<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-34667
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
CrossZ Software Corporation
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 94-3087939
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(516) 228-8500 (Telephone)
(516) 228-8584 (Telecopy)
(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)
Alan W. Kaufman
President and Chief Executive Officer
CrossZ Software Corporation
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(516) 228-8500 (Telephone)
(516) 228-8584 (Telecopy)
(Name, Address and Telephone Number of Agent For Service)
---------------------
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)
---------------------
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/
---------------------
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.
<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 NOVEMBER 12, 1997
[GRAPHIC OMITTED]
3,000,000 Shares of Common Stock
All of the 3,000,000 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. The Company has applied for quotation of the Common Stock
on the Nasdaq SmallCap Market under the symbol "CRSZ." 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 Common Stock offered hereby is speculative and involves a high degree of
risk and substantial dilution. See "Risk Factors" at page 7 hereof and
"Dilution" at page 18 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) ................. $ $ $
================================================================================
(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 300,000 shares of Common Stock ("Representatives' Purchase
Option") and to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance, estimated at approximately $1,380,000.
(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 450,000 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
_____________, 1997
<PAGE>
[Schematic of Company's product and the following text:]
CrossZ's technology advanced software product, QueryObject(TM) System,
transforms terabytes (thousand billion) of data stored in mainframe size data
warehouses into a mathematical representation that is typically megabyte size
and resides on a PC or laptop. This allows complex analysis to be performed by
business managers rapidly, and without the assistance of the corporate IT
department, anytime anywhere.
Imagine... carrying hundreds of millions of call detail records on your notebook
computer and analyzing them to monitor and predict network traffic...using
standard spreadsheets; Imagine... copying tens of millions of credit card
transactions to your desktop PC and performing statistical analysis and merchant
reporting...using standard statistical software; Imagine... accessing 50 million
point-of-sale transactions on your departmental server and performing market
share analysis...using geographic information systems; Imagine... studying
managed care plans over a year's worth of Medicare data in exquisite
detail...using standard desktop query tools; Imagine... supporting an unlimited
number of concurrent users, working with any combination of front-end
applications, with a single, Web-server data mart; Imagine... delivering this
kind of power to business managers, using source data no matter how large, on
your current hardware...and doing it all next week;
The Company's business intelligence software products enable users to: scan
entire data warehouse for relevant data; extract virtually unlimited amounts of
raw data; and create data marts containing more data in less storage space.
This results in efficiencies and cost savings as compared to traditional data
marts and allows more business managers throughout the corporate enterprise to
access and analyze relevant data.
System Features &
Benefits
Creates optimized data marts through advanced data mining technologies; Enables
business managers to build full-scale data marts on their desktop PCs in less
than a day; Utilizes integrated, open architecture; - IBM MVS/System 390; -
Unix; - Windows NT; - Windows 95; Utilizes client/server architecture; Leverages
existing corporate data; Permits greater scalability, speed and mobility;
Enables greater multi-user support; Plug and play;
...delivering on the promise
of business intelligence.
-------------------
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.
2
<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 in
November 1997 under the name CrossZ Software Corporation; (ii) a one-for-four
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 and a one-for-two reverse stock split
of the Company's outstanding Common Stock and the Outstanding Preferred Stock
effected in October 1997; (iii) the conversion of all Outstanding Preferred
Stock ("Preferred Stock Conversion") and all accrued and unpaid dividends
thereon, through September 30, 1997, into 1,679,491 shares of Common Stock,
which will occur immediately prior to the completion of this Offering; and (iv)
the issuance of 17,500 shares of Common Stock upon the exercise of certain
outstanding warrants ("Warrant Exercise") of the Company which will occur
immediately prior to the completion of this Offering. Unless otherwise
indicated, the information in this Prospectus does not give effect to 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 ("mining") of such data; consequently, the data
gathering and analysis industry is experiencing significant growth. The Company
intends to market and sell its products through a direct sales force, original
equipment manufactuers ("OEMs") and value-added resellers ("VARs") and has
entered into agreements and relationships with, among others, Amdahl
Corporation, Hewlett-Packard Company, STRATOS, Strategic Tools & Services and
Worldnet Consulting, SA.
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
$5.0 billion by the year 2000, an annual growth rate of approximately 30%. 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 are the 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,
is a data mining product that uses multiple concurrent pattern recognition
algorithms to analyze data from data warehouses and other data repositories and
to then automatically design a data mart and analyze its economic value.
Voyager 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:
3
<PAGE>
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 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 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: The ability to load raw data into QueryObject System reduces or
eliminates time-consuming and costly 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, because the
storage-based requirement is reduced.
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. In October
1997, the Company began to implement full-scale marketing of QueryObject System
and Voyager. Prior to the recent launch of its products, the Company's revenues
were derived primarily from providing contract consulting services to the
banking, telecommunications, finance, insurance, retail and travel and lodging
industries. 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. 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, OEMs and VARs. The Company has established license
agreements and VAR relationships with Amdahl Corporation, Hewlett-Packard
Company, STRATOS, Strategic Tools & Services and Worldnet Consulting, SA. In
addition, the Company has a joint development and marketing agreement with
Pyramid Technology Corporation and co-marketing programs with several companies
including Brio Technology, Inc. and 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 vertical markets; and (vi) expand sales capabilities
both domestically and internationally.
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.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock Offered ................................. 3,000,000 shares
Common Stock Outstanding Prior to this Offering(1) ... 2,608,860 shares
Common Stock to be Outstanding after the Offering (1). 5,608,860 shares
Use of Proceeds ....................................... Sales and marketing; repayment of
debt; research and development;
and working capital and general
corporate purposes. See "Use of
Proceeds" and "Certain Transac-
tions."
Proposed Nasdaq SmallCap Market Symbol ............... CRSZ
Proposed Boston Stock Exchange Symbol .................. CRZ
</TABLE>
- -----------
(1) Includes 1,679,491 shares of Common Stock issuable pursuant to the
Preferred Stock Conversion and an additional 10,131 shares of Common Stock
issuable upon the conversion of Outstanding Preferred Stock as the result
of dividends on the Outstanding Preferred Stock that accrue between
October 1, 1997 and October 31, 1997 and 17,500 shares of Common Stock
issuable pursuant to the Warrant Exercise. Does not include: (i) 1,950,000
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 141,363 shares of
Common Stock are outstanding and options to purchase approximately 700,000
shares of Common Stock are being granted immediately prior to the
effectiveness of the Offering; (ii) 175,000 shares of Common Stock
reserved for issuance upon exercise of certain other outstanding
non-qualified stock options granted to advisors ("Advisory Options");
(iii) 1,075,000 shares of Common Stock ("Bridge Warrant Shares") reserved
for issuance, the maximum number of shares issuable, upon the exercise of
warrants ("Bridge Warrants") issued in the Company's July 1997 bridge
financing ("Bridge Financing") and (iv) 239,881 shares of Common Stock
reserved for issuance upon the exercise of additional outstanding
warrants. See "Management -- Executive Compensation" and "-- 1991
Incentive Stock Option Plan," "Certain Transactions" and "Description of
Securities -- Bridge Warrants and "--Other 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.
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."
5
<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 nine months ended September 30, 1996 and 1997 and the
balance sheet data at September 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 nine months ended September 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, Nine Months Ended September 30,
--------------------------------- ---------------------------------
1995 1996 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Software licenses ........................... $ 194,000 $ 851,150 $ 228,025 $ 493,750
Services and maintenance ..................... 2,596,815 1,051,828 985,784 292,856
------------ ------------ ------------ ------------
Total revenues .............................. 2,790,815 1,902,978 1,213,809 786,606
Gross profit ................................. 2,166,878 1,424,551 843,454 651,266
Total operating expenses ..................... 4,871,876 6,076,760 3,969,037 6,199,048
Loss from operations ........................ (2,704,998) (4,652,209) (3,125,583) (5,547,782)
Net loss .................................... (3,061,919) (4,917,935) (3,389,466) (5,980,124)
Pro forma net loss per common share ......... $ (2.51) $ (2.29)
Pro forma weighted average shares used in per
share computation (see Note 1 of Notes to the
Financial Statements) ..................... 1,957,856 2,611,932
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------------
Pro Forma As
Actual Pro Forma(1) Adjusted(2)
------------------------- -------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....................................... $ 93,346 $ 735,346 $13,575,346
Working capital (deficiency) .................................... (1,917,312) (1,875,312) 11,564,688
Total assets ...................................................... 3,887,931 4,529,931 16,930,712
Long-term debt ................................................... 3,483,022 3,483,022 315,972
Total liabilities ................................................ 7,786,246 8,386,246 4,619,196
Series D mandatorily redeemable convertible preferred stock ...... 11,427,940 -- --
Stockholders' equity (deficit) .................................... $ (15,326,255) (3) $(3,856,315) $12,311,516
</TABLE>
- -----------
(1) The pro forma balance sheet data as of September 30, 1997 gives effect to
the Preferred Stock Conversion resulting in the issuance of 1,679,491
shares of Common Stock. As of September 30, 1997, each of the 32,582
shares of Series A Preferred Stock, 17,737 shares of Series B Preferred
Stock, 230,498 shares of Series C Preferred Stock and 1,347,489 shares of
Series D Preferred Stock (including accrued and unpaid dividends thereon)
converts into 1.30, 1.75, 1.12 and 1.00 shares of Common Stock,
respectively. In addition the pro forma balance sheet data as of September
30, 1997 gives effect to: (i) the issuance of $600,000 of principal amount
unsecured promissory notes ("October 1997 Interim Financing Notes") issued
in connection with an interim financing consummated in October 1997
("October 1997 Interim Financing"); and (ii) the Warrant Exercise
resulting in the purchase of 17,500 shares of Common Stock for an
aggregate purchase price of $42,000. The pro forma balance sheet data as
of September 30, 1997 does not give effect to the issuance of 10,131
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 October 1, 1997 and October 31, 1997.
<PAGE>
(2) The pro forma as adjusted balance sheet data as of September 30, 1997 gives
effect to: (i) the sale of the Shares offered hereby at an assumed initial
public offering price of $7.00 per share and the receipt of the net
proceeds therefrom of approximately $17,940,000; (ii) the repayment of
$4,300,000 of unsecured promissory notes ("Bridge Notes") issued in the
Bridge Financing and the related effect of the write-off of $1,332,950 of
unamortized debt discount and $438,000 of unamortized debt issuance costs
incurred in connection with the Bridge Financing; and (iii) the repayment
of the October 1997 Interim Financing Notes and the repayment of $200,000
of principal amount unsecured promissory notes ("Second Interim Financing
Notes") issued in connection with an interim financing consummated in June
1997 ("Second Interim Financing").
(3) Excludes Series D mandatorily redeemable convertible preferred stock.
6
<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
investment.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At
September 30, 1997, the Company had an accumulated deficit of $21,084,975. For
the fiscal year ended December 31, 1996 and for the nine months ended September
30, 1997, the Company incurred net losses of $4,917,935 and $5,980,124,
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. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 September 30, 1997, the Company realized software product revenue from only
five QueryObject System installations, one of which (sold in 1995) was a
pre-production beta version. The Company completed development of Voyager in
September 1997, has made no sales of such product, and there can be no
assurance that Voyager will perform as expected. Further, the Company has just
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 nine months ended
September 30, 1997 were approximately $787,000 and consisted primarily of two
sales of QueryObject System. Prior to 1997, the Company's revenues were derived
from contract services provided 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
September 30, 1997, the Company had a working capital deficiency of $1,917,312.
To date, the Company has obtained working capital primarily through private
financings, including the Bridge Financing and the October 1997 Interim
Financing, both of which are 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 $921,000, and vendor financings. 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. The October 1997 Interim Financing was
provided by Wheatley Foreign Partners, L.P. and Wheatley Partners, L.P., each
of which is a 5% stockholder of the Company. 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
7
<PAGE>
completion of the Offering. There can be no assurance, however, that 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."
Significant Portion of Proceeds Used to Satisfy Indebtedness; Payment to
Affiliates; Broad Discretion in Application of Proceeds. Approximately
$5,228,000, or 29% of the net proceeds received by the Company from this
Offering (based on an Offering price of $7.00 per share), will be used to repay
in full the Bridge Notes, the Second Interim Financing Notes and the October
1997 Interim Financing Notes held by 5% stockholders and entities affiliated
with the Company. Approximately $4,412,000, or 25% 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."
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
currently is 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 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.
Dependence on Significant Customers. For the fiscal year ended December
31, 1996 General Electric Capital Corporation, Allstate Corporation and Amdahl
Corporation accounted for 17%, 16% and 21% of the Company's revenues,
respectively. For the nine months ended September 30, 1997 VGER Technologies,
Inc. accounted for 73% of the Company's revenues. The loss of any of these
customers could have a material adverse effect on the financial condition and
results of operations of the Company.
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
8
<PAGE>
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 able to offer 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 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, or Alan Kaufman, the 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 which expires in December 1999 and an employment and consultant
agreement with Mr. Kaufman which expires in October 1998, which provides that
Mr. Kaufman will serve as either President and Chief Executive Officer or as a
consultant. The Company is in the process of purchasing "key person" life
insurance policies on Messrs. Chroscielewski's and Kaufman's lives in the
amounts of three million dollars and one million dollars, respectively. 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."
Lack of Patent Protection and Proprietary Protection on 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. Although 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 although 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. See "Business --
Competition."
9
<PAGE>
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 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.
Although the Company does not maintain an "errors and omissions" insurance
policy, its license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
While 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 $10,500,000 and $115,000 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). The Company does not anticipate
that it will utilize its NOL carryforwards for 1997.
10
<PAGE>
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.
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.
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."
Effect of Outstanding Warrants and Options, Including Representatives'
Purchase Option. As of the date of this Prospectus, there are outstanding
Bridge Warrants to purchase 1,075,000 shares of Common Stock, options to
purchase 141,363 shares of Common Stock issued under the Plan, Advisory Options
to purchase 175,000 shares of Common Stock and certain other warrants to
purchase 239,881 shares of Common Stock. Immediately prior to the effectiveness
of the Offering, the Company will grant options to purchase approximately
700,000 shares of Common Stock pursuant to the Plan. In addition, in connection
with this Offering, the Company will issue the Representatives' Purchase
Option. The Representatives' Purchase Option is exercisable at $__ per share
( % 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, respecitvely, 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 exercise of all 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."
Shares Eligible for Future Sale. Upon the completion of this Offering, the
Company will have 5,598,729 shares of Common Stock outstanding. Of these
shares, all of the 3,000,000 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 2,598,729 shares of
Common Stock outstanding were sold by the Company in reliance on exemptions
from
11
<PAGE>
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. In addition, the
Company has 1,950,000 shares of Common Stock reserved for issuance under the
Plan, of which options to purchase 141,363 shares of Common Stock have been
granted and options to purchase approximately 700,000 shares of Common Stock
are being granted immediately prior to the effectiveness of the Offering.
Moreover, the Company has outstanding options and warrants to purchase an
aggregate of 1,631,244 shares of Common Stock. 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 and stockholders owning approximately 98% of the
outstanding shares, options and warrants prior to this Offering have entered
into agreements which prohibit them from selling or otherwise transferring
stock in the Company for 13 months from the date of this Prospectus. 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. 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 69% 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
$2.20 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 23.4% of the
outstanding Common Stock. As a result, these stockholders will be able to
exercise significant influence over all matters requiring stockholder 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, including, without
limitation, restricting dividends on the Common Stock, dilution of the voting
power of the Common Stock and impairing the liquidation rights of the holders
of Common Stock, 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. 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. The Company has applied to have the Common
Stock approved for quotation on the Nasdaq SmallCap Market. Under recently
implemented Nasdaq rules, in order for the Company to remain eligible for
listing on the Nasdaq SmallCap Market, (i) the Company's Common Stock
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<PAGE>
must have a minimum bid price of $1.00, (ii) the Company must have minimum
tangible net assets of $2,000,000 or a market capitalization of $35,000,000 or
net income of $500,000 in two of the three prior years, (iii) the Company must
have a public float of at least 500,000 shares with a market value of at least
$1,000,000 and the Common Stock must have at least two market makers and be
held of record by at least 300 stockholders. While the Company will satisfy the
Nasdaq SmallCap Market listing and maintenance standards upon completion of the
Offering, the failure to meet the maintenance criteria in the future 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. Trading, if any, of the Common Stock would
thereafter be conducted on the OTC Bulletin Board. As a result of such
ineligibility for quotations, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of the Common
Stock. Furthermore, the regulations of the Securities and Exchange Commission
("Commission") promulgated under the Securities Exchange Act of 1934, as
amended ("Exchange Act") require additional disclosure relating to the market
for penny stocks. Commission regulations generally define a penny stock to be
an equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. A disclosure schedule explaining the penny stock
market and the risks associated therewith is required to be delivered to a
purchaser and various sales practice requirements are imposed on broker-dealers
who sell penny stocks to persons other than established customers and
accredited investors (generally institutions). In addition, the broker-dealer
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. If the Company's securities become
subject to the regulations applicable to penny stocks, the market liquidity for
the Company's securities could be severely affected. In such an event, the
regulations on penny stocks could limit the ability of broker-dealers to sell
the Company's securities and thus the ability of purchasers of the Company's
securities to sell their securities in the secondary 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 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."
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<PAGE>
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 $17,940,000 ($20,743,500 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:
<TABLE>
<CAPTION>
Application of Proceeds Amount Percent
- ----------------------- ------------ --------
<S> <C> <C>
Sales and Marketing ................................. $ 5,800,000 32.4%
Repayment of Bridge and Interim Financings ......... 5,228,000 29.1
Research and Development ........................... 2,500,000 13.9
Working Capital and General Corporate Purposes ...... 4,412,000 24.6
------------ ------
Total .......................................... $17,940,000 100.0%
============ ======
</TABLE>
Approximately $5,800,000 of the net proceeds of this Offering will be used
to fund the Company's integrated full-scale 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 were consummated on October 31, 1997, the interest to
be paid on the Bridge Notes would 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 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"). In addition, approximately $208,000 of the net proceeds of this
Offering will be used to repay the Second Interim Financing Note and
approximately $600,000 of the net proceeds of this Offering will be used to
repay the October 1997 Interim Financing Notes. The net proceeds from the
Second Interim Financing and the October 1997 Interim Financing have been used
primarily for working capital purposes. The October 1997 Interim Financing
Notes are held by 5% stockholders of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources and "Certain Transactions."
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 $2,803,500, which
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.
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<PAGE>
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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<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the total
capitalization of the Company (i) as of September 30, 1997, (ii) pro forma to
give effect to the October 1997 Interim 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>
September 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 ................................................ $ 1,089,396 $ 1,689,396 $ 1,089,396
============= ============= =============
Long-term debt, including Interim Financing Notes payable
to stockholders, Bridge Notes, loan payable to stock-
holder and capital lease obligations $ 3,483,022 $ 3,483,022 $ 315,972
------------- ------------- -------------
Series D mandatorily redeemable convertible preferred
stock, $.001 par value 14,030,593 shares authorized
actual, pro forma and pro forma as adjusted; 1,347,489
shares issued and outstanding actual; no shares issued
and outstanding, pro forma and pro forma as adjusted ...... 11,427,940 -- --
------------- ------------- -------------
Stockholders' 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; 280,817 shares
issued and outstanding; no shares issued and out-
standing pro forma and pro forma as adjusted 281 -- --
Common Stock, $.001 par value; 30,000,000 shares
authorized; 901,735 shares issued and outstanding,
actual; 2,598,729 shares issued and outstanding, pro
forma; 5,598,729 shares issued and outstanding pro
forma, as adjusted(3) ................................. 902 2,599 5,599
Additional paid-in capital .............................. 5,769,837 17,238,361 35,175,361
Accumulated deficit .................................... (21,084,975) (21,084,975) (22,857,144)
Receivable from stockholder .............................. (12,300) (12,300) (12,300)
------------- ------------- -------------
Total stockholders' equity (deficit) ..................... (15,326,255) (3,856,315) 12,311,516
------------- ------------- -------------
Total capitalization ................................. $ (415,293) $ (373,293) $ 12,627,488
============= ============= =============
</TABLE>
<PAGE>
- ------------
(1) The pro forma balance sheet data as of September 30, 1997 gives effect to
the Preferred Stock Conversion resulting in the issuance of 1,679,491
shares of Common Stock. As of September 30, 1997, each of the 32,582
shares of Series A Preferred Stock, 17,737 shares of Series B Preferred
Stock, 230,498 shares of Series C Preferred Stock and 1,347,489 shares of
Series D Preferred Stock (including accrued and unpaid dividends thereon)
converts into 1.30, 1.75, 1.12 and 1.0 shares of Common Stock,
respectively. In addition the pro forma balance sheet data as of September
30, 1997 gives effect to: (i) the issuance of the $600,000 October 1997
Interim Financing Notes; and (ii) the Warrant Exercise resulting in the
purchase of 17,500 shares of Common Stock for an aggregate purchase price
of $42,000. The pro forma balance sheet data as of September 30, 1997 does
not give effect to the issuance of 10,131 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 October
1, 1997 and October 31, 1997.
(2) The pro forma as adjusted balance sheet data as of September 30, 1997 gives
effect to: (i) the sale of the Shares offered hereby at an assumed initial
public offering price of $7.00 per share and the receipt of the net
proceeds therefrom, (ii) the repayment of the Bridge Notes and the related
effect of the write-off of $1,332,950 of unamortized debt discount and
$438,000 of unamortized debt issuance costs incurred in connection with
the Bridge Financing; and (iii) the repayment of the October 1997 Interim
Financing Notes and the Second Interim Financing Notes.
16
<PAGE>
(3) Does not include (i) 1,950,000 shares of Common Stock reserved for issuance
upon exercise of stock options granted or to be granted under the Plan, of
which options to purchase 141,363 shares of Common Stock were outstanding
at September 30, 1997 at a weighted average exercise price of $1.14 per
share, of which options to purchase 112,315 shares of Common Stock are
currently exercisable; (ii) 175,000 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
$8.56 per share; (iii) 1,075,000 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 $8.56 per
share; (iv) 239,881 shares of Common Stock reserved for issuance upon the
exercise of additional warrants at a weighted average exercise price of
$8.94 per share, of which warrants to purchase 200,342 shares will be
exercisable upon the completion of this Offering; and (v) 10,131 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 October 1, 1997 and October 31, 1997. See "Certain Transactions"
and "Description of Securities."
17
<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 September 30, 1997, on a
pro forma basis after giving effect to the (i) Preferred Stock Conversion, and
(ii) Warrant Exercise, the Company had a deficiency in net tangible book value
(total pro forma tangible assets less total pro forma liabilities) of
$3,856,315, or approximately $(1.48) per share of Common Stock. Without taking
into account any other changes in such net tangible book value of the Company
after September 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 September 30, 1997
would have been $12,311,516 or approximately $2.20 per share, which represents
an immediate increase in the pro forma net tangible book value of approximately
$3.68 per share to existing stockholders and an immediate dilution of $4.80 per
share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share .................. $7.00
Pro forma deficiency in net tangible book value per
share before this Offering ................................. $ (1.48)
Increase per share attributable to this Offering ............ 3.68
-------
Pro forma net tangible book value per share after this Offering . 2.20
-------
Dilution per share to new investors .............................. $4.80
=======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 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):
<PAGE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price per
Number Percent Amount Percent Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 2,598,729 46.4% $14,400,000 40.7% $ 5.54
New investors ............... 3,000,000 53.6 21,000,000 59.3 7.00
--------- ------ ------------ ------
Total(1) ............... 5,598,729 100.0% $35,400,000 100.0%
========= ====== ============ ======
</TABLE>
- ------------
(1) Does not include (i) 1,950,000 shares of Common Stock reserved for issuance
upon exercise of stock options granted or to be granted under the Plan, of
which options to purchase 141,363 shares of Common Stock were outstanding
as of September 30, 1997 at a weighted average exercise price of $1.14 per
share, of which options to purchase 112,315 shares of Common Stock are
currently exercisable; (ii) 175,000 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
$8.56 per share; (iii) 1,075,000 Bridge Warrant Shares of Common Stock
reserved for issuance upon the exercise of the Bridge Warrants, all of
which are exercisable commencing July 30, 1998 at an exercise price of
$8.56 per share; (iv) 239,881 shares of Common Stock reserved for issuance
upon the exercise of additional warrants at a weighted average exercise
price of $8.94 per share, of which warrants to purchase 200,342 shares
will be exercisable upon the completion of this Offering; and (v) 10,131
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 October 1, 1997 and October 31, 1997. See
"Management -- Executive Compensation" and " -- 1991 Incentive Stock
Option Plan" and "Certain Transactions" and "Description of Securities."
18
<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 September 30, 1997 had an accumulated deficit of $21,084,975. 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.
QueryObject System previously required certain consulting services and was
promoted selectively through the direct sales channel, at several industry
trade shows, and to potential business partners. The current release of
QueryObject System has reduced consulting requirements and is capable of
running on additional UNIX operating systems and the Windows NT operating
system. During the fourth quarter of 1997, the Company intends to increase
promotional activity, including increased trade show and partnering activity
and public relations. Development of Voyager is completed and the product 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 $160,000. As a result, the timing of the receipt and shipment of a
single order can have a significant impact on the Company's revenues and
results of operations for a particular period.
19
<PAGE>
Results of Operations
The following table sets forth certain items in the Company's statements
of operations for the years ended December 31, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 ($ in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Software licenses ............... $ 194 $ 851 $ 228 $ 494
Services and maintenance(1) ...... 2,597 1,052 986 293
-------- -------- -------- --------
Total revenues .................. 2,791 1,903 1,214 787
-------- -------- -------- --------
Cost of revenues
Software licenses ............... 33 102 33 52
Services and maintenance ......... 591 376 337 84
-------- -------- -------- --------
Total cost of revenues ......... 624 478 370 136
-------- -------- -------- --------
Gross profit ..................... 2,167 1,425 844 651
-------- -------- -------- --------
Operating expenses
Sales and marketing ............... 2,504 3,145 2,118 3,344
Research and development ......... 1,357 1,792 1,149 1,890
General and administrative ...... 1,011 1,140 702 965
-------- -------- -------- --------
Total operating expenses ...... 4,872 6,077 3,969 6,199
-------- -------- -------- --------
Loss from operations ............... (2,705) (4,652) (3,125) (5,548)
Interest income .................. -- 88 49 38
Interest expense .................. (335) (355) (314) (471)
Other income (expense) ............ (22) 1 1 1
-------- -------- -------- --------
Net loss ........................ $ (3,062) $ (4,918) $ (3,389) $ (5,980)
======== ======== ======== ========
</TABLE>
- ------------
(1) Prior to the nine months ended September 30, 1997 services and maintenance
revenues consisted entirely of service revenue..
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
<PAGE>
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 35% from $1,214,000 for the nine
months ended September 30, 1996 ("the 1996 period") to $787,000 for the nine
months ended September 30, 1997 ("the 1997 period"). License revenues increased
by $266,000 or 116% from $228,000 for the 1996 period, to $494,000 for the 1997
period. During the 1996 period license revenues were derived from the sale of
one license while during the 1997 period license revenues were derived from the
sale of two licenses. Services and maintenance revenue decreased by $693,000,
or 70%, from $986,000 for the 1996 period to $293,000 for the 1997 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 $247,000, or 127%, from $195,000 for the 1996
20
<PAGE>
period to $442,000 for the 1997 period, representing 86% and 84% 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 $440,000, or 68%, from $649,000 for the 1996 period to $209,000
for the 1997 period, representing 66% and 71% 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 $1,226,000, or 58%, from
$2,118,000 for the 1996 period to $3,344,000 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 $741,000, or 64%, from $1,149,000 for the 1996
period to $1,890,000 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
$263,000, or 37%, from $702,000 for the 1996 period to $965,000 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 income decreased by $11,000 or 23%, from $49,000 for the
1996 period to $38,000 for the 1997 period. This decrease was primarily due to
a lower level of cash and cash equivalents on deposit for the 1997 period.
Interest expense generally represents charges relating to the Company's
Loan Agreement, interest expense on capital equipment leases, and for the 1997
period, interest relating to the Bridge Financing (see Note 6 of Notes to the
Financial Statements). Interest expense increased by $157,000, or 50% from
$314,000 for the 1996 period to $471,000 for the 1997 period. This increase was
primarily due to accrued interest and the amortization of the debt discount and
the debt issuance costs relating to the Bridge Financing. These charges totaled
$84,000, $179,000 and $55,000 respectively for the 1997 period. This increase
in interest expense was partially offset by a decrease in outstanding notes
payable that were converted into Series D Redeemable Convertible Preferred
Stock ("Series D Preferred") or repaid from the proceeds of the Series D
Preferred financing (see Note 8 of Notes to the Financial Statements.).
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
21
<PAGE>
$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.
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 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 Series D Preferred in
1996. Interest expense was comparable during 1996 and 1995 and 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 $10,500,000 and $115,000, 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 September 30, 1997, the Company had $93,000 in cash and cash equivalents.
Net cash used in operating activities was $1,743,000, $5,542,000 and $4,970,000
in 1995, 1996 and for the nine months ended September 30, 1997, respectively.
For 1996, net cash used in operating activities was primarily attributable to a
net loss of $4,918,000, a decrease in accounts payable and accrued expenses of
$769,000 (required to satisfy seriously delinquent payments owed), and an
increase in accounts receivable of $237,000. For the nine months ended
September 30, 1997, net cash
22
<PAGE>
used in operating activities was primarily attributable to a net loss of
$5,980,000 an increase in accounts payable and accrued expenses of $798,000, a
decrease in accounts receivable of $405,000 and an increase in deferred
offering costs of $637,000. Net cash provided by financing activities was
$1,717,000, $8,310,000 and $4,187,000 in 1995, 1996 and for the nine months
ended September 30, 1997, respectively. Since January 1, 1995, the Company's
principal sources of capital have been as follows:
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 258,503 shares of Common Stock at a per share offering price
of $8.56 and issued warrants to purchase an aggregate of 131,851 shares of
Common Stock at an exercise price of $8.56 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 1,347,489 shares of Common Stock at a per share offering price of
$8.56 (after taking into account all accrued and unpaid dividends) and issued
an aggregate of 34,053 warrants ("Series D Warrants") with an exercise price of
$8.56 per share. See "Certain Transactions."
First Interim Financing. In May 1997, the Company consummated an interim
financing ("First Interim Financing") whereby it received the principal amount
of $500,000 and issued $500,000 of principal amount unsecured promissory notes
("First Interim Financing Notes"). Such amount was repaid out of the proceeds
of the Bridge Financing in July 1997. 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 35,333
shares of Common Stock at an exercise price of $8.56 per share. The Second
Interim Financing will be repaid out of the proceeds of this Offering.
Third Interim Financing. In June 1997, the Company consummated an interim
financing ("Third Interim Financing") whereby it received the principal amount
of $250,000 and issued a $250,000 principal amount unsecured promissory note
("Third Interim Financing Note"). 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 4,206 shares of Common Stock at an exercise price of $8.56 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 completed 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 16,667 Bridge
Warrant Shares at a purchase price of $8.56 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."
October 1997 Interim Financing. In October 1997, the Company consummated
the October 1997 Interim Financing whereby it received the principal amount of
$600,000. The October 1997 Interim Financing will be repaid out of the proceeds
of this Offering. See "Certain Transactions."
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 $921,000, 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 $868,000 as of
September 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 September 30, 1997, the Company has available $88,000 under
an equipment leasing line of credit.
23
<PAGE>
As of September 30, 1997, the Company's principal commitments consisted of
obligations under operating and capital leases and employment agreements. 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). Pursuant to employment agreements with
executive officers of the Company, the Company is obligated to pay $233,000 and
$929,000 in salaries for the three months between October 1, 1997 and December
31, 1997 and the fiscal year ending December 31, 1998, respectively.
As of September 30, 1997, the Company had a deficiency in working capital
of $1,917,312. Subsequent to September 30, 1997 and as described above, the
Company received $600,000 from the October 1997 Interim Financing. 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.
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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. In the third quarter
of 1996, the Company shifted its focus from providing contract services to
customers using its proprietary data mining technology to the sale and support
of such proprietary products, and has to date achieved limited sales.
Industry Background
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 $5.0 billion by the year 2000, an annual growth rate of
approximately 30%. 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%.
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:
- 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.
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- 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.
Although a data warehouse is useful, since 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 any specific or particular 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. A data warehouse contains all the data elements,
however, 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. First generation data marts have reduced deployment timeframes, query
response times, and overall costs but, 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, 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 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.
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 or 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.
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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
minutes, computing their economic value and by automatically generating the
machine readable data mart specification, permitting complete data mart
production in less than a day, instead of weeks. The Company has recently begun
marketing Voyager and has made no sales of Voyager to date.
QueryObject System.
Once the appropriate data elements have been identified using 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. In October 1997, the Company began to implement full-scale marketing
of QueryObject System. QueryObject System previously required certain
consulting services and was promoted selectively through direct sales channels,
at several industry trade shows, and to potential business partners. The
current release of QueryObject System has reduced consulting requirements and
is capable of running on additional UNIX operating systems and the Windows NT
operating system. During the fourth quarter of 1997, the Company intends to
increase promotional activity, including increased trade show and partnering
activity and public relations.
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 then 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.
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.
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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. 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. 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. The
Company has established license agreements and VAR relationships with Amdahl
Corporation, Hewlett-Packard Company, STRATOS, Strategic Tools & Services and
Worldnet Consulting, SA. In addition, the Company has a joint development and
marketing agreement with Pyramid Technology Corporation and co-marketing
programs with several companies including Brio Technology, Inc. and Siemens
Nixdorf Informations Systemme AG.
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. 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 customers 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.
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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 developing 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
its 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.
CrossZ Voyager
The Voyager product line consists of data mining applications that utilize
multiple concurrent pattern recognition algorithms to analyze data from
multiple sources 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 product line by configuration and operating system:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product Configuration Operating System
- -------------------------------------------------------------------------------------
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, QueryObject Engine is able to perform these
tasks automatically for each QueryObject. The Company believes that the ability
to store and build a 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.
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.
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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 30 employees as of September 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. The Company has
entered into similar agreements with Worldnet Consulting, SA and STRATOS,
Strategic Tools & Services.
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.
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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 September 30, 1997, the Company's research and development
organization consisted of 30 individuals, of which 14 are located in Europe and
are engaged as independent contractors. During 1995 and 1996, and the nine
months ended September 30, 1997, research and development expenses were
$1,357,381, $1,791,597 and $1,889,663 or 48.6%, 94.1% and 240.2% 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 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
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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
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.
33
<PAGE>
Employees
As of September 30, 1997, the Company had a total of 71 employees and
independent contractors, including 30 in research and development, of which 14
are located in Europe and are engaged as independent contractors, 30 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.
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 in 1998. The Company believes that such
additional space will be available on commercially reasonable terms.
34
<PAGE>
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of the Company, and their ages and
positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Mark A. Chroscielewski ...... 40 Chairman of the Board
Alan W. Kaufman ............ 59 President, Chief Executive Officer and Director
Andre Szykier ............... 53 Executive Vice President, Chief Technology Officer
and Director
Daniel M. Pess ............... 44 Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Robert V. Aloisio ............ 40 Senior Vice President of Worldwide Sales
Robert A. Thompson ......... 48 Vice President of Marketing
Deepak Mohan ............... 35 Vice President of Engineering
Scott Jones .................. 42 Director
Rino Bergonzi ............... 51 Director
</TABLE>
Mark A. Chroscielewski, co-founder of the Company, has served as its
Chairman of the Board since the inception of the Company in February 1989 and
served as the Company's President and Chief Executive Officer from February
1989 until October 1997. 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.
Alan W. Kaufman has been a director of the Company since August 1997 and
President and Chief Executive Officer of the Company since October 1997. Mr.
Kaufman has been an independent consultant since December 1996. From April 1986
to December 1996, Mr. Kaufman held various positions with Cheyenne Software,
Inc. ("Cheyenne"), a provider of storage management, security and
communications software products, 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.
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 and was promoted to Senior Vice President of Finance
and Administration in October 1997. 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 V. Aloisio joined the Company in October 1997 as Senior Vice
President of Worldwide Sales. From April 1996 to September 1997, Mr. Aloisio
was employed by Pilot Software, Inc., a provider of interactive decision
support software, as Senior Vice President of the Americas, responsible for
managing the Direct Sales
35
<PAGE>
Organization, Indirect Channel Business Development, Corporate Telesales,
Professional Services and System Engineers for North America, South America,
Canada and the Caribbean. From January 1995 to March 1996, Mr. Aloisio was
employed by Informix Corporation, a provider of database management software,
as Regional Director, managing sales, service and support for the eastern
United States division. From March 1991 to December 1994, Mr. Aloisio was
employed by Sequent Computer Systems, a provider of parallel multiprocessor
computer systems, as Regional Manager for the New England, New York
Metropolitan, Midatlantic, Southeast, Canada and Telco districts. Mr. Aloisio
holds a B.S. in Finance from C.W. Post College of Long Island University.
Robert A. Thompson joined 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 for data access, data
analysis and application development, most recently as Director of Marketing
Programs. 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, 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.
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. Jones and Bergonzi and
the Audit Committee is composed of Messr. Jones and Bergonzi.
The Company is in the process of purchasing and intends to maintain "key
person" life insurance policies in the amounts of three million dollars and one
million dollars on the lives of Messrs. Chroscielewski and Kaufman,
respectively.
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 6,250 shares of Common Stock at an exercise price of $0.96
per share. Upon his appointment to the Board of Directors, the Company granted
Rino Bergonzi options to purchase 6,250 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 purchase 6,250 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.
36
<PAGE>
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 and former Chief Executive
Officer and President, Andre Szykier and Daniel M. Pess, the Company's only
other the executive officers whose salary and bonus exceeded $100,000 with
respect to the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Long-Term
Compensation
Awards
Securities
Name and Annual Compensation(1) Underlying
Principal Position Year Salary($) Bonus($) Options(#)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark A. Chroscielewski, 1996 $150,000(2) $ -- --
Chairman of the Board,
Chief Executive Officer
and President(3)
- -----------------------------------------------------------------------------------------------------
Andre Szykier, 1996 $150,000(2) $ -- --
Executive Vice President and
Chief Technology Officer
- -----------------------------------------------------------------------------------------------------
Daniel M. Pess 1996 $100,000 $ 10,000(4) 1,250
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
$10,417 of such compensation.
(3) In October 1997 Alan W. Kaufman was appointed as the Company's Chief
Executive Officer and President.
(4) All of such amount was paid in 1997.
The following table sets forth certain information regarding stock option
grants made to the Named Executive Officers during the fiscal year ended
December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base
Name Granted(#) In Fiscal Year Price ($/Sh) Expiration Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel M. Pess 1,250 1.5 $.96 February 26, 2001
- -------------------------------------------------------------------------------------------------------
</TABLE>
No options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1996.
37
<PAGE>
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 4,549/2,952 $27,476/$17,830
- ---------------------------------------------------------------------------------------------------------
</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 Chairman of the Board, Andre Szykier, its Executive Vice
President and Chief Technology Officer, Daniel M. Pess, its Senior Vice
President of Finance and Administration, and Chief Financial Officer, Robert V.
Aloisio, its Senior Vice President of Worldwide Sales, Robert A. Thompson, its
Vice President of Marketing, and Deepak Mohan, its Vice President-Engineering.
Each of Messrs. Chroscielewski, Szykier, Pess, Aloisio, Thompson and Mohan's
employment agreements provide for an initial term through December 31, 1999,
December 31, 1998, April 30, 1999, October 6, 1999, August 31, 1999 and April
21, 1999, respectively with annual base cash compensation of $150,000,
$150,000, $125,000, $150,000, $145,000 and $150,000, respectively. The Company
also has an agreement with Alan W. Kaufman, its President and Chief Executive
Officer, whereby Mr. Kaufman has agreed to serve as either President and Chief
Executive Officer or as a consultant to the Company through October 14, 1998.
Each of Messrs. Chroscielewski, Szykier, Aloisio, 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. Aloisio, 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. Mr. Szykier has agreed not to
compete with the Company for a period of two years after termination, each of
Messrs. Chroscielewski, Pess, Thompson and Mohan has agreed not to compete with
the Company for a period of one year after termination and Mr. Aloisio has
agreed not to compete with the Company for a period of six months after
termination. The enforceability of non-compete clauses is not free from doubt,
depending on the facts and circumstances of each agreement. Accordingly, a
court may determine not to enforce, or only partially enforce, such non-compete
clauses should their terms be contested. 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,
pursuant to their agreements, immediately prior to the effectiveness of the
Offering, each of Messrs. Kaufman, Aloisio, Thompson and Mohan will receive
options to purchase 100,000, 50,000, 50,000 and 12,500 shares of Common Stock,
respectively, pursuant to the Plan, at an exercise price equal to the Offering
price.
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
1,950,000 shares of Common Stock. To date, options to purchase 141,363
38
<PAGE>
shares of Common Stock are outstanding under the Plan, of which options to
purchase 112,315 shares of Common Stock are currently exercisable, at a
weighted average exercise price of $1.14 per share. The Company also intends to
grant options to purchase approximately 700,000 shares of Common Stock at the
Offering price immediately prior to the effectiveness of the Offering. 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.
39
<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 258,503 shares of
Common Stock at a per share offering price of $8.56 and issued Series C
Warrants to purchase the equivalent of an aggregate of 131,851 shares of Common
Stock at an exercise price of $8.56 per share. Among the purchasers in the
Series C Private Placement were (i) Scott Jones, a director of the Company (who
purchased 795 shares of Common Stock), (ii) Maximillian Partner's I, a limited
partnership in which Mr. Jones is a general partner (which purchased 3,655
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
3,655 shares of Common Stock and received Series C Warrants to purchase the
equivalent of 1,529 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 117,710 shares of Common Stock
and Series C Warrants to purchase the equivalent of an aggregate of 76,159
shares of Common Stock).
Between May and August 1996, the Company consummated the Series D Private
Placement whereby it issued the equivalent of 1,347,489 shares of Common Stock
(after accounting for the conversion of all Series D Preferred Stock into
Common Stock, including dividends that accrued through September 30, 1997) at a
per share offering price of $8.56 and issued Series D Warrants to purchase the
equivalent of an aggregate of 34,053 shares of Common Stock at an exercise
price of $8.56 per share. Among the purchasers in the Series D Private
Placement were (i) Scott Jones (who purchased 4,817 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 325,342 shares of
Common Stock and received Series D Warrants to purchase the equivalent of 6,250
shares of Common Stock), (iii) Maximillian Partner's II, a limited partnership
in which Mr. Jones is a general partner (which purchased 1,042 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
348,371 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 130,200 shares of Common Stock at a per share purchase price of
$8.56 and received Series D Warrants to purchase an aggregate of 6,250 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 4,206 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 Notes into Bridge
Notes and Bridge Warrants and accordingly received $250,000 principal amount of
Bridge Notes, Bridge Warrants to purchase 41,667 Bridge Warrant Shares.
40
<PAGE>
In October 1997, in connection with the October 1997 Interim Financing,
Wheatley and Wheatley Foreign purchased $558,000 and $42,000 principal amounts
of the October 1997 Interim Financing Notes, respectively.
Officer, Director and 5% Stockholders' Transactions
Pursuant to the Loan Agreement with HCC, the Company has outstanding
borrowings in the aggregate principal amount of approximately $921,000, 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% stockholders 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 30,567, 26,124 and
27,512 shares of Common Stock, respectively.
All transactions between the Company and its officers, directors,
principal shareholders or other affiliates have been on terms no less favorable
than those that are generally available from unaffiliated third parties.
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.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
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>
Number of
Shares Percentage
Beneficially Before After
Directors, Executive Officers and 5% Stockholders Owned(1) Offering Offering
- ----------------------------------------------------------- -------------- ------------ ---------
<S> <C> <C> <C>
Barry Rubenstein (2) .................................... 527,417 19.8% 9.4%
68 Wheatley Road
Brookville, New York 11545
Irwin Lieber (3) .......................................... 387,842 14.6% 6.9%
767 Fifth Avenue, 45th Floor
New York, New York 10153
John Walecka (4) ....................................... 360,871 13.9% 6.5%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Brentwood Associates, L.P. VII (5) ........................ 348,371 13.5% 6.3%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Wheatley Foreign Partners, L.P. (6) ..................... 331,592 12.8% 6.0%
c/o Fiduciary Trust
One Capital Place
Snedden Road
P.O. Box 1062
Grand Cayman
British West Indies
Wheatley Partners, L.P. (6) .............................. 331,592 12.8% 6.0%
80 Cutter Mill Road
Great Neck, New York 11021
Mark A. Chroscielewski (7) .............................. 222,284 8.6% 4.0%
Andre Szykier (8) ....................................... 212,835 8.2% 3.8%
Dwight E. Lee (9) ....................................... 205,304 7.7% 3.6%
James S. Thompson ....................................... 154,829 6.0% 2.8%
Scott Jones (10) .......................................... 36,028 1.4% *
Daniel M. Pess (11) ....................................... 9,654 * *
Alan W. Kaufman (12) .................................... 0 * *
Rino Bergonzi (12) ....................................... 0 * *
All directors and executive officers as a group (9 persons)
(13) ................................................... 480,800 18.7% 8.9%
</TABLE>
- ---------------------
* Less than one percent
42
<PAGE>
(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) 56,250 shares of Common Stock issuable upon exercise of
currently exercisable options, (ii) 39,060 shares of Common Stock and
3,125 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Woodland Partners of which Mr. Rubenstein is
a partner, (iii) 52,080 shares of Common Stock and 3,125 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) 39,060 shares of Common Stock and 3,125 shares of Common Stock
issuable upon exercise of currently exercisable warrants owned by Seneca
Ventures of which Mr. Rubenstein is a general partner, (v) 307,114 shares
of Common Stock and 5,879 shares of Common Stock issuable upon exercise of
currently exercisable warrants owned by Wheatley Partners, L.P. and (vi)
18,229 shares of Common Stock and 371 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) 56,250 shares of Common Stock issuable upon exercise of
currently exercisable options and (ii) 307,114 shares of Common Stock and
5,879 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Wheatley Partners, L.P. and 18,229 shares of
Common Stock and 371 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) 12,500 shares of Common Stock issuable upon exercise of
currently exercisable options and (ii) 348,371 shares of Common Stock
owned by Brentwood Associates L.P. VII, of which Mr. Walecka is a general
partner. Does not include 4,206 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 4,206 shares of Common Stock underlying warrants that are
not currently exercisable.
