<PAGE>
As filed with the Securities and Exchange Commission on October 22, 1997
Registration No. 333-34667
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
CrossZ Software Corporation
(Name of small business issuer in its charter)
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<CAPTION>
<S> <C> <C>
Delaware 7372 94-3087939
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(516) 228-8500 (Telephone)
(516) 228-8584 (Telecopy)
(Address and telephone number of principal executive offices)
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal place of business or intended principal place of business)
Alan W. Kaufman
President and Chief Executive Officer
CrossZ Software Corporation
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(516) 228-8500 (Telephone)
(516) 228-8584 (Telecopy)
(Name, Address and Telephone Number of Agent For Service)
---------------------
Copies of communications to:
David J. Adler, Esq. David Alan Miller, Esq.
Olshan Grundman Frome & Rosenzweig LLP Graubard Mollen & Miller
505 Park Avenue 600 Third Avenue
New York, New York 10022 New York, New York 10016
(212) 753-7200 (Telephone) (212) 818-8800 (Telephone)
(212) 755-1467 (Telecopy) (212) 818-8881 (Telecopy)
---------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
---------------------
===============================================================================
<PAGE>
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended ("Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
-----------------------------
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CALCULATION OF REGISTRATION FEE
========================================================================================================================
Proposed Proposed
Maximum Maximum
Title of each Class of Securities to be Amount to be Offering Price Aggregate Offering Amount of
Registered Registered Per Share Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, $.001
par value ("Common
Stock")(2) ........................... 3,450,000 $ 8.00 $ 27,600,000 $ 8,362.80
- ------------------------------------------------------------------------------------------------------------------------
Representatives' Purchase Option
("Representatives' Option") (3) . 300,000 $.0003 $ 100 $ .03
- ------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock included
as part of the Representatives'
Option(3) .............................. 300,000 $ 8.80 $ 2,640,000 $ 799.92
- ------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock underly-
ing the Bridge Warrants
("Bridge Warrants") issued to
certain investors in connection
with a private placement(3) ............ 1,075,000 $ 8.56 $ 9,202,000(4) $ 2,788.48
- ------------------------------------------------------------------------------------------------------------------------
Total Registration Fee ............... $ 39,442,100 $ 11,951.23(5)
========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) of the Securities Act, based on an assumed
initial public offering price range of $6.00 to $8.00 per share.
(2) Includes up to 450,000 shares of Common Stock which may be issued on
exercise of a 45-day option granted to the Underwriters to cover
over-allotments, if any. See "Underwriting".
(3) Pursuant to Rule 416 of the Securities Act, there are also being
registered such indeterminable number of additional securities as may be
issued as a result of the anti-dilution provisions of the Representatives'
Option and the Bridge Warrants.
(4) Represents the exercise price of the Bridge Warrants multiplied by the
number of shares of Common Stock issuable upon the exercise of the Bridge
Warrants.
(5) A filing fee of $10,424.88 was previously paid upon the initial filing of
this Registration Statement. The additional amount of $1,526.35 is being
paid with the filing of this Amendment No. 1.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time that the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 22, 1997
[LOGO]
3,000,000 Shares of Common Stock
--------------------
All of the 3,000,000 shares ("Shares") of Common Stock, $.001 par value
("Common Stock"), offered hereby ("Offering") are being sold by CrossZ
Software Corporation ("CrossZ" or "Company"). Prior to this Offering, there
has been no public market for the Common Stock and there can be no assurance
that any such market will develop. The Company has applied for quotation of
the Common Stock on the Nasdaq SmallCap Market under the symbol "CRSZ." It is
currently anticipated that the initial public offering price of the Shares
will be between $6.00 and $8.00 per share. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price of the Common Stock.
-------------------
The Common Stock offered hereby is speculative and involves a high degree of
risk and substantial dilution. See "Risk Factors" at page 7 hereof and
"Dilution" at page 18 hereof.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company (2)
- -------------------------------------------------------------------------------
Per Share ...... $ $ $
- -------------------------------------------------------------------------------
Total (3) ...... $ $ $
===============================================================================
(1) Does not include a 3% nonaccountable expense allowance which the Company
has agreed to pay to GKN Securities Corp. ("GKN") and Barington Capital
Group, L.P. ("Barington" and together with GKN, the "Representatives").
The Company also has agreed to sell to the Representatives an option to
purchase up to 300,000 shares of Common Stock ("Representatives' Purchase
Option") and to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance, estimated at approximately $1,380,000.
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase up to an
additional 450,000 shares of Common Stock on the same terms as set forth
above, solely for the purpose of covering over-allotments, if any. If such
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$__________, $_________ and $__________, respectively. See "Underwriting."
The Shares are being offered by the Underwriters on a firm commitment basis
subject to prior sale, when, as, and if delivered to and accepted by the
Underwriters and subject to the approval of certain legal matters by counsel
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Offering and to reject any order in whole or in part. It
is expected that delivery of certificates representing the Shares will made
against payment therefor at the offices of GKN in New York City on or about
________, 1997.
GKN Securities Corp. Barington Capital Group
_____________, 1997
<PAGE>
[Schematic of the Company's product and the following text:]
CrossZ's technologically advanced software product, QueryObject(TM) System,
transforms terabytes (thousand billion) of data stored in mainframe size data
warehouses into a mathematical representation that is typically megabyte size
and resides on a PC or laptop. This allows complex analysis to be performed by
business managers rapidly, and without the assistance of the corporate IT
department, anytime anywhere.
Imagine... carrying hundreds of millions of call detail records on your
notebook computer and analyzing them to monitor and predict network
traffic...using standard spreadsheets; Imagine... copying tens of millions of
credit card transactions to your desktop PC and performing statistical
analysis and merchant reporting...using standard statistical software;
Imagine... accessing 50 million point-of-sale transactions on your
departmental server and performing market share analysis...using geographic
information systems; Imagine... studying managed care plans over a year's worth
of Medicare data in exquisite detail...using standard desktop query tools;
Imagine... supporting an unlimited number of concurrent users, working with
any combination of front-end applications, with a single, Web-server data mart;
Imagine... delivering this kind of power to business managers, using source
data no matter how large, on your current hardware...and doing it all next
week;
The Company's business intelligence software products enable users to: scan
entire data warehouse for relevant data; extract virtually unlimited amounts
of raw data; and create data marts containing more data in less storage space.
This results in efficiencies and cost savings as compared to traditional data
marts and allows more business managers throughout the corporate enterprise to
access and analyze relevant data.
System Features &
Benefits
Creates optimized data marts through advanced data mining technologies;
Enables business managers to build full-scale data marts on their desktop PCs
in less than a day; Utilizes integrated, open architecture; - IBM MVS/System
390; - Unix; - Windows NT; - Windows 95; Utilizes client/server architecture;
Leverages existing corporate data; Permits greater scalability, speed and
mobility; Enables greater multi-user support; Plug and play;
...delivering on the promise
of business intelligence.
-------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
-------------------
This Prospectus includes references to trademarks of entities other than the
Company, which have reserved all rights with respect to their respective trade
marks.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed
information and Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus, including the information set forth under "Risk
Factors." Each prospective investor is urged to read this Prospectus in its
entirety. Unless otherwise indicated, all information and all share
transactions in this Prospectus give effect to: (i) the Company's
reincorporation in Delaware in October 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 June 30, 1997, into
1,649,753 shares of Common Stock, which will occur immediately prior to the
completion of this Offering; and (iv) the issuance of 17,500 shares of Common
Stock upon the exercise of certain outstanding warrants ("Warrant Exercise")
of the Company which will occur immediately prior to the completion of this
Offering. Unless otherwise indicated, the information in this Prospectus does
not give effect to exercise of the Underwriters' over-allotment option or the
Representatives' Purchase Option.
The Company
CrossZ develops and markets proprietary business intelligence software
solutions that enable business managers to make strategic decisions,
leveraging existing corporate data. Through the evolution of technology,
businesses operating in large customer base and transaction intensive
industries, such as telecommunications and banking, have dramatically
increased their ability to gather and store large amounts of data generated
from various sources. The Company developed its products in response to the
need to analyze the increasing volumes of data that businesses accumulate.
Such data contains information, that if extracted effectively and efficiently,
can be used to enhance strategic corporate development. While companies have
invested heavily in capturing data, they have only recently begun to focus
significant resources on the management and analysis ("mining") of such data;
consequently, the data gathering and analysis industry is experiencing
significant growth. The Company intends to market and sell its products
through a direct sales force, original equipment manufactuers ("OEMs") and
value-added resellers ("VARs") and has entered into agreements and
relationships with, among others, Amdahl Corporation, Hewlett Packard Company,
STRATOS, Strategic Tools & Services and Worldnet Consulting, SA.
The business intelligence software market consists of three segments:
data warehousing, data marts, and data mining. A data warehouse is a data
repository where unprocessed corporate data is stored. Data marts are subject
specific subsets of the data warehouse. Data mining products are used to
uncover patterns in data. International Data Corp. ("IDC"), a leading
technology consulting/research company, estimates that the size of the broad
data warehousing software market was $1.4 billion in 1995, and will increase
to over $5.0 billion by the year 2000, an annual growth rate of approximately
30%. The stimulus for growth in this market has been the exceptional returns
on capital experienced by companies that have invested in data warehousing and
related technologies. IDC studied 62 companies that invested an average of
$2.2 million each in data warehousing and found that the average return on
investment after three years was 401%.
CrossZ's software enables users to define, cost justify and rapidly
deliver business driven data marts to the desktop. The Company's proprietary
products are the QueryObject(TM) System ("QueryObject System") and CrossZ
Voyager(TM) ("Voyager"). QueryObject System transforms mainframe size data
repositories into compact mathematical representations, called QueryObjects,
that can fit onto standard desktop and laptop computers. Once a QueryObject
has been created, the user can pose thousands of questions to it using on-line
analytical processing ("OLAP"), mapping, spreadsheet and word processing tools
and receive answers in seconds. The Company's other principal product,
Voyager, is a data mining product that uses multiple concurrent pattern
recognition algorithms to analyze data from data warehouses and other data
repositories and to then automatically design a data mart and analyze its
economic value. Voyager and QueryObject System are based on the Company's next
generation data mining and data mart technologies and, as a result, offer the
following advantages over conventional data marts and data mining tools:
3
<PAGE>
o Plug and Play with Raw Data: QueryObject System allows the user to extract
virtually unlimited amounts of raw data directly from existing on-line
transaction processing ("OLTP") and other systems, without the need to
aggregate and summarize the data.
o Greater Scalability and Speed: The use of proprietary algorithmic equations
allow QueryObject-based data marts to store more data in a fraction of the
storage space needed by conventional data marts. Even with data marts
containing hundreds of millions of records, the retrieval can be executed in
seconds or less.
o Fresher Data: QueryObject System was designed specifically for high-speed
data mart creation without the management overhead and negative performance
implications associated with data warehouses and other conventional data
repositories, allowing users to create dozens of data marts in a single day.
o Lower Cost: The ability to load raw data into QueryObject System reduces or
eliminates time-consuming and costly work such as extracting, cleaning,
normalizing, formatting and summarizing data before loading it into a data
warehouse. In addition, large amounts of operational data can be preserved
for future analysis at far lower cost than a data warehouse, because the
storage-based requirement is reduced.
o Greater Multi-User Support: QueryObjects can support unlimited numbers of
concurrent users since ALL POSSIBLE ANSWERS TO ALL POSSIBLE QUERIES are
contained therein and impose virtually no degradation on processing power,
in contrast to conventional data marts that consume large amounts of
processing power in computing potential answers.
o Greater Mobility: Since QueryObjects can reside on desktops, laptops or Web
servers, or be distributed over local area networks, they allow businesses
to deploy complex data marts to thousands of users in an enterprise using
existing information technology infrastructure.
The Company recently shifted its focus to the sale and support of its
proprietary products, and, therefore, has achieved limited sales. In October
1997, the Company began to implement full-scale marketing of QueryObject
System and Voyager. Prior to the recent launch of its products, the Company's
revenues were derived primarily from providing contract consulting services to
the banking, telecommunications, finance, insurance, retail and travel and
lodging industries. In its role as a consultant, CrossZ applied its
proprietary technology to a wide range of business needs and through that
process developed QueryObject System and Voyager. In October 1996, the Company
made the strategic decision to pursue product sales in what it believes is a
very dynamic marketplace. All of the Company's revenues for the foreseeable
future are expected to be generated from sales of QueryObject System and
Voyager. The Company intends to market and sell Voyager and QueryObject System
through a direct sales force, OEMs and VARs. The Company has established
license agreements and VAR relationships with Amdahl Corporation, Hewlett
Packard Company, STRATOS, Strategic Tools & Services and Worldnet Consulting,
SA. In addition, the Company has a joint development and marketing agreement
with Pyramid Technology Corporation and co-marketing programs with several
companies including Brio Technology, Inc. and Siemens Nixdorf Informations
Systemme AG.
The Company's objective is to establish QueryObject System technology as
a data mart standard and become a leading provider of integrated data
mining/mart software products for business intelligence applications. The
Company's strategy to achieve this goal involves the following key elements:
(i) establish technology leadership by continuing to invest in and develop
innovative technologies; (ii) develop strategic relationships with indirect
channel partners including OEMs and VARS; (iii) expand an open systems
approach; (iv) leverage existing customer investments in information
technology; (v) target vertical markets; and (vi) expand sales capabilities
both domestically and internationally.
The Company was incorporated as CrossZ International, Inc., a California
corporation ("CrossZ-California"). CrossZ Software Corporation, a Delaware
corporation ("CrossZ-Delaware") was formed in August 1997 as part of a
corporate reorganization, pursuant to which CrossZ-California merged into
CrossZ-Delaware ("Reincorporation"). Unless otherwise indicated, references to
the Company also includes its predecessors. The Company's executive offices
are located at 60 Charles Lindbergh Boulevard, Uniondale, New York 11553, and
its telephone number at that address is (516) 228-8500.
4
<PAGE>
The Offering
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<S> <C>
Common Stock Offered ................................. 3,000,000 shares
Common Stock Outstanding Prior to this Offering(1) ... 2,602,408 shares
Common Stock to be Outstanding after the Offering (1). 5,602,408 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."
Proposed Nasdaq SmallCap Market Symbol ............... CRSZ
Proposed Boston Stock Exchange Symbol .................. CRZ
</TABLE>
- -----------
(1) Includes 1,649,753 shares of Common Stock issuable pursuant to the
Preferred Stock Conversion and an additional 39,677 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 July
1, 1997 and October 31, 1997 and 17,500 shares of Common Stock issuable
pursuant to the Warrant Exercise. Does not include: (i) 1,950,000 shares
of Common Stock reserved for issuance upon exercise of stock options
granted or to be granted under the Company's 1991 Incentive Stock Option
Plan ("Plan"), of which options to purchase 141,363 shares of Common Stock
are outstanding; (ii) 175,000 shares of Common Stock reserved for issuance
upon exercise of certain other outstanding non-qualified stock options
granted to advisors ("Advisory Options"); (iii) 1,075,000 shares of Common
Stock ("Bridge Warrant Shares") reserved for issuance, the maximum number
of shares issuable, upon the exercise of warrants ("Bridge Warrants")
issued in the Company's July 1997 bridge financing ("Bridge Financing")
and (iv) 239,881 shares of Common Stock reserved for issuance upon the
exercise of additional outstanding warrants. See "Management -- Executive
Compensation" and "-- 1991 Incentive Stock Option Plan," "Certain
Transactions" and "Description of Securities -- Bridge Warrants and
"--Other Warrants." Unless otherwise indicated, the information in this
Prospectus does not give effect to the exercise of the Underwriters'
over-allotment option or the Representatives' Purchase Option.
Risk Factors
An investment in the Shares offered hereby involves a high degree of
risk, including without limitation, the Company's: accumulated deficit,
historical and projected future operating losses and the independent
accountants' report going concern qualification; dependence upon new products
and uncertain market acceptance of its products; lack of substantial revenue
and limited operating history; and working capital deficiency and dependence
upon proceeds of this Offering. An investment in the Shares offered hereby
should be considered only by investors who can afford the loss of their entire
investment. See "Risk Factors."
5
<PAGE>
Summary Financial Data
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, including the Notes thereto,
included elsewhere in this Prospectus. The statement of operations data for
the years ended December 31, 1995 and 1996 are derived from the Company's
audited Financial Statements included elsewhere in this Prospectus. The
statement of operations data for the six months ended June 30, 1996 and 1997
and the balance sheet data at June 30, 1997 have been derived from unaudited
financial statements and include all adjustments (consisting of only normal
recurring adjustments) that the Company considers necessary for a fair
statement of the results for such interim periods. The operating results for
the six months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year or for any future period.
<TABLE>
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Year Ended December 31, Six Months Ended June 30,
--------------------------------- ---------------------------------
1995 1996 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Software licenses ........................... $ 194,000 $ 851,150 $ 228,025 $ 398,750
Services and maintenance ..................... 2,596,815 1,051,828 694,017 96,377
------------ ------------ ------------ ------------
Total revenues .............................. 2,790,815 1,902,978 922,042 495,127
Gross profit ................................. 2,166,878 1,424,551 672,749 434,581
Total operating expenses ..................... 4,871,876 6,076,760 2,359,678 3,867,485
Loss from operations ........................ (2,704,998) (4,652,209) (1,686,929) (3,432,904)
Net loss .................................... (3,061,919) (4,917,935) (1,939,503) (3,506,881)
Pro forma net loss per common share ......... $ (2.51) $ (1.35)
Pro forma weighted average shares used in per
share computation (see Note 1 of Notes to the
Financial Statements) ..................... 1,957,856 2,599,101
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------------
Pro Forma As
Actual Pro Forma(1) Adjusted(2)
------------------------ -------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....................................... $ 67,126 $ 3,795,126 $16,635,126
Working capital (deficiency) .................................... (2,701,715) 426,285 13,866,285
Total assets ...................................................... 2,503,148 6,695,148 19,071,148
Long-term debt ................................................... 2,049,794 4,166,475 1,178,872
Total liabilities ................................................ 5,427,041 8,143,722 4,556,119
Series D mandatorily redeemable convertible preferred stock ...... 11,173,369 -- --
Stockholders' equity (deficit) .................................... (14,097,262) (3) (1,448,574) 14,515,029
</TABLE>
- -----------
(1) The pro forma balance sheet data as of June 30, 1997 gives effect to the
Preferred Stock Conversion resulting in the issuance of 1,649,753 shares
of Common Stock. As of June 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 1,317,751 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 June 30, 1997 gives effect
to: (i) the issuance of $4,300,000 of unsecured promissory notes ("Bridge
Notes") of the Company issued in the Bridge Financing, net of the
conversion into Bridge Notes of a $250,000 principal amount unsecured
Promissory Note ("Third Interim Financing Note") issued in connection with
an interim financing consummated in June 1997 ("Third Interim Financing");
(ii) 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"); (iii) 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 (iv) 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 June 30, 1997 does not
give effect to the issuance of 39,677 shares of Common Stock issuable upon
the conversion of Outstanding Preferred Stock as the result of dividends
on the Outstanding Preferred Stock which accrue between July 1, 1997 and
October 31, 1997.
(2) The pro forma as adjusted balance sheet data as of June 30, 1997 gives
effect to: (i) the sale of the Shares offered hereby at an assumed initial
public offering price of $7.00 per share and the receipt of the net
proceeds therefrom of approximately $17,940,000; (ii) the repayment of the
Bridge Notes and the related effect of the write-off of $1,433,319 of debt
discount and $464,000 of debt issuance costs incurred in connection with
the Bridge Financing; and (iii) the repayment of the 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") and the related effect of the write-off of $79,078 of
debt discount incurred in connection with such financings.
(3) Excludes Series D mandatorily redeemable convertible preferred stock.
6
<PAGE>
RISK FACTORS
The Shares offered hereby are speculative in nature and involve a high
degree of risk. Accordingly, in analyzing an investment in these Shares,
prospective investors should carefully consider, along with the other matters
referred to herein, the following risk factors. No investor should participate
in this Offering unless such investor can afford a complete loss of his
investment.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At June
30, 1997, the Company had an accumulated deficit of $18,357,161. For the
fiscal year ended December 31, 1996 and for the six months ended June 30,
1997, the Company incurred net losses of $4,917,935 and $3,506,881,
respectively. The Company estimates that its net loss for the quarter and the
nine months ended September 30, 1997 will exceed $2,000,000 and $5,500,000,
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 June 30, 1997, the Company realized software product revenue from only
four 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 six months ended
June 30, 1997 were approximately $495,000 and consisted primarily of one sale
of QueryObject System. Prior to 1997, the Company's revenues were derived from
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
June 30, 1997, the Company had a working capital deficiency of $2,701,715. To
date, the Company has obtained working capital primarily through private
financings, including the Bridge Financing 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 $951,000, 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,
7
<PAGE>
should be sufficient to satisfy the Company's cash requirements for at least
18 months after completion of the Offering. There can be no assurance,
however, that the Company will not require additional financing during or
after such 18-month period. Any inability by the Company to obtain additional
financing, if required, could have a material adverse effect on the operations
of the Company. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Significant Portion of Proceeds Used to Satisfy Indebtedness; Payment to
Affiliates; Broad Discretion in Application of Proceeds. Approximately
$5,228,000, or 29% of the net proceeds received by the Company from this
Offering (based on an Offering price of $7.00 per share), will be used to
repay in full the Bridge Notes, the Second Interim Financing Notes and the
October 1997 Interim Financing Notes. Approximately $4,412,000, or 25% of the
net proceeds from this Offering has been allocated to working capital and
general corporate purposes. The Company will have broad discretion regarding
how and when such proceeds will be applied and will use a portion of such
proceeds to pay salaries, including salaries of its executive officers. See
"Use of Proceeds."
Dependence on and Expansion of Indirect Channel Partners. An integral
part of the Company's sales and marketing efforts is to develop strategic
relationships with indirect channel partners such as OEMs and VARs and to
increase the proportion of the Company's customers licensed through indirect
channel partners. Accordingly, the Company believes that the licensing of its
products through indirect channel partners will in the future account for a
high percentage of its revenues. There can be no assurance that any customer
will continue to purchase the Company's products in the future. The Company
currently is investing, and intends to continue to invest, significant
resources to develop indirect channel partners, which could adversely affect
its operating results if its efforts do not generate significant license
revenues. In addition, there can be no assurance that the Company will be able
to attract OEMs or VARs or other indirect channel partners that will be able
to market the Company's products effectively and will be qualified to provide
timely and cost effective customer support and service which could adversely
affect the Company's results of operations. In addition, if the Company is
successful in selling products through these sales channels, the Company's
gross margins may be negatively affected due to the lower unit prices that the
Company expects to receive when selling through OEMs or VARs or other indirect
channel partners. See "Business -- Sales and Marketing."
Need to Develop New Products and Adapt to Rapid Technological Change. The
market for the Company's software is characterized by rapid technological
change, frequent new product introductions and evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
The life cycles of the Company's products are difficult to estimate. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing product
enhancements or new products that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing
of these products or that the Company's new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. Any potential new products would likely be subject to significant
technical risks. If the Company experiences delays in the commencement of
commercial shipments of new products and enhancements, the Company could
experience delays in or loss of product revenues. If the Company is unable,
for technological or other reasons, to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected.
Competition. The market for the Company's products is intensely
competitive and subject to rapid change. The Company's competitors include
Arbor Software, HNC Software Inc., Red Brick Systems, Inc., Informix Corp.,
Oracle Corp., IBM, and Cognos Inc. Because there are relatively low barriers
to entry into the software market, the Company expects additional competition
from other established and emerging companies if the business intelligence
data delivery software market continues to develop and expand. The Company's
competitors have longer operating histories, significantly greater financial,
technical and marketing resources and name recognition and a larger installed
base of customers and products. In addition, many of the Company's competitors
have well-established relationships with current and potential customers of
the Company, have extensive knowledge of the relational database industry and
may be able to offer a single vendor solution. As a result, the
8
<PAGE>
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 employment agreements with each of
Messrs. Chroscielewski and Kaufman that expire in December 1999 and November
1998, respectively and 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."
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.
9
<PAGE>
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 $10,481,791 and $114,988 respectively,
available to offset future federal taxable income and tax. These NOL
carryforwards expire at various dates through 2011. The availability of the
NOL to reduce or offset taxable income of the Company is subject to various
limitations under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"). In particular, the Company's ability to utilize the NOL
carryforward would be restricted upon the occurrence of an "ownership change"
within the meaning of Section 382 of the Code. Although the determination of
whether an ownership change has occurred is subject to factual and legal
uncertainties, the Company believes that an ownership change occurred upon the
completion of previous financings and such "ownership change" will materially
limit the Company's ability to utilize its NOL carryforward. As a result of
the "ownership change," the Company will generally be permitted to utilize NOL
carryforward (available on the date of such change) in any year thereafter to
reduce its income to the extent that the amount of such income does not exceed
the product of (i) the fair market value of the Company's outstanding equity
at the time of the ownership change (reduced by the amount of certain capital
contributions such as those received pursuant to this Offering) and (ii) a
long-term tax-exempt rate published by the Internal Revenue Service (5.64% for
ownership changes occurring in August 1997). The Company does not anticipate
that it will utilize its NOL carryforwards for 1997.
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.
10
<PAGE>
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. As of the date of this
Prospectus, there are outstanding Bridge Warrants to purchase 1,075,000 shares
of Common Stock, options to purchase 141,363 shares of Common Stock issued
under the Plan, Advisory Options to purchase 175,000 shares of Common Stock
and certain other warrants to purchase 239,881 shares of Common Stock. In
addition, in connection with this Offering, the Company will issue the
Representatives' Purchase Option. The exercise of such outstanding warrants
and options would dilute the then-existing stockholders' percentage ownership
of the Company's stock, and any sales in the public market of Common Stock
underlying such securities could adversely affect prevailing market prices for
the Common Stock. Moreover, the terms upon which the Company would be able to
obtain additional equity capital could be adversely affected since the holders
of such securities can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided by such securities. See "Shares
Available for Future Sale", "Management -- 1991 Incentive Stock Option Plan,"
"Description of Securities" and "Underwriting."
Shares Eligible for Future Sale. Upon the completion of this Offering,
the Company will have 5,562,731 shares of Common Stock outstanding. Of these
shares, all of the 3,000,000 shares of Common Stock sold to the public in this
Offering will be freely transferable by persons other than affiliates of the
Company, without restriction or further registration under the Securities Act
of 1933, as amended ("Securities Act"). The remaining 2,562,731 shares of
Common Stock outstanding were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" as defined in Rule 144 under the Securities Act. Substantially all
of the restricted securities will be available for sale on the date of this
Prospectus or within 90 days of the date of this Prospectus. In addition, the
Company has 1,950,000 shares of Common Stock reserved for issuance under the
Plan, of which options to purchase 141,363 shares of Common Stock have been
granted and options to purchase approximately 500,000 shares of Common Stock
are being granted immediately prior to the effectiveness of the Offering.
Moreover, the Company has outstanding options and warrants to purchase an
aggregate of 1,631,244 shares of Common Stock. The sale of a substantial
number of shares of the Common Stock or the availability of Common Stock for
sale could adversely affect the market price of the Common Stock prevailing
from time to time. The Company and stockholders owning approximately 98% of
the outstanding shares, options and warrants prior to this Offering have
entered into agreements which prohibit them from selling or otherwise
transferring stock in the Company for 13 months from the date of this
Prospectus. The Representatives may, in their sole discretion and at any time
without notice, release all or any portion of the securities subject to
lock-up agreements. See "Shares Eligible for Future Sale" and "Underwriting."
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<PAGE>
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 63% of
their investment in the Common Stock because the pro forma net tangible book
value of the Company's Common Stock after this Offering will be approximately
$2.61 per share as compared with the assumed initial public offering price of
$7.00 per share of Common Stock. See "Dilution."
Concentration of Stock Ownership. Upon completion of this Offering, the
present directors, executive officers and principal stockholders of the
Company and their affiliates will beneficially own approximately 23.4% of the
outstanding Common Stock. As a result, these stockholders will be able to
exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. See "Principal
Stockholders."
Issuance of Preferred Stock; Anti-Takeover Provisions; Pursuant to its
Certificate of Incorporation, the Company has an authorized class of 2,000,000
shares of preferred stock which may be issued by the Board of Directors on
such terms and with such rights, preferences and designations, including,
without limitation, restricting dividends on the Common Stock, dilution of the
voting power of the Common Stock and impairing the liquidation rights of the
holders of Common Stock, as the Board may determine without any vote of the
stockholders. Issuance of such preferred stock, depending upon the rights,
preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. In addition,
certain "anti-takeover" provisions of the Delaware General Corporation Law,
among other things, may restrict the ability of the stockholders to authorize
a merger, business combination or change of control of the Company. See
"Description of Securities -- Preferred Stock."
Limited Liability for Directors. The Company's Certificate of
Incorporation provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, with certain exceptions prescribed by Delaware
law. This may discourage stockholders from bringing suit against a director
for breach of fiduciary duty and may reduce the likelihood of derivative
litigation brought by stockholders on behalf of the Company against a
director. In addition, the Company's By-laws and indemnification agreements to
be entered into with the Company's directors and officers will provide for
mandatory indemnification to the fullest extent permitted by Delaware law. See
"Description of Securities -- Limitation on Liability and Indemnification
Matters."
No Prior Market; Potentially Limited Trading Market; Possible Volatility
of Stock Price. There has been no prior market for the Common Stock and there
can be no assurance that a public market for the Common Stock will develop or
be sustained after the Offering. The Company has applied to have the Common
Stock approved for quotation on the Nasdaq SmallCap Market. Under recently
implemented Nasdaq rules, in order for the Company to remain eligible for
listing on the Nasdaq SmallCap Market, (i) the Company's Common Stock must
have a minimum bid price of $1.00, (ii) the Company must have minimum tangible
net assets of $2,000,000 or a market capitalization of $35,000,000 or net
income of $500,000 in two of the three prior years, (iii) the Company must
have a public float of at least 500,000 shares with a market value of at least
$1,000,000 and the Common Stock must have at least two market makers and be
held of record by at least 300 stockholders. While the Company will satisfy
the Nasdaq SmallCap Market listing and maintenance standards upon completion
of the Offering, the failure to meet the maintenance criteria in the future
may result in the Common Stock no longer being eligible for quotation on
Nasdaq and trading, if any, of the Common Stock would thereafter be conducted
in the non-Nasdaq over-the-counter market. Trading, if any, of the Common
Stock would thereafter be conducted on the OTC Bulletin Board. As a result of
such ineligibility for quotations, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Common Stock. Furthermore, the regulations of the Securities and Exchange
Commission ("Commission") promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act") require additional disclosure relating to
the market for penny stocks. Commission regulations generally define a penny
stock to be an equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. A disclosure schedule explaining
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<PAGE>
the penny stock market and the risks associated therewith is required to be
delivered to a purchaser and various sales practice requirements are imposed
on broker-dealers who sell penny stocks to persons other than established
customers and accredited investors (generally institutions). In addition, the
broker-dealer must provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction and monthly account statements showing the market value of
each penny stock held in the customer's account. If the Company's securities
become subject to the regulations applicable to penny stocks, the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of
broker-dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the
secondary market.
The public offering price of the Common Stock being offered hereby was
established by negotiation between the Company and the Representatives and may
not be indicative of prices that will prevail in the trading market. In the
absence of an active trading market, purchasers of the Common Stock may
experience substantial difficulty in selling their securities. The trading
price of the Company's Common Stock is expected to be subject to significant
fluctuations in response to variations in quarterly operating results, changes
in analysts' earnings estimates, general conditions in the computer software
industry and other factors. In addition, the stock market is subject to price
and volume fluctuations that affect the market prices for companies and that
are often unrelated to operating performance. See "Underwriting."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby, assuming an initial public offering price of $7.00 per
share, are estimated to be approximately $17,940,000 ($20,743,500 if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to apply the net proceeds as follows:
<TABLE>
<CAPTION>
Application of Proceeds Amount Percent
- ----------------------- ------------- --------
<S> <C> <C>
Sales and Marketing ................................. $ 5,800,000 32.4%
Repayment of Bridge and Interim Financings ......... 5,228,000 29.1
Research and Development ........................... 2,500,000 13.9
Working Capital and General Corporate Purposes ...... 4,412,000 24.6
------------ ------
Total .......................................... $17,940,000 100.0%
============ ======
</TABLE>
Approximately $5,800,000 of the net proceeds of this Offering will be
used to fund the Company's integrated full-scale sales and marketing
activities and to expand its sales and marketing activities both domestically
and internationally, by hiring additional domestic and internationals sales
and marketing personnel, increasing advertising, participating in trade shows
and other promotional activities, developing indirect sales channels and
enhancing the Company's customer service capabilities. See "Business--Sales
and Marketing."
