As filed with the Securities and Exchange Commission on August 29, 1997
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Crossz Software Corporation
(Name of small business issuer in its charter)
Delaware 7372 94-3087939
- ---------------------- ---------------------- ------------------------
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification Number)
Organization) Code Number)
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60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(516) 228-8500 (Telephone)
(516) 228-8584 (Telecopy)
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(Address and telephone number of principal executive offices)
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal place of business or intended principal place of business)
Mark A. Chroscielewski, Chairman of the Board,
President and Chief Executive Officer
CrossZ Software Corporation
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(516) 228-8500 (Telephone)
(516) 228-8584 (Telecopy)
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(Name, Address and Telephone Number of Agent For Service)
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Copies of communications to:
DAVID J. ADLER, ESQ. DAVID ALAN MILLER, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP GRAUBARD MOLLEN & MILLER
505 PARK AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10016
(212) 753-7200 (TELEPHONE) (212) 818-8800 (TELEPHONE)
(212) 755-1467 (TELECOPY) (212) 818-8881 (TELECOPY)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
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<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of each Class of Securities to be Proposed Maximum Aggregate Amount of Registration
Registered Offering Price(1) Fee
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<S> <C> <C>
Shares of Common Stock, $.001 par value $23,000,000 $6,969.70
("Common Stock")(2)
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Representatives' Purchase Option $100 $.03
("Representatives' Option") (3)
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Shares of Common Stock included as part of the $2,200,000 $666.67
Representatives' Option(3)
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Shares of Common Stock underlying the $9,202,000 $2,788.48
Warrants issued to certain investors in
connection with a private placement(3)(4)
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Total Registration Fee $34,402,100 $10,424.88
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</TABLE>
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(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) of the Securities Act, based on an assumed
initial public offering price range of $6.00 to $8.00 per share.
(2) Includes up to 375,000 shares of Common Stock which may be issued on
exercise of a 45-day option granted to the Underwriters to cover
over-allotments, if any. See "Underwriting".
(3) Pursuant to Rule 416 of the Securities Act, there are also being
registered such indeterminable number of additional securities as may
be issued as a result of the anti-dilution provisions of the
Representatives' Option and the Warrants.
(4) Represents the exercise price of the Warrants multiplied by the number
of shares of Common Stock issuable upon the exercise of the Warrants,
assuming that the initial public offering price is $6.00 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 29, 1997
[Logo]
CROSSZ SOFTWARE CORPORATION
2,500,000 SHARES OF COMMON STOCK
All of the 2,500,000 shares ("Shares") of Common Stock, $.001 par value ("Common
Stock") offered hereby ("Offering") are being sold by CrossZ Software
Corporation ("CrossZ" or "Company"). Prior to this Offering, there has been no
public market for the Common Stock and there can be no assurance that any such
market will develop. It is currently anticipated that the initial public
offering price of the Shares will be between $6.00 and $8.00 per share. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price of the Common Stock. The Company has applied
for quotation of the Common Stock on the Nasdaq SmallCap Market under the symbol
"CRSZ."
--------------------------
THE COMMON STOCK OFFERED HEREBY IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AT PAGE HEREOF AND "DILUTION"
AT PAGE HEREOF.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company (2)
- -------------------------------------------------------------------------------
Per Share............ $-- $-- $--
- -------------------------------------------------------------------------------
Total (3)............ $-- $-- $--
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(1) Does not include a 3% nonaccountable expense allowance which the
Company has agreed to pay to GKN Securities Corp. ("GKN") and Barington
Capital Group, L.P. ("Barington" and together with GKN, the
"Representatives"). The Company also has agreed to sell to the
Representatives an option to purchase up to 250,000 shares of Common
Stock ("Representatives' Purchase Option") and to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance, estimated at approximately $-------.
(3) The Company has granted the Underwriters an option, exercisable within
45 business days from the date of this Prospectus, to purchase up to an
additional 375,000 shares of Common Stock on the same terms as set
forth above, solely for the purpose of covering over-allotments, if
any. If such over-allotment option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $_______, $________ and $___________, respectively. See
"Underwriting."
The Shares are being offered by the Underwriters on a firm commitment basis
subject to prior sale, when, as, and if delivered to and accepted by the
Underwriters and subject to the approval of certain legal matters by counsel and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify the Offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the Shares will made against
payment therefor at the offices of GKN in New York City on or about ________,
1997.
GKN SECURITIES CORP. BARINGTON CAPITAL GROUP, L.P.
_____________, 1997
<PAGE>
[PICTURE]
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
----------------------------------------
This Prospectus includes references to trademarks of entities other than the
Company, which have reserved all rights with respect to their respective trade
marks.
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<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed
information and Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus, including the information set forth under "Risk
Factors." Each prospective investor is urged to read this Prospectus in its
entirety. Unless otherwise indicated, all information and all share transactions
in this Prospectus give effect to: (i) the Company's reincorporation in Delaware
under the name CrossZ Software Corporation; (ii) a one-for-four reverse stock
split ("Reverse Stock Split") of the Company's outstanding Common Stock and the
Company's outstanding Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock (collectively, "Outstanding
Preferred Stock") effected in July 1997; (iii) the conversion of all Outstanding
Preferred Stock ("Preferred Stock Conversion") and all accrued and unpaid
dividends thereon, through June 30, 1997, into 3,299,505 shares of Common Stock,
which will occur upon the completion of this Offering; and (iv) the exercise of
certain outstanding warrants ("Warrant Exercise") of the Company and the
issuance of 82,500 shares of Common Stock. Unless otherwise indicated, the
information in this Prospectus does not give effect to the exercise of the
Underwriters' over-allotment option or the Representatives' Purchase Option.
THE COMPANY
CrossZ develops and markets proprietary business intelligence software
solutions that enable business managers to make strategic decisions, leveraging
existing corporate data. Through the evolution of technology, businesses
operating in large customer base and transaction intensive industries, such as
telecommunications and banking, have dramatically increased their ability to
gather and store large amounts of data generated from various sources. The
Company developed its products in response to the need to analyze the increasing
volumes of data that businesses accumulate. Such data contains information, that
if extracted effectively and efficiently, can be used to enhance strategic
corporate development. While companies have invested heavily in capturing data,
they have only recently begun to focus significant resources on the management
and analysis of such data; consequently, the data gathering and analysis
industry is experiencing significant growth.
The business intelligence software market consists of three segments:
data warehousing, data marts, and data mining. A data warehouse is a data
repository where unprocessed corporate data is stored. Data marts are subject
specific subsets of the data warehouse. Data mining products are used to uncover
patterns in data. International Data Corp. ("IDC"), a leading technology
consulting/research company, estimates that the size of the broad data
warehousing software market was $1.4 billion in 1995, and will increase to over
$5.5 billion by the year 2000, an annual growth rate of over 30%. IDC also
estimates that more than 50% of the market will be comprised of data mart
software sales. The stimulus for growth in this market has been the exceptional
returns on capital experienced by companies that have invested in data
warehousing and related technologies. IDC studied 62 companies that invested an
average of $2.2 million each in data warehousing and found that the average
return on investment after three years was 401%.
CrossZ's software enables users to define, cost justify and rapidly
deliver business driven data marts to the desktop. The Company's proprietary
products consist of QueryObject(TM) System ("QueryObject System") and CrossZ
Voyager(TM) ("Voyager"). QueryObject System transforms mainframe size data
repositories into compact mathematical representations, called QueryObjects,
that can fit onto standard desktop and laptop computers. Once a QueryObject has
been created, the user can pose thousands of questions to it using on-line
analytical processing ("OLAP"), mapping, spreadsheet and word processing tools
and receive answers in seconds. The Company's other principal product, Voyager,
has recently been developed and is currently being marketed. Voyager is a data
mining product that uses multiple concurrent pattern recognition algorithms to
analyze data from data warehouses and other data repositories and automatically
design and analyze the economic value of a data mart in a user's business.
Voyager
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<PAGE>
and QueryObject System are based on the Company's next generation data mining
and data mart technologies and, as a result, offer the following advantages over
conventional data marts and data mining tools:
O PLUG AND PLAY WITH RAW DATA: QueryObject System allows the user to
extract virtually unlimited amounts of raw data directly from existing
on-line transaction processing ("OLTP") and other systems, without the
need to aggregate and summarize the data.
O FRESHER DATA: QueryObject System was designed specifically for
high-speed data mart creation without the management overhead and
negative performance implications associated with data warehouses and
other conventional data repositories, allowing users to create dozens
of data marts in a single day.
O LOWER COST: As a result of their ability to load raw data into
QueryObject System, users can reduce or eliminate time-consuming work
such as extracting, cleaning, normalizing, formatting and summarizing
data before loading it into a data warehouse. In addition, large
amounts of operational data can be preserved for future analysis at far
lower cost than a data warehouse.
o GREATER SCALABILITY AND SPEED: The use of proprietary algorithmic
equations allow QueryObject-based data marts to store more data in a
fraction of the storage space needed by conventional data marts. Even
with data marts containing hundreds of millions of records, the
retrieval can be executed in seconds or less.
O GREATER MULTI-USER SUPPORT: QueryObjects can support unlimited numbers
of concurrent users since ALL POSSIBLE ANSWERS TO ALL POSSIBLE QUERIES
are contained therein and impose virtually no degradation on processing
power, in contrast to conventional data marts that consume large
amounts of processing power in computing potential answers.
O GREATER MOBILITY: Since QueryObjects can reside on desktops, laptops or
Web servers, or be distributed over local area networks, they allow
businesses to deploy complex data marts to thousands of users in an
enterprise using existing information technology infrastructure.
The Company recently shifted its focus to the sale and support of its
proprietary products, and, therefore, has achieved limited sales. Prior to the
recent launch of its products, the Company's revenues were derived primarily
from providing contract consulting services. In its role as a consultant, CrossZ
applied its proprietary technology to a wide range of business needs and through
that process developed QueryObject System and Voyager. As a business
intelligence consultant, CrossZ worked with leaders in the banking,
telecommunications, finance, insurance, retail and travel and lodging
industries. In October 1996, the Company made the strategic decision to pursue
product sales in what it believes is a very dynamic marketplace. All of the
Company's revenues for the foreseeable future are expected to be generated from
sales of QueryObject System and Voyager. The Company intends to market and sell
Voyager and QueryObject System through a direct sales force, original equipment
manufacturers ("OEMs") and value-added resellers ("VARs"). The Company has
established a license agreement and VAR relationship with Amdahl Corporation. In
addition, the Company has a joint development and marketing agreement with
Pyramid and a co-marketing program with such hardware vendors as Siemens Nixdorf
Informations Systemme AG. The Company's objective is to establish QueryObject
System technology as a data mart standard and become a leading provider of
integrated data mining/mart software products for business intelligence
applications. The Company's strategy to achieve this goal involves the following
key elements: (i) establish technology leadership by continuing to invest in and
develop innovative technologies; (ii) develop strategic relationships with
indirect channel partners including OEMs and VARS; (iii) expand an open systems
approach; (iv) leverage existing customer investments in information technology;
(v) target horizontal markets; (vi) provide customer service support; and (vii)
expand sales capabilities both domestically and internationally.
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<PAGE>
The Company was incorporated as CrossZ International, Inc., a
California corporation ("CrossZ-California"). CrossZ Software Corporation, a
Delaware corporation ("CrossZ-Delaware") was formed in August 1997 as part of a
corporate reorganization, pursuant to which CrossZ-California merged into
CrossZ-Delaware ("Reincorporation"). Unless otherwise indicated, references to
the Company also includes its predecessors. The Company's executive offices are
located at 60 Charles Lindbergh Boulevard, Uniondale, New York 11553, and its
telephone number at that address is (516) 228-8500
THE OFFERING
Common Stock Offered.............................. 2,500,000 shares
Common Stock to be
Outstanding after the Offering (1)............... 7,672,961 shares
Proposed Nasdaq SmallCap Market Symbol............ CRSZ
Proposed Boston Stock Exchange Symbol............. CRZ
- -------------------
(1) Includes 3,299,505 shares of Common Stock issuable pursuant to the Preferred
Stock Conversion and 82,500 shares of Common Stock issuable pursuant to the
Warrant Exercise. Does not include: (i) 1,300,000 shares of Common Stock
reserved for issuance upon exercise of stock options granted or to be granted
under the Company's 1991 Incentive Stock Option Plan ("Plan"), of which options
to purchase 282,725 shares of Common Stock are outstanding; (ii) 350,000 shares
of Common Stock reserved for issuance upon exercise of certain other outstanding
non-qualified stock options granted to advisors ("Advisory Options"); (iii)
1,960,275 shares of Common Stock ("Bridge Warrant Shares"), based on an assumed
initial public offering price of $7.00 per share, reserved for issuance upon the
exercise of warrants ("Bridge Warrants") issued in the Company's July 1997
bridge financing ("Bridge Financing"); (iv) 432,262 shares of Common Stock
reserved for issuance upon the exercise of additional outstanding warrants; and
(v) 79,353 shares of Common Stock issuable upon the conversion of Outstanding
Preferred Stock as the result of dividends on the Outstanding Preferred Stock
which accrue between July 1, 1997 and October 31, 1997 (the anticipated closing
date of this Offering). See "Management -- Executive Compensation" and "-- 1991
Incentive Stock Option Plan," "Certain Transactions" and "Description of
Securities -- Warrants." Unless otherwise indicated, the information in this
Prospectus does not give effect to the exercise of the Underwriters'
over-allotment option or the Representatives' Purchase Option.
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering approximately
as follows: (i) $5,800,000 for sales and marketing; (ii) $4,628,000 to repay in
full the Bridge Notes (as hereinafter defined) issued in the Bridge Financing
and the Second Interim Financing Notes (as hereinafter defined); (iii)
$2,500,000 for research and development; and (iv) $1,897,000 for working capital
and general corporate purposes. See "Use of Proceeds" and "Certain
Transactions."
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of risk,
including without limitation, the Company's: accumulated deficit, historical and
projected future operating losses and the independent accountants' report going
concern qualification; dependence upon new products and uncertain market
acceptance of its products; lack of substantial revenue and limited operating
history; and working capital deficiency and dependence upon proceeds of this
Offering. An investment in the Shares offered hereby should be considered only
by investors who can afford the loss of their entire investment. See "Risk
Factors."
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<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, including the Notes thereto, included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 are derived from the Company's audited
Financial Statements included elsewhere in this Prospectus. The statement of
operations data for the six months ended June 30, 1996 and 1997 and the balance
sheet data at June 30, 1997 have been derived from unaudited financial
statements and include all adjustments (consisting of only normal recurring
adjustments) that the Company considers necessary for a fair statement of the
results for such interim periods. The operating results for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year or for any future period.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------- --------------------------------
1995 1996 1996 1997
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Software licenses....................... $ 194,000 $ 851,150 $ 228,025 $ 398,750
Services and maintenance................ 2,596,815 1,051,828 694,017 96,377
--------- --------- --------- --------
Total revenues........................ 2,790,815 1,902,978 922,042 495,127
Gross profit............................ 2,166,878 1,424,551 672,749 434,581
Total operating expenses................ 4,871,876 6,076,760 2,359,678 3,867,485
Loss from operations.................... (2,704,998) (4,652,209) (1,686,929) (3,432,904)
Net loss................................ (3,061,919) (4,917,935) (1,939,503) (3,506,881)
Pro forma net loss per common share..... $ (.99) $ (.58)
Pro forma weighted average shares used
in per share computation (see Note 1
of Notes to the Financial Statements).. 4,979,306 6,048,706
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
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Pro Forma As
Actual Pro Forma(1) Adjusted(2)
----------------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 67,126 $3,419,126 $13,744,126
Working capital (deficiency).................................... (2,701,715) 650,285 10,975,285
Total assets.................................................... 2,503,148 6,319,148 16,180,148
Long-term debt.................................................. 2,049,794 4,166,475 1,178,872
Total liabilities............................................... 5,427,041 7,543,722 4,556,119
Series D mandatorily redeemable convertible preferred stock..... 11,173,369 -- --
Shareholders' equity (deficit).................................. (14,097,262) (3) (1,224,574) 11,624,029
</TABLE>
(1) The pro forma balance sheet data as of June 30, 1997 gives effect to: (i)
the Preferred Stock Conversion resulting in the issuance of 3,299,505
shares of Common Stock; (ii) the issuance of $4,300,000 of unsecured
promissory notes ("Bridge Notes") of the Company issued in the Bridge
Financing, net of the conversion into Bridge Notes of a $250,000 principal
amount unsecured Promissory Note ("Third Interim Financing Note") issued in
connection with an interim financing consummated in June 1997 ("Third
Interim Financing"); (iii) the repayment of an aggregate $500,000 of
principal amount unsecured promissory notes ("First Interim Financing
Notes") issued in connection with an interim financing consummated in May
1997 ("First Interim Financing"); and (iv) the Warrant Exercise resulting
in the purchase of 82,500 shares of Common
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<PAGE>
Stock for an aggregate purchase price of $266,000. The pro forma balance
sheet data as of June 30, 1997 does not give effect to the issuance of
79,353 shares of Common Stock issuable upon the conversion of Outstanding
Preferred Stock as the result of dividends on the Outstanding Preferred
Stock which accrue between July 1, 1997 and October 31, 1997 (the
anticipated closing date of this Offering).
(2) The pro forma as adjusted balance sheet data as of June 30, 1997 gives
effect to: (i) the sale of the Shares offered by the Company hereby at an
assumed initial public offering price of $7.00 per share and the receipt of
the net proceeds therefrom of approximately $14,825,000; (ii) the repayment
of the Bridge Notes and the related effect of the write-off of $1,433,319
of debt discount and $464,000 of debt issuance costs incurred in connection
with the Bridge Financing; and (iii) the repayment of $200,000 of principal
amount unsecured promissory notes ("Second Interim Financing Notes") and
the related effect of the write-off of $79,078 of debt discount incurred in
connection with an interim financing consummated in June 1997 ("Second
Interim Financing").
(3) Excludes Series D mandatorily redeemable convertible preferred stock.
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<PAGE>
RISK FACTORS
The Shares offered hereby are speculative in nature and involve a high
degree of risk. Accordingly, in analyzing an investment in these Shares,
prospective investors should carefully consider, along with the other matters
referred to herein, the following risk factors. No investor should participate
in this Offering unless such investor can afford a complete loss of his or her
investment.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At June 30,
1997, the Company had an accumulated deficit of $18,357,161. For the fiscal year
ended December 31, 1996 and for the six months ended June 30, 1997, the Company
incurred net losses of $4,917,935 and $3,506,881, respectively. In addition, the
Company has incurred a net loss in each year during which it has operated, and
its operations to date have been financed in significant part through private
placements of both equity and debt securities. The Company's expense levels are
increasing rapidly and revenues are difficult to predict. As a result, the
Company expects to continue to incur net losses for the foreseeable future.
There can be no assurance that significant revenues or profitability will ever
be achieved or, if they are achieved, that they can be sustained or increased on
a quarterly or annual basis in the future. Future operating results will depend
on many factors, including the demand for the Company's products, the level of
product and price competition, the Company's success in expanding its direct
sales force and indirect distribution channels, the ability of the Company to
develop and market products and to control costs, the percentage of the
Company's revenues derived from indirect channel partners and general economic
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The independent accountants' report for the year ended
December 31, 1996 states that the Company's recurring losses from operations and
the Company's working capital deficiency raise substantial doubt about the
Company's ability to continue as a going concern.
Dependence Upon New Products; Uncertain Market Acceptance.
Substantially all of the Company's revenues for the foreseeable future are
expected to be derived from sales of QueryObject System and Voyager. Between
January 1, 1995 and June 30, 1997, the Company realized software product revenue
from only four QueryObject System installations. The QueryObject System sold in
1995 was a pre-production beta version. The Company has substantially completed
development of Voyager. However, there can be no assurance that Voyager will
perform as expected. Further, the Company has not yet commenced an integrated
marketing effort for its products. The Company's future financial performance
will depend upon the successful introduction and customer acceptance of
QueryObject System and Voyager and development of new and enhanced versions of
such products. The failure to achieve broad market acceptance of QueryObject
System or Voyager will have a material adverse effect on the business, operating
results and financial condition of the Company.
Lack of Substantial Revenue; Limited Operating History. The Company has
had a limited operating history as a software product company and has not made
significant sales of its products. Total revenues for the six months ended June
30, 1997 were approximately $495,000 and consisted primarily of one sale of
QueryObject System. Prior to 1997, the Company's revenues were derived from
providing contract services to customers using the Company's proprietary data
mining technology. The Company has discontinued this business. The Company
believes that comparisons of its current and future operating results to
pre-1997 operating results are not meaningful and operating results should not
be relied upon as indicative of future performance.
Working Capital Deficiency; Dependence Upon Proceeds of this Offering.
At June 30, 1997, the Company had a working capital deficiency of $2,701,715. To
date, the Company has obtained working capital primarily through private
financings, including the Bridge Financing to be repaid out of the proceeds of
this Offering, an agreement ("Loan Agreement") with H.C.C. Financial Services
("HCC") under which the Company has outstanding borrowings in the aggregate
principal amount of approximately $951,000, and vendor financings. The Company
anticipates, based on current plans and assumptions relating to its operations,
that the proceeds of the Offering together with existing resources and cash
generated from operations, should be sufficient to satisfy the Company's cash
requirements for at least 18 months after completion of the Offering. There can
be no assurance, however, that
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<PAGE>
the Company will not require additional financing during or after such 18-month
period. Any inability by the Company to obtain additional financing, if
required, could have a material adverse effect on the operations of the Company.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Dependence on and Expansion of Indirect Channel Partners. An integral
part of the Company's sales and marketing efforts is to develop strategic
relationships with indirect channel partners such as OEMs and VARs and to
increase the proportion of the Company's customers licensed through indirect
channel partners. Accordingly, the Company believes that the licensing of its
products through indirect channel partners will in the future account for a high
percentage of its revenues. There can be no assurance that any customer will
continue to purchase the Company's products in the future. The Company is
currently investing, and intends to continue to invest, significant resources to
develop indirect channel partners, which could adversely affect its operating
results if its efforts do not generate significant license revenues. In
addition, there can be no assurance that the Company will be able to attract
OEMs or VARs or other indirect channel partners that will be able to market the
Company's products effectively and will be qualified to provide timely and cost
effective customer support and service which could adversely affect the
Company's results of operations. In addition, if the Company is successful in
selling products through these sales channels, the Company's gross margins may
be negatively affected due to the lower unit prices that the Company expects to
receive when selling through OEMs or VARs or other indirect channel partners.
See "Business - Sales and Marketing."
Need to Develop New Products and Adapt to Rapid Technological Change.
The market for the Company's software is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycles of the Company's products are difficult to estimate. The Company's
future success will depend upon its ability to timely enhance its current
products and to develop and introduce new products that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing product
enhancements or new products that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
products or that the Company's new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Any potential new products would likely be subject to significant
technical risks. If the Company experiences delays in the commencement of
commercial shipments of new products and enhancements, the Company could
experience delays in or loss of product revenues. If the Company is unable, for
technological or other reasons, to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected.
Competition. The market for the Company's products is intensely
competitive and subject to rapid change. The Company's competitors include Arbor
Software, HNC Software Inc., Red Brick Systems, Inc., Informix Corp., Oracle
Corp., IBM, and Cognos Inc. Because there are relatively low barriers to entry
into the software market, the Company expects additional competition from other
established and emerging companies if the business intelligence data delivery
software market continues to develop and expand. The Company's competitors have
longer operating histories, significantly greater financial, technical and
marketing resources and name recognition and a larger installed base of
customers and products. In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company, have extensive knowledge of the relational database industry and may be
capable of offering a single vendor solution. As a result, the Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products. Further, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among
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competitors may emerge and rapidly acquire significant market share. The Company
also expects that software industry consolidations may create more formidable
competitors, resulting in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business -- Competition."
Dependence Upon Key Personnel; Need to Increase Sales, Marketing,
Development and Technical Personnel. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of the
Company's key employees, in particular, Mark Chroscielewski, the Chairman of the
Board, President and Chief Executive Officer, could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company has an employment agreement with Mr. Chroscielewski that expires in
December 1999 and has purchased a "key person" life insurance policy on his life
in the amount of five million dollars. The Company's future success also depends
on its continuing ability to attract, train and retain highly qualified
technical, sales, marketing, development and managerial personnel. The Company
intends to hire a significant number of additional sales, development and
technical personnel in 1997 and beyond. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
technical, sales, development and managerial employees or that it can attract,
assimilate or retain other highly qualified technical, sales, development and
managerial personnel in the future. If the Company is unable to hire such
personnel on a timely basis in the future, its business, operating results and
financial condition could be materially adversely affected. See "Management."
Limited Protection of Proprietary Technology; Risks of Infringement.
The Company relies primarily on a combination of trade secrets, confidentiality
agreements and contractual provisions to protect its proprietary technology. For
example, the Company licenses rather than sells its software and requires
licensees to enter into license agreements that impose certain restrictions on
licensees' ability to utilize the software. In addition, the Company seeks to
avoid disclosure of its trade secrets, including but not limited to requiring
those persons with access to the Company's proprietary information to execute
confidentiality agreements with the Company and restricting access to the
Company's source code. Trade secret and copyright laws afford only limited
protection. While the Company may apply for certain design patents, the Company
presently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
The Company has not been notified that its products infringe on the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Potential Fluctuations in Periodic Results. The Company's revenues may
be subject to significant variation from period to period due to the
discretionary nature of business intelligence data delivery software purchases
and
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will be difficult to predict. Further, although the Company's product line will
include products with sales prices from $1,000 to over $250,000, the majority of
its revenues is expected to be derived from products with sales prices from
$60,000 to $160,000. As a result, the timing of the receipt and shipment of a
single order can have a significant impact on the Company's revenues and results
of operations for a particular period. It is also expected that for the
foreseeable future a relatively small number of customers and VARs will account
for a significant percentage of the Company's revenues. The Company anticipates
that product revenues in any quarter will be substantially dependent on orders
booked and shipped in that quarter, and revenues for any future quarter will not
be predictable with any significant degree of certainty. Product revenues are
also difficult to forecast because the market for business intelligence software
products is rapidly evolving, and the Company's sales cycle may vary
substantially with each customer. As the Company matures in its product
releases, it is anticipated that the Company will operate with limited order
backlog because its software products will typically be shipped shortly after
orders are received. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risk of Product Defects; Product Liability. Software products as
complex as those offered by the Company may contain undetected errors or
failures when first introduced or when new versions are released. Although the
Company has not experienced material adverse effects resulting from any errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new versions of the
Company's products after commencement of commercial shipments, resulting in loss
of or delay in market acceptance, which could have a material adverse effect
upon the Company's business, operating results and financial condition. The
Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
Although the Company has not experienced product liability claims to date, the
license and support of products by the Company may entail the risk of such
claims. A successful product liability claim brought against the Company could
have a material adverse effect on the Company's business, operating results and
financial condition.
Limitation on Net Operating Loss Carryforward. The Company estimates
that at December 31, 1996 for United States federal income tax purposes, it had
tax benefits attributable to net operating loss and research and experimental
tax credit ("NOL") carryforwards of $10,481,791 and $114,988 respectively,
available to offset future federal taxable income and tax. These NOL
carryforwards expire at various dates through 2011. The availability of the NOL
to reduce or offset taxable income of the Company is subject to various
limitations under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"). In particular, the Company's ability to utilize the NOL
carryforward would be restricted upon the occurrence of an "ownership change"
within the meaning of Section 382 of the Code. Although the determination of
whether an ownership change has occurred is subject to factual and legal
uncertainties, the Company believes that an ownership change occurred upon the
completion of previous financings and such "ownership change" will materially
limit the Company's ability to utilize its NOL carryforward. As a result of the
"ownership change," the Company will generally be permitted to utilize NOL
carryforward (available on the date of such change) in any year thereafter to
reduce its income to the extent that the amount of such income does not exceed
the product of (i) the fair market value of the Company's outstanding equity at
the time of the ownership change (reduced by the amount of certain capital
contributions such as those received pursuant to this Offering) and (ii) a
long-term tax-exempt rate published by the Internal Revenue Service (5.64% for
ownership changes occurring in August 1997).
International Operations. The Company had no international sales prior
to 1996. During 1996, license revenue was recorded with AT&T Istel, a division
of AT&T, which is based in the United Kingdom. The Company intends to expand its
international operations and to enter additional international markets, which
will require significant management attention and financial resources and could
adversely affect the Company's business, operating results or financial
condition. In order to expand international sales successfully in 1997 and in
subsequent periods, the Company must establish additional foreign operations,
hire additional personnel and recruit additional international resellers and
distributors. To the extent that the Company is unable to do so in a timely
manner, the Company's growth, if any, in international sales will be limited,
and the Company's business, operating results and financial condition could be
materially adversely affected.
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<PAGE>
It is anticipated that the Company's international sales will be
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in those markets. Additional risks
inherent in the Company's future international business activities generally
include unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of acceptance
of localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences including restrictions on the repatriation of earnings, weaker
intellectual property protection and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales and,
consequently, the Company's results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Management of Changing Business. The Company expects a period of
material growth in revenue that will place a significant strain upon its
management systems and resources. The Company continues to implement new
financial and management controls, reporting systems and procedures. The
Company's ability to compete effectively and to manage anticipated future growth
will require continued improvement in the Company's financial and management
controls, reporting systems and procedures as well as the implementation of new
systems as necessary. There can be no assurance that the Company will be able to
do so successfully. The Company's failure to do so could have a material adverse
effect upon the Company's business, operating results and financial condition.
Effect of Outstanding Warrants and Options. As of the date of this
Prospectus, there are outstanding Bridge Warrants to purchase 1,960,275 shares
of Common Stock, options to purchase 282,725 shares of Common Stock issued under
the Plan, Advisory Options to purchase 350,000 shares of Common Stock and
certain other warrants to purchase 432,262 shares of Common Stock. In addition,
in connection with this Offering, the Company will issue the Representatives'
Purchase Option. The exercise of such outstanding warrants and options would
dilute the then-existing stockholders' percentage ownership of the Company's
stock, and any sales in the public market of Common Stock underlying such
securities could adversely affect prevailing market prices for the Common Stock.
Moreover, the terms upon which the Company would be able to obtain additional
equity capital could be adversely affected since the holders of such securities
can be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than those provided by such securities. See "Shares Available for Future
Sale", "Management -- 1991 Incentive Stock Option Plan", "Description of
Securities" and "Underwriting."
Significant Portion of Proceeds Used to Satisfy Indebtedness; Broad
Discretion in Application of Proceeds. Approximately $4,628,000, or 31% of the
net proceeds received by the Company from this Offering, will be used to repay
in full the Bridge Notes and the Second Interim Financing Notes. Approximately
$1,897,000, or 13% of the net proceeds from this Offering has been allocated to
working capital and general corporate purposes. The Company will have broad
discretion regarding how and when such proceeds will be applied and will use a
portion of such proceeds to pay salaries, including salaries of its executive
officers. See "Use of Proceeds."
Shares Eligible for Future Sale. Upon the completion of this Offering,
the Company will have 7,672,961 shares of Common Stock outstanding. Of these
shares, all of the 2,500,000 shares of Common Stock sold to the public in this
Offering will be freely transferable by persons other than affiliates of the
Company, without restriction or further registration under the Securities Act of
1933, as amended ("Securities Act"). The remaining 5,172,961 shares of Common
Stock outstanding were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted securities"
as defined in Rule 144 under the Securities Act. Substantially all of the
restricted securities will be available for sale on the date of this Prospectus
or within 90 days of the date of this Prospectus. The sale of a substantial
number of shares of the Common Stock or the availability of Common Stock for
sale could adversely affect the market price of the Common Stock prevailing from
time to time. The Company has entered into, and its stockholders have been
requested to enter into, agreements which
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<PAGE>
prohibit them from selling stock in the Company for 13 months following this
Offering. See "Shares Eligible for Future Sale" and "Underwriting."
Dividends Unlikely. The Company has never declared or paid dividends on
its Common Stock and does not intend to pay dividends in the foreseeable future.
The payment of dividends in the future will be at the discretion of the
Company's Board of Directors. See "Dividend Policy."
Immediate and Substantial Dilution. Purchasers of the Common Stock
offered hereby will incur an immediate and substantial dilution of approximately
78% of their investment in the Common Stock because the pro forma net tangible
book value of the Company's Common Stock after this Offering will be
approximately $1.51 per share as compared with the assumed initial public
offering price of $7.00 per share of Common Stock. See "Dilution."
Concentration of Stock Ownership. Upon completion of this Offering, the
present directors, executive officers and principal stockholders of the Company
and their affiliates will beneficially own approximately 43.9% of the
outstanding Common Stock. As a result, these stockholders will be able to
exercise significant influence over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See "Principal Stockholders."
Issuance of Preferred Stock; Anti-Takeover Provisions; Pursuant to its
Certificate of Incorporation, the Company has an authorized class of 2,000,000
shares of preferred stock which may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders. Issuance of such preferred
stock, depending upon the rights, preferences and designations thereof, may have
the effect of delaying, deterring or preventing a change in control of the
Company. Issuance of additional shares of Common Stock could result in the
dilution of the voting power of the Common Stock purchased in this Offering. In
addition, certain "anti-takeover" provisions of the Delaware General Corporation
Law, among other things, may restrict the ability of the stockholders to
authorize a merger, business combination or change of control of the Company.
See "Description of Securities -- Preferred Stock."
Limited Liability for Directors. The Company's Certificate of
Incorporation provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, with certain exceptions prescribed by Delaware
law. This may discourage stockholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by stockholders on behalf of the Company against a director. In
addition, the Company's By-laws and indemnification agreements to be entered
into with the Company's directors and officers will provide for mandatory
indemnification to the fullest extent permitted by Delaware law. See
"Description of Securities --Limitation on Liability and Indemnification
Matters."
No Prior Market; Potentially Limited Trading Market; Possible
Volatility of Stock Price. There has been no prior market for the Common Stock
and there can be no assurance that a public market for the Common Stock will
develop or be sustained after the Offering. Although the Company has applied to
have the Common Stock approved for quotation on the Nasdaq SmallCap Market, in
order to maintain such quotation, the Company must satisfy certain maintenance
criteria. The failure to meet these maintenance criteria may result in the
Common Stock no longer being eligible for quotation on Nasdaq and trading, if
any, of the Common Stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. The public offering price of the Common Stock being
offered hereby was established by negotiation between the Company and the
Representatives and may not be indicative of prices that will prevail in the
trading market. In the absence of an active trading market, purchasers of the
Common Stock may experience substantial difficulty in selling their securities.
The trading price of the Company's Common Stock is expected to be subject to
significant fluctuations in response to variations in quarterly operating
results, changes in analysts' earnings estimates, general conditions in the
computer software industry and other factors. In
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<PAGE>
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies and that are often unrelated to operating
performance. See "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby, assuming an initial public offering price of $7.00 per
share, are estimated to be approximately $14,825,000 ($17,161,250 if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to apply the net proceeds as follows:
APPLICATION OF PROCEEDS AMOUNT PERCENT
- ----------------------- ------- -------
Sales and Marketing............................... $ 5,800,000 39.1%
Repayment of Bridge and Interim Financings........ 4,628,000 31.2
Research and Development.......................... 2,500,000 16.9
Working Capital and General Corporate Purposes.... 1,897,000 12.8
----------- ------
Total.................................... $14,825,000 100.0%
=========== ======
Approximately $5,800,000 of the net proceeds of this Offering will be
used to fund the Company's ongoing sales and marketing activities and to expand
its sales and marketing activities both domestically and internationally, by
hiring additional domestic and internationals sales and marketing personnel,
increasing advertising, participating in trade shows and other promotional
activities, developing indirect sales channels and enhancing the Company's
customer service capabilities. See "Business--Sales and Marketing."
Approximately $4,420,000 of the net proceeds of this Offering will be
used to repay the Bridge Notes issued in connection with the Bridge Financing
consummated in July 1997. The Bridge Notes consist of 43 unsecured promissory
notes in the aggregate principal amount of $4,300,000, bearing interest at the
rate of 10% per annum through September 30, 1997 and at a rate of 13% per annum
thereafter and payable with interest thereon upon the consummation of this
Offering. If the Offering is consummated on October 31, 1997, the interest to be
paid on the Bridge Notes will be approximately $120,000. Approximately $259,000
of the principal and interest to be repaid on the Bridge Notes is to be repaid
on Bridge Notes held by 5% stockholders and entities affiliated with directors
of the Company. The net proceeds from the sale of the Bridge Notes have been
used primarily for working capital purposes, including payments to suppliers and
the repayment of the First Interim Financing Notes. In addition, approximately
$208,000 of the net proceeds of this Offering will be used to repay the Second
Interim Financing Note. The net proceeds from the Second Interim Financing have
been used primarily for working capital purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources."
Approximately $2,500,000 of the net proceeds of this Offering will be
used for research and development, including enhancements to existing features
and development of new functions for Voyager and QueryObject System and the
salaries and related payroll costs of additional research and development
personnel. See "Research and Development."
The balance of the net proceeds of this Offering will be allocated to
working capital and general corporate purposes, including payment of salaries
(including salaries of its executive officers), and for possible acquisitions.
The Company currently has no agreement, arrangement or understanding with
respect to any acquisition. A portion of the proceeds allocated to working
capital will be used to pay taxing authorities amounts due for sales, use and
excise taxes, as well as to make payments to certain vendors which are currently
past due. If the Underwriters exercise the over-allotment option in full, the
Company will realize additional net proceeds of $2,336,250, which
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will be added to working capital. Management will have significant discretion
regarding how and when such proceeds will be applied.
The allocation of the net proceeds of the Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors change, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories.
Proceeds not immediately required for the purposes described above will
be invested temporarily, pending their application as described above, in
short-term United States government securities, short-term bank certificates of
deposit, money market funds or other investment grade, short-term,
interest-bearing instruments.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations (including the costs associated with its
growth strategy), that the proceeds of the Offering, together with its existing
financial resources and revenues, should be sufficient to satisfy its
anticipated cash requirements for at least the next 18 months; however, there
can be no assurance that this will be the case. The Company's actual cash
requirements may vary materially from those now planned and will depend upon
numerous factors, including the general market acceptance of the Company's new
and existing products and services, the growth of the Company's distribution
channels, the technological advances and activities of competitors, and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth the short-term debt and the total
capitalization of the Company (i) as of June 30, 1997, (ii) pro forma to give
effect to the Bridge Financing, the Preferred Stock Conversion and the Warrant
Exercise, and (iii) pro forma as adjusted to give effect to the consummation of
the Offering at an assumed initial public offering price of $7.00 per share and
the application of the estimated net proceeds therefrom, after deducting the
underwriting discounts and commissions and estimated offering expenses. The
table should be read in conjunction with the Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------
Pro
Forma,
Pro As
Actual Forma(1) Adjusted(2)
----------- ------------ -----------
<S> <C> <C> <C>
Short-term debt, including current portion
of capital lease obligations............................. $ 326,157 $ 326,157 $ 326,157
========= ======== =========
Long-term debt, including Interim Financing
Notes payable to shareholders,
Bridge Notes, loan payable to
shareholder and capital lease obligations................ 2,049,794 4,166,475 1,178,872
--------- --------- ---------
Series D mandatorily redeemable convertible
preferred stock, $.001 par value 14,030,593
shares authorized actual, pro forma and pro
forma as adjusted; 2,385,691 shares issued
and outstanding actual; no shares
issued and outstanding, pro forma and pro
forma as adjusted........................................ 11,173,369 - -
---------- --------- --------
Shareholders' equity (deficit):
Preferred Stock - $.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding........... - - -
Series A, B and C Convertible Preferred Stock, par
value $.001; 3,364,419 shares authorized actual,
pro forma and pro forma as adjusted; 561,643 shares
issued and outstanding; no shares issued and
outstanding pro forma and pro forma as adjusted........ 561 - -
Common Stock, $.001 par value; 30,000,000 shares
authorized; 1,790,956 shares issued and outstanding,
actual; 5,172,961 shares issued and outstanding,
pro forma; 7,672,961 shares issued and outstanding
pro forma, as adjusted(3).............................. 1,791 5,173 7,673
Additional paid-in capital............................... 4,269,847 17,139,714 31,962,214
Accumulated deficit...................................... (18,357,161) (18,357,161) (20,333,558)
Receivable from shareholder.............................. ( 12,300) ( 12,300) ( 12,300)
----------- ----------- -----------
Total shareholders' equity (deficit)..................... (14,097,262) (1,224,574) 11,624,029
----------- ----------- -----------
Total capitalization................................... $ (874,099) $2,941,901 $12,802,901
=========== =========== ===========
</TABLE>
- ------------------
(1) The pro forma balance sheet data as of June 30, 1997 gives effect to
(i) the Preferred Stock Conversion resulting in the issuance of
3,299,505 shares of Common Stock; (ii) the issuance of $4,300,000 of
Bridge
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<PAGE>
Notes, net of the conversion into Bridge Notes of the $250,000 Third
Interim Financing Note; (iii) the repayment of the $500,000 First
Interim Financing Notes with proceeds from the Bridge Financing; and
(iv) the Warrant Exercise resulting in the purchase of 82,500 shares of
Common Stock for an aggregate purchase price of $266,000.
(2) The pro forma as adjusted balance sheet data as of June 30, 1997 gives
effect to: (i) the sale of the Shares offered by the Company hereby at
an assumed initial public offering price of $7.00 per share and the
receipt of the net proceeds of approximately $14,825,000 from the sale
of the Shares; (ii) the repayment of the Bridge Notes and the related
effect of the write-off of $1,433,319 of debt discount and $464,000 of
debt issuance costs incurred in connection with the Bridge Financing;
and (iii) the repayment of the Second Interim Financing Notes and the
related effect of the write-off of $79,078 of debt discount incurred in
connection with the Second Interim Financing. The pro forma balance
sheet data as of June 30, 1997 does not give effect to the issuance of
79,353 shares of Common Stock issuable upon the conversion of the
Outstanding Preferred Stock as the result of dividends on the
Outstanding Preferred Stock which accrue between July 1, 1997 and
October 31, 1997 (the anticipated closing date of this Offering).
(3) Does not include (i) 1,300,000 shares of Common Stock reserved for
issuance upon exercise of stock options granted or to be granted under
the Company's 1991 Incentive Stock Option Plan, of which options to
purchase 282,725 shares of Common Stock are outstanding at a weighted
average exercise price of $0.57 per share, of which options to purchase
217,880 shares of Common Stock are currently exercisable; (ii) 350,000
shares of Common Stock reserved for issuance upon exercise of the
Advisory Options, all of which will be exercisable upon the completion
of this Offering, at an exercise price of $4.28 per share; (iii)
1,960,275 Bridge Warrant Shares reserved for issuance upon the exercise
of the Bridge Warrants, all of which are exercisable commencing July
30, 1998 at an exercise price of $4.28 per share; (iv) 432,262 shares
of Common Stock reserved for issuance upon the exercise of additional
warrants at a weighted average exercise price of $4.44 per share, of
which warrants to purchase 353,184 shares are currently exercisable or
will be exercisable upon the completion of this Offering; and (v)
79,353 shares of Common Stock issuable upon the conversion of
Outstanding Preferred Stock as the result of dividends on the
Outstanding Preferred Stock which accrue between July 1, 1997 and
October 31, 1997 (the anticipated closing date of this Offering). See
"Certain Transactions" and "Description of Securities."
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<PAGE>
DILUTION
Purchasers of the Shares offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their investment. The
difference between the initial public offering price per share of Common Stock
and the pro forma net tangible book value per share of Common Stock after this
Offering constitutes the dilution per share of Common Stock to investors in this
Offering. Net tangible book value per share is determined by dividing the net
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of Common Stock.
As of June 30, 1997, on a pro forma basis after giving effect to the
(i) sale of the Bridge Notes, net of the conversion into Bridge Notes of the
Third Interim Note and the repayment of the First Interim Notes, and the receipt
of the net proceeds thereof, (ii) Preferred Stock Conversion, and (iii) Warrant
Exercise, the Company had a deficiency in net tangible book value (total pro
forma tangible assets less total pro forma liabilities) of $1,224,574, or
approximately $0.24 per share of Common Stock. Without taking into account any
other changes in such net tangible book value of the Company after June 30,
1997, other than to give effect to the sale of all of the Shares offered hereby
at an assumed initial public offering price of $7.00 per share, and the receipt
and application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company on June 30, 1997 would have been $11,624,029
or approximately $1.51 per share, which represents an immediate increase in the
pro forma net tangible book value of approximately $1.75 per share to existing
stockholders and an immediate dilution of $5.49 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share................ $7.00
Pro forma deficiency in net tangible book
value before this Offering........................ (0.24)
Increase per share attributable to this Offering...... 1.75
-----
Pro forma net tangible book value per share after this
Offering...................................................... 1.51
-----
Dilution per share to new investors............................ $5.49
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors purchasing the Shares offered hereby
at an assumed initial public offering price of $7.00 per share (before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------------------- -----------------------------------------
Average
Price per
Number Percent Amount Percent share
-------------- ---------------- ----------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 5,172,961 67.4% $14,400,000 45.1% $2.78
New investors................ 2,500,000 32.6 17,500,000 54.9 7.00
--------- ---- ----------- -----
Total(1)............ 7,672,961 100.0% $31,900,000 100.0% $4.16
========= ===== =========== =====
</TABLE>
- --------------------------
(1) Does not include (i) 1,300,000 shares of Common Stock reserved for
issuance upon exercise of stock options granted or to be granted under
the Company's 1991 Incentive Stock Option Plan, of which warrants to
purchase 282,725 shares of Common Stock are outstanding at a weighted
average exercise price of $0.57 per share, of which options to purchase
217,880 shares of Common Stock are currently exercisable; (ii) 350,000
shares of Common Stock reserved for issuance upon exercise of the
Advisory Options, all of which will be exercisable upon the completion
of this Offering at an exercise price of $4.28 per share; (iii)
1,960,275 Bridge Warrant Shares of Common Stock reserved for issuance
upon the exercise of the Bridge
-18-
<PAGE>
Warrants, all of which are exercisable commencing July 30, 1998 at an
exercise price of $4.28 per share; (iv) 432,262 shares of Common Stock
reserved for issuance upon the exercise of additional warrants at a
weighted average exercise price of $4.44 per share, of which warrants
to purchase 353,184 shares are currently exercisable or will be
exercisable upon the completion of this Offering; and (v) 79,353 shares
of Common Stock issuable upon the conversion of Outstanding Preferred
Stock as the result of dividends on the Outstanding Preferred Stock
which accrue between July 1, 1997 and October 31, 1997 (the anticipated
closing date of this Offering). See "Management -- Executive
Compensation" and " - 1991 Incentive Stock Option Plan" and "Certain
Transactions" and "Description of Securities."
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the Notes to Financial Statements
included elsewhere in this Prospectus.
OVERVIEW
The Company commenced operations in February 1989, and to date
substantially all of its revenues have been derived from providing contract
services to customers using its proprietary business intelligence technology. In
the third quarter of 1996, the Company shifted its focus to commercializing its
proprietary business intelligence technology and most of its activities since
then have been devoted to research and development, recruiting personnel,
raising capital, and developing a sales and marketing strategy and
infrastructure. Accordingly, the Company has a limited operating history as a
software product company and has only limited sales of its QueryObject System.
The Company believes that comparisons of its current and future operating
results to its pre-1997 operating results are, therefore, not meaningful. The
Company's future financial performance will depend upon the successful
development, introduction and customer acceptance of QueryObject System and
Voyager products.
To date, the Company has incurred substantial losses from operations,
and at June 30, 1997 had an accumulated deficit of $18,357,161. The Company's
operations and activities have been primarily funded through private sales of
debt and equity securities. The Company expects to incur substantial operating
expenses in the future to support its product development efforts, establish and
expand its domestic and international sales and marketing capabilities,
including recruiting additional indirect channel partners, and support and
expand its technical and management personnel and organization. The Company
believes that the net proceeds from the Offering will be sufficient to finance
its operations for at least the next 18 months.
QueryObject System has not yet been marketed actively to customers.
Development of Voyager is completed and is currently being marketed to
customers. The Company intends to market and sell QueryObject System and Voyager
through its direct sales force as well as through indirect channel partners such
as OEMs and VARs. The Company anticipates that sales through indirect channel
partners will be harder to forecast and will most likely have lower gross
margins. There can be no assurance that the Company will be successful in
developing additional products, in marketing and selling its products, or that
such products will achieve broad market acceptance. The Company's inability to
develop its products or to establish relationships with indirect channel
partners would have a material adverse effect on the Company's business,
financial condition and results of operations.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by Management. In instances where a
significant vendor obligation exists, revenue recognition is delayed until such
obligation has been satisfied. Allowances for estimated future returns are
provided for upon shipment. It is anticipated that in the near term, the
Company's revenues from its sales of products will be difficult to predict due
to the discretionary nature of business data delivery software purchases and the
variable length of the sales cycle with respect to new product introductions.
Further, although the Company's product line will include products with sales
prices from $1,000 to over $250,000, the preponderance of its revenues is
expected to be derived from products with sales prices from $60,000 to $160,000.
As a result, the timing of the receipt and shipment of a single order can have a
significant impact on the Company's revenues and results of operations for a
particular period.
-20-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
statements of operations for the years ended December 31, 1995 and 1996, and for
the six months ended June 30, 1996 and 1997 ($ in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
----------------------------------- -----------------------------------
1995 1996 1996 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues
Software licenses $ 194 $ 851 $ 228 $ 399
Services and maintenance(1) 2,597 1,052 694 96
------- ------- ------- -------
TOTAL REVENUES 2,791 1,903 922 495
------- ------- ------- -------
Cost of revenues
Software licenses 33 102 33 48
Services and maintenance 591 376 216 12
------- ------- ------- -------
TOTAL COST OF REVENUES 624 478 249 60
------- ------- ------- -------
GROSS PROFIT 2,167 1,425 673 435
------- ------- ------- -------
Operating expenses
Sales and marketing 2,504 3,145 1,264 2,061
Research and development 1,357 1,792 643 1,198
General and
administrative 1,011 1,140 453 609
------- ------- ------- -------
Total operating
expenses 4,872 6,077 2,360 3,868
------- ------- ------- -------
LOSS FROM OPERATIONS (2,705) (4,652) (1,687) (3,433)
Interest income -- 88 17 27
Interest expense (335) (355) (271) (102)
Other income (expense) (22) 1 1 1
------- ------- ------- -------
NET LOSS ($3,062) ($4,918) ($1,940) ($3,507)
======= ======= ======= =======
</TABLE>
(1) Prior to the six months ended June 30, 1997, services and maintenance
revenues consisted entirely of service revenue.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
REVENUES. The Company's license revenues have been generated from sales
of QueryObject System. Service revenues have been generated from fees paid by
customers on a project or contract basis for data analysis by the Company using
its proprietary software, and are recognized over the term of the respective
agreements. Maintenance revenues consist of ongoing support and product updates
and are recognized ratably over the term of the contract, which is typically
twelve months (See Note 1 of Notes to the Financial Statements). The Company has
recognized revenue, for all periods presented, in accordance with the American
Institute of Certified Public Accountants Statement of Position 91-1 entitled
"Software Revenue Recognition."
Total revenues decreased by $427,000 or 46% from $922,000 for the six
months ended June 30, 1996 ("the 1996 period") to $495,000 for the six months
ended June 30, 1997 ("the 1997 period"). License revenues increased by $171,000
or 75% from $228,000 for the 1996 period, to $399,000 for the 1997 period.
During both the 1996 and 1997 periods, license revenues were derived from the
sale of one license in each period. The increase in the 1997 period was
primarily due to the different components, and therefore prices, of the
respective licenses. Services and maintenance revenue decreased by $598,000, or
86%, from $694,000 for the 1996 period to $96,000 for the 1997
-21-
<PAGE>
period, due primarily to the curtailment of service based engagements. The
Company has discontinued its service-based engagements and does not anticipate
any ongoing revenue from these activities.
