SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential,for Use of the Commission Only (as permitted by Rule 14a-6(e)2)
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
QueryObject Systems Corporation
(Formerly CrossZ Software Corporation)
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
198732.5
<PAGE>
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0- 11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- -------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
198732.5
-2-
<PAGE>
PRELIMINARY COPY
FOR INFORMATION OF THE SECURITIES AND EXCHANGE COMMISSION ONLY
QUERYOBJECT SYSTEMS CORPORATION
--------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 12, 1998
--------------
To the Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of QueryObject Systems Corporation, a Delaware corporation
(the "Company"), will be held at the Company's headquarters, located at 60
Charles Lindbergh Boulevard, Uniondale, New York 11553, on Wednesday, August 12,
1998, at 10:00 A.M., local time, for the following purpose:
1. To approve the issuance in a private placement of shares of
Common Stock of the Company (and securities exercisable for such Common
Stock) representing 20% or more of the number of issued and outstanding
shares of such Common Stock; and
2. To transact such other business as may properly be brought
before the Special Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on July 23, 1998
as the record date for the Special Meeting or any adjournments thereof. Only
stockholders of record on the stock transfer books of the Company at the close
of business on that date are entitled to notice of, and to vote at, the Special
Meeting.
By Order of the Board of Directors
DANIEL M. PESS
Secretary
Dated: July 24, 1998
Uniondale, New York
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE
URGED TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE THAT
IS PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
198732.5
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
60 CHARLES LINDBERGH BOULEVARD
UNIONDALE, NEW YORK 11553
----------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
AUGUST 12, 1998
----------------
INTRODUCTION
This Proxy Statement is being furnished to stockholders by the Board of
Directors of QUERYOBJECT SYSTEMS CORPORATION, a Delaware corporation (the
"Company"), in connection with the solicitation of the accompanying Proxy for
use at a Special Meeting of Stockholders of the Company (the "Special Meeting")
to be held at the Company's principal executive offices located at 60 Charles
Lindbergh Boulevard, Uniondale, New York 11553, on Wednesday, August 12, 1998,
at 10:00 A.M., local time, or at any adjournment thereof.
The approximate date on which this Proxy Statement and the accompanying
Proxy will first be sent or given to stockholders is July 24, 1998.
RECORD DATE AND VOTING SECURITIES
Only stockholders of record at the close of business on July 23, 1998,
the record date (the "Record Date") for the Special Meeting, will be entitled to
notice of, and to vote at, the Special Meeting and any adjournment thereof. As
of the close of business on the Record Date, there were 5,120,172 outstanding
shares of the Company's common stock, $.001 par value (the "Common Stock"). The
holder of each such share is entitled to one vote. There was no other class of
voting securities of the Company outstanding on that date. A majority of the
outstanding shares of Common Stock present in person or by proxy is required for
a quorum.
VOTING OF PROXIES
Shares of Common Stock represented by Proxies that are properly
executed, duly returned and not revoked will be voted in accordance with the
instructions contained therein. If no specification is indicated in the Proxy,
the shares of Common Stock represented thereby will be voted (i) for the
approval of the issuance in a private placement of shares of Common Stock (and
securities exercisable for Common Stock) representing 20% or more of the number
of issued and outstanding shares of Common Stock (the "Share Issuance Proposal")
and (ii) for any other matter that may properly be brought before the Special
Meeting in accordance with the judgment of the person or persons voting the
Proxies.
The execution of a Proxy will in no way affect a stockholder's right to
attend the Special Meeting and to vote in person. Any Proxy executed and
returned by a stockholder may be revoked at any time thereafter if written
notice of revocation is given to the Secretary of the Company prior to the vote
to be taken at the Special Meeting, or by execution of a subsequent proxy that
is presented to the Special Meeting, or if the stockholder attends the Special
Meeting and votes by ballot, except as to any matter or matters upon which a
vote shall have been cast pursuant to the authority conferred by such Proxy
prior
198732.5
<PAGE>
to such revocation. For purposes of determining the presence of a quorum for
transacting business at the Special Meeting, abstentions and broker "non-votes"
(i.e., proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owner or other persons entitled to
vote shares on a particular matter with respect to which the brokers or nominees
do not have discretionary power) will be treated as shares that are present but
that have not been voted. Broker non-votes will have no effect on the Share
Issuance Proposal. Abstentions may be specified on the Share Issuance Proposal,
will be counted as present and will have the effect of a vote against the Share
Issuance Proposal.
The cost of solicitation of the Proxies being solicited on behalf of
the Board of Directors will be borne by the Company. In addition to the use of
the mails, proxy solicitation may be made by telephone, telegraph and personal
interview by officers, directors and employees of the Company. The Company will,
upon request, reimburse brokerage houses and persons holding Common Stock in the
names of their nominees for their reasonable expenses in sending soliciting
material to their principals.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of the
Company's Common Stock, as of the Record Date, by each person known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, each director, each executive officer and by all directors and executive
officers of the Company as a group. Unless otherwise indicated, the address for
each such person is in care of the Company, 60 Charles Lindbergh Boulevard,
Uniondale, New York 11553.
<TABLE>
<CAPTION>
Number of Shares
Directors, Executive Officers and Beneficially
5% Stockholders Owned(1) Percentage
- --------------------------------- ------------------- -------------------
<S> <C> <C>
Barry Rubenstein(2)......................................... 1,012,156 18.8%
68 Wheatley Road
Brookville, New York 11545
Irwin Lieber(3)............................................. 549,844 10.6%
767 Fifth Avenue, 45th Floor
New York, New York 10153
Wheatley Foreign Partners, L.P.(4).......................... 493,594 9.6%
c/o Fiduciary Trust
One Capital Place
Snedden Road
P.O. Box 1062
Grand Cayman
British West Indies
Wheatley Partners, L.P. (4)................................. 493,594 9.6%
80 Cutter Mill Road
Great Neck, New York 11021
John Walecka(5).......................................... 473,897 9.2%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
Brentwood Associates, L.P. VII(6)........................... 461,397 9.0%
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, California 94023
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Directors, Executive Officers and Number of Shares Beneficially
5% Stockholders Owned(1) Percentage
- --------------------------------- ------------------- -------------------
<S> <C> <C>
Mark A. Chroscielewski (7).................................. 291,047 5.6%
Andre Szykier (8)........................................... 213,750 4.2%
Alan W. Kaufman (9)......................................... 66,667 1.3%
Amy L. Newmark (10)......................................... 61,000 1.1%
Deepak Mohan (11)........................................... 16,040 (12)
Daniel M. Pess (13)......................................... 10,815 (12)
Rino Bergonzi (14).......................................... 10,000 (12)
Irwin Jacobs................................................ 0 __
All directors and executive officers as a group (9 persons)(15) 646,149 12.4%
</TABLE>
- ----------
(1) A PERSON IS DEEMED TO BE THE BENEFICIAL OWNER OF VOTING SECURITIES THAT
CAN BE ACQUIRED BY SUCH PERSON WITHIN 60 DAYS AFTER THE DATE HEREOF
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 THAT ARE CURRENTLY
EXERCISABLE (I.E., THAT ARE EXERCISABLE WITHIN 60 DAYS FROM THE DATE
HEREOF) 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) BASED UPON INFORMATION CONTAINED IN A REPORT ON SCHEDULE 13D (THE
"WHEATLEY 13D") FILED JOINTLY BY BARRY RUBENSTEIN, IRWIN LIEBER,
WHEATLEY FOREIGN PARTNERS, L.P. ("WHEATLEY FOREIGN"), WHEATLEY
PARTNERS, L.P. ("WHEATLEY"), SENECA VENTURES, WOODLAND VENTURE FUND,
WOODLAND PARTNERS AND CERTAIN OTHER ENTITIES WITH THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"). INCLUDES (I) 56,250 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF OPTIONS, (II) 158,481 SHARES OF COMMON STOCK
AND 3,125 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS
OWNED BY WOODLAND PARTNERS OF WHICH MR. RUBENSTEIN IS A PARTNER, (III)
53,975 SHARES OF COMMON STOCK AND 3,125 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS OWNED BY THE WOODLAND VENTURE FUND OF WHICH
MR. RUBENSTEIN IS A GENERAL PARTNER, (IV) 40,481 SHARES OF COMMON STOCK
AND 3,125 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS
OWNED BY SENECA VENTURES OF WHICH MR. RUBENSTEIN IS A GENERAL PARTNER,
(V) 455,680 SHARES OF COMMON STOCK AND 5,879 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF WARRANTS OWNED BY WHEATLEY, (VI) 31,664
SHARES OF COMMON STOCK AND 371 SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF WARRANTS OWNED BY WHEATLEY FOREIGN AND (VII) 200,000 SHARES
OF COMMON STOCK OWNED BY REV-WOOD MERCHANT PARTNERS, OF WHICH MR.