(6) Includes (i) 307,114 shares of Common Stock and 5,879 shares of Common
Stock issuable upon exercise of currently exercisable warrants owned by
Wheatley Partners, L.P. and (ii) 18,229 shares of Common Stock and 371
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 625 shares of Common Stock issuable upon exercise of currently
exercisable options owned by Diana Chroscielewski, Mr. Chroscielewski's
spouse.
(8) Includes 313 shares of Common Stock owned by Remy Szykier, Mr. Syzkier's
daughter.
<PAGE>
(9) Includes (i) 6,250 shares of Common Stock issuable upon exercise of
currently exercisable options and 1,529 shares of Common Stock issuable
upon exercise of currently exercisable warrants, (ii) 29,491 shares of
Common Stock and 21,309 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) 16,573 shares of Common Stock and 11,419
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) 42,408 shares of Common Stock and 31,199 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)
29,240 shares of Common Stock and 12,234 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.
(10) Includes (i) 6,250 shares of Common Stock issuable upon exercise of
currently exercisable options, (ii) 3,655 shares of Common Stock owned by
Maximillian Partner's I, of which Mr. Jones is a general partner and (iii)
3,011 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 9,654 shares of Common Stock issuable upon exercise of currently
exercisable options. Does not include 4,097 shares of Common Stock
underlying options that are not currently exercisable.
(12) Does not include 6,250 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 16,597 shares
of Common Stock underlying options that are not currently exercisable.
43
<PAGE>
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 September
30, 1997 there were 2,598,729 shares of Common Stock outstanding and
approximately 175 record holders of Common Stock after giving effect to the
Preferred Stock Conversion and the Warrant Exercise. Upon the completion of
this Offering there will be 5,598,729 shares of Common Stock outstanding, after
giving effect to the Preferred Stock Conversion. After giving effect to the
issuance of an additional 10,131 shares of Common Stock issuable upon the
conversion of Outstanding Preferred Stock as the result of dividends which
accrue between October 1, 1997 and October 31, 1997, there will be 5,608,860
shares of Common Stock outstanding upon completion of this Offering. No shares
of Preferred Stock will be outstanding after the date hereof.
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.
Preferred Stock
Prior to the closing of this Offering there were 1,628,306 shares of
Outstanding Preferred Stock. Prior to the closing of this Offering, all
Outstanding Preferred Stock will be converted into an aggregate of 1,679,491
shares of Common Stock, after giving effect to all accrued and unpaid dividends
through September 30, 1997 (or 1,689,622 shares of Common Stock after giving
effect to dividends which accrued on the Outstanding Preferred Stock between
October 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
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 $8.56
per share, commencing July 30, 1998 and expiring at the close of business, on
July 30, 2003. Each Bridge Warrant is exercisable into 25,000 Bridge Warrant
Shares for an aggregate of 1,075,000 Bridge Warrant Shares.
44
<PAGE>
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 131,851 shares of
Common Stock at an exercise price of $8.56 per share, (ii) Series D Warrants to
purchase the equivalent of an aggregate of 34,053 shares of Common Stock at an
exercise price of $8.56 per share, (iii) Series B Warrants to purchase an
aggregate of 7,876 shares of Common Stock at an exercise price of $12.56 per
share, and (iv) warrants to purchase an aggregate of 66,102 shares of Common
Stock at exercise prices ranging from $8.00 to $22.00 per share.
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 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. Insofar as
indemnification for liabilities under the Securities 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 Commission such indemnification is against public policy and is,
therefore, unenforceable.
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
45
<PAGE>
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
American Stock Transfer & Trust Company, New York, New York.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,598,729 shares of Common Stock 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
3,000,000 shares of Common Stock sold to the public in the Offering (3,450,000
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.
The 2,598,729 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
stockholder (or stockholders whose shares are aggregated) who has beneficially
owned any restricted securities for at least one year (including a stockholder
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 stockholder 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 stockholder (or
stockholders 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 stockholder, 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 867,634 of the Restricted Shares may be sold pursuant to Rule
144 beginning on the date of this Prospectus, 1,682,748 Shares (or 1,692,879
Restricted Shares after giving affect to dividends which accrue on Outstanding
Preferred Stock between October 1, 1997 and October 31, 1997) may be sold
beginning 90 days thereafter and the remaining 48,347 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.
In addition, the Company has 1,950,000 shares of Common Stock reserved for
issuance under the Plan, of which options to purchase 141,363 shares of Common
Stock have been granted and options to purchase approximately 700,000 shares of
Common Stock are being granted immediately prior to the effectiveness of the
Offering. Moreover, the Company has outstanding options and warrants to
purchase an aggregate of 1,631,244 shares of Common Stock. The Company and
stockholders owning approximately 98% of the Restricted Shares, options and
warrants have entered into agreements which prohibit them from selling or
otherwise transferring stock in the Company for 13 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.
47
<PAGE>
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 3,000,000
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 .............................. ----------
Total ................................................... 3,000,000
=========
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. The Representatives have advised the Company that
they do not intend to sell to discretionary accounts
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 450,000 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 civil
liabilities in connection with this Offering, 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 300,000 shares of Common Stock ("Representatives' Purchase
Option"). The Representatives' Purchase Option is exercisable at $____ per
share ( % 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.
48
<PAGE>
Pursuant to the Underwriting Agreement, the directors and executive
officers and certain stockholders of the Company holding, in the aggregate,
4,140,284 shares of Common Stock and Common Stock issuable upon exercise of
options and warrants 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.
In June 1996, in connection with consulting services rendered in the
Series D Private Placement (which included assisting with structuring and
negotiating the terms of the Series D Private Placement), the Company issued to
GKN the equivalent of 9,765 shares of Common Stock in lieu of cash compensation
of $75,000.
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).
The foregoing is a summary of all of the material terms of the
Underwriting Agreement and does not purport to be complete. A copy of the
Underwriting Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
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 (which contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern as described in Note 2 to the Financial Statements) 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 stockholders 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
49
<PAGE>
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. This Prospectus contains a
complete summary of the terms of the contracts or other documents filed as
exhibits to the Registration Statement that are material to an investor 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.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ...................................................... F-2
Balance Sheet as of December 31, 1996 and September 30, 1997 (unaudited) ............... F-3
Statement of Operations for the years ended December 31, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997 (unaudited) .................................. F-4
Statement of Changes in Shareholders' Deficit for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997 (unaudited) .......................... F-5
Statement of Cash Flows for the years ended December 31, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997 (unaudited) .................................. F-7
Notes to the Financial Statements ...................................................... F-8
</TABLE>
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 one-for-four reverse stock split described in
Note 1, which is as of July 17, 1997 and the one-for-two reverse stock split
described in Note 1, which is as of October 29, 1997
F-2
<PAGE>
CROSS/Z INTERNATIONAL, INC.
Balance Sheet
<TABLE>
<CAPTION>
Pro Forma
Preferred Stock
Conversion (Note 1)
December 31, September 30, September 30,
1996 1997 1997
--------------- --------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ........................... $ 1,367,566 $ 93,346
Accounts receivable, net of allowance for
doubtful accounts of $25,000 and $13,200 at
December 31, 1996 and September 30, 1997 820,307 426,751
Deferred offering costs .............................. -- 636,666
Restricted certificate of deposit .................. -- 868,502
Prepaid expenses and other current assets ......... 30,519 95,037
------------- -------------
Total current assets .............................. 2,218,392 2,120,302
Restricted certificate of deposit .................. 840,054 --
Property and equipment, net ........................ 1,036,913 1,239,837
Debt issuance costs ................................. 438,249
Deposits and other assets ........................... 31,956 89,543
------------- -------------
Total assets ....................................... $ 4,127,315 $ 3,887,931
------------- -------------
Liabilities, Mandatorily Redeemable
Convertible Preferred Stock and
Shareholders' Deficit
Current liabilities
Accounts payable .................................... $ 777,499 $ 992,656
Accrued expenses .................................... 679,507 1,262,622
Notes payable ....................................... 25,000 25,000
Deferred revenue .................................... 132,299 127,478
Compensation payable to related parties ............ 351,184 265,462
Current portion of loan payable to
shareholder ....................................... 120,000 921,335
Customer advance .................................... 300,000 300,000
Capital lease obligations due within one year ........ 152,333 143,061
------------- -------------
Total current liabilities ........................ 2,537,822 4,037,614
Bridge financing payable, net of unamortized
discount of $1,332,950 .............................. -- 2,967,050
Interim financing notes payable to shareholders ...... -- 200,000
Loan payable to shareholder ........................ 891,335 --
Capital lease obligations ........................... 95,326 315,972
Deferred rent ....................................... 255,640 265,610
------------- -------------
Total liabilities ................................. 3,780,123 7,786,246
Series D mandatorily redeemable convertible
preferred stock (Note 8) ........................... 10,667,027 11,427,940 --
Shareholders' deficit
Series A, B and C convertible preferred stock,
(Note 9) .......................................... 281 281 --
Common stock, $0.001 par value: 30,000,000
shares authorized; 863,590 and 901,735
shares issued and outstanding at December
31, 1996 and September 30, 1997,
respectively; 2,581,229 shares pro forma ......... 864 902 $ 2,581
Additional paid-in-capital ........................ 4,035,258 5,769,837 17,196,379
Accumulated deficit ................................. (14,343,938) (21,084,975) (21,084,975)
Receivable from shareholder ........................ (12,300) (12,300) (12,300)
------------- ------------- -------------
Total shareholders' deficit ..................... (10,319,835) (15,326,255) $ (3,898,315)
------------- ------------- -------------
Commitments (Notes 13 and 15)
Total liabilities and shareholders' deficit ...... $ 4,127,315 $ 3,887,931
============= =============
</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, Nine Months ended September 30,
1995 1996 1996 1997
--------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues
Software licenses ............... $ 194,000 $ 851,150 $ 228,025 $ 493,750
Services and maintenance ......... 2,596,815 1,051,828 985,784 292,856
------------ ------------ ------------ ------------
Total revenues ............... 2,790,815 1,902,978 1,213,809 786,606
Cost of revenues
Software licenses ............... 32,980 102,138 33,332 51,654
Services and maintenance ......... 590,957 376,289 337,023 83,686
------------ ------------ ------------ ------------
Total cost of revenues ......... 623,937 478,427 370,355 135,340
------------ ------------ ------------ ------------
Gross profit ..................... 2,166,878 1,424,551 843,454 651,266
------------ ------------ ------------ ------------
Operating expenses
Sales and marketing ............ 2,503,421 3,145,160 2,118,483 3,344,456
Research and development ......... 1,357,381 1,791,597 1,148,673 1,889,663
General and administrative ...... 1,011,074 1,140,003 701,881 964,929
------------ ------------ ------------ ------------
Total operating expenses ...... 4,871,876 6,076,760 3,969,037 6,199,048
------------ ------------ ------------ ------------
Loss from operations ............ (2,704,998) (4,652,209) (3,125,583) (5,547,782)
Interest income .................. -- 88,288 49,173 38,093
Interest expense .................. (335,323) (355,314) (314,356) (470,977)
Other income (expense) ............ (21,598) 1,300 1,300 542
------------ ------------ ------------ ------------
Net loss ........................ $ (3,061,919) $ (4,917,935) $ (3,389,466) $ (5,980,124)
============ ============ ============ ============
Pro forma net loss per common
share (Note 1) .................. $ (2.51) $ (2.29)
============ ============
Pro forma weighted average shares
used in per share computation
(Note 1) ........................ 1,957,856 2,611,932
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CROSS/Z INTERNATIONAL, INC.
Statement of Changes in Shareholders' Deficit
<TABLE>
<CAPTION>
Series C
Series A Convertible Series B Convertible 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 ...... 111,428 $ 111 48,135 $ 48 -- $ -- 753,295 $ 754
Issuance of Preferred Stock:
Series B, at $22.00 per share ..... 11,364 11
Series C, at $9.60 per share,
net issuance costs of
$32,693 ........................ 65,547 65
Conversion of Series A and B
Preferred stock to Series C ...... (72,253) (72) (30,398) (30) 123,184 123
Issuance of warrants on Series B
Preferred Stock
Issuance of common stock for
consulting services ............ 6,250 6
Common stock options
exercised ........................ 32,095 32
Net loss ........................
------- ----- ------- --- -------- ----- -------- ----
Balance at December 31, 1995 ....... 39,175 39 29,101 29 188,731 188 761,640 792
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 $9.60 per share ...... 13,400 13
In exchange for notes payable 1,147 1
For compensation payable to
related parties ............... 5,672 6
Conversion of Series A and B
Preferred Stock to Series C ...... (6,593) (6) (11,364) (11) 21,548 22
Common stock options
exercised ........................ 71,950 72
Net loss ........................
------- ----- ------- --- -------- ----- -------- ----
Balance at December 31, 1996 ....... 32,582 33 17,737 18 230,498 230 863,590 864
Accretion of excess of
redemption value of Series D
Preferred Stock over fair
value at issuance date
Issuance of options on Series D
Preferred Stock
Issuance of common stock
options for consulting services
Issuance of common stock
warrants in connection with
bridge financing
Common stock options
exercised ........................ 25,645 26
Common stock warrants
exercised ........................ 12,500 12
Net loss ........................
------- ----- ------- --- -------- ----- -------- ----
Balance at September 30, 1997
(unaudited) ..................... 32,582 $ 33 17,737 $ 18 230,498 $ 230 901,735 $ 902
======== ====== ======== ===== ======== ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CROSS/Z INTERNATIONAL, INC.
Statement of Changes in Shareholders' Deficit (Continued)
<TABLE>
<CAPTION>
Additional Receivable
Paid-In Accumulated From Shareholders'
Capital Deficit Shareholder Deficit
---------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 .............................. $2,681,251 $ (5,801,245) $ -- $ (3,119,081)
Issuance of Preferred Stock:
Series B, at $22.00 per share ........................ 249,992 250,003
Series C, at $9.60 per share, net issuance costs of
$32,693 ............................................. 596,491 596,556
Conversion of Series A and B Preferred stock to Series C (21) --
Issuance of warrants on Series B Preferred Stock ...... 5,800 5,800
Issuance of common stock for consulting services ...... 5,594 5,600
Common stock options exercised ........................ 17,879 17,911
Net loss ................................................ (3,061,919) (3,061,919)
---------- ------------- ---------- -------------
Balance at December 31, 1995 ........................... 3,556,986 (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 $9.60 per share ........................... 128,623 128,636
In exchange for notes payable ........................ 11,006 11,008
For compensation payable to related parties ......... 54,442 54,448
Conversion of Series A and B Preferred Stock to Series C (5) --
Common stock options exercised ........................ 49,505 (12,300) 37,277
Net loss ................................................ (4,917,935) (4,917,935)
---------- ------------- ---------- -------------
Balance at December 31, 1996 ........................... 4,035,258 (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 ...... (760,913) (760,913)
Issuance of options on Series D Preferred Stock ......... 161,500 161,500
Issuance of common stock options for consulting services 2,500 2,500
Issuance of common stock warrants in connection with
bridge financing ....................................... 1,512,397 1,512,397
Common stock options exercised ........................ 28,194 28,220
Common stock warrants exercised ........................ 29,988 30,000
Net loss ................................................ (5,980,124) (5,980,124)
---------- ------------- ---------- -------------
Balance at September 30, 1997 (unaudited) ............... $5,769,837 $ (21,084,975) $ (12,300) $ (15,326,255)
=========== ============= ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CROSS/Z INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, Nine Months ended September 30,
1995 1996 1996 1997
---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss ....................................... $ (3,061,919) $ (4,917,935) $ (3,389,466) $ (5,980,124)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization ............... 163,680 236,751 224,047 259,616
Amortization of debt discount ............... 5,800 112,200 112,200 179,447
Amortization of debt issuance costs ............ -- -- -- 54,781
Options issued for consulting services ...... -- 122,500 70,833 164,000
Changes in assets and liabilities
Accounts receivable ........................ (29,061) (237,189) 280,946 393,556
Prepaid expenses and other current
assets .................................... 9,866 (22,983) (124,276) (64,518)
Deferred offering costs ..................... -- -- -- (636,666)
Deposits and other assets .................. 8,017 (505) (30,930) (57,587)
Accounts payable and accrued expenses 707,186 (769,312) (1,110,915) 798,272
Deferred rent .............................. 172,304 83,336 62,505 9,970
Compensation payable to related parties 91,615 (111,762) (30,269) (85,722)
Deferred revenue ........................... (110,641) (36,772) 231,319 (4,821)
Customer advance ........................... 300,000 -- -- --
------------ ------------ ------------ ------------
Net cash used in operating activities ...... (1,743,153) (5,541,671) (3,704,006) (4,969,796)
------------ ------------ ------------ ------------
Cash flows from investing activities
Acquisitions of property and equipment ......... (59,923) (618,993) (534,401) (462,540)
Purchase of restricted certificate of deposit..... -- (840,054) (829,748) (28,448)
------------ ------------ ------------ ------------
Net cash used in investing activities ...... (59,923) (1,459,047) (1,364,149) (490,988)
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from issuance of Series D preferred
stock, net .................................... -- 8,643,418 8,643,418 --
Proceeds from issuance of Series C preferred
stock, net .................................... 596,556 128,637 96,469 --
Issuance of common stock ........................ 23,511 37,277 27,994 58,220
Proceeds from issuance of notes payable ......... 700,000 -- -- --
Proceeds from Interim and Bridge
financings, net .............................. -- -- -- 4,506,970
Repayment of Interim financing notes
payable ....................................... -- -- -- (500,000)
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) (112,000) (90,000)
Payments of capital lease obligations ......... (110,395) (144,200) (110,107) (198,055)
Proceeds from sale-leaseback transaction ...... -- -- -- 409,429
------------ ------------ ------------ ------------
Net cash provided by financing
activities ................................. 1,716,533 8,309,877 8,322,519 4,186,564
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents .................................... (86,543) 1,309,159 3,254,364 (1,274,220)
Cash and cash equivalents at beginning of
period .......................................... 144,950 58,407 58,407 1,367,566
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ...... $ 58,407 $ 1,367,566 $ 3,312,771 $ 93,346
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 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.
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 corporate reorganization and immediately prior to an
initial public offering, 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, CrossZ-Delaware 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, preferrences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control of
CrossZ-Delaware. Issuance of additional shares of Common Stock could result in
the dilution of the voting power of the Common Stock. 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 CrossZ-Delaware.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT AND RECLASSIFICATION FOR REVERSE STOCK SPLITS
On October 29, 1997, the Company's shareholders ratified a one-for-two
reverse stock split on all common and preferred stock. 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-two-reverse
stock split and the previous one-for-four reverse stock split.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial data at September 30, 1997 and for the nine months
ended September 30, 1996 and September 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
F-8
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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 September 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 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
F-9
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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.
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.
F-10
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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 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 ON "SOFTWARE REVENUE RECOGNITION"
In October 1997, the AICPA issued a Statement of Position 97-2 ("SOP") on
software revenue recognition. The Company believes that adoption of the new SOP
will not have a material impact on the Company.
F-11
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997) -- (Continued)
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 $21,084,975 as
of September 30, 1997, and was 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.
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1995 1996 1996 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Interest paid during the period ............ $167,279 $209,787 $171,667 $ 109,983
Schedule of non cash investing and financing
activities:
Capital lease obligations entered into during
the period .............................. 226,264 99,341 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 ................................. -- 562,839 302,676 760,920
Common Stock warrants issued in
connection with Bridge Financing ......... -- -- -- 1,512,397
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses included the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
<S> <C> <C>
Compensation and related benefits ............... $247,768 $ 244,238
Consulting and professional fees, including deferred
offering expenses ................................. 183,134 668,379
Interest .......................................... 14,940 100,663
Commissions ....................................... 21,797 24,121
Other ............................................. 211,868 225,221
--------- -----------
$679,507 $1,262,622
========= ===========
</TABLE>
F-12
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997) -- (Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment (net) consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
<S> <C> <C>
Computer equipment and software ..................... $1,334,052 $ 1,787,759
Furniture and fixtures .............................. 204,103 204,289
Office equipment .................................... 89,633 98,277
Leasehold improvements .............................. 35,249 19,579
----------- ------------
1,663,037 2,109,,904
Less-accumulated depreciation and amortization ...... 626,124 870,067
----------- ------------
$1,036,913 $ 1,239,837
=========== ============
</TABLE>
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 1,147 shares of
Series C Preferred Stock at $9.60 per share and $300,000 was converted into
35,046 shares of Series D Preferred Stock at $8.56 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 32,126 shares of Series D Preferred Stock at $8.56 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 781 warrants to purchase Series B Preferred Stock at
$22.00 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.
<PAGE>
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
December 31, 1996 and September 30, 1997 the Company has set aside $840,064 and
$868,502 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 $87,089 for the nine months ended September 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 below.
In June 1997, the Company received 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
F-13
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
6. BORROWING ARRANGEMENTS -- (Continued)
attached warrants to purchase 15,900 shares of common stock at $8.56 per share.
In connection with these notes the Company issued warrants to purchase 3,533
shares of Common Stock. 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.
BRIDGE FINANCING
On July 30, 1997, the Company completed a $4,300,000 Bridge Financing (the
"Bridge Financing"). The proceeds to the Company from such financing were
approximately $3,807,000, net of approximately $493,000 of issuance costs.
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 16,666 shares (716,638 total
common shares) of the Company's common stock at a price of $8.56 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 $16.00 per share, each Bridge Warrant
will entitle the holder to purchase a maximum of 8,334 additional shares
(358,362 total common shares) of common stock (based upon a formula as defined
in the Bridge Warrant agreement) at an exercise price of $8.56 per share. 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 $8.56. As an incentive for early participation, the Company issued
to certain investors, warrants to purchase a total of 4,206 shares of common
stock at a price of $8.56, in addition to the bridge warrants that were
included in the bridge units. A portion of the gross proceeds from the Bridge
Financing has been allocated to the warrants based on their estimated fair
market value and resulted in $1,512,397 of original issue discount and a
corresponding amount of additional paid in capital. The amortization of the
original issue discount through September 30, 1997 totaled $179,447.
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 30,299
shares of Series D at $8.56 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 53,903 shares of Series D. The remaining balance was paid
in cash.
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 1,022,196 shares of Series D at $8.56 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 151,374 shares of Series D at a conversion price of $8.56
per share. At December 31, 1996 and September 30, 1997 the outstanding shares
of Series D were 1,258,598 and 1,347,489, respectively.
F-14
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (Continued)
In May 1996, the Company issued 19,276 shares of Series D at $8.56 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 $8.56, 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 September 30, 1997 the Company has reserved 65,752 and
154,644 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. At September 30, 1997 each share
of Series D was convertible into one share of common stock. 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 $5.00.
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 $8.56 per
share, plus any accrued and unpaid dividends.
SERIES D WARRANTS
During April 1996, the Company issued warrants to purchase 31,250 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 $8.56 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 2,336 warrants to purchase shares of
Series D preferred stock at a price of $8.56 per share. As of
F-15
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (Continued)
December 31, 1996, no borrowings were outstanding related to the line of
credit. Also in November 1996, the Company issued 467 warrants to purchase
shares of Series D preferred stock at a price of $8.56 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 125,000 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 $8.56 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
the event that the Series D is converted into common stock, the Advisory
Options which were issued as options to purchase Series D will also convert
into options to purchase the same number of shares of common stock. In April
1997, two of the Advisory Board members were each granted options to purchase
25,000 shares of Series D at an exercise price of $8.56 per share. The options
vest ratably over two years from the date of grant. Consulting expense of
$112,500 and $161,500 has been recognized in results of operations for the year
ended December 31, 1996 and the nine months ended September 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:
DIVIDENDS
The holders of the Series A, B and C Preferred Shares shall be entitled to
receive noncumulative, preferential dividends of $1.04, $1.76 and $.76 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 September 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. At September
30, 1997 the conversion ratios for the Series A, B and C Preferred Stock was
1.30, 1.75 and 1.12 shares of common stock, respectively. 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 $5.00.
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.
F-16
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
9. CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANTS -- (Continued)
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 shareholders at a liquidation
value of $12.80, $22.00 and $9.60 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 the holders of the Series A and
B shares 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 72,253 and 30,398 shares, respectively, into
123,184 shares of Series C preferred stock. During 1996, certain holders of the
Company's Series A and B preferred stock converted 6,593 and 11,364 shares,
respectively, into 21,548 shares of Series C preferred stock.
SERIES B WARRANTS
As of December 31, 1996 and September 30, 1997, warrants were outstanding
to purchase up to 7,876 shares of Series B Preferred Stock at an exercise price
of $22.00, 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 1,690 and 0 shares of Series B
Preferred Stock were issued, respectively.
SERIES C WARRANTS
As of December 31, 1996 and September 30, 1997, warrants were outstanding
to purchase up to 131,851 shares of Series C Preferred Stock at an exercise
price of $8.56, 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 124,808 and 7,043 shares of Series C
Preferred Stock were issued, respectively. These warrants were immediately
exercisable.
COMMON STOCK WARRANTS
At December 31, 1996, 56,563 warrants to purchase shares of common stock
were outstanding, of which 12,500 and 8,750 were issued in 1995 and 1996
respectively with exercise prices which range from $2.40 to $22.00 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. In connection with these warrants and the
Bridge warrants described in Note 6, the Company has reserved for issuance
1,158,600 shares of common stock at September 30, 1997.
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. 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 -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
10. EMPLOYEE STOCK OPTIONS -- (Continued)
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 ......... 124,551 146,738 $.40-$8.00
Granted ....................................... (119,756) 119,756 .96-8.00
Exercised ....................................... -- (32,095) .40-2.40
Canceled ....................................... 115,323 (115,323) .40-8.00
Reissued ....................................... (80,043) 80,043 .40-.96
--------- --------- ------------
Options outstanding at December 31, 1995 ...... 40,075 199,119 .40-.96
Additional shares authorized .................. 125,000 -- --
Granted ....................................... (82,357) 82,357 .96
Exercised ....................................... -- (75,700) .40-.96
Canceled ....................................... 53,976 (53,976) .96
--------- --------- ------------
Options outstanding at December 31, 1996 ...... 136,694 151,800 .40-.96
Granted ....................................... (49,064) 49,064 .96-4.00
Exercised ....................................... -- (25,646) .96
Canceled ....................................... 33,855 (33,855) .96
--------- --------- ------------
Options outstanding at September 30, 1997 ...... 121,485 141,363 $ .96-4.00
========= ========= ============
Options exercisable at September 30, 1997 ...... 112,315 $ .96-4.00
========= ============
</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 was immaterial.
11. MAJOR CUSTOMERS
Sales to major customers, as a percentage of revenues, are as follows:
Year Ended Nine Months Ended
December 31, September 30,
1996 1997
-------------- ------------------
A ...... 17% --
B ...... 16% --
C ...... 21% --
D ...... -- 73%
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 nine month period ended September 30, 1997.
F-18
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 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.
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
Leases Leases
Year Ending December 31, ------------- ----------
<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 $323,536 for the nine month period ended September 30,
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 :
<TABLE>
<S> <C>
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 .............................. $ --
============
</TABLE>
F-19
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997)
14. INCOME TAXES -- (Continued)
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
$10,500,000 and $115,000, 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.
15. COMMITMENTS
EMPLOYMENT AGREEMENTS
In May 1996, the Company entered into employment agreements ( the
"agreement(s)") with its Chairman and its Chief Technology 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
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 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
Chairman 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 (UNAUDITED)
In October 1997, the Company issued $600,000 of principal amount of
unsecured promissory notes to shareholders of the Company. The notes bear
interest at 15% per annum and are payable on the earlier of (i) the completion
of an IPO (as defined) of the Company's common stock, or (ii) March 31, 1998.
In October 1997, the Company's Board of Directors authorized an increase
in the number of shares reserved for issuance to 1,950,000 pursuant to the 1991
Incentive Stock Plan.
F-20
<PAGE>
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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 .................. 3
Risk Factors ........................ 7
Use of Proceeds ..................... 14
Dividend Policy ..................... 15
Capitalization ........................ 16
Dilution .............................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................ 19
Business .............................. 25
Management ........................... 35
Certain Transactions .................. 40
Principal Stockholders ............... 42
Description of Securities ............ 44
Shares Eligible for Future Sale ...... 47
Underwriting ........................ 48
Legal Matters ........................ 49
Experts .............................. 49
Available Information ............... 49
Financial Statements .................. F-1
-----------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
3,000,000 Shares of Common Stock
----------------
PROSPECTUS
----------------
GKN Securities Corp.
Barington Capital Group
_________, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GRAPHIC This Prospectus is printed on recycled paper using soy-bean ink.
OMITTED]
<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
stockholders, (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 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 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.
<TABLE>
<S> <C>
Registration Fee ............................................................... $11,951.23
NASD filing fee ............................................................... 3,940.21
Nasdaq SmallCap Market and The Boston Stock Exchange filing fee listing expenses 25,000.00
Blue Sky fees and expenses (including legal and filing fees) .................. 50,000.00
Printing and Engraving expenses ................................................ 100,000.00
Transfer agent and registrar fees and expenses ................................. 5,000.00
Legal fees and expenses (other than Blue Sky) ................................. 275,000.00
Accounting fees and expenses ................................................... 250,000.00
Miscellaneous expenses ......................................................... 29,108.56
-------------
TOTAL ........................................................................... $750,000.00
=============
</TABLE>
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. With respect to such transactions, the Company believes that
such purchasers (i) had sufficient knowledge and experience in financial and
business matters so as to be capable of evaluating the risks and merits of the
transaction and was capable of bearing the economic risks of such investment
including a complete loss of its investment, (ii) had an opportunity to discuss
the business, management and financial affairs of the Company with the
Company's representatives, (iii) acquired the securities for his own account
for the purpose of investment and not with a view to or for resale in
connection with any distribution thereof and (iv) understood that (a) the
securities had not been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof, (b) the securities must be
held indefinitely unless a subsequent disposition thereof is registered under
the Securities Act or is exempt from such registration, (c) the securities
would bear a legend to such effect and (d) the Company will make a notation on
its transfer books to such effect. All transactions have been adjusted to
reflect the reverse stock split of the Registrant's outstanding Common Stock
and Preferred Stock effected in (i) July 1997 on the basis of .25 shares of
Common Stock and Preferred Stock for each share of Common Stock and Preferred
Stock, respectively and (ii) October 1997 on the basis of .50 shares of Common
Stock and Preferred Stock for each share of Common Stock and Preferred Stock,
respectively.
II-2
<PAGE>
In September 1994, the Company issued the following shares of Series A
Preferred Stock at a per share offering price of $12.80 to the following
persons:
Number of shares of Series
Name A Preferred Stock
- ---------------------------- ---------------------------
Barker, Lee & Co. 10,324
Clough, Herbert C. 8,260
Esselen, Gustavus III 4,130
Fiske, Guy W. 4,130
J.M.R. Barker Foundation 6,195
Jones, Addis T. 2,478
Jones, Arthur R. III 2,065
Jones, Scott T. 2,891
Lee, Dwight E. 2,065
Maximillian Partners I 2,065
Maximillian Partners II 1,637
Musser, William L. 2,065
Namakagon Associates, L.P. 14,454
Sharples, Arthur A. 6,195
Sterling, Lionel N. 8,260
Taylor, John N. 9,457
Upland Associates, L.P. 16,519
Darviche, Parviz 2,065
Ruyan, Jerry L. 4,112
Gillett, Richard 2,065
In September 1994, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $22.00 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. 4,546 1,818
Dixon, Anthony 688 275
Fiske, Guy W. 4,546 1,818
Heller, Andrew 2,273 909
J.M.R. Barker Foundation 2,273 909
Jones, Addis T. 2,500 1,000
Jones, Arthur R. III 2,500 1,000
Namakagon Associates, L.P. 6,818 2,727
Knowlton, Winthrop 909 364
Knowlton, Winthrop & Erica TTEES 2,273 909
Paine Webber, CFN FBO, 2,273 909
Sharples, Arthur A. 2,273 909
Sterling, Lionel N. 3,409 1,364
Loevner, Kirk 3,125 1,250
Darviche, Parviz 682 273
Ruyan, Jerry L. 2,500 1,000
Esselen, Gustavus III 4,550 1,820
</TABLE>
II-3
<PAGE>
In February 1995, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $22.00 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 4,546 1,818
Dusa, Jerry A. & Margaret 4,546 1,818
</TABLE>
In March 1995, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $22.00 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 Trust 2,273 909
</TABLE>
In March 1995, the Company issued the following Series B Preferred Stock
Warrant at a per share offering price of $22.00 to the following person:
Number of Shares of Series B
Preferred Stock Represented by the
Name Warrant
- -------------------- -----------------------------------
Ventura Vista L.C. 782
In March 1996, the Company issued the following shares of Series C
Preferred Stock at a per share offering price of $9.60 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. 26,330 21,309
J.M.R. Barker Foundation 14,777 11,419
Namakagon Associates L.P. 37,814 31,199
Upland Associates, L.P. 26,073 12,234
Lee, Dwight E. 3,259 1,529
Musser, William L. 3,259 1,529
McCray, Shriver Eckdahl & Associates 4,688 --
Jones, Scott T. 709 --
Maximillian Partner's I 3,259 --
Maximillian Partner's II 1,757 --
Knowlton, Winthrop 2,000 2,733
Knowlton, Winthrop & Erica TTEE 5,000 6,832
Paine Webber CFN FBO,
Winthrop Knowlton, IRA 5,000 6,832
Sharples, Arthur A. 14,777 909
Sterling, Lionel N. 20,537 16,364
Loevner, Kirk 6,875 9,393
Ruyan, Jerry L. 11,997 1,000
Gillett, Richard 3,259 1,529
Dauber, Phillip S. & Elayne TTEES Fbo
PSERD Trust 10,000 1,818
Dusa, Jerry A. & Margaret TTES fbo Jerry
A Dusa 10,000 1,818
Heller, Andrew & Mary Ann 5,000 909
Berman, Stuart M. 7,813 2,500
Halpert, Richard L. 2,604 --
Manners, Richard E. & Bonnie 3,750 --
</TABLE>
II-4
<PAGE>
In May 1996, the Company issued the following shares of Series D Preferred
Stock at a per share offering price of $8.56 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 292,056 6,250
Woodland Ventures Fund 46,729 3,125
Woodland Partners 35,047 3,125
Seneca Venture Fund 35,047 3,125
Ruyan, Jerry L. 35,047 6,250
Redwood Venture Group, Ltd. 11,682 --
Z/Cross Partnership 11,682 3,125
Brausch, J. Jeffrey 11,682 3,125
Motto, William J. 17,523 3,125
Evans, James E. 46,729 --
Goldblatt, Stuart 5,841 --
Whipple, Donald E. 11,682 --
Mosher, Greg C. 23,365 --
Manners, Richard E. & Bonnie 2,045 --
Halpert, Richard 2,921 --
Berman, Stuart M. 1,168 --
Knowlton, Winthrop 8,762 --
Jones, Scott T. 4,323 --
Maximillian Partner's II 935 --
McCray, Shriver, Eckdahl & Associates 5,257 --
Chroscielewski, Mark 30,567 --
Thompson, James S. 27,511 --
Szykier, Andre 26,124 --
GKN Securities Corp. 8,762 --
Messmore, Thomas E. 11,682 --
Simon, John 5,841 --
Dusa, Jerry A. 17,523 --
White, Eugene R., Jr. 2,921 --
Mayes, John 2,921 --
Jepson, Rebecca A. 2,921 --
Heller, Andrew 17,523 --
</TABLE>
In July 1996, the Company issued the following shares of Series D Preferred
Stock at a per share offering price of $8.56 per share to the following
persons:
Number of Shares of
Name Series D Preferred Stock
- -------------------------- -------------------------
Berman, Beth L. 2,500
Berman, Stuart M. 3,125
Manners, Richard E., IRA 7,009
Halpert, Richard 4,089
Gaymark Associates 23,365
South Ferry #2, L.P. 56,000
Wolfson, Aaron 5,841
II-5
<PAGE>
In August 1996, the Company issued the following shares of Series D
Preferred Stock at a per share offering price of $8.56 per share to the
following persons:
Number of Shares of
Name Series D Preferred Stock
- ---------------------------- -------------------------
Brentwood Associates, L.P. 321,262
In October 1996, the Company issued the following Series D Preferred Stock
Warrants at a per share offering price of $8.56 per share:
Number of Shares of Series D
Preferred Stock Represented by the
Name Warrant
- ----------------- -----------------------------------
Phoenix Leasing 2,337
HCC Financial 467
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 $0.06 and $0.48 per share to the following persons:
Name Number of Shares of Common Stock
- --------------------- ---------------------------------
Vogel, Loring 729
Bunce, Charles III 19,719
Nadeau, Michael 625
Hendell, Reuben 27,500
Ai-Chang, Mitchell 527
Jurist, Susan 2,173
Story, Debra 333
Rothenberg, Pamela 109
Nadeau, Michael 1,459
Yanowitch, Richard 7,813
Thompson, James S. 29,675
Neugebauer, Marilyn 3,750
Fressle, Thomas 2,500
Petersen, David 3,438
Siragusa, Thomas 3,438
Heller, Andrew 12,500
Gillett, William 6,250
Puleo, Paula 1,337
Yanowitch, Richard 5,000
Furnia, Joseph 1,250
Mui, Karen 799
Daviche, Michael 7,209
Szykier, Remy 313
Petersen, David 2,778
Crowell, James 156
Zakrzewski, Andrew 1,250
Smith, Michael 4,861
Kulesa, Robert 781
Clough, Herbert C. 12,500
Tatelman, Michael 5,250
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 $8.56 per share.
<TABLE>
<CAPTION>
Name Shares Issuable Upon Exercise of Warrants
- --------------------------------------- ------------------------------------------
<S> <C>
Brentwood Associates, L.P. VII ...... 4,206
Dr. Stuart Berman .................. 15,900
Dr. Richard Manners .................. 15,900
Richard Mazur ........................ 3,533
</TABLE>
In July 1997, in connection with a Bridge Financing in which GKN
Securities Corp. and Barington Capital Group, L.P., acted as Placement Agents
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), 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 has been
adjusted in consideration that the offering price of the Common Stock in this
Offering is less than $16.00 per share.
<TABLE>
<CAPTION>
Name Note Amount($) Number of Warrant Shares
- ----------------------------------------------------- ---------------- -------------------------
<S> <C> <C>
Adams, Robert M. ................................. 75,000 12,500
American Friends of Hebron Yeshiva ............... 150,000 25,000
Aucott, George W. ................................. 25,000 4,167
Beck, Ronald N. .................................... 100,000 16,667
Blanch, Sonia Bernal .............................. 25,000 4,167
Braun, Emil E. .................................... 50,000 8,334
Brentwood Associates, LP VII ..................... 250,000 41,667
Buckridge, Charles R., Revocable Trust ............ 100,000 16,667
U/A/D 5/7/93, Charles R. Buckridge Trustee .......
Cywiak, Aaron .................................... 25,000 4,167
D. Stake Mill Inc. ................................. 25,000 4,167
David, Steven II and Dara M., JTWROS ............... 25,000 4,167
Davidson, Penn W. ................................. 25,000 4,167
Deakman, Thomas R. ................................. 25,000 4,167
Dimes, Edwin K. .................................... 25,000 4,167
Duffield, Albert W. .............................. 25,000 4,167
Feiner, Andrew .................................... 187,500 31,250
Friedman, Harry, Living Trust ..................... 25,000 4,167
Gadraz, Inc. ....................................... 187,500 31,250
Gold, Stuart W. .................................... 37,500 6,250
Greenberg, Bruce ................................. 25,000 4,167
Greenblatt, Jeffrey N. ........................... 75,000 12,500
Greenstein, Stuart ................................. 25,000 4,167
Grossman, Richard L. .............................. 25,000 4,167
Gyenes, Andrew .................................... 25,000 4,167
Hantke, Richard .................................... 25,000 4,167
Harsac, Inc. ....................................... 100,000 16,667
Hauser, Sara D. .................................... 25,000 4,167
Healy, John J. .................................... 25,000 4,167
Hutton, Terrence ................................. 25,000 4,167
Jablon, Alan ....................................... 150,000 25,000
Joel, Ralph & Rosalie JTWROS ..................... 25,000 4,167
Juranich, Frank T., Jr. ........................... 25,000 4,167
Kilgannon, Owen L. ................................. 100,000 16,667
Kleinberg, Charles ................................. 25,000 4,167
Krinick, Ronald N. ................................. 25,000 4,167
Lasry, Marc ....................................... 500,000 83,333
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name Note Amount($) Number of Warrant Shares
- ------------------------------------------------- ---------------- -------------------------
<S> <C> <C>
Leach, Scott ................................. 25,000 4,167
Lenny Corp. .................................... 50,000 8,334
Matusow, Paul ................................. 37,500 6,125
McMaster, John ................................. 25,000 4,167
Medved, Jonathan .............................. 25,000 4,167
Menkin, Michael .............................. 25,000 4,167
Muchnick, Howard W. ........................... 175,000 29,167
Nagar, Sheila ................................. 25,000 4,167
Neuman, Joseph ................................. 100,000 16,667
Parson, Ned F. ................................. 100,000 16,667
Providenti, A.C. .............................. 75,000 12,500
Reddy, Malladi S. .............................. 75,000 12,500
Rothberg, Lawrence ........................... 25,000 4,167
Rothstein, Steven R. ........................... 50,000 8,334
Rubin, Eric C. ................................. 100,000 16,667
Suker, Wayne ................................. 25,000 4,167
Sargent Capital Ventures, LLC .................. 75,000 12,500
Schirripa, George T. ........................... 150,000 25,000
Schwartzbard, Michael ........................ 25,000 4,167
Siegal, Richard D. ........................... 25,000 4,167
Steinberg, Arthur B. & Co. ..................... 50,000 8,334
Stoker, Jerry W. .............................. 50,000 8,334
Tritt, Ramie A. .............................. 25,000 4,167
US Data Capture, Inc. ........................ 25,000 4,167
Wilks, Jeffrey S. .............................. 25,000 4,167
Wright, Donald C. .............................. 25,000 4,167
Zoe Consulting West Inc. Defined Benefit ...... 200,000 33,333
Pension Plan Zipper, Sandra .................. 50,000 8,334
Zozzora, Frank Carmine and Jane March, ......... 25,000 4,167
Community Property ..............................
</TABLE>
In October 1997, the Company issued $558,000 and $42,000 of principal
amount unsecured promissory notes to Wheatley Partners, L.P. and Wheatley
Foreign Partners L.P., respectively in connection with an interim financing
consummated in October 1997.
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
<TABLE>
<S> <C>
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.
**4.3 Form of Warrant issued in connection with the July 1997 Private Placement.
**4.4 Form of Promissory Note issued in connection with the July 1997 Private Placement.
4.5 Form of Lock-up Agreement.
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 Employment Agreement, dated October 6, 1997, by and among the Registrant and Robert V.
Aloisio.
10.9 Employment Agreement, dated October 14, 1997, by and among the Registrant and Alan W.
Kaufman.
**10.10 HCC Loan Agreement dated March 31, 1992 and Addendum dated May 8, 1996.
**10.11 Software Licensing Agreement between Amdahl Corporation and the Registrant dated November
27, 1996.
**10.12 Value Added Reseller Software License Agreement between Stratos, Strategic Tools & Services
and the Registrant dated September 9, 1997.
**10.13 Value Added Reseller Software License Agreement between Worldnet Consulting, SA and the
Registrant dated September 9, 1997.
10.14 Software Distribution Agreement between Hewlett-Packard Company and the Registrant dated
September 10, 1997.
10.15 Capital Lease Agreement dated October 27, 1994 by and between Reckson Associates and the
Registrant.
11.1 Computation of Pro Forma Net Loss Per Common Share.
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).
</TABLE>
- ------------
* To be filed by Amendment.
** Previously filed.
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; and
(c) include any additional or changed material information on the plan
of distribution*.
The undersigned small business issuer will provide to the Representatives
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(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 12th day of November, 1997.