COST OF REVENUES/GROSS PROFIT. Cost of software license revenues
consists primarily of product packaging, documentation and production costs.
Gross profit resulting from software licenses increased by $156,000, or 80%,
from $195,000 for the 1996 period to $351,000 for the 1997 period, representing
86% and 88% of related license revenues, respectively. Cost of services and
maintenance revenues consist primarily of customer support costs and direct
costs associated with providing services. Gross profit resulting from services
and maintenance decreased by $394,000, or 82%, from $478,000 for the 1996 period
to $84,000 for the 1997 period, representing 69% and 88% of related service and
maintenance revenues, respectively. The decrease in gross profit was primarily
due to the curtailing of service based engagements. The Company has discontinued
its service based engagements.
OPERATING EXPENSES. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions and incentives, of all personnel
involved in the sales and marketing process, as well as related recruiting
costs, public relations, advertising related costs, new product collateral
material and trade shows. Sales and marketing expenses increased $797,000, or
63%, from $1,264,000 for the 1996 period to $2,061,000 for the 1997 period. This
increase was primarily due to costs associated with the expansion of the direct
sales and technical pre-sales force, increased costs associated with public
relations, trade shows, and product collateral material. The Company expects to
continue hiring additional sales and marketing personnel and to increase
promotion and advertising expenditures.
See "Use of Proceeds."
Research and development expenses consist primarily of salaries and
other personnel-related expenses, recruiting costs associated with the hiring of
additional software engineers and quality assurance personnel, programming
consultant costs and depreciation of development equipment. Research and
development expenses increased $555,000, or 86%, from $643,000 for the 1996
period to $1,198,000 for the 1997 period. This increase was primarily due to an
increase in the number of software engineers and associated support required to
develop and maintain the Company's products. The Company believes that a
significant level of investment for product research and development is required
to remain competitive and, accordingly, the Company anticipates that it will
continue to devote substantial resources to product research and development and
that research and development expenses will increase in absolute dollars. To
date, all research and development costs have been expensed as incurred. See
"Use of Proceeds" and Note 1 of Notes to Financial Statements.
General and administrative expenses consist primarily of personnel
costs for finance, MIS, human resources and general management, as well as
insurance and professional expenses. General and administrative expenses
increased $156,000, or 34%, from $453,000 for the 1996 period to $609,000 for
the 1997 period. This increase was primarily due to increased staffing costs and
professional fees necessary to manage and support the Company. The Company
believes that its general and administrative expenses will continue to increase
as it expands its administrative staff, adds infrastructure and incurs
additional costs related to being a public company, such as expenses related to
directors' and officers' insurance, investor relations programs and increased
professional fees.
INTEREST INCOME AND INTEREST EXPENSE. Interest income represents income
earned on the Company's cash and cash equivalents. Interest expense represents
charges relating to the Company's Loan Agreement and interest expense on capital
equipment leases.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
REVENUES. Total revenues decreased by $888,000, or 32%, from $2,791,000
for the year ended December 31, 1995 ("1995") to $1,903,000 for the year ended
December 31, 1996 ("1996"). License revenues increased by $657,000, or 339%,
from $194,000 in 1995 to $851,000 in 1996, primarily as a result of an increase
in the number of licenses sold. The Company sold three licenses during 1996, two
of which occurred in the latter part of the year. Service and maintenance
revenues decreased $1,545,000, or 59%, from $2,597,000 in 1995 to $1,052,000 in
1996, primarily attributable to the curtailment of service based engagements.
-22-
<PAGE>
COST OF REVENUES/GROSS PROFIT. Gross profit resulting from software
licenses increased by $588,000, or 365%, from $161,000 for 1995 to $749,000 for
1996, representing 83% and 88% of related license revenues, respectively,
primarily due to an increase in the number of licenses sold. Gross Profit
resulting from services and maintenance decreased by $1,330,000, or 66%, from
$2,006,000 in 1995 to $676,000 in 1996, representing 77% and 64% of related
service and maintenance revenues, respectively, primarily due to lower staffing
levels resulting from the curtailment of service based engagements.
OPERATING EXPENSES. Sales and marketing expenses increased $641,000, or
26%, from $2,504,000 in 1995 to $3,145,000 in 1996, primarily due to costs
associated with the expansion of the direct sales and technical pre-sales force
(including related recruiting costs), increased costs associated with public
relations, trade shows, and new product collateral material. The increase as a
percentage of total revenues was due to a reduction in the Company's total
revenues during the Company's transition to a product sales company.
Research and development expenses increased $435,000, or 32%, from
$1,357,000 in 1995 to $1,792,000 in 1996, primarily due to an increase in
software engineering personnel and related costs. Additionally, the Company
incurred nonrecurring costs related to the consolidation of the Company's
development operations to its New York headquarters.
General and administrative expenses increased $129,000, or 13%, from
$1,011,000 in 1995 to $1,140,000 in 1996, primarily due to increased consulting
and professional fees necessary to manage and support the transition of the
Company's business to product sales.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE. Interest income in 1996
resulted primarily from an increase in cash and cash equivalents relating to a
private placement of the Company's Series D Redeemable Convertible Preferred
Stock in 1996. Interest expense represents charges relating to the Company's
Loan Agreement and interest expense on capital equipment leases.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The Company incurred net operating losses in 1995 and 1996
and consequently paid no federal or state income taxes. At December 31, 1996,
the Company had tax benefits attributable to net operating loss and research and
experimental tax credit carryforwards of $10,481,791 and $114,988, respectively,
available to offset future federal taxable income and tax. These net operating
loss carryforwards expire at various dates through 2011. Utilization of prior
net operating losses is limited after an ownership change as defined in Section
382 of the Code. As a result of previous financing transactions, which resulted
in ownership changes, there can be no assurance that a significant amount of the
existing net operating loss will be available to the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private
cash sales of preferred equity securities, which total approximately $14 million
and, to a lesser extent, through capital and operating equipment leases, the
issuance of notes payable and a borrowing arrangement with HCC. As of June 30,
1997, the Company had $67,000 in cash and cash equivalents. Net cash used in
operating activities was $1,743,000, $5,542,000 and $2,290,000 in 1995, 1996 and
for the six months ended June 30, 1997, respectively. For 1996, net cash used in
operating activities was primarily attributable to a net loss of $4,918,000 and
a decrease in accounts payable and accrued expenses of $769,000 (required to
satisfy seriously delinquent payments owed), offset by an increase in accounts
receivable of $237,000. For the six months ended June 30, 1997, net cash used in
operating activities was primarily attributable to a net loss of $3,507,000,
increases in accounts payable and accrued expenses of $546,000 and by decreases
in accounts receivable of $596,000. Net cash provided by financing activities
was $1,717,000, $8,310,000 and $1,223,000 in 1995, 1996 and for the six months
ended June 30, 1997, respectively. Since January 1, 1995, the Company's
principal sources of capital have been as follows:
-23-
<PAGE>
SERIES C PRIVATE PLACEMENT. During the latter part of 1995
through March 1996, the Company consummated a private placement of Series C
Convertible Preferred Stock ("Series C Private Placement") whereby it issued the
equivalent of an aggregate of 517,005 shares of Common Stock at a per share
offering price of $4.28 and issued warrants to purchase an aggregate of 263,702
shares of Common Stock at an exercise price of $4.28 per share ("Series C
Warrants"). See "Certain Transactions."
SERIES D PRIVATE PLACEMENT. From May 1996 through August 1996,
the Company consummated a private placement of Series D Redeemable Convertible
Preferred Stock ("Series D Private Placement") whereby it issued the equivalent
of an aggregate of 2,635,501 shares of Common Stock at a per share offering
price of $4.28 per share (after taking into account all accrued and unpaid
dividends) and issued an aggregate of 68,106 warrants ("Series D Warrants") at
an exercise price of $4.28 per share. See "Certain Transactions."
FIRST INTERIM FINANCING. In May 1997, the Company consummated
the First Interim Financing whereby it received the principal amount of
$500,000. Such amount was repaid out of the proceeds of the Bridge Financing.
See "Certain Transactions."
SECOND INTERIM FINANCING. In June 1997, the Company
consummated the Second Interim Financing whereby it received the principal
amount of $200,000. In connection therewith, the Company also issued warrants to
purchase 70,666 shares of Common Stock at an exercise price of $4.28 per share.
The Second Interim Financing will be repaid out of the proceeds from this
Offering.
THIRD INTERIM FINANCING. In June 1997, the Company consummated
the Third Interim Financing whereby it received the principal amount of
$250,000. In connection with the Bridge Financing, the holders of Third Interim
Financing Notes agreed to convert such Third Interim Financing Notes into 2-1/2
Bridge Units. The Company also issued warrants to purchase 8,412 shares of
Common Stock at an exercise price of $4.28 per share.
See "Certain Transactions."
JULY 1997 INTERIM FINANCING. In July 1997, the Company
borrowed $250,000 which was repaid out of the proceeds from the Bridge
Financing.
BRIDGE FINANCING. In July 1997, the Company issued an
aggregate of $4.3 million Bridge Notes in connection with the Bridge Financing,
whereby it issued 43 Bridge Units ("Bridge Units") at a purchase price of
$100,000 per Bridge Unit, each Bridge Unit consisting of a $100,000 principal
amount Bridge Note and a Bridge Warrant to purchase 33,333 Bridge Warrant Shares
at a purchase price of $4.28 per share. As part of such Bridge Financing, the
Third Interim Financing Notes were converted into Bridge Units. The Bridge Notes
are in the aggregate principal amount of $4.3 million, bearing interest at the
rate of 10% per annum through September 30, 1997, and at a rate of 13% per annum
thereafter, with principal and interest payable in full upon the consummation of
this Offering. The Bridge Notes are being repaid out of the proceeds from this
Offering. See "Use of Proceeds," "Certain Transactions", "Principal
Stockholders"and "Description of Securities -- Warrants."
The Company does not currently have a line of credit with a commercial
bank. Under the Loan Agreement, the Company has outstanding borrowings in the
aggregate principal amount of approximately $951,000, such indebtedness secured
by a security interest in and lien on all of the Company's assets. An Addendum
to the Loan Agreement provides that HCC, the lender thereunder, will not demand
payment under the Loan Agreement (and requires the Company to maintain a
restricted Certificate of Deposit which was in the amount of $858,000 as of June
30, 1997), until the earlier of March 31, 1998, a material breach by the Company
under the Addendum or an event of default under the Loan Agreement. The Company
is obligated under the Addendum to pay HCC each month $10,000 plus accrued
interest on the outstanding balance under the Loan Agreement. Additionally, as
of June 30, 1997, the Company has available $88,000 under an equipment leasing
line of credit.
-24-
<PAGE>
As of June 30, 1997, the Company's principal commitments consisted of
obligations under operating and capital leases. At that date, the Company had
approximately $600,000 in outstanding borrowings under capital leases which are
payable through 2000 (see Notes 8 and 13 of Notes to the Financial Statements).
As of June 30, 1997, the Company had a deficiency in working capital of
$2,701,715. Subsequent to June 30, 1997 and as described above, the Company
received an additional $3,586,000 in net proceeds from the Bridge Financing and
immediately repaid the First Interim Financing of $500,000. Based on its current
operating plan, the Company believes that the net proceeds from this offering
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 18 months. Thereafter, if cash
generated from operations is insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or convertible debt
securities or obtain additional credit facilities. The sale of additional equity
or convertible debt securities could result in additional dilution to the
Company's stockholders. A portion of the Company's cash may be used to acquire
or invest in complementary businesses or products or to obtain the right to use
complementary technologies. It is anticipated that in the ordinary course of
business, the Company may evaluate potential acquisitions of such businesses,
products or technologies. The Company has no current plans, agreements or
commitments, and is not currently engaged in any negotiations with respect to
any such transaction.
-25-
<PAGE>
BUSINESS
COMPANY OVERVIEW
CrossZ develops and markets proprietary business intelligence software
solutions that enable business managers to make strategic decisions, leveraging
existing corporate data. Through the evolution of technology, businesses
operating in large customer base and transaction intensive industries, such as
telecommunications and banking, have dramatically increased their ability to
gather and store large amounts of data generated from various sources. The
Company developed its products in response to the need to analyze the increasing
volumes of data that businesses accumulate. Such data contains information, that
if extracted effectively and efficiently, can be used to enhance strategic
corporate development. While companies have invested heavily in capturing data,
they have only recently begun to focus significant resources on the management
and analysis of such data; consequently, the data gathering and analysis
industry is experiencing significant growth. The Company recently shifted its
focus to the sale and support of such proprietary products, and has to date
achieved limited sales.
The business intelligence software market consists of three segments:
data warehousing, data marts, and data mining. International Data Corp. ("IDC"),
a leading technology consulting/research company, estimates that the size of the
broad data warehousing software market was $1.4 billion in 1995, and will
increase to over $5.5 billion by the year 2000, an annual growth rate of over
30%. IDC also estimates that more than 50% of the market will be comprised of
data mart software sales. The stimulus for growth in this market has been the
exceptional returns on capital experienced by companies that have invested in
data warehousing and related technologies. IDC studied 62 companies that
invested an average of $2.2 million each in data warehousing and found that the
average return on investment after three years was 401%.
INDUSTRY BACKGROUND
Traditionally, businesses developed their information systems to
support transactional data processing and only collected data necessary to
facilitate such processing. Therefore, data storage methods were designed in
contemplation of narrow transactional goals rather than strategic analysis. As
corporate information strategy evolved, and the need for more intelligent
presentations of data emerged, technologies were developed to access and analyze
accumulated operational data. These technologies proved to be limited in
analyzing and presenting stored data in formats that facilitated business
decision making (a process known as business intelligence). Subsequently,
several systems were developed to perform specific business intelligence
functions, yet such systems still do not fully address the need to transform
data into useful information.
Relational database management systems ("RDBMS") are frequently used as
repositories of historical data for common business operational systems. RDBMS
are tuned to support high volume on-line transaction processing ("OLTP")
applications such as data entry and are designed to store large quantities of
data in a simple tabular, two-dimensional form, such as product-by-customer or
product-by-fiscal period.
Database query and reporting tools have been developed to make
accessing and viewing the contents of databases more efficient. These tools are
well-suited for viewing historical data and performing simple analytical
functions, but they generally lack robust business intelligence capabilities,
are unable to find correlations or make projections and are not designed to
integrate, modify or reorganize such data to test business hypotheses. As a
result, enterprises require more powerful software for accessing and analyzing
RDBMS data. Many enterprises have adopted business intelligence technology to
address their information analysis needs.
There are generally three separate components to an enterprise-wide
business intelligence system:
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<PAGE>
- Data warehouse: where the unprocessed corporate data is stored
in one place. Data warehousing involves the controlled,
periodic loading of selected historical data from various
databases into a central repository in a summarized and
standardized format that is made available to users on a
read-only basis. This approach provides users with better
access to critical data in the organization's RDBMS, but users
are not generally familiar enough with database syntax to
extract data from data warehouses without assistance from
information technology ("IT") personnel or the use of query
tools.
- Data mart: subject specific subsets of the data warehouse. An
advanced form of data mart contains pre-calculated answers
stored in a multidimensional data mart known as a data cube.
- Data mining: discovering and extracting hidden patterns or
trends from databases and data marts that went previously
unnoticed by analysts using standard query and reporting
tools.
Limitations of Traditional On-Line Analytical Processing Products.
While a data warehouse is useful, as it contains all of the data that
will be analyzed, its immense size makes business intelligence analysis
inefficient and unwieldy. Within any data warehouse there will be extraneous
data (as such data relate to the goal of the analysis) that must be disregarded
in subsequent analyses. For example, if a company is trying to determine the
most relevant factors in retaining its customers for repeat purchases, certain
elements of each customer's data profile will have a relatively high correlative
value, such as income, gender or occupation, while other elements will have a
relatively low correlative value, such as first name or social security number.
While a data warehouse contains all the data elements, it does not contain the
additional information necessary to identify those data elements relevant to a
business goal.
The response to the inefficiencies of the data warehouse was the
development of the data mart. Data Mart technology enabled business managers to
manually search the data warehouse subset for data relevant to their business
goal. While first generation data marts have reduced deployment timeframes,
query response times, and overall costs, they are limited by the amount of
information they can contain and are not effective as an enterprise-wide
solution.
Another response to the limitations of OLAP was the application of data
mining to the data warehouse. While first generation data mining can be used
successfully to target specific data elements for further analysis, like the
data mart, it also has several significant limitations. The data mining tools
tend to be complex software applications that cannot be used on standard desktop
personal computers by non-IT personnel. Additionally, because first generation
data mining is a repetitive process, it requires multiple scans of the data
warehouse, which may take days or weeks, to identify the patterns related to the
business goal. Moreover, since first generation data mining tools generally use
only one technique to search through the data warehouse, they are limited to
specific business applications and therefore are not effective as an
enterprise-wide solution.
Accordingly, the Company believes enterprises are searching for ways to
transcend these limitations, to develop more efficient data marts and data
mining techniques, in less time, using already existing hardware and systems,
with a more precise correlation between data mart content and the user's
business objectives and with less impact on critical IT resources.
The Company believes that Voyager and QueryObject System are the
enterprise-wide solution to the limitations of first generation business
intelligence technology.
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<PAGE>
THE CROSSZ SOLUTION
CrossZ Voyager.
Voyager is a data mining product that utilizes multiple concurrent
pattern recognition algorithms to analyze data from relational databases, data
warehouses and other data repositories, and to automatically design, prototype
and compute the potential economic value of a data mart prior to its
implementation. Voyager uses multiple, concurrent data mining techniques to
select the right data and the optimal format for revealing patterns within that
data in support of a business goal. The Company believes that using multiple
techniques allows Voyager to process a diversity of data structures and types
that cannot be effectively addressed by the single data mining algorithms used
by traditional data mining tools and enables Voyager to accurately analyze a
broad range of data and goal formats. A single data mining algorithm can be
stumped by the type of goal and data being mined, resulting in few to no
patterns being found, or inaccurate conclusions being drawn. As a result, the
Company believes the multiple technique approach improves data mining, because
each technique provides an independent perspective on heterogeneous data.
Voyager is designed to enable business managers to build fully
functional prototypes and full-scale data marts on their own desktops in a
matter of minutes, based on actual business data. The Company believes Voyager's
methodology has the potential to fundamentally change the data warehouse
paradigm by providing a bridge for a truly collaborative development effort
among IT staff and business managers, by generating powerful prototypes in a
matter of minutes, computing their economic value (i.e., the projected revenue
stream generated by the potential customers that have been identified, less the
projected cost of obtaining such customers) and by automatically generating the
machine readable data mart specification, permitting complete data mart
production in less than a day, instead of weeks.
QueryObject System.
Once the appropriate data elements have been identified through either
the Voyager prototype or third party software, QueryObject System employs
advanced mathematics to create compact, portable and accurate representations of
data sets, called QueryObjects, from the data repository. In real-world
applications, a QueryObject System-based data mart can be tens, hundreds or even
thousands of times smaller than the source data, thereby making terabyte-class
databases small enough to transport on a standard laptop. QueryObject System
technology can reside on mainframe, midrange or Windows NT systems.
The Company believes that QueryObject System offers the following
advantages over conventional data marts:
o PLUG AND PLAY WITH RAW DATA: QueryObject System allows the user to
extract virtually unlimited amounts of raw data directly from existing OLTP and
other systems, without the need to aggregate and summarize the data.
o FRESHER DATA: Performing a full scan on a data warehouse to create a
data mart is time intensive, consumes CPU resources, and renders the warehouse
virtually inaccessible to users with other purposes. In fact, most businesses
find it difficult to perform more than one full scan on their data warehouse in
a day and often require a week or more to create a data mart. QueryObject System
was designed specifically for high speed data mart creation without the
management overhead and negative performance implications associated with data
warehouses and other conventional data repositories, allowing users to create
dozens of data marts in a single day. Moreover, because QueryObject System
technology can reside on MVS, Unix or Windows NT servers, the user can create
the data mart on the system that makes the most sense for the business and
insulate mission critical applications and databases from the performance
degradation normally associated with full database scans.
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o LOWER COST: As a result of their ability to load raw data directly
into QueryObject System, users can reduce or eliminate time-consuming work such
as extracting, cleaning, normalizing, formatting and summarizing data before
loading it into a data warehouse. In addition, large amounts of operational data
can be preserved for future analysis at far lower cost than a data warehouse.
o GREATER SCALABILITY AND SPEED: The Company believes QueryObject based
data marts contain more data in less storage space than traditional data marts
such as Arbor Essbase and Oracle Express. A single QueryObject can contain
hundreds of millions of records, tens of thousands of values in each field or
column and billions of potential query answers. The use of proprietary
algorithmic equations allows QueryObject-based data marts to store more data in
a fraction of the storage space needed by conventional data marts. Even with
data marts that measure in the hundreds of millions of records, the retrieval
can often be executed in seconds or less.
o GREATER MULTI-USER SUPPORT: QueryObjects can support unlimited
numbers of concurrent users since all possible answers to all possible queries
are contained therein, and impose virtually no degradation on processing, in
contrast to conventional data marts that consume large amounts of processing
power in computing potential answers.
o GREATER MOBILITY: When business intelligence was a function confined
to a small cadre of analysts and specialists, it was acceptable for business
intelligence systems to reside in a single, central location. In contrast, since
QueryObjects can reside on desktops, laptops, and Web servers, or be distributed
over local area networks, they allow businesses to deploy complex data marts to
thousands of users in an enterprise-using existing information technology
infrastructure.
THE CROSSZ STRATEGY
The Company's objective is to establish Voyager and QueryObject System
technology as a ubiquitous data mining and data mart standard and become the
leading worldwide provider of integrated data mining/data mart software products
for business intelligence applications. Key elements of the Company's strategy
include:
Establish Technology Leadership. The Company has developed a number of
technologies specifically to meet the scalability, capacity, usability and
functionality requirements of integrated data mining/data mart software. In
particular, the Company has developed a proprietary high performance
mathematical algorithm suite to compute and represent all possible answers,
univariates, uniques and intermediates across very large databases. These
answers are stored in highly compact formats that do not require significant
server memory or processing power to provide instantaneous query response. The
Company intends to continue to develop what it believes are innovative
technologies and features to address the specific business requirements of
integrated data mining/data marts in the areas of performance, scalability, data
integrity, system administration and decision analysis capabilities. The Company
intends to continue to invest in its technology in order to enhance its existing
data mining and data mart products as well as to develop complementary data
mining algorithms and data visualization tools. The Company intends to use a
portion of the proceeds of this Offering for research and development.
Develop Strategic Relationships. The Company believes that its
strategic relationships with hardware and other software vendors are a key part
of its strategy to establish a leadership position in the business intelligence
data delivery market. To achieve broader market coverage, the Company has
established a license agreement and VAR relationship with Amdahl Corporation and
a joint development and marketing agreement with Pyramid. Additionally, the
Company has co-marketing programs with several leading hardware vendors,
including Hewlett-Packard Company and Siemens Nixdorf Informations Systemme AG.
To accelerate the adoption of Voyager and QueryObject System as a standard
platform for integrated data mining/data mart applications, the Company has
begun to form strategic relationships with many providers of business
intelligence software applications, tools and services.
Expand Open Systems Approach. The Company seeks to maximize the market
for its products by designing them to adhere to industry standards which allows
the sharing of data across platforms and software applications.
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QueryObject technology operates with a wide range of third-party front-ends,
databases and operating systems via an open architecture that supports
Microsoft's open database connectivity. The Company believes that its open
systems approach represents a competitive advantage versus competing solutions
that are more proprietary in nature, and as such intends to continue to adhere
to industry standards.
Leverage Existing Investments in Information Technology. The Company
believes that it has designed Voyager and QueryObject System to take advantage
of customers' existing IT investments, thereby accelerating the acceptance of
such software. Voyager and QueryObject System are designed to leverage
investments in personal computer hardware and software and to integrate data
from existing relational databases, legacy repositories and emerging data
warehouses. The Company also leverages third party-based consulting services and
distribution capabilities to enable it to focus on providing industry leading
business intelligence data delivery software.
Target Horizontal Markets/New Applications and Markets. Because
integrated data mining/data marts are critical corporate functions in a wide
variety of industries, the Company believes that its solutions are potentially
applicable in a broad range of markets. The Company is currently targeting
companies in financial services, insurance, telecommunications, retail and
health care. The Company's strategy also includes converting customized
applications it develops as proofs-of-concept into products for sale to specific
market segments.
Provide Superior Customer Service. The Company believes that providing
superior customer service is critical for customer success. The Company's
strategy is to deliver technology and services that enable its customers to
implement quickly and cost effectively integrated data mining/data mart
applications. The Company provides its customers with a comprehensive array of
services, including software updates, documentation updates, product
maintenance, and emergency response. The Company intends to maintain its focus
and to continue to invest in service and support to extend its customer service
advantage.
Expand Sales and Marketing Capabilities. The Company intends to expand
its sales and marketing capabilities, both domestically and internationally, by
increasing the size of its direct sales organization and to develop an indirect
channel of distributors such as OEMs and VARs. The Company has recently opened
an office in the United Kingdom to penetrate the European marketplace. The
Company intends to use a portion of the proceeds of this Offering to enhance the
Company's sales and marketing capabilities.
PRODUCTS
The Company's Voyager and QueryObject System are an integrated data
mining/data mart solution. Voyager is the data mining component that is
integrated with QueryObject System, which is the data mart component. Each of
Voyager and QueryObject System can operate independently and can also be
integrated with third party software applications.
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CROSSZ VOYAGER
The Voyager product line consists of data mining applications that
utilize multiple concurrent pattern recognition algorithms to analyze data from
throughout an enterprise, including data from RDBMS, data warehouses and other
data repositories, and to automatically design, prototype and compute the
economic value of a data mart. The Voyager product line operates on Windows 95
or Windows NT and comprises Voyager Live Trial, Voyager, Voyager Client and
Voyager Server.
Voyager Live Trial is a fully functional evaluation version of Voyager
with key limitations encrypted into the software. The product has a built in 60
day life span from the date of installation. The objective of Voyager Live Trial
is to demonstrate the functionality and benefits of Voyager so that the user
will upgrade to Voyager or Voyager Client and Server.
Voyager is a standalone edition of the Voyager product line that is
designed to process a small to moderate volume of records and rows on the
desktop. The principal functions of Voyager include:
- project set-up and management;
- data usability;
- business goal definition;
- correlation ranking of all useable input variables/columns of the
business goal; - multiple concurrent algorithm data mining; -
integration of data mining results with a QueryObject data cube
created on the fly; - data visualization functions for economic value
measurement and return on investment; and - machine readable output
of the data mart specification "blueprint."
Voyager Client/Server is designed for multiple concurrent users
processing moderate to large volumes of records and rows in a client server
configuration. Voyager Client is the user interface module that seamlessly
interacts with Voyager Server. Users work within the applications interface to
activate Voyager features through mouse clicks and familiar "drag and drop"
operations. Voyager Server is the engine component that encompasses and runs the
functional code which performs all Voyager functions as requested by the user
through Voyager Client.
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QUERYOBJECT SYSTEM
QueryObject System is a powerful OLAP data mart solution that
transforms mainframe size databases into highly compact and portable
mathematical representations that fit onto standard PC laptops. The following
table lists the QueryObject System line by configuration and operating system:
<TABLE>
<CAPTION>
=============================================================================================================================
PRODUCT Configuration Operating System
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC SYSTEM QueryObject DBA Client Win 95/NT
---------------------------------------------------------------------------------------------------
QueryObject Designer Client Win 3.1, 95/NT
---------------------------------------------------------------------------------------------------
QueryObject Engine Server MVS, UNIX, Win NT
---------------------------------------------------------------------------------------------------
QueryObject Open Client Win 3.1, 95/NT
- -----------------------------------------------------------------------------------------------------------------------------
OPTIONAL MODULES QueryObject Viewer Client Win 3.1, 95/NT
---------------------------------------------------------------------------------------------------
QueryObject Server Server Win NT, UNIX
---------------------------------------------------------------------------------------------------
QueryObject Web Server Win NT, UNIX
=============================================================================================================================
</TABLE>
QueryObject DBA (Data Base Administrator) provides a Windows based
environment to manage the process of reading, synchronizing and staging source,
atomic level data in QueryObject System. Using standard drag and drop actions,
data administrators can map their source data into the QueryObject System
repository, the QueryObject Ready File. The Company believes that QueryObject
DBA users benefit from working with a graphical tool that understands the
complexities of both legacy and warehouse data.
QueryObject Designer enables end users to design and build their own
QueryObjects. Working in a familiar Windows environment, users create
QueryObjects by selecting a subset of the fields from the QueryObject Ready file
using a drag and drop interface. The Company believes that the end user benefits
from an environment that requires no programming, gives a visual representation
as to how the Query Object will look, and is able to process hundreds of
millions of data records.
QueryObject Engine is designed to work with large quantities of data,
reads a variety of data formats and processes the data first into an analytical
repository, and then into multiple QueryObjects. From this staging area,
multiple QueryObjects are produced in an efficient manner on the server. The
Company believes that users are protected from the server environment by using
QueryObject DBA and QueryObject Designer, yet they gain the power of a server
behind their business intelligence system. QueryObject Engine runs on a wide
variety of server platforms from MVS to UNIX to Windows/NT. The resulting
QueryObject can be moved to a user's individual personal computer or managed by
the QueryObject Server.
Unlike other data mart systems which require significant amounts of
preprocessing and data aggregation, the QueryObject Engine is able to perform
these tasks automatically for each QueryObject. The Company believes that the
ability to store and build QueryObject from detail level data allows the user to
explore his data without the constraints of pre-aggregated data sets that might
not represent the data in the manner that the user requires for a particular
business challenge.
QueryObject Open contains an Open Database Connectivity (ODBC)
interface that allows end users to work within a familiar environment as an
alternative to QueryObject Viewer.
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QueryObject Viewer is a multidimensional database browser that allows
users to segment and filter their database. Where other tools limit the number
of dimensions a user can analyze, or force the user to navigate predefined drill
down paths, QueryObject Viewer allows the user full access to the data for open
ended and wide-ranging exploration. QueryObject Viewer features three display
modes, including spreadsheets and graphics, which enable each user to select the
interface type with which they are most comfortable. Using standard Windows drag
and drop methods, users can customize their view of the data. Additionally, data
can be moved into other standard Windows packages.
QueryObject Server allows the enterprise to locate and manage
QueryObjects on a centralized server infrastructure. QueryObject Server provides
enhanced security and performance across multiple QueryObjects. Users may also
download QueryObjects from the server to their individual personal computers.
QueryObject WEB allows users to work from their existing web browsers
on the Internet or corporate intranets to obtain business intelligence from a
QueryObject. QueryObject WEB is a version of QueryObject Server that has been
modified to operate in a web environment.
SALES AND MARKETING
The Company markets and sells Voyager and QueryObject System through
its direct sales organization and intends to increase the proportion of sales
through indirect channel parties such as VARs and OEMs. The direct sales process
involves the generation of sales leads through direct mail and telemarketing or
requests for proposal from prospects. The Company's field sales force conducts
multiple presentations and demonstrations of its products to management and
users at the customer site as part of the direct sales effort. Sales cycles
generally last at least four months.
The Company's sales, marketing and related customer support services
organization consisted of 33 employees as of June 30, 1997. The sales staff is
based at the Company's corporate headquarters in Uniondale, New York and at
field sales offices in the metropolitan areas of Chicago, Miami, San Francisco
and London, England. To support its sales force, the Company engages in direct
mail solicitations, telesales and public relations and presents its products at
trade shows. The Company intends to use a portion of the proceeds from this
Offering to increase advertising and its participation in trade shows and other
promotional activities.
The Company employs sales and technical personnel who are teamed with
an inside sales specialist to support a designated account territory within a
specified geographic area. The team is responsible for creating and maintaining
local partner relationships and resolving channel conflicts. To ensure the
appropriate level of channel support, the direct sales force is compensated for
sales that are made through indirect channel partners and those that are made
directly to end users. The Company intends to use a portion of the proceeds of
this Offering to hire additional sales and marketing personnel. A separate
partnering and business development organization is responsible for the
recruitment and maintenance of OEMs and national and global VARs and business
partners. The Company will also use a portion of the proceeds of this Offering
to expand and develop its indirect channel partners.
The Company has entered into a VAR agreement with Amdahl Corporation
("Amdahl"), a leading provider of integrated enterprise computing solutions.
Amdahl markets the Amdahl Data Refinery for MVS, which product combines the
power of the Amdahl System/390 compatible mainframes and QueryObject System.
QueryObject System is marketed and supported by Amdahl and Amdahl's agents and
indirect channel partners around the world. Under the Company's agreement with
Amdahl, Amdahl is granted a non-exclusive license to use, copy, distribute and
sublicense QueryObject System worldwide. The Company is paid a percentage of
license fees generated by Amdahl with minimum commitments owed to the Company in
order to maintain the scope of Amdahl's distribution rights. The agreement
provides for standard confidentiality and non-disclosure obligations and commits
standard warranty and indemnification rights to Amdahl.
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The Company believes that a high level of customer support is important
to the successful marketing and sale of Voyager and QueryObject System.
Maintenance and support contracts, which are typically for twelve months, are
offered with the initial license, and may be renewed annually at a cost equal to
a fixed percentage of the total license fee paid. Telephone hotline support will
be complemented by an internet site that provides an interactive forum and a
repository for technical tips and skills.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part
on its ability to maintain and enhance its leadership in business intelligence
software technology and develop new products that meet an expanding range of
customer requirements. The Company's research and development organization is
divided into teams consisting of development engineers and quality assurance
engineers. The market addressed by the Company is very sensitive to product
quality and therefore the process is aimed at continuous improvement of product
quality. The product definition is based upon a consolidation of the
requirements from existing customers, from technical support and from
engineering. These are prioritized by the Company's management to fit business
priorities and to meet the Company's vision.
The Company intends to use a portion of the net proceeds of this
Offering for research and development including enhancements to existing
features and development of new features for Voyager and QueryObject System and
the salaries and related payroll costs of additional research and development
personnel.
The market for the Company's software is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. Therefore, the life cycles of the Company's products are difficult
to estimate. The Company's future success will depend upon its ability to
enhance on a timely basis its current products, develop and introduce new
products that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers.
As of June 30, 1997, the Company's research and development
organization consisted of 27 individuals, of which 14 are located in Europe and
are engaged as independent contractors. During fiscal 1995 and 1996, and the six
months ended June 30, 1997, research and development expenses were $1,357,381,
$1,791,597 and $1,197,731 or 48.6%, 94.1% and 241.9% of total revenues,
respectively. The Company will continue to commit substantial resources to
research and development in the future.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential in establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
The Company currently has several registered trademarks, and may seek
additional legal protection for its products and trade names. The Company has
invested substantial resources in registering the trademarks and developing
branded products and product lines. There can be no assurance that the steps
taken by the Company to protect these intellectual property assets will be
sufficient to deter misappropriation. Failure to protect these intellectual
property assets could have a material adverse effect on the Company's business
operations. Moreover, although the Company is not aware of any lawsuit alleging
the Company's infringement of intellectual property
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rights, there can be no assurance that any such lawsuit will not be filed
against the Company in the future or, if such lawsuit is filed, that the Company
would ultimately prevail.
The Company currently has no United States patents or corresponding
patent applications pending elsewhere. Furthermore, there can be no assurance
that others will not develop technologies that are similar or superior to the
Company's technology or design around any patents that may be owned in the
future by the Company. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of its products or to
obtain and use information that it regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights in the United States or abroad will
be adequate or that competitors will not independently develop similar
technology. The Company has entered into source code escrow agreements with a
limited number of its customers and VARs requiring release of source code. Such
agreements provide that such parties will have a limited, non-exclusive right to
use such code in the event that there is a bankruptcy proceeding by or against
the Company, if the Company ceases to do business or if the Company fails to
meet its contractual obligations. The provision of source code may increase the
likelihood of misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company with respect to Voyager or QueryObject
System or enhancements thereto. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays and require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition could be
materially adversely affected.
COMPETITION
The market in which the Company competes is intensely competitive,
highly fragmented and characterized by rapidly changing technology and a lack of
standards. The Company's current and prospective competitors offer a variety of
data mining and multidimensional data mart software solutions and generally fall
within five categories: (i) vendors of multidimensional database and analysis
software such as Oracle (Express) Arbor (Essbase) and Pilot Software (Pilot
Lightship Server); (ii) vendors of OLAP/relational database software such as
Informix (Metacube), Information Advantage (Decision Suite) and Holistic Systems
(Holos); (iii) vendors of desktop based data mining software, such as Business
Objects (BusinessMiner), Cognos (Scenario), Agnoss (Knowledge Seeker) and
DataMind (DataCruncher); (iv) vendors of server based multiprocessor data mining
software such as Thinking Machines (Darwin), Neovista (Neovista) and
Hyperparallel (Hyperparallel) and (v) vendors of vertical software applications
for budgeting and financial consolidation, such as Hyperion Software Corporation
(Hyperion and FYPlan) and consulting vendors such as Coopers & Lybrand, Arthur
Andersen and Deloitte & Touche, who focus on customer applications in the
telecommunications, banking, insurance and retail industries.
The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Also, certain current and potential competitors may have greater name
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recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects additional
competition as other established and emerging companies enter into the OLAP
software market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which would materially adversely
affect the Company's business, operating results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. The Company's current or future indirect
channel partners may establish cooperative relationships with current or
potential competitors of the Company, thereby limiting the Company's ability to
sell its products through particular distribution channels. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could
materially adversely affect the Company's ability to obtain new contracts and
maintenance and support renewals for existing contracts on terms favorable to
the Company. Further, competitive pressures may require the Company to reduce
the price of Voyager and QueryObject System, which would materially adversely
affect the Company's business, operating results and financial condition. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors, and the failure to do so would have a
material adverse effect upon its business, operating results and financial
condition.
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of use
and customer support. The Company believes it presently competes favorably with
respect to each of these factors. However, the Company's market is still
evolving and there can be no assurance that the Company will be able to compete
successfully against current and future competitors and the failure to do so
successfully will have a material adverse affect upon the its business,
operating results and financial condition.
EMPLOYEES
As of June 30, 1997, the Company had a total of 71 employees and
independent contractors, including 27 in research and development, of which 14
are located in Europe and are engaged as independent contractors, 33 in sales
and marketing and related customer support services and 11 in administration.
None of the Company's employees is represented by a collective bargaining
agreement, nor has the Company experienced any work stoppage.
The Company considers its relations with its employees to be good.
The Company's future operating results depend in significant part upon
the continued service of its key technical and senior management personnel. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will retain
its key managerial or technical personnel or attract such personnel in the
future. The Company has at times experienced and continues to experience
difficulty in recruiting qualified personnel and there can be no assurance that
the Company will not experience such difficulties in the future. The Company,
either directly or through personnel search firms, actively recruits qualified
research and development, financial and sales personnel. If the Company is
unable to hire and retain qualified personnel in the future, such inability
could have a material adverse effect on its business, operating results and
financial condition.
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FACILITIES
The Company leases 16,385 square feet of office space in Uniondale, New
York as its principal administrative, sales, marketing and research and
development facility. The Uniondale lease expires in 2004. The Company's total
lease payments for the current fiscal year will be approximately $310,135. The
Company also has month-to-month leases in Chicago, Miami, San Francisco and
London, England, where it maintains sales offices. The Company believes that its
existing facilities are adequate for its current needs but anticipates that it
will need additional space by the end of 1997. The Company believes that such
additional space will be available on commercially reasonable terms.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The officers and directors of the Company, and their ages and positions
with the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Mark A. Chroscielewski 40 Chairman of the Board, President and Chief
Executive Officer
Andre Szykier 53 Executive Vice President, Chief Technology
Officer and Director
Daniel M. Pess 44 Vice President of Finance and
Administration, Chief Financial Officer and
Secretary
Robert A. Thompson 48 Vice President of Marketing
Deepak Mohan 35 Vice President of Engineering
Scott Jones 42 Director
Alan Kaufman 58 Director
Rino Bergonzi 51 Director
Mark A. Chroscielewski, co-founder of the Company, has served as its
Chairman of the Board, President and Chief Executive Officer since the inception
of the Company in February 1989. Prior to co-founding the Company, Mr.
Chroscielewski was Vice President and Second Vice President in charge of
corporate business intelligence for Citibank and Chase Manhattan Bank. Mr.
Chroscielewski holds a B.B.A. in Business Administration from Baruch College,
where he majored in computer sciences and marketing. Messrs. Chroscielewski and
Szykier are first cousins.
Andre Szykier, co-founder of the Company, has served as its Executive
Vice President and Chief Technology Officer since the inception of the Company
in February 1989. Prior to co-founding the Company, Mr. Szykier was Director of
Business Research at Pacific Telesis Group, founder and Chief Executive Officer
of Elan Vital Research Ltd., a software engineering and consulting firm, and was
a mathematician at Bell Labs, where he obtained a patent on signal compression
and worked on interplanetary missions. Mr. Szykier holds an M.S. in Applied
Statistics from the University of California-Berkeley and a B.S. in Economics
from St. Mary's University. Messrs. Chroscielewski and Szykier are first
cousins.
Daniel M. Pess joined the Company in July 1994 as Vice President of
Finance and Administration. Since December 1996, Mr. Pess has also served as
Chief Financial Officer of the Company and since August 1997 Mr. Pess has served
as Secretary of the Company. From 1991 to July 1994, Mr. Pess was Corporate
Controller of Uniforce Services, Inc., a supplemental staffing company. From
1986 to 1991, Mr. Pess was employed as Chief Financial Officer and Controller of
The Dartmouth Plan, Inc., a financial institution involved in mortgage and
leasing origination, sales and service. Mr. Pess is a Certified Public
Accountant and holds a B.S. in Accounting from C.W.
Post College of Long Island University.
Robert A. Thompson will join the Company in September 1997 as Vice
President of Marketing. From January 1989 to August 1997, Mr. Thompson was
employed by Cognos Corporation, a provider of client/server tools
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for data access, data analysis and application development, most recently as
Director of RealObjects Market Development. Mr. Thompson holds a B.A.A. in Radio
and Television Arts from Ryerson Politechnical Institute.
Deepak Mohan joined the Company in April 1997 as Vice President of
Engineering. From September 1987 to April 1997, Mr. Mohan was employed by
Cheyenne Software, Inc. ("Cheyenne"), a provider of storage management, security
and communications software products, most recently as Director of Business and
Technology. Mr. Mohan holds a M.S. in Computer Sciences from New York
University, a M.S. in Chemical Engineering from the City College of New York and
a B.S. in Chemical Engineering from the Indian Institute of Technology.
Scott Jones has been a director of the Company since 1992. Mr. Jones
has been a private as well as institutional investor since 1986, and previous to
that time was employed by General Electric Company, Motorola, Inc. and several
private companies in a variety of managerial positions. Mr. Jones currently
serves on the boards of five other private companies in the high technology
arena. Mr. Jones holds an MBA from The University of Chicago and a BSEE from
Stanford University.
Alan Kaufman has been a director of the Company since August 1997. Mr.
Kaufman has been an independent consultant since December 1996. From April 1986
to December 1996, Mr. Kaufman held various positions with Cheyenne, including
Vice President of Marketing and Vice President of Sales and Marketing, and
served most recently as Executive Vice President of Sales. Mr. Kaufman is a
director of Global Telecommunication Solutions, Inc., a publicly traded prepaid
phone card company, and was the founding President of the New York Software
Industry Association.
Rino Bergonzi has been a director of the Company since August 1997.
Since November 1993, Mr. Bergonzi has served as Vice President and Division
Executive of Corporate Information Technology Services at AT&T, and has 25 years
of experience in the information services field that includes working for such
companies as Western Union, United Parcel Service Information Services and EDS
Corp. Mr. Bergonzi is a director of Enteractive Inc., a public company which
provides internet services and publishes multimedia titles to the home.
All directors of the Company hold office until the next annual meeting
of the stockholders and until their successors have been elected and qualified.
The officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold office
until their death, until they resign or until they have been removed from
office.
The Board of Directors has recently formed a Stock Option and
Compensation Committee that administers the Stock Option Plan and approves the
salaries, incentive compensation for employees of and consultants to the
Company, and an Audit Committee which reviews the results and scope of the audit
and other services provided by the Company's independent accountants. The Stock
Option and Compensation Committee will be composed of Messrs. Kaufman and
Bergonzi and the Audit Committee is composed of Messrs. Kaufman and Bergonzi.
The Company has purchased and intends to maintain a "key person" life
insurance policy in the amount of five million dollars on the life of Mr.
Chroscielewski.
DIRECTOR COMPENSATION
The Company does not currently compensate directors who are also
employees of the Company for service on the Board of Directors. Directors are
reimbursed for their expenses incurred in attending meetings of the Board of
Directors. In connection with his service as a director of the Company, Scott
Jones received options to purchase 12,500 shares of Common Stock at an exercise
price of $0.48 per share. The Company intends to grant Rino Bergonzi and Alan
Kaufman options to purchase 12,500 shares of Common Stock at an exercise price
equal to the Offering price of the Shares. During the one year following the
consummation of this Offering, the Company intends to grant each new
non-employee Director, if any, options to
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<PAGE>
purchase 12,500 shares of Common Stock at an exercise price equal to the lesser
of the Offering price of the Shares or the fair market value on the date of
grant.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid by the Company during the fiscal year ended December 31, 1996 to Mark A.
Chroscielewski, the Company's Chairman of the Board, Chief Executive Officer and
President of the Company, Andre Szykier and Daniel M. Pess, the Company's only
other the executive officers whose salary and bonus exceeded $100,000 with
respect to the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
================================================================================================================================
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
AWARDS
- --------------------------------------------------------------------------------------------------------------------------------
SECURITIES
NAME AND UNDERLYING
PRINCIPAL POSITION ANNUAL COMPENSATION(1) BONUS($) OPTIONS(#)
-----------------------------------
YEAR SALARY($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark A. Chroscielewski, 1996 $150,000(2) $-- --
Chairman of the Board,
Chief Executive Officer
and President
- --------------------------------------------------------------------------------------------------------------------------------
Andre Szykier, 1996 $150,000(2) $-- --
Executive Vice President and
Chief Technology Officer
- --------------------------------------------------------------------------------------------------------------------------------
Daniel M. Pess 1996 $100,000 $10,000(3) 2,500
Vice President of Finance
and Administration, Chief
Financial Officer and Secretary
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain of the officers of the Company routinely receive other benefits
from the Company, including travel reimbursement, the amounts of which
are customary in the industry. The Company has concluded, after
reasonable inquiry, that the aggregate amounts of such benefits during
1996 did not exceed the lesser of $50,000 or 10% of the compensation
set forth above as to any named individual.
(2) Mr. Chroscielewski and Mr. Szykier each agreed to defer the payment of
$10,417 of such compensation.
(3) All of such amount was paid in 1997.
The following table sets forth certain information regarding stock
option grants made to the Named Executive Officers during the fiscal year ended
December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
===============================================================================================================================
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME GRANTED(#) IN FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel M. Pess 2,500 1.5 $.48 February 26, 2001
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
No options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1996.
The following table sets forth certain information regarding
unexercised stock options held by Daniel M. Pess, the only Named Executive
Officer who held unexercised stock options as of December 31, 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
=====================================================================================================================
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1996 OPTIONS AT DECEMBER 31, 1996 (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Daniel M. Pess 9,097/5,903 $59,312/$38,488
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on an assumed initial public offering price of the Common Stock
of $7.00 per share, the mid-point of the estimated initial public
offering range, as the fair market value.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors of the Company made all compensation
decisions regarding compensation of executive officers during the Company's 1996
fiscal year. During such period, Messrs. Chroscielewski and Szykier were
executive officers and directors of the Company. For information concerning
transactions with the Directors of the Company and entities affiliated with
certain Directors, see "Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Mark A.
Chroscielewski, its Chief Executive Officer and President, Andre Szykier, its
Executive Vice President and Chief Technology Officer, Daniel M. Pess, its Vice
President of Finance and Administration, and Chief Financial Officer, Robert A.
Thompson, its Vice President of Marketing, and Deepak Mohan, its Vice
President-Engineering. Each of Messrs. Chroscielewski, Szykier, Pess, Thompson
and Mohan's employment agreements provide for an initial term through December
31, 1999, December 31, 1998, April 30, 1999, August 31, 1999 and April 21, 1999,
respectively. The annual base cash compensation for each of Messrs.
Chroscielewski, Szykier, Pess, Thompson and Mohan under their respective
employment agreements is $150,000, $150,000, $125,000, $145,000 and $150,000,
respectively. Each of Messrs. Chroscielewski, Szykier and Thompson can also
receive a bonus if the Company meets certain operating targets agreed upon each
fiscal year in advance by the Board of Directors and Mr. Pess can also receive a
bonus of not less than $10,000 if he meets targets agreed upon each fiscal year
in advance by the Board of Directors. Each of Messrs. Chroscielewski, Szykier
and Pess's employment agreements entitle each of them to receive his full salary
for twelve months upon termination, unless such employment agreement is
terminated for cause, disability or death. Each of Messrs. Thompson and Mohan's
employment agreements entitle each of them to receive his full salary for six
months upon termination, unless such employment agreement is terminated for
cause, disability or death. Each of Messrs. Chroscielewski and Szykier has
agreed not to compete with the Company for a period of two years after
termination and each of Messrs. Pess, Thompson and Mohan has agreed not to
compete with the Company for a period of one year after termination. All such
employment agreements are for full-time employment and are automatically
renewable for additional periods unless either party terminates such employment
agreement at least 60 days prior to the expiration of the initial term or any
subsequent term. In addition upon the execution of their employment agreements,
Mr. Mohan and Mr. Thompson are entitled to receive options to purchase 25,000
shares and 100,000 shares of Common Stock, respectively, at an exercise price
equal to the Offering price.
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<PAGE>
1991 INCENTIVE STOCK OPTION PLAN
The Plan was adopted to attract and retain employees and currently
provides for the issuance of options to purchase up to an aggregate of 1,300,000
shares of Common Stock. To date, options to purchase 282,725 shares of Common
Stock are outstanding under the Plan, of which options to purchase 217,880
shares of Common Stock are currently exercisable, at a weighted average exercise
price of $0.57 per share. Under the Plan, options to purchase shares of Common
Stock may be granted to any employee or consultant.
Options granted to employees may be either incentive stock options
("ISO") meeting requirements of Section 422 of the Internal Revenue Code of
1986, as amended ("Code"), or non-qualified stock options ("NQSOs") not meeting
the requirements of Section 422 of the Code. Options granted to consultants
shall be NQSOs. The Plan is currently administered by the Stock Option and
Compensation Committee, which is generally empowered to interpret the Plan,
prescribe rules and regulations relating thereto and determine the individuals
to whom options are to be granted. The exercise price of all ISOs and NQSOs
granted under the Plan within one year after this Offering will not be less than
the greater of the Offering Price of the Common Stock or 100% of the fair market
value of the Common Stock on the date of grant. Thereafter, the exercise price
of all ISOs granted under the Plan will be at least 100% of the fair market
value on the date of grant and the exercise price of all NQSOs granted under the
Plan will be at least 85% of the fair market value of the Common Stock on the
date of grant.
The Board of Directors may modify, suspend or terminate the Plan;
provided, however, that certain material modifications affecting the Plan must
be approved by the stockholders and any change in the Plan that may adversely
affect the optionee's rights under an option previously granted under the Plan
requires the consent of the optionee.