Approximately $4,420,000 of the net proceeds of this Offering will be
used to repay the Bridge Notes issued in connection with the Bridge Financing
consummated in July 1997. The Bridge Notes consist of 43 unsecured promissory
notes in the aggregate principal amount of $4,300,000, bearing interest at the
rate of 10% per annum through September 30, 1997 and at a rate of 13% per
annum thereafter and payable with interest thereon upon the consummation of
this Offering. If the Offering were consummated on October 31, 1997, the
interest to be paid on the Bridge Notes would be approximately $120,000.
Approximately $259,000 of the principal and interest to be repaid on the
Bridge Notes is to be repaid on Bridge Notes held by 5% stockholders and
entities affiliated with directors of the Company. The net proceeds from the
sale of the Bridge Notes have been used primarily for working capital
purposes, including payments to suppliers and the repayment of the First
Interim Financing Notes. In addition, approximately $208,000 of the net
proceeds of this Offering will be used to repay the Second Interim Financing
Note and approximately $600,000 of the net proceeds of this Offering will be
used to repay the October 1997 Interim Financing Notes. The net proceeds from
the Second Interim Financing and the October 1997 Interim Financing have been
used primarily for working capital purposes. The October 1997 Interim
Financing Notes are held by 5% stockholders of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources and "Certain Transactions."
Approximately $2,500,000 of the net proceeds of this Offering will be used
for research and development, including enhancements to existing features and
development of new functions for Voyager and QueryObject System and the
salaries and related payroll costs of additional research and development
personnel. See "Research and Development."
The balance of the net proceeds of this Offering will be allocated to
working capital and general corporate purposes, including payment of salaries
(including salaries of its executive officers), and for possible acquisitions.
The Company currently has no agreement, arrangement or understanding with
respect to any acquisition. A portion of the proceeds allocated to working
capital will be used to pay taxing authorities amounts due for sales, use and
excise taxes, as well as to make payments to certain vendors which are
currently past due. If the Underwriters exercise the over-allotment option in
full, the Company will realize additional net proceeds of $2,803,500, which
will be added to working capital. Management will have significant discretion
regarding how and when such proceeds will be applied.
The allocation of the net proceeds of the Offering set forth above
represents the Company's best estimates based upon its current plans and
certain assumptions regarding industry and general economic conditions and the
Company's future revenues and expenditures. If any of these factors change,
the Company may find it necessary or advisable to reallocate some of the
proceeds within the above-described categories.
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<PAGE>
Proceeds not immediately required for the purposes described above will
be invested temporarily, pending their application as described above, in
short-term United States government securities, short-term bank certificates
of deposit, money market funds or other investment grade, short-term,
interest-bearing instruments.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations (including the costs associated with
its growth strategy), that the proceeds of the Offering, together with its
existing financial resources and revenues, should be sufficient to satisfy its
anticipated cash requirements for at least the next 18 months; however, there
can be no assurance that this will be the case. The Company's actual cash
requirements may vary materially from those now planned and will depend upon
numerous factors, including the general market acceptance of the Company's new
and existing products and services, the growth of the Company's distribution
channels, the technological advances and activities of competitors, and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, to finance
the growth and development of its business and does not anticipate paying any
cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the total
capitalization of the Company (i) as of June 30, 1997, (ii) pro forma to give
effect to the Bridge Financing, the October 1997 Interim Financing, the
Preferred Stock Conversion and the Warrant Exercise, and (iii) pro forma as
adjusted to give effect to the consummation of the Offering at an assumed
initial public offering price of $7.00 per Share and the application of the
estimated net proceeds therefrom, after deducting the underwriting discounts
and commissions and estimated offering expenses. The table should be read in
conjunction with the Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------
Pro Forma,
Pro As
Actual Forma(1) Adjusted(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Short-term debt, including current portion of capital lease
obligations ................................................ $ 326,157 $ 926,157 $ 326,157
============= ============= =============
Long-term debt, including Interim Financing Notes payable to
stockholders, Bridge Notes, loan payable to stockholder
and capital lease obligations .............................. $ 2,049,794 $ 4,166,475 $ 1,178,872
------------- ------------- -------------
Series D mandatorily redeemable convertible preferred stock,
$.001 par value 14,030,593 shares authorized actual, pro
forma and pro forma as adjusted; 1,317,751 shares issued
and outstanding actual; no shares issued and outstanding,
pro forma and pro forma as adjusted ....................... 11,173,369 -- --
------------- ------------- -------------
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;
895,478 shares issued and outstanding, actual; 2,562,731
shares issued and outstanding, pro forma; 5,562,731 shares
issued and outstanding pro forma, as adjusted(3) ...... 895 2,563 5,563
Additional paid-in capital .............................. 4,271,023 16,918,324 34,855,324
Accumulated deficit .................................... (18,357,161) (18,357,161) (20,333,558)
Receivable from stockholder .............................. (12,300) (12,300) (12,300)
------------- ------------- -------------
Total stockholders' equity (deficit) ..................... (14,097,262) (1,448,574) 14,515,029
------------- ------------- -------------
Total capitalization ................................. $ (874,099) $ 2,717,901 $ 15,693,901
============= ============= =============
</TABLE>
- ------------
(1) The pro forma balance sheet data as of June 30, 1997 gives effect to the
Preferred Stock Conversion resulting in the issuance of 1,649,753 shares
of Common Stock. As of June 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 1,317,751 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 June 30, 1997 gives effect
to: (i) the issuance of $4,300,000 of Bridge Notes, net of the conversion
into Bridge Notes of the $250,000 Third Interim Financing Note; (ii) the
repayment of the $500,000 First Interim Financing Notes with proceeds from
the Bridge Financing; (iii) the issuance and repayment of the $600,000
October 1997 Interim Financing Notes; and (iv) the Warrant Exercise
resulting in the purchase of 17,500 shares of Common Stock for an
aggregate purchase price of $42,000.
16
<PAGE>
(2) The pro forma as adjusted balance sheet data as of June 30, 1997 gives
effect to: (i) the sale of the Shares offered hereby at an assumed initial
public offering price of $7.00 per share and the receipt of the net
proceeds therefrom, (ii) the repayment of the Bridge Notes and the related
effect of the write-off of $1,433,319 of debt discount and $464,000 of
debt issuance costs incurred in connection with the Bridge Financing; and
(iii) the repayment of the October 1997 Interim Financing Notes and the
Second Interim Financing Notes and the related effect of the write-off of
$79,078 of debt discount incurred in connection with such financings. The
pro forma balance sheet data as of June 30, 1997 does not give effect to
the issuance of 39,677 shares of Common Stock issuable upon the conversion
of the Outstanding Preferred Stock as the result of dividends on the
Outstanding Preferred Stock which accrue between July 1, 1997 and October
31, 1997.
(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 are
outstanding at a weighted average exercise price of $1.14 per share, of
which options to purchase 108,940 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) 39,677 shares of Common
Stock issuable upon the conversion of Outstanding Preferred Stock as the
result of dividends on the Outstanding Preferred Stock which accrue
between July 1, 1997 and October 31, 1997. 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 June 30, 1997, on a pro
forma basis after giving effect to the (i) sale of the Bridge Notes, net of
the conversion into Bridge Notes of the Third Interim Note and the repayment
of the First Interim Notes, and the receipt of the net proceeds thereof, (ii)
Preferred Stock Conversion, and (iii) Warrant Exercise, the Company had a
deficiency in net tangible book value (total pro forma tangible assets less
total pro forma liabilities) of $1,448,574, or approximately $0.57 per share
of Common Stock. Without taking into account any other changes in such net
tangible book value of the Company after June 30, 1997, other than to give
effect to the sale of all of the Shares offered hereby at an assumed initial
public offering price of $7.00 per share, and the receipt and application of
the estimated net proceeds therefrom, the pro forma net tangible book value of
the Company on June 30, 1997 would have been $14,515,029 or approximately
$2.61 per share, which represents an immediate increase in the pro forma net
tangible book value of approximately $3.18 per share to existing stockholders
and an immediate dilution of $4.39 per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share .................. $7.00
Pro forma deficiency in net tangible book value per
share before this Offering ................................. $ (0.57)
Increase per share attributable to this Offering ............ 3.18
-------
Pro forma net tangible book value per share after this Offering... 2.61
-----
Dilution per share to new investors .............................. $4.39
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
by existing stockholders and by new investors purchasing the Shares offered
hereby at an assumed initial public offering price of $7.00 per share (before
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price per
Number Percent Amount Percent Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 2,562,731 46.1% $14,400,000 40.7% $ 5.62
New investors ............... 3,000,000 53.9 21,000,000 59.3 7.00
--------- ------ ------------ ------
Total(1) ............... 5,562,731 100.0% $35,400,000 100.0%
========= ====== ============ ======
</TABLE>
- ------------
(1) Does not include (i) 1,950,000 shares of Common Stock reserved for
issuance upon exercise of stock options granted or to be granted under the
Plan, of which options to purchase 141,362 shares of Common Stock are
outstanding at a weighted average exercise price of $1.14 per share, of
which options to purchase 108,940 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) 39,677 shares of
Common Stock issuable upon the conversion of Outstanding Preferred Stock
as the result of dividends on the Outstanding Preferred Stock which accrue
between July 1, 1997 and October 31, 1997. 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 June 30, 1997 had an accumulated deficit of $18,357,161. The Company
estimates that its net loss for the quarter and the nine months ended
September 30, 1997 will exceed $2,000,000 and $5,500,000, respectively. 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 $160,000. As a result, the timing of the receipt and shipment of a
single order can have a significant impact on the Company's revenues and
results of operations for a particular period.
19
<PAGE>
Results of Operations
The following table sets forth certain items in the Company's statements
of operations for the years ended December 31, 1995 and 1996, and for the six
months ended June 30, 1996 and 1997 ($ in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Software licenses ............... $ 194 $ 851 $ 228 $ 399
Services and maintenance(1) ...... 2,597 1,052 694 96
-------- -------- -------- --------
Total revenues .................. 2,791 1,903 922 495
-------- -------- -------- --------
Cost of revenues
Software licenses ............... 33 102 33 48
Services and maintenance ......... 591 376 216 12
-------- -------- -------- --------
Total cost of revenues ......... 624 478 249 60
-------- -------- -------- --------
Gross profit ..................... 2,167 1,425 673 435
-------- -------- -------- --------
Operating expenses
Sales and marketing ............... 2,504 3,145 1,264 2,061
Research and development ......... 1,357 1,792 643 1,198
General and administrative ...... 1,011 1,140 453 609
-------- -------- -------- --------
Total operating expenses ...... 4,872 6,077 2,360 3,868
-------- -------- -------- --------
Loss from operations ............... (2,705) (4,652) (1,687) (3,433)
Interest income .................. -- 88 17 27
Interest expense .................. (335) (355) (271) (102)
Other income (expense) ............ (22) 1 1 1
-------- -------- -------- --------
Net loss ........................ $ (3,062) $ (4,918) $ (1,940) $ (3,507)
======== ======== ======== ========
</TABLE>
- ------------
(1) Prior to the six months ended June 30, 1997, services and maintenance
revenues consisted entirely of service revenue.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues
The Company's license revenues have been generated from sales of
QueryObject System. Service revenues have been generated from fees paid by
customers on a project or contract basis for data analysis by the Company
using its proprietary software, and are recognized over the term of the
respective agreements. Maintenance revenues consist of ongoing support and
product updates and are recognized ratably over the term of the contract,
which is typically twelve months (See Note 1 of Notes to the Financial
Statements). The Company has recognized revenue, for all periods presented, in
accordance with the American Institute of Certified Public Accountants
Statement of Position 91-1 entitled "Software Revenue Recognition."
Total revenues decreased by $427,000 or 46% from $922,000 for the six
months ended June 30, 1996 ("the 1996 period") to $495,000 for the six months
ended June 30, 1997 ("the 1997 period"). License revenues increased by
$171,000 or 75% from $228,000 for the 1996 period, to $399,000 for the 1997
period. During both the 1996 and 1997 periods, license revenues were derived
from the sale of one license in each period. The increase in the 1997 period
was primarily due to the different components, and therefore prices, of the
respective licenses. Services and maintenance revenue decreased by $598,000,
or 86%, from $694,000 for the 1996 period to $96,000 for the 1997 period, due
primarily to the curtailment of service based engagements. The Company has
discontinued its service-based engagements and does not anticipate any ongoing
revenue from these activities.
Cost of Revenues/Gross Profit
Cost of software license revenues consists primarily of product
packaging, documentation and production costs. Gross profit resulting from
software licenses increased by $156,000, or 80%, from $195,000 for the 1996
20
<PAGE>
period to $351,000 for the 1997 period, representing 86% and 88% of related
license revenues, respectively. Cost of services and maintenance revenues
consist primarily of customer support costs and direct costs associated with
providing services. Gross profit resulting from services and maintenance
decreased by $394,000, or 82%, from $478,000 for the 1996 period to $84,000
for the 1997 period, representing 69% and 88% of related service and
maintenance revenues, respectively. The decrease in gross profit was primarily
due to the curtailing of service based engagements. The Company has
discontinued its service based engagements.
Operating Expenses
Sales and marketing expenses consist primarily of personnel costs,
including sales commissions and incentives, of all personnel involved in the
sales and marketing process, as well as related recruiting costs, public
relations, advertising related costs, new product collateral material and
trade shows. Sales and marketing expenses increased $797,000, or 63%, from
$1,264,000 for the 1996 period to $2,061,000 for the 1997 period. This
increase was primarily due to costs associated with the expansion of the
direct sales and technical pre-sales force, increased costs associated with
public relations, trade shows, and product collateral material. The Company
expects to continue hiring additional sales and marketing personnel and to
increase promotion and advertising expenditures. See "Use of Proceeds."
Research and development expenses consist primarily of salaries and other
personnel-related expenses, recruiting costs associated with the hiring of
additional software engineers and quality assurance personnel, programming
consultant costs and depreciation of development equipment. Research and
development expenses increased $555,000, or 86%, from $643,000 for the 1996
period to $1,198,000 for the 1997 period. This increase was primarily due to
an increase in the number of software engineers and associated support
required to develop and maintain the Company's products. The Company believes
that a significant level of investment for product research and development is
required to remain competitive and, accordingly, the Company anticipates that
it will continue to devote substantial resources to product research and
development and that research and development expenses will increase in
absolute dollars. To date, all research and development costs have been
expensed as incurred. See "Use of Proceeds" and Note 1 of Notes to Financial
Statements.
General and administrative expenses consist primarily of personnel costs
for finance, MIS, human resources and general management, as well as insurance
and professional expenses. General and administrative expenses increased
$156,000, or 34%, from $453,000 for the 1996 period to $609,000 for the 1997
period. This increase was primarily due to increased staffing costs and
professional fees necessary to manage and support the Company. The Company
believes that its general and administrative expenses will continue to
increase as it expands its administrative staff, adds infrastructure and
incurs additional costs related to being a public company, such as expenses
related to directors' and officers' insurance, investor relations programs and
increased professional fees.
Interest Income and Interest Expense
Interest income represents income earned on the Company's cash and cash
equivalents. Interest income increased by $9,657, or 55%, from $17,436 for the
1996 period to $27,093 for the 1997 period. This increase was primarily due to
a higher level of cash and cash equivalents on deposit.
Interest expense generally represents charges relating to the Company's
Loan Agreement and interest expense on capital equipment leases. Interest
expense decreased by $169,698, or 63%, from $271,310 for the 1996 period to
$101,612 for the 1997 period. This decrease was primarily due to 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, and a one time charge of $112,200 which
represented the debt discount associated with warrants issued pursuant to a
loan to the Company (see Note 9 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 $10,481,791 and $114,988, respectively, available to
offset future federal taxable income and tax. These net operating loss
carryforwards expire at various dates through 2011. Utilization of prior net
operating losses is limited after an ownership change as defined in Section
382 of the Code. As a result of previous financing transactions, which
resulted in ownership changes, there can be no assurance that a significant
amount of the existing net operating loss will be available to the Company in
the future.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through private
cash sales of preferred equity securities, which total approximately $14
million and, to a lesser extent, through capital and operating equipment
leases, the issuance of notes payable and a borrowing arrangement with HCC. As
of June 30, 1997, the Company had $67,000 in cash and cash equivalents. At
such date, the Company had outstanding vendor obligations for which it was
seriously delinquent in the amount of $750,000. Such obligations were repaid
out of proceeds from the Bridge Financing and the Company believes that there
will not be any effects on its continuing operations from such delinquency.
Net cash used in operating activities was $1,743,000, $5,542,000 and
$2,290,000 in 1995, 1996 and for the six months ended June 30, 1997,
respectively. For 1996, net cash used in
22
<PAGE>
operating activities was primarily attributable to a net loss of $4,918,000
and a decrease in accounts payable and accrued expenses of $769,000 (required
to satisfy seriously delinquent payments owed), offset by an increase in
accounts receivable of $237,000. For the six months ended June 30, 1997, net
cash used in operating activities was primarily attributable to a net loss of
$3,507,000, increases in accounts payable and accrued expenses of $546,000 and
by decreases in accounts receivable of $596,000. Net cash provided by
financing activities was $1,717,000, $8,310,000 and $1,223,000 in 1995, 1996
and for the six months ended June 30, 1997, respectively. Since January 1,
1995, the Company's principal sources of capital have been as follows:
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 1,317,751 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 the First
Interim Financing whereby it received the principal amount of $500,000. Such
amount was repaid out of the proceeds of the Bridge Financing 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 the Third
Interim Financing whereby it received the principal amount of $250,000. In
connection with the Bridge Financing, the holders of Third Interim Financing
Notes agreed to convert such Third Interim Financing Notes into 2 1/2 Bridge
Units. The Company also issued warrants to purchase 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 $951,000, such indebtedness
secured by a security interest in and lien on all of the Company's assets. An
Addendum to the Loan Agreement provides that HCC, the lender thereunder, will
not demand payment under the Loan Agreement (and requires the Company to
maintain a restricted Certificate of Deposit which was in the amount of
$858,000 as of June 30, 1997), until the earlier of March 31, 1998, a material
breach by the Company under the Addendum or
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an event of default under the Loan Agreement. The Company is obligated under
the Addendum to pay HCC each month $10,000 plus accrued interest on the
outstanding balance under the Loan Agreement. Additionally, as of June 30,
1997, the Company has available $88,000 under an equipment leasing line of
credit.
As of June 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 $377,000
and $929,000 in salaries for the six months between July 1, 1997 and December
31, 1997 and the fiscal year ending December 31, 1998, respectively.
As of June 30, 1997, the Company had a deficiency in working capital of
$2,701,715. Subsequent to June 30, 1997 and as described above, the Company
received an additional $3,586,000 in net proceeds from the Bridge Financing
and immediately repaid the First Interim Financing of $500,000 and also
received an additional $600,000 from the October 1997 Interim Financing. Based
on its current operating plan, the Company believes that the net proceeds from
this Offering will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next 18 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional
equity or convertible debt securities or obtain additional credit facilities.
The sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. A portion of the Company's
cash may be used to acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies. It is anticipated
that in the ordinary course of business, the Company may evaluate potential
acquisitions of such businesses, products or technologies. The Company has no
current plans, agreements or commitments, and is not currently engaged in any
negotiations with respect to any such transaction.
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BUSINESS
Company Overview
CrossZ develops and markets proprietary business intelligence software
solutions that enable business managers to make strategic decisions,
leveraging existing corporate data. Through the evolution of technology,
businesses operating in large customer base and transaction intensive
industries, such as telecommunications and banking, have dramatically
increased their ability to gather and store large amounts of data generated
from various sources. The Company developed its products in response to the
need to analyze the increasing volumes of data that businesses accumulate.
Such data contains information that, if extracted effectively and efficiently,
can be used to enhance strategic corporate development. While companies have
invested heavily in capturing data, they have only recently begun to focus
significant resources on the management and analysis of such data;
consequently, the data gathering and analysis industry is experiencing
significant growth. In the third quarter of 1996, the Company shifted its
focus from providing contract services to customers using its proprietary data
mining technology to the sale and support of such proprietary products, and
has to date achieved limited sales.
Industry Background
The business intelligence software market consists of three segments:
data warehousing, data marts, and data mining. International Data Corp.
("IDC"), a leading technology consulting/research company, estimates that the
size of the broad data warehousing software market was $1.4 billion in 1995,
and will increase to over $5.0 billion by the year 2000, an annual growth rate
of approximately 30%. The stimulus for growth in this market has been the
exceptional returns on capital experienced by companies that have invested in
data warehousing and related technologies. IDC studied 62 companies that
invested an average of $2.2 million each in data warehousing and found that
the average return on investment after three years was 401%.
Traditionally, businesses developed their information systems to support
transactional data processing and only collected data necessary to facilitate
such processing. Therefore, data storage methods were designed in
contemplation of narrow transactional goals rather than strategic analysis. As
corporate information strategy evolved, and the need for more intelligent
presentations of data emerged, technologies were developed to access and
analyze accumulated operational data. These technologies proved to be limited
in analyzing and presenting stored data in formats that facilitated business
decision making (a process known as business intelligence). Subsequently,
several systems were developed to perform specific business intelligence
functions, yet such systems still do not fully address the need to transform
data into useful information.
Relational database management systems ("RDBMS") are frequently used as
repositories of historical data for common business operational systems. RDBMS
are tuned to support high volume on-line transaction processing ("OLTP")
applications such as data entry and are designed to store large quantities of
data in a simple tabular, two-dimensional form, such as product-by-customer or
product-by-fiscal period.
Database query and reporting tools have been developed to make accessing
and viewing the contents of databases more efficient. These tools are
well-suited for viewing historical data and performing simple analytical
functions, but they generally lack robust business intelligence capabilities,
are unable to find correlations or make projections and are not designed to
integrate, modify or reorganize such data to test business hypotheses. As a
result, enterprises require more powerful software for accessing and analyzing
RDBMS data. Many enterprises have adopted business intelligence technology to
address their information analysis needs.
There are generally three separate components to an enterprise-wide
business intelligence system:
- Data warehouse: where the unprocessed corporate data is stored in one
place. Data warehousing involves the controlled, periodic loading of
selected historical data from various databases into a central repository
in a summarized and standardized format that is made available to users
on a read-only basis. This approach provides users with better access to
critical data in the organization's RDBMS, but users are not generally
familiar enough with database syntax to extract data from data warehouses
without assistance from information technology ("IT") personnel or the
use of query tools.
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- Data mart: subject specific subsets of the data warehouse. An advanced
form of data mart contains pre-calculated answers stored in a
multidimensional data mart known as a data cube.
- Data mining: discovering and extracting hidden patterns or trends from
databases and data marts that went previously unnoticed by analysts using
standard query and reporting tools.
Limitations of Traditional On-Line Analytical Processing Products.
Although a data warehouse is useful, since it contains all of the data
that will be analyzed, its immense size makes business intelligence analysis
inefficient and unwieldy. Within any data warehouse there will be extraneous
data (as such data relate to the goal of the analysis) that must be
disregarded in any specific or particular analyses. For example, if a company
is trying to determine the most relevant factors in retaining its customers
for repeat purchases, certain elements of each customer's data profile will
have a relatively high correlative value, such as income, gender or
occupation, while other elements will have a relatively low correlative value,
such as first name or social security number. A data warehouse contains all
the data elements, however, it does not contain the additional information
necessary to identify those data elements relevant to a business goal.
The response to the inefficiencies of the data warehouse was the
development of the data mart. Data mart technology enabled business managers
to manually search the data warehouse subset for data relevant to their
business goal. First generation data marts have reduced deployment timeframes,
query response times, and overall costs but, they are limited by the amount of
information they can contain and are not effective as an enterprise-wide
solution.
Another response to the limitations of OLAP was the application of data
mining to the data warehouse. While first generation data mining can be used
successfully to target specific data elements for further analysis, it also
has several significant limitations. The data mining tools tend to be complex
software applications that cannot be used on standard desktop personal
computers by non-IT personnel. Additionally, because first generation data
mining is a repetitive process, it requires multiple scans of the data
warehouse, which may take days or weeks, to identify the patterns related to
the business goal. Moreover, since first generation data mining tools
generally use only one technique to search through the data warehouse, they
are limited to specific business applications and therefore are not effective
as an enterprise-wide solution.
Accordingly, the Company believes enterprises are searching for ways to
transcend these limitations, to develop more efficient data marts and data
mining techniques, in less time, using existing hardware and systems, with a
more precise correlation between data mart content and the user's business
objectives and with less impact on critical IT resources.
The Company believes that Voyager and QueryObject System are the
enterprise-wide solution to the limitations of first generation business
intelligence technology.
The CrossZ Solution
CrossZ Voyager.
Voyager is a data mining product that utilizes multiple concurrent
pattern recognition algorithms to analyze data from relational databases, data
warehouses and other data repositories, and to automatically design, prototype
and compute the potential economic value of a data mart prior to its
implementation. Voyager uses multiple, concurrent data mining techniques to
select the right data and the optimal format for revealing patterns within
that data in support of a business goal. The Company believes that using
multiple techniques allows Voyager to process a diversity of data structures
and types that cannot be effectively addressed by the single data mining
algorithms used by traditional data mining tools and enables Voyager to
accurately analyze a broad range of data and goal formats. A single data
mining algorithm can be stumped by the type of goal and data being mined,
resulting in few or no patterns being found, or inaccurate conclusions being
drawn. As a result, the Company believes the multiple technique approach
improves data mining, because each technique provides an independent
perspective on heterogeneous data.
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Voyager is designed to enable business managers to build fully functional
prototypes and full-scale data marts on their own desktops in a matter of
minutes, based on actual business data. The Company believes Voyager's
methodology has the potential to fundamentally change the data warehouse
paradigm by providing a bridge for a truly collaborative development effort
among IT staff and business managers, by generating powerful prototypes in
minutes, computing their economic value and by automatically generating the
machine readable data mart specification, permitting complete data mart
production in less than a day, instead of weeks. The Company has recently
begun marketing Voyager and has made no sales of Voyager to date.
QueryObject System.
Once the appropriate data elements have been identified using either the
Voyager prototype or third party software, QueryObject System employs advanced
mathematics to create compact, portable and accurate representations of data
sets, called QueryObjects, from the data repository. In real-world
applications, a QueryObject System-based data mart can be tens, hundreds or
even thousands of times smaller than the source data, thereby making
terabyte-class databases small enough to transport on a standard laptop.
QueryObject System technology can reside on mainframe, midrange or Windows NT
systems. QueryObject System has not yet been actively marketed to customers.
QueryObject System previously required certain consulting services and was
promoted selectively through direct sales channels, at several industry trade
shows, and to potential business partners. The current release of QueryObject
System has reduced consulting requirements and is capable of running on
additional UNIX operating systems and the Windows NT operating system. During
the fourth quarter of 1997, the Company intends to increase promotional
activity, including increased trade show and partnering activity and public
relations.
The Company believes that QueryObject System offers the following
advantages over conventional data marts:
o Plug and Play with Raw Data: QueryObject System allows the user to
extract virtually unlimited amounts of raw data directly from existing OLTP
and other systems, without the need to aggregate and then summarize the data.
o Fresher Data: Performing a full scan on a data warehouse to create a
data mart is time intensive, consumes CPU resources, and renders the warehouse
virtually inaccessible to users with other purposes. In fact, most businesses
find it difficult to perform more than one full scan on their data warehouse
in a day and often require a week or more to create a data mart. QueryObject
System was designed specifically for high speed data mart creation without the
management overhead and negative performance implications associated with data
warehouses and other conventional data repositories, allowing users to create
dozens of data marts in a single day. Moreover, because QueryObject System
technology can reside on MVS, Unix or Windows NT servers, the user can create
the data mart on the system that makes the most sense for the business and
insulate mission critical applications and databases from the performance
degradation normally associated with full database scans.
o Lower Cost: As a result of their ability to load raw data directly into
QueryObject System, users can reduce or eliminate time-consuming work such as
extracting, cleaning, normalizing, formatting and summarizing data before
loading it into a data warehouse. In addition, large amounts of operational
data can be preserved for future analysis at far lower cost than a data
warehouse.
o Greater Scalability and Speed: The Company believes QueryObject based
data marts contain more data in less storage space than traditional data marts
such as Arbor Essbase and Oracle Express. A single QueryObject can contain
hundreds of millions of records, tens of thousands of values in each field or
column and billions of potential query answers. The use of proprietary
algorithmic equations allows QueryObject-based data marts to store more data
in a fraction of the storage space needed by conventional data marts. Even
with data marts that measure in the hundreds of millions of records, the
retrieval can often be executed in seconds or less.
o Greater Multi-User Support: QueryObjects can support unlimited numbers
of concurrent users since all possible answers to all possible queries are
contained therein, and impose virtually no degradation on processing, in
contrast to conventional data marts that consume large amounts of processing
power in computing potential answers.
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o Greater Mobility: When business intelligence was a function confined to
a small cadre of analysts and specialists, it was acceptable for business
intelligence systems to reside in a single, central location. In contrast,
since QueryObjects can reside on desktops, laptops, and Web servers, or be
distributed over local area networks, they allow businesses to deploy complex
data marts to thousands of users in an enterprise, using existing information
technology infrastructure.
The CrossZ Strategy
The Company's objective is to establish Voyager and QueryObject System
technology as a ubiquitous data mining and data mart standard and become the
leading worldwide provider of integrated data mining/data mart software
products for business intelligence applications. Key elements of the Company's
strategy include:
Establish Technology Leadership. The Company has developed a number of
technologies specifically to meet the scalability, capacity, usability and
functionality requirements of integrated data mining/data mart software. In
particular, the Company has developed a proprietary high performance
mathematical algorithm suite to compute and represent all possible answers,
univariates, uniques and intermediates across very large databases. These
answers are stored in highly compact formats that do not require significant
server memory or processing power to provide instantaneous query response. The
Company intends to continue to develop what it believes are innovative
technologies and features to address the specific business requirements of
integrated data mining/data marts in the areas of performance, scalability,
data integrity, system administration and decision analysis capabilities. The
Company intends to continue to invest in its technology in order to enhance
its existing data mining and data mart products as well as to develop
complementary data mining algorithms and data visualization tools. The Company
intends to use a portion of the proceeds of this Offering for research and
development.
Develop Strategic Relationships. To accelerate the adoption of Voyager
and QueryObject System as a standard platform for integrated data mining/data
mart applications, the Company has begun to form strategic relationships with
many providers of business intelligence software applications, tools and
services. The Company believes that its strategic relationships with hardware
and other software vendors are a key part of its strategy to establish a
leadership position in the business intelligence data delivery market. The
Company has established license agreements and VAR relationships with Amdahl
Corporation, Hewlett Packard Company, STRATOS, Strategic Tools & Services and
Worldnet Consulting, SA. In addition, the Company has a joint development and
marketing agreement with Pyramid Technology Corporation and co-marketing
programs with several companies including Brio Technology, Inc. and Siemens
Nixdorf Informations Systemme AG.
Expand Open Systems Approach. The Company seeks to maximize the market
for its products by designing them to adhere to industry standards which
allows the sharing of data across platforms and software applications.
QueryObject technology operates with a wide range of third-party front-ends,
databases and operating systems via an open architecture that supports
Microsoft's open database connectivity. The Company believes that its open
systems approach represents a competitive advantage versus competing solutions
that are more proprietary in nature, and as such intends to continue to adhere
to industry standards.
Leverage Existing Investments in Information Technology. The Company
believes that it has designed Voyager and QueryObject System to take advantage
of customers' existing IT investments, thereby accelerating the acceptance of
such software. Voyager and QueryObject System are designed to leverage
investments in personal computer hardware and software and to integrate data
from existing relational databases, legacy repositories and emerging data
warehouses. The Company also leverages third party-based consulting services
and distribution capabilities to enable it to focus on providing industry
leading business intelligence data delivery software.
Target Horizontal Markets/New Applications and Markets. Because
integrated data mining/data marts are critical corporate functions in a wide
variety of industries, the Company believes that its solutions are potentially
applicable in a broad range of markets. The Company is currently targeting
customers in financial services, insurance, telecommunications, retail and
health care. The Company's strategy also includes converting customized
applications it develops as proofs-of-concept into products for sale to
specific market segments.
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Provide Superior Customer Service. The Company believes that providing
superior customer service is critical for customer success. The Company's
strategy is to deliver technology and services that enable its customers to
implement quickly and cost effectively integrated data mining/data mart
applications. The Company provides its customers with a comprehensive array of
services, including software updates, documentation updates, product
maintenance, and emergency response. The Company intends to maintain its focus
and to continue to invest in service and support to extend its customer
service advantage.
Expand Sales and Marketing Capabilities. The Company intends to expand
its sales and marketing capabilities, both domestically and internationally,
by increasing the size of its direct sales organization and developing an
indirect channel of distributors such as OEMs and VARs. The Company has
recently opened an office in the United Kingdom to penetrate the European
marketplace. The Company intends to use a portion of the proceeds of this
Offering to enhance its sales and marketing capabilities.
Products
The Company's Voyager and QueryObject System are an integrated data
mining/data mart solution. Voyager is the data mining component that is
integrated with QueryObject System, which is the data mart component. Each of
Voyager and QueryObject System can operate independently and can also be
integrated with third-party software applications.
