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Filed Pursuant to Rule 424B [TO COME]
Registration No. 333-34667
PROSPECTUS
[GRAPHIC OMITTED]
2,500,000 Shares of Common Stock
All of the 2,500,000 shares ("Shares") of Common Stock, $.001 par value
("Common Stock"), offered hereby ("Offering") are being sold by CrossZ Software
Corporation ("CrossZ" or "Company"). Prior to this Offering, there has been no
public market for the Common Stock and there can be no assurance that any such
market will develop. The Common Stock has been approved for quotation on the
Nasdaq SmallCap Market under the symbol "CRSZ." 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 ...... $ 6.00 $ 0.48 $ 5.52
- --------------------------------------------------------------------------------
Total (3) ...... $15,000,000 $1,200,000 $13,800,000
================================================================================
(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 "Underwriters"). The
Company also has agreed to sell to the Underwriters an option to purchase
up to 250,000 shares of Common Stock ("Underwriters' 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 $1,200,000.
(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 375,000 shares of Common Stock on the same terms as set forth
above, solely for the purpose of covering over-allotments, if any. If such
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$17,250,000, $1,380,000 and $15,870,000, 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
November 25, 1997.
GKN Securities Corp. Barington Capital Group
November 19, 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
Create 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
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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 Underwriters' 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:
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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
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The Offering
<TABLE>
<S> <C>
Common Stock Offered .................. 2,500,000 shares
Common Stock Outstanding Prior to this
Offering(1) ........................ 2,608,860 shares
Common Stock to be Outstanding after the
Offering (1) ........................ 5,108,860 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 Transactions."
Nasdaq SmallCap Market Symbol ......... CRSZ
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 453,863 shares of
Common Stock are outstanding; (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 Underwriters' 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
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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 $ 8,235,346
Working capital (deficiency) .................................... (1,917,312) (1,875,312) 6,224,688
Total assets ...................................................... 3,887,931 4,529,931 11,590,712
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) $ 6,971,516
</TABLE>
<PAGE>
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(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.
(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 and the receipt of
the net proceeds therefrom of approximately $12,600,000; (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.
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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 14 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 14-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 41% of the net proceeds received by the Company from this
Offering, 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
$1,150,000, or 9% 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
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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 Underwriters'
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 453,863 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. In addition, in connection with this
Offering, the Company will issue the Underwriters' Purchase Option. The
Underwriters' Purchase Option is exercisable at $8.94 per share (149% of the
offering price) for a period of four years commencing one year from the date of
this Prospectus. The Underwriters' 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 Underwriters' 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 5,098,729 shares of Common Stock outstanding. Of these
shares, all of the 2,500,000 shares of Common Stock sold to the public in this
Offering will be freely transferable by persons other than affiliates of the
Company, without restriction or further registration under the Securities Act
of 1933, as amended ("Securities Act"). The remaining 2,598,729 shares of
Common Stock outstanding were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" as defined in Rule 144 under
11
<PAGE>
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
453,863 shares of Common Stock have been granted. Moreover, the Company has
outstanding other 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 Underwriters 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 77% of
their investment in the Common Stock because the pro forma net tangible book
value of the Company's Common Stock after this Offering will be approximately
$1.37 per share as compared with the initial public offering price of $6.00 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 27.5% 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 Common Stock has been 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 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
12
<PAGE>
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 Underwriters 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."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are estimated to be approximately $12,600,000 ($14,602,500
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 ................................. $ 4,222,000 33.5%
Repayment of Bridge and Interim Financings ......... 5,228,000 41.5
Research and Development ........................... 2,000,000 15.9
Working Capital and General Corporate Purposes ...... 1,150,000 9.1
------------ ------
Total .......................................... $12,600,000 100.0%
============ ======
</TABLE>
Approximately $4,222,000 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 $2,000,000 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). A portion of the proceeds
allocated to working capital will be used to pay taxing authorities amounts due
for sales, use, excise and past due payroll 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 $2,002,500, 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 14 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.