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<PAGE>
CERTAIN TRANSACTIONS
From time to time, the Company has raised capital through the sale of
debt and equity securities. Many of the investors in such offerings have been
officers, directors and entities associated with directors, and beneficial
owners of 5% or more of the Company's securities. In each transaction, such
persons participated on terms no more favorable than those offered to all other
investors. All share information in the Series C Private Placement, the Series D
Private Placement and the conversion of certain debt owed by the Company to
officers into equity reflect the Preferred Stock Conversion.
PREFERRED STOCK PRIVATE PLACEMENTS
At the end of 1995 through March 1996, the Company consummated the
Series C Private Placement whereby it issued the equivalent of 517,005 shares of
Common Stock at a per share offering price of $4.28 and issued Series C Warrants
to purchase the equivalent of an aggregate of 263,702 shares of Common Stock at
an exercise price of $4.28 per share. Among the purchasers in the Series C
Private Placement were (i) Scott Jones, a director of the Company (who purchased
1,589 shares of Common Stock), (ii) Maximillian Partner's I, a limited
partnership in which Mr. Jones is a general partner (which purchased 7,310
shares of Common Stock), (iii) Dwight E. Lee, who may be deemed to be the
beneficial owner of more than 5% of the outstanding Common Stock (who purchased
7,310 shares of Common Stock and received Series C Warrants to purchase the
equivalent of 3,058 shares of Common Stock), and (iv) Namakagon Associates,
Barker, Lee & Co., Upland Associates L.P. and J.M.R. Barker Foundation, each of
which are limited partnerships in which Mr. Lee is a general partner (which
limited partnerships purchased an aggregate of 235,421 shares of Common Stock
and Series C Warrants to purchase the equivalent of an aggregate of 152,318
shares of Common Stock).
Between May and August 1996, the Company consummated the Series D
Private Placement whereby it issued the equivalent of 2,635,501 shares of Common
Stock (after accounting for the conversion of all Series D Preferred Stock into
Common Stock, including dividends that accrued through June 30, 1997) at a per
share offering price of $4.28 per share and issued Series D Warrants to purchase
the equivalent of an aggregate of 68,106 shares of Common Stock at an exercise
price of $4.28 per share. Among the purchasers in the Series D Private Placement
were (i) Scott Jones (who purchased 9,634 shares of Common Stock), (ii) Wheatley
Partners, L.P. ("Wheatley") and Wheatley Foreign Partners, L.P. ("Wheatley
Foreign"), entities that beneficially own more than 5% of the outstanding Common
Stock (which purchased an aggregate of 650,684 shares of Common Stock and
received Series D Warrants to purchase the equivalent of 12,499 shares of Common
Stock), (iii) Maximillian Partner's II, a limited partnership in which Mr. Jones
is a general partner (which purchased 2,083 shares of Common Stock), and (iv)
Brentwood Associates L.P. VII ("Brentwood"), an entity that beneficially owns
more than 5% of the outstanding Common Stock (which purchased 696,741 shares of
Common Stock). Barry Rubenstein and Irwin Lieber may be deemed to be the owners
of more than 5% of the outstanding Common Stock by virtue of being members and
officers of Wheatley Partners, LLC, a Delaware limited liability company which
is the general partner of Wheatley, and also a general partner of Wheatley
Foreign. In addition, limited partnerships in which Mr. Rubenstein is a general
partner purchased in the Series D Private Placement an aggregate of 260,400
shares of Common Stock at a per share purchase price of $4.28 and received
Series D Warrants to purchase an aggregate of 12,500 shares of Common Stock.
INTERIM FINANCINGS
In May 1997, in connection with the First Interim Financing, Wheatley
and Wheatley Foreign purchased $458,341 and $41,659 principal amounts of the
First Interim Financing Notes, respectively.
In June 1997, in connection with the Third Interim Financing, Brentwood
purchased $250,000 principal amount of the Third Interim Financing Note and
received warrants to purchase 8,412 shares of Common Stock.
In July 1997, the Company consummated the Bridge Financing. As part of
such Bridge Financing, the Company repaid the First Interim Financing Notes. In
addition, Brentwood converted its Third Interim Financing
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<PAGE>
Notes into Bridge Notes and Bridge Warrants and accordingly received $250,000
principal amount of Bridge Notes, Bridge Warrants to purchase 83,333 Bridge
Warrant Shares.
OFFICER, DIRECTOR AND 5% SHAREHOLDERS' TRANSACTIONS
Pursuant to the Loan Agreement with HCC, the Company has outstanding
borrowings in the aggregate principal amount of approximately $951,000, such
indebtedness being secured by a security interest in and lien on all of the
Company's assets. Pursuant to an addendum ("Addendum") to the Loan Agreement,
HCC has agreed that it will not demand payment under the Loan Agreement until
the earlier of March 31, 1998, a material breach by the Company under the
Addendum or an event of default under the Loan Agreement. The Company is
obligated under the Addendum to pay HCC each month $10,000 plus accrued interest
on the outstanding balance under the Loan Agreement. Herbert C. Clough, a
principal of HCC, is the father-in-law of James S. Thompson, a 5% stockholder
and former director of the Company.
In May 1996, Mark A. Chroscielewski, Andre Szykier and James S.
Thompson, executive officers, directors and/or 5% shareholders of the Company,
each agreed to convert $261,653, $223,617, and $235,496 of debt owed to them by
the Company relating to payroll and benefit obligations into 61,134, 52,247 and
55,023 shares of Common Stock respectively.
The Company has adopted a policy whereby all future transactions
between the Company and its officers, directors, principal stockholders or
affiliates, will be approved by a majority of the Board of Directors, including
all of the independent and disinterested members of the Board of Directors or,
if required by law, a majority of disinterested stockholders, and will be on
terms no less favorable to the Company than could be obtained in arm's length
transactions from unaffiliated third parties.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of the date of this
Prospectus for (i) each person who is known by the Company to beneficially own
more than 5% of the outstanding Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers and (iv) all directors and
executive officers as a group. Unless otherwise indicated, the address for
directors, executive officers and 5% stockholders is 60 Charles Lindbergh
Boulevard, Uniondale, New York 11553.
<TABLE>
<CAPTION>
Percentage
Number of
Shares
Beneficially Before After
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS OWNED(1) OFFERING OFFERING
- ------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Barry Rubenstein (2)...................................... 1,054,833 19.8% 13.5%
68 Wheatley Road
Brookville, New York 11545
Irwin Lieber (3).......................................... 775,683 14.6% 9.9%
767 Fifth Avenue, 45th Floor
New York, New York 10153
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage
Number of
Shares
Beneficially Before After
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS Owned(1) Offering Offering
- ------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
John Walecka (4) ......................................... 721,741 13.9% 9.4%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Brentwood Associates, L.P. VII (5)........................ 696,741 13.5% 9.1%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Wheatley Foreign Partners, L.P. (6)....................... 663,183 12.8% 8.6%
c/o Fiduciary Trust
One Capital Place
Shedden Road
P.O. Box 1062
Grand Cayman
British West Indies
Wheatley Partners, L.P. (6)............................... 663,183 12.8% 8.6%
80 Cutter Mill Road
Great Neck, New York 11021
Mark A. Chroscielewski (7)................................ 444,567 8.6% 5.8%
Andre Szykier (8)......................................... 425,670 8.2% 5.5%
Dwight E. Lee (9)......................................... 410,607 7.7% 5.2%
James S. Thompson ........................................ 309,658 6.0% 4.0%
Scott Jones (10).......................................... 72,055 1.4% *
Daniel M. Pess (11)....................................... 19,307 * *
Alan Kaufman (12)......................................... 0 * *
Rino Bergonzi (12)........................................ 0 * *
All directors and executive officers as a group (6 persons)
(13)...................................................... 961,599 18.7% 12.7%
</TABLE>
* Less than one percent
(1) A person is deemed to be the beneficial owner of voting securities that
can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined
by assuming that options, warrants or convertible securities that are
held by such person (but not those held by any other person) and which
are currently exercisable (i.e., that are exercisable within 60 days of
the date of this Prospectus) have been exercised. Unless otherwise
noted, the Company believes that all persons named in the table have
sole voting and investment power with respect to all shares
beneficially owned by them.
(2) Includes (i) 112,500 shares of Common Stock issuable upon exercise of
currently exercisable options, (ii) 78,120 shares of Common Stock and
6,250 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Woodland Partners of which Mr. Rubenstein
is a partner, (iii) 104,160 shares of Common Stock and 6,250 shares of
Common Stock issuable upon exercise of currently exercisable warrants
owned by the Woodland Venture Fund of which Mr. Rubenstein is a general
partner, (iv) 78,120
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<PAGE>
shares of Common Stock and 6,250 shares of Common Stock issuable upon
exercise of currently exercisable warrants owned by Seneca Ventures of
which Mr. Rubenstein is a general partner, (v) 614,227 shares of Common
Stock and 11,758 shares of Common Stock issuable upon exercise of
currently exercisable warrants owned by Wheatley Partners, L.P. and
(vi) 36,457 shares of Common Stock and 741 shares of Common Stock
issuable upon exercise of currently exercisable warrants owned by
Wheatley Foreign. Mr. Rubenstein is a member and officer of Wheatley
Partners LLC, a Delaware limited liability company which is the general
partner of Wheatley Partners, L.P. and also a general partner of
Wheatley Foreign. Mr. Rubenstein disclaims beneficial ownership of the
securities owned by Woodland Partners, Woodland Venture Fund, Seneca
Ventures, Wheatley Partners, L.P. and Wheatley Foreign Partners, L.P.
except to the extent of his equity interest therein.
(3) Includes (i) 112,500 shares of Common Stock issuable upon exercise of
currently exercisable options and (ii) 614,227 shares of Common Stock
and 11,758 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Wheatley Partners, L.P. and 36,457 shares
of Common Stock and 741 shares of Common Stock issuable upon exercise
of currently exercisable warrants owned by Wheatley Foreign Partners,
L.P. Mr. Lieber is a member and officer of Wheatley Partners LLC. Mr.
Lieber disclaims beneficial ownership of the securities owned by
Wheatley Partners, L.P. and Wheatley Foreign Partners, L.P. except to
the extent of his equity interest therein.
(4) Includes (i) 25,000 shares of Common Stock issuable upon exercise of
currently exercisable options and (ii) 696,741 shares of Common Stock
owned by Brentwood Associates L.P. VII, of which Mr. Walecka is a
general partner. Does not include 8,412 shares of Common Stock
underlying options or warrants that are not currently exercisable. Mr.
Walecka disclaims beneficial ownership of the securities owned by
Brentwood Associates L.P. VII except to the extent of his equity
interest therein.
(5) Does not include 8,412 shares of Common Stock underlying warrants that
are not currently exercisable.
(6) Includes (i) 614,227 shares of Common Stock and 11,758 shares of Common
Stock issuable upon exercise of currently exercisable warrants owned by
Wheatley Partners, L.P. and (ii) 36,457 shares of Common Stock and 741
shares of Common Stock issuable upon exercise of currently exercisable
warrants owned by Wheatley Foreign Partners, L.P. Such entities are
controlled by Wheatley Partners, LLC, a Delaware limited liability
company which is the general partner of Wheatley Partners, L.P., and
also a general partner of Wheatley Foreign. The members and officers of
Wheatley Partners LLC include Barry Rubenstein, Irwin Lieber, Barry
Fingerhut, Seth Lieber, Jonathan Lieber and Matthew Smith.
(7) Includes 1,250 shares of Common Stock issuable upon exercise of
currently exercisable options owned by Diana Chroscielewski, Mr.
Chroscielewski's spouse.
(8) Includes 625 shares of Common Stock owned by Remy Szykier, Mr.
Syzkier's daughter.
(9) Includes (i) 12,500 shares of Common Stock issuable upon exercise of
currently exercisable options and 3,058 shares of Common Stock issuable
upon exercise of currently exercisable warrants, (ii) 58,981 shares of
Common Stock and 42,617 shares of Common Stock issuable upon exercise
of currently exercisable warrants owned by Barker, Lee & Co., of which
Mr. Lee is a general partner, (iii) 33,145 shares of Common Stock and
22,837 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by the J.M.R. Barker Foundation, of which
Mr. Lee is a Vice President, (iv) 84,815 shares of Common Stock and
62,397 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Namakagon Associates, L.P., of which Mr.
Lee is a general partner, and (v) 58,480 shares of Common Stock and
24,467 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Upland Associates, L.P., of which Mr. Lee
is a general partner. Mr. Lee disclaims beneficial ownership of the
securities owned by Barker, Lee & Co., the J.M.R. Barker Foundation,
Namakagon Associates, L.P. and Upland Associates, L.P. except to the
extent of his equity interest therein.
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<PAGE>
(10) Includes (i) 12,500 shares of Common Stock issuable upon exercise of
currently exercisable options, (ii) 7,310 shares of Common Stock owned
by Maximillian Partner's I, of which Mr. Jones is a general partner and
(iii) 6,022 shares of Common Stock owned by Maximillian Partner's II,
of which Mr. Jones is a general partner. Mr. Jones disclaims beneficial
ownership of the securities owned by Maximillian Partner's I and
Maximillian Partner's II except to the extent of his equity interest
therein.
(11) Includes 19,307 shares of Common Stock issuable upon exercise of
currently exercisable options. Does not include 8,193 shares of Common
Stock underlying options that are not currently exercisable.
(12) Does not include 12,500 shares of Common Stock underlying options that
are not currently exercisable.
(13) Includes those shares of Common Stock deemed to be included in Messrs.
Chroscielewski, Szykier, Pess and Jones respective beneficial ownership
as described in notes 7, 8, 10 and 11 above. Does not include 33,193
shares of Common Stock underlying options that are not currently
exercisable.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company comprises 32,000,000
shares, consisting of 30,000,000 shares of Common Stock, $.001 par value per
share and 2,000,000 shares of preferred stock, $.001 par value per share. As of
June 30, 1997 there were 5,172,961 shares of Common Stock outstanding after
giving effect to the Preferred Stock Conversion and the Warrant Exercise. Upon
the completion of this Offering there will be 7,672,961 shares of Common Stock
outstanding, after giving effect to the Preferred Stock Conversion. After giving
effect to the issuance of an additional 79,353 shares of Common Stock issuable
upon the conversion of Outstanding Preferred Stock as the result of dividends
which accrue between July 1, 1997 and October 31, 1997, there will be 7,752,314
shares of Common Stock outstanding upon completion of this Offering. No shares
of Preferred Stock will be outstanding after the date hereof.
DESCRIPTION OF COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held on all matters to be voted on by such stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted can elect all of the directors then
being elected. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for the Outstanding Preferred Stock and any
other class of stock, if any, having preference over the Common Stock. Holders
of shares of Common Stock, as such, have no redemption, preemptive or other
subscription rights, and there are no conversion provisions available to the
Common Stock.
DESCRIPTION OF PREFERRED STOCK
Prior to the closing of this Offering there were 2,947,334 shares of
Outstanding Preferred Stock. Prior to the closing of this Offering, all
Outstanding Preferred Stock will be converted into an aggregate of 3,299,505
shares of Common Stock, after giving effect to all accrued and unpaid dividends
through June 30, 1997 (or 3,378,858 shares of Common Stock after giving effect
to dividends which accrued on the Outstanding Preferred Stock between July 1,
1997 and October 31, 1997). Subsequent to the Preferred Stock Conversion, the
Company's authorized shares of Preferred Stock may be issued in one or more
series, and the Board of Directors is authorized, without further action by the
Stockholders, to designate the rights, preferences, limitations and restrictions
of and upon shares of each series, including dividend, voting, redemption and
conversion rights. The Board of Directors also may designate par value,
preferences in liquidation and the number of shares constituting any series. The
Company believes that the availability of Preferred Stock issuable in series
will provide increased flexibility for structuring possible future
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<PAGE>
financings and acquisitions, if any, and in meeting other corporate needs. It is
not possible to state the actual effect of the authorization and issuance of any
series of Preferred Stock upon the rights of holders of Common Stock until the
Board of Directors determines the specific terms, rights and preferences of a
series of Preferred Stock. However, such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, or impairing liquidation rights of such shares without further
action by holders of the Common Stock. In addition, under various circumstances,
the issuance of Preferred Stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the assumption
of control by a holder of a large block of the Company's securities or the
removal of incumbent management. Issuance of Preferred Stock could also
adversely effect the market price of the Common Stock. The Company has no
present plans to issue any additional shares of Preferred Stock.
BRIDGE WARRANTS
The Bridge Warrants are exercisable at an initial exercise price of
$4.28 per share, commencing July 30, 1998 and expiring at the close of business,
on July 30, 2003. Each Bridge Warrant is initially exercisable into 33,333
Bridge Warrant Shares. In the event that the offering price of the shares is
less than $8.00 per share ("Reduced Price"), then the aggregate number of Bridge
Warrant Shares issuable upon exercise of a Bridge Warrant will be increased to
the lesser of (i) 1.5 times 33,333 and (ii) the quotient obtained by dividing
(a) $3.72 times 33,333 by (b) the difference between the Reduced Price and $4.28
up to a maximum of 16,667 additional Shares per Warrant (or an aggregate of
716,681 Bridge Warrant Shares).
A holder of Bridge Warrants will not have any rights, privileges or
liabilities as a stockholder of the Company prior to exercise of the Bridge
Warrants. The Company is required to keep available a sufficient number of
authorized shares of Common Stock to permit exercise of the Bridge Warrants.
The exercise price of the Bridge Warrants and the number of shares
issuable upon exercise of the Bridge Warrants will be subject to adjustment to
protect against dilution in the event of a merger, acquisition,
recapitalization, or split-up of the Common Stock, the issuance of a stock
dividend or any similar event. No assurance can be given that the market price
of the Company's Common Stock will exceed the exercise price of the Bridge
Warrants at any time during the exercise period. The Company has registered the
issuance of the shares of Common Stock underlying the Bridge Warrants on the
Registration Statement of which this Prospectus forms a part and has agreed to
maintain the effectiveness of the Registration Statement of which this
Prospectus forms a part until the expiration of the Bridge Warrants.
Notwithstanding that the Common Stock underlying the Bridge Warrants are being
registered, the holders of the Bridge Warrants have agreed that none of such
shares of Common Stock or the Bridge Warrants may be sold prior to thirteen
months following the consummation of the Offering without the prior written
consent of the Underwriter.
OTHER WARRANTS
In addition to the Bridge Warrants, the Company has issued (i) the
Series C Warrants to purchase the equivalent of an aggregate of 263,702 shares
of Common Stock at an exercise price of $4.28 per share, (ii) Series D Warrants
to purchase the equivalent of an aggregate of 68,106 shares of Common Stock at
an exercise price of $4.28, (iii) Series B Warrants to purchase an aggregate of
15,751 shares of Common Stock at an exercise price of $6.28, (iv) Series B
warrants to purchase an aggregate of 5,625 shares of Common Stock at an exercise
price of $11.00, and (v) warrants to purchase an aggregate of 79,078 shares of
Common Stock at an exercise price of $4.28.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Certificate of Incorporation, as amended, limits the personal
liability of a director or officer to the Company for monetary damages for
breach of fiduciary duty of care as a director. Liability is not eliminated for
(i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional
-48-
<PAGE>
misconduct or a knowing violation of law, (iii) unlawful payment of dividends or
stock purchases or redemptions pursuant to Section 174 of the DGCL, or (iv) any
transaction from which the director derived an improper personal benefit.
The Company has also entered into indemnification agreements with each
of its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly-held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. A "business combination" includes mergers, stock or asset sales and
other transactions resulting in a financial benefit to the interested
stockholder.
The provisions of Section 203 of the DGCL could have the effect of
delaying, deferring or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for the Common Stock is
Continental Stock Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
7,672,961 shares of Common Stock (or 7,752,314 shares of Common Stock after
giving effect to dividends which accrued on Outstanding Preferred Stock between
July 1, 1997 and October 31, 1997), not including shares of Common Stock
issuable upon exercise of outstanding options and warrants, and assuming no
exercise of the over-allotment option granted to the Underwriters. Of those
shares, the 2,500,000 shares of Common Stock sold to the public in the Offering
(2,875,000 if the Underwriters' over-allotment is exercised in full) may be
freely traded without restriction or further registration under the Securities
Act, except for any shares that may be held by an "affiliate" of the Company (as
that term is defined in the rules and regulations under the Securities Act)
which may be sold only pursuant to a registration under the Securities Act or
pursuant to an exemption from registration under the Securities Act, including
the exemption provided by Rule 144 adopted under the Securities Act.
-49-
<PAGE>
The 5,172,961 (or 5,252,314 shares of Common Stock after giving effect
to dividends which accrued on Outstanding Preferred Stock between July 1, 1997
and October 31, 1997) shares of Common Stock outstanding prior this Offering are
restricted securities as that term is defined in Rule 144 ("Restricted Shares")
and may not be sold unless such sale is registered under the Securities Act or
is made pursuant to an exemption from registration under the Securities Act,
including the exemption provided by Rule 144. In general, under Rule 144, a
shareholder (or shareholders whose shares are aggregated) who has beneficially
owned any restricted securities for at least one year (including a shareholder
who may be deemed to be an affiliate of the Company), will be entitled to sell,
within any three-month period, that number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of such sale is given to the Commission,
provided certain public information, manner of sale and notice requirements are
satisfied. A shareholder who is deemed to be an affiliate of the Company,
including members of the Board of Directors and executive officers of the
Company, will still need to comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of Common Stock that are not restricted securities, unless such sale is
registered under the Securities Act. A shareholder (or shareholders whose shares
are aggregated) who is deemed not to have been an affiliate of the Company at
any time during the 90 days preceding a sale by such shareholder, and who has
beneficially owned restricted securities for at least two years, will be
entitled to sell such restricted securities under Rule 144 without regard to the
volume limitations described above.
A total of 1,735,267 of the Restricted Shares may be sold pursuant to
Rule 144 beginning on the date of this Prospectus, 3,306,404 Shares (or
3,385,757 Restricted Shares after giving affect to dividends which accrue on
Outstanding Preferred Stock between July 1, 1997 and October 31, 1997) may be
sold beginning 90 days thereafter and the remaining 131,290 restricted
securities may be sold at various periods, beginning 90 days from the date of
this Prospectus until thirteen months from the date of this Prospectus, subject
to the Lock-Up Agreements discussed below. All holders of the Restricted Shares
of the Company's Common Stock have been requested, as a condition to the closing
of this Offering, to enter into certain agreements that they will not sell any
Common Stock owned by them without the prior written consent of the
Representatives for a period of thirteen months from the date of this
Prospectus.
Prior to this Offering, there has been no public trading market for the
Common Stock, and no predictions can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market could adversely affect the
then-prevailing market price.
UNDERWRITING
The Underwriters named herein for whom GKN and Barington are acting as
Representatives have severally agreed, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Company a total of 2,500,000
shares of Common Stock from the Company. The number of Shares that each such
Underwriter has agreed to purchase is set forth opposite its name:
UNDERWRITER SHARES
GKN Securities Corp. . . . . . . . . . . . . . .
Barington Capital Group, L.P.. . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . 2,500,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions precedent, and that the Underwriters
are obligated to purchase all shares of Common Stock offered hereby (other than
the shares of Common Stock covered by the over-allotment option described below)
if any are purchased.
-50-
<PAGE>
The Representatives have advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the price set forth
on the cover page of this Prospectus and to certain dealers at those prices less
a concession not in excess of $_____ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $____ per share to
certain other dealers. After the Offering, the offering prices and other terms
may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price set forth on the cover page of this Prospectus,
less underwriting discounts and commissions, up to 375,000 additional shares of
Common Stock for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay the Representatives an expense allowance on a nonaccountable basis
equal to 3% of the gross proceeds derived from the sale of the shares of Common
Stock underwritten (including the sale of any shares of Common Stock subject to
the Underwriters' over-allotment option), $50,000 of which has been paid to
date.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the right to purchase up to an
aggregate of 250,000 shares of Common Stock ("Representatives' Purchase
Option"). The Representatives' Purchase Option is exercisable at $_____ per
share (110% of the offering price) for a period of four years commencing one
year from the date of this Prospectus. The Representatives' Purchase Option
grants to the holders thereof certain "piggyback" and demand rights for periods
of seven and five years, respectively, from the date of this Prospectus with
respect to the registration under the Securities Act of the shares issuable upon
exercise of the Representatives' Purchase Option. The Representatives' Purchase
Option cannot be transferred, sold, assigned or hypothecated during the one year
period following the date of this Prospectus, except to officers of the
Representatives and to Underwriters and selected dealers and their officers or
partners.
Pursuant to the Underwriting Agreement, the directors and executive
officers and certain shareholders of the Company holding, in the aggregate,
_______ shares of Common Stock and options and warrants to purchase an aggregate
of _______ shares of Common Stock, have agreed not to sell or otherwise dispose
of any of such shares for thirteen months from the date of this Prospectus
without the prior written consent of the Representatives. The Representatives
may, in their sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition, the
Underwriting Agreement provides that, for a period of three years from the date
of this Prospectus, the Company will recommend and use its best efforts to elect
a designee of the Representatives as a member of the Board of Directors.
Alternatively, the Representatives will have the right to send a representative
to observe each meeting of the Board of Directors. The Representatives have not
yet selected such designee or representative.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate short covering transactions and penalty bids in
accordance with Regulation M under the Exchange Act. Over-allotment involves
sales by the underwriting syndicate in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the shares of Common Stock so long as the stabilizing bids do not
exceed a specified maximum. Syndicate short covering transactions involve
purchases of the shares of Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
selling group member when the shares of Common Stock originally sold by such
selling group member are repurchased in the open market by the Underwriters.
Such stabilizing transactions, syndicate short covering transactions and penalty
bids may cause the price of the shares of Common Stock to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on the Nasdaq SmallCap Market or otherwise and, if commenced, may be
discontinued at any time.
-51-
<PAGE>
In June 1996, in connection with consulting services rendered in the
Series D Private Placement and in lieu of cash compensation of $75,000, the
Company issued GKN the equivalent of 19,530 shares of Common Stock.
In July 1997, the Representatives acted as placement agents for the
Bridge Financing and were paid an aggregate commission of $301,000 (7% of the
net proceeds of the Bridge Financing) and a nonaccountable expense allowance of
$129,000 (3% of the net proceeds of the Bridge Financing).
-52-
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby and certain other legal
matters will be passed upon for the Company by Olshan Grundman Frome &
Rosenzweig LLP, 505 Park Avenue, New York, New York 10022. Graubard Mollen &
Miller, New York, New York, has served as counsel to the Underwriters in
connection with this Offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for
each of the two years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders annual reports,
which will include statements audited by independent accountants, and such other
periodic reports as it may determine to furnish or as may be required by law,
including Sections 13(a) and 15(d) of the Exchange Act.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act with respect to the securities offered hereby
(such Registration Statement with all exhibits, and amendments thereto being
referred to hereinafter as the "Registration Statement"). This Prospectus, which
is a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement. For further information with respect to
the Company and the securities offered hereby, reference is made to the
Registration Statement. The statements contained in this Prospectus as to the
contents of any contract or any other document in this Prospectus are not
necessarily complete and, in each instance, reference is made to the copy of
such Registration Statement, each such statement being qualified in any and all
respects by such reference. The Registration Statement, including exhibits, may
be inspected without charge and copied at the Commission's Public Reference
Section located at 450 Fifth Street, N.W., Washington, D.C. 20549, its Midwest
Regional Office, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and its
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048 upon payment of the fees prescribed by the Commission. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
-53-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants............................................F-2
Balance Sheet as of December 31, 1996 and June 30, 1997 (unaudited)..........F-3
Statement of Operations for the years ended December 31, 1995
and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)...F-4
Statement of Changes in Stockholders' Deficit for the years ended
December 31, 1995 and 1996 and the six months ended
June 30, 1997 (unaudited)..................................................F-5
Statement of Cash Flows for the years ended December 31, 1995
and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)...F-6
Notes to the Financial Statements............................................F-7
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Cross/Z International, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Cross/Z
International, Inc. at December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996 in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Melville, New York
June 9, 1997 except as to the reverse stock split described in Note 1, which is
as of July 17, 1997
F-2
<PAGE>
CROSS/Z INTERNATIONAL, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma
Preferred Stock
Conversion (Note 1)
December 31, June 30, June 30,
1996 1997 1997
(Unaudited)
-----------------------------------------------------
ASSETS
Current assets
<S> <C> <C> <C>
Cash and cash equivalents $ 1,367,566 $ 67,126
Accounts receivable, net of allowance for doubtful
accounts of $25,000 at December 31, 1996 and
June 30, 1997 820,307 224,770
Prepaid expenses and other current assets 30,519 121,349
------------ ------------
TOTAL CURRENT ASSETS 2,218,392 413,245
Restricted certificate of deposit 840,054 858,066
Property and equipment, net 1,036,913 1,155,355
Deposits and other assets 31,956 76,482
------------ ------------
TOTAL ASSETS $ 4,127,315 $ 2,503,148
------------ ------------
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 777,499 $ 1,293,022
Accrued expenses 679,507 710,201
Notes payable 25,000 25,000
Deferred revenue 132,299 203,686
Compensation payable to related parties 351,184 281,894
Current portion of loan payable to shareholder 120,000 120,000
Customer advance 300,000 300,000
Capital lease obligations due within one year 152,333 181,157
------------ ------------
TOTAL CURRENT LIABILITIES 2,537,822 3,114,960
Interim financing notes payable to shareholders -- 870,922
Loan payable to shareholder 891,335 831,335
Capital lease obligations 95,326 347,537
Deferred rent 255,640 262,287
------------ ------------
TOTAL LIABILITIES 3,780,123 5,427,041
Series D mandatorily redeemable convertible preferred
stock (Note 8) 10,667,027 11,173,369 --
Shareholders' deficit
Series A, B and C convertible preferred stock, (Note 9) 561 561 --
Common stock, $0.001 par value: 30,000,000 shares
authorized; 1,727,179 and 1,790,956 shares issued
and outstanding at December 31, 1996 and June 30,
1997, respectively; 5,082,853 shares pro forma 1,727 1,791 $ 5,082
Additional paid-in-capital 4,034,115 4,269,847 15,440,486
Accumulated deficit (14,343,938) (18,357,161) (18,357,161)
Receivable from shareholder (12,300) (12,300) (12,300)
------------ ------------ ------------
TOTAL SHAREHOLDERS' DEFICIT (10,319,835) (14,097,262) $ (2,923,893)
------------ ------------ ------------
Commitments (Notes 13 and 15)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,127,315 $ 2,503,148
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CROSS/Z INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, Six Months ended June 30,
1995 1996 1996 1997
(Unaudited)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Software licenses $ 194,000 $ 851,150 $ 228,025 $ 398,750
Services and maintenance 2,596,815 1,051,828 694,017 96,377
----------- ----------- ----------- -----------
TOTAL REVENUES 2,790,815 1,902,978 922,042 495,127
Cost of revenues
Software licenses 32,980 102,138 33,332 47,850
Services and maintenance 590,957 376,289 215,961 12,696
----------- ----------- ----------- -----------
Total cost of revenues 623,937 478,427 249,293 60,546
----------- ----------- ----------- -----------
Gross profit 2,166,878 1,424,551 672,749 434,581
----------- ----------- ----------- -----------
Operating expenses
Sales and marketing 2,503,421 3,145,160 1,264,446 2,061,319
Research and development 1,357,381 1,791,597 642,530 1,197,731
General and administrative 1,011,074 1,140,003 452,702 608,435
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 4,871,876 6,076,760 2,359,678 3,867,485
----------- ----------- ----------- -----------
Loss from operations (2,704,998) (4,652,209) (1,686,929) (3,432,904)
Interest income -- 88,288 17,436 27,093
Interest expense (335,323) (355,314) (271,310) (101,612)
Other income (expense) (21,598) 1,300 1,300 542
----------- ----------- ----------- -----------
Net loss $(3,061,919) $(4,917,935) $(1,939,503) $(3,506,881)
=========== =========== =========== ===========
Pro forma net loss per common share (Note 1) $ (.99) $ (.58)
=========== ===========
Pro forma weighted average shares used in per share
computation (Note 1) 4,979,306 6,048,706
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CROSS/Z INTERNATIONAL, INC.
STATEMENT OF CHANGE IN SHAREHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 222,858 $ 223 96,271 $ 96 $ - 1,506,590 $ 1,507
Issuance of Preferred Stock:
Series B, at $11.00 per share 22,728 23
Series C, at $4.80 per share,
net issuance costs of $32,693 131,094 $ 131
Conversion of Series A and B
Preferred stock to Series C (144,505) (144) (60,796) (61) 246,376 246
Issuance of warrants on Series B
Preferred Stock
Issuance of common stock
for consulting services 12,500 12
Common stock options exercised 64,190 64
Net loss
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 78,353 79 58,203 58 377,470 377 1,583,280 1,583
Accretion of excess of redemption
value of Series D Preferred
Stock over fair value at
issuance date
Issuance of options and warrants
on Series D Preferred Stock
Issuance of Series C Preferred Stock:
For cash at $4.80 per share 26,799 27
In exchange for notes payable 2,293 2
For compensation payable
to related parties 11,343 11
Conversion of Series A and B
Preferred Stock to Series C (13,186) (13) (22,728) (23) 43,096 43
Common stock options exercised 143,899 144
Net loss
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 65,167 66 35,475 35 461,001 460 1,727,179 1,727
Accretion of excess of redemption
value of Series D Preferred
Stock over fair value at
issuance date
Issuance of options and warrants
on Series D Preferred Stock
Issuance of common stock
options for consulting services
Issuance of common stock warrants
Common stock options exercised 38,777 39
Common stock warrants exercised 25,000 25
Net loss
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1997
(unaudited) 65,167 $ 66 35,475 $ 35 461,001 $ 460 1,790,956 $ 1,791
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLE TOTAL
PAID-IN ACCUMULATED FROM STOCKHOLDERS'
CAPITAL DEFICIT SHAREHOLDER DEFICIT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,680,338 $(5,801,245) $ - $(3,119,081)
Issuance of Preferred Stock:
Series B, at $11.00 per share 249,980 250,003
Series C, at $4.80 per share,
net issuance costs of $32,693 596,425 596,556
Conversion of Series A and B
Preferred stock to Series C (41) -
Issuance of warrants on Series B
Preferred Stock 5,800 5,800
Issuance of common stock
for consulting services 5,588 5,600
Common stock options exercised 17,847 17,911
Net loss (3,061,919) (3,061,919)
--------- ------------ ------------ ------------
Balance at December 31, 1995 3,555,937 (8,863,164) - (5,305,130)
Accretion of excess of redemption
value of Series D Preferred
Stock over fair value at
issuance date (562,839) (562,839)
Issuance of options and warrants
on Series D Preferred Stock 234,700 234,700
Issuance of Series C Preferred Stock:
For cash at $4.80 per share 128,609 128,636
In exchange for notes payable 11,006 11,008
For compensation payable
to related parties 54,437 54,448
Conversion of Series A and B
Preferred Stock to Series C (7) -
Common stock options exercised 49,433 $ (12,300) 37,277
Net loss (4,917,935) (4,917,935)
--------- ------------ ------------ ------------
Balance at December 31, 1996 4,034,115 (14,343,938) (12,300) (10,319,835)
Accretion of excess of redemption
value of Series D Preferred
Stock over fair value at
issuance date (506,342) (506,342)
Issuance of options and warrants
on Series D Preferred Stock 102,000 102,000
Issuance of common stock
options for consulting services 2,500 2,500
Issuance of common stock warrants 79,078 79,078
Common stock options exercised 22,179 22,218
Common stock warrants exercised 29,975 30,000
Net loss (3,506,881) (3,506,881)
--------- ------------ ------------ ------------
Balance at June 30, 1997
(unaudited) 4,269,847 $(18,357,161) $ (12,300) $(14,097,262)
========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CROSS/Z INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, Six Months ended June 30,
1995 1996 1996 1997
(Unaudited)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(3,061,919) $(4,917,935) $(1,939,503) $(3,506,881)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 163,680 236,751 136,456 97,413
Amortization of debt discount 5,800 112,200 112,200 --
Options issued for consulting services -- 122,500 28,633 104,500
Changes in assets and liabilities
Accounts receivable (29,061) (237,189) 331,763 595,537
Prepaid expenses and other current assets 9,866 (22,983) (38,366) (90,830)
Deposits and other assets 8,017 (505) (500) (44,525)
Accounts payable and accrued expenses 707,186 (769,312) (980,702) 546,217
Deferred rent 172,304 83,336 41,668 6,647
Compensation payable to related parties 91,615 (111,762) (2,131) (69,290)
Deferred revenue (110,641) (36,772) (53,679) 71,387
Customer advance 300,000 -- -- --
----------- ----------- ----------- -----------
Net Cash Used In Operating Activities (1,743,153) (5,541,671) (2,364,161) (2,289,825)
----------- ----------- ----------- -----------
Cash flows from investing activities
Acquisitions of property and equipment (59,923) (618,993) (61,247) (215,856)
Purchase of restricted certificate of deposit -- (840,054) (819,632) (18,012)
----------- ----------- ----------- -----------
Net Cash Used In Investing Activities (59,923) (1,459,047) (880,879) (233,868)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of Series D preferred stock, net -- 8,643,418 5,106,483 --
Proceeds from issuance of Series C preferred stock, net 596,556 128,637 96,469 --
Issuance of common stock 23,511 37,277 14,244 52,218
Proceeds from issuance of notes payable 700,000 -- -- --
Proceeds from interim financing notes payable
to shareholders -- -- -- 950,000
Proceeds from issuance of Series B preferred stock, net 250,003 -- -- --
Repayment of notes payable -- (238,992) (238,992) --
Proceeds from loan payable to shareholders 256,858 15,737 15,737 --
Repayment of loan payable to shareholder -- (132,000) (82,000) (60,000)
Payments of capital lease obligations (110,395) (144,200) (67,178) (128,394)
Proceeds from sale-leaseback transaction -- -- -- 409,429
----------- ----------- ----------- -----------
Net Cash Provided By Financing Activities 1,716,533 8,309,877 4,844,763 1,223,253
----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (86,543) 1,309,159 1,599,723 (1,300,440)
Cash and cash equivalents at beginning of year 144,950 58,407 58,407 1,367,566
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 58,407 $ 1,367,566 $ 1,658,130 $ 67,126
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cross/Z International, Inc. (the "Company") was incorporated in California
on February 6, 1989. The Company develops, markets and supports integrated
client/server data mining proprietary software products/solutions that
allow users to organize and analyze large amounts of data in order to make
intelligent business decisions.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT AND RECLASSIFICATION FOR REVERSE STOCK SPLIT
On July 17, 1997, the Company's shareholders ratified a one-for-four
reverse stock split on all common and preferred stock. All share and per
share amounts affecting net loss per share, weighted average number of
common and common equivalent shares outstanding, common stock and preferred
stock issued and outstanding, additional paid-in-capital and all other
stock transactions presented in these financial statements have been
restated to reflect the one-for-four-reverse stock split.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial data at June 30, 1997 and for the six months ended
June 30, 1996 and June 30, 1997 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. Results for the interim period are not necessarily
indicative of results to be expected for the full fiscal year.
PRO FORMA PREFERRED STOCK CONVERSION (UNAUDITED)
On April 27, 1997 the Board of Directors of the Company authorized
management to pursue an initial public offering of the Company's common
stock. Upon the closing of the Company's proposed initial public offering,
each outstanding share of the Company's Series A, B and C convertible
preferred stock and its Series D mandatorily redeemable convertible
preferred stock ("Series D") and all Series D accrued and unpaid dividends
thereon will be automatically converted to common stock based on their
conversion terms (set forth in Notes 8 and 9). The pro forma effect of the
conversion has been presented as a separate column in the Company's balance
sheet assuming the conversion had occurred on June 30, 1997.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the weighted average
number of common shares and common share equivalents assumed to be
outstanding during the period. Common share equivalents consist of the
Company's common shares issuable upon conversion of the Company's Series A,
B and C Preferred Stock (Note 9) and Series D (Note 8), stock options and
outstanding warrants and are reflected when dilutive. Pursuant to the
requirements of the Securities and Exchange Commission, stock options
granted and warrants and shares issued by the Company within one year of
the date of the proposed initial public offering at prices below the
proposed offering price have been included in the calculation of weighted
average shares outstanding as if they were outstanding for all periods
presented using the treasury stock method. The calculation of the pro forma
weighted average common shares outstanding includes the conversion of the
Company's Series A, B, C and D preferred stock and assumes the conversion
F-7
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
occurred at the beginning of the earliest period presented or at issuance
date if later even though the effect is antidilutive.
Historical pro forma net loss per share has not been presented since such
amount is not deemed to be meaningful due to the significant change in the
Company's capital structure anticipated as a result of the Company's
proposed initial public offering.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 91-1 on
Software Revenue Recognition. Revenue from product licensing is generally
recognized after execution of a licensing agreement and shipment of the
product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectable by management. Service revenues
consists of data analysis using the Company's proprietary software
performed for customers on a project or contract basis and are recognized
over the term of the respective agreements. Maintenance revenues consist of
ongoing support and product updates and are recognized ratability over the
term of the contract.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is computed using the straight line method
over the estimated useful lives of the assets, generally three to five
years. Assets acquired under capital leases and leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the terms of the related leases.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86 ("SFAS 86") requires the
capitalization of certain software development costs once technological
feasibility is established, which the Company defines as the completion of
a working model. To date, the period between achieving technological
feasibility and the general availability of such software has been short
and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has expensed all software
development costs as incurred.
ADVERTISING
Advertising costs are included in selling and marketing expenses and are
expensed as incurred. To date advertising costs have not been significant.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Income taxes are computed using the asset and liability method. Under the
asset and liability method specified by SFAS 109, deferred income tax
assets and liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and are
measured using the currently enacted tax rates and laws.
F-8
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
USE OF ESTIMATES
These financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make reasonable
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the financial
statements. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
relatively short maturity of these instruments. Loans payable to
shareholder and Series D are not traded in the open market and a market
price for such loans and preferred stock are not readily available.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and accounts receivable. The Company places its cash with high quality
financial institutions. The Company performs ongoing credit evaluations of
its customers and generally requires no collateral. The Company maintains
reserves for potential credit losses and historically such losses have not
been significant.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with their
1997 presentation.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for the Company's fiscal
year beginning in 1996. SFAS 123 established a fair value based method of
accounting for stock-based compensation plans. The Company has chosen to
adopt the disclosure requirements of SFAS 123, and continue to record
stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under
APB 25, the Company has not recognized compensation expense with respect to
such awards because the exercise price of options granted to employees has
approximated the fair market value of the common stock at the respective
grant dates.
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER
SHARE"("SFAS 128")
In February 1997, the FASB issued SFAS 128, which requires presentation of
basic earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or
contingent stock arrangements). SFAS 128 also requires presentation of
earnings per share by an entity that has made a filing or is in the process
of filing with a regulatory agency in preparation for the sale of those
securities in a public market. Basic EPS is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings per share. The statement is effective for both interim and annual
periods ending after December 15, 1997. The
F-9
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
effect on the Company's earnings per share resulting from the adoption of
SFAS 128 is not expected to be significant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, "REPORTING
COMPREHENSIVE INCOME" ("SFAS 130")
On June 30, 1997, the FASB issued SFAS 130. This statement establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. It is not expected that the adoption
of SFAS 130 will have a material impact on the Company.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, "DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE" ("SFAS 131")
In June 1997, the FASB issued SFAS No. 131. This statement requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods to shareholders. It also
requires that enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. This statement is effective for fiscal years beginning after
December 15, 1997. The effect of the adoption of this statement is not
expected to have a significant impact on the Company.
STATEMENT OF POSITION EXPOSURE DRAFT "SOFTWARE REVENUE RECOGNITION"
It is expected that in 1997, the AICPA will issue a new Statement of
Position ("SOP") on software revenue recognition. If approved in its
current draft form the Company believes the new SOP will not have a
material impact on the Company.
2. LIQUIDITY AND BUSINESS RISKS
The Company has incurred operating losses since inception, had an
accumulated deficit of $14,343,938 as of December 31, 1996, and $18,357,161
as of June 30, 1997, and is seriously delinquent on certain of its
outstanding vendor obligations. In order to continue as a going concern,
the Company will have to raise funds through the offerings of securities
until profitable operations are achieved. Although there is no assurance
that these offerings will be consummated and that the net proceeds
therefrom will be available to the Company, management believes sufficient
funding will be obtained to enable the Company to meet its working capital
needs for the foreseeable future (see Note 16).
F-10
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Interest paid during the year $167,279 $209,787 $130,551 $101,612
Schedule of non cash investing and financing activities:
Capital lease obligations entered into during the year 226,264 99,341 -- --
Series C Preferred Stock, issued for:
Notes payable -- 11,008 11,008 --
Compensation payable to related parties -- 54,448 54,448 --
Series D Preferred Stock, issued for:
Notes payable -- 575,000 575,000 --
Compensation payable to related parties -- 720,767 720,767 --
Consulting services -- 165,000 165,000 --
Dividends -- 562,839 75,665 506,342
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses included the following:
December 31, June 30,
1996 1997
Compensation and related benefits $247,768 $250,820
Consulting and professional fees 183,134 214,999
Interest 14,940 28,394
Commissions 21,797 37,567
Other 211,868 178,421
-------- --------
$679,507 $710,201
======== ========
F-11
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment (net) consisted of the following:
December 31, June 30,
1996 1997
Computer equipment and software $1,334,052 $1,549,951
Furniture and fixtures 204,103 204,290
Office equipment 89,633 105,073
Leasehold improvements 35,249 19,578
---------- ----------
1,663,037 1,878,892
Less-accumulated depreciation and amortization 626,124 723,537
---------- ----------
$1,036,913 $1,155,355
========== ==========
6. BORROWING ARRANGEMENTS
During 1995, the Company issued several promissory notes to its
shareholders, originally due within six months and with interest rates
ranging from 12% to 24%. During 1996, $113,992 of these notes were repaid
and $311,008 was converted to equity, of which $11,008 was converted into
2,293 shares of Series C Preferred Stock at $4.80 per share and $300,000
was converted into 70,093 shares of Series D Preferred Stock at $4.28 per
share.
Notes payable to third parties at December 31, 1995 included $400,000 of
short term notes, with interest rates ranging from 8% to 12%. In May 1996,
$125,000 of the notes were repaid and the remaining balance of $275,000 was
converted into 64,252 shares of Series D Preferred Stock at $4.28 per
share.
In March 1995, the Company issued a $25,000 promissory note due in March
1997, with interest at 2% above the prime rate. In connection with the
note, the Company also issued 1,563 warrants to purchase Series B Preferred
Stock at $11.00 per share, which expire at the earlier of (i) March 2000,
or (ii) upon the closing of a public offering of the Company's common
stock.
LOAN PAYABLE TO SHAREHOLDER
In May 1992, the Company entered into a borrowing arrangement whereby a
shareholder agreed to advance the Company funds at an interest rate of 18%
per annum. Such borrowings were collateralized by the Company's accounts
receivable. In May 1996, the Company was in default of certain provisions
of the agreement, at which time the shareholder and the Company amended the
agreement to reduce the interest rate to the greater of prime plus 3% or
12% per annum and delay the time that the shareholder could demand
repayment until March 1998. The revised agreement requires the Company to
set aside funds in a restricted account to the extent that the outstanding
borrowings exceed 80% of the Company's accounts receivable and to make
monthly payments of $10,000, plus interest, until March 1998 at which time
the entire balance will be due. At
F-12
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
December 31, 1996 and June 30, 1997 the Company has set aside $840,064 and
$858,066 in a restricted certificate of deposit relating to the obligation.
Interest expense related to this agreement was $190,314 and $147,527 for
1995 and 1996, respectively, and $58,528 for the six months ended June 30,
1997.
INTERIM FINANCING NOTES PAYABLE TO SHAREHOLDERS
In May 1997, the Company received a $500,000 loan, with an interest rate of
10% per annum, from existing shareholders. The loan was repaid out of the
proceeds of the Bridge Financing, as described in Note 16.
In June 1997, the Company received additional loans from two shareholders
each consisting of a $100,000 promissory note bearing interest of 10% per
annum through September 30, 1997 and 13% annually thereafter and attached
warrants to purchase 31,800 shares of common stock at $4.28 per share. In
connection with these notes, 7,066 warrants were issued. These notes are
payable to shareholders at the earliest of the following events: (i)
December 31, 1997, (ii) upon the closing of an IPO, or (iii) upon
termination of the IPO.
In June 1997, the Company received an advance from the Bridge Financing of
$250,000 which bears interest at a rate of 10% per annum through September
30, 1997 and 13% per annum thereafter. The advance was converted into 2.5
units under the terms of the Bridge Financing upon closing. As an incentive
for early participation, the Company issued to the holders of these notes
warrants to purchase 8,412 shares of common stock at a price of $4.28, in
addition to the bridge warrants that were included in the bridge units.
A portion of the gross proceeds has been allocated to the warrants issued
in June based on their estimated fair value resulting in $79,078 of
original issue discount and a corresponding increase in additional paid-in
capital.
The Company classified these notes as long term since they were refinanced
in connection with the Bridge Financing (See Note 16).
7. COMPENSATION PAYABLE TO RELATED PARTIES
Compensation payable to related parties includes accrued payroll and
related benefits and amounts payable to certain officers/shareholders
pursuant to a 1990 compensation agreement, as amended. During 1996, the
Company converted $259,358 of its accrued payroll and benefits obligations
into 60,598 shares of Series D at $4.28 per share. Under the 1990 agreement
certain officers were entitled to receive a total of $700,000 to be paid
over a number of years and determined based upon a percentage of cash based
revenues. The balance payable under this agreement was $508,646 at December
31, 1995. In May 1996, the Company settled $461,409 of its outstanding
obligation under this agreement by issuing 107,806 shares of Series D. The
remaining balance was paid in cash.
F-13
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1996, the Company authorized 14,030,593 shares of mandatorily
redeemable convertible preferred stock ("Series D") with a par value of
$.001 per share and issued 2,044,392 shares of Series D at $4.28 per share.
Proceeds from the sale of Series D totaled $8,643,418, net of related
expenses of $106,582. In addition, the Company converted various borrowings
and compensation liabilities totaling $1,295,767 (described in Notes 6 and
7, respectively) into 302,748 shares of Series D at a conversion price of
$4.28 per share. At December 31, 1996 and June 30, 1997 the outstanding
shares of Series D were 2,517,196 and 2,635,500, respectively.
In May 1996, the Company issued 38,551 shares of Series D at $4.28 per
share, in satisfaction of a liability for $165,000 in consulting services.
The Series D ranks senior to all other preferred stock and the common stock
of the Company in priority of dividends and rights of redemption, and
senior to all other preferred stock and the common stock of the Company,
other than Series C, in the event of payment upon liquidation. The
principal terms of the Series D are as follows:
REDEMPTION
The holders of Series D shares shall be entitled to redeem their shares
after May 8, 2001, as sufficient funds are available to the Company, at a
redemption price of $4.28, subject to adjustments for stock splits and
recapitalizations, plus any accrued and unpaid dividends. In the event that
insufficient funds are available to redeem all shares electing redemption,
the Company shall effect such redemption on a pro-rata basis among the
Series D shareholders.
DIVIDENDS
The holders of Series D shares shall be entitled to receive noncompounded
cumulative dividends which accrue at an annual rate equal to 10% of the
redemption value of the Series D, payable in additional shares of Series D.
At December 31, 1996 and June 30, 1997 the Company has reserved 131,505 and
249,809 shares of Series D related to dividends, respectively.
CONVERSION
The holders of Series D shares have the right to convert such shares into
such number of common shares as provided for in each series; subject to
adjustment for dilution and for stock splits. Each share shall
automatically convert into common stock upon the closing of a public
offering of the Company's common stock which results in gross proceeds to
the Company of at least $7,500,000, with a minimum share price of $6.00.