RUBENSTEIN IS A GENERAL PARTNER. MR. RUBENSTEIN IS A MEMBER AND OFFICER
OF WHEATLEY PARTNERS LLC, A DELAWARE LIMITED LIABILITY COMPANY, WHICH
IS THE GENERAL PARTNER OF WHEATLEY 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. MR. RUBENSTEIN DISCLAIMS BENEFICIAL
OWNERSHIP OF THE SECURITIES OWNED BY WOODLAND PARTNERS, WOODLAND
VENTURE FUND, SENECA VENTURES, WHEATLEY, WHEATLEY FOREIGN AND REV-WOOD
MERCHANT PARTNERS, EXCEPT TO THE EXTENT OF HIS EQUITY INTEREST THEREIN.
-3-
<PAGE>
(3) BASED UPON INFORMATION CONTAINED IN THE WHEATLEY 13D. INCLUDES (I)
56,250 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF OPTIONS AND
(II) 455,680 SHARES OF COMMON STOCK AND 5,879 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF WARRANTS OWNED BY WHEATLEY AND 31,664 SHARES
OF COMMON STOCK AND 371 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
OF WARRANTS OWNED BY WHEATLEY FOREIGN. MR. LIEBER IS A MEMBER AND
OFFICER OF WHEATLEY PARTNERS LLC. MR. LIEBER DISCLAIMS BENEFICIAL
OWNERSHIP OF THE SECURITIES OWNED BY WHEATLEY AND WHEATLEY FOREIGN,
EXCEPT TO THE EXTENT OF HIS EQUITY INTEREST THEREIN.
(4) BASED UPON INFORMATION CONTAINED IN THE WHEATLEY 13D. INCLUDES (I)
455,680 SHARES OF COMMON STOCK AND 5,879 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF WARRANTS OWNED BY WHEATLEY AND (II) 31,664
SHARES OF COMMON STOCK AND 371 SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF WARRANTS OWNED BY WHEATLEY FOREIGN.
(5) BASED UPON INFORMATION CONTAINED IN A REPORT ON SCHEDULE 13D (THE
"BRENTWOOD 13D") FILED JOINTLY BY JOHN WALECKA AND BRENTWOOD ASSOCIATES
L.P., VII ("BRENTWOOD") WITH THE SEC ON DECEMBER 10, 1997. INCLUDES (I)
12,500 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF OPTIONS HELD BY
MR. WALECKA AND (II) 461,397 SHARES OF COMMON STOCK OWNED BY BRENTWOOD,
OF WHICH MR. WALECKA IS A GENERAL PARTNER. MR. WALECKA DISCLAIMS
BENEFICIAL OWNERSHIP OF THE SECURITIES OWNED BY BRENTWOOD EXCEPT TO THE
EXTENT OF HIS EQUITY INTEREST THEREIN.
(6) BASED UPON INFORMATION CONTAINED IN THE BRENTWOOD 13D.
(7) INCLUDES 66,667 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
OPTIONS HELD BY MR. CHROSCIELEWSKI AND 625 SHARES OF COMMON STOCK HELD
BY DIANA CHROSCIELEWSKI, MR.
CHROSCIELEWSKI'S SPOUSE.
(8) INCLUDES 312 SHARES OF COMMON STOCK OWNED BY REMY SZYKIER, MR.
SYZKIER'S DAUGHTER.
(9) CONSISTS OF 66,667 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
OPTIONS.
(10) INCLUDES 35,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
OPTIONS AND AN AGGREGATE OF 14,000 SHARES OF COMMON STOCK HELD BY MS.
NEWMARK ON BEHALF OF HER CHILDREN.
(11) CONSISTS OF 16,040 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
OPTIONS.
(12) LESS THAN 1%.
(13) CONSISTS OF 10,815 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
OPTIONS.
(14) CONSISTS OF 10,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
OPTIONS.
(15) INCLUDES THOSE SHARES OF COMMON STOCK DEEMED TO BE INCLUDED IN THE
RESPECTIVE BENEFICIAL OWNERSHIP OF MESSRS. SZYKIER, KAUFMAN, MOHAN,
PESS AND BERGONZI AND MS. NEWMARK AS DESCRIBED IN NOTES 8, 9, 10, 11,
13 AND 14 ABOVE AND CERTAIN OTHER EXECUTIVE OFFICERS OF THE COMPANY.
-4-
<PAGE>
PROPOSAL I--APPROVAL OF THE SHARE ISSUANCE PROPOSAL
In November 1997, the Company completed an initial public offering of
its Common Stock (the "IPO"), pursuant to which the Company received net
proceeds, after the repayment of indebtedness, of approximately $7,000,000. As
indicated in the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998, the Company is in need of additional financing to fund the
Company's operations. The IPO prospectus indicated that the Company believed
that the proceeds of the IPO, together with then-existing resources and cash
anticipated to be generated from operations, would be sufficient to satisfy the
Company's cash requirements for at least 14 months after completion of the IPO.
At March 31, 1998, the Company had $1,497,279 of working capital and $3,157,002
of cash and cash equivalents. The Company currently estimates that cash on hand
together with cash generated from operations will be sufficient to satisfy the
Company's cash requirements until August 31, 1998. The variance between the
Company's expectations at the time of the IPO and the Company's current analysis
of its cash position is primarily due to lower than expected sales of the
Company's products. The Board of Directors of the Company has considered various
means of procuring additional financing and has determined that a private
offering of the Company's securities (the "Private Placement") would be in the
best interests of the Company. The net proceeds of the Private Placement will be
used for sales and marketing, research and development and general working
capital purposes in the proportions of 50%, 30% and 20%, respectively.
