UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 000-26598
PAPERCLIP SOFTWARE, INC.
(Exact name of small business issuer in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
22-3137907
(I.R.S. Employer Identification No.)
611 Route 46 West
Hasbrouck Heights, New Jersey 07604
(Address of principal executive offices) (Zip Code)
(201) 329-6300
(Issuer's telephone number)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class: None Name of exchange on which registered
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.01; Class A Purchase Warrants
(Title of Each Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in 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. [ ]
The issuer's revenue for the fiscal year ended December 31, 1998 was $1,145,219.
As of March 6, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the OTC Bulletin Board closing bid
price on March 6, 2000) was $2,761,317. As of March 6, 2000, there were
8,121,521 shares of the registrant's common stock outstanding.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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PART I
Item 1. Description of Business.
INTRODUCTION
PaperClip Software, Inc. formerly known as PaperClip Imaging Software,
Inc. (the "Company" or "PaperClip"), a Delaware corporation (which is the
successor by merger, in March 1992, to the original company which had been
incorporated in New Jersey in October 1991), is engaged in the development and
distribution of computer software for document management and transport of
electronic document packages across the public Internet or a private intranet
with interoperability, security and tracking capabilities.
RECENT DEVELOPMENTS
During October 1996, the Company entered into an agreement with a
software developer which provided for the rescheduling of payments owed by the
Company to the developer. The Company paid $150,000 upon signing such agreement
and agreed to pay an additional amount aggregating approximately $200,000 (the
"Remaining Amount") in three monthly installments commencing January 1, 1997. On
January 29, 1997, the Company paid the remaining amount from the proceeds of the
Access Loan (as defined herein).
In December 1996, the Company borrowed an aggregate amount of
$129,690.74 from nine of its stockholders (the "Stockholder Creditors"). The
loan was evidenced by Convertible Promissory Notes ("Notes") issued to each of
the nine stockholders for their respective loan amounts. The Notes: (i) have a
three (3) year maturity, (ii) have a 12% interest rate, and (iii) are
convertible into common stock of the Company at a rate of $0.30 per share (the
"Stockholder Notes"). To date the Stockholders Notes have not been repaid.
In January 1997, the Company entered into a non-binding Letter of
Intent (the "Letter of Intent") with Access Solutions International, Inc.
("Access") pursuant to which the Company and Access agreed to use their best
efforts to negotiate a transaction involving the purchase by Access of
substantially all of the assets of the Company. Access also agreed, pursuant to
the Letter of Intent, to provide the Company with a one year bridge loan of
$300,000 (the "Access Loan") in exchange for a promissory note, at an interest
rate of 12% per annum, convertible into shares of Common Stock (as defined
herein). The proceeds of the Access Loan were used as operating capital.
On November 12, 1997, the Company and Access entered into a definitive
Merger Agreement (the "Merger Agreement") which provided that the Company would
merge with and into a newly formed wholly owed subsidiary of Access. The merger
consideration to be paid to the Company was 1,544,438 of the common stock of
Access plus an equivalent number of Class B Warrants. Concurrent with the
execution of the Merger Agreement, the Company and Access also entered into a
Management Agreement pursuant to which Access assumed control of the day to day
operations of the Company and advanced funds to the Company pending the closing
of the transactions contemplated by the Merger Agreement (the "Management
Agreement").
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In August 1998, Access terminated the Merger Agreement in accordance
with its terms due to the failure by Access to satisfy the financing condition
contained in the Merger Agreement. The Management Agreement was terminated in
October 1998. The Company is currently conducting discussions with Access
regarding exchanging all but $300,000 of the approximately $3.0 million owed to
Access by the Company for equity of the Company and the resolution of other
potential disputes between the Company and Access. These discussions are
preliminary and there can be no assurance that the Company will be successful in
resolving any potential disputes with Access.
Since August 1998, the Company has been exploring options to obtain
sources of funding, including a proposal made by certain of the Company's
employees who agreed to receive a reduction, or no, salary for a specified
period of time in exchange for equity in the Company. Some of the Company's
employees have agreed to defer payment of their salary temporarily or to forego
a portion of their salary in exchange for equity in the Company to be issued in
the future. There can be no assurance that such arrangements will continue to be
acceptable to the Company's employees.
On March 11, 1997, the Company was informed by Nasdaq that its
securities were deleted from The Nasdaq SmallCap Market due to the Company's
failure to comply with minimum asset and capital surplus requirements
established by Nasdaq. The Company's common stock, $.01 par value per share (the
"Common Stock"), and Class A Common Stock Purchase Warrants are now quoted on
the OTC Bulletin Board. The Company has been informed that after March 8, 2000,
its securities will no longer be eligible to be traded on the OTC Bulletin Board
unless it complies with certain reporting requirements. While the Company is
currently completing a certified audit and anticipates meeting the requirements
for listing on the OTC Bulletin Board, there can be no assurance that the
Company will be able to meet such reporting requirements and remain eligible to
have its securities traded on the OTC Bulletin Board.
Since the termination of the Merger Agreement and the Management
Agreement, the Company had no sources of capital other than revenues from sales.
The Company did not have the funds necessary to pay for the audits of its
statements or file reports required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and operated on a subsistence basis. The
number of employees of the Company decreased from 31 in 1997 to 13 in 1999, and
had dropped to a low of 11 in 1998.
In October 1998, BISYS Insurance Services ("BISYS"), the nation's
largest independent distributor of life insurance, had selected the Company's
Systems (as defined herein) as its enterprise document management and imaging
solution. BISYS will use more than 450 installed end users of the Systems to
reduce the tremendous amounts of paper-based documents processed daily, and to
further automate and enhance their entire business process. In July 1999, BISYS
began transmitting documents to Midland Insurance utilizing the Company's
Internet Express product. In January 2000, First Colony Insurance, a division of
GE, and CNA Insurance began receiving documents from BISYS.
The Company is in the process of negotiating a contract with
D. Michael Bridges to join the Company as President of the Company. Since
August 1998, Mr. Bridges has been acting as a consultant to the Company.
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In 1999, the Company applied for a Technology Tax Certificate with
State of New Jersey Economic Development Authority. The program allowed the
Company to sell its New Jersey tax losses to a New Jersey company that could
utilize the losses. The Company received approximately $625,000 in December 1999
from selling a portion of its losses. The receipt of such funds allowed the
Company to have its financial statements audited on a current basis and begin to
comply with its reporting requirements under the Exchange Act. The Company
intends to file in 2000 to sell additional tax losses of up to approximately
$10.0 million which will result in net proceeds to the Company of approximately
$800,000. There can be no assurance if or when the Company will receive such
amount. In addition, there can be no assurance that the Company will receive
sufficient funds to pay its creditors, file required documents with the
Securities Exchange Commission and maintain its existence.
ABOUT THE COMPANY
The Company's systems allow users of personal computers and personal
computer networks to scan, file, retrieve, display, print and route documents
and other software objects (such as word processing files, spreadsheets and
electronic mail), while continuing to use their existing application software.
The systems can be integrated with many personal computer applications with
little or no programming and can file and retrieve documents without the time
consuming step of manually labeling or indexing each document, or manually
searching for documents.
The Company has developed and markets a line of software consisting of
Professional, Network and SQL Enterprise Editions (the "Systems"). The Company
also markets PaperClip COLD, which captures batch file information before it
goes to paper and allows expeditious access, retrieval, full text searching and
printing of COLD documents. "COLD" refers to Computer Output to Laser Disk which
are documents that are archived in large volumes of formatted data streams
directly to optical media. Instead of printing large paper reports or producing
microfilm or microfiche, data is stored on optical disks.
The Company is currently completing development of its WebServer(TM)
Product, which is an add-on to the Systems. This new product has been designed
to provide full security for documents stored on a PaperClip System, to enable
users to make the documents available to anyone with a Web Browser and to make a
user's document repository accessible via the Internet or a private intranet.
In November 1995, PaperClip acquired, from Cheyenne Software, Inc.
("Cheyenne"), the NOSS (Network Optical Storage System) product line. The
Company offers NOSS as part of its systems as well as a stand-alone product. The
Company is developing the next generation of the NOSS product. NOSS for NT will
be deployed on the Microsoft Windows NT server platform and provide several new
enhancements.
The Company markets the Systems and associated products domestically
(i) through mass distributors, including Law Cypress Distributing Company, New
Wave and Z Source who sell to a value added reseller ("VAR") channel that
currently consists of approximately 50 resellers and (ii) directly through such
VARs. The Company markets its products internationally through approximately 10
VARs.
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INDUSTRY BACKGROUND
Many businesses must manage, exchange and process large amounts of
information in their day to day activities. Traditional data processing systems
have automated the creation and processing of data and text, but they do not
provide a means for storing and retrieving documents that must be retained in
their original form and used in conjunction with the data.
The greatest difficulty in dealing with paper documents is filing,
storing and retrieving them conveniently and cost-effectively. In the course of
performing these tasks manually, critical documents can be inadvertently
misfiled, physically damaged, or lost. Manual handling is inefficient because
documents can only be used by one person at a time and are also inaccessible
during the time required to transport them within the organization. Moreover,
significant time and resources are often spent storing and locating documents in
large filing systems. With the public acceptance of document management and,
more importantly, the imaged document as an original document, exchanging
electronic documents is a market opportunity.
The procedural steps involved in processing incoming documents may
include sorting documents as they are received, indexing them for future
reference, routing them from one employee to the next, entering information from
these documents into computer systems, collecting different documents for
appropriate action, creating letters and forms of response and queuing documents
for subsequent filing. In order to improve the efficiency of the flow of
documents, manage information, and improve office productivity and response
times, many companies may seek to automate their paper and electronic document
management procedures.
Technological developments in recent years have made possible the low
cost capture, storage, retrieval and processing of paper documents as digitized
images. In particular, the application of optical disk technology, which permits
digitized document images to be stored with densities many times greater than
magnetic storage media, has enabled the development of cost effective computer
systems for document management.