VOTING RIGHTS
The holders of Series D shares shall be entitled to one vote for each share
of common stock into which the Series D could be converted.
LIQUIDATION PREFERENCE
In the event of the liquidation of the Company, the holders of the Series D
shares will be entitled, under certain conditions, to receive $4.28 per
share, plus any accrued and unpaid dividends.
F-14
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
SERIES D WARRANTS
During April 1996, the Company issued warrants to purchase 62,500 shares of
Series D to investors who had advanced $500,000 to the Company prior to the
initial closing of the Series D private placement. These warrants were
immediately exercisable at an exercise price of $4.28 and expire five years
from the date of issuance. The aggregate fair market value of the warrants,
estimated at $112,200, was recorded as a discount to the debt and amortized
through the closing date of the Series D placement.
In November 1996, in conjunction with the granting of a $500,000 equipment
lease line of credit, the Company issued 4,672 warrants to purchase shares
of Series D preferred stock at a price of $4.28 per share. As of December
31, 1996, no borrowings were outstanding related to the line of credit.
Also in November 1996, the Company issued 934 warrants to purchase shares
of Series D preferred stock at a price of $4.28 per share in conjunction
with the May 1996 grant of a $100,000 equipment lease loan by a related
party. These warrants were immediately exercisable and expire ten years
from the date of issuance.
SERIES D OPTIONS
In May 1996, the Company issued 250,000 options to purchase shares of
Series D to individual members of an Advisory Committee, which includes a
member of the Board of Directors and three of the Company's shareholders,
that was established to provide industry advice and guidance to the
Company. The options are exercisable at $4.28 per share, which was equal to
the fair value of the Series D at the date of grant. The aggregate fair
market value of these options is estimated at $340,000 and is being
recognized over their period of benefit. These options expire five years
from the date of issuance and vest ratably through April 1, 1998. Such
options become immediately exercisable upon the closing of an initial
public offering of common stock of the Company. In April 1997, two of the
Advisory Board members were each granted options to purchase 50,000 shares
of Series D at an exercise price of $4.28 per share. The options vest
ratably over two years from the date of grant. Consulting expense of
$112,500 and $102,000 has been recognized in results of operations for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
9. CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANTS
The Company has authorized 17,395,012 shares of preferred stock, of which
260,669 shares have been designated Series A Preferred Stock ("Series A"),
204,913 shares have been designated Series B Preferred Stock ("Series B")
and, 2,898,837 shares have been designated Series C Preferred Stock
("Series C") (collectively "Preferred Shares") the remainder being
designated as Series D shares which are described in Note 8. The Preferred
Shares have certain rights, preferences and restrictions. The principal
terms of the Preferred Shares are as follows:
F-15
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
DIVIDENDS
The holders of the Series A, B and C Preferred Shares shall be entitled to
receive noncumulative, preferential dividends of $.52, $.88 and $.38 per
share, respectively, per annum, when and if declared by the Board of
Directors. Series C dividends are payable before any payment of Series A,
B, or common stock dividends. Series A and B dividends are payable before
any payment of common stock dividends. No such dividends have been declared
from the respective dates of issuance through December 31, 1996 and June
30, 1997.
CONVERSION
The holders of the Series A, B and C Preferred Stock have the right to
convert such shares into such number of common shares as provided for in
each series; subject to adjustment for dilution and for stock splits. Each
share of Series A, B and C Preferred Stock shall automatically convert into
common stock upon the closing of a public offering of the Company's common
stock which results in gross proceeds to the Company of at least
$7,500,000, with a minimum share price of $6.00.
VOTING RIGHTS
The holders of Preferred Shares shall be entitled to one vote for each
share of common stock into which the Preferred Shares could be converted.
LIQUIDATION PREFERENCE
In the event of the liquidation of the Company, the holders of the Series
A, B and C Preferred Shares will be entitled, under certain conditions, to
receive a distribution in preference to common stockholders at a
liquidation value of $6.40, $11.00 and $4.80 per share, respectively, plus
any declared but unpaid dividends. The liquidation rights of the holders of
Series D shares are equal to the liquidation rights of the holders of the
Series C shares and are in priority to the liquidation rights of the
holders of Series A and B shares.
CONVERSION OF PREFERRED STOCK
During 1995 and 1996, the Company offered Series A and B shareholders the
option to convert each share of their Series A or B into 1.2 shares of
Series C. During 1995, certain holders of the Company's Series A and B
preferred stock converted 144,505 and 60,796 shares, respectively, into
246,376 shares of Series C preferred stock. During 1996, certain holders of
the Company's Series A and B preferred stock converted 13,186 and 22,728
shares, respectively, into 43,096 shares of Series C preferred stock.
SERIES B WARRANTS
As of December 31, 1996 and June 30, 1997, warrants were outstanding to
purchase up to 15,751 shares of Series B Preferred Stock at an exercise
price of $11.00, subject to adjustments for dilution and stock splits, with
such exercise price being equal to the fair market value at the date of
grant. During 1995 and 1996 warrants to purchase 3,381 and 0 shares of
Series B Preferred Stock were issued, respectively.
F-16
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
SERIES C WARRANTS
As of December 31 ,1996 and June 30, 1997, warrants were outstanding to
purchase up to 263,702 shares of Series C Preferred Stock at an exercise
price of $4.80, subject to adjustments for dilution and stock splits, with
such exercise price being equal to the fair market value at the date of
grant. During 1995 and 1996 warrants to purchase 249,617 and 14,091 shares
of Series C Preferred Stock were issued, respectively. These warrants were
immediately exercisable.
COMMON STOCK WARRANTS
At December 31, 1996, 113,125 warrants to purchase shares of common stock
were outstanding, of which 25,0000 and 17,500 were issued in 1995 and 1996
respectively with exercise prices which range from $1.20 to $11.00 per
share. These warrants expire from November 1998 through January 2006 and
will terminate if not exercised prior to the closing of an initial public
offering of common stock of the Company. At June 30, 1997 there were
167,203 warrants outstanding of which 79,078 were issued in 1997 with an
exercise price of $4.28. The Warrants issued during 1997 are exercisable
one year after the date of the initial closing of an IPO and expire five
years after the date of the closing of an IPO.
10. EMPLOYEE STOCK OPTIONS
In 1991, the Board of Directors approved the 1991 Incentive Stock Plan (the
"Plan") which was subsequently amended and allows the Board to grant either
incentive or non-qualified stock options to the Company's employees,
officers and consultants to purchase a maximum of 875,000 shares of common
stock. The options generally expire five years from the date of grant.
Individuals owning more than 10% of the total combined voting power of all
classes of stock of the Company are not eligible to participate in the Plan
unless the option price is at least 110% of the fair market value of the
common stock at the date of grant.
F-17
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
A summary of the activity under the stock option plan is as follows:
<TABLE>
<CAPTION>
Options Exercise
Available for Shares Under Price
Grant Option Per Share
---------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 1, 1995 249,102 293,475 $ .20-$4.00
Granted (239,512) 239,512 .48-4.00
Exercised - (64,190) .20-1.20
Canceled 230,646 (230,646) .20-4.00
Reissued (160,086) 160,086 .20-.48
--------------- ----------------- ----------------
Options outstanding at December 31, 1995 80,150 398,237 .20-.48
Additional shares authorized 250,000 - -
Granted (164,714) 164,714 .48
Exercised - (151,399) .20-.48
Canceled 107,952 (107,952) .48
--------------- ----------------- ----------------
Options outstanding at December 31, 1996 273,388 303,600 .20-.48
Granted (83,750) 83,750 .48-2.00
Exercised - (38,791) .48
Canceled 15,834 (15,834) .48
--------------- ----------------- ----------------
Options outstanding at June 30, 1997 205,472 332,725 $ .48-2.00
============== ================ ================
Options exercisable at June 30, 1997 217,880 $ .48-2.00
================ ================
</TABLE>
The Company continues to account for stock options granted to employees
under APB 25. In 1996, the Company adopted SFAS No. 123 for disclosure
purposes. Because options granted to employees in 1996 had exercise prices
equal to or greater than the fair market value of the underlying common
stock at the respective grant dates, as determined by the Company's
management, compensation expense has not been recognized in results of
operations. The pro forma impact of SFAS No. 123 on the Company's results
of operations related to options granted during 1995 and 1996 would have
been immaterial.
F-18
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
11. MAJOR CUSTOMERS
Sales to major customers, as a percentage of revenues, are as follows:
Year Ended Six Months Ended
December 31, June 30,
1996 1997
A 17% -
B 16% -
C 21% -
D - 84%
At December 31, 1996, Customer C represented 49% of total accounts
receivable.
12. EMPLOYEE BENEFITS PLANS
The Company has a 401(k) savings plan (the "Plan") covering all full-time
employees and qualifying part time employees. As allowed under Section
401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary
reductions for eligible employees. Employees are eligible to participate
after a ninety day service requirement. Participants may make voluntary
contributions to the Plan up to 20% of their compensation, subject to
annual limits. The plan permits company contributions, however, none were
made during the year ended December 31, 1996 and the six month period ended
June 30, 1997.
13. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
The Company is obligated under capital leases for computers and office
equipment through the year 2000. All assets leased under these agreements
have been capitalized and the related obligations are reflected in the
accompanying financial statements based upon the present value of future
minimum lease payments. In addition, the Company leases its office
facilities and certain furniture and equipment. These operating leases are
noncancellable and expire on various dates through 2004.
F-19
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
The future minimum lease payments under capital and operating leases at
December 31, 1996 and the present value of the net minimum lease payments
are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
---------------------------------------
<S> <C> <C>
1997 $ 429,439 $ 176,925
1998 442,124 65,596
1999 442,595 30,081
2000 354,724 298
2001 and thereafter 1,506,784 -
----------------- -----------------
Total minimum lease payments $ 3,175,666 272,900
=================
Less amounts related to interest 25,241
----------------
Present value of net minimum lease payments 247,659
Less: current portion 152,333
----------------
Long-term obligation under capital leases $ 95,326
================
</TABLE>
Included in the above are minimum capital lease payments of $149,379 due to
a related party.
During 1997, the Company refinanced certain equipment purchased at the end
of 1996, under a sale/leaseback agreement. The transaction was accounted
for as a financing, wherein the property remains on the books and continues
to be depreciated. A financing obligation representing the proceeds was
recorded and is reduced based upon payments under the lease over a 42 month
period.
Rental expense under operating leases was $339,358 for the year ended
December 31, 1996, and $233,944 for the six month period ended June 30,
1997.
F-20
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
14. INCOME TAXES
The tax effect of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets and liabilities at December
31, 1996 are :
Deferred rent $ 102,256
Accounts payable 311,000
Accrued expenses 271,803
Deferred revenues 52,920
Customer advances 120,000
Compensation payable to related parties 140,474
Net operating loss carryforward 4,235,458
Research and experimental credit carryforwards 114,988
-----------
Deferred tax assets 5,348,899
Accounts receivable (328,123)
Prepaid expenses (12,208)
-----------
Deferred tax liabilities (340,331)
Net deferred tax assets 5,008,568
Less-valuation allowance (5,008,568)
-----------
Net deferred tax assets $ --
===========
The Company has recorded a full valuation allowance against its net
deferred tax assets since management believes that based upon the available
objective evidence it is more likely than not that these assets will not be
realized. The Company's effective tax rate differs from the federal
statutory rate as a result of the change in the valuation allowance.
As of December 31, 1996, the Company has tax benefits attributable to net
operating loss and research and experimental tax credit carryforwards of
$10,481,791 and $114,988, respectively, available to offset future federal
taxable income and tax. These carryforwards will expire at various dates
through 2011. Under Section 382 of the Internal Revenue Code of 1986, as
amended, utilization of prior net operating losses ("NOLs") is limited
after an ownership change, as defined in such Section 382. As a result of
previous transactions which involved an ownership change as defined by
Section 382, the Company will be subject to limitation on the use of its
NOLs. Accordingly there can be no assurance that a significant amount of
the existing NOLs will be available to the Company.
F-21
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997)
- --------------------------------------------------------------------------------
15. COMMITMENTS
EMPLOYMENT AGREEMENTS
In May 1996, the Company entered into employment agreements ( the
"agreement(s)") with its Chief Executive Officer, Chief Technology Officer
and its then current Chief Financial Officer, that expire on December 31,
1998. The agreements provide each employee with a base annual compensation
of $150,000 and additional compensation payable upon attaining certain
corporate targets as determined by the Board of Directors. The agreement
with the former Chief Financial Officer was terminated in November 1996
upon his resignation. The agreements provide that in the event of the
termination, other than for cause, the executives will be entitled to
between six and twelve months of severance. In May 1997, the Company
entered into an employment agreement with its new Chief Financial Officer
that expires in April 1999. The agreement provides for annual base
compensation of $125,000 and additional incentives based upon performance.
Also in June 1997, the Company extended the employment agreement with its
Chief Executive Officer through December 31, 1999.
In April 1997, the Company entered into a two year employment agreement
with its Vice President of Engineering that provides for a base
compensation of $150,000. The agreement also provides for the accelerated
vesting of stock options in the event of a change of control.
16. SUBSEQUENT EVENTS
On July 30, 1997, the Company completed a Bridge Financing (the "Bridge
Financing"). The gross proceeds were $4,300,000, and the net proceeds to
the Company from such financing were approximately $3,586,000, of which
$250,000 was received in advance on June 26, 1997 (see Note 6).
In connection with the Bridge Financing, the Company issued 43 units, each
consisting of a $100,000 promissory note (the "Bridge Note") and a warrant
(the "Bridge Warrant") allowing the holder to purchase 33,333 shares of the
Company's common stock at a price of $4.28 per share. In the event of an
initial public offering of the Company's common stock, with a per share
offering price of less than $8.00 per share, each Bridge Warrant will
entitle the holder to purchase a maximum of 16,667 additional shares of
common stock (based upon a formula as defined in the Bridge Warrant
agreement). The Bridge Warrants are exercisable on or after July 30, 1998
and expire on July 30, 2003. The Bridge Notes accrue interest at a rate of
10% per annum from July 30, 1997 through September 30, 1997, and at a rate
of 13% per annum thereafter, and are payable, together with accrued
interest, on the earlier of (i) the completion of an IPO (as defined) of
the Company's common stock, or (ii) January 30, 1999. In the event of an
Offering Termination, as defined in the Bridge Financing Term Sheet dated
July 10, 1997, the holders of the Bridge Notes have the option to convert
their notes into shares of the Company's common stock, at a rate equal to
the principal amount and accrued interest divided by $4.28. A portion of
the gross proceeds will be allocated to the warrants based on their
estimated fair market value and will result in $1,433,319 of original issue
discount and a corresponding increase in additional paid in capital.
F-22
<PAGE>
In August 1997, the Company incorporated a company in the state of Delaware
under the name CrossZ Software Corporation ("CrossZ-Delaware"). Pursuant to
a plan of a corporate reorganization, it is the Company's intention to
merge with CrossZ-Delaware. CrossZ-Delaware will be the surviving entity
and will assume the name CrossZ Software Corporation.
In August 1997, pursuant to the Certificate of Incorporation of
CrossZ-Delaware, the Company has authorized a class of 2,000,000 shares of
preferred stock which may be issued by the Board of Directors on such terms
and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders. Issuance of such preferred
stock, depending upon the rights, preferences and designations thereof, may
have the effect of delaying, deterring or preventing a change in control of
the Company. Issuance of additional shares of Common Stock could result in
the dilution of the voting power of the Common Stock purchased in this
Offering. In addition, certain "anti-takeover" provisions of the Delaware
General Corporation Law, among other things, may restrict the ability of
the stockholders to expect a merger or business combination or to obtain
control of the Company.
F-23
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information and representation must not be relied upon as having been authorized
by the Company or any of the Underwriters. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any security other than
the securities offered by this Prospectus, or an offer to sell or a solicitation
of an offer to buy any securities by any person in any jurisdiction in which
such offer or solicitation is not authorized or is unlawful. The delivery of
this Prospectus shall not, under any circumstances, create any implication that
the information herein is correct as of any time subsequent to the date of this
Prospectus.
TABLE OF CONTENTS
PAGE
Prospectus Summary.....................................
Risk Factors...........................................
Use of Proceeds........................................
Dividend Policy........................................
Capitalization.........................................
Selected Financial Data................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations......
Business...............................................
Management.............................................
Certain Transactions...................................
Principal Shareholders.................................
Description of Securities..............................
Shares Eligible for Future Sale........................
Underwriting...........................................
Legal Matters..........................................
Experts................................................
Available Information..................................
Financial Statements...................................
-------------------------------------
UNTIL _______, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
CrossZ Software Corporation
[LOGO]
2,500,000 SHARES OF COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
GKN SECURITIES CORP.
BARINGTON CAPITAL GROUP, L.P.
_________, 1997
================================================================================
This Prospectus is printed on recycled paper using soy-bean ink.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Certificate of Incorporation, as amended, limits the personal
liability of a director or officer to the Company for monetary damages for
breach of fiduciary duty of care as a director. Liability is not eliminated for
(i) any breach of the director's duty of loyalty to the Company or its
shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment of
dividends or stock purchase or redemptions pursuant to Section 174 of the DGCL,
or (iv) any transaction from which the director derived an improper personal
benefit.
The Company has also entered into indemnification agreements with each
of its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provision may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to pubic policy.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL, which prevents an
"interested shareholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly-held Delaware corporation for three years
following the date such person became an interested shareholder, unless: (i)
before such person became an interested shareholder, the board of directors of
the corporation approved the transaction in which the interested shareholder
became an interested shareholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested shareholder's
becoming an interested shareholder, the interested shareholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions), or (iii) following the transaction in
which such person became an interested shareholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of shareholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
shareholder. A "business combination" includes mergers, stock or asset sales and
other transactions resulting in a financial benefit to the interested
shareholder.
The provisions of Section 203 of the DGCL could have the effect of
delaying, deferring or preventing a change in the control of the Company.
II-1
<PAGE>
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by the Registrant in
connection with the issuance and distribution of the securities being
registered. With the exception of the registration fee, NASD filing fee and
NASDAQ SmallCap Market System and Boston Stock Exchange filing fee expenses, all
amounts shown are estimates.
Registration Fee..........................................$10,424.81
NASD filing fee.............................................3,940.21
Nasdaq SmallCap Market and The Boston Stock
Exchange Filing Fee listing expenses.............................*
Blue Sky fees and expenses
(including legal and filing fees)................................*
Printing and Engraving expenses....................................*
Transfer agent and registrar fees and expenses.....................*
Legal fees and expenses (other than Blue Sky)......................*
Accounting fees and expenses.......................................*
Miscellaneous expenses.............................................*
TOTAL..............................................$750,000
- ----------------
* To be filed by amendment.
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following securities were sold by the
Registrant without registration under the Securities Act of 1933, as amended
("Securities Act"). Except as otherwise indicated, the securities were sold by
the Company in reliance upon the exemption provided by Section 4(2) of the
Securities Act. All transactions have been adjusted to reflect the reverse stock
split effected in July 1997 of the Registrant's outstanding Common Stock and
Preferred Stock on the basis of .25 shares of Common Stock and Preferred Stock
for each share of Common Stock and Preferred Stock, respectively.
In September 1994, the Company issued the following shares of Series A
Preferred Stock at a per share offering price of $6.40 to the following persons:
Number of shares of Series
Name A Preferred Stock
- ------------------------- ------------------------------
Barker, Lee & Co. 20,649
Clough, Herbert C. 16,519
Esselen, Gustavus III 8,259
Fiske, Guy W. 8,259
J.M.R. Barker Foundation 12,389
Jones, Addis T. 4,956
Jones, Arthur R. III 4,130
Jones, Scott T. 5,782
Lee, Dwight E. 4,130
Maximillian Partners I 4,130
Maximillian Partners II 3,274
Musser, William L. 4,130
Namakagon Associates, L.P. 28,908
Sharples, Arthur A. 12,389
Sterling, Lionel N. 16,519
Taylor, John N. 18,914
Upland Associates, L.P. 33,038
II-2
<PAGE>
Number of shares of Series
Name A Preferred Stock
- ------------------------- ------------------------------
Darviche, Parviz 4,130
Ruyan, Jerry L. 8,223
Gillett, Richard 4,130
In September 1994, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $11.00 per share and Series B
Preferred Stock Warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series B
Number of Shares of Preferred Stock Represented by the
Name Series B Preferred Stock Warrant
- ---------------------------------------- ---------------------------- ---------------------------------------
<S> <C> <C>
Barker, Lee & Co. 9,091 3,636
Dixon, Anthony 1,375 550
Fiske, Guy W. 9,091 3,636
Heller, Andrew 4,545 1,818
J.M.R. Barker Foundation 4,545 1,818
Jones, Addis T. 5,000 2,000
Jones, Arthur R. III 5,000 2,000
Namakagon Associates, L.P. 13,636 5,454
Knowlton, Winthrop 1,818 727
Knowlton, Winthrop & Erica TTEES 4,545 1,818
Paine Webber, CFN FBO, 4,545 1,818
Winthrop Knowlton, IRA
Sharples, Arthur A. 4,545 1,818
Sterling, Lionel N. 6,818 2,727
Loevner, Kirk 6,250 2,500
Darviche, Parviz 1,364 545
Ruyan, Jerry L. 5,000 2,000
Esselen, Gustavus III 9,100 3,640
</TABLE>
In February 1995, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $11.00 and Series B Preferred
Stock Warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series B
Number of Shares of Preferred Stock Represented by the
Name Series B Preferred Stock Warrant
- ---------------------------------------- ---------------------------- ---------------------------------------
<S> <C> <C>
Dauber, Philip S. & Elayne 9,091 3,636
Dusa, Jerry A. & Margaret 9,091 3,636
</TABLE>
In March 1995, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $11.00 and Series B Preferred
Stock Warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series B
Number of Shares of Preferred Stock Represented by the
Name Series B Preferred Stock Warrant
- ---------------------------------------- ---------------------------- ---------------------------------------
<S> <C> <C>
Condit, Robert D. TTEE fbo Corbin 4,545 1,818
Trust
</TABLE>
II-3
<PAGE>
In 1994, the Company issued the following Series B Preferred Stock
Warrant at a per share offering price of $11.00 to the following person:
Number of Shares of Series B
Preferred Stock Represented by the
Name Warrant
- ----------------------------------- ---------------------------------------
Ventura Vista L.C. 1,563
In March 1996, the Company issued the following shares of Series C
Preferred Stock at a per share offering price of $4.80 and Series C Preferred
Stock warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series C
Number of Shares of Preferred Stock Represented by the
Name Series C Preferred Stock Warrant
- ---------------------------------------- ---------------------------- ---------------------------------------
<S> <C> <C>
Barker, Lee & Co. 52,659 42,617
J.M.R. Barker Foundation 29,554 22,838
Namakagon Associates L.P. 75,627 62,397
Upland Associates, L.P. 52,145 24,467
Lee, Dwight E. 6,518 3,058
Musser, William L. 6,518 3,058
McCray, Shriver Eckdahl & 9,375 --
Associates
Jones, Scott T. 1,417 --
Maximillian Partner's I 6,518 --
Maximillian Partner's II 3,513 --
Knowlton, Winthrop 4,000 5,465
Knowlton, Winthrop & Erica TTEE 10,000 13,663
Paine Webber CFN FBO Winthrop 10,000 13,663
Knowlton, IRA
Sharples, Arthur A. 29,554 1,818
Sterling, Lionel N. 41,073 32,727
Loevner, Kirk 13,750 18,786
Ruyan, Jerry L. 23,993 2,000
Gillett, Richard 6,518 3,058
Dauber, Phillip S. & Elayne TTEES 20,000 3,636
Fbo PSERD Trust
Dusa, Jerry A. & Margaret TTES fbo 20,000 3,636
Jerry A Dusa
Heller, Andrew & Mary Ann 10,000 1,818
Berman, Stuart M. 15,625 5,000
Halpert, Richard L. 5,208 --
Manners, Richard E. & Bonnie 7,500 --
</TABLE>
In May 1996, the Company issued the following shares of Series D
Preferred Stock at a per share offering price of $4.28 per share and Series D
Preferred Stock warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series D
Number of Shares of Preferred Stock Represented by the
Name Series D Preferred Stock Warrant
- ---------------------------------------- ---------------------------- ---------------------------------------
<S> <C> <C>
Wheatley Partners, LLC 584,112 12,500
Woodland Ventures Fund 93,458 6,250
Woodland Partners 70,093 6,250
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Series D
Number of Shares of Preferred Stock Represented by the
Name Series D Preferred Stock Warrant
- ---------------------------------------- ---------------------------- ---------------------------------------
<S> <C> <C>
Seneca Venture Fund 70,093 6,250
Ruyan, Jerry L. 70,093 12,500
Redwood Venture Group, Ltd. 23,364 --
Z/Cross Partnership 23,364 6,250
Brausch, J. Jeffrey 23,364 6,250
Motto, William J. 35,046 6,250
Evans, James E. 93,457 --
Goldblatt, Stuart 11,682 --
Whipple, Donald E. 23,364 --
Mosher, Greg C. 46,729 --
Manners, Richard E. & Bonnie 4,089 --
Halpert, Richard 5,841 --
Berman, Stuart M. 2,336 --
Knowlton, Winthrop 17,523 --
Jones, Scott T. 8,645 --
Maximillian Partner's II 1,869 --
McCray, Shriver, Eckdahl & 10,514 --
Associates
Chroscielewski, Mark 61,134 --
Thompson, James S. 55,022 --
Szykier, Andre 52,247 --
GKN Securities Corp. 17,523 --
Messmore, Thomas E. 23,364 --
Simon, John 11,682 --
Dusa, Jerry A. 35,046 --
White, Eugene R., Jr. 17,523 --
Mayes, John 5,841 --
Jepson, Rebecca A. 5,841 --
Heller, Andrew 35,046 --
</TABLE>
In July 1996, the Company issued the following shares of Series D
Preferred Stock at a per share offering price of $4.28 per share to the
following persons:
Number of Shares of
Name Series D Preferred Stock
- ---------------------------------------- ----------------------------
Berman, Beth L. 5,000
Berman, Stuart M. 6,250
Manners, Richard E., IRA 14,018
Halpert, Richard 8,177
Gaymark Associates 46,729
South Ferry #2, L.P. 112,000
Wolfson, Aaron 11,682
In August 1996, the Company issued the following shares of Series D
Preferred Stock at a per share offering price of $4.28 per share to the
following persons:
Number of Shares of
Name Series D Preferred Stock
- ---------------------------------------- ----------------------------
Brentwood Associates, L.P. 642,523
II-5
<PAGE>
In October 1996, the Company issued the following Series D Preferred
Stock Warrants at a per share offering price of $4.28 per share:
Number of Shares of Series D
Preferred Stock Represented by the
Name Warrant
- --------------------------------- ---------------------------------------
Phoenix Leasing 4,673
HCC Financial 934
Between November 1994 and July 1997, the Company issued the following
shares of Common Stock pursuant to option exercises at per share exercise prices
of between $0.03 and $0.12 per share to the following persons:
Name Number of Shares of Common Stock
- ------------------------------------ --------------------------------------
Vogel, Loring 1,458
Bunce, Charles III 39,437
Nadeau, Michael 1,250
Hendell, Reuben 55,000
Ai-Chang, Mitchell 1,053
Jurist, Susan 4,345
Story, Debra 666
Rothenberg, Pamela 208
Nadeau, Michael 2,917
Yanowitch, Richard 15,625
Thompson, James S. 59,350
Neugebauer, Marilyn 7,500
Fressle, Thomas 5,000
Petersen, David 6,875
Siragusa, Thomas 6,875
Heller, Andrew 25,000
Gillett, William 12,500
Puleo, Paula 2,673
Yanowitch, Richard 10,000
Furnia, Joseph 2,500
Mui, Karen 1,597
Daviche, Michael 14,417
Szykier, Remy 625
Petersen, David 5,555
Crowell, James 312
Zakrzewski, Andrew 2,500
Smith, Michael 9,722
Kulesa, Robert 1,562
Clough, Herbert C. 25,000
Tatelman, Michael 12,500
II-6
<PAGE>
In June 1997, in connection with interim financings, the Company issued
warrants to purchase shares of Common Stock to the following persons or
entities. The warrants have an exercise price of $4.28 per share.
NAME SHARES ISSUABLE UPON EXERCISE OF WARRANTS
- ---- -----------------------------------------
Brentwood Associates, L.P. VII 8,412
Dr. Stuart Berman 31,800
Dr. Richard Manners 31,800
Richard Mazur 7,066
In July 1997, in connection with a Bridge Financing, the Company issued
Bridge Notes and Bridge Warrants to the following persons. The exercise price of
the offering price for each issuance was the Note Amount. The Bridge Warrants
are exercisable into the Number of Warrant Shares reflected below. The Number of
Warrant Shares issuable upon the exercise of the Bridge Warrants may be adjusted
if the offering price of the Common Stock in this Offering is less than $8.00
per share.
<TABLE>
<CAPTION>
Name Note Amount($) Number of Warrant Shares
<S> <C> <C>
Adams, Robert M. 75,000 25,000
American Friends of Hebron Yeshiva 150,000 50,000
Aucott, George W. 25,000 8,333
Beck, Ronald N. 100,000 33,333
Blanch, Sonia Bernal 25,000 8,333
Braun, Emil E. 50,000 16,667
Brentwood Associates, LP VII 250,000 83,333
Buckridge, Charles R., Revocable Trust 100,000 33,333
U/A/D 5/7/93, Charles R. Buckridge Trustee
Cywiak, Aaron 25,000 8,333
D. Stake Mill Inc. 25,000 8,333
David, Steven II and Dara M., JTWROS 25,000 8,333
Davidson, Penn W. 25,000 8,333
Deakman, Thomas R. 25,000 8,333
Dimes, Edwin K. 25,000 8,333
Duffield, Albert W. 25,000 8,333
Feiner, Andrew 187,500 62,499
Friedman, Harry, Living Trust 25,000 8,333
Gadraz, Inc. 187,500 62,499
Gold, Stuart W. 37,500 12,500
Greenberg, Bruce 25,000 8,333
Greenblatt, Jeffrey N. 75,000 25,000
Greenstein, Stuart 25,000 8,333
Grossman, Richard L. 25,000 8,333
Gyenes, Andrew 25,000 8,333
Hantke, Richard 25,000 8,333
Harsac, Inc. 100,000 33,333
Hauser, Sara D. 25,000 8,333
Healy, John J. 25,000 8,333
Hutton, Terrence 25,000 8,333
Jablon, Alan 150,000 50,000
Joel, Ralph & Rosalie JTWROS 25,000 8,333
Juranich, Frank T., Jr. 25,000 8,333
Kilgannon, Owen L. 100,000 33,333
Kleinberg, Charles 25,000 8,333
Krinick, Ronald N. 25,000 8,333
Lasry, Marc 500,000 166,665
Leach, Scott 25,000 8,333
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name Note Amount($) Number of Warrant Shares
<S> <C> <C>
Lenny Corp. 50,000 16,667
Matusow, Paul 37,500 12,500
McMaster, John 25,000 8,333
Medved, Jonathan 25,000 8,333
Menkin, Michael 25,000 8,333
Muchnick, Howard W. 175,000 58,333
Nagar, Sheila 25,000 8,333
Neuman, Joseph 100,000 33,333
Parson, Ned F. 100,000 33,333
Providenti, A.C. 75,000 25,000
Reddy, Malladi S. 75,000 25,000
Rothberg, Lawrence 25,000 8,333
Rothstein, Steven R. 50,000 16,667
Rubin, Eric C. 100,000 33,333
Suker, Wayne 25,000 8,333
Sargent Capital Ventures, LLC 75,000 25,000
Schirripa, George T. 150,000 50,000
Schwartzbard, Michael 25,000 8,333
Siegal, Richard D. 25,000 8,333
Steinberg, Arthur B. & Co. 50,000 16,667
Stoker, Jerry W. 50,000 16,667
Tritt, Ramie A. 25,000 8,333
US Data Capture, Inc. 25,000 8,333
Wilks, Jeffrey S. 25,000 8,333
Wright, Donald C. 25,000 8,333
Zoe Consulting West Inc. Defined Benefit 200,000 66,666
Pension Plan
Zipper, Sandra 50,000 16,667
Zozzora, Frank Carmine and Jane March, 25,000 8,333
Community Property
</TABLE>
The sales set forth above are claimed to be exempt from registration
with the Securities and Exchange Commission pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as transactions by an issuer not involving
any public offering. All certificates representing the shares issued by the
Registrant referred to herein and currently outstanding have been properly
legended.
II-8
<PAGE>
Item 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant, as amended.
*4.1 Specimen Certificate of the Registrant's Common Stock.
*4.2 Form of Representatives' Purchase Option granted to GKN
Securities Corp.
*5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP as to the
legality of the securities.
10.1 1991 Incentive Stock Option Plan.
10.2 Form of Stock Option Agreement for Non-Qualified Options
granted to Advisors.
10.3 Employment Agreement, dated as of June 1, 1997, by and among
the Registrant and Mark A. Chroscielewski.
10.4 Employment Agreement, dated as of April 21, 1997, by and
among the Registrant and Deepak Mohan.
10.5 Employment Agreement, dated as of May 1, 1997, by and among
the Registrant and Daniel M. Pess.
10.6 Employment Agreement, dated as of May 8, 1996, by and among
the Registrant and Andre Szykier.
10.7 Employment Agreement, dated September 1, 1997, by and among
the Registrant and Robert A. Thompson.
10.8 HCC Loan Agreement dated March 31, 1992 and Addendum dated
May 8, 1996.
10.9 Software Licensing Agreement between Amdahl Corporation and
the Registrant dated November 27, 1996.
11.1 Statement re Computation of Earnings
*23.1 Consent of Olshan Grundman Frome & Rosenzweig LLP (included
in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP
24.1 Powers of Attorney (included on signature page to this
Registration Statement).
- ------------------------------------
* To be filed by Amendment.
II-9
<PAGE>
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised 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. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that it will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) include any Prospectus required by Section 10(a)(3)
of the Act;
(b) reflect in the Prospectus any facts or events which,
individually or together represent a fundamental change in the information set
forth in the Registration Statement;
(c) include any additional or changed material
information on the plan of distribution;
(2) for the purpose of determining any liability under the Act, each
post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) for determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1), or (4), or 497(h) under the Act as
part of this registration statement as of the time the Commission declared it
effective.
(5) for determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, the City of Uniondale,
State of New York, on the 29th day of August, 1997.
CROSSZ SOFTWARE CORPORATION
-------------------------------------------
(Registrant)
By: /S/ MARK A. CHROSCIELEWSKI
-------------------------------------------
Mark A. Chroscielewski, Chairman of the
Board, President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Mark A. Chroscielewski and Daniel
M. Pess his true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for and in his or her name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ MARK A. CHROSCIELEWSKI Chairman of the Board, President and Chief August 29, 1997
- ----------------------------------------------- Executive Officer (principal executive officer)
Mark A. Chroscielewski
/S/ ANDRE SZYKIER Executive Vice President and Chief Technology August 29, 1997
- ----------------------------------------------- Executive Officer (principal executive officer)
Andre Szykier
/S/ DANIEL M. PESS Vice President of Finance and Administration August 29, 1997
- ----------------------------------------------- Executive Officer (principal executive officer)
Daniel M. Pess Executive Officer (principal executive officer)
- ----------------------------------------------- Director August , 1997
Rino Bergonzi
/S/ SCOTT JONES Director August 29, 1997
- -----------------------------------------------
Scott Jones
/S/ ALAN KAUFMAN Director August 29, 1997
- -----------------------------------------------
Alan Kaufman
</TABLE>
II-11
CROSS/Z INTERNATIONAL, INC.
1991 INCENTIVE STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Incentive Stock Plan are to
attract and retain the best available personnel, to provide additional incentive
to the Employees of Cross/Z International, Inc. (the "Company") and to promote
the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion or the Board and as reflected in
the terms of the written option agreement. The Board also has the discretion to
grant Stock Purchase Rights.
2. DEFINITIONS. As used herein, the following definitions shall apply:
2.1 "Board" shall mean the Committee, if one has been appointed,
or the Board of Directors of the Company, if no Committee is appointed.
2.2 Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.3 "Common Stock" shall mean the Common stock of the Company.
2.4 "Company" shall mean Cross/Z International, Inc., a California
corporation.
2.5 "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4.1 of the Plan, if one is appointed.
2.6 "Consultant" shall mean any person who is engaged by the
Company or any subsidiary to render consulting services and is compensated for
such consulting services, and any director of the Company whether compensated
for such services or not; provided that if and in the event the Company
registers any class of any equity security pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term
Consultant shall thereafter not include directors who are to be compensated for
their services or are paid only a director's fee by the Company.
2.7 "Continuous Status as an Employee or Consultant" shall mean
the absence of any interruption or termination of service as an Employee or
Consultant, as applicable. Continuous Status as an
<PAGE>
Employee or Consultant shall not be considered interrupted in the case of sick
leave, military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
2.8 "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
2.9 "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
2.10 "Nonstatutory Stock Option" shall mean an Option not intended
to qualify as an Incentive Stock Option.
2.11 "Option" shall mean a stock option granted pursuant to the
Plan.
2.12 "Optioned Stock" shall mean the Common Stock subject to an
Option.
2.13 "Optionee" shall mean an Employee or Consultant who receives
an Option.
2.14 "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
2.15 "Plan" shall mean this 1991 Incentive Stock Plan.
2.16 "Purchaser" shall mean an Employee or Consultant who exercises
a Stock Purchase Right.
2.17 "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
2.18 "Stock Purchase Right" shall mean a right to purchase Common
Stock pursuant to the Plan or the right to receive a bonus of Common Stock for
past services.
2.19 "Subsidiary" shall mean a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the Maximum aggregate number of shares under the Plan is one million
four hundred thousand (1,400,000) shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
2
<PAGE>
If an Option or Stock Purchase Right should expire or become
unexercisable for any reason without having been exercised in full, then the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant or sale under the Plan.
Notwithstanding any other provision of the Plan, shares issued under the Plan
and later repurchased by the Company shall not become available for future grant
or sale under the Plan.
4. ADMINISTRATION OF THE PLAN.
4.1 Procedure. The Plan shall be administered by the Board of
Directors or the Company.
4.1.1 Subject to subparagraph (4.1.2), the Board or
Directors may appoint a Committee consisting of no. less than two members of the
Board of Directors to administer the Plan on behalf or the Board of Directors,
subject to such terms and conditions as the Board of Directors may prescribe.
Once appointed, the Committee shall continue to serve until otherwise directed
by the Board of Directors. Members of the Board who are either eligible for
options and/or Stock Purchase Rights or have been granted Options and/or Stock
Purchase Rights may vote on any matters affecting the administration of the Plan
or the grant of any Options and/or Stock Purchase Rights pursuant to the Plan,
except that no such member shall act upon the granting of an Option and/or Stock
Purchase Right to himself, but any such member may be counted in determining the
existence of a quorum at any meeting or the Board during which action is taken
with respect to the granting of Options and/or Stock Purchase Rights to him.
4.1.2 Notwithstanding the foregoing subparagraph (4.1.1),
if and in any event the Company registers any class of any equity security
pursuant to Section 12 of the Exchange Act, from the effective date of such
registration until six months after the termination of such registration, any
grants of Options and/or Stock Purchase Rights to officers or directors shall
only be made by the Board of Directors; provided, however, that if a majority of
the Board of Directors is eligible to participate in this Plan or any other
stock option or other stock plan of the Company or any of its affiliates, or has
been eligible at any time within the preceding year, any grants of options
and/or Stock Purchase Rights to directors must be made by, or only in accordance
with the recommendation of, a Committee consisting of three or more persons, who
may but need not be directors or employees of the Company, appointed by the
Board of Director, and having full authority to act in the matter, none of whom
is eligible to participate in this Plan or any other stock option or other stock
plan of the Company or any of its affiliates, or has been eligible at any time
within the preceding year. Any Committee administering the Plan with respect to
grants to
3
<PAGE>
officers who are not also directors shall conform to the requirements of the
preceding sentence. Once appointed, the Committee shall continue to serve until
otherwise directed by the Board of Directors.
4.1.3 Subject to the foregoing subparagraphs (4.1.1) and
(4.1.2), from time to time the Board of Directors may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan.
4.2 Powers Of The Board. Subject to the provisions of the Plan,
the Board shall have the authority, in its discretion: (1) to grant Incentive
Stock Options, Nonstatutory Stock Options or Stock Purchase Rights; (2) to
determine, upon review of relevant information and in accordance with Section 7
of the Plan, the fair market value of the Common Stock; (3) to determine the
exercise price per share of Options or Stock Purchase Rights, to be granted,
which exercise price shall be determined in accordance with Section 7 of the
Plan; (4) to determine the Employees or Consultants to whom, and the time or
times at which, Options or Stock Purchase Rights shall be granted and the number
of shares to be represented by each Option or Stock Purchase Right; (I) to
interpret the Plan; (6) to prescribe, amend and rescind rules and regulations
relating to the Plan; (7) to determine the terms and provisions of each Option
and Stock Purchase Right granted (which need not be identical) and, with the
consent of the holder thereof, modify or amend each Option or Stock Purchase
Right; (8) to accelerate or defer (with the consent of the Optionee) the
exercise date of any Option, consistent with the provisions of Section 5 of the
Plan; (9) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option or Stock Purchase Right
previously granted by the Board; and (10) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
4.3 Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees,
Purchasers and any other holders of any Options or Stock Purchase Rights granted
under the Plan.
5. ELIGIBILITY.
5.1 Options and Stock Purchase Rights may be granted to Employees
and Consultants, provided that Incentive Stock Options may only be granted to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if he is otherwise eligible, be granted additional Option(s)
or Stock Purchase Right(s).
4
<PAGE>
5.2 No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other incentive stock options Granted to such Employee
by the Company or any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as or the date or grand c
the Option covering such Share) in excess of $300,000 becoming first available
for purchase upon exercise of one or more incentive stock options during any
calendar year.
5.3 Section 5.2 of the Plan shall apply only to an Incentive Stock
Option evidenced by an "Incentive Stock Option Agreements which sets forth the
intention of the Company and the Optionee that such option shall qualify as an
incentive stock option. Section 5.2 of the Plan shall not apply to any Option
evidenced by a "Nonstatutory Stock Option Agreement" which sets forth the
intention of the Company and the Optionee that such Option shall be a
Nonstatutory Stock Option.
5.4 The Plan shall not confer upon any Optionee or holder of a
Stock Purchase Right any right with respect to continuation of employment by or
the rendition of consulting services to the Company, nor shall it interfere in
any way with his right or the Company's right to terminate his employment or
services at any time.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by vote or the holders
of a majority of the outstanding shares or the Company entitled to vote on the
adoption of the Plan. It shall continue in effect for a term or ten (10) years
unless sooner terminated under Section 14 of the Plan.
7. EXERCISE PRICE AND CONSIDERATION.
7.1 The per Share exercise price for the Shares to be issued
pursuant to exercise of an Option or Stock Purchase Right
shall be such price as is determined by the Board, but shall
be subject to the following:
7.1.1 In the case of an Incentive Stock Option
(a) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the fair market value per Share on the date of grant.
(b) granted to any Employee, the per Share
exercise price shall be no less than 100% of the fair market value per Share on
the date of grant.
5
<PAGE>
7.1.2 In the case of a nonstatutory stock option
(a) granted to a person who at the time or the
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power or all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the fair market value
per Share on the date of the grant.
(b) granted to any person, the per Share
exercise price shall be no less than 85% of the fair market value per Share on
the date of grant.
7.1.3 In the case of a Stock Purchase Right granted to any
person, the per Share exercise price shall be no less than 85% or the fair
market value per Share on the date of grant.
7.1.4 In the case of an Option or Stock Purchase Right
granted on or after the effective date of registration of any class of equity
security of the Company pursuant to Section 12 of the Exchange Act and prior to
six months after the termination of such registration, the per Share exercise
price shall be no less than 100% of the fair market value per Share on the date
of grant.
7.2 The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the bid and
asked prices of the Common Stock for the date of grant, as reported in the Wall
Street Journal (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation (NASDAQ) System) or, in
the event the Common Stock is listed on a stock exchange, the fair market value
Share shall be the closing price on such exchange on the date or grand of the
option or Stock Purchase Right, as reported in the Wall Street Journal.
7.3 The consideration to be paid for the Shares to be issued upon
exercise of an Option or Stock Purchase Right, including the method of payment,
shall be determined by the Board and may consist entirely or cash, check,
promissory note, other Shares of Common Stock having a fair market value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said option shall be exercised, or any combination of such methods of
payment, or such other consideration and method of payment for the issuance of
Shares to the extent permitted under Sections 408 and 409 of the California
General Corporation Law. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company (Section 315(b)
of the California General Corporation Law).
6
<PAGE>
8. OPTIONS.
8.1 Term of Option. The tern of each Incentive Stock Option shall
be ten (10) years from the date of grant thereof or such shorter term as may be
provided in the Stock Option Agreement. The term of each Option that is not an
Incentive Stock Option shall be ten (10) years and one (1) day from the date or
grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Employee who, at the
time the Option is granted, owns stock representing more Than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, (i) if the Option is an Incentive Stock Option, the term of the
Option shall be five (I) years from the date of grant Thereof or such shorter
time as may be provided in the Stock Option Agreement, or (ii) if the Option is
not an Incentive Stock Option, the term of the Option shall be five (5) years
and one (1) day from the date or grant thereof or such other term as may be
provided in the Stock Option Agreement.
8.2 Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan. For purposes of this provision, an Incentive Stock Option
shall be treated as outstanding until such Incentive Stock Option is exercised
in full or expires by reason of lapse of time.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
The Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Board, consist of any
consideration and method of Payment allowable under Section 7 of the Plan. The
Company shall issue a stock certificate evidencing such shares as soon as
practicable. Until the Company receives written notice or such exercise and full
payment for the Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock. No
adjustment will be made for a dividend or other right for which the record dare
is Prior to the date of the stock certificate is issued, except as provided in
Section 31 or the Plan.
7
<PAGE>
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number or Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. If an
Employee or Consultant ceases to serve as an Employee or Consultant (as the case
may be), he may, but only within thirty (30) days (or such other period of time
not exceeding three (3) months as is determined by the Board at the time of
grant of the Option) after the date he ceases to be an Employee or Consultant
(as the case may be) or the Company, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of such termination, or
if he does not exercise such Option (which he was entitled to exercise) within
the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 8.2(b) above, in the event an Employee or Consultant is unable to
continue his employment or consulting relationship (as the case may be) with the
Company as a result of his total and permanent disability (as defined in Section
22(e)(3) of the Code), he may, but only within six (6) months (or such other
period of time not exceeding twelve (12) months as is determined by the Board at
the time of grant of the Option) from the date of termination, exercise his
Option to the extent he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise) within the time
specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an
Optionee:
(i) during the term of the Option who is at the
time of his death an Employee or Consultant of the Company and who shall have
been in Continuous Status as an Employee or Consultant since the date of grant
of the Option, the Option may be exercised, at any time within six (6) months
(or such other period of time as is determined by the Board at the time of grant
of the Option) following the date of death, by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant for six (6) months (or such other period of time as is determined by
the Board at the time of grant of the Option) after the date of death; or
8
<PAGE>
(e) within thirty (30) days (or such other period of time as
is determined by the Board at the time of grant of the Option) after the
termination of Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months (or such other period of time as is
determined by the Board at the time of grant of the Option) following the date
of death, by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of termination.
9. STOCK PURCHASE RIGHTS.
9.1 Rights to Purchase. After the Board of Directors determines
that it will offer an Employee or Consultant a Stock Purchase Right, it shall
deliver to the offeree a stock purchase agreement or stock bonus agreement, as
the case may be, setting forth the terms, conditions and restrictions relating
to the offer, including the number of Shares which such person shall be entitled
to purchase, and the time within which such person must accept such offer, which
shall in no event exceed six (6) months from the date upon which the Board of
Directors or its Committee made the determination to grant the Stock Purchase
right. The offer shall be accepted by execution of a stock purchase agreement or
stock bonus agreement in the form determined by the Board of Directors.
9.2 Issuance of Shares. Forthwith after payment therefor, the
Shares purchased shall be duly issued; provided, however, that the Board may
require that the purchaser make adequate provision for any Federal and State
withholding obligations of the Company as a condition to the Purchaser
purchasing such Shares.
9.3 Repurchase Option. Unless the Board determines otherwise, the
stock purchase agreement or stock bonus agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the Purchaser's employment with the Company for any reason (including death or
disability). If the Board so determines, the purchase price for shares
repurchased may be paid by cancellation of any indebtedness of the Purchaser to
the Company. The repurchase option shall lapse at such rate as the Board may
determine.
9.4 Other Provisions. The stock purchase agreement or stock bonus
agreement shall contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Board or Directors.
9
<PAGE>
10. NONTRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS.
The Options and Stock Purchase Rights may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee or Purchaser, only by the Optionee or Purchaser.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
Subject to any required action by the shareholders of the Company, the
number of shares of. Common Stock covered by each outstanding Option and Stock
Purchase Right, and the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right, or
repurchase of Shares from a Purchaser upon termination of employment, as well as
the Price per share of Common Stock covered by each such outstanding Option or
Stock Purchase Right, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock of the Company or the payment of a stock dividend with respect
to the Common Stock or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities off the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
In the event of the proposed dissolution or liquidation of the Company,
the Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not-otherwise be exercisable. In the event
of a Proposed sale of all or substantially all of the assets or the Company, or
the merger of the Company with or into another corporation, the Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or
10
<PAGE>
subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
12. TIME OF GRANT. The date of grant of an Option or Stock Purchase Right shall,
for all purposes, be the date on which the Board makes the determination
granting such Option or Stock Purchase Right. Notice of the determination shall
be given to each Employee or Consultant to whom an Option or Stock Purchase
Right is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
13.1 Amendment and Termination. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 17 of the
Plan:
13.1.1 any increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under Section 11 of the Plan;
13.1.2 any change in the designation of the class of persons
eligible to be granted Options and Stock Purchase Rights; or
13.1.3 if the Company has a class of equity securities
registered under Section 12 of the Exchange Act at the time of such revision or
amendment, any material increase in the benefits accruing to participants under
the Plan.
13.2 Shareholder Approval. If any amendment requiring shareholder
approval under Section 13.1 of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 17 of the Plan.
13.3 Effect of Amendment or Termination. Any such amendment or
termination or the Plan shall not affect Options or Stock Purchase Rights
already granted and such Options or Stock Purchase Rights shall remain in full
force and effect as if this
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<PAGE>
Plan had not been amended or terminated, unless mutually agreed otherwise
between the Optionee or purchaser (as the case may be) and the Board, which
agreement must be in writing and signed by the Optionee or Purchaser (as the
case may be) and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option or Stock Purchase Rights unless the exercise of
such Option or Stock Purchase Rights and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option or Stock Purchase Rights,
the Company may require the person exercising such Option or Stock Purchase
Rights to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. OPTION, STOCK PURCHASE AND STOCK BONUS AGREEMENTS. Options shall be
evidenced by written option agreements in such form as the Board shall approve.
Upon the exercise of Stock Purchase Rights, the Purchaser shall sign a stock
purchase agreement or stock bonus agreement in such form as the Board shall
approve.
17. SHAREHOLDER APPROVAL.
17.1 Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. If such shareholder approval is obtained at a duly held
shareholders' meeting, it may be obtained by the affirmative vote of the holders
of a majority
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<PAGE>
of the outstanding shares of the Company, such holders being present or
represented and entitled to vote thereon. If such shareholder approval is
obtained by written consent, it must be obtained by the unanimous written
consent of all shareholders of the Company, or by written consent of a smaller
percentage of shareholders but only if the Board determines, in its discretion
after consultation with the Company's legal counsel, that the written consent of
such a smaller percentage of shareholders will comply with all applicable laws
and will not adversely affect the qualifications of the Plan under Section 422A
of the Code.
