------------
Cash paid during the
period for:
Interest - $6,508 $ 60,614 $ 67,122
- - ----------------------------------------------------------------------------
Income taxes - $1,600 - $ 1,660
- - ----------------------------------------------------------------------------
Supplemental disclosures
of noncash investing
activities:
Issuance of common stock
for software rights $5,000 $1,250 $ - $ 6,250
Issuance of common stock
for services 4,030 - - 4,030
Conversion of MTI debt
to paid-in capital - - 491,284 491,284
Issuance of common stock
for the purchase of
Netphone - - 240,000 240,000
Issuance of common stock
for legal services - - 150,000 150,000
- - ------------------------------------------------------------------------------
12. Acquisition of
Netphone On October 9, 1995, the Company acquired
Netphone, a software package, from
Electric Magic Co. in exchange for
$200,000 in cash and options to acquire
50,000 shares of the Company's common
stock valued at $500. This product allows
users of Macintosh to conduct long distance
conversations over the Internet for the
cost of local Internet access. The Company
paid a third party (Omotsu Holdings Limited)
$80,000 in cash and issued 80,000 shares of
restricted common stock and warrants to acquire
80,000 shares of the Company's common stock
valued at $240,000 (market value $520,000)
for surrendering its rights to acquire Netphone.
On October 31, 1995, the Company sold
Netphone to Camelot Corporation
("Camelot") for $193,532 in cash, 67,470
shares of Camelot's restricted common
stock valued at $350,000 and an agreement
by Camelot to pay the Company a fee for
each unit sold by Camelot in the future.
This resulted in a gain of $23,032
included in gain on sale of assets in the
consolidated statements of operations. On
March 31, 1996, the market value of the
Camelot restricted stock had decreased to
$185,543 resulting in an unrealized loss
of $164,457 which has been reflected in
the consolidated statement of shareholders' equity.
13 Employee Effective FebruaryE15, 1996, the Company
. Benefit Plan implemented a 401(k) profit sharing plan
covering substantially all employees.
Contributions to the plan are at the
discretion of the Board of Directors. The
Board did not elect to make a contribution
for the year ended MarchE31, 1996.
14 Related Party (a) Effective March 31, 1996, the Company
. Transactions entered into a five-year value added
reseller agreement with Petra
Corporation ("Petra"). Petra's
president is a consultant to and a
former director of the Company. The
Company granted to Petra the right to
license and distribute the Company's
COPERNICUS software program integrated
with Petra's products.
In exchange for granting this license,
the Company will receive $100,000
within 180 days of the effective date
of this agreement and $100,000 within
90 days of the delivery date of a
second platform of the Copernicus
software program. The Company has
verbally agreed to pay a fee of
$100,000 to another company if a
second platform is licensed. In
addition, Petra agreed to pay the
Company an annual royalty fee for each
license sold in the future.
At March 31, 1996, the Company
recorded revenue (included in software
and licensing fees) and a related
receivable of $100,000 in connection
with this agreement.
(b) During the years ended March 31, 1995
and 1996, the Company incurred fees of
approximately $11,400 and $18,000 to a
consulting firm owned by the Company's
Chairman of the Board of Directors.
(c) During the years ended March 31, 1995
and 1996, the Company incurred
marketing fees of approximately
$36,000 and $72,000 to a firm where a
Company director is employed.
15. Major Revenues from four major customers for
Customers the year ended March 31, 1996 accounted
for approximately 64% of the CompanyOs
total revenues. Amounts receivable from
these customers at March 31, 1996
accounted for approximately 44% of the
Company's accounts receivable.
Exhibit 11
Weighted Average Share Calculations
Date Description # of # of days Weighte
Granted/ Shares outstandi d
Issued ng average
4/1/95 Opening balance 693,323 365 693,323
6/30/95 Stock issued to an 1,333 275 1,004
employee/restricted grant
7/12/95 Exercise of O93 warrants 29,250 263 21,076
8/11/95 Conversion of A preferred 28,000 233 17,874
stock
8/11/95 Conversion of A preferred 201,916 233 128,894
stock
8/17/95 Sale of Stock in IPO 1,200,0 227 746,301
00
9/23/95 Exercise of Overallotment 180,000 190 93,699
11/01/95 Issuance of Stock for 80,000 151 33,096
Netphone
12/31/95 Issuance of Stock for 27,907 91 6,958
legal fees
12/31/95 Stock issued to an 5,000 91 1,247
employee/restricted grant
3/31/96 2,446,7 2,446,7
29 29
Exhibit 24
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated
opposite their respective names below, hereby constitute and
appoint ARTHUR M. MITCHELL and PETER K. INGERMAN, and each
of them, singularly, attorneys-in-fact of the undersigned
with full power to each of them to sign for and in the name
of the undersigned in the capacities indicated below (a) the
Annual Report on Form 10-KSB under the Securities Exchange
Act of 1934, as amended, of New Paradigm Software Corp. (the
"Company") and (b) any and all amendments thereto, and to
give any certification which may be required in connection
therewith .
Signature Title Date
June 28, 1996
/s/ Mark Blundell CHIEF EXECUTIVE OFFICER
Mark Blundell AND PRESIDENT (PRINCIPAL
EXECUTIVE OFFICER,
PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL
ACCOUNTING OFFICER) AND
DIRECTOR
June 27, 1996
/s/ John Brann SECRETARY AND DIRECTOR
John Brann
July 1, 1996
/s/ Beverly Brown DIRECTOR
Beverly Brown
July 1, 1996
/s/ Daniel A. CHAIRMAN OF THE BOARD OF
Gordon DIRECTORS
Daniel A. Gordon
July 1, 1996
/s/ Jeff Kahn DIRECTOR
Jeff Kahn
July 1, 1996
/s/ Michael Taylor DIRECTOR
Michael Taylor
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,017,472
<SECURITIES> 185,543
<RECEIVABLES> 266,623
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,284,095
<PP&E> 567,290
<DEPRECIATION> 214,326
<TOTAL-ASSETS> 3,113,868
<CURRENT-LIABILITIES> 237,841
<BONDS> 0
0
0
<COMMON> 24,467
<OTHER-SE> 2,851,560
<TOTAL-LIABILITY-AND-EQUITY> 3,113,868
<SALES> 0
<TOTAL-REVENUES> 563,068
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,684,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 439,270
<INCOME-PRETAX> (3,560,292)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,560,292)
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<NET-INCOME> (3,560,292)
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