UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File Number 000-26598
PAPERCLIP SOFTWARE, INC.
(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.)
1 University Plaza
Hackensack , New Jersey 07601
(Address of principal executive offices) (Zip Code)
(201) 525-1221
(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: N/A
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.01
(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 X No
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. [X ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
The issuer's revenue for the fiscal year ended December 31, 2005 was
$1,739,394. As of March 16, 2006, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $315,766 (based on the closing
price of the OTC Bulletin Board on March 16, 2006). As of March 16, 2006, there
were 8,196,521 shares of the registrant's common stock outstanding.
Documents Incorporated by Reference: None. Transitional Small
Business Disclosure Format (check one): Yes ___ No X
Certain information included in this Annual Report may be deemed to include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risk and uncertainty, such as information relating to
the acceptance and sale of the Company's products, the Company's ability to
successfully market and distribute its products, product development or
enhancements, the Company's ability to generate sufficient cash flow from the
sale of its products to meet the Company's cash requirements and to pay its
liabilities when due, the Company's ability to raise additional capital, the
Company's ability to protect its proprietary property and the Company's ability
to attract and retain key employees. In addition, certain statements may involve
risk and uncertainty if they are preceded by, followed by, or that include the
words "intends," "estimates," "believes," "expects," "anticipates," "should,"
"could," or similar expressions, and other statements contained herein regarding
matters that are not historical facts.
Although we believe that our expectations are based on reasonable assumptions,
we can give no assurance that our expectations will be achieved. We do not
undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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, 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 is the successor by merger, in March 1992, to the original company which
had been incorporated in New Jersey in October 1991.
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 Company's 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 developed and markets a line of software consisting of
Professional, Workgroup and 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, and
printing of COLD documents. "COLD" refers to Computer Output to Laser Disk,
which relates to 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 developed its WebServer(TM) Product, which is an add-on to the
Systems. This product provides full security for documents stored on a PaperClip
System, enables users to make the documents available to anyone with a Web
Browser and makes 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 . The Company has developed the next
generation of the NOSS product, which has been deployed on the Microsoft Windows
NT server platform. The Company markets the Systems and associated products
domestically (i) through a mass distributor, Z Source, which sells to a value
added reseller ("VAR") channel that currently consists of approximately 20
resellers and (ii) directly through such VARs. The Company markets its products
internationally through approximately 3 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 marketing 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
personal 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 give users the
added flexibility of exchanging, accessing and managing stored documents via the
Internet.
The Company derives all of its revenues from the licensing or sale of the
Systems and associated products and services. The Company's principal products
are the Professional, Workgroup and Enterprise Editions, as well as the Internet
Express and eXpressLink products.
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The Company has begun marketing a new document management and work flow
product which has been customized for the mortgage broker industry. The
Company's sales from this product were approximately $125,000 and $25,000 in
2005 and 2004, respectively. The product is available in either a client server
model and installed at the customer site, or in an ASP model and hosted by
PaperClip. ASP refers to a model where PaperClip hosts the clients information
on PaperClip's computers. The client server product is named Mortgage Assistant
(MA) and the hosted product is named Virtual Loan Folder. The Company believes
that this product may represent a promising opportunity for its business,
although there are competitors in this business and there can be no assurance
that the Company can generate meaningful revenues from this product.
The Company has also begun marketing its PaperClip32 product in ASP model
hosted by PaperClip. PaperClip32 is the name for PaperClip's document management
software. To date interest in this service has been shown by the life insurance
industry. The Company believes that this product may represent a promising
opportunity for its business although there is at least one competitor in this
business and there can be no assurance that the Company can generate meaningful
revenues from this product.
PaperClip leveraged its workflow application in 2005 by adding support for
forms recognition and processing data in the ACORD 103 EDI format (XML). This
technology development resulted in two new service offerings, ImageIn and IGO
Service. ImageIn provides the ability to correctly identify incoming document
types eliminating the need for manual identification. IGO Service provides an
"In Good Order" value to the recipient, which means all data and documents are
analyzed to ensure all the recipients required documents have been submitted and
are available before releasing the package to Internet eXpress for delivery.
There can be no assurance that the Company's products will achieve
broader market acceptance or result in significant revenue to the Company.
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 (collectively "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.
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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.
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 millions of Documents while
maintaining a high level of performance. The Professional Edition works in
conjunction with SQL database products from Microsoft and Sybase.
Workgroup Edition
Workgroup 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.
Enterprise Edition
Enterprise Edition provides all the features of the Workgroup Edition and
provides for Wide Area Network operation using a client/server architecture. The
significant difference provided to users by the Enterprise Edition are the
improved performance in networks with more than 20 users and the ability to
manage a greater number of folders and documents. To operate Enterprise Edition,
the user is required to obtain a license, which is readily available from
various third parties, for the desired SQL server. The Enterprise Edition is
suited to large departmental and enterprise installations. The Company presently
offers its Enterprise Edition to work in conjunction with SQL Servers from
Microsoft, Sybase and Oracle.
Capture Product Line - DECS
DECS (Document EDI Capture Suite) is a set of applications with which end
users and business applications will collect electronic documents and / or
Electronic Data Interchange (EDI) into an Electronic Document Exchange ("EDX")
V2.0 Package for transmission to an IDM solution or EDI application or both.
DECS provides the tools for collecting scanned images, documents printed to the
DECS Print Driver, file import, keyed and file captured EDI. This data can be
transformed, packaged and transported to the recipient for further processing as
an EDX V2.0 Package. 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 Internet Express
("IE"), eXpressLink ("XL"), the Systems and/or any EDX compliant solution.
-4-
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 by viewing through
the PaperClip system. 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.
The Noss Product Line
NOSS is the subsystem for optical storage and jukebox management. When
combined with the Workgroup and Enterprise 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.
Internet Product Line - Webserver
WebServer(TM) is an add-on to the Systems. The product provides full
security for documents stored on a PaperClip System and enables users to make
documents available to anyone with a Web Browser and to make available the
user's document repository to both Internet and private intranet users.
WebServer allows users across the World Wide Web to retrieve documents and
conduct simple workflow tasks from their thin client browser.
Internet Express
Internet Express (IE) is an extranet designed to exchange electronic
documents as an Application Service Provider ("ASP"). The Company will derive
revenue based on the movement of EDX packages across the Internet. IE has
expanded to four delivery options, IE Client, Secure Email, Secure Hosting, and
Secure Fax. Service traffic for the year increased by 50% compared to 2004.
Clipit Toolkit
ClipIt is designed to facilitate the integration of legacy applications
with other applications. ClipIt's greatest demand is found in the new thin
client services. By integrating ClipIt within thin client applications, users
simply hit a "Hot Key" to quickly view important records and documents across
the Web. ClipIt is a Tool-kit designed to leverage PaperClip's award winning
Visual Context Processor (Clipping) technology allowing developers and
integrators the ability to program ClipIt within their application or script
within browsers.
-5-
PaperClip BarCode
PaperClip developed and released a BarCode recognition solution where
bar-coded documents are automatically received and filed. The solutions includes
the ability to create bar-coded cover sheets and a server engine capable of
reading the same. Documents can be scanned or faxed directly to the recognition
engine.
Expresslink Communications
PaperClip's eXpressLink (XL) is an electronic document package exchange
solution designed to interconnect dissimilar Electronic Document Management
solutions whereby they can exchange documents similar to electronic data
interchange (EDI). Designed to transport electronic document packages across the
corporate Intranet or Internet providing interoperability, security and
tracking. Utilizing the public standard Electronic Document eXchange version 2.0
for packaging electronic documents, any EDX V2.0 compliant system can connect to
the XL Server seamlessly with no programming. A company can now connect company
workflow and integrate dissimilar document management solutions to business
partners and branch offices attached to the corporate Intranet or Internet. XL
significantly reduces document processing costs. Standards driven, XL cuts cost
and reduces time to process.
eXpressLink is designed to exchange electronic documents among
organizations that are members of the same private intranet and connect to IE.
The Company provides XL as a product, not a service. This product expands the
user's communications options while maintaining a consistent interface to a
user's document management solution.
Mortgage Assistant
Mortgage Assistant (MA) is PaperClip's workflow application designed to
manage users, stages, products, documents, alerts and reports. Mortgage
Assistant manages document requirements and performs workflow features including
rendezvous, sign-offs, process reports, notification alerts, data-feed
integration and process audits. Mortgage Assistant is an add-on module to
PaperClip32.
-6-
Objectives, Internal Sales Force And Risks
Management's marketing objectives for the Systems and the Company's other
products are as follows: (i) develop strategic relationships with prominent
software organizations; (ii) introduce the Systems and the Company's other
products 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.