17.2 If and in the event that the Company registers any class of
any equity securities pursuant to Section 12 of the Exchange Act, any required
approval of the shareholders of the Company obtained after such registration
shall be solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.
17.3 If any required approval by the shareholders of the Plan
itself or of any amendment thereto is solicited at any time otherwise than in
the manner described in Section 17.2 hereof, then the Company shall, at or prior
to the first annual meeting of shareholders held subsequent to the later of (1)
the first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
17.3.1 furnish in writing to the holders entitled to vote
for the Plan substantially the same information which would be required (if
proxies to be voted with respect to approval or disapproval of the Plan or
amendment were then being solicited) by the rules and regulations in effect
under Section 14(a) of the Exchange Act at the time such information, is
furnished; and
17.3.2 file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
Section 17.3.1 hereof not later than the date on which such information is first
sent or given to shareholders.
18. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee
and Purchaser, during the period for which he has one or more Options or Stock
Purchase Rights outstanding, copies of all annual reports and other information
which are provided to all shareholders of the Company. The Company shall not be
required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information.
13
CROSS/Z INTERNATIONAL, INC.
ADVISORY COMMITTEE STOCK OPTION AGREEMENT
I. NOTICE OF STOCK OPTION GRANT
Optionee's Name:
Optionee's Address
You have been granted an option to purchase Series D Preferred Stock of
the Company, subject to the terms and conditions of this Option Agreement, as
follows:
Date of Grant
Vesting Commencement Date
Exercise Price per Share
Total Number of Shares Granted
Total Exercise Price $
Type of Option: Nonstatutory Stock Option
Term/Expiration Date:
VESTING SCHEDULE:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
1/24 of the Shares subject to the Option shall vest each month after
the Vesting Commencement Date. Notwithstanding the foregoing, this option shall
become exercisable in full upon the closing of the Company's Initial Public
Offering (as that term is defined in the Company's Articles of Incorporation
then in effect) or in the event of a merger or sale of the assets of the Company
which would trigger the liquidation provisions set forth in Article III, Section
<PAGE>
2 of the Company's Articles of Incorporation then in effect.
I. TERMINATION PERIOD:
This Option may be exercised for sixty (60) days after termination of
membership on the Company's Advisory Committee, or such longer period as may be
applicable upon death or disability of Optionee as provided herein, but in no
event later than the Term/Expiration Date as provided above.
II. AGREEMENT
1. GRANT OF OPTION. Cross/Z International, Inc., a California
corporation (the "Company"), hereby grants to the Optionee named in the Notice
of Grant (the "Optionee"), an option (the "Option") to purchase the total number
of shares of Series D Preferred Stock (the "Shares") set forth in the Notice of
Grant, at the exercise price per share set forth in the Notice of Grant (the
"Exercise Price").
2. EXERCISE OF OPTION. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant as
follows:
(i) RIGHT TO EXERCISE.
(a) This Option may not be exercised for a fraction of
a Share.
(b) In the event of Optionee's death, disability or
other termination of the employment or consulting relationship, the
exercisability of the Option is governed by Sections 6, 7 and 8 below, subject
to the limitation contained in subsection 2(i)(c).
(c) In no event may this Option be exercised after the
date of expiration of the term of this Option as set forth in the Notice of
Grant.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by
written notice in the form attached as Exhibit A (the "Exercise Notice") which
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be reasonably required by the Company, including a required
market stand-off period of no more than 180 days following the Company's initial
public offering. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified mail to the Secretary of the Company. The
written notice shall be accompanied by payment of the Exercise Price. This
Option shall be deemed to be exercised upon receipt by the Company of such
written notice accompanied by the Exercise Price.
No Shares will be issued pursuant to the exercise of an Option
unless such issuance
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<PAGE>
and such exercise shall comply with all relevant provisions of law and the
requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:
(i) cash; or
(ii) check;
(iii) full recourse promissory note secured by assets other than
the purchased Shares;
(iv) surrender of other shares of Series D Preferred Stock of
the Company which in the case of Shares acquired pursuant to the exercise of a
Company option, (A) have been owned by the Optionee for more than six (6) months
on the date of surrender and (B) have a Fair Market Value on the date of
surrender equal to the Exercise Price of the Shares as to which the Option is
being exercised; or
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the Exercise Price.
5. RIGHT TO EXCHANGE OPTION.
(a) Subject to Section 5(b) hereof, the Optionee shall have the
right to exchange this Option (the "Exchange Right"), in whole or in part, at
any time prior to the Termination Date, for Shares as provided for in Section
5(b) below, and the Company shall accept all or any part of this Option so
submitted for such exchange; provided, however, that the maximum number of
Shares issuable upon exchange of this Option pursuant to this Section 5(a) shall
in no event exceed the number of Total Number of Shares Granted set forth in
Section 1 hereof.
(b) Upon exercise of the Exchange Right, the Company shall
deliver to the Optionee (without payment by the Optionee of any Exercise Price)
that number of Shares equal to the quotient obtained by dividing (i) the value
of this Option at the time the Exchange Right is exercised, determined by
subtracting the aggregate Exercise Price for the Shares in effect immediately
prior to the exercise of the Exchange Right from the aggregate Fair Market Value
(as defined below) of the Shares immediately prior to the exercise of the
Exchange Right, by (ii) the Fair Market Value of one Share immediately prior to
the exercise of the Exchange Right.
(c) The Exchange Right may be exercised by the Optionee by
delivering the Exchange Notice to the Company at the offices of the Company,
exercising the Exchange Right and specifying the total number of Shares the
holder of this Option will receive pursuant to such exchange.
(d) Any exchange effected hereunder shall be consummated at the
offices of the Company or at such other place as shall be mutually acceptable to
the Company and the holder hereof effecting such exchange. At the closing of any
such exchange, the Optionee will surrender the Option and the Company will
deliver to the Optionee a certificate or certificates for the number of Shares
issuable upon such exchange, together with cash in lieu of any fraction of a
share.
(e) As used herein, the "Fair Market Value" of the Shares shall
mean:
(i) in the event of a merger or sale of stock or sale
of assets, the value of the consideration to be received by the shareholders of
the Company for each share of Series D Preferred held (assuming, in the case of
a sale of assets, the Company is liquidated immediately following such sale and
the consideration paid to the Company is immediately distributed to its
shareholders), as determined in good faith by the Board of Directors of the
Company;
(ii) in the event of a liquidation, dissolution or
winding-up of the Company, the value of any non-cash consideration per share, if
any, to be received by the holders of the Company's Series D Preferred in such
liquidation, dissolution or winding-up, as determined in good faith by the Board
of Directors of the Company;
(iii) in the event of an Initial Public Offering, the
offering price per share of common stock sold in such Initial Public Offering,
net of commissions and discounts; and
(iv) in all other cases, as shall be reasonably
determined in good faith by the Board of Directors.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
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<PAGE>
7. TERMINATION OF RELATIONSHIP. In the event Optionee's status as a
member of the Company's Advisory Committee terminates, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "Termination
Date"), exercise this Option during the Termination Period set out in the Notice
of Grant. To the extent that Optionee was not entitled to exercise this Option
at the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
8. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of Optionee as a member of the Company's
Advisory Committee as a result of his or her disability, Optionee may, but only
within twelve (12) months from the date of such termination (and in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
9. DEATH OF OPTIONEE. In the event of termination of Optionee as a
member of the Company's Advisory Committee as a result of the death of Optionee,
the Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the date of expiration of the term of
this Option as set forth in Section 10 below), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent the Optionee could exercise the Option at the date of
death.
10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
11. TERM OF OPTION. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the terms of this Option.
12. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon
exercising a Nonstatutory Option, he will recognize income for tax purposes in
an amount equal to the excess of the then Fair Market Value of the Shares over
the exercise price. However, the timing of this income recognition may be
deferred for up to six months if Optionee is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). If the
Optionee is an Employee, the Company will be required to withhold from
Optionee's compensation, or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income.
Additionally, the Optionee may at some point be required to satisfy tax
withholding obligations with respect to the disqualifying disposition of an
Incentive Stock Option. The Optionee shall satisfy his or her tax withholding
obligation arising upon the exercise of this Option out of Optionee's
compensation or by payment to the Company.
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<PAGE>
13. TAX CONSEQUENCES. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT
A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(i) EXERCISE OF NONSTATUTORY STOCK OPTION. There may
be a regular federal income tax liability upon the exercise of a Nonstatutory
Stock Option. The Optionee will be treated as having received compensation
income (taxable at ordinary income tax rates) equal to the excess, if any, of
the Fair Market Value of the Shares on the date of exercise over the Exercise
Price. If Optionee is an Employee or a former Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount in cash equal to a percentage
of this compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) DISPOSITION OF SHARES. If Shares are held for at
least one year, any gain realized on disposition of the Shares will be treated
as long-term capital gain for federal income tax purposes.
14. RIGHT OF FIRST REFUSAL. The Shares shall be subject to the right of
first refusal contained in Section 5 of the Exercise Notice.
15. REGISTRATION RIGHTS. That certain Restated Registration Rights
Agreement dated as of even date herewith between the Company and the parties
named on Exhibit A attached thereto is incorporated herein by reference. The
Shares shall be deemed "Registrable Securities" thereunder and Optionee shall be
deemed a "Holder" upon exercise of the Option.
16. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The number of shares of
Series D Preferred Stock covered by this Option, as well as the exercise price
per share, shall be proportionately adjusted for any increase or decrease in the
number of outstanding shares of Series D Preferred Stock of the Company
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of outstanding shares of Series D Preferred Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration". Such adjustment shall be made by
the Board of Directors of the Company, whose determination shall be final,
binding and conclusive. Except as specifically provided herein, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or exercise price of shares of Series
D Preferred Stock subject to this Option.
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<PAGE>
In the event of the proposed dissolution or liquidation of the Company,
this Option will terminate immediately prior to consummation of such proposed
action, unless otherwise provided by the Board of Directors of the Company.
17. ENTIRE AGREEMENT; GOVERNING LAW. This Option Agreement and the
Exhibits hereto constitute the entire agreement of the parties with respect to
the subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by California law except for that body of law pertaining to conflict of
laws.
CROSS/Z INTERNATIONAL, INC.,
a California corporation
------------------------------
Mark Chroscielewski, President
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION GRANTED HEREBY IS EARNED ONLY BY CONTINUING SERVICE ON THE ADVISORY
COMMITTEE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). IN THE EVENT AN OPTION IS TERMINATED BEFORE IT IS
FULLY VESTED, THE UNVESTED PORTION SHALL BECOME AVAILABLE TO THE ADVISORY
COMMITTEE FOR FUTURE GRANT AS MAY BE AGREED UPON BY THE ADVISORY COMMITTEE.
Optionee hereby accepts this Option subject to all of the terms and
provisions hereof and thereof. Optionee has reviewed this Option in its
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board of Directors upon any questions arising under
this Option. Optionee further agrees to notify the Company upon any change in
the residence address indicated below.
Dated: May 8, 1996
------------------------------
Optionee
------------------------------
Print Name
Residence Address:
------------------------------
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-8-
<PAGE>
EXHIBIT A
EXERCISE NOTICE
Cross/Z International, Inc.
60 Charles Lindbergh Blvd.
Uniondale, NY 11553
Attention: Corporate Secretary
1. EXERCISE OF OPTION. Effective as of today, ___________, 19__, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Series D Preferred Stock (the "Shares") of Cross/Z
International, Inc., a California corporation (the "Company"), under and
pursuant to the Advisory Committee Stock Option Agreement dated May 8, 1996 (the
"Option Agreement").
2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee
has received, read and understood the Option Agreement and agrees to abide by
and be bound by its terms and conditions.
3. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing such
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued
Optionee shall enjoy rights as a stockholder until such time as
Optionee disposes of the Shares or the Company or its assignee(s) exercises the
Right of First Refusal hereunder. Upon such exercise, Optionee shall have no
further rights as a holder of the Shares so purchased except the right to
receive payment for the Shares so purchased in accordance with the provisions of
this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing
the Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by
Optionee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").
<PAGE>
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares
shall deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within
fifteen (15) days after receipt of the Notice, the Company or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all, but not less
than all, of the Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for
the Shares purchased by the Company or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) (check if appropriate: ____) PAYMENT. Payment of the
Purchase Price shall be made, at the option of the Company or its assignee(s),
in cash, by check, with full recourse promissory note, or with such other
consideration as may be provided for in Section 4 of the Option Agreement, or by
any combination thereof within 30 days after receipt of the Notice or in the
manner and at the times set forth in the Notice.
(e) (check if appropriate: ____) EXCHANGE OF OPTION. The
Option is being exercised pursuant to Section 5 of the Option Agreement. The
undersigned desires to exchange the Option for the issuance of ______ shares of
Series D Preferred Stock.
(f) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company or its assignees shall again be offered
the Right of First Refusal before any Shares held by the Holder may be sold or
otherwise transferred.
(g) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section.
<PAGE>
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(h) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal shall terminate as to any Shares 90 days after the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
on Form S-1, SB-1 or SB-2 (or successor forms) filed with and declared effective
by the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. Optionee understands and agrees that the Company
shall cause the legends set forth below or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of the Shares
together with any other legends that may be required by the Company or by state
or federal securities laws:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. NO SALE OR DISPOSITION OF THESE
SECURITIES MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE ACT OR RECEIPT OF A NO ACTION LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO, AND MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH, AN
AGREEMENT AMONG THE HOLDERS OF THESE SECURITIES AND CERTAIN
OTHER SHAREHOLDERS OF THE COMPANY'S STOCK, WHICH AGREEMENT
INCLUDES RIGHTS OF FIRST REFUSAL AND CO-SALE, A COPY OF WHICH
IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER."
(b) STOP-TRANSFER NOTICES. Optionee agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required
(i) to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii) to
treat as owner of such Shares or to accord the right to vote or pay dividends to
any purchaser or other transferee to whom such Shares shall have been so
transferred.
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<PAGE>
7. SUCCESSORS AND ASSIGNS. The Company may assign any of its
rights under this Agreement to single or multiple assignees, and this Agreement
shall inure to the benefit of the successors and assigns of the Company. Subject
to the restrictions on transfer herein set forth, this Agreement shall be
binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
8. INTERPRETATION. Any dispute regarding the interpretation of
this Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the
Company's stock option plans and agreements, which shall review such dispute at
its next regular meeting. The resolution of such a dispute by the Board or
committee shall be final and binding on the Company and on Optionee.
9. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed
by and construed in accordance with the laws of the State of California
excluding that body of law pertaining to conflicts of law. Should any provision
of this Agreement be determined by a court of law to be illegal or
unenforceable, the other provisions shall nevertheless remain effective and
shall remain enforceable.
10. NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery or
four (4) days after deposit in the United States mail by certified mail, with
postage and fees prepaid, addressed to the other party at its address as shown
below beneath its signature, or to such other address as such party may
designate in writing from time to time to the other party.
11. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
12. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company
the full Exercise Price for the Shares.
13. ENTIRE AGREEMENT. The Notice of Grant/Option Agreement are
incorporated herein by reference. This Agreement, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE:
CROSS/Z INTERNATIONAL, INC.
(Signature) __________________________
Mark Chroscielewski, President
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<PAGE>
ADDRESS:
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<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : CROSS/Z INTERNATIONAL, INC.
SECURITY : Series D Preferred Stock
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities other than pursuant to that certain Amended and Restated
Registration Rights Agreement dated as of May 8, 1996 by and among the Company
and the parties named in Exhibit A thereto. Optionee understands that the
certificate evidencing the Securities will be imprinted with a legend that
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel satisfactory to the
Company and any other legend required under applicable state securities laws.
<PAGE>
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under Rule
701 at the time of the grant of the Option to the Optionee, the exercise will be
exempt from registration under the Securities Act. In the event the Company
becomes subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), ninety (90)
days thereafter (or such longer period as any market stand-off agreement may
require) the Securities exempt under Rule 701 may be resold, subject to the
satisfaction of certain of the conditions specified by Rule 144, including: (1)
the resale being made through a broker in an unsolicited "broker's transaction"
or in transactions directly with a market maker (as said term is defined under
the Exchange Act); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three-month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the
time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than two years after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than three years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any securities of the Company under the Securities Act, Optionee
shall not sell or otherwise transfer any Shares or other securities of the
Company during the 180-day period following the date of the final Prospectus
contained in a registration statement of the Company filed under the Securities
Act; provided, however, that such restriction shall only apply to the first
registration statement of the Company to become effective under the Securities
Act which includes securities to be sold on behalf of the Company to the public
in an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
(e) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that
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<PAGE>
such persons and their respective brokers who participate in such transactions
do so at their own risk. Optionee understands that no assurances can be given
that any such other registration exemption will be available in such event.
Signature of Optionee:
________________________________
________________________________
Print Name
Date:_____________, 19__
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CROSS/Z INTERNATIONAL, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of June 1, 1997 (the "Effective Date"), by and between Mark
Chroscielewski (the "Executive") and Cross/Z International, Inc., a California
company (the "Company").
R E C I T A L S
The Company and the Executive desire to enter into this Agreement in
order to provide additional financial security and benefits to the Executive, to
encourage the Executive to continue employment with the Company and to enhance
the motivation and incentive of the Executive to increase the profitability of
the Company.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of the Executive with the Company,
the parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company shall employ the Executive in
the position of PRESIDENT & CEO with such duties, responsibilities and
compensation as in effect as of the Effective Date; provided, however, that the
Board of Directors of the Company (the "Board") shall have the right to revise
such responsibilities and compensation from time to time as the Board may deem
necessary or appropriate. Such duties and responsibilities shall be commensurate
with Executive's past practices and consistent with his position as President
and Chief Executive Officer of the Company. If any such revision constitutes
"Involuntary Termination" as defined in Section 8 (d) of this Agreement, the
Executive shall be entitled to benefits upon such Involuntary Termination as
provided under this Agreement.
(b) OBLIGATIONS. The Executive shall devote his full
business efforts and time to the Company and its subsidiaries. The foregoing,
however, shall not preclude the Executive from engaging in such activities and
services as do not interfere or conflict with his responsibilities to the
Company.
2. TERMINATION. This Agreement shall continue in force and effect
until the earliest of: (i) December 31, 1999 or (ii) until such time as notice
of non-renewal or termination of this Agreement is given in writing by either
the Company or the Executive to the other (the "Termination Event"). The Company
and the Executive agree to meet to negotiate in good faith the renewal of this
Agreement two (2) months prior to the Termination Event. This Agreement may be
extended for an additional period or periods by mutual written agreement of the
Company and the Executive. A termination of the terms of this Agreement pursuant
to the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation
<PAGE>
or benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement, nor affect Executive's right to
twelve (12) months of Base Compensation as severance pay after the termination.
3. COMPENSATION AND BENEFITS.
(a) BASE COMPENSATION. The Company shall pay the
Executive as compensation for services a base salary at the annualized rate of
not less than $150,000. Such salary shall be reviewed at least annually. Such
salary shall be paid periodically in accordance with normal Company payroll. The
annual compensation specified in this Section, as adjusted from time to time,
before any salary reduction under Section 401(k) of the Internal Revenue Code,
deferred compensation plan or agreement or any other benefit or plan requiring
reduction of salary, is referred to in this Agreement as "Base Compensation."
(b) BONUS. Beginning with the Company's current fiscal
year and for each fiscal year thereafter during the term of this Agreement, the
Executive shall be eligible to receive an annual bonus (the "Bonus") based upon
a target or targets approved by the Board annually. Although the maximum Bonus
that may be earned by an executive executing this Agreement may differ, it shall
exceed the maximum potential bonus that may be earned by executives with a lower
base compensation and be consistent with the Executive's position as a senior
executive (the maximum potential bonus hereinafter referred to as the "Target
Bonus"). The Bonus payable hereunder shall be payable in accordance with the
Company's normal practices and policies.
(c) VACATION. The Executive shall be entitled to four
(4) weeks of paid vacation per year or such additional vacation as may be
permitted from time to time by Company policy. In recognition that business
demands may prevent the Executive from taking such vacation in full, the
Executive may accrue any vacation not taken without limitation, notwithstanding
any Company policy to the contrary.
(d) EXECUTIVE BENEFITS. The Executive shall be eligible
to participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the determination
of the Board or any committee administering such plan or program. Participation
shall be consistent with the Executive's position as President of the Company.
The Company shall reimburse the Executive for all reasonable business and travel
expenses actually incurred or paid by the Executive in the performance of
services on behalf of the Company, in accordance with the Company's expense
reimbursement policy as in effect from time to time.
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<PAGE>
4. SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT DURING TERM OF AGREEMENT.
If the Executive's employment with the Company terminates during the term of
this Agreement, then the Executive shall be entitled to receive severance
benefits as follows:
(i) INVOLUNTARY TERMINATION. If, at any time
during the term of this Agreement, the Executive's employment terminates as a
result of Involuntary Termination other than for Cause, Disability or death, or
the Company breaches any of the material terms of this Agreement (either of the
foregoing, an "Event"), the Company shall pay the Executive severance in the
amount of one-twelfth (1/12) of the Base Compensation of the Executive at the
time of such termination (without giving effect to any reduction in Base
Compensation that resulted in such Involuntary Termination) per month, for a
period twelve (12) months or the number of full and partial months remaining on
the term of the Agreement, if lower, but not less than twelve (12) months (the
"Wind-down Period"). The Company shall retain the Executive as a consultant
during the Wind-down Period and the Executive shall continue to vest in the
options granted to the Executive to date (the "Options"). The Executive may take
other employment during the Wind-down Period, and any such other employment
shall not reduce such continuation of Option vesting and cash payments as set
forth herein.
(ii) VOLUNTARY RESIGNATION; TERMINATION FOR
CAUSE. If the Executive's employment terminates by reason of the Executive's
voluntary resignation (and is not an Involuntary Termination), or if the
Executive is terminated for Cause, then the Executive shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established (and applicable) under the Company's then-existing severance and
benefits plans and policies at the time of such termination.
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<PAGE>
(iii) DISABILITY; DEATH. If the Company
terminates the Executive's employment as a result of the Executive's Disability,
or such Executive's employment is terminated due to the death of the Executive,
then the Executive shall not be entitled to receive severance or other benefits
except (i) those (if any) as may then be established (and applicable) under the
Company's then-existing severance and other benefits plans and policies at the
time of such Disability or death, (ii) benefits required by applicable laws, and
(iii) in the case of death, the Executive's salary for thirteen (13) weeks
payable to the Executive's surviving spouse, or if the Executive has no spouse,
to the Executive's estate. In the event of termination as a result of Disability
under this Agreement, the Executive shall be entitled to the benefits provided
under the Company's then-existing disability or extended sick pay plan, for so
long as such Executive continues to be disabled under this Agreement or benefits
otherwise terminate under such plan, whether or not the Executive is deemed to
be disabled under such plan.
(b) CONTINUING BENEFITS. In the event the Executive is
entitled to severance benefits pursuant to subsection 4(a)(i), then in addition
to such severance benefits, the Executive shall receive Company-paid health,
dental, vision, disability and life insurance coverage as provided to such
Executive immediately prior to the Executive's termination, upon the terms and
conditions, including deductibles and co-payments, provided in the Company's
then-existing plans, policies and programs (the "Company-Paid Coverage"). If
such coverage included the Executive's dependents immediately prior to the
Executive's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for twelve (12) months after the
Termination Date in the case of life insurance coverage and for the joint lives
of the Executive and his spouse on the Effective Date in the case of medical,
dental and vision coverage.
Notwithstanding the foregoing, if the Executive is
covered under any medical, life, dental, vision or disability insurance plan(s)
provided by a subsequent employer, then the amount of coverage required to be
provided by the Company hereunder shall be reduced by the amount of coverage
provided by the subsequent employer's plan(s) for so long as such coverage
continues. The Executive's rights under this Section 4(b) shall be in addition
to, and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation, continuation coverage required by Section 4980B of the Internal
Revenue Code.
(c) ACCRUED SALARY, BENEFITS AND EXPENSES. In addition,
(i) the Company shall pay the Executive any unpaid base salary and unpaid bonus
due for periods prior to the Termination Date; (ii) the Company shall pay the
Executive all of the Executive's accrued and unused vacation through the
Termination Date; and (iii) following submission of proper expense reports by
the Executive, the Company shall reimburse the Executive for all expenses
reasonably and necessarily incurred by the Executive in connection with the
business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
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<PAGE>
(d) RETIREMENT PLANS. In addition to any other
retirement rights to which Executive may be legally entitled by contract or
pursuant to any plan or program, the Company shall pay the Executive regularly
scheduled payments which shall commence on the Executive's normal retirement age
or earlier if the Executive elects early retirement and shall be payable in
accordance with the Company's then-existing retirement plan, if any, determined
as though the Executive continued his employment with the Company for an
additional twelve (12) months following the Termination Date or until Executive
has attained normal retirement age under such Plan, whichever occurs earlier.
For purposes of determining the amount Executive is to receive the Company shall
utilize the greater of the Executive's compensation as defined under any such
retirement plan in effect on the date of this Agreement for the year including
the Termination Date.
(e) OPTIONS. In the event the Executive is entitled to
severance benefits pursuant to subsection 4(a)(i), the Executive's stock options
and other exercise rights shall remain exercisable (i) a period of twelve (12)
months following such termination, or (ii) the date Executive no longer serves
as a consultant to the Company, subject to the applicable option or exercise
term, and except as provided in subsection 4(f) below.
(f) VESTING OF BENEFITS. If the Executive's employment
terminates as a result of Involuntary Termination other than Cause, Disability,
or death within twelve (12) months of a Change-in-Control or, prior thereto, if
resulting from a Change-in-Control, then any unvested benefits on the date of
termination, including stock options, restricted stock, stock appreciation
rights, growth units, or other incentive compensation (other than target bonus),
shall immediately accelerate and become fully vested and exercisable. The
Executive shall thereupon have fully vested rights to such benefits in
accordance with the terms of applicable plan or agreement.
In the event that the Executive has exercisable rights,
such as stock options, such rights shall remain exercisable for a period of
twelve (12) months following such termination, subject to any option or exercise
term under an applicable plan.
(g) DEFERRED COMPENSATION. Any compensation deferred by
the Executive shall be subject to the terms and conditions of any applicable
plan or agreement, and shall not be affected or altered by this Agreement.
5. PROPRIETARY RIGHTS AND SEPARATION AGREEMENT. The Company and the
Executive have previously entered into a Proprietary Rights and Separation
Agreement dated as of June 16, 1992 (the "Separation Agreement"). Sections 1 and
3 of the Separation Agreement shall remain in full force and effect after the
Effective Date of this Agreement. Section 2 of the Separation Agreement shall be
deemed superseded by the provisions of this Agreement.
6. LIMITATION ON PAYMENTS. In the event that any payment or benefit
received or to be received by the Executive pursuant to this Agreement or
otherwise (collectively the "Payments") would be subject to the Excise Tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar or successor provision (the "Excise Tax"), the Company
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<PAGE>
shall pay to the Executive within ninety (90) days of the Termination Date (or,
if earlier, within ninety (90) days of the date the Executive becomes subject to
the Excise Tax), an additional amount (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of any Excise Tax and any
federal (and state and local) income tax on the Payments, shall be equal to the
Payments minus all applicable taxes on the Payments. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amount of
Excise Tax, (i) any other payments or benefits received or to be received in
connection with a Change of Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company), shall be treated as
"parachute payments" within the meaning of Section 280G(b)(2) of the Code or any
similar or successor provision, and all "excess parachute payments" within
meaning of Section 280G(b)(1) or any similar or successor provision shall be
treated as subject to the Excise Tax, unless in the opinion of tax counsel
selected by the Company such other payments or benefits (in whole or in part) do
not constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services within the meaning of
Section 280G(b) or any similar or successor provision of the Code in excess of
the base amount within the meaning of Section 280G(b)(3) or any similar or
successor provision of the Code, or are otherwise not subject to Excise Tax;
(ii) the amount of the Payments which shall be treated as subject to the Excise
Tax shall be equal to the lesser of (A) the total amount of the Payments or (B)
the amount of the excess parachute payments within the meaning of Section
280G(b)(1) (after applying clause (i) above), and (iii) the value of any
non-cash benefits or an deferred payment or benefit shall be determined by the
Company's independent auditors in accordance with the principles of Section
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at
the highest nominal marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made and state and local income
taxes at the highest nominal marginal rate of taxation in the state and locality
of the Executive's residence on the Termination Date, net of the maximum
reduction in federal income taxes which could be obtained from deducting of such
state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder at the time
of termination of the Executive's employment, the Executive shall repay to the
Company at the time that the amount of such reduction in Excise Tax is finally
determined the portion of the Gross-Up Payment attributable to such reduction
(plus the portion of the Gross-Up Payment attributable to the Excise Tax and
federal (and state and local) income tax imposed on the Gross-Up Payment being
repaid by the Executive if such repayment results in a reduction in Excise Tax
and/or a federal (and state and local) income tax deduction) plus interest on
the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of a payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any interest
payable with respect to such excess) at the time that the amount of such excess
is finally determined.
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7. NONCOMPETE.
(a) The Executive agrees that during his employment with
the Company and for two (2) years following termination of such employment, he
shall not engage in, own, manage or control, or participate in the ownership,
management or control, directly or indirectly, of any person, firm, corporation
or other entity engaged in the design, development, provision, sales or
marketing of any product for the creation, compression, storage, retrieval or
analysis of relational databases ("Restricted Business") anywhere in the world
(the "Restricted Area"). Notwithstanding the foregoing, the Executive may
acquire shares representing not more than 5% of the outstanding securities of
any publicly traded company engaged in the Restricted Business. The convenant
contained in this Section 7(a) shall be construed as a series of separate
covenants, one for each country in the world and each province or state within
such country. If, in any judicial proceeding, a court shall refuse to enforce
any of such separate covenants, such unenforceable covenant shall be deemed
deleted from this Agreement to the extent necessary to permit the remaining
separate covenants included in this Section 7(a) to be enforced.
(b) The provisions of Section 1.1 of the Separation
Agreement shall continue in full force and effect for a period of two (2) years
following the termination of the Executive's employment, unless such termination
is (i) an Involuntary Termination other than for Cause, (ii) due to the
Executive's death or Disability, (iii) due to the Company's unwillingness to
renew or extend this Agreement, or (iv) within one year following a Change of
Control.
8. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean:
(i) Executive's failure to begin to
substantially perform his duties or responsibilities hereunder for a period of
fifteen (15) days after written notice thereof from the Board to Executive
setting forth in reasonable detail the respects in which the Company believes
Executive has not substantially performed his duties or responsibilities
hereunder or continued failure to begin to substantially perform such duties or
responsibilities for a period of thirty (30) days after such written notice;
(ii) Executive personally engaging in
knowing and intentional illegal conduct which is seriously injurious to the
Company or its affiliates;
(iii) Executive being charged with
committing a felony, or committing an act of dishonesty or fraud against, or the
misappropriation of property belonging to, the Company or its affiliates;
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(iv) Executive knowingly and intentionally
breaching in any material respect the terms of the Separation Agreement or any
other confidentiality agreement or invention or proprietary information
agreement with the Company;
(v) Executive's commencement of material
negotiation as regards employment with another employer while he is an employee
of the Company; or
(vi) any material breach by Executive of any
material provision of this Agreement for which a cure is not initiated within
fifteen (15) days of notice thereof from the Board to Executive or which remains
uncured for thirty (30) days following such notice.
(b) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
(i) Any "person" or "group" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing 30%
or more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the
Board of the Company occurring within a two-year period after an Initial Public
Offering of the Company's common stock, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company);
or
(iii) The shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) DISABILITY. "Disability" shall mean that the
Executive has been unable to perform his duties under this Agreement for a
period of three or more consecutive months due to illness, accident or other
physical or mental incapacity.
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(d) INVOLUNTARY TERMINATION. "Involuntary Termination"
shall include, but not be limited to,
(i) the continued assignment to Executive of
any duties or the continued material reduction of Executive's duties, either of
which is substantially inconsistent with the level of Executive's position with
the Company, for a period of thirty (30) days after notice thereof from
Executive to the Board of Directors setting forth in reasonable detail the
respects in which Executive believes such assignments or duties are
substantially inconsistent with the level of Executive's position;
(ii) a reduction in Executive's salary,
other than any such reduction which is part of, and generally consistent with, a
general reduction of officer salaries;
(iii) a reduction by the Company in the kind
or level of employee benefits (other than salary and bonus) to which Executive
is entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is materially reduced
(other than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Executive's principal
place for the rendering of the services to be provided by him hereunder to a
location more than fifty (50) miles from the present location of the principal
executive office of the Company;
(v) any purported termination of the
Executive's employment by the Company other than for Cause or as a result of the
Executive's Disability;
(vi) the failure of the Company to obtain
the assumption of this Agreement by any successors contemplated in Section 9
below; or
(vii) any material breach by the Company of
any material provision of this Agreement which continues uncured for thirty (30)
days following notice thereof; provided that none of the foregoing shall
constitute Involuntary Termination to the extent Executive has agreed thereto.
(e) TERMINATION DATE. "Termination Date" shall mean (i)
if the Executive's employment is terminated by the Company for Disability,
thirty (30) days after notice of termination is given to the Executive (provided
that the Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty (30) day period), (ii) if the
Executive's employment is terminated by the Company for any other reason, the
date on which a notice of termination is given, or (iii) if the Agreement is
terminated by the Executive, the date on which the Executive delivers the notice
of termination to the Company.
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9. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. The terms of this Agreement
and all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
10. NOTICE.
(a) GENERAL. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Executive, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Corporate Secretary.
(b) NOTICE OF TERMINATION. Any termination by the
Company for Cause or by the Executive as an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with this Agreement. Such notice shall indicate the specific
termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice). The
failure by the Executive to include in the notice any fact or circumstance which
contributes to a showing of Involuntary Termination shall not waive any right of
the Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
11. CONFIDENTIALITY. Except as required by applicable laws, neither
party shall disclose the contents of this Agreement without first obtaining the
prior written consent of the other party, provided, however, that the Executive
may disclose this Agreement to his attorney, financial planner and tax advisor
if such persons agree to keep the terms hereof confidential.
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12. MISCELLANEOUS PROVISIONS.
(a) VOLUNTARY EXECUTION; CONFLICT WAIVER. The Executive
has been advised to obtain independent legal counsel regarding this Agreement.
The Executive is signing this Agreement knowingly and voluntarily. The Company
and the Executive acknowledge that Wilson Sonsini Goodrich & Rosati ("WSGR") has
acted as counsel to the Company in negotiating this Agreement and will continue
to serve as the Company's general counsel in the future, acknowledge that each
has received full disclosure of any potential conflict of interest which may
result from such representation, and knowingly and voluntarily waive any such
conflict of interest.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Executive and by an authorized officer of
the Company (other than the Executive). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) WHOLE AGREEMENT; INTEGRATION. This Agreement,
Sections 1 and 3 of the Separation Agreement, any written agreements or other
documents evidencing matters referred to herein and any written Company existing
plans that are referenced herein represent the entire agreement and
understanding between the parties as to the subject matter hereof and thereof
and supersede all prior or contemporaneous agreements as to the subject matter
hereof and thereof, whether written or oral. No waiver, alteration, or
modification, if any, of the provisions of this Agreement shall be binding
unless in writing and signed by duly authorized representatives of the parties
hereto.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of New York. The parties hereto consent to the personal jurisdiction
of the state and federal courts of the County of Nassau, State of New York.
(e) SEVERABILITY. The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) NO ASSIGNMENT OF BENEFITS. The rights of any person
to payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
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(h) ASSIGNMENT BY COMPANY. The Company may assign its
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that the Company shall remain jointly and severally
liable under this Agreement, and provided further, that no assignment shall be
made if the net worth of the assignee is less than the net worth of the Company
at the time of assignment. In the case of any such assignment, the term
"Company" when used in a section of this Agreement shall mean the corporation
that actually employs the Executive.
(i) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(j) LEGAL FEES. In the event that the Executive is
required to enforce this Agreement or to procure the benefits hereunder through
arbitration or litigation, the Executive shall be entitled to reasonable legal
fees and all out-of-pocket expenses.
(k) INTEREST. In the event that the Company fails to
make any payment hereunder or afford any benefit when due, the Company shall pay
interest at the rate of the publicly-announced prime rate of interest of Bank of
America N.T. & S.A. or its successor in effect from time to time plus 3%, or the
maximum amount permitted by law, whichever is less.
IN WITNESS WHEREOF, each of the parties has executed
this Agreement, in the case of the Company by its duly authorized officer, as of
the day and year first above written.
"COMPANY" CROSS/Z INTERNATIONAL, INC.
/s/ Daniel M. Pess
--------------------------------------------------------
Daniel M. Pess, Vice President-Finance & Administration
"EXECUTIVE" MARK CHROSCIELEWSKI
/s/ MARK CHROSCIELEWSKI
--------------------------------------------------------
CROSS/Z INTERNATIONAL, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of April 21, 1997 (the "Effective Date"), by and between Deepak
Mohan (the "Executive") and Cross/Z International, Inc., a California company
(the "Company").
R E C I T A L S
The Company and the Executive desire to enter into this Agreement in
order to provide additional financial security and benefits to the Executive, to
encourage Executive to continue employment with the Company and to enhance the
motivation and incentive of Executive to increase the profitability of the
Company.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive with the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company shall employ the Executive in
the position of VICE PRESIDENT - ENGINEERING, with such duties, responsibilities
and compensation as in effect as of the Effective Date; provided, however, that
the Board of Directors of the Company (the "Board") shall have the right to
revise such responsibilities and compensation from time to time as the Board may
deem necessary or appropriate. Such duties and responsibilities shall be
commensurate with Executive's past practices and consistent with his position as
Vice President - Engineering of the Company. If any such revision constitutes
"Involuntary Termination" as defined in Section 7(d) of this Agreement, the
Executive shall be entitled to benefits upon such Involuntary Termination as
provided under this Agreement.
(b) OBLIGATIONS. The Executive shall devote his full
business efforts and time to the Company and its subsidiaries. The foregoing,
however, shall not preclude the Executive from engaging in such activities and
services as do not interfere or conflict with his responsibilities to the
Company.
(c) PRIOR OBLIGATIONS. The Executive has informed the
Company about his prior obligations/agreements with Computer Associates/Cheyenne
Software. Any compensation benefits received from Computer Associates
International will not be considered a breach of this agreement or any other
agreement that the Executive signed with the Company.
2. TERMINATION. This Agreement shall continue in force and effect
until the earliest of: (i) April 21, 1999 or (ii) until such time as notice of
non-renewal or termination of this Agreement is given in writing by either the
Company or the Executive to the other (the "Termination Event"). The
<PAGE>
Company and the Executive agree to meet to negotiate in good faith the renewal
of this Agreement two (2) months prior to the Termination Event. This Agreement
may be extended for an additional period or periods by mutual written agreement
of the Company and the Executive. A termination of the terms of this Agreement
pursuant to the preceding sentence shall be effective for all purposes, except
that such termination shall not affect the payment or provision of compensation
or benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement, nor affect Executive's right to six
(6) months of Base Compensation as severance pay after the termination.
3. COMPENSATION AND BENEFITS.
(a) BASE COMPENSATION. The Company shall pay the
Executive as compensation for services a base salary at the annualized rate of
not less than $150,000. Such salary shall be reviewed at least annually and may
be increased from time to time. Such salary shall be paid periodically in
accordance with normal Company payroll practice. The annual compensation
specified in this Section, as adjusted from time to time, before any salary
reduction under Section 401(k) of the Internal Revenue Code, deferred
compensation plan or agreement or any other benefit or plan requiring reduction
of salary, is referred to in this Agreement as "Base Compensation."
(b) VACATION. The Executive shall be entitled to three
(3) weeks of paid vacation per year or such additional vacation as may be
permitted from time to time by Company policy.
(c) EXECUTIVE BENEFITS. The Executive shall be eligible
to participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the determination
of the Board or any committee administering such plan or program. Participation
shall be consistent with the Executive's position as Vice President -
Engineering of the Company. The Company shall reimburse the Executive for all
reasonable business and travel expenses actually incurred or paid by the
Executive in the performance of services on behalf of the Company, in accordance
with the Company's expense reimbursement policy as in effect from time to time.
The Company agrees that the Executive may elect to delay his participation in
the Company's health and dental plan, and thereby elect to maintain his existing
coverage under the provisions of the insurance that is currently in effect. If
Executive so elects, the Company will reimburse to Executive all reasonable
documented costs associated with the continued coverage, for the Executive and
his immediate family, until such time as the existing coverage lapses. If the
Executive elects to be covered under the Company's health and dental plan, the
full cost of such coverage for Executive and his immediate family, will be borne
by the Company.
(d) STOCK OPTIONS. Pending Board approval, and subject
to the provisions of the Company's 1991 Stock Option Plan, the Executive will be
granted an option ("the Option") to purchase 100,000 shares of the Company's
common stock at an exercise price determined by the Board.
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The Option will begin to vest, and the grant date of such option, will be one
month from the date of this agreement. 25,000 shares (12/48 of the Option)
subject to the Option will vest and become exercisable on the first day of the
thirteenth month from the grant date. Each full month thereafter, an additional
1/48 of the Option will vest and become exercisable.
4. SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT DURING TERM OF AGREEMENT.
If the Executive's employment with the Company terminates during the term of
this Agreement, then the Executive shall be entitled to receive severance
benefits as follows:
(i) INVOLUNTARY TERMINATION. If, at any time
during the term of this Agreement, the Executive's employment terminates as a
result of Involuntary Termination other than for Cause, Disability or death, or
the Company breaches any of the material terms of this Agreement (either of the
foregoing, an "Event"), the Company shall pay the Executive severance in the
amount of one-twelfth (1/12) of the Base Compensation of the Executive at the
time of such termination (without giving effect to any reduction in Base
Compensation that resulted in such Involuntary Termination) per month, for a
period of six (6) months.
(ii) VOLUNTARY RESIGNATION; TERMINATION FOR
CAUSE. If the Executive's employment terminates by reason of the Executive's
voluntary resignation (and is not an Involuntary Termination), or if the
Executive is terminated for Cause, then the Executive shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established (and applicable) under the Company's then-existing severance and
benefits plans and policies at the time of such termination.
(iii) DISABILITY; DEATH. If the Company
terminates the Executive's employment as a result of the Executive's Disability,
or such Executive's employment is terminated due to the death of the Executive,
then the Executive shall not be entitled to receive severance or other benefits
except (i) those (if any) as may then be established (and applicable) under the
Company's then-existing severance and other benefits plans and policies at the
time of such Disability or death, (ii) benefits required by applicable laws, and
(iii) in the case of death, the Executive's salary for thirteen (13) weeks
payable to the Executive's surviving spouse, or if the Executive has no spouse,
to the Executive's estate. In the event of termination as a result of Disability
under this Agreement, the Executive shall be entitled to the benefits provided
under the Company's then-existing disability or extended sick pay plan, for so
long as such Executive continues to be disabled under this Agreement or benefits
otherwise terminate under such plan, whether or not the Executive is deemed to
be disabled under such plan.
(b) CONTINUING BENEFITS. In the event the
Executive is entitled to severance benefits pursuant to subsection 4(a)(i), then
in addition to such severance benefits, the Executive shall receive Company-paid
health, dental, vision, disability and life insurance coverage as provided to
such
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Executive immediately prior to the Executive's termination, upon the terms and
conditions, including deductibles and co-payments, provided in the Company's
then-existing plans, policies and programs.
(c) ACCRUED SALARY, BENEFITS AND EXPENSES. In addition,
(i) the Company shall pay the Executive any unpaid base salary for periods prior
to the Termination Date; (ii) the Company shall pay the Executive all of the
Executive's accrued and unused vacation through the Termination Date; and (iii)
following submission of proper expense reports by the Executive, the Company
shall reimburse the Executive for all expenses reasonably and necessarily
incurred by the Executive in connection with the business of the Company prior
to termination. These payments shall be made promptly upon termination and
within the period of time mandated by law.
(d) RETIREMENT PLANS. In addition to any other
retirement rights to which Executive may be legally entitled by contract or
pursuant to any plan or program, the Company shall pay Executive regularly
scheduled payments which shall commence on Executive's normal retirement age or
earlier if Executive elects early retirement and shall be payable in accordance
with the Company's then-existing retirement plan, if any, determined as though
the Executive continued his employment with the Company for an additional twelve
(12) months following the Termination Date or until Executive has attained
normal retirement age under such Plan, whichever occurs earlier. For purposes of
determining the amount Executive is to receive the Company shall utilize the
greater of the Executive's compensation as defined under any such retirement
plan in effect on the date of this Agreement for the year including the
Termination Date.
(e) OPTIONS. In the event the Executive is entitled to
severance benefits pursuant to subsection 4(a)(i), the Executive's stock options
and other exercise rights shall remain exercisable in accordance with the
provisions of the Stock Option Plan.
(f) VESTING OF BENEFITS. If a Change-of-Control occurs,
then any unvested benefits on the date of termination, including stock options,
restricted stock, stock appreciation rights, growth units, or other incentive
compensation , shall immediately accelerate and fifty percent (50%) of such
unvested benefits shall become fully vested and exercisable. If the Executive's
employment terminates as a result of Involuntary Termination other than Cause,
Disability, or death within twelve (12) months of a Change-of-Control or, prior
thereto, if resulting from a Change-of-Control, then any unvested benefits on
the date of termination, including stock options, restricted stock, stock
appreciation rights, growth units, or other incentive compensation ,shall
immediately accelerate and one hundred percent (100%) of such unvested benefits
shall become fully vested and exercisable. The Executive shall thereupon have
fully vested rights to such benefits in accordance with the terms of the
applicable plan or agreement.
(g) DEFERRED COMPENSATION. Any compensation deferred by
the Executive shall be subject to the terms and conditions of any applicable
plan or agreement, and shall not be affected or altered by this Agreement.
5. LIMITATION ON PAYMENTS. In the event that any payment or benefit
received or to be received by the Executive pursuant to this Agreement or
otherwise (collectively the "Payments") would
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be subject to the Excise Tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), or any similar or successor provision
(the "Excise Tax"), the Company shall pay to the Executive within ninety (90)
days of the Termination Date (or, if earlier, within ninety (90) days of the
date the Executive becomes subject to the Excise Tax), an additional amount (the
"Gross-Up Payment") such that the net amount retained by the Executive, after
deduction of any Excise Tax and any federal (and state and local) income tax on
the Payments, shall be equal to the Payments minus all applicable taxes on the
Payments. For purposes of determining whether any of the Payments will be
subject to the Excise Tax and the amount of Excise Tax, (i) any other payments
or benefits received or to be received in connection with a Change of Control of
the Company or the Executive's termination of employment (whether pursuant to
the terms of this Agreement or any other plan, arrangement or agreement with the
Company), shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code or any similar or successor provision, and all "excess
parachute payments" within meaning of Section 280G(b)(1) or any similar or
successor provision shall be treated as subject to the Excise Tax, unless in the
opinion of tax counsel selected by the Company such other payments or benefits
(in whole or in part) do not constitute parachute payments, or such excess
parachute payments (in whole or in part) represent reasonable compensation for
services within the meaning of Section 280G(b) or any similar or successor
provision of the Code in excess of the base amount within the meaning of Section
280G(b)(3) or any similar or successor provision of the Code, or are otherwise
not subject to Excise Tax; (ii) the amount of the Payments which shall be
treated as subject to the Excise Tax shall be equal to the lesser of (A) the
total amount of the Payments or (B) the amount of the excess parachute payments
within the meaning of Section 280G(b)(1) (after applying clause (i) above), and
(iii) the value of any non-cash benefits or an deferred payment or benefit shall
be determined by the Company's independent auditors in accordance with the
principles of Section 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income taxes at the highest nominal marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest nominal marginal rate of taxation in
the state and locality of the Executive's residence on the Termination Date, net
of the maximum reduction in federal income taxes which could be obtained from
deducting of such state and local taxes. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company at the time that the amount of such reduction in Excise Tax
is finally determined the portion of the Gross-Up Payment attributable to such
reduction (plus the portion of the Gross-Up Payment attributable to the Excise
Tax and federal (and state and local) income tax imposed on the Gross-Up Payment
being repaid by the Executive if such repayment results in a reduction in Excise
Tax and/or a federal (and state and local) income tax deduction) plus interest
on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of a payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any interest
payable with respect to such excess) at the time that the amount of such excess
is finally determined.
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6. NONCOMPETE.
(a) If the Executive's employment terminates by reason
of voluntary resignation under Section 4, (a), (ii) only above, then the
Executive agrees not to work directly in the data warehousing, data mining and
business intelligence areas, or any technologies that the Executive is directly
engaged in with the Company for one year following the termination date.
(b) The Executive agrees that during his employment with
the Company, he shall not engage in, own, manage or control, or participate in
the ownership, management or control, directly or indirectly, of any person,
firm, corporation or other entity engaged in the design, development, provision,
sales or marketing of any product for the creation, compression, storage,
retreival or analysis of relational databases ("Restricted Business") anywhere
in the world (the "Restricted Area"). Notwithstanding the foregoing, the
Executive may acquire shares representing not more than 5% of the outstanding
securities of any publicly traded company engaged in the Restricted Business.
The convenant contained in this Section 6 shall be construed as a series of
separate covenant, one for each country in the world and each province or state
within such country. If, in any judicial proceeding, a court shall refuse to
enforce any of such separate covenants, such unenforceable covenant shall be
deemed deleted from this Agreement to the extent necessary to permit the
remaining separate covenants included in this Section 6 to be enforced.
7. DEFINITION OF TERMS. The following terms referred to
in this Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean:
(i) Executive's failure to begin to
substantially perform his duties or responsibilities hereunder for a period of
fifteen (15) days after written notice thereof from the Board to Executive
setting forth in reasonable detail the respects in which the Company believes
Executive has not substantially performed his duties or responsibilities
hereunder or continued failure to begin to substantially perform such duties or
responsibilities for a period of thirty (30) days after such written notice;
(ii) Executive personally engaging in
knowing and intentional illegal conduct which is seriously injurious to the
Company or its affiliates;
(iii) Executive being convicted of a felony,
or committing an act of dishonesty or fraud against, or the misappropriation of
property belonging to, the Company or its affiliates;
(iv) Executive knowingly and intentionally
breaching in any material respect the terms of the confidentiality agreement or
invention or proprietary information agreement with the Company;
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(v) Executive's commencement of employment
with another employer while he is an employee of the Company, without the
Company's written consent; or
(vi) any material breach by Executive of any
material provision of this Agreement for which a cure is not initiated within
fifteen (15) days of notice thereof from the Board to Executive or which remains
uncured for thirty (30) days following such notice.
(b) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
(i) Any "person" or "group" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing 50%
or more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the
Board of the Company occurring within a two-year period, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of June 1, 1997, or (B) are elected, or nominated for election, to the Board of
the Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company);
or
(iii) The shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) DISABILITY. "Disability" shall mean that the
Executive has been unable to perform his duties under this Agreement for a
period of three or more consecutive months due to illness, accident or other
physical or mental incapacity.