The Systems have been designed to provide users of personal computers
and computer networks the ability to exchange, file, retrieve and process large
volumes of documents quickly, efficiently and at a low cost. The enhancements
developed for the Systems have been designed to allow users to quickly implement
workflow technology in their existing environments without the need for costly
programming. The Company's Internet products should give users the added
flexibility of exchanging, accessing and managing stored documents via the
Internet.
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THE PRODUCTS
The Company derives all of its revenues from the licensing or sale of
the Systems and associated products and services.
The Company is currently developing 4 new products, Internet Express,
Intranet Express, WebServer and DECS (Document / EDI Capture Suite), and the
further enhancements of, and additions to, its existing products. Internet
Express ("IE") is an extranet designed to exchange electronic document as an
Application Service Provider ("ASP"). The Company will derive revenue based on
the movement of Electronic Document Exchange ("EDX") packages across the
Internet. Intranet Express ("IA") is designed to exchange electronic documents
among organizations that are members of the same private intranet. The Company
will provide IA as a product, not a service. WebServer will allow users across
the World Wide Web to retrieve documents and conduct simple workflow task from
their thin client browser. DECS is a remote electronic document EDX packaging
system that provides scanning, printing, filing and Electronic Data Interchange
("EDI") capture producing capabilities, and creates EDX Packages for IE, IA, the
Systems and / or any EDX compliant solution.
There can be no assurance that the products and enhancements currently
being tested, developed or explored by the Company will be completed or
introduced within the anticipated timeframes, that they will perform as
anticipated, achieve market acceptance or result in revenue to the Company. The
inability to further enhance successfully the Company's existing products or to
develop new products may have a material adverse effect on the Company's
operations and profitability.
THE SYSTEMS
The Systems allow users of personal computers and personal computer
networks to scan, file, retrieve, display, print and route documents and other
software objects ("Documents"), such as word processing files, spreadsheets and
electronic mail. The Systems can be integrated with many personal computer
applications with little or no programming and can file and retrieve Documents
without the time consuming step of manually labeling or indexing each Document.
The Systems range from single user, stand-alone products to enterprise-wide
document management solutions.
Electronic "file folders" of Documents can be accessed at any time by
the user with only one key stroke combination. Minimal training is required.
Moreover, all Documents previously attached to an electronic file folder are
accessible as soon as each of the Systems is activated. If a Document is not so
attached, it can be located by searching a Document list or by entering exact or
partial identifying information into the folder's index fields. Multiple
Documents can be viewed simultaneously in any of the Systems.
Images displayed through any of the Systems are facsimiles of the
Documents that have been scanned, and the Systems allow Documents to be scrolled
through (i.e., moved on a display screen to search for a particular line or
section), enlarged, reduced, and rotated. The Systems also allow stored
Documents to be reproduced through a locally connected laser printer, or through
shared laser print servers on a network.
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PROFESSIONAL EDITION
The Professional Edition allows users to create "folders" of Documents
and attach or "clip" them to their existing application software. The additional
features available include the ability to scan, index, retrieve, display, print,
fax, import and export Documents. Storage of Documents is on multiple forms of
media, and, in addition, enables the user to store Documents on a large variety
of optical disk and "jukebox" storage devices. A "jukebox" is a mechanical
device which allows for multiple optical disk platters or tapes to be managed
and accessed by software. This allows the storage of thousands of Documents
while maintaining a high level of performance. The user also has the ability to
convert scanned Documents by optical character recognition to a variety of word
processing formats, and to store such Documents. The DocumentLink(TM) feature
allows the user to find both the folder and the scanned image of such a Document
from within a word processing program.
NETWORK EDITION
Network Edition provides users with all of the features of Professional
Edition, and allows users to perform all of the functions at the same time, as
well as to route Documents and folders to other users on a network. It also
supports a shared network fax capability, allowing the user to send faxes from,
and store faxes in, folders.
SQL EDITION
SQL Edition provides all the features of the Network Edition and
provides for Wide Area Network operation using a client/server architecture. The
significant differences provided to users by the SQL Edition are the increased
integrity of the database (i.e., if there is a hardware or software failure
which corrupts the database, SQL Edition will facilitate the recovery of such
records as they existed prior to their corruption) and the improved performance
in networks with more than 20 users. To operate SQL Edition, the user is
required to obtain a license, which is readily available from various third
parties, for the desired SQL server. The SQL Edition is suited to large
departmental and enterprise installations because of its inherent security,
transaction logging capability and database integrity. The Company presently
offers its SQL Edition to work in conjunction with SQL Servers from Microsoft,
Oracle and Centura.
THE COLD PRODUCT
PaperClip COLD captures formatted print data streams. Once the data is
captured by the PaperClip COLD Extract Engine, it is automatically imported into
the user's PaperClip System and made available to the users through a familiar
interface. Users can access folders containing COLD data by simply pressing a
designated key from the applications that they choose. They can also access
folders of diverse information through PaperClip's intuitive file cabinet/folder
interface. PaperClip COLD can print to any standard Windows printers or fax and
can display documents on conventional 80-column monitors in 132 column format.
To further facilitate the retrieval and review of COLD documents, PaperClip COLD
supports full text searching of COLD documents and forms overlay, and can add
colored lines to the display to simulate green bar paper viewing.
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THE NOSS PRODUCT LINE
NOSS is the subsystem for optical storage and jukebox management. When
combined with the Network and SQL Editions, it provides a powerful system that
manages a range of mass storage devices.
The acquisition of the NOSS product line (a portion of which is subject
to an exclusive, royalty free, perpetual license from Cheyenne) allows PaperClip
to fully take advantage of NOSS's high-end functionality to further develop
powerful document imaging solutions for client/server network environments.
PaperClip is also making NOSS available as a separate product for VARs,
integrators, and distributors to develop applications based on network optical
storage.
THE WEBCLIP PRODUCT
The WebClip product has been eliminated from the Company's product line
due to lack of sales.
THE WORK FLOW PRODUCT
While the Work Flow product has been substantially completed for the 32
bit platform, based on current projections, no further development of the Work
Flow Product is anticipated.
INTERNET PRODUCT LINE - WEBSERVER
The Company is completing development of its WebServer(TM), which is an
add-on to the Systems. The new product is being designed to provide full
security for documents stored on a PaperClip System, to enable users to make the
documents available to anyone with a Web Browser and to make available the
user's document repository to both Internet and private intranet users.
MARKETING
OBJECTIVES, INTERNAL SALES FORCE AND RISKS
Management's marketing objectives for the Systems are as follows: (i)
develop strategic relationships with prominent software organizations; (ii)
introduce the Systems to customers through VARs, original equipment
manufacturers ("OEMs"), distributors and other distribution networks; (iii)
create brand name recognition of its products by advertising in appropriate
trade magazines and publications, and by attending and participating in
exhibitions, shows and seminars, engaging in public relations campaigns, and
conducting its own seminars and direct mail campaigns; and (iv) support the
sales efforts of its resellers through sales tools and training.
Marketing assistance, training and technical support of VARs is a
critical component of the Company's efforts with respect to its Network and SQL
Editions. Consequently, the Company is expending approximately $25,000 per month
to maintain a group of five marketing, training, and technical support employees
dedicated to providing on-going communication with, and support to, its VARs.
Marketing assistance includes hot line access, mailings of product and technical
updates, joint cooperative marketing, site visits and seminars.
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The Company has a field sales force of four persons. While management
will attempt to encourage VARs, distributors and other resellers to focus on the
Company's products, management is aware that VARs, distributors and other
resellers also represent other lines of products, some of which may be, or are,
competitive with those of the Company. Accordingly, the VARs, OEMs, distributors
and other resellers may choose to give higher priority to products of other
publishers, which would decrease potential sales by the Company.
VALUE ADDED RESELLER NETWORK
To date, the most significant portion of the Company's sales have been
made through VARs. The Company currently has approximately 60 VARs, of which
approximately 50 VARs are in the United States and approximately 10 are abroad.
BUSINESS SERVICES
The Company's Business Services Department sells directly to major
accounts that want to work on a direct basis with the Company. It also offers
users of its products and VARs, post-contract support, consulting services and
assistance in the form of training, product education and technical support,
when requested. The Business Services Department currently consists of one (1)
employee.
CUSTOMERS AND SALES
The Company had net sales of $1,505,972 in 1997, $1,538,795 in 1998 and
$1,145,219 for 1999. Law Cypress accounted for 21% of the Company's sales in
1999. Sales to two major customers for the year ended December 31, 1998 were
approximately 23% and 14%. Sales to two major customers for the year ended
December 31, 1997 were approximately 13% and 11%.
CUSTOMER SUPPORT AND SERVICE
The Company presently provides telephone support to its VARs. The
majority of the Company's service and support activities involve responses to
customer inquiries regarding use of the Network, SQL and Professional Editions,
which are provided by telephone support directly from the Company's technical
support center.
PRODUCT DEVELOPMENT
At present the Company's systems are being developed by a combination
of in house staff and outside consultants. PaperClip expended approximately
$351,200, 546,300 and $1,266,500 on research and development in 1999, 1998 and
1997, respectively.
Existing and future competing products that may be offered at lower
prices, or that may have superior technological and performance characteristics,
could adversely affect sales of the Systems and/or other products offered by the
Company. Management expects that growing demand for efficient and cost-effective
solutions for document management and imaging will continue to drive the
developments of new technologies that may be more sophisticated than the
Company's products and that the Company's ability to continue to compete depends
upon its ability to continue to enhance successfully its existing products and
to develop new products that meet the changing needs of end-users. If the
Company is unable to successfully enhance its existing products or to develop
new products, it may have a material adverse effect on the Company's operations
and profitability.
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PRODUCTION
The Company has produced a set of master CD'S and documentation for
each System, duplicates the CD'S and assembles and ships the Systems at and from
its headquarters. The Company has also engaged various sources to produce and
assemble the product and documentation (including packaging for the Systems on
terms management believes are comically reasonable).