CrossZ Voyager
The Voyager product line consists of data mining applications that
utilize multiple concurrent pattern recognition algorithms to analyze data
from multiple sources throughout an enterprise, including data from RDBMS,
data warehouses and other data repositories, and to automatically design,
prototype and compute the economic value of a data mart. The Voyager product
line operates on Windows 95 or Windows NT and comprises Voyager Live Trial,
Voyager, Voyager Client and Voyager Server.
Voyager Live Trial is a fully functional evaluation version of Voyager
with key limitations encrypted into the software. The product has a built in
60 day life span from the date of installation. The objective of Voyager Live
Trial is to demonstrate the functionality and benefits of Voyager so that the
user will upgrade to Voyager or Voyager Client and Server.
Voyager is a standalone edition of the Voyager product line that is
designed to process a small to moderate volume of records and rows on the
desktop. The principal functions of Voyager include:
- project set-up and management;
- data usability;
- business goal definition;
- correlation ranking of all useable input variables/columns of the
business goal;
- multiple concurrent algorithm data mining;
- integration of data mining results with a QueryObject data cube created
on the fly;
- data visualization functions for economic value measurement and return on
investment; and
- machine readable output of the data mart specification "blueprint."
Voyager Client/Server is designed for multiple concurrent users
processing moderate to large volumes of records and rows in a client server
configuration. Voyager Client is the user interface module that seamlessly
interacts with Voyager Server. Users work within the applications interface to
activate Voyager features through mouse clicks and familiar "drag and drop"
operations. Voyager Server is the engine component that encompasses and runs
the functional code which performs all Voyager functions as requested by the
user through Voyager Client.
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QueryObject System
QueryObject System is a powerful OLAP data mart solution that transforms
mainframe size databases into highly compact and portable mathematical
representations that fit onto standard PC laptops. The following table lists
the QueryObject System product line by configuration and operating system:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
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 33 employees as of June 30, 1997. The sales staff is
based at the Company's corporate headquarters in Uniondale, New York and at
field sales offices in the metropolitan areas of Chicago, Miami, San Francisco
and London, England. To support its sales force, the Company engages in direct
mail solicitations, telesales and public relations and presents its products
at trade shows. The Company intends to use a portion of the proceeds from this
Offering to increase advertising and its participation in trade shows and
other promotional activities.
The Company employs sales and technical personnel who are teamed with an
inside sales specialist to support a designated account territory within a
specified geographic area. The team is responsible for creating and
maintaining local partner relationships and resolving channel conflicts. To
ensure the appropriate level of channel support, the direct sales force is
compensated for sales that are made through indirect channel partners and
those that are made directly to end users. The Company intends to use a
portion of the proceeds of this Offering to hire additional sales and
marketing personnel. A separate partnering and business development
organization is responsible for the recruitment and maintenance of OEMs and
national and global VARs and business partners. The Company will also use a
portion of the proceeds of this Offering to expand and develop its indirect
channel partners.
The Company has entered into a VAR agreement with Amdahl Corporation
("Amdahl"), a leading provider of integrated enterprise computing solutions.
Amdahl markets the Amdahl Data Refinery for MVS, which product combines the
power of the Amdahl System/390 compatible mainframes and QueryObject System.
QueryObject System is marketed and supported by Amdahl and Amdahl's agents and
indirect channel partners around the world. Under the Company's agreement with
Amdahl, Amdahl is granted a non-exclusive license to use, copy, distribute and
sublicense QueryObject System worldwide. The Company is paid a percentage of
license fees generated by Amdahl with minimum commitments owed to the Company
in order to maintain the scope of Amdahl's distribution rights. The agreement
provides for standard confidentiality and non-disclosure obligations and
commits standard warranty and indemnification rights to Amdahl. 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 June 30, 1997, the Company's research and development organization
consisted of 27 individuals, of which 14 are located in Europe and are engaged
as independent contractors. During 1995 and 1996, and the six months ended
June 30, 1997, research and development expenses were $1,357,381, $1,791,597
and $1,197,731 or 48.6%, 94.1% and 241.9% of total revenues, respectively. The
Company will continue to commit substantial resources to research and
development in the future.
Proprietary Rights
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential in establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection.
The Company currently has several registered trademarks, and may seek
additional legal protection for its products and trade names. The Company has
invested substantial resources in registering the trademarks and developing
branded products and product lines. There can be no assurance that the steps
taken by the Company to protect these intellectual property assets will be
sufficient to deter misappropriation. Failure to protect these intellectual
property assets could have a material adverse effect on the Company's business
operations. Moreover, although the Company is not aware of any lawsuit
alleging the Company's infringement of intellectual property 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
32
<PAGE>
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays and require the Company
to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, if at all. In the event of a successful claim of product infringement
against the Company and failure or inability of the Company to license the
infringed or similar technology, the Company's business, operating results and
financial condition could be materially adversely affected.
Competition
The market in which the Company competes is intensely competitive, highly
fragmented and characterized by rapidly changing technology and a lack of
standards. The Company's current and prospective competitors offer a variety
of data mining and multidimensional data mart software solutions and generally
fall within five categories: (i) vendors of multidimensional database and
analysis software such as Oracle (Express), Arbor (Essbase) and Pilot Software
(Pilot Lightship Server); (ii) vendors of OLAP/relational database software
such as Informix (Metacube), Information Advantage (Decision Suite) and
Holistic Systems (Holos); (iii) vendors of desktop based data mining software,
such as Business Objects (BusinessMiner), Cognos (Scenario), Agnoss (Knowledge
Seeker) and DataMind (DataCruncher); (iv) vendors of server based
multiprocessor data mining software such as Thinking Machines (Darwin),
Neovista (Neovista) and Hyperparallel (Hyperparallel); and (v) vendors of
vertical software applications for budgeting and financial consolidation, such
as Hyperion Software Corporation (Hyperion and FYPlan) and consulting vendors
such as Coopers & Lybrand, Arthur Andersen and Deloitte & Touche, who focus on
customer applications in the telecommunications, banking, insurance and retail
industries.
The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom
have significantly greater financial, technical, marketing and other resources
than the Company. Such competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sales of their products
than the Company. Also, certain current and potential competitors may have
greater name recognition or more extensive customer bases that could be
leveraged, thereby gaining market share to the Company's detriment. The
Company expects additional competition as other established and emerging
companies enter into the OLAP software market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any of which would materially adversely affect the Company's business,
operating results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. The Company's current or future indirect
channel partners may establish cooperative relationships with current or
potential competitors of the Company, thereby limiting the Company's ability
to sell its products through particular distribution channels. Accordingly, it
is possible that new competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share. Such
competition could materially adversely affect the Company's ability to obtain
new contracts and maintenance and support renewals for existing contracts on
terms favorable to the Company. Further, competitive pressures may require the
Company to reduce the price of Voyager and QueryObject System, which would
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able
to compete successfully against current and future competitors, and the
failure to do so would have a material adverse effect upon its business,
operating results and financial condition.
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of
use and customer support. The Company believes it presently competes favorably
with respect to each of these factors. However, the Company's market is still
evolving and there can be no assurance that the Company will be able to
compete successfully against current and future competitors and the failure to
do so successfully will have a material adverse affect upon the its business,
operating results and financial condition.
33
<PAGE>
Employees
As of June 30, 1997, the Company had a total of 71 employees and
independent contractors, including 27 in research and development, of which 14
are located in Europe and are engaged as independent contractors, 33 in sales
and marketing and related customer support services and 11 in administration.
None of the Company's employees is represented by a collective bargaining
agreement, nor has the Company experienced any work stoppage. The Company
considers its relations with its employees to be good.
The Company's future operating results depend in significant part upon
the continued service of its key technical and senior management personnel.
The Company's future success also depends on its continuing ability to attract
and retain highly qualified technical and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will retain its key managerial or technical personnel or attract such
personnel in the future. The Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel and there can be no
assurance that the Company will not experience such difficulties in the
future. The Company, either directly or through personnel search firms,
actively recruits qualified research and development, financial and sales
personnel. If the Company is unable to hire and retain qualified personnel in
the future, such inability could have a material adverse effect on its
business, operating results and financial condition.
Facilities
The Company leases 16,385 square feet of office space in Uniondale, New
York as its principal administrative, sales, marketing and research and
development facility. The Uniondale lease expires in 2004. The Company's total
lease payments for the current fiscal year will be approximately $310,135. The
Company also has month-to-month leases in Chicago, Miami, San Francisco and
London, England, where it maintains sales offices. The Company believes that
its existing facilities are adequate for its current needs but anticipates
that it will need additional space in 1998. The Company believes that such
additional space will be available on commercially reasonable terms.
34
<PAGE>
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of the Company, and their ages and
positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark A. Chroscielewski ...... 40 Chairman of the Board
Alan W. Kaufman ............ 59 President, Chief Executive Officer and Director
Andre Szykier ............... 53 Executive Vice President, Chief Technology Officer
and Director
Daniel M. Pess ............... 44 Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Robert V. Aloisio ............ 40 Senior Vice President of Worldwide Sales
Robert A. Thompson ......... 48 Vice President of Marketing
Deepak Mohan ............... 35 Vice President of Engineering
Scott Jones .................. 42 Director
Rino Bergonzi ............... 51 Director
</TABLE>
Mark A. Chroscielewski, co-founder of the Company, has served as its
Chairman of the Board since the inception of the Company in February 1989 and
served as the Company's President and Chief Executive Officer from February
1989 until October 1997. Prior to co-founding the Company, Mr. Chroscielewski
was Vice President and Second Vice President in charge of corporate business
intelligence for Citibank and Chase Manhattan Bank. Mr. Chroscielewski holds a
B.B.A. in Business Administration from Baruch College, where he majored in
Computer Sciences and Marketing. Messrs. Chroscielewski and Szykier are first
cousins.
Alan W. Kaufman has been a director of the Company since August 1997 and
President and Chief Executive Officer of the Company since October 1997. Mr.
Kaufman has been an independent consultant since December 1996. From April
1986 to December 1996, Mr. Kaufman held various positions with Cheyenne
Software, Inc. ("Cheyenne"), a provider of storage management, security and
communications software products, including Vice President of Marketing and
Vice President of Sales and Marketing, and served most recently as Executive
Vice President of Sales. Mr. Kaufman is a director of Global Telecommunication
Solutions, Inc., a publicly traded prepaid phone card company, and was the
founding President of the New York Software Industry Association.
Andre Szykier, co-founder of the Company, has served as its Executive Vice
President and Chief Technology Officer since the inception of the Company in
February 1989. Prior to co-founding the Company, Mr. Szykier was Director of
Business Research at Pacific Telesis Group, founder and Chief Executive Officer
of Elan Vital Research Ltd., a software engineering and consulting firm, and
was a mathematician at Bell Labs, where he obtained a patent on signal
compression and worked on interplanetary missions. Mr. Szykier holds an M.S. in
Applied Statistics from the University of California-Berkeley and a B.S. in
Economics from St. Mary's University. Messrs. Chroscielewski and Szykier are
first cousins.
Daniel M. Pess joined the Company in July 1994 as Vice President of
Finance and Administration and was promoted to Senior Vice President of
Finance and Administration in October 1997. Since December 1996, Mr. Pess has
also served as Chief Financial Officer of the Company and since August 1997
Mr. Pess has served as Secretary of the Company. From 1991 to July 1994, Mr.
Pess was Corporate Controller of Uniforce Services, Inc., a supplemental
staffing company. From 1986 to 1991, Mr. Pess was employed as Chief Financial
Officer and Controller of The Dartmouth Plan, Inc., a financial institution
involved in mortgage and leasing origination, sales and service. Mr. Pess is a
Certified Public Accountant and holds a B.S. in Accounting from C.W. Post
College of Long Island University.
Robert V. Aloisio joined the Company in October 1997 as Senior Vice
President of Worldwide Sales. From April 1996 to September 1997, Mr. Aloisio
was employed by Pilot Software, Inc., a provider of interactive decision
support software, as Senior Vice President of the Americas, responsible for
managing the Direct Sales
35
<PAGE>
Organization, Indirect Channel Business Development, Corporate Telesales,
Professional Services and System Engineers for North America, South America,
Canada and the Caribbean. From January 1995 to March 1996, Mr. Aloisio was
employed by Informix Corporation, a provider of database management software,
as Regional Director, managing sales, service and support for the eastern
United States division. From March 1991 to December 1994, Mr. Aloisio was
employed by Sequent Computer Systems, a provider of parallel multiprocessor
computer systems, as Regional Manager for the New England, New York
Metropolitan, Midatlantic, Southeast, Canada and Telco districts. Mr. Aloisio
holds a B.S. in Finance from C.W. Post College of Long Island University.
Robert A. Thompson joined the Company in September 1997 as Vice President
of Marketing. From January 1989 to August 1997, Mr. Thompson was employed by
Cognos Corporation, a provider of client/server tools for data access, data
analysis and application development, most recently as Director of Marketing
Programs. Mr. Thompson holds a B.A.A. in Radio and Television Arts from Ryerson
Politechnical Institute.
Deepak Mohan joined the Company in April 1997 as Vice President of
Engineering. From September 1987 to April 1997, Mr. Mohan was employed by
Cheyenne, most recently as Director of Business and Technology. Mr. Mohan holds
a M.S. in Computer Sciences from New York University, a M.S. in Chemical
Engineering from the City College of New York and a B.S. in Chemical
Engineering from the Indian Institute of Technology.
Scott Jones has been a director of the Company since 1992. Mr. Jones has
been a private as well as institutional investor since 1986, and previous to
that time was employed by General Electric Company, Motorola, Inc. and several
private companies in a variety of managerial positions. Mr. Jones currently
serves on the boards of five other private companies in the high technology
arena. Mr. Jones holds an MBA from The University of Chicago and a BSEE from
Stanford University.
Rino Bergonzi has been a director of the Company since August 1997. Since
November 1993, Mr. Bergonzi has served as Vice President and Division
Executive of Corporate Information Technology Services at AT&T, and has 25
years of experience in the information services field that includes working
for such companies as Western Union, United Parcel Service Information
Services and EDS Corp. Mr. Bergonzi is a director of Enteractive Inc., a
public company which provides internet services and publishes multimedia
titles to the home.
All directors of the Company hold office until the next annual meeting of
the stockholders and until their successors have been elected and qualified.
The officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's stockholders, and hold
office until their death, until they resign or until they have been removed
from office.
The Board of Directors has recently formed a Stock Option and
Compensation Committee that administers the Stock Option Plan and approves the
salaries, incentive compensation for employees of and consultants to the
Company, and an Audit Committee which reviews the results and scope of the
audit and other services provided by the Company's independent accountants.
The Stock Option and Compensation Committee will be composed of Messrs. Jones
and Bergonzi and the Audit Committee is composed of Messr. Jones and Bergonzi.
The Company is in the process of purchasing and intends to maintain "key
person" life insurance policies in the amounts of three million dollars and
one million dollars on the lives of Messrs. Chroscielewski and Kaufman,
respectively.
Director Compensation
The Company does not currently compensate directors who are also
employees of the Company for service on the Board of Directors. Directors are
reimbursed for their expenses incurred in attending meetings of the Board of
Directors. In connection with his service as a director of the Company, Scott
Jones received options to purchase 6,250 shares of Common Stock at an exercise
price of $0.96 per share. Upon his appointment to the Board of Directors, the
Company granted Rino Bergonzi options to purchase 6,250 shares of Common Stock
at an exercise price equal to the Offering price of the Shares. During the one
year following the consummation of this Offering, the Company intends to grant
each new non-employee Director, if any, options to purchase 6,250 shares of
Common Stock at an exercise price equal to the lesser of the Offering price of
the Shares or the fair market value on the date of grant.
36
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
paid by the Company during the fiscal year ended December 31, 1996 to Mark A.
Chroscielewski, the Company's Chairman of the Board and former Chief Executive
Officer and President, Andre Szykier and Daniel M. Pess, the Company's only
other the executive officers whose salary and bonus exceeded $100,000 with
respect to the fiscal year ended Decem-ber 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Long-Term
Compensation
Awards
Securities
Name and Annual Compensation(1) Underlying
Principal Position Year Salary($) 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 $27,476/$17,830
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) Based on an assumed initial public offering price of the Common Stock of
$7.00 per share, the mid-point of the estimated initial public offering
range, as the fair market value.
Compensation Committee Interlocks and Insider Participation
The entire Board of Directors of the Company made all compensation
decisions regarding compensation of executive officers during the Company's
1996 fiscal year. During such period, Messrs. Chroscielewski and Szykier were
executive officers and directors of the Company. For information concerning
transactions with the Directors of the Company and entities affiliated with
certain Directors, see "Certain Transactions."
Employment Agreements
The Company has entered into employment agreements with each of Mark A.
Chroscielewski, its Chairman of the Board, Alan W. Kaufman, its President and
Chief Executive Officer, 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, Kaufman, Szykier, Pess, Aloisio, Thompson and Mohan's
employment agreements provide for an initial term through December 31, 1999,
October 14, 1998, 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, $75,000, $150,000, $125,000, $150,000, $145,000 and $150,000,
respectively. 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 employment
agreements, immediately prior to the effectiveness of the Offering, each of
Messrs. Kaufman, Aloisio, Thompson and Mohan will receive options to purchase
100,000, 50,000, 50,000 and 12,500 shares of Common Stock, respectively,
pursuant to the Plan, at an exercise price equal to the Offering price.
<PAGE>
1991 Incentive Stock Option Plan
The Plan was adopted to attract and retain employees and currently
provides for the issuance of options to purchase up to an aggregate of
1,950,000 shares of Common Stock. To date, options to purchase 141,363 shares
38
<PAGE>
of Common Stock are outstanding under the Plan, of which options to purchase
108,940 shares of Common Stock are currently exercisable, at a weighted
average exercise price of $1.14 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 1,317,751 shares of Common Stock
(after accounting for the conversion of all Series D Preferred Stock into
Common Stock, including dividends that accrued through June 30, 1997) at a per
share offering price of $8.56 and issued Series D Warrants to purchase the
equivalent of an aggregate of 34,053 shares of Common Stock at an exercise
price of $8.56 per share. Among the purchasers in the Series D Private
Placement were (i) Scott Jones (who purchased 4,817 shares of Common Stock),
(ii) Wheatley Partners, L.P. ("Wheatley") and Wheatley Foreign Partners, L.P.
("Wheatley Foreign"), entities that beneficially own more than 5% of the
outstanding Common Stock (which purchased an aggregate of 325,342 shares of
Common Stock and received Series D Warrants to purchase the equivalent of
6,250 shares of Common Stock), (iii) Maximillian Partner's II, a limited
partnership in which Mr. Jones is a general partner (which purchased 1,042
shares of Common Stock), and (iv) Brentwood Associates L.P. VII ("Brentwood"),
an entity that beneficially owns more than 5% of the outstanding Common Stock
(which purchased 348,371 shares of Common Stock). Barry Rubenstein and Irwin
Lieber may be deemed to be the owners of more than 5% of the outstanding
Common Stock by virtue of being members and officers of Wheatley Partners,
LLC, a Delaware limited liability company which is the general partner of
Wheatley, and also a general partner of Wheatley Foreign. In addition, limited
partnerships in which Mr. Rubenstein is a general partner purchased in the
Series D Private Placement an aggregate of 130,200 shares of Common Stock at a
per share purchase price of $8.56 and received Series D Warrants to purchase
an aggregate of 6,250 shares of Common Stock.
Interim Financings
In May 1997, in connection with the First Interim Financing, Wheatley and
Wheatley Foreign purchased $458,341 and $41,659 principal amounts of the First
Interim Financing Notes, respectively.
In June 1997, in connection with the Third Interim Financing, Brentwood
purchased $250,000 principal amount of the Third Interim Financing Note and
received warrants to purchase 4,206 shares of Common Stock.
In July 1997, the Company consummated the Bridge Financing. As part of
such Bridge Financing, the Company repaid the First Interim Financing Notes.
In addition, Brentwood converted its Third Interim Financing Notes into Bridge
Notes and Bridge Warrants and accordingly received $250,000 principal amount
of Bridge Notes, Bridge Warrants to purchase 41,667 Bridge Warrant Shares.
40
<PAGE>
In October 1997, in connection with the October 1997 Interim Financing,
Wheatley and Wheatley Foreign purchased $558,000 and $42,000 principal amounts
of the October 1997 Interim Financing Notes, respectively.
Officer, Director and 5% Stockholders' Transactions
Pursuant to the Loan Agreement with HCC, the Company has outstanding
borrowings in the aggregate principal amount of approximately $951,000, such
indebtedness being secured by a security interest in and lien on all of the
Company's assets. Pursuant to an addendum ("Addendum") to the Loan Agreement,
HCC has agreed that it will not demand payment under the Loan Agreement until
the earlier of March 31, 1998, a material breach by the Company under the
Addendum or an event of default under the Loan Agreement. The Company is
obligated under the Addendum to pay HCC each month $10,000 plus accrued
interest on the outstanding balance under the Loan Agreement. Herbert C.
Clough, a principal of HCC, is the father-in-law of James S. Thompson, a 5%
stockholder and former director of the Company.
In May 1996, Mark A. Chroscielewski, Andre Szykier and James S. Thompson,
executive officers, directors and/or 5% stockholders of the Company, each
agreed to convert $261,653, $223,617, and $235,496 of debt owed to them by the
Company relating to payroll and benefit obligations into 30,567, 26,124 and
27,512 shares of Common Stock, respectively.
All transactions between the Company and its officers, directors,
principal shareholders or other affiliates have been on terms no less
favorable than those that are generally available from unaffiliated third
parties.
The Company has adopted a policy whereby all future transactions between
the Company and its officers, directors, principal stockholders or affiliates,
will be approved by a majority of the Board of Directors, including all of the
independent and disinterested members of the Board of Directors or, if
required by law, a majority of disinterested stockholders, and will be on
terms no less favorable to the Company than could be obtained in arm's length
transactions from unaffiliated third parties.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of the date of this
Prospectus for (i) each person who is known by the Company to beneficially own
more than 5% of the outstanding Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers and (iv) all directors
and executive officers as a group. Unless otherwise indicated, the address for
directors, executive officers and 5% stockholders is 60 Charles Lindbergh
Boulevard, Uniondale, New York 11553.
<TABLE>
<CAPTION>
Number of
Shares Percentage
Beneficially Before After
Directors, Executive Officers and 5% Stockholders Owned(1) Offering Offering
- ------------------------------------------------- -------------- ------------ ---------
<S> <C> <C> <C>
Barry Rubenstein (2) .................................... 527,417 19.8% 9.4%
68 Wheatley Road
Brookville, New York 11545
Irwin Lieber (3) .......................................... 387,842 14.6% 6.9%
767 Fifth Avenue, 45th Floor
New York, New York 10153
John Walecka (4) ....................................... 360,871 13.9% 6.5%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Brentwood Associates, L.P. VII (5) ........................ 348,371 13.5% 6.3%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Wheatley Foreign Partners, L.P. (6) ..................... 331,592 12.8% 6.0%
c/o Fiduciary Trust
One Capital Place
Snedden Road
P.O. Box 1062
Grand Cayman
British West Indies
Wheatley Partners, L.P. (6) .............................. 331,592 12.8% 6.0%
80 Cutter Mill Road
Great Neck, New York 11021
Mark A. Chroscielewski (7) .............................. 222,284 8.6% 4.0%
Andre Szykier (8) ....................................... 212,835 8.2% 3.8%
Dwight E. Lee (9) ....................................... 205,304 7.7% 3.6%
James S. Thompson ....................................... 154,829 6.0% 2.8%
Scott Jones (10) .......................................... 36,028 1.4% *
Daniel M. Pess (11) ....................................... 9,654 * *
Alan W. Kaufman (12) .................................... 0 * *
Rino Bergonzi (12) ....................................... 0 * *
All directors and executive officers as a group (9 persons)
(13) ................................................... 480,800 18.7% 8.9%
</TABLE>
- ---------------------
* Less than one percent
42
<PAGE>
(1) A person is deemed to be the beneficial owner of voting securities that
can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that options, warrants or convertible securities that are held
by such person (but not those held by any other person) and which are
currently exercisable (i.e., that are exercisable within 60 days of the
date of this Prospectus) have been exercised. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares beneficially owned by them.
(2) Includes (i) 56,250 shares of Common Stock issuable upon exercise of
currently exercisable options, (ii) 39,060 shares of Common Stock and
3,125 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Woodland Partners of which Mr. Rubenstein
is a partner, (iii) 52,080 shares of Common Stock and 3,125 shares of
Common Stock issuable upon exercise of currently exercisable warrants
owned by the Woodland Venture Fund of which Mr. Rubenstein is a general
partner, (iv) 39,060 shares of Common Stock and 3,125 shares of Common
Stock issuable upon exercise of currently exercisable warrants owned by
Seneca Ventures of which Mr. Rubenstein is a general partner, (v) 307,114
shares of Common Stock and 5,879 shares of Common Stock issuable upon
exercise of currently exercisable warrants owned by Wheatley Partners,
L.P. and (vi) 18,229 shares of Common Stock and 371 shares of Common
Stock issuable upon exercise of currently exercisable warrants owned by
Wheatley Foreign. Mr. Rubenstein is a member and officer of Wheatley
Partners LLC, a Delaware limited liability company which is the general
partner of Wheatley Partners, L.P. and also a general partner of Wheatley
Foreign. Mr. Rubenstein disclaims beneficial ownership of the securities
owned by Woodland Partners, Woodland Venture Fund, Seneca Ventures,
Wheatley Partners, L.P. and Wheatley Foreign Partners, L.P. except to the
extent of his equity interest therein.
(3) Includes (i) 56,250 shares of Common Stock issuable upon exercise of
currently exercisable options and (ii) 307,114 shares of Common Stock and
5,879 shares of Common Stock issuable upon exercise of currently
exercisable warrants owned by Wheatley Partners, L.P. and 18,229 shares
of Common Stock and 371 shares of Common Stock issuable upon exercise of
currently exercisable warrants owned by Wheatley Foreign Partners, L.P.
Mr. Lieber is a member and officer of Wheatley Partners LLC. Mr. Lieber
disclaims beneficial ownership of the securities owned by Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P. except to the extent
of his equity interest therein.
(4) Includes (i) 12,500 shares of Common Stock issuable upon exercise of
currently exercisable options and (ii) 348,371 shares of Common Stock
owned by Brentwood Associates L.P. VII, of which Mr. Walecka is a general
partner. Does not include 4,206 shares of Common Stock underlying options
or warrants that are not currently exercisable. Mr. Walecka disclaims
beneficial ownership of the securities owned by Brentwood Associates L.P.
VII except to the extent of his equity interest therein.
(5) Does not include 4,206 shares of Common Stock underlying warrants that
are not currently exercisable.
(6) Includes (i) 307,114 shares of Common Stock and 5,879 shares of Common
Stock issuable upon exercise of currently exercisable warrants owned by
Wheatley Partners, L.P. and (ii) 18,229 shares of Common Stock and 371
shares of Common Stock issuable upon exercise of currently exercisable
warrants owned by Wheatley Foreign Partners, L.P. Such entities are
controlled by Wheatley Partners, LLC, a Delaware limited liability
company which is the general partner of Wheatley Partners, L.P., and also
a general partner of Wheatley Foreign. The members and officers of
Wheatley Partners LLC include Barry Rubenstein, Irwin Lieber, Barry
Fingerhut, Seth Lieber, Jonathan Lieber and Matthew Smith.
(7) Includes 625 shares of Common Stock issuable upon exercise of currently
exercisable options owned by Diana Chroscielewski, Mr. Chroscielewski's
spouse.
(8) Includes 313 shares of Common Stock owned by Remy Szykier, Mr. Syzkier's
daughter.
(9) Includes (i) 6,250 shares of Common Stock issuable upon exercise of
currently exercisable options and 1,529 shares of Common Stock issuable
upon exercise of currently exercisable warrants, (ii) 29,491 shares of
Common Stock and 21,309 shares of Common Stock issuable upon exercise of
currently exercisable warrants owned by Barker, Lee & Co., of which Mr.
Lee is a general partner, (iii) 16,573 shares of Common Stock and 11,419
shares of Common Stock issuable upon exercise of currently exercisable
warrants owned by the J.M.R. Barker Foundation, of which Mr. Lee is a
Vice President, (iv) 42,408 shares of Common Stock and 31,199 shares of
Common Stock issuable upon exercise of currently exercisable warrants
owned by Namakagon Associates, L.P., of which Mr. Lee is a general
partner, and (v) 29,240 shares of Common Stock and 12,234 shares of
Common Stock issuable upon exercise of currently exercisable warrants
owned by Upland Associates, L.P., of which Mr. Lee is a general partner.
Mr. Lee disclaims beneficial ownership of the securities owned by Barker,
Lee & Co., the J.M.R. Barker Foundation, Namakagon Associates, L.P. and
Upland Associates, L.P. except to the extent of his equity interest
therein.
(10) Includes (i) 6,250 shares of Common Stock issuable upon exercise of
currently exercisable options, (ii) 3,655 shares of Common Stock owned by
Maximillian Partner's I, of which Mr. Jones is a general partner and
(iii) 3,011 shares of Common Stock owned by Maximillian Partner's II, of
which Mr. Jones is a general partner. Mr. Jones disclaims beneficial
ownership of the securities owned by Maximillian Partner's I and
Maximillian Partner's II except to the extent of his equity interest
therein.
(11) Includes 9,654 shares of Common Stock issuable upon exercise of currently
exercisable options. Does not include 4,097 shares of Common Stock
underlying options that are not currently exercisable.
(12) Does not include 6,250 shares of Common Stock underlying options that are
not currently exercisable.
(13) Includes those shares of Common Stock deemed to be included in Messrs.
Chroscielewski, Szykier, Pess and Jones respective beneficial ownership
as described in notes 7, 8, 10 and 11 above. Does not include 16,597
shares of Common Stock underlying options that are not currently
exercisable.
43
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company comprises 32,000,000 shares,
consisting of 30,000,000 shares of Common Stock, $.001 par value per share and
2,000,000 shares of preferred stock, $.001 par value per share. As of June 30,
1997 there were 2,562,731 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 5,562,731 shares of Common Stock outstanding, after giving
effect to the Preferred Stock Conversion. After giving effect to the issuance
of an additional 39,677 shares of Common Stock issuable upon the conversion of
Outstanding Preferred Stock as the result of dividends which accrue between
July 1, 1997 and October 31, 1997, there will be 5,602,408 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 1,598,567 shares of
Outstanding Preferred Stock. Prior to the closing of this Offering, all
Outstanding Preferred Stock will be converted into an aggregate of 1,649,753
shares of Common Stock, after giving effect to all accrued and unpaid
dividends through June 30, 1997 (or 1,689,430 shares of Common Stock after
giving effect to dividends which accrued on the Outstanding Preferred Stock
between July 1, 1997 and October 31, 1997). Subsequent to the Preferred Stock
Conversion, the Company's authorized shares of preferred stock may be issued
in one or more series, and the Board of Directors is authorized, without
further action by the stockholders, to designate the rights, preferences,
limitations and restrictions of and upon shares of each series, including
dividend, voting, redemption and conversion rights. The Board of Directors
also may designate par value, preferences in liquidation and the number of
shares constituting any series. The Company believes that the availability of
preferred stock issuable in series will provide increased flexibility for
structuring possible future financings and acquisitions, if any, and in
meeting other corporate needs. It is not possible to state the actual effect
of the authorization and issuance of any series of preferred stock upon the
rights of holders of Common Stock until the Board of Directors determines the
specific terms, rights and preferences of a series of preferred stock.
However, such effects might include, among other things, restricting dividends
on the Common Stock, diluting the voting power of the Common Stock, or
impairing liquidation rights of such shares without further action by holders
of the Common Stock. In addition, under various circumstances, the issuance of
preferred stock may have the effect of facilitating, as well as impeding or
discouraging, a merger, tender offer, proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of
incumbent management. Issuance of preferred stock could also adversely effect
the market price of the Common Stock. The Company has no present plans to
issue any additional shares of preferred stock.
Bridge Warrants
The Bridge Warrants are exercisable at an initial exercise price of $8.56
per share, commencing July 30, 1998 and expiring at the close of business, on
July 30, 2003. Each Bridge Warrant is exercisable into 25,000 Bridge Warrant
Shares for an aggregate of 1,075,000 Bridge Warrant Shares.
44
<PAGE>
A holder of Bridge Warrants will not have any rights, privileges or
liabilities as a stockholder of the Company prior to exercise of the Bridge
Warrants. The Company is required to keep available a sufficient number of
authorized shares of Common Stock to permit exercise of the Bridge Warrants.
The exercise price of the Bridge Warrants and the number of shares
issuable upon exercise of the Bridge Warrants will be subject to adjustment to
protect against dilution in the event of a merger, acquisition,
recapitalization, or split-up of the Common Stock, the issuance of a stock
dividend or any similar event. No assurance can be given that the market price
of the Company's Common Stock will exceed the exercise price of the Bridge
Warrants at any time during the exercise period. The Company has registered
the issuance of the shares of Common Stock underlying the Bridge Warrants on
the Registration Statement of which this Prospectus forms a part and has
agreed to maintain the effectiveness of the Registration Statement of which
this Prospectus forms a part until the expiration of the Bridge Warrants.