(d) INVOLUNTARY TERMINATION. "Involuntary Termination"
shall include, but not be limited to,
(i) the continued assignment to Executive of
any duties or the continued material reduction of Executive's duties, either of
which is substantially inconsistent with the level of
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Executive's position with the Company, for a period of thirty (30) days after
notice thereof from Executive to the Board of Directors setting forth in
reasonable detail the respects in which Executive believes such assignments or
duties are substantially inconsistent with the level of Executive's position;
(ii) a reduction in Executive's salary;
(iii) a reduction by the Company in the kind
or level of employee benefits (other than salary and bonus) to which Executive
is entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is materially reduced
(other than any such reduction applicable to officers of the Company generally);
(iv) any purported termination of the
Executive's employment by the Company other than for Cause or as a result of the
Executive's Disability;
(v) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 9 below;
or
(vi) any material breach by the Company of
any material provision of this Agreement which continues uncured for thirty (30)
days following notice thereof; provided that none of the foregoing shall
constitute Involuntary Termination to the extent Executive has agreed thereto.
(e) TERMINATION DATE. "Termination Date" shall mean (i)
if the Executive's employment is terminated by the Company for Disability,
thirty (30) days after notice of termination is given to the Executive (provided
that the Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty (30) day period), (ii) if the
Executive's employment is terminated by the Company for any other reason, 30
days from the date on which a notice of termination is given, or (iii) if the
Agreement is terminated by the Executive, 30 days from the date on which the
Executive delivers the notice of termination to the Company.
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. The terms of this Agreement
and all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
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<PAGE>
9. NOTICE.
(a) GENERAL. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Executive, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Corporate Secretary.
(b) NOTICE OF TERMINATION. Any termination by the
Company for Cause or by the Executive as an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with this Agreement. Such notice shall indicate the specific
termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice). The
failure by the Executive to include in the notice any fact or circumstance which
contributes to a showing of Involuntary Termination shall not waive any right of
the Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
10. CONFIDENTIALITY. Except as required by applicable laws, neither
party shall disclose the contents of this Agreement without first obtaining the
prior written consent of the other party, provided, however, that the Executive
may disclose this Agreement to his attorney, financial planner and tax advisor
if such persons agree to keep the terms hereof confidential.
11. MISCELLANEOUS PROVISIONS.
(a) VOLUNTARY EXECUTION; CONFLICT WAIVER. The Executive
has been advised to obtain independent legal counsel regarding this Agreement.
The Executive is signing this Agreement knowingly and voluntarily. The Company
and the Executive acknowledge that Wilson Sonsini Goodrich & Rosati has acted as
counsel to the Company in negotiating this Agreement and may continue to serve
as the Company's general counsel in the future, acknowledge that each has
received full disclosure of any potential conflict of interest which may result
from such representation, and knowingly and voluntarily waive any such conflict
of interest.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Executive and by an authorized officer of
the Company (other than the Executive). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
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(c) WHOLE AGREEMENT; INTEGRATION. This Agreement and any
written agreements or other documents evidencing matters referred to herein and
any written Company existing plans that are referenced herein represent the
entire agreement and understanding between the parties as to the subject matter
hereof. No waiver, alteration, or modification, if any, of the provisions of
this Agreement shall be binding unless in writing and signed by duly authorized
representatives of the parties hereto.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of New York. The parties hereto consent to the personal jurisdiction
of the state and federal courts of the County of Nassau, State of New York.
(e) SEVERABILITY. The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) NO ASSIGNMENT OF BENEFITS. The rights of any person
to payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(h) ASSIGNMENT BY COMPANY. The Company may assign its
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that the Company shall remain jointly and severally
liable under this Agreement, and provided further, that no assignment shall be
made if the net worth of the assignee is less than the net worth of the Company
at the time of assignment. In the case of any such assignment, the term
"Company" when used in a section of this Agreement shall mean the corporation
that actually employs the Executive.
(i) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(j) LEGAL FEES. In the event that the Executive is
required to enforce this Agreement or to procure the benefits hereunder through
arbitration or litigation, the Executive shall be entitled to reasonable legal
fees and all out-of-pocket expenses.
(k) INTEREST. In the event that the Company fails to
make any payment hereunder or afford any benefit when due, the Company shall pay
interest at the rate of the publicly-announced prime rate of interest of Bank of
America N.T. & S.A. or its successor in effect from time to time plus 3%, or the
maximum amount permitted by law, whichever is less.
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IN WITNESS WHEREOF, each of the parties has executed
this Agreement, in the case of the Company by its duly authorized officer, as of
the day and year first above written.
"COMPANY" CROSS/Z INTERNATIONAL, INC.
/s/ Mark Chroscielewski
------------------------------------------------
Mark Chroscielewski, President
"EXECUTIVE" DEEPAK MOHAN
/s/ DEEPAK MOHAN
------------------------------------------------
CROSS/Z INTERNATIONAL, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of May 1, 1997 (the "Effective Date"), by and between Daniel Pess
(the "Executive") and Cross/Z International, Inc., a California company (the
"Company").
R E C I T A L S
The Company and the Executive desire to enter into this Agreement in
order to provide additional financial security and benefits to the Executive, to
encourage the Executive to continue employment with the Company and to enhance
the motivation and incentive of the Executive to increase the profitability of
the Company.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive with the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company shall employ the Executive in
the position of VICE PRESIDENT OF FINANCE AND ADMINISTRATION, with such duties,
responsibilities and compensation as in effect as of the Effective Date;
provided, however, that the Board of Directors of the Company (the "Board")
shall have the right to revise such responsibilities and compensation from time
to time as the Board may deem necessary or appropriate. Such duties and
responsibilities shall be commensurate with the Executive's past practices and
consistent with his position as Vice President of Finance and Administration of
the Company. If any such revision constitutes "Involuntary Termination" as
defined in Section 7(d) of this Agreement, the Executive shall be entitled to
benefits upon such Involuntary Termination as provided under this Agreement.
(b) OBLIGATIONS. The Executive shall devote his full
business efforts and time to the Company and its subsidiaries. The foregoing,
however, shall not preclude the Executive from engaging in such activities and
services as do not interfere or conflict with his responsibilities to the
Company.
2. TERMINATION. This Agreement shall continue in force and effect
until the earliest of: (i) April 30, 1999 or (ii) until such time as notice of
non-renewal or termination of this Agreement is given in writing by either the
Company or the Executive to the other (the "Termination Event"). The Company and
the Executive agree to meet to negotiate in good faith the renewal of this
Agreement two (2) months prior to the Termination Event. This Agreement may be
extended for an additional period or periods by mutual written agreement of the
Company and the Executive. A termination of the terms of this Agreement pursuant
to the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of the terms
<PAGE>
of this Agreement, nor affect Executive's right to twelve (12) months of Base
Compensation as severance pay after the termination.
3. COMPENSATION AND BENEFITS.
(a) BASE COMPENSATION. The Company shall pay the
Executive as compensation for services a base salary at the annualized rate of
$125,000. Such salary shall be reviewed at least annually and may be increased
from time to time. Such salary shall be paid periodically in accordance with
normal Company payroll practice. The annual compensation specified in this
Section, as adjusted from time to time, before any salary reduction under
Section 401(k) of the Internal Revenue Code, deferred compensation plan or
agreement or any other benefit or plan requiring reduction of salary, is
referred to in this Agreement as "Base Compensation."
(b) BONUS. The Executive shall be entitled to an annual
bonus of not less than $10,000, based on the successful completion of certain
objectives designated by the Board and the President of the Company.
(c) VACATION. The Executive shall be entitled to three
(3) weeks of paid vacation per year (four (4) weeks effective July 1, 1997) or
such additional vacation as may be permitted from time to time by Company
policy.
(d) EXECUTIVE BENEFITS. The Executive shall be eligible
to participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the determination
of the Board or any committee administering such plan or program. Participation
shall be consistent with the Executive's position as Vice President of Finance
and Administration of the Company. The Company shall reimburse the Executive for
all reasonable business and travel expenses actually incurred or paid by the
Executive in the performance of services on behalf of the Company, in accordance
with the Company's expense reimbursement policy as in effect from time to time.
4. SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT DURING TERM OF AGREEMENT.
If the Executive's employment with the Company terminates during the term of
this Agreement, then the Executive shall be entitled to receive severance
benefits as follows:
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(i) INVOLUNTARY TERMINATION. If, at any time
during the term of this Agreement, the Executive's employment terminates as a
result of Involuntary Termination other than for Cause, Disability or death, or
the Company breaches any of the material terms of this Agreement (either of the
foregoing, an "Event"), the Company shall pay the Executive severance in the
amount of one-twelfth (1/12) of the Base Compensation of the Executive at the
time of such termination (without giving effect to any reduction in Base
Compensation that resulted in such Involuntary Termination) per month, for a
period of twelve (12) months.
(ii) VOLUNTARY RESIGNATION; TERMINATION FOR
CAUSE. If the Executive's employment terminates by reason of the Executive's
voluntary resignation (and is not an Involuntary Termination), or if the
Executive is terminated for Cause, then the Executive shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established (and applicable) under the Company's then-existing severance and
benefits plans and policies at the time of such termination.
(iii) DISABILITY; DEATH. If the Company
terminates the Executive's employment as a result of the Executive's Disability,
or such Executive's employment is terminated due to the death of the Executive,
then the Executive shall not be entitled to receive severance or other benefits
except (i) those (if any) as may then be established (and applicable) under the
Company's then-existing severance and other benefits plans and policies at the
time of such Disability or death, (ii) benefits required by applicable laws, and
(iii) in the case of death, the Executive's salary for thirteen (13) weeks
payable to the Executive's surviving spouse, or if the Executive has no spouse,
to the Executive's estate. In the event of termination as a result of Disability
under this Agreement, the Executive shall be entitled to the benefits provided
under the Company's then-existing disability or extended sick pay plan, for so
long as such Executive continues to be disabled under this Agreement or benefits
otherwise terminate under such plan, whether or not the Executive is deemed to
be disabled under such plan.
(b) CONTINUING BENEFITS. In the event the Executive is
entitled to severance benefits pursuant to subsection 4(a)(i), then in addition
to such severance benefits, the Executive shall receive Company-paid health,
dental, vision, disability and life insurance coverage as provided to such
Executive immediately prior to the Executive's termination, upon the terms and
conditions, including deductibles and co-payments, provided in the Company's
then-existing plans, policies and programs, for a period of twelve (12) months.
(c) ACCRUED SALARY, BENEFITS AND EXPENSES. In addition,
(i) the Company shall pay the Executive any unpaid base salary for periods prior
to the Termination Date; (ii) the Company shall pay the Executive all of the
Executive's accrued and unused vacation through the Termination Date; and (iii)
following submission of proper expense reports by the Executive, the Company
shall reimburse the Executive for all expenses reasonably and necessarily
incurred by the Executive in connection with the business of the Company prior
to termination. These payments shall be made promptly upon termination and
within the period of time mandated by law.
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(d) RETIREMENT PLANS. In addition to any other
retirement rights to which the Executive may be legally entitled by contract or
pursuant to any plan or program, the Company shall pay the Executive regularly
scheduled payments which shall commence on Executive's normal retirement age or
earlier if Executive elects early retirement and shall be payable in accordance
with the Company's then-existing retirement plan, if any, determined as though
the Executive continued his employment with the Company for an additional twelve
(12) months following the Termination Date or until Executive has attained
normal retirement age under such Plan, whichever occurs earlier. For purposes of
determining the amount the Executive is to receive the Company shall utilize the
greater of the Executive's compensation as defined under any such retirement
plan in effect on the date of this Agreement for the year including the
Termination Date.
(e) OPTIONS. In the event the Executive is entitled to
severance benefits pursuant to subsection 4(a)(i), the Executive's stock options
and other exercise rights shall remain exercisable in accordance with the
provisions of the Stock Option Plan.
(f) VESTING OF BENEFITS. If the Executive's employment
terminates as a result of Involuntary Termination other than Cause, Disability,
or death within twelve (12) months of a Change-of-Control or, prior thereto, if
resulting from a Change-of-Control, then any unvested benefits on the date of
termination, including stock options, restricted stock, stock appreciation
rights, growth units, or other incentive compensation, shall immediately
accelerate and one hundred percent (100%) of such unvested benefits shall become
fully vested and exercisable. The Executive shall thereupon have fully vested
rights to such benefits in accordance with the terms of the applicable plan or
agreement.
(g) DEFERRED COMPENSATION. Any compensation deferred by
the Executive shall be subject to the terms and conditions of any applicable
plan or agreement, and shall not be affected or altered by this Agreement.
5. LIMITATION ON PAYMENTS. In the event that any payment or benefit
received or to be received by the Executive pursuant to this Agreement or
otherwise (collectively the "Payments") would be subject to the Excise Tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar or successor provision (the "Excise Tax"), the Company
shall pay to the Executive within ninety (90) days of the Termination Date (or,
if earlier, within ninety (90) days of the date the Executive becomes subject to
the Excise Tax), an additional amount (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of any Excise Tax and any
federal (and state and local) income tax on the Payments, shall be equal to the
Payments minus all applicable taxes on the Payments. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amount of
Excise Tax, (i) any other payments or benefits received or to be received in
connection with a Change of Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company), shall be treated as
"parachute payments" within the meaning of Section 280G(b)(2) of the Code or any
similar or successor provision, and all "excess parachute payments" within
meaning of Section 280G(b)(1) or any similar or successor provision shall be
treated as subject to the Excise Tax, unless in the opinion of tax counsel
selected by the Company such other payments or benefits (in whole or in part) do
not constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services within the meaning of
Section 280G(b) or any similar or successor
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provision of the Code in excess of the base amount within the meaning of Section
280G(b)(3) or any similar or successor provision of the Code, or are otherwise
not subject to Excise Tax; (ii) the amount of the Payments which shall be
treated as subject to the Excise Tax shall be equal to the lesser of (A) the
total amount of the Payments or (B) the amount of the excess parachute payments
within the meaning of Section 280G(b)(1) (after applying clause (i) above), and
(iii) the value of any non-cash benefits or an deferred payment or benefit shall
be determined by the Company's independent auditors in accordance with the
principles of Section 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income taxes at the highest nominal marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest nominal marginal rate of taxation in
the state and locality of the Executive's residence on the Termination Date, net
of the maximum reduction in federal income taxes which could be obtained from
deducting of such state and local taxes. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company at the time that the amount of such reduction in Excise Tax
is finally determined the portion of the Gross-Up Payment attributable to such
reduction (plus the portion of the Gross-Up Payment attributable to the Excise
Tax and federal (and state and local) income tax imposed on the Gross-Up Payment
being repaid by the Executive if such repayment results in a reduction in Excise
Tax and/or a federal (and state and local) income tax deduction) plus interest
on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of a payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any interest
payable with respect to such excess) at the time that the amount of such excess
is finally determined.
6. NONCOMPETE.
(a) If the Executive's employment terminates by reason
of voluntary resignation under Section 4, (a), (ii) only above, then the
Executive agrees not to work directly in the data warehousing, data mining and
business intelligence areas, or any technologies that the Executive is directly
engaged in with the Company for one year following the termination date.
(b) The Executive agrees that during his employment with
the Company, he shall not engage in, own, manage or control, or participate in
the ownership, management or control, directly or indirectly, of any person,
firm, corporation or other entity engaged in the design, development, provision,
sales or marketing of any product for the creation, compression, storage,
retreival or
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analysis of relational databases ("Restricted Business") anywhere in the world
(the "Restricted Area"). Notwithstanding the foregoing, the Executive may
acquire shares representing not more than 5% of the outstanding securities of
any publicly traded company engaged in the Restricted Business. The convenant
contained in this Section 6 shall be construed as a series of separate covenant,
one for each country in the world and each province or state within such
country. If, in any judicial proceeding, a court shall refuse to enforce any of
such separate covenants, such unenforceable covenant shall be deemed deleted
from this Agreement to the extent necessary to permit the remaining separate
covenants included in this Section 6 to be enforced.
7. DEFINITION OF TERMS. The following terms referred to in
this Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean:
(i) Executive's failure to begin to
substantially perform his duties or responsibilities hereunder for a period of
fifteen (15) days after written notice thereof from the Board to Executive
setting forth in reasonable detail the respects in which the Company believes
Executive has not substantially performed his duties or responsibilities
hereunder or continued failure to begin to substantially perform such duties or
responsibilities for a period of thirty (30) days after such written notice;
(ii) Executive personally engaging in
knowing and intentional illegal conduct which is seriously injurious to the
Company or its affiliates;
(iii) Executive being convicted of a felony,
or committing an act of dishonesty or fraud against, or the misappropriation of
property belonging to, the Company or its affiliates;
(iv) Executive knowingly and intentionally
breaching in any material respect the terms of the confidentiality agreement or
invention or proprietary information agreement with the Company;
(v) Executive's commencement of employment
with another employer while he is an employee of the Company, without the
Company's written consent; or
(vi) any material breach by Executive of any
material provision of this Agreement for which a cure is not initiated within
fifteen (15) days of notice thereof from the Board to Executive or which remains
uncured for thirty (30) days following such notice.
(b) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
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(i) Any "person" or "group" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing 50%
or more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the
Board of the Company occurring within a two-year period, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of June 1, 1997, or (B) are elected, or nominated for election, to the Board of
the Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company);
or
(iii) The shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) DISABILITY. "Disability" shall mean that the
Executive has been unable to perform his duties under this Agreement for a
period of three or more consecutive months due to illness, accident or other
physical or mental incapacity.
(d) INVOLUNTARY TERMINATION. "Involuntary Termination"
shall include, but not be limited to,
(i) the continued assignment to Executive of
any duties or the continued material reduction of Executive's duties, either of
which is substantially inconsistent with the level of Executive's position with
the Company, for a period of thirty (30) days after notice thereof from
Executive to the Board of Directors setting forth in reasonable detail the
respects in which Executive believes such assignments or duties are
substantially inconsistent with the level of Executive's position;
(ii) a reduction in Executive's salary;
(iii) a reduction by the Company in the kind
or level of employee benefits (other than salary and bonus) to which Executive
is entitled immediately prior to such reduction with
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the result that Executive's overall benefits package (other than salary and
bonus) is materially reduced (other than any such reduction applicable to
officers of the Company generally);
(iv) any purported termination of the
Executive's employment by the Company other than for Cause or as a result of the
Executive's Disability;
(v) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 9 below;
or
(vi) any material breach by the Company of
any material provision of this Agreement which continues uncured for thirty (30)
days following notice thereof; provided that none of the foregoing shall
constitute Involuntary Termination to the extent Executive has agreed thereto.
(e) TERMINATION DATE. "Termination Date" shall mean (i)
if the Executive's employment is terminated by the Company for Disability,
thirty (30) days after notice of termination is given to the Executive (provided
that the Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty (30) day period), (ii) if the
Executive's employment is terminated by the Company for any other reason, 30
days from the date on which a notice of termination is given, or (iii) if the
Agreement is terminated by the Executive, 30 days from the date on which the
Executive delivers the notice of termination to the Company.
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. The terms of this Agreement
and all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
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9. NOTICE.
(a) GENERAL. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Executive, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Corporate Secretary.
(b) NOTICE OF TERMINATION. Any termination by the
Company for Cause or by the Executive as an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with this Agreement. Such notice shall indicate the specific
termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice). The
failure by the Executive to include in the notice any fact or circumstance which
contributes to a showing of Involuntary Termination shall not waive any right of
the Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
10. CONFIDENTIALITY. Except as required by applicable laws, neither
party shall disclose the contents of this Agreement without first obtaining the
prior written consent of the other party, provided, however, that the Executive
may disclose this Agreement to his attorney, financial planner and tax advisor
if such persons agree to keep the terms hereof confidential.
11. MISCELLANEOUS PROVISIONS.
(a) VOLUNTARY EXECUTION; CONFLICT WAIVER. The Executive
has been advised to obtain independent legal counsel regarding this Agreement.
The Executive is signing this Agreement knowingly and voluntarily. The Company
and the Executive acknowledge that Wilson Sonsini Goodrich & Rosati has acted as
counsel to the Company in negotiating this Agreement and may continue to serve
as the Company's general counsel in the future, acknowledge that each has
received full disclosure of any potential conflict of interest which may result
from such representation, and knowingly and voluntarily waive any such conflict
of interest.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Executive and by an authorized officer of
the Company (other than the Executive). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) WHOLE AGREEMENT; INTEGRATION. This Agreement and any
written agreements or other documents evidencing matters referred to herein and
any written Company existing plans that are referenced herein represent the
entire agreement and understanding between the parties as to
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the subject matter hereof. No waiver, alteration, or modification, if any, of
the provisions of this Agreement shall be binding unless in writing and signed
by duly authorized representatives of the parties hereto.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of New York. The parties hereto consent to the personal jurisdiction
of the state and federal courts of the County of Nassau, State of New York.
(e) SEVERABILITY. The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) NO ASSIGNMENT OF BENEFITS. The rights of any person
to payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(h) ASSIGNMENT BY COMPANY. The Company may assign its
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that the Company shall remain jointly and severally
liable under this Agreement, and provided further, that no assignment shall be
made if the net worth of the assignee is less than the net worth of the Company
at the time of assignment. In the case of any such assignment, the term
"Company" when used in a section of this Agreement shall mean the corporation
that actually employs the Executive.
(i) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(j) LEGAL FEES. In the event that the Executive is
required to enforce this Agreement or to procure the benefits hereunder through
arbitration or litigation, the Executive shall be entitled to reasonable legal
fees and all out-of-pocket expenses.
(k) INTEREST. In the event that the Company fails to
make any payment hereunder or afford any benefit when due, the Company shall pay
interest at the rate of the publicly-announced prime rate of interest of Bank of
America N.T. & S.A. or its successor in effect from time to time plus 3%, or the
maximum amount permitted by law, whichever is less.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
"COMPANY" CROSS/Z INTERNATIONAL, INC.
/s/ Mark Chroscielewski
------------------------------------
Mark Chroscielewski, President
"EXECUTIVE" DANIEL M. PESS
/s/ DANIEL M. PESS
------------------------------------
CROSS/Z INTERNATIONAL, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of May 8, 1996 (the "Effective Date"), by and between Andre Szykier
(the "Executive") and Cross/Z International, Inc., a California company (the
"Company").
R E C I T A L S
The Company and the Executive desire to enter into this Agreement in
order to provide additional financial security and benefits to the Executive, to
encourage Executive to continue employment with the Company and to enhance the
motivation and incentive of Executive to increase the profitability of the
Company.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive with the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company shall employ the Executive in the
position of Executive Vice President and Chief Technical Officer, with such
duties, responsibilities and compensation as in effect as of the Effective Date;
provided, however, that the Board of Directors of the Company (the "Board")
shall have the right to revise such responsibilities and compensation from time
to time as the Board may deem necessary or appropriate. Such duties and
responsibilities shall be commensurate with Executive's past practices and
consistent with his position as Executive Vice President and Chief Technical
Officer of the Company. If any such revision constitutes "Involuntary
Termination" as defined in Section 8(d) of this Agreement, the Executive shall
be entitled to benefits upon such Involuntary Termination as provided under this
Agreement.
(b) OBLIGATIONS. The Executive shall devote his full business
efforts and time to the Company and its subsidiaries. The foregoing, however,
shall not preclude the Executive from engaging in such activities and services
as do not interfere or conflict with his responsibilities to the Company.
2. TERMINATION. This Agreement shall continue in force and effect until
the earliest of: (i) December 31, 1998 or (ii) until such time as notice of
non-renewal or termination of this Agreement is given in writing by either the
Company or the Executive to the other (the "Termination Event"). The Company and
the Executive agree to meet to negotiate in good faith the renewal of this
Agreement two (2) months prior to the Termination Event. This Agreement may be
extended for an additional period or periods by mutual written agreement of the
Company and the Executive. A termination of the terms of this Agreement pursuant
to the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement, nor affect Executive's right to
twelve (12) months of Base Compensation as severance pay after the termination.
<PAGE>
3. COMPENSATION AND BENEFITS.
(a) BASE COMPENSATION. The Company shall pay the Executive as
compensation for services a base salary at the annualized rate of not less than
$150,000. Such salary shall be reviewed at least annually and may be increased
from time to time. Such salary shall be paid periodically in accordance with
normal Company payroll. The annual compensation specified in this Section, as
adjusted from time to time, before any salary reduction under Section 401(k) of
the Internal Revenue Code, deferred compensation plan or agreement or any other
benefit or plan requiring reduction of salary, is referred to in this Agreement
as "Base Compensation."
(b) BONUS. Beginning with the Company's current fiscal year
and for each fiscal year thereafter during the term of this Agreement, the
Executive shall be eligible to receive an annual bonus (the "Bonus") based upon
a target or targets approved by the Board annually. Although the maximum Bonus
that may be earned by an executive executing this Agreement may differ, it shall
exceed the maximum potential bonus that may be earned by executives with a lower
base compensation and be consistent with the Executive's position as a senior
executive (the maximum potential bonus hereinafter referred to as the "Target
Bonus"). The Bonus payable hereunder shall be payable in accordance with the
Company's normal practices and policies.
(c) VACATION. The Executive shall be entitled to four (4)
weeks of paid vacation per year or such additional vacation as may be permitted
from time to time by Company policy. In recognition that business demands may
prevent the Executive from taking such vacation in full, the Executive may
accrue any vacation not taken without limitation, notwithstanding any Company
policy to the contrary.
(d) EXECUTIVE BENEFITS. The Executive shall be eligible to
participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the determination
of the Board or any committee administering such plan or program. Participation
shall be consistent with the Executive's position as Executive Vice President
and Chief Technical Officer of the Company. The Company shall reimburse the
Executive for all reasonable business and travel expenses actually incurred or
paid by the Executive in the performance of services on behalf of the Company,
in accordance with the Company's expense reimbursement policy as in effect from
time to time.
4. SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT DURING TERM OF AGREEMENT. If the
Executive's employment with the Company terminates during the term of this
Agreement, then the Executive shall be entitled to receive severance benefits as
follows:
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(i) INVOLUNTARY TERMINATION. If, at any time during
the term of this Agreement, the Executive's employment terminates as a result of
Involuntary Termination other than for Cause, Disability or death, or the
Company breaches any of the material terms of this Agreement (either of the
foregoing, an "Event"), the Company shall pay the Executive severance in the
amount of one-twelfth (1/12) of the Base Compensation of the Executive at the
time of such termination (without giving effect to any reduction in Base
Compensation that resulted in such Involuntary Termination) per month, for a
period twelve (12) months or the number of full and partial months remaining on
the term of the Agreement, if lower, but not less than twelve (12) months (the
"Wind-down Period"). The Company shall retain the Executive as a consultant
during the Wind-down Period and the Executive shall continue to vest in the
options granted to Executive to date (the "Options"). The Executive may take
other employment during the Wind-down Period, and any such other employment
shall not reduce such continuation of Option vesting and cash payments as set
forth herein.
(ii) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If
the Executive's employment terminates by reason of the Executive's voluntary
resignation (and is not an Involuntary Termination), or if the Executive is
terminated for Cause, then the Executive shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then-existing severance and benefits plans
and policies at the time of such termination.
(iii) DISABILITY; DEATH. If the Company terminates
the Executive's employment as a result of the Executive's Disability, or such
Executive's employment is terminated due to the death of the Executive, then the
Executive shall not be entitled to receive severance or other benefits except
(i) those (if any) as may then be established (and applicable) under the
Company's then-existing severance and other benefits plans and policies at the
time of such Disability or death, (ii) benefits required by applicable laws, and
(iii) in the case of death, the Executive's salary for thirteen (13) weeks
payable to the Executive's surviving spouse, or if the Executive has no spouse,
to the Executive's estate. In the event of termination as a result of Disability
under this Agreement, the Executive shall be entitled to the benefits provided
under the Company's then-existing disability or extended sick pay plan, for so
long as such Executive continues to be disabled under this Agreement or benefits
otherwise terminate under such plan, whether or not the Executive is deemed to
be disabled under such plan.
(b) CONTINUING BENEFITS. In the event the Executive is
entitled to severance benefits pursuant to subsection 4(a)(i), then in addition
to such severance benefits, the Executive shall receive Company-paid health,
dental, vision, disability and life insurance coverage as provided to such
Executive immediately prior to the Executive's termination, upon the terms and
conditions, including deductibles and co-payments, provided in the Company's
then-existing plans, policies and programs (the "Company- Paid Coverage"). If
such coverage included the Executive's dependents immediately prior to the
Executive's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for twelve (12) months after the
Termination Date in the case of life insurance coverage and for the joint lives
of the Executive and his spouse on the Effective Date in the case of medical,
dental and vision coverage.
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Notwithstanding the foregoing, if the Executive is covered
under any medical, life, dental, vision or disability insurance plan(s) provided
by a subsequent employer, then the amount of coverage required to be provided by
the Company hereunder shall be reduced by the amount of coverage provided by the
subsequent employer's plan(s) for so long as such coverage continues. The
Executive's rights under this Section 4(b) shall be in addition to, and not in
lieu of, any post-termination continuation coverage or conversion rights the
Executive may have pursuant to applicable law, including without limitation,
continuation coverage required by Section 4980B of the Internal Revenue Code.
(c) ACCRUED SALARY, BENEFITS AND EXPENSES. In addition, (i)
the Company shall pay the Executive any unpaid base salary and unpaid bonus due
for periods prior to the Termination Date; (ii) the Company shall pay the
Executive all of the Executive's accrued and unused vacation through the
Termination Date, and (iii) following submission of proper expense reports by
the Executive, the Company shall reimburse the Executive for all expenses
reasonably and necessarily incurred by the Executive in connection with the
business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(d) RETIREMENT PLANS. In addition to any other retirement
rights to which Executive may be legally entitled by contract or pursuant to any
plan or program, the Company shall pay Executive regularly scheduled payments
which shall commence on Executive's normal retirement age or earlier if
Executive elects early retirement and shall be payable in accordance with the
Company's then-existing retirement plan, if any, determined as though the
Executive continued his employment with the Company for an additional twelve
(12) months following the Termination Date or until Executive has attained
normal retirement age under such Plan, whichever occurs earlier. For purposes of
determining the amount Executive is to receive the Company shall utilize the
greater of the Executive's compensation as defined under any such retirement
plan in effect on the date of this Agreement for the year including the
Termination Date.
(e) OPTIONS. In the event the Executive is entitled to
severance benefits pursuant to subsection 4(a)(i), the Executive's stock options
and other exercise rights shall remain exercisable (i) a period of twelve (12)
months following such termination, or (ii) the date Executive no longer serves
as a consultant to the Company, subject to the applicable option or exercise
term, and except as provided in subsection 4(f) below.
(f) VESTING OF BENEFITS. If the Executive's employment
terminates as a result of Involuntary Termination other than Cause, Disability,
or death within twelve (12) months of a Change-in- Control or, prior thereto, if
resulting from a Change-in-Control, than any unvested benefits on the date of
termination, including stock options, restricted stock, stock appreciation
rights, growth units, or other incentive compensation (other than target bonus),
shall immediately accelerate and become fully vested and exercisable. The
Executive shall thereupon have fully vested rights to such benefits in
accordance with the terms of applicable plan or agreement.
In the event that the Executive has exercisable rights, such
as stock options, such rights shall remain exercisable for a period of twelve
(12) months following such termination, subject to any option or exercise term
under an applicable plan.
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(g) DEFERRED COMPENSATION. Any compensation deferred by the
Executive shall be subject to the terms and conditions of any applicable plan or
agreement, and shall not be affected or altered by this Agreement.
5. PROPRIETARY RIGHTS AND SEPARATION AGREEMENT. The Company and the
Executive have previously entered into a Proprietary Rights and Separation
Agreement dated as of June 16, 1992 (the "Separation Agreement"). Sections 1.2,
1.3 and 1.4 of the Separation Agreement shall remain in full force and effect
after the Effective Date of this Agreement. Section 1.1, 2 and 3 of the
Separation Agreement shall be deemed superseded by the provisions of this
Agreement.
6. LIMITATION ON PAYMENTS. In the event that any payment or benefit
received or to be received by the Executive pursuant to this Agreement or
otherwise (collectively the "Payments") would be subject to the Excise Tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar or successor provision (the "Excise Tax"), the Company
shall pay to the Executive within ninety (90) days of the Termination Date (or,
if earlier, within ninety (90) days of the date the Executive becomes subject to
the Excise Tax), an additional amount (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of any Excise Tax and any
federal (and state and local) income tax on the Payments, shall be equal to the
Payments minus all applicable taxes on the Payments. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amount of
Excise Tax, (i) any other payments or benefits received or to be received in
connection with a Change of Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company), shall be treated as
"parachute payments" within the meaning of Section 280G(b)(2) of the Code or any
similar or successor provision, and all "excess parachute payments" within
meaning of Section 280G(b)(1) or any similar or successor provision shall be
treated as subject to the Excise Tax, unless in the opinion of tax counsel
selected by the Company such other payments or benefits (in whole or in part) do
not constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services within the meaning of
Section 280G(b) or any similar or successor provision of the Code in excess of
the base amount within the meaning of Section 280G(b)(3) or any similar or
successor provision of the Code, or are otherwise not subject to Excise Tax;
(ii) the amount of the Payments which shall be treated as subject to the Excise
Tax shall be equal to the lesser of (A) the total amount of the Payments or (B)
the amount of the excess parachute payments within the meaning of Section
280G(b)(1) (after applying clause (i) above), and (iii) the value of any
non-cash benefits or any deferred payment or benefit shall be determined by the
Company's independent auditors in accordance with the principles of Section
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at
the highest nominal marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made and state and local income
taxes at the highest nominal marginal rate of taxation in the state and locality
of the Executive's residence on the Termination Date, net of the maximum
reduction in federal income taxes which could be obtained from deducting of such
state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account hereunder at the time
of termination of the Executive's employment, the Executive shall repay to the
Company at the time that the amount of such reduction in Excise Tax is finally
determined the portion of the Gross-Up Payment attributable to such reduction
(plus the portion of the Gross-Up
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Payment attributable to the Excise Tax and federal (and state and local) income
tax imposed on the Gross-Up Payment being repaid by the Executive if such
repayment results in a reduction in Excise Tax and/or a federal (and state and
local) income tax deduction) plus interest on the amount of such repayment at
the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the
Excise Tax is determined to exceed the amount taken into account hereunder at
the time of the termination of the Executive's employment (including by reason
of a payment the existence or amount of which cannot be determined at the time
of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment
in respect of such excess (plus any interest payable with respect to such
excess) at the time that the amount of such excess is finally determined.
7. NONCOMPETE.
(a) The Executive agrees that during his employment with the
Company and for two (2) years following termination of such employment, he shall
not engage in, own, manage or control, or participate in the ownership,
management or control, directly or indirectly, of any person, firm, corporation
or other entity engaged in the design, development, provision, sales or
marketing of any product for the creation, compression, storage, retrieval or
analysis of relational databases (the "Restricted Business") anywhere in the
world (the "Restricted Area"). Notwithstanding the foregoing, the Executive may
acquire shares representing not more than 5% of the outstanding securities of
any publicly traded company engaged in the Restricted Business. The covenant
contained in this Section 7(a) shall be construed as a series of separate
covenants, one for each country in the world and each province or state within
such country. If, in any judicial proceeding, a court shall refuse to enforce
any of such separate covenants, such unenforceable covenant shall be deemed
deleted from this Agreement to the extent necessary to permit the remaining
separate covenants included in this Section 7(a) to be enforced.
8. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean:
(i) Executive's failure to begin to substantially
perform his duties or responsibilities hereunder for a period of fifteen (15)
days after written notice thereof from the Board to Executive setting forth in
reasonable detail the respects in which the Company believes Executive has not
substantially performed his duties or responsibilities hereunder or continued
failure to begin to substantially perform such duties or responsibilities for a
period of thirty (30) days after such written notice;
(ii) Executive personally engaging in knowing and
intentional illegal conduct which is seriously injurious to the Company or its
affiliates;
(iii) Executive being convicted of a felony, or
committing an act of dishonesty or fraud against, or the misappropriation of
property belonging to, the Company or its affiliates;
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(iv) Executive knowingly and intentionally breaching
in any material respect the terms of the Separation Agreement or any other
confidentiality agreement or invention or proprietary information agreement with
the Company;
(v) Executive's commencement of employment with
another employer while he is an employee of the Company; or
(vi) any material breach by Executive of any material
provision of this Agreement for which a cure is not initiated within fifteen
(15) days of notice thereof from the Board to Executive or which remains uncured
for thirty (30) days following such notice.
(b) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
(i) Any "person" or "group" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company);
or
(iii) The shareholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) DISABILITY. "Disability" shall mean that the Executive has
been unable to perform his duties under this Agreement for a period of three or
more consecutive months due to illness, accident or other physical or mental
incapacity.
(d) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include, but not be limited to,
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(i) the continued assignment to Executive of any
duties or the continued material reduction of Executive's duties, either of
which is substantially inconsistent with the level of Executive's position with
the Company, for a period of thirty (30) days after notice thereof from
Executive to the Board of Directors setting forth in reasonable detail the
respects in which Executive believes such assignments or duties are
substantially inconsistent with level of Executive's position;
(ii) a reduction in Executive's salary, other than
any such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a reduction by the Company in the kind or level
of employee benefits (other than salary and bonus) to which Executive is
entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is materially reduced
(other than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Executive's principal place
for the rendering of the services to be provided by him hereunder to a location
more than fifty (50) miles from the present location of the principal executive
office of the Company;
(v) any purported termination of the Executive's
employment by the Company other than for Cause or as a result of the Executive's
Disability;
(vi) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 9 below;
or
(vii) any material breach by the Company of any
material provision of this Agreement which continues uncured for thirty (30)
days following notice thereof; provided that none of the foregoing shall
constitute Involuntary Termination to the extent Executive has agreed thereto.
(e) TERMINATION DATE. "Termination Date" shall mean (i) if the
Executive's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Executive (provided that the
Executive shall not have returned to the performance of the Executive's duties
on a full-time basis during such thirty (30) day period), (ii) if the
Executive's employment is terminated by the Company for any other reason, the
date on which a notice of termination is given, or (iii) if the Agreement is
terminated by the Executive, the date on which the Executive delivers the notice
of termination to the Company.
9. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
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business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. The terms of this Agreement and
all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
10. NOTICE.
(a) GENERAL. Notices and all other communications contemplated
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. In the case of the
Executive, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Corporate Secretary.
(b) NOTICE OF TERMINATION. Any termination by the Company for
Cause or by the Executive as an Involuntary Termination shall be communicated by
a notice of termination to the other party hereto given in accordance with this
Agreement. Such notice shall indicate the specific termination provision in this
Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination under the provision so
indicated, and shall specify the termination date (which shall be not more than
30 days after the giving of such notice). The failure by the Executive to
include in the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Executive hereunder or
preclude the Executive from asserting such fact or circumstance in enforcing his
rights hereunder.
11. CONFIDENTIALITY. Except as required by applicable laws, neither
park, shall disclose the contents of this Agreement without first obtaining the
prior written consent of the other party, provided, however, that the Executive
may disclose this Agreement to his attorney, financial planner and tax advisor
if such persons agree to keep the terms hereof confidential.
12. MISCELLANEOUS PROVISIONS.
(a) VOLUNTARY EXECUTION; CONFLICT WAIVER. The Executive has
been advised to obtain independent legal counsel regarding this Agreement. The
Executive is signing this Agreement knowingly and voluntarily. The Company and
the Executive acknowledge that Wilson Sonsini Goodrich & Rosati ("WSGR") has
acted as counsel to the Company in negotiating this Agreement and will continue
to serve as the Company's general counsel in the future, acknowledge that each
has received full disclosure of any potential conflict of interest which may
result from such representation, and knowingly and voluntarily waive any such
conflict of interest.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Executive and by an authorized officer of the
Company (other than the Executive). No waiver by either party of any breach
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of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) WHOLE AGREEMENT; INTEGRATION. This Agreement, except as
provided in Section 5 hereof, any written agreements or other documents
evidencing matters referred to herein and any written Company existing plans
that are referenced herein represent the entire agreement and understanding
between the parties as to the subject matter hereof and thereof and supersede
all prior or contemporaneous agreements as to the subject matter hereof and
thereof, whether written or oral. No waiver, alteration, or modification, if
any, of the provisions of this Agreement shall be binding unless in writing and
signed by duly authorized representatives of the parties hereto.
(d) CHOICE OF LAW. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
New York. The parties hereto consent to the personal jurisdiction of the state
and federal courts of the County of Nassau, State of New York.
(e) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof; which shall remain in full force
and effect.
(f) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(h) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that the Company shall remain jointly and severally liable
under this Agreement, and provided further, that no assignment shall be made if
the net worth of the assignee is less than the net worth of the Company at the
time of assignment. In the case of any such assignment, the term "Company" when
used in a section of this Agreement shall mean the corporation that actually
employs the Executive.
(i) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(j) LEGAL FEES. In the event that the Executive is required to
enforce this Agreement or to procure the benefits hereunder through arbitration
or litigation, the Executive shall be entitled to reasonable legal fees and all
out-of-pocket expenses.
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(k) INTEREST. In the event that the Company fails to make any
payment hereunder or afford any benefit when due, the Company shall pay interest
at the rate of the publicly-announced prime rate of interest of Bank of America
N T. & S.A. or its successor in effect from time to time plus 3%, or the maximum
amount permitted by law, whichever is less.
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IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year first above written.
"COMPANY" CROSS/Z INTERNATIONAL, INC.
/S/MARK CHROSCIELEWSKI
----------------------
"EXECUTIVE" ANDRE SZYKIER
/S/ANDRE SZYKIER
----------------
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CROSSZ SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of September 1, 1997 (the "Effective Date"), by and between Robert
A. Thompson (the "Executive") and CrossZ Software Corporation (the "Company").
R E C I T A L S
The Company and the Executive desire to enter into this Agreement in
order to provide additional financial security and benefits to the Executive, to
encourage the Executive to continue employment with the Company and to enhance
the motivation and incentive of the Executive to increase the profitability of
the Company.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of the Executive with the Company,
the parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company shall employ the Executive in
the position of VICE PRESIDENT OF MARKETING with such duties, responsibilities
and compensation as in effect as of the Effective Date; provided, however, that
the Board of Directors of the Company (the "Board") shall have the right to
revise such responsibilities and compensation from time to time as the Board may
deem necessary or appropriate. Such duties and responsibilities shall be
commensurate with Executive's past practices and consistent with his position as
Vice President of Marketing of the Company. If any such revision constitutes
"Involuntary Termination" as defined in Section 7 (d) of this Agreement, the
Executive shall be entitled to benefits upon such Involuntary Termination as
provided under this Agreement.
(b) OBLIGATIONS. The Executive shall devote his full
business efforts and time to the Company and its subsidiaries. The foregoing,
however, shall not preclude the Executive from engaging in such activities and
services as do not interfere or conflict with his responsibilities to the
Company.
2. TERMINATION. This Agreement shall continue in force and effect
until the earliest of: (i) August 31, 1999 or (ii) until such time as notice of
non-renewal or termination of this Agreement is given in writing by either the
Company or the Executive to the other (the "Termination Event"). The Company and
the Executive agree to meet to negotiate in good faith the renewal of this
Agreement two (2) months prior to the Termination Event. This Agreement may be
extended for an additional period or periods by mutual written agreement of the
Company and the Executive. A termination of the terms of this Agreement pursuant
to the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement, nor affect Executive's right to six
(6) months of Base Compensation as severance pay after the termination.
<PAGE>
3. COMPENSATION AND BENEFITS.
(a) BASE COMPENSATION. The Company shall pay the
Executive as compensation for services a base salary at the annualized rate of
not less than $145,000. Such salary shall be reviewed at least annually and may
be increased from time to time. Such salary shall be paid periodically in
accordance with normal Company payroll. The annual compensation specified in
this Section, as adjusted from time to time, before any salary reduction under
Section 401(k) of the Internal Revenue Code, deferred compensation plan or
agreement or any other benefit or plan requiring reduction of salary, is
referred to in this Agreement as "Base Compensation." The Company will also
reimburse you for documented relocation expenses to cover your moving and real
estate expenses in an amount not to exceed $45,000.00. The relocation plan,
including the anticipated expenses, will be provided to the Company for review.
Documented, approved expenses will be paid per usual Company procedure, however,
these costs will be fully earned upon the completion of three (3) years of
employment. These reimbursed costs will vest 1/24 of the total amount at the end
of each full month of employment commencing with the first day of the
Executive's 13th month of employment.
(b) BONUS. Beginning with the Company's current fiscal
year and for each fiscal year thereafter during the term of this Agreement, the
Executive shall be eligible to receive a bonus (the "Bonus") based upon a target
or targets approved by the Board annually. Although the maximum Bonus that may
be earned by an executive executing this Agreement may differ, it shall be
consistent with the Executive's position as a senior executive. The Bonus
payable hereunder shall be payable in accordance with the Company's normal
practices and policies.
MBO
The Executive shall be eligible to receive the
additional compensation of $11,250.00 per
quarter for one year of employment to be earned
by MBO's.
1. One-Third will be attributable to
Corporate revenue attainment
2. One-Third will be attributable to the
development, implementation and
structuring of the Marketing Department
3. One-Third will be attributable to
specific marketing incentives
(c) VACATION. The Executive shall be entitled to four
(4) weeks of paid vacation per year or such additional vacation as may be
permitted from time to time by Company policy.
(d) EXECUTIVE BENEFITS. The Executive shall be eligible
to participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the determination
of the Board or any committee
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<PAGE>
administering such plan or program. Participation shall be consistent with the
Executive's position as Vice President of Marketing of the Company. The Company
shall reimburse the Executive for all reasonable business and travel expenses
actually incurred or paid by the Executive in the performance of services on
behalf of the Company, in accordance with the Company's expense reimbursement
policy as in effect from time to time.
The Company shall reimburse the Executive
for all reasonable travel expenses to from the Executive's current home in
Massachusetts. The Company will also provide accommodations for the Executive as
well as compensation for the lease and operation of a car for use while in New
York. All expenses will be reimbursed through the Company's usual expense
reimbursement procedure.
The Company will reimburse the Executive the
total sum of $15,000.00 related to expenses for boarding school for the
Executive's son. The payment of $7,500.00 will be provided on September 1, 1998
and January 1, 1999.
(e) STOCK OPTIONS. Pending Board approval and subject to
the provisions of the Company's 1991 Incentive Stock Options Plan, the Executive
will be granted an option ("the Option") to purchase 100,000 shares of the
Company's common stock that will fully vest over a period of 4 years. The Option
will accrue 2/48 of the total number of shares at the each of each full month of
employment starting from the Executive's date of hire. On the first day of the
7th month of employment, 12/48 (25,000 shares) of the total number of shares
subject to the Option will vest and become exercisable with the balance of such
shares vesting ratably each month over the remaining 3 1/2 year period.
4. SEVERANCE BENEFITS.
(a) TERMINATION OF EMPLOYMENT DURING TERM OF AGREEMENT.
If the Executive's employment with the Company terminates during the term of
this Agreement, then the Executive shall be entitled to receive severance
benefits as follows:
(i) INVOLUNTARY TERMINATION. If, at any time
during the term of this Agreement, the Executive's employment terminates as a
result of Involuntary Termination other than for Cause, Disability or death, or
the Company breaches any of the material terms of this Agreement (either of the
foregoing, an "Event"), the Company shall pay the Executive severance in the
amount of one-twelfth (1/12) of the Base Compensation of the Executive at the
time of such termination (without giving effect to any reduction in Base
Compensation that resulted in such Involuntary Termination) per month, for a
period of six (6) months.
(ii) VOLUNTARY RESIGNATION; TERMINATION FOR
CAUSE. If the Executive's employment terminates by reason of the Executive's
voluntary resignation (and is not an Involuntary Termination), or if the
Executive is terminated for Cause, then the Executive shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established (and applicable) under the Company's then-existing severance and
benefits plans and policies at the time of such termination.
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<PAGE>
(iii) DISABILITY; DEATH. If the Company
terminates the Executive's employment as a result of the Executive's Disability,
or such Executive's employment is terminated due to the death of the Executive,
then the Executive shall not be entitled to receive severance or other benefits
except (i) those (if any) as may then be established (and applicable) under the
Company's then-existing severance and other benefits plans and policies at the
time of such Disability or death, (ii) benefits required by applicable laws, and
(iii) in the case of death, the Executive's salary for thirteen (13) weeks
payable to the Executive's surviving spouse, or if the Executive has no spouse,
to the Executive's estate. In the event of termination as a result of Disability
under this Agreement, the Executive shall be entitled to the benefits provided
under the Company's then-existing disability or extended sick pay plan, for so
long as such Executive continues to be disabled under this Agreement or benefits
otherwise terminate under such plan, whether or not the Executive is deemed to
be disabled under such plan.
(b) CONTINUING BENEFITS. In the event the Executive is
entitled to severance benefits pursuant to subsection 4(a)(i), then in addition
to such severance benefits, the Executive shall receive Company-paid health,
dental, vision, disability and life insurance coverage as provided to such
Executive immediately prior to the Executive's termination, upon the terms and
conditions, including deductibles and co-payments, provided in the Company's
then-existing plans, policies and programs.
(c) ACCRUED SALARY, BENEFITS AND EXPENSES. In addition,
(i) the Company shall pay the Executive any unpaid base salary and unpaid bonus
due for periods prior to the Termination Date; (ii) the Company shall pay the
Executive all of the Executive's accrued and unused vacation through the
Termination Date; and (iii) following submission of proper expense reports by
the Executive, the Company shall reimburse the Executive for all expenses
reasonably and necessarily incurred by the Executive in connection with the
business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(d) RETIREMENT PLANS. In addition to any other
retirement rights to which Executive may be legally entitled by contract or
pursuant to any plan or program, the Company shall pay the Executive regularly
scheduled payments which shall commence on the Executive's normal retirement age
or earlier if the Executive elects early retirement and shall be payable in
accordance with the Company's then-existing retirement plan, if any, determined
as though the Executive continued his employment with the Company for an
additional twelve (12) months following the Termination Date or until Executive
has attained normal retirement age under such Plan, whichever occurs earlier.
For purposes of determining the amount Executive is to receive the Company shall
utilize the greater of the Executive's compensation as defined under any such
retirement plan in effect on the date of this Agreement for the year including
the Termination Date.
(e) OPTIONS. In the event the Executive is entitled to
severance benefits pursuant to subsection 4(a)(i), the Executive's stock options
and other exercise rights shall remain exercisable in accordance with the
provisions of the Stock Option Plan.
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(f) VESTING OF BENEFITS. If the Executive's employment
terminates as a result of Involuntary Termination other than Cause, Disability,
or death within twelve (12) months of a Change-in-Control or, prior thereto, if
resulting from a Change-in-Control, then any unvested benefits on the date of
termination, including stock options, restricted stock, stock appreciation
rights, growth units, or other incentive compensation (other than target bonus),
shall immediately accelerate and become fully vested and exercisable. The
Executive shall thereupon have fully vested rights to such benefits in
accordance with the terms of applicable plan or agreement.
(g) DEFERRED COMPENSATION. Any compensation deferred by
the Executive shall be subject to the terms and conditions of any applicable
plan or agreement, and shall not be affected or altered by this Agreement.