The Company has had preliminary discussions with regard to the Private
Placement, which is currently anticipated to consist of shares of the Company's
Common Stock and may include warrants (the "Warrants") exercisable for shares of
the Company's Common Stock. Pursuant to Rule 4460(i)(1)(D) ("Rule
4460(i)(1)(D)") of the Nasdaq Stock Market, Inc. ("Nasdaq"), the Company is
required to obtain stockholder approval in connection with any transaction,
other than a public offering, that involves the issuance by the Company of
Common Stock (or securities convertible into or exercisable for Common Stock)
that equals 20% or more of the Common Stock of the Company outstanding before
the issuance of such securities at a price below market value (the "20%
Limitation"). On July , 1998, the closing sale price of the Common Stock on the
Nasdaq SmallCap Market was $ per share. The Company currently expects the
Private Placement to consist of an offering of a minimum of 2,000,000 shares of
Common Stock and a maximum of 4,000,000 shares of Common Stock at a price per
share of between $3.00 and $3.50. As of the date hereof, there were 5,121,422
shares of Common Stock outstanding. Thus, if the Company is successful in
placing even the minimum number of shares in the Private Placement, the 20%
Limitation would be exceeded. If the stockholders approve the Share Issuance
Proposal, the Board of Directors of the Company will be authorized to determine
(i) the number of shares of Common Stock that will be issued in the Private
Placement (which may or may not exceed 20% or more of the Common Stock
outstanding); (ii) the purchase price of such shares of Common Stock and (iii)
whether Warrants will be issued in the Private Placement and, if so, the terms
and conditions of the Warrants. The stockholders will be requested to approve
the Share Issuance Proposal by adopting the following resolutions:
RESOLVED, that this Corporation be authorized to consummate a
private placement of its securities (the "Private Placement"),
the proceeds of which would be utilized for sales and
marketing, research and development and working capital and
general corporate purposes (including the expenses of the
Private Placement), and that in connection therewith this
Corporation is hereby authorized to issue shares of its Common
Stock, $.001 par value (the "Common Stock"), and securities
exercisable for Common Stock, that together equal 20% or more
of the Common Stock outstanding prior to the issuance thereof;
and it is further
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<PAGE>
RESOLVED, that the Board of Directors of this Corporation
(and/or an appropriate committee thereof) is hereby authorized
to determine the terms and conditions of the Private
Placement, including without limitation, (i) the number of
shares of Common Stock that will be issued in the Private
Placement (which may or may not exceed 20% or more of the
Common Stock outstanding); (ii) the purchase price of such
shares of Common Stock and (iii) whether warrants will be
issued in the Private Placement and, if so, the terms and
conditions of such warrants.
The Board of Directors of the Company has determined to obtain approval
of the Private Placement in order to avoid a possible conflict with Rule
4460(i)(1)(D), which conflict could result in the removal of the Company's
Common Stock from inclusion on the Nasdaq SmallCap Market. In the event the
Company fails to obtain approval by the stockholders for the Private Placement,
the Company will be required to seek alternative means of financing. Such
financing would likely be in the form of short term bridge loans. There can be
no assurance that such financing can be obtained on a timely basis on
commercially reasonable terms, or at all. Further, even if such short term loans
were obtained, the Company would be required within a short time thereafter to
seek additional financing to repay such loans and to finance its operations.
There can be no assurance that such additional financing could be obtained and
that the Company would not again be required to seek stockholder approval for
such financing.
Under recently implemented Nasdaq rules (the "Listing and Maintenance
Standards"), in order for the Company to continue 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 currently satisfies the Nasdaq
SmallCap Market Listing and Maintenance Standards, if the Company is unable to
obtain additional financing either through the Private Placement or otherwise,
the Company may fail to meet the maintenance criteria in the future, which 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, stockholders 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 SEC promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), require additional disclosure
relating to the market for penny stocks. Commission regulations generally define
a penny stock to be an equity security that has a market price of less than
$5.00 per share,subject to certain exceptions. A disclosure schedule explaining
the penny stock market and the risks associated therewith is required to be
delivered to a purchaser and various sales practice requirements are imposed on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). In addition, the
broker-dealer must provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction and monthly account statements showing the market value of
each penny stock held in the customer's account. If the Company's securities
become subject to the regulations applicable to penny stocks, the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and thus the ability of purchasers of the
Company's securities to sell their securities in the secondary market.
The Company does not currently intend to utilize a placement agent for
the Private Placement, though a placement agent may be retained if the Board of
Directors of the Company deems such retention to be advisable. The Company will
be responsible for all of the expenses of the Private Placement.
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<PAGE>
The Company believes that notwithstanding the consummation of the
Private Placement, it will be required to seek additional financing in the
future to fund its operations and to continue to develop its products. If the
minimum amounts proposed to be offered is sold, the Company anticipates that its
cash requirements should be satisfied for nine months. Should additional shares
be sold, such cash requirement should be satisfied for a longer period.
CAPITALIZATION
The following table sets forth the short-term debt and the total
capitalization of the Company (i) as of March 31, 1998, (ii) pro forma to give
effect to the sale of the minimum and maximum number of shares of Common Stock
in the Private Placement at an assumed offering price of $3.25 per share and the
application of the estimated net proceeds therefrom, after deducting offering
expenses estimated at $100,000. The table should be read in conjunction with the
financial statements, including the notes thereto, attached hereto as Annex A
and Annex B.
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------------
Pro Forma(1)
------------------------------------------
Minimum Maximum
Actual Offering Offering
------ -------- --------
<S> <C> <C> <C>
Short-term debt, including current portion
of capital lease obligations $ 1,075,444 $ 1,075,444 $ 1,075,444
============ ============ ============
Long-term debt, including capital lease
obligations $ 277,771 $ 277,771 $ 277,771
------------ ------------ ------------
Stockholders' equity:
Preferred Stock - $.001 par value,
2,000,000 shares authorized, no
shares issued and outstanding -- -- --
Common Stock, $.001 par value;
30,000,000 shares authorized;
5,120,172 shares issued and
outstanding, actual; 7,120,172
shares issued and outstanding,
pro forma, assuming the minimum
number of shares; 9,120,172 shares
issued and outstanding, pro forma
assuming the maximum number of shares 5,120 7,120 9,120
Additional paid-in capital 30,393,881 36,791,881 43,289,881
Accumulated deficit (28,102,569) (28,102,569) (28,102,569)
Receivable from shareholder (12,300) (12,300) (12,300)
------------ ------------ ------------
Total stockholders' equity 2,284,132 8,684,132 15,184,132
------------ ------------ ------------
Total capitalization $ 2,561,903 $ 8,961,903 $ 15,461,903
============ ============ ============
</TABLE>
- --------------
(1) The pro forma balance sheet data as of March 31, 1998 give effect to
the issuance of 2,000,000 and 4,000,000 shares of Common Stock,
respectively, which is the minimum and maximum number of shares of
Common Stock that may be issued pursuant to the Private Placement, and
the receipt of the net proceeds therefrom.
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<PAGE>
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Certain directors and executive officers of the Company have expressed a
preliminary interest in purchasing securities in the Private Placement. Such
directors and executive officers will not make a decision regarding investing in
the Private Placement until the terms of the Private Placement have been
finalized. Should such directors and executive officers choose to invest in the
Private Placement, their investment would be on the same terms and conditions as
are available to other investors in the Private Placement.
Unless otherwise specified, all Proxies received will be voted in favor of
the Share Issuance Proposal. The affirmative vote of the holders of record of a
majority of the shares of Common Stock present in person or by proxy at the
Special Meeting is required for approval of the Share Issuance Proposal.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE
SHARE ISSUANCE PROPOSAL
ANNUAL AND QUARTERLY REPORT
All stockholders of record as of the Record Date, have been sent, or
are concurrently herewith being sent, a copy of the Company's (i) Annual Report
on Form 10-KSB for the year ended December 31, 1997, which contains certified
financial statements of the Company for the year then ended and (ii) Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998.
ANY STOCKHOLDER OF THE COMPANY MAY OBTAIN WITHOUT CHARGE A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997
(WITHOUT EXHIBITS) AND QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED
MARCH 31, 1998, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, BY WRITING
TO DANIEL M. PESS, CHIEF FINANCIAL OFFICER AND SECRETARY AT QUERYOBJECT SYSTEMS
CORPORATION, 60 CHARLES LINDBERGH BOULEVARD, UNIONDALE, NEW YORK 11553.
OTHER MATTERS
As of the date of this Proxy Statement, management knows of no matters
other than those set forth herein which will be presented for consideration at
the Meeting. If any other matter or matters are properly brought before the
Meeting or any adjournment thereof, the persons named in the accompanying Proxy
will have discretionary authority to vote, or otherwise act, with respect to
such matters in accordance with their judgment.