15
<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 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
outstanding 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; 5,098,729 shares issued and outstanding pro
forma, as adjusted(3) ................................. 902 2,599 5,099
Additional paid-in capital .............................. 5,769,837 17,238,361 29,835,861
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) 6,971,516
------------- ------------- -------------
Total capitalization ................................. $ (415,293) $ (373,293) $ 7,287,488
============= ============= =============
</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 1.0 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 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.
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<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
accrued 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 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 $6,971,516 or approximately $1.37 per share,
which represents an immediate increase in the pro forma net tangible book value
of approximately $2.85 per share to existing stockholders and an immediate
dilution of $4.63 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per Share ................................. $6.00
Pro forma deficiency in net tangible book value per
share before this Offering ................................. $ (1.48)
Increase per share attributable to this Offering ............ 2.85
-------
Pro forma net tangible book value per share after this Offering . 1.37
-----
Dilution per share to new investors .............................. $4.63
=====
</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
(before deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price per
Number Percent Amount Percent Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 2,598,729 51.0% $14,400,000 49.0% $ 5.54
New investors ............... 2,500,000 49.0 15,000,000 51.0 6.00
--------- ------ ------------ ------
Total(1) ............... 5,098,729 100.0% $29,400,000 100.0%
========= ====== ============ ======
</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 accrued 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.
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Revenues
The Company's license revenues have been generated from sales of
QueryObject System. Service revenues have been generated from fees paid by
customers on a project or contract basis for data analysis by the Company using
its proprietary software, and are recognized over the term of the respective
agreements. Maintenance revenues consist of ongoing support and product updates
and are recognized ratably over the term of the contract, which is typically
twelve months (See Note 1 of Notes to the Financial Statements). The Company
has recognized revenue, for all periods presented, in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1
entitled "Software Revenue Recognition."
Total revenues decreased by $427,000 or 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 89% 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 14 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.
24
<PAGE>
BUSINESS
Company Overview
CrossZ develops and markets proprietary business intelligence software
solutions that enable business managers to make strategic decisions, leveraging
existing corporate data. Through the evolution of technology, businesses
operating in large customer base and transaction intensive industries, such as
telecommunications and banking, have dramatically increased their ability to
gather and store large amounts of data generated from various sources. The
Company developed its products in response to the need to analyze the
increasing volumes of data that businesses accumulate. Such data contains
information that, if extracted effectively and efficiently, can be used to
enhance strategic corporate development. While companies have invested heavily
in capturing data, they have only recently begun to focus significant resources
on the management and analysis of such data; consequently, the data gathering
and analysis industry is experiencing significant growth. 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.
25
<PAGE>
- 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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<PAGE>
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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<PAGE>
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>
Product Configuration Operating System
<S> <C> <C> <C>
Basic System QueryObject DBA Client Win 95/NT
QueryObject Designer Client Win 3.1, 95/NT
QueryObject Engine Server MVS, UNIX, Win NT
QueryObject Open Client Win 3.1, 95/NT
Optional Modules QueryObject Viewer Client Win 3.1, 95/NT
QueryObject Server Server Win NT, UNIX
QueryObject Web Server Win NT, UNIX
</TABLE>
QueryObject DBA (Data Base Administrator) provides a Windows based
environment to manage the process of reading, synchronizing and staging source,
atomic level data in QueryObject System. Using standard drag and drop actions,
data administrators can map their source data into the QueryObject System
repository, the QueryObject Ready File. The Company believes that QueryObject
DBA users benefit from working with a graphical tool that understands the
complexities of both legacy and warehouse data.
QueryObject Designer enables end users to design and build their own
QueryObjects. Working in a familiar Windows environment, users create
QueryObjects by selecting a subset of the fields from the QueryObject Ready
file using a drag and drop interface. The Company believes that the end user
benefits from an environment that requires no programming, gives a visual
representation as to how the Query Object will look, and is able to process
hundreds of millions of data records.
QueryObject Engine is designed to work with large quantities of data,
reads a variety of data formats and processes the data first into an analytical
repository, and then into multiple QueryObjects. From this staging area,
multiple QueryObjects are produced in an efficient manner on the server. The
Company believes that users are protected from the server environment by using
QueryObject DBA and QueryObject Designer, yet they gain the power of a server
behind their business intelligence system. QueryObject Engine runs on a wide
variety of server platforms from MVS to UNIX to Windows/NT. The resulting
QueryObject can be moved to a user's individual personal computer or managed by
the QueryObject Server.