Notwithstanding that the Common Stock underlying the Bridge Warrants are being
registered, the holders of the Bridge Warrants have agreed that none of such
shares of Common Stock or the Bridge Warrants may be sold prior to thirteen
months following the consummation of the Offering without the prior written
consent of the Underwriter.
Other Warrants
In addition to the Bridge Warrants, the Company has issued (i) the Series
C Warrants to purchase the equivalent of an aggregate of 131,851 shares of
Common Stock at an exercise price of $8.56 per share, (ii) Series D Warrants
to purchase the equivalent of an aggregate of 34,053 shares of Common Stock at
an exercise price of $8.56, (iii) Series B Warrants to purchase an aggregate
of 7,876 shares of Common Stock at an exercise price of $12.56, (iv) Series B
warrants to purchase an aggregate of 2,813 shares of Common Stock at an
exercise price of $22.00, and (v) warrants to purchase an aggregate of 39,539
shares of Common Stock at an exercise price of $8.56.
Limitation on Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Certificate of Incorporation, as amended, limits the personal
liability of a director or officer to the Company for monetary damages for
breach of fiduciary duty of care as a director. Liability is not eliminated
for (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment
of dividends or stock purchases or redemptions pursuant to Section 174 of the
DGCL, or (iv) any transaction from which the director derived an improper
personal benefit.
The Company has also entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited
circumstances, including on account of knowingly fraudulent, deliberately
dishonest or willful misconduct. To the extent the provisions of the
indemnification agreements exceed the indemnification permitted by applicable
law, such provisions may be unenforceable or may be limited to the extent they
are found by a court of competent jurisdiction to be contrary to public
policy. Insofar as indemnification for liabilities under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy and is, therefore, unenforceable.
Delaware Law
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from
45
<PAGE>
engaging in a "business combination" with a publicly-held Delaware corporation
for three years following the date such person became an interested
stockholder, unless: (i) before such person became an interested stockholder,
the board of directors of the corporation approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination; (ii) upon consummation of the transaction that resulted
in the interested stockholder's becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (subject to
certain exceptions); or (iii) following the transaction in which such person
became an interested stockholder, the business combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66% of the outstanding
voting stock of the corporation not owned by the interested stockholder. A
"business combination" includes mergers, stock or asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
The provisions of Section 203 of the DGCL could have the effect of
delaying, deferring or preventing a change in control of the Company.
Transfer Agent and Registrar
The Company's transfer agent and registrar for the Common Stock is
American Stock Transfer & Trust Company, New York, New York.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,562,731 shares of Common Stock not including shares of Common Stock issuable
upon exercise of outstanding options and warrants, and assuming no exercise of
the over-allotment option granted to the Underwriters. Of those shares, the
3,000,000 shares of Common Stock sold to the public in the Offering (3,450,000
if the Underwriters' over-allotment is exercised in full) may be freely traded
without restriction or further registration under the Securities Act, except
for any shares that may be held by an "affiliate" of the Company (as that term
is defined in the rules and regulations under the Securities Act) which may be
sold only pursuant to a registration under the Securities Act or pursuant to
an exemption from registration under the Securities Act, including the
exemption provided by Rule 144 adopted under the Securities Act.
The 2,562,731 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, 1,653,202 Shares (or 1,692,879
Restricted Shares after giving affect to dividends which accrue on Outstanding
Preferred Stock between July 1, 1997 and October 31, 1997) may be sold
beginning 90 days thereafter and the remaining 65,645 restricted securities
may be sold at various periods, beginning 90 days from the date of this
Prospectus until thirteen months from the date of this Prospectus, subject to
the Lock-Up Agreements discussed below. All holders of the Restricted Shares
of the Company's Common Stock have been requested, as a condition to the
closing of this Offering, to enter into certain agreements that they will not
sell any Common Stock owned by them without the prior written consent of the
Representatives for a period of thirteen months from the date of this
Prospectus.
In addition, the Company has 1,950,000 shares of Common Stock reserved
for issuance under the Plan, of which options to purchase 141,363 shares of
Common Stock have been granted and options to purchase approximately 500,000
shares of Common Stock are being granted immediately prior to the Offering.
Moreover, the Company has outstanding options and warrants to purchase an
aggregate of 1,631,244 shares of Common Stock. The Company and stockholders
owning approximately 98% of the Restricted Shares, options and warrants have
entered into agreements which prohibit them from selling or otherwise
transferring stock in the Company for 13 months from the date of this
Prospectus.
Prior to this Offering, there has been no public trading market for the
Common Stock, and no predictions can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market could adversely affect the
then-prevailing market price.
47
<PAGE>
UNDERWRITING
The Underwriters named herein for whom GKN and Barington are acting as
Representatives have severally agreed, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Company a total of 3,000,000
shares of Common Stock from the Company. The number of Shares that each such
Underwriter has agreed to purchase is set forth opposite its name:
Underwriter Shares
- ----------- ----------
GKN Securities Corp. ....................................
Barington Capital Group .................................
Total ................................................... 3,000,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to
the Underwriters and various other conditions precedent, and that the
Underwriters are obligated to purchase all shares of Common Stock offered
hereby (other than the shares of Common Stock covered by the over-allotment
option described below) if any are purchased. The Representatives have advised
the Company that they do not intend to sell to discretionary accounts.
The Representatives have advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the price set
forth on the cover page of this Prospectus and to certain dealers at those
prices less a concession not in excess of $_____ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $____
per share to certain other dealers. After the Offering, the offering prices
and other terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price set forth on the cover page of this Prospectus,
less underwriting discounts and commissions, up to 450,000 additional shares
of Common Stock for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
civil liabilities in connection with this Offering, including liabilities
under the Securities Act. The Company has agreed to pay the Representatives an
expense allowance on a nonaccountable basis equal to 3% of the gross proceeds
derived from the sale of the shares of Common Stock underwritten (including
the sale of any shares of Common Stock subject to the Underwriters'
over-allotment option), $50,000 of which has been paid to date.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the right to purchase up to an
aggregate of 300,000 shares of Common Stock ("Representatives' Purchase
Option"). The Representatives' Purchase Option is exercisable at $____ per
share ( % of the offering price) for a period of four years commencing one
year from the date of this Prospectus. The Representatives' Purchase Option
grants to the holders thereof certain "piggyback" and demand rights for
periods of seven and five years, respectively, from the date of this
Prospectus with respect to the registration under the Securities Act of the
shares issuable upon exercise of the Representatives' Purchase Option. The
Representatives' Purchase Option cannot be transferred, sold, assigned or
hypothecated during the one year period following the date of this Prospectus,
except to officers of the Representatives and to Underwriters and selected
dealers and their officers or partners.
48
<PAGE>
Pursuant to the Underwriting Agreement, the directors and executive
officers and certain stockholders of the Company holding, in the aggregate,
4,140,284 shares of Common Stock and Common Stock issuable upon exercise of
options and warrants have agreed not to sell or otherwise dispose of any of
such shares for thirteen months from the date of this Prospectus without the
prior written consent of the Representatives. The Representatives may, in
their sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition, the
Underwriting Agreement provides that, for a period of three years from the
date of this Prospectus, the Company will recommend and use its best efforts
to elect a designee of the Representatives as a member of the Board of
Directors. Alternatively, the Representatives will have the right to send a
representative to observe each meeting of the Board of Directors. The
Representatives have not yet selected such designee or representative.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves sales by the
underwriting syndicate in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
shares of Common Stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate short covering transactions involve purchases of
the shares of Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a selling group member when
the shares of Common Stock originally sold by such selling group member are
repurchased in the open market by the Underwriters. Such stabilizing
transactions, syndicate short covering transactions and penalty bids may cause
the price of the shares of Common Stock to be higher than it would otherwise
be in the absence of such transactions. These transactions may be effected on
the Nasdaq SmallCap Market or otherwise and, if commenced, may be discontinued
at any time.
In June 1996, in connection with consulting services rendered in the
Series D Private Placement (which included assisting with structuring and
negotiating the terms of the Series D Private Placement), the Company issued
to GKN the equivalent of 9,765 shares of Common Stock in lieu of cash
compensation of $75,000.
In July 1997, the Representatives acted as placement agents for the
Bridge Financing and were paid an aggregate commission of $301,000 (7% of the
net proceeds of the Bridge Financing) and a nonaccountable expense allowance
of $129,000 (3% of the net proceeds of the Bridge Financing).
The foregoing is a summary of all of the material terms of the
Underwriting Agreement and does not purport to be complete. A copy of the
Underwriting Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
LEGAL MATTERS
The legality of the securities offered hereby and certain other legal
matters will be passed upon for the Company by Olshan Grundman Frome &
Rosenzweig LLP, 505 Park Avenue, New York, New York 10022. Graubard Mollen &
Miller, New York, New York, has served as counsel to the Underwriters in
connection with this Offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for
each of the two years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company intends to furnish to its stockholders annual reports, which
will include statements audited by independent accountants, and such other
periodic reports as it may determine to furnish or as may be required by law,
including Sections 13(a) and 15(d) of the Exchange Act.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act with respect to the securities offered
hereby (such Registration Statement with all exhibits, and amendments
49
<PAGE>
thereto being referred to hereinafter as the "Registration Statement"). This
Prospectus, which is a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement. This Prospectus contains a
complete summary of the terms of the contracts or other documents filed as
exhibits to the Registration Statement that are material to an investor and,
in each instance, reference is made to the copy of such Registration
Statement, each such statement being qualified in any and all respects by such
reference. The Registration Statement, including exhibits, may be inspected
without charge and copied at the Commission's Public Reference Section located
at 450 Fifth Street, N.W., Washington, D.C. 20549, its Midwest Regional
Office, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and its
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048 upon payment of the fees prescribed by the Commission. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ...................................................... F-2
Balance Sheet as of December 31, 1996 and June 30, 1997 (unaudited) .................. F-3
Statement of Operations for the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997 (unaudited) ..................................... F-4
Statement of Changes in Shareholders' Deficit for the years ended December 31, 1995 and
1996 and the six months ended June 30, 1997 (unaudited) ............................. F-5
Statement of Cash Flows for the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997 (unaudited) ..................................... F-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.
The one-for-two reverse stock split described in Note 1 to the financial
statements has not been consummated at October 22, 1997. When it has been
consummated we will be in a position to furnish the following report:
"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
F-2
<PAGE>
CROSS/Z INTERNATIONAL, INC.
Balance Sheet
<TABLE>
<CAPTION>
Pro Forma
Preferred Stock
Conversion (Note 1)
December 31, June 30, June 30,
1996 1997 1997
--------------- ---------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ........................... $ 1,367,566 $ 67,126
Accounts receivable, net of allowance for
doubtful accounts of $25,000 at December
31, 1996 and June 30, 1997 ........................ 820,307 224,770
Prepaid expenses and other current assets ......... 30,519 121,349
------------- -------------
Total Current Assets .............................. 2,218,392 413,245
Restricted certificate of deposit .................. 840,054 858,066
Property and equipment, net ........................ 1,036,913 1,155,355
Deposits and other assets ........................... 31,956 76,482
------------- -------------
Total Assets ....................................... $ 4,127,315 $ 2,503,148
------------- -------------
Liabilities, Mandatorily Redeemable
Convertible Preferred Stock and
Shareholders' Deficit
Current liabilities
Accounts payable .................................... $ 777,499 $ 1,293,022
Accrued expenses .................................... 679,507 710,201
Notes payable ....................................... 25,000 25,000
Deferred revenue .................................... 132,299 203,686
Compensation payable to related parties ............ 351,184 281,894
Current portion of loan payable to shareholder . 120,000 120,000
Customer advance .................................... 300,000 300,000
Capital lease obligations due within one year . 152,333 181,157
------------- -------------
Total Current Liabilities ........................ 2,537,822 3,114,960
Interim financing notes payable to shareholders . -- 870,922
Loan payable to shareholder ........................ 891,335 831,335
Capital lease obligations ........................... 95,326 347,537
Deferred rent ....................................... 255,640 262,287
------------- -------------
Total Liabilities ................................. 3,780,123 5,427,041
Series D mandatorily redeemable convertible
preferred stock (Note 8) ........................... 10,667,027 11,173,369 --
Shareholders' deficit
Series A, B and C convertible preferred stock,
(Note 9) .......................................... 281 281 --
Common stock, $0.001 par value: 30,000,000
shares authorized; 863,590 and 895,478 shares issued
and outstanding at December 31, 1996 and June 30,
1997, respectively; 2,545,231 shares pro forma .... 864 895 $ 2,545
Additional paid-in-capital ........................ 4,035,258 4,271,023 15,443,023
Accumulated deficit ................................. (14,343,938) (18,357,161) (18,357,161)
Receivable from shareholder ........................ (12,300) (12,300) (12,300)
------------- ------------- -------------
Total Shareholders' Deficit ..................... (10,319,835) (14,097,262) $ (2,923,893)
------------- ------------- -------------
Commitments (Notes 13 and 15)
Total Liabilities and Shareholders' Deficit ...... $ 4,127,315 $ 2,503,148
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CROSS/Z INTERNATIONAL, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year ended December 31, Six Months ended June 30,
1995 1996 1996 1997
--------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues
Software licenses ............... $ 194,000 $ 851,150 $ 228,025 $ 398,750
Services and maintenance ......... 2,596,815 1,051,828 694,017 96,377
------------ ------------ ------------ ------------
Total Revenues ............... 2,790,815 1,902,978 922,042 495,127
Cost of revenues
Software licenses ............... 32,980 102,138 33,332 47,850
Services and maintenance ......... 590,957 376,289 215,961 12,696
------------ ------------ ------------ ------------
Total cost of revenues ......... 623,937 478,427 249,293 60,546
------------ ------------ ------------ ------------
Gross profit ..................... 2,166,878 1,424,551 672,749 434,581
------------ ------------ ------------ ------------
Operating expenses
Sales and marketing ............ 2,503,421 3,145,160 1,264,446 2,061,319
Research and development ......... 1,357,381 1,791,597 642,530 1,197,731
General and administrative ...... 1,011,074 1,140,003 452,702 608,435
------------ ------------ ------------ ------------
Total Operating Expenses ...... 4,871,876 6,076,760 2,359,678 3,867,485
------------ ------------ ------------ ------------
Loss from operations ............ (2,704,998) (4,652,209) (1,686,929) (3,432,904)
Interest income .................. -- 88,288 17,436 27,093
Interest expense .................. (335,323) (355,314) (271,310) (101,612)
Other income (expense) ............ (21,598) 1,300 1,300 542
------------ ------------ ------------ ------------
Net loss ........................ $ (3,061,919) $ (4,917,935) $ (1,939,503) $ (3,506,881)
============ ============ ============ ============
Pro forma net loss per common
share (Note 1) .................. $ (2.51) $ (1.35)
============ ============
Pro forma weighted average shares
used in per share computation
(Note 1) ........................ 1,957,856 2,599,101
============ ============
</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 and warrants
on Series D Preferred Stock
Issuance of common stock
options for consulting services
Issuance of common stock
warrants
Common stock options
exercised ........................ 19,388 19
Common stock warrants
exercised ........................ 12,500 12
Net loss ........................
------ ---- ------- ---- ------- ---- ------- ---
Balance at June 30, 1997
(unaudited) ..................... 32,582 $ 33 17,737 $ 18 230,498 $ 230 895,478 $ 895
======== ====== ======== ===== ======== ====== ======== ======
</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
Pre-erred 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 ....... (506,342) (506,342)
Issuance of options and warrants on Series D Preferred
Stock ................................................ 102,000 102,000
Issuance of common stock options for
consulting services ................................. 2,500 2,500
Issuance of common stock warrants ..................... 79,078 79,078
Common stock options exercised ........................ 22,199 22,218
Common stock warrants exercised ........................ 29,988 30,000
Net loss ............................................. (3,506,881) (3,506,881)
---------- ------------- --------- ------------
Balance at June 30, 1997 (unaudited) .................. 4,271,023 $ (18,357,161) $ (12,300) $ (14,097,262)
=========== ============= ========== =============
</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, Six Months ended June 30,
1995 1996 1996 1997
---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss ....................................... $ (3,061,919) $ (4,917,935) $ (1,939,503) $ (3,506,881)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization ............... 163,680 236,751 136,456 97,413
Amortization of debt discount ............... 5,800 112,200 112,200 --
Options issued for consulting services ...... -- 122,500 28,633 104,500
Changes in assets and liabilities Accounts
receivable ................................. (29,061) (237,189) 331,763 595,537
Prepaid expenses and other current assets 9,866 (22,983) (38,366) (90,830)
Deposits and other assets ..................... 8,017 (505) (500) (44,525)
Accounts payable and accrued expenses ........ 707,186 (769,312) (980,702) 546,217
Deferred rent ................................. 172,304 83,336 41,668 6,647
Compensation payable to related parties ...... 91,615 (111,762) (2,131) (69,290)
Deferred revenue .............................. (110,641) (36,772) (53,679) 71,387
Customer advance .............................. 300,000 -- -- --
------------ ------------ ------------ ------------
Net Cash Used In Operating Activities ......... (1,743,153) (5,541,671) (2,364,161) (2,289,825)
------------ ------------ ------------ ------------
Cash flows from investing activities
Acquisitions of property and equipment ......... (59,923) (618,993) (61,247) (215,856)
Purchase of restricted certificate of deposit .... -- (840,054) (819,632) (18,012)
------------ ------------ ------------ ------------
Net Cash Used In Investing Activities ....... (59,923) (1,459,047) (880,879) (233,868)
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from issuance of Series D preferred
stock, net .................................... -- 8,643,418 5,106,483 --
Proceeds from issuance of Series C preferred
stock, net .................................... 596,556 128,637 96,469 --
Issuance of common stock ........................ 23,511 37,277 14,244 52,218
Proceeds from issuance of notes payable ......... 700,000 -- -- --
Proceeds from interim financing notes pay able
to shareholders ................................ -- -- -- 950,000
Proceeds from issuance of Series B preferred
stock, net .................................... 250,003 -- -- --
Repayment of notes payable ..................... -- (238,992) (238,992) --
Proceeds from loan payable to shareholders ....... 256,858 15,737 15,737 --
Repayment of loan payable to shareholder ....... -- (132,000) (82,000) (60,000)
Payments of capital lease obligations ......... (110,395) (144,200) (67,178) (128,394)
Proceeds from sale-leaseback transaction ...... -- -- -- 409,429
------------ ------------ ------------ ------------
Net Cash Provided By Financing
Activities ................................. 1,716,533 8,309,877 4,844,763 1,223,253
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents .................................... (86,543) 1,309,159 1,599,723 (1,300,440)
Cash and cash equivalents at beginning of year..... 144,950 58,407 58,407 1,367,566
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ...... $ 58,407 $ 1,367,566 $ 1,658,130 $ 67,126
============ ============ ============ ============
</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 SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cross/Z International, Inc. (the "Company") was incorporated in
California on February 6, 1989. The Company develops, markets and supports
integrated client/server data mining proprietary software products/solutions
that allow users to organize and analyze large amounts of data in order to
make intelligent business decisions.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT AND RECLASSIFICATION FOR REVERSE STOCK SPLITS
In October 1997, the Company's Board of Directors approved a one-for-two
reverse stock split on all Common and Preferred Stock subject to shareholder
approval. 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 June 30, 1997 and for the six months ended
June 30, 1996 and June 30, 1997 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. Results for the interim period are not necessarily indicative
of results to be expected for the full fiscal year.
PRO FORMA PREFERRED STOCK CONVERSION (UNAUDITED)
On April 27, 1997 the Board of Directors of the Company authorized
management to pursue an initial public offering of the Company's common stock.
Upon the closing of the Company's proposed initial public offering, each
outstanding share of the Company's Series A, B and C convertible preferred
stock and its Series D mandatorily redeemable convertible preferred stock
("Series D") and all Series D accrued and unpaid dividends thereon will be
automatically converted to common stock based on their conversion terms (set
forth in Notes 8 and 9). The pro forma effect of the conversion has been
presented as a separate column in the Company's balance sheet assuming the
conversion had occurred on June 30, 1997.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the weighted
average number of common shares and common share equivalents assumed to be
outstanding during the period. Common share equivalents consist of the
Company's common shares issuable upon conversion of the Company's Series A, B
and C Preferred Stock (Note 9) and Series D (Note 8), stock options and
outstanding warrants and are reflected when dilutive. Pursuant to the
requirements of the Securities and Exchange Commission, stock options granted
and warrants and shares issued by the Company within one year of the date of
the proposed initial public offering at prices below the proposed offering
price have been included in the calculation of weighted average shares
outstanding as if they were outstanding for all periods presented using the
treasury stock method. The calculation of the pro forma weighted average
common shares outstanding includes the conversion of the Company's Series A,
B, C and D preferred stock and assumes the conversion occurred at the
beginning of the earliest period presented or at issuance date if later even
though the effect is antidilutive.
F-8
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Historical pro forma net loss per share has not been presented since such
amount is not deemed to be meaningful due to the significant change in the
Company's capital structure anticipated as a result of the Company's proposed
initial public offering.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants ("AICPA") Statement of Position 91-1 on
Software Revenue Recognition. Revenue from product licensing is generally
recognized after execution of a licensing agreement and shipment of the
product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectable by management. Service revenues
consists of data analysis using the Company's proprietary software performed
for customers on a project or contract basis and are recognized over the term
of the respective agreements. Maintenance revenues consist of ongoing support
and product updates and are recognized ratability over the term of the
contract.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is computed using the straight line method
over the estimated useful lives of the assets, generally three to five years.
Assets acquired under capital leases and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives
of the assets or the terms of the related leases.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86 ("SFAS 86") requires
the capitalization of certain software development costs once technological
feasibility is established, which the Company defines as the completion of a
working model. To date, the period between achieving technological feasibility
and the general availability of such software has been short and software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has expensed all software development costs as
incurred.
ADVERTISING
Advertising costs are included in selling and marketing expenses and are
expensed as incurred. To date advertising costs have not been significant.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Income taxes are computed using the asset and liability method. Under the
asset and liability method specified by SFAS 109, deferred income tax assets
and liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
currently enacted tax rates and laws.
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.
F-9
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
relatively short maturity of these instruments. Loans payable to shareholder
and Series D are not traded in the open market and a market price for such
loans and preferred stock are not readily available.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents and accounts receivable. The Company places its cash with high
quality financial institutions. The Company performs ongoing credit
evaluations of its customers and generally requires no collateral. The Company
maintains reserves for potential credit losses and historically such losses
have not been significant.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with their
1997 presentation.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for the Company's fiscal
year beginning in 1996. SFAS 123 established a fair value based method of
accounting for stock-based compensation plans. The Company has chosen to adopt
the disclosure requirements of SFAS 123, and continue to record stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, the
Company has not recognized compensation expense with respect to such awards
because the exercise price of options granted to employees has approximated
the fair market value of the common stock at the respective grant dates.
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE"("SFAS
128")
In February 1997, the FASB issued SFAS 128, which requires presentation
of basic earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or
contingent stock arrangements). SFAS 128 also requires presentation of
earnings per share by an entity that has made a filing or is in the process of
filing with a regulatory agency in preparation for the sale of those
securities in a public market. Basic EPS is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period. The computation of
Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an antidilutive effect on earnings per share. The
statement is effective for both interim and annual periods ending after
December 15, 1997. The 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
F-10
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
general-purpose financial statements. SFAS 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. It is not expected that the adoption of
SFAS 130 will have a material impact on the Company.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, "DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE" ("SFAS 131")
In June 1997, the FASB issued SFAS No. 131. This statement requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods to shareholders. It also
requires that enterprises report certain information about their products and
services, the geographic areas in which they operate and their major
customers. This statement is effective for fiscal years beginning after
December 15, 1997. The effect of the adoption of this statement is not
expected to have a significant impact on the Company.
STATEMENT OF POSITION EXPOSURE DRAFT "SOFTWARE REVENUE RECOGNITION"
It is expected that in 1997, the AICPA will issue a new Statement of
Position ("SOP") on software revenue recognition. If approved in its current
draft form the Company believes the new SOP will not have a material impact on
the Company.
2. LIQUIDITY AND BUSINESS RISKS
The Company has incurred operating losses since inception, had an
accumulated deficit of $14,343,938 as of December 31, 1996, and $18,357,161 as
of June 30, 1997, and is seriously delinquent on certain of its outstanding
vendor obligations. In order to continue as a going concern, the Company will
have to raise funds through the offerings of securities until profitable
operations are achieved. Although there is no assurance that these offerings
will be consummated and that the net proceeds therefrom will be available to
the Company, management believes sufficient funding will be obtained to enable
the Company to meet its working capital needs for the foreseeable future (see
Note 16).
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996 1996 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Interest paid during the year ............... $167,279 $209,787 $130,551 $81,421
Schedule of non cash investing and financing
activities:
Capital lease obligations entered into during
the year ................................. 226,264 99,341 -- --
Series C Preferred Stock, issued for:
Notes payable ........................... -- 11,008 11,008 --
Compensation payable to related parties . -- 54,448 54,448 --
Series D Preferred Stock, issued for:
Notes payable ........................... -- 575,000 575,000 --
Compensation payable to related parties . -- 720,767 720,767 --
Consulting services ..................... -- 165,000 165,000 --
Dividends ................................. -- 562,839 75,665 506,342
</TABLE>
F-11
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
4. ACCRUED EXPENSES
Accrued expenses included the following:
December 31, June 30,
1996 1997
-------------- ---------
Compensation and related benefits ...... $247,768 $250,820
Consulting and professional fees ...... 183,134 214,999
Interest .............................. 14,940 28,394
Commissions ........................... 21,797 37,567
Other ................................. 211,868 178,421
--------- ---------
$679,507 $710,201
========= =========
5. PROPERTY AND EQUIPMENT
Property and equipment (net) consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- -----------
<S> <C> <C>
Computer equipment and software ..................... $1,334,052 $1,549,951
Furniture and fixtures .............................. 204,103 204,290
Office equipment .................................... 89,633 105,073
Leasehold improvements .............................. 35,249 19,578
----------- -----------
1,663,037 1,878,892
Less-accumulated depreciation and amortization ...... 626,124 723,537
----------- -----------
$1,036,913 $1,155,355
=========== ===========
</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
F-12
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
6. BORROWING ARRANGEMENTS -- (Continued)
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
June 30, 1997 the Company has set aside $840,064 and $858,066 in a restricted
certificate of deposit relating to the obligation. Interest expense related to
this agreement was $190,314 and $147,527 for 1995 and 1996, respectively, and
$58,528 for the six months ended June 30, 1997.
INTERIM FINANCING NOTES PAYABLE TO SHAREHOLDERS
In May 1997, the Company received a $500,000 loan, with an interest rate
of 10% per annum, from existing shareholders. The loan was repaid out of the
proceeds of the Bridge Financing, as described in Note 16.
In June 1997, the Company received additional loans from two shareholders
each consisting of a $100,000 promissory note bearing interest of 10% per
annum through September 30, 1997 and 13% annually thereafter and attached
warrants to purchase 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.
In June 1997, the Company received an advance from the Bridge Financing
of $250,000 which bears interest at a rate of 10% per annum through September
30, 1997 and 13% per annum thereafter. The advance was converted into 2.5
units under the terms of the Bridge Financing upon closing. As an incentive
for early participation, the Company issued to the holders of these notes
warrants to purchase 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 has been allocated to the warrants issued
in June based on their estimated fair value resulting in $79,078 of original
issue discount and a corresponding increase in additional paid-in capital.
The Company classified these notes as long term since they were
refinanced in connection with the Bridge Financing (See Note 16).
7. COMPENSATION PAYABLE TO RELATED PARTIES
Compensation payable to related parties includes accrued payroll and
related benefits and amounts payable to certain officers/shareholders pursuant
to a 1990 compensation agreement, as amended. During 1996, the Company
converted $259,358 of its accrued payroll and benefits obligations into 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 June 30, 1997 the outstanding shares of
Series D were 1,258,598 and 1,317,751, respectively.
F-13
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 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 June 30, 1997 the Company has reserved 65,752 and
124,905 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 June 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-14
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 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 $102,000 has been recognized in results of operations for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
9. CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANTS
The Company has authorized 17,395,012 shares of preferred stock, of which
260,669 shares have been designated Series A Preferred Stock ("Series A"),
204,913 shares have been designated Series B Preferred Stock ("Series B") and,
2,898,837 shares have been designated Series C Preferred Stock ("Series C")
(collectively "Preferred Shares") the remainder being designated as Series D
shares which are described in Note 8. The Preferred Shares have certain
rights, preferences and restrictions. The principal terms of the Preferred
Shares are as follows:
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 June 30, 1997.
CONVERSION
The holders of the Series A, B and C Preferred Stock have the right to
convert such shares into such number of common shares as provided for in each
series; subject to adjustment for dilution and for stock splits. At June 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-15
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 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 June 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 June 30, 1997, warrants were outstanding to
purchase up to 131,851 shares of Series C Preferred Stock at an exercise price
of $9.60, 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. At June 30, 1997 there were 83,602 warrants
outstanding of which 39,539 were issued in 1997 with an exercise price of
$8.56. The Warrants issued during 1997 are exercisable one year after the date
of the initial closing of an IPO and expire five years after the date of the
closing of an IPO.
10. EMPLOYEE STOCK OPTIONS
In 1991, the Board of Directors approved the 1991 Incentive Stock Plan
(the "Plan") which was subsequently amended and allows the Board to grant
either incentive or non-qualified stock options to the Company's employees,
officers and consultants to purchase a maximum of 437,500 shares of common
stock. The options generally expire five years from the date of grant.
Individuals owning more than 10% of the total combined voting power of all
classes of stock of the Company are not eligible to participate in the Plan
unless the option price is at least 110% of the fair market value of the
common stock at the date of grant.
F-16
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 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 .................................... -- (19,396) .96
Canceled ....................................... 15,105 (15,105) .96
--------- --------- ------------
Options outstanding at June 30, 1997 ......... 102,736 166,363 $ .96-4.00
========= ========= ============
Options exercisable at June 30, 1997 ......... 108,940 $ .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 Six Months Ended
December 31, June 30,
1996 1997
-------------- -----------------
A ................ 17% --
B ................ 16% --
C ................ 21% --
D ................ -- 84%
At December 31, 1996, Customer C represented 49% of total accounts
receivable.
12. EMPLOYEE BENEFITS PLANS
The Company has a 401(k) savings plan (the "Plan") covering all full-time
employees and qualifying part time employees. As allowed under Section 401(k)
of the Internal Revenue Code, the Plan provides tax-deferred salary reductions
for eligible employees. Employees are eligible to participate after a ninety
day service requirement. Participants may make voluntary contributions to the
Plan up to 20% of their compensation, subject to annual limits. The plan
permits company contributions, however, none were made during the year ended
December 31, 1996 and the six month period ended June 30, 1997.
F-17
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 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 $233,944 for the six month period ended June 30, 1997.
F-18
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997
14. INCOME TAXES
The tax effect of temporary differences and carryforwards that give rise
to significant portions of the deferred tax assets and liabilities at December
31, 1996 are:
Deferred rent ....................................... $ 102,256
Accounts payable .................................... 311,000
Accrued expenses .................................... 271,803
Deferred revenues .................................... 52,920
Customer advances .................................... 120,000
Compensation payable to related parties ............ 140,474
Net operating loss carryforward ..................... 4,235,458
Research and experimental credit carryforwards ...... 114,988
------------
Deferred tax assets ................................. 5,348,899
Accounts receivable ................................. (328,123)
Prepaid expenses .................................... (12,208)
------------
Deferred tax liabilities ........................... (340,331)
Net deferred tax assets .............................. 5,008,568
Less-valuation allowance ........................... (5,008,568)
------------
Net deferred tax assets .............................. $ --
============
The Company has recorded a full valuation allowance against its net
deferred tax assets since management believes that based upon the available
objective evidence it is more likely than not that these assets will not be
realized. The Company's effective tax rate differs from the federal statutory
rate as a result of the change in the valuation allowance.
As of December 31, 1996, the Company has tax benefits attributable to net
operating loss and research and experimental tax credit carryforwards of
$10,481,791 and $114,988, respectively, available to offset future federal
taxable income and tax. These carryforwards will expire at various dates
through 2011. Under Section 382 of the Internal Revenue Code of 1986, as
amended, utilization of prior net operating losses ("NOLs") is limited after
an ownership change, as defined in such Section 382. As a result of previous
transactions which involved an ownership change as defined by Section 382, the
Company will be subject to limitation on the use of its NOLs. Accordingly
there can be no assurance that a significant amount of the existing NOLs will
be available to the Company.
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.
F-19
<PAGE>
CROSS/Z INTERNATIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997)
15. COMMITMENTS -- (Continued)
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
a.) On July 30, 1997, the Company completed a Bridge Financing (the
"Bridge Financing"). The gross proceeds were $4,300,000, and the net proceeds
to the Company from such financing were approximately $3,586,000, of which
$250,000 was received in advance on June 26, 1997 (see Note 6).