PRODUCT PROTECTION
The Company will reply on a combination of copyright, trade secret and
trademark laws and license agreements to protect its proprietary rights in its
technology. The Company obtained from the U.S. Patent and Trademark Office a
registered trademark for PAPERCLIP SOFTWARE AND DESIGN in August 1993 and
obtained a registered trademark for PAPERCLIP IMAGING SOFTWARE AND DESIGN in
February 1993. Although no other person or entity owns any U.S. registered
trademark for the mark "PaperClip" in connection with software or imaging
products, there was a prior U.S. registration for use of the "PaperClip" mark in
connection with pre-recorded word processor programs. This latter registration
was automatically canceled on April 2, 1992 by the U.S. Patent and Trademark
Office because of the registrant's failure to file (as required by statute) an
affidavit, during the year commencing with the fifth anniversary of the
registration, stating that the mark was still in use. However, the user of the
canceled registration might, at some future time, assert an infringement claim
in the U.S. based on alleged common law rights. If such a claim is asserted, the
Company may be forced to expend significant effort, time and funds to defend
against it. If the Company is not successful in defending against such a claim,
the Company would be required to adopt a different name and would incur as a
result thereof.
The Company relies on a combination of copyright, trade secret and
trademark laws and license agreements to protect its proprietary rights in its
technology. The Company obtained from the U.S. Patent and Trademark Office a
registered trademark for PAPERCLIP SOFTWARE AND DESIGN in August 1993 and
obtained a registered trademark for PAPERCLIP IMAGING SOFTWARE AND DESIGN in
February 1993.
The Company also has registered trademarks for PAPERCLIP IMAGING
SOFTWARE & DESIGN in the United Kingdom, Germany and Canada, but has not filed
applications for trademark registration in other countries in which the Systems
are sold.
The Company distributes its products under signed software license
agreements, which grant customers perpetual licenses to, rather than ownership
of, the Company's products and which contain restrictions on copying,
disclosure, reverse engineering and transferability. The source code for all of
the Company's products is protected as a trade secret and as an unpublished
copyrighted work. In addition, the Company has entered into nondisclosure
agreements with its employees. There can be no assurance that the steps taken by
the Company in this regard will be adequate to deter misappropriations or
independent third-party development of its technology.
The Company has no patents on its proprietary software technology and
existing copyright laws afford only limited practical protection. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights in its products and technology to the same extent as U.S. laws.
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Although management believes that the Company's products, trademarks
and other proprietary rights do not infringe on any existing proprietary right
of others, there can be no assurance that third parties will not assert
infringement claims in the future.
COMPONENTS PROVIDED BY OTHERS
The Systems require licenses, which the Company has obtained, from
Input Software, Inso Corporation, Merant AccuSoft Corporation, Sybase Inc., and
Snowbound Software.
COMPETITION
The document management software market is intensely competitive. Buyer
preferences can shift quickly, and rapid changes in technology provide
opportunities for new entrants into the market. Management is not aware of any
product line which offers all of the features and functions of the Systems.
However, a number of software companies offer products which compete with one or
more of the functions of the Systems.
There are numerous companies that sell either stand-alone, network and
Web based systems with which the Company competes. Competition for the Company's
products include, among others, KeyFile Corporation, Westbrook Technologies, a
division of Intelligent Optics Co., Optika Imaging Systems Incorporated,
LaserData, Inc., Minolta Corporation, Network Imaging Corporation, Genesys
Information Systems Corporation and Hitachi. The Company also competes with more
expensive turnkey solutions such as those produced by FileNet Corp. ("FileNet"),
IBM Corporation ("IBM"), Wang Laboratories, Inc. ("Wang") and ViewStar
Corporation. Many of these companies have greater financial strength and
resources than the Company, and there can be no assurance that these competitors
will not modify their existing systems, develop new products or systems or
acquire other competitors of the Company to better compete with the Systems. Nor
can there by any assurance that new companies will not introduce new systems
with better features and functions than the Systems. There a few competitors in
the electronic document exchange market. This is a new extension of the Internet
services collectively known as the Business to Business Electronic Commerce
(B2B/ec). Current competition is focused on electronic mail (Email) based
exchange solutions, which is different from the methodology the Company has
adopted. Email based competitors include United Parcel Service and Pitney Bowes.
In the life insurance industry, one competitor has emerged utilizing a central
repository for document exchange.
In addition to computer software for document management and imaging,
there is also a diverse range of alternative types of tools and methods for
storing and retrieving documents, including microfilm, microfiche and computer
output microfilm and microfiche machines. Moreover, management expects that the
growing demand for efficient and cost-effective solutions for document
management and computer imaging will continue to drive the development of new
technologies that may be more sophisticated and cost-effective than the Systems.
Many existing and potential competitors have considerably greater financial,
technological, marketing and personnel resources than the Company.
Management believes that the principal competitive factors in the
market for the Company's products include product performance, technology,
quality of customer support, availability of training and consulting services,
price, sales and marketing strength, corporate reputation and ongoing
responsiveness to user needs.
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EMPLOYEES
As a result of limited resources, the Company decreased its full time
staff from 31 in 1997 to 13 in 1999. At present, the Company's full-time staff
of 13 includes 4 engaged in development and systems testing, 6 engaged in sales,
marketing and technical support, 1 in Business Services and 2 engaged in
administration. The Company has no collective bargaining agreements, and no
employee is represented by a labor union. The Company has never had a work
stoppage and considers its relationship with its employees to be satisfactory.
The Company utilizes a number of consultants to supplement its systems
development, sales and marketing.
The Company's success depends to a significant extent upon a number of
key management and technical employees. The loss of services of one or several
of these key employees could have a material adverse effect on the Company.
Management believes that the future success of the Company will also depend in
large part upon the Company's ability to attract and retain highly skilled
technical, managerial and marketing personnel. Competition for such personnel in
the software industry is intense.
YEAR 2000 COMPLIANCE
All of the Company's products and systems are Year 2000 compliant.
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ITEM 2. Description of Property.
The Company's principal administrative, sales and marketing, product
development and support facilities are located in Hasbrouck Heights, New Jersey,
and comprise approximately 7,000 square feet. The Company occupies these
premises pursuant to a sublease, the term of which expires on November 30, 2000.
The fixed rent is approximately $7,000 per month plus utilities.
ITEM 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings.
ITEM 4. Submission Of Matters To A Vote Of Security Holders.
The Company held a stockholders meeting on February 17, 1998 at which
the proposed merger with Access was approved by the requisite number of
stockholders entitled to vote thereon. The Merger Agreement was terminated on
August 25, 1998.
PART II
ITEM 5. Market For Common Equity And Related Stockholder Matters.
Common Class A
Stock Warrants
1997 High Low High Low
First 0.69 0.05 0.22 0.06
Second 0.31 0.09 0.06 0.03
Third 0.21 0.09 0.03 0.01
Fourth 0.20 0.05 0.01 0.001
1998
First 0.12 0.06 0.01 0.001
Second 0.27 0.05 0.08 0.001
Third 0.13 0.02 0.005 0.001
Fourth 0.05 0.01 0.001 0.001
1999
First 0.34 0.01 0.02 0.001
Second 0.25 0.11 0.01 0.005
Third 0.16 0.12 0.02 0.01
Fourth 0.12 0.08 0.02 0.01
2/23/00 0.26 0.09 0.01 0.005
14
<PAGE>
On March 11, 1997, the Company was informed by Nasdaq that its
securities were deleted from the Nasdaq SmallCap Market due to the Company's
failure to comply with minimum asset and capital surplus requirements
established by Nasdaq. The Company's securities are presently traded on the OTC
Bulletin Board.
As of February 23, 2000 there were approximately 769 holders of record
of the Company's shares of Common Stock.
On February 23, 2000, the closing bid and asked prices of the Common
Stock were .22 and .31, respectively, and the closing bid and asked prices of
the Class A Warrants were .005 and .01 respectively, as reported on the OTC
Bulletin Board. OTC market quotations reflect interdealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
The Company has not paid cash dividends since its organization and does
not anticipate the declaration or the payment of cash dividends in the
foreseeable future.
15
<PAGE>
ITEM 6. Management's Discussion and Analysis or Plan
of Operation
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales decreased by $393,576 or 26% to $1,145,219 in 1999 from
$1,538,795 in 1998, due to lower promotional expenses by the Company resulting
from the Company's financial constraints.
Salaries and related benefits decreased by $90,856 or 11% to $733,681
in 1999 from $824,537 in 1998, due to additional termination of employees.
Research and development expenses decreased by $195,179 or 36% to
$351,171 in 1999 from $546,350 in 1998, due to additional termination of
employees.
Selling expenses decreased by $279,543 or 56% to $220,725 in 1999 from
$500,268 in 1998, due to a reduction in promotional expenses resulting from the
financial constraints of the Company.
General and administrative expenses decreased by $111,909 or 32% to
$238,712 in 1999 from $350,621 in 1998, due to a reduction in professional fees
and other management expenses incurred in 1998, primarily incurred in connection
with the Merger Agreement.
Interest expense and financing costs increased by $10,376 or 5% to
$215,500 in 1999 from $205,124 in 1998, due to accrual of interest expense as a
result of cash advances by Access to the Company in 1997 and 1998.
Net income increased by $896,568 to $8,740 in 1999 from a net loss of
$887,828 in 1998, due to lower payroll costs, and gain on the sale of its New
Jersey net operating losses. Due to a change in the laws of the State of New
Jersey, the Company was able to realize in 1999 a gain $623,135 from the sale of
some of its cumulative net operating losses for New Jersey income tax purposes.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales was approximately the same in 1998 as in 1997, showing an
increase by $32,823 or 2% to $1,538,795 in 1998 from $1,505,972 in 1997.
Salaries and related benefits decreased by $616,617 or 43% to $824,537
in 1998 from $1,441,154 in 1997, due to the termination of employees resulting
from the financial constraints of the Company and the termination of the
Management Agreement with Access.