CrossZ Software Corporation
-----------------------------
(Registrant)
By:
-------------------------------------------
By: /s/ Daniel M. Pess
Daniel M. Pess, Vice President of
Finance and Administration and Chief Financial
Officer
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>
Signatures Title Date
- ----------------------------- ------------------------------------------------- ------------------
<S> <C> <C>
/s/ Alan W. Kaufman* President, Chief Executive Officer (principal November 12, 1997
- ------------------------- executive officer) and Director
Alan W. Kaufman
/s/ Mark A. Chroscielewski* Chairman of the Board November 12, 1997
- -------------------------
Mark A. Chroscielewski
/s/ Andre Szykier* Executive Vice President and Chief Technology November 12, 1997
- ------------------------- Officer
Andre Szykier
/s/ Daniel M. Pess Vice President of Finance and Administration November 12, 1997
- ------------------------- and Chief Financial Officer (principal financial
Daniel M. Pess officer and principal accounting officer)
___________, 1997
- ------------------------- Director
Rino Bergonzi
/s/ Scott Jones* Director November 12, 1997
- -------------------------
Scott Jones
</TABLE>
- ------------
* By Power of Attorney
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ------------- ----------------------------------------------------------------------------------- -----
<S> <C> <C>
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.
**4.3 Form of Warrant issued in connection with the July 1997 Private Placement.
**4.4 Form of Promissory Note issued in connection with the July 1997 Private Placement.
4.5 Form of Lock-up Agreement.
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 Employment Agreement, dated October 6, 1997, by and among the Registrant and
Robert V. Aloisio.
10.9 Employment Agreement, dated October 14, 1997, by and among the Registrant and
Alan W. Kaufman.
**10.10 HCC Loan Agreement dated March 31, 1992 and Addendum dated May 8, 1996.
**10.11 Software Licensing Agreement between Amdahl Corporation and the Registrant dated
November 27, 1996.
**10.12 Value Added Reseller Software License Agreement between Stratos, Strategic Tools &
Services and the Registrant dated September 9, 1997.
**10.13 Value Added Reseller Software License Agreement between Worldnet Consulting, SA
and the Registrant dated September 9, 1997.
10.14 Software Distribution Agreement between Hewlett-Packard Company and the
Registrant dated September 10, 1997.
10.15 Capital Lease Agreement dated October 27, 1994 by and between Reckson Associates
and the Registrant.
11.1 Computation of Pro Forma Net Loss Per Common Share.
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).
</TABLE>
- ------------
* To be filed by Amendment.
** Previously filed.
<PAGE>
CROSSZ SOFTWARE CORPORATION
3,000,000 Shares of Common Stock
UNDERWRITING AGREEMENT
New York, New York
November , 1997
GKN Securities Corp.
61 Broadway
New York, N.Y. 10006
Barington Capital Group, L.P
888 Seventh Avenue, 17th Floor
New York, N.Y. 10019
Ladies and Gentlemen:
The undersigned, CrossZ Software Corporation, a Delaware
corporation ("Company"), hereby confirms its agreement with GKN Securities
Corp. ("GKN") and Barington Capital Group, L.P. ("Barington," together with
GKN, being referred to herein variously as "you" or the "Representatives") and
the other underwriters named on Schedule I hereto (the Representatives and the
other underwriters being collectively called the "Underwriters" or
individually, an "Underwriter"), as follows:
1. Purchase and Sale of Securities.
1.1 Firm Securities.
1.1.1 Purchase of Firm Securities. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell, severally
and not jointly, to the several Underwriters 3,000,000 shares of the Company's
Common Stock, par value $.001 ("Common Stock"), at a purchase price (net of
commissions) of $__________ [INSERT NET PRICE TO Representatives] per share
(such shares of Common Stock being referred to herein as "Firm Securities").
The Underwriters, severally and not jointly, agree to purchase from the
Company the number of Firm Securities set forth opposite their respective
names on Schedule I attached hereto and made a part hereof at a purchase price
of [INSERT NET PRICE] per share of Common Stock.
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1.1.2 Payment and Delivery. Delivery and payment for the
Firm Securities shall be made at 10:00 A.M., New York time, on or before the
third business day following the date the Firm Securities commence trading or
at such earlier time as the Representatives shall determine, or at such other
time as shall be agreed upon by the Representatives and the Company, at the
offices of GKN or at such other place as shall be agreed upon by the
Representatives and the Company. The hour and date of delivery and payment for
the Firm Securities are called the "Closing Date." Payment for the Firm
Securities shall be made on the Closing Date at the Representatives' election
by certified or bank cashier's check(s) in New York Clearing House funds,
payable to the order of the Company upon delivery to you of certificates (in
form and substance satisfactory to the Representatives) representing the Firm
Securities for the respective accounts of the Underwriters. The Firm
Securities shall be registered in such name or names and in such authorized
denominations as the Representatives may request in writing at least two full
business days prior to the Closing Date. The Company will permit the
Representatives to examine and package the Firm Securities for delivery at
least one full business day prior to the Closing Date. The Company shall not
be obligated to sell or deliver the Firm Securities except upon tender of
payment by the Underwriters for all the Firm Securities.
1.2 Over-Allotment Option.
1.2.1 Option Securities. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm
Securities, the Underwriters are hereby granted an option for an aggregate
purchase price of $__________ purchase up to an additional 450,000 shares of
Common Stock from the Company ("Over-allotment Option"). Such additional
450,000 shares of Common Stock are hereinafter referred to as the "Option
Securities." The Firm Securities and the Option Securities are hereinafter
referred to collectively as the "Public Securities." The purchase price to be
paid for the Option Securities will be the same price per Option Security as
the price per Firm Security set forth in Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Representatives on
behalf of the Underwriters as to all or any part of the Option Securities at
any time, from time to time, within forty-five days after the effective date
("Effective Date") of the Registration Statement (as hereinafter defined). The
Underwriters will not be under any obligation to purchase any Option
Securities prior to the exercise of the Over-allotment Option. The
Over-allotment Option granted hereby may be exercised by the giving of oral
notice to the Company from the Representatives, which must be confirmed by a
letter or telecopy setting forth the number of Option Securities to be
purchased, the date and time for delivery of and payment for the Option
Securities and stating that the Option Securities referred to therein are to
be used for the purpose of covering over-allotments in connection with the
distribution and sale of the Firm Securities. If such notice is given at least
two full business days prior to the Closing Date, the date set forth therein
for such delivery and payment will be the Closing Date. If such notice is
given thereafter, the date set forth therein for such delivery and payment
will not be earlier than three full business days after the date of the
notice. If such delivery and payment for the Option Securities does not occur
on the Closing Date, the date and time of the closing for such Option
Securities will be as set forth in the notice (hereinafter the "Option Closing
Date"). Upon exercise
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of the Over-allotment Option, the Company will become obligated to convey to
the Underwriters, and, subject to the terms and conditions set forth herein,
the Underwriters will become obligated to purchase, the number of Option
Securities specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option
Securities will be at the Representatives' election by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of
the Company at the offices of GKN Securities Corp. or at such other place as
shall be agreed upon by the Representatives and the Company upon delivery to
you of certificates representing such securities for the respective accounts
of the Underwriters. The certificates representing the Option Securities to be
delivered will be in such denominations and registered in such names as the
Representatives request not less than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be, and will be made
available to the Representatives for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less
than one full business day prior to such Closing Date.
1.3 Representatives' Purchase Option.
1.3.1 Purchase Option. The Company hereby agrees to issue
and sell to the Representatives (and/or their designees) on the Closing Date
an option ("Representatives' Purchase Option") for the purchase of an
aggregate of 300,000 shares of Common Stock ("Representatives' Shares") at an
initial exercise price of $_________ per share. The Representatives' Shares
are identical to the Firm Securities. The Representatives' Purchase Option and
the Representatives' Shares, are hereinafter referred to collectively as the
"Representatives' Securities." The Public Securities and the Representatives'
Securities are hereinafter referred to collectively as the "Securities."
1.3.2 Payment and Delivery. Delivery and payment for the
Representatives' Purchase Option shall be made on the Closing Date. The
Company shall deliver to the Representatives, upon payment therefor,
certificates for the Representatives' Purchase Option in the name or names and
in such authorized denominations as the Representatives may request. The
Representatives' Purchase Option shall be exercisable for a period of four
years commencing one year from the Effective Date.
2. Representations and Warranties of the Company. The Company represents and
warrants to the Representatives as follows:
2.1 Filing of Registration Statement.
2.1.1 Pursuant to the Act. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 333-34667 including any
related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Public Securities under the Securities Act of 1933, as
amended ("Act"), which registration statement and amendment or amendments have
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<PAGE>
been prepared by the Company in conformity with the requirements of the Act,
and the rules and regulations ("Regulations") of the Commission under the Act.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration statement
becomes effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated
therein and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430A of the Regulations), is hereinafter
called the "Registration Statement," and the form of the final prospectus
dated the Effective Date (or, if applicable, the form of final prospectus
filed with the Commission pursuant to Rule 424 of the Regulations), is
hereinafter called the "Prospectus." The Registration Statement has been
declared effective by the Commission on the date hereof.
2.1.2 Pursuant to the Exchange Act. The Company has filed
with the Commission a registration statement on Form 8-A [INSERT FILE NUMBER]
providing for the registration under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), of the Public Securities. Such registration of the
Public Securities has been declared effective by the Commission on the date
hereof.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of
the Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has
instituted or, to the best of the Company's knowledge, threatened to institute
any proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
2.3.1 Securities Act and Exchange Act Representation. At
the time the Registration Statement became effective and at all times
subsequent thereto up to and including the Closing Date and the Option Closing
Date, if any, the Registration Statement and the Prospectus and any amendment
or supplement thereto contained and will contain all material statements which
are required to be stated therein in accordance with the Act and the
Regulations, and conformed and will conform in all material respects to the
requirements of the Act and the Regulations; neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, during
such time period and on such dates, contained or will contain any untrue
statement of a material fact or omitted or will omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, nor did they or will they contain any untrue statement of a
material fact or did they or will they omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. When
any Preliminary Prospectus was first filed with the Commission (whether filed
as part of the Registration Statement for the registration of the Securities
or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and
when any amendment thereof or supplement thereto was first filed with the
Commission, such Preliminary Prospectus and any amendments thereof and
supplements thereto at the time such filing was made complied in all material
respects with the applicable provisions of the Act and the Regulations. The
representation and warranty made in this Section 2.3.1 does not apply to
statements made or statements omitted in reliance upon and in conformity with
written information
4
<PAGE>
furnished to the Company with respect to the Underwriters by the
Representatives expressly for use in the Registration Statement or Prospectus
or any amendment thereof or supplement thereto.
2.3.2 Disclosure of Contracts. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and
there are no contracts or other documents required to be described in the
Registration Statement or the Prospectus or to be filed with the Commission as
exhibits to the Registration Statement which have not been so described or
filed. Each contract or other instrument (however characterized or described)
to which the Company is a party or by which its property or business is or may
be bound or affected and (i) which is referred to in the Prospectus, or (ii)
is material to the Company's business, has been duly and validly executed, is
in full force and effect in all material respects and is enforceable against
the parties thereto in accordance with its terms, and none of such contracts
or instruments has been assigned by the Company, and neither the Company nor,
to the best of the Company's knowledge, any other party is in default
thereunder and, to the best of the Company's knowledge, no event has occurred
which, with the lapse of time or the giving of notice, or both, would
constitute a default thereunder. None of the material provisions of such
contracts or instruments violates or will result in a violation of any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court having jurisdiction over the Company or any of
its respective assets or businesses, including, without limitation, those
relating to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the
Company have been sold by the Company or by or on behalf of, or for the
benefit of, any person or persons controlling, controlled by, or under common
control with the Company within the three years prior to the date hereof,
except as disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has
been no material adverse change in the condition, financial or otherwise, or
in the results of operations, business or business prospects of the Company,
including, but not limited to, a material loss or interference with its
business from fire, storm, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, whether or not arising in the ordinary course of
business, and (ii) there have been no transactions entered into by the
Company, other than those in the ordinary course of business, which are
material with respect to the condition, financial or otherwise, or to the
results of operations, business or business prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to
the respective dates as of which information is given in the Registration
Statement and the Prospectus, and except as may otherwise be indicated or
contemplated herein or therein, the Company has not (i) issued any securities
or incurred any liability or obligation, direct or contingent, for borrowed
money; or (ii) declared or paid any dividend or made any other distribution on
or in respect to its capital stock.
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<PAGE>
2.5 Independent Accountants. Price Waterhouse LLP , whose report is
filed with the Commission as part of the Registration Statement, are
independent accountants as required by the Act and the Regulations.
2.6 Financial Statements. The financial statements, including the
notes thereto and supporting schedules included in the Registration Statement
and Prospectus, fairly present the financial position and the results of
operations of the Company at the dates and for the periods to which they
apply; and such financial statements have been prepared in conformity with
generally accepted accounting principles, consistently applied throughout the
periods involved; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any issuances pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options,
warrants, rights or convertible securities.
2.8 Valid Issuance of Securities; Etc.
2.8.1 Outstanding Securities. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto, and are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of the
Company or similar contractual rights granted by the Company. The outstanding
options and warrants to purchase shares of Common Stock constitute the valid
and binding obligations of the Company, enforceable in accordance with their
terms. The authorized Common Stock and outstanding options and warrants to
purchase shares of Common Stock conform to all statements relating thereto
contained in the Registration Statement and the Prospectus. The offers and
sales of the outstanding Common Stock, options and warrants to purchase shares
of Common Stock were at all relevant times either registered or qualified
under the Act and the applicable state securities or Blue Sky Laws or exempt
from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The
Securities have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the holders thereof are not and
will not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security
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<PAGE>
of the Company or similar contractual rights granted by the Company; and all
corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken. When issued, the
Representatives' Purchase Option will constitute the valid and binding
obligation of the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for thereby
and the Representatives' Purchase Option and will be enforceable against the
Company in accordance with its respective terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought.
2.8.3 Preferred Stock. All outstanding shares of the
Company's preferred stock (including any dividends thereon) will convert into
_________ shares of Common Stock concurrently with the consummation of the
sale of the Firm Securities and, upon such conversion, such holders of the
preferred stock shall have no rights with respect to the Company, and the
Company shall have no obligations to such holders, except as may apply to
shareholders of Common Stock of the Company or except as provided in contracts
described in the Registration Statement or the Prospectus.
2.9 Registration Rights of Third Parties. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register
any such securities of the Company under the Act or to include any such
securities in a registration statement to be filed by the Company.
2.10 Validity and Binding Effect of Agreements. This Agreement has
been duly and validly authorized by the Company and constitutes the valid and
binding agreement of the Company, enforceable against the Company in
accordance with its respective terms, except (i) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under the federal and state securities laws, and
(iii) that the remedy of specific performance and injunctive and other forms
of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by
the Company of this Agreement and the Representatives' Purchase Option and the
consummation by the Company of the transactions herein and therein
contemplated and the compliance by the Company with the terms hereof and
thereof have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time or
both, (i) result in a breach of, or conflict with any of the terms and
provisions of, or constitute a default under, or result in the creation,
modification, termination or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to the terms of any
indenture, mortgage, deed of trust,
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note, loan or credit agreement or any other agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
any of the property or assets of the Company is subject; (ii) result in any
violation of the provisions of the Certificate of Incorporation or the By-Laws
of the Company; (iii) violate any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its properties or
business; or (iv) have a material adverse effect on any permit, license,
certificate, registration, approval, consent, license or franchise concerning
the Company.
2.12 No Defaults; Violations. Except as described in the Prospectus,
no default exists in the due performance and observance of any term, covenant
or condition of any license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be
bound or to which any of the properties or assets of the Company is subject.
The Company is not in violation of any term or provision of its Certificate of
Incorporation or By-Laws or in violation of any franchise, license, permit,
applicable law, rule, regulation, judgment or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business, except as described in the Prospectus.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite
corporate power and authority, and has all necessary authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory officials and bodies to own or lease its properties
and conduct its business as described in the Prospectus, and the Company is
and has been doing business in compliance with all such material
authorizations, approvals, orders, licenses, certificates and permits and all
federal, state and local laws, rules and regulations. The disclosures in the
Registration Statement concerning the effects of federal, state and local
regulation on the Company's business as currently contemplated are correct in
all material respects and do not omit to state a material fact.
2.13.2 Transactions Contemplated Herein. The Company has
all corporate power and authority to enter into this Agreement and to carry
out the provisions and conditions hereof, and all consents, authorizations,
approvals and orders required in connection therewith have been obtained. No
consent, authorization or order of, and no filing with, any court, government
agency or other body is required for the valid issuance, sale and delivery, of
the Securities pursuant to this Agreement and the Representatives' Purchase
Option, and as contemplated by the Prospectus, except with respect to
applicable federal and state securities laws.
2.14 Title to Property; Insurance. The Company has good and
marketable title to, or valid and enforceable leasehold estates in, all items
of real and personal property (tangible and intangible) owned or leased by it,
free and clear of all liens, encumbrances, claims, security interests, defects
and restrictions of any material nature whatsoever, other than those referred
to
8
<PAGE>
in the Prospectus and liens for taxes not yet due and payable. The Company has
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is
usually maintained by companies engaged in the same or similar business.
2.15 Litigation; Governmental Proceedings. Except as set forth in
the Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or
the operation or the properties or the business of the Company, or which
question the validity of the capital stock of the Company or this Agreement or
of any action taken or to be taken by the Company pursuant to, or in
connection with, this Agreement. There are no outstanding orders, judgments or
decrees of any court, governmental agency or other tribunal naming the Company
and enjoining the Company from taking, or requiring the Company to take, any
action, or to which the Company, its properties or business is bound or
subject.
2.16 Good Standing. The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of
the state of its incorporation. The Company is duly qualified and licensed and
in good standing as a foreign corporation in each jurisdiction in which
ownership or leasing of any properties or the character of its operations
requires such qualification or licensing, except where the failure to qualify
would not have a material adverse effect on the Company.
2.17 Taxes. The Company has filed all returns (as hereinafter
defined) required to be filed with taxing authorities prior to the date hereof
or has duly obtained extensions of time for the filing thereof. The Company
has paid all taxes (as hereinafter defined) shown as due on such returns that
were filed and has paid all taxes imposed on or assessed against the Company.
The provisions for taxes payable, if any, shown on the financial statements
filed with or as part of the Registration Statement are sufficient for all
accrued and unpaid taxes, whether or not disputed, and for all periods to and
including the dates of such consolidated financial statements. Except as
disclosed in writing to the Representatives, (i) no issues have been raised
(and are currently pending) by any taxing authority in connection with any of
the returns or taxes asserted as due from the Company, and (ii) no waivers of
statutes of limitation with respect to the returns or collection of taxes have
been given by or requested from the Company. The term "taxes" mean all
federal, state, local, foreign, and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
lease, service, service use, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, windfall profits, customs,
duties or other taxes, fees, assessments, or charges of any kind whatever,
together with any interest and any penalties, additions to tax, or additional
amounts with respect thereto. The term "returns" means all returns,
declarations, reports, statements, and other documents required to be filed in
respect to taxes.
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2.18 Employees' Options. No more than [INSERT NUMBER] shares of
Common Stock are eligible for sale pursuant to Rule 701 promulgated under the
Act in the 12 months period following the Effective Date.
2.19 Transactions Affecting Disclosure to NASD.
2.19.1 Finder's Fees. Except as described in the
Prospectus, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Securities hereunder or any other
arrangements, agreements, understandings, payments or issuance with respect to
the Company that may affect the Representatives' compensation, as determined
by the National Association of Securities Dealers, Inc. ("NASD").
2.19.2 Payments Within Twelve Months. Other than payments
to the Representatives, the Company has not made any direct or indirect
payments (in cash, securities or otherwise) to (i) any person, as a finder's
fee, investing fee or otherwise, in consideration of such person raising
capital for the Company or introducing to the Company persons who provided
capital to the Company, except for the issuance of 3,533 warrants to Richard
Mazur, (ii) to any NASD member, or (iii) to any person or entity that has any
direct or indirect affiliation or association with any NASD member within the
twelve month period prior to the date on which the Registration Statement was
filed with the Commission ("Filing Date") or thereafter.
2.19.3 Use of Proceeds. None of the net proceeds of the
offering will be paid by the Company to any NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.
2.19.4 Insiders' NASD Affiliation. No officer or director
of the Company or owner of any of the Company's unregistered securities has
any direct or indirect affiliation or association with any NASD member. The
Company will advise the Representatives and the NASD if any officer, director
or stockholder of the Company is or becomes an affiliate or associated person
of an NASD member participating in the offering.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of
its officers, directors, employees, agents or any other person acting on
behalf of the Company has, directly or indirectly, given or agreed to give any
money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency or instrumentality of any government (domestic or foreign)
or any political party or candidate for office (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other person
who was, is, or may be in a position to help or hinder the business of the
Company (or assist it in connection with any actual or proposed transaction)
which (i) might subject the Company to any damage or penalty in any civil,
criminal or governmental litigation or proceeding, (ii) if not given in the
past, might have had a materially adverse effect on the assets, business or
operations of the Company as reflected in any of the financial statements
contained in the Prospectus or (iii)
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if not continued in the future, might adversely affect the assets, business,
operations or prospects of the Company. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
2.21 Nasdaq and The Boston Stock Exchange Eligibility. As of the
Effective Date, the Public Securities have been approved for quotation on the
Nasdaq SmallCap Market and for listing on The Boston Stock Exchange ("BSE").
2.22 Intangibles. The Company owns or possesses the requisite
licenses or rights to use all trademarks, service marks, service names, trade
names, patents and patent applications, copyrights and other rights
(collectively, "Intangibles") described as being licensed to or owned by it in
the Registration Statement. The Company's Intangibles which have been
registered in the United States Patent and Trademark Office have been fully
maintained and are in full force and effect. There is no claim or action by
any person pertaining to, or proceeding pending or threatened and the Company
has not received any notice of conflict with the asserted rights of others
which challenges the exclusive right of the Company with respect to any
Intangibles used in the conduct of the Company's business except as described
in the Prospectus. The Intangibles and the Company's current products,
services and processes do not infringe on any intangibles held by any third
party. To the best of the Company's knowledge, no others have infringed upon
the Intangibles of the Company.
2.23 Relations With Employees.
2.23.1 Employee Matters. The Company has generally enjoyed
a satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment
practices, terms and conditions of employment and wages and hours relating
thereto. There are no pending investigations involving the Company by the U.S.
Department of Labor or any other governmental agency responsible for the
enforcement of such federal, state or local laws and regulations. There is no
unfair labor practice charge or complaint against the Company pending before
the National Labor Relations Board or any strike, picketing, boycott, dispute,
slowdown or stoppage pending or threatened against or involving the Company or
any predecessor entity, and none has ever occurred. No question concerning
representation exists respecting the employees of the Company and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company,
if any.
2.23.2 Employee Benefit Plans. Other than as set forth in
the Registration Statement, the Company neither maintains, sponsors nor
contributes to, nor is it required to contribute to, any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a, "multi-employer plan" as such terms are defined in
Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does
not, and has at no time, maintained or contributed to a defined benefit plan,
as defined in Section 3(35) of ERISA. If the Company does
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maintain or contribute to a defined benefit plan, any termination of the plan
on the date hereof would not give rise to liability under Title IV of ERISA.
No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Internal Revenue Code of 1986, as amended ("Code"), which could subject the
Company to any tax penalty for prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all material
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been received from
the Internal Revenue Service with respect to each ERISA Plan which is intended
to comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multi-employer plan".
2.24 Officers' Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel
shall be deemed a representation and warranty by the Company to the
Representatives as to the matters covered thereby.
2.25 Reserved.
2.26 Agreements With Insiders.
2.26.1 Lock-Up Agreements. Subject to Section 2.26.2
directly below, the Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which all of the officers and directors of
the Company (including their family members and affiliates) and persons
(including their family members and affiliates) who beneficially own or hold
one percent or more of the outstanding Common Stock of the Company and all
option holders who would have the ability to sell the shares underlying their
options under Rule 701 of the Act (collectively, "Insiders") agree not to sell
any shares of Common Stock owned by them (either pursuant to Rule 144 of the
Regulations or otherwise) for a period of 13 months following the Effective
Date except with the consent of GKN and, if applicable, the Pennsylvania
Securities Commission.
2.26.2 Lock-up Agreements Exceptions. [Get from GKN &
Barington the exceptions to Lock-up] ("Excluded Insiders").
2.27 Subsidiaries. The representations and warranties made by the
Company in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)"), also apply and be true with respect to
each subsidiary, individually and taken as a whole with the Company and all
other subsidiaries, as if each representation and warranty contained herein
made specific reference to the subsidiary each time the term "Company" was
used.
2.28 Unaudited Financials. The Company has furnished to the
Representatives as early as practicable prior to the date hereof a copy of the
latest available unaudited interim financial statements ("Unaudited
Financials") of the Company (which in no event shall be as of a date more
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than thirty days prior to the Effective Date) which have been read by the
Company's independent accountants, as stated in their letter to be furnished
pursuant to Section 4.3 hereof.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. The Company will deliver
to the Representatives, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the
Representatives shall reasonably object.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements imposed upon it by the Act, the
Regulations and the Exchange Act and by the regulations under the Exchange
Act, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Public Securities in accordance
with the provisions hereof. If at any time when a Prospectus relating to the
Public Securities is required to be delivered under the Act any event shall
have occurred as a result of which, in the opinion of counsel for the Company
or counsel for the Representatives, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the Prospectus to
comply with the Act, the Company will notify the Representatives promptly and
prepare and file with the Commission, subject to Section 3.1 hereof, an
appropriate amendment or supplement in accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
Prospectus (in form and substance satisfactory to the Representatives) with
the Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and Warrants under the provisions of the
Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
cooperation with the Representatives, at or prior to the time the Registration
Statement becomes Effective to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Representatives
may reasonably designate, provided that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company would be
subject to service of general process or to taxation as a foreign corporation
doing business in such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Representatives
agree that such action is not at the time necessary or advisable, use all
reasonable efforts to file
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and make such statements or reports at such times as are or may be required by
the laws of such jurisdiction.
3.4 Delivery to Underwriters of Prospectuses. The Company will
deliver to each of the several Underwriters, without charge, from time to time
during the period when the Prospectus is required to be delivered under the
Act or the Exchange Act such number of copies of each Preliminary Prospectus
and the Prospectus as such Underwriter may reasonably request and, as soon as
the Registration Statement or any amendment or supplement thereto becomes
effective, deliver to you two original executed Registration Statements,
including exhibits, and all post-effective amendments thereto and copies of
all exhibits filed therewith or incorporated therein by reference and all
original executed consents of certified experts.
3.5 Events Requiring Notice to Representatives. The Company will
notify the Representatives immediately and confirm the notice in writing (i)
of the effectiveness of the Registration Statement and any amendment thereto,
(ii) of the issuance by the Commission of any stop order or of the initiation,
or the threatening, of any proceeding for that purpose, (iii) of the issuance
by any state securities commission of any proceedings for the suspension of
the qualification of the Public Securities for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the mailing and delivery to the Commission for filing of
any amendment or supplement to the Registration Statement or Prospectus, (v)
of the receipt of any comments or request for any additional information from
the Commission, and (vi) of the happening of any event during the period
described in Section 3.4 hereof which, in the judgment of the Company, makes
any statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. If the Commission or any state securities commission shall enter a
stop order or suspend such qualification at any time, the Company will make
every reasonable effort to obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from
the Effective Date, the Company, at its expense, shall cause its regularly
engaged independent certified public accountants to review (but not audit) the
Company's financial statements for each of the first three fiscal quarters
prior to the announcement of quarterly financial information, the filing of
the Company's Form 10-Q quarterly report and the mailing of quarterly
financial information to stockholders.
3.7 Reserved.
3.8 Secondary Market Trading and Standard & Poor's. The Company will
take all necessary and appropriate actions to achieve accelerated publication
in Standard and Poor's Corporation Records Corporate Descriptions (within 30
days after the Effective Date) and to maintain such publication with updated
quarterly information for a period of five years from the Effective Date,
including the payment of any necessary fees and expenses. The Company shall
take such action as may be reasonably requested by the Representatives to
obtain a secondary
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market trading exemption in such States as may be requested by the
Representatives, including the payment of any necessary fees and expenses and
the filing of a Form (e.g., 25101(b)) for secondary market trading in the
State of California on the Effective Date.
3.9 Nasdaq and BSE Maintenance. For a period of five years from the
date hereof, the Company will use its best efforts to maintain the quotation
by Nasdaq SmallCap and the listing by the BSE of the Common Stock.
3.10 Reserved.
3.11 Reserved.
3.12 Reports to the Representatives and Others.
3.12.1 Periodic Reports, Etc. For a period of five years
from the Effective Date, the Company will promptly furnish to the
Representatives, and to each other Underwriter who may so request, copies of
such financial statements and other periodic and special reports as the
Company from time to time files with any governmental authority or furnishes
generally to holders of any class of its securities, and promptly furnish to
the Representatives (i) a copy of each periodic report the Company shall be
required to file with the Commission, (ii) a copy of every press release and
every news item and article with respect to the Company or its affairs which
was released by the Company, (iii) copies of each Form SR, (iv) a copy of each
Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the
Company, (v) a copy of monthly statements setting forth such information
regarding the Company's results of operations and financial position
(including balance sheet, profit and loss statements and data regarding
outstanding purchase orders) as is regularly prepared by management of the
Company, and (vi) such additional documents and information with respect to
the Company and the affairs of any future subsidiaries of the Company as the
Representatives may from time to time reasonably request.
3.12.2 Transfer Sheets and Weekly Position Listings. For a
period of five years from the Closing Date, the Company will furnish to the
Representatives at the Company's sole expense such transfer sheets and
position listings of the Company's securities as the Representatives may
request, including the daily, weekly and monthly consolidated transfer sheets
of the transfer agent of the Company and the weekly security position listings
of the Depository Trust Company.
3.12.3 Secondary Market Trading Memorandum. Until such time
as the Public Securities are listed or quoted, as the case may be, on the New
York Stock Exchange, the American Stock Exchange or Nasdaq National Market,
the Company shall cause the Representatives' legal counsel to deliver to the
Representatives at the times set forth below a written memorandum detailing
those states in which Public Securities may be traded in non-issuer
transactions under the Blue Sky laws of the fifty states ("Secondary Market
Trading Memorandum"). The Secondary Market Trading Memorandum shall be
delivered to the Representatives on the Effective Date and on the first day of
every calendar quarter thereafter.
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The Company shall pay to Representatives' legal counsel a one-time fee of
$5,000 for such services at the Closing.
3.13 Representatives' Purchase Option. On the Effective Date, the
Company will execute and deliver the Representatives' Purchase Option to the
Representatives substantially in the form filed as an exhibit to the
Registration Statement.
3.14 Disqualification of Form S-1 (or other appropriate form). For a
period equal to five years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form
S-1 (or other appropriate form) for the registration of the Representatives'
Securities under the Act.
3.15 Payment of Expenses.
3.15.1 General Expenses. The Company hereby agrees to pay
on each of the Closing Date and the Option Closing Date, if any, to the extent
not paid at Closing Date, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
(i) the preparation, printing, filing, delivery and mailing (including the
payment of postage with respect to such mailing) of the Registration
Statement, the Prospectus and the Preliminary Prospectuses and the printing
and mailing of this Agreement and related documents, including the cost of all
copies thereof and any amendments thereof or supplements thereto supplied to
the Underwriters in quantities as may be required by the Underwriters, (ii)
the printing, engraving, issuance and delivery of the shares of Common Stock
and the Representatives' Purchase Option, including any transfer or other
taxes payable thereon, (iii) the qualification of the Public Securities under
state or foreign securities or Blue Sky laws, including the filing fees under
such Blue Sky laws, the costs of printing and mailing the "Preliminary Blue
Sky Memorandum," and all amendments and supplements thereto, fees up to an
aggregate of $30,000 and disbursements of Representatives' counsel, and fees
and disbursements of local counsel, if any, retained for such purpose, and a
one-time fee of $5,000 payable to the Representatives' counsel for the
preparation of the Secondary Market Trading Memorandum, (iv) costs associated
with applications for assignments of a rating of the Public Securities by
qualified rating agencies, (v) filing fees, costs and expenses (including fees
[up to $5,000] and disbursements for the Representatives' counsel) incurred in
registering the offering with the NASD, (vi) fees and disbursements of the
transfer agent, (vii) the Company's expenses associated with "due diligence"
meetings arranged by the Underwriter, (viii) the preparation, binding and
delivery of nine sets of transaction "bibles," in form and style satisfactory
to the Representatives and transaction lucite cubes or similar commemorative
items in a style and quantity as requested by the Representatives, (ix) any
listing of the Public Securities on Nasdaq SmallCap or National Market, as the
case may be, and any securities exchange, or any listing in Standard & Poor's
and (x) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in
this Section 3.15.1. The Representatives may deduct from the net proceeds of
the offering payable to the Company on the Closing Date, or the Option Closing
Date, if any, the expenses set forth herein to be paid by the Company to the
Representatives and/or to third parties.
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3.15.2 Non-Accountable Expenses. The Company further agrees
that, in addition to the expenses payable pursuant to Section 3.15.1, it will
pay to the Representatives a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of
the Public Securities, of which $50,000 has been paid to date, and the Company
will pay the balance on the Closing Date and any additional monies owed
attributable to the Option Securities or otherwise on the Option Closing Date
by certified or bank cashier's check or, at the election of the
Representatives, by deduction from the proceeds of the offering contemplated
herein. If the offering contemplated by this Agreement is not consummated for
any reason whatsoever then the following provisions shall apply: The Company's
liability for payment to the Representatives of the non-accountable expense
allowance shall be equal to the sum of the Representatives' actual
out-of-pocket expenses (including, but not limited to, counsel fees, "road-
show" and due diligence expenses). The Representatives shall retain such part
of the non-accountable expense allowance previously paid as shall equal its
actual out-of-pocket expenses. If the amount previously paid is insufficient
to cover such actual out-of-pocket expenses, the Company shall remain liable
for and promptly pay any other actual out-of-pocket expenses. If the amount
previously paid exceeds the amount of the actual out-of-pocket expenses, the
Representatives shall promptly remit to the Company any such excess.
3.16 Application of Net Proceeds. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "USE OF PROCEEDS" in the Prospectus.
The Company hereby agrees that, without the express prior written consent of
the Representatives, the Company will not apply any net proceeds from the
offering to pay (i) any debt for borrowed funds or (ii) any debt or obligation
owed to any Insider.
3.17 Delivery of Earnings Statements to Security Holders. The
Company will make generally available to its security holders as soon as
practicable, but not later than the first day of the fifteenth full calendar
month following the Effective Date, an earnings statement (which need not be
certified by independent public or independent certified public accountants
unless required by the Act or the Regulations, but which shall satisfy the
provisions of Rule 158(a) under Section 11(a) of the Act) covering a period of
at least twelve consecutive months beginning after the Effective Date.
3.18 Key Person Life Insurance. The Company will maintain key person
life insurance in an amount no less than Five Million ($5,000,00) Dollars on
the life of Mark A. Chroscielewski and pay the annual premiums therefore
naming the Company as the sole beneficiary thereof, for at least three years
following the Effective Date.
3.19 Stabilization. Neither the Company, nor, to its knowledge, any
of its employees, directors or stockholders has taken or will take, directly
or indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
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3.20 Internal Controls. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 Reserved.
3.22 Transfer Agent. For a period of five years from the Effective
Date, the Company shall retain a transfer agent for the Common Stock
acceptable to the Representatives.
3.23 Sale of Securities. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally
or beneficially by the Insiders for a period of 13 months following the
Effective Date without obtaining the prior written consent of the
Representatives; provided, however, [insert exceptions]
3.24 Exercise Price of Options/Warrants. For a period of 12 months
after the Effective Date, the Company will not grant any option pursuant to
the Company's 1991 Incentive Stock Option Plan at an exercise price less than
the greater of [$____] per share or the fair market value of the Common Stock
on the date of the grant to persons with a pre-existing employment, consulting
or directorship relationship with the Company or at an exercise price no less
than the market price on the date of grant of options to all other persons.
4. Conditions of Underwriters' Obligations. The obligations of the several
Underwriters to purchase and pay for the Securities, as provided herein, shall
be subject to the continuing accuracy of the representations and warranties of
the Company as of the date hereof and as of each of the Closing Date and the
Option Closing Date, if any, to the accuracy of the statements of officers of
the Company made pursuant to the provisions hereof and to the performance by
the Company of its obligations hereunder and to the following conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement. The
Registration Statement has been declared effective on the date of this
Agreement, and at each of the Closing Date and the Option Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for the purpose shall have been instituted
or shall be pending or contemplated by the Commission and any request on the
part of the Commission for additional information shall have been complied
with to the reasonable satisfaction of Graubard Mollen & Miller, counsel to
the Representatives.
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4.1.2 NASD Clearance. By the Effective Date, the
Representatives shall have received clearance from the NASD as to the amount
of compensation allowable or payable to the Representatives as described in
the Registration Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale
of the Securities in any jurisdiction designated by you pursuant to Section
3.3 hereof shall have been issued on either on the Closing Date or the Option
Closing Date, and no proceedings for that purpose shall have been instituted
or shall be contemplated.
4.2 Company Counsel Matters.
4.2.1 Closing Date Opinion of Counsel. On the Closing Date
and the Option Closing Date, if any, the Representatives shall have received
the favorable opinion of Olshan Grundman Frome & Rosenzweig LLP, counsel to
the Company, dated the Closing Date (or the Option Closing Date, if any),
addressed to the Representatives and in form and substance satisfactory to
Graubard Mollen & Miller, counsel to the Representatives to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of
its state of incorporation. The Company is duly qualified and licensed and in
good standing as a foreign corporation in each jurisdiction in which it owns
or leases any real property or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have
a material adverse effect on the Company.
(ii) The Company has all requisite corporate power
and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental or regulatory
officials and bodies to own or lease its properties and conduct its business
as described in the Prospectus except where the failure to obtain any Permit,
singly or in the aggregate, would not have a material adverse effect on the
Company, and the Company is and has been doing business in compliance with all
such authorizations, approvals, orders, licenses, certificates and permits and
all federal, state and local laws, rules and regulations. The Company has all
corporate power and authority to enter into this Agreement and to carry out
the provisions and conditions hereof, and all consents, authorizations,
approvals and orders required in connection therewith have been obtained. No
consents, approvals, authorizations or orders of, and no filing with any court
or governmental agency or body (other than such as may be required under the
Act and applicable Blue Sky laws), is required for the valid authorization,
issuance, sale and delivery of the Securities, and the consummation of the
transactions and agreements contemplated by this Agreement and the
Representatives' Purchase Option, and as contemplated by the Prospectus or if
so required, all such authorizations, approvals, consents, orders,
registrations, licenses and permits have been duly obtained and are in full
force and effect and have been disclosed to the Representatives.
(iii) All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no
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rights of rescission with respect thereto, and are not subject to personal
liability by reason of being such holders; and none of such securities were
issued in violation of the statutory preemptive rights of any holders of any
security of the Company or to the best of such counsel's knowledge similar
contractual rights granted by the Company. The outstanding options and
warrants to purchase shares of Common Stock constitute the valid and binding
obligations of the Company, enforceable in accordance with their terms except,
in each case (a) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (b) as enforceability of any indemnification and contribution
provisions may be limited under the federal and state securities laws and
public policy, and (c) that the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses and
to the discretion of the court before which any proceeding therefor may be
brought. To the best of our knowledge, the offers and sales of the outstanding
Common Stock and options and warrants to purchase shares of Common Stock were
at all relevant times either registered under the Act and the applicable state
securities or Blue Sky Laws or exempt from such registration requirements. The
authorized and outstanding capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and,
when issued and paid for, will be validly issued, fully paid and
non-assessable; the holders thereof are not and will not be subject to
personal liability by reason of being such holders. The Securities are not and
will not be subject to the preemptive rights of any holders of any security of
the Company or, to the best of such counsel's knowledge after due inquiry,
similar contractual rights granted by the Company. All corporate action
required to be taken for the authorization, issuance and sale of the
Securities has been duly and validly taken. When issued, the Representatives'
Purchase Option will constitute valid and binding obligations of the Company
to issue and sell, upon exercise thereof and payment therefor, the number and
type of securities of the Company called for thereby and such Representatives'
Purchase Option when issued, in each case, will be enforceable against the
Company in accordance with their respective terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought. The certificates representing the Securities are in
due and proper form.
(v) To the best of such counsel's knowledge,
except as set forth in the Prospectus, no holders of any securities of the
Company or of any options, warrants or securities of the Company exercisable
for or convertible or exchangeable into securities of the Company have the
right to require the Company to register any such securities of the Company
under the Act or to include any such securities in a registration statement to
be filed by the Company.
(vi) To the best of such counsel's knowledge,
after due inquiry, the shares of Common Stock and the Warrants are eligible
for quotation on Nasdaq SmallCap and have been approved for listing on the
BSE.
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(vii) This Agreement and the Representatives'
Purchase Option have each been duly and validly authorized and, when executed
and delivered by the Company, will constitute valid and binding obligations of
the Company, enforceable against the Company in accordance with their
respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provisions may
be limited under the federal and state securities laws, and (c) that the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to the equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by
the Company of this Agreement and the Representatives' Purchase Option, the
issuance and sale of the Securities, the consummation of the transactions
contemplated hereby and thereby and the compliance by the Company with the
terms and provisions hereof and thereof, do not and will not, with or without
the giving of notice or the lapse of time, or both, (a) conflict with, or
result in a breach of, any of the terms or provisions of, or constitute a
default under, or result in the creation or modification of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to the terms of, any material mortgage, deed of trust, note,
indenture, loan, contract, commitment or other material agreement or
instrument, to which the Company is a party or by which the Company or any of
its properties or assets may be bound, (b) result in any violation of the
provisions of the Certificate of Incorporation or the By-Laws of the Company,
(c) violate any statute or any judgment, order or decree, rule or regulation
applicable to the Company of any court, domestic or foreign, or of any
federal, state or other regulatory authority or other governmental body having
jurisdiction over the Company, its properties or assets, or (d) have a
material effect on any permit, certification, registration, approval, consent,
license or franchise of the Company.
(ix) The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or supplements
thereto (other than the financial statements included therein, as to which no
opinion need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other
securities issued or issuable by the Company conform in all respects to the
description thereof contained in the Registration Statement and the
Prospectus. The statements in the Prospectus under "Business," "Management,"
"Certain Transactions," "Risk Factors," "Principal Stockholders," "Description
of Securities" and "Shares Eligible for Future Sale" have been reviewed by
such counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, Intangibles, rules or regulations or legal conclusions are
correct in all material respects. No statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is not
described as required, nor are any contracts or documents of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement not so described or filed
as required.
(x) Counsel has participated in conferences with
officers and other representatives of the Company, representatives of the
independent public accountants for the Company and representatives of the
Representatives at which the contents of the Registration
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Statement, the Prospectus and related matters were discussed and although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and Prospectus (except as otherwise set forth in this
opinion), no facts have come to the attention of such counsel which lead them
to believe that either the Registration Statement or the Prospectus nor any
amendment or supplement thereto, as of the date of such opinion, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus). The statements in the
Prospectus have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or regulations or
legal conclusions, are correct in all material respects.
(xi) The Registration Statement is effective under
the Act, and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened under the Act or applicable state securities laws.
(xii) To the best of such counsel's knowledge, the
Company has good and marketable title to, or valid and enforceable leasehold
estates in, all items of real and personal property (tangible and intangible)
stated in the Prospectus to be owned or leased by it, free and clear of all
liens, encumbrances, claims, security interests, defects and restrictions of
any material nature whatsoever, other than those referred to in the Prospectus
and liens for taxes not yet due and payable.
(xiii) To the best of such counsel's knowledge, no
default exists in the due performance and observance of any term, covenant or
condition of any license, contract, indenture, mortgage, deed of trust, note,
loan or credit agreement, or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement
or instrument to which the Company is a party or by which the Company may be
bound or to which any of the properties or assets of the Company is subject.
The Company is not in violation of any term or provision of its Certificate of
Incorporation or By-Laws or of any franchise, license, permit, or of any
applicable law, rule, regulation, or of any judgment or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over
the Company or any of its properties or business, except for such violations
which, singly or in the aggregate, would not have a material adverse effect on
the Company.
(xiv) To the best of such counsel's knowledge,
after due inquiry, the Company owns or possesses, free and clear of all liens
or encumbrances and rights thereto or therein by third parties, other than as
described in the Prospectus, the requisite licenses or other rights to use all
patents, licenses, Intangibles and other rights necessary to conduct its
business (including, without limitation, any such licenses or rights described
in the Prospectus as being licensed to or owned or possessed by the Company),
and there is no claim or action by any person
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pertaining to, or proceeding, pending or to the best of such counsel's
knowledge after due inquiry threatened, which challenges the exclusive rights
of the Company with respect to any Intangibles used in the conduct of the its
business (including without limitation any such licenses or rights described
in the Prospectus as being owned or possessed by the Company); to the best of
such counsel's knowledge after due inquiry, the Company's current products,
services and processes do not infringe on any Intangibles held by third
parties except as discussed in the Prospectus; and the Company's Intangibles
which have been registered in the United States Patent and Trademark Office
have been fully maintained and are in full force and effect.
(xv) To the best of such counsel's knowledge,
after due inquiry, except as described in the Prospectus, the Company does not
own an interest in any corporation, partnership, joint venture, trust or other
business entity.
(xvi) To the best of such counsel's knowledge,
after due inquiry, except as set forth in the Prospectus, there is no action,
suit or proceeding before or by any court of governmental agency or body,
domestic or foreign, now pending, or threatened against the Company, which
might result in any material and adverse change in the condition (financial or
otherwise), business or prospects of the Company, or might materially and
adversely affect the properties or assets thereof.