Training and technical support of VARs is a component of the Company's
efforts with respect to its Workgroup and Enterprise Editions. Consequently, the
Company provides technical support along with on-going communication to its
VARs.
The Company has a sales force of three persons. The Company conducts
selling efforts directly to the mortgage broker industry and life insurance
brokers. The Company has one sales person focusing on each of those markets.
While the Company attempts 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, revenue sources are approximately evenly divided between VAR sales
and internal services. The Company currently has approximately 23 VARs, of which
approximately 20 VARs are in the United States and approximately 3 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 1 employee.
Customers And Sales
The Company had net sales of $1,739,394 in 2005 and $1,420,637 in 2004.
ImageTek, a VAR, Bisys and NISC accounted for 9%, 10%, and 9%, respectively, of
the Company's sales in 2005. Lumtron, an OEM, and ImageTek, a VAR, Bisys and
NISC accounted for 10%, 11%,11%, and 10%, respectively, of the Company's sales
in 2004. In 2004, the Company commenced a lawsuit against Lumtron in the
Superior Court of the State of New Jersey for payment of delinquent accounts
receivable approximating $ 93,000. The Company has set up what it believes is an
adequate bad debt reserve to cover this dispute. An arbitration proceeding
relating to this dispute is currently scheduled for July 2006. Three customers
(ImageTek, Summit and Valmark) represented 47% of accounts receivable at
December 31, 2005. Three customers (Companion, ImageTek, and Lumtron)
represented 58% of accounts receivable at December 31, 2004.
-7-
Customer Support And Service
The Company presently provides telephone support to its VARs and OEMs and
customers it deals with directly. The majority of the Company's service and
support activities involve responses to customer inquiries regarding use of the
Workgroup, Enterprise 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, when necessary, outside consultants. PaperClip expended
approximately $503,000 and $ 421,800 on research and development in 2005 and
2004, 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.
Production
The Company has produced a set of master CD's and documentation for all of
its products. Depending on the product, the Company will either duplicate the
CD's and ship the Systems from its headquarters or provide the customer with a
download of the file. 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 commercially reasonable).
Product Protection
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 was issued a Certificate of Registration for the
Trademark Paperclip on November 20, 2001. Although to the best of Company's
knowledge no other person or entity owns any U.S. registered trademark for the
mark "PaperClip" in connection with software or imaging products, there is a
registration filed by a third party for "Technology As Easy To Use As A
PaperClip"(tm) for consulting on computer hardware, software and systems in the
fields of sales automation, order processing, voicemail, paging, dictation,
transcription and telecommunications and off-site employee programs and
businesses. While the Company does not believe there is any likelihood of
confusion raised by the use of such mark, if such confusion were alleged, the
Company would rely on its prior common law rights. If any 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 costs as
a result thereof.
-8-
The Company owns registrations for the trademark PAPERCLIP IMAGING SOFTWARE
& DESIGN in Canada, but does not now own registrations or pending
applications for trademark registration in other countries in which the Systems
and the Company's other products are sold.
The Company distributes its products under signed software license
agreements, which grant customers perpetual licenses to use, 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.
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, Merant
AccuSoft Corporation, and Snowbound Software and may require licenses from
Pegasus Imaging Corporation and Sybase Inc.
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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, Hyland Software, Optika Imaging Systems
Incorporated, OTG (a division of EMC) and LaserFiche Document Imaging. The
Company also competes with more expensive turnkey solutions such as those
produced by FileNet Corp. 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. In addition, there can be no assurance that new companies will not
introduce new systems with better features and functions than the Systems. There
are 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. In the life insurance industry, one
competitor has emerged utilizing a central repository for document exchange.
Intellisys and Hooper Holmes each provides a central repository and sells
retrieval and communications with selected carriers as their service. Each
contracts with the smaller brokers where outsourcing to the broker makes more
sense. PaperClip's document management customers are the larger volume brokers.
Intellisys is an Internet Express customer. In the mortgage broker industry,
PaperClip competes with a number of companies, such as Virpak, Advectis,
SwiftView Inc. and Del Mar. 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 of March 21, 2006, the Company's full-time staff of sixteen (compared to
seventeen a year ago) employees includes seven employees engaged in development
and systems testing, three engaged in sales, two in training and technical
support, one in Business Services and three 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 intends to
utilize consultants to supplement its systems development, sales and marketing
efforts, when necessary.
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.
Capital Raising Initiatives
On October 29, 2004, the Company engaged Sloan Securities Corp. (together
with its affiliates, "Sloan") to provide financial advisory services, which may
include assistance in seeking to raise additional capital. In connection with
such engagement, the Company issued two-year warrants to Sloan to purchase
500,000 shares of the Company's Common Stock at an exercise price of $.10 per
share. The Warrants vested as to 425,000 shares on the date of issuance of such
warrants and as to the remaining 75,000 shares at such time that a financing is
consummated in which at least 1,400,000 shares of common stock or common stock
equivalents are issued to investors introduced to the Company by Sloan.
On March 30, 2005 and April 8, 2005, the Company received funds from a
group of accredited investors in the net amounts of $100,000 and $57,500,
respectively, in anticipation of the execution of definitive documentation with
such investors. Documents had been fully negotiated in anticipation of a
financing for gross proceeds of between $500,000 and $1,200,000. While the
Company executed certain documents prior to its receipt of the funds, the
documents were to be held in escrow pending a final transaction and the Company
never received countersigned agreements from the investors. Under the terms of
the negotiated transaction, the invested funds were to be in the form of a two
year loan, secured by a lien on the Company's assets, with interest at the rate
of 12% per annum prepaid for the entire period, and financing fees due to Sloan
in an aggregate amount equal to 13% of the gross proceeds raised. Warrants to
purchase 200,000 shares and 50,000 shares were also to be issued to the
investors and Sloan, respectively, for each $100,000 of the financing. One half
of such warrants were to be exercisable at $0.20 per share, and the other half
of such warrants were to be exercisable at $0.25 per share. In a letter
agreement dated March 31, 2005, Sloan and the investors agreed that they would
not enforce their registration rights related to shares of common stock issuable
upon exercise of the warrants until such time as the Company has received an
aggregate of $500,000 of gross proceeds through the issuance of notes. The
Company has recorded a $250,000 loan payable on its December 31, 2005 balance
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sheet based on its understanding of the intent of the parties that such
$157,500 aggregate amount represents net proceeds to the Company, after prepaid
interest and financing costs, of a $250,000 loan to the Company by such
investors. The Company has also reserved 625,000 shares for issuance upon
exercise of the warrants that were to be issued in connection with the $250,000
financing. The Company has been unable to obtain executed documents from the
investors or Sloan or definitive confirmation of their intent regarding the
funds. Accordingly, there can be no assurance that the investors will not seek
to treat the funding as an incomplete investment and demand return of the funds.
The Company has accounted for the loan as short-term indebtedness.
ITEM 2. Description of Property.
The Company's principal administrative, sales and marketing, product
development and support facilities are located in Hackensack, New Jersey,
and comprise approximately 2,100 square feet. The Company occupies these
premises pursuant to a lease, the term of which expires on February 28, 2011.
The fixed rent is approximately $4,000 per month plus utilities, plus its
proportionate share of any increase in operating costs.
-12-
ITEM 3. Legal Proceedings.
In 2004, the Company commenced a lawsuit against Lumtron, one of the
largest customers of the Company, in the Superior Court of the State of New
Jersey for payment of delinquent accounts receivable approximating $93,000. The
Company has set up what it believes is an adequate bad debt reserve to cover
this dispute. An arbitration proceeding relating to this dispute is currently
scheduled for July 2006.
Except as set forth above, the Company is not a party to any material
pending legal proceedings.
ITEM 4. Submission Of Matters To A Vote Of Security Holders.
No matters were submitted to a vote of security holders during 2005.
PART II
ITEM 5. Market For Common Equity and Related Stockholder Matters.
Common
Stock
2005 High Low
First 0.14 0.04
Second 0.07 0.05
Third 0.08 0.04
Fourth 0.06 0.03
2004 High Low
First 0.10 0.04
Second 0.18 0.09
Third 0.12 0.06
Fourth 0.14 0.07
The above prices per share were the bid prices during such periods as
reported by Bloomberg News Service for OTC market quotations. Such quotations
reflect interdealer prices without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
The Company's securities are presently traded on the OTC Bulletin Board. As
of December 31, 2005, there were approximately 160 holders of record of the
Company's shares of Common Stock. 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. In addition, the Company's Series A
Preferred Stock Certificate of Designation restricts the declaration, payment
and setting aside of any dividends without the consent of the holders of the
Requisite Percentage (as defined in such Certificate) of Series A Preferred
Stock.
-13-
ITEM 6. Management's Discussion and Analysis or Plan of Operation.