In connection with the Bridge Financing, the Company issued 43 units,
each consisting of a $100,000 promissory note (the "Bridge Note") and a
warrant (the "Bridge Warrant") allowing the holder to purchase 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). 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.
A portion of the gross proceeds will be allocated to the warrants based on
their estimated fair market value and will result in $1,433,319 of original
issue discount and a corresponding increase in additional paid in capital.
b.) In August 1997, the Company incorporated a company in the state of
Delaware under the name CrossZ Software Corporation ("CrossZ-Delaware").
Pursuant to a plan of a corporate reorganization, it is the Company's
intention to merge with CrossZ-Delaware. CrossZ-Delaware will be the surviving
entity and will assume the name CrossZ Software Corporation.
In August 1997, pursuant to the Certificate of Incorporation of
CrossZ-Delaware, the Company has authorized a class of 2,000,000 shares of
preferred stock which may be issued by the Board of Directors on such terms
and with such rights, preferences and designations as the Board may determine
without any vote of the stockholders. Issuance of such preferred stock,
depending upon the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control of the
Company. Issuance of additional shares of Common Stock could result in the
dilution of the voting power of the Common Stock purchased in this Offering.
In addition, certain "anti-takeover" provisions of the Delaware General
Corporation Law, among other things, may restrict the ability of the
shareholders to expect a merger or business combination or to obtain control
of the Company.
c.) 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.
d.) Unaudited -- 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 , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not
participating in the distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================
<PAGE>
===============================================================================
[GRAPHIC OMITTED]
3,000,000 Shares of Common Stock
-------------------------------
PROSPECTUS
-------------------------------
GKN Securities Corp.
Barington Capital Group
_________, 1997
===============================================================================
This Prospectus is printed on recycled paper using soy-bean
ink.
[GRAPHIC OMITTED]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Certificate of Incorporation, as amended, limits the personal
liability of a director or officer to the Company for monetary damages for
breach of fiduciary duty of care as a director. Liability is not eliminated
for (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment
of dividends or stock purchase or redemptions pursuant to Section 174 of the
DGCL, or (iv) any transaction from which the director derived an improper
personal benefit.
The Company has also entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited
circumstances, including on account of knowingly fraudulent, deliberately
dishonest or willful misconduct. To the extent the provisions of the
indemnification agreements exceed the indemnification permitted by applicable
law, such provision may be unenforceable or may be limited to the extent they
are found by a court of competent jurisdiction to be contrary to pubic policy.
Delaware Law
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" with a publicly-held Delaware corporation for
three years following the date such person became an interested stockholder,
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (subject to certain
exceptions), or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by
the affirmative vote of the holders of 66% of the outstanding voting stock of
the corporation not owned by the interested stockholder. A "business
combination" includes mergers, stock or asset sales and other transactions
resulting in a financial benefit to the interested stockholder.
The provisions of Section 203 of the DGCL could have the effect of
delaying, deferring or preventing a change in the control of the Company.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by the Registrant
in connection with the issuance and distribution of the securities being
registered. With the exception of the registration fee, NASD filing fee and
NASDAQ SmallCap Market System and Boston Stock Exchange filing fee expenses,
all amounts shown are estimates.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee ............................................................... $11,951.23
NASD filing fee ............................................................... 3,940.21
Nasdaq SmallCap Market and The Boston Stock Exchange filing fee listing expenses *
Blue Sky fees and expenses (including legal and filing fees) .................. *
Printing and Engraving expenses ................................................ *
Transfer agent and registrar fees and expenses ................................. *
Legal fees and expenses (other than Blue Sky) ................................. *
Accounting fees and expenses ................................................... *
Miscellaneous expenses ......................................................... *
-----------
TOTAL ........................................................................... $ 750,000
===========
</TABLE>
- ------------
* To be filed by amendment.
Item 26. Recent Sales of Unregistered Securities
During the past three years, the following securities were sold by the
Registrant without registration under the Securities Act of 1933, as amended
("Securities Act"). Except as otherwise indicated, the securities were sold by
the Company in reliance upon the exemption provided by Section 4(2) of the
Securities Act. With respect to such transactions, each purchaser of
securities represented to the Company that such purchaser (i) had sufficient
knowledge and experience in financial and business matters so as to be capable
of evaluating the risks and merits of the transaction and was capable of
bearing the economic risks of such investment including a complete loss of its
investment, (ii) had an opportunity to discuss the business, management and
financial affairs of the Company with the Company's representatives, (iii)
acquired the securities for his own account for the purpose of investment and
not with a view to or for resale in connection with any distribution thereof
and (iv) understood that (a) the securities had not been registered under the
Securities Act by reason of their issuance in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof, (b) the securities must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration, (c) the securities would bear a legend to such effect and
(d) the Company will make a notation on its transfer books to such effect. All
transactions have been adjusted to reflect the reverse stock split of the
Registrant's outstanding Common Stock and Preferred Stock effected in (i) July
1997 on the basis of .25 shares of Common Stock and Preferred Stock for each
share of Common Stock and Preferred Stock, respectively and (ii) October 1997
on the basis of 50 shares of Common Stock and Preferred Stock for each share
of Common Stock and Preferred Stock, respectively.
II-2
<PAGE>
In September 1994, the Company issued the following shares of Series A
Preferred Stock at a per share offering price of $12.80 to the following
persons:
Number of shares of Series
Name A Preferred Stock
- ---------------------------- ---------------------------
Barker, Lee & Co. 10,324
Clough, Herbert C. 8,260
Esselen, Gustavus III 4,130
Fiske, Guy W. 4,130
J.M.R. Barker Foundation 6,195
Jones, Addis T. 2,478
Jones, Arthur R. III 2,065
Jones, Scott T. 2,891
Lee, Dwight E. 2,065
Maximillian Partners I 2,065
Maximillian Partners II 1,637
Musser, William L. 2,065
Namakagon Associates, L.P. 14,454
Sharples, Arthur A. 6,195
Sterling, Lionel N. 8,260
Taylor, John N. 9,457
Upland Associates, L.P. 16,519
Darviche, Parviz 2,065
Ruyan, Jerry L. 4,112
Gillett, Richard 2,065
In September 1994, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $22.00 per share and Series B
Preferred Stock Warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series B
Number of Shares of Preferred Stock Represented by the
Name Series B Preferred Stock Warrant
- ---------------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Barker, Lee & Co. 4,546 1,818
Dixon, Anthony 688 275
Fiske, Guy W. 4,546 1,818
Heller, Andrew 2,273 909
J.M.R. Barker Foundation 2,273 909
Jones, Addis T. 2,500 1,000
Jones, Arthur R. III 2,500 1,000
Namakagon Associates, L.P. 6,818 2,727
Knowlton, Winthrop 909 364
Knowlton, Winthrop & Erica TTEES 2,273 909
Paine Webber, CFN FBO, 2,273 909
Sharples, Arthur A. 2,273 909
Sterling, Lionel N. 3,409 1,364
Loevner, Kirk 3,125 1,250
Darviche, Parviz 682 273
Ruyan, Jerry L. 2,500 1,000
Esselen, Gustavus III 4,550 1,820
</TABLE>
II-3
<PAGE>
In February 1995, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $22.00 and Series B Preferred
Stock Warrants to the following persons
<TABLE>
<CAPTION>
Number of Shares of Series B
Number of Shares of Preferred Stock Represented by the
Name Series B Preferred Stock Warrant
- ---------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Dauber, Philip S. & Elayne 4,546 1,818
Dusa, Jerry A. & Margaret 4,546 1,818
</TABLE>
In March 1995, the Company issued the following shares of Series B
Preferred Stock at a per share offering price of $22.00 and Series B Preferred
Stock Warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series B
Number of Shares of Preferred Stock Represented by the
Name Series B Preferred Stock Warrant
- ----------------------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Condit, Robert D. TTEE fbo Corbin Trust 2,273 909
</TABLE>
In March 1995, the Company issued the following Series B Preferred Stock
Warrant at a per share offering price of $22.00 to the following person:
Number of Shares of Series B
Preferred Stock Represented by the
Name Warrant
- -------------------- -----------------------------------
Ventura Vista L.C. 782
In March 1996, the Company issued the following shares of Series C
Preferred Stock at a per share offering price of $9.60 and Series C Preferred
Stock warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series C
Number of Shares of Preferred Stock Represented by the
Name Series C Preferred Stock Warrant
- ----------------------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Barker, Lee & Co. 26,330 21,309
J.M.R. Barker Foundation 14,777 11,419
Namakagon Associates L.P. 37,814 31,199
Upland Associates, L.P. 26,073 12,234
Lee, Dwight E. 3,259 1,529
Musser, William L. 3,259 1,529
McCray, Shriver Eckdahl & Associates 4,688 --
Jones, Scott T. 709 --
Maximillian Partner's I 3,259 --
Maximillian Partner's II 1,757 --
Knowlton, Winthrop 2,000 2,733
Knowlton, Winthrop & Erica TTEE 5,000 6,832
Paine Webber CFN FBO,
Winthrop Knowlton, IRA 5,000 6,832
Sharples, Arthur A. 14,777 909
Sterling, Lionel N. 20,537 16,364
Loevner, Kirk 6,875 9,393
Ruyan, Jerry L. 11,997 1,000
Gillett, Richard 3,259 1,529
Dauber, Phillip S. & Elayne TTEES Fbo
PSERD Trust 10,000 1,818
Dusa, Jerry A. & Margaret TTES fbo Jerry
A Dusa 10,000 1,818
Heller, Andrew & Mary Ann 5,000 909
Berman, Stuart M. 7,813 2,500
Halpert, Richard L. 2,604 --
Manners, Richard E. & Bonnie 3,750 --
</TABLE>
II-4
<PAGE>
In May 1996, the Company issued the following shares of Series D
Preferred Stock at a per share offering price of $8.56 per share and Series D
Preferred Stock warrants to the following persons:
<TABLE>
<CAPTION>
Number of Shares of Series D
Number of Shares of Preferred Stock Represented by the
Name Series D Preferred Stock Warrant
- --------------------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Wheatley Partners, LLC 292,056 6,250
Woodland Ventures Fund 46,729 3,125
Woodland Partners 35,047 3,125
Seneca Venture Fund 35,047 3,125
Ruyan, Jerry L. 35,047 6,250
Redwood Venture Group, Ltd. 11,682 --
Z/Cross Partnership 11,682 3,125
Brausch, J. Jeffrey 11,682 3,125
Motto, William J. 17,523 3,125
Evans, James E. 46,729 --
Goldblatt, Stuart 5,841 --
Whipple, Donald E. 11,682 --
Mosher, Greg C. 23,365 --
Manners, Richard E. & Bonnie 2,045 --
Halpert, Richard 2,921 --
Berman, Stuart M. 1,168 --
Knowlton, Winthrop 8,762 --
Jones, Scott T. 4,323 --
Maximillian Partner's II 935 --
McCray, Shriver, Eckdahl & Associates 5,257 --
Chroscielewski, Mark 30,567 --
Thompson, James S. 27,511 --
Szykier, Andre 26,124 --
GKN Securities Corp. 8,762 --
Messmore, Thomas E. 11,682 --
Simon, John 5,841 --
Dusa, Jerry A. 17,523 --
White, Eugene R., Jr. 2,921 --
Mayes, John 2,921 --
Jepson, Rebecca A. 2,921 --
Heller, Andrew 17,523 --
</TABLE>
In July 1996, the Company issued the following shares of Series D Preferred
Stock at a per share offering price of $8.56 per share to the following
persons:
Number of Shares of
Name Series D Preferred Stock
- -------------------------- -------------------------
Berman, Beth L. 2,500
Berman, Stuart M. 3,125
Manners, Richard E., IRA 7,009
Halpert, Richard 4,089
Gaymark Associates 23,365
South Ferry #2, L.P. 56,000
Wolfson, Aaron 5,841
II-5
<PAGE>
In August 1996, the Company issued the following shares of Series D
Preferred Stock at a per share offering price of $8.56 per share to the
following persons:
Number of Shares of
Name Series D Preferred Stock
- ---------------------------- -------------------------
Brentwood Associates, L.P. 321,262
In October 1996, the Company issued the following Series D Preferred
Stock Warrants at a per share offering price of $8.56 per share:
Number of Shares of Series D
Preferred Stock Represented by the
Name Warrant
- ----------------- -----------------------------------
Phoenix Leasing 2,337
HCC Financial 467
Between November 1994 and July 1997, the Company issued the following
shares of Common Stock pursuant to option exercises at per share exercise
prices of between $0.06 and $0.48 per share to the following persons:
Name Number of Shares of Common Stock
- --------------------- ---------------------------------
Vogel, Loring 729
Bunce, Charles III 19,719
Nadeau, Michael 625
Hendell, Reuben 27,500
Ai-Chang, Mitchell 527
Jurist, Susan 2,173
Story, Debra 333
Rothenberg, Pamela 109
Nadeau, Michael 1,459
Yanowitch, Richard 7,813
Thompson, James S. 29,675
Neugebauer, Marilyn 3,750
Fressle, Thomas 2,500
Petersen, David 3,438
Siragusa, Thomas 3,438
Heller, Andrew 12,500
Gillett, William 6,250
Puleo, Paula 1,337
Yanowitch, Richard 5,000
Furnia, Joseph 1,250
Mui, Karen 799
Daviche, Michael 7,209
Szykier, Remy 313
Petersen, David 2,778
Crowell, James 156
Zakrzewski, Andrew 1,250
Smith, Michael 4,861
Kulesa, Robert 781
Clough, Herbert C. 12,500
Tatelman, Michael 5,250
II-6
<PAGE>
In June 1997, in connection with interim financings, the Company issued
warrants to purchase shares of Common Stock to the following persons or
entities. The warrants have an exercise price of $8.56 per share.
<TABLE>
<CAPTION>
Name Shares Issuable Upon Exercise of Warrants
- --------------------------------------- ------------------------------------------
<S> <C>
Brentwood Associates, L.P. VII ...... 4,206
Dr. Stuart Berman .................. 15,900
Dr. Richard Manners .................. 15,900
Richard Mazur ........................ 3,533
</TABLE>
In July 1997, in connection with a Bridge Financing in which GKN
Securities Corp. and Barington Capital Group, L.P., acted as Placement Agents
and were paid an aggregate commission of $301,000 (7% of the net proceeds of
the Bridge Financing) and a nonaccountable expense allowance of $129,000 (3%
of the net proceeds of the Bridge Financing), the Company issued Bridge Notes
and Bridge Warrants to the following persons. The exercise price of the
offering price for each issuance was the Note Amount. The Bridge Warrants are
exercisable into the Number of Warrant Shares reflected below. The Number of
Warrant Shares issuable upon the exercise of the Bridge Warrants has been
adjusted in consideration that the offering price of the Common Stock in this
Offering is less than $16.00 per share.
<TABLE>
<CAPTION>
Name Note Amount($) Number of Warrant Shares
- ---- -------------- ------------------------
<S> <C> <C>
Adams, Robert M. ................................. 75,000 12,500
American Friends of Hebron Yeshiva ............... 150,000 25,000
Aucott, George W. ................................. 25,000 4,167
Beck, Ronald N. .................................... 100,000 16,667
Blanch, Sonia Bernal .............................. 25,000 4,167
Braun, Emil E. .................................... 50,000 8,334
Brentwood Associates, LP VII ..................... 250,000 41,667
Buckridge, Charles R., Revocable Trust ............ 100,000 16,667
U/A/D 5/7/93, Charles R. Buckridge Trustee ......
Cywiak, Aaron .................................... 25,000 4,167
D. Stake Mill Inc. ................................. 25,000 4,167
David, Steven II and Dara M., JTWROS ............... 25,000 4,167
Davidson, Penn W. ................................. 25,000 4,167
Deakman, Thomas R. ................................. 25,000 4,167
Dimes, Edwin K. .................................... 25,000 4,167
Duffield, Albert W. .............................. 25,000 4,167
Feiner, Andrew .................................... 187,500 31,250
Friedman, Harry, Living Trust ..................... 25,000 4,167
Gadraz, Inc. ....................................... 187,500 31,250
Gold, Stuart W. .................................... 37,500 6,250
Greenberg, Bruce ................................. 25,000 4,167
Greenblatt, Jeffrey N. ........................... 75,000 12,500
Greenstein, Stuart ................................. 25,000 4,167
Grossman, Richard L. .............................. 25,000 4,167
Gyenes, Andrew .................................... 25,000 4,167
Hantke, Richard .................................... 25,000 4,167
Harsac, Inc. ....................................... 100,000 16,667
Hauser, Sara D. .................................... 25,000 4,167
Healy, John J. .................................... 25,000 4,167
Hutton, Terrence ................................. 25,000 4,167
Jablon, Alan ....................................... 150,000 25,000
Joel, Ralph & Rosalie JTWROS ..................... 25,000 4,167
Juranich, Frank T., Jr. ........................... 25,000 4,167
Kilgannon, Owen L. ................................. 100,000 16,667
Kleinberg, Charles ................................. 25,000 4,167
Krinick, Ronald N. ................................. 25,000 4,167
Lasry, Marc ....................................... 500,000 83,333
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name Note Amount($) Number of Warrant Shares
- ---- -------------- ------------------------
<S> <C> <C>
Leach, Scott ................................. 25,000 4,167
Lenny Corp. .................................... 50,000 8,334
Matusow, Paul ................................. 37,500 6,125
McMaster, John ................................. 25,000 4,167
Medved, Jonathan .............................. 25,000 4,167
Menkin, Michael .............................. 25,000 4,167
Muchnick, Howard W. ........................... 175,000 29,167
Nagar, Sheila ................................. 25,000 4,167
Neuman, Joseph ................................. 100,000 16,667
Parson, Ned F. ................................. 100,000 16,667
Providenti, A.C. .............................. 75,000 12,500
Reddy, Malladi S. .............................. 75,000 12,500
Rothberg, Lawrence ........................... 25,000 4,167
Rothstein, Steven R. ........................... 50,000 8,334
Rubin, Eric C. ................................. 100,000 16,667
Suker, Wayne ................................. 25,000 4,167
Sargent Capital Ventures, LLC .................. 75,000 12,500
Schirripa, George T. ........................... 150,000 25,000
Schwartzbard, Michael ........................ 25,000 4,167
Siegal, Richard D. ........................... 25,000 4,167
Steinberg, Arthur B. & Co. ..................... 50,000 8,334
Stoker, Jerry W. .............................. 50,000 8,334
Tritt, Ramie A. .............................. 25,000 4,167
US Data Capture, Inc. ........................ 25,000 4,167
Wilks, Jeffrey S. .............................. 25,000 4,167
Wright, Donald C. .............................. 25,000 4,167
Zoe Consulting West Inc. Defined Benefit ...... 200,000 33,333
Pension Plan Zipper, Sandra .................. 50,000 8,334
Zozzora, Frank Carmine and Jane March, ......... 25,000 4,167
Community Property ..............................
</TABLE>
The sales set forth above are claimed to be exempt from registration with
the Securities and Exchange Commission pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as transactions by an issuer not involving
any public offering. All certificates representing the shares issued by the
Registrant referred to herein and currently outstanding have been properly
legended.
II-8
<PAGE>
Item 27. Exhibits
<TABLE>
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant, as amended.
*4.1 Specimen Certificate of the Registrant's Common Stock.
*4.2 Form of Representatives' Purchase Option granted to GKN Securities Corp.
4.3 Form of Warrant issued in connection with the July 1997 Private Placement.
4.4 Form of Promissory Note issued in connection with the July 1997 Private Placement.
*4.5 Form of Lock-up Agreement.
*5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP as to the legality of the securities.
**10.1 1991 Incentive Stock Option Plan.
**10.2 Form of Stock Option Agreement for Non-Qualified Options granted to Advisors.
**10.3 Employment Agreement, dated as of June 1, 1997, by and among the Registrant and Mark A.
Chroscielewski.
**10.4 Employment Agreement, dated as of April 21, 1997, by and among
the Registrant and Deepak Mohan.
**10.5 Employment Agreement, dated as of May 1, 1997, by and among the Registrant and Daniel M.
Pess.
**10.6 Employment Agreement, dated as of May 8, 1996, by and among the
Registrant and Andre Szykier.
**10.7 Employment Agreement, dated September 1, 1997, by and among the Registrant and Robert A.
Thompson.
10.8 Employment Agreement, dated October 6, 1997, by and among the Registrant and Robert V.
Aloisio.
*10.9 Employment Agreement, dated October 14, 1997, by and among the Registrant and Alan W.
Kaufman.
**10.10 HCC Loan Agreement dated March 31, 1992 and Addendum dated May 8, 1996.
**10.11 Software Licensing Agreement between Amdahl Corporation and the Registrant dated November
27, 1996.
10.12 Value Added Reseller Software License Agreement between Stratos, Strategic Tools & Services
and the Registrant dated September 9, 1997.
10.13 Value Added Reseller Software License Agreement between Worldnet Consulting, SA and the
Registrant dated September 9, 1997.
*10.14 Software Distribution Agreement between Hewlett-Packard Company and the Registrant dated
September 10, 1997.
*10.15 Capital Lease Agreement dated October 27, 1994 by and between Reckson Associates and the
Registrant.
11.1 Computation of Pro Forma Net Loss Per Common Share.
*23.1 Consent of Olshan Grundman Frome & Rosenzweig LLP (included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
**24.1 Powers of Attorney (included on signature page to this Registration Statement).
</TABLE>
- ------------
* To be filed by Amendment.
** Previously filed.
II-9
<PAGE>
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing provisions,
or otherwise, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that it will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) include any Prospectus required by Section 10(a)(3) of the Act;
(b) reflect in the Prospectus any facts or events which, individually
or together represent a fundamental change in the information set forth in
the Registration Statement; and
(c) include any additional or changed material information on the plan
of distribution*.
The undersigned small business issuer will provide to the Representatives
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(2) for the purpose of determining any liability under the Act, each
post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) remove from registration by means of post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) for determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule 424(b)(1), or (4), or 497(h)
under the Act as part of this registration statement as of the time the
Commission declared it effective.
(5) for determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned, the City
of Uniondale, State of New York, on the 22nd day of October, 1997.
CrossZ Software Corporation
-----------------------------
(Registrant)
By: /s/ Daniel M. Pess
---------------------------------------
Daniel M. Pess, Vice President of
Finance and Administration and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Alan W. Kaufman* President, Chief Executive Officer (principal October 22, 1997
- ------------------------- executive officer) and Director
Alan W. Kaufman
/s/ Mark A. Chroscielewski* Chairman of the Board October 22, 1997
- -------------------------
Mark A. Chroscielewski
/s/ Andre Szykier* Executive Vice President and Chief Technology October 22, 1997
- ------------------------- Officer
Andre Szykier
/s/ Daniel M. Pess Vice President of Finance and Administration October 22, 1997
- ------------------------- and Chief Financial Officer (principal financial
Daniel M. Pess officer and principal accounting officer)
Director October , 1997
- -------------------------
Rino Bergonzi
/s/ Scott Jones* Director October 22, 1997
- -------------------------
Scott Jones
</TABLE>
- ------------
* By Power of Attorney
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ------------- ----------- ----
<S> <C> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant, as amended.
*4.1 Specimen Certificate of the Registrant's Common Stock.
*4.2 Form of Representatives' Purchase Option granted to GKN Securities Corp.
4.3 Form of Warrant issued in connection with the July 1997 Private Placement.
4.4 Form of Promissory Note issued in connection with the July 1997 Private Placement.
*4.5 Form of Lock-up Agreement.
*5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP as to the legality of the securities.
**10.1 1991 Incentive Stock Option Plan.
**10.2 Form of Stock Option Agreement for Non-Qualified Options granted to Advisors.
**10.3 Employment Agreement, dated as of June 1, 1997, by and among the Registrant and
Mark A. Chroscielewski.
**10.4 Employment Agreement, dated as of April 21, 1997, by and among the Registrant and Deepak Mohan.
**10.5 Employment Agreement, dated as of May 1, 1997, by and among the Registrant and
Daniel M. Pess.
**10.6 Employment Agreement, dated as of May 8, 1996, by and among the Registrant and Andre Szykier.
**10.7 Employment Agreement, dated September 1, 1997, by and among the Registrant and
Robert A. Thompson.
10.8 Employment Agreement, dated October 6, 1997, by and among the Registrant and
Robert V. Aloisio.
*10.9 Employment Agreement, dated October 14, 1997, by and among the Registrant and
Alan W. Kaufman.
**10.10 HCC Loan Agreement dated March 31, 1992 and Addendum dated May 8, 1996.
**10.11 Software Licensing Agreement between Amdahl Corporation and the Registrant dated
November 27, 1996.
10.12 Value Added Reseller Software License Agreement between Stratos, Strategic Tools & Services
and the Registrant dated September 9, 1997.
10.13 Value Added Reseller Software License Agreement between Worldnet Consulting, SA and the
Registrant dated September 9, 1997.
*10.14 Software Distribution Agreement between Hewlett-Packard Company and the Registrant dated
September 10, 1997.
*10.15 Capital Lease Agreement dated October 27, 1994 by and between Reckson Associates and
the Registrant.
11.1 Computation of Pro Forma Net Loss Per Common Share.
*23.1 Consent of Olshan Grundman Frome & Rosenzweig LLP (included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
**24.1 Powers of Attorney (included on signature page to this Registration Statement).
</TABLE>
- ------------
* To be filed by Amendment.
** Previously filed.
<PAGE>
NEITHER THIS WARRANT NOR THE COMMON STOCK WHICH MAY BE ACQUIRED UPON THE
EXERCISE HEREOF ("WARRANT SHARES"), AS OF THE DATE OF ISSUANCE HEREOF, HAS
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, PLEDGED,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
WITH RESPECT THERETO UNDER THE ACT AND COMPLIANCE WITH ANY APPLICABLE STATE
SECURITIES LAW, OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED. THE
COMPANY'S SUBSCRIPTION AGREEMENT WITH THE HOLDER CONTAINS ADDITIONAL
PROVISIONS RESTRICTING THE TRANSFER OF THIS WARRANT AND THE WARRANT SHARES.
THIS WARRANT AND SUCH SUBSCRIPTION AGREEMENT SET FORTH THE COMPANY'S
OBLIGATIONS TO REGISTER THE ISSUANCE OF THE WARRANT SHARES. A COPY OF SUCH
SUBSCRIPTION AGREEMENT IS AVAILABLE FOR INSPECTION AT THE COMPANY'S OFFICE.
For the Purchase of
Number of shares shares of
No. -Warrant/#
WARRANT FOR THE PURCHASE OF
SHARES OF COMMON STOCK
OF
CROSS/Z INTERNATIONAL, INC.
Cross/Z International, Inc., a California corporation
("Company"), hereby certifies that for value received, Holder, or his, her or
its registered assigns ("Registered Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company, at any time or from time
to time during the period commencing on ____ __, 1998 and ending on ____ __,
2003, Number of shares ("Initial Number") shares of common stock, $.001 par
value, of the Company ("Common Stock"), at an exercise price equal to $4.28
per share. The number of shares of Common Stock purchasable upon exercise of
this Warrant, and the exercise price per share, each as adjusted from time to
time pursuant to the provisions of this Warrant, are hereinafter referred to
as the "Warrant Shares" and the "Exercise Price," respectively.
<PAGE>
1. Exercise.
(a) This Warrant may be exercised by the Registered Holder,
in whole or in part, by the surrender of this Warrant (with the Notice of
Exercise Form attached hereto duly executed by such Registered Holder) at the
principal office of the Company, or at such other office or agency as the
Company may designate, accompanied by payment in full, in lawful money of the
United States, of an amount equal to the then applicable Exercise Price
multiplied by the number of Warrant Shares then being purchased upon such
exercise.
(b) Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which
this Warrant shall have been surrendered to the Company as provided in
subsection 1(a) above. At such time, the person or persons in whose name or
names any certificates for Warrant Shares shall be issuable upon such exercise
as provided in subsection 1(c) below shall be deemed to have become the holder
or holders of record of the Warrant Shares represented by such certificates.
(c) Within five (5) business days after the exercise of the
purchase right represented by this Warrant, the Company at its expense will
use its best efforts to cause to be issued in the name of, and delivered to,
the Registered Holder, or, subject to the terms and conditions hereof, to such
other individual or entity as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of
full shares of Warrant Shares to which such Registered Holder shall be
entitled upon such exercise plus, in lieu of any fractional share to which
such Registered Holder would otherwise be entitled, cash in an amount
determined pursuant to Section 3 hereof, and
(ii) in case such exercise is in part only, a new
warrant or warrants (dated the date hereof) of like tenor, stating on the face
or faces thereof the number of shares currently stated on the face of this
Warrant minus the number of such shares purchased by the Registered Holder
upon such exercise as provided in subsection 1(a) above.
2. Adjustments.
(a) Split, Subdivision or Combination of Shares. If the
outstanding shares of the Company's Common Stock at any time while this
Warrant remains outstanding and unexpired shall be subdivided or split into a
greater number of shares or a dividend in Common Stock shall be paid in
respect of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or split or immediately after the
record date of such dividend (as the case may be), shall be proportionately
decreased. If the outstanding shares of Common Stock shall be combined or
reverse-split into a smaller number of shares, the Exercise Price in effect
immediately prior to such combination or reverse split shall, simultaneously
with the effectiveness of such combination or reverse split, be
proportionately increased. When any adjustment is required to be made in the
Exercise Price, the number of Warrant Shares purchasable upon the exercise of
this Warrant shall be changed to the number determined by dividing (i) an
amount equal to the number of shares issuable upon the
2
<PAGE>
exercise of this Warrant immediately prior to such adjustment, multiplied by
the Exercise Price in effect immediately prior to such adjustment, by (ii) the
Exercise Price in effect immediately after such adjustment.
(b) Reclassification Reorganization, Consolidation or
Merger. In the case of any reclassification of the Common Stock (other than a
change in par value or a subdivision or combination as provided for in
subsection 2(a) above), or any reorganization, consolidation or merger of the
Company with or into another corporation (other than a merger or
reorganization with respect to which the Company is the continuing corporation
and which does not result in any reclassification of the Common Stock), or a
transfer of all or substantially all of the assets of the Company, or the
payment of a liquidating distribution then, as part of any such
reorganization, reclassification, consolidation, merger, sale or liquidating
distribution, lawful provision shall be made so that the Registered Holder of
this Warrant shall have the right thereafter to receive upon the exercise
hereof (to the extent, if any, still exercisable) the kind and amount of
shares of stock or other securities or property which such Registered Holder
would have been entitled to receive if, immediately prior to any such
reorganization, reclassification, consolidation, merger, sale or liquidating
distribution, as the case may be, such Registered Holder had held the number
of shares of Common Stock which were then purchasable upon the exercise of
this Warrant. In any such case, appropriate adjustment (as reasonably
determined by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the Registered Holder of this Warrant such that the
provisions set forth in this Section 2 (including provisions with respect to
the Exercise Price) shall thereafter be applicable, as nearly as is reasonably
practicable, in relation to any shares of stock or other securities or
property thereafter deliverable upon the exercise of this Warrant.
(c) Price Adjustment. No adjustment in the per share
Exercise Price shall be required unless such adjustment would require an
increase or decrease in the Exercise Price of at least $0.01; provided,
however, that any adjustments which by reason of this subsection are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 2 shall be made to
the nearest cent or to the nearest 1/100th of a share, as the case may be.
(d) Price Reduction. Notwithstanding any other provision set
forth in this Warrant, at any time and from time to time during the period
that this Warrant is exercisable, the Company in it sole discretion may reduce
the Exercise Price or extend the period during which this Warrant is
exercisable.
(e) Additional Warrant Shares. In the event that the price
at which the Company's Common Stock is offered in the Company's initial public
offering is less than $8.00 ("Reduced Price"), then, in such event, the
aggregate number of Warrant Shares issuable upon exercise of this Warrant will
be increased to the lesser of (i) 1.5 times the Initial Number and (ii) the
quotient obtained by dividing (a) $3.72 times the Initial Number by (b) the
difference between the Reduced Price and $4.28.
3
<PAGE>
(f) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company but will at
all times in good faith assist in the carrying out of all the provisions of
this Section 2 and in the taking of all such actions as may be necessary or
appropriate in order to protect against impairment of the rights of the
Registered Holder of this Warrant to adjustments in the Exercise Price.
(g) Notice of Adjustment. Upon the happening of any event
requiring an adjustment of the Exercise Price hereunder, the Company shall
forthwith give written notice thereto to the Registered Holder of this Warrant
stating the adjusted Exercise Price and the adjusted number of Warrant Shares
resulting from such event and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
3. Fractional Shares. The Company shall not be required upon the
exercise of this Warrant to issue any fractional shares, but shall make an
adjustment thereof in cash on the basis of the last sale price of the
Company's Common Stock on the over-the-counter market as reported by the
National Association of Securities Dealers Automated Quotations System or on a
national securities exchange on the trading day immediately prior to the date
of exercise, whichever is applicable, or if neither is applicable, then on the
basis of the then fair market value of the Company's Common Stock as shall be
reasonably determined by the Board of Directors of the Company.