(xvii) To the best of such counsel's knowledge,
after due inquiry, except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the nature
of a finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangements or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Representatives' compensation, as determined by the NASD.
Unless the context clearly indicates otherwise, the term
"Company" as used in this Section 4.2.1 shall include each subsidiary of the
Company. The opinion of counsel for the Company and any opinion relied upon by
such counsel for the Company shall include a statement to the effect that it
may be relied upon by counsel for the Representatives in its opinion delivered
to the Representatives.
4.2.2 Reliance. In rendering such opinion, such counsel may
rely (i) as to matters involving the application of laws other than the laws
of the United States and jurisdictions in which they are admitted, to the
extent such counsel deems proper and to the extent specified in such opinion,
if at all, upon an opinion or opinions (in form and substance reasonably
satisfactory to Representatives' counsel) of other counsel reasonably
acceptable to Representatives' counsel, familiar with the applicable laws, and
(ii) as to matters of fact, to the extent they deem proper, on certificates or
other written statements of officers of departments of various jurisdiction
having custody of documents respecting the corporate existence or good
standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Representatives' counsel if requested. The
opinion of counsel for the Company shall include a statement to the
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effect that it may be relied upon by counsel for the Representatives in its
opinion delivered to the Representatives.
4.2.3 Secondary Market Trading Memorandum. On the Effective
Date the Representatives shall have received the Secondary Market Trading
Memorandum.
4.3 Cold Comfort Letter. At the time this Agreement is executed and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Representatives and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to
Graubard Mollen & Miller, counsel for the Representatives, from Price
Waterhouse LLP dated, respectively, as of the date of this Agreement and as of
the Closing Date and the Option Closing Date, if any:
(i) Confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the applicable
Regulations;
(ii) Stating that in their opinion the financial statements of
the Company included in the Registration Statement and Prospectus comply as to
form in all material respects with the applicable accounting requirements of
the Act and the published Regulations thereunder;
(iii) Stating that, based on the performance of procedures
specified by the American Institute of Certified Public Accountants for a
review of the latest available unaudited interim financial statements of the
Company (as described in SAS No. 71 Interim Financial Information), with an
indication of the date of the latest available unaudited interim financial
statements, a reading of the latest available minutes of the stockholders and
board of directors and the various committees of the board of directors,
consultations with officers and other employees of the Company responsible for
financial and accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to believe that (a)
the unaudited financial statements of the Company included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Regulations or any
material modification should be made to the unaudited interim financial
statements included in the Registration Statement for them to be in conformity
with generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company
included in the Registration Statement, (b) at a date not later than five days
prior to the Effective Date, Closing Date or Option Closing Date, as the case
may be, there was any change in the capital stock or long-term debt of the
Company, or any decrease in the stockholders' equity of the Company as
compared with amounts shown in the June 30, 1997 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any decrease, setting forth the
amount of such decrease, and (c) during the period from July 1, 1997 to a
specified date not later than five days prior to the Effective Date, Closing
Date or Option Closing Date, as the case may be, there was any decrease in
revenues, net earnings or net earnings per share of Common Stock, in each case
as compared with the corresponding period in the preceding year and as
compared with the
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corresponding period in the preceding quarter, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
(iv) Setting forth, at a date not later than five days prior to
the Effective Date, the amount of liabilities of the Company (including a
break-down of commercial papers and notes payable to banks);
(v) Stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements
and information may be derived from the general accounting records and work
sheets, of the Company with the results obtained from the application of
specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement;
(vi) Stating that they have not during the immediately
preceding five year period brought to the attention of the Company's
management any reportable condition related to internal structure, design or
operation as defined in the Statement on Auditing Standards No. 60 --
"Communication of Internal Control Structure Related Matters Noted in an
Audit," in the Company's internal controls; and
(vii) Statements as to such other matters incident to the
transaction contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
4.4.1 Officers' Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Representatives shall have received a
certificate of the Company signed by the Chairman of the Board or the
President and the Secretary of the Company, dated the Closing Date or the
Option Closing Date, as the case may be, respectively, to the effect that the
Company has performed all covenants and complied with all conditions required
by this Agreement to be performed or complied with by the Company prior to and
as of the Closing Date, or the Option Closing Date, as the case may be, and
that the conditions set forth in Section 4.5 hereof have been satisfied as of
such date and that, as of Closing Date and the Option Closing Date, as the
case may be, the representations and warranties of the Company set forth in
Section 2 hereof are true and correct. In addition, the Representatives will
have received such other and further certificates of officers of the Company
as the Representatives may reasonably request.
4.4.2 Secretary's Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Representatives shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
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Company are true and complete, have not been modified and are in full force
and effect, (ii) that the resolutions relating to the public offering
contemplated by this Agreement are in full force and effect and have not been
modified, (iii) all correspondence between the Company or its counsel and the
Commission, (iv) all correspondence between the Company or its counsel and the
NASD concerning inclusion on Nasdaq, (v) all correspondence between the
Company or its counsel and the BSE concerning listing on the BSE, and (vi) as
to the incumbency of the officers of the Company. The documents referred to in
such certificate shall be attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date and
the Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the
Company from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company from the latest date as of which the financial condition of the
Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company, taken as a whole, (iii) the Company shall
not be in default under any provision of any instrument relating to any
outstanding indebtedness which default would have a material adverse effect on
the Company, (iv) no material amount of the assets of the Company shall have
been pledged or mortgaged, except as set forth in the Registration Statement
and Prospectus, (v) no action suit or proceeding, at law or in equity, shall
have been pending or threatened against the Company or affecting any of its
property or business before or by any court or federal or state commission,
board or other administrative agency wherein an unfavorable decision, ruling
or finding may materially adversely affect the business, operations, prospects
or financial condition or income of the Company, except as set forth in the
Registration Statement and Prospectus, (vi) no stop order shall have been
issued under the Act and no proceedings therefor shall have been initiated or
threatened by the Commission, and (vii) the Registration Statement and the
Prospectus and any amendments or supplements thereto contain all material
statements which are required to be stated therein in accordance with the Act
and the Regulations and conform in all material respects to the requirements
of the Act and the Regulations, and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto contains any untrue
statement of a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.6 Delivery of Agreements. The Company has delivered to the
Representatives an executed copy of the Representatives' Purchase Option dated
the Effective Date.
4.7 Opinion of Counsel for Representatives. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance to
you and to Graubard Mollen & Miller, counsel to the Representatives, and you
shall have received from such counsel a favorable opinion, dated the Closing
Date and the Option Closing Date, if any, with respect to such of these
proceedings as you may reasonably require. On or prior to the Effective Date,
the Closing Date and the Option Closing Date, as the case may be, counsel for
the Representatives shall have been furnished such
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documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
this Section 4.7, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained.
5. Indemnification.
5.1 Indemnification of Underwriters.
5.1.1 General. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless each of the Underwriters, its
directors, officers, agents and employees and each person, if any, who
controls any Underwriter ("controlling person") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage and expense whatsoever (including but not limited to
any and all legal or other expenses reasonably incurred in investigating,
preparing or defending against any litigation, or any claims whatsoever
commenced or threatened, whether arising out of any action between any of the
Underwriters and the Company or between any of the Underwriters and any
third-party or otherwise) to which they or any of them may become subject
under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
in (i) any Preliminary Prospectus, the Registration Statement or the
Prospectus (as from time to time each may be amended and supplemented); (ii)
in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Representatives' Purchase Option; or (iii)
any application or other document or written communication (in this Section 5
collectively called "application") executed by the Company or based upon
written information furnished by the Company in any jurisdiction in order to
qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any
securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to any Underwriter by or on behalf of such Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment or supplement thereof, or in any application, as
the case may be. The Company agrees promptly to notify the Representatives of
the commencement of any litigation or proceedings against the Company or any
of its officers, directors or controlling persons in connection with the issue
and sale of the Securities or in connection with the Registration Statement or
Prospectus.
5.1.2 Procedure. If any action is brought against an
Underwriter or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 5.1.1, such Underwriter shall promptly
notify the Company in writing of the institution of such action and the
Company shall assume the defense of such action, including the employment and
fees of counsel (subject to the approval of such Underwriter) and payment of
actual expenses. Such
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Underwriter or controlling person shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall
be at the expense of such Underwriter or such controlling person unless (i)
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company
shall not have employed counsel to have charge of the defense of such action,
or (iii) such indemnified party or parties shall have reasonably concluded
that there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the fees and expenses of
not more than one additional firm of attorneys selected by the Underwriter
and/or controlling person shall be borne by the Company. Notwithstanding
anything to the contrary contained herein, if an Underwriter or controlling
person shall assume the defense of such action as provided above, the Company
shall have the right to approve the terms of any settlement of such action
which approval shall not be unreasonably withheld.
5.2 Indemnification of the Company. Each Underwriter, severally and
not jointly, agrees to indemnify and hold harmless the Company against any and
all loss, liability, claim, damage and expense described in the foregoing
indemnity from the Company to the several Underwriters, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements
or omissions directly relating to the transactions effected by the
Underwriters in connection with this offering made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any application in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
such Underwriter by or on behalf of such Underwriter expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any such application. In case any action
shall be brought against the Company or any other person so indemnified based
on any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Underwriter, such Underwriter shall have
the rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the several
Underwriters by the provisions of Section 5.1.2.
5.3 Contribution.
5.3.1 Contribution Rights. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for
indemnification pursuant hereto but it is judicially determined (by the entry
of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5 provides for indemnification in such case, or (ii)
contribution under the Act, the Exchange Act or otherwise may be required on
the part of any such person in circumstances for which indemnification is
provided under this Section 5, then, and in each such case, the Company and
the Underwriters shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by said indemnity
agreement
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incurred by the Company and the Underwriters, as incurred, in such proportions
that the Underwriters are responsible for that portion represented by the
percentage that the underwriting discount appearing on the cover page of the
Prospectus bears to the initial offering price appearing thereon and the
Company is responsible for the balance; provided, that, no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section
5.3, no Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Public Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay in respect of such losses, liabilities, claims, damages and
expenses. For purposes of this Section, each director, officer and employee of
an Underwriter, and each person, if any, who controls an Underwriter within
the meaning of Section 15 of the Act shall have the same rights to
contribution as such Underwriter.
5.3.2 Contribution Procedure. Within fifteen days after receipt
by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim
for contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding which was
effected by such party without the written consent of such contributing party.
The contribution provisions contained in this Section are intended to
supersede, to the extent permitted by law, any right to contribution under the
Act, the Exchange Act or otherwise available.
6. Default by an Underwriter.
6.1 Default Not Exceeding 10% of Firm Securities. If any Underwriter
or Underwriters shall default in its or their obligations to purchase the Firm
Securities or the Option Securities if exercised, hereunder, and if the number
of the Firm Securities with respect to which such default relates does not
exceed in the aggregate 10% of the number of Firm Securities or Option
Securities which all Underwriters have agreed to purchase hereunder, then such
Firm Securities or Option Securities to which the default relates shall be
purchased by the non-defaulting Underwriters in proportion to their respective
commitments hereunder.
6.2 Default Exceeding 10% of Firm Securities. In the event that such
default relates to more than 10% of the Firm Securities or Option Securities,
you may in your discretion arrange for yourself or for another party or
parties to purchase such Firm Securities or Option Securities to which such
default relates on the terms contained herein. If within one business day
after such default relating to more than 10% of the Firm Securities or Option
Securities you do not arrange
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for the purchase of such Firm Securities or Option Securities, then the
Company shall be entitled to a further period of one business day within which
to procure another party or parties satisfactory to you to purchase said Firm
Securities or Option Securities on such terms. In the event that neither you
nor the Company arrange for the purchase of the Firm Securities or Option
Securities to which a default relates as provided in this Section 6, this
Agreement may be terminated by you or the Company without liability on the
part of the Company (except as provided in Section 3.15 and Section 5.1
hereof) or the several Underwriters but nothing herein shall relieve a
defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for damages occasioned by its default
hereunder.
6.3 Postponement of Closing Date. In the event that the Firm
Securities or Option Securities to which the default relates are to be
purchased by the non-defaulting Underwriters, or are to be purchased by
another party or parties as aforesaid, you or the Company shall have the right
to postpone the Closing Date or Option Closing Date for a reasonable period,
but not in any event exceeding five business days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus or in any other documents and arrangements, and the Company agrees
to file promptly any amendment to the Registration Statement or the Prospectus
which in the opinion of counsel for the Underwriters may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 6 with like effect as if it had
originally been a party to this Agreement with respect to such Securities.
7. Additional Covenants.
7.1 Board Designee. For a period of not less than three years from the
Effective Date, the Company will recommend and use its best efforts to elect a
designee of the Representatives, at the option of the Representatives, either
as a member of or a non-voting advisor to the Board of Directors of the
Company. Such designee, if elected or appointed, shall attend meetings of the
Board and receive no more or less compensation than is paid to other
non-management directors of the Company and shall be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings,
including, but not limited to, food, lodging and transportation. To the extent
permitted by law, the Company will agree to indemnify the Representatives and
their designee for the actions of such designee as a director of the Company.
In the event the Company maintains a liability insurance policy affording
coverage for the acts of its officers and directors, it will, if possible,
include each of the Representatives and their designee as an insured under
such policy. If the Representatives do not exercise their option to designate
a member of the Company's Board of Directors, the Representatives shall
nevertheless have the right to send a representative (who need not be the same
individual from meeting to meeting) to observe each meeting of the Board of
Directors. The Company agrees to give the Representatives written notice of
each such meeting and to provide the Representatives with an agenda and
minutes of the meeting no later than it gives such notice and provides such
items to the other directors.
7.2 Reserved.
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7.3 Rule 144 Sales. During the three year period following the
Effective Date, GKN shall have the right to purchase for GKN's account or to
sell for the account of the Insiders (other than the Excluded Insiders) any
securities sold on the open market other than in underwritten offerings where
the managing underwriter is a "larger bracket" firm than GKN and such managing
underwriter offers GKN the opportunity to participate in the syndicate at the
first or second level below the manager. Each of such Insiders ("Sellers")
will agree to consult with GKN with regard to any such sales and will offer
GKN the exclusive opportunity to purchase or sell such securities on terms at
least as favorable to the Sellers as they can secure elsewhere. If GKN fails
to accept in writing any such proposal for sale by the Sellers within five
business hours after receipt of a notice containing such proposal, then GKN
shall have no claim or right with respect to any such sales contained in any
such notice. If, thereafter, such proposal is modified in any material
respect, the Sellers shall adopt the same procedure as with respect to the
original proposal.
7.4 Press Releases. The Company will not issue a press release or
engage in any other publicity until 25 days after the Effective Date without
the Representatives' prior written consent.
7.5 Form S-8 or any Similar Form. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period
of one year from the Effective Date without the Representatives' written
consent.
7.6 Transactional Bibles. The Company agrees that if its
representatives have not submitted to a bindery acceptable to the
Representatives all of the closing and other documents material to the
offering within 30 days of the Effective Date, then the Company shall pay the
fees and costs of the Representatives' agents to prepare the transactional
bibles and have them bound.
7.7 Compensation and Other Arrangements. The Company hereby agrees
that for a period of three years from the Effective Date, all compensation and
other arrangements between the Company and its officers, directors and
affiliates shall be approved by the Compensation Committee of the Company's
Board of Directors, a majority of the members of which shall have no
affiliation or other relationship with the Company other than as directors.
8. Representations and Agreements to Survive Delivery. Except as the context
otherwise requires, all representations, warranties and agreements contained
in this Agreement shall be deemed to be representations, warranties and
agreements at the Closing Dates and such representations, warranties and
agreements of the Underwriters and Company, including the indemnity agreements
contained in Section 5 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
Underwriter, the Company or any controlling person, and shall survive
termination of this Agreement or the issuance and delivery of the Securities
to the several Underwriters until the earlier of the expiration of any
applicable statute of limitations and the seventh anniversary of the later of
the Closing Date or the Option Closing Date, if any, at which time the
representations, warranties and agreements shall terminate and be of no
further force and effect.
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9. Effective Date of This Agreement and Termination Thereof.
9.1 Effective Date. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 Termination. You shall have the right to terminate this Agreement
at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will
in the immediate future materially disrupt, general securities markets in the
United States; or (ii) if trading on the New York Stock Exchange, the American
Stock Exchange, the Boston Stock Exchange or in the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been fixed,
or maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction, or (iii) if the United States shall
have become involved in a war or major hostilities, or (iv) if a banking
moratorium has been declared by a New York State or federal authority, or (v)
if a moratorium on foreign exchange trading has been declared which materially
adversely impacts the United States securities market, or (vi) if the Company
shall have sustained a material loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether
or not such loss shall have been insured, will, in your opinion, make it
inadvisable to proceed with the delivery of the Securities, or (vii) if Mark
A. Chroscielewski shall no longer serve the Company in his present capacity,
or (viii) if the Company has breached any of its representations, warranties
or obligations hereunder, or (ix) if any Underwriter shall have become aware
after the date hereof of such a material adverse change in the condition
(financial or otherwise), business, or prospects of the Company, or such
adverse material change in general market conditions as in the
Representatives' judgment would make it impracticable to proceed with the
offering, sale and/or delivery of the Securities or to enforce contracts made
by the Representatives for the sale of the Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried
out for any reason whatsoever, within the time specified herein or any
extensions thereof pursuant to the terms herein, the obligations of the
Company to pay the expenses related to the transactions contemplated herein
shall be governed by Section 3.15 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
10. Miscellaneous.
32
<PAGE>
10.1 Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Representatives:
GKN Securities Corp.
61 Broadway
New York, New York 10006
Attention: David M. Nussbaum
Barington Capital Group, L.P.
888 Seventh Avenue, 17th Floor
New York, New York 10019
Attention: Carl Kleidman
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
If to the Company:
CrossZ Software Corporation
60 Charles Lindbergh Blvd.
Uniondale, New York 11553
Attention: Mark A. Chroscielewski
Copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: David J. Adler, Esq.
10.2 Headings. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
33
<PAGE>
10.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with
this Agreement) and the Agency Agreement dated July 10, 1997 between the
Representatives and the Company, constitute the entire agreement of the
parties hereto with respect to the subject matter hereof, and supersede all
prior agreements and understandings of the parties, oral and written, with
respect to the subject matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Representatives, the Underwriters the
Company and the controlling persons, directors and officers referred to in
Section 5 hereof, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained.
10.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the law of the State of New
York, without giving effect to conflicts of law. The Company hereby agrees
that any action, proceeding or claim against it arising out of, relating in
any way to this Agreement shall be brought and enforced in the courts of the
State of New York or the United States District Court for the Southern
District of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company hereby waives any objection to
such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any such process or summons to be served upon the Company may be served
by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in
Section 10.1 hereof. Such mailing shall be deemed personal service and shall
be legal and binding upon the Company in any action, proceeding or claim. The
Company agrees that the prevailing party(ies) in any such action shall be
entitled to recover from the other party(ies) all of its reasonable attorneys'
fees and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
10.7 Execution in Counterparts. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts has been signed by each of the
parties hereto and delivered to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this
Agreement. No waiver of any breach, non-compliance or non-fulfillment of any
of the provisions of this Agreement shall be effective unless set forth in a
written instrument executed by the party or parties against whom or which
enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver
of any other or subsequent breach, non-compliance or non-fulfillment.
34
<PAGE>
If the foregoing correctly sets forth the understanding between
the Representatives, for itself and as Representatives of the Underwriters
listed on Schedule I hereto, and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
CrossZ Software Corporation
By: __________________________________
Name: Alan W. Kaufman
Title: President
Accepted as of the date first
above written.
New York, New York
GKN Securities Corp.
(for itself and as one of the Representatives
of the Underwriters listed on Schedule I hereto)
By: ________________________________
Name: Brian Coventry
Title: Vice President
Barington Capital Group, L.P.
(for itself and as one of the Representatives
of the Underwriters listed on Schedule I hereto)
By: _________________________________
Name: Carl Kleidman
Title: Managing Director
35
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SCHEDULE I
CrossZ Software Corporation
2,500,000 Shares of Common Stock
Underwriter Number of Firm Securities
----------- to be Purchased
---------------
GKN Securities Corp.
Barington Capital Group, L.P.
Total =====================
36
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CROSSZ SOFTWARE CORPORATION
FIRST: The name of the Corporation is: CrossZ Software
Corporation (the "Corporation").
SECOND: The registered office of the corporation and
registered agent in the State of Delaware is to be located at 1013 Centre
Road, Wilmington, DE 19805, County of New Castle. The name of its registered
agent is The Prentice-Hall Corporation System, Inc.
THIRD: The nature of the business, and the objects and
purposes proposed to be transacted, promoted and carried on, are to do any
lawful act or thing for which a corporation may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
FOURTH: This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares of Common Stock this corporation is authorized to
issue is 30,000,000, par value $0.001 per share, and the total number of
shares of Preferred Stock this corporation is authorized to issue is
19,395,012, par value $0.001 per share. The first series of Preferred Stock
shall be comprised of 260,669 shares and shall be designated "Series A
Preferred Stock." The second series of Preferred Stock shall be comprised of
204,913 shares and shall be designated "Series B Preferred Stock." The third
series of Preferred Stock shall be comprised of 2,898,837 shares and shall be
designated "Series C Preferred Stock." The fourth series of Preferred Stock
shall be comprised of 14,030,593 shares and shall be designated "Series D
Preferred Stock." In addition to the four series of Preferred Stock enumerated
above, this Coporation shall also be authorized to issue 2,000,000 addtional
shares of Preferred Stock, with the Board of Directors being hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any series of such additional Preferred Stock, and the
number of shares constituting any such series and the designation thereof, or
of any of them. The Board of Directors is also authorized to increase or
decrease the number of shares of any series, prior or subsequent to the issue
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
<PAGE>
The Corporation shall from time to time in accordance with
the laws of the State of Delaware increase the authorized amount of its Common
Stock if at any time the number of shares of Common Stock remaining unissued
and available for issuance shall not be sufficient to permit conversion of the
Preferred Stock.
The relative rights, preferences, privileges and
restrictions granted to or imposed upon the respective classes of the shares
of capital stock or the holders thereof are as set forth below.
Section 1. Dividend Rights of Preferred
(a) The holders of Series D Preferred Stock shall be
entitled to receive, out of any funds legally available therefor, dividends
for each share of Series D Preferred Stock held by them in each case as
adjusted for stock splits, recapitalizations and the like, in an amount equal
to ten percent (10%) of the then effective Series D Conversion Price (defined
below), as adjusted for stock splits, recapitalizations and the like, payable
in preference and priority to any payment of any dividends on Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common
Stock. Dividends on each share of Series D Preferred Stock shall be cumulative
and shall accrue on a day-to-day basis (based on the actual number of days
elapsed and a year of 365 days) from the date of its original issue. Dividends
on the Series D Preferred Stock shall be paid by the issuance of additional
shares of Series D Preferred Stock (valued at the then effective Series D
Conversion Price), plus a cash payment in lieu of any fractional shares to
which the holder would otherwise be entitled.
(b) The holders of the Series C Preferred Stock shall be
entitled to receive, out of any funds legally available therefor, dividends in
an amount equal to $0.38 per share per annum, as adjusted for stock splits,
recapitalizations and the like, payable in preference and priority to any
payment of any dividends on Series A Preferred, the Series B Preferred and the
Common Stock when and as declared by the Board. The right to such dividends on
the Series C Preferred Stock shall not be cumulative, and no right shall
accrue to holders of Series C Preferred Stock by reason of the fact that
dividends on such shares are not declared or paid in any prior year.
(c) The holders of Series A Preferred Stock and Series B
Preferred Stock shall be entitled to receive, out of any funds legally
available therefor, dividends in an amount equal to $0.52 per share per annum
and $0.88 per share per annum, respectively, in each case as adjusted for
stock splits, recapitalizations and the like, payable in preference and
priority to any payment of any dividend on Common Stock when and as declared
by the Board. The right to such dividends on the Series A Preferred Stock and
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Series B Preferred Stock shall not be cumulative, and no right shall accrue to
holders of Series A Preferred Stock and Series B Preferred Stock by reason of
the fact that dividends on such shares are not declared or paid in any prior
year.
(d) After payment of such dividends, any additional
dividends declared shall be distributed among all holders of Preferred Stock
and all holders of Common Stock in proportion to the number of shares of
Common Stock which would be held by each holder if all shares of Preferred
Stock were converted into Common Stock at the then effective Conversion Price
(as defined in Section 4 below).
(e) In the event that the corporation shall have declared
but unpaid dividends outstanding immediately prior to and in the event of a
conversion of Preferred Stock (as provided in Section 4 hereof), the
corporation shall pay in cash to the holders of Preferred Stock subject to the
conversion, the full amount of any such dividends.
Section 2. Liquidation
(a) In the event of any liquidation, dissolution or winding
up of the corporation, whether voluntary or involuntary, the holders of the
then outstanding Series C Preferred Stock and Series D Preferred Stock shall
be entitled to receive, prior to and in preference to any distribution of any
of the assets or surplus funds of the corporation available for distribution
to the holders of Series A Preferred Stock, Series B Preferred Stock or Common
Stock by reason of their ownership thereof, the amount of (i) the then
effective Series C Conversion Price (as defined below) to the holders of
Series C Preferred Stock and (ii) the then effective Series D Conversion Price
(as defined below) to the holders of Series D Preferred Stock (in each case,
as adjusted for any stock splits, recapitalizations or the like with respect
to such shares), plus all declared but unpaid dividends in respect of such
shares for each share of Series C Preferred Stock and Series D Preferred Stock
then held by them. If upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series C Preferred Stock and Series
D Preferred Stock shall be insufficient to permit the payment to such holders
of the full aforesaid preferential amount then the entire assets and funds of
the corporation legally available for distribution shall be distributed pro
rata among the holders of the Series C Preferred Stock and Series D Preferred
Stock in proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After the payment to the holders of Series C Preferred
Stock and Series D Preferred Stock of the amounts set forth in Section 2(a),
the holders of the then outstanding Series A Preferred Stock and Series B
Preferred Stock shall be entitled
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<PAGE>
to receive, prior and in preference to any distribution of any of the assets
or surplus funds of the corporation available for distribution to the holders
of Common Stock by reason of their ownership thereof, the amount of (i) $6.40
per share to the holders of Series A Preferred Stock and (ii) $11.00 per share
to the holders of Series B Preferred Stock (in each case, as adjusted for any
stock splits, stock dividends, recapitalizations or the like with respect to
such shares), plus all declared but unpaid dividends in respect of such shares
for each share of Series A Preferred Stock and Series B Preferred Stock then
held by them. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series A Preferred Stock and Series B
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amount, then the entire assets and funds of
the corporation legally available for distribution shall be distributed pro
rata among the holders of the Series A Preferred Stock and Series B Preferred
Stock in proportion to the preferential amount each such holder is otherwise
entitled to receive.
(c) After payment to the holders of the Preferred Stock of
the amount set forth in Sections 2(a) and (b) hereof, the entire remaining
assets and funds of the corporation legally available for distribution, if
any, shall be distributed among the holders of the Common Stock and Preferred
Stock pro rata according to the relative aggregate number of shares of Common
Stock then held by them or into which their Preferred Stock shall then be
convertible.
(d) The merger or consolidation of the corporation with or
into another corporation or person or entity and the sale or transfer of all
or substantially all of the assets of the corporation shall not be deemed to
be a liquidation, dissolution or winding up of the corporation, provided,
however, that if as a result of such a transaction, the holders of the then
outstanding Series A Preferred Stock would receive an amount per share of less
than $6.40, the holders of the then outstanding Series B Preferred Stock would
receive an amount per share of less than $11.00, the holders of the then
outstanding Series C Preferred Stock would receive an amount per share of less
than the then effective Series C Conversion Price, or the holders of the then
outstanding Series D Preferred Stock would receive an amount per share of less
than the then effective Series D Conversion Price, then such merger,
consolidation, sale, transfer or lease shall be deemed to be a liquidation,
dissolution or winding up of the corporation for purposes of this Section 2
with respect to such series of Preferred Stock, and provided further that the
merger or consolidation of the corporation with or into a wholly-owned
subsidiary of the corporation or into another corporation or person or entity
in which the holders of the capital stock of the corporation hold at least 50%
of the voting securities of the
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<PAGE>
surviving entity shall not be deemed to be a liquidation, dissolution or winding
up of the corporation.
Section 3. Voting
(a) Except as otherwise required by law or as set forth
herein, each holder of shares of Preferred Stock shall be entitled to that
number of votes equal to the whole number of shares of the corporation's
Common Stock issued or issuable upon the conversion of such holder's shares of
Preferred Stock immediately after the close of business on the record date
fixed for a shareholder meeting or the effective date of such written consent.
(b) The consent of the holders of at least a majority of the
then outstanding Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock, voting together as a single class, shall be required in
connection with: (i) any amendment of any provision of the corporation's
articles of incorporation if such amendment would adversely alter or change
the rights, preference or privileges of the Series A, Series B, and Series C
Preferred Stock; (ii) the authorization or issuance of additional shares of
the corporation's capital stock having a preference over the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, with
the exception of the issuance of additional shares upon conversion of the
Preferred Stock authorized herein; (iii) payment of dividends on or
repurchases of any shares of the Common Stock (excluding repurchases of Common
Stock held by employees upon termination of employment); and (iv) the merger
or consolidation of the corporation with or into another corporation or person
or entity, other than a wholly-owned subsidiary of the corporation and other
than a merger in which the holders of the capital stock of the corporation
hold at least 50% of the voting securities of the surviving entity and the
articles of incorporation of the surviving entity shall be substantially
identical to these articles of incorporation; or (v) the sale or transfer of
all of substantially all of the assets of the corporation.
(c) The consent of the holders of at least a majority of the
then outstanding Series D Preferred Stock, shall be required in connection
with: (i) any amendment of any provision of the corporation's articles of
incorporation if such amendment would adversely alter or change the rights,
preferences or privileges of the Series D Preferred Stock; (ii) the
authorization or issuance of additional shares of the corporation's capital
stock having a preference over or pari passu with the Series D Preferred
Stock, with the exception of the issuance of additional shares upon conversion
of the Preferred Stock authorized herein, or the incurrence of bank debt or
issuance of debt securities in the aggregate principal amount of $750,000
following the first issuance of the Series D
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<PAGE>
Preferred Stock; (iii) payment of dividends on or repurchases of any shares of
the Common Stock (excluding repurchases of Common Stock held by employees upon
termination of employment); (iv) the merger or consolidation of the
corporation with or into another corporation or person or entity, other than a
wholly-owned subsidiary of the corporation and other than a merger in which
the holders of the capital stock of the corporation hold at least 50% of the
voting securities of the surviving entity and the articles of incorporation of
the surviving entity shall be substantially identical to these articles of
incorporation; (v) the sale or transfer of all of substantially all of the
assets of the corporation; or (vi) the issuance of shares of Common Stock
representing more than 10% of the outstanding Common Stock (after giving
effect to the conversion of all outstanding Preferred Stock and the exercise
of all outstanding options and warrants), other than pursuant to the
conversion of Preferred Stock or the exercise of outstanding options and
warrants.
Section 4. Conversion Rights. The holders of the Preferred
Stock shall have conversion rights and obligations as follows (the "Conversion
Rights"):
(a) Right to Convert. Subject to Section 4(b) hereof, each
share of Series A Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share, at the
office of the corporation or any transfer agent for the Series A Preferred
Stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing $6.40 by the Conversion Price of the Series A
Preferred Stock (the "Series A Conversion Price"), determined as hereinafter
provided, in effect at the time of conversion. The initial Series A Conversion
Price shall be $4.91 per share of Common Stock. The Series A Conversion Price
shall be subject to adjustment as hereinafter provided.
Subject to Section 4(b) hereof, each share of Series B
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
corporation or any transfer agent for the Series B Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing $11.00 by the Conversion Price of the Series B Preferred Stock
(the "Series B Conversion Price"), determined as hereinafter provided, in
effect at the time of conversion. The initial Series B Conversion Price shall
be $6.28 per share of Common Stock. The Series B Conversion Price shall be
subject to adjustment as hereinafter provided.
Subject to Section 4(b) hereof, each share of Series C
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
corporation or any transfer agent for the
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Series C Preferred Stock, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing $4.80 by the Conversion
Price of the Series C Preferred Stock (the "Series C Conversion Price"),
determined as hereinafter provided, in effect at the time of conversion. The
initial Series C Conversion Price shall be $4.28 per share of Common Stock.
The Series C Conversion Price shall be subject to adjustment as hereinafter
provided.
Subject to Section 4(b) hereof, each share of Series D
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
corporation or any transfer agent for the Series D Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing $4.28 by the Conversion Price of the Series D Preferred Stock (the
"Series D Conversion Price"), determined as hereinafter provided, in effect at
the time of conversion. The initial Series D Conversion Price shall be $4.28
per share of Common Stock. The Series D Conversion Price shall be subject to
adjustment as hereinafter provided.
The Series A, Series B, Series C and Series D Conversion
Prices are sometimes referred to herein as the "Conversion Price."
(b) Automatic Conversion. Each share of Series A, Series B,
Series C and Series D Preferred Stock shall automatically be converted into
shares of Common Stock at the then effective Series A Conversion Price, Series
B Conversion Price, Series C Conversion Price or Series D Conversion price,
respectively, upon the earlier of: (i) the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), covering
the offer and sale of Common Stock to the public at an aggregate offering
price which results in gross cash proceeds to the corporation of at least
seven million five hundred thousand dollars ($7,500,000) at a price per share
of at least $7.48 (the "Initial Public Offering"); or (ii) the consent of (x)
the holders of at least a majority of the then outstanding Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred, voting together
as a single class, and (y) the holders of at least 50% of the then outstanding
Series C Preferred, and (z) the holders of at least 50% of then outstanding
Series D Preferred.
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of the Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled (determined
by aggregating all shares to be converted that are held by such holder), the
corporation shall
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<PAGE>
pay to such holder cash equal to such fraction multiplied by the then
effective Conversion Price.
(i) Before any holder of Preferred Stock shall be
entitled to convert the same into full shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at
the office of the corporation or any transfer agent for the Preferred Stock
and shall give written notice to the corporation at such office that he elects
to convert the same. The corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Preferred Stock a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid, a check payable to such holder in
the amount of any cash amounts payable as a result of the conversion of any
shares of Preferred Stock into fractional shares of Common Stock, any declared
and unpaid dividends on the converted Preferred Stock and, if less than all of
the shares of the Preferred Stock represented by such certificate are
converted into Common Stock, a certificate representing the shares of
Preferred Stock not converted into Common Stock. In the event of any
conversion at the election of a holder of Preferred Stock, such conversion
shall be deemed to have been made immediately prior to the close of business
on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(ii) If the conversion is in connection with an
underwriters public offering of securities registered pursuant to the
Securities Act, the conversion shall be conditioned upon closing with the
underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the closing of such sale of
securities. Notice of such conversion shall be given by the corporation by
mail, postage prepaid, to the holders of the Preferred Stock at their
addresses shown in the corporation's records, within a reasonable time after
the closing date of the sale of such securities. On or after the closing date
of the sale of such securities as specified in such notice, each holder of
Preferred Stock shall surrender the certificate or certificates representing
such holder's shares of Preferred Stock for the number of shares of Common
Stock to which such holder is entitled, at the office of the corporation or
any transfer agent for the applicable series of Preferred Stock. The
corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of Preferred Stock, a certificate or certificates
for the number of shares of Common Stock to which such holder shall be
entitled as aforesaid, and a check payable
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<PAGE>
to the holder in the amount of any cash amounts payable as a result of the
conversion of any shares of Preferred Stock into fractional shares of Common
Stock, and the amount of any declared and unpaid dividends on the converted
Preferred Stock. Notwithstanding that any certificate representing the
Preferred Stock to be converted shall not have been surrendered, each holder
of such Preferred Stock shall thereafter be treated for all purposes as the
record holder of the number of shares of Common Stock issuable to such holder
upon such conversion.
(d) Adjustments to Series A, Series B, Series C and Series D
Conversion Prices for Certain Diluting Issues. The Series A Conversion Price,
the Series B Conversion Price, the Series C Conversion Price and the Series D
Conversion Price shall be subject to adjustment as follows:
(i) Special Definitions. For purposes of this
Section 4(d), the following definitions shall apply:
(1) "Options" shall mean rights, options
or warrants to subscribe for purchase or otherwise acquire either Common Stock
or Convertible Securities.
(2) "Original Issue Date" shall mean the
date on which the first shares of Series A Preferred Stock are issued.
(3) "Convertible Securities" shall mean
any evidence of indebtedness, shares (other than Common Sock, but including
without limitation the Preferred Stock) or other securities convertible into
or exchangeable for Common Stock.
(4) "Additional Shares of Common" shall
mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii),
deemed to be issued) by the corporation on or after the Original Date, other
than shares of Common Stock issued or issuable at any time.
(A) upon conversion of the Preferred
Stock authorized herein;
(B) to employees, officers, and
directors of and consultants, but excluding Mark Chroscielewski, James S.
Thompson and Andre Szykier, to the corporation pursuant to any one or more
employee stock incentive plans or agreements approved by the Board of
Directors in an aggregate amount (net of repurchases or cancellations or
expirations or options) of not more than 3,500,000 shares, subject to
adjustment for all subdivisions or combinations;
(C) to members of the Advisory
Committee of the corporation pursuant to any agreements approved
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by the Board of Directors in an aggregate amount (net of repurchases or
cancellations or expirations of options) of not more than 1,000,000 shares
subject to adjustment for all subdivisions or combinations;
(D) as a dividend or distribution on
the Preferred Stock authorized herein or pursuant to any event
for which adjustment is made pursuant to this Section 4;
(E) upon the exercise of warrants to
purchase 452,500 shares of Common Stock, 63,012 shares of Series B Preferred
Stock, 1,054,831 shares of Series C Preferred Stock and 250,000 shares of
Series D Preferred Stock; or
(F) upon conversion of the Preferred
Stock issuable upon the exercise of 63,012 warrants to purchase Series B
Preferred Stock, 1,054,831 warrants to purchase Series C Preferred Stock, and
250,000 warrants to purchase Series D Preferred Stock.
(ii) No Adjustment of Conversion Price. No adjustment in the
Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price or Series D Conversion Price shall be made in respect of the issuance of
Additional Shares of Common unless the consideration per share for an
Additional Share of Common Stock issued or deemed to be issued by the
corporation is less than the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price (as the case may
be) in effect on the date of, and immediately prior to such issue in which
case an adjustment shall be made pursuant to Section 4(d)(iv) hereof.
(iii) Deemed Issue of Additional Shares of Common. In the
event the corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefore, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common issued as of the time of such issue, or in the case such a
record date shall have been fixed, as of the close of business on such record
date, provided that in any such case in which the Additional Shares of Common
are deemed to be issued:
(1) no further adjustments in the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price or
Series D Conversion Price shall be made upon the
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subsequent issue of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase
in the consideration payable to the corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and
any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
(3) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price computed upon
the original issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon
such expiration, be recomputed as if: (i) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
issued were shares of Common Stock, if any, actually issued upon the exercise
of such Options or the conversion or exchange of such Convertible Securities
and the consideration received therefor was the consideration actually
received by the corporation for the issue of all such Options, whether or not
exercised, plus the consideration actually received by the corporation upon
such exercise, or for the issue of all such Convertible Securities which were
actually converted or exchanged, plus the additional consideration, if any,
actually received by the corporation upon such conversion or exchange, and
(ii) in the case of Options for Convertible Securities, only the Convertible
Securities, if any, actually issued upon the exercise thereof were issued at
the time of issue of such Options, and the consideration received by the
corporation for the Additional Shares of Common deemed to have been then
issued was the consideration actually received by the corporation for the
issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the corporation upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to clause (2) or (3)
above shall have the effect of increasing the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price to an amount which exceeds the lower of
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(i) the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price (as the case may be) on the
original adjustment date, or (ii) the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price or Series D Conversion Price (as
the case may be) that would have resulted from any issuance or Additional
Shares of Common between the original adjustment date and such readjustment
date; and
(5) in the case of any Options which expire by
their terms not more than 30 days after the date of issue thereof, no
adjustment of the Series A Conversion Price, Series B Conversion Price, Series
C Conversion Price or Series D Conversion Price shall be made until the
expiration or exercise of all such Options, whereupon such adjustments shall
be made in the same manner provided in clause (3) above.
(iv) Adjustment of Series A and Series B Conversion Prices
Upon Issuance of Additional Shares of Common. In the event this corporation
after the Original Issue Date shall issue Additional Shares of Common
(including Additional Shares of Common deemed to be issued pursuant to Section
4(d)(iii), without consideration or for consideration per share less than the
Series A Conversion Price or Series B Conversion Price (as the case may be)
then in effect immediately prior to such issue, then and in such event, such
Series A Conversion Price or Series B Conversion Price (as the case may be)
shall be respectively reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Series A
Conversion Price or Series B Conversion Price (as the case may be) by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue (including any Common Stock
issuable pursuant to any then outstanding options or warrants for Common Stock
or a class or series of Stock convertible into Common Stock, plus the number
of shares then issued or issuable upon conversion of the Preferred Stock) plus
the number of shares of Common Stock which the aggregate consideration
received by the corporation for the total number of Additional Shares of
Common so issued would purchase at such Series A Conversion Price or Series B
Conversion Price (as the case may be) and the denominator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue (including any Common Stock issuable pursuant to any then outstanding
immediately prior to such issue (including any Common Stock issuable pursuant
to any then outstanding options or warrants for Common Stock or a class or
series of stock convertible into Common Stock, plus the number of shares then
issued or issuable upon conversion of the Preferred Stock), plus the number of
such Additional Shares of Common so issued: and provided, further, that for
the purposes of this Section 4(d)(iv), all shares of Common Stock issuable
upon conversion of outstanding Convertible Securities or the exercise of
outstanding
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Options shall be deemed to be outstanding, and immediately after any
Additional Shares of Common are deemed issued pursuant to Section 4(d)(iii),
such Additional Shares of Common shall be deemed to be outstanding.
Adjustment of Series C and Series D Conversion Upon
Issuance of Additional Shares of Common. In the event of this corporation
after the Original Issue Date shall issue Additional Shares of Common
(including Additional Shares of Common deemed to be issued pursuant to Section
4(d)(iii), for consideration per share less than the Series C Conversion Price
or Series D Conversion Price then in effect immediately prior to such issue
(the "Dilution Shares"), then and in such event, such Series C Conversion
Price or Series D Conversion Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) equal to the per share
consideration received by the corporation for the Dilution Shares so issued.
If the issuance of the Dilution Shares gives rise to the further issuance of
Additional Shares of Common (the "Breakup Shares"), then and in such event,
such Series C Conversion Price and Series D Conversion Price (as the case may
be) shall be respectively reduced, concurrently with such issue, to a price
(calculated to the nearest cent) equal to a fraction, the numerator of which
shall be the aggregate consideration received by the corporation for the
Dilution Shares and the denominator of which shall be the number of Dilution
Shares plus the number of Breakup Shares.
(v) Determination of Consideration. For purposes of this
Section 4(d), the consideration received by the corporation for the issue of
any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the net amount of cash received by the corporation excluding
expenses, discounts and commissions payable by the corporation in connection
with such issuance or sale and amounts paid or payable for accrued interest.
(B) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors net of expenses
as set forth in clause (A) above; and
(C) in the event Additional Shares of
Common are issued together with other shares or securities or other assets of
the corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above,
as determined in good faith by the Board of Directors.
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(2) Options and Convertible Securities. The
consideration per share received by the corporation for Additional Shares of
Common deemed to have been issued pursuant to Section 4(d)(iii), relating to
Options and Convertible Securities, shall be determined by dividing:
(x) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without
regard to any provision contained therein for a subsequent adjustment of such
consideration) payable to the corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities, by
(y) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange if
such Convertible Securities or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities.
(3) Stock Dividends. Any Additional Shares of
Common deemed to have been issued relating to stock dividends shall be deemed
to have been issued for no consideration.
(e) Adjustment to Conversion Prices for Subdivisions,
Combinations or Consolidations of Common Stock. In the event the outstanding
shares of Common Stock shall be subdivided (by stock split, stock dividend,
recapitalization or other like occurrence) into a greater number of shares of
Common Stock, and no equivalent subdivision or increase is made with respect
to the Preferred Stock, the respective Conversion Price then in effect for
each series of Preferred Stock shall, concurrently with the effectiveness of
such subdivision or increase, be proportionately decreased. In the event the
outstanding shares of Common Stock shall be combined or consolidated, and no
equivalent combination or decrease is made with respect to the Preferred
Stock, by reclassification or otherwise, into a lesser number of shares of
Common Stock, the respective Conversion Price then in effect for each series
of Preferred Stock shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
(f) Adjustments for Other Dividends and Distributions. In
the event the corporation at any time or from time to time makes, or fixes a
record date for the determination of holders of
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Common Stock entitled to receive a dividend or other distribution payable in
securities of the corporation, and no equivalent dividend or other
distribution is declared or made to the Preferred Stock, then and in each such
event provision shall be made so that the holders of each series of Preferred
Stock shall receive, concurrently therewith, the amount of such securities
which they would have received had their Preferred Stock been converted into
Common Stock on the date of such event.