RESULTS OF OPERATIONS
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net sales increased by $318,757 or 22.4% to $1,739,394 for the year ended
December 31, 2005 from $1,420,637 for the year ended December 31, 2004. The
increase was due to an increase in revenues from annual support and upgrade
assurances and an increase in sales of the Company's products.
Research and development expenses increased by $81,182 or 19% to $ 502,979
for the year ended December 31, 2005 from $421,797 for the year ended December
31, 2004. The increase was due to an increase in salaries related to
research and development.
Selling expenses increased by $43,447 or 6% to $796,039 for the year ended
December 31, 2005 from $752,592 for the year ended December 31, 2004. The
increases resulted from an increase in sales salaries, partially offset by a
decrease in travel expenses.
General and administrative expenses increased by $75,374 or 14% to $600,839
for the year ended December 31, 2005 from $525,465 for the year ended December
31, 2004. The increase was due to an increase in professional fees and moving
expense to relocate the Company's offices.
Other income (expense) decreased by $44,331 to $(23,064) for the year ended
December 31, 2005 from income of $21,267 for the year ended December 31, 2004.
The decrease was primarily due to an increase in interest expense resulting from
loans payable to a group of investors.
-14-
There was no current provision for income taxes in 2005 or 2004 as the
Company had losses in both years and the Company has provided a full valuation
allowance for net deferred tax assets.
Net loss decreased by $74,423 to $(183,527) for the year ended December 31,
2005 from $(257,950) for the year ended December 31, 2004. The decrease was
primarily due to an increase in sales, offset by an increase in salaries
professional fees, and an increase in other expenses.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2005, the Company's net loss was $183,527.
For the year ended December 31, 2004, the Company's operations resulted in a net
loss of $(257,950). The Company reported an operating loss of approximately
$160,463 during fiscal year 2005. As of December 31, 2005 and 2004, the Company
had an accumulated deficit of $20,946,008 and $20,762,481, respectively. Net
cash (used for) provided by operating activities was $(130,028) and $46,990 for
the years ended December 31, 2005 and December 31, 2004, respectively. As of
December 31, 2005, the Company had a working capital deficit of $(601,781), with
$626,388 in current assets and $1,228,169 in current liabilities. As of December
31, 2004, the Company had a working capital deficit of $(454,674), with $535,562
in current assets and $990,236 in current liabilities.
-15-
Presently, the Company funds working capital from revenues it receives from
the sale of its products. Over the preceding five fiscal years, the Company
received an aggregate of approximately $1,500,000 from the sale of its tax
losses, but does not anticipate any additional proceeds from such sales in the
future. As of December 31, 2005, the Company had aggregate liabilities
approximately $2.1 million. Such amount of aggregate liabilities includes
approximately (i) $400,000 in annual support contracts, which are recorded as
deferred revenue, a non-cash item, for accounting purposes and reclassified, on
a pro rata basis to sales as such contracts expire and income is earned, (ii)
$435,000 in accounts payable and accrued expenses, and (iii) $380,000 in notes
and loans payable of which $130,000 was issued more than six years ago. Such
liabilities also include accrued compensation-related party, which relates to
deferred compensation of approximately $868,000 payable to Mr. Weiss. Mr. Weiss
has entered into a written agreement with the Company in which he agreed not to
demand payment of his deferred compensation until subsequent to April 1, 2007.
At December 31, 2005, the Company had net Federal operating loss carry
forwards ("NOL") of approximately $20,000,000 for financial reporting purposes,
which are due to expire from 2007 through 2025. Due to losses sustained by the
Company for both financial and tax reporting through 2005, 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 valuation allowance of $6,197,500
against the potential tax deferred tax asset of $6,197,500. 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 $623,135, $ 351,335, $223,000, $191,000 and
$127,000 in 1999, 2000, 2001, 2002 and 2003, respectively, from the sale of
its New Jersey net operating losses and research tax credits. As noted above, no
additional proceeds are anticipated from such sales in the future.
For 2006, the Company anticipates that it will need approximately
$1,800,000 in order to fund its operations. The Company's management believes
that the Company will be able to meet its anticipated cash requirements through
the end of 2006 through a combination of cash from the sale of its products,
cost reduction initiatives to be implemented as necessary (which initiatives the
Company expects would be primarily related to the Company's sales and marketing
activities), and cash on hand.
The Company's ability to fund its operations is subject to broader
acceptance of its product lines, its ability to continue to realize revenues
from its largest customers, product performance, competitive forces, sales
efforts of resellers, the absence of unanticipated expenses and other factors
identified herein. There can be no assurance that the Company will generate
enough cash from the sale of its products, or that the Company will be
successful in implementing any cost reduction initiatives that may be
undertaken, to meet its anticipated cash requirements for the next 12 months. If
the Company does not generate enough cash to meet its requirements for the next
12 months, the Company will not have sufficient working capital to satisfy its
liabilities, develop new products or implement its marketing and sales
initiatives, which may result in a loss of sales and would have a material
adverse effect on the Company.
-16-
See "Business-Capital Raising Initiatives" for a description of certain
capital raised by the Company during 2005. As described in greater detail
therein, on March 30, 2005 and April 8, 2005, the Company received funds from a
group of accredited investors in the net amounts of $100,000 and $57,500,
respectively, in connection with an investment in the Company in the aggregate
principal amount of $250,000. Under the terms of the negotiated transaction,
definitive documentation for which was never received, the amount invested would
have been treated as a loan becoming due in 2007 on the second anniversaries of
such dates and secured by a lien on the Company's assets. If the Company does
not repay this amount in 2007 and if the investors were determined to have an
enforceable loan and an enforceable security interest in the Company's assets,
the investors could foreclose upon the Company's assets and apply the proceeds
from the sale of such assets to the repayment of such amount. Any such
foreclosure or other disposition of the Company's assets would have a material
adverse effect on the Company.
Statement Regarding Critical Accounting Policies
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America that
require the Company to make estimates and assumptions. The Securities and
Exchange Commission ("SEC") has recently issued disclosure guidance for
"critical accounting policies." The SEC defines critical accounting policies as
those that require application of management's most difficult, subjective or
complex judgments that are inherently uncertain and may change in subsequent
periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Notwithstanding the foregoing, the Company believes that the
Company's operations are of such a nature that management is not required to
make estimates and assumptions about highly uncertain matters such that
differences in such estimates would have a material impact on the presentation
of the Company's financial statements. Accordingly, the Company believes that
none of its significant accounting policies (see Note 2 in the Notes to the
Financial Statements) require additional disclosure as being "critical
accounting policies."
-17-
ITEM 7. Financial Statements.
The Financial Statements can be found following Part III of this Report.
ITEM 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
None
ITEM 8A CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
The Chief Executive Officer/Principal Financial Officer of the Company has
concluded, based on his evaluation as of the end of the fiscal period covered by
this Report, that the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in the
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including the Chief Executive Officer/Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting.
During the year ended December 31, 2005, there has been no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
-18-
PART III
ITEM 9. Directors and Executive Officers of the Registrant
Executive Officers and Directors
The directors and executive officers of the Company are
as follows:
Name Age Position
William Weiss 62 Chief Executive Officer; Treasurer;
Director
D. Michael Bridges 51 President, Director
Michael Suleski 45 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. From January
1980 until March 31, 2003 Mr. Weiss had also been an executive officer and
President 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 40 hours per week to the Company. Mr. Weiss
received a B.S. from the Wharton School of the University of Pennsylvania and a
J.D. from New York Law School.
D. MICHAEL BRIDGES, President, rejoined the Company in March, 2000 after
providing consulting services to the Company from August 1998 to March 2000. He
has been a director of the Company since March 2000. Mr. Bridges served as the
Company's Vice President of Marketing & Sales and Director of Corporate Services
from February 1995 to August 1998. Mr. Bridges received a B.S. from Rowan
University and served as a Captain in the United States Marine Corps.
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. He received a B.S. and a M.S. degree from Fairleigh Dickenson University
College of Science and Engineering.
-19-
The Company's directors were elected at the last 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.
The Company does not have any independent directors and therefore does not
have an audit committee. The full Board of Directors is performing the functions
of the audit committee.
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,
D. Michael Bridges or Michael Suleski could have a material adverse effect on
the Company.
Board of Advisors
In January 2004, the Company formed an Advisory Board consisting of
distinguished professionals and entrepreneurs who will provide guidance and
advice to the Company and serve as a sounding board for the management team. The
Advisory Board members will share experiences with colleagues and voice opinions
on the technologies transforming electronic document management and its end
communications. The Company believes that the input of its Board of Advisors
will influence the development of new products and improve existing
technologies. During 2004, the Company revamped its Advisory Board to reflect
the direction that the Company was taking in focusing on the mortgage and life
insurance industries. To that end the Company replaced the three members of the
advisory board with two others. See "2004 Stock Incentive Plan" below for a
description of stock options available for issuance to members of the Advisory
Board. The current Advisory Board members are as follows:
A.W. Pickel, III, CMC, president of Leader Mortgage Company, is the former
president of the National Association of Mortgage Brokers. Leader Mortgage
Company ("Leader"), is based in Lenexa, Kansas, with a branch office in St.