Unlike other data mart systems which require significant amounts of
preprocessing and data aggregation, 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.
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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.
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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 $100,000 with
respect to the fiscal year ended Decem-ber 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Securities
Name and Annual Compensation(1) Underlying
Principal Position Year Salary($) 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 $22,927/$14,878
</TABLE>
- ------------
(1) Based on the initial public offering price of the Common Stock.
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.
Mr. Kaufman's annual base cash compensation is $75,000 per year. 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. Chroscielewski, Kaufman, Aloisio, Thompson and Mohan
received options to purchase 100,000, 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 453,863 shares
38
<PAGE>
of Common Stock are outstanding under the Plan, of which options to purchase
178,983 shares of Common Stock are currently exercisable, at a weighted average
exercise price of $2.95 per share. Under the Plan, options to purchase shares
of Common Stock may be granted to any employee or consultant.
Options granted to employees may be either incentive stock options ("ISO")
meeting requirements of Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"), or non-qualified stock options ("NQSOs") not meeting the
requirements of Section 422 of the Code. Options granted to consultants shall
be NQSOs. The Plan is currently administered by the Stock Option and
Compensation Committee, which is generally empowered to interpret the Plan,
prescribe rules and regulations relating thereto and determine the individuals
to whom options are to be granted. The exercise price of all ISOs and NQSOs
granted under the Plan within one year after this Offering will not be less
than the greater of the Offering Price of the Common Stock or 100% of the fair
market value of the Common Stock on the date of grant. Thereafter, the exercise
price of all ISOs granted under the Plan will be at least 100% of the fair
market value on the date of grant and the exercise price of all NQSOs granted
under the Plan will be at least 85% of the fair market value of the Common
Stock on the date of grant.
The Board of Directors may modify, suspend or terminate the Plan;
provided, however, that certain material modifications affecting the Plan must
be approved by the stockholders and any change in the Plan that may adversely
affect the optionee's rights under an option previously granted under the Plan
requires the consent of the optionee.
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 $552,000 and $48,000 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% 10.3%
68 Wheatley Road
Brookville, New York 11545
Irwin Lieber (3) .......................................... 387,842 14.6% 7.6%
767 Fifth Avenue, 45th Floor
New York, New York 10153
John Walecka (4) ....................................... 360,871 13.9% 7.1%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Brentwood Associates, L.P. VII (5) ........................ 348,371 13.5% 6.8%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Wheatley Foreign Partners, L.P. (6) ..................... 331,592 12.8% 6.5%
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% 6.5%
80 Cutter Mill Road
Great Neck, New York 11021
Mark A. Chroscielewski (7) .............................. 255,618 9.7% 5.0%
Andre Szykier (8) ....................................... 212,835 8.2% 4.2%
Dwight E. Lee (9) ....................................... 205,304 7.7% 4.0%
James S. Thompson ....................................... 154,829 6.0% 3.0%
Scott Jones (10) .......................................... 36,028 1.4% *
Daniel M. Pess (11) ....................................... 9,654 * *
Alan W. Kaufman (12) .................................... 33,334 1.2% *
Rino Bergonzi (12) ....................................... 0 * *
All directors and executive officers as a group (9 persons)
(13) ................................................... 547,468 20.5% 10.6%
</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 33,334 and 625 shares of Common Stock issuable upon exercise of
currently exercisable options held respectively by Mr. Chroscielewski; and
by Diana Chroscielewski, Mr. Chroscielewski's spouse. Does not include
66,666 shares of Common Stock underlying options that are not currently
exercisable.
(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) Includes 33,334 shares of Common Stock issuable upon exercise of currently
exercisable options. Does not include 72,916 shares of Common Stock
underlying options that are not currently exercisable.
(13) Includes those shares of Common Stock deemed to be included in the
respective beneficial ownership of Messrs. Chroscielewski, Szykier, Jones,
Pess and Kaufman as described in notes 7, 8, 10, 11 and 12 above. Does not
include 149,929 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 5,098,729 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 5,108,860
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.