(g) Adjustments for Reclassification, Exchange and
Substitution. In the event the Common Stock issuable upon conversion of the
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock or other securities or property of this
corporation, whether by capital reorganization, reclassification,
consolidation or merger of the corporation, exchange or sale of the
corporation's properties and assets or otherwise (other than a subdivision or
combination of shares provided for above) (a "Restructuring"), and no
equivalent Restructuring is made with respect to the Preferred Stock, the
respective Conversion Price then in effect for each series of Preferred Stock
shall, concurrently with the effectiveness of such Restructuring, be
proportionately adjusted such that each series of Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders thereof would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock or other securities or property
of this corporation equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders thereof upon conversion of
the Preferred Stock immediately before such Restructuring. This provision
shall apply to successive Restructurings.
(h) Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to this
Section 4, the corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustments or
readjustment is based. The corporation shall, upon the written request at any
time of any holder of Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (i) all such adjustments and
readjustments since the original date of issue of any shares of the Preferred
Stock, (ii) the Conversion Price of each series of Preferred Stock at the time
in effect and (iii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of the Preferred Stock.
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Section 5. No Reissuance of Preferred. No shares of Preferred Stock
acquired by this corporation by reason of redemption, purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired
and eliminated from the shares which the corporation shall be authorized to
issue.
Section 6. Redemption
(a) From and after the fifth anniversary of the date the Series D
Preferred Stock is first issued (the "Series D Issue Date"), to the extent
that the shares of Series D Preferred Stock have not been redeemed or
converted prior to such date and to the extent requested by any holder
thereof, the corporation shall redeem the number of issued, outstanding and
unconverted shares of Series D Preferred Stock for which a holder has
delivered a written request for redemption to the corporation, from any source
of funds legally available therefor in accordance with the GCL. If no funds or
insufficient funds are available to the corporation at any time to meet the
corporation's redemption obligations pursuant to this Section, then the
corporation's obligations to redeem shares of Series D Preferred Stock for
which a holder has delivered a written request for redemption to the
corporation, shall be earned over (subject to the same limitations on payment
as set forth above) until all such shares entitled to be redeemed and
qualifying for redemption hereunder have been redeemed. The shares of Series D
Preferred Stock which have not been redeemed shall continue to be entitled to
the dividend, conversion and other rights, preferences, privileges and
restrictions of the Series D Preferred Stock.
(b) The redemption price for each shares of Series D Preferred Stock
repurchased shall be equal to $4.28, adjusted for stock splits and
recapitalizations, plus any accrued but unpaid dividends.
(c) In the event sufficient funds are available to redeem all shares
of Series D Preferred Stock entitled and electing to be redeemed pursuant to
subsection (a) hereof, the corporation shall effect each such redemption pro
rata among the holders of the Series D Preferred Stock based upon the number
of shares of Series D Preferred Stock then held by each holder and electing to
be redeemed.
(d) Within thirty (30) days after receipt or notice by certified
mail, postage prepaid, to the Company by a holder of record or the Series D
Preferred Stock requesting redemption, the Company shall respond in writing,
which response shall specify the date of redemption, the number of Series D
Preferred Stock of the holder, if any, which cannot be redeemed. On or after
the date of redemption as specified in such notice each holder shall surrender
such holder's certificate for the number of shares to
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be redeemed as stated in the notice to this corporation at the place specified
in such notice. Provided such notice is duly given, and provided that on the
redemption date specified there shall be a source of funds legally available
for such redemption, and funds necessary for the redemption shall have been
paid or made available at the place fixed for redemption, then all rights with
respect to such shares shall, after the specified redemption date, terminate
whether or not said certificates have been surrendered, excepting only that in
the latter instance the right of the holder to receive the redemption price
thereof, without interest, upon such surrender will not terminate.
FIFTH: The name and mailing address of the Incorporator is:
Marc A. Greendorfer
c/o Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
SIXTH: A. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the directors' duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the GCL, or (iv) for any transaction from which the director derived an
improper personal benefit. If the GCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the GCL, as so amended. Any repeal or
modification of this Paragraph A by the stockholders of the Corporation shall
not adversely affect any right or protection of a director of the Corporation
with respect to events occurring prior to the time of such repeal or
modification.
B. (1) Each person who was or is made a
party or is threatened to be made a party to or is involved in any action,
suit, or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she or a person
of whom he or she is the legal representative is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of
the Corporation, as a director, officer or employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and
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held harmless by the Corporation to the fullest extent authorized by the GCL
as the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered
by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that except as provided in paragraph (2) of this Paragraph
B with respect to proceedings seeking to enforce rights to indemnification,
the Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation. The right to indemnification conferred in this Paragraph B
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that if the GCL requires, the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity) in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking by or on behalf of such director or officer
to repay all amounts so advanced if it shall ultimately be determined that
such director or officer is not entitled to be indemnified under this
Paragraph B or otherwise.
(2) If a claim under paragraph (1) of this
Paragraph B is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It shall be
a defense to any such action (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the GCL for the Corporation to
indemnify the claimant for the amount claimed but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel or stockholders)
to have
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made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in the GCL, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel or stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
(3) The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Paragraph B shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, By-Laws, agreement, vote of
stockholders or disinterested directors or otherwise.
(4) The Corporation may maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the GCL.
(5) The Corporation may, to the extent authorized
from time to time by the Board of Directors, grant rights to indemnification,
and rights to be paid by the Corporation for the expenses incurred in
defending any proceeding in advance of its final disposition, to any agent of
the Corporation to the fullest extent of the provisions of this Paragraph B
with respect to the indemnification and advancement of expenses of directors,
officers and employees of the Corporation.
SEVENTH: In furtherance and not in limitation of the powers
conferred by law or in this Certificate of Incorporation, the Board of
Directors (and any committee of the Board of Directors) is expressly
authorized, to the extent permitted by law, to take such action or actions as
the Board or such committee may determine to be reasonably necessary or
desirable to (A) encourage any person to enter into negotiations with the
Board of Directors and management of the Corporation with respect to any
transaction which may result in a change in control of the Corporation which
is proposed or initiated by such person or (B) contest or oppose any such
transaction which the Board of Directors or such committee determines to be
unfair, abusive or otherwise undesirable with respect to the Corporation and
its business, assets or properties or the stockholders of the Corporation,
including, without limitation, the adoption of plans or the issuance of
rights, options, capital stock, notes, debentures or other evidences of
indebtedness or other securities
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of the Corporation, which rights, options, capital stock, notes, evidences of
indebtedness and other securities (i) may be exchangeable for or convertible
into cash or other securities on such terms and conditions as may be
determined by the Board or such committee and (ii) may provide for the
treatment of any holder or class of holders thereof designated by the Board of
Directors or any such committee in respect of the terms, conditions,
provisions and rights of such securities which is different from, and unequal
to, the terms, conditions, provisions and rights applicable to all other
holders thereof.
EIGHTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation,
and any other provisions authorized by the laws of the State of Delaware at
the time in force may be added or inserted, subject to the limitations set
forth in this Certificate of Incorporation and in the manner now or hereafter
provided herein by statute, and all rights, preferences and privileges of
whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as amended are granted subject to the rights reserved in this Article
EIGHTH.
IN WITNESS WHEREOF, I have hereunto set my hand this ___ day
of __________, 1997.
_______________________________
Marc A. Greendorfer
Sole Incorporator
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----------------------------------
BY-LAWS
OF
CROSSZ SOFTWARE CORPORATION
AS ADOPTED ON
NOVEMBER 10, 1997
---------------------------------
ARTICLE I
STOCKHOLDERS
SECTION 1.1. Annual Meetings. An annual meeting of
stockholders to elect directors and transact such other business as may properly
be presented to the meeting shall be held at such place as the Board of
Directors may from time to time fix, if that day shall be a legal holiday in the
jurisdiction in which the meeting is to be held, then on the next day not a
legal holiday or as soon thereafter as may be practical, determined by the Board
of Directors.
SECTION 1.2. Special Meetings. A special meeting of
stockholders may be called at any time by two or more directors or the Chairman
of the Board or the President and shall be called by any of them or by the
Secretary upon receipt of a written request to do so specifying the matter or
matters, appropriate for action at such a meeting, proposed to be presented at
the meeting and signed by holders of record of a majority of the shares of stock
that would be entitled to be voted on such matter or matters if the meeting were
held on the day such request is received and the record date for such meeting
were the close of business on the preceding day. Any such meeting shall be held
at such time and at such place, within or without the State of Delaware, as
shall be determined by the body or person calling such meeting and as shall be
stated in the notice of such meeting.
SECTION 1.3. Notice of Meeting. For each meeting of
stockholders written notice shall be given stating the place, date and hour and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Except as otherwise provided by Delaware law, the written notice of
any meeting shall be given not less than 10 or more than 60 days before the date
of the meeting to each stockholder entitled to vote at such meeting. If mailed,
notice shall be deemed to be given when deposited in the
<PAGE>
United States mail, postage prepaid, directed to the stockholder at his address
as it appears on the records of the Corporation.
SECTION 1.4. Quorum. Except as otherwise required by Delaware
law or the Certificate of Incorporation, the holders of record of a majority of
the shares of stock entitled to be voted present in person or represented by
proxy at a meeting shall constitute a quorum for the transaction of business at
the meeting, but in the absence of a quorum the holders of record present or
represented by proxy at such meeting may vote to adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is obtained. At any such adjourned session of the meeting at which there shall
be present or represented the holders of record of the requisite number of
shares, any business may be transacted that might have been transacted at the
meeting as originally called.
SECTION 1.5. Chairman and Secretary at Meeting. At each
meeting of stockholders the Chairman of the Board, or in his absence the person
designated in writing by the Chairman of the Board, or if no person is so
designated, then a person designated by the Board of Directors, shall preside as
chairman of the meeting; if no person is so designated, then the meeting shall
choose a chairman by plurality vote. The Secretary, or in his absence a person
designated by the chairman of the meeting, shall act as secretary of the
meeting.
SECTION 1.6. Voting; Proxies. Except as otherwise provided by
Delaware law or the Certificate of Incorporation, and subject to the provisions
of Section 1.10:
(a) Each stockholder shall at every meeting of the
stockholders be entitled to one vote for each share of capital stock held by
him.
(b) Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
(c) Directors shall be elected by a plurality vote.
(d) Each matter, other than election of directors,
properly presented to any meeting shall be decided by a majority of the votes
cast on the matter.
(e) Election of directors and the vote on any other
matter presented to a meeting shall be by written ballot only if so ordered by
the chairman of the meeting or if so requested by any stockholder present or
represented by proxy at the meeting entitled to vote in such election or on such
matter, as the case may be.
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SECTION 1.7. Adjourned Meetings. A meeting of stockholders may
be adjourned to another time or place as provided in Section 1.4. Unless the
Board of Directors fixes a new record date, stockholders of record for an
adjourned meeting shall be as originally determined for the meeting from which
the adjournment was taken. If the adjournment is for more than 30 days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote. At the adjourned meeting any business may be transacted that
might have been transacted at the meeting as originally called.
SECTION 1.8. Consent of Stockholders in Lieu of Meeting. Any
action that may be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Notice of the taking of such
action shall be given promptly to each stockholder that would have been entitled
to vote thereon at a meeting of stockholders and that did not consent thereto in
writing.
SECTION 1.9. List of Stockholders Entitled to Vote. At least
10 days before every meeting of stockholders a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder, shall be prepared and shall be open to the examination of any
stockholder for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting, at a place within
the city where the meeting is to be held. Such list shall be produced and kept
at the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
SECTION 1.10. Fixing of Record Date. In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than 60 or less than 10 days
before the date of such meeting, nor more than 60 days prior to any other
action. If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held; the record date for determining stockholders
entitled to express
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consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed; and the record date for any other purpose shall be
at the close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
ARTICLE II
DIRECTORS
SECTION 2.1. Number; Term of Office; Qualifications;
Vacancies. The number of the directors constituting the entire Board of
Directors shall be the number, not less than two nor more than 15, fixed from
time to time by a majority of the total number of directors which the
Corporation would have, prior to any increase or decrease, if there were no
vacancies, provided, however, that no decrease shall shorten the term of an
incumbent director. Until otherwise fixed by the directors, the number of
directors constituting the entire Board shall be five. Directors shall be
elected at the annual meeting of stockholders to hold office, subject to
Sections 2.2 and 2.3, until the next annual meeting of stockholders and until
their respective successors are elected and qualified. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by the sole remaining director, and the directors so
chosen shall hold office, subject to Sections 2.2 and 2.3, until the next annual
meeting of stockholders and until their respective successors are elected and
qualified.
SECTION 2.2. Resignation. Any director of the Corporation may
resign at any time by giving written notice of such resignation to the Board of
Directors or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if no time be specified, upon receipt
thereof by the Board of Directors or one of the above-named officers; and,
unless specified therein, the acceptance of such resignation shall not be
necessary to make it effective. When one or more directors shall resign from the
Board of Directors effective at a future date, a majority of the directors then
in office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in these By-Laws in the filling of other vacancies.
SECTION 2.3. Removal. Any one or more directors may be
removed, with or without cause, by the vote or written consent of the holders of
a majority of the shares entitled to vote at an election of directors.
SECTION 2.4. Regular and Annual Meetings; Notice. Regular
meetings of the Board of Directors shall be held at such
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time and at such place, within or without the State of Delaware, as the Board of
Directors may from time to time prescribe. No notice need be given of any
regular meeting, and a notice, if given, need not specify the purposes thereof.
A meeting of the Board of Directors may be held without notice immediately after
an annual meeting of stockholders at the same place as that at which such
meeting was held.
SECTION 2.5. Special Meetings; Notice. A special meeting of
the Board of Directors may be called at any time by the Board of Directors, the
Chairman of the Board or the President and shall be called by any one of them or
by the Secretary upon receipt of a written request to do so specifying the
matter or matters, appropriate for action at such a meeting, proposed to be
presented at the meeting and signed by at least two directors. Any such meeting
shall be held at such time and at such place, within or without the State of
Delaware, as shall be determined by the body or person calling such meeting.
Notice of such meeting stating the time and place thereof shall be given (a) by
deposit of the notice in the United States mail, first class, postage prepaid,
at least seven days before the day fixed for the meeting addressed to each
director at his address as it appears on the Corporation's records or at such
other address as the director may have furnished the Corporation for that
purpose, or (b) by delivery of the notice similarly addressed for dispatch by
telegraph, cable, radio or fax or by delivery of the notice by telephone or in
person, in each case at least 24 hours before the time fixed for the meeting.
SECTION 2.6. Presiding Officer and Secretary at Meetings. Each
meeting of the Board of Directors shall be presided over by the Chairman of the
Board or in his absence by such member of the Board of Directors as shall be
chosen at the meeting. The Secretary, or in his absence an Assistant Secretary,
shall act as secretary of the meeting, or if no such officer is present, a
secretary of the meeting shall be designated by the person presiding over the
meeting.
SECTION 2.7. Quorum. Three directors shall constitute a quorum
for the transaction of business, but in the absence of a quorum a majority of
those present (or if only one be present, then that one) may adjourn the
meeting, without notice other than announcement at the meeting, until such time
as a quorum is present. The vote of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
SECTION 2.8. Meeting by Telephone. Members of the Board of
Directors or of any committee thereof may participate in meetings of the Board
of Directors or of such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute presence in
person at such meeting.
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SECTION 2.9. Action Without Meeting. Unless otherwise
restricted by the Certificate of Incorporation, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or of
such committee, as the case may be, consent thereto in writing and the writing
or writings are filed with the minutes of proceedings of the Board of Directors
or of such committee.
SECTION 2.10. Committees of the Board. The Board of Directors
may, by resolution passed by the whole Board of Directors, designate one or more
other committees, each such committee to consist of one or more directors as the
Board of Directors may from time to time determine. Any such committee, to the
extent provided in such resolution or resolutions, shall have and may exercise
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, but no such committee shall have such
power of authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws; and unless the resolution shall expressly so provide, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Each such
committee shall have such name as may be determined from time to time by the
Board of Directors.
SECTION 2.11. Compensation. No director shall receive any
stated salary for his services as a director or as a member of a committee but
shall receive such sum, if any, as may from time to time be fixed by the action
of a majority of the stockholders.
ARTICLE III
OFFICERS
SECTION 3.1. Election; Qualification. The officers of the
Corporation shall be a Chairman of the Board, a Chief Executive Officer, a
President, one or more Vice Presidents, a Secretary and a Treasurer, each of
whom shall be selected by the Board of Directors. The Board of Directors may
elect a Controller, one or more Assistant Secretaries, one or more Assistant
Treasurers, one or more Assistant Controllers and such other officers as it may
from time to time determine. Two or more offices may be held by the same person.
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SECTION 3.2. Term of Office. Each officer shall hold office
from the time of his election and qualification to the time at which his
successor is elected and qualified, unless he shall die or resign or shall be
removed pursuant to Section 3.4 at any time sooner.
SECTION 3.3. Resignation. Any officer of the Corporation may
resign at any time by giving written notice of such resignation to the Board of
Directors, the Chairman of the Board, the President or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein or, if no time be specified, upon receipt thereof by the Board of
Directors or one of the above-named officers; and, unless specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 3.4. Removal. Any officer may be removed at any time,
with or without cause, by the vote of two directors if there are three directors
or less, or the vote of a majority of the whole Board of Directors if there are
more than three directors.
SECTION 3.5. Vacancies. Any vacancy however caused in
any office of the Corporation may be filled by the Board of Directors.
SECTION 3.6. Compensation. The compensation of each
officer shall be such as the Board of Directors may from time to
time determine.
SECTION 3.7. Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the Board of Directors and of the shareholders,
and shall have such powers and duties as generally pertain to the office of
Chairman of the Board, subject to the direction of the Board of Directors.
SECTION 3.8. President. The President shall be the chief
executive officer of the Corporation and shall have general charge of the
business and affairs of the Corporation, subject however to the right of the
Board of Directors to confer specified powers on officers and subject generally
to the direction of the Board of Directors.
SECTION 3.9. Vice President. Each Vice President shall have
such powers and duties as generally pertain to the office of Vice President and
as the Board of Directors or the President may from time to time prescribe.
During the absence of the president or his inability to act, the Vice President,
or if there shall be more than one Vice President, then that one designated by
the Board of Directors, shall exercise the powers and shall perform the duties
of the President, subject to the direction of the Board of Directors and the
Executive Committee, if any.
SECTION 3.10. Secretary. The Secretary shall keep the
minutes of all meetings of stockholders and of the Board of
Directors. He shall be custodian of the corporate seal and shall
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affix it or cause it to be affixed to such instruments as require such seal and
attest the same and shall exercise the powers and shall perform the duties
incident to the office of Secretary, subject to the direction of the Board of
Directors and the Executive Committee, if any.
SECTION 3.11. Other Officers. Each other officer of the
Corporation shall exercise the powers and shall perform the duties incident to
his office, subject to the direction of the Board of Directors and the Executive
Committee, if any.
ARTICLE IV
CAPITAL STOCK
SECTION 4.1. Stock Certificates. The interest of each holder
of stock of the Corporation shall be evidenced by a certificate or certificates
in such form as the Board of Directors may from time to time prescribe. Each
certificate shall be signed by or in the name of the Corporation by the Chairman
of the Board, the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary. Any of or all
the signatures appearing on such certificate or certificates may be a facsimile.
If any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
SECTION 4.2. Transfer of Stock. Shares of stock shall be
transferable on the books of the Corporation pursuant to applicable law and such
rules and regulations as the Board of Directors shall from time to time
prescribe.
SECTION 4.3. Holders of Record. Prior to due presentment for
registration of transfer the Corporation may treat the holder of record of a
share of its stock as the complete owner thereof exclusively entitled to vote,
to receive notifications and otherwise entitled to all the rights and powers of
a complete owner thereof, notwithstanding notice to the contrary.
SECTION 4.4. Lost, Stolen, Destroyed or Mutilated
Certificates. The Corporation shall issue a new certificate of stock to replace
a certificate theretofore issued by it alleged to have been lost, destroyed or
wrongfully taken, if the owner or his legal representative (i) requests
replacement, before the Corporation has notice that the stock certificate has
been acquired by a bona fide purchaser; (ii) files with the Corporation a bond
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss or destruction of any such stock
certificate or the issuance of any such new stock certificate; and (iii)
satisfies such other terms and conditions as the Board of Directors may from
time to time prescribe.
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ARTICLE V
MISCELLANEOUS
SECTION 5.1. Indemnity. (a) The Corporation shall indemnify,
subject to the requirements of subsection (d) of this Section, any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation),
by reason of the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify, subject to the
requirements of subsection (d) of this Section, any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery of the State of Delaware or such other court shall deem
proper.
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(c) To the extent that a director, officer, employee
or agent of the Corporation, or a person serving in any other enterprise at the
request of the Corporation, has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsection (a) and (b)
of this Section, or in defense of any claim, issue or matter therein, the
Corporation shall indemnify him against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b)
of this Section (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this Section. Such determination shall be made (1) by
a majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the Stockholders.
(e) Expenses incurred by a director, officer,
employee or agent in defending a civil or criminal action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board of Directors upon receipt
of an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Section.
(f) The indemnification and advancement of expenses
provided by or granted pursuant to, the other subsections of this Section shall
not limit the Corporation from providing any other indemnification or
advancement of expenses permitted by law nor shall it be deemed exclusive of any
other rights to which those seeking indemnification may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
(g) The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or who is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Section.
(h) The indemnification and advancement of expenses
provided by, or granted pursuant to this section shall, unless
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otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
(i) For the purposes of this Section, references to
"the Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents, so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(j) This Section 5.1 shall be construed to give the
Corporation the broadest power permissible by the Delaware General Corporation
Law, as it now stands and as heretofore amended.
SECTION 5.2. Waiver of Notice. Whenever notice is required by
the Certificate of Incorporation, the By-Laws or any provision of the General
Corporation Law of the State of Delaware, a written waiver thereof, signed by
the person entitled to notice, whether before or after the time required for
such notice, shall be deemed equivalent to notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders, directors or
members of a committee of directors need be specified in any written waiver of
notice.
SECTION 5.3. Fiscal Year. The fiscal year of the
Corporation shall start on such date as the Board of Directors shall from time
to time prescribe.
SECTION 5.4. Corporate Seal. The corporate seal shall be in
such form as the Board of Directors may from time to time prescribe, and the
same may be used by causing it or a facsimile thereof to be impressed or affixed
or in any other manner reproduced.
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ARTICLE VI
AMENDMENT OF BY-LAWS
SECTION 6.1. Amendment. The By-Laws may be altered, amended or
repealed by the stockholders or by the Board of Directors by a majority vote.
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THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF,
AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION
EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO ___________, 1998. VOID AFTER 5:00 P.M. EASTERN TIME,
_________, 2002.
PURCHASE OPTION
For the Purchase of
300,000 shares of Common Stock
of
CrossZ Software Corporation
(A Delaware Corporation)
1. Purchase Option.
THIS CERTIFIES THAT, in consideration of $100.00 duly paid
by or on behalf of GKN Securities Corp. ("Holder"), as registered owner of
this Purchase Option, to CrossZ Software Corporation ("Company"), Holder is
entitled, at any time or from time to time at or after ________, 1998 [one
year anniversary of the effective date] ("Commencement Date"), and at or
before 5:00 p.m., Eastern Time, ________, 2002 ("Expiration Date"), but not
thereafter, to subscribe for, purchase and receive, in whole or in part, up to
300,000 shares ("Shares") of common stock ("Common Stock") of the Company. The
Shares are sometimes referred to herein as the "Securities." If the Expiration
Date is a day on which banking institutions are authorized by law to close,
then this Purchase Option may be exercised on the next succeeding day which is
not such a day in accordance with the terms herein. During the period
commencing on the date of issue of the Purchase Option and ending on the
Expiration Date, the Company agrees not to take any action that would
terminate this Purchase Option. This Purchase Option is initially exercisable
at $____ per Share purchased; provided, however, that upon the occurrence of
any of the events specified in Section 6 hereof, the rights granted by this
Purchase Option, including the exercise price and the number of shares of
Common Stock to be received upon such exercise, shall be adjusted as therein
specified. The term "Exercise Price" shall mean the initial exercise price or
the adjusted exercise price, depending on the context of a share of Common
Stock.
2. Exercise.
2.1. Exercise Form. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and
delivered to the Company, together with this Purchase Option and payment of
the Exercise Price in cash or by certified check or official
<PAGE>
bank check for the Shares being purchased. If the subscription rights
represented hereby shall not be exercised at or before 5:00 p.m., Eastern
time, on the Expiration Date, this Purchase Option shall become void without
further force or effect, and all rights represented hereby shall cease and
expire.
2.2. Legend. Each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows unless such Securities have
been registered under the Securities Act of 1933, as amended ("Act"):
"The securities represented by this certificate have not
been registered under the Securities Act of 1933, as
amended ("Act"), or applicable state law. The securities
may not be offered for sale, sold or otherwise transferred
except pursuant to an effective registration statement
under the Act, or pursuant to an exemption from
registration under the Act and applicable state law."
2.3. Conversion Right.
2.3.1. Determination of Amount. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have
the right (but not the obligation) to convert any exercisable but unexercised
portion of this Purchase Option into securities ("Conversion Right") as
follows: Upon exercise of the Conversion Right, the Company shall deliver to
the Holder (without payment by the Holder of any of the Exercise Price in
cash) that number of shares of Common Stock equal to the quotient obtained by
dividing (x) the "Value" (as defined below) of the portion of the Purchase
Option being converted by (y) the Market Price (as defined below). The "Value"
of the portion of the Purchase Option being converted shall equal the
remainder derived from subtracting (a) the Exercise Price multiplied by the
number of shares of Common Stock underlying the portion of the Purchase Option
being converted from (b) the Market Price of the Common Stock multiplied by
the number of shares of Common Stock underlying the portion of the Purchase
Option being converted. As used herein, the term "Market Price" shall be
deemed to be the last reported sale price of the Common Stock on the date
prior to the date the Conversion Right is exercised, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed
or admitted to trading on any national securities exchange or if any such
exchange on which the Common Stock is listed is not its principal trading
market, the last reported sale price as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the Nasdaq National Market or
SmallCap Market, or, if applicable, the OTC Bulletin Board, or if the Common
Stock is not listed or admitted to trading on any of the foregoing markets, or
similar organization, as determined in good faith by resolution of the Board
of Directors of the Company, based on the best information available to it.
2.3.2. Mechanics of Cashless Exercise. The Conversion Right may
be exercised by the Holder on any business day on or after the Commencement
Date and not later than the Expiration Date by delivering to the Company the
Purchase Option with a duly executed exercise form attached hereto with the
cashless exercise section completed.
2
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3. Transfer.
3.1. General Restrictions. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell, transfer or
assign or hypothecate this Purchase Option prior to the Commencement Date to
anyone other than (i) an officer of GKN Securities Corp. ("GKN") or Barington
Capital Group, L.P. (together with GKN, the "Representatives") or an officer
or partner of any other underwriter listed on Schedule I to the Underwriting
Agreement ("Underwriters") or any broker-dealer which executed the Selected
Dealer Agreement between the Representatives and the members of the selling
group ("Selected Dealer") in connection with the Company's public offering
with respect to which this Purchase Option has been issued, or (ii) the
Representative, any Underwriter or Selected Dealer. On and after the
Commencement Date, transfers to others may be made subject to compliance with
or exemptions from applicable securities laws. In order to make any permitted
assignment, the Holder must deliver to the Company the assignment form
attached hereto duly executed and completed, together with the Purchase Option
and payment of all transfer taxes, if any, payable in connection therewith.
The Company shall immediately transfer this Purchase Option on the books of
the Company and shall execute and deliver a new Purchase Option or Purchase
Options of like tenor to the appropriate assignee(s) expressly evidencing the
right to purchase the aggregate number of Shares purchasable hereunder or such
portion of such number as shall be contemplated by any such assignment.
3.2. Restrictions Imposed by the Act. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction
of the Company (the Company hereby agreeing that the written opinion of
Graubard Mollen & Miller shall be deemed satisfactory evidence of the
availability of an exemption), or (ii) a registration statement relating to
such Purchase Option or Securities, as the case may be, has been filed by the
Company and declared effective by the Securities and Exchange Commission
("Commission") and is in compliance with applicable state law.
4. New Purchase Options to be Issued.
4.1. Partial Exercise, Conversion or Transfer. Subject to the
restrictions in Section 3 hereof, this Purchase Option may be exercised or
assigned in whole or in part. In the event of the exercise, conversion or
assignment hereof in part only, upon surrender of this Purchase Option for
cancellation, together with the duly executed exercise or assignment form and
funds (except in the case of conversion) sufficient to pay any Exercise Price
and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of Shares purchasable hereunder as to which this Purchase
Option has not been exercised, converted or assigned.
4.2. Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any
such new Purchase Option executed and delivered as a result of such loss,
theft,
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mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.
5. Registration Rights.
5.1. Demand Registration.
5.1.1. Grant of Right. The Company, upon written demand
("Initial Demand Notice") of the Holder(s) of at least 51% of the Purchase
Options and/or the underlying shares of Common Stock ("Majority Holders"),
agrees to register, on one occasion, all or any portion of the Purchase
Options requested by the Majority Holders in the Initial Demand Notice and all
of the Securities underlying such Purchase Options (collectively, the
"Registrable Securities"). On such occasion, the Company will file a
registration statement covering the Registrable Securities within sixty days
after receipt of the Initial Demand Notice and use its best efforts to have
such registration statement declared effective promptly thereafter. If the
Company fails to comply with the provisions of this Section 5.1.1, the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), be liable for any and all incidental, special and consequential
damages sustained by the Holder(s). The demand for registration may be made at
any time commencing one year from the Effective Date and terminating on the
fifth anniversary thereof. The Company covenants and agrees to give written
notice of its receipt of any Initial Demand Notice by any Holder(s) to all
other registered Holders of the Purchase Options and/or the Registrable
Securities within ten days from the date of the receipt of any such Initial
Demand Notice.
5.1.2. Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. The Company agrees to use its best efforts to cause
the filing required herein to become effective promptly and to qualify or
register the Registrable Securities in such States as are reasonably requested
by the Holder(s); provided, however, that in no event shall the Company be
required to register the Registrable Securities in a State in which such
registration would cause (i) the Company to be obligated to register or
license to do business in such State, or (ii) the principal stockholders of
the Company to be obligated to escrow their shares of capital stock of the
Company. The Company shall cause any registration statement filed pursuant to
the demand rights granted under Section 5.1.1 to remain effective until all of
the Registrable Securities covered by such registration statement have been
sold.
5.2. "Piggy-Back" Registration.
5.2.1. Grant of Right. In addition to the demand right of
registration, the Holders of the Purchase Options shall have the right at any
time commencing one year from the Effective Date and terminating on the
seventh anniversary thereof to include the Registrable Securities as part of
any other registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under
the Act or pursuant to Form S-8 or any equivalent form).
5.2.2. Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed registration,
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<PAGE>
the Company shall furnish the then Holders of outstanding Registrable
Securities with not less than thirty days written notice prior to the proposed
date of filing of such registration statement. Such notice to the Holders
shall continue to be given for each registration statement filed by the
Company until such time as all of the Registrable Securities have been sold by
the Holder. The holders of the Registrable Securities shall exercise the
"piggy-back" rights provided for herein by giving written notice, within
twenty days of the receipt of the Company's notice of its intention to file a
registration statement. The Company shall cause any registration statement
filed pursuant to the above "piggyback" rights to remain effective until all
of the Registrable Securities covered by such registration statement have been
sold.
5.3. General Terms.
5.3.1. Indemnification. The Company shall indemnify the
Holder(s) of the Registrable Securities to be sold pursuant to any
registration statement hereunder and each person, if any, who controls such
Holders within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all reasonable attorneys'
fees and other expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become
subject under the Act, the Exchange Act or otherwise, arising from such
registration statement but only to the same extent and with the same effect as
the provisions pursuant to which the Company has agreed to indemnify the
Representatives contained in Section 5 of the Underwriting Agreement between
the underwriters and the Company, dated the Effective Date. The Holder(s) of
the Registrable Securities to be sold pursuant to such registration statement,
and their successors and assigns, shall severally, and not jointly, indemnify
the Company, against all loss, claim, damage, expense or liability (including
all reasonable attorneys' fees and other expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their
successors or assigns, in writing, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 5 of the Underwriting Agreement pursuant to which the
underwriters have agreed to indemnify the Company.
5.3.2. Exercise of Purchase Option. Nothing contained in this
Purchase Option shall be construed as requiring the Holder(s) to exercise
their Purchase Options prior to or after the initial filing of any
registration statement or the effectiveness thereof.
5.3.3. Exclusivity. The Company shall not permit the inclusion
of any securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Registrable Securities.
5.3.4. Documents Delivered to Holders. The Company shall
furnish to each Holder participating in any of the foregoing offerings and to
each underwriter of any such offering, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the
date of the closing under any underwriting agreement related thereto), and
(ii) a "cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering,
a letter dated the date of the closing under the underwriting agreement)
signed by the independent public
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accountants who have issued a report on the Company's financial statements
included in such registration statement, in each case covering substantially
the same matters with respect to such registration statement (and the
prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with
respect to the registration statement and permit each Holder and underwriter
to do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it
deems reasonably necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers, Inc. ("NASD"). Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable
times and as often as any such Holder shall reasonably request.
5.3.5. Underwriting Agreement. The Company shall enter into an
underwriting agreement with the managing underwriter selected by any the
Holders whose Registrable Securities are being registered pursuant to this
Section 5. Such underwriter must be reasonably acceptable to the Company. Such
agreement shall be reasonably satisfactory in form and substance to the
Company, each Holder and such managing underwriter, and shall contain such
representations, warranties and covenants by the Company and such other terms
as are customarily contained in agreements of that type used by the
underwriter. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Registrable Securities and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriter shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriter except as they may relate to such Holders, their
shares and their intended methods of distribution.
5.3.6. Documents to be Delivered by Holder(s). Each of the
Holder(s) participating in any of the foregoing offerings shall furnish to the
Company a completed and executed questionnaire provided by the Company
requesting information customarily sought of selling security holders.
6. Adjustments.
6.1. Adjustments to Exercise Price and Number of Securities. The
Exercise Price and the number of Shares underlying the Purchase Option shall
be subject to adjustment from time to time as hereinafter set forth:
6.1.1. Stock Dividends, Recapitalization, Reclassification,
Split-Ups. If after the date hereof, and subject to the provisions of Section
6.3 below, the number of outstanding shares of Common Stock is increased by a
stock dividend payable in shares of Common Stock or by a split-up,
recapitalization or reclassification of shares of Common Stock or other
similar event, then,
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<PAGE>
on the effective date thereof, the number of Shares issuable on exercise of
this Purchase Option shall be increased in proportion to such increase in
outstanding shares.
6.1.2. Aggregation of Shares. If after the date hereof, and
subject to the provisions of Section 6.3, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or reclassification
of shares of Common Stock or other similar event, then, upon the effective
date thereof, the number of Shares issuable on exercise of this Purchase
Option shall be decreased in proportion to such decrease in outstanding
shares.
6.1.3. Adjustments in Exercise Price. Whenever the number of
shares of Common Stock issuable upon exercise of this Purchase Option is
adjusted, as provided in this Section 6.1, the Exercise Price shall be
adjusted (to the nearest cent) by multiplying such Exercise Price immediately
prior to such adjustment by a fraction (x) the numerator of which shall be the
number of Shares purchasable upon the exercise of this Purchase Option
immediately prior to such adjustment, and (y) the denominator of which shall
be the number of Shares so purchasable immediately thereafter.
6.1.4. Replacement of Securities upon Reorganization, etc. In
case of any reclassification or reorganization of the outstanding shares of
Common Stock other than a change covered by Section 6.1.1 hereof or which
solely affects the par value of such shares of Common Stock, or in the case of
any merger or consolidation of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or
reorganization of the outstanding shares of Common Stock), or in the case of
any sale or conveyance to another corporation or entity of the property of the
Company as an entirety or substantially as an entirety in connection with
which the Company is dissolved, the Holder of this Purchase Option shall have
the right thereafter (until the expiration of the right of exercise of this
Purchase Option) to receive upon the exercise hereof, for the same aggregate
Exercise Price payable hereunder immediately prior to such event, the kind and
amount of shares of stock or other securities or property (including cash)
receivable upon such reclassification, reorganization, merger or
consolidation, or upon a dissolution following any such sale or other
transfer, by a Holder of the number of shares of Common Stock of the Company
obtainable upon exercise of this Purchase Option immediately prior to such
event; and if any reclassification also results in a change in shares of
Common Stock covered by Section 6.1.1, then such adjustment shall be made
pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The provisions of
this Section 6.1.4 shall similarly apply to successive reclassifications,
reorganizations, mergers or consolidations, sales or other transfers.
6.1.5. Changes in Form of Purchase Option. This form of
Purchase Option need not be changed because of any change pursuant to this
Section, and Purchase Options issued after such change may state the same
Exercise Price and the same number of Shares as are stated in the Purchase
Options initially issued pursuant to this Agreement. The acceptance by any
Holder of the issuance of new Purchase Options reflecting a required or
permissive change shall not be deemed to waive any rights to a prior
adjustment or the computation thereof.
6.2. [Intentionally Omitted]
6.3. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of Shares upon the
exercise or transfer of this Purchase Option,
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<PAGE>
nor shall it be required to issue scrip or pay cash in lieu of any fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up or down to the nearest whole
number of Shares or other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable
upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Purchase Options and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise,
shall be duly and validly issued, fully paid and non-assessable and not
subject to preemptive rights of any stockholder. The Company further covenants
and agrees that upon exercise of this Purchase Option, all shares of Common
Stock and other securities issuable upon such exercises shall be duly and
validly issued, fully paid and non-assessable and not subject to preemptive
rights of any shareholder. As long as the Purchase Options shall be
outstanding, the Company shall use its best efforts to cause all Shares
issuable upon exercise of the Purchase Option to be listed (subject to
official notice of issuance) on all securities exchanges (or, if applicable on
Nasdaq) on which the Common Stock issued to the public in connection herewith
are then listed and/or quoted.
8. Certain Notice Requirements.
8.1. Holder's Right to Receive Notice. Nothing herein shall be
construed as conferring upon the Holders the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company.
If, however, at any time prior to the expiration of the Purchase Options and
their exercise, any of the events described in Section 8.2 shall occur, then,
in one or more of said events, the Company shall give written notice of such
event at least fifteen days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, conversion or exchange of securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of the closing of the transfer books, as the case may be.
8.2. Events Requiring Notice. The Company shall be required to give
the notice described in this Section 8 upon one or more of the following
events: (i) if the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution, or (ii) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company,
or any option, right or warrant to subscribe therefor, or (iii) a dissolution,
liquidation or winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of its
property, assets and business shall be proposed.
8.3. Notice of Change in Exercise Price. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's President and Chief Financial Officer.
8
<PAGE>
8.4. Transmittal of Notices. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally
or sent by overnight courier, with acknowledgment of receipt to the party to
which notice is given, or on the fifth day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, return
receipt requested, postage prepaid and properly addressed as follows: (i) if
to the registered Holder of the Purchase Option, to the address of such Holder
as shown on the books of the Company, or (ii) if to the Company, to its
principal executive office.
9. Miscellaneous.
9.1. Amendments. The Company and the Representatives may from time to
time supplement or amend this Purchase Option without the approval of any of
the Holders in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Representatives may
deem necessary or desirable and which the Company and the Representatives deem
shall not adversely affect the interest of the Holders. All other
modifications or amendments shall require the written consent of the party
against whom enforcement of the modification or amendment is sought.
9.2. Headings. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Purchase
Option.
9.3. Entire Agreement. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with
this Purchase Option) constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof, and supersedes all prior agreements
and understandings of the parties, oral and written, with respect to the
subject matter hereof.
9.4. Binding Effect. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Purchase Option or any
provisions herein contained.
9.5. Governing Law; Submission to Jurisdiction. This Purchase Option
shall be governed by and construed and enforced in accordance with the laws of
the State of New York, without giving effect to conflict of laws. The Company
hereby agrees that any action, proceeding or claim against it arising out of,
or relating in any way to this Purchase Option shall be brought and enforced
in the courts of the State of New York or of the United States of America for
the Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives
any objection to such exclusive jurisdiction and that such courts represent an
inconvenient forum. Any process or summons to be served upon the Company may
be served by transmitting a copy thereof by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address set
forth in Section 8.4 hereof. Such mailing shall be deemed personal service and
shall be legal and binding upon the Company in any action, proceeding or
claim. The Company agrees that the prevailing party(ies) in any such action
shall
9
<PAGE>
be entitled to recover from the other party(ies) all of its reasonable
attorneys' fees and expenses relating to such action or proceeding and/or
incurred in connection with the preparation therefor.
9.6. Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Purchase Option shall not be deemed
or construed to be a waiver of any such provision, nor to in any way affect
the validity of this Purchase Option or any provision hereof or the right of
the Company or any Holder to thereafter enforce each and every provision of
this Purchase Option. No waiver of any breach, non-compliance or
non-fulfillment of any of the provisions of this Purchase Option shall be
effective unless set forth in a written instrument executed by the party or
parties against whom or which enforcement of such waiver is sought; and no
waiver of any such breach, non-compliance or non-fulfillment shall be
construed or deemed to be a waiver of any other or subsequent breach,
non-compliance or non-fulfillment.
9.7. Execution in Counterparts. This Purchase Option may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts has been signed by each of the
parties hereto and delivered to each of the other parties hereto.
9.8. Exchange Agreement. As a condition of the Holder's receipt and
acceptance of this Purchase Option, Holder agrees that, at any time prior to
the complete exercise of this Purchase Option by Holder, if the Company and
GKN enter into an agreement ("Exchange Agreement") pursuant to which they
agree that all outstanding Purchase Options will be exchanged for securities
or cash or a combination of both, then Holder shall agree to such exchange and
become a party to the Exchange Agreement.
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the _____ day of November, 1997.
CrossZ Software Corporation
By: ____________________________________
Name: Alan W. Kaufman
Title: President
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<PAGE>
Form to be used to exercise Purchase Option:
CrossZ Software Corporation
60 Charles Lindbergh Blvd.
Uniondale, New York, 11553
Date:_________________, _____
The undersigned hereby elects irrevocably to exercise the
within Purchase Option and to purchase ________ shares of common stock of
CrossZ Software Corporation and hereby makes payment of $____________ (at the
rate of $__________ per share) in payment of the Exercise Price pursuant
thereto. Please issue the common stock as to which this Purchase Option is
exercised in accordance with the instructions given below.
or
The undersigned hereby elects irrevocably to convert the
Purchase Option to purchase ________ shares of common stock into ________
shares of Common Stock of CrossZ Software Corporation. The portion of this
Purchase Option (being converted has a "Value" of $____________ based on a
"Market Price" of $___________ per share of Common Stock). Please issue the
common stock in accordance with the instructions given below.
____________________________
Signature
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Purchase Option in every
particular without alteration or enlargement or any change whatsoever.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name _________________________________________________________________________
(Print in Block Letters)
Address _______________________________________________________________________
11
<PAGE>
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Purchase Option):
FOR VALUE RECEIVED,____________________________________ does
hereby sell, assign and transfer unto _______________________________ the
right to purchase _______________________ shares of common stock of CrossZ
Software Corporation ("Company") evidenced by the within Purchase Option and
does hereby authorize the Company to transfer such right on the books of the
Company.
Dated:___________________, 19__
____________________________
Signature
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Purchase Option in every
particular without alteration or enlargement or any change whatsoever.
12
<PAGE>
June , 1997
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Cross/Z International, Inc.
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
Gentlemen:
The undersigned shareholder, officer and/or director of
Cross/Z International, Inc. (the "Company"), in consideration of the
underwriting of a public offering of securities of the Company by GKN Securities
Corp. ("GKN") and BARRINGTON Captial Group, L.P. ("Barrington"), hereby agrees
that, without the prior written consent of GKN, for a period of 13 months from
the effective date ("Effective Date") of the Company's Registration Statement on
Form SB-2 or Form S-1 which relates to the public offering to be underwritten by
GKN and Barrington, the undersigned will not offer, sell, transfer or otherwise
dispose of any shares of Common Stock of the Company owned or hereafter
acquired, whether beneficially(1) or of record, by the
- --------
(1) It is agreed that, for purposes of this letter, the undersigned beneficially
owns any shares owned by (i) members of the undersigned's immediate family (as
defined under Rule 16a-1 of the Securities Exchange Act of 1934 but excluding
adult members of the same family not sharing the same household) sharing the
same household and (ii) any person or entity controlled by the undersigned or
under common control with the undersigned.
<PAGE>
June , 1997
Page -2-
undersigned, including, but not limited to, shares of Common Stock acquired
upon exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned, except for purchases of Common Stock
purchased in the open market (the "Securities").
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available from the
Company or the Company's transfer agent upon
request and without charge;
2. A notice to be placed on the face of each
certificate for Securities stating that the
transfer of the Securities is restricted in
accordance with the conditions set forth on the
reverse side of the certificate; and
3. A typed legend to be placed on the reverse side of
each certificate representing Securities which
states that the sale or transfer of the Securities
is subject to certain restrictions pursuant to an
agreement between the shareholder, the Company,
and GKN which agreement is on file with the
Company and the transfer agent from which a copy
is available upon request and without charge.
The terms and conditions contained in this Agreement can
only be modified (including premature termination of this Agreement) with the
prior written consent of GKN.