4. Limitation on Sales. Each holder of this Warrant acknowledges that
this Warrant and the Warrant Shares have not been registered under the
Securities Act of 1933 ("Act") as of the date of issuance hereof and agrees
not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose
of this Warrant, or any Warrant Shares issued upon its exercise, in the
absence of (i) an effective registration statement under the Act as to this
Warrant or such Warrant Shares and registration or qualification of this
Warrant or such Warrant Shares under any applicable Blue Sky or state
securities law then in effect or (ii) an opinion of counsel, satisfactory to
the Company, that such registration and qualification are not required.
Without limiting the generality of the foregoing, unless the
offering and sale of the Warrant Shares to be issued upon the particular
exercise of the Warrant shall have been effectively registered under the Act,
the Company shall be under no obligation to issue the shares covered by such
exercise unless and until the Registered Holder shall have executed an
investment letter in form and substance satisfactory to the Company, including
a warranty at the time of such exercise that it is acquiring such shares for
its own account, and will not transfer the Warrant Shares unless pursuant to
an effective and current registration statement under the Act or an exemption
from the registration requirements of the Act and any other applicable
restrictions, in which event the Registered Holder shall be bound by the
provisions of a legend or legends to such effect which shall be endorsed upon
the certificate(s) representing the Warrant Shares
4
<PAGE>
issued pursuant to such exercise. In such event, the Warrant Shares issued
upon exercise hereof shall be imprinted with a legend in substantially the
following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF SAID ACT OR APPLICABLE STATE SECURITIES LAWS, SUPPORTED
BY AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED."
5. Certain Dividends. If the Company pays a dividend or makes a
distribution on the Common Stock payable otherwise than in cash out of
earnings or earned surplus (determined in accordance with generally accepted
accounting principles) except for a stock dividend payable in shares of Common
Stock (a "Property Dividend"), then the Company will pay or distribute to the
Registered Holder of this Warrant, upon the exercise hereof, in addition to
the Warrant Shares purchased upon such exercise, the Property Dividend which
would have been paid to such Registered Holder if it had been the owner of
record of such shares of Warrant Shares immediately prior to the date on which
a record is taken for such Property Dividend or, if no record is taken, the
date as of which the record holders of Common Stock entitled to such dividends
or distribution are to be determined.
6. Registration Rights of Warrant Holder. The Company has agreed to
register the issuance of the Warrant Shares in accordance with Section 7.1 of
the Subscription Agreement entered into between the Company and the Registered
Holder.
7. Notices of Record Date. In case:
(a) the Company shall take a record of the holders of its
Common Stock (or other stock or securities at the time deliverable upon the
exercise of this Warrant) for the purpose of entitling or enabling them to
receive any dividend or other distribution, or to receive any right to
subscribe for or purchase any shares of any class or any other securities, or
to receive any other right, or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving entity), or any
transfer of all or substantially all of the assets of the Company, or
(c) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
5
<PAGE>
then, and in each such case, the Company will mail or cause to be mailed to
the Registered Holder of this Warrant a notice specifying, as the case may be,
(i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation or winding-up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Common Stock (or such
other stock or securities at the time deliverable upon the exercise of this
Warrant) shall be entitled to exchange their shares of Common Stock (or such
other stock or securities) for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be mailed at least
ten (10) days prior to the record date or effective date for the event
specified in such notice, provided that the failure to mail such notice shall
not affect the legality or validity of any such action.
8. Reservation of Stock. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the exercise of this
Warrant, such shares of Warrant Shares and other stock, securities and
property, as from time to time shall be issuable upon the exercise of this
Warrant.
9. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of
an indemnity agreement (with surety if reasonably required) in an amount
reasonably satisfactory to the Company, or (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will issue, in lieu
thereof, a new Warrant of like tenor.
10. Transfers, etc.
(a) The Company will maintain a register containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its, his or her address as shown on the warrant register by
written notice to the Company requesting such change.
(b) Until any transfer of this Warrant is made in the
warrant register, the Company may treat the Registered Holder of this Warrant
as the absolute owner hereof for all purposes; provided, however, that if and
when this Warrant is properly assigned in blank, the Company may (but shall
not be obligated to) treat the bearer hereof as the absolute owner hereof for
all purposes, notwithstanding any notice to the contrary.
11. No Rights as Shareholder. Until the exercise of this Warrant, the
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a shareholder of the Company.
12. Successors. The rights and obligations of the parties to this
Warrant will inure to the benefit of and be binding upon the parties hereto
and their respective heirs, successors, assigns, pledgees, transferees and
purchasers. Without limiting the
6
<PAGE>
foregoing, the registration rights set forth in this Warrant shall inure to
the benefit of the Registered Holder and all the Registered Holder's
successors, heirs, pledgees, assignees, transferees and purchasers of this
Warrant and the Warrant Shares.
13. Change or Waiver. Any term of this Warrant may be changed or
waived only by an instrument in writing signed by the party against which
enforcement of the change or waiver is sought.
14. Headings. The headings in this Warrant are for purposes of
reference only and shall not limit or otherwise affect the meaning of any
provision of this Warrant.
15. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York as such laws are applied to
contracts made and to be fully performed entirely within that state between
residents of that state.
16. Jurisdiction and Venue. The Company (i) agrees that any legal
suit, action or proceeding arising out of or relating to this Warrant shall be
instituted exclusively in New York State Supreme Court, County of New York or
in the United States District Court for the Southern District of New York,
(ii) waives any objection to the venue of any such suit, action or proceeding
and the right to assert that such forum is not a convenient forum, and (iii)
irrevocably consents to the jurisdiction of the New York State Supreme Court,
County of New York, and the United States District Court for the Southern
District of New York in any such suit, action or proceeding, and the Company
further agrees to accept and acknowledge service or any and all process which
may be served in any such suit, action or proceeding in New York State Supreme
Court, County of New York or in the United States District Court for the
Southern District of New York.
17. Mailing of Notices, etc. All notices and other communications
under this Warrant (except payment) shall be in writing and shall be
sufficiently given if delivered to the addressees in person, by Federal
Express or similar receipt delivery, or if mailed, postage prepaid, by
certified mail, return receipt requested, as follows:
Registered Holder: To his or her address on page 1 of this Warrant.
7
<PAGE>
The Company: Cross/Z International, Inc.
60 Charles Lindbergh Boulevard
Uniondale, NY 11553
Attn: Mark Chroscielewski, President
Fax: (212) 516-228-8584
In either case, with a copy to: Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attn: David Alan Miller, Esq.
Fax: (212) 818-8881
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attn: David J. Adler, Esq.
Fax: (212) 755-1467
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
delivery in person or by mailing.
CROSS/Z INTERNATIONAL, INC.
By: ____________________________________
Mark Chroscielewski, President
8
<PAGE>
NOTICE OF EXERCISE
TO: Cross/Z International, Inc.
60 Charles Lindberg Boulevard
Uniondale, NY 11553
18. The undersigned hereby elects to purchase _____ shares of
the Common Stock of Cross/Z International, Inc., pursuant to terms of the
attached Warrant, and tenders herewith payment of the exercise price of such
shares in full, together with all applicable transfer taxes, if any.
19. Please issue a certificate or certificates representing said
shares of the Common Stock in the name of the undersigned or in such other
name as is specified below:
____________________________________________
(Name)
____________________________________________
(Address)
____________________________________________
____________________________________________
____________________________________________
(Taxpayer Identification Number)
____________________________________________
[print name of Registered Holder]
By: ____________________________________________
Title:__________________________________________
Date: __________________________________________
9
<PAGE>
CROSS/Z INTERNATIONAL, INC.
CONVERTIBLE NEGOTIABLE PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD,
ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
WITH RESPECT THERETO UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR
UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED. THE COMPANY'S SUBSCRIPTION
AGREEMENT WITH THE HOLDER CONTAINS ADDITIONAL PROVISIONS RESTRICTING THE
TRANSFER OF THIS NOTE. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT
THE COMPANY'S OFFICE.
$Principal Amount July ___, 1997
FOR VALUE RECEIVED, CROSS/Z INTERNATIONAL, INC., a
California corporation ("Company"), with its principal office at 60 Charles
Lindbergh Blvd., Uniondale, NY 11553, promises to pay to the order of Investor
Name ("Holder") residing at Investor Address, or registered assigns, on the
earliest of (i) ___________, 1999 [the 18-month anniversary of the initial
closing], (ii) the date of successful consummation by the Company of an
initial public offering of its securities, as described in Section 4 hereof,
(iii) the date of consummation of a sale by the Company of all or
substantially all of its assets or a merger or consolidation in which the
Company is not the survivor, (iv) the date of consummation of the sale or
exchange (including by way of merger) of all or substantially all of the
outstanding shares of the Company's Common Stock, par value $.001 per share
("Common Stock"), or (v) an "Offering Termination" as defined in Section 5
hereof, subject to the conversion rights of the Holder described therein (in
any such event, "Maturity Date"), the principal amount of Dollar Amount
Dollars ($Principal Amount), in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public or private debts, together with interest on the unpaid balance of said
principal amount from time to time outstanding at the rate of ten (10%)
percent per annum; provided, however, that if the GKN Offering (as defined in
Section 4 hereof) is not consummated on or before September 30, 1997, interest
shall accrue on the outstanding principal hereof at the rate of thirteen
percent (13%) per annum commencing October 1, 1997. Notwithstanding the
foregoing, this Note may be prepaid or called by the Company at any time in
whole, but not in part, without penalty or premium, but with at least two days
notice to the Holder. Interest shall accrue to and include the date on which
payment of principal is made. This Note shall be paid (and prepaid, if
applicable) only pro rata with certain additional notes of like tenor being
issued simultaneously herewith, subject to each Holder's conversion rights.
Except as set forth in Section 4, payments of principal and interest are to be
made at the address of the Holder designated above or at such other place as
the Holder shall have notified the Company in writing at least five days
before such payment is due.
<PAGE>
This Note is issued pursuant to a subscription agreement
between the Company and the Holder ("Subscription Agreement"), which is
available for inspection at the Company's principal office. Reference herein to
the Subscription Agreement shall in no way impair the absolute and
unconditional obligation of the Company to pay both principal and interest
hereon as provided herein.
1. Use of Proceeds. The Company agrees that the proceeds of
this Note shall not be used to pay (i) any indebtedness for borrowed money other
than (a) approximately $32,000 of principal and interest owed to Gorman/Ventura;
(b) scheduled payments to HCC Financial Corp. pursuant to a letter agreement
dated March 31, 1992, as amended on May 8, 1996; and (c) approximately an
aggregate of $512,000 payable to Wheatley Partners LP and Wheatley Foreign
Partners LP in connection with the Company's May 1997 interim financing and (ii)
any of the Company's obligations, including indebtedness (both principal and any
interest thereon) for borrowed funds and unpaid salaries, fees or other
compensation, owed to any of its officers, directors, stockholders owning one
percent or more of the outstanding shares of Common Stock, or any of their
affiliates, for whatever purpose made and whether or not evidenced by a note,
bond, debenture or other formal instrument, excluding, for the purposes hereof,
any salaries or fees payable on a current basis to officers and directors in the
ordinary course of the Company's business ("Related Party Obligations").
2. Events of Default. (a) Upon the occurrence of any of the
following events (herein called "Events of Default"):
(i) The Company shall fail to pay the principal of
or interest on this Note on the Maturity Date;
(ii) (A) The Company shall commence any proceeding
or other action relating to it in bankruptcy or seek
reorganization, arrangement, readjustment of its debts,
receivership, dissolution, liquidation, winding-up,
composition or any other relief under any bankruptcy law, or
under any other insolvency, reorganization, liquidation,
dissolution, arrangement, composition, readjustment of debt or
any other similar act or law, of any jurisdiction, domestic or
foreign, now or hereafter existing; or (B) the Company shall
admit the material allegations of any petition or pleading in
connection with any such proceeding; or (C) the Company shall
apply for, or consent or acquiesce to, the appointment of a
receiver, conservator, trustee or similar officer for it or
for all or a substantial part of its property; or (D) the
Company shall make a general assignment for the benefit of
creditors;
(iii) (A) The commencement of any proceedings or the
taking of any other action against the Company in bankruptcy
or seeking reorganization, arrangement, readjustment of its
debts, liquidation, dissolution, arrangement, composition, or
any other relief under any bankruptcy law or any other similar
act or law of any jurisdiction, domestic or foreign, now or
hereafter existing and the continuance of any of such events
for sixty (60) days undismissed, unbonded or undischarged; or
(B) the appointment of a receiver, conservator, trustee or
similar officer for the Company for any of its property and
the continuance of any of such events for sixty (60) days
undismissed, unbonded or undischarged; or (C) the issuance of
a warrant of attachment, execution or similar process against
any of the property of the Company and the continuance of such
event for sixty (60) days undismissed, unbonded and
undischarged;
2
<PAGE>
(iv) Any material breach of any of the Company's
representations or warranties contained in the Subscription
Agreement or in the Agency Agreement dated as of July 10, 1996
("Agency Agreement") between the Company, on the one hand and
GKN Securities Corp. ("GKN") and Barington Capital Group, L.P.
on the other;
(v) The Company shall fail to perform any obligation
of the Company contained in the Subscription Agreement or the
Agency Agreement, after giving effect to any applicable notice
provisions and cure periods;
(vi) The Company shall fail to comply with any of
its obligations under this Note; provided, however, that with
respect to a failure to comply with any of the provisions of
Sections 3.1(a) and (c) of this Note, such failure is not
remedied within thirty (30) days after the Company's receipt
of written notice of same;
(vii) The Company shall default with respect to any
indebtedness of $50,000 or more for borrowed money (other than
under this Note) if either (a) the effect of such default is
to accelerate the maturity of such indebtedness (giving effect
to any applicable grace periods) or (b) the holder of such
indebtedness declares the Company to be in default (giving
effect to any applicable grace periods); or
(viii) Any judgment or judgments against the Company
or any attachment, levy or execution against any of its
properties for any amount in excess of $50,000 in the
aggregate shall remain unpaid, or shall not be released,
discharged, dismissed, stayed or fully bonded for a period of
45 days or more after its entry, issue or levy, as the case
may be;
then, and in any such event, the Holder, at its option and without written
notice to the Company, may declare the entire principal amount of this Note
then outstanding together with accrued unpaid interest thereon immediately due
and payable, and the same shall forthwith become immediately due and payable
without presentment, demand, protest, or other notice of any kind, all of
which are expressly waived. The Events of Default listed herein are solely for
the purpose of protecting the interests of the Holder of this Note. If the
Note is not paid in full upon acceleration, as required above, interest shall
accrue on the outstanding principal of and interest on this Note from the date
of the Event of Default up to and including the date of payment at a rate
equal to the lesser of sixteen (16%) percent per annum or the maximum interest
rate permitted by applicable law.
(b) Non-Waiver and Other Remedies. No course of dealing or
delay on the part of the Holder of this Note in exercising any right hereunder
shall operate as a waiver or otherwise prejudice the right of the Holder of this
Note. No remedy conferred hereby shall be exclusive of any other remedy referred
to herein or now or hereafter available at law, in equity, by statute or
otherwise.
(c) Collection Costs; Attorney's Fees. In the event this
Note is turned over to an attorney for collection or Holder otherwise seeks
advice of an attorney in connection with the exercise of its rights hereunder
upon the occurrence of an Event of Default, the Company agrees to pay all
reasonable costs of collection, including reasonable attorney's fees and
expenses and all out of pocket expenses incurred in connection with such
collection efforts, which amounts may, at the Holder's option, be added to the
principal hereof.
3
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3. Obligation to Pay Principal and Interest; Covenants. No
provision of this Note shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and interest on
this Note at the place, at the respective times, at the rates, and in the
currency herein prescribed.
3.1 Affirmative Covenants. The Company covenants and agrees
that, while this Note is outstanding, it shall:
(a) Pay and discharge all taxes, assessments and
governmental charges or levies imposed upon it or upon its income and profits,
or upon any properties belonging to it before the same shall be in default;
provided, however, that the Company shall not be required to pay any such tax,
assessment, charge or levy which is being contested in good faith by proper
proceedings and adequate reserves for the accrual of same are maintained if
required by generally accepted accounting principles;
(b) Preserve its corporate existence and continue to engage
in business of the same general type as conducted as of the date hereof;
provided that the Company may be reincorporated in Delaware;
(c) Comply in all respects with all statutes, laws,
ordinances, orders, judgments, decrees, injunctions, rules, regulations,
permits, licenses, authorizations and requirements ("Requirement(s)") of all
governmental bodies, departments, commissions, boards, companies or associates
insuring the premises, courts, authorities, officials, or officers, which are
applicable to the Company; except wherein the failure to comply would not have a
material adverse effect on the Company; provided that nothing contained herein
shall prevent the Company from contesting the validity or the application of any
Requirements.
3.2 Negative Covenants. The Company covenants and agrees
that while this Note is outstanding it will not directly or indirectly:
(a) Guaranty or otherwise in any way become or be
responsible for indebtedness for borrowed money, or for obligations, in either
case of any of its officers, directors or principal stockholders or any of their
affiliates, contingently or otherwise, other than such guaranties existing as of
the date hereof;
(b) Declare or pay cash dividends;
(c) Sell, transfer or dispose of, any of its assets other
than in the ordinary course of its business and for fair value;
(d) Purchase, redeem, retire or otherwise acquire for value
any of its capital stock now or hereafter outstanding; or
(e) Repay out of the proceeds of this Note any (i)
indebtedness for borrowed funds or (ii) Related Party Obligations, except as set
forth in Section 1 hereof.
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<PAGE>
4. Repayment in the Event of a Public Offering. As set forth
in clause (i) of the first paragraph of this Note, this Note shall be paid in
full, without premium, in the event, and on the date, that the Company
successfully consummates an initial public offering of securities of the Company
("Offering"). The words "successful consummation," for this purpose, shall mean
the date on which the Company receives the net proceeds of the Offering. The
Company shall repay the Note by making payment into such Holder's account at GKN
upon the successful consummation of the Offering. The Offering contemplated by
the letter of intent, dated April 30, 1997 as amended on June 20, 1997 between
the Company and GKN ("Letter of Intent") shall be referred to herein as the "GKN
Offering."
5. Conversion.
5.1 Offering Termination. In the event that either (x) the
Company elects not to proceed with the GKN Offering for any reason other than
GKN's informing the Company that it will proceed with the offering only with a
per-share offering price of less than $6.00 at a time when none of the following
conditions is present: (i) a material adverse change has occurred since the
signing of the Letter of Intent in the financial condition, business or
prospects of the Company, (ii) as a result of the review of the Company's
financial statements by the Company's independent accountants approved by GKN,
it is determined that the Company's historical financial statements must be
restated and that, as restated, the Company's earnings, revenues, assets and/or
net worth is materially less than as previously presented; or (iii) the Company
has breached any of its material representations, warranties or obligations in
the Letter of Intent, or failed to proceed expeditiously with the GKN Offering
or to cooperate with GKN in requesting effectiveness of the registration
statement to be filed in connection with the GKN Offering at such time as GKN
may deem appropriate, or (y) GKN elects not to proceed with the GKN Offering as
a result of any of the conditions set forth in clauses (i), (ii) or (iii) above,
then an "Offering Termination" shall be deemed to have occurred and the Holder
may, at its option, determine to convert this Note, in whole but not in part,
into Common Stock, as provided below.
5.2 Notice. In the event of an Offering Termination, the
Company shall furnish notice of such event to the Holder at such Holder's
address as set forth on page one hereof within five (5) days of such Offering
Termination. In order to elect to convert the principal and interest of this
Note, the Holder must deliver to the Company within fifteen (15) days after the
receipt of the notice of the Offering Termination a written notice of his
election to convert the principal and interest of this Note into the applicable
number of Converted Shares (as defined herein), as determined under Section 5.3
hereof. If the Holder fails to deliver such notice within fifteen (15) days
after receipt of the notice of the Offering Termination, the Holder shall not be
entitled to convert the principal and interest of this Note as a result of such
Offering Termination and this Note and all accrued interest hereon shall be paid
in full.
5.3 Conversion Rate. If the Holder properly elects to
convert the entire principal amount and interest owed under this Note pursuant
to Section 5.2 hereof in the event of an Offering Termination, the Company shall
convert this Note into the number of shares of the Common Stock ("Converted
Shares") equal to the principal amount and interest then owed under the Note as
of the date of the Offering Termination divided by $4.28 ("Conversion Price")
and issue legended certificates for such Converted Shares to the Holder. If the
Holder elects to convert this Note in accordance with Section 5.2, the number of
securities to be issued to the Holder upon such conversion will be rounded up to
the nearest whole number.
5
<PAGE>
5.4 Adjustments.
(a) If the outstanding shares of the Company's Common Stock
shall be subdivided or split into a greater number of shares, or a dividend in
Common Stock shall be paid in respect of Common Stock, the Conversion Price in
effect immediately prior to such subdivision or at the record date of such
dividend shall, simultaneously with the effectiveness of such subdivision or
split or immediately after the record date of such dividend, be proportionately
reduced. If the outstanding shares of Common Stock shall be combined or
reverse-split into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination or reverse-split shall, simultaneously
with the effectiveness of such combination or reverse-split, be proportionately
increased. When any adjustment is required to be made in the Conversion Price,
the number of shares of Common Stock purchasable upon the conversion of this
Note shall be changed to the number determined by dividing (i) an amount equal
to the number of shares issuable upon the conversion of this Note immediately
prior to such adjustment, multiplied by the Conversion Price in effect
immediately prior to such adjustment, by (ii) the Conversion Price in effect
immediately after such adjustment.
(b) If there shall occur any capital reorganization or
reclassification of the Company's Common Stock (other than a change in par value
or a subdivision or combination as provided for in subsection (a) above), or the
payment of a liquidating distribution, then, as part of any such reorganization,
reclassification or liquidating distribution, lawful provision shall be made so
that the Holder of this Note shall have the right thereafter to receive upon the
conversion hereof (to the extent, if any, still convertible) the kind and amount
of shares of stock or other securities or property which such Holder would have
been entitled to receive if, immediately prior to any such reorganization,
reclassification or liquidating distribution, as the case may be, such Holder
had held the number of shares of Common Stock which were then purchasable upon
the conversion of this Note. In any such case, appropriate adjustment (as
reasonably determined by the Board of Directors of the Company) shall be made in
the application of the provisions set forth herein with respect to the rights
and interests thereafter of the Holder of this Note such that the provisions set
forth in this Section 5.4 (including provisions with respect to adjustment of
the Conversion Price) shall thereafter be applicable, as nearly as practicable,
in relation to any shares of stock or other securities or property thereafter
deliverable upon the conversion of this Note.
(c) Upon the happening of any event requiring an adjustment
of the Conversion Price hereunder, the Company shall forthwith give written
notice thereto to the Holder of this Note stating the adjusted Conversion Price
and the adjusted number of shares purchasable upon the conversion hereof
resulting from such event and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
6. Miscellaneous.
6.1 Required Consent. The Company may not modify any of the
terms of this Note without the prior written consent of the Holder.
6.2 Lost Documents. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Note or
any Note exchanged for it, and (in the case of loss, theft or destruction) of
indemnity satisfactory to it, and upon reimbursement to the
6
<PAGE>
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of such Note, if mutilated, the Company will make and deliver in
lieu of such Note a new Note of like tenor and unpaid principal amount and dated
as of the original date of the Note.
6.3 Benefit. This Note shall be binding upon and inure to
the benefit of the parties hereto and their legal representatives, successors
and assigns.
6.4 Notices and Addresses. All notices, offers, acceptances
and any other acts under this Note (except payment) shall be in writing, and
shall be sufficiently given if delivered to the addressee in person, by
overnight courier service or similar receipted delivery, or, if mailed, postage
prepaid, by certified mail, return receipt requested, as follows:
To Holder: To Holder's address on page 1 of this Note
To the Company: Cross/Z International, Inc.
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
Attn: Mark Chroscielewski, President
In either case with copies to: GKN Securities Corp.
61 Broadway, 12th Fl.
New York, New York 10006
Attn: Deborah S. Novick, Sr. Vice
President Investment Banking
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
Attn: David Alan Miller, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attn: David J. Adler, Esq.
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
delivery in person or five (5) business days after mailing.
6.5 Governing Law. This Note and any dispute, disagreement,
or issue of construction or interpretation arising hereunder whether relating to
its execution, its validity, the obligations provided therein or performance
shall be governed and interpreted according to the law of the State of New York
without regard to principles of conflicts of law.
7
<PAGE>
6.6 Jurisdiction and Venue. The Company (i) agrees that any
legal suit, action or proceeding arising out of or relating to this Note shall
be instituted exclusively in New York State Supreme Court, County of New York or
in the United States District Court for the Southern District of New York, (ii)
waives any objection to the venue of any such suit, action or proceeding and the
right to assert that such forum is not a convenient forum, and (iii) irrevocably
consents to the jurisdiction of the New York State Supreme Court, County of New
York, and the United States District Court for the Southern District of New York
in any such suit, action or proceeding, and the Company further agrees to accept
and acknowledge service of any and all process which may be served in any such
suit, action or proceeding in New York State Supreme Court, County of New York,
or in the United States District Court for the Southern District of New York.
6.7 Section Headings. Section headings herein have been
inserted for reference only and shall not be deemed to limit or otherwise
affect, in any matter, or be deemed to interpret in whole or in part any of the
terms or provisions of this Note.
6.8 Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements contained herein shall survive
the delivery of this Note.
IN WITNESS WHEREOF, this Note has been executed and
delivered on the date specified above by the duly authorized representative of
the Company.
CROSS/Z INTERNATIONAL, INC
By:_______________________
Mark Chroscielewski
President
8
<PAGE>
CrossZ SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of October 6, 1997 (the "Effective Date"), by and between Robert
V. Aloisio (the "Executive") and CrossZ Software Corporation (the "Company").
R E C I T A L S
The Company and the Executive desire to enter into this Agreement in
order to provide additional financial security and benefits to the Executive,
to encourage the Executive to continue employment with the Company and to
enhance the motivation and incentive of the Executive to increase the
profitability of the Company.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of the Executive with the Company,
the parties agree as follows:
1. Duties and Scope of Employment.
(a) Position. The Company shall employ the Executive in the
position of Senior Vice President of Worldwide Sales with such duties,
responsibilities and compensation as in effect as of the Effective Date;
provided, however, that the Board of Directors of the Company (the "Board")
shall have the right to revise such responsibilities and compensation from
time to time as the Board may deem necessary or appropriate. Such duties and
responsibilities shall be commensurate with Executive s past practices and
consistent with his position as Senior Vice President of Worldwide Sales of
the Company. If any such revision constitutes "Involuntary Termination" as
defined in Section 7 (d) of this Agreement, the Executive shall be entitled to
benefits upon such Involuntary Termination as provided under this Agreement.
(b) Obligations. The Executive shall devote his full
business efforts and time to the Company and its subsidiaries. The foregoing,
however, shall not preclude the Executive from engaging in such activities and
services as do not interfere or conflict with his responsibilities to the
Company.
2. Termination. This Agreement shall continue in force and effect
until the earliest of: (i) October 6, 1999 or (ii) until such time as notice
of non-renewal or termination of this Agreement is given in writing by either
the Company or the Executive to the other (the "Termination Event"). The
Company and the Executive agree to meet to negotiate in good faith the renewal
of this Agreement two (2) months prior to the Termination Event. This
Agreement may be extended for an additional period or periods by mutual
written agreement of the Company and the Executive. A termination of the terms
of this Agreement pursuant to the preceding sentence shall be effective for
all purposes, except that such termination shall not affect the payment or
provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement,
nor affect
<PAGE>
Executive's right to six (6) months of Base Compensation as severance pay
after the termination.
3. Compensation and Benefits.
(a) Base Compensation. The Company shall pay the Executive
as compensation for services a base salary at the annualized rate of not less
than $150,000. Such salary shall be reviewed at least annually and may be
increased from time to time. Such salary shall be paid periodically in
accordance with normal Company payroll. The annual compensation specified in
this Section, as adjusted from time to time, before any salary reduction under
Section 401(k) of the Internal Revenue Code, deferred compensation plan or
agreement or any other benefit or plan requiring reduction of salary, is
referred to in this Agreement as "Base Compensation."
(b) Bonus and Commissions. Beginning with the Company's
current fiscal quarter and for each fiscal year thereafter during the term of
this Agreement, the Executive shall be eligible to receive commissions and
additional equity (the "Target Bonus") based upon a target or targets approved
by the Board annually (See Exhibit A). The Target Bonus payable hereunder
shall be payable in accordance with the Company's normal practices and
policies.
(c) Vacation. The Executive shall be entitled to three (3)
weeks of paid vacation per year or such additional vacation as may be
permitted from time to time by Company policy.
(d) Executive Benefits. The Executive shall be eligible to
participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement or
excess-benefit plans, stock option, incentive or other bonus plans, life,
disability, health, accident and other insurance programs, paid vacations, and
similar plans or programs, subject in each case to the generally applicable
terms and conditions of the plan or program in question and to the
determination of the Board or any committee administering such plan or
program. Participation shall be consistent with the Executive's position as
Senior Vice President of Worldwide Sales of the Company. The Company shall
reimburse the Executive for all reasonable business and travel expenses
actually incurred or paid by the Executive in the performance of services on
behalf of the Company, in accordance with the Company's expense reimbursement
policy as in effect from time to time.
(e) Stock Options. Pending Board approval and subject to the
provisions of the Company's 1991 Incentive Stock Options Plan, the Executive
will be granted an initial option ("the Option") to purchase 100,000 stock
options at the exercise price equal to the Initial Offering Price of the
Company's common stock. The options granted will fully vest over a period of
four (4) years at the rate of 25% after one year of service with the balance
of the options vesting ratably each month over the remaining three year
period.
<PAGE>
4. Severance Benefits.
(a) Termination of Employment During Term of Agreement. If
the Executive's employment with the Company terminates during the term of this
Agreement, then the Executive shall be entitled to receive severance benefits
as follows:
(i) Involuntary Termination. If, at any time during
the term of this Agreement, the Executive's employment terminates as a result
of Involuntary Termination other than for Cause, Disability or death, or the
Company breaches any of the material terms of this Agreement (either of the
foregoing, an "Event"), the Company shall pay the Executive severance in the
amount of one-twelfth (1/12) of the Base Compensation of the Executive at the
time of such termination (without giving effect to any reduction in Base
Compensation that resulted in such Involuntary Termination) per month, for a
period of six (6) months.
(ii) Voluntary Resignation; Termination for Cause.
If the Executive's employment terminates by reason of the Executive's
voluntary resignation (and is not an Involuntary Termination), or if the
Executive is terminated for Cause, then the Executive shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established (and applicable) under the Company's then-existing severance and
benefits plans and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates
the Executive's employment as a result of the Executive's Disability, or such
Executive's employment is terminated due to the death of the Executive, then
the Executive shall not be entitled to receive severance or other benefits
except (i) those (if any) as may then be established (and applicable) under
the Company's then-existing severance and other benefits plans and policies at
the time of such Disability or death, (ii) benefits required by applicable
laws, and (iii) in the case of death, the Executive's salary for thirteen (13)
weeks payable to the Executive's surviving spouse, or if the Executive has no
spouse, to the Executive's estate. In the event of termination as a result of
Disability under this Agreement, the Executive shall be entitled to the
benefits provided under the Company's then-existing disability or extended
sick pay plan, for so long as such Executive continues to be disabled under
this Agreement or benefits otherwise terminate under such plan, whether or not
the Executive is deemed to be disabled under such plan.
(b) Continuing Benefits. In the event the Executive is
entitled to severance benefits pursuant to subsection 4(a)(i), then in
addition to such severance benefits, the Executive shall receive Company-paid
health, dental, vision, disability and life insurance coverage as provided to
such Executive immediately prior to the Executive's termination, upon the
terms and conditions, including deductibles and co-payments, provided in the
Company's then-existing plans, policies and programs.
(c) Accrued Salary, Benefits and Expenses. In addition, (i)
the Company shall
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<PAGE>
pay the Executive any unpaid base salary and unpaid bonus due for periods
prior to the Termination Date; (ii) the Company shall pay the Executive all of
the Executive's accrued and unused vacation through the Termination Date; and
(iii) following submission of proper expense reports by the Executive, the
Company shall reimburse the Executive for all expenses reasonably and
necessarily incurred by the Executive in connection with the business of the
Company prior to termination. These payments shall be made promptly upon
termination and within the period of time mandated by law.
(d) Retirement Plans. In addition to any other retirement
rights to which Executive may be legally entitled by contract or pursuant to
any plan or program, the Company shall pay the Executive regularly scheduled
payments which shall commence on the Executive's normal retirement age or
earlier if the Executive elects early retirement and shall be payable in
accordance with the Company's then-existing retirement plan, if any,
determined as though the Executive continued his employment with the Company
for an additional twelve (12) months following the Termination Date or until
Executive has attained normal retirement age under such Plan, whichever occurs
earlier. For purposes of determining the amount Executive is to receive the
Company shall utilize the greater of the Executive's compensation as defined
under any such retirement plan in effect on the date of this Agreement for the
year including the Termination Date.