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 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 stock-
45
<PAGE>
holder, 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
5,098,729 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
2,500,000 shares of Common Stock sold to the public in the Offering (2,875,000
if the Underwriters' over-allotment is exercised in full) may be freely traded
without restriction or further registration under the Securities Act, except
for any shares that may be held by an "affiliate" of the Company (as that term
is defined in the rules and regulations under the Securities Act) which may be
sold only pursuant to a registration under the Securities Act or pursuant to an
exemption from registration under the Securities Act, including the exemption
provided by Rule 144 adopted under the Securities Act.
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 accrued 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. Holders of approximately 2,500,000 shares of the
Restricted Shares have entered into agreements that they will not transfer any
shares of Common Stock owned by them for a period of 13 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 453,863 shares of Common
Stock have been granted. Moreover, the Company has outstanding other options
and warrants to purchase an aggregate of 1,631,244 shares of Common Stock.
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
GKN Securities Corp. ("GKN") and Barington Capital Group, L.P.
("Barington," and together with GKN, the "Underwriters") have agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 2,500,000 shares of Common Stock. Each of GKN and Barington
has agreed to purchase fifty percent of such Shares.
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 Underwriters have advised the Company that
they do not intend to sell to discretionary accounts
The Company has been advised by the Underwriters that they 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 $.24 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain other dealers. After the Offering, the offering prices and other terms
may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price set forth on the cover page of this Prospectus,
less underwriting discounts and commissions, up to 375,000 additional shares of
Common Stock for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities in connection with this Offering, including liabilities under the
Securities Act. The Company has agreed to pay the Underwriters 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
Underwriters, for nominal consideration, the right to purchase up to an
aggregate of 250,000 shares of Common Stock ("Underwriters' Purchase Option").
The Underwriters' Purchase Option is exercisable at $8.94 per share (149% of
the offering price) for a period of four years commencing one year from the
date of this Prospectus. The Underwriters' 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 Underwriters' Purchase Option. The Underwriters' 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 Underwriters
and selected dealers and their officers or partners.
Pursuant to the Underwriting Agreement, the directors and executive
officers and certain stockholders of the Company holding, in the aggregate,
3,065,284 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 Underwriters. In addition, the holders of the
1,075,000 Bridge Warrants have agreed not to sell or otherwise dispose of the
shares of Common Stock underlying the Bridge Warrants for thirteen months from
the date of this Prospectus. 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 Underwriters
as a member of the Board of Directors. Alternatively, the Underwriters will
have the right to send a representative to observe each meeting of the Board of
Directors. The Underwriters 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.
48
<PAGE>
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.
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.
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 Underwriters 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).
In August 1997, GKN and certain of its executive officers, managers and
current or former brokers reached settlements with NASD Regulation, Inc.
("NASDR") in connection with excessive markups on warrants of several companies
whose offerings were underwritten by GKN and for which GKN was a market maker
from December 1993 through April 1996. Without admitting or denying NASDR's
allegations, GKN and such persons consented to findings that (i) the firm
dominated and controlled the market in eight securities, thereby requiring the
firm to base its markups on contemporaneous cost, which the firm failed to do,
and (ii) this resulted in violations of the NASD's Conduct Rules, including its
antifraud, pricing and supervisory provisions. GKN and such persons consented
to various sanctions including censures, and restitution and fines of an
aggregate of $2,216,500 (including in excess of $300,000 of interest), and GKN
also consented to the appointment of an independent consultant and to disclose
all brokers' compensation in excess of ten percent of the gross transaction
amount on confirmations given or sent to its customers.
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 thereto being
referred to hereinafter as the "Registration Statement"). This Prospectus,
which is a part of the
49
<PAGE>
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.
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>
================================================================================
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 December 14, 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]
2,500,000 Shares of Common Stock
-------------------------------
PROSPECTUS
-------------------------------
GKN Securities Corp.
Barington Capital Group
November 19, 1997
================================================================================
[GRAPHIC This Prospectus is printed on recycled paper using soy-bean ink.
OMITTED]