Daniel M. Pess
Secretary
July 24, 1998
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<PAGE>
ANNEX A
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997
As filed on March 31, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
-----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______________
Commission file number 1-13587
CROSSZ SOFTWARE CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3087939
-------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
60 Charles Lindbergh Boulevard, Uniondale, New York 11553
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 228-8500
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
<PAGE>
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. /X/
State the issuer's revenues for its most recent fiscal year:
The issuer's revenues for the fiscal year ended December 31, 1997 were
$1,012,159.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference to the price at which the
stock was sold on March 2, 1998 was approximately: $13,858,805. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At March 1,
1998, there were outstanding 5,119,807 shares of the Registrant's Common Stock,
$.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy
statement to be filed not later than April 30, 1998 pursuant to Regulation 14A
are incorporated by reference in Items 9 through 12 of Part III of this Annual
Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes / / No / X /
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
CrossZ Software Corporation ("CrossZ" or the "Company") 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 transaction
intensive industries, such as telecommunications, retail and banking, have
dramatically increased their ability to gather and store large amounts of data
generated from various sources. Such data contains information that, if
extracted effectively and efficiently, can be used to enhance strategic
corporate development. While companies have invested heavily in capturing data,
they have only recently begun to focus significant resources on the management
and analysis of such data; consequently, the data gathering and analysis
industry is experiencing significant growth. The Company developed its products
in response to the need by major corporations to analyze these increasing
volumes of data.
In the third quarter of 1996, the Company shifted its focus from using
its proprietary technologies to provide contract data analysis services, to the
sale and support of its proprietary products, thereby enabling customers to do
their own analysis. To date, the Company has realized limited sales.
The Company was incorporated in Delaware in 1997 and is the successor
by merger to CrossZ International, Inc., a California corporation
("CrossZ-California"), incorporated in 1989. Unless otherwise indicated,
references to the Company also include its predecessor.
Industry Background
Data marts are component technologies in the "Business Intelligence" or
more broadly, the "Data Warehousing" market. International Data Corp. ("IDC"), a
leading technology consulting/research company, estimates that the size of the
data warehousing software market will increase to over $5.0 billion by the year
2000, with an annual compound growth rate of approximately 30%. The stimulus for
this growth is 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%.
There are generally three components to an enterprise-wide business
intelligence system:
<PAGE>
- Data warehouse: where the unprocessed corporate data is stored in one
place. Data warehousing involves the controlled, periodic loading of selected
historical data from various databases into a central repository in a summarized
and standardized format that is made available to users on a read-only basis.
This approach provides users with better access to critical data in the
organization's relational database management systems ("RDBMS"), but users are
not generally familiar enough with database syntax to extract data from data
warehouses without assistance from information technology ("IT") personnel.
- 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 analysis: accessing information and discovering and extracting
hidden patterns or trends from databases and data marts.
Despite the size of this market, and the strategic value of the
"business intelligence" available from corporate data, businesses developed
their information systems solely to support transactional data processing,
collecting and storing the data necessary to facilitate such processing.
Therefore, data storage methods designed in contemplation of narrow
transactional goals are being burdened with the new goals of strategic analysis.
Such systems do not fully address the need to transform data into useful
information.
In the business intelligence area, RDBMS are most frequently used as
data repositories, both for historical data as a "data warehouse" and for
analytical data as a "datamart." RDBMS are tuned to optimize support of high
volume on-line transaction processing ("OLTP") applications such as data entry
and do not support the extraction and analysis of that data.
Limitations of Traditional On-Line Analytical Processing Products.
Although a data warehouse is useful, because 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 (such as data related 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 has been the
development of the data mart. However, traditional data mart technology is still
based on the relational model employed in the data warehouse and often does not
present that data in a fully transformed form most suitable for analytical as
opposed to storage purposes.
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The Company believes enterprises are searching for ways to transcend
these limitations, to develop data marts that more efficiently support Business
Intelligence analytical techniques, in less time, with a more precise
correlation between data mart content and the user's business objectives. At the
same time, such product must use existing hardware and systems and minimize
impact on critical IT resources.
The Company believes that its QueryObject System provides an
enterprise-wide solution to the problems of first generation data mart
technology limitations.
QueryObject(TM) System.
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
(UNIX) or Windows NT systems. In October 1997, the Company began to implement
full-scale marketing of QueryObject System. QueryObject System previously
required certain consulting services and was promoted selectively through direct
sales channels, at several industry trade shows, and to potential business
partners. The current release of QueryObject System has reduced consulting
requirements and is capable of running on additional UNIX operating systems and
the Windows NT operating system.
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,
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normalizing, formatting and summarizing data before loading it into a data
warehouse. In addition, large amounts of operational data can be preserved for
future analysis at far lower cost than a data warehouse.
o Greater Scalability and Speed: The Company believes
QueryObject based data marts contain more data in less storage space than
traditional data marts such as Arbor Essbase and Oracle Express. A single
QueryObject can contain hundreds of millions of records, tens of thousands of
values in each field or column and billions of potential query answers. The use
of proprietary algorithmic equations allows QueryObject-based data marts to
store more data in a fraction of the storage space needed by conventional data
marts. Even with data marts that measure in the hundreds of millions of records,
the retrieval can often be executed in seconds or less.
o Greater Multi-User Support: QueryObjects can support unlimited
numbers of concurrent users since all possible answers to all possible queries
are contained therein, and impose virtually no degradation on processing, in
contrast to conventional data marts that consume large amounts of processing
power in computing potential answers.
o Greater Mobility: When business intelligence was a function
confined to a small cadre of analysts and specialists, it was acceptable for
business intelligence systems to reside in a single, central location. In
contrast, since QueryObjects can reside on desktops, laptops, and Web servers,
or be distributed over local area networks, they allow businesses to deploy
complex data marts to thousands of users in an enterprise, using existing
information technology infrastructure.
The CrossZ Strategy
The Company's objective is to establish the QueryObject System
technology as a ubiquitous data mart standard for providing information to
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 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 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 mart products.
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<PAGE>
Develop Strategic Relationships. To accelerate the adoption of the
QueryObject System as a standard platform business intelligence application, 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, APlus Technologies, GM Group (GM Group is not affiliated with General
Motors Corporation), IBEX Corporation SA, Empower Geographics, Inc., STRATOS,
Strategic Tools & Services and Worldnet Consulting, SA. In addition, the Company
has a joint development and marketing agreement with Siemens Pyramid and
co-marketing programs with several companies including Brio Technology, Inc. and
Siemens Nixdorf Information Systems 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 (ODBC) and object linking and embedding database ("OLE
DB") standards. 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 QueryObject System to take advantage of customers'
existing IT investments, thereby accelerating the acceptance of such software.
QueryObject System is 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 the
delivery of relevant data to business intelligence applications is a critical
corporate function 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.
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
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<PAGE>
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 original equipment manufacturers ("OEMs") and
value-added resellers ("VARs"). During 1997, the Company opened an office in the
United Kingdom to enter the European marketplace.
Products
The Company's QueryObject System is a highly scaleable and efficient
solution for providing business intelligence applications and users with all the
relevant information from corporate data.
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:
- --------------------------------------------------------------------------------
Product Configuration Operating System
-------------------------------------------------------------
Basic System QueryObject Voyager Client Win 95/NT
-------------------------------------------------------------
QueryObject DBA Client Win 95/NT
-------------------------------------------------------------
QueryObject Designer Client Win 3.1, 95/NT
-------------------------------------------------------------
QueryObject Engine Server MVS, UNIX, Win NT
- --------------------------------------------------------------------------------
Optional Modules QueryObject Open Client Win 3.1, 95/NT
-------------------------------------------------------------
QueryObject Viewer Client Win 3.1, 95/NT
-------------------------------------------------------------
QueryObject Server Server Win NT, UNIX
================================================================================
QueryObject Voyager ("Voyager") is a data mart prototyping tool that
uses advanced data mining techniques to help the user rapidly design data marts
best suited to answer its business question. Voyager 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
operates on Windows 95 or Windows NT.