Research and development expenses decreased by $720,180 or 57% to
$546,350 in 1998 from $1,266,530 in 1997, due to the termination of employees
resulting from the financial constraints of the Company.
Selling expenses decreased by $192,831 or 28% to $500,268 in 1998 from
$693,099 in 1997, due to lower promotional efforts by the Company due to the
financial constraints of the Company.
16
<PAGE>
General and administrative expenses decreased by $425,121 or 55% to
$350,621 in 1998 from $775,742 in 1997, due to a reduction in professional fees
that resulted from the termination of the Merger Agreement with Access.
Interest income decreased by $3,886 to $277 in 1998 from $4,163 in
1997, due to a reduction in investments resulting from the Company's use of
funds.
Interest expense and financing costs increased by $79,425 or 63% to
$205,124 in 1998 from $125,699 in 1997, due to additional interest accrued on
the advances by Access Solutions.
Net loss decreased by $1,904,261 or 68% to $887,828 in 1998 from
$2,792,089 in 1997, due to the termination of employees, lower promotion
expenses and the termination of the Management Agreement with Access Solutions.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales decreased by $462,778 or 24% to $1,505,972 in 1997 from
$1,968,750 in 1996, due to lower demand in 1997. Net sales were adversely
affected by a decrease in marketing efforts, which resulted from the Company's
financial constraints. None of such decrease was a result of a decrease in
prices.
Salaries and related benefits was approximately the same for both
years,showing an increase by $49,429 or 4% to $1,441,154 in 1997 from $1,391,725
in 1996.
Research and development expenses decreased by $1,799,865 or 59% to
$1,266,530 in 1997 from $3,066,395 in 1996, due to the completion of Internet
products, the cessation of work on the workflow products, and the Company's
financial constraints.
Selling expenses decreased by $754,494 or 52% to $693,099 in 1997 from
$1,447,593 in 1996, due to a lower marketing effort and lower promotion expenses
resulting from the Company's financial constraints.
General and administrative expenses decreased by $129,395 or 14% to
$775,742 in 1997 from $905,137 in 1996, due to an increase in professional fees
related to the potential merger with Access Solutions, which increase was offset
by a reduction in recruiting fees.
Interest income decreased by $91,657 to $4,163 in 1997 from $95,820 in
1996, due to the loss of interest income on investments that the Company had in
1996, which investments were used to fund operations.
Interest expense increased by $120,138 to $125,699 in 1997 from $5,561
in 1996, due to accrued interest payable to Access for the advances it made to
fund the Company's operations.
Net loss decreased by $1,959,752 or 41% to $2,792,089 in 1997 from
$4,751,841 in 1996, due to a decrease in research and development and marketing
efforts in light of the Company's financial constraints.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company's operations resulted
in net income of $8,740. However, for the years ended December 31, 1996, 1997
and 1998, the Company incurred net losses of $4,751,841, $2,792,089 and
$887,828, respectively. As of December 31, 1999, the Company had an accumulated
deficit of $20,469,183 and a working capital deficit of $4,019,310. As of
December 31, 1998, the Company had a working capital deficit of $3,939,398. For
the year ended December 31, 1997, the Company's negative cash flows from
operations were $92,710, while in 1998 and 1999 the Company had a positive cash
flow of $160,999 and $381,074, respectively. However, these positive cash flows
resulted from the nonpayment of interest expense to Access. As a result of these
factors, as well as the uncertain conditions the Company faces regarding the
delinquency of accounts payable and loans payable, the report of the independent
public accountants contains explanatory language as to the Company's ability to
continue as a going concern.
At December 31, 1999, the Company had net Federal operating loss carry
forwards ("NOL") of $19,669,721 for financial reporting purposes. Due to losses
sustained by the Company for both financial and tax reporting through 1999,
management was unable to determine that realization of the tax asset related to
the NOL was more likely than not and, thus, has provided a full valuation
allowance. As a result of the Offering, the Company's NOL that would be
available to offset future income may be subject to annual limitations. However,
due to a provision under the laws of the State of New Jersey, the Company
realized in 1999 $623,135 from the sale of some of its New Jersey net operating
losses. The Company intends to file in 2000 to sell additional tax losses of up
to approximately $10.0 million which would result in net proceeds to the Company
of approximately $800,000. There can be no assurance if or when the Company will
receive such amount. In the Company is unable to realize such tax credits, it
may have a material adverse effect on the Company.
In January 1997, the Company entered into a non-binding Letter of
Intent (the "Letter of Intent") with Access Solutions International, Inc.
("Access") pursuant to which the Company and Access agreed to use their best
efforts to negotiate a transaction involving the purchase by Access of
substantially all of the assets of the Company. Access also agreed, pursuant to
the Letter of Intent, to provide the Company with a one year bridge loan of
$300,000 (the "Access Loan") in exchange for a promissory note convertible into
shares of Common Stock (as defined herein).
On November 12, 1997, the Company and Access entered into a definitive
Merger Agreement (the "Merger Agreement") which provided that the Company would
merge with and into a newly formed wholly owed subsidiary of Access. Concurrent
with the execution of the Merger Agreement, the Company and Access also entered
into a Management Agreement pursuant to which Access assumed control of the day
to day operations of the Company and advanced funds to the Company pending the
closing of the transactions contemplated by the Merger Agreement.
In August 1988, Access terminated the Merger Agreement in accordance
with its terms due to the failure by Access to satisfy the financing condition
contained in the Merger Agreement. The Company is currently conducting
discussions with Access regarding exchanging all but $300,000 of the
approximately $3.0 million owed to Access for equity of the Company and the
resolution of other potential disputes between the Company and Access. These
discussions are preliminary and there can be no assurance that the Company will
be successful in resolving any potential disputes with Access.
18
<PAGE>
Since August 1998, the Company has been exploring options to obtain
sources of funding, including a proposal made by certain of the Company's
employees who agreed to receive a reduction, or no, salary for a specified
period of time in exchange for equity in the Company. Some of the Company's
employees have agreed to defer payment of their salary temporarily or to forego
a portion of their salary in exchange for equity in the Company to be issued in
the future. There can be no assurance that such arrangements will continue to be
acceptable to the Company's employees.
Presently, the Company funds working capital from revenues it receives
from the sale of its products and the sale of its tax losses. As of February 29,
2000, the Company had aggregate liabilities in excess of $4.7 million,
approximately $3.0 million of which is owed to Access. The Company does not have
sufficient working capital to satisfy such liabilities. While the Company has
been successful to date in negotiating arrangements with its creditors for the
long-term payment of its liabilities,and is currently negotiating the potential
equitization of the amount owed to Access, there can be no assurance that such
arrangements will continue or that the Company will enter into an agreement with
Access regarding the amounts owed to it. In addition, there can be no
assurance that the Company's creditors will not institute an action for
the repayment of such amounts and if such action is taken against the Company,
that the Company would be able to satisfy such amounts. In the event such action
is brought against the Company, it would have a material adverse effect on the
Company.
ITEM 7. Financial Statements.
The Financial Statements can be found following Part IV of this Report.
19
<PAGE>
ITEM 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
(1) Previous independent accountant
On March 1, 2000, the Company dismissed Arthur Andersen LLP
("Andersen") as the Company's independent public accountants. The decision to
dismiss was approved by the Board of Directors of the Company (the "Board").
Andersen's report on the financial statements of the Company for each
of the previously audited financial statements for December 31, 1996 and 1995
did not contain any adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principle.
In connection with the audits by Andersen of the Company's financial
statements for 1996 and 1995, there were no disagreements with Andersen on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Andersen, would have caused Andersen to make reference to the
subject matter of the disagreements in connection with its audit report with
respect to financial statements of the Company for 1996 and 1995. The term
"disagreement" is utilized in accordance with Instruction 4 to Item 304 of
Regulation S-K.
During the two most recent fiscal years, and the subsequent interim
period through February 29, 2000 there were no "reportable events", as that term
is defined in Item 304 (a)(1)(v) of Regulation S-K.
(1) New independent accountant
The Company has selected Sobel & Co., LLC as the Company's independent
public accountants. The decision to change auditors was approved by the Board.
During the three most recent fiscal years and the subsequent interim
period through February 29, 2000, neither the Company nor anyone on behalf of
the Company consulted regarding either the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the financial statements of the Company or any
matter that was either the subject of a disagreement, within the meaning of Item
304(a)(1)(iv) of Regulation S-K, or any reportable event, as that term is
defined in Item 304 (a)(1)(v) of Regulation S-K.
20
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Executive Officers and Directors
The directors and executive officers of the Company as of February 24,
2000 are as follows:
Name Age Position
William Weiss 56 Chief Executive Officer; Treasurer;
Director
Michael Suleski 38 Vice President, Engineering; Secretary;
Director
WILLIAM WEISS, a founder of the Company, has been Chief Executive
Officer and a director of the Company since its formation in October 1991. Since
January 1980, Mr. Weiss has also been an executive officer (and President since
November 1988) and a director of Medical Registry Services, Inc., a computer
software company which sells and services a computerized system for cancer
record keeping in hospitals. Mr. Weiss devotes approximately 10-15 hours per
week to the Company and approximately 40-50 hours per week to Medical Registry
Services, Inc. From April 1974 to December 1979, Mr. Weiss was Executive Vice
President of Numerax, Inc., a public company specializing on computerized
freight billing and payment. From December 1969 to March 1974, Mr. Weiss served
as an Executive Vice President of a division of Automatic Data Processing, Inc.,
the purchaser of MSM, Inc., a company he founded which provided a computer
service for the investment advisory industry. Mr. Weiss received a B.S. from the
Wharton School of the University of Pennsylvania and a J.D. from New York Law
School.