Louis, Missouri. Leader has been in business since 1992, primarily in the
Midwest. A.W. Pickel, III as a mortgage brokerage, founded Leader. Over time
Leader has grown and evolved into a regional mortgage banker. Leader offers
in-house processing, underwriting and closing. Leader is a full service mortgage
lender, approved to provide conventional as well as government loans.
Mr. Nachmany is the Chief Operating Officer of International Object
Technology (IOT). Prior to joining International Object Technology Mr. Nachmany
was the President and CEO of bCompliant, Inc., a company he established in order
to conduct the collection, review, validation, and approval of electronic and
paper transaction documents for the mortgage industry in an efficient and
convenient fashion regardless of the number of participants and their geographic
dispersion. From 1990 to 1997, Mr. Nachmany was the President and CEO of Image
Integration Corp. From 1985-1990, Mr. Nachmany acted as the CEO of Image
Communication Systems, a company which was responsible for the development and
support of a joint venture between McDonnell Douglas Computer Systems Company
and the Bell & Howell Company, in the Computer Aided Retrieval (CAR) market for
the banking industry.
-20-
Limitation of Liability and Indemnification Matters
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, 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.
Audit Committee Financial Expert
The Board of Directors has determined that William Weiss, the Company's
Chief Executive Officer, is the Board's "audit committee financial expert"
within the meaning of Item 401(e)(2) of Regulation S-B. The Company does not
have any independent directors and therefore does not have an audit committee.
The full Board of Directors is performing the functions of the audit committee.
Compliance with Section 16
Section 16(a) of the Exchange Act requires certain persons, including the
Company's directors and executive officers, and beneficial owners of more than
10% of the Company's equity securities, to file reports with the Securities and
Exchange Commission regarding beneficial ownership of equity securities of the
Company. Based on material provided to the Company by such directors, officers
and beneficial owners of more than 10% of the Company's equity securities, the
Company believes that during the fiscal year ended December 31, 2005, there was
compliance with all such filing requirements.
Code of Ethics
The Company has adopted a code of ethics (the "Code") that applies to our
directors, officers and employees. The Code is designed to deter wrongdoing on
the part of such persons and to promote: (1) honest and ethical business
conduct, including the ethical handling of actual or apparent conflicts of
interest between personal and provisional relationships, (2) full, fair,
accurate, timely and understandable disclosure in reports and documents that we
file with, or submit to the SEC and in other public communications made by us,
(3) compliance with applicable governmental laws, rules and regulations, (4) the
prompt internal reporting of violations of the Code to an appropriate person or
persons identified in the Code, and (5) accountability for adherence to the
Code. The Code is designed to foster the highest standards of ethics and conduct
in all of our business relationships. The Code will be available on the
Company's website, www.paperclip.com, and copies will be mailed upon written
request to Secretary, 1 University Plaza, Hackensack, NJ 07601 or by
calling (201) 525-1221. The Company intends to disclose any amendments to or
waivers of the Code on behalf of its Chief Executive Officer, Chief Financial
Officer, and persons performing similar functions on the Company's website, at
www.paperclip.com, promptly following the date of such amendment or waiver. To
date, there are no such amendments.
-21-
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, 2005 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 $100,000. The
Board determines the compensation of the Company's executive officers, none of
whom received increases in their salaries, or a bonus, in 2005.
Summary Compensation Table
--------------------------------------------------------------------------------
Annual Compensation
Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------
Securities
Other Restricted Underlying LTIP
Name and Other Bonus Annual Stock Options/SARs (#)Payouts All
Position Year Salary ($) ($) Compensation Awards ($) ($)
Compensation
--------------------------------------------------------------------------------------------------------------------------
William Weiss 2005 120,000 0 0 0 0 N/A N/A
2004 120,000 0 0 0 0 N/A N/A
CEO (1)(2) 2003 120,000 0 0 0 0 N/A N/A
--------------------------------------------------------------------------------------------------------------------------
Michael Suleski 2005 105,000 0 0 0 0 N/A N/A
2004 105,000 0 0 0 0 N/A N/A
Vice President 2003 105,000 0 0 0 0 N/A N/A
Engineering (1)
--------------------------------------------------------------------------------------------------------------------------
D Michael Bridges 2005 107,800 0 0 0 0 N/A N/A
2004 107,800 0 0 0 0 N/A N/A
President 2003 107,800 0 0 0 0 N/A N/A
--------------------------------------------------------------------------------------------------------------------------
(1) The Company presently has no employment contract with William Weiss or
Michael Suleski.
(2)As of December 31, 2005, approximately $868,000 is owed to William Weiss
for past salaries accrued but not paid.
-22-
Option/SAR Grants
During the fiscal year ended December 31, 2005, there were no options
granted to either the Company's Chief Executive Officer or any of its principal
officers.
The table below indicates that no options/SARs were exercised during fiscal
year 2005 by the Company's Chief Executive Officer and each of its principal
executive officers and shows the value of their unexercised options/SARs.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 2005
AND OPTION/SAR VALUES AT DECEMBER 31, 2005
Value of Unexercised
Number of Securities In-the-Money
Underlying Options/
Unexercised Options/SARs SARs at
at FY-end FY-End
Shares Acquired On Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable (#) (1) Unexercisable($)
----------------------- ---------------------- ---------------------- ------------------------------------------------
William Weiss 0 0 770,921/0 0/0
D. Michael Bridges 0 0 405,000/0 0/0
Michael Suleski 0 0 744,921/0 0/0
(1) The Company does not have a stock appreciation rights ("SAR") plan and
does not have any SARs outstanding.
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, other than a 2004 Stock Incentive Plan for consultants and members of the
Board of Advisors, which is described below.
-23-
The Company entered into an Employment Agreement with David Michael Bridges
effective as of January 1, 2000 (the "Employment Agreement"). The Employment
Agreement provides that Mr. Bridges will serve as the Company's President and as
a member of the Company's Board of Directors, subject to stockholder vote, for a
term of three years, subject to automatic one year extensions and early
termination, at an initial base salary of $107,800. The Employment Agreement
provides that Mr. Bridges shall not compete with the Company in the product
lines under development by the Company or use or disclose any trade secrets of
the Company during the term of the Employment Agreement. In addition, the
Employment Agreement provides that Mr. Bridges shall not solicit employees of
the Company or induce any employee to terminate his or her relationship with the
Company during the term and for a period of 24 months after termination of the
Employment Agreement unless the Company terminates Mr. Bridges without cause (as
defined in the Employment Agreement), the Company fails to satisfy certain
conditions or if William Weiss or Michael Suleski shall leave the employment of
the Company other than by reason of death or disability. Mr. Bridges may not be
terminated prior to the end of the term except with cause (as defined in the
Employment Agreement) and Mr. Bridges may terminate the Employment Agreement
prior to the end of the term by giving the Company at least 90 days written
notice. In the event that there is a transfer of control, defined as 50%, of the
Company within 6 months of the termination of Mr. Bridges, Mr. Bridges shall be
entitled to his base salary, vacation and other benefits for the remainder of
the term of the Employment Agreement and any difference in value of the
Company's capital stock owned by Mr. Bridges at the time of his termination and
the value of such stock after transfer of control as valued in accordance with
the terms of the Employment Agreement. The Employment Agreement also provided
for the grant of options to purchase 400,000 shares of the Company's common
stock. Mr. Bridges is also entitled to indemnification to the fullest extent
permitted under New Jersey law. In the event that Mr. Bridges' employment is
terminated without cause prior to the end of the term or any extension of the
term or because of a disability (as defined in the Employment Agreement), he is
entitled to receive his base salary for 6 months, at his then current annual
rate paid in a lump sum within 10 days of termination, plus a payment for unused
vacation. The Employment Agreement also provides that Mr. Bridges may
independently develop intellectual property outside of his regular hours of
employment with the Company and maintain full ownership of such intellectual
property but provides for the Company's use of certain intellectual property
owned by Mr. Bridges. The Employment Agreement restricts Mr. Bridges from using
certain intellectual property owned by him to compete with the Company during
the term of the Employment Agreement.
-24-
2004 Stock Incentive Plan
In February 2004, the Board of Directors of the Company adopted a stock
incentive plan (the "2004 Stock Incentive Plan"). Only consultants and members
of the Board of Advisors are eligible to participate in this plan. The 2004
Stock Incentive Plan provides that the aggregate number of shares of common
stock for which options may be granted thereunder is 600,000 shares. The 2004
Stock Incentive Plan provides that it shall be administered by a committee (the
"Committee") consisting of either the full Board of Directors or a committee
consisting of at least two directors.