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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" for direct importing into the QueryObject engine
While initially intended as a stand alone product, results from a
recent market test indicate that Voyager's main value is as a component of the
QueryObject System. The Company therefore does not intend to market Voyager on
its own but rather as in integral part of the QueryObject System.
QueryObject DBA (Data Base Administrator) provides administrators in a
Windows based environment with a tool 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
of the QueryObject, 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 Voyager, 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 that 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
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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 both the ODBC and OLE DB interfaces that
allow 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 a user to select the
interface type with which he is most comfortable. Using standard Windows drag
and drop methods, a user can customize his 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.
Sales and Marketing
The Company markets and sells 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 range from six months to nine months or longer.
The Company's sales, marketing and related customer support services
organization consisted of 27 full time employees as of December 31, 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, 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 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
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users. A separate partnering and business development function is responsible
for the recruitment and maintenance of OEMs and national and global VARs and
business partners.
The Company believes that a high level of customer support is important
to the successful marketing and sale of QueryObject System. Maintenance and
support contracts, which are typically for twelve months, are offered with the
initial license, and may be renewed annually at a cost equal to a fixed
percentage of the total license fee paid. Telephone hotline support will be
complemented by an internet site that provides an interactive forum and a
repository for technical tips and skills.
Research and Development
The Company believes that its future success will depend in large part
on its ability to maintain and enhance its leadership in business intelligence
software technology and develop new products that meet an expanding range of
customer requirements. The Company's research and development organization is
divided into teams consisting of development engineers and quality assurance
engineers. The market addressed by the Company is very sensitive to product
quality and therefore the process is aimed at continuous improvement of product
quality. The product definition is based upon a consolidation of the
requirements from existing customers, from technical support and from
engineering. These are prioritized by the Company's management to fit business
priorities and to meet the Company's vision.
The 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 December 31, 1997, the Company's research and development
organization consisted of 16 full time employees. The Company also utilizes
independent contractors located in Europe for its development activities. During
1997 and 1996, research and development expenses were $2,523,127 and $1,791,597
or 249% and 94% 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 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
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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 QueryObject System or
enhancements thereto. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays and
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
license the
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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
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QueryObject System, which would materially adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, and the failure to do so would have a material adverse effect upon
its business, operating results and financial condition.
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of use
and customer support. The Company believes it presently competes favorably with
respect to each of these factors. However, the Company's market is still
evolving and there can be no assurance that the Company will be able to compete
successfully against current and future competitors and the failure to do so
successfully will have a material adverse affect upon the its business,
operating results and financial condition.
Employees
As of December 31, 1997, the Company had a total of 55 full time
employees, including 16 in research and development, 27 in sales and marketing
and related customer support services and 12 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.
Recent Developments
On March 10, 1998, the Company announced that Mark Chroscielewski would
resign as Chairman of the Board of the Company. Subsequent to such date, the
Company and Mr. Chroscielewski entered into negotiations as to the terms and
conditions under which such resignation would occur, but they have been unable
to reach a definitive agreement as to such terms and conditions. On March 30,
1998, counsel to Mr. Chroscielewski ("Chroscielewski's Counsel") furnished
counsel to the Company with a copy of a complaint, which Chroscielewski's
Counsel stated had been filed in New York Supreme Court, Nassau County.
Chroscielewski's Counsel further stated that such complaint would be served upon
the Company if negotiations with Mr. Chroscielewski were not to result in a
definitive agreement. The complaint alleges a
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breach of Mr. Chroscielewski's employment agreement and a purported term sheet
relating to his resignation. It seeks damages in an amount not less than
$301,896, attorneys' fees, certain injunctive relief relating to the description
of the circumstances of Mr. Chroscielewski's departure from the Company to be
included in the Company's Annual Report on Form 10-K, a declaratory judgment
relating to the parties' rights under the aforementioned employment agreement
and term sheet, costs and disbursements.
On March 16, 1998, as part of a consolidated branding effort, the
Company announced its intent to do business under the name QueryObject Systems
Corporation. The Company intends to submit for stockholder approval at the 1998
Annual Meeting of Stockholders a proposal to change the name of the Company from
CrossZ Software Corporation to QueryObject Systems Corporation.
The Company developed Voyager to be sold as a stand-alone product.
Based on the results of a market test, however, the Company determined that the
proper marketing of Voyager was as an integrated component of the QueryObject
System. As a result, Voyager is being marketed as a part of the QueryObject
System product line.
Risk Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights the most material of the risks.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At December
31, 1997, the Company had an accumulated deficit of $25,866,986. For the fiscal
years ended December 31, 1997 and 1996, the Company incurred net losses of
$10,563,484 and $4,917,935, 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 sales of both equity and debt
securities. The Company's expense levels are high 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, 1997 states that the Company's recurring losses from
operations and the Company's negative cash flow from operating activities raise
substantial doubt about the Company's ability to continue as a going concern.
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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. Between January 1, 1995
and December 31, 1997, the Company realized software product revenue from only
seven QueryObject System installations, one of which (sold in 1995) was a
pre-production beta version. Further, the Company has recently 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 the development of new and enhanced versions of the
product. The failure to achieve broad market acceptance of QueryObject System
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 year ended December
31, 1997 were $1,012,159 and consisted primarily of four sales of QueryObject
System. Prior to 1997, the Company's revenues were derived primarily from
contract services provided to customers using the Company's proprietary data
analysis technology. The Company has discontinued this business. The Company
believes that comparisons of its future operating results to operating results
presented herein will not be meaningful.
Limited Working Capital; Need For Additional Funding. At December 31,
1997, the Company had working capital of $3,793,889. The Company has had a
limited operating history as a software product company and has not made
significant sales of its products. Therefore, revenues are difficult to predict.
Based on its current operating plan, the Company believes that its current cash
and cash equivalent position is sufficient to meet its working capital and
capital expenditure requirements for the next eight months. It is more likely
than not that cash generated from operations will be insufficient to satisfy the
Company's liquidity requirements beyond eight months, and as a result, the
Company will seek to sell additional equity or convertible debt securities or
obtain additional credit facilities. However, there can be no assurance that the
Company will be able to consummate any such transactions. The sale of additional
equity or convertible debt securities could result in additional dilution to the
Company's stockholders.
Potentially Limited Trading Market; Possible Volatility of Stock Price.
The Common Stock is listed on the Nasdaq SmallCap Market ("Nasdaq"). Under
recently implemented Nasdaq rules, in order for the Company to remain eligible
for listing on Nasdaq, (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 currently satisfies Nasdaq listing and
maintenance standards, the Company believes that without additional financing
(of which there can be no assurance), the Company could have less than
$2,000,000 in net tangible assets by September 30, 1998. The failure to meet the
maintenance criteria in the future may result in the Common Stock no longer
being eligible for quotation on
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Nasdaq and trading, if any, of the Common Stock would thereafter be conducted in
the non- Nasdaq over-the-counter market. As a result of such delisting of the
Common Stock from Nasdaq, it may be more difficult for investors to dispose of,
or to obtain accurate quotations as to the market value of, the Common Stock.
The regulations of the Securities and Exchange Commission
("Commission") promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), require additional disclosure relating to the market for penny
stocks. Commission regulations generally define a penny stock to be an equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. A disclosure schedule explaining the penny stock market and
the risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks (i.e., by Nasdaq delisting), 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. In the
absence of an active trading market, holders 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.
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
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due to the lower unit prices that the Company expects to receive when selling
through OEMs or VARs or other indirect channel partners.
Need to Develop New Products and Adapt to Rapid Technological Change.