(e) Options. In the event the Executive is entitled to
severance benefits pursuant to subsection 4(a)(i), the Executive's stock
options and other exercise rights shall remain exercisable in accordance with
the provisions of the Stock Option Plan.
(f) Vesting of Benefits. If the Executive's employment
terminates as a result of Involuntary Termination other than Cause,
Disability, or death within twelve (12) months of a Change-in-Control or,
prior thereto, if resulting from a Change-in-Control, then any unvested
benefits on the date of termination, including stock options, restricted
stock, stock appreciation rights, growth units, or other incentive
compensation (other than target bonus), shall immediately accelerate and
become fully vested and exercisable. The Executive shall thereupon have fully
vested rights to such benefits in accordance with the terms of applicable plan
or agreement.
(g) Deferred Compensation. Any compensation deferred by the
Executive shall be subject to the terms and conditions of any applicable plan
or agreement, and shall not be affected or altered by this Agreement.
5. Limitation on Payments. In the event that any payment or benefit
received or to be received by the Executive pursuant to this Agreement or
otherwise (collectively the "Payments") would be subject to the Excise Tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar or successor provision (the "Excise Tax"), the Company
shall pay to the Executive within ninety (90) days of the Termination Date
(or, if earlier, within ninety (90) days of the date the Executive becomes
subject to the Excise Tax), an additional amount (the "Gross-Up Payment") such
that the net
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<PAGE>
amount retained by the Executive, after deduction of any Excise Tax and any
federal (and state and local) income tax on the Payments, shall be equal to
the Payments minus all applicable taxes on the Payments. For purposes of
determining whether any of the Payments will be subject to the Excise Tax and
the amount of Excise Tax, (i) any other payments or benefits received or to be
received in connection with a Change of Control of the Company or the
Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company), shall
be treated as "parachute payments" within the meaning of Section 280G(b)(2) of
the Code or any similar or successor provision, and all "excess parachute
payments" within meaning of Section 280G(b)(1) or any similar or successor
provision shall be treated as subject to the Excise Tax, unless in the opinion
of tax counsel selected by the Company such other payments or benefits (in
whole or in part) do not constitute parachute payments, or such excess
parachute payments (in whole or in part) represent reasonable compensation for
services within the meaning of Section 280G(b) or any similar or successor
provision of the Code in excess of the base amount within the meaning of
Section 280G(b)(3) or any similar or successor provision of the Code, or are
otherwise not subject to Excise Tax; (ii) the amount of the Payments which
shall be treated as subject to the Excise Tax shall be equal to the lesser of
(A) the total amount of the Payments or (B) the amount of the excess parachute
payments within the meaning of Section 280G(b)(1) (after applying clause (i)
above), and (iii) the value of any non-cash benefits or an deferred payment or
benefit shall be determined by the Company's independent auditors in
accordance with the principles of Section 280G(d)(3) and (4) of the Code. For
purposes of determining the amount of the Gross-Up Payment, the Executive
shall be deemed to pay federal income taxes at the highest nominal marginal
rate of federal income taxation in the calendar year in which the Gross-Up
Payment is to be made and state and local income taxes at the highest nominal
marginal rate of taxation in the state and locality of the Executive's
residence on the Termination Date, net of the maximum reduction in federal
income taxes which could be obtained from deducting of such state and local
taxes. In the event that the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time of termination of the
Executive's employment, the Executive shall repay to the Company at the time
that the amount of such reduction in Excise Tax is finally determined the
portion of the Gross-Up Payment attributable to such reduction (plus the
portion of the Gross-Up Payment attributable to the Excise Tax and federal
(and state and local) income tax imposed on the Gross-Up Payment being repaid
by the Executive if such repayment results in a reduction in Excise Tax and/or
a federal (and state and local) income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment (including by reason of a payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest payable with respect to such excess) at the time that the amount of
such excess is finally determined.
6. Noncompete.
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<PAGE>
(a) If the Executive's employment terminates by reason of
voluntary resignation under Section 4, (a), (ii) only above, then the
Executive agrees not to work directly in the data warehousing, data mining and
business intelligence areas, or any technologies that the Executive is
directly engaged in with the Company for six (6) months following the
termination date.
(b) The Executive agrees that during his employment with the
Company, he shall not engage in, own, manage or control, or participate in the
ownership, management or control, directly or indirectly, of any person, firm,
corporation or other entity engaged in the design, development, provision,
sales or marketing of any product for the creation, compression, storage,
retrieval or analysis of relational databases ("Restricted Business") anywhere
in the world (the "Restricted Area"). Notwithstanding the foregoing, the
Executive may acquire shares representing not more than 5% of the outstanding
securities of any publicly traded company engaged in the Restricted Business.
The convenant contained in this Section 6 shall be construed as a series of
separate covenants, one for each country in the world and each province or
state within such country. If, in any judicial proceeding, a court shall
refuse to enforce any of such separate covenants, such unenforceable covenant
shall be deemed deleted from this Agreement to the extent necessary to permit
the remaining separate covenants included in this Section 6 to be enforced.
7. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
(i) Executive's failure to begin to substantially
perform his duties or responsibilities hereunder for a period of fifteen (15)
days after written notice thereof from the Board to Executive setting forth in
reasonable detail the respects in which the Company believes Executive has not
substantially performed his duties or responsibilities hereunder or continued
failure to begin to substantially perform such duties or responsibilities for
a period of thirty (30) days after such written notice;
(ii) Executive personally engaging in knowing and
intentional illegal conduct which is seriously injurious to the Company or its
affiliates;
(iii) Executive being convicted of a felony, or
committing an act of dishonesty or fraud against, or the misappropriation of
property belonging to, the Company or its affiliates;
(iv) Executive knowingly and intentionally
breaching in any material respect the terms of the Separation Agreement or any
other confidentiality agreement or invention or proprietary information
agreement with the Company;
(v) Executive's commencement of employment with
another employer
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<PAGE>
while he is an employee of the Company; or
(vi) any material breach by Executive of any
material provision of this Agreement for which a cure is not initiated within
fifteen (15) days of notice thereof from the Board to Executive or which
remains uncured for thirty (30) days following such notice.
(b) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) Any "person" or "group" (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Act), directly or indirectly, of securities of the Company representing
30% or more of the total voting power represented by the Company's then
outstanding voting securities; or
(ii) A change in the composition of the Board of
the Company occurring within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
reconstituted subsequent to the Company's Initial Public Offering, or (B) are
elected, or nominated for election, to the Board of the Company with the
affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company); or
(iii) The shareholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets (other than to a subsidiary or
subsidiaries).
(c) Disability. "Disability" shall mean that the Executive
has been unable to perform his duties under this Agreement for a period of
three or more consecutive months due to illness, accident or other physical or
mental incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall
include, but not be limited to,
(i) the continued assignment to Executive of any
duties or the
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continued material reduction of Executive's duties, either of which is
substantially inconsistent with the level of Executive's position with the
Company, for a period of thirty (30) days after notice thereof from Executive
to the Board of Directors setting forth in reasonable detail the respects in
which Executive believes such assignments or duties are substantially
inconsistent with the level of Executive's position;
(ii) a reduction in Executive's salary, other than
any such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a reduction by the Company in the kind or
level of employee benefits (other than salary and bonus) to which Executive is
entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is materially reduced
(other than any such reduction applicable to officers of the Company
generally);
(iv) any purported termination of the Executive's
employment by the Company other than for Cause or as a result of the
Executive's Disability;
(v) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 8
below; or
(vi) any material breach by the Company of any
material provision of this Agreement which continues uncured for thirty (30)
days following notice thereof; provided that none of the foregoing shall
constitute Involuntary Termination to the extent Executive has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if
the Executive's employment is terminated by the Company for Disability, thirty
(30) days after notice of termination is given to the Executive (provided that
the Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty (30) day period), (ii) if the
Executive's employment is terminated by the Company for any other reason, the
date on which a notice of termination is given, or (iii) if the Agreement is
terminated by the Executive, the date on which the Executive delivers the
notice of termination to the Company.
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<PAGE>
8. Successors.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement
in the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes
under this Agreement, the term "Company" shall include any successor to the
Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by the terms
of this Agreement by operation of law.
(b) Executive's Successors. The terms of this Agreement and
all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
9. Notice.
(a) General. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Executive, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Corporate Secretary.
(b) Notice of Termination. Any termination by the Company
for Cause or by the Executive as an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with this Agreement. Such notice shall indicate the specific
termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 30 days after the giving of
such notice). The failure by the Executive to include in the notice any fact
or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of the Executive hereunder or preclude the Executive
from asserting such fact or circumstance in enforcing his rights hereunder.
10. Confidentiality. Except as required by applicable laws, neither
party shall disclose the contents of this Agreement without first obtaining
the prior written consent of the other party, provided, however, that the
Executive may disclose this Agreement to his attorney, financial planner and
tax advisor if such persons agree to keep the terms hereof confidential.
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11. Miscellaneous Provisions.
(a) Voluntary Execution; Conflict Waiver. The Executive has
been advised to obtain independent legal counsel regarding this Agreement. The
Executive is signing this Agreement knowingly and voluntarily. The Company and
the Executive acknowledge that each has received full disclosure of any
potential conflict of interest which may result from such representation, and
knowingly and voluntarily waive any such conflict of interest.
(b) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Executive and by an authorized officer
of the Company (other than the Executive). No waiver by either party of any
breach of, or of compliance with, any condition or provision of this Agreement
by the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) Whole Agreement; Integration. This Agreement, the
Employment, Confidential Information and Invention Assignment Agreement, and
any written agreements or other documents evidencing matters referred to
herein and any written Company existing plans that are referenced herein
represent the entire agreement and understanding between the parties as to the
subject matter hereof and thereof and supersede all prior or contemporaneous
agreements as to the subject matter hereof and thereof, whether written or
oral. No waiver, alteration, or modification, if any, of the provisions of
this Agreement shall be binding unless in writing and signed by duly
authorized representatives of the parties hereto.
(d) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws
of the State of New York. The parties hereto consent to the personal
jurisdiction of the state and federal courts of the County of Nassau, State of
New York.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this subsection (f)
shall be void.
(g) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(h) Assignment by Company. The Company may assign its rights
under this
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Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that the Company shall remain jointly and severally liable under this
Agreement, and provided further, that no assignment shall be made if the net
worth of the assignee is less than the net worth of the Company at the time of
assignment. In the case of any such assignment, the term "Company" when used
in a section of this Agreement shall mean the corporation that actually
employs the Executive.
(i) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(j) Legal Fees. In the event that the Executive is required
to enforce this Agreement or to procure the benefits hereunder through
arbitration or litigation, the Executive shall be entitled to reasonable legal
fees and all out-of-pocket expenses.
(k) Interest. In the event that the Company fails to make
any payment hereunder or afford any benefit when due, the Company shall pay
interest at the rate of the publicly-announced prime rate of interest of Bank
of America N.T. & S.A. or its successor in effect from time to time plus 3%,
or the maximum amount permitted by law, whichever is less.
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of
the day and year first above written.
"COMPANY" CrossZ Software Corporation
/s/ Mark Chroscielewski
-----------------------------------
Mark Chroscielewski, President
"EXECUTIVE" Robert V. Aloisio
/s/ Robert V. Aloisio
-----------------------------------
<PAGE>
"NON EXCLUSIVE" VAR (Value Added Reseller)
SOFTWARE LICENSE AGREEMENT
This VAR Software License Agreement (the "Agreement") is entered into as of
9th September 1997 (date) by and between Cross/Z International, Inc., a
California corporation, with offices at 60 Charles Lindbergh Boulevard,
Uniondale, New York 11553 ("CrossZ") and STRATOS, strategic tools & services,
a company based in ITALY, with offices at Via Assarotti 9, 10122 TORINO,
ITALY. ("Reseller").
WHEREAS, the parties desire that Reseller acquire from CrossZ the right to
distribute certain CrossZ software directly to end users in the territories
listed, on the terms and conditions set forth herein;
NOW, THEREFORE, the parties agree:
1. Definitions.
1.1 "Software" shall mean the CrossZ software set forth in Exhibit
A attached hereto and shall include all Updates supplied by CrossZ
hereunder.
1.2 "Documentation" shall mean the related materials customarily
supplied by CrossZ to End Users of the Software.
1.3 "Software Copy" shall mean a copy of the Software and/or
Documentation ordered or acquired by Reseller from CrossZ for
distribution pursuant to this Agreement.
1.4 "Update" to Software shall mean any correction, update,
upgrade, or other Software modification or addition.
1.5 "End User" shall mean a person or entity that acquires the
Software and Documentation only for its internal data processing
requirements and not for further distribution.
1.6 "Confidential Information" shall have the meaning specified
therefor in Section 10.1 below.
2. License Grant.
2.1 License. Subject to the terms, conditions, and restrictions of
this Agreement, CrossZ hereby grants to Reseller a nonexclusive,
nontransferable license during the term of this Agreement (i) to
distribute Software Copies acquired by Reseller from CrossZ
pursuant to this Agreement only directly to End Users in the
European Community and in accordance with Sections 2.2 and 2.3
below and the remainder of this Agreement; and (ii) to use such
Software Copies only to support and demonstrate the Software.
<PAGE>
Reseller shall have no right to sub-license any of these rights or
licenses to any third party. Reseller shall have no right to, and
agrees not to, reproduce the Software or Documentation or to use,
license, distribute or otherwise transfer the Software or
Documentation except as specifically authorized hereunder.
Reseller shall not modify or alter any Software Copy in any
fashion.
2.2 End User Licensing. Reseller agrees to distribute the Software
and Documentation only pursuant to the CrossZ End User license
agreement supplied by CrossZ. Unless and until CrossZ provides
Software with shrink-wrap, on-line, or other self-executing End
User licenses, Reseller shall obtain each End User's execution of
a CrossZ-supplied End User license agreement prior to delivering
Software or Documentation to that End User.
2.3 Distribution; Territory. Reseller shall be entitled to
distribute Software only directly to End Users, and shall not use
distributors or other third party intermediaries. Reseller shall
not distribute the Software outside of, or for use outside of, the
European Community.
2.4 No Rights to Source Code. Reseller shall have no rights with
respect to any Software source code and agrees not to reverse
engineer the Software or to reverse assemble, decompile, or
otherwise attempt to derive the source code from the Software
provided to Reseller. No right to modify or otherwise prepare
derivative works of the Software or Documentation is granted.
2.5 Ownership. Subject only to the limited rights and licenses
expressly granted to Reseller in this Agreement, CrossZ shall
retain and own all right, title, and interest in the Software and
Documentation, and each copy thereof, and all intellectual
property rights with respect thereto. All rights not expressly
granted to Reseller herein are retained by CrossZ.
3. Terms of Acquisition of Software Copies by Reseller.
3.1 Terms and Conditions. All orders of Software Copies by
Reseller from CrossZ during the term of this Agreement shall be
governed by the terms and conditions of this Agreement, and
nothing contained in any such order shall in any way modify such
terms or conditions or add any additional terms or conditions.
3.2 Prices. All prices are F.O.B. CrossZ's manufacturing facility.
The price to Reseller for each of the Software Copies (the "Per
Copy Fee") shall be CrossZ's then current (as of the date of
CrossZ's acceptance of the order) European retail price therefore
less the applicable discount as set forth in Exhibit A attached
hereto.
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<PAGE>
3.3 Taxes. Reseller's Per Copy Fee does not include any federal,
state, local sales, use, value added, or other taxes that may be
applicable to the Software Copies. When CrossZ has the legal
obligation to collect such taxes, the appropriate amount shall be
added to Reseller's invoice and paid by Reseller unless Reseller
provides CrossZ with a valid tax exemption certificate authorized
by the appropriate taxing authority.
3.4 Forecasts. Reseller shall provide to CrossZ, on or before the
first day of each month, a non-binding, good faith written
forecast of Reseller's estimated Software Copy orders for delivery
in each of the following three (3) months (e.g., on or before
January 1, Reseller will provide a forecast for each of February,
March, and April).
3.5 Order and Acceptance. All orders for Software Copies submitted
by Reseller shall be initiated by written orders sent to CrossZ
and requesting a delivery date during the term of this Agreement;
provided, however, that an order may initially be placed orally or
by telecopy if a confirmational written purchase order is received
by CrossZ within five (5) days after said oral or telecopy order.
To facilitate CrossZ's production scheduling, Reseller shall
submit purchase orders to CrossZ at least 21 days prior to the
requested day of delivery. No order shall be binding upon CrossZ
until accepted by CrossZ in writing (such acceptance not to be
unreasonably withheld), and CrossZ shall have no liability to
Reseller with respect to purchase orders that are not accepted.
CrossZ shall use its reasonable best efforts to notify Reseller of
the acceptance or rejection of an order and of the assigned
delivery date for accepted orders within five (5) business days of
receipt of the order. CrossZ shall use its reasonable best efforts
to deliver Software Copies at the times specified either in its
quotation or in its written acceptance of Reseller's orders.
3.6 Rejection of Software Copies. Until thirty (30) days after
receipt, Reseller shall be entitled to reject any Software Copy
for defects in materials or workmanship. Any Software Copy not
properly rejected within thirty (30) days after receipt of that
Software Copy by Reseller ("Rejection Period") shall be deemed
accepted. To reject a Software Copy, Reseller shall, within the
Rejection Period, notify CrossZ in writing of its rejection and
request a Material Return Authorization ("MRA") number. Within ten
(10) days after receipt of the MRA number, Reseller shall return
to CrossZ the rejected Software Copy, freight prepaid, in its
original shipping carton with the MRA number displayed on the
outside of the carton. As promptly as practicable but no later
than thirty (30) working days after receipt by CrossZ of properly
rejected Software Copies, CrossZ shall, at its option and expense,
either repair or replace the Software Copies. CrossZ shall pay the
shipping charges back to Reseller for properly rejected Software
Copies; otherwise, Reseller shall be responsible for the shipping
charges.
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<PAGE>
3.7 Payment. CrossZ shall submit an invoice to Reseller upon
shipment of each Software Copy ordered by Reseller and as set
forth below. The invoice shall cover Reseller's Per Copy Fee for
the Software Copies in a given shipment plus any freight, taxes or
other applicable costs initially paid by CrossZ but to be borne by
Reseller. The full invoiced amount shall be due for payment within
thirty (30) days of the date of invoice, unless prior written
consent is granted by CrossZ, for a specific sale to the
Reseller's client, whereby such terms cannot be applied. Any
invoiced amount not received within thirty days of the date of
invoice shall be subject to a service charge of one and one-half
percent (1.5%) per month (or, if less, the maximum allowed by
applicable law). Reseller shall pay all of CrossZ's costs and
expenses (including reasonable attorneys' fees) to enforce and
preserve CrossZ's rights under this Section 3.7. CrossZ, however,
shall be entitled to withdraw Reseller's credit and require
different payment terms if CrossZ determines, in its discretion,
that Reseller's financial condition warrants the change.
3.8 Shipping. All Software Copies delivered pursuant to this
Agreement shall be suitably packed for shipment in CrossZ's
standard shipping cartons, marked for shipment at Reseller's
address first set forth above or as otherwise specified by
Reseller, and delivered to Reseller or its carrier agent F.O.B.
CrossZ's manufacturing facility, at which time risk of loss shall
pass to Reseller. Unless otherwise instructed in writing by
Reseller, CrossZ shall select the carrier. All freight, insurance,
and other shipping expenses, as well as any special packing
expense, shall be paid by Reseller.
4. Use of CrossZ Trademarks.
4.1 Authorized Uses. Reseller may use in its Software marketing,
promotional and advertising materials such applicable trademarks,
trade names and other marks of CrossZ (collectively, the "CrossZ
Trademarks") in connection therewith. Such use may be in
conjunction with Reseller's use of its own marks. Before any such
use, Reseller will provide to CrossZ copies of any such materials,
and Reseller shall not so use any CrossZ Trademark to which CrossZ
reasonably objects. If CrossZ does not object within five (5)
business days after receipt of such materials, Reseller shall be
entitled to use the materials as set forth herein. CrossZ will not
unreasonably withhold its consent.
4.2 No Other Use. Except as authorized in this section, Reseller
shall have no rights with respect to any CrossZ Trademark or other
CrossZ product, service, or company identifier. Reseller shall
make no reference to CrossZ or its Software without the prior
written permission of CrossZ, except as set forth herein.
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<PAGE>
4.3 Ownership by CrossZ. Any and all good will arising from
Reseller's use of the CrossZ Trademarks shall inure solely to the
benefit of CrossZ, and neither during nor after the termination of
this Agreement shall Reseller assert any claim to the CrossZ
Trademarks (or any confusingly similar mark) or such good will.
Reseller shall not take any action that could be detrimental to
the good will associated with the CrossZ Trademarks or with
CrossZ. Reseller shall, during the term of this Agreement and
after termination hereof, execute such documents as CrossZ may
request from time to time to ensure that all right, title and
interest in and to the CrossZ Trademarks reside with CrossZ.
Without limiting the foregoing, Reseller shall not register any
CrossZ Trademark, or any mark confusingly similar to any CrossZ
Trademark, in any country or territory.
5. Software Training, Support and Maintenance.
Exhibit B to this Agreement sets forth details regarding training,
support and maintenance for the Software, the respective rights
and responsibilities of CrossZ and Reseller for such training,
support and maintenance, and any charges to Reseller for such
training, support or maintenance.
6. Term and Termination.
6.1 Term. This Agreement shall continue for an initial term of Two
(2) years unless earlier terminated as set forth herein. This
agreement will renew automatically for additional twelve (12)
month periods unless written notice is given by either party, as
to it's intention not to renew this agreement, at least thirty
(30) days prior to the end of the initial and any subsequent term.
6.2 Convenience. Either party shall be entitled to terminate this
Agreement giving six (6) months written notice, in the event of
a major change in the business activities of either the Reseller
or CrossZ.
6.3 Default.
(a) If either party defaults in the performance of any of its
material obligations hereunder and if any such default is not
corrected within thirty (30) days after it shall have been
called to the attention of the defaulting party, in writing, by
the other party, then the other party, at its option, may, in
addition to any other remedies it may have, thereupon terminate
this Agreement by giving written notice of termination to the
other party.
(b) In the event of default by Reseller for reason of
nonpayment only, in addition to CrossZ's right to terminate
this Agreement CrossZ
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<PAGE>
shall be entitled, on written notice to Reseller, to require
that Reseller immediately cease all use and distribution of the
Software and Documentation until this default has been fully
cured, as well as to modify the payment terms in Section 3.7
above.
6.4 Insolvency. This Agreement may be terminated by either party,
on notice, (i) upon the institution by the other party of
insolvency, receivership or bankruptcy proceedings or any other
proceedings for the settlement of its debts, (ii) upon the
institution of such proceedings against the other party, which are
not dismissed or otherwise resolved in its favor within sixty (60)
days thereafter, (iii) upon the other party's making a general
assignment for the benefit of creditors, or (iv) upon the other
party's dissolution or ceasing to conduct business in the normal
course.
6.5 Survival.
(a) Except as otherwise set forth herein, the parties rights
and obligations pursuant to Sections 3.7, 6.5, 7, 8, 9, 10 and
11 shall survive any termination or expiration of this
Agreement.
(b) If this Agreement is terminated or expires, then all of
Reseller's rights and licenses with respect to the Software
shall terminate, provided that
(i) Reseller's right to continue to use one copy of the
Software and one copy of the related Documentation, in
accordance with this Agreement, to support and maintain
existing Software customers shall survive; and
(ii) Reseller shall be entitled to dispose of Software Copies
in its inventory. All other copies of the Software and related
Documentation in Reseller's possession shall be promptly
returned to CrossZ.
7. Infringement Indemnity.
7.1 Indemnity. CrossZ, at its expense, will defend any action
brought against Reseller to the extent based on a claim that the
Software or Documentation, as supplied by CrossZ and when used as
provided for by this Agreement, infringes any copyright, trade
secret, or United States patent. CrossZ will pay any award against
Reseller, or settlement entered into on Reseller's behalf, based
on such infringement only if Reseller notified CrossZ promptly in
writing of the claim, provided reasonable assistance in connection
with the defense and/or settlement thereof, and permitted CrossZ
to control the defense and/or settlement thereof. CrossZ shall
have no liability if the alleged infringement is caused by any
modification of the Software or Documentation, or the combination
of the Software or Documentation with other items, where the
unmodified Software or Documentation, or the Software or
Documentation alone, would not have given rise to the claim.
7.2 CrossZ Options. In the event of an infringement action against
Reseller with respect to the Software or Documentation, or in the
event CrossZ believes
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<PAGE>
such a claim is likely, CrossZ shall be entitled, at its option
but without obligation, to
(i) appropriately modify the Software and/or Documentation
licensed hereunder, or substitute other Software and/or
Documentation which, in CrossZ's good faith opinion, does not
infringe any third party intellectual property rights; (ii) obtain
a license with respect to the applicable third party intellectual
property rights; or (iii) if neither (i) nor (ii) is commercially
practicable, terminate this Agreement and Reseller's licenses
hereunder. If distribution of any Software Copy is enjoined,
CrossZ shall refund to Reseller the fee paid to CrossZ with
respect thereto.
7.3 Entire Liability. Notwithstanding anything contained in this
Agreement, the foregoing states CrossZ's entire liability for
actual or alleged infringement of intellectual property rights and
the limit of liability set forth in Section 9 shall not apply to
this Section 7.
8. Warranty and Disclaimer.
8.1 Warranty. CrossZ warrants only that each Software Copy, as
delivered by CrossZ, will be free of defects in materials and
workmanship. CrossZ's exclusive obligation and liability, and
Reseller's sole remedy, arising out of this warranty shall be for
CrossZ to replace defective Software Copies returned to CrossZ
within thirty (30) days after delivery to Reseller.
8.2 Except as set forth in Section 8.1, CROSSZ PROVIDES NO
WARRANTY, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AND
SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, WITH RESPECT TO THIS AGREEMENT,
INCLUDING WITHOUT LIMITATION WITH RESPECT TO THE SOFTWARE AND
DOCUMENTATION, WHICH ARE PROVIDED "AS IS".
9. Limitation of Liability.
IN NO EVENT SHALL CROSSZ'S LIABILITY ARISING OUT OF THIS AGREEMENT EXCEED THE
AMOUNTS RECEIVED BY CROSSZ FROM RESELLER HEREUNDER. IN NO EVENT SHALL CROSSZ
BE LIABLE FOR COSTS OF SUBSTITUTE PRODUCTS OR SERVICES. IN NO EVENT SHALL
CROSSZ BE LIABLE FOR LOST PROFITS OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL,
OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING
OUT OF THIS AGREEMENT. RESELLER ACKNOWLEDGES AND AGREES
THAT THE PRICE TO RESELLER IS BASED IN PART UPON THESE
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<PAGE>
LIMITATIONS, AND FURTHER AGREES THAT THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
10. Confidentiality.
10.1 Confidential Information. As used in this Agreement, the term
"Confidential Information" shall mean any information disclosed by
one party to the other pursuant to this Agreement which is in
written, graphic, machine readable or other tangible form and is
marked "Confidential", "Proprietary" or in some other manner to
indicate its confidential nature. Confidential Information may
also include oral information disclosed by one party to the other
pursuant to this Agreement, provided that such information is
designated as confidential at the time of disclosure and is
reduced to writing by the disclosing party within a reasonable
time (not to exceed thirty (30) days) after its oral disclosure,
and such writing is marked in a manner to indicate its
confidential nature and delivered to the receiving party.
10.2 Confidentiality. Each party shall treat as confidential all
Confidential Information of the other party, shall not use such
Confidential Information except as set forth herein, and shall use
reasonable efforts not to disclose such Confidential Information
to any third party. Without limiting the foregoing, each of the
parties shall use at least the same degree of care which it uses
to prevent the disclosure of its own confidential information of
like importance to prevent the disclosure of Confidential
Information disclosed to it by the other party under this
Agreement. Each party shall promptly notify the other party of any
actual or suspected misuse or unauthorized disclosure of the other
party's Confidential Information.
10.3 Exceptions. Notwithstanding the above, neither party shall
have liability to the other with regard to any Confidential
Information of the other which the receiving party can prove:
(i) was in the public domain at the time it was disclosed
or has become in the public domain through no fault of the
receiving party;
(ii) was known to the receiving party, without
restriction, at the time of disclosure, as demonstrated by
files in existence at the time of disclosure;
(iii) is disclosed with the prior written approval of the
disclosing party;
(iv) was independently developed by the receiving party
without any use of the Confidential Information;
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<PAGE>
(v) becomes known to the receiving party, without
restriction, from a source other than the disclosing party
without breach of this Agreement by the receiving party
and otherwise not in violation of the disclosing party's
rights; or
(vi) is disclosed generally to third parties by the
disclosing party without restrictions similar to those
contained in this Agreement.
In addition, the receiving party shall be entitled to disclose the
other party's Confidential Information to the extent such
disclosure is required by order or requirement of a court,
administrative agency, or other governmental body, provided,
however, that the receiving party shall provide prompt notice
thereof to the disclosing party to enable the disclosing party to
seek a protective order or otherwise prevent or restrict such
disclosure.
11. General.
11.1 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York,
without reference to conflict of laws principles.
11.2 Forum Selection. All disputes arising out of this Agreement
shall be subject to the exclusive jurisdiction of the state and
federal (Southern District of New York) New York courts, and the
parties agree and submit to the personal and exclusive
jurisdiction and venue of these courts.
11.3 Indemnification of CrossZ. Reseller agrees to indemnify and
hold CrossZ harmless against any liability, or any litigation cost
or expense (including attorneys' fees), arising out of third party
claims against CrossZ as a result of (i) Reseller's use or
distribution of Reseller products, or (ii) misrepresentations by
Reseller with respect to the Software or Documentation.
11.4. Confidentiality of Agreement. Each party shall be entitled
to disclose the existence of this Agreement, but agrees that the
terms and conditions of this Agreement shall be treated as
confidential information and shall not be disclosed to any third
party; provided, however, that each party may disclose the terms
and conditions of this Agreement:
(i) as required by any court or other governmental
body;
(ii) as otherwise required by law;
(iii) to legal counsel of the parties;
(iv) in confidence, to accountants, banks, and
financing sources and their advisors;
(v) in connection with the enforcement of this
Agreement or rights under this Agreement; or
(vi) in confidence, in connection with an actual or
proposed merger, acquisition, or similar
transaction.
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<PAGE>
11.5 Partial Invalidity. If any provision in this Agreement shall
be found or be held to be invalid or unenforceable in any
jurisdiction in which this Agreement is being performed, then the
meaning of said provision shall be construed, to the extent
feasible, so as to render the provision enforceable, and if no
feasible interpretation would save such provision, it shall be
severed from the remainder of this Agreement, which shall remain
in full force and effect. In such event, the parties shall
negotiate, in good faith, a substitute, valid and enforceable
provision which most nearly effects the parties' intent in
entering into this Agreement.
11.6 Independent Contractors. The parties hereto are independent
contractors. Nothing contained herein or done in pursuance of this
Agreement shall constitute either party the agent of the other
party for any purpose or in any sense whatsoever, or constitute
the parties as partners or joint ventures. Reseller shall make no
representations or warranties on behalf of CrossZ with respect to
the Software or Documentation.
11.7 Modification. No alteration, amendment, waiver, cancellation
or any other change in any term or condition of this Agreement
shall be valid or binding on either party unless the same shall
have been mutually assented to in writing by both parties.
11.8 Waiver. The failure of either party to enforce at any time
any of the provisions of this Agreement, or the failure to require
at any time performance by the other party of any of the
provisions of this Agreement, shall in no way be construed to be a
present or future waiver of such provisions, nor in any way affect
the right of either party to enforce each and every such provision
thereafter. The express waiver by either party of any provision,
condition or requirement of this Agreement shall not constitute a
waiver of any future obligation to comply with such provision,
condition or requirement.
11.9 Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors
and assigns; provided, however, that neither party shall assign
any of its rights, obligations, or privileges (by operation of law
or otherwise) hereunder without the prior written consent of the
other party. Notwithstanding the foregoing, however, either party
may assign this Agreement to a successor in interest (or its
equivalent) to all or substantially all of its relevant assets,
whether by sale, merger, or otherwise. Any attempted assignment in
violation of this section shall be void.
11.10 Notices. Any notice required or permitted to be given by
either party under this Agreement shall be in writing, in English,
and shall be personally delivered or sent by commercial courier
service (e.g., UPS), or by first class mail (certified or
registered), or by telecopy confirmed by first class mail
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<PAGE>
(registered or certified), to the other party at its address first
set forth above, or such new address as may from time to time be
supplied hereunder by the parties hereto. If mailed, notices will
be deemed effective three (3) working days after deposit, postage
prepaid, in the mail.