Very truly yours,
----------------------------------
Name:
<PAGE>
November 10, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Cross Z Software Corporation
Commission File No. 333-34667
Registration Statement on Form SB-2
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form SB-2 dated
August 29, 1997, as amended, (the "Registration Statement"), filed with the
Securities and Exchange Commission by Cross Z Software Corporation, a Delaware
corporation (the "Company"). The Registration Statement relates to (i)
3,450,000 shares (the "Public Offering Shares") of Common Stock, par value
$.01 per share ("Common Stock"), (ii) the Representative's Purchase Option
(the "Representative's Purchase Option") consisting of 300,000 shares of
Common Stock ("RPO Shares") and (iii) 1,075,000 shares of Common Stock
underlying the Bridge Warrants (the "Bridge Financing Shares").
We advise you that we have examined original or copies certified or
otherwise identified to our satisfaction of the Certificate of Incorporation
and By-laws of the Company, minutes of meetings of the Board of Directors and
shareholders of the Company, the Registration Statement and the underwriting
agreement, each as described in the Registration Statement and such other
documents, instruments and certificates of officers and representatives of the
Company and public officials, and we have made such examination of the law as
we have deemed
<PAGE>
November 10, 1997
Page -2-
appropriate as the basis for the opinion hereinafter expressed. In making
such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
to original documents of documents submitted to us as certified or photostatic
copies.
Based upon the foregoing, we are of the opinion that:
(a) The Public Offering Shares have been duly authorized and, when
issued and sold pursuant to the Registration Statement, will be legally
issued, fully paid and non-assessable;
(b) The Representative's Purchase Option has been duly authorized
and, when issued and sold, will be legally issued, fully paid and
non-assessable;
(c) The RPO Shares have been duly authorized and, when issued and
sold as part of the Representative's Purchase Option, will be legally issued,
fully paid and non-assessable;
(d) The Bridge Warrants have been duly authorized and granted; and
(e) The Bridge Financing Shares have been duly authorized and
reserved for and, when issued upon the exercise of the Bridge Warrants, will
be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and we further consent to the reference to this firm
under the caption "Legal Matters" in the Registration Statement and the
Prospectus forming a part thereof.
Very truly yours,
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
<PAGE>
Employment/Consulting Agreement
This Agreement sets out the particulars of the agreement and
conditions of your employment and engagement by CrossZ Software Corporation (the
"Company" or the "Corporation").
Date: October 14, 1997
Name of Employee/Consultant: Alan W. Kaufman
Date Service Begins: October 14, 1997
Title: President and Chief
Executive Officer
Reporting To: Board of Directors
Salary:
Your base monthly salary will be $6,250.00
($75,000.00 per year) to be paid on a semi-monthly basis.
Salaries are normally reviewed after one year.
Term of Employment/Engagement:
The term of employment or engagement with the
Company shall continue for one (1) year and is renewable,
upon mutual agreement, on a yearly basis thereafter.
Initially, you will serve as the President and Chief
Executive Officer of the Company but within such one year
period or thereafter you may, upon mutual agreement of the
Company and you, serve instead in a consulting capacity to
the Company. So long as you serve as President and Chief
Executive, you shall be responsible for the management of the
Company, shall report only to the Board of Directors of the
Company and shall have such other powers and responsibilities
consistent with your position as the Board of Directors may
assign to you. In the event that this Agreement is terminated
for any reason other than "Cause," you will be entitled to
receive all compensation owed to you under the Agreement,
including but not limited to the balance of your annual
compensation. For purposes of this Agreement, the term
"Cause" shall be limited to (i) embezzlement, fraud or
misappropriation of material corporate assets; (ii) you are
convicted of a felony; or (iii) you are convicted of any
lesser crime committed in connection with the performance of
your duties hereunder or involving moral turpitude.
Notwithstanding the foregoing, no termination shall be
treated as a termination for Cause under (iv) above unless
the Board has provided you with at least 30 days prior
written notice identifying the alleged breach of your
obligations, given you a reasonable opportunity
<PAGE>
to correct such alleged breach during such period of 30 days,
and has given you an opportunity to meet with the Board of
Directors.
Stock Options:
You will receive incentive and non-qualified stock
options to purchase an aggregate of 100,000 shares of Common
Stock at an exercise price equal to the Initial Offering
Price of the Company's Common Stock. The options will fully
vest January 1, 1999, with options to purchase 33,334 shares
vesting on the day after the effectiveness of the Company's
initial public offering (which is expected to become
effective on or before November 17, 1997), options to
purchase 33,333 shares vesting on January 1, 1998 and options
to purchase 33,333 shares vesting on January 1, 1999. The
term of these options is five (5) years. Such options will
continue to vest even if you are no longer serving the
Company as either President and Chief Executive Officer or as
a Consultant, and even if your employment with the Company is
terminated for any reason other than "Cause" as defined
herein, including voluntary retirement, or change in status
from employee to a consultancy capacity to the Company. In
the event of your death or a disability which prevents you
from performing as either the President and Chief Executive
Officer of the Company or a Consultant, such options will
vest immediately. The options will be issued in accordance
with the Company's 1991 Stock Option Plan, as amended (the
"Plan"). The Corporation expressly warrants and represents
that the stock options issued to you and the vesting period
of said stock options are authorized and permitted under the
Plan, and to the extent that the Plan requires the approval
of the Board of Directors that such approval of the Board has
been given. Reference is made to the terms and conditions of
the Plan, all of which are incorporated by reference in this
agreement as if fully set forth herein. Notwithstanding the
forgoing, to the extent any term and condition of the Plan
conflicts with any of the terms and conditions of this
paragraph, the terms and conditions of this paragraph will
take precedence.
Benefits:
After completing your introductory period of three
months, you will be eligible to participate in our 401(k) Plan and our
health, dental and life insurance plans in accordance with the terms
and conditions of the respective plans. Eligibility for the health
care coverage is the first of the month after your initial three
months of employment and eligibility for the 401(k) Plan is the first
of the quarter following your first three months of employment. The
Company will provide you
-2-
<PAGE>
with life insurance coverage of $300,000 and will contribute 70% of
the cost of the health and dental coverage. You will receive more
information about these plans prior to their respective effective
dates.
The Company shall reimburse you for all reasonable
expenses you incur in promoting the Company's business,
including expenses for travel, entertainment of business
associates, service and usage charges for business use of
cellular phones, computers and similar items, upon
presentation by you from time to time of an itemized account
of such expenditures. You will be eligible to participate in
the Executive Compensation Program, if any, and will
participate on terms at least as favorable as those
applicable to any other key executives. You shall be entitled
to the use of Company credit cards for charging business
expenses, in accordance with the Company's policy for
management employees.
Vacation:
The Company also offers 9.5 paid holidays, and you
will be entitled to three (3) weeks of paid vacation per
year. In addition, you will be entitled to seven (7) weeks of
unpaid vacation per year. You will be eligible to use one (1)
week of accrued vacation after your first four (4) months of
service.
Employment, Confidential Information and Invention
Assignment Agreement:
All employees are required to sign the Company
Employment, Confidential Information and Invention Assignment
Agreement, as amended, which amended agreement is annexed
hereto and made a part hereof.
Amendments to Agreement:
This Agreement sets forth certain terms under which
you will serve the Company. The parties agree that during the
term of this Agreement they will mutually work together to
evaluate whether these terms and other terms should be
codified in a new agreement.
Non-Competition:
You agree that during your employment and
consultancy with the Company, you 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, you may acquire shares
-3-
<PAGE>
representing not more than 5% of the outstanding securities
of any publicly traded company engaged in the Restricted
Business. 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 to be enforced.
Signatures:
CrossZ Software Corporation _______________________________________
Signature Date
_______________________________________
Title
Acknowledgment:
I acknowledge receipt of this Agreement setting out
the particulars of the Agreement and Conditions of my
employment/consulting.
Alan W. Kaufman
_______________________________________
Signature Date
-4-
<PAGE>
SOFTWARE DISTRIBUTION AGREEMENT
THIS SOFTWARE DISTRIBUTION AGREEMENT (this "Agreement") is made as of
September 10, 1997 by and between HEWLETT-PACKARD COMPANY, a California
corporation ("HP"), and CrossZ Software Corporation, a Delaware corporation
("Licensor").
1. DEFINITIONS
1.1 "Documentation" shall mean such manuals and other standard
end-user and technical documentation that Licensor
ordinarily makes available with a Program, including
amendments and revisions thereto.
1.2 "Enhancements" shall mean modifications, improvements,
updates, error corrections, bug fixes, or other enhancements
with respect to the functionality or performance of the
Program which Licensor may provide for the Program.
1.3 "HP Product" shall mean HP products of which the Program
identified in Exhibit A operate on or with.
1.4 "Order" means a written or electronic purchase order issued
by HP to Licensor for the purchase of Programs.
1.5 "Program" shall mean the prepackaged versions of Licensor's
software program(s) listed and described in Exhibit A
hereto, including all Program Enhancements, Revisions,
Versions and localized versions thereto as further set forth
below
1.6 "Revision" shall mean a version of the Program which
contains Enhancements and is designated by Licensor by a
number on the right of the decimal point (e.g, Version I.X).
1.7 "Version" shall mean a version of the Program which contains
substantial and significant Enhancements, or other
substantial change in functionality or performance as
compared to the previous version (if any), and which is
designated by Licensor by a number on the left of the
decimal point (e.g. Version X.O).
2. RIGHTS GRANTED AND RESTRICTIONS
2.1 License to the Program Object Code. Subject to the terms and
conditions set forth herein, Licensor hereby grants to HP,
its subsidiaries, divisions and affiliates a non-exclusive,
worldwide license to use, display and distribute the
Program, either separately or as bundled with an HP Product.
Such license shall include the right of HP to sublicense
distributors, resellers, and other third parties to achieve
the foregoing. In the event HP desires to sublicense and
distribute, either directly or indirectly, the Packaged
Program outside of the United States and Canada, the parties
shall negotiate in good faith to execute an
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amendment(s) to this Agreement for such new geographic area to
address any contractual or business issues that either party
identifies with regard to the distribution of the Programs
in such territory(ies).
2.2 License to the Documentation. Subject to the terms and
conditions set forth herein, Licensor hereby grants to HP,
its subsidiaries, divisions and affiliates a non-exclusive,
worldwide license to use, reproduce, display and distribute
the Documentation for use with a Program. Such license shall
include the right of HP to sublicense distributors,
resellers, and other third parties to achieve the foregoing.
HP will make reasonable efforts to notify Licensor if HP
intends to distribute the Program through an HP reseller or
affiliate, and both parties agree to negotiate in good faith
to resolve any additional issues that either party
identifies to facilitate distribution through such reseller
or affiliate channels.
2.3 License for Consulting Purposes. Subject to the terms and
conditions set forth herein, Licensor hereby grants to HP,
its subsidiaries, divisions and affiliates a royalty-free,
non-exclusive, worldwide license to use and display the
Program and Documentation to provide consulting services,
including but not limited to demonstrations of the Program
and installation or integration of the Program with hardware
or other software products, to HP customers. Such license
shall include the right of HP to sublicense distributors,
resellers, and other third parties to achieve the foregoing.
2.4 Restrictions. HP agrees not to decompile, disassemble or
otherwise seek to reduce the object code of the Program to
its source code form or authorize others to do so, unless
permitted by law.
2.5 Trademarks. Neither party is granted any right or interest
to the trademarks, marks or trade names (collectively,
"Marks") of the other party. Neither party may use the
other's Marks without the prior written consent of the other
party. Notwithstanding the foregoing, Licensor agrees that
HP may, in its discretion, use Licensor's name and the
Program name to identify the Program distributed by HP
2.6 Customer License. All Programs will be licensed to end users
pursuant to an end user license substantially in the form of
the software license contained in HP Software License Terms,
the current form of which is attached hereto as Exhibit F.
3. ORDER AND SHIPMENT OF PROGRAMS
3.1 Orders. Each delivery of Programs will be initiated by an
Order issued to Licensor by HP. Each Order should include:
(i) unit quantity; (ii) unit price; (iii) shipping
destination; (iv) delivery date; (v) HP reseller certificate
number, and (vi) other instructions or requirements
pertinent to the order. (e.g. end user customer including
location, contact name & phone #, HP sales rep)
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<PAGE>
3.2 Order Acknowledgment. Unless Licensor gives HP notice of its
objection to any such term or condition within five work
days after HP's issuance of the order, Licensor will be
bound by the terms and conditions of every Order regardless
of whether Licensor acknowledges or otherwise signs the
Order.
3.3 Order Changes. HP may without charge postpone, decrease,
increase, or cancel any Order by notice to Licensor prior to
shipment.
3.4 Shipment Requirements. Licensor shall use its best efforts
to ship all Orders complete. Licensor will give HP immediate
notice if it knows that it cannot meet a delivery date or
that only a portion of the Programs will be available for
shipment to meet a delivery date. For partial shipments,
Licensor will ship the available Programs unless directed by
HP to reschedule shipment. If Licensor ships any Programs by
a method other than as specified in the corresponding Order,
Licensor will pay any resulting increase in the cost of
freight. HP may utilize drop shipment options to any HP
shipping destination. If HP designates a drop shipment
location outside the country in which the Order is placed,
HP agrees to pay any additional costs associated with the
shipment.
3.5 Meeting Delivery Dates. If due to Licensor's failure to make
a timely (within 5 days of requested ship date) shipment,
the specified method of transportation would not permit
Licensor to meet the delivery date, the Programs affected
will be shipped by air transportation or other expedient
means acceptable to HP. Licensor will pay for any resulting
increase in the freight cost over that which HP would have
been required to pay by the specified method of
transportation.
3.6 Packaging. Licensor must preserve, package, handle, and pack
all Programs so as to protect the Programs from loss or
damage, in conformance with good commercial practice,
government regulations, and other applicable standards.
Special static protection must be provided for Programs
reqarding such packaging.
3.7 Responsibility For Damage. Licensor will be liable for any
loss or damage due to its failure to properly preserve,
package, handle, or pack Programs. HP will not be required
to assert any claims for such loss or damage against the
common carrier involved.
3.8 Country of Origin Certification. Upon HP's request, Licensor
shall provide HP with an appropriate certification stating
the country of origin for Licensor Program, sufficient to
satisfy the requirements of the customs authorities of the
country of receipt and any applicable export licensing
regulations, including those of the United States.
3.9 F1ow Down. HP and Licensor agree that the terms and
conditions set forth in any contract between HP and its
customer as they relate to the Program to be provided, by
Licensor shall be binding on Licensor, upon Licensor's
written agreement thereto. HP will give Licensor the
opportunity to review said terms. In the event that Licensor
disputes the flow down of certain terms and conditions,
Licensor shall provide HP with its reasons, in writing. If
HP and Licensor are unable to
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<PAGE>
agree on the flow down of any terms and conditions, either
party shall have the right to terminate the applicable Order.
4. PROGRAM MAINTENANCE AND SUPPORT
4.1 Maintenance and Support. Licensor agrees to provide HP and
its customers with ongoing maintenance and support for the
Program as set forth in Exhibit C hereto. Licensor agrees to
maintain such number of qualified personnel as is necessary
to provide such timely and knowledgeable maintenance and
support service.
Notwithstanding any termination of this Agreement, Licensor
agrees to maintain and support the Program distributed by HP
for at least three (3) years after such Program is last
distributed by HP to a customer hereunder.
4.2 Marketing Materials. Upon HP's request, Licensor will provide
for HP's use and distribution reasonable amounts (initially
estimated to be no more than 100 copies) of marketing
materials in hardcopy and, as available, electronic
versions.
4.3 New HP Products. The parties intend that during the term of
this Agreement, the Program will be compatible with future
releases and revisions of the HP Products, including new or
revised versions of the operating systems for the HP
Products, provided that such new HP Products support the
Program. Upon request by HP, Licensor agrees to use its best
efforts to provide HP, at no additional charge, with the
Program adapted for use with such new HP Products within one
hundred-eighty (180) days after notification from HP,
provided that HP makes available to Licensor such hardware
and software reasonably necessary for Licensor to develop
and qualify such adapted Program.
4.4 Functionality Enhancements. HP may from time to time request
significant functionality enhancements to a Program.
Licensor agrees to develop these enhancements if both
parties agree to the enhancement proposal, which may provide
for additional payments by HP to Licensor. The fee for any
such enhancements shall be at the rates Licensor charges its
most favored customers for similar work. Prior to commencing
work, Licensor will provide HP with a written estimate of
the total fee for the proposed enhancement and the final fee
shall not exceed the estimate by more than fifteen percent
(15%) unless mutually agreed to by HP and Licensor.
5. PAYMENT
5.1 Distribution Fees. In consideration for the rights and
licenses granted to HP under this Agreement, HP agrees to
pay Licensor a fee for each copy of the Program that HP
distributes in the amount set forth in Exhibit B. Such fee
shall include the right to distribute appropriate
Documentation. For each copy of Program Revision distributed
to existing Program customers, HP agrees to
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<PAGE>
pay the applicable fee as set in Exhibit B. No royalty is
due with respect to the distribution of other Program
Enhancements which Licensor may provide under this
Agreement.
5.2 Payment. Fees will accrue upon shipment of any copy of the
Program or Revision by HP to HP's customer. All accrued fees
will be paid by HP to Licensor within thirty five (35) days
after the invoice date. HP may require confirmation of HP
customer receipt prior to paying such invoice.
5.3 Invoices. Licensor invoices should include: (i) unit
quantity; (ii) unit price; (iii) address to send payment;
(iv) invoice due date; (v) HP contact and phone number; (vi)
Licensor contact and phone number; (vii) HP Order #; and
(viii) other instructions or requirements pertinent to the
invoice.
5.4 Fee Warranty. Licensor warrants that the amounts payable
hereunder by HP are no greater than those for any other
licensee for similar quantities of licenses and similar
conditions for those versions of the Program for use on
similar non-HP hardware.
5.5 Taxes. Licensor shall be solely responsible for taxes on
amounts paid to Licensor by HP under this Agreement,
including all state and local use, sales, property (ad
valorem) and similar taxes. When applicable, HP shall
provide Licensor with a reseller certificate number or other
documentation so that Licensor may successfully claim
exemption from tax.
6. WARRANTY AND INDEMNIFICATION
6.1 General Warranty. Licensor warrants that it owns all rights
to each Program and accompanying Documentation, including
all portions thereof, and that such interests are free of
any and all restrictions, settlements, judgments or adverse
claims. Licensor warrants it has full power and authority to
grant HP the rights granted herein including the right to
use and distribute each Program and Documentation worldwide
and to authorize third parties to do the same.
6.2 Program Warranty. Licensor warrants that each Program will
operate in accordance with and conform to the specifications
set forth in the Documentation, manuals and any relevant
data sheet or promotional literature provided by Licensor.
In the event that the Program fails to conform to such
specifications, Licensor agrees that HP may return the
product and Licensor shall promptly refund any moneys paid
for such Program.
6.3 General Indemnity. Licensor will indemnify and hold HP
harmless of and from any and all loss, cost, claim,
liability, suit, judgment or expense, including reasonable
attorneys' fees, arising out of any breach of the above
described warranties. Should any such claim or breach arise,
HP shall have the right to withhold payment of any sums
otherwise due under this Agreement but agrees to place the
same in escrow or trust pending resolution.
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<PAGE>
6.4 Infringement Warranty. Licensor warrants that the Program,
Documentation, trademarks, copyrights and trade names
related to the Program do not violate or infringe any
patent, copyright, trade secret or other proprietary right
of any third party and that Licensor is not aware of any
facts upon which such a claim for infringement could be
based.
6.5 Infringement Indemnity. Licensor will defend any claim,
suit, or proceeding brought against HP or its customers
insofar as it is based on a claim that the Program or
Documentation, or any part thereof, furnished by Licensor
under this Agreement constitutes an infringement of any
third party's patent, copyright, trademark, trade name, or
unauthorized trade secret use; provided that Licensor is
notified promptly in writing of such claim, and given
authority, information and assistance (at Licensor's
expense) to handle the defense or settlement of any such
claim, suit or proceeding. Licensor agrees to pay all
damages and costs awarded therein against HP and its
customers.
In case any Program or Documentation or any part thereof in
such suit is held to constitute an infringement and its use
is enjoined, Licensor shall, at its own expense and at its
option, either procure for HP and its customers the right to
continue use or, if applicable, replace the same with a
noninfringing program and documentation of equivalent
function and performance, or modify them so they become
noninfringing without detracting from function or
performance.
Notwithstanding the foregoing, Licensor shall have no
responsibility for claims arising from modifications of the
Program made by HP if such claim would not have arisen but
for such modifications.
6.6 Year 2000 Warranty. Licensor warrants that each Program
delivered under this Agreement shall be able to accurately
process date data (including, but not limited to,
calculating, comparing and sequencing) from, into and
between the twentieth and twenty-first centuries, including
leap year calculations.
6.7 Warranty Disclaimer. EXCEPT AS EXPRESSLY PROVIDED HEREIN,
LICENSOR MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR
IMPLIED, REGARDING THE PROGRAM, ITS MERCHANTABILITY OR ITS
FITNESS FOR ANY PARTICULAR PURPOSE.
7. TERM AND TERMINATION
7.1 Term. Unless otherwise terminated earlier under this Section
7, this Agreement shall commence as of the date first set
forth above, and shall continue for a period of [three (3)]
years after such date. This Agreement will renew
automatically for additional one (1) year periods unless
written notice is given by one party to the other as to its
intention not to renew this Agreement at least thirty (30)
days prior to the end of the initial or any subsequent term.
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<PAGE>
7.2 Termination for Breach. Either party may terminate this
Agreement by written notice to the other party if the other
party breaches any material provision of this Agreement and
such breach is not cured within thirty (30) days after
written notice thereof is received by the breaching party.
7.3 Effect of Termination. Notwithstanding any termination of
this Agreement, HP shall have the right to continue to use
the Program and Documentation to support existing Program
customers and all licenses granted to end users prior to the
date of termination for use of the Program shall survive.
Licensor agrees that HP shall have a period of thirty (30)
days following the effective date of any termination to
distribute copies of the Program which were delivered to
HP's distribution channels prior to the effective date of
termination.
7.4 Survival. Notwithstanding any termination of this Agreement,
the following provisions of this Agreement shall survive for
the relevant period of time set forth therein, if any:
Sections 4.1 (Maintenance and Support), 6 (Warranty and
Indemnification), 8 (Limited Liability), 9 (Confidential
Information) and 10 (Other Provisions).
8. LIMITED LIABILITY
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR
CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES ARISING FROM ANY CLAIM
OR ACTION HEREUNDER, BASED ON CONTRACT, TORT OR OTHER LEGAL THEORY.
THIS SECTION 8 SHALL NOT LIMIT ANY OBLIGATION UNDER SECTION 6. IN NO
EVENT SHALL HP BE LIABLE TO LICENSOR FOR DAMAGES FOR ANY CAUSE
WHATSOEVER IN AN AMOUNT IN EXCESS OF THE DOLLAR AMOUNT OF THE ORDER
THAT IS THE SUBJECT MATTER OF THE CAUSE OF ACTION OR CAUSED THE
DAMAGE RESULTING IN THE LIABILITY.
9. CONFIDENTIAL INFORMATION
9.1 The Program. All Programs in object code form and related
Documentation provided to HP hereunder are deemed
non-confidential, and HP is not under any obligation to
Licensor to restrict access to or use of such Programs in
object code form or related Documentation, provided HP
otherwise complies with the terms of this Agreement.
9.2 Confidential Information. During the term of this Agreement,
either party may receive or have access to technical
information, as well as information about product plans and
strategies, promotions, customers and related non-technical
business information which the disclosing party considers to
be confidential ("Confidential Information"). In the event
such information is disclosed, the parties shall first agree
to disclose and receive such information in confidence. If
then disclosed, the information shall (i) be marked as
confidential at the time of disclosure, or (ii) if disclosed
orally but stated to be confidential, be
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designated as confidential in a writing by the disclosing
party summarizing the Confidential Information disclosed and
sent to the receiving party within a reasonable period of
time after such oral disclosure.
9.3 Nondisclosure. Confidential Information may be used by the
receiving party only with respect to performance of its
obligations under this Agreement, and only by those
employees of the receiving party who have a need to know
such information for purposes related to this Agreement. The
receiving party shall protect the Confidential Information
of the disclosing party by using the same degree of care
(but not less than a reasonable degree of care) to prevent
the unauthorized use, dissemination or publication of such
Confidential Information, as the receiving party uses to
protect its own confidential information of like nature. The
receiving party's obligation under this Section 9 shall be
for a period of three (3) years after the date of
disclosure. The foregoing obligation shall not apply to any
information which is: (i) already known by the receiving
party prior to disclosure; (ii) publicly available through
no fault of the receiving party; (iii) rightfully received
from a third party without a duty of confidentiality; (iv)
disclosed by the disclosing party to a third party without a
duty of confidentiality on such third party; (v)
independently developed by the receiving party prior to or
independent of the disclosure; (vi) disclosed under
operation of law; or (vii) disclosed by the receiving party
with the disclosing party's prior written approval.
10. OTHER PROVISIONS
10.1 Publicity. Each party agrees not to publicize or disclose
the terms of this Agreement to any third party without the
prior written consent of the other except as required by
law. In particular, no press releases shall be made without
the mutual written consent of each party.
10.2 Independent Contractors. The relationship of the parties
under this Agreement is that of independent contractors, and
neither party is an employee, agent, partner or joint
venture of the other.
10.3 Relationship Managers. Each party designates the person(s)
set forth in Exhibit E as the primary contact(s) of each
party with respect to this Agreement, which person(s) may be
redesignated by a party by notice to the other,
10.4 Dispute Resolution. In the event of disagreement with
respect to any aspect of this Agreement, the parties agree
to discuss in good-faith to reach an amicable resolution,
and to escalate such resolution process to the appropriate
members of their respective management organization who have
the power and authority to achieve a successful resolution.
10.5 Notice. Unless otherwise stated, all notices required under
this Agreement shall be in writing and shall be considered
given upon personal delivery of the written notice or within
forty eight (48) hours after deposit in the U.S. Mail,
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certified or registered, and addressed to the appropriate
relationship manager as set forth in Exhibit E.
10.6 No Assignment. Neither party may assign or transfer any of
the rights or responsibilities set forth herein, or change
its control of ownership, without the express written
consent of the other party (which consent shall not be
unreasonably withheld or delayed) and any purported attempt
to do so shall be deemed void.
10.7 Governing Law. This Agreement is made under and shall be
construed in accordance with the law of the State of
California, without reference to conflict of laws
principles. Licensor and HP expressly agree that the United
Nations Convention on Contracts for the International Sale
of Goods will not apply to this Agreement or to the
transactions processed under this Agreement.
10.8 Severability. If any provision of this Agreement is held to
be invalid or unenforceable by a court of competent
jurisdiction, then the remaining provisions will
nevertheless remain in full force and effect, and the
parties will negotiate in good-faith a substitute, valid and
enforceable provision which most nearly effects the parties'
intent in entering into this Agreement.
10.9 Headings. The captions and headings used in this Agreement
are for convenience in reference only, and are not to be
construed in any way as terms or be used to interpret the
provisions of this Agreement.
10.10 No Distribution Obligation. Except as expressly provided
herein, HP may in its sole discretion (with HP using
reasonable efforts to notify and obtain Licensors agreement
with respect to distribution through resellers or
affiliates) decide to distribute or not distribute the
Programs it deems appropriate. Nothing in this Agreement
shall be construed or interpreted as placing a "best
efforts" standard upon HP with respect to the use and
distribution of the Program, or placing any minimum
obligation to pay fees.
10.11 Non-Restrictive Relationship. Nothing in this Agreement
shall be construed to preclude HP from independently
developing, acquiring from other third parties, distributing
or marketing software programs or other products which may
perform the same or similar functions as the Programs
provided under this Agreement.
10.12 Modifications. This Agreement may only be modified only by a
writing signed by an authorized representative of each
party.
10.13 Waiver. Neither party's failure to exercise any of its
rights hereunder shall constitute or be deemed a waiver or
forfeiture of any such rights.
10.14 Force Majeure. Nonperformance of either party will be
excused to the extent that performance is rendered
impossible by strike, fire, flood, governmental acts or
orders or restrictions or other similar reason where failure
to perform is
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beyond the control and not caused by the negligence of the
nonperforming party, provided that the non-performing party
gives prompt notice of such conditions to the other party
and makes all reasonable efforts to perform.
10.15 Export Control. Each party agrees to comply with all
applicable United States laws and regulations which may
govern the export of Program abroad, including the Export
Administration Act of 1979, as amended, any successor
legislation, and the Export Administration Regulations issued
by the Department of Commerce. Licensor shall promptly
notify HP of any export restrictions or regulations
applicable to Programs.
10.16 Insurance. During the term of this Agreement Licensor shall
carry at a minimum the levels of insurance described in
Exhibit G and shall name HP as additional insured.
10.17 Entire Agreement. This document represents the entire
agreement between the parties as to the matters set forth
herein and supersedes all prior discussions, representations
or understandings between them.
10.18 Exhibits. Each of the following Exhibits referred to in
this Agreement is incorporated in full in this Agreement
wherever reference to it is made:
EXHIBIT A PROGRAM DESCRIPTION
EXHIBIT B FEES
EXHIBIT C MAINTENANCE AND SUPPORT
EXHIBIT D TECHNICAL ASSISTANCE AND TRAINING
EXHIBIT E RELATIONSHIP MANAGERS
EXHIBIT F HP SOFTWARE LICENSE TERMS
EXHIBIT G LICENSOR CERTIFICATE OF INSURANCE
10.19 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original.
Agreed:
HEWLETT-PACKARD COMPANY CROSSZ SOFTWARE CORPORATION
By: By: Daniel Pess
----------------------------- ----------------------------------
Print Name: Print Name: Daniel Pess
--------------------- --------------------------
Title: Title: Vice President - Finance
-------------------------- -------------------------------
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Exhibit A
QOS Engine Version 2.0 - is designed to read a variety of data formats and
process the data first into a multidimensional repository, and then into
multiple QueryObjects.
QO DBA Version 2.0 - is a desktop administrative tool that works with QOS Engine
and allows you to extract raw, atomic data from practically any data source, and
to load it into a data repository specifically designed for the rapid creation
of QueryObject datamarts.
QO Designer Version 2.0 - is a desktop administrative tool that works with QOS
Engine and gives designers an intuitive way to define the data and schema for
QueryObject datamarts.
QO Viewer Version 2.0 - is a front-end desktop tool that allows users to
navigate, segment and filter the QueryObject datamart.
QO Open Version 2.0 - is an ODBC interface to QueryObject datamarts that allows
users to interface with datamarts using other front-end tools such as query
and reporting tools, statistical tools, mapping tools and data mining tools.
<PAGE>
CrossZ Price List Exhibit B
<TABLE>
<CAPTION>
SKU Description Retail Price HP Discount HP Price VERSION PLATFOTM
Environment, Media
<S> <C> <C> <C> <C> <C> <C>
QOE-HXU2-4 QOS ENGINE $60,000 45% $33,000 2.0 HP UX - Uni-Processor, 4MM
QOE-HXU2-8 QOS ENGINE $60,000 45% $33,000 2.0 HP UX - Uni-Processor, 8MM
QOE-HXU2-CD QOS ENGINE $60,000 45% $33,000 2.0 HP UX - Uni-Processor, CD ROM
QOEHXD2-4 HP UX Single Domain $93,000 45% $51,150 2.0 HP UX - Multi-Processor
Platform*
QOCP-W2 QOS CLIENT PACK (all 4 components 45% $330 2.0 WIN 3.1/WIN/NT (16 & 32 bit)
below) $600
QODB-W2 QO DBA $125 45% $69 2.0 WIN 3.1/WIN/NT
QOD-W2 QO DESIGNER $125 45% $69 2.0 WIN 3.1/WIN/NT
QOV-W2 QO VIEWER $450 45% $248 2.0 WIN 3.1/WIN/NT
QOO-W2 QO OPEN $150 45% $83 2.0 WIN 3.1/WIN/NT
</TABLE>
*Domain - Customer is licensed to run multiple instances of the product on
multiple processors within the same "box" (domain) simultaneously. However each
instance (job) is only working on 1 and only 1 processor.
<TABLE>
<CAPTION>
SKU Description Retail Price HP Discount HP Price
<S> <C> <C> <C> <C>
QOMTN Maintenance (mandatory 18% of purchase 20%
1st year)
QOIPS 5 day installation package** $6,000 20% $4,800
QOTRN 2 day training package** $2,400 20% $1,920
QOCNST Consulting per day** $1,200 20% $ 960
</TABLE>
**Does not include travel expense
<PAGE>
EXHIBIT C
MAINTENANCE AND SUPPORT
Licensor shall provide at minimum the following maintenance and support with
respect to the Program:
1. Receiving bug, error and defect reports, and promptly fixing or
providing workarounds to such bugs, errors and defects. In the event
a critical defect is discovered, Licensor agrees, via any reasonably
appropriate method chosen by Licensor, to correct the defect and
provide such correction within fifteen (15) calendar days after
notice thereof. A critical defect is generally defined as one which
causes the system not to function or to lose data and for which there
is no known workaround. All costs and expenses for such corrections
shall be borne by Licensor.
2 Maintaining a telephone number and technician to receive calls during
normal business hours concerning problems and questions, including
receiving calls from HP customers forwarded by HP.
3 Providing prompt notification and assistance in the event Licensor
determines a problem exists, but not later than seven (7) calendar
days after determination of such problem.
4 Providing normal evolutionary Enhancements and Revisions, including
instructions for implementation, no later than 90 days following
general release of the foregoing.
5 Providing a designated, knowledgeable support contact for providing
technical support, who may be changed by written notice.
6. Licensor agrees to provide the above Maintenance and Support to HP at
[ no charge ] during the term of this Agreement. During the first
year of such Maintenance and Support, HP may provide first line
assistance to HP's customers.
7. In order to provide adequate Maintenance and Support to HP and HP's
customers, Licensor agrees to maintain an HP operating system at its
site to reproduce and resolve Program problems occurring on such HP
Product. If Licensor can not duplicate the problem at Licensor's
site, Licensor agrees to work with HP to duplicate problem at an HP
facility on HP owned equipment. Licensor agrees to provide the above
Maintenance and Support to the relevant HP personnel (those who have
been trained on Licensor's product) as may be designated by HP from
time to time.
8. Commencing one year after shipment of the Program, Licensor shall
retain sole responsibility to secure maintenance and support fees
should the HP customer desire such maintenance and support and
Licensor shall retain all revenues from such maintenance and support
fees.
Page 13
<PAGE>
EXHIBIT D
TECHNICAL ASSISTANCE AND TRAINING
Licensor agrees to provide, at no charge to HP, on-going technical assistance
with respect to the Program, and training with respect to the use,
reproduction and distribution of the Program as contemplated under the
Agreement.
Licensor agrees to provide technical training to HP personnel at Licensor's
facilities at times mutually agreeable to HP and Licensor. The technical
training shall be for the purposes of enabling such HP personnel to properly
demonstrate and sell the Program to prospective customers. Licensor agrees to
provide technical training up to 3 days of training for up to 20 HP personnel
at no charge to HP, or as mutually agreed to. HP shall be responsible for any
travel and other HP related expenses incurred by it in attending such
technical training classes.
Page 14
<PAGE>
EXHIBIT E
NOTICE AND RELATIONSHIP MANAGERS
HP LICENSOR
Account Manager
- ---------------
Mellisa Collins Lenn Platnick
972-830-6335 215-321-4903
Technical Manager
- -----------------
Dennis Ballow Thomas Siragusa
972-830-8907 516-228-8500
Marketing Manager
- -----------------
Terry Daly Robert Thompson
972-868-4336 516-228-8500
Notices with respect to the administration of this Agreement shall be
addressed to the _____________ manager set forth above.
Page 15
<PAGE>
EXHIBIT F
HP SOFTWARE LICENSE TERMS
1. DEFINITIONS
a) "Software" means one or more programs capable of operating on a controller,
processor or other hardware Product ("Device"). Software is either a separate
Product, included with another Product ("Bundled Software"), or fixed in a
Device and not removable in normal operation ("Firmware").
b) "Use" means storing, loading, installing, executing, or displaying Software
on a Device.
c) "Products" means hardware, Software, documentation accessories, supplies,
parts and upgrades that are determined by HP to be available from HP upon
receipt of Customer's order. "Custom Products" means Products modified,
designed or manufactured to meet Customer requirements.
d) "Software License" means the Use authorization(s) for the Software
specified by HP in its quotation, invoice or other documentation. Each
Software License has a corresponding License Fee.
e) "License Fee" means the fee or fees designated by HP for Use of Software.
Different License Fees may apply to particular Software if more than one
Software License is available for that Software.
2. LICENSES
In return for the License Fee, HP grants Customer a non-exclusive license to
Use the Software listed in Customer's order in conformance with the applicable
Software License. Details of the types of Software Licenses offered are
available from HP on request. If no Software License is specified, then, in
return for the applicable fee, HP grants Customer a license to Use one copy of
the Software on one Device at any one time. All Software Licenses will be
perpetual unless terminated, transferred or otherwise specified.
If Customer is an HP authorized reseller, Customer may sublicense the Software
to an end-user for its Use, or (if applicable) sublicense the Software to an
HP authorized reseller for subsequent distribution to an end-user for its Use.
These sublicenses must incorporate the terms of this license in a written
sublicense agreement, which will be made available to HP upon request.
3. GENERAL LICENSE TERMS
a) Unless otherwise permitted by HP, Customer may only make copies or
adaptations of the Software for archival purposes or when copying or
adaptation is an essential step in the authorized Use of the Software on a
backup Device, provided that copies and adaptations are used in no other
manner and provided further that the Use on the backup Device is
discontinued when the original or replacement Device becomes operable.
b) Customer must reproduce all copyright notices in or on the original
Software on all permitted copies or adaptations. Customer may not copy the
Software onto any public or distributed network.
Page 16
<PAGE>
c) Bundled Software or Firmware provided to Customer may only be used when
operating the associated Device in configurations as sold or subsequently
upgraded by HP. Customer may transfer Firmware only upon transfer of the
associated Device.
d) Updates, upgrades or other enhancements are available under HP Support
agreements. HP reserves the right to require additional licenses and fees for
Use of the Software on upgraded Devices.
e) The Software is owned and copyrighted by HP or by third party suppliers.
Customer's license confers no title or ownership and is not a sale of any
rights in the Software, its documentation, or the media on which they are
recorded or printed. Third party suppliers may protect their rights in the
Software in the event of any infringement.
f) Customer will not disassemble or decompile the Software without HP's prior
written consent. Where Customer has other rights under statute, Customer will
provide HP with reasonably detailed information regarding any intended
disassembly or decompilation. Customer will not decrypt the Software unless
necessary for legitimate use of the Software.
g) Customer's Software License is transferable subject to HP's prior written
authorization and payment to HP of any applicable fees. Customer will
immediately upon transfer deliver all copies of the Software to the
transferee. The transferee must agree in writing to the terms of Customer's
license. All license terms will be binding on involuntary transferees, notice
of which is hereby given. Customers license will automatically terminate upon
transfer.
h) HP may terminate Customers or any transferee's or sublicensee's Software
License upon notice for failure to comply with any applicable license terms.
Immediately upon termination, the Software and all copies of the Software will
be destroyed or returned to HP. Copies of the Software that are merged into
adaptations, except for individual pieces of data in Customer's or
transferee's or sublicensee's data base, will be removed and destroyed or
returned to HP. With HP's written consent, one copy of the Software may be
retained subsequent to termination for archival purposes.
i) In this clause on Licenses to the U.S. Government, the term "Customer"
means HPs direct purchaser, any entity sublicensing the Software, and the
end-user.
1) If Software is licensed for use in the performance of a U.S
government prime contract or subcontract, Customer agrees that
Software has been developed entirely at private expense. Customer
agrees that Software, and any derivatives or modifications, is
adequately marked when the Restricted Rights Legend below is affixed
to the Software or to its storage media and is perceptible directly
or with the aid of a machine or device. Customer agrees to
conspicuously put the following legend on the Software media with
Customer's name and address added below the notice:
RESTRICTED RIGHTS LEGEND
Use, duplication or disclosure is subject to HP standard commercial license
terms or to the following restrictions, whichever is applicable;
1) for non-DOD Departments and Agencies of the U.S. Government, as set forth
in FAR 52.227-19(c)(1-2)(Jun 1987)
2) for the DOD and its Agencies, as set forth in DFARS 252.227-7013 (c) (1)
(ii) (Oct 1988), DFARS 252.211-7015(c)(May 1991), whichever is applicable.
Hewlett-Packard Company
3000 Hanover Street
Palo Alto, CA 94304 U.S.A.
Page 17
<PAGE>
Copyright (c) 199_ Hewlett-Packard Company. All Rights Reserved
2) Customer further agrees that Software is delivered and licensed as
"Commercial computer software" as defined in DFARS 252.227-7013(Oct
1988), DFARS 252.211-7015(May 1991) or DFARS 252.227-7014(Jun 1995), or
as a " commercial item" as defined in FAR 2.101(a), or as "Restricted
computer software" as defined in FAR 52.227-19 (Jun 1987) (or any
equivalent agency regulation or contract clause), whichever is
applicable. The Customer agrees that it has only those rights provided
for such Software by the applicable FAR or DFARS clause or the HP
standard software agreement for the product involved.
j) Neither party may assign any rights or obligations hereunder without prior
written consent of the other party.
k) Customer who exports, re-exports or imports HP licensed Products, technology
or technical data purchased hereunder, assumes responsibility for complying
with applicable laws and regulations and for obtaining required export and
import authorizations. HP may suspend performance if Customer is in violation
of any applicable laws or regulations.
l) Disputes arising in connection with this Agreement will be governed by the
laws of the country and locality in which HP accepts the order.
m) These HP Software License Terms supersede any previous communications
representations or agreements between the parties, whether oral or written,
regarding transactions hereunder. Customer's additional or different terms and
conditions will not apply. These HP Software License Terms may not be changed
except by an amendment signed by an authorized representative of each party.
Effective the ___ day of _______, 19__
AGREED TO: AGREED TO:
Customer: HP:
--------------------------- ---------------------------------
Authorized Representative Signature Authorized Representative Signature
Name: Name:
------------------------------- -------------------------------
Title: Title:
------------------------------ ------------------------------
Address: Address:
---------------------------- ----------------------------
---------------------------- ----------------------------
---------------------------- ----------------------------
---------------------------- ----------------------------
Page 18
<PAGE>
AGREEMENT OF LEASE
BETWEEN
RECKSON ASSOCIATES
AND
CROSS/Z INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
----
SPACE................................................................. 1
TERM ................................................................. 1
RENT ................................................................. 2
USE .................................................................. 3
LANDLORD ALTERATION .................................................. 4
SERVICES ............................................................. 4
LANDLORD'S REPAIRS ................................................... 4
WATER SUPPLY ......................................................... 4
PARKING FIELD ........................................................ 4
DIRECTORY ............................................................ 5
TAXES AND OTHER CHARGES .............................................. 5
TENANT'S REPAIRS ..................................................... 6
FIXTURES & INSTALLATIONS ............................................. 7
ALTERATIONS .......................................................... 7
REQUIREMENTS OF LAW .................................................. 9
END OF TERM .......................................................... 9
QUIET ENJOYMENT ...................................................... 10
SIGNS ................................................................ 10
RULES AND REGULATIONS ................................................ 11
RIGHT TO SUBLET OR ASSIGN ........................................... 11
LANDLORD'S ACCESS TO PREMISES ........................................ 13
SUBORDINATION ........................................................ 14
PROPERTY LOSS, DAMAGE REIMBURSEMENT .................................. 15
TENANT'S INDEMNITY ................................................... 16
i
<PAGE>
DESTRUCTION - FIRE OR OTHER CASUALTY ..................................... 17
INSURANCE ................................................................ 18
EMINENT DOMAIN ........................................................... 21
NONLIABILITY OF LANDLORD ................................................ 22
DEFAULT .................................................................. 22
TERMINATION ON DEFAULT .................................................. 24
DAMAGES .................................................................. 25
SUMS DUE LANDLORD ....................................................... 27
NO WAIVER ................................................................ 28
WAIVER OF TRIAL BY JURY .................................................. 28
NOTICES .................................................................. 29
INABILITY TO PERFORM ..................................................... 29
INTERRUPTION OF SERVICE .................................................. 30
CONDITIONS OF LANDLORD'S LIABILITY ...................................... 30
TENANT'S TAKING POSSESSION ............................................... 31
ENTIRE AGREEMENT.......................................................... 31
DEFINITIONS .............................................................. 32
PARTNERSHIP TENANT ....................................................... 32
SUCCESSORS, ASSIGNS, ETC ................................................. 33
BROKER ................................................................... 33
CAPTIONS ................................................................. 33
SCHEDULE "A" ............................................................. 36
SCHEDULE "B" ............................................................. 39
SCHEDULE "C" ............................................................. 41
SCHEDULE "D" ............................................................. 42
EXHIBIT 1 ................................................................ 45
EXHIBIT 2 ................................................................ 46
ii
<PAGE>
AGREEMENT OF LEASE, made as of this 27th day of October, 1994, between
RECKSON ASSOCIATES, a limited partnership, having its principal office at 225
Broadhollow Road, Suite 212 W, CS 5341, Melville, New York 11747-0983
(hereinafter referred to as "Landlord") and CROSS/Z INTERNATIONAL, INC., a
California corporation, having its principal place of business at 1134
Ballena Boulevard, Alameda, California 94501 (hereinafter referred to as
"Tenant"),
WITNESSETH: Landlord and Tenant hereby covenant and agree as follows:
SPACE
1. Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
the space substantially as shown on the Rental Plan initialed by the parties
and made part hereof as Exhibit "1" ("Demised Premises" or "Premises") in the
building known as Nassau West Corporate Center I, located at 60 Charles
Lindbergh Boulevard, Uniondale, New York (hereinafter referred to as the
"Building") which the parties agree contains 16,385 square feet in a Building
containing 200,000 square feet which constitutes 8.19 percent of the rentable
area of the Building.