The market for the Company's software is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycles of the Company's products are difficult to estimate. The Company's
future success will depend upon its ability to enhance its current products and
to develop and introduce new products that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these products or that
the Company's new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. Any potential new
products would likely be subject to significant technical risks. If the Company
experiences delays in the commencement of commercial shipments of new products
and enhancements, the Company could experience delays in or loss of product
revenues. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially adversely affected.
Dependence on Significant Customers. For the fiscal year ended December
31, 1997, VGER Technologies, Inc. accounted for 65% of the Company's revenues.
The Company does not anticipate receiving significant revenues from this
customer in 1998.
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 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
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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.
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, Alan Kaufman, the President and Chief
Executive Officer, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company has an
employment and consultant agreement with Mr. Kaufman which expires in October
1998, which provides that Mr. Kaufman will serve as either President and Chief
Executive Officer or as a consultant. The Company has purchased "key person"
life insurance policies on Mr. Kaufman's life in the amount of one million
dollars. The Company's future success also depends on its continuing ability to
attract, train and retain highly qualified technical, sales, marketing,
development and managerial personnel. 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.
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.
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. See "Description of Business-- Research and Development."
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 $7,500 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
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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.
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, 1997 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 $22,000,000 and $144,000 respectively,
available to offset future federal taxable income and tax. These NOL
carryforwards expire at various dates through 2012. 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 the Company's initial public
offering) and (ii) a long-term tax-exempt rate published by the Internal Revenue
Service (5.64% for ownership changes occurring in August 1997). Moreover, while
such loss carryforwards are available to offset future taxable income of the
Company, the Company does
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not expect to generate sufficient taxable income so as to utilize all or a
substantial portion of such loss carryforwards prior to their expiration.
Management of Changing Business. If the material growth in revenue that
the Company anticipates does in fact occur, it will place a significant strain
upon the Company's management systems and resources. The Company continues to
implement new financial and management controls, reporting systems and
procedures. The Company's ability to compete effectively and to manage
anticipated future growth will require continued improvement in the Company's
financial and management controls, reporting systems and procedures as well as
the implementation of new systems as necessary. There can be no assurance that
the Company will be able to do so successfully. The Company's failure to do so
could have a material adverse effect upon the Company's business, operating
results and financial condition.
International Operations. The Company had no international sales prior
to 1996. During 1996, license revenue was recorded with AT&T Istel, a division
of AT&T, which is based in the United Kingdom. The Company intends to expand its
international operations and to enter additional international markets, which
will require significant management attention and financial resources and could
adversely affect the Company's business, operating results or financial
condition. In order to expand international sales successfully in 1998 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, if any, 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.
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ITEM 2. DESCRIPTION OF PROPERTY
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 lease relating to such facility expires in 2004. In
addition, the Company also leases sales offices on a short-term basis in the
metropolitan areas of Chicago, Miami, San Francisco and London, England. The
Company believes that its existing facilities are adequate for its current needs
but anticipates that it will need to seek additional space in the future. The
Company believes that suitable additional or alternative space will be available
in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1997, the Board of Directors of Cross/Z California
adopted resolutions authorizing an amendment ("Amendment") to the Amended and
Restated Articles of Incorporation of Cross/Z California, effecting a
one-for-two reverse stock split (the "Reverse Split") of all Cross/Z
California's outstanding shares of Common Stock, par value $.001 per share
("Common Stock"), Series A Preferred Stock, par value $.001 per share ("Series
A"), Series B Preferred Stock, par value $.001 per share ("Series B"), Series C
Preferred Stock, par value $.001 per share ("Series C") and Series D Preferred
Stock, par value $.001 per share ("Series D" and together with the Series A,
Series B and Series C, the "Outstanding Preferred Stock"). On or about October
22, 1997, holders of (i) a majority of the outstanding shares of Common Stock
voting as a class, and (ii) a majority of the outstanding shares of Series A,
Series B and Series C voting together as a single class and (iii) a majority of
the outstanding shares of Series D delivered to the Company a written consent
(the "Consent") to (a) the Amendment, (b) the conversion of all shares of
Outstanding Preferred Stock into Common Stock (the "Preferred Stock Conversion")
immediately prior to the closing of an initial public offering resulting in
gross proceeds of at least $7,500,000 at an initial offering price of at least
$5.00 per share (such amount being determined giving effect to the Reverse
Split) and (c) an increase to 1,950,000 shares in the number of shares of Common
Stock available for issuance (the "Plan Amendment") under Cross Z/California's
1991 Incentive Stock Plan (such amount having been determined after giving
effect to the Reverse Split). The Consent was approved in lieu of holding a
meeting of the shareholders to adopt the Amendment, the Preferred Stock
Conversion and the Plan Amendment, in accordance with Section 603(a) of the
California General Corporation Law.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol CRSZ. The table below sets forth the range of closing sale
prices of the Common Stock on such market as reported by Nasdaq for the fiscal
periods specified.
Common Stock
High Low
---- ---
Fiscal 1997
Fourth Quarter* ........................... $6.00 $4.75
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* The Company's Common Stock began trading on Nasdaq on November
20, 1997; prior thereto, there was no public market for the
Common Stock.
As of March 1, 1998, there were 135 record holders of the Company's
Common Stock. The Company believes that there are in excess of 500 beneficial
owners of its Common Stock.
The Company has never paid any dividends on its Common Stock and does
not intend to pay such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for the development and growth
of the Company.
On November 19, 1997 the Commission declared effective the Company's
Registration Statement on Form SB-2 (File No. 333-34667) relating to the initial
public offering ("IPO") of 2,500,000 shares of common stock, $.001 par value
(the "Common Stock") of the Company at a price per share of $6.00. The IPO
closed on November 25, 1997 and was underwritten by GKN Securities Corp. ("GKN")
and Barington Capital Group, L.P. (together with GKN, the "Underwriters"). The
Underwriters received underwriting discounts and commissions of 8% of the gross
offering proceeds (or $1,200,000). In addition, the Company incurred
approximately $1,331,000 of expenses from the offering including a
non-accountable expense allowance paid to the Underwriters of 3% of the gross
offering proceeds (or $450,000). Accordingly, the Company received net proceeds
of approximately $12,469,000 from the IPO. Of such proceeds, approximately
$4,461,000 was used to repay bridge notes ("Bridge Notes") issued in connection
with a bridge financing (the "Bridge Financing") consummated in July 1997. The
Bridge Notes consisted 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 the IPO. Approximately $262,000
of the principal and interest repaid on the Bridge Notes was repaid on Bridge
Notes held by 5% stockholders and entities affiliated with directors of the
Company. The
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Company also used approximately $210,000 of the net proceeds from the offering
to repay promissory notes ("Second Interim Financing Notes") issued in
connection with a interim financing consummated in June 1997 ("Second Interim
Financing") and approximately $610,000 of the net proceeds to repay promissory
notes ("October 1997 Interim Financing Notes") issued in connection with an
interim financing consummated in October 1997 ("October 1997 Interim
Financing"). The October 1997 Interim Financing Notes were held by 5%
stockholders of the Company. Of the remaining proceeds from the IPO,
approximately $1,004,000 has been 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, $594,000 has been used for
research and development including enhancements to existing features and
development of new functions for QueryObject System and $300,000 of the proceeds
of the IPO have been used for working capital and general corporate purposes.
The remaining amount of the proceeds, $5,290,000, have been invested temporarily
in investment grade, short-term, interest bearing instruments.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The discussion in this report on Form 10-KSB contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the section above entitled "Risk
Factors That May Affect Future Results," in Item 1 of this report as well as
those risks discussed in this section and elsewhere on this report.
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 herein.
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 future operating results to the
operating results presented herein, will not be meaningful. The Company's future
financial performance will depend upon the successful formal introduction and
customer acceptance of QueryObject System.