5. LIMITATION ON PAYMENTS. In the event that any payment or benefit
received or to be received by the Executive pursuant to this Agreement or
otherwise (collectively the "Payments") would be subject to the Excise Tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar or successor provision (the "Excise Tax"), the Company
shall pay to the Executive within ninety (90) days of the Termination Date (or,
if earlier, within ninety (90) days of the date the Executive becomes subject to
the Excise Tax), an additional amount (the "Gross-Up Payment") such that the net
amount retained by the Executive, after deduction of any Excise Tax and any
federal (and state and local) income tax on the Payments, shall be equal to the
Payments minus all applicable taxes on the Payments. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amount of
Excise Tax, (i) any other payments or benefits received or to be received in
connection with a Change of Control of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company), shall be treated as
"parachute payments" within the meaning of Section 280G(b)(2) of the Code or any
similar or successor provision, and all "excess parachute payments" within
meaning of Section 280G(b)(1) or any similar or successor provision shall be
treated as subject to the Excise Tax, unless in the opinion of tax counsel
selected by the Company such other payments or benefits (in whole or in part) do
not constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services within the meaning of
Section 280G(b) or any similar or successor provision of the Code in excess of
the base amount within the meaning of Section 280G(b)(3) or any similar or
successor provision of the Code, or are otherwise not subject to Excise Tax;
(ii) the amount of the Payments which shall be treated as subject to the Excise
Tax shall be equal to the lesser of (A) the total amount of the Payments or (B)
the amount of the excess parachute payments within the meaning of Section
280G(b)(1) (after applying clause (i) above), and (iii) the value of any
non-cash benefits or an deferred payment or benefit shall be determined by the
Company's independent auditors in accordance with the principles of Section
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at
the highest nominal marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made and state and local income
taxes at the highest nominal marginal rate of taxation in the state and locality
of the Executive's residence on the Termination Date, net of the maximum
reduction in federal income taxes which could be obtained from deducting of such
state and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account
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hereunder at the time of termination of the Executive's employment, the
Executive shall repay to the Company at the time that the amount of such
reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal (and state and local) income tax
imposed on the Gross-Up Payment being repaid by the Executive if such repayment
results in a reduction in Excise Tax and/or a federal (and state and local)
income tax deduction) plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax
is determined to exceed the amount taken into account hereunder at the time of
the termination of the Executive's employment (including by reason of a payment
the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest payable with respect to such excess)
at the time that the amount of such excess is finally determined.
6. NONCOMPETE.
(a) If the Executive's employment terminates by reason
of voluntary resignation under Section 4, (a), (ii) only above, then the
Executive agrees not to work directly in the data warehousing, data mining and
business intelligence areas, or any technologies that the Executive is directly
engaged in with the Company for one (1) year following the termination date.
(b) The Executive agrees that during his employment with
the Company, he shall not engage in, own, manage or control, or participate in
the ownership, management or control, directly or indirectly, of any person,
firm, corporation or other entity engaged in the design, development, provision,
sales or marketing of any product for the creation, compression, storage,
retrieval or analysis of relational databases ("Restricted Business") anywhere
in the world (the "Restricted Area"). Notwithstanding the foregoing, the
Executive may acquire shares representing not more than 5% of the outstanding
securities of any publicly traded company engaged in the Restricted Business.
The convenant contained in this Section 6 shall be construed as a series of
separate covenants, one for each country in the world and each province or state
within such country. If, in any judicial proceeding, a court shall refuse to
enforce any of such separate covenants, such unenforceable covenant shall be
deemed deleted from this Agreement to the extent necessary to permit the
remaining separate covenants included in this Section 6 to be enforced.
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7. DEFINITION OF TERMS. The following terms referred to in
this Agreement shall have the following meanings:
(a) CAUSE. "Cause" shall mean:
(i) Executive's failure to begin to
substantially perform his duties or responsibilities hereunder for a period of
fifteen (15) days after written notice thereof from the Board to Executive
setting forth in reasonable detail the respects in which the Company believes
Executive has not substantially performed his duties or responsibilities
hereunder or continued failure to begin to substantially perform such duties or
responsibilities for a period of thirty (30) days after such written notice;
(ii) Executive personally engaging in
knowing and intentional illegal conduct which is seriously injurious to the
Company or its affiliates;
(iii) Executive being convicted of a felony,
or committing an act of dishonesty or fraud against, or the misappropriation of
property belonging to, the Company or its affiliates;
(iv) Executive knowingly and intentionally
breaching in any material respect the terms of the Separation Agreement or any
other confidentiality agreement or invention or proprietary information
agreement with the Company;
(v) Executive's commencement of employment
with another employer while he is an employee of the Company; or
(vi) any material breach by Executive of any
material provision of this Agreement for which a cure is not initiated within
fifteen (15) days of notice thereof from the Board to Executive or which remains
uncured for thirty (30) days following such notice.
(b) CHANGE OF CONTROL. "Change of Control" shall mean
the occurrence of any of the following events:
(i) Any "person" or "group" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing 30%
or more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the
Board of the Company occurring within a two-year period, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
reconstituted subsequent to the Company's Initial Public Offering, or (B) are
elected, or nominated for election, to the Board of the Company with the
affirmative votes of at least a majority of the Incumbent
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Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company);
or
(iii) The shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) DISABILITY. "Disability" shall mean that the
Executive has been unable to perform his duties under this Agreement for a
period of three or more consecutive months due to illness, accident or other
physical or mental incapacity.
(d) INVOLUNTARY TERMINATION. "Involuntary Termination"
shall include, but not be limited to,
(i) the continued assignment to Executive of
any duties or the continued material reduction of Executive's duties, either of
which is substantially inconsistent with the level of Executive's position with
the Company, for a period of thirty (30) days after notice thereof from
Executive to the Board of Directors setting forth in reasonable detail the
respects in which Executive believes such assignments or duties are
substantially inconsistent with the level of Executive's position;
(ii) a reduction in Executive's salary,
other than any such reduction which is part of, and generally consistent with, a
general reduction of officer salaries;
(iii) a reduction by the Company in the kind
or level of employee benefits (other than salary and bonus) to which Executive
is entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is materially reduced
(other than any such reduction applicable to officers of the Company generally);
(iv) any purported termination of the
Executive's employment by the Company other than for Cause or as a result of the
Executive's Disability;
(v) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 8 below;
or
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(vi) any material breach by the Company of
any material provision of this Agreement which continues uncured for thirty (30)
days following notice thereof; provided that none of the foregoing shall
constitute Involuntary Termination to the extent Executive has agreed thereto.
(e) TERMINATION DATE. "Termination Date" shall mean (i)
if the Executive's employment is terminated by the Company for Disability,
thirty (30) days after notice of termination is given to the Executive (provided
that the Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty (30) day period), (ii) if the
Executive's employment is terminated by the Company for any other reason, the
date on which a notice of termination is given, or (iii) if the Agreement is
terminated by the Executive, the date on which the Executive delivers the notice
of termination to the Company.
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. The terms of this Agreement
and all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
9. NOTICE.
(a) GENERAL. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Executive, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Corporate Secretary.
(b) NOTICE OF TERMINATION. Any termination by the
Company for Cause or by the Executive as an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with this Agreement. Such notice shall indicate the specific
termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice). The
failure by
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the Executive to include in the notice any fact or circumstance which
contributes to a showing of Involuntary Termination shall not waive any right of
the Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
10. CONFIDENTIALITY. Except as required by applicable laws, neither
party shall disclose the contents of this Agreement without first obtaining the
prior written consent of the other party, provided, however, that the Executive
may disclose this Agreement to his attorney, financial planner and tax advisor
if such persons agree to keep the terms hereof confidential.
11. MISCELLANEOUS PROVISIONS.
(a) VOLUNTARY EXECUTION; CONFLICT WAIVER. The Executive
has been advised to obtain independent legal counsel regarding this Agreement.
The Executive is signing this Agreement knowingly and voluntarily. The Company
and the Executive acknowledge that each has received full disclosure of any
potential conflict of interest which may result from such representation, and
knowingly and voluntarily waive any such conflict of interest.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Executive and by an authorized officer of
the Company (other than the Executive). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) WHOLE AGREEMENT; INTEGRATION. This Agreement, the
Employment, Confidential Information and Invention Assignment Agreement, and any
written agreements or other documents evidencing matters referred to herein and
any written Company existing plans that are referenced herein represent the
entire agreement and understanding between the parties as to the subject matter
hereof and thereof and supersede all prior or contemporaneous agreements as to
the subject matter hereof and thereof, whether written or oral. No waiver,
alteration, or modification, if any, of the provisions of this Agreement shall
be binding unless in writing and signed by duly authorized representatives of
the parties hereto.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of New York. The parties hereto consent to the personal jurisdiction
of the state and federal courts of the County of Nassau, State of New York.
(e) SEVERABILITY. The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) NO ASSIGNMENT OF BENEFITS. The rights of any person
to payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or
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involuntary assignment or by operation of law, including (without limitation)
bankruptcy, garnishment, attachment or other creditor's process, and any action
in violation of this subsection (f) shall be void.
(g) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(h) ASSIGNMENT BY COMPANY. The Company may assign its
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that the Company shall remain jointly and severally
liable under this Agreement, and provided further, that no assignment shall be
made if the net worth of the assignee is less than the net worth of the Company
at the time of assignment. In the case of any such assignment, the term
"Company" when used in a section of this Agreement shall mean the corporation
that actually employs the Executive.
(i) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(j) LEGAL FEES. In the event that the Executive is
required to enforce this Agreement or to procure the benefits hereunder through
arbitration or litigation, the Executive shall be entitled to reasonable legal
fees and all out-of-pocket expenses.
(k) INTEREST. In the event that the Company fails to
make any payment hereunder or afford any benefit when due, the Company shall pay
interest at the rate of the publicly-announced prime rate of interest of Bank of
America N.T. & S.A. or its successor in effect from time to time plus 3%, or the
maximum amount permitted by law, whichever is less.
IN WITNESS WHEREOF, each of the parties has executed
this Agreement, in the case of the Company by its duly authorized officer, as of
the day and year first above written.
"COMPANY" CrossZ Software Corporation
/s/ Daniel M. Pess
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Daniel M. Pess, Vice President, Finance and Administration
"EXECUTIVE" Robert A. Thompson
/s/ Robert A. Thompson
----------------------------------------------------------
H.C.C. FINANCIAL SERVICES
40 Deodora Drive
Atherton, California 94026
FACTORING AGREEMENT
This Factoring Agreement (the "Agreement") is made on the 31st day of March,
1992 by and between H.C.C. Financial (Buyer) services doing business at 40
Deodora Drive, Atherton, CA 94027 and Cross/Z International, Inc., a California
corporation (Seller) having its principal place of business and chief
executive office at:
Address: 1150 BALLENA BLVD., SUITE 255
----------------------------------------------------
City: ALAMEDA
----------------------------------------------------
County: ALAMEDA
----------------------------------------------------
State: CALIFORNIA, 94501
----------------------------------------------------
Mailing address (if different from above)
Post Office Box: ___________________________________________
City: ___________________________________________
State: ___________________________________________
Zip Code: ___________________________________________
Definitions. When used herein, the following terms shall have
the following meanings.
1.1 "Account Balance" shall mean, on any given day, the gross amount of all
Purchased Receivables unpaid on that day.
1.2 "Account Debtor" shall have the meaning set forth in the California
Uniform Commercial Code and shall include any person liable on any
Purchased Receivable, including without limitation, any guarantor of
the Purchased Receivable and any issuer of a letter of credit or
banker's acceptance.
1.3 "Adjustments" shall mean all discounts, allowances, returns, disputes,
counterclaims, offsets, defenses, rights of recoupment, rights of
return, warranty claims, or short payments, asserted by or on behalf of
any Account Debtor with respect to any Purchased Receivable.
1.4 "Administrative Fee" shall have the meaning as set forth in Section 3.3
hereof.
1.5 "Advance" shall have the meaning set forth in Section 2.2 hereof.
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1.6 "Collateral" shall have the meaning set forth in Section 8 hereof.
1.7 "Collections" shall mean all good funds received by Buyer from or on
behalf of an Account Debtor with respect to Purchased Receivables.
1.8 "Event of Default" shall have the meaning set forth in Section 9
hereof.
1.9 "Finance Charges" shall have the meaning set forth in Section 3.2
hereof.
1.10 "Invoice Transmittal" shall mean a writing signed by an authorized
representative of Seller which accurately identifies the Purchased
Receivables, and includes for each Purchased Receivable the correct
amount owed by the Account Debtor, the name and address of the Account
Debtor, the invoice number, the invoice date and the account code.
1.11 "Obligations" shall have the meaning set forth in Section 4.4 hereof.
1.12 "Purchased Receivables" shall mean all those accounts, chattel paper,
instruments, contract rights, documents, general intangibles, letters
of credit, drafts, bankers acceptances, and rights to payment, and all
proceeds thereof, arising out of the invoices and other agreements
identified on or delivered with any Invoice Transmittal delivered by
Seller to Buyer which Buyer elects to purchase and for which Buyer
makes an Advance.
1.13 "Refund" shall have the meaning set in Section 3.5 hereof.
1.14 "Reserve" shall have the meaning set forth in Section 2.4 hereof.
1.15 "Repurchase Amount" shall have the meaning set forth in Section 4.2
hereof.
1.16 "Reconciliation Date" shall mean the last calendar day of each
Reconciliation Period.
1.17 "Reconciliation Period" shall mean each calendar month of every year.
2. PURCHASE AND SALE OF RECEIVABLES.
2.1 OFFER TO SELL RECEIVABLES. During the term hereof, and
provided that there does not then exist any Event of Default or any event that
with notice, lapse of time or otherwise would constitute
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an Event of Default, Seller may request that Buyer purchase receivables and
Buyer may, in its sole discretion, elect to purchase receivables. Seller shall
deliver to Buyer an Invoice Transmittal with respect to any receivable for which
a request for purchase is made. An authorized representative of Seller shall
sign each Invoice Transmittal delivered to Buyer. Buyer shall be entitled to
rely on all of the information provided by Seller to Buyer on the Invoice
Transmittal and to rely on the signature on any Invoice Transmittal as an
authorized signature of Seller.
2.2 ACCEPTANCE OF RECEIVABLES. Buyer shall have no obligation to
purchase any receivable listed on an Invoice Transmittal. Buyer may exercise its
sole discretion in approving the credit of each Account Debtor before buying any
receivable. Upon acceptance by Buyer of all or any of the receivables described
on any Invoice Transmittal, Buyer shall pay to Seller 80 percent of the face
amount of each receivable Buyer desires to purchase. Such payment shall be the
"Advance" with respect to such receivable. Buyer may, from time to time, in its
sole discretion, change the percentage of the Advance. Upon Buyer's acceptance
of the receivable and payment to Seller of the Advance, the receivable shall
become a "Purchased Receivable."
2.3 EFFECTIVENESS OF SALE TO BUYER. Effective upon Buyer's payment
of an Advance, and for and in consideration therefor and in consideration of the
covenants of this Agreement, Seller hereby absolutely sells, transfers and
assigns to Buyer, all of Seller's right, title and interest in and to each
Purchased Receivable and all monies due or which may become due on or with
respect to such Purchased Receivable. Buyer shall be the absolute owner of each
Purchased Receivable. Buyer shall have, with respect to any goods related to the
Purchased Receivable, all the rights and remedies of an unpaid seller under the
Uniform Commercial Code and other applicable law, including the rights of
replevin, claim and delivery, reclamation and stoppage in transit.
2.4 ESTABLISHMENT OF A RESERVE. Upon the purchase by Buyer of each
Purchased Receivable, Buyer shall establish a reserve. The reserve shall be the
amount by which the face amount of the Purchased Receivable exceeds the Advance
on that Purchased Receivable (the "Reserve"); provided, the Reserve with respect
to all Purchased Receivables outstanding at any one time shall be the amount not
less than 20 percent of the Account Balance at that time and may be set at a
higher percentage, at Buyer's sole discretion. The Reserve shall be a book
balance maintained on the records of Buyer and shall not be a segregated fund.
3. COLLECTIONS, CHARGES AND REMITTANCES.
3.1 COLLECTIONS. Upon receipt by Buyer of Collections,
Buyer shall promptly credit such Collections to Seller's Account
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Balance on a daily basis; provided, that if Seller is in default under this
Agreement, Buyer shall apply all Collections to Seller's Obligations hereunder
in such order and manner as Buyer may determine. If an item of collection is not
honored or Buyer does not receive good funds for any reason, the amount shall be
included in the Account Balance as if the Collections had not been received and
Finance Charges under Section 3.2 shall accrue thereon.
3.2 FINANCE CHARGES. On each Reconciliation Date, Seller shall pay
to Buyer a finance charge in an amount equal to one percent per month of the
average daily Account Balance outstanding during the applicable Reconciliation
Period (the "Finance Charges"). Buyer shall deduct the accrued Finance Charges
from the Reserve as set forth in Section 3.5 below.
3.3 ADMINISTRATIVE FEE. On each Reconciliation Date Seller shall
pay to Buyer an Administrative Fee equal to zero percent of the face amount of
each Purchased Receivable first purchased during that Reconciliation Period (the
"Administrative Fee"). Buyer shall deduct the Administrative Fee from the
Reserve as set forth in Section 3.5 below.
3.4 ACCOUNTING. Buyer shall prepare and send to Seller after the
close of business for each Reconciliation Period, an accounting of the
transactions for that Reconciliation Period, including the amount of all
Purchased Receivables, all Collections, Adjustments, Finance Charges, and the
Administrative Fee. The accounting shall be deemed correct and conclusive unless
Seller makes written objection to Buyer within thirty (30) days after the date
Seller mails the accounting to Buyer.
3.5 REFUND TO SELLER. Provided that there does not then exist an
Event of Default or any event or condition that with notice, lapse of time or
otherwise would constitute an Event of Default, Buyer shall refund to Seller by
check after the Reconciliation Date, the amount, if any, which Buyer owes to
Seller at the end of the Reconciliation Period according to the accounting
prepared by Buyer for that Reconciliation Period (the "Refund"). The Refund
shall be an amount equal to:
(A) (1) The Reserve as of the beginning of the
Reconciliation Period, plus
(2) the Reserve created for each Purchased
Receivable purchased during that
Reconciliation Period, minus
(B) The total for that Reconciliation Period of:
(1) the Administrative Fee;
(2) Finance Charges;
(3) Adjustments;
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(4) Repurchase Amounts, to the extent Buyer has
agreed to accept payment thereof by deduction
from the Refund; and
(5) the Reserve for the Account Balance as of the
first day of the following Reconciliation
Period in the minimum percentage set forth in
Section 2.4 hereof.
In the event the formula set forth in this Section 3.5 results in an amount due
to Buyer from Seller, Seller shall make such payment in the same manner as set
forth in Section 4.3 hereof for repurchases. If the formula set forth in this
Section 3.5 results in an amount due to Seller from Buyer, Seller shall make
such payment by check, subject to Buyer's rights under Section 4.3 and Buyer's
rights of offset and recoupment.
4. RECOURSE AND REPURCHASE OBLIGATIONS.
4.1 RECOURSE. Buyer's acquisition of Purchased Receivables from
Seller shall be with full recourse against Seller. In the event the Obligations
exceed the amount of Purchased Receivables and Collateral, Seller shall be
liable for any deficiency.
4.2 SELLER'S AGREEMENT TO REPURCHASE. Seller agrees to pay
to Buyer on demand, the full face amount, or any unpaid portion
of, any Purchased Receivable:
(A) which remains unpaid ninety (90) calendar days after
the invoice date; or
(B) which is owed by any Account Debtor who has filed, or
has had filed against it, any bankruptcy case, assignment for
the benefit of creditors, receivership, or insolvency
proceeding or who has become insolvent (as defined in the
United States Bankruptcy Code) or who is generally not paying
its debts as such debts become due; or
(C) with respect to which there has been any breach of
warranty or representation set forth in Section 6 hereof or
any breach of any covenant contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any
discount, allowance, return, dispute, counterclaim, offset,
defense, right of recoupment, right of return, warranty claim,
or short payment;
4.3 SELLER'S PAYMENT OF THE REPURCHASE AMOUNT. When any Repurchase
Amount becomes due, Buyer shall inform Seller of the manner of payment which may
be any one or more of the following in Buyer's sole discretion: (a) in cash
immediately upon demand therefor; (b) by delivery of substitute invoices and an
Invoice Transmittal acceptable to Buyer which shall thereupon become
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Purchased Receivables; (c) by adjustment to the Reserve pursuant to Section 3.5
hereof; (d) by deduction from or offset against the Refund that would otherwise
be due and payable to Seller; or (e) by any combination of the forgoing as Buyer
may from time to time choose.
4.4 SELLER'S AGREEMENT TO REPURCHASE - ALL PURCHASED RECEIVABLES.
Upon and after the occurrence of an Event of Default, Seller shall, upon Buyer's
demand, repurchase the Purchased Receivables then outstanding such option
thereof as Buyer may demand. Such demand may, at Buyer's option, include and
Seller shall pay to Buyer immediately upon demand, cash in an amount equal to
the Advance with respect to each Purchased Receivable then outstanding together
with all accrued Finance Charges, Adjustments, Administrative Fees, attorneys'
and professional fees, court costs and expenses as provided for herein, and any
other amounts due and owing hereunder (the "Obligations"). Upon receipt of
payment in full of the Obligations, Buyer shall immediately instruct Account
Debtors to pay Seller directly, and return to Seller any Refund due to Seller.
For the purpose of calculating any Refund due under this Section only, the
Reconciliation Date shall be deemed to be the date Buyer receives payment in
good funds of all the Obligations as provided in this Section 4.4.
5. POWER OF ATTORNEY. Seller does hereby irrevocably appoint Buyer and its
successors and assigns as Seller's true and lawful attorney in fact, with
respect to Purchased Receivables and hereby authorizes Buyer, regardless of
whether there has been an Event of Default (a) to sell, assign, transfer,
pledge, compromise, or discharge the whole or any part of the Purchased
Receivables; (b) to demand collect, receive, sue, and give releases to any
Account Debtor for the monies due or which may become due upon or with respect
to the Purchased Receivables and to compromise, prosecute, or defend any action,
claim, case, or proceeding relating to the Purchased Receivables, including the
filing of a claim or the voting of such claims in any bankruptcy case, all in
Buyer's name or Seller's name, as Buyer may choose; (c) to prepare, file and
sign Seller's name on any notice, claim, assignment, demand, draft or notice of
or satisfaction of lien or mechanics' lien or similar document; (d) to notify
all Account Debtors with respect to the Purchased Receivables to pay Buyer
directly; (e) to receive, open, and dispose of all mail addressed to Seller for
the purpose of collecting the Purchased Receivables; (f) to endorse Seller's
name on any checks or other forms of payment on the Purchased Receivables; and
(g) to do all acts and things necessary or expedient, in furtherance of any such
purposes. If Buyer receives a check or item which is payment for both a
Purchased Receivable and another receivable, the funds shall first be applied to
the Purchased Receivable and, so long as there does not exist an Event of
Default, the excess shall be remitted to Seller.
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6. REPRESENTATIONS, WARRANTIES AND COVENANTS.
6.1 RECEIVABLES' WARRANTIES, REPRESENTATIONS AND COVENANTS. To induce
Buyer to buy receivables and to render its services to Seller, and with full
knowledge that the truth and accuracy of the following are being relied upon by
the Buyer in determining whether to accept receivables as Purchased Receivables,
Seller represents, warrants, covenants and agrees, with respect to each Invoice
Transmittal delivered to Buyer and each Receivable described therein, that;
(A) Seller is the absolute owner of each receivable set
forth in the Invoice Transmittal and has full legal right to
sell, transfer and assign such receivables;
(B) The correct amount of each receivable is as set forth
in the Invoice Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon
the fulfillment of any obligation or contract, past or future,
and any and all obligations required of the Seller have been
fulfilled as of the date of this Agreement;
(D) Each receivable set forth on the Invoice Transmittal
is based on an actual sale and delivery of goods and/or
services actually rendered, is presently due and owing to
Seller, is not past due or in default, has not been previously
sold, assigned, transferred, or pledged and is free of any
encumbrance of lien;
(E) There are no defenses, offsets, or counterclaims
against any of the receivables, and no agreement has been made
under which the Account Debtor may claim any deduction or
discount, except as otherwise stated in the Invoice
Transmittal;
(F) Each Purchased Receivable shall be the property of
the Buyer and shall be collected directly by Buyer, but if for
any reason it should be paid to Seller, Seller shall promptly
notify Buyer of such payment, shall hold any checks, drafts,
or monies so received in trust for the benefit of Buyer, and
shall promptly, transfer and deliver the same to the Buyer;
(G) Buyer shall have the right of endorsement, and also
the right to require endorsement by Seller, on all payments
received in connection with each Purchased Receivable and any
proceeds of Collateral;
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(H) Seller, and to Seller's best knowledge, each Account
Debtor set forth in the Invoice Transmittal, are and shall
remain solvent as that term is defined in the federal
Bankruptcy Code and the Uniform Commercial Code;
(I) Each Account Debtor named on the Invoice Transmittal
will not object to the payment for, or the quality or the
quantity of the subject matter of, the receivable and is
liable for the amount set forth on the Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified after
acceptance by Buyer that the Purchased Receivable has been
transferred to and is payable to Buyer, and Seller shall not
take or permit any action countermand such notification; and
(K) All receivables forwarded to and accepted by Buyer
after the date hereof, and thereby becoming Purchased
Receivables, shall comply with each and every one of the
foregoing representations, warranties, covenants and
agreements referred to above in this Section 6.1.
6.2 ADDITIONAL WARRANTIES, REPRESENTATIONS AND COVENANTS. In addition
to the foregoing warranties, representations and covenants, to induce Buyer to
buy receivables and to render its services to Seller, Seller hereby represents,
warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant any
lien or security interest in any Purchased Receivables or
Collateral to any other party, without Buyer's prior written
consent;
(B) The Seller's name, form of organization, place of
business and the place where the records concerning all
receivables herein referred to are kept as set forth at the
beginning of this Agreement, and Seller will promptly advise
Buyer in writing if such name, organization, place of business
or record keeping is changed or a new place of business or
record keeping is added and shall execute any documents
necessary to perfect Buyer's interest in the Purchased
Receivables and the Collateral; and
(C) Seller shall pay all of its normal gross payroll for
employees, and all federal and state taxes, as and
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when due, including without limitation all payroll and
withholding taxes and state sales taxes.
7. ADJUSTMENTS. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall promptly
advise Buyer and shall, subject to the Buyer's approval, resolve such disputes
and advise Buyer of any adjustment. Unless the disputed Purchased Receivable is
repurchased by Seller and the full Repurchase Amount is paid, Buyer shall remain
the absolute owner of any Purchased Receivable which is subject to Adjustment or
repurchase under Section 4.2 hereof, and any rejected, returned, or recovered
personal property, with the right to take possession thereof at any time. If
such possession is not taken by Buyer, Seller is to resell it for Buyer's
account Seller's expense with the proceeds made payable to Buyer. While Seller
retains possession of said returned goods, Seller shall segregate said goods and
mark them "property of Silicon Valley Financial Services."
8. SECURITY INTEREST. In order to secure all of Seller's now existing
or hereafter arising obligations to Buyer under this Agreement and the
professional and legal fees and expenses set forth herein. Seller hereby grants
the Buyer a continuing lien upon and security interest in all Seller's now
existing or hereafter arising rights and interests in the following (the
"Collateral"):
(A) All accounts, contract rights, chattel paper, general
intangibles, claims, causes of action, instruments, documents, letters
of credit, bankers acceptances, drafts, rights in and under insurance
policies, rights to tax refunds, and inventory, and all proceeds of any
of the foregoing, including Seller's rights to any returned or rejected
goods, with respect to which Buyer shall have all the rights of any
unpaid seller, including the rights of replevin, claim and delivery,
reclamation, and stoppage in transit;
(B) All Seller's rights to monies, refunds, and other amounts due
hereunder, which security interest shall include Seller's right of
offset and recoupment;
(C) All goods of Seller, including, but not limited to, all goods,
equipment, farm products, machinery, furniture, furnishings, fixtures,
tools, supplies and motor vehicles; and
(D) All proceeds of the foregoing, whether due to voluntary or
involuntary disposition, including insurance proceeds.
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Seller is not authorized to sell, assign, transfer or otherwise convey any
Collateral without Buyer's prior consent, except for the sale of finished
inventory in the Seller's usual course of business. Seller agrees to sign UCC
financing statements, in a form acceptable to Buyer. Seller agrees to deliver to
Buyer the originals of all instruments, chattel; paper and documents evidencing
or related to Purchased Receivables.
9. DEFAULT. The occurrence of any one or more of the following shall
constitute and Event of Default hereunder.
(A) Seller fails to pay any amount owed to Buyer as and when due;
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the federal Bankruptcy Code, or any assignment
for the benefit of creditors, or appointment of a receiver or custodian
for any of its assets;
(C) Seller shall become insolvent in that its debts are greater
than the fair value of its assets, or Seller is generally not paying it
debts as they become due or is left with unreasonably small capital;
(D) Any involuntary lien, garnishment, attachment or the like is
issued against or attaches to the Purchased Receivables or the
Collateral and the same is not released within ten (10) days after the
date it is issued or attaches; or
(E) Seller shall breach any covenant, agreement, warranty, or
representation set forth herein, and the same is not cured to Buyer's
satisfaction within ten (10) days after Buyer has given Seller oral or
written notice thereof; provided, that if such breach is incapable of
being cured it shall constitute an immediate default hereunder.
10. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, (1)
without implying any obligation to buy receivables, Buyer may cease buying
receivables or extending any financial accommodations to Seller; and (2) Buyer
shall have and may exercise all the rights and remedies under this Agreement and
under applicable law, including the rights and remedies of a secured party under
the California Commercial Code, including all the power of attorney rights
described in Section 5 with respect to any Collateral and the right to collect,
dispose of, sell, lease, use, and realize upon all Purchased Receivables and all
Collateral in any commercially reasonable manner. Seller and Buyer agree that
any notice of sale required to be given to Seller shall be deemed to be
reasonable if given five (5) days prior to the date on or after which the sale
may be held.
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11. ACCRUAL OF INTEREST. If any amount owed by Seller hereunder is not paid
when due, including, without limitation, amounts due under Section 3.5,
Repurchase Amounts, Obligations, and professional fees and expenses under
Section 11, such amounts shall bear interest at a per annum rate equal to the
per annum rate of the Finance Charges until the earlier of (i) payment in good
funds or (ii) entry of a final judgment therefor, at which time the principal
amount of any money judgment remaining unsatisfied shall accrue interest at the
highest rate allowed by applicable law.
12. ATTORNEY'S FEES. The Seller will pay to Buyer immediately upon demand
all reasonable fees and expenses of attorneys and other professionals that Buyer
incurs in preparing, negotiating and enforcing this Agreement, protecting or
enforcing its interest in the Purchased Receivables or the Collateral,
collecting Purchased Receivables, and representing Buyer in connection with any
bankruptcy case or insolvency proceeding involving Seller, the Collateral, any
Account Debtor, or any Purchased Receivables.
13. SEVERABILITY AND CHOICE OF LAW. In the event that any provision of this
Agreement is deemed invalid by reason of law, this Agreement will be construed
as not containing such provision and the remainder of the Agreement shall remain
in full force and effect. This Agreement has been transmitted by Seller to Buyer
at Buyer's office in the State of California and has been executed and accepted
by Buyer in the State of California. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California.
14. ACCOUNT COLLECTION SERVICES. Certain Account Debtors may require or
prefer that all of Seller's receivables be paid to the same address and/or
party, or Seller and Buyer may agree that all receivables with respect to
certain Account Debtors be paid to one party. In such event Buyer and Seller may
agree that Buyer shall collect all receivables whether owned by Seller or Buyer
and (provided that there does not then exist an Event of Default or event that
with notice, lapse or time otherwise would constitute an Event of Default, and
subject to Buyer's rights in the Collateral) Buyer agrees to remit to Seller the
amount of the receivables collections it receives with respect to receivables
other than Purchased Receivables. It is understood and agreed by Seller that
this Section does not impose any affirmative duty on Buyer to do any act other
than to turn over such amounts. All such receivables and collections are
Collateral and in the event of Seller's default hereunder, Buyer shall have no
duty to remit collections of Collateral and may apply such collections to the
obligations hereunder and Buyer shall have all the rights of a secured party
under the Uniform Commercial Code.
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<PAGE>
15. NOTICES. All notices shall be given to Buyer and Seller at the
addresses set forth on the first page of this Agreement and shall be deemed to
have been delivered and received: (a) if service; or (c) on the same date of
transmission if sent by hand delivery, telecopy, telefax or telex.
16. TERM AND TERMINATION. The term of this Agreement shall be for one (1)
year from the date hereof, and from year to year thereafter unless terminated in
writing by Buyer or Seller. Seller and Buyer shall each have the right to
terminate this Agreement at any time. Notwithstanding the foregoing, any
termination of this Agreement shall not affect Seller's security interest in the
Collateral and Buyer's ownership of the Purchased Receivables, and this
Agreement shall continue to be effective, and Buyer's rights and remedies
hereunder shall survive such termination, until all transactions entered into
and Obligations incurred hereunder have been completed and satisfied in full.
17. TITLES AND SECTION HEADINGS. The titles and section headings used
herein are for convenience only and shall not be used in interpreting this
agreement.
IN WITNESS WHEREOF, Seller and Buyer have executed this agreement on
the day and year above written.
SELLER Cross/Z International, Inc.
BY /s/ Andre Szykier
------------------------------------------------
TITLE Senior Vice President
------------------------------------------------
BUYER H.C.C. Financial Services
BY /s/ Herbert C. Clough
------------------------------------------------
TITLE President
------------------------------------------------
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<PAGE>
ITEM IV, 1
EXHIBIT I
CROSS/Z INTERNATIONAL, INC.
ADDENDUM TO FACTORING AGREEMENT
This Addendum to Factoring Agreement (the "Addendum") is made
as of May 8, 1996 by and between CROSS/Z INTERNATIONAL, INC., a California
corporation (the "Company"), and H.C.C. Financial Services, a California
proprietorship doing business at 40 Deodora Drive, Atherton, California 94027
("HCC").
RECITALS
A. The Company and HCC have previously entered into that
certain Factoring Agreement dated as of March 31, 1992, relating to the
financing of the Company's accounts receivable (the "Factoring Agreement").
B. As of the date hereof, aggregate eligible receivables
were approximately $700,000.
C. As of the date hereof, the Company had borrowings in
the aggregate principal amount of approximately $1,127,000 under the Factoring
Agreement.
D. The Company is currently in default under the
Factoring Agreement and the Outstanding Balance is immediately due and payable
upon demand by HCC.
E. The Company has entered into a Series D Preferred
Stock Purchase Agreement dated as of even date herewith (the "Series D
Agreement") pursuant to which the Company intends to issue and sell to those
persons named on Exhibit A thereto (the "Purchasers") up to 5,649,533 shares of
its Series D Preferred Stock, $0.001 par value per share, at a purchase price of
$1.07 per share (the "Series D Financing"). The Series D Agreement and the
exhibits thereto contemplate the issuance of additional shares of Series D
Preferred Stock as a condition to the initial closing of the Series D Financing.
All capitalized terms not otherwise defined herein shall have the meanings set
forth in the Series D Agreement.
F. The Series D Agreement provides that the amendment of
the Factoring Agreement shall be a condition to the closing of the Series D
Financing.
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<PAGE>
NOW, THEREFORE, THE PARTIES HERETO AGREE to amend the Factoring
Agreement as follows:
1. HCC agrees that it will not demand payment under the Factoring
Agreement until the earlier of (i) March 31, 1998, (ii) a material breach by the
Company hereunder, or (iii) the occurrence of any of the events of default set
forth in Section 9(B), (C) or (D) of the Factoring Agreement (the "Standstill
Period").
2. During the term of the Standstill Period, the Company will set
aside segregated funds equal to the difference between then outstanding
borrowings under the Factoring Agreement and Eligible Receivables (the "Cash
Collateral Account"). The Cash Collateral Account shall be kept in an interest
bearing bank account. The Company shall grant HCC a security interest in the
Cash Collateral Account to secure its obligations under the Factoring Agreement.
3. Effective April 30, 1996 and during the term of the Standstill
Period, the Company will pay to HCC $10,000 on the first business day of each
month. Such amounts will be applied to reduce outstanding borrowings under the
Factoring Agreement and will be in addition to payment of monthly interest on
outstanding borrowings under the Factoring Agreement.
4. Effective immediately, the interest rate on all outstanding
borrowings under the Factoring Agreement shall be reduced to the greater of (i)
12% per annum or (ii) the prime lending rate as quoted by Bank of America NT&SA
plus 3%, adjusted monthly. During the term of the Standstill Period, on the
first business day of each month, the Company shall pay interest due on all
outstanding borrowings under the Factoring Agreement.
5. The Company incorporates by reference its representations
contained in Article 3 of the Series D Agreement.
6. The provisions of Article 10 of the Series D Agreement are
incorporated herein by reference.
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<PAGE>
The foregoing Addendum is hereby executed as of the date first written
above.
"COMPANY"
CROSS/Z INTERNATIONAL, INC.
a California corporation
By: /s/ Mark Chroscielewski
--------------------------------
Mark Chroscielewski, President
"HCC"
HCC Financial Services
By: /s/ Herbert C. Clough
--------------------------------
Herbert C. Clough, President
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SOFTWARE LICENSING
AND
DISTRIBUTION AGREEMENT
Between
Amdahl Corporation
1250 East Arques
Sunnyvale, CA 94088-3470
and
Cross/Z International, Inc.
60 Charles Lindbergh Blvd.
Uniondale, New York 11553
<PAGE>
TABLE OF CONTENTS:
1. Definitions 1
2. License Rights 2
3. End User License 5
4. General Responsibilities of CrossZ 5
5. General Responsibilities of Amdahl 6
6. Disputes 6
7. Marketing Support 7
8. Maintenance and Support Services 8
9. Payment, Reporting and Taxes 8
10. Warranty 9
11. Confidential Information 10
12. Export Written Assurance 11
13. Term and Termination 11
14. Intellectual Property Indemnification 12
15. Limitation of Liability 13
16. Press Releases 14
17. Assignment 14
18. Force Majeure 14
19. Severability 15
20. Waiver and Amendment 15
21. Compliance with Laws and Regulations 15
22. Notice 15
23. Relationship of Parties 16
24. Non-Solicitation 16
25. Governing Law 16
26. Headings 16
27. Cumulative Remedies 16
28. Right to Independent Development 17
29. Entire Agreement 17
Acceptance Signatures 17
Exhibit A 18
Exhibit B 19
Attachment 1 20
Attachment 2 21
Exhibit C 22
Exhibit D 23
<PAGE>
This Software Licensing and Distribution Agreement ("Agreement")
entered into as of November 27, 1996 ("Effective Date") by and between Amdahl
Corporation, a Delaware corporation with principal offices located at 1250 East
Arques Avenue, Sunnyvale, CA 94088-3470, U.S.A. (hereafter "Amdahl") and Cross/Z
International, Inc., a California corporation ("CrossZ") with offices at 60
Charles Lindbergh Blvd., Uniondale, New York 11553, U.S.A.
WHEREAS, Amdahl wishes to license Software from CrossZ in order to
sublicense it to Distributors and End Users; and
WHEREAS, CrossZ is willing to license Software to Amdahl so Amdahl may
sublicense it to Distributors and End Users;
THEREFORE, in consideration of the terms and conditions set forth
below, the parties agree as follows:
1. DEFINITIONS
1.1 Binary Code means machine readable object and executable code.
1.2 Confidential information means any information, including but
not limited to all code, inventions, algorithms, know-how and ideas and all
other businesses, technical and financial information a party obtains from the
other party that is marked as "Confidential" or "Secret". The material financial
terms of this Agreement will be considered the Confidential Information of each
party. All information disclosed orally between developers or otherwise will be
Confidential information only if it is identified as such at the time of
disclosure and is confirmed to be Confidential Information in writing no more
than twenty (20) days later.
1.3 Software means, at any time, the then current Release of
CrossZ's Binary Code and Documentation for the CrossZ software products in
Exhibit A, and including all Maintenance Updates and future Releases provided to
Amdahl by CrossZ.
1.4 Demo means a copy of Software which may be run by Amdahl or
Distributors solely for the purpose of internal testing or evaluating Software
capabilities including demonstrations at trade shows.
1.5 Derivative of a work means a derivative work of that work as
such term is used in the United States Copyright Act of 1976, as amended, as
well as modified versions or releases that are not sufficiently different from
the work to constitute a separate derivative work under such Act.
1.6 Distributor means an entity authorized by Amdahl and approved
in writing by CrossZ to sublicense Software to End Users. CrossZ will not
unreasonably withhold such approval.
1.7 Documentation means all End User, marketing, training and
maintenance documentation relating to Software.
1.8 Effective Date means the effective date of this Agreement
referred to above.
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<PAGE>
1.9 End User means an entity that enters into a sublicense with
Amdahl or a Distributor for that entity's internal use of Software.
1.10 Maintenance and Support Services means services provided by
CrossZ to Amdahl pursuant to this Agreement.
1.11 Maintenance Update means a new release of Software that fixes
flaws or bugs in previous versions of Software, but does not contain new
functionality and is generally released by CrossZ to End Users or other
resellers. CrossZ designates Maintenance Updates by changing the letter to the
right of the tenths digit (e.g. Version 3. 1a to 3.1 b).
1.12 Release (Major or Minor Release) means a release of Software
created by or for CrossZ that contains new software functionality and is
generally released by CrossZ to End Users or other resellers. CrossZ designates
Major Releases by changing the numeral to the left of the decimal point (e.g.
Release 3.0 to 4.0) and Minor Releases by changing the numeral to the immediate
right of the decimal point (e.g. Release 3.1 to 3.2.).
1.13 Royalty has the meaning ascribed to it in Attachment 1.
1.14 Source Code means the human readable code including related
documentation that must be converted into machine executable language by the use
of compilers, assemblers or interpreters.
1.15 Specifications means the Functional Specifications and
Performance Specifications of Software described in Exhibit A to this Agreement
respectively and any other specifications or performance characteristics
described in any Documentation.
1.16 Trial means a copy of Software which may be run by a potential
End User for a preset limited time (not to exceed ninety (90) days unless
otherwise agreed in writing by CrossZ) solely for the purpose of determining if
such End User will license Software beyond the Trial period.
1.17 Subsidiary of a party means a corporation or other entity of
which more than fifty percent (50%) of the outstanding stock or other equity
interests entitled to vote for the election of directors or equivalent governing
body is now or hereinafter controlled, directly or indirectly, by that party,
but such corporation or other entity shall be deemed to be a Subsidiary only so
long as such ownership exists.
2. LICENSE RIGHTS
CrossZ grants to Amdahl the following worldwide, non-exclusive,
non-transferable license for Software to:
2.1 Use Software for internal use, subject to the restrictions in
Exhibit B, and reproduce it as required for such use.
2.2 Use, reproduce, and sublicense (i) Demos to Distributors; and
(ii) Trials to End Users.
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<PAGE>
2.3 Manufacture, distribute and sublicense Software to End Users
for their internal use only and to Distributors for sublicensing to End Users
for their internal use only. Maintenance documentation shall not be distributed
to End Users.
2.4 CrossZ grants to Amdahl a worldwide, non-exclusive license
under all of its intellectual property rights relative to Software and, with
respect to any patents, to combine Software with Amdahl hardware, software and
third party hardware and software; in each case only to the extent necessary for
Amdahl, Distributors, and End Users to exercise the rights and licenses granted
under Sections 2. 1-2.3 of this Agreement.
2.5 Amdahl Subsidiaries may use and sublicense Software under this
Agreement provided that such Subsidiaries agree to comply with the terms and
conditions of this Agreement to the same extent as Amdahl including abiding by
the same restrictions on sublicensing Software. The parties intend that all
transactions and dealings relating to this Agreement will be directly between
CrossZ and Amdahl in the United States. A breach of this Agreement or any
obligation hereunder by Amdahl or any of its Subsidiaries shall be deemed a
breach by Amdahl. The parties agree that claims for any such breach will be
pursued against Amdahl and not a Subsidiary unless under applicable law the
claim must be brought directly against the Subsidiary. Any such claim against a
Subsidiary shall not preclude a claim against Amdahl.
2.6 Except as set forth in Section 2.7, no rights with respect to
any Source Code are granted. Amdahl agrees, and shall require its End Users and
Distributors to agree (subject to local law), not to reverse engineer,
decompile, or attempt to derive source code from the Software. No rights are
granted except for the rights expressly granted under this Agreement, and all
other rights are expressly retained by CrossZ. Any activities by Amdahl with
respect to Software outside the scope of the licenses granted in this Agreement
shall be a material breach of this Agreement, and nothing in this Agreement
shall restrict CrossZ's right to bring an action for infringement.
2.7 Within sixty (60) days after signing of this Agreement, CrossZ
will execute a third party Source Code subscription escrow agreement ("Escrow
Agreement") substantially in the form attached as Exhibit C, to which Amdahl
will be a beneficiary, for deposit of Escrow Materials which will be subject to
verification at CrossZ's offices in Alameda, California by the escrow company
under CrossZ supervision. Verification shall not include examination of the
Source Code but shall be limited to compilation to demonstrate that the Source
Code corresponds to the Binary Code licensed to Amdahl. The Escrow Materials
shall consist of Software Source Code (with all existing comments) and existing
programmer documentation which a skilled programmer would customarily require to
understand and modify the Source Code. CrossZ will update the Escrow Materials
quarterly as necessary. All expenses and fees related to the establishment,
registration and continued subscription of such agreement will be paid by
Amdahl, including without limitation all fees payable by CrossZ pursuant to
Section 6 of the Escrow Agreement.
2.7.1 Escrow Materials will be released from escrow to
Amdahl in the event (i) that CrossZ ceases to do business, or (ii) that CrossZ
discontinues support of the Software, or (iii) of a material breach by CrossZ of
support obligations hereunder which results in a termination by Amdahl under
13.2.1, and, in any event, that no assignee is appointed by CrossZ to assume the
obligations and responsibilities of supporting the Software under this
Agreement.
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<PAGE>
2.7.2 The Escrow Agreement shall contain provisions giving
CrossZ the right to dispute whether the release conditions have been met. In
case of such dispute the parties will submit the matter to binding arbitration
with JAMS pursuant to Section 2.7.6. The sole question to be determined by the
arbitrators shall be whether or not a release condition existed at the time
Amdahl made a demand for release of the Escrow Materials, and if so, whether the
default causing such condition has been cured. If the arbitrators find that an
uncured release condition exists, the escrow agent shall promptly deliver the
Escrow Materials to Amdahl.
2.7.3 Upon release of Escrow Materials to Amdahl, Amdahl
shall have the right to use the Escrow Materials only for the purpose of
supporting the Software. In the event of Escrow Materials release, the
obligation to remit any maintenance and support payments will be reduced by the
then current maintenance portion of such payments.
2.7.4 In the event of Escrow Materials release, CrossZ
shall refund to Amdahl the unused portion of any Level 2 and 3 maintenance and
support fees prepaid by CrossZ by Amdahl.
2.7.5 Upon release of Escrow Materials to Amdahl, the
license to use such Escrow Materials will be subject to the following
conditions:
(i) Amdahl will keep copies of the Escrow
Materials only at a secure location in the United States to be specified by
Amdahl at the time of release of such Escrow Materials;
(ii) Amdahl may change the secure location,
within the United States, upon thirty (30) days, prior written notice to CrossZ;
(iii) Amdahl may make only as many copies of the
Escrow Materials for any Software as are reasonably necessary to exercise
Amdahl's rights hereunder, but in no event more than three (3). Amdahl agrees to
use diligent efforts to prevent release or disclosure of all or any part of the
Escrow Materials to anyone other than Amdahl employees who have a need for
access to the Escrow Materials to perform their duties as permitted by this
Agreement.
(iv) Amdahl will grant access to the Escrow
Materials only to a reasonably limited number of its employees who have a need
for access to perform their duties as permitted by this Agreement. Amdahl may
not disclose any escrow Materials to any third party.
(v) Amdahl agrees to include in all copies of
any part of any Escrow Materials made by Amdahl the proprietary rights notices
contained in the original copy of Escrow Materials. This obligation applies to
partial, merged and modified copies.
(vi) Without limiting the foregoing, the Escrow
Materials shall be CrossZ Confidential Information and, without limitation,
Amdahl shall treat the Escrow Materials with at least the same care, to prevent
disclosure or misuse, as Amdahl uses for its own most confidential software
Source Code.
2.7.6 Issues or claims by either party which are submitted
to JAMS pursuant to Section 2.7.2 for arbitration shall proceed as follows:
Arbitration shall commence within fifteen (15) days of receipt of such notice
and shall be conducted by three (3) independent
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<PAGE>
arbitrators with at least five (5) years of experience in the computer
software/hardware field in accordance with the standard arbitration procedures
established by JAMS, unless otherwise agreed by the parties. Each party shall
select an independent arbitrator within five (5) days of submission to JAMS and
the two arbitrators selected by the parties shall select the third independent
arbitrator within five (5) days of selection of the parties' arbitrators. If any
arbitrator is not selected during the time periods designated herein, then JAMS
shall select such arbitrators. The parties agree that the arbitrators' decision
shall be binding. Each party shall pay its own legal fees and the non-prevailing
party shall pay the arbitration fees.
2.7.7 Upon release of the Escrow Materials to Amdahl, (i)
CrossZ's Software support and maintenance obligations shall terminate, and (ii)
CrossZ shall refund to Amdahl, on a pro rata, customer by customer basis the
then unused portion of any maintenance fees paid to CrossZ by Amdahl (e.g., if
the Escrow Materials were released to Amdahl on July 1 and an Amdahl customer
had commenced a one year support and maintenance agreement with Amdahl January
1, then CrossZ would refund to Amdahl fifty percent (50%) of the maintenance fee
Amdahl paid to CrossZ for that customer for that year).
3. END USER LICENSE
3.1 Amdahl will license the Binary Code of Software to End Users
and require its Distributors to license Binary Code of Software to End Users
pursuant to, at its option, (a) a written agreement signed by the End User that
contains terms no less restrictive than the terms specified in Exhibit B, or (b)
a written agreement on or accompanying the Software media that is fully visible
to the End User before the media package is opened, that specifies that the End
User is accepting the license by opening the package and that has terms no less
restrictive than the terms specified in Exhibit B, provided that the alternative
specified in this clause (b) may be utilized only if a similar license is used
by Amdahl in licensing its own similar software products in the jurisdiction
where Software is to be so licensed. Amdahl will enforce the End User agreements
in order to protect CrossZ's rights, or shall take all actions reasonably
necessary or useful to enable CrossZ to do so.
3.2 Amdahl will license the Binary Code of Software to its
Distributors under terms and conditions no less protective of CrossZ's rights
than the terms and conditions of this Agreement.
4. GENERAL RESPONSIBILITIES OF CROSSZ
4.1 CrossZ will designate an official liaison to interface with
Amdahl for matters relating to this Agreement.
4.2 CrossZ agrees to have its senior management meet with Amdahl's
management then responsible for the Software product at least quarterly to
review and address business and technical issues relating to Software and to
discuss, at a minimum, CrossZ development plans relating to Software. CrossZ
agrees to provide to Amdahl at least the same development plan information
relating to Software as it provides to its direct and indirect sales channels.
4.3 CrossZ will provide Amdahl with a master tape (or other
appropriate medium) of Software and Software Documentation in electronic format
within ten (10) business days of the execution of this Agreement.
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<PAGE>
4.4 During the term of this Agreement, CrossZ will, at no charge
to Amdahl, provide reasonable assistance to Amdahl in installing the first two
(2) installations of the Software for each platform on which the Software
operates (e.g., two (2) MVS installations, two (2) UNIX installations).
5. GENERAL RESPONSIBILITIES OF AMDAHL
5.1 Amdahl will designate an official liaison to interface with
CrossZ for matters relating to this Agreement.
5.2 Amdahl's management then responsible for the software product
will meet with CrossZ at least quarterly to review and address business and
technical issues.
5.3 Amdahl will manufacture by making copies from the master tape
of Software delivered by CrossZ to Amdahl and will produce documentation by
making copies form the electronic copy of the Documentation provided to Amdahl
by CrossZ.
5.4 Amdahl will maintain documents and records sufficient to
determine that it has been paid the appropriate Royalties for two (2) years
following each quarter.
5.5 The parties agree to jointly create an Amdahl Software "sales
kit," including literature and promotional materials, training materials, and
demonstration software. In addition, Amdahl agrees to create its own collateral
materials to promote the Software as part of Amdahl's normal product set,
consistent with such materials for other Amdahl products.