The Committee has the full power and authority, subject to the provisions
of the 2004 Stock Incentive Plan, to designate participants, grant options and
determine the terms of all options. The terms of specific options granted under
the 2004 Stock Incentive Plan are determined by the Committee. The term of each
option is also determined by the Committee, but no option may be exercisable
after ten years have elapsed from the date upon which the option is granted. As
of December 31, 2005, 100,000 options under the 2004 Stock Incentive Plan were
outstanding.
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 expired on February 1, 2003, and all the outstanding options
expired in 2005.
1995 Stock Option Plan
In May 1995, the Company adopted a stock option plan (the "1995 Stock
Plan"), pursuant to which officers, directors and employees of the Company and
certain other persons conferring benefit upon the Company were eligible to
receive stock options. The 1995 Stock Plan terminated on March 1, 2005. All
options thereunder outstanding at the time of such termination shall continue in
full force and effect according to the terms of the option agreements governing
such options. As of December 31, 2005, options to acquire 3,969,222 shares of
Common Stock had been granted under the 1995 Stock Plan. At such date, 892,872
options had expired, 95,508 options had been exercised and 2,980,842 options
were outstanding.
Long-Term Incentive Plan
The Company did not grant any awards to executive officers under any
long-term incentive plan during fiscal year 2005.
-25-
Compensation of Directors
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.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management And
Related Stockholder Matters.
The following table sets forth, as of March 21, 2006, the number of shares
of Common Stock and Series A Preferred 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 or the Series A
Preferred Stock, as the case may be, known to the Company and the respective
percentage ownership of the outstanding Common Stock and Series A Preferred
Stock held by each such holder and group:
Common shares Series Preferred A shares
---------------------------------- --------------------------
Name and Address Number Percentage Number Percentage
of Beneficial Owner of Shares (1) of Class of Shares of Class
---------------------------------- ---------------- ------------ ---------------- ----------
William Weiss (2) 3,569,643(3) 31.04% 2,533,869 69.4%
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601
Michael Suleski (2) 780,936(4) 8.73%
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601
D. Michael Bridges 556,500(5) 6.38% 150,000 4.1%
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601
A11 Officers and Directors
as a group (3 persons) 4,911,079 38.35% 2,683,869 73.5%
(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) 770,921 shares of Common Stock issuable upon the exercise
of options currently exercisable under the 1995 Stock Option Plan, and (b)
2,533,869 shares of Common Stock issuable upon the conversion of 2,533,869
shares of Series A Preferred Stock.
(4) Includes 744,921 shares of Common Stock issuable upon the exercise of
options currently exercisable under the 1995 Stock Option Plan.
(5) Includes 405,000 shares of Common Stock issuable upon the exercise of
options currently exercisable under the 1995 Stock Option Plan, and 150,000
shares of Common Stock issuable upon the conversion of 150,000 shares of Series
A Preferred Stock.
-26-
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information, as of December 31, 2005, about
the Company's 1995 Stock Option Plan and 2004 Stock Incentive Plan, the material
features of which are described in this report under "Item 10-Executive
Compensation." Although the 1995 Stock Option Plan expired on March 1, 2005, the
options with unexercised terms remain outstanding under such plan and are
included in the table below.
All outstanding awards relate to the Company's common stock.
Number of securities Number of securities
remaining
to be issued upon Weighted-average available for future
issuance
exercise of exercise price of under equity compensation
plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)
------------------- ----------------------------------- ------------------------------ ----------------------------
Equity compensation 2,980,842(1) .31 0(2)
plans approved by
security holders
Equity compensation
plans not approved by
security holders 100,000 (3) 500,000(4)
------------------- ----------------------------------- ----------------------- -----------------------------
Total 3,080,842 500,000
=================== =================================== ======================= =============================
(1) Represents 2,980,842 shares of Common Stock issuable upon the exercise
of outstanding options previously granted under the 1995 Stock Option Plan
(2) The 1995 Stock Option Plan expired on March 1, 2005.
(3) Represents 100,000 shares of Common Stock issuable upon the exercise
of outstanding options granted under the 2004 Stock Incentive Plan.
(4) Represents 500,000 shares of Common Stock available for future issuance
under the 2004 Stock Incentive Plan.
-27-
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Weiss receives compensation of $10,000 per month as part of an oral
employment arrangement. However, in lieu of receiving current compensation
payments, Mr. Weiss has agreed to the deferred payment of such compensation.
During 2002 and for the first three months ended March 31, 2003, Mr. Weiss has
assigned payment of the compensation to another company he is affiliated with.
At December 31, 2005, the Company had accrued $867,749 in deferred compensation
to Mr. Weiss, or his affiliated company which is recorded as long term accrued
compensation- related party on the balance sheet. Mr. Weiss has entered into a
written agreement with the Company in which he agreed not to demand payment of
his deferred compensation until subsequent to April 1, 2007.
Item 13. Exhibits .
-28-
(a) Exhibits:
3.1 Certificate of Incorporation of Registrant, as amended.(1)
3.1(a) Certificate of Amendment to Certificate of Incorporation.(3)
3.1(b) Series A Preferred Stock Certificate of Designations.(3)
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)
10.2 1995 Stock Option Plan, as amended (2)
10.3 2004 Stock Incentive Plan (5)
10.4 Form of End User License. (1)
10.5 (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)
10.6 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)
10.11 Employment Agreement dated as of January 1, 2000 between Paperclip
Software, Inc. and D. Michael Bridges. (3)
10.13 Agreement, dated December 31, 2005 , by and between PaperClip Software,
Inc. and William Weiss
14. Code of Ethics (5)
23.1 Consent of Sobel & Co., LLC
31.1 Certification Pursuant to Rule 13a-14(a) Promulgated under the
Securities Exchange Act of 1934.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-29-
(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).
(3) Incorporated by reference from the Registrant's Form 10-KSB for the
Fiscal year December 31, 2000 (File No. 000-26598)
(4) Incorporated by reference from the Registrant's Form 10-KSB for the
Fiscal year December 31, 2002 (File No. 000-26598)
(5) Incorporated by reference from the Registrant's Form 10-KSB for the
Fiscal year December 31, 2004 (File No. 000-26598)
-30-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Sobel & Co., LLC ("Sobel") was the Company's principal accountant for the
fiscal years ended December 31, 2005 and 2004.
The following is a summary of the fees billed to the Company by Sobel for
professional services rendered for the fiscal years ended December 31, 2005 and
December 31, 2004:
Percentage of Percentage of
2005 Fees 2004 Fees
Fee Category Fiscal 2005 Approved by the Fiscal 2004 Fees Approved by the
Fees Board Board
------------- ------------ ---------------- ---------------- ---------------
Audit Fees $30,734 100% $27,600 100%
Audit-Related Fees 5,780 -
Tax Fees - -
All Other Fees - -
--------- ---------
Total Fees $36,514 $27,600
========= =========
Audit Fees. Consists of fees billed for professional services rendered for
the audit of the Company's annual financial statements and review of the interim
financial statements included in the Company's quarterly reports on Form 10-QSB
and related services.
Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's financial statements and are not reported under "Audit Fees."
The audit-related fees of $5,780 relate to professional services rendered
in conjunction with research, assistance and discussions in assisting the
Company preparing responses to SEC letters.
Tax Fees. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning.
All Other Fees. Consists of fees for services other than the services
reported above.
The Company does not have any independent directors and therefore does not
have an audit committee. The full Board of Directors is performing the functions
of the audit committee. The Board of Director's policy is to pre-approve all
audit and permissible non-audit services provided by the independent auditors.
These services may include audit services, audit-related services, tax services
and other services. Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specific budget. The independent auditors
and management are required to periodically report to the Board of Directors
regarding the extent of services provided by the independent auditors in
accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis. As illustrated in the table set forth above, the Board of
Directors pre-approved each audit and non-audit service rendered to the Company
by its independent Auditors and no services were approved using the de minimus
exception afforded by Rule 2-01(c)(7)(i)(C) of Regulation S-X.
-31-
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 30, 2006
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 30, 2006
Officer (Principal Executive,
Financial and Accounting Officer)
/s/ D. Michael Bridges Director, President March 30, 2006
D. Michael Bridges
/s/ Michael Suleski
Michael Suleski Director, Vice President, March 30, 2006
Engineering and Secretary
-32-
PAPERCLIP SOFTWARE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
PAPERCLIP SOFTWARE, INC.