To date, the Company has incurred substantial losses from operations,
and at December 31, 1997 had an accumulated deficit of $25,866,986. The
Company's operations and activities
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have been primarily funded through sales of equity and debt securities,
including the closing of the IPO on November 25, 1997. 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.
In November 1997, the Company began implementation of full-scale
marketing activity for QueryObject System. QueryObject System previously
required additional consulting services to implement 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. In 1998, the Company
intends to increase promotional activity, including increased trade show and
partnering activity and public relations. The Company intends to market and sell
QueryObject System 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 and expand its
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 $7,500 to over $250,000, the preponderance of its revenues is
expected to be derived from products with sales prices from $60,000 to $160,000.
As a result, the timing of the receipt and shipment of a single order can have a
significant impact on the Company's revenues, results of operations and cash
flows for a particular period.
Results of Operations
The following table sets forth certain items in the Company's
statements of operations for the years ended December 31, 1997 and 1996 ($ in
thousands):
-23-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---- ----
Revenues
<S> <C> <C>
Software licenses ................................. $ 596 $ 851
Services and maintenance(1) ....................... 416 1,052
-------- --------
Total revenues ................................. 1,012 1,903
-------- --------
Cost of revenues
Software licenses ................................. 75 102
Services and maintenance .......................... 131 376
-------- --------
Total cost of revenues ......................... 206 478
-------- --------
Gross profit ............................................ 806 1,425
-------- --------
Operating expenses
Sales and marketing ............................... 4,576 3,145
Research and development .......................... 2,523 1,792
General and administrative ........................ 1,914 1,140
-------- --------
Total operating expenses ....................... 9,013 6,077
-------- --------
Loss from operations .................................... (8,207) (4,652)
Interest income ....................................... 78 88
Interest expense ...................................... (806) (355)
Other income .......................................... 1 1
-------- --------
Loss before extraordinary item .......................... (8,934) (4,918)
Extraordinary loss from extinguishment of
debt................................................. (1,629) --
-------- --------
Net Loss ................................................ $(10,563) $ (4,918)
======== ========
</TABLE>
(1) Prior to the year ended December 31, 1997 services and maintenance revenues
consisted entirely of service revenue.
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
-24-
<PAGE>
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." The Company will implement
Statement of Position 97-2 on software revenue recognition in the first quarter
of 1998. The Company believes that the addition of this statement will not have
a significant impact on the Company.
Total revenues decreased by $891,000, or 47%, from $1,903,000 for the year
ended December 31, 1996 ("1996") to $1,012,000 for the year ended December 31,
1997 ("1997"). License revenues decreased by $255,000, or 30%, from $851,000 in
1996 to $596,000 in 1997. During 1997 license revenues were derived from the
sale of four licenses while during 1996 license revenues were derived from the
sale of three licenses. While more licenses were sold in 1997 as compared to
1996, the average license sale in 1997 decreased to $149,000 from $284,000 in
1996, resulting from lower prices charged by the Company for QueryObject System
running on the UNIX operating system as compared to MVS. Service and maintenance
revenue decreased by $636,000, or 60%, from $1,052,000 in 1996 to $416,000 in
1997, primarily due to the curtailment of service-based engagements. The Company
has discontinued the pursuit of service-based engagements and does not
anticipate any ongoing material revenue from these activities.
Cost of Revenues
Cost of software license revenues consists primarily of product packaging,
documentation and production costs. Cost of software license revenues increased
as a percentage of software license revenues from 12% in 1996 to 12.5% in 1997,
primarily due to higher documentation costs. Cost of services and maintenance
revenues consist primarily of customer support costs and direct costs associated
with providing services. Cost of services and maintenance revenues decreased as
a percentage of services and maintenance revenues from 36% in 1996 to 32% in
1997, primarily due to lower staffing levels resulting from the curtailment of
service based engagements.
Operating Expenses
Sales and Marketing. 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, collateral material and
trade shows. Sales and marketing expenses increased by $1,431,000, or 45%, from
$3,145,000 in 1996 to $4,576,000 in 1997, primarily due to costs associated with
the expansion of the direct sales and technical pre-sales force (including
related recruiting costs) and, to a lesser extent, increased marketing personnel
costs. The Company believes that its sales and marketing expenses will increase
in absolute dollars as the Company continues to increase promotion and other
marketing expenses.
-25-
<PAGE>
Research and Development. 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, consultant costs and depreciation of development equipment.
Research and development expenses increased by $731,000, or 41%, from $1,792,000
in 1996 to $2,523,000 in 1997, primarily due to an increase in software
engineering and quality assurance personnel and related costs and consultant
costs. 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 these costs will increase in absolute
dollars. To date, all research and development costs have been expensed as
incurred. See Note 1 of Notes to Financial Statements.
General and Administrative. 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 by $774,000, or 68%, from $1,140,000 in 1996
to $1,914,000 in 1997, primarily due to increased non-recurring consulting
expense relating to Advisory Board stock options and, to a lesser extent,
increased personnel related costs and benefits. The Company believes that its
general and administrative expenses will increase in absolute dollars as it
incurs additional costs related to being a public company, such as increased
professional fees, expenses related to directors' and officers' insurance and
investor relations programs.
Interest Income and Interest Expense
Interest income represents income earned on the Company's cash and cash
equivalents. Interest income decreased by $10,000, or 12%, from $88,000 in 1996
to $78,000 in 1997, primarily due to a lower level of cash and cash equivalents
on deposit during 1997.
Interest expense generally represents charges relating to the Company's
Loan Agreement, interest expense on capital equipment leases, and for 1997,
interest relating to the Bridge and Interim Financings (see Note 6 of Notes to
the Financial Statements). Interest expense increased by $451,000, or 127%, from
$355,000 in 1996 to $806,000 in 1997. This increase was primarily due to
interest expense and the amortization of debt discount and debt issuance costs
relating to the Bridge and Interim Financings. These charges totaled $192,000,
$319,000 and $100,000 respectively for 1997. This increase in interest expense
was partially offset by a decrease in outstanding notes payable that were
converted into Series D Redeemable Convertible Preferred Stock ("Series D
Preferred") or repaid from the proceeds of the Series D Preferred financing in
1996 (see Note 8 of Notes to the Financial Statements), and reduced outstanding
borrowings under the Loan Agreement.
Extraordinary Loss from Early Extinguishment of Debt
On November 25, 1997, the Company repaid the noteholders of the Bridge
Financing out of the proceeds of the IPO. Accordingly, the Company recorded an
extraordinary loss of $1,629,000
-26-
<PAGE>
relating to the early extinguishment of debt. The extraordinary loss was
comprised of unamortized deferred debt discount and unamortized deferred debt
issuance costs related to the Bridge Financing.
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 1997 and 1996 and consequently paid no
federal or state income taxes. At December 31, 1997, the Company had net
operating losses and research and experimental tax credit carryforwards of
$22,000,000 and $144,000, respectively, available to offset future federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2012. 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. Moreover, while such loss carryforwards are available to
offset future taxable income of the Company, the Company does not expect to
generate sufficient taxable income so as to utilize all or a substantial portion
of such loss carryforwards prior to their expiration.
Liquidity and Capital Resources
On November 25, 1997, the Company closed the IPO. The Company sold
2,500,000 shares of Common Stock in the IPO and received approximately
$12,470,000 of cash, net of underwriting discounts, commissions and other
offering costs. See "Item 5 -- Market for Common Equity and Related Stockholder
Matters." The Company immediately repaid $5,100,000 plus accrued interest due on
the Bridge Notes and interim financings noted below. Upon completion of the IPO,
all outstanding shares of Series A, Series B, Series C and Series D Preferred
Stock (a total of approximately 1,697,000 shares) were converted into shares of
Common Stock.