MICHAEL SULESKI, a founder of the Company, has been Vice President,
Engineering of the Company since August 1992, and its Director of Research and
Development from its inception in October 1991 to August 1992. He has been a
director of the Company since May 1995, and Secretary of the Company since July
1995. From July 1991 through October 1991, Mr. Suleski worked with a founder to
develop the DOS Network Edition and helped found the Company. From April 1989
through July 1991, he was a Senior Engineer with Synercon Corp., a firm
specializing in computer based solutions for the medical profession. From April
1988 to March 1989, Mr. Suleski was a software engineer with Henderson
Industries, a developer and manufacturer of commercial industrial control
systems and military electronics. From July 1986 to March 1988, Mr. Suleski was
employed as software engineer with Singer/Kerfott, a defense contractor for
guidance and navigation systems. He received a B.S. and a M.S. degree from
Fairleigh Dickenson University College of Science and Engineering.
The Company's directors are elected at the annual meeting of
stockholders and hold office until the next annual meeting of the stockholders
or until their successors are elected and qualified. Directors are not currently
compensated or reimbursed for expenses incurred by them in connection with their
services as directors, except for travel to Board of Directors meetings.
21
<PAGE>
There are no family relationships among any of the directors or
officers.
The Company's officers are chosen by the Board of Directors and serve
at the pleasure of the Board. The loss of the services of any one of William
Weiss or Michael Suleski could have a material adverse effect on the Company.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation: (i) eliminates the
liability of the directors of the Company for monetary damages to the fullest
extent permitted by Delaware law: and (ii) authorizes the Company indemnify its
officers and directors to the fullest extent permitted by Delaware Law. The
By-Laws of the Company provide broad indemnification for officers and directors
against expenses (including legal fees, judgements, and Company-approved
settlements) incurred in connection with any civil or criminal act in which
arises from the performance of duties for the Company. The By-Laws of the
Company also provided that the Company will indemnify such persons to the
fullest extent permitted by law. The indemnification provide by the By-Laws
applies to any action taken by the indemnitee while serving as an officer or
director of the Company, any of its subsidiaries (non presently) or at the
Company's request as a director, officer, employee or agent of any of the above,
whether occurring before or after the date of the employment. The By-Laws of the
Company do not provide indemnification for any acts or omissions from which a
director may nor relieve of liability under the Delaware General Corporation
Law.
In so far as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers, or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
Compliance with Section 16
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires certain persons, including the Company's directors and executive
officers, to file reports with the Securities and Exchange Commission regarding
beneficial ownership of equity securities of the Company. William Weiss filed
one late report covering the acquisition of options by Mr. Weiss in 1998. Each
of William Weiss, Sol Rosenberg and Michael Suleski failed to file a report
covering the respective acquisitions of options in 1997, 1998 and 1999 by each
of them.
22
<PAGE>
ITEM 10. Executive Compensation.
The Summary Compensation Table below sets forth compensation paid by
the Company for the last three fiscal years ended December 31, 1999 for all
services in all capacities for its Chief Executive Officer and each of its
principal executive officers whose total annual salary and bonus exceeded
$100,000:
<TABLE>
<CAPTION>
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------------------------------------------------------------
Securities
Other Restricted Underlying LTIP
Name and Bonus Annual Underlying Stock Options/SARs (#)Payouts All Other
Position Year Salary ($) ($) Compensation Awards ($) ($) Compensation
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Weiss 1999 120,000(1) 0 0 0 81,000(2) N/A N/A
CEO(3) 1998 120,000(1) 0 0 0 81,000(2) N/A N/A
1997 120,000(1) 0 0 0 77,721(2) N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Sol Rosenberg 1998 50,000(4) 0 0 0 81,000(2) N/A N/A
(4) 1997 120,000(4) 0 0 0 81,000(2) N/A N/A
President 77,721(2) N/A N/A
CEO
- --------------------------------------------------------------------------------------------------------------------------
Michael Suleski 1999 100,000(1) 0 0 0 81,000(2) N/A N/A
Vice President 1998 100,000(1) 0 0 0 81,000(2) N/A N/A
Engineering 1997 100,000(1) 0 0 0 77,721(2) N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company presently has no employment contract with William Weiss or
Michael Suleski. (2) Granted pursuant to an automatic grant provision in the
1995 Stock Plan (as defined herein) for services rendered as a member of the
Board in the prior year. (3)As of February 29, 2000, $345,000 is owed to William
Weiss for past salaries
accrued but not paid.
(4)Mr. Rosenberg's employment with the Company was terminated in April 1997.
Mr. Rosenberg resigned as a member of the Board in February 2000. The
Company paid Mr. Rosenberg $120,000 as severance pay through 1998 and
continued to pay on his behalf premiums on disability insurance for a year
after termination.
23
<PAGE>
Option/SAR Grants
Shown below is information regarding stock option grants during the
fiscal year ended December 31, 1999 to the Company's Chief Executive Officer and
each of its principal executive officers:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
- -------------------- ------------------------------------------------------------- -------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Appreciation for Option
Individual Grants Term (1)
- -------------------- ------------- -------------- --------------- ---------------- --------------- ---------------
Number of
Securities % of Total
Underlying Options/
Options/ SARs Granted
SARs to Employees
Granted (#) in 1999 Exercise Price Expiration Date
Name 5%($) 10%($)
---- ----- ------
- -------------------- ------------- -------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William Weiss 81,000(2) 33.3% $0.03 3/1/2005 $120 $240
Chief Executive
Officer
- -------------------- ------------- -------------- --------------- ---------------- --------------- ---------------
Sol Rosenberg 81,000(2) 33.3% $0.03 3/1/2005 $120 $240
President (3)
- -------------------- ------------- -------------- --------------- ---------------- --------------- ---------------
Michael Suleski 81,000(2) 33.3% $0.03 3/1/2005 $120 $240
Vice President
Engineering
- -------------------- ------------- -------------- --------------- ---------------- --------------- ---------------
</TABLE>
(1) The potential realizable values represent future opportunity and have
not been reduced to present value in 1999 dollars. The dollar amounts
included in these columns are the result of calculations at assumed
rates set by the Securities and Exchange Commission for illustration
purposes, and these rates are not intended to be a forecast of the
Common Stock price and are not necessarily indicative of the values
that may be realized by the named executive officer.
(2) Granted pursuant to an automatic grant provision in the 1995 Stock Plan (3)
Mr. Rosenberg's employment with the Company was terminated in April
1997. Mr. Rosenberg resigned as a member of the Board in February 2000.
24
<PAGE>
Aggregated Option/SAR Exercises in fiscal year 1999 and fiscal year end Option/
SAR Values
Shown below is information regarding options/SARs that were exercised
during fiscal year 1999 by the Company's Chief Executive Officer and each of its
principal executive officers and the value of unexercised options/SARs:
<TABLE>
<CAPTION>
- ----------------------- ---------------------- ----------------- --------------------------- ---------------------
Value of
Unexercised
Unexercised Options at In-the-Money
fiscal year end Options Exercisable/
Shares Acquired On Value Exercisable/ Unexercisable ($)
------------------- ----- ------------ -----------------
Name Exercise (#) Realized ($) Unexercisable (#) (1)
---- ------------ ------------ ---------------------
- ----------------------- ---------------------- ----------------- --------------------------- ---------------------
<S> <C> <C> <C> <C>
William Weiss 0 0 289,721/0 0/0
Sol Rosenberg (2) 0 0 289,721/0 0/0
Michael Suleski 0 0 279,129/0 0/0
</TABLE>
(1) The Company does not have a stock appreciation rights ("SAR") plan and
does not have any SARs outstanding.
(2) Mr. Rosenberg's employment with the Company was terminated in
April,1997. Mr. Rosenberg resigned as a member of the Board in
February 2000.
The Company presently has no employment contracts with William Weiss or
Michael Suleski. The Company does not have any pension, profit sharing, or bonus
plan except that it has established a 1993 Option Stock Plan and a 1995 Stock
Option Plan, each of which is described below.
1993 Stock Option Plan
In March 1993, the Company adopted its 1993 Stock Option Plan (the
"1993 Stock Plan") covering 68,912 shares of Common Stock, pursuant to which
employees (other than directors) of the Company were eligible to receive stock
options. The 1993 Stock Plan, which expires on February 1, 2003, is administered
by the Board of Directors. The selection of participants, allotment of shares,
determination of price and other conditions of the purchase of the options were
determined by the Board of Directors. Stock options granted under the 1993 Stock
Plan are exercisable for a period of up to ten years from the date of the grant.
As of December 31, 1999, all of the options under the 1993 Stock Plan had been
granted. At such date, 48,729 options had expired, 20,183 options were
outstanding and none had been exercised.
25
<PAGE>
1995 Stock Option Plan
In May 1995, the Company adopted a 1995 Stock Option Plan, which was
amended in 1996 (the "1995 Stock Plan") covering 500,000 shares of Common Stock,
pursuant to which officers, directors and employees of the Company and certain
other persons conferring benefit upon the Company would be eligible to receive
stock options. The 1995 Stock Plan, which expires on March 1, 2005, is
administered by the Board of Directors. The selection of participants, allotment
of shares, determination of price and other conditions of purchase of the
options will be determined by the Board of Directors. Stock options granted
under the 1995 Stock Plan are exercisable for a period of up to ten years from
the date of the grant. The 1995 Stock Plan also provides for annual automatic
grants of stock options to directors who are employees of the Company ("Employee
Directors") and directors who are not employees of the Company ("Non-Employee
Directors"). Each Employee Director who is a member of the Board on December 31
of a year during the term of the 1995 Stock Plan shall be eligible to receive
non-qualified options to receive 1% of the outstanding Common Stock on the date
of grant on the first business day following the end of the year and each
Non-Employee Director who is a member of the Board on December 31 of a year
during the term of the 1995 Stock Plan shall be eligible to receive
non-qualified options to receive one fourth of one percent (1/4%) of the
outstanding Common Stock on the date of grant on the first business day
following the end of the year. As of December 31, 1999, options to acquire
1,273,022 shares of Common Stock had been granted under the 1995 Stock Plan. At
such date, 215,351 options had expired, 95,508 options had been exercised and
962,163 options were outstanding.
Executive Compensation
The Board determines the compensation of the Company's executive
officers, each of whom did not receive increases in their salaries, nor a bonus,
in 1999.