DECEMBER 31, 2005 AND 2004
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm 1
Financial Statements:
Balance Sheet at December 31, 2005 2
Statements of Operations For The Years Ended
December 31, 2005 And 2004 3
Statements of Changes in Stockholders' Deficiency
For The Years Ended December 31, 2005 And 2004 4
Statements of Cash Flows For The Years Ended
December 31, 2005 And 2004 5
Notes to Financial Statements 6
Report of Independent Registered Public Accounting Firm
To the Board of Directors
PaperClip Software, Inc.
We have audited the accompanying balance sheet of PaperClip Software, Inc.
(a Delaware corporation) (the "Company") as of December 31, 2005 , and the
related statements of operations, change in stockholders' deficiency, and cash
flows for each of the years ended December 31, 2005 and 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, 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, 2005, and the results of its operations and its cash flows for
the years ended December 31, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has a significant loss from operations;
current liabilities exceed current assets by approximately $202,000 (after
adjusting for approximately $400,000 of deferred revenues, a non-cash item);
deficiencies in 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 3. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Sobel & Co., LLC
Certified Public Accountants
March 13, 2006
Livingston, New Jersey
PAPERCLIP SOFTWARE, INC.
BALANCE SHEET
DECEMBER 31,
2005
---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 384,539
Accounts receivable (net of
allowance for doubtful accounts
of $89,000) 200,053
Other current assets 41,796
---------------
Total Current Assets 626,388
---------------
EQUIPMENT, FURNITURE AND FIXTURES:
Computer and office equipment 42,932
Furniture and fixtures 6,056
---------------
48,988
Less- Accumulated depreciation 14,008
---------------
Equipment, Furniture, and Fixtures, Net 34,980
---------------
OTHER ASSETS 22,006
DEFERRED FINANCING COSTS, NET 35,314
---------------
Total assets $ 718,688
===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 435,278
Taxes payable 13,500
Deferred revenue 399,700
Notes payable 129,691
Loans payable 250,000
---------------
Total Current Liabilities 1,228,169
---------------
Accrued compensation- related party 867,749
---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Convertible Series A, preferred stock, authorized
10,000,000 shares; $.01 par value; 3,649,543 shares
issued and outstanding 36,495
Common stock, authorized 30,000,000
shares; $.01 par value; issued and
outstanding 8,196,521 shares 81,965
Additional paid-in capital 19,450,318
Accumulated deficit (20,946,008)
---------------
Total Stockholders' Deficiency (1,377,230)
---------------
Total liabilities and
stockholders' deficiency $ 718,688
===============
See report of independent registered public accounting firm and notes to
financial statements
-2-
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2005 2004
----------- ---------------
NET SALES $ 1,739,394 $ 1,420,637
----------- ---------------
OPERATING EXPENSES:
Research and development expenses 502,979 421,797
Selling expenses 796,039 752,592
General and administrative expenses 600,839 525,465
----------- ---------------
Total operating expenses 1,899,857 1,699,854
----------- ---------------
LOSS FROM OPERATIONS (160,463) (279,217)
----------- ---------------
OTHER INCOME (EXPENSE):
Extinguishment of accounts payable 35,090 36,127
Interest expense (59,186) (15,600)
Interest income 1,032 740
----------- ---------------
Total other (expense) income, net (23,064) 21,267
----------- ---------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES $ (183,527) $ (257,950)
Provision for income taxes 0 0
----------- ---------------
NET LOSS $ (183,527) $ (257,950)
=========== ===============
BASIC AND FULLY DILUTED
LOSS PER COMMON SHARE $ (0.02) $ (0.03)
=========== ===============
WEIGHTED AVERAGE NUMBER COMMON
SHARES OUTSTANDING 8,196,521 8,196,521
=========== ===============
See report of independent registered public accounting firm and notes to
financial statements
-3-
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Preferred Stock Common Stock
Additional Accumulated Stockholders
Number of Par valuNumber of Par valuPaid-In Deficit Deficiency
Shares Shares Capital
-----------------------------------------------------------------------------
BALANCE, December 31, 2003 3,649,543 $36,495 8,196,521 $81,965 $19,426,318 ($20,504,531) ($959,753)
Deferred financing costs 24,000 24,000
NET LOSS, 2004 (257,950) (257,950)
-----------------------------------------------------------------------------
BALANCE, December 31, 2004 3,649,543 $36,495 8,196,521 81,965 19,450,318 (20,762,481) (1,193,703)
NET LOSS, 2005 (183,527) (183,527)
-----------------------------------------------------------------------------
BALANCE, December 31, 2005 3,649,543 $36,495 8,196,521 $81,965 $19,450,318 ($20,946,008) ($1,377,230)
=============================================================================
See report of independent registered public accounting firm and notes to
financial statements
-4-
PAPERCLIP SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2005 2004
----------- ---------------
OPERATING ACTIVITIES:
Net loss $ (183,527) $ (257,950)
Adjustments to reconcile net income to
net cash provided by (used for) operating activities-
Depreciation 10,066 7,843
Extinguishment of accounts payable (35,090) (36,127)
Accrued interest on convertible note 15,500 15,600
Increase in accrued compensation to related party 64,038 93,592
Amortization of prepaid interest & deferred financing costs 43,686 -
Tax deferred asset - 11,600
Change in operating assets and liabilities:
Accounts receivable (39,422) 107,018
Other current assets (4,296) -
Other assets (8,506) -
Accounts payable and accrued expenses 26,223 (9,836)
Taxes payable - (27,000)
Deferred revenue (18,700) 142,250
----------- ---------------
Net cash (used for) provided by operating activities (130,028) 46,990
----------- ---------------
INVESTING ACTIVITIES -- Purchases of
equipment, furniture and fixtures (17,864) (25,067)
----------- ---------------
FINANCING ACTIVITIES:
Net proceeds from loans payable 157,500 -
----------- ---------------
Net cash provided by financing activities 157,500 -
----------- ---------------
Net increase in cash and cash equivalents 9,608 21,923
CASH AND CASH EQUIVALENTS
Beginning of year 374,931 353,008
----------- ---------------
End of year $ 384,539 $ 374,931
=========== ===============
See report of independent registered public accounting firm and notes to
financial statements
-5-
PAPERCLIP SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION:
PaperClip Software, Inc. (formerly known as PaperClip Imaging Software,
Inc.),located in Hackensack, NJ, (the "Company"), a Delaware corporation,
incorporated 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. 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 twenty three Value Added
Resellers ("VAR's") and original equipment manufacturers ("OEM's") 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, and end users. The Company's delivery and payment arrangements do
not include extended payment terms and are generally net 30 days.
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 post contract
services, which includes telephone support, software version upgrades and
consulting and training services related to installation and implementation of
the Company's products 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.
In addition to the above-referenced post contract services provided at no
additional charge, the Company offers additional contractual support services
that are billed separately. Revenues paid by the customer prior to performance
of such contractual support services are deferred and recognized over the term
of the contract service agreement, usually one year. The underlying calculation
for deferred services are generally not complex (i.e., deferred revenues are
generally recognized as income over the course of the applicable contract on a
formulaic basis).
-6-
Reclassification:
Certain reclassifications have been made to the 2004 financial statements
to conform to the 2005 financial statement presentation.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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.
Significant estimates have been made by management in the areas of the
allowance for bad Debts (See Note 9)and the recognition/realization of deferred
revenues. Actual results could differ materially from these estimates, making it
reasonably possible that a change in these estimates could occur in the near
term.
Advertising:
Advertising costs are expensed as incurred, and amounted to approximately
$17,000 in 2005 and $32,000 in 2004.
Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash at banks and highly
liquid investments with original maturities of three months or less.
Accounts Receivable:
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and adjusts the allowance for doubtful accounts, based on a history
of past write-offs and collections and current credit conditions. At December
31, 2005 and 2004, the Company believes the allowance for doubtful accounts is
adequate.
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 has elected to follow Accounting Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees"(APB25). If the option price under
the Stock Option plans equals or exceeds the fair market value of the common
shares on the date of the grant, no compensation cost is recognized under the
provisions of APB 25 for stock options. If the option price under the Stock
Option Plans is less than the fair market value of the common stock on the date
of grant, compensation cost is recognized for the difference.
-7-
The Company adopted only the disclosure part of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123 as amended by SFAS 123R). The adoption of this pronouncement had no impact
on the Company's financial condition or results of operations for 2005 and 2004,
however, additional disclosures have been included in the financial statements.
Deferred Financing Costs:
Expenditures incurred in conjunction with debt or equity capital issuances
are deferred as other assets. Such costs will be offset against equity proceeds,
amortized over the life of the debt, or expensed if the transaction is not
completed.
Deferred Rent:
The Company recognizes rent expense on a straight line basis for financial
reporting purposes. The difference between cash payments and expenses will be
included in deferred rent. Deferred rent will commence January 1, 2006.
Federal Income Taxes:
The Company has adopted Statement of Financial Accounting Standards Board
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.