TERM
2. The term ("Term" or "Demised Term" or "term") of this lease shall
commence on December 1, 1994 hereinafter referred to as the "Term Commencement
Date", and shall terminate on December 31, 2004, hereinafter referred to as the
"Expiration Date", unless the Term shall sooner terminate pursuant to any of
the terms, covenants or conditions of this lease or pursuant to law.
If the Demised Premises shall not be "substantially completed" in
accordance with Schedule A annexed hereto on or before January 1, 1995, then
the Term Commencement Date (and Tenant's obligation to pay rent) shall be
postponed until the date on which the Demised Premises shall be "substantially
completed" and the Term of this lease (and the Tenant's obligation to pay
rent) shall be extended so that the Expiration Date shall be ten (10) years
and one (1) month after the last day of the month in which the Term
Commencement Date occurs. "Substantially completed" as used herein is defined
to mean when the only items to be completed are those which do not interfere
with the Tenant's occupancy and substantially full enjoyment of the Demised
Premises; but if Landlord shall be delayed in such "substantial completion" as
a result of (i) Tenant's failure to furnish plans and specifications; (ii)
Tenant's request for materials, finishes or installations other than
Landlord's standard; (iii) Tenant's changes in said plans; (iv) the
performance or completion of any work, labor or services by a party employed
by Tenant; (v) Tenant's failure to approve final plans, working drawings or
reflective
1
<PAGE>
ceiling plans; then the commencement of the Term of this lease and the payment
of rent hereunder shall be accelerated by the number of days of such delay.
Tenant waives any right to rescind this lease under Section 223-a of the New
York Real Property Law or any successor statute of similar import then in force
and further waives the right to recover any damages which may result from
Landlord's failure to deliver possession of the Premises on the Term
Commencement Date.
RENT
3. The minimum annual rent ("Rent" or "rent") is as follows:
During the first thirteen (13) months of the Term of this lease commencing
December 1, 1994 and ending December 31, 1995, the Rent shall be $218,749.99,
payable $43,749.99 for the first month and $14,583.33 for each of the second
through thirteenth months.
During the second year, the Rent shall be $240,094.40, payable in monthly
installments of $20,007.87.
During the third year, the Rent shall be $310,135.28, payable in monthly
installments of $25,844.61.
During the fourth year, the Rent shall be $322,540.69, payable in monthly
installments of $26,878.39.
During the fifth year, the Rent shall be $335,442.32, payable in monthly
installments of $27,953.53.
During the sixth year, the Rent shall be $348,860.01, payable in monthly
installments of $29,071.67.
During the seventh year, the Rent shall be $362,814.41, payable in monthly
installments of $30,234.53.
During the eighth year, the Rent shall be $377,326.99, payable in monthly
installments of $31,443.92.
During the ninth. year, the Rent shall be $392,420.07, payable in monthly
installments of $32,701.67.
During the tenth year, the Rent shall be $378,950.21, payable $34,009.74 for
each of the first through tenth months and $19,426.41. for each of the eleventh
and twelfth months.
Each of the rent periods set forth above shall commence immediately after the
preceding rent period.
Tenant agrees to pay the Rent to Landlord, without notice or demand, in lawful
money of the United States which shall be legal
2
<PAGE>
tender in payment of the debts and dues, public and private, at the time of
payment in advance on the first day of each calendar month during the Demised
Term at the office of the Landlord, or at such other place as Landlord shall
designate, except that Tenant shall pay the first monthly installment on the
execution hereof. Tenant shall pay the Rent as above and as hereinafter
provided, without any set off or deduction whatsoever. Should the Term
Commencement Date be a date other than the first day of a calendar month, the
Tenant shall pay a pro rata portion of the Rent on a per diem basis, based upon
the second month of the Term, from such date to the first day of the following
month, and Landlord shall credit the excess amount paid toward the payment of
Rent for the next succeeding calendar month.
USE
4. (A) The Tenant shall use and occupy the Demised Premises only for
executive and administrative offices and for no other purpose.
(B) Tenant shall not use or occupy, suffer or permit the Premises, or
any part thereof, to be used in any manner which would in any way, in the
reasonable judgment of Landlord, (i) violate any laws or regulations of public
authorities; (ii) make void or voidable any insurance policy then in force with
respect to the Building; (iii) impair the appearance, character or reputation of
the Building; (iv) discharge objectionable fumes, vapors or odors into the
Building, air-conditioning systems or Building flues or vents in such a manner
as to offend other occupants. The provisions of this Section shall not be deemed
to be limited in any way to or by the provisions of any other Section or any
Rule or Regulation.
(C) The emplacement of any equipment which will impose an evenly
distributed floor load in excess of 100 pounds per square foot shall be done
only after written permission is received from the Landlord. Such permission
will be granted only after adequate proof is furnished by a professional
engineer that such floor loading will not endanger the structure. Within ten
(10) days after Tenant shall deliver to Landlord written specifications of any
equipment which Tenant desires to place in the Demised Premises, Landlord shall
advise Tenant if such equipment will have a floor load in excess of 100 pounds
per square foot and, if so, whether Tenant may bring such equipment into the
Demised Premises. Business machines and mechanical equipment in the Premises
shall be placed and maintained by Tenant, at Tenant's expense, in such manner as
shall be sufficient in Landlord's judgment to absorb vibration and noise and
prevent annoyance or inconvenience to Landlord or any other tenants or occupants
of the Building.
3
<PAGE>
(D) Tenant will not at any time use or occupy the Demised Premises in
violation of the certificate of occupancy (temporary or permanent) issued for
the Building or portion thereof of which the Demised Premises form a part.
Landlord represents that the certificate of occupancy for the Building permits
the Demised Premises to be used for office purposes
LANDLORD ALTERATION
5. Landlord, at its expense, will perform the work and make the
installations, as set forth in Schedule A annexed hereto, which is sometimes
hereinafter referred to as the "Landlord's Initial Construction".
SERVICES
6. (A) As long as Tenant is not in default under any covenants of this
lease, Landlord, during the hours of 8:00 A.M. to 6:00 P.M. on weekdays and on
Saturdays from 8:00 A.M. to 1:00 P.M., excluding legal holidays, shall furnish
elevator services to the Demised Premises and provide normal services to the
"Common Area" of the Building. Tenant shall have twenty-four (24) hour access to
the Demised Premises three hundred sixty-five (365) days per year and the
heating and air conditioning systems servicing the Demised Premises shall be
able to provide heat or air conditioning to the Demised Premises during the
hours in which Tenant has employees in the Demised Premises.
(B) Tenant shall contract directly with LILCO for energy service to the
Demised Premises and Tenant shall pay the cost of such service to LILCO in a
timely fashion.
LANDLORD'S REPAIRS
7. Landlord, at its expense, will make all the repairs to and provide the
maintenance for the Demised Premises (excluding painting and decorating) and for
all public areas and facilities as set forth in Schedule B, except such repairs
and maintenance as may be necessitated by the negligence, improper care or
improper use of such premises and facilities by Tenant, its agents, employees,
licensees or invitees, which will be made by Landlord at Tenant's expense.
4
<PAGE>
WATER SUPPLY
8. Landlord, at its expense, shall furnish hot and cold water for lavatory
purposes only.
PARKING FIELD
9. Tenant shall have the right to use sixty-five (65) parking spaces, eight
(8) of which shall be reserved spaces, for the parking of automobiles of the
Tenant, its employees and invitees, in the parking area reserved for tenants of
the building (hereinafter sometimes referred to as "Building Parking Area")
subject to the Rules and Regulations now or hereafter adopted by Landlord
(provided such Rules and Regulations shall be uniformly enforced by Landlord
against the other tenants of the Building). Tenant shall not use nor permit any
of its officers, agents or employees to use any parking spaces in excess of
Tenant's allotted number of spaces therein.
MONUMENT SIGN
10. Landlord will furnish to Tenant a listing of Tenant's name on the lawn
monument sign near the main entrance of the Demised Premises. The initial
listing will be made at Landlord's expense and any subsequent changes by Tenant
shall be made at Tenant's expense. Landlord's acceptance of any name for listing
on such sign will not be deemed, nor will it substitute for, Landlord's consent,
as required by this lease, to any sublease, assignment or other occupancy of the
Premises.
TAXES AND OTHER CHARGES
l1. (A) As used in and for the purposes of this Article 11, the following
definitions shall apply:
(i) "Taxes" shall be any amount of real estate taxes, assessments,
special or otherwise, sewer rents, rates and charges, State, Town, County taxes,
School taxes, or any other governmental charges, general, specific, ordinary or
extraordinary, foreseen or unforeseen, levied on a calendar year or fiscal year
basis against the Real Property. If at any time during the Term the method of
taxation prevailing at the date hereof shall be altered so that in lieu of, or
as in addition to, or as a substitute for, the whole or any part of the taxes,
levies, impositions or charges now levied, assessed or imposed on all or any
part of the Real Property
5
<PAGE>
(a) a tax, assessment, levy, imposition or charge based upon the rents received
thereon, whether or not wholly or partially as a capital levy or otherwise, or
(b) a tax, assessment, levy, imposition or charge measured by or based in whole
or in part upon all or any part of the Real Property and imposed on Landlord, or
(c) a license fee measured by the rent payable by Tenant to Landlord, or (d)
any other tax, levy, imposition, charge or license fee however described or
imposed in the nature of a real estate tax assessed against the Real Property
(defined below), then all such taxes, levies, impositions, charges or license
fees or any part thereof, so measured or based, shall be deemed to be Taxes.
(ii) "Base Year Taxes" shall be the taxes actually due and payable in
the 1994/95 tax year for Taxes assessed on a fiscal year basis and in 1995 for
Taxes assessed on a calendar year basis.
(iii) "Escalation Year" shall mean each calendar year which shall
include any part of the Demised Term.
(iv) "Real Property" shall be the land upon which the Building stands
and any part or parts thereof utilized for parking, landscaped areas or
otherwise used in connection with the Building, and the Building and other
improvements appurtenant thereto.
(B) The Tenant shall pay the Landlord increases in Taxes levied against
the Real Property as follows: If the Taxes actually due and payable with respect
to the Real Property in any Escalation Year shall be increased above the Base
Year Taxes, then the Tenant shall pay to the Landlord, as additional rent for
such Escalation Year, a sum equal to Tenant's percentage of the rentable area of
the Building, as set forth in Paragraph 1 of this Lease multiplied by the amount
of said increase.
(C) Landlord shall render to Tenant a statement containing a computation
of additional rent due under this Article ("Landlord's Statement") by reason of
any increase in Taxes over the Base Year Taxes. Within twenty (20) days after
the rendition of the Landlord's Statement which shows additional rent to be
payable, Tenant shall pay to Landlord the amount of such additional rent. On the
first day of each month following the rendition of each Landlord's Statement,
Tenant shall pay to Landlord, on account of the potential additional rent, a sum
equal to one-twelfth (1/12th) of the additional rent last paid by Tenant,
which sum shall be subject to adjustment for subsequent increases in Taxes.
(D) Landlord's failure to render a Landlord's Statement with respect to
any Escalation Year shall not prejudice Landlord's right to render a Landlord's
Statement with respect to any Escalation Year. The obligation of Landlord and
Tenant under the provisions of this Article with respect to any additional rent
which has accrued for any Escalation Year contained in whole or part in the
6
<PAGE>
Term of this lease shall survive the expiration or any sooner termination of the
Demised Term.
TENANT'S REPAIRS
12. Tenant shall take good care of the Demised Premises and, subject to the
provisions of Article 7 hereof, Landlord at the expense of Tenant, shall make as
and when needed as a result of misuse or neglect by Tenant or Tenant's servants,
employees, agents or licensees, all repairs in and about the Demised Premises
necessary to preserve them in good order and condition. Except as provided in
Article 24 hereof, there shall be no allowance to Tenant for a diminution of
rental value and, except if caused by Landlord's negligence, no liability on the
part of Landlord by reason of incovenience, annoyance or injury to business
arising from Landlord, Tenant or others making any repairs, alterations,
additions or improvements in or to any portion of the Building or of the Demised
Premises, or in or to the fixtures, appurtenances or equipment thereof, and,
except if caused by Landlord's negligence, no liability upon Landlord for
failure of Landlord or others to make any repairs, alterations, additions or
improvements in or to any portion of the Building or of the Demised Premises, or
in or to the fixtures, appurtenances or equipment thereof.
FIXTURES AND INSTALLATIONS
13. All appurtenances, fixtures, improvements, additions and other property
attached to or built into the Demised Premises, whether by Landlord or Tenant or
others, and whether at Landlord's expense, or Tenant's expense, or the joint
expense of Landlord and Tenant, shall be and remain the property of Landlord,
except that any such fixtures, improvements, additions and other property
installed at the sole expense of Tenant with respect to which Tenant has not
been granted any credit or allowance by Landlord, whether pursuant to Schedule A
or otherwise, and which are removable without material damage to the said
Demised Premises, and any of Tenant's trade fixtures, may be removed by Tenant
on condition that Tenant shall repair at its expense any damage to the Demised
Premises or the Building resulting from such removal. All the outside walls of
the Demised Premises including corridor walls and the outside entrance doors to
the Demised PRemises, any balconies, terraces or roofs adjacent to the Demised
Premises, and any space in the Demised Premises used for shafts, stacks, pipes,
conduits, ducts or other building facilities, and the use thereof, as well as
access thereto in and through the Demised Premises for the purpose of operation,
maintenance, decoration and repair, are expressly reserved to Landlord, and
Landlord does not convey any rights to Tenant therein. Notwithstanding the
foregoing, Tenant
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shall enjoy full right of access to the Demised Premises through the public
entrances, public corridors and public areas within the Building.
ALTERATIONS
14. (A) After completion of the Demised Premises as set forth in
Schedule A, Tenant shall make no alterations, installations, additions or
improvements (hereinafter collectively referred to as "Improvements"), except
decorations, in or to the Demised Premises without Landlord's prior written
consent, which consent shall not be unreasonably withheld, and then only by
contractors or mechanics approved by Landlord and at such times and in such
manner as Landlord may from time to time designate.
(B) All Improvements done by Tenant shall at all times comply with (i)
laws, rules, orders and regulations of governmental authorities having
jurisdiction thereof, and (ii) rules and regulations of the Landlord attached as
Schedule D.
(C) Plans and specifications prepared by and at the expense of Tenant
shall be submitted to Landlord for its prior written approval; no installations
or work shall be undertaken, started, or begun by Tenant, its agents, servants
or employees, until Landlord has approved such plans and specifications; and no
amendments or additions to such plans and specifications shall be made without
the prior written consent of Landlord; and such alterations or work performed by
or on behalf of Tenant (but not by Landlord) shall be subject to Landlord's
supervisory fee charge of 6% of the cost thereof. Tenant agrees that it will
not, either directly or indirectly, use any contractors and/or labor and/or
materials if the use of such contractors and/or labor and/or materials would or
will create any difficulty with other contractors and/or labor engaged by Tenant
or Landlord or others in the construction, maintenance and/or operation of the
Building or any part thereof.
(D) Tenant's right to make Improvements shall be subject to the
following additional conditions: (i) the Improvements will not result in a
violation of, or require a change in, any Certificate of Occupancy applicable to
the Premises or the Building; (ii) the outside appearance, character or use of
the Building shall not be affected; (iii) no part of the Building outside of the
Premises shall be physically affected; (iv) the proper functioning of any
air-conditioning, elevator, plumbing, electrical, sanitary, mechanical and
other service or utility system of the Building shall not be affected.
(E) Tenant shall defend, indemnify and save harmless Landlord against
any and all mechanics' and other liens filed in
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connection with its Improvements, repairs or installations, including the liens
of any conditional sales of, or chattel mortgages upon, any materials, fixtures
or articles so installed in and constituting part of the Premises and against
any loss, cost, liability, claim, damage and expense, including reasonable
counsel fees, penalties and fines incurred in connection with any such lien,
conditional sale or chattel mortgage or any action or proceeding brought
thereon. As a condition precedent to Landlord's consent to the making by Tenant
of Improvements, Tenant agrees to obtain and deliver to Landlord, written and
unconditional waivers of mechanics' liens for all work, labor and services to be
performed and materials to be furnished, signed by all contractors,
subcontractors, materialmen and laborers to become involved in such work.
Notwithstanding anything to the contrary contained in this Paragraph, Tenant
shall be permitted to finance and encumber their trade fixtures and computer
systems.
Tenant, at its expense, shall procure the satisfaction or discharge of all
such liens within thirty (30) days of the filing of such lien against the
Premises or the Building. If Tenant shall fail to cause such lien to be
discharged within the aforesaid period, then, in addition to any other right or
remedy, Landlord may, but shall not be obligated to, discharge the same either
by paying the amount claimed to be due or by procuring the discharge of such
lien by deposit or by bonding proceedings, and in any such event Landlord shall
be entitled, if Landlord so elects, to compel the prosecution of an action for
the foreclosure of such lien by the lienor and to pay the amount of the judgment
in favor of the lienor with interest, costs and allowances. Any amount so paid
by Landlord, and all costs and expenses incurred by Landlord in connection
therewith, together with interest thereon at the maximum rate permitted by law
from the respective dates of Landlord's making of the payments or incurring of
the cost and expense, shall constitute additional rent and shall be paid on
demand.
REQUIREMENTS OF LAW
15. (A) Tenant, as Tenant's sole cost and expense, shall comply with all
statutes, laws, ordinances, orders, regulations and notices of Federal, State,
County and Municipal authorities, and with all directions, pursuant to law, of
all public officers, which shall impose any duty upon Landlord or Tenant with
respect to the Demised Premises or the use or occupation thereof, except that
Tenant shall not be required to make any structural alterations in order so to
comply unless such alterations shall be necessitated or occasioned, in whole or
in part, by the acts, omissions, or negligence of Tenant or any person claiming
through or under Tenant or any of their servants, employees, contractors,
agents, visitors
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or licensees. Or by the use or occupancy or manner of use or of the Demised
Premises by Tenant, or any such person.
(B) The parties acknowledge that there are certain Federal, State and
local laws, regulations and guidelines now in effect and that additional laws,
regulations and guidelines may hereafter be enacted, relating to or affecting
the Premises, the Building, and the land of which the Premises and the Building
may be a part, concerning the impact on the environment of construction, land
use, the maintenance and operation of structures and the conduct of business.
Tenant will not cause, or permit to be caused, any act or practice, by
negligence, omission, or otherwise that would adversely affect the environment
or do anything or permit anything to be done that would violate any of said
laws, regulations, or guidelines. Any violation of this covenant shall be an
event of default under this lease.
END OF TERM
16. (A) Upon the expiration or other termination of the Term of this lease,
Tenant shall, at its own expense, quit and surrender to Landlord the Demised
Premises, broom clean, in good order and condition, ordinary wear, tear and
damage by fire or other insured casualty excepted, and Tenant shall remove all
of its property and shall pay the cost to repair all damage to the Demised
Premises or the Building occasioned by such removal. Any property not removed
from the Premises shall be deemed abandoned by Tenant and may be retained by
Landlord, as its property, or disposed of in any manner deemed appropriate by
the Landlord. Any expense incurred by Landlord in removing or disposing of such
property shall be reimbursed to Landlord by Tenant on demand. Tenant's
obligation to observe or perform this covenant shall survive the expiration or
other termination of the Term of this lease. If the last day of the Term of this
lease or any renewal hereof falls on Sunday or a legal holiday, this lease shall
expire on the business day immediately preceding. Tenant's obligations under
this Article 16 shall survive the Expiration Date or sooner termination of this
lease.
(B) If Tenant shall hold over after the end of the Term, such holding
over shall be unlawful and in no manner constitute a renewal or an extension of
this lease and no notice of any kind shall be required prior to any commencement
of summary proceeding and Tenant hereby waives any such right. However, during
such hold over time Tenant shall have all of the obligations of this lease. In
the event of any holdover after a termination of the term of this lease
pursuant to court order or after December 31, 2004, Tenant shall be required to
pay, if it shall fail to vacate the Demised Premises within (10) days after
notice from Landlord, rent at a monthly rate equal to 150% of the amount due
during the first
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month of the last year of occupancy before the end of the expired term, plus any
esclations or additional rent provided for in this lease.
QUIET ENJOYMENT
17. Landlord covenants and agrees with Tenant that upon Tenant paying the
Rent and additional rent and observing and performing all the terms, covenants
and conditions on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the Demised Premises during the Term of this lease
without hindrance or molestation by anyone claiming by or through Landlord,
subject, nevertheless, to the terms, covenants and conditions of this lease
including, but not limited to, Article 22.
SIGNS
18. No signs or lettering of any nature may be put on or in any window or
on the exterior of the Building or elsewhere within the Demised Premises such as
will be visible from the street. No sign or lettering in the public corridors or
on the doors is permitted except Landlord's standard name plaque which shall be
located on the main entrance door to the Demised Premises. Landlord shall
inscribe upon such plaque Tenant's name and the name of up to two (2) companies
affiliated with Tenant. The first sign shall be at Landlord's expense.
RULES AND REGULATIONS
19. Tenant and Tenant's agents, employees, visitors, and licensees shall
faithfully observe and comply with, and shall not permit violation of, the Rules
and Regulations set forth on Schedule D annexed hereto and made part hereof, and
with such further reasonable Rules and Regulations as Landlord at any time may
make and communicate in writing to Tenant which, in Landlord's judgment, shall
be necessary for the reputation, safety, care and appearance of the Building and
the land allocated to it or the preservation of good order therein, or the
operation or maintenance of the Building, and such land, its equipment, or the
more useful occupancy or the comfort of the tenants or others in the Building.
Landlord shall use reasonable best efforts to secure compliance with said Rules
and Regulations by the other tenants or occupants of the Building but Landlord
shall not be liable to Tenant for the violation of any of said Rules and
Regulations, or the breach of any covenant or condition, in any lease by any
other tenant or
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occupant in the Building, nor shall Landlord be required to commence a legal
action to enforce such compliance.
RIGHT TO SUBLET OR ASSIGN
20. (A) The Tenant covenants that it shall not assign this lease nor sublet
the Demised Premises or any part thereof without the prior written consent of
Landlord in each instance, except on the conditions hereinafter stated. The
Tenant may assign this lease or sublet all or a portion of the Demised Premises
with Landlord's written consent, providing:
(i) That such assignment or sublease is for a use which is in compliance
with the then existing zoning regulations and the Certificate of Occupancy;
(ii) That, at the time of such assignment or subletting, there is no
default under the terms of this lease on the Tenant's part;
(iii) That, in the event of an assignment, the assignee shall assume in
writing the performance of all of the terms and obligations of the within lease;
(iv) That a duplicate original of said assignment or sublease shall be
delivered by certified mail to the Landlord at the address herein set forth
within ten (10) days from the said assignment or sublease and within ninety (90)
days of the date that Tenant first advises Landlord of the name and address of
the proposed subtenant or assignee, as required pursuant to subparagraph (B)
hereof;
(v) Such assignment or subletting shall not, however, release the within
Tenant or any successor tenant or any guarantor from their liability for the
full and faithful performance of all of the terms and conditions of this lease;
(vi) If this lease be assigned, or if the Demised Premises or any part
thereof be underlet or occupied by anybody other than Tenant, Landlord may after
default by Tenant collect rent from the assignee, undertenant or occupant, and
apply the net amount collected to the rent herein reserved.
(B) Notwithstanding anything contained in this Article 20 to the
contrary, no assignment or underletting shall be made by Tenant in any event
until Tenant has offered to terminate this lease as of the last day of any
calendar month during the Term hereof and to vacate and surrender the Demised
Premises to Landlord on the date fixed in the notice served by Tenant upon
Landlord (which date shall be prior to the date of such proposed assignment
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or the commencement date of such proposed lease). Simultaneously with said offer
to terminate this lease, Tenant shall advise the Landlord, in writing, of the
name and address of the proposed assignee or subtenant, a reasonably detailed
statement of the proposed subtenant/assignee's business, reasonably detailed
financial references, and all the terms, covenants, and conditions of the
proposed sublease or assignment.
(C) Tenant may, without the consent of Landlord, assign this lease to an
affiliated (i.e., a corporation 20% or more of whose capital stock is owned by
the same stockholders owning 20% or more of Tenant's capital stock), parent or
subsidiary corporation of Tenant or to a corporation to which it sells or
assigns all or substantially all of its assets or with which it may be
consolidated or merged, provided such purchasing, consolidated, merged,
affiliated or subsidiary corporation shall, in writing, assume and agree to
perform all of the obligations of Tenant under this lease and it shall deliver
such assumption with a copy of such assignment to Landlord within ten (10) days
thereafter, and provided further than Tenant shall not be released or discharged
from any liability under this lease by reason of such assignment.
(D) Whenever Tenant shall claim under this Article or any other part of
this lease that Landlord has unreasonably withheld or delayed its consent to
some request of Tenant, Tenant shall have no claim for damages by reason of such
alleged withholding or delay, and Tenant's sole remedy thereof shall be a right
to obtain specific performance or injunction but in no event with recovery of
damages.
(E) Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not mortgage nor encumber this agreement or the Demised
Premises.
LANDLORD'S ACCESS TO PREMISES
21. (A) Landlord or Landlord's agents shall have the right to enter and/or
pass through the Demised Premises at all reasonable times on reasonable notice,
except in an emergency, to examine the same, and to show them to ground lessors,
prospective purchasers or lessees or mortgagees of the Building, and to make
such repairs, improvements or additions as Landlord may deem necessary or
desirable, and Landlord shall be allowed to take all material into and upon
and/or through said Demised Premises that may be required therefor. During the
twelve (12) months prior to the expiration of the Term of this lease, or any
renewal term, Landlord may exhibit the Demised Premises to prospective tenants
or purchasers at all reasonable hours and without unreasonably interfering with
Tenant's business. If Tenant shall not be personally present to
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open and permit an entry into said premises at any time, when for any reason an
entry therein shall be necessary or permissible, Landlord or Landlord's agents
may enter the same by a master key, or forcibly, without rendering Landlord or
such agent liable therefor (if during such entry Landlord or Landlord's agents
shall accord reasonable care to Tenant's property).
(B) Landlord shall also have the right, at any time, to change the
arrangement and/or location of entrances or passageways, doors and doorways,
and corridors, elevators, stairs, toilets, or other public parts of the
Building, provided, however, that Landlord shall make no change in the
arrangement and/or location of entrances or passageways or other public parts of
the Building which will adversely affect in any material manner Tenant's use
and enjoyment of the Demised Premises. Landlord shall also have the right, at
any time, to name the Building, including, but not limited to, the use of
appropriate signs and/or lettering on any or all entrances to the Building, and
to change the name, number or designation by which the Building is commonly
known.
(C) Neither this lease nor any use by Tenant shall give Tenant any right
or easement to the use of any door or passage or concourse connecting with any
other building or to any public conveniences, and the use of such doors and
passages and concourse and of such conveniences may be regulated and/or
discontinued at any time and from time to time by Landlord without notice to
Tenant.
(D) The exercise by Landlord or its agents of any right reserved to
Landlord in this Article shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of rent, or relieve Tenant from any of its obligations under this lease, or,
except if caused by Landlord's negligence, impose any liability upon Landlord,
or its agents, or upon any lessor under any ground or underlying lease, by
reason of inconvenience or annoyance to Tenant, or injury to or interruption of
Tenant's business, or otherwise.
SUBORDINATION
22. (A) This lease and all rights of Tenant hereunder are, and shall be,
subject and subordinate in all respects to all ground leases and/or underlying
leases and to all mortgages and building loan agreements which may now or
hereafter be placed on or affect such leases and/or the Real Property of which
the Demised Premises form a part, or any part or parts of such Real Property,
and/or Landlord's interest or estate therein, and to each advance made and/or
hereafter to be made under any such mortgages, and to all renewals,
modifications, consolidations, replacements and
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extensions thereof and all substitutions therefor. This Section A shall be
self-operative and no further instrument of subordination shall be required. In
confirmation of such subordination, Tenant shall execute and deliver promptly
any certificate that Landlord and/or any mortgagee and/or the lessor under any
ground or underlying lease and/or their respective successors in interest may
request.
(B) Without limitation of any of the provisions of this lease, in the
event that any mortgagee or its assigns shall succeed to the interest of
Landlord or of any successor-Landlord and/or shall have become lessee under a
new ground or underlying lease, then, at the option of such mortgagee, this
lease shall nevertheless continue in full force and effect and Tenant shall and
does hereby agree to attorn to such mortgagee or its assigns and to recognize
such mortgagee or its respective assigns as its Landlord.
(C) Tenant shall, at any time and from time to time, upon not less than
five (5) days prior notice by Landlord, execute, acknowledge and deliver to
Landlord a statement in writing certifying that this lease is unmodified and in
full force and effect (or if there have been modifications, that the same is in
full force and effect as modified and stating the modification) and the dates to
which the Rent, additional rent and other charges have been paid in advance, if
any, and stating whether or not to the best knowledge of the signer of such
certificate Landlord is in default in performance of any covenant, agreement,
term, provision or condition contained in this lease, and if so, specifying each
such default of which the signer may have knowledge, it being intended that any
such statement delivered pursuant hereto may be relied upon by any prospective
purchaser or lessee of said real property or any interest or estate therein, any
mortgagee or prospective mortgagee thereof, or any prospective assignee of any
mortgage thereof. If, in connection with obtaining financing for the Building
and the land allocated to it, a banking, insurance or other recognized
institutional lender shall request reasonable modifications in this lease as a
condition to such financing, Tenant will not unreasonably withhold, delay or
defer its consent thereof, provided that such modifications do not increase the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created. If, in connection with such financing, such
institutional lender shall require financial information on the Tenant, Tenant
shall promptly comply with such request. Such financial information shall be
audited if Tenant otherwise possesses audited financial statements.
(D) The Tenant covenants and agrees that if by reason of a default under
any underlying lease (including an underlying lease through which the Landlord
derives its leasehold estate in the premises), such underlying lease and the
leasehold estate of the Landlord or the premises demised hereby is terminated,
providing
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notice has been given to the Tenant and leasehold mortgagee, the Tenant will
attorn to the then holder of the reversionary interest in the premises demised
by this lease or to anyone who shall succeed to the interest of the Landlord or
to the leasee of a new underlying lease entered into pursuant to the provisions
of such underlying lease, and will recognize such holder and/or such lessee as
the Tenant's landlord of this lease. The Tenant agrees to execute and deliver,
at any time and from time to time, upon the request of the Landlord or of the
lessor under any such underlying lease, any instrument which may be necessary or
appropriate to evidence such attornment. The Tenant further waives the provision
of any statute or rule of law now or hereafter in effect which may give or
purport to give the Tenant any right of election to terminate this lease or to
surrender possession of the premises hereby in the event any proceeding is
brought by the lessor under any underlying lease to terminate the same, and
agrees that unless and until any such lessor, in connection with any such
proceeding, shall elect to terminate this lease and the rights of the Tenant
hereunder, this lease shall not be affected in any way whatsoever by any such
proceeding. Nothing herein contained shall diminish any rights derived by reason
of Nondisturbance Agreements granted to Tenant by lessor under the terms of
their underlying lease.
(E) At Tenant's option, Landlord shall deliver to Tenant, within sixty (60)
days after the date of this lease, a Nondisturbance and Attornment Agreement
from the holder of the mortgage on the Building, provided such mortgage holder
is satisfied with the financial status of Tenant. If Tenant shall not request
such Nondisturbance and Attornment Agreement until after the first sixty (60)
days after the date of this lease, Landlord shall use its reasonable best
efforts to obtain such Nondisturbance and Attornment Agreement. Tenant shall
provide to Landlord upon request by Landlord a current financial statement for
submission to such mortgage holder. Such Nondisturbance and Attornment Agreement
shall provide, in part, that such mortgage holder shall not disturb Tenant's
rights under this lease provided Tenant shall not be in default hereunder and
shall further provide that, if such mortgage holder (or its designee) shall
succeed to Landlord's interest under this lease, Tenant shall attorn to such
mortgage holder (or its designee).
PROPERTY LOSS, DAMAGE REIMBURSEMENT
23. (A) Landlord or its agents shall not be liable for any damages to
property of Tenant or of others entrusted to employees of the Building, nor for
the loss of or damage to any property of Tenant by theft or otherwise, unless
such loss or damage shall be caused by Landlord's negligence. Landlord or its
agents shall not be liable for any injury or damage to persons or property
resulting from fire, explosion, falling plaster, steam, gas, electricity,
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electrical disturbance, water, rain or snow or leaks from any part of the
Building or from the pipes, appliances or plumbing works or from the roof,
street or subsurface or from any other place or by dampness or by any other
cause of whatsoever nature, unless caused by or due to the negligence of
Landlord, its agents, servants or employees; nor shall Landlord or its agents be
liable for any such damage caused by other tenants or persons in the Building or
caused by operations in construction of any private, public or quasi-public
work; nor shall Landlord be liable for any latent defect in the Demised
Premises, or in the Building. If at any time any windows of the Demised Premises
are temporarily closed or darkened incident to or for the purpose of repairs,
replacements, maintenance and/or cleaning in, on, to or about the Building or
any part or parts thereof, Landlord shall not be liable for any damage Tenant
may sustain thereby and Tenant shall not be entitled to any compensation
therefor nor abatement of rent nor shall the same release Tenant from its
obligations hereunder nor constitute an eviction. Tenant shall reimburse and
compensate Landlord as additional rent for all expenditures made by, or damages
or fines sustained or incurred by, Landlord due to non-performance or
non-compliance with or breach or failure to observe any term, covenants or
condition of this lease upon Tenant's part to be kept, observed, performed or
complied with. Tenant shall give immediate notice to Landlord in case of fire or
accidents in the Demised Premises or in the Building or of defects therein or in
any fixtures or equipment.
TENANT'S INDEMNITY
(B) Tenant shall indemnify and save harmless Landlord against and
from any and all claims by or on behalf of any person or persons, firm or
firms, corporation or corporations arising from the conduct or management of
or from any work or thing whatsoever done (other than by Landlord or its
contractors or the agents or employees of either) in and on the Demised
Premises during the Term of this lease and during the period of time, if any,
prior to the specified Term Commencement Date that Tenant may have been given
access to the Demised Premises for the purpose of making installations, and
will further indemnify and save harmless Landlord against and from any and all
claims arising from any condition of the Demised Premises due to or arising
from any act or omissions or negligence of Tenant or any of its agents,
contractors, servants, employees, licensees or invitees and against and from
all costs, expenses, and liabilities incurred in connection with any such
claim or claims or action or proceeding brought thereon; and in case any
action or proceeding be brought against Landlord by reason of any such claim,
Tenant, upon notice from Landlord, agrees that Tenant, at Tenant's expense,
will resist or defend such action or proceeding and will employ counsel
therefor reasonably satisfactory to Landlord.
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DESTRUCTION - FIRE OR OTHER CASUALTY
24. (A) if the premises or any part thereof shall be damaged by fire
or other casualty and Tenant gives prompt notice thereof to Landlord,
Landlord shall proceed with reasonable diligence to repair or cause to be
repaired such damage. The Rent shall be abated to the extent that the Premises
shall have been rendered untenantable, such abatement to be from the date of
such damage or destruction to the date the Premises shall be substantially
repaired or rebuilt in proportion which the area of the part of the Premises
so rendered untenantable bears to the total area of the Premises.
(B) If the Premises shall be totally damaged or rendered wholly
untenantable by fire or other casualty, and Landlord has not terminated this
lease pursuant to Subsection (C) and Landlord has not completed the making of
the required repairs and restored and rebuilt the Premises and/or access
thereto within nine (9) months from the date of such damage or destruction,
and such additional time after such date (but in no event to exceed six (6)
months) as shall equal the aggregate period Landlord may have been delayed in
doing so by unavoidable delays or adjustment of insurance, Tenant may serve
notice on Landlord of its intention to terminate this lease, and, if within
thirty (30) days thereafter Landlord shall not have completed the making of
the required repairs and restored and rebuilt the Premises, this lease shall
terminate on the expiration of such thirty (30) day period as if such
termination date were the Expiration Date, and the Rent and additional rent
shall be apportioned as of such date and any prepaid portion of Rent and
additional rent for any period after such date shall be refunded by Landlord
to Tenant.
(C) If the Premises shall be totally damaged or rendered wholly
untenantable by fire or other casualty or if the Building shall be so damaged
by fire or other casualty that substantial alteration or reconstruction of the
Building shall, in Landlord's opinion, be required (whether or not the
Premises shall have been damaged by such fire or other casualty), then in any
of such events Landlord may, at its option, terminate this lease and the Term
and estate hereby granted, by giving Tenant thirty (30) days notice of such
termination within ninety (90) days after the date of such damage. In the
event that such notice of termination shall be given, this lease and the Term
and estate hereby granted, shall terminate as of the date provided in such
notice of termination (whether or not the Term shall have commenced) with the
same effect as if that were the Expiration Date, and the Rent and additional
rent shall be apportioned as of such date or sooner termination and any
prepaid portion of Rent and additional rent for any period after such date
shall be refunded by Landlord to Tenant.
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(D) Landlord shall not be liable for any inconvenience or annoyance
to Tenant or injury to the business of Tenant resulting in any way from such
damage by fire or other casualty or the repair thereof, unless caused by
Landlord's negligence and only to the extent of Landlord's insurance coverage.
Landlord will not carry insurance of any kind on Tenant's property, and
Landlord shall not be obligated to repair any damage thereto or replace the
same.
(E) This lease shall be considered an express agreement governing any
case of damage to or destruction of the Building or any part thereof by fire
or other casualty, and Section 227 of the Real Property Law of the State of
New York providing for such a contingency in the absence of such express
agreement, and any other law of like import now or hereafter enacted, shall
have no application in such case.
INSURANCE
25. (A) Tenant shall not do anything, or suffer or permit anything to
be done, in or about the Premises which shall (i) invalidate or be in conflict
with the provisions of any fire or other insurance policies covering the
Building or any property located therein, or (ii) result in a refusal by fire
insurance companies of good standing to insure the Building or any such property
in amounts reasonably satisfactory to Landlord, or (iii) subject Landlord to any
liability or responsibility for injury to any person or property by reason of
any activity being conducted in the Premises or (iv) cause any increase in the
fire insurance rates applicable to the Building or equipment or other property
located therein at the beginning of the Term or at any time thereafter. Tenant,
at Tenant's expense, shall comply with all rules, orders, regulations or
requirements of the New York Board of Fire Underwriters and the New York Fire
Insurance Rating Organization or any similar body.
(B) If, by reason of any act or omission on the part of Tenant, the
rate of fire insurance with extended coverage on the Building or equipment or
other property of Landlord or any other tenant or occupant of the Building
shall be higher than it otherwise would be, Tenant shall reimburse Landlord
and all such other tenants or occupants, on demand, for the part of the
premiums for fire insurance and extended coverage paid by Landlord and such
other tenants or occupants because of such act or omission on the part of
Tenant.
(C) In the event that any dispute should arise between Landlord and
Tenant concerning insurance rates, a schedule or make up of insurance rates
for the Building or the Premises, as the case may be, issued by the New York
Fire Insurance Rating Organization
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or other similar body making rates for fire insurance and extended coverage
for the Premises concerned, shall be conclusive evidence of the facts therein
stated and of the several items and charges in the fire insurance rates with
extended coverage then applicable to such Premises.
(D) Tenant shall obtain and keep in full force and effect during the
Term, at its own cost and expense, (i) Public Liability Insurance, such
insurance to afford protection in an amount of not less than Three Million
($3,000,000) Dollars for injury or death arising out of any one occurrence,
and Five Hundred Thousand ($500,000) Dollars for damage to property,
protecting Landlord and Tenant as insureds against any and all claims for
personal injury, death or property damage and (ii) Fire and Extended Coverage
Insurance on Tenant's property, insuring against damage by fire, and such
other risks and hazards as are insurable under present and future standard
forms of fire and extended coverage insurance policies, to Tenant's property
for the full insurable value thereof, protecting Landlord and Tenant as
insureds.
(E) Said insurance is to be written in form and substance
satisfactory to Landlord by a good and solvent insurance company of recognized
standing, admitted to do business in the State of New York, which shall be
reasonably satisfactory to Landlord. Tenant shall procure, maintain and place
such insurance and pay all premiums and charges therefor and upon failure to
do so Landlord may, but shall not be obligated to, procure, maintain and place
such insurance or make such payments, and in such event the Tenant agrees to
pay the amount thereof, plus interest at the maximum rate permitted by law, to
Landlord on demand and said sum shall be in each instance collectible as
additional rent on the first day of the month following the date of payment by
Landlord. Tenant shall cause to be included in all such insurance policies a
provision to the effect that the same will be non-cancellable except upon
twenty (20) days written notice to Landlord. On the Term Commencement Date the
original insurance policies or appropriate certificates shall be deposited
with Landlord. Any renewals, replacements or endorsements thereto shall also
be deposited with Landlord to the end that said insurance shall be in full
force and effect during the Term.
(F) Each party agrees to use its best efforts to include in each of
its insurance policies (insuring the Building and Landlord's property therein,
in the case of Landlord, and insuring Tenant's property, in the case of Tenant,
against loss, damage or destruction by fire or other casualty) a waiver of the
insurer's right of subrogation against the other party, or if such waiver should
be unobtainable or unenforceable (i) an express agreement that such policy shall
not be invalidated if the insured waives or has waived before the casualty, the
right of recovery against any party responsible for a casualty covered by the
policy, or (ii) any
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other form of Permission for the release of the other party, or (iii) the
inclusion of the other party as an additional insured, but not a party to whom
any loss shall be payable. If such waiver, agreement or permission shall not be,
or shall cease to be, obtainable without additional charge or at all, the
insured party shall so notify the other party promptly after learning thereof.
In such case, if the other party shall agree in writing to pay the insurer's
additional charge therefor, such waiver, agreement or permission shall be
included in the policy, or the other party shall be named as an additional
insured in the policy, but not a party to whom any loss shall be payable. Each
such policy which shall so name a party hereto as an additional insured shall
contain, if obtainable, agreements by the insurer that the policy will not be
cancelled without at least twenty (20) days prior notice to both insureds and
that the act or omission of one insured will not invalidate the policy as to the
other insured.
(G) As long as Landlord's fire insurance policies then in force
include the waiver of subrogation or agreement or permission to release
liability referred to in Subsection (F) or name the Tenant as an additional
insured, Landlord hereby waives (i) any obligation on the part of Tenant to make
repairs to the Premises necessitated or occasioned by fire or other casualty
that is an insured risk under such policies, and (ii) any right of recovery
against Tenant, any other permitted occupant of the Premises, and any of their
servants, employees, agents or contractors, for any loss occasioned by fire or
other casualty that is an insured risk under such policies. In the event that at
any time Landlord's fire insurance carriers shall not include such or similar
provisions in Landlord's fire insurance policies, the waivers set forth in the
foregoing sentence, upon notice given by Landlord to Tenant, shall be deemed of
no further force or effect, with respect to any insured risks under such
policies from and after the giving of such notice. During any period while the
foregoing waiver of right of recovery is in effect, Landlord shall look solely
to the proceeds of such policies to compensate Landlord for any loss occasioned
by fire or other casualty which is an insured risk under such policies.
(H) As long as Tenant's fire insurance policies then in force include
the waiver of subrogation or agreement or permission to release liability
referred to in Subsection (F), or name the Landlord as an additional insured,
Tenant hereby waives (and agrees to cause any other permitted occupants of the
Premises to execute and deliver to Landlord written instruments waiving) any
right of recovery against Landlord, any other tenants or occupants of the
Building, and any servants, employees, agents or contractors of Landlord or of
any such other tenants or occupants, for any loss occasioned by fire or other
casualty which is an insured risk under such policies. In the event that at
any time Tenant's fire insurance carriers shall not include such or similar
provisions in Tenant's fire insurance policies, the waiver set forth in the
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foregoing sentence shall, upon notice given by Tenant to Landlord, be deemed of
no further force or effect with respect to any insured risks under such policy
from and after the giving of such notice. During any period while the foregoing
waiver of right of recovery is in effect, Tenant, or any other permitted
occupant of the Premises, as the case may be, shall look solely to the proceeds
of such policies to compensate Tenant or such other permitted occupant for any
loss occasioned by fire or other casualty which is an insured risk under such
policies.