26
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of February 24, 2000 (except as
otherwise set forth in the footnotes), the number of shares of Common Stock
beneficially owned by each director, by the directors and executive officers of
the Company as a group and by each holder of at least five percent of Common
Stock known to the Company and the respective percentage ownership of the
outstanding Common Stock held by each such holder and group:
Name and Address Number Percentage
of Beneficial Owner of Shares (1) of Class
- -------------------------------------------- ------------- --------
William Weiss (2)(3) 563,104 6.93%
PaperClip Software, Inc.
611 Route 46 West
Hasbrouck Heights, NJ 07604
Michael Suleski (2)(4) 315,144 3.78%
PaperClip Software, Inc.
611 Route 46 West
Hasbrouck Heights, NJ 07604
James W. Giddens, solely in 1,252,840 15.5%
his capacity as trustee for the
liquidation of the business of
A.R. Baron & Co., Inc.
P.O. Box 359
Bowling Green Station
New York, NY 10274 (5)
A11 Officers and Directors
as a group (2 persons) 879,048 10.7%
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
(2) William Weiss and Michael Suleski are founders of the Company.
(3) Includes (a) 924 shares of Common Stock issuable upon the exercise of
924 warrants obtained in a private placement, (b) 289,721 shares
currently exercisable under the 1995 Stock Option Plan, and (c) 9,000
shares issuable upon the exercise of 9,000 Class A Warrants.
(4) Includes 15,408 shares of Common Stock issuable upon the exercise of
options currently exercisable under the 1993 Stock Plan and 263,721
shares currently exercisable under the 1995 Stock Option Plan.
(5) Includes 362,800 shares of Common Stock underlying currently
exercisable redeemable Class A Purchase Warrants of the Company. The
information set forth in the table and the preceding sentence James W.
Giddens, as trustee, was obtained from Amendment No. 1 to a Statement
on Schedule 13D, dated June 4, 1999, filed with the Securities and
Exchange Commission.
27
<PAGE>
Item. 12. Certain Relationships and Related Transactions.
Not Applicable
PART IV
Item 13. Exhibits, Financial Statements and Report on Form 8-K.
28
<PAGE>
(a) Exhibits:
3.1 Certificate of Incorporation of Registrant, as amended.(1)
3.2 By-Laws of Registrant, as amended. (1)
3.3 Registrant's Authorization to do Business in New Jersey. (1)
3.5 Form of Common Stock Certificate. (1)
4.2 Class A Warrant Agreement (including form of Class A Warrant) among the
Registrant, A.R. Baron & Co.,
Inc. ("Baron") and American Stock Transfer & Trust Company.(1) 4.3
Stock Purchase Option, dated September 27, 1995, granted to
Baron.(1) 4.4 Warrant Purchase Option, dated September 27, 1995,
granted to Baron.(1)4.5 Form of Investor Purchaser Agreement, dated as
of April 5, 1995, by and between the Registrant and the Investors
identified in the Schedule of Investors attached thereto, and
amendment thereto, dated March 29, 1995. (1)
4.6 Form of Bridge Note issued on April 5, 1995, to each Investor
identified on the Schedule of Investors ncluded with Exhibit 4.5. (1)
4.7 Form of Bridge Warrant dated April 5, 1995, given to each Investor
identified on the Schedule of Investors included with Exhibit 4.5. (1)
10.1 1993 Stock Option Plan. (1)
10.2 1995 Stock Option Plan, as amended (2)
10.3 License Agreement with Pixel Translations, Inc., dated May 16, 1995.(1)
10.4 Distributor Agreement with Law Cypress Distributing Company, dated as
of March 18,1993 (incorporated by reference from Exhibit 10.16 of the
Registrant's Form 10-KSB for the fiscal year ended December 31, 1995).
(2)
10.5 Form of End User License. (1)
10.6 Merger and Acquisition Agreement between the Registrant and Baron,
dated September 27, 1995. (1)
10.7 Consulting Agreement with Stephen Kornfeld, dated as of January 1, 1996
(incorporated by reference from Exhibit 10.27 of the Registrant's Form
10-KSB for the fiscal year ended December 31, 1995).
10.8 (a) Reschedule Agreement with NCC Export Systems 1995 LTD ("NCC"),
dated as of October 21, 1996 (incorporated by reference from Exhibit 10
of the Registrant's Form 10-QSB for the quarter ended September 30,
1996). (b) Receipt of full payment and termination of the Reschedule
Agreement from NCC, dated January 29 , 1997. (2)
10.9 License Agreement with Cheyenne Software, Inc., dated November 10, 1995
(incorporated by reference from Exhibit 10.12(c) of the Registrant's
Form 10-KSB for the fiscal year ended December 31, 1995).
10.10 (a) Letter of Intent with Access Solutions International, Inc. ("Access
Solutions"), dated January 2, 1997, (b) Letter Agreement with Access
Solutions, amending the Letter of Intent, dated January 31, 1997, (c)
Letter Agreement with Access Solutions, amending the Letter of Intent,
dated February 28, 1997, (d) Letter Agreement with Access Solutions,
amending the Letter of Intent, dated March 31, 1997, (e) Convertible
Promissory note issued by the Registrant to Access Solutions, dated
January 29, 1997, (f) Security Agreement with Access Solutions, dated
January 29, 1997 and (g) Registration Rights Agreement with Access
Solutions, dated January 29, 1997. (2)
10.11 Employment Termination Agreement and release between the Company and
Sol Rosenberg, dated as of June 18, 1997 (incorporated by reference
from Exhibit 99.1 of the Registrant's Form 10-QSB for the quarterly
period ended June 30, 1997).
29
<PAGE>
10.12 Agreement and Plan of Merger among the Company, Access Solutions and
PaperClip Acquisitions, dated as of November 12, 1997 (incorporated by
reference from Exhibit 2 of the Registrant's Form 10-QSB for the
quarterly period ended September 30, 1997).
10.13 Tenth Amendment to Agreement and Plan of Merger among the Company,
Access Solutions and PaperClip Acquisitions, dated as of April 22, 1998
(incorporated by reference from Exhibit 10.28 of the Registrant's Form
8-K filed with the Securities and Commission on June 5, 1998).
10.14 Second Amendment to the Management Agreement between the Company and
Access Solutions dated as of April 22, 1998 (incorporated by reference
from Exhibit 10.29 of the Registrant's Form 8-K filed with the
Securities and Commission on June 5, 1998).
10.15 Tenth Amendment to Convertible Promissory Note between the Company and
Access Solutions dated as of April 22, 1998 (incorporated by reference
from Exhibit 10.30 of the Registrant's Form 8-K filed with the
Securities and Commission on June 5, 1998).
- ---------------------
(1) Incorporated by reference from the Registrant's Registration Statement
on Form SB-2 (File No.
33-92768NY).
(2) Incorporated by reference from the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1997 (File No. 000-26598).
30
<PAGE>
PAPERCLIP SOFTWARE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<PAGE>
PAPERCLIP SOFTWARE, INC.
DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
Page
Independent Auditors' Report........................................ 1
Financial Statements:
Balance Sheets.................................................. 2
Statements of Operations........................................ 3
Statements of Changes in Stockholders' Deficiency............... 4
Statements of Cash Flows........................................ 5
Notes to Financial Statements...................................... 6-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
PaperClip Software, Inc.
We have audited the accompanying balance sheets of PaperClip Software, Inc. (a
Delaware corporation) as of December 31, 1999, 1998 and 1997, and the related
statements of operations, changes in stockholders' deficiency, and cash flows
for each of the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of PaperClip Software, Inc. as of
December 31, 1999, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered significant negative cash flows,
has incurred significant losses from operations since inception and has
substantial negative working capital and net worth. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 8. These
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
/s/ Sobel & Co., LLC
Certified Public Accountants
Livingston, NJ
March 3, 2000
<PAGE>
PAPERCLIP SOFTWARE, INC.
BALANCE SHEETS 2
==============================================================================
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $580,623 $217,129 $81,789
Accounts receivable, net of allowance
for doubtful accounts of $30,000
in 1999, 1998 and 1997 136,658 182,844 195,497
------------------ ------------------ ------------------
Total Current Assets 717,281 399,973 277,286
------------------ ------------------ ------------------
EQUIPMENT, FURNITURE AND FIXTURES:
Computer and office equipment 427,582 408,002 386,597
Furniture and fixtures 204,858 204,858 204,858
------------------ ------------------ ------------------
632,440 612,860 591,455
Less: accumulated depreciation (551,577) (492,851) (385,941)
------------------ ------------------ ------------------
Equipment, Furniture and Fixtures, Net 80,863 120,009 205,514
------------------ ------------------ ------------------
OTHER ASSETS 20,000 19,893 51,475
------------------ ------------------ ------------------
$818,144 $539,875 $534,275
================== ================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,100,082 $1,244,649 $1,198,541
Due to ASI 3,010,818 2,804,722 2,068,596
Accounts payable - related party 395,000 290,000 180,000
Deferred revenue 101,000 - 6,321
Current portion of capitalized lease
obligations - - 4,254
Notes payable 129,691 - -
------------------ ------------------ ------------------
Total Current Liabilities 4,736,591 4,339,371 3,457,712
NOTES PAYABLE - 129,691 129,691
------------------ ------------------ ------------------
Total Liabilities 4,736,591 4,469,062 3,587,403
------------------ ------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock-authorized 30,000,000 shares;
$.01 par value; issued and outstanding
8,121,521, 8,101,521 and 8,101,521 shares
in 1999, 1998 and 1997, respectively 81,215 81,015 81,015
Additional paid-in capital 16,469,521 16,467,721 16,455,952
Accumulated deficit (20,469,183) (20,477,923) (19,590,095)
------------------ ------------------ ------------------
Total Stockholders' Deficiency (3,918,447) (3,929,187) (3,053,128)
------------------ ------------------ ------------------
$818,144 $539,875 $534,275
================== ================== ==================
</TABLE>
<PAGE>
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF OPERATIONS 3
==============================================================================
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
NET SALES $1,145,219 $1,538,795 $1,505,972
------------------ ------------------ ------------------
OPERATING EXPENSES:
Salaries and related benefits 733,681 824,537 1,441,154
Research and development expenses 351,171 546,350 1,266,530
Selling expenses 220,725 500,268 693,099
General and administrative expenses 238,712 350,621 775,742
------------------ ------------------ ------------------
Total Operating Expenses 1,544,289 2,221,776 4,176,525
------------------ ------------------ ------------------
LOSS FROM OPERATIONS (399,070) (682,981) (2,670,553)
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest income 175 277 4,163
Interest expense and financing costs (215,500) (205,124) (125,699)
Income from sale of tax credits 623,135 - -
------------------ ------------------ ------------------
Total Other Income (Expense), Net 407,810 (204,847) (121,536)
------------------ ------------------ ------------------
NET INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 8,740 (887,828) (2,792,089)
PROVISION FOR INCOME TAXES - - -
------------------ ------------------ ------------------
NET INCOME (LOSS) $8,740 $(887,828) $(2,792,089)
================== ================== ==================
NET INCOME (LOSS) PER COMMON SHARE Nil (.11) (.35)
================== ================== ==================
WEIGHTED AVERAGE NUMBER COMMON
SHARES OUTSTANDING 8,044,637 8,028,418 8,028,418
================== ================== ==================
</TABLE>
<PAGE>
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 4
===============================================================================
The accompanying notes are an integral part of these financial statements.