Income (Loss) Per Common Share:
Income per common share-basic is computed based upon the weighted average
number of common shares and common share equivalents outstanding, if dilutive.
2005 and 2004 fully diluted loss per share does not reflect the conversion of
Series A Preferred Stock or common stock equivalents as the result would be
anti-dilutive.
Research and Development Costs:
The costs incurred in establishing the technological feasibility of a
computer software product that is to be sold, leased or otherwise marketed by
the Company is accounted for as Research & Development costs and expensed in the
period incurred. The amount charged against income was $502,979 and $421,797 for
the years ended December 31, 2005 and 2004, respectively.
-8-
Recent Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") has issued several new
standards during 2005 and 2004. In December 2004, the FASB issued SFAS 123(R),
"Share-Based Payment," which revises SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS 123(R) requires fair value recognition of stock option
grants in the income statement as an expense and is effective for the first
interim reporting period beginning after December 15, 2005. This pronouncement
may have a material impact on the Company's operating results. The Company is in
the process of evaluating the impact of this pronouncement on its financial
statements.
NOTE 3-GOING CONCERN:
The accompanying financial statements have been prepared assuming the
Company is a going concern, which assumption contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company has suffered a loss from operations, current liabilities exceed current
assets by approximately $202,000 (after adjusting for approximately $400,000 of
deferred revenues, a non-cash item), and the Company lacks sufficient liquidity
to continue its operations. Management's 2006 forecast indicates positive trends
for sales, but it may not result in an increase in operating income, net income,
and positive cash flows.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments related to the recoverability and classification of recorded asset
amounts or the amount of liabilities that might be necessary should the Company
be unable to continue in existence.
Continuation of the Company as a going concern is dependent upon achieving
profitable operations . Management's plans to achieve profitability include
developing new products, obtaining new customers, increasing sales to existing
customers and implementing certain cost reduction initiatives as necessary.
There can be no assurance that the Company will generate enough cash from the
sale of its products, or that cost reduction initiatives will be successful to
meet anticipated cash requirements.
-9-
NOTE 4 - INCOME TAXES:
For tax return purposes, the Company has the following net operating loss
carry forwards as of December 31, 2005 and 2004 for Federal purposes:
Federal
Net Operating Loss Year Incurred Expiration Date
$1,474,595 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, 2017
$ 880,373 December 31, 1998 December 31, 2018
$ 35,944 December 31, 1999 December 31, 2019
$ 633,601 December 31, 2000 December 31, 2020
$ 43,371 December 31, 2001 December 31, 2021
$ 161,000 December 31, 2004 December 31, 2024
$ 183,000 December 31, 2005 December 31, 2025
The Company also has tax credits related to research activities of
approximately $400,000 for Federal purposes at December 31, 2005.
As stated in Note 13, the State of New Jersey has allowed in recent years
the sale of state net operating losses and research tax credits. The Company has
sold all of its net operating losses and research tax credits available through
2003. The Company has a state net operating loss carryforward for 2004 and 2005
approximately $200,000, which will expire through 2012.
The Company's total deferred tax liabilities, deferred tax assets, which
are comprised principally of net operating loss carry forwards, and valuation
allowance consists of the following at December 31:
2005 2004
--------------------------------------
Total deferred tax liabilities $ - $ -
Total deferred tax assets 6,197,500 6,140,000
Total valuation allowance 6,197,500 6,140,000
-------------------------------------
Current deferred tax asset $ - $ -
======================================
A reconciliation of the statutory tax rates are as follows:
Year Ended December 31,
2005 2004
--------------------------------------
Statutory rate (34%) (34%)
State income tax (6%) (6%)
-------------- ---------------
(40%) (40%)
Current year valuation allowance 40% 40%
-------------- ---------------
Benefit for income tax 0% 0%
-------------- ---------------
-10-
Note 5- INVESTMENT BANKING AGREEMENT AND LOAN PAYABLE:
On October 29, 2004, the Company signed an investment banking agreement
with Sloan Securities Corp. ("Sloan") to raise capital for the Company. In
connection with such engagement, the Company issued two-year warrants to Sloan
to purchase 500,000 shares of the Company's Common Stock at an exercise price of
$.10 per share. The Warrants vested as to 425,000 shares on the date of issuance
and as to the remaining 75,000 shares at such time that a financing is
consummated in which at least 1,400,000 shares of common stock or common stock
equivalents are issued to investors introduced to the Company by Sloan. The
Company recorded the 425,000 warrants on the balance sheet as deferred financing
costs at a value of $24,000.
On March 31, 2005 and April 8, 2005 the Company received funds from a group
of accredited investors in the amounts of $100,000 and $57,500, respectively, in
anticipation of the execution of definite documentation with such investors.
Documents had been fully negotiated in anticipation of a financing for gross
proceeds of between $500,000 and $1,200,000. While the Company executed certain
documents prior to its receipt of the funds, the documents were to be held in
escrow pending a final transaction and the Company never received countersigned
agreements from the investors. Under the terms of the negotiated transaction,
the invested funds were to be in the form of a two year loan, secured by a lien
on the Company's assets, with interest at the rate of 12% per annum prepaid for
the entire period, and financing fees to Sloan in the aggregate amount equal to
13% of the gross proceeds raised. Warrants to purchase 200,000 shares and 50,000
shares were also to be issued to the investors and Sloan, respectively, for each
$100,000 of the financing. One half of such warrants were to be exercisable at
$0.20 per share, and the other half of such warrants were to be exercisable at
$0.25 per share. In a letter agreement dated March 31, 2005, Sloan and the
investors agreed that they would not enforce their registration rights related
to shares of common stock issuable upon exercise of the warrants until such time
as the Company has received an aggregate of $500,000 of gross proceeds through
the issuance of notes. The Company has recorded a $250,000 loan payable on its
December 31, 2005 balance sheet based on its understanding of the intent of the
parties that such $157,000 aggregate amount represents net proceeds to the
Company, after prepaid interest and financing costs, of a $250,000 loan to the
Company, by such investors. The Company has also reserved 625,000 shares for
issuance upon exercise of the warrants that were to be issued in connection with
the $250,000 financing. The Company has been unable to obtain executed documents
from the investors or Sloan or definite confirmation of their intent regarding
the funds. Accordingly, there can be no assurance that the investors will not
seek to treat the funding as an incomplete investment and demand return of the
funds. The Company has accounted for the loan as short-term indebtedness.
NOTE 6 - CONVERTIBLE DEBT:
Notes payable, convertible into common stock at $.30
per share, 12% interest, matured December 31, 1999,
and as of December 31, 2005, the notes remain in default. $129,691
============
-11-
Note 7 - EXTINGUISHMENT OF ACCOUNTS PAYABLE:
During the years ended December 31, 2005 and 2004, the Company wrote down
its accounts payable by $35,090 and $36,127, respectively, relating to debts
which were incurred over six years ago, for which the statute of limitations has
expired and the vendors can no longer institute a claim against the Company. The
write down was included in the statement of operations as an extinguishment of
accounts payable.
NOTE 8 - PREFERRED STOCK:
The Company has ten million shares of preferred stock $.01 par Value
authorized. The Company has designated Series A Preferred Stock, with 3,649,543
shares issued on November 2, 2000, 3,649,543 shares issued and outstanding as of
December 31, 2005. Each share of Series A Preferred Stock is convertible into
one share of common stock subject to adjustment and anti-dilution protection
upon certain events.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
In 2004, the Company commenced a lawsuit against a customer in the Superior
Court of the State of New Jersey for payment of delinquent accounts receivable
approximating $50,000. The Company has set up what it believes is an adequate
bad debt reserve to cover this dispute.
NOTE 10 - LEASES:
The Company leases its office space under a non-cancelable operating lease.
which expires in 2011. Rent expense was approximately $56,000 and $51,000 for
the years ended December 31, 2005 and 2004, respectively.
Future minimum rental payments required under this lease are as follows:
Year Ended December 31,
2006 $40,275
2007 $48,778
2008 $49,315
2009 $49,852
2010 $50,389
2011 $ 8,413
NOTE 11 - EMPLOYMENT AGREEMENT:
The Company has an employment agreement with Michael Bridges, the Company's
President who is also a member of the Board of Directors, subject to automatic
one-year extensions and early terminations at a base salary of $107,800. The
agreement also provides for options to purchase 400,000 shares of common stock
at $0.25 per share with immediate vesting, which was subsequently granted at the
fair market value of the Company's stock at the time of issuance which was $.25
per share. In addition, the agreement has specific clauses including not limited
to covenants not to compete with the Company's product line, solicitation of
employees of the Company upon termination and a severance package if there is a
transfer of control.