5.6 Amdahl will at all times maintain competent technical and
sales personnel with respect to the Software, to enable Amdahl to represent the
Software competently and accurately and to provide competent installation,
implementation, and support. Amdahl will procure training from CrossZ as
necessary to accomplish this.
6. DISPUTES
6.1 If a dispute arises between the parties under this Agreement
each party agrees that before resorting to judicial process the parties will
attempt to resolve it. The resolution of any such dispute will first be mutually
attempted by each party's designated liaison. If the dispute cannot be resolved
by the liaisons within three (3) business days of one party informing the other
party in writing of the issue in dispute, then the Amdahl liaison will promptly
refer the dispute to the senior management of the Amdahl organization which has
responsibility for the Software product and the CrossZ liaison will promptly
refer the dispute to its Senior Vice President who has responsibility for
Software and the CrossZ senior management will refer the dispute to CrossZ's
CEO. If these persons cannot resolve the dispute within ten (10) business days
then either party will have the right to proceed to resolve the suit by judicial
process. Notwithstanding the foregoing, each party shall be entitled, without
delay, to seek and obtain intern, temporary, or preliminary injunctive or other
equitable relief to protect its rights.
6.2 In any legal action arising out of or related to this
Agreement, between the parties hereto, the unsuccessful party will pay all
costs, including legal fees, of the prevailing party.
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<PAGE>
7. MARKETING SUPPORT
7.1 CrossZ will provide to Amdahl available Software marketing
collateral and presentation material in electronic form at no cost. Such
materials will be delivered within ten (10) business days after the execution of
this Agreement.
7.2 Amdahl shall use CrossZ's logos, trademarks and product names,
with reasonable prominence, on each Software package. Amdahl will have the right
to use its own logos, trademarks or product names in addition to CrossZ's logos,
trademarks or product names on the software packaging, media labels and
marketing collaterals in connection with its marketing and licensing of
Software. If Amdahl adds its logos trademarks and product names to the software
packaging, media labels or marketing collaterals, Amdahl shall have the right to
make reasonable modifications (based on both parties interests) to the logos,
trademarks and representation of the Software product name. Any use of CrossZ's
logos, trademarks or product names pursuant to this section shall be subject to
the prior written approval of CrossZ as to form.
7.3 CrossZ will provide Amdahl the logo image, trademarks and
representation of the Software product name for Amdahl's use pursuant to Section
7.2 of this Agreement.
7.4 Except as authorized in this Section 7, Amdahl shall have no
rights with respect to any CrossZ trademark or other product, service, or
company identifier ("CrossZ Trademarks").
7.5 Any and all good will arising from Amdahl's use of the CrossZ
Trademarks shall inure solely to the benefit of CrossZ, and neither during nor
after the termination of this Agreement and the license granted hereunder shall
Amdahl assert any claim to the CrossZ Trademarks (or any confusingly similar
mark) or such good will. Amdahl shall use reasonable judgment and good faith to
prevent any action by Amdahl or its Distributors that could be detrimental to
the good will associated with the CrossZ Trademarks or with CrossZ. Amdahl
shall, during the term of this Agreement and after termination hereof, execute
such documents as CrossZ may request from time to time to ensure that all right,
title and interest in and to the CrossZ Trademarks reside with CrossZ. Without
limiting the foregoing, Amdahl shall not register any CrossZ Trademark, or any
mark confusingly similar to any CrossZ Trademark, in any country or territory.
7.6 Amdahl will notice CrossZ's copyright on software packaging,
media labels, marketing collateral and display screens generated by Software in
connection with its marketing of Software to the same extent that CrossZ notices
its copyright notice on its software packaging, media labels, marketing
collateral and display screens generated by Software.
7.7 Within ten (10) business days after the execution of this
Agreement and each release of a subsequent Release, CrossZ will provide to
Amdahl at no cost the following training:
7.7.1 One day of sales training for up to 15 Amdahl
personnel, at Amdahl's training facilities in Sunnyvale, California or
at an agreed upon CrossZ location;
7.7.2 training of an Amdahl employees to enable such
employee to train other Amdahl employees.
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<PAGE>
7.8 CrossZ will make its standard education course offering for
Software available to Amdahl, Distributors and End Users at a price at least as
low as the price CrossZ charges to any other such customer.
8. MAINTENANCE AND SUPPORT SERVICES
8.1 CrossZ shall provide second and third level software
Maintenance and Support Services to Amdahl for the Software currently marketed
by CrossZ and Release 1.5 and subsequent Release. These services will be
provided to Amdahl pursuant to the provisions of Attachment 2, provided that
problems can be recreated and the maintenance and support services are
implemented on Software operating on a standalone basis, i.e., not bundled.
Amdahl has responsibility for first level support.
8.2 Amdahl shall sell Software support and maintenance for at
least one year after installation for each copy of any MVS version of Software.
Amdahl shall provide to CrossZ prompt written notice of installation of each
copy of any MVS version of the Software.
9. PAYMENT, REPORTING AND TAXES
9.1 Amdahl will pay to CrossZ the per-copy Royalty and maintenance
prices as calculated pursuant to Attachment 1 for every copy of Software
distributed or sublicensed to Distributors or End Users, except for Software
distributed for Demo or Trial purposes. Amdahl shall pay Royalties arising out
of distribution of Software by its Subsidiaries. Internal use of the Software by
Amdahl and its Subsidiaries shall be royalty free. Amdahl will submit a Royalty
report with sufficient information for CrossZ to calculate the Royalties which
are due for each calendar quarter and pay such Royalties within thirty (30) days
after the end of each calendar quarter (ending March 31, June 30, September 30,
and December 31). Upon execution of this Agreement, Amdahl shall pay to CrossZ a
prepaid, nonrefundable (except as specifically set forth in Section 14.3)
Royalty of four hundred three thousand dollars ($403,000). At Amdahl's option,
Amdahl may credit any such Royalties and maintenance fees (limited to Royalties
and maintenance fees accruing during the initial twenty-four (24) month term of
this Agreement only and not during any renewal term) against any prepaid
Royalties it has already paid to CrossZ.
9.2 All payments are to be made by telegraphic transfer to
CrossZ's bank account and are to be in U.S. Dollars. Royalties based on Sales in
other currencies shall be converted to United States dollars according to the
official rate of exchange for that currency, as published in the Wall Street
Journal (Western Edition) on the last day of the calendar month in which the
Royalty accrued (or, if not published on that day, the last publication day for
the Wall Street Journal (Western Edition) during that month). Late payments
shall bear interest at the lesser of one and one-half percent (1.5%) per month
or the maximum allowed by applicable law.
9.3 Amdahl will upon written request, but no more frequently than
annually (unless the preceding audit revealed a discrepancy), provide CrossZ
access to pertinent records (including without limitation records of
Subsidiaries) with respect to Royalties due to CrossZ under this Agreement.
Access will be provided during normal business hours, at a mutually acceptable
time, to an independent accounting organization, chosen and compensated by
CrossZ and reasonably acceptable to Amdahl. The accounting organization will
report to CrossZ only the number of licenses issued and per copy sublicense fees
paid or due and will keep confidential any other information it may discover in
the course of the audit. CrossZ will pay all costs and
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expenses in connection with such audit. If the audit reveals that Amdahl has
underpaid Royalties by an amount which is greater than $200,000, then Amdahl
will reimburse CrossZ for the expense of the audit.
9.4 Royalties will be paid in full without offset or deduction by
Amdahl relating to any withholding or action, state or local sales, use, value
added or other taxes, customs duties, or similar tariffs and fees which Amdahl
may be required to pay or collect upon the delivery of Software or upon
collection of sublicense fees or otherwise. Except for taxes based on CrossZ's
income, net worth or similar taxes, Amdahl agrees to pay such tax or levy.
Amdahl agrees to provide CrossZ with appropriate resale certificate numbers and
other documentation satisfactory to the applicable taxing authorities to
substantiate any claim or exemption from any such taxes or fees.
9.5 In addition, if either party sells Software-related services
(other than customary Software support and/or maintenance) to any End User and
the parties agree that such party (the "Contracting Party") will subcontract
performance of those services to the other party (the "Performing Party"), then
the Contracting Party shall pay to the Performing Party seventy-five percent
(75%) of all amounts charged by the Contracting Party for the services performed
or to be performed by the Performing Party. Payments shall be made quarterly
within thirty (30) days after each calendar quarter in which any payment of
amounts charged for such services accrues, in accordance with the procedures
specified in Sections 9.2 - 9.4 for royalties.
10. WARRANTY
10.1 While CrossZ does not warrant that the operation of Software
will be error-free or uninterrupted, until ninety (90) days after its initial
delivery to Amdahl, CrossZ does warrant that Software will perform in
substantial conformance to the Documentation (excluding documentation relating
to training) and Specifications and that the media, as delivered by CrossZ
containing Software will be free of defects during the warranty period. CrossZ's
sole obligation under this warranty will be to use diligent efforts to correct
non-conformities in Software and to repair or replace any such defective media.
10.2 CrossZ makes no warranty that Software will work in
combination with any hardware or applications provided by third parties except
as provided in the Documentation.
10.3 CrossZ warrants that Software contains no encryption code or
cryptographic capability which for the purpose of export would require a license
under the ARMS Export Control Act and the International Traffic in Arms
Regulations.
10.4 CrossZ represents and warrants that (a) it is the owner of all
rights, title and interest in Software necessary to permit Amdahl to exercise
all of Amdahl's rights under this Agreement, (b) it has not assigned,
transferred, licensed, pledged or otherwise encumbered Software or any
underlying technology or intellectual property rights with respect to Software
in any manner that conflicts with Amdahl's rights under this Agreement, (c)
entering into this Agreement and exercising its rights under this Agreement will
not violate any right of, breach, or result in any obligation by CrossZ or
Amdahl to any third party under any agreement or arrangement between CrossZ and
such third party, (d) to the best of its knowledge, no claim, whether or not
embodied in an action past or present, or infringement of any copyright, patent,
trade secret or trademark has been made or is pending against it or to its
knowledge any entity
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from which it has obtained such rights relative to Software (e) to the best of
its knowledge, Software provided by CrossZ to Amdahl does not infringe any third
party intellectual property rights, (f) no licenses, permissions or releases of
third party rights are necessary for it to perform under this Agreement, and (g)
it has and will have written agreements with its employees and contractors
sufficient for the development of Software or the license of Software to Amdahl
as provided under this Agreement.
10.5 THE FOREGOING WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW,
STATUTORY OR OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE.
11. CONFIDENTIAL INFORMATION
11.1 Each party agrees that Confidential Information disclosed by a
party will be considered the Confidential Information of that party. Except as
expressly and unambiguously allowed herein, the receiving party will hold the
disclosing party's Confidential Information in confidence and not disclose it to
third parties except for the purposes of this Agreement and under a written
agreement no less restrictive than the terms of this Section, and will treat the
disclosing party's Confidential Information with at least the same degree of
care taken to protect its own similar Confidential Information but in no event
with less than reasonable care. Each party receiving Confidential Information
further agrees to limit disclosure of such information to those of its employees
and contractors who have a need for such information to effect the use permitted
under this Agreement and who are bound under a written agreement to keep such
information confidential. For purposes of this Agreement each party's standard
employee agreement conferring Confidential Information issues will satisfy this
requirement with respect to its employees.
11.2 Notwithstanding the foregoing, the receiving party will not be
required to protect or hold in confidence any information which:
11.2.1 becomes publicly known through no wrongful act or
omission of the receiving party; or
11.2.2 becomes known or was previously known to the
receiving party, without confidential restriction, from a third party unless the
receiving party had or should have had knowledge of this confidentiality; or
11.2.3 is approved by the disclosing party for disclosure
without restriction in a written document which is signed by a duly
authorized officer of the disclosing party; or
11.2.4 is independently developed by the receiving party
without use of the other party's Confidential Information.
11.3 Disclosure of Confidential information will not be precluded
by Section 11.2 if such disclosure is:
11.3.1 necessary to establish rights under this Agreement
(subject however to the receiving party's obligation at its expense to make a
good faith attempt to obtain a protective order prior to such disclosure);
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11.3.2 required by law or regulation or in response to a
valid order of a court or other governmental body of a country or political
subdivision thereof, provided that the receiving party gives prompt written
notice to the disclosing party to enable the disclosing party to seek a
protective order or prevent the disclosure.
11.4 If such Confidential Information is relevant to the material
financial terms and conditions of this Agreement then in addition to the
exceptions of Section 11.3 disclosure of Confidential Information will not be
precluded by Section 11.2 if such disclosure is:
11.4.1 to legal counsel of the parties, accountants, and
other professional advisors;
11.4.2 in confidence, to banks, investors and other
financing sources and their advisors;
11.4.3 in connection with the enforcement of this Agreement
or rights under this Agreement; or
11.4.4 in confidence, in connection with an actual or
prospective merger or acquisition or similar transaction.
11.5 All Confidential Information together with all copies thereof
which have been made by the receiving party will remain the property of the
disclosing party.
12. EXPORT WRITTEN ASSURANCE
CrossZ will provide all information under its control reasonably
requested by Amdahl, including all information with respect to encryption code
or cryptographic capabilities of Software, to assist Amdahl to obtain any export
or import licenses for Software. Amdahl agrees to comply with all U.S. Export
control laws, including the U.S. Export Administration Act and its associated
regulations.
13. TERM AND TERMINATION
13.1 This Agreement will become effective on the Effective Date.
Unless earlier terminated in accordance with this Section 13, this Agreement
will remain in full force and effect for a period of twenty-four (24) months.
Thereafter, this Agreement will be automatically extended (without additional
prepaid royalty obligation) for renewal terms of twelve (12) months each,
provided, however that either party may terminate it as of the end of its then
current term by giving written notice of termination at least ninety (90) days
prior to the end of the then current term. In addition, at any time after the
initial twenty-four (24) month term of this Agreement, either party shall be
entitled to terminate this Agreement, for its convenience for any reason or for
no reason, on at least six (6) months written notice to the other party. This
Agreement will be considered an agreement for a fixed terms regardless of the
number of renewals that may take place.
13.2 This Agreement may be terminated by a party upon the
occurrences of any of the following events:
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13.2.1 If the other party materially breaches any material
provision of this Agreement, or if CrossZ material breaches the
maintenance and support service agreement entered into by Amdahl and
CrossZ for Maintenance and Support Services, and, in any such case, the
breaching party fails to substantially cure such breach within thirty
(30) days of written notice by the non-breaching party describing the
breach. In addition, CrossZ shall be entitled to terminate this
Agreement, and Amdahl's right to market and distribute the Software,
pursuant to this Section in any particular country or countries if
Amdahl is not complying with its obligations pursuant to Section 5.6
with respect to that country or countries and does not cure such
failure within thirty (30) days after notice from CrossZ.
13.2.2 If the other party ceases to do business, or
otherwise terminates its business operations, or if there is a change
in control of the other party (except for a change in the control of
Amdahl involving Fujitsu, Ltd. or another company controlled by
Fujitsu, Ltd.).
13.2.3 If the other party seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement,
composition or comparable proceeding, or if any such proceeding is
instituted against the other party (and not dismissed within one
hundred and twenty (120) days);
13.3 Upon termination or expiration of this Agreement the following
will occur:
13.3.1 Amdahl's obligations to pay Royalties under Section
9 will continue provided, however, that if Amdahl terminates pursuant
to Section 13.2.1 Amdahl may offset any such Royalties against any
damages it may have sustained as a result of CrossZ's breach of this
Agreement or the maintenance and support services agreement.
13.3.2 All rights and licenses of Amdahl will terminate,
except that then existing licenses to End Users for Software will
remain in effect.
13 3.3 Each party will immediately cease using any logos,
trademarks, service marks, product names and other designations of the
other except to the extent required in connection with the existing
licenses to End Users.
13.3.4 Each party will return to the other its Confidential
Information unless it was expressly provided for use in sales
promotions or as part of a sale.
13.3.5 In addition to those Sections referred to in
13.3.1-5 (which survive termination of this Agreement only to the
extent provided therein), the following Sections of this Agreement will
survive a termination of this Agreement for any reason: Payment,
Reporting and Taxes; Warranty; Confidential Information; Expert Written
Assurance; Intellectual Property Indemnification; Limitation of
Liability; Severability; Compliance With Laws and Regulations;
Governing Law; Cumulative Remedies; and Entire Agreement. Section 8
(Maintenance and Support Services), together with Amdahl's obligation
to make support and maintenance payments as set forth in Attachment 1,
shall survive any termination except for termination by CrossZ for
Amdahl's failure to pay support and maintenance payments.
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14. INTELLECTUAL PROPERTY INDEMNIFICATION
14.1 CrossZ hereby agrees to defend or settle at its expense any
claim against Amdahl, Distributors or End Users that Software infringes a
worldwide copyright or trade secret, or a patent or trademark in the United
States, the European Union, Japan, Canada, Australia, or any other country where
CrossZ does business. CrossZ will indemnify and hold harmless Amdahl,
Distributors or End Users against and from costs and attorney's fees awarded as
a result of any such claim and any judgment or arbitration award finally awarded
or the amount of the settlement thereof, provided that CrossZ is promptly
notified of the claim in writing, is given full control of the defense and
settlement thereof, and, at its request and expense (except the value of
employee time) is given reasonable assistance by Amdahl or Distributor or End
User, as the case may be. In the event of such a claim, CrossZ may procure for
Amdahl, Distributors or End User the right to continue to market, use and
license Software as provided under this Agreement, or to replace or modify it to
make it non-infringing but substantially equivalent in functionality and
performance. Notwithstanding the foregoing, CrossZ will have no obligation under
this Section 14.1 with respect to the circumstances specified in Section 14.2.
14.2 Amdahl hereby agrees to defend or settle at its expense any
claim against CrossZ that (i) the modification of Software other than by CrossZ,
or (ii) the combination of Software with other software, hardware or services,
infringes (which infringement would not have occurred but for such modification
or combination) a worldwide copyright or trade secret, or a patent or trademark
in the Untied States, the European Union, Japan, Canada, Australia. Amdahl will
indemnify and hold CrossZ harmless against and from costs and attorney's fees
awarded as a result of any such claim, and any judgment and arbitration award
finally awarded or the amount of the settlement thereof, provided that Amdahl is
promptly notified of the claim in writing, is given full control of the defense
and settlement thereof, and, at its request and expense (except the value of
employee time) is given reasonable assistance by CrossZ.
14.3 In the event the use of Software is enjoined as a result of a
claim of infringement described in Section 14.1, CrossZ shall use reasonable
commercial efforts to in any order, procure on reasonable terms for Amdahl,
Distributors, and End Users the right to continue using Software, or to replace
or modify it so that it is outside the scope of the injunction but is
substantially equivalent in functionality and performance. In addition to other
remedies available to Amdahl, if neither of those actions is reasonably feasible
despite CrossZ's reasonable commercial efforts, CrossZ will pay to Amdahl any
amount Amdahl refunds to Distributors or End Users as a result of the
injunction, up to the amount received by CrossZ with respect thereto.
14.4 Notwithstanding any other provision of this Agreement, the
foregoing states CrossZ's sole liability and obligation, and Amdahl's (and
Distributors' and End Users') exclusive remedy, arising out of any actual or
alleged intellectual property infringement.
15. LIMITATION OF LIABILITY
15.1 In no event will either party be liable under this Agreement
or under contract, negligence, strict liability or other equitable theory for
any costs of substitute products or services, or for any indirect, special or
consequential damages or lost business or profits, even if the party has been
advised of the possibility of such damages.
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15.2 Subject to Section 15.1 above, each party's total aggregate
liability to the other for all claims under this Agreement or under contract,
negligence, strict liability or other equitable theory will be limited to the
amount already paid and due to be paid to CrossZ by Amdahl as Royalties except
that Amdahl's liability pursuant to the preceding clause shall be in addition to
Amdahl's obligation to pay all amounts due to be paid to CrossZ.
15.3 The limitations of liability set forth in Sections 15.1 and
15.2 above will not apply to claims of personal injury, death, or tangible
property damage, to liability for infringement of the other party's intellectual
property rights, or to CrossZ's or Amdahl's obligations and liabilities pursuant
to Section 14, PROVIDED that each party's liability to the other party for
infringement of the other party's intellectual property rights shall not exceed
the greater of two million dollars ($2,000,000) or the total amounts paid or
payable by Amdahl to CrossZ pursuant to this Agreement, PROVIDED FURTHER that if
the infringement was authorized by management personnel at the director level or
higher (e.g., director, vice president, president, etc. ), then this maximum
liability shall be the greater of ten million dollars ($10,000,000) or the total
amounts paid or payable by Amdahl to CrossZ pursuant to this Agreement. In the
event of any such infringement, the infringing party shall, at its expense, (i)
provide prompt and full written notice to the other party describing the
infringing activities, (ii) immediately cease the infringing activity, and (iii)
use its diligent and reasonable best efforts to eliminate or minimize the
effects of the infringing activities.
16. PRESS RELEASES
Either party may issue a press release describing Amdahl's intent as a
distributor of Software. Each party will have the right of prior approval of any
press release proposed by the other party which approval will not be
unreasonably withheld. If such written approval or nonapproval is not received
within five (5) business days of the date a written request for approval is
received by the other party's liaison, the request for the press release will be
considered approved. In any case, CrossZ will not issue any press releases in
connection with Amdahl's Software offering until after Amdahl announces its
product offering related to Software.
17. ASSIGNMENT
Neither party will, without the prior written consent of the other,
sell, transfer, assign or subcontract in whole or in part any right or
obligation hereunder, except to an entity (but not a competitor of the other
party) who acquires all or substantially all of the relevant assets or business
of the party, whether by sale, merger or acquisition. Any attempted assignment
in violation of this section shall be void.
18. FORCE MAJEURE
Notwithstanding anything else in this Agreement, except for the
obligation to pay money, no default, delay or failure to perform on the part of
either party will be chargeable hereunder if such default, delay or failure to
perform is due to causes beyond that party's reasonable control. In such event,
any dates or times by which the party is otherwise scheduled to perform will be
extended automatically for a period of time equal in duration to the time that
the cause for such default, delay or failure to perform is in effect.
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19. SEVERABILITY
If any provision of this Agreement is held to be illegal or
unenforceable, that provision will be limited or eliminated to the extent
necessary so that this Agreement will otherwise remain in full force and effect
and be enforceable.
20. WAIVER AND AMENDMENT
This Agreement shall not be modified except by a written agreement
dated subsequent to the date of this Agreement and signed by a Vice President or
a more senior officer of each of the parties. No waiver of any breach of, or
failure to exercise any right under, any provision of this Agreement will
constitute a waiver of any prior, concurrent or subsequent breach of or right
under the same or any other provision hereof, and no waiver shall be effective
unless made in writing and signed by a Vice President of the waiving party. This
Agreement will take precedence over additional or different terms of any
purchase order, confirmation, invoice or similar document (all of which terms
shall be void), even if accepted in writing by both parties, and waivers and
amendments will be effective only if made by non pre-printed agreements
constituting an amendment or waiver.
21. COMPLIANCE WITH LAWS AND REGULATIONS
Each party hereto will at its own expense comply with all laws, rules
and regulations of competent public authorities relating to its duties,
obligations and performance under this Agreement and will procure all licenses
and pay all fees and other charges required thereby.
22. NOTICES
22.1 All notices, demands and other communications under this
Agreement will be made in English and will be deemed to have been given when two
(2) working days have passed after transmission by facsimile or delivery by hand
or by overnight courier, or when five (5) working days have passed after the
transmission by certified airmail, return receipt requested. If notice is made
by facsimile, a confirming copy of the same will also be sent by mail to the
same address.
22.2 Such notices, requests, demands and other communications will
be sent to the following addresses, unless the party changing its address
notifies the other party of the change by fifteen (15) days prior written
notice.
For Amdahl:
Amdahl Corporation M/S
1250 East Arques
Sunnyvale, CA 94088-3470
Fax: (408) 746-7095
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Copy to: Amdahl Law Department
Amdahl Corporation M/S
1250 East Arques
Sunnyvale, CA 94088-3470
Fax: (408) 746-8999
For CrossZ: President or Chief Executive Officer
CrossZ International, Inc.
60 Charles Lindberg Blvd.
Uniondale, New York 11553
23. RELATIONSHIP OF PARTIES
23.1 Amdahl will at all times during the term of this Agreement act
as, and will contract on its own behalf and in its own name as principal. Amdahl
will not, without CrossZ's express prior written permission, except as expressly
provided for in this Agreement, obligate CrossZ in any manner, including without
limitation, making any representations or offering any guarantees on behalf of
CrossZ or about Software. In all dealings in connection with this Agreement,
Amdahl will not represent CrossZ as being in a relationship with Amdahl other
than as an authorized distributor of CrossZ Software.
23.2 Nothing in this Agreement will be construed as creating a
relationship between the parties of partnership, joint-venturers, or as
conferring on Amdahl the right to assume obligations or responsibilities on
behalf of CrossZ.
24. NON-SOLICITATION
Amdahl and CrossZ agree during the term of this Agreement not to
solicit, directly or indirectly, employees of the other party for employment, or
as consultants or contractors, unless otherwise agreed to in writing by the
party whose employee is proposed to be solicited by the other party. Nothing in
this provision is intended to limit the ability of either Amdahl or CrossZ to
hire employees of the other as employees, consultants or contractors where such
hiring opportunity was publicly advertised or was part of a job fair to which
the public was invited.
25. GOVERNING LAW
The validity, construction and performance of this Agreement will be
governed by the laws of the State of California and the United States without
regard to the conflict of law provisions thereof, and without regard to the
United Nations Convention on Contracts for the International Sale of Goods.
26. HEADINGS
The title of this Agreement and the headings of Sections contained herein are
for convenience and reference only and will have no effect upon the
interpretation or construction of the provisions of this Agreement.
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27. CUMULATIVE REMEDIES
The right of termination will not be the sole remedy under this
Agreement. Whether or not termination is effected, unless specifically provided
otherwise, all other remedies provided for under this Agreement or in law or
equity will remain available to the parties.
28. RIGHT TO INDEPENDENT DEVELOPMENT
Nothing in this Agreement will prevent Amdahl from independently
developing (or having developed for it), licensing and marketing directly or
indirectly any product similar to Software provided that in doing so Amdahl does
not violate any provision of this Agreement or infringe any of CrossZ's or its
suppliers' intellectual property rights with respect to Software.
29. ENTIRE AGREEMENT
The provisions herein, including all amendments, attachments or
exhibits which refer to this Agreement, constitute the entire agreement between
the parties and supersede all prior agreements, oral or written, and all other
communications between them and/or their agents relating to the subject matter
hereof. No representations were made by either party or its agents as a basis
for entering into this Agreement other than those specifically stated herein.
Acceptance Signatures
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
below by their duly authorized representatives indicating acceptance of the
terms and conditions herein.
FOR AMDAHL
- ------------------------------
Accepted and Agreed to by:
Signature: /s/ Michael Orr
Name: Michael Orr
Title: Vice President and General Manager, Telecom Business Unit
Date: November 27, 1996
FOR CROSSZ
Accepted and Accepted by
Signature: /s/ Michael S. Tatelman
Name: Michael S. Tatelman
Title: Senior Vice-President
Date: 11/29/96
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EXHIBIT A
to
Software Licensing and Distribution Agreement
by and between
Amdahl Corporation and Cross/Z International, Inc.
SOFTWARE:
1. CrossZ Query Object System:
a. Query Object Engine
b. Query Object DBA
c. Query Object Designer
d. Query Object Open
2. Query Object Viewer
3. Query Object Voyager
FUNCTIONAL SPECIFICATIONS AND PERFORMANCE SPECIFICATIONS
(See attached copy of FAX per Michael Tatelman to Dave Radack, Re:
Documentation, dated 11/27/96.)
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CROSSZ
SOFTWARE
FAX
DATE: 11/27/96
To: Dave Radack
From: Michael Tatelman
RE: Documentation and specifications for Attachment A of
our agreement
End user and systems administrator documentation, for the following products,
will be delivered to Amdahl within 5 business days: QueryObject Engine,
QueryObject DBA, QueryObject Designer and QueryObject Viewer.
Individual data sheets for each of the products and an installation guide for
QueryObject Open are in process and will be made available within 90 days.
Documentation for the as yet unreleased Voyager product will be made available
simultaneously with the release of the product.
Return Phone: 847.438.4178
<PAGE>
EXHIBIT B
to
Software Licensing and Distribution Agreement
by and Between
Amdahl Corporation and Cross/Z International, Inc.
End User License Agreements
TERMS OF END USER LICENSE AGREEMENT
The End User License Agreement that Amdahl (or Amdahl's Distributors) will use
in licensing Software to End Users will provide for, at a minimum, the
following:
1. LICENSE(S) TO SOFTWARE. The End User is only licensed to use one copy
of the Binary Code of Software for internal purposes. The End User is granted no
right to make modifications to the Software or otherwise create Derivatives
thereof. Amdahl or its licensors retain all title to the Software, and all
copies thereof. Upon termination of the license, the End User shall return all
copies of the Software to Amdahl (or its Distributor).
2. LICENSE FEE. The End User will pay a license fee for each copy of the
Software licensed under Paragraph 1.
3. PROHIBITIONS ON COPYING OR DISCLOSURE. The End User is prohibited from
making any copies (other than for backup purposes) of Software and is prohibited
from disclosing the Binary Code of Software or any of the Documentation (except
for marketing materials) to any third party.
4. SOURCE CODE. The End User is granted no rights with respect to any
Source Code and agrees (subject to local law) not to reverse engineer,
decompile, or derive Source Code from the Software.
5. NO ASSIGNMENT. The End User is prohibited from assigning any of its
rights under the End User License Agreement to any third party.
6. OUTSOURCING. The End User may provide a copy of the Binary Code of
Software to a third party that is acting as an outsourcer for the End User (and
only the End User) regarding such Binary Code of Software provided that such
Outsourcer is bound by confidentiality obligations and prohibitions on copying
no less restrictive than those in the End User License Agreement and is
authorized to use the Software only to provide data processing services on
behalf of the End User.
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ATTACHMENT 1
to
Software Licensing and Distribution Agreement
by and Between
Amdahl Corporation and Cross/Z International, Inc.
Royalty: Fifty percent (50%) of CrossZ's then current retail
quantity-of-one price for the Software in the country to which
that copy of the Software is shipped or otherwise distributed by
Amdahl. Amdahl will be entitled to a royalty credit for Software
copies for which a full refund is provided by Amdahl if Amdahl so
notifies CrossZ in writing (i) in the case of MVS versions of the
Software, no later than ninety (90) days after installation of the
applicable Software copy, but in no event later than one hundred
twenty (120) days after Amdahl's delivery of the applicable
Software copy to its customer, and (ii) in the case of all other
versions of the Software, no later than ninety (90) days after
Amdahl's delivery of the applicable Software copy to its customer.
Amdahl shall provide to CrossZ prompt written notice of
installation of each copy of any MVS version of the Software.
CrossZ will consider in good faith each Amdahl request to adjust
the royalty for special bids or projects; for countries which
impose a withholding tax but in which a corresponding increase in
Amdahl's price would not be competitive; and to permit Amdahl to
sell site licenses, enterprise licenses, and the like for an
agreed royalty. A guideline for these special cases shall be fifty
percent (50%) of Amdahl's selling price of the applicable license,
but this shall only be a guideline and shall not be binding on the
parties. Nothing herein shall obligate CrossZ to agree to any
particular arrangement or royalty in any particular case.
Maintenance: For each Software customer to which Amdahl provides Software
support or maintenance, Amdahl shall pay to CrossZ an annual fee
equal to thirteen and one-half percent ( 13.5%) of CrossZ's then
current retail quantity-of-one price for the Software in the
country in which the Software is being used. If Amdahl is selling
Software support and maintenance in one year subscriptions, this
fee will be due upon the commencement of the one year subscription
period, and CrossZ's then current retail quantity-of-one price for
the Software shall be determined as of that same date. If Amdahl
is selling Software support and maintenance on any other basis,
the parties shall establish another payment schedule which
provides to CrossZ the same annual fee of thirteen and one-half
percent (13.5%) of CrossZ's then current retail quantity-of-one
price for the Software in the country in which the Software is
being used. This fee shall apply whether Amdahl sells Software
support and maintenance separately, bundles it with the Software
price, or otherwise provides such support or maintenance.
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<PAGE>
ATTACHMENT 2
to
Software Licensing and Distribution Agreement
by and Between
Amdahl Corporation and Cross/Z International, Inc.
Technical Product Support for Generally Available Software Releases
This section describes the technical product support to Amdahl
Corporation that is available when a Software Release becomes generally
available.
Within ninety (90) days after the date of this Agreement, the parties will
complete this Attachment 2 substantially in the form attached hereto as Exhibit
D.
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EXHIBIT C
FORM OF ESCROW AGREEMENT
[Attached]
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<PAGE>
SOURCEFLEX
SOFTWARE SOURCE CODE ESCROW AGREEMENT
SOURCEFILE NUMBER:__________
This Software Source Code Escrow Agreement, dated as of__________, 199_
by and between FileSafe, Inc., a California corporation, doing business as
SourceFile ("SourceFile") located at 1350 West Grand Avenue, Oakland,
California, 94607 and ____________________________________ located at
_____________________________________________ ("Depositor"), and each
Beneficiary identified by Depositor to SourceFile as provided for in Paragraph 3
hereof (each a "Beneficiary", collectively the "Beneficiaries").
RECITALS:
A. Pursuant to certain software license agreements (each a
"License Agreement", collectively the "License Agreements"), Depositor licenses
to certain licensees certain software in object code form (the "Software"). A
description of each Software effective as of the date hereof, is attached hereto
as EXHIBIT "A".
B. The Software is the proprietary and confidential information
of Depositor, and Depositor desires to protect such ownership and
confidentiality.
C. Depositor desires to ensure the availability to its
Beneficiaries of the source code and all necessary proprietary information
related to the Software as set forth in the License Agreements (the "Source
Material") in the event certain conditions set forth in Paragraph 4 of this
Agreement should occur.
AGREEMENT:
1. DELIVERY OF SOURCE MATERIAL TO SOURCEFILE. Depositor shall
deliver to SourceFile a parcel (the "Parcel") sealed by Depositor, which
Depositor represents and warrants is two copies of the Source Material.
SourceFile has no knowledge of, and makes no representations with respect to,
the contents or substance of the Parcel, the Software or the Source Material.
2. ACKNOWLEDGEMENT OF RECEIPT BY SOURCEFILE. Promptly after
receipt of the Parcel and of any supplements to the Source Material, SourceFile
shall notify in writing such Beneficiaries for which Depositor has paid
SourceFile the fee for such notice. Depositor shall provide quarterly
supplements to the Source Material for the latest version of the Software.
Depositor shall send to SourceFile a duplicate of the Source Material within
three (3) days after receiving written notice from SourceFile that the Source
Material has been destroyed or damaged. All supplements shall be subject to the
terms and provisions of this Agreement. SourceFile will notify Beneficiary and
Depositor of each update to the Source Material. Such notification will be sent
via certified mail, return receipt required.
3. ACKNOWLEDGEMENT BE BENEFICIARIES. For purposes of this
Agreement, a licensee of the Software shall be a Beneficiary hereunder with such
rights of a Beneficiary as set forth
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herein, ONLY IF (i) such licensee is identified on the current schedule of
Software licensees delivered to SourceFile by Depositor from time to time AND
(ii) such licensee has sent to SourceFile a fully executed copy of the form of
acknowledgement attached hereto as EXHIBIT "B", in which such licensee accepts
the terms of this Agreement. The name and addresses of the Beneficiaries shall
be described in one or more schedules of Beneficiaries to be presented to
SourceFile from time to time by Depositor. A schedule of Beneficiaries effective
as of the date of this Agreement is attached hereto as EXHIBIT "C". All other
licensees of the Software shall have no rights hereunder and SourceFile shall
have no duties to such licensees.
4. TERMS AND CONDITIONS OF THE SOURCE MATERIAL ESCROW. The Parcel
shall be held by SourceFile upon the following terms and conditions:
(i) In the event that (1) SourceFile is notified by A Beneficiary that
Depositor is unwilling or unable to support or maintain the Software in breach
of its License Agreement with Beneficiary and that the Beneficiary has given
Depositor written notice of such breach (the "Release Condition") and (2)
Beneficiary has paid to SourceFile all fees and charges then due and owing,
SourceFile shall follow the following procedures set forth in this Section 4,
parts (ii), (iii) and (iv).
(ii) SourceFile shall promptly notify Depositor of the occurrence of
the Release Condition and shall provide to Depositor a copy of Beneficiary's
notice to SourceFile.
(iii) If SourceFile does not receive Contrary Instructions, as defined
below, from Depositor within thirty (30) days following SourceFile's delivery of
a copy of such notice to Depositor, SourceFile shall deliver a copy of the
Source Material to that Beneficiary. "Contrary Instructions" for the purposes of
this sub-section 3 shall mean the filing of written notice with SourceFile by
Depositor, with a copy to the Beneficiary demanding delivery, stating that the
Release Condition has not occurred or has been cured.
(iv) If SourceFile receives Contrary Instructions from Depositor within
thirty (30) days of the giving of such notice to Depositor, SourceFile shall not
deliver a copy of the Source Material to the Beneficiary, but shall continue to
store the Parcel until: (1) otherwise directed by the Depositor and Beneficiary
jointly; or (2) SourceFile has received a copy of an order of a court of
competent jurisdiction or a written decision by an arbitrator handling the
matter, directing SourceFile as to the disposition of the Source Material.
5. TERM OF AGREEMENT. This Agreement shall have an initial term
of three (3) years. The term shall be automatically renewed on a yearly basis
thereafter, unless Depositor or SourceFile notifies the other party in writing
at least forty-five (45) days prior to the end of the then current term of its
intention to terminate this Agreement. SourceFile shall provide at least a
thirty (30) day notice to Beneficiary of either SourceFile's or Depositor's
intention to terminate this Agreement.
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6. COMPENSATION OF SOURCEFILE. Depositor agrees to pay SourceFile
reasonable fees for the initial establishment of the Escrow, and the Beneficiary
shall pay SourceFile reasonable compensating for all other services to be
rendered hereunder (including without limitation annual maintenance fees), in
each case in accordance with SourceFile's then current schedule of fees. Any
fees associated with Escrow Release Requests and Technical Review/Verification
Requests initiated by a Beneficiary must be paid by that Beneficiary in
accordance with SourceFile's then current schedule of fees. Depositor or the
Beneficiary requesting additional services, as applicable. will pay or reimburse
SourceFile upon request for all reasonable expenses, disbursements and advances,
including software duplication charges incurred or made by it in connection with
carrying out such requested duties hereunder. SourceFile's schedule of fees for
the initial term of this Agreement is attached to this Agreement as EXHIBIT "D".
SourceFile will provide to Depositor and each Beneficiary at least sixty (60)
days prior written notice of any increase in SourceFile's fees.
7. LIMITATION OF DUTIES OF SOURCEFILE. SourceFile undertakes to
perform only such duties as are expressly set forth herein.
8. LIMITATION OF LIABILITY OF SOURCEFILE. SourceFile may rely on
and shall suffer no liability as a result of acting or refraining from acting
upon any written notice, instruction or request furnished to SourceFile
hereunder which is reasonably believed by SourceFile to be genuine and to have
been signed or presented by a person reasonably believed by SourceFile to be
authorized to act on behalf of the parties hereto. SourceFile shall not be
liable for any action taken by it in good faith and believed by it to be
authorized or within the rights or powers conferred upon it by this Agreement.
SourceFile may consult with legal counsel of its own choice, and shall have full
and complete authorization and protection for any action taken or suffered by it
hereunder in good faith and in accordance with the opinion of such counsel.
9. INDEMNIFICATION OF SOURCEFILE. Depositor and Beneficiary agree
to defend and indemnify SourceFile and to hold SourceFile harmless from and
against all claims, actions and suits, whether in contract or in tort, except
for personal injury and tangible property damage to the extent caused by
SourceFile, and from and against any and all liabilities, damages payable to
third parties, costs, charges, penalties, counsel fees and other expenses of any
nature (including, without limitation, settlement costs) incurred by SourceFile
with respect to such claims, actions, and suits, as a result of performance of
this Agreement except in the event that SourceFile acted with gross negligence
or willful misconduct or in breach of this Agreement. In addition, Depositor and
Beneficiary shall only be jointly liable to the extent that (i) they are jointly
negligent and then on a prorated basis, or (ii) neither Depositor or Beneficiary
is negligent.
10. RECORD KEEPING AND INSPECTION OF SOFTWARE. SourceFile shall
maintain complete written records of all materials deposited by Depositor
pursuant to this Agreement. During the term of this Agreement, Depositor shall
be entitled at reasonable times during normal business hours and upon reasonable
notice to SourceFile to inspect the records of SourceFile maintained pursuant to
this Agreement and to inspect the facilities of SourceFile and the physical
condition of the Source Material.
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11. TECHNICAL VERIFICATION. Beneficiary reserves the option to
request SourceFile to verify the Source Material for completeness and accuracy.
SourceFile may elect to perform the verification only at the Depositor's site.
Depositor agrees to cooperate with SourceFile in the verification process by
providing its facilities and computer systems and by permitting SourceFile and
at least one employee of Beneficiary to be present during the verification of
Source Material. Verification shall not include examination of the Source Code
but shall be limited to compilation to demonstrate that the Source Code
corresponds to the Binary Code licensed to the Beneficiary.
12. RESTRICTION ON ACCESS TO AND USE OF SOURCE MATERIAL. Except as
required to carry out its duties hereunder, SourceFile shall not permit any
SourceFile employee, Beneficiary or any other person access to the Source
Material except as provided herein, unless consented to in writing by Depositor.
SourceFile shall use its best efforts to avoid unauthorized access to the Source
Material by its employees or any other person. SourceFile shall use the Source
Material only for the purposes of this Agreement.
13. BANKRUPTCY. Depositor and Beneficiary acknowledge that this
Agreement is an "agreement supplementary to" the License Agreement as provided
in Section 365 (n) of Title 11, United State Code (the "Bankruptcy Code").
Depositor acknowledges that if Depositor, as a debtor in possession or a trustee
in Bankruptcy in a case under the Bankruptcy Code, rejects the License Agreement
or this Agreement, Beneficiary may elect to retain its rights under the License
Agreement and this Agreement as provided in Section 365 (n) of the Bankruptcy
Code. Upon written request of Beneficiary to Depositor or the Bankruptcy
Trustee, Depositor or such Bankruptcy Trustee shall not interfere with the
rights of Beneficiary as provided in the License Agreement and this Agreement,
including the right to obtain the Source Material from SourceFile.
14. NOTICES. Any notice or other communication required or
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given on the date service is served personally, sent by overnight
courier, or five (5) days after the date of mailing if sent registered mail,
postage prepaid, return receipt required, and addressed as follows or to such
other address or facsimile number as either party may, from time to time,
designate in a written notice given in like manner:
TO DEPOSITOR: _______________________
_______________________
_______________________
_______________________
_______________________
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TO SOURCEFILE: SourceFile
1350 West Grand Avenue
Oakland, California 94607
Attn: Customer Service
Telephone: (510) 419-3888
Facsimile: (510) 419-3875
TO BENEFICIARY: As set forth in Exhibit "C" Schedule of Beneficiaries.
15. MISCELLANEOUS PROVISIONS.
(a) WAIVER. Any term of this Agreement may be waived by the
party entitled to the benefits thereof, provided that any such waiver must be in
writing and signed by the party against whom the enforcement of the waiver is
sought. No waiver of any condition, or of the breach of any provision of this
Agreement, in any one or more instances, shall be deemed to be a further or
continuing waiver of such condition or breach. Delay or failure to exercise any
right or remedy shall not be deemed the waiver of that right or remedy.
(b) MODIFICATION OR AMENDMENT. Any modification or amendment
of any provision of this Agreement must be in writing, signed by the parties
hereto and dated subsequent to the date hereof.
(c) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to the conflict of law provisions thereof.
(d) HEADINGS; SEVERABILITY. The headings appearing at the
beginning of the sections contained in this Agreement have been inserted for
identification and reference purposes only and shall not be used to determine
the construction or interpretation of this Agreement. If any provision of this
Agreement is held to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
(e) FURTHER ASSURANCES. The parties agree to perform all acts
and execute all supplementary instruments or documents which may be reasonably
necessary to carry out the provisions of this Agreement.
(f) ENTIRE AGREEMENT. This Agreement, including the Exhibits
hereto, contains the entire understanding between the parties' and supersedes
all previous communications, representations and contracts, oral or written,
between the parties, with respect to the subject matter thereof. It is agreed
and understood that this document and agreement shall be the whole and only
agreement between the parties hereto with regard to these escrow instructions
and the obligations of SourceFile herein in connection with this Agreement, and
shall supersede and
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cancel any prior instructions. SourceFile is specifically directed to follow
these instructions only and SourceFile shall have no responsibility to follow
the terms of any prior agreements or oral understandings.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DEPOSITOR SOURCEFILE
FILESAFE, INC.
A CALIFORNIA CORPORATION
By:___________________________ By:___________________________
Name:_________________________ Name:_________________________
Title:________________________ Title:________________________
Date:_________________________ Date:_________________________
[SOURCEFILE\B\SOURCE.FLX]
DOCUMENT VERSION DATE: JULY 8, 1994
DOCUMENT PRINT DATE: FEBRUARY 18, 1997
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EXHIBIT "A-____ (-____)"
DESCRIPTION OF SOURCE MATERIAL
SOURCEFILE ACCOUNT #:
The Depositor agrees to deposit the Source Material for the benefit of the
Licensee of this attached escrow arrangement. Below is the acknowledgement that
the deposit arrived at SourceFile in good order. It is completed by the
Depositor and visually inspected by SourceFile. A copy of this form will be
shared with the Licensee of the Source Material. (As multiple deposits are made,
please make copies of this form and number them appropriately. For example, the
initial deposit will be Exhibit "A-l", the supplemental one would be "A-1-2, the
next deposit would be "A-2", supplemental one would be "A-2-2", and so on.)
1. Source Material Deposit
Product Name __________________________________________
Version_____________________________________________
2. Type of Media
- there can be more than one type (i.e. diskette, tape, hardcopy
materials, etc.)
- please include the quantity of type (i.e. two (2) diskettes)
_____________________________________________________
_____________________________________________________
_____________________________________________________
3. Please check one of the following:
Initial Deposit _______ Supplemental_____ Replacement_____*
*If Replacement then: Destroy Deposit ________or Return Deposit____
................................................................................
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Completed by: Visually verified by:
DEPOSITOR SOURCEFILE
signature_______________________ signature______________________
name____________________________ name___________________________
title___________________________ Client Services
date____________________________ date_________________________________
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EXHIBIT "B"
FORM OF ACKNOWLEDGEMENT BY BENEFICIARY
The undersigned hereby acknowledges, accepts and agrees to be bound by
the terms of the attached SourceFlex Software Source Code Escrow Agreement,
SourceFile account number _____________ by and between SourceFile as Escrow
Agent and ______________, as Depositor, dated ___________________, 199_.
BENEFICIARY: By:____________________________________
Name:__________________________________
Title:_________________________________
Address:_______________________________
_______________________________
_______________________________
Phone:_________________________________
Fax:___________________________________
DEPOSITOR: _______________________________________
_______________________________________
Phone:_________________________________
Fax:___________________________________
Please send CERTIFIED OR REGISTERED MAIL to
SOURCEFILE: SOURCEFILE
1350 West Grand Ave.
Oakland, California 94607
Attn: Client Services
Phone: 510.419.3888
Fax: 510.419.3875
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EXHIBIT "C"
SCHEDULE OF BENEFICIARIES OF THE SOFTWARE
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EXHIBIT "D"
SCHEDULE OF NOTICES
Deposit notices should be sent to: By:_______________________________
Name:_____________________________
Title:____________________________
Address:__________________________
_______________________________
_______________________________
Phone:____________________________
Fax:______________________________
Deposit notices should be sent to: By:_______________________________
Name:_____________________________
Title:____________________________
Address:__________________________
_______________________________
_______________________________
Phone:____________________________
Fax:______________________________
Invoices should be sent to: By:_______________________________
Name:_____________________________
Title:____________________________
Address:__________________________
_______________________________
_______________________________
Phone:____________________________
Fax:______________________________
Invoices should be sent to: By:_______________________________
Name:_____________________________
Title:____________________________
Address:__________________________
_______________________________
_______________________________
Phone:____________________________
Fax:______________________________
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<TABLE>
<CAPTION>
Exhibit 11.1
Cross/Z International, Inc.
Computation of pro forma net loss per common share
- --------------------------------------------------------------------------------
Number of
Common and Weighted
Common Equivalent Days Average
Year ended December 31, 1996 Shares Outstanding Shares
- ---------------------------------------- ------------------ ------------------ ------------
<S> <C> <C> <C>
Common stock outstanding at January 1, 1996 1,583,280 365 1,583,280
Stock options exercised: 15,625 358 15,325
59,350 309 50,244
-----------
1,658,255
Issuance and assumed conversion of series A preferred stock, net of 78,353 53 11,377
conversions to Series C and as adjusted for anti-dilution 71,172 159 31,004
80,206 26 5,713
81,843 81 18,162
82,111 46 10,348
----------- -----------
365 76,605
Issuance and assumed conversion of series B preferred stock, net of 58,203 53 8,451
conversions to Series C and as adjusted for anti-dilution 42,050 159 18,318
54,259 26 3,865
56,885 81 12,624
56,918 46 7,173
----------- -----------
365 50,431
Issuance and assumed conversion of series C preferred stock including 423,331 52 60,310
conversions from series A and series B and as adjusted for anti-dilution 517,011 313 443,355
----------- -----------
365 503,665
Issuance and assumed conversion of series D peferred stock 2,385,691 237 1,549,065
Accretion of series D dividends 131,488 118 42,509
----------- ----------- -----------
2,517,180 1,591,574
Cheap stock consideration for common stock, stock options and warrants
issued during 1996 1,108,181 365 1,108,181
-----------
Pro forma weighted average shares used in per share computation 4,979,306
===========
Net loss for the year ended December 31, 1996 $(4,917,935)
Pro forma net loss per common share $ (.99)
===========
</TABLE>
<PAGE>
Exhiit 11.1 (CONT'D)
<TABLE>
<CAPTION>
Number of
Common and Weighted
Common Equivalent Days Average
Six months ended June 30, 1997 Shares Outstanding Shares
- ---------------------------------------- ------------------ ------------------ ------------
<S> <C> <C> <C>
Common stock outstanding at January 1, 1997 1,727,179 180 1,727,179
Issuance and assumed conversion of series A preferred stock, 65,167 90 32,584
adjusted for anti-dilution 82,100 90 41,050
----------- -----------
180 73,634
Issuance and assumed conversion of series B preferred stock 35,475 90 17,738
adjusted for anti-dilution 57,285 90 28,643
----------- -----------
180 46,380
Issuance and assumed conversion of series C preferred stock 517,011 180 517,011
adjusted for anti-dilution
Issuance and assumed conversion of series D preferred stock 2,517,180 180 2,517,180
Accretion of series D dividends 118,284 90 59,142
----------- -----------
2,635,463 2,576,321
Cheap stock consideration for common stock, stock optons and warrants
issued during the six months ended June 30, 1997 1,108,181 180 1,108,181
-----------
Pro forma weighted average shares used in per share computation 6,048,706
===========
Net loss for the six months ended June 30, 1997 $(3,506,881)
Pro form net loss per common share $ (0.58)
===========
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated June 9, 1997, except as
to the reverse stock split described in Note 1 which is as of July 17, 1997,
relating to the financial statements of Cross/Z International, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Melville, New York
August 29, 1997