Common Stock
<TABLE>
<CAPTION>
Additional
Number Paid-in Accumulated Stockholders'
of Shares Par Value Capital Deficit Deficiency
------------- ------------ ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 7,722,188 $77,222 $16,362,395 $(16,798,006) $(358,389)
Issuance of stock in lieu of cash compensation 333,333 3,333 48,750 - 52,083
Exercise of stock options 46,000 460 2,620 - 3,080
Options granted at less than fair market value - - 42,187 - 42,187
NET LOSS, 1997 (2,792,089) (2,792,089)
---------- ------------ ------------------ --------------- --------------
BALANCE, December 31, 1997 8,101,521 81,015 16,455,952 (19,590,095) (3,053,128)
Options granted at less than fair market value - - 11,769 - 11,769
NET LOSS, 1998 - - - (887,828) (887,828)
------------- ------------- ------------------ ------------------ --------------
BALANCE, December 31, 1998 8,101,521 81,015 16,467,721 (20,477,923) (3,929,187)
Exercise of stock options 20,000 200 1,800 - 2,000
NET INCOME, 1999 - - - 8,740 8,740
---------- ------------- ------------------ ------------------ --------------
BALANCE, December 31, 1999 8,121,521 $81,215 $16,469,521 $(20,469,183) $(3,918,447)
========== ============= ================== ================== ===============
</TABLE>
<PAGE>
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF CASH FLOWS 5
===============================================================================
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income (loss) $8,740 $(887,828) $(2,792,089)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation 58,726 106,910 217,331
Expense recognized for options granted at
less than fair market value - 11,769 42,187
Stock issued in lieu of cash compensation - - 52,083
(Increase) decrease in:
Accounts receivable, net 46,186 12,653 80,030
Prepaid expenses and other current assets - - 33,855
Other assets (107) 31,582 1,807
Increase (decrease) in:
Accounts payable and accrued expenses (144,567) 46,108 73,235
Due to ASI 206,096 747,388 2,068,596
Due to related party 105,000 110,000 180,000
Deferred revenue 101,000 (6,321) (736,126
------------------ ------------------ -----------------
Net Cash Provided by (Used for)
Operating Activities 381,074 160,999 (92,710)
------------------ ------------------ -----------------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and
fixtures (19,580) (21,405) -
------------------ ------------------ -----------------
FINANCING ACTIVITIES:
Proceeds from issuance of stock in exchange for
stock options and cash 2,000 - 3,080
Payments on capitalized lease obligations - (4,254) (49,154)
------------------ ------------------ -----------------
Net Cash Provided by (Used for)
Financing Activities 2,000 (4,254) (46,074)
------------------ ------------------ -----------------
INCREASE (DECREASE) IN CASH 363,494 135,340 (138,784)
CASH AND CASH EQUIVALENTS:
Beginning of year 217,129 81,789 220,573
------------------ ------------------ -----------------
End of year $580,623 $ 217,129 $ 81,789
================== ================== =================
</TABLE>
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 6
===============================================================================
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION:
- --------------------------------------------------------------------------------
PaperClip Software, Inc. (formerly known as PaperClip Imaging Software, Inc.)
(the "Company"), a Delaware corporation, is engaged in the development and
distribution of computer software for document management and transport of
electronic document packages across the public Internet or a private Intranet
with interoperability, security and tracking capabilities. The Company's systems
allow users of personal computer networks to scan, file, retrieve, display,
print and route documents and other software objects (such as word processing
files, spreadsheets and electronic mail), while continuing to use their existing
application software. The systems can be integrated with many personal computer
applications with little or no programming and can file and retrieve documents
without the time consuming step of manually labeling or indexing each document.
The Company sells its products worldwide to value added resellers and original
equipment manufacturers of personal computers and personal computer networks
utilized, on a corporate level.
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
Basis of Accounting:
The Company's policy is to prepare its financial statements on the accrual basis
of accounting.
Revenue Recognition:
The Company generates revenues from licensing the rights to use its software
products directly to distributors, resellers, original equipment manufacturers
(OEM's), and end users.
Revenues from licenses are recognized upon shipment of the software if there are
no significant post delivery obligations, if collection is probable and if
payment is due within one year. The Company provides telephone support at no
additional charge for periods not exceeding one year. The estimated cost of
providing such support is not significant. Revenues from consulting services are
recognized as services are performed.
The Company also offers post contract services, which includes software version
upgrades and consulting and training services related to installation and
implementation of the Company's product. Revenues paid by the customer prior to
performance of post contract services are deferred and recognized over the term
of the post contract service agreement, usually one year.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 7
===============================================================================
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
- --------------------------------------------------------------------------------
Advertising:
Advertising costs are expensed as incurred.
Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash at banks and highly liquid
investments with maturities of three months or less.
Equipment, Furniture and Fixtures:
Equipment, furniture and fixtures are stated at cost, less accumulated
depreciation. Depreciation expense is computed using the straight-line method
over the estimated useful lives of the assets which range from five to seven
years.
Accounting for Stock-Based Compensation:
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). The adoption of this
pronouncement had no impact on the Company's financial condition or results of
operations, however, additional disclosures have been included in the financial
statements.
Federal Income Taxes:
The Financial Accounting Standards Board issued Statement No. 109, "Accounting
for Income Taxes" (SFAS 109), which provides for the recognition of deferred tax
assets, net of an applicable valuation allowance, related to net operating loss
carryforwards and certain temporary differences.
Net Income (Loss) Per Common Share:
Net income (loss) per common share is computed based upon the weighted average
number of common shares and common share equivalents outstanding if dilutive
during each year.
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 8
===============================================================================
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
NOTE 3 - INCOME TAXES:
- -------------------------------------------------------------------------------
For tax return purposes, the Company has the following net operating loss carry
forwards as of December 31, 1999, 1998 and 1997 for Federal and State purposes:
Federal Net
Operating Loss Year Incurred Expiration Date
----------------- ----------------- ----------------------
$2,110,824 December 31, 1992 December 31, 2007
$2,790,034 December 31, 1993 December 31, 2008
$2,880,756 December 31, 1994 December 31, 2009
$3,648,749 December 31, 1995 December 31, 2010
$4,660,613 December 31, 1996 December 31, 2011
$2,707,112 December 31, 1997 December 31, 2012
$ 880,373 December 31, 1998 December 31, 2013
State Net
Operating Loss Year Incurred Expiration Date
----------------- ------------------- -------------------------
$2,159,599 December 31, 1995 December 31, 2002
$4,656,237 December 31, 1996 December 31, 2003
$2,704,336 December 31, 1997 December 31, 2004
$ 879,754 December 31, 1998 December 31, 2005
As stated in Note 11, the State of New Jersey is currently allowing the sale of
state net operating losses and research tax credits. At this time, it is
undeterminable the duration of the program or the amounts that will be sold.
The Company also has tax credits related to research activities of
approximately $175,000, $145,000 and $117,000 at December 31, 1999, 1998,
and 1997, respectively.
The Company's total deferred tax liabilities, deferred tax assets and valuation
allowance consists of the following at December 31:
1999 1998 1997
------------------------------------------------
Total deferred tax liabilities $ - $ - $ -
Deferred tax assets 5,900,000 5,900,000 5,600,000
Total valuation allowance 5,900,000 5,900,000 5,600,000
-----------------------------------------------
$ - $ - $ -
===============================================
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 9
===============================================================================
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
NOTE 4 - DEBT:
- -------------------------------------------------------------------------------
During 1996, the Company issued $129,691 of Convertible Notes (the Notes) to
certain stockholders of the Company. The Notes bear interest at 12% per annum
and are convertible into common stock at a rate of $.30 per share. The Notes
matured in December 1999 and are callable at any time.
- -------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------------------------------------------
William Weiss, Chief Executive Officer and Sol Rosenberg, President entered into
an employment agreement with the Company for a term ending December 31, 1998. In
accordance with their respective contracts, each of Messrs. Weiss and Rosenberg
is entitled to $120,000 per annum. Mr. Weiss' annual compensation will be
increased to $150,000 per annum after the end of the first fiscal year in which
the Company is profitable. On April 15, 1997, Mr. Rosenberg's contract was
terminated. As per the contract he received $120,000 severance pay and had his
disability insurance maintained for one year.
During 1997, 1998 and 1999, the Company has been involved with various lawsuits
regarding outstanding delinquent liabilities incurred in the ordinary course of
business. As of the date of the financial statements, these lawsuits have been
settled for the amount of the obligation recorded with various terms. These
amounts are recorded on the accompanying December 31, 1999 balance sheet. The
payment terms of the settlement amounts are being met.