EMINENT DOMAIN
26. (A) In the event that the whole of the Demised Premises shall be
lawfully condemned or taken in any manner for any public or quasi-public use,
this lease and the Term and estate hereby granted shall forthwith cease and
terminate as of the date of vesting of title. In the event that only a part of
the Demised Premises shall be so condemned or taken, then effective as of the
date of vesting of title, the Rent hereunder shall be abated in an amount
thereof apportioned according to the area of the Demised Premises so condemned
or taken. In the event that a substantial part of the Building shall be so
condemned or taken, then (i) Landlord (whether or not the Demised Premises be
affected) may, at its option, terminate this lease and the Term and estate
hereby granted as of the date of such vesting of title by notifying Tenant in
writing of such termination within sixty (60) days following the date on which
Landlord shall have received notice of vesting of title, and (ii) if such
condemnation or taking shall be of a substantial part of the Demised Premises or
a substantial part of the means of access thereof, Tenant shall have the right,
by delivery of notice in writing to Landlord within sixty (60) days following
the date on which Tenant shall have received notice of vesting of title, to
terminate this lease and the Term and estate hereby granted as of the date of
vesting of title, or (iii) if neither Landlord nor Tenant elects to terminate
this lease, as aforesaid, this lease shall be and remain unaffected by such
condemnation or taking, except that the Rent shall be abated to the extent, if
any, hereinabove provided in this Article 26. For purposes of this paragraph,
the taking of the roadways or parking areas of the Building which do not affect
a substantial part of the means of access to the Building or do not affect a
substantial number of parking spaces shall not be deemed to be a taking of a
substantial part of the Building. In the event that only a part of the Demised
Premises shall be so condemned or taken and this lease and the Term and estate
hereby granted are not terminated as hereinbefore provided, Landlord will, at
its expense, restore the remaining portion of the Demised Premises as nearly as
practicable to the same condition as it was in prior to such condemnation or
taking.
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(B) In the event of a termination in any of the cases hereinabove
provided, this lease and the Term and estate granted shall expire as of the
date of such termination with the same effect as if that were the date
hereinbefore set for the expiration of the Term of this lease, and the Rent
hereunder shall be apportioned as of such date.
(C) In the event of any condemnation or taking hereinabove mentioned
of all or part of the Building, Landlord shall be entitled to receive the
entire award in the condemnation proceeding, including any award made for the
value of the estate vested by this lease in Tenant, and Tenant hereby
expressly assigns to Landlord any and all right, title and interest of Tenant
now or hereafter arising in or to any such award or any part thereof, and
Tenant shall be entitled to receive no part of such award, except that the
Tenant may file a claim for any taking of nonmovable fixtures owned by Tenant
and for moving expenses incurred by Tenant. It is expressly understood and
agreed that the provisions of this Article 26 shall not be applicable to any
condemnation or taking for governmental occupancy for a limited period.
NONLIABILITY OF LANDLORD
27. (A) If Landlord or a successor in interest is an individual
(which term as used herein includes aggregates of individuals, such as joint
ventures, general or limited partnerships or associations), such individual
shall be under no personal liability with respect to any of the provisions of
this lease, and if such individual hereto is in breach or default with respect
to its obligations under this lease, Tenant shall look solely to the equity of
such individual in the land and Building of which the Demised Premises form a
part for the satisfaction of Tenant's remedies and in no event shall Tenant
attempt to secure any personal judgment against any such individual or any
partner, employee or agent of Landlord by reason of such default by Landlord.
(B) The word "Landlord" as used herein means only the owner of the
landlord's interest for the time being in the land and Building (or the owners
of a lease of the Building or of the land and Building) of which the Premises
form a part, and in the event of any sale of the Building and land of which
the Demised Premises form a part, Landlord shall be and hereby is entirely
freed and relieved of all covenants and obligations of Landlord hereunder and,
it shall be deemed and construed without further agreement between the parties
or between the parties and the purchaser of the Premises, that such purchaser
has assumed and agreed to carry out any and all covenants and obligations of
Landlord hereunder.
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DEFAULT
28. (A) Upon the occurrence at any time prior to or during the
Demised Term, of any one or more of the following events (referred to as
"Events of Default"):
(i) If Tenant shall default in the payment when due of any
installment of Rent or in the payment when due of any additional rent, and
such default shall continue for a period of ten (10) days after notice by
Landlord to Tenant of such,default; or
(ii) If Tenant shall default in the observance or
performance of any term, covenant or condition of this lease on Tenant's part
to be observed or performed (other than the covenants for the payment of Rent
and additional rent) and Tenant shall fail to remedy such default within
twenty (20) days after notice by Landlord to Tenant of such default, or if
such default is of such a nature that it cannot be completely remedied within
said period of twenty (20) days and Tenant shall not commence within said
period of twenty (20) days, or shall not thereafter diligently prosecute to
completion, all steps necessary to remedy such default; or
(iii) If Tenant shall file a voluntary petition in
bankruptcy or insolvency, or shall be adjudicated a bankrupt or become
insolvent, or shall file any petition or answer seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the present or any future federal bankruptcy code or any other
present or future applicable federal, state or other statute or law, or shall
make an assignment for the benefit of creditors or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator of Tenant
or of all or any part of Tenant's property; or
(iv) If, within sixty (60) days after the commencement of
any proceeding against Tenant, whether by the filing of a petition or
otherwise, seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present or any future
federal bankruptcy code or any other present or future applicable federal,
state or other statute or law, such proceedings shall not have been dismissed,
or if, within sixty (60) days after the appointment or any trustee, receiver
or liquidator of Tenant, or of all or any part of Tenant's property, such
appointment shall not have been vacated or otherwise discharged, or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property pursuant to which the Demised Premises shall be taken or occupied or
attempted to be taken or occupied; or
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(v) If Tenant shall default in the observance or performance of any
term, covenant or condition on Tenant's part to be observed or performed
under any other lease with Landlord of space in the Building and such default
shall continue beyond any grace period set forth in such other lease for the
remedying of such default; or
(vi) [Intentionally omitted.]
(vii) If Tenant's interest in this lease shall devolve upon or pass to
any person, whether by operation of law or otherwise, except as expressly
permitted under Article 20; then, upon the occurrence, at anytime prior to or
during the Demised Term, of any one or more of such Events of Default, Landlord,
at any time thereafter, at Landlord's option, may give to Tenant a ten day
notice of termination of this lease and, in the event such notice is given, this
lease and the Term shall come to an end and expire (whether or not said term
shall have commenced) upon the expiration of said ten (10) days with the same
effect as if the date of expiration of said ten (10) days were the Expiration
Date, but Tenant shall remain liable for damages as provided in Article 30.
(B) If, at any time (i) Tenant shall be comprised of two (2) or more
persons, or (ii) Tenant's obligations under this lease shall have been
guaranteed by any person other than Tenant, or (iii) Tenant's interest in this
lease shall have been assigned, the word "Tenant", as used in subsection (iii)
and (iv) of Section 28(A), shall be deemed to mean any one or more of the
persons primarily or secondarily liable for Tenant's obligations under this
lease.
TERMINATION ON DEFAULT
29. (A) If Tenant shall default in the payment when due of any
installment of rent or in the payment when due of any additional rent and
such default shall continue for a period of ten (10) days after notice by
Landlord to Tenant of such default, or if this lease and the Demised Term
shall expire and come to an end as provided in Article 28:
(i) Landlord and its agents and servants may immediately, or
at any time after such default or after the date upon which this lease and the
Demised Term shall expire and come to an end, re-enter the Demised Premises or
any part thereof, without notice, either by summary proceedings or by any
other applicable action or proceeding, or by force or other means provided
such force or other means are lawful (without being liable to indictment,
prosecution or damages therefor), and may repossess
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the Demised Premises and dispossess Tenant and any other persons from the
Demised Premises and remove any and all of their property and effects from the
Demised Premises; and
(ii) Landlord, at Landlord's option, may relet the whole or
any part or parts of the Demised Premises from time to time, either in the
name of Landlord or otherwise, to such tenant or tenants, for such term or
terms ending before, on or after the Expiration Date, at such rental or
rentals and upon such other conditions, which may include concessions and free
rent periods, as Landlord, in its sole discretion, may determine. Landlord
shall use reasonable efforts to relet the Demised Premises and shall in no
event be liable for failure to relet the Demised Premises or any part thereof,
or, in the event of any such reletting, for failure to collect any rent due
upon any such reletting, and no such failure shall operate to relieve Tenant
of any liability under this lease or otherwise to affect any such liability;
Landlord, at Landlord's option, may make such repairs, replacements,
alterations, additions, improvements, decorations and other physical changes
in and to the Demised Premises as Landlord, in its sole discretion, considers
advisable or necessary in connection with any such reletting or proposed
reletting, without relieving Tenant of any liability under this lease or
otherwise affecting any such liability.
(B) Tenant, on its own behalf and on behalf of all persons
claiming through or under Tenant, including all creditors, does hereby waive
any and all rights which Tenant and all such persons might otherwise have
under any present or future law to redeem the Demised Premises, or to re-enter
or repossess the Demised Premises, or to restore the operation of this lease,
after Tenant shall have been dispossessed by a judgment. In the event of a
breach or threatened breach by Tenant or any persons claiming through or under
Tenant, of any term, covenant or condition of this lease on Tenant's part to
be observed or performed, Landlord shall have the right to enjoin such breach
and the right to invoke any other remedy allowed by law or in equity as if
re-entry, summary proceedings and other special remedies were not provided in
this lease for such breach. The rights to invoke the remedies hereinbefore set
forth are cumulative and shall not preclude Landlord from invoking any other
remedy allowed at law or in equity.
DAMAGES
30. (A) If this lease and the Demised Term shall expire and come to
an end as provided in Article 28 or by or under any summary proceeding or any
other action or proceeding, or if Landlord shall re-enter the Demised Premises
as provided in Article 29 or by or
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under any summary proceedings or any other action or proceeding, then, in any
of said events:
(i) Tenant shall pay to Landlord all Rent, additional rent and other
charges payable under this lease by Tenant to Landlord to the date upon which
this lease and the Demised Term shall have expired and come to an end or to
the date of re-entry upon the Demised Premises by Landlord, as the case may
be; and
(ii) Tenant shall also be liable for and shall pay to Landlord, as
damages, any deficiency (referred to as "Deficiency") between the Rent and
additional rent reserved in this lease for the period which otherwise would
have constituted the unexpired portion of the Demised Term and the net amount,
if any, of rents collected under any reletting effected pursuant to the
provisions of Section 29(A) for any part of such period (first deducting from
the rents collected under any such reletting all of Landlord's expenses in
connection with the termination of this lease or Landlord's re-entry upon the
Demised Premises and with such reletting including, but not limited to, all
repossession costs, brokerage commissions, legal expenses, reasonable
attorneys' fees, alteration costs and other expenses of preparing the Demised
Premises for such reletting). Any such Deficiency shall be paid in monthly
installments by Tenant on the days specified in this lease for payment of
installments of Rent. Landlord shall be entitled to recover from Tenant each
monthly Deficiency as the same shall arise, and no suit to collect the amount
of the Deficiency for any month shall prejudice Landlord's rights to collect
the Deficiency for any subsequent month by a similar proceeding; and
(iii) At any time after the Demised Term shall have expired and come
to an end or Landlord shall have re-entered upon the Demised Premises, as the
case may be, whether or not Landlord shall have collected any monthly
Deficiencies as aforesaid, Landlord shall be entitled to recover from Tenant,
and Tenant shall pay to Landlord, on demand, as and for liquidated and agreed
final damages, a sum equal to the amount by which the Rent and additional rent
reserved in this lease for the period which otherwise would have constituted the
unexpired portion of the Demised Term exceeds the then fair and reasonable
rental value of the Demised Premises for the same period, both discounted to
present worth at the rate of four (4%) per cent per annum. If, before
presentation of proof of such liquidated damages to any court, commission, or
tribunal, the Demised Premises, or any part thereof, shall have been relet by
Landlord for the period which otherwise would have constituted the unexpired
portion of the Demised Term, or any part thereof, the amount of Rent reserved
upon such reletting shall be deemed, prima facie, to be the fair and reasonable
rental value for the part or the whole of the Demised Premises so relet during
the term of the reletting.
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(B) If the Demised Premises, or any part thereof, shall be relet
together with other space in the Building, the rents collected or reserved
under any such reletting and the expenses of any such reletting shall be
equitably apportioned for the purposes of this Article 30. Tenant shall in no
event be entitled to any rents collected or payable under any reletting,
whether or not such rents shall exceed the rent reserved in this lease. Solely
for the purposes of this Article, the term "Rent" as used in Section 30(A)
shall mean the rent in effect immediately prior to the date upon which this
lease and the Demised Term shall have expired and come to an end, or the date
of re-entry upon the Demised Premises by Landlord, as the case may be, plus any
additional rent payable pursuant to the provisions of Article 11 for the
Escalation Year (as defined in Article 11) immediately preceding such event.
Nothing contained in Articles 28 and 29 of this lease shall be deemed to limit
or preclude the recovery by Landlord from Tenant of the maximum amount allowed
to be obtained as damages by any statute or rule of law, or of any sums or
damages to which Landlord may be entitled in addition to the damages set forth
in Section 30(A).
SUMS DUE LANDLORD
31. If Tenant shall default in the performance of any covenants on
Tenant's part to be performed under this lease, Landlord may immediately, or
at anytime thereafter, on ten (10) days prior notice (except in the event of
an emergency which shall not require notice), and without thereby waiving such
default, perform the same for the account of Tenant and at the expense of
Tenant. If Landlord at any time is compelled to pay or elects to pay any sum
of money, or do any act which will require the payment of any sum of money by
reason of the failure of Tenant to comply with any provision hereof, or, if
Landlord is compelled to or elects to incur any expense, including reasonable
attorneys' fees, instituting, prosecuting and/or defending any action or
proceeding instituted by reason of any default of Tenant hereunder, the sum or
sums so paid by Landlord, with all interest, costs and damages, shall be
deemed to be additional rent hereunder and shall be due from Tenant to
Landlord on the first day of the month following the incurring of such
respective expenses or, at Landlord's option, on the first day of any
subsequent month. Any sum of money (other than rent) accruing from Tenant to
Landlord pursuant to any provisions of this lease, including, but not limited
to, the provisions of Schedule C, whether prior to or after the Term
Commencement Date, may, at Landlord's option, be deemed additional rent, and
Landlord shall have the same remedies for Tenant's failure to pay any item of
additional rent when due as for Tenant's failure to pay any installment of
Rent when due. Tenant's obligations under this Article shall survive the
expiration or sooner termination of the Demised Term. In any case in which the
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Rent or additional rent is not paid within ten (10) days of the day when same
is due, on more than one (1) occasion in any twelve (12) month period, Tenant
shall pay a late charge equal to 8-1/2 cents for each dollar so due.
NO WAIVER
32. No act or thing done by Landlord or Landlord's agents during the
term hereby demised shall be deemed an acceptance of a surrender of said
Demised Premises, and no agreement to accept such surrender shall be valid
unless in writing signed by Landlord. No employee of Landlord or of
Landlord's agents shall have any power to accept the keys of the Demised
Premises prior to the termination of this lease. The delivery of keys to any
employee of Landlord or of Landlord's agents shall not operate as a
termination of this lease or a surrender of the Demised Premises. In the event
Tenant shall at any time desire to have Landlord underlet the Demised Premises
for Tenant's account, Landlord or Landlord's agents are authorized to receive
said keys for such purposes without releasing Tenant from any of the
obligations under this lease, and Tenant hereby relieves Landlord of any
liability for loss of or damage to any of Tenant's effects in connection with
such underleting. The failure of Landlord to seek redress for violation of,
or to insist upon the strict performance of, any covenants or conditions of
this lease, or any of the Rules and Regulations annexed hereto and made part
hereof or hereafter adopted by Landlord, shall not prevent a subsequent act,
which would have originally constituted a violation, from having all the force
and effect of an original violation. The receipt by Landlord of rent with
knowledge of the breach of any covenant of this lease shall not be deemed a
wavier of such breach. The failure of Landlord to enforce any of the Rules and
Regulations annexed hereto and made a part hereof, or hereafter adopted,
against Tenant and/or any other tenant in the Building shall not be deemed a
waiver of any such Rules and Regulations. No provision of this lease shall be
deemed to have been waived by Landlord, unless such waiver be in writing
signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser
amount then the monthly Rent herein stipulated shall be deemed to be other
than on account of the earliest stipulated Rent nor shall any endorsement or
statement on any check or any letter accompanying any check or payment of Rent
be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
Rent or pursue any other remedy in this lease provided.
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WAIVER OF TRIAL BY JURY
33. To the extent such waiver is permitted by law, Landlord and
Tenant hereby waive trial by jury in any action, proceeding or counterclaim
brought by Landlord or Tenant against the other on any matter whatsoever
arising out of or in any way connected with this lease, the relationship of
landlord and tenant, the use or occupancy of the Demised Premises by Tenant or
any person claiming through or under Tenant, any claim of injury or damage,
and any emergency or other statutory remedy. The provisions of the foregoing
sentence shall survive the expiration or any sooner termination of the
Demised Term. If Landlord commences any summary proceeding for nonpayment,
Tenant agrees not to interpose any counterclaim of whatever nature or
description in any such proceeding (except counterclaims which are
inextricably connected to the obligation to pay Rent or additional rent) or to
consolidate such proceeding with any other proceeding.
Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event of Landlord's obtaining
possession of the Demised Premises, by reason of the violation by Tenant of
any of the covenants and conditions of this lease or otherwise.
NOTICES
34. Except as otherwise expressly provided in this lease, any bills,
statements, notices, demands, requests or other communications (other than
bills, statements or notices given in the regular course of business) given or
required to be given under this lease shall be effective only if rendered or
given in writing, sent by registered or certified mail (return receipt
requested) or by overnight delivery service, addressed (A) to Tenant (i) at
Tenant's address set forth in this lease if sent prior to Tenant's taking
possession of the Demised Premises, or (ii) at the Building if sent
subsequent to Tenant's taking possession of the Demised Premises, or (iii) at
any place where Tenant or any agent or employee of Tenant may be found if sent
subsequent to Tenant's vacating, deserting, abandoning or surrendering the
Demised Premises, and (iv) with a copy in all such cases to Tenant at 1134
Ballena Boulevard, Alameda, California 94501, Attention: James Thompson,
Executive Vice President, or (B) to Landlord at Landlord's address set forth
in this lease, or (c) addressed to such other address as either Landlord or
Tenant may designate as its new address for such purpose by notice given to
the other in, accordance with the provisions of this Article. Any such bills,
statements, notices, demands, requests or other communications shall be deemed
to have been rendered or given on the date
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received or rejected in the case of mailing and on the date sent in the case
of overnight delivery. For purposes of counting the days of any notice
required to be given under this lease, such days shall be business days.
INABILITY TO PERFORM
35. (A) If, by reason of strikes or other labor disputes, fire or
other casualty (or reasonable delays in adjustment of insurance), accidents,
orders or regulations of any Federal, State, county or Municipal authority, or
any other cause beyond Landlord's reasonable control, whether or not such
other cause shall be similar in nature to those hereinbefore enumerated,
Landlord is unable to furnish or is delayed in furnishing any utility or
service required to be furnished by Landlord under the provisions of this
lease or any collateral instrument or is unable to perform or make or is
delayed in performing or making any installations, decorations, repairs,
alterations, additions or improvements, whether or not required to be
performed or made under this lease, or under any collateral instrument, or is
unable to fulfill or is delayed in fulfilling any of Landlord's other
obligations under this lease, or any collateral instrument, no such inability
or delay shall constitute an actual or constructive eviction, in whole or in
part, or entitle Tenant to any abatement or diminution of rent, or relieve
Tenant from any of its obligations under this lease, or impose any liability
upon Landlord or its agents, by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business, or otherwise.
INTERRUPTION OF SERVICE
(B) Landlord reserves the right to stop the services of the air
conditioning, elevator, escalator, plumbing, electrical or other mechanical
systems or facilities in the Building when necessary by reason of accident or
emergency, or for repairs, alterations or replacements, which, in the judgment
of Landlord are necessary, until such repairs, alterations or replacements
shall have been completed. The exercise of such rights by Landlord shall not
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant from any of
its obligations under this lease, or, unless caused by Landlord's negligence,
impose any liability upon Landlord or its agents by reason of inconvenience
or annoyance to Tenant, or injury to or interruption of Tenant's business or
otherwise.
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<PAGE>
CONDITIONS OF LANDLORD'S LIABILITY
(C) (i) Tenant shall not be entitled to claim a constructive eviction
from the Demised Premises unless Tenant shall have first notified Landlord of
the condition or conditions giving rise thereto, and if the complaints be
justified, unless Landlord shall have failed to remedy such conditions within a
reasonable time after receipt of such notice.
(ii) If Landlord shall be unable to give possession of the Demised
Premises on any date specified for the commencement of the term by reason of the
fact that the Premises have not been sufficiently completed to make the Premises
ready for occupancy, or for any other reason, Landlord shall not be subject to
any liability for the failure to give possession on said date, nor shall such
failure in any way affect the validity of this lease or the obligations of
Tenant hereunder.
TENANT'S TAKING POSSESSION
(D) (i) Tenant, by entering into occupancy of the Premises, shall be
conclusively deemed to have agreed that Landlord, up to the time of such
occupancy has performed all of its obligations hereunder and that the Premises
were in satisfactory condition as of the date of such occupancy, unless within
ten (10) days after the such date Tenant shall have given written notice to
Landlord specifying the respects in which the same were not in such condition.
(ii) If Tenant shall use or occupy all or any part of the Demised
Premises for the conduct of business prior to the Term Commencement Date, such
use or occupancy shall be deemed to be under all of the terms, covenants and
conditions of this lease, including the covenant to pay rent for the period from
the commencement of said use or occupancy to the Term Commencement Date.
ENTIRE AGREEMENT
36. This lease (including the Schedules and Exhibits annexed hereto)
contains the entire agreement between the parties and all prior negotiations and
agreements are merged herein. Tenant hereby acknowledges that neither Landlord
nor Landlord's agent or representative has made any representations or
statements, or promises, upon which Tenant has relied, regarding any matter or
thing relating to the Building, the land allocated to it (including the parking
area) or the Demised Premises, or any other matter
32
<PAGE>
whatsoever, except as is expressly set forth in this lease, including, but
without limiting the generality of the foregoing, any statement, representation
or promise as to the fitness of the Demised Premises for any particular use, the
services to be rendered to the Demised Premises, or the prospective amount of
any item of additional rent. No oral or written statement, representation or
promise whatsoever with respect to the foregoing or any other matter made by
Landlord, its agent or any broker, whether contained in an affidavit,
information circular, or otherwise, shall be binding upon the Landlord unless
expressly set forth in this lease. No rights, easements or licenses are or shall
be acquired by Tenant by implication or otherwise unless expressly set forth in
this lease. This lease may not be changed, modified or discharged, in whole or
in part, orally, and no executory agreement shall be effective to change, modify
or discharge, in whole or in part, this lease or any obligations under this
lease, unless such agreement is set forth in a written instrument executed by
the party against whom enforcement of the change, modification or discharge is
sought. All references in this lease to the consent or approval of Landlord
shall be deemed to mean the written consent of Landlord, or the written approval
of Landlord, as the case may be, and no consent or approval of Landlord shall be
effective for any purpose unless such consent or approval is set forth in a
written instrument executed by Landlord.
DEFINITIONS
37. The words "re-enter", "re-entry", and "re-entered" as used in this
lease are not restricted to their technical legal meanings. The term "business
days" as used in this lease shall exclude Saturdays, Sundays and all days
observed by the State or Federal Government as legal holidays. The terms
"person" and "persons" as used in this lease shall be deemed to include natural
persons, firms, corporations, partnerships, associations and any other private
or public entities, whether any of the foregoing are acting on their behalf or
in a representative capacity. The various terms which are defined in other
Articles of this lease or are defined in Schedules or Exhibits annexed hereto,
shall have the meanings specified in such other Articles, Exhibits and Schedules
for all purposes of this lease and all agreements supplemental thereto, unless
the context clearly indicates the contrary.
PARTNERSHIP TENANT
38. If Tenant is a partnership (or is comprised of two (2)or more
persons, individually or as co-partners of a partnership) or if Tenant's
interest in this lease shall be assigned to a partnership (or to two (2) or more
persons, individually or as co-
33
<PAGE>
partners of a partnership) pursuant to Article 20 (any such partnership and such
persons are referred to in this Section as "Partnership Tenants), the following
provisions of this Section shall apply to such Partnership Tenant: (a) the
liability of each of the parties comprising Partnership Tenant shall be joint
and several, and (b) each of the parties comprising Partnership Tenant hereby
consents in advance to, and agrees to be bound by, any modifications of this
lease which may hereafter be made, and by any notices, demands, requests or
other communications which may hereafter be given, by Partnership Tenant or by
any of the parties comprising Partnership Tenant, and (c) any bills, statements,
notices, demands, requests and other communications given or rendered to
Partnership Tenant or to any of the parties comprising Partnership Tenant shall
be deemed given or rendered to Partnership Tenant and to all such parties and
shall be binding upon Partnership Tenant and all such parties, and (d) if
Partnership Tenant shall admit new partners, all of such new partners shall, by
their admission to Partnership Tenant, be deemed to have assumed performance of
all of the terms, covenants and conditions of this lease on Tenant's part to be
observed and performed, and (e) Partnership Tenant shall give prompt notice to
Landlord of the admission of any such new partners, and upon demand of Landlord,
shall cause each such new partner to execute and deliver to Landlord an
agreement in form satisfactory to Landlord, wherein each such new partner shall
assume performance of all of the terms, covenants and conditions of this lease
on Tenant's part to be observed and performed (but neither Landlord's failure to
request any such agreement nor the failure of any such new partner to execute
or deliver any such agreement to Landlord shall vitiate the provisions of
subdivision (d) of this Section)
SUCCESSORS, ASSIGNS, ETC.
39. The terms, covenants, conditions and agreements contained in this
lease shall bind and inure to the benefit of Landlord and Tenant and their
respective heirs, distributees, executors, administrators, successors, and,
except as otherwise provided in this lease, their respective assigns.
BROKER
40. Landlord and Tenant each represents to the other that this lease
was brought about by Douglas, Payton & Company as broker and all negotiations
with respect to this lease were conducted exclusively with said broker. Each
party agrees that if any claim is made for commissions by any other broker
through or on account of any acts of the indemnifying parts, such party will
hold the other party free and harmless from any and all liabilities and
34
<PAGE>
expenses in connection therewith, including reasonable attorney's fees. Landlord
agrees to pay the commission due the aforementioned broker pursuant to a
separate agreement.
CAPTIONS
41. The captions in this lease are included only as a matter of
convenience and for reference, and in no way define, limit or describe the scope
of this lease nor the intent of any provisions thereof.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this lease as of the day and year first above written.
Witness for Landlord: RECKSON ASSOCIATES
By:
- ---------------------------------- --------------------------------------
, Partner
Witness for Tenant: CROSS/Z INTERNATIONAL, INC.
By: /s/ Mark Chroscielewski
- ---------------------------------- --------------------------------------
Mark Chroscielewski, President
35
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF )
On this 31 day of October, 1994, before me personally came Michael
Heckler to me known, who being by me duly sworn, did dispose and say that he is
a general partner of RECKSON ASSOCIATES, the partnership described in and which
executed the foregoing instrument; that he signed his name thereto and executed
said instrument for and on behalf of and within the authority of said
partnership, as "Landlord".
/s/ Kathleen Giaimo
------------------------------
Notary Public
STATE OF NEW YORK )
) ss.:
COUNTY OF NASSAU )
On this _____________day of _________________, 1994, before me
personally came Mark Chroschilewski, to me known, who being by me duly sworn,
did depose and say that he resides at_____________________________________
_________________________________________________, that he is the President of
CROSS/Z INTERNATIONAL, INC., the corporation described in and which executed the
foregoing instrument as "Tenant"; that he knows the seal of said corporation;
that the seal affixed to said instrument is such corporate seal; that it was so
affixed by order of the Board of Directors of said corporation, and that he
signed his name thereto by like order.
_________________________________
Notary Public
36
<PAGE>
SCHEDULE "A"
LANDLORD'S INITIAL CONSTRUCTION
1. Initial Office Finishing Schedule
At the Tenant's option, Landlord will design or follow Tenant's plans in
preparing Tenant's office area at Landlord's cost in accordance with the
following specifications. (Any discrepancy between the following specifications
and the approved plans shall be controlled by the plans.)
Erect the necessary dividing walls constructed of metal stud, 5/8" Fire X gypsum
board, with batts of 3" fiberglass for sound attenuation in Demising walls.
Finish exterior walls with 1/2" sheetrock. Erect per approved plan dry-wall
partitioning of 2-1/2" metal studs with 1/2" gypsum board on each side to
underside of hung ceiling not to exceed 1 linear foot of partitioning for every
20 square feet of usable space.
Spackle and tape walls three coats to a smooth and true finish. Paint walls two
coats flat latex and doors and trim coats matching enamel,
Install in executive offices, main conference room and reception area, over
padding, executive grade commercial, 26 ounce carpet. Balance of space carpeted
with building standard 20 ounce carpet (glued down). Building standard vinyl
reinforced tile may be installed in place of carpet.
Install a 2" x 4" acoustical tile ceiling with a Travertine finish.
Provide interior hollow core Colony Oak doors on Tenant's plan limited to 3 per
1,000 square feet.
2. Lavatory Area - Public Spaces
a) Separate male and female toilet facilities.
3. Landscaping
The Building will be extensively landscaped with trees, plantings and other
materials. An underground sprinkler system will be provided with a time clock to
maintain proper watering.
4. Electrical Specifications
All electrical work shall be installed in accordance with the National
Electrical Code, and the local building code. A "Certificate of Compliance"
shall be obtained from the New York Board of Fire Underwriters at the completion
of the project.
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<PAGE>
Lighting throughout the entire finished office area shall be obtained by the use
of recessed light 2' by 4' fluorescent fixtures with prismatic lenses, not to
exceed one (1) fixture for each eighty (80) square feet of usable space. Local
wall switches shall be provided for control of lighting. Toilet, corridor, lobby
and other similar areas shall be lit to 50 foot candles.
Exit light lighting for all paths of egress shall be provided in accordance with
local building department regulations, if required.
All branch circuit wiring shall be above hung ceiling or within dry-wall
construction in finished areas and shall be type BX. All exposed conduits in
non-finished areas shall be thin-walled "EMT".
Wall-mounted duplex convenience outlets shall be provided on the basis of one
duplex outlet for each 120 square feet of rented area. This formula shall be
used to establish the quantity of outlets. However, the exact location of each
outlet shall be coordinated with the Tenant's furniture layout. All duplex
outlets are to be considered as normal convenience outlets and shall be wired up
with an average of 5 to 8 outlets on one 20 ampere, 120 volt circuit. Panel
capacity shall be adequate to handle all tenant lighting and equipment load,
providing such equipment load does not exceed 2 watts per square foot of usable
area.
No credit given for installation less than standard installation.
5. Heating, Ventilation and Air Conditioning specifications
General
The intent of this specification is to define a design concept for the subject
area.
Design Criteria
Central air conditioning with modular systems with individual zone control,
shall be capable of the following performance when the criteria noted are not
exceeded:
A) Between September 1 and June 1, the "heating system" shall be operative and
maintain a minimum of 70 degrees FDB when the outdoor temperature is 0 degrees
FDB and the prevailing wind velocity does not exceed 15 mph.
B) Between April 15 and October 14, the "cooling system" shall be operative and
maintain a maximum of 80 degrees FDB and 55% relative humidity when the outdoor
temperature is 95 degrees FDB and 75 degrees FDB with the prevailing wind
velocity not exceeding 13 mph.
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<PAGE>
C) During the overlapping seasons (April 15 - June 1 and September 1 - October
15) both systems shall be operative (cooling and heating).
D) Zoning temperature and balancing controls shall be operated solely by the
Landlord to assure the conditions above.
E) Maintenance of the foregoing temperature conditions is conditioned upon the
following criteria, which shall not be exceeded by the Tenant in any room, or
area, within the Demised Premises:
a) Population Density..................................... 1 person per 150
square feet
b) Lighting and Electrical Load Density................... 4 watts per
square foot
c) Exhaust and Ventilation Load........................... 5 cfm per person
6. Ventilation
Bathrooms and similar areas to be ventilated per code using rooftop fans.
7. System Design
Exterior Perimeter Zones
Heating/cooling of exterior offices and areas provided by variable air volume
terminals with integrated thermostats to meet Tenant's requirements for
individual control.
Interior Zones
Heating/cooling provided by variable air volume system terminals with integrated
thermostats for areas of 2,000 square feet.
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<PAGE>
SCHEDULE "B"
LANDLORD'S CLEANING SERVICES AND MAINTENANCE OF PREMISES
(to be performed on all business days except those which are union holidays for
the employees performing cleaning services and maintenance in the Building and
grounds or those days in which the Building is closed)
I. CLEANING SERVICES - PUBLIC SPACES:
A. Floor of entrance lobby and public corridors will be vacuumed or swept and
washed nightly and waxed as necessary.
B. Entranceway glass and metal work will be washed and rubbed down daily.
C. Wall surfaces and elevator cabs will be kept in polished condition.
D. Lighting fixtures will be cleaned and polished annually. Bulbs will be
replaced as needed.
E. Elevators and restrooms will be washed and disinfected once a day. The floors
will be mopped as many times as required. All brightwork and mirrors will be
kept in polished condition. Dispensers will be continuously checked and
receptacles continuously emptied.
F. Exterior surfaces and all windows of the building will be cleaned quarterly.
II. CLEANING SERVICES - TENANT SPACES:
A. Floors will be swept and spot cleaned nightly. Carpets will be swept daily
with carpet sweeper and vacuumed weekly.
B. Office equipment, telephones, etc. will be dusted nightly.
C. Normal office waste in receptacles and ashtrays will be emptied nightly.
D. Interior surface of windows and sills will be washed and blinds dusted
quarterly.
E. There shall be regularly scheduled visits by a qualified exterminator.
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<PAGE>
III. EXTERIOR SERVICES:
A. Parking fields will be regularly swept, cleared of snow in excess of two
inches, and generally maintained so as to be well drained, properly surfaced and
striped.
B. All landscaping, gardening, exterior lighting and irrigation systems will
have regular care and servicing.
IV. EQUIPMENT SERVICE:
A. All air-conditioning and heating equipment and elevators will be regularly
serviced and maintained.
B. Plumbing and electrical facilities, doors, hinges and locks will be repaired
as necessary.
C. All appurtenances, such as rails, stairs, etc. will be maintained in a safe
condition.
V. EXTRA CLEANING SERVICES
Tenant shall pay to Landlord, on demand, Landlord's charges for (a) cleaning
work in the Premises required because of (i) misuse or neglect on the part of
Tenant or its employees or visitors, (ii) use of portions of the Premises for
preparation, serving or consumption of food or beverages, or other special
purposes requiring greater or more difficult cleaning work than office areas;
(iii) unusual quantity of interior glass surfaces; (iv) non-building standard
materials or finishes installed by Tenant or at its request; (v) increases in
frequency or scope in any item set forth in Schedule B as shall have been
requested by Tenant; and (b) removal from the Premises and Building of (i) so
much of any refuse and rubbish of Tenant as shall exceed that normally
accumulated in the routine of ordinary business office activity and (ii) all of
the refuse and rubbish of any eating facility requiring special handling (wet
garbage).
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<PAGE>
SCHEDULE "C"
1. Landlord shall have full and unrestricted access to all
air-conditioning and heating equipment, and to all other utility installations
servicing the Building and the Demised Premises. Landlord reserves the right
temporarily to interrupt, curtail, stop or suspend air-conditioning and heating
service, and all other utilities, or other services, because of Landlord's
inability to obtain, or difficulty or delay in obtaining, labor or materials
necessary therefor, or in order to comply with governmental restrictions in
connection therewith, or for any other causes beyond Landlord's reasonable
control. Landlord hereby agrees to use reasonable best efforts not to curtail
such services. No diminution or abatement of Rent, additional rent, or other
compensation shall be granted to Tenant, nor shall this Lease or any of the
obligations of Tenant hereunder be affected or reduced by reason of such
interruptions, stoppages or curtailments, the causes of which are hereinabove
enumerated, nor shall the same give rise to a claim in Tenant's favor that such
failure constitutes actual or constructive, total or partial, eviction from the
Demised Premises, unless such interruptions, stoppages or curtailments have been
due to the arbitrary, willful or negligent act, or failure to act, of Landlord
or its agents.
2. Telephone service shall be the responsibility of Tenant. Tenant
shall make all arrangements for telephone service with the company supplying
said service, including the deposit requirement for the furnishing of service.
Landlord shall not be responsible for any delays occasioned by failure of the
telephone company to furnish service.
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<PAGE>
SCHEDULE "D"
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress to and egress from
the Demised Premises and for delivery of merchandise and equipment in a prompt
and efficient manner using elevators and passageways designated for such
delivery by Landlord. There shall not be used in any space, or in the public
hall of the Building, either by any Tenant or by jobbers or others in the
delivery or receipt of merchandise, any hand trucks, except those equipped with
rubber tires and sideguards.
2. The water and wash closets and plumbing fixtures shall not be used
for any purposes other than those for which they were designed or constructed
and no sweepings, rubbish, rags, acids or other substance's shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No Tenant shall sweep or throw or permit to be swept or thrown from
the Premises any dirt or other substances into any of the corridors or halls,
elevators, or out of the doors or windows or stairways of the Building, and the
Tenant shall not use, keep or permit to be used or kept any coffee machine,
vending machine, burner, micro wave oven, refrigerator or oven, food or noxious
gas or substance in the Demised Premises, or permit or suffer the Demised
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or those having business
therein, nor shall any animals or birds be kept in or about the Building.
Smoking or carrying lighted cigars or cigarettes in the elevators of the
Building is prohibited.
4. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of the Landlord.
5. No sign, advertisement, notice or other lettering and/or window
treatment shall be exhibited, inscribed, painted or affixed by any Tenant on
any part of the outside of the Demised Premises or the Building or on the inside
of the Demised Premises if the same is visible from the outside of the Demised
Premises without the prior written consent of the Landlord. In the event of the
violation of the foregoing by any Tenant, Landlord may remove same without any
liability, and may charge the expense incurred by such removal to Tenant or
Tenants violating this rule. Interior signs on doors and directory tables shall
be inscribed, painted or affixed for each Tenant by Landlord at the expense of
such Tenant, and shall be of a size, color and style currently being used by
Landlord for other tenants occupying comparably sized space in the Building.
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<PAGE>
6. No Tenant shall mark, paint, drill into, or in any way deface any
part of the Demised Premises or the Building of which they form a part. No
boring, cutting or stringing of wires shall be permitted, except with the prior
written consent of Landlord, or as shown on plans approved by Landlord, which
approval shall not be unreasonably withheld. No tenant shall lay linoleum or
other similar floor covering so that the same shall come in direct contact with
the floor of the Demised Premises and, if linoleum or other similar floor
covering is desired to be used, an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other water soluble material, the
use of cement or other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or in the mechanisms thereof. Each Tenant must, upon the termination of
his tenancy, restore to Landlord all keys of stores, offices and toilet rooms,
either furnished to, or otherwise procured by, such Tenant, and in the event of
the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost
thereof.
8. Freight, furniture business equipment, merchandise and bulky matter
of any description shall be delivered to and removed from the Premises only
through the service entrances and corridors, and only during hours and in a
manner approved by Landlord. Landlord reserves the right to inspect all freight
to be brought into the Building and to exclude from the Building all freight
which violates any of these Rules and Regulations or the lease of which these
Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the Building is prohibited
and each Tenant shall cooperate to prevent the same.
10. Landlord reserves the right to exclude from the building between
the hours of 6:00 P.M. and 8:00 A.M. and at all hours on Sundays and legal
holidays, all persons who do not present a pass to the building signed by
Landlord. Landlord will furnish passes to persons for whom any Tenant requires
same in writing. Each Tenant shall be responsible for all persons for whom he
requires such a pass and shall be liable to Landlord for all acts of such
persons.
11. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's reasonable opinion, tends to impair the reputation
of the Building or its desirability as an office building, and upon written
notice from Landlord, Tenant shall refrain from or discontinue such
advertising.
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12. Tenant shall not bring or permit to be brought or kept in or on the
Premises, any inflammable, combustible, hazardous or explosive fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors, to permeate in or
emanate from the Premises.
13. Tenant agrees to keep all entry doors closed at all times and to
abide by all rules and regulations issued by the Landlord with respect to such
services.
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<PAGE>
EXHIBIT 1
RENTAL PLAN
-----------
46
<PAGE>
EXHIBIT 2
TENANT'S WORK
Tenant's Plans and Work. With respect to any work or alterations to be
performed by Tenant pursuant to this Lease, Tenant shall, at its expense,
furnish Landlord with all drawings, plans, layouts and specifications for work
to be performed by Tenant, including, without limitation, architectural,
plumbing, electrical, mechanical and heating, ventilating and air conditioning
plans (the "Tenant's Plans"). All of the Tenant's Plans shall:
(1) be compatible with the Landlord's building plans;
(2) comply with all applicable laws and the rules, regulations,
requirements and orders of any and all governmental agencies,
departments or bureaus having jurisdiction; and
(3) be fully detailed, including locations and complete dimensions.
Tenant's Plans shall be subject to approval by Landlord which shall not be
unreasonably withheld. Tenant shall, at Tenant's expense, (i) cause Tenant's
Plans to be filed with the governmental agencies having jurisdiction thereover,
(ii) obtain when necessary all governmental permits, licenses and authorizations
required for the work to be done in connection therewith, and (iii) obtain all
necessary certificates of occupancy, both temporary and permanent. Landlord
shall execute such documents as may be reasonably required in connection with
the foregoing and Landlord shall otherwise cooperate with Tenant in connection
with obtaining the foregoing, but without any expense to Landlord. Tenant shall
make no change in any of Tenant's Plans without the prior written consent of
Landlord in each instance, except for minor, non-structural items involving a
cost of less than $2,000.
No work shall commence in the Premises until (i) Tenant has procured
all necessary permits therefor and has delivered copies of same to Landlord,
(ii) Tenant has procured a paid builder's risk insurance policy naming Landlord
as an additional insured and has delivered to Landlord a certificate of
insurance evidencing such policy, and (iii) Tenant or its contractor has
procured a workmen's compensation insurance policy covering the activities of
all persons working at the Premises naming Landlord as an additional insured and
has delivered to Landlord a certificate of insurance evidencing such policy.
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Tenant may use any licensed architect or engineer to prepare its plans
and to file for permits. However, all such plans and permit applications shall
be subject to review, revision and approval by Landlord or its architect.
Tenant, at its expense, shall perform all work, in accordance with
Tenant's Plans.
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Exhibit 11.1
Cross/Z International, Inc.
Computation of pro forma net loss per common share
<TABLE>
<CAPTION>
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 ............ 791,640 365 791,640
Stock options exercised: .............................. 11,113 358 10,900
42,212 309 35,736
----------
844,965
Issuance and assumed conversion of series A preferred
stock, net of conversions to series C and as adjusted for
anti-dilution .......................................... 49,206 53 7,145
40,923 312 34,981
---- ------------
365 42,126
Issuance and assumed conversion of series B preferred
stock, net of conversions to series C and as adjusted for
anti-dilution .......................................... 46,679 53 6,778
28,452 312 24,321
---- ------------
365 31,099
Issuance and assumed conversion of series C preferred
stock including conversions from series A and series B
and as adjusted for anti-dilution ..................... 211,665 53 30,735
258,506 312 220,969
---- ------------
365 251,704
Issuance and assumed conversion of series D preferred
stock ................................................ 769,655 237 499,749
101,929 153 42,726
321,262 127 111,781
Accretion of series D dividends ........................ 65,752 118 21,257
---------- ---- ------------
1,258,598 675,513
Cheap stock consideration for common stock, stock options
and warrants issued during 1996 ........................ 119,139 365 119,139
------------
Pro forma weighted average shares used in per share
computation .......................................... 1,957,856
============
Net loss for the year ended December 31, 1996 ............ $ (4,917,935)
Pro forma net loss per common share ..................... $ (2.51)
============
</TABLE>
<PAGE>
Exhibit 11.1 (Cont'd)
Cross/Z International, Inc.
Computation of pro forma net loss per common share
<TABLE>
<CAPTION>
Number of
Common and Weighted
Common Equivalent Days Average
Nine months ended September 30, 1997 Shares Outstanding Shares
- ------------------------------------ ------------------- ------------- ----------------
<S> <C> <C> <C>
Common stock outstanding at January 1, 1997 ............... 863,589 273 863,589
Issuance and assumed conversion of series A preferred
stock, adjusted for anti-dilution ........................ 42,359 273 42,359
Issuance and assumed conversion of series B preferred
stock adjusted for anti-dilution ........................... 31,041 273 31,041
Issuance and assumed conversion of series C preferred
stock adjusted for anti-dilution ........................... 258,161 273 258,161
Issuance and assumed conversion of series D preferred
stock ................................................... 1,258,590 273 1,258,590
Accretion of series D dividends ........................... 88,892 137 44,446
---------- --- ------------
1,317,742 1,303,036
Cheap stock consideration for common stock, stock options
and warrants issued during the nine months ended
September 30, 1997 ....................................... 113,746 273 113,746
------------
Pro forma weighted average shares used in per share
computation ............................................. 2,611,932
============
Net loss for the nine months ended September 30, 1997 ...... $ (5,980,124)
Pro forma net loss per common share ........................ $ (2.29)
============
</TABLE>
<PAGE>
Exhibit 23.2
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 one-for-four reverse stock split described in Note 1, which is as of July
17, 1997, and the one-for-two reverse stock split described in Note 1, which is
as of October 29, 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
November 12, 1997