11.11 Import/Export Regulations. Reseller agrees to comply with
all U.S. export regulations, and Local import regulations, in
connection with distribution of Software or Documentation or
otherwise arising out of this Agreement. Unless an appropriate
license, exemption or similar authorization has been duly obtained
to CrossZ's satisfaction, the Reseller shall not, nor shall the
Reseller authorize or permit it's employees, distributors, dealers
and/or agents to, export or r export any CrossZ products,
attachments, parts, supplies or technology (including information
relating thereto) to any country specified as a prohibited
destination in applicable U.S. Laws, regulations and ordinances,
including the regulations of the U.S. Department of Commerce
and/or government agencies. Reseller agrees to defend, indemnify,
and hold harmless, CrossZ from any claim, loss, liability expense
or damage (Including fines or legal fees) incurred by CrossZ with
respect to any of the Reseller's export or re-export activities,
contrary to the foregoing instructions.
11.12 Force Majeure. Notwithstanding anything else in this
Agreement, and except for the obligation to pay money, no default,
delay or failure to perform on the part of either party shall be
considered a breach of this Agreement if such default, delay or
failure to perform is shown to be due to causes beyond reasonable
control of the party charged with a default, including, but not
limited to, causes such as strikes, lockouts or other labor
disputes, riots, civil disturbances, actions or inactions of
governmental authorities or suppliers, epidemics, war, embargoes,
severe weather, fire, earthquakes, acts of God or the public
enemy, nuclear disasters, or default of a common carrier.
11.13 No Third Party Beneficiaries. Unless otherwise expressly
provided, no provisions of this Agreement are intended or shall be
construed to confer upon or give to any person or entity other
than CrossZ and Reseller any rights, remedies or other benefits
under or by reason of this Agreement.
11.14 Compliance with Laws. Reseller shall comply with all
applicable laws and regulations applicable to its activities under
this Agreement.
11.16 Entire Agreement. The terms and conditions herein contained,
including all exhibits hereto, constitute the entire agreement
between the parties and supersede all previous agreements and
understandings, whether oral or written, between the parties
hereto with respect to the subject matter hereof. The terms and
conditions of the Agreement shall automatically apply to each
transaction between the parties contemplated by this Agreement
notwithstanding any additional or different terms and conditions
of any ordering document or other instrument submitted by
Reseller, which terms and conditions shall be void and of no
effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by duly authorized officers or representatives as of the date first
above written.
CROSSZ INTERNATIONAL, INC. [RESELLER]
By: /s/ Daniel Pess By: /s/ G. Oglietti
--------------------------- ------------------------------
Print Name: Daniel Pess Print Name: G. Oglietti
------------------- ----------------------
Title: Vice President - Finance Title: Amm Vaico
------------------------ ---------------------------
Date: 9/10/97 Date: 9/10/97
------------------------- ----------------------------
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<PAGE>
EXHIBIT A
Software and Discount
Software Discount
- -------- --------
Query Object System 40%
Query Object Voyager 40%
Query Object Client Pack 40%
(including: DBA
Designer
Viewer
Open)
<PAGE>
EXHIBIT B
Training, Support and Maintenance
Training & Materials.
CrossZ will furnish the Reseller with the following:
Technical training, Product positioning, Competitive Analysis and Marketing
Assistance will be made available to the Reseller, at CrossZ's USA
Headquarters. Training will be provided free of charge, all travel
related expenses will be born by the Reseller. In the event the reseller
requires "On-Site" training, a charge will be levied at CrossZ's current
consultancy rates plus associated travel costs.
A Complete set of CrossZ software that will be sold by the Reseller, FOR
DEMONSTRATION PURPOSES ONLY will be provided free of charge.
A Complete set of technical documentation for all CrossZ products sold will
be provided free of charge.
Relevant marketing materials will be provided on an ongoing basis i.e.
brochures, Promotional CD's, White Papers, Press Extracts, Analyst
Reports, etc.
<PAGE>
Support and Maintenance
CrossZ will make available to Reseller's End User customers Software support
and maintenance in accordance with CrossZ's customary practices, as
detailed in Exhibit C.
Maintenance will be charged at the following rates:
Standard maintenance (9:00 a.m. - 5:00 p.m. C.E.T, and 9:00 a.m.- 5:00
p.m. E.S.T. Monday To Friday) will be charged at 12% of supported
product price list, price per annum.
Extended maintenance (7 x 24) will be charged at 18% of supported
product list price, per annum.
CrossZ products are not date dependent, therefore, they are "Year 2000
Compliant".
<PAGE>
"NON EXCLUSIVE" VAR ( Value Added Reseller )
SOFTWARE LICENSE AGREEMENT
This VAR Software License Agreement (the "Agreement") is entered into as of
9th September 1997 (date) by and between Cross/Z International, Inc., a
California corporation, with offices at 60 Charles Lindbergh Boulevard,
Uniondale, New York 11553 ("CrossZ") and Worldnet Consulting, SA a company
based in SPAIN, with offices at Manuel Ballbe, 5 Bajos, 08034 MADRID, SPAIN.
("Reseller").
WHEREAS, the parties desire that Reseller acquire from CrossZ the right to
distribute certain CrossZ software directly to end users in the territories
listed, on the terms and conditions set forth herein;
NOW, THEREFORE, the parties agree:
1. Definitions.
1.1 "Software" shall mean the CrossZ software set forth in Exhibit
A attached hereto and shall include all Updates supplied by CrossZ
hereunder.
1.2 "Documentation" shall mean the related materials customarily
supplied by CrossZ to End Users of the Software.
1.3 "Software Copy" shall mean a copy of the Software and/or
Documentation ordered or acquired by Reseller from CrossZ for
distribution pursuant to this Agreement.
1.4 "Update" to Software shall mean any correction, update,
upgrade, or other Software modification or addition.
1.5 "End User" shall mean a person or entity that acquires the
Software and Documentation only for its internal data processing
requirements and not for further distribution.
1.6 "Confidential Information" shall have the meaning specified
therefor in Section 10.1 below.
2. License Grant.
2.1 License. Subject to the terms, conditions, and restrictions of
this Agreement, CrossZ hereby grants to Reseller a nonexclusive,
nontransferable license during the term of this Agreement (i) to
distribute Software Copies acquired by Reseller from CrossZ
pursuant to this Agreement only directly to End Users in the
European Community and in accordance with Sections 2.2 and 2.3
below and the remainder of this Agreement; and (ii) to use such
Software Copies only to support and demonstrate the Software.
<PAGE>
Reseller shall have no right to sub-license any of these rights or
licenses to any third party. Reseller shall have no right to, and
agrees not to, reproduce the Software or Documentation or to use,
license, distribute or otherwise transfer the Software or
Documentation except as specifically authorized hereunder.
Reseller shall not modify or alter any Software Copy in any
fashion.
2.2 End User Licensing. Reseller agrees to distribute the Software
and Documentation only pursuant to the CrossZ End User license
agreement supplied by CrossZ. Unless and until CrossZ provides
Software with shrink-wrap, on-line, or other self-executing End
User licenses, Reseller shall obtain each End User's execution of
a CrossZ-supplied End User license agreement prior to delivering
Software or Documentation to that End User.
2.3 Distribution; Territory. Reseller shall be entitled to
distribute Software only directly to End Users, and shall not use
distributors or other third party intermediaries. Reseller shall
not distribute the Software outside of, or for use outside of, the
European Community.
2.4 No Rights to Source Code. Reseller shall have no rights with
respect to any Software source code and agrees not to reverse
engineer the Software or to reverse assemble, decompile, or
otherwise attempt to derive the source code from the Software
provided to Reseller. No right to modify or otherwise prepare
derivative works of the Software or Documentation is granted.
2.5 Ownership. Subject only to the limited rights and licenses
expressly granted to Reseller in this Agreement, CrossZ shall
retain and own all right, title, and interest in the Software and
Documentation, and each copy thereof, and all intellectual
property rights with respect thereto. All rights not expressly
granted to Reseller herein are retained by CrossZ.
3. Terms of Acquisition of Software Copies by Reseller.
3.1 Terms and Conditions. All orders of Software Copies by
Reseller from CrossZ during the term of this Agreement shall be
governed by the terms and conditions of this Agreement, and
nothing contained in any such order shall in any way modify such
terms or conditions or add any additional terms or conditions.
3.2 Prices. All prices are F.O.B. CrossZ's manufacturing facility.
The price to Reseller for each of the Software Copies (the "Per
Copy Fee") shall be CrossZ's then current (as of the date of
CrossZ's acceptance of the order) European retail price therefore
less the applicable discount as set forth in Exhibit A attached
hereto.
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<PAGE>
3.3 Taxes. Reseller's Per Copy Fee does not include any federal,
state, local sales, use, value added, or other taxes that may be
applicable to the Software Copies. When CrossZ has the legal
obligation to collect such taxes, the appropriate amount shall be
added to Reseller's invoice and paid by Reseller unless Reseller
provides CrossZ with a valid tax exemption certificate authorized
by the appropriate taxing authority.
3.4 Forecasts. Reseller shall provide to CrossZ, on or before the
first day of each month, a non-binding, good faith written
forecast of Reseller's estimated Software Copy orders for delivery
in each of the following three (3) months (e.g., on or before
January 1, Reseller will provide a forecast for each of February,
March, and April).
3.5 Order and Acceptance. All orders for Software Copies submitted
by Reseller shall be initiated by written orders sent to CrossZ
and requesting a delivery date during the term of this Agreement;
provided, however, that an order may initially be placed orally or
by telecopy if a confirmational written purchase order is received
by CrossZ within five (5) days after said oral or telecopy order.
To facilitate CrossZ's production scheduling, Reseller shall
submit purchase orders to CrossZ at least 21 days prior to the
requested day of delivery. No order shall be binding upon CrossZ
until accepted by CrossZ in writing (such acceptance not to be
unreasonably withheld), and CrossZ shall have no liability to
Reseller with respect to purchase orders that are not accepted.
CrossZ shall use its reasonable best efforts to notify Reseller of
the acceptance or rejection of an order and of the assigned
delivery date for accepted orders within five (5) business days of
receipt of the order. CrossZ shall use its reasonable best efforts
to deliver Software Copies at the times specified either in its
quotation or in its written acceptance of Reseller's orders.
3.6 Rejection of Software Copies. Until thirty (30) days after
receipt, Reseller shall be entitled to reject any Software Copy
for defects in materials or workmanship. Any Software Copy not
properly rejected within thirty (30) days after receipt of that
Software Copy by Reseller ("Rejection Period") shall be deemed
accepted. To reject a Software Copy, Reseller shall, within the
Rejection Period, notify CrossZ in writing of its rejection and
request a Material Return Authorization ("MRA") number. Within ten
(10) days after receipt of the MRA number, Reseller shall return
to CrossZ the rejected Software Copy, freight prepaid, in its
original shipping carton with the MRA number displayed on the
outside of the carton. As promptly as practicable but no later
than thirty (30) working days after receipt by CrossZ of properly
rejected Software Copies, CrossZ shall, at its option and expense,
either repair or replace the Software Copies. CrossZ shall pay the
shipping charges back to Reseller for properly rejected Software
Copies; otherwise, Reseller shall be responsible for the shipping
charges.
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<PAGE>
3.7 Payment. CrossZ shall submit an invoice to Reseller upon
shipment of each Software Copy ordered by Reseller and as set
forth below. The invoice shall cover Reseller's Per Copy Fee for
the Software Copies in a given shipment plus any freight, taxes or
other applicable costs initially paid by CrossZ but to be borne by
Reseller. The full invoiced amount shall be due for payment within
thirty (30) days of the date of invoice, unless prior written
consent is granted by CrossZ, for a specific sale to the
Reseller's client, whereby such terms cannot be applied. Any
invoiced amount not received within thirty days of the date of
invoice shall be subject to a service charge of one and one-half
percent (1.5%) per month (or, if less, the maximum allowed by
applicable law). Reseller shall pay all of CrossZ's costs and
expenses (including reasonable attorneys' fees) to enforce and
preserve CrossZ's rights under this Section 3.7. CrossZ, however,
shall be entitled to withdraw Reseller's credit and require
different payment terms if CrossZ determines, in its discretion,
that Reseller's financial condition warrants the change.
3.8 Shipping. All Software Copies delivered pursuant to this
Agreement shall be suitably packed for shipment in CrossZ's
standard shipping cartons, marked for shipment at Reseller's
address first set forth above or as otherwise specified by
Reseller, and delivered to Reseller or its carrier agent F.O.B.
CrossZ's manufacturing facility, at which time risk of loss shall
pass to Reseller. Unless otherwise instructed in writing by
Reseller, CrossZ shall select the carrier. All freight, insurance,
and other shipping expenses, as well as any special packing
expense, shall be paid by Reseller.
4. Use of CrossZ Trademarks.
4.1 Authorized Uses. Reseller may use in its Software marketing,
promotional and advertising materials such applicable trademarks,
trade names and other marks of CrossZ (collectively, the "CrossZ
Trademarks") in connection therewith. Such use may be in
conjunction with Reseller's use of its own marks. Before any such
use, Reseller will provide to CrossZ copies of any such materials,
and Reseller shall not so use any CrossZ Trademark to which CrossZ
reasonably objects. If CrossZ does not object within five (5)
business days after receipt of such materials, Reseller shall be
entitled to use the materials as set forth herein. CrossZ will not
unreasonably withhold its consent.
4.2 No Other Use. Except as authorized in this section, Reseller
shall have no rights with respect to any CrossZ Trademark or other
CrossZ product, service, or company identifier. Reseller shall
make no reference to CrossZ or its Software without the prior
written permission of CrossZ, except as set forth herein.
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<PAGE>
4.3 Ownership by CrossZ. Any and all good will arising from
Reseller's use of the CrossZ Trademarks shall inure solely to the
benefit of CrossZ, and neither during nor after the termination of
this Agreement shall Reseller assert any claim to the CrossZ
Trademarks (or any confusingly similar mark) or such good will.
Reseller shall not take any action that could be detrimental to
the good will associated with the CrossZ Trademarks or with
CrossZ. Reseller shall, during the term of this Agreement and
after termination hereof, execute such documents as CrossZ may
request from time to time to ensure that all right, title and
interest in and to the CrossZ Trademarks reside with CrossZ.
Without limiting the foregoing, Reseller shall not register any
CrossZ Trademark, or any mark confusingly similar to any CrossZ
Trademark, in any country or territory.
5. Software Training, Support and Maintenance.
Exhibit B to this Agreement sets forth details regarding training,
support and maintenance for the Software, the respective rights
and responsibilities of CrossZ and Reseller for such training,
support and maintenance, and any charges to Reseller for such
training, support or maintenance.
6. Term and Termination.
6.1 Term. This Agreement shall continue for an initial term of Two
(2) years unless earlier terminated as set forth herein. This
agreement will renew automatically for additional twelve (12)
month periods unless written notice is given by either party, as
to it's intention not to renew this agreement, at least thirty
(30) days prior to the end of the initial and any subsequent term.
6.2 Convenience. Either party shall be entitled to terminate this
Agreement giving six (6) months written notice, in the event of
a major change in the business activities of either the Reseller
or CrossZ.
6.3 Default.
(a) If either party defaults in the performance of any of its
material obligations hereunder and if any such default is not
corrected within thirty (30) days after it shall have been
called to the attention of the defaulting party, in writing,
by the other party, then the other party, at its option, may,
in addition to any other remedies it may have, thereupon
terminate this Agreement by giving written notice of
termination to the other party.
(b) In the event of default by Reseller for reason of
nonpayment only, in addition to CrossZ's right to terminate
this Agreement CrossZ
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<PAGE>
shall be entitled, on written notice to Reseller, to require
that Reseller immediately cease all use and distribution of
the Software and Documentation until this default has been
fully cured, as well as to modify the payment terms in Section
3.7 above.
6.4 Insolvency. This Agreement may be terminated by either party,
on notice, (i) upon the institution by the other party of
insolvency, receivership or bankruptcy proceedings or any other
proceedings for the settlement of its debts, (ii) upon the
institution of such proceedings against the other party, which are
not dismissed or otherwise resolved in its favor within sixty (60)
days thereafter, (iii) upon the other party's making a general
assignment for the benefit of creditors, or (iv) upon the other
party's dissolution or ceasing to conduct business in the normal
course.
6.5 Survival.
(a) Except as otherwise set forth herein, the parties rights
and obligations pursuant to Sections 3.7, 6.5, 7, 8, 9, 10 and
11 shall survive any termination or expiration of this
Agreement.
(b) If this Agreement is terminated or expires, then all of
Reseller's rights and licenses with respect to the Software
shall terminate, provided that
(i) Reseller's right to continue to use one copy of the
Software and one copy of the related Documentation, in
accordance with this Agreement, to support and maintain
existing Software customers shall survive; and
(ii) Reseller shall be entitled to dispose of Software Copies
in its inventory. All other copies of the Software and related
Documentation in Reseller's possession shall be promptly
returned to CrossZ.
7. Infringement Indemnity.
7.1 Indemnity. CrossZ, at its expense, will defend any action
brought against Reseller to the extent based on a claim that
the Software or Documentation, as supplied by CrossZ and when
used as provided for by this Agreement, infringes any
copyright, trade secret, or United States patent. CrossZ will
pay any award against Reseller, or settlement entered into on
Reseller's behalf, based on such infringement only if Reseller
notified CrossZ promptly in writing of the claim, provided
reasonable assistance in connection with the defense and/or
settlement thereof, and permitted CrossZ to control the
defense and/or settlement thereof. CrossZ shall have no
liability if the alleged infringement is caused by any
modification of the Software or Documentation, or the
combination of the Software or Documentation with other items,
where the unmodified Software or Documentation, or the
Software or Documentation alone, would not have given rise to
the claim.
7.2 CrossZ Options. In the event of an infringement action
against Reseller with respect to the Software or
Documentation, or in the event CrossZ believes
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<PAGE>
such a claim is likely, CrossZ shall be entitled, at its
option but without obligation, to
(i) appropriately modify the Software and/or Documentation
licensed hereunder, or substitute other Software and/or
Documentation which, in CrossZ's good faith opinion, does not
infringe any third party intellectual property rights;
(ii) obtain a license with respect to the applicable third
party intellectual property rights; or
(iii) if neither (i) nor (ii) is commercially practicable,
terminate this Agreement and Reseller's licenses hereunder. If
distribution of any Software Copy is enjoined, CrossZ shall
refund to Reseller the fee paid to CrossZ with respect
thereto.
7.3 Entire Liability. Notwithstanding anything contained in
this Agreement, the foregoing states CrossZ's entire liability
for actual or alleged infringement of intellectual property
rights and the limit of liability set forth in Section 9 shall
not apply to this Section 7.
8. Warranty and Disclaimer.
8.1 Warranty. CrossZ warrants only that each Software Copy, as
delivered by CrossZ, will be free of defects in materials and
workmanship. CrossZ's exclusive obligation and liability, and
Reseller's sole remedy, arising out of this warranty shall be for
CrossZ to replace defective Software Copies returned to CrossZ
within thirty (30) days after delivery to Reseller.
8.2 Except as set forth in Section 8.1, CROSSZ PROVIDES NO
WARRANTY, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AND
SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, WITH RESPECT TO THIS AGREEMENT,
INCLUDING WITHOUT LIMITATION WITH RESPECT TO THE SOFTWARE AND
DOCUMENTATION, WHICH ARE PROVIDED "AS IS".
9. Limitation of Liability.
IN NO EVENT SHALL CROSSZ'S LIABILITY ARISING OUT OF THIS AGREEMENT
EXCEED THE AMOUNTS RECEIVED BY CROSSZ FROM RESELLER HEREUNDER. IN
NO EVENT SHALL CROSSZ BE LIABLE FOR COSTS OF SUBSTITUTE PRODUCTS
OR SERVICES. IN NO EVENT SHALL CROSSZ BE LIABLE FOR LOST PROFITS
OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL, OR INDIRECT DAMAGES,
HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS
AGREEMENT. RESELLER ACKNOWLEDGES AND AGREES THAT THE PRICE TO
RESELLER IS BASED IN PART UPON THESE LIMITATIONS, AND FURTHER
AGREES THAT THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY
FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
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<PAGE>
10. Confidentiality.
10.1 Confidential Information. As used in this Agreement, the
term "Confidential Information" shall mean any information
disclosed by one party to the other pursuant to this Agreement
which is in written, graphic, machine readable or other tangible
form and is marked "Confidential", "Proprietary" or in some other
manner to indicate its confidential nature. Confidential
Information may also include oral information disclosed by one
party to the other pursuant to this Agreement, provided that such
information is designated as confidential at the time of
disclosure and is reduced to writing by the disclosing party
within a reasonable time (not to exceed thirty (30) days) after
its oral disclosure, and such writing is marked in a manner to
indicate its confidential nature and delivered to the receiving
party.
10.2 Confidentiality. Each party shall treat as confidential all
Confidential Information of the other party, shall not use such
Confidential Information except as set forth herein, and shall
use reasonable efforts not to disclose such Confidential
Information to any third party. Without limiting the foregoing,
each of the parties shall use at least the same degree of care
which it uses to prevent the disclosure of its own confidential
information of like importance to prevent the disclosure of
Confidential Information disclosed to it by the other party under
this Agreement. Each party shall promptly notify the other party
of any actual or suspected misuse or unauthorized disclosure of
the other party's Confidential Information.
10.3 Exceptions. Notwithstanding the above, neither party shall
have liability to the other with regard to any Confidential
Information of the other which the receiving party can prove:
(i) was in the public domain at the time it was disclosed or
has become in the public domain through no fault of the
receiving party;
(ii) was known to the receiving party, without restriction,
at the time of disclosure, as demonstrated by files in
existence at the time of disclosure;
(iii) is disclosed with the prior written approval of the
disclosing party;
(iv) was independently developed by the receiving party
without any use of the Confidential Information;
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<PAGE>
(v) becomes known to the receiving party, without
restriction, from a source other than the disclosing party
without breach of this Agreement by the receiving party and
otherwise not in violation of the disclosing party's rights;
or
(vi) is disclosed generally to third parties by the
disclosing party without restrictions similar to those
contained in this Agreement.
In addition, the receiving party shall be entitled to
disclose the other party's Confidential Information to the extent such
disclosure is required by order or requirement of a court, administrative
agency, or other governmental body, provided, however, that the receiving
party shall provide prompt notice thereof to the disclosing party to enable
the disclosing party to seek a protective order or otherwise prevent or
restrict such disclosure.
11. General.
11.1 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York,
without reference to conflict of laws principles.
11.2 Forum Selection. All disputes arising out of this Agreement
shall be subject to the exclusive jurisdiction of the state and
federal (Southern District of New York) New York courts, and the
parties agree and submit to the personal and exclusive
jurisdiction and venue of these courts.
11.3 Indemnification of CrossZ. Reseller agrees to indemnify and
hold CrossZ harmless against any liability, or any litigation
cost or expense (including attorneys' fees), arising out of third
party claims against CrossZ as a result of (i) Reseller's use or
distribution of Reseller products, or (ii) misrepresentations by
Reseller with respect to the Software or Documentation.
11.4. Confidentiality of Agreement. Each party shall be entitled
to disclose the existence of this Agreement, but agrees that the
terms and conditions of this Agreement shall be treated as
confidential information and shall not be disclosed to any third
party; provided, however, that each party may disclose the terms
and conditions of this Agreement:
(i) as required by any court or other governmental body;
(ii) as otherwise required by law;
(iii) to legal counsel of the parties;
(iv) in confidence, to accountants, banks, and financing
sources and their advisors;
(v) in connection with the enforcement of this Agreement or
rights under this Agreement; or
(vi) in confidence, in connection with an actual or
proposed merger, acquisition, or similar transaction.
-9-
<PAGE>
11.5 Partial Invalidity. If any provision in this Agreement shall
be found or be held to be invalid or unenforceable in any
jurisdiction in which this Agreement is being performed, then the
meaning of said provision shall be construed, to the extent
feasible, so as to render the provision enforceable, and if no
feasible interpretation would save such provision, it shall be
severed from the remainder of this Agreement, which shall remain
in full force and effect. In such event, the parties shall
negotiate, in good faith, a substitute, valid and enforceable
provision which most nearly effects the parties' intent in
entering into this Agreement.
11.6 Independent Contractors. The parties hereto are independent
contractors. Nothing contained herein or done in pursuance of
this Agreement shall constitute either party the agent of the
other party for any purpose or in any sense whatsoever, or
constitute the parties as partners or joint ventures. Reseller
shall make no representations or warranties on behalf of CrossZ
with respect to the Software or Documentation.
11.7 Modification. No alteration, amendment, waiver, cancellation
or any other change in any term or condition of this Agreement
shall be valid or binding on either party unless the same shall
have been mutually assented to in writing by both parties.
11.8 Waiver. The failure of either party to enforce at any time
any of the provisions of this Agreement, or the failure to
require at any time performance by the other party of any of the
provisions of this Agreement, shall in no way be construed to be
a present or future waiver of such provisions, nor in any way
affect the right of either party to enforce each and every such
provision thereafter. The express waiver by either party of any
provision, condition or requirement of this Agreement shall not
constitute a waiver of any future obligation to comply with such
provision, condition or requirement.
11.9 Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither party
shall assign any of its rights, obligations, or privileges (by
operation of law or otherwise) hereunder without the prior
written consent of the other party. Notwithstanding the
foregoing, however, either party may assign this Agreement to a
successor in interest (or its equivalent) to all or substantially
all of its relevant assets, whether by sale, merger, or
otherwise. Any attempted assignment in violation of this section
shall be void.
11.10 Notices. Any notice required or permitted to be given by
either party under this Agreement shall be in writing, in
English, and shall be personally delivered or sent by commercial
courier service (e.g., UPS), or by first class mail
-10-
<PAGE>
(certified or registered), or by telecopy confirmed by first
class mail (registered or certified), to the other party at its
address first set forth above, or such new address as may from
time to time be supplied hereunder by the parties hereto. If
mailed, notices will be deemed effective three (3) working days
after deposit, postage prepaid, in the mail.
11.11 Import/Export Regulations. Reseller agrees to comply with
all U.S. export regulations, and Local import regulations, in
connection with distribution of Software or Documentation or
otherwise arising out of this Agreement. Unless an appropriate
license, exemption or similar authorization has been duly
obtained to CrossZ's satisfaction, the Reseller shall not, nor
shall the Reseller authorize or permit it's employees,
distributors, dealers and/or agents to, export or rexport any
CrossZ products, attachments, parts, supplies or technology
(including information relating thereto) to any country
specified as a prohibited destination in applicable U.S. Laws,
regulations and ordinances, including the regulations of the
U.S. Department of Commerce and/or government agencies.
Reseller agrees to defend, indemnify, and hold harmless, CrossZ
from any claim, loss, liability expense or damage (Including
fines or legal fees) incurred by CrossZ with respect to any of
the Reseller's export or re-export activities, contrary to the
foregoing instructions.
11.12 Force Majeure. Notwithstanding anything else in this
Agreement, and except for the obligation to pay money, no
default, delay or failure to perform on the part of either party
shall be considered a breach of this Agreement if such default,
delay or failure to perform is shown to be due to causes beyond
reasonable control of the party charged with a default,
including, but not limited to, causes such as strikes, lockouts
or other labor disputes, riots, civil disturbances, actions or
inactions of governmental authorities or suppliers, epidemics,
war, embargoes, severe weather, fire, earthquakes, acts of God or
the public enemy, nuclear disasters, or default of a common
carrier.
11.13 No Third Party Beneficiaries. Unless otherwise expressly
provided, no provisions of this Agreement are intended or shall
be construed to confer upon or give to any person or entity other
than CrossZ and Reseller any rights, remedies or other benefits
under or by reason of this Agreement.
11.14 Compliance with Laws. Reseller shall comply with all
applicable laws and regulations applicable to its activities
under this Agreement.
11.16 Entire Agreement. The terms and conditions herein
contained, including all exhibits hereto, constitute the entire
agreement between the parties and supersede all previous
agreements and understandings, whether oral or written, between
the parties hereto with respect to the subject matter hereof. The
terms and conditions of the Agreement shall automatically apply
to each transaction between the parties contemplated by this
Agreement notwithstanding any additional or different terms and
conditions of any ordering document or other instrument submitted
by Reseller, which terms and conditions shall be void and of no
effect.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be signed by duly authorized officers or representatives as of
the date first above written.
CROSSZ INTERNATIONAL, INC. [RESELLER]
By: /s/ Daniel Pess By: /s/ Worldnet Consulting SA
--------------------------- ------------------------------
Print Name: Daniel Pess Print Name: Salvador xxxxxx
------------------- ----------------------
Title: Vice President - Finance Title: Managing Partner
------------------------ ---------------------------
Date: 9/11/97 Date: 9/11/97
------------------------- ----------------------------
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<PAGE>
EXHIBIT A
Software and Discount
---------------------
Software Discount
- -------- --------
Query Object System 40%
Query Object Voyager 40%
Query Object Client Pack 40%
(including: DBA
Designer
Viewer
Open)
<PAGE>
EXHIBIT B
Training, Support and Maintenance
---------------------------------
Training & Materials.
- ---------------------
CrossZ will furnish the Reseller with the following :
Technical training, Product positioning, Competitive Analysis and Marketing
Assistance will be made available to the Reseller, at CrossZ's USA
Headquarters. Training will be provided free of charge, all travel related
expenses will be born by the Reseller. In the event the reseller requires
"On-Site" training, a charge will be levied at CrossZ's current consultancy
rates plus associated travel costs.
A Complete set of CrossZ software that will be sold by the Reseller, FOR
DEMONSTRATION PURPOSES ONLY will be provided free of charge.
A Complete set of technical documentation for all CrossZ products sold will be
provided free of charge.
Relevant marketing materials will be provided on an ongoing basis i.e.
brochures, Promotional CD's, White Papers, Press Extracts, Analyst Reports,
etc.
<PAGE>
Support and Maintenance
- -----------------------
CrossZ will make available to Reseller's End User customers Software support and
maintenance in accordance with CrossZ's customary practices, as detailed in
Exhibit C.
Maintenance will be charged at the following rates:
Standard maintenance ( 9:00 a.m. - 5:00 p.m. C.E.T, and 9:00 a.m.- 5:00
p.m. E.S.T. Monday To Friday ) will be charged at 12% of supported
product price list, price per annum.
Extended maintenance ( 7 x 24 ) will be charged at 18% of supported
product list price, per annum.
CrossZ products are not date dependent, therefore, they are "Year 2000
Compliant".
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
Cross/Z International, Inc.
Computation of pro forma net loss per common share
- --------------------------------------------------------------------------------
Number of
Common and Weighted
Common Equivalent Days Average
Year ended December 31, 1996 Shares Outstanding Shares
- ---------------------------------------- ------------------ ------------------ ------------
<S> <C> <C> <C>
Common stock outstanding at January 1, 1996 791,640 365 791,640
Stock options exercised: 11,113 358 10,900
42,212 309 35,736
-----------
844,965
Issuance and assumed conversion of series A preferred stock, net of 49,206 53 7,145
conversions to Series C and as adjusted for anti-dilution 40,923 312 34,981
----------- -----------
365 42,126
Issuance and assumed conversion of series B preferred stock, net of 46,679 53 6,778
conversions to Series C and as adjusted for anti-dilution 28,452 312 24,321
----------- -----------
365 31,099
Issuance and assumed conversion of series C preferred stock including 211,665 53 30,735
conversions from series A and series B and as adjusted for anti-dilution 258,506 312 220,969
----------- -----------
365 251,704
Issuance and assumed conversion of series D peferred stock 769,655 237 499,749
101,929 153 42,726
321,262 127 111,781
Accretion of series D dividends 65,752 118 21,257
----------- ----------- -----------
1,258,598 675,513
Cheap stock consideration for common stock, stock options and warrants
issued during 1996 119,139 365 119,139
-----------
Pro forma weighted average shares used in per share computation 1,957,856
===========
Net loss for the year ended December 31, 1996 $(4,917,935)
Pro forma net loss per common share $ (2.51)
===========
</TABLE>
<PAGE>
Exhiit 11.1 (CONT'D)
<TABLE>
<CAPTION>
Number of
Common and Weighted
Common Equivalent Days Average
Six months ended June 30, 1997 Shares Outstanding Shares
- ---------------------------------------- ------------------ ------------------ ------------
<S> <C> <C> <C>
Common stock outstanding at January 1, 1997 863,589 180 863,589
Issuance and assumed conversion of series A preferred stock, 41,055 180 41,055
adjusted for anti-dilution
Issuance and assumed conversion of series B preferred stock 28,646 180 28,646
adjusted for anti-dilution
Issuance and assumed conversion of series C preferred stock 258,506 180 258,506
adjusted for anti-dilution
Issuance and assumed conversion of series D preferred stock 1,258,590 180 1,258,590
Accretion of series D dividends 59,152 90 29,576
----------- -----------
1,317,742 1,288,166
Cheap stock consideration for common stock, stock options and warrants
issued during the six months ended June 30, 1997 119,139 180 119,139
-----------
Pro forma weighted average shares used in per share computation 2,599,101
===========
Net loss for the six months ended June 30, 1997 $(3,506,881)
Pro form net loss per common share $ (1.35)
===========
</TABLE>
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated June 9, 1997, except
as to the one-for-four reverse stock split described in Note 1 which is as of
July 17, 1997, relating to the financial statements of Cross/Z International,
Inc., which appears in such Prospectus. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Melville, New York
October 22, 1997