- --------------------------------------------------------------------------------
NOTE 6 - LEASES:
- -------------------------------------------------------------------------------
The Company leases its office space under a non-cancelable operating lease.
Future minimum rental payments required under this lease are $80,000, $73,333
and $116,444 for 1999, 1998 and 1997, respectively. In addition, the Company
leases office furniture and a copier under two capital lease agreements
requiring principal payments of $-0-, $61,500 and $16,500 in 1999, 1998 and
1997, respectively. Rent expense was approximately $80,000, $73,333 and $116,444
for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum rental payment required under these leases are as follows:
Year Ended
December 31,
2000 $85,839
2001 12,506
2002 -
2003 -
2004 -
Thereafter -
===================
$98,345
===================
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 10
===============================================================================
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
NOTE 7 - DUE TO ASI:
- --------------------------------------------------------------------------------
In January, 1997, the Company signed a letter of intent with Access Solutions
International, Inc. (ASI) for the sale of the Company's assets and assumption of
certain liabilities in exchange for ASI stock. The negotiations of the sale
continued through August 24, 1998 at which time ASI terminated all negotiations
of a merger. During these negotiations, ASI loaned the Company $300,000 at 12%
interest which is convertible into common stock at $.25 per share at the option
of ASI. The Company also entered into a management agreement with ASI for a fee
of $50,000 per month up to $300,000 and then $1 per month thereafter. This
agreement was terminated in October 1998. In addition, ASI billed the Company
for various ordinary business expenses that the Company incurred and ASI paid on
the Company's behalf. All of these amounts, including accrued interest on the
$300,000 note have been included in due to ASI on the accompanying balance
sheet.
- -------------------------------------------------------------------------------
NOTE 8 - GOING CONCERN:
- -------------------------------------------------------------------------------
As shown in the accompanying financial statements, the Company has a history of
significant operating losses and as of December 31, 1999, current liabilities
exceed current assets by $4,019,310 and total liabilities exceed total assets by
$3,918,447. These factors, as well as the uncertain conditions the Company faces
regarding the delinquency of accounts payable and loans payable raise
substantial doubt about the Company's ability to continue as a going concern.
Management has developed new software called "Internet Express" and is currently
pursuing the marketing of this product. The Company is also in the process of
developing a plan to reduce its liabilities through the issuance of stock. As
discussed in Note 11, management will continue to sell State net operating
losses and research tax credits in order to provide cash flow if the State of
New Jersey continues this program. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
- --------------------------------------------------------------------------------
NOTE 9 - MAJOR CUSTOMERS:
- --------------------------------------------------------------------------------
The Company sells its products primarily through mass distributors and
approximately 60 independent Value Added Resellers ("VARS"). The VARS sell and
install these products at end user sites. Sales to one major customer for the
year ended December 31, 1999 was approximately 21%. Sales to two major customers
for the year ended December 1998 were approximately 23% and 14%. Sales to two
major customers for the year ended December 31, 1997 were 13% and 11%.
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 11
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
NOTE 10 - OPTIONS AND WARRANTS:
The Company adopted a stock option plan (the "1993 Stock Option Plan"),
effective March 8, 1993, pursuant to which employees of the Company are eligible
to receive incentive stock options. The 1993 Stock Option Plan, which expires in
2003, is administered by the Board of Directors. The selection of participants,
allotment of shares, determination of price and other conditions of purchase of
options is determined by the Board of Directors.
Stock option transactions for the 1993 Stock Option Plan are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
------------ ------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 20,183 $2.60 32,417 $2.60 33,187 $2.60
Granted - - - - - -
Exercised - - - - - -
Canceled or expired - - (12,234) $2.60 (770) $2.60
------------ ------------- ------------- ------------ ----------- -------------
Outstanding, end of year 20,183 $2.60 20,183 $2.60 32,417 $2.60
============ ============= ============= ============ =========== =============
</TABLE>
As of December 31, 1999, all of the options outstanding under the 1993 Stock
Option Plan were exercisable at $2.60 per share.
1995 Stock Option Plan -
In May 1995, the Company adopted a stock option plan (the "1995 Stock Option
Plan"), pursuant to which officers, directors and employees of the Company
and certain other persons conferring benefit upon the Company will be
eligible to receive stock options. The 1995 Stock Option Plan, which expires
on March 1, 2005, is administered by the Board of Directors. The selection
of participants, allotment of shares, determination of price, vesting and
other conditions of purchase of options is determined by the Board of
Directors. Stock options granted under the Plan are exercisable for a period
of up to 10 years from the date of grant.
Stock option transactions for the 1995 Stock Option Plan are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
------------- -------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 738,563 $.10-2.50 620,780 $.10-2.50 467,434 $.05-2.50
Granted 243,600 .03 243,000 .06 264,747 .41
Exercised (20,000) .10 - - (46,000) .005-.10
Canceled or expired - - (125,217) .10-2.50 (65,401) .10-2.50
------------- -------------- ------------- ------------- --------------- -------------
Outstanding, end of year 962,163 $.03-2.50 738,563 $.06-2.50 620,780 $.10-2.50
============= ============== ============= ============= =============== =============
</TABLE>
<PAGE>
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 12
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
- --------------------------------------------------------------------------------
NOTE 10 - OPTIONS AND WARRANTS: (Continued)
- --------------------------------------------------------------------------------
As of December 31, 1999, 962,163 options were exercisable at prices ranging from
$.03 to $2.50 per share.
Effective January 1, 1996, the Company adopted the provisions of SFAS 123,
"Accounting for stock-based Compensation." As permitted by the statement, the
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method. Had the fair value method of accounting been applied to
the Company's stock option plans, which requires recognition of compensation
cost ratably over the vesting period of the underlying equity instruments, the
net loss would have been increased by approximately $-0- with a $.01 per share
effect in 1999 and approximately $42,000 with $.01 per share effect in 1998 and
$12,000 with a $.01 per share effect in 1997. This pro forma impact only takes
into account options granted since January 1, 1995 and is likely to increase in
future years as additional options are granted and amortized ratably over the
vesting period. The average fair value of options granted during 1999, 1998 and
1997 was $.03, $.06 and $.41, respectively.
The fair value was estimated using the Black-Scholes option-pricing model based
on the weighted average market price at grant date of $.03 in 1999, $.06 in 1998
and $.41 in 1997 and the following weighted average assumptions; risk-free
interest rate of 5.0% in 1999, 1998 and 1997, volatility of 75% for 1999, 1998
and 1997, and dividend yield of 0% for 1999, 1998 and 1997.
- -------------------------------------------------------------------------------
NOTE 11 - INCOME FROM SALE OF TAX CREDITS:
- -------------------------------------------------------------------------------
In June 1999, the State of New Jersey passed legislature allowing small
businesses to sell State of New Jersey Net Operating Loss and Research Tax
credit carryforwards to companies that could utilize the loss. For 1999, a pool
of $50 million was available to be shared by all companies eligible. The Company
was authorized to sell $9,231,633 of State net operating losses from 1992, 1993,
1994 and 1995. The net proceeds to the company for the sale of these net
operating losses were $623,135. The Company has approximately $10,500,000 of
State losses available for future sale.
- --------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS:
- -------------------------------------------------------------------------------
Mr. William Weiss, CEO of the Company receives compensation of $10,000 per month
as part of an employment contract. During 1999, 1998 and 1997, he has assigned
payment of the compensation to other companies he is affiliated with.
During 1997, the Company issued 333,333 shares of stock in lieu of compensation
to a majority stockholder.
<PAGE>
================================================================================
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS 13
DECEMBER 31, 1999, 1998 AND 1997
===============================================================================
NOTE 13 - ROYALTIES:
- --------------------------------------------------------------------------------
During 1999, 1998 and 1997, the Company had licensing agreements with 5 vendors
to distribute various software products. At December 31, 1999, all amounts
outstanding in regards to these agreements have been included in the
accompanying December 31, 1999 financial statements.
- -------------------------------------------------------------------------------
NOTE 14 - EXPORT SALES:
- -------------------------------------------------------------------------------
Export sales were approximately 8%, 9% and 16% of the Company's net sales for
the years ended December 1999, 1998 and 1997, respectively.
- -------------------------------------------------------------------------------
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
- --------------------------------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------
Cash paid for interest $ - $ 24 $1,700
================= ================== ============
<PAGE>
(a) Reports on Form 8-K.
The Company filed one report on Form 8-K during the period covered by
this report. The report on Form 8-K was filed with respect to Item 5. The date
of such report on Form 8-K was August 25, 1998.
The Company also filed a report on Form 8-K on March 1, 2000 relating
to Item 9.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the Registrant has caused this Report to be signed on
its behalf by the undersigned, hereunto duly authorized.
PAPERCLIP SOFTWARE, INC.
By: /s/ William Weiss
William Weiss, Chief Executive Officer
Date: March 7,2000
Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature Title Date
/s/ William Weiss
William Weiss Director and Chief Executive March 7, 2000
Officer (Principal Executive,
Financial and Accounting Officer)
/s/ Michael Suleski
Michael Suleski Director, Vice President, March 7, 2000
Engineering and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 580,623
<SECURITIES> 0
<RECEIVABLES> 166,658
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 717,281
<PP&E> 632,440
<DEPRECIATION> (551,577)
<TOTAL-ASSETS> 818,144
<CURRENT-LIABILITIES> 4,736,591
<BONDS> 0
0
0
<COMMON> 81,215
<OTHER-SE> 16,469,521
<TOTAL-LIABILITY-AND-EQUITY> 818,144
<SALES> 1,145,219
<TOTAL-REVENUES> 1,145,219
<CGS> 0
<TOTAL-COSTS> 1,544,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (215,325)
<INCOME-PRETAX> 0
<INCOME-TAX> (623,135)
<INCOME-CONTINUING> 8,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,740
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