-12-
NOTE 12 - CONCENTRATION OF RISK:
The Company maintains its cash balances and certificates of deposit at one
financial institution. This account is insured by the FDIC (Federal Deposit
Insurance Corporation) up to $100,000. The Company routinely maintains balances
in excess of $100,000 in the ordinary course of business.
NOTE 13 - MAJOR CUSTOMERS:
The Company sells its products primarily through mass distributors and
approximately 23 independent VARS. The VARS sell and install these products at
end user sites.
Sales to three major customers for the year ended December 31, 2005 were
approximately 28%. Sales to four major customers for the year ended December 31,
2004 was approximately 42%.
Four and three customers make up 47% and 58% of accounts receivable at
December 31, 2005 and 2004, respectively.
NOTE 14 - STOCK OPTIONS:
1993 Stock Option Plan
The Company adopted a stock option plan (the "1993 Stock Option Plan"),
effective March 8, 1993, pursuant to which employees of the Company were
eligible to receive incentive stock options. The 1993 Stock Option Plan expired
on February 1, 2003, and all outstanding options thereunder expired in 2005.
Stock option transactions for the 1993 Stock Option Plan are summarized as
follows:
Year Ended December 31,
Exercise Exercise
2005 Price 2004 Price
---------------------------------------
Outstanding, beginning of year 20,183 $2.60 20,183 $2.60
Granted - - - -
Exercised - - - -
Cancelled, settled or expired 20,183 $2.60 - -
---------------------------------------
Outstanding, end of year - - 20,183 $2.60
=======================================
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 were
eligible to receive stock options. The 1995 Stock Option Plan expired on March
1, 2005. All options thereunder outstanding at the time of such termination
shall continue in full force and effect according to the terms of the option
agreements governing such options.
-13-
Stock option transactions for the 1995 Stock Option Plan are summarized as
follows:
Year Ended December 31,
Exercise Exercise
2005 Price 2004 Price
----------------------------------------------
Outstanding, beginning of
year 3,183,842 $.06-2.50 3,133,842 $.06-2.50
Granted - - 150,000 $.05-$.07
Exercised - - - -
Cancelled or expired (203,000) $.05-2.50 (100,000) $.25
----------------------------------------------
Outstanding, end of year 2,980,842 $.05-2.50 3,183,842 $.06-2.50
==============================================
In February 2004, the Board of Directors of the Company adopted a stock
incentive plan(the "2004 Stock Incentive Plan"). Only consultants and members of
the Board of Advisors are eligible to participate in this plan. The 2004 Stock
Incentive Plan provides that the aggregate number of shares of common stock for
which options may be granted thereunder is 600,000 shares. In 2004, the Board
awarded options for an aggregate of 525,000 shares to the members of the Board
of Advisors under the 2004 Stock Incentive Plan at an exercise price of $.07 to
$.10 per share, the market price of the Common Stock on the date of grant. Such
options are not included in the tables above.
Stock option transactions for the 2004 Stock Incentive Option Plan are
summarized as follows:
Year Ended December 31,
Exercise Exercise
2005 Price 2004 Price
----------------------------------------------
Outstanding, beginning of
year 175,000 $.07-$.10
Granted - 525,000 $.07-$.10
Exercised - - - -
Cancelled,repurchased
or expired (75,000) $.07-$.10 (350,000) $.07
----------------------------------------------
Outstanding, end of year 100,000 $.07 175,000 $.07-$.10
==============================================
SFAS 123 disclosure:
During the year ended December 31, 2004, the Board of Directors authorized
the issuance of options to purchase 675,000 shares at an average exercise price
of $.06 per share. The Board did not authorize the granting of any options in
2005. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected volatility of 175% and 190% for 2005 and
2004, respectively; risk-free interest rate of 4.5% and 4% for 2005 and 2004,
respectively; and expected lives of 10 years.
-14-
Had compensation cost for the Company's stock option plan been recognized
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, as amended by SFAS No. 123R, the Company's net
income and income per share for the year ended December 31, 2005 and 2004 would
have been as follows:
2005 2004
--------- -----------
Net loss as reported $(183,527) $(257,950)
Required adjustment to loss (6,300) (10,500)
--------- -----------
Net loss pro forma $(189,827) $(268,450)
========= ===========
Basic Fully diluted
Loss per common share - as reported 2005 $(.02) $(.02)
========== =========
Loss per common share - pro forma 2005 $(.02) $(.02)
========== =========
Loss per common share - as reported 2004 $(.03) $(.03)
========== =========
Loss per common share - pro forma 2004 $(.03) $(.03)
========== =========
NOTE 15 - RELATED PARTY TRANSACTIONS:
Mr. William Weiss, ("Weiss"), Chief Executive Officer and Treasurer of the
Company, receives compensation of $10,000 per month as part of an oral
employment arrangement. In lieu of receiving current compensation payments, Mr.
Weiss has agreed to the deferred payment of such compensation. During 2002 and
for the first three months ended March 31, 2003, Mr. Weiss has assigned payment
of the compensation to another company he is affiliated with. At December 31,
2005, the Company has accrued $867,749 in deferred compensation to Mr. Weiss,
which is recorded as accrued compensation - related party on the balance sheet.
Mr. Weiss has entered into a written agreement with the Company in which he
agreed not to demand payment of his deferred compensation until subsequent to
April 1, 2007.
-15-
NOTE 16 - ROYALTIES:
During 2005 and 2004, the Company had licensing agreements with five
vendors to distribute various software products. The agreements require royalty
payments to vendors based on sales volume. At December 31, 2005, all amounts
outstanding in regards to these agreements have been included in the
accompanying financial statements. For the years ended December 31, 2005 and
2004, the Company paid royalties of $8,535 and $11,752, respectively. As of
December 31, 2005, the Company's accrued royalties of approximately $49,000,
which is included as accrued expenses on the balance sheet.
NOTE 17 - EXPORT SALES:
Export sales were approximately 1% and 2% of the Company's net sales for
the years ended December 2005 and 2004, respectively. The foreign countries that
the Company primarily deals with are Italy, Nigeria and various other
countries.
NOTE 18 - SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
2005 2004
------------------------------------
Cash paid for interest $ - $ -
====================================
Cash paid for state income taxes $ - $ -
====================================
Non cash financing activity-
Prepaid interest and
deferred costs $92,500 $ -
====================================
Non cash issuance of warrants
for services $ - $24,000
====================================
Note 19 - Fair Value of Financial Instruments:
SFAS No.107" Disclosure About the Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments. The
carrying amounts reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued expenses approximate fair value because of their
short term nature. The carrying amounts of notes payable and long term debt
approximates fair value because those financial instruments bear interest at
rates that approximate current market rates for loans with similar maturities
and credit quality. None of these financial instruments are held for trading
purposes.
-16-
Exhibit 10.12
Agreement, dated December 31, 2005, by and between
PaperClip Software, Inc. and William Weiss
WILLIAM WEISS
December 31, 2005
PaperClip Software, Inc.
1 University Plaza
Hackensack , New Jersey 07601
Reference is hereby made to the $867,749 in "accrued compensation-related
party" recorded on the balance sheet appearing in the Annual Report on Form
10-KSB of PaperClip Software, Inc. for the year ended December 31, 2005. Such
payables relate to deferred compensation for services previously performed by
William Weiss ("Weiss") as an officer of the Company pursuant to an oral
employment arrangement and are payable to Weiss and/or his affiliated company.
Weiss hereby agrees that neither Weiss nor such affiliated company shall demand
payment of such payables prior to April 1, 2007.
Sincerely,
/s/ William Weiss
William Weiss
Exhibit 23.1
CONSENT OF INDEPENDENT REGISITERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (Registration No. 333-04245) of our report dated March 13, 2006,
with respect to the financial statements of PaperClip Software, Inc. included in
the Annual Report on Form 10-KSB of PaperClip Software, Inc. for the year ended
December 31, 2005.
/s/ Sobel & Co., LLC
Certified Public Accountants
March 13, 2006
Livingston, New Jersey
Exhibit 31.1 CERTIFICATION
I, William Weiss, certify that:
1. I have reviewed this annual report on Form 10-KSB of PaperClip Software,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) [Reserved];
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: March 30, 2006 By: /s/ William Weiss
William Weiss
Chief Executive Officer
Principal Financial Officer
Exhibit 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER OF
PAPERCLIP SOFTWARE, INC.
(Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code)
The undersigned, William Weiss, Chief Executive Officer and Principal
Financial Officer of PaperClip Software, Inc. (the "Company"), certifies that:
- the Annual Report on Form 10-KSB of the Company for the year ended December
31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934;
- and the information contained in the Annual Report on Form 10-KSB of the
Company for the year ended December 31, 2005 fairly presents, in all material
respects, the financial condition and results of operations of the Company.
March 30, 2006 By: /s/ William Weiss