Prior to the IPO, the Company had funded its operations primarily through
sales of preferred equity securities, with net proceeds therefrom of
approximately $14,000,000 and, to a lesser extent, through interim financings
and the Bridge Financing, through capital and operating equipment leases, the
issuance of notes payable and a borrowing arrangement ("Loan Agreement") with
H.C.C. Financial Services. As of December 31, 1997, the Company had $5,437,000
in cash and cash equivalents. Net cash used in operating activities was
$7,456,000 and $5,542,000 in 1997 and 1996, respectively. For 1997, net cash
used in operating activities was primarily attributable to a net loss of
$10,563,000, less an extraordinary loss on extinguishment of debt on the Bridge
Financing of $1,629,000, options issued for consulting services and amortization
of debt discount and issuance costs. For 1996, net cash used in operating
activities was primarily attributable to a net loss of $4,918,000 plus an
increase in accounts payable and accrued expenses of $769,000. Net cash provided
by financing activities was $12,196,000 and $8,310,000 in 1997
-27-
<PAGE>
and 1996, respectively, as a result of the items noted below. In addition to the
IPO, since January 1, 1996, 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 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 D Private Placement. From May 1996 through August 1996, the Company
consummated a private placement of Series D Redeemable Convertible Preferred
Stock whereby it issued the equivalent of an aggregate of 1,365,790 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
with an exercise price of $8.56 per share.
First Interim Financing. In May 1997, the Company consummated an interim
financing whereby it received the principal amount of $500,000 and issued
$500,000 of principal amount unsecured promissory notes. Such amount was repaid
out of the proceeds of the Bridge Financing in July 1997.
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 47,700 shares
of Common Stock at an exercise price of $8.56 per share. The Second Interim
Financing was repaid out of the proceeds of the IPO.
Third Interim Financing. In June 1997, the Company consummated an interim
financing whereby it received the principal amount of $250,000 and issued a
$250,000 principal amount unsecured promissory note ("Third Interim Financing
Notes"). 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 6,309 shares of
Common Stock at an exercise price of $8.56 per share.
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 warrant to purchase 25,000 shares of Common
Stock 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
principal amount of the Bridge Notes ($4,300,000) plus interest of approximately
$161,000 was paid in full out of the proceeds of the IPO.
-28-
<PAGE>
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 was repaid out of the
proceeds of the IPO.
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 $891,000, 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 $878,000 as of
December 31, 1997), until the earlier of March 31, 1998, a material breach by
the Company under the Addendum or an event of default under the Loan Agreement.
The Company is obligated under the Addendum to pay HCC each month $10,000 plus
accrued interest on the outstanding balance under the Loan Agreement.
Additionally, as of December 31, 1997, the Company has available $189,000 under
an equipment leasing line of credit
As of December 31, 1997, the Company's principal commitments consisted
of obligations under operating and capital leases and employment agreements. At
that date, the Company had approximately $554,000 in outstanding borrowings
under capital leases which are payable through 2001 (see Note 11 of Notes to the
Financial Statements). Pursuant to employment agreements with executive officers
of the Company, the Company is obligated to pay $936,000 and $460,000 in
salaries for the years ended December 31, 1998 and 1999, respectively.
As of December 31, 1997, the Company had working capital of $3,794,000.
The Company has had a limited operating history as a software product company
and has not made significant sales of its products. Therefore, revenues are
difficult to predict. Based on its current operating plan, the Company believes
that its current cash and cash equivalent position is sufficient to meet its
working capital and capital expenditure requirements for the next eight months.
It is more likely than not that cash generated from operations will be
insufficient to satisfy the Company's liquidity requirements beyond eight
months, and as a result, the Company will seek to sell additional equity or
convertible debt securities or obtain additional credit facilities. However,
there can be no assurance that the Company will be able to consummate any such
transactions. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders.
Year 2000 Compliance
The Company has assessed and continues to assess the impact of the Year
2000 issue on its operations, including the development of cost estimates for,
and the extent of programming changes required to address, this issue. Although
final cost estimates have yet to be determined, the Company expects that these
Year 2000 costs will not be material to the Company's expenses during 1998 and
1999. The Company does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
the
-29-
<PAGE>
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-30-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 ("Regulation 14A").
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1998 pursuant to Regulation 14A.
-31-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Exhibits
- ------ --------
3.1 Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form SB-2, No. 333-34667).
3.2 By-laws of the Registrant, as amended (Incorporated by
reference to Exhibit 3.2 to the Registration Statement on
Form SB-2, No. 333-34667).
4.1 Specimen Certificate of the Registrant's Common Stock
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form SB-2, No. 333-34667).
4.2 Form of Representative's Purchase Option granted to GKN
Securities Corp. (Incorporated by reference to Exhibit 4.2
to the Registration Statement on Form SB-2, No. 333-34667).
4.3 Form of Warrant issued in connection with the July 1997
Private Placement (Incorporated by reference to Exhibit 4.3
to the Registration Statement on Form SB-2, No. 333-34667).
4.4 Form of Lock-up Agreement (Incorporated by reference to
Exhibit 4.5 to the Registration Statement on Form SB-2, No.
333-34667).
10.1 1991 Incentive Stock Option Plan (Incorporated by reference
to Exhibit 10.1 to the Registration Statement on Form SB-2,
No. 333-34667).
10.2 Form of Stock Option Agreement for Non-Qualified Options
granted to Advisors (Incorporated by reference to Exhibit
10.2 to the Registration Statement on Form SB-2, No.
333-34667).
10.3 Employment Agreement, dated as of June 1, 1997, by and
among, the Company and Mark A. Chroscielewski (Incorporated
by reference to Exhibit 10.3 to the Registration Statement
on Form SB-2, No. 333-34667).
10.4 Employment Agreement, dated as of April 21, 1997, by and
among, the Company and Deepak Mohan (Incorporated by
reference to Exhibit 10.4 to the Registration Statement on
Form SB-2, No. 333-34667).
10.5 Employment Agreement, dated as of May 1, 1997, by and among,
the Company and Daniel M. Pess (Incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form SB-2, No.
333-34667).
10.6 Employment Agreement, dated as of May 8, 1996, by and among,
the Company and Andre Szykier (Incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form SB-2, No.
333-34667).
10.7 Employment Agreement, dated as of September 1, 1997, by and
among, the Company and Robert A. Thompson (Incorporated by
reference to Exhibit 10.7 to the Registration Statement on
Form SB-2, No. 333-34667).
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<PAGE>
10.8 Employment Agreement, dated as of October 6, 1997, by and
among, the Company and Robert V. Aloisio (Incorporated by
reference to Exhibit 10.8 to the Registration Statement on
Form SB-2, No. 333-34667).
10.9 Employment Agreement, dated as of October 14, 1997, by and
among, the Company and Alan W. Kaufman (Incorporated by
reference to Exhibit 10.9(a) to the Registration Statement
on Form SB-2, No. 333-34667).
10.10 HCC Loan Agreement dated March 31, 1992 and Addendum dated
May 8, 1996 (Incorporated by reference to Exhibit 10.9(b) to
the Registration Statement on Form SB-2, No. 333-34667).
10.11 Software Licensing Agreement between Amdahl Corporation and
the Registrant dated November 27, 1996 (Incorporated by
reference to Exhibit 10.10 to the Registration Statement on
Form SB-2, No. 333-34667).
10.12 Value Added Reseller Software Licensing Agreement between
Stratos, Strategic Tools & Services and the Company dated
September 9, 1997 (Incorporated by reference to Exhibit
10.11 to the Registration Statement on Form SB-2, No.
333-34667).
10.13 Value Added Reseller Software Licensing Agreement between
Worldnet Consulting, S.A. and the Company dated September 9,
1997 (Incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form SB-2, No. 333-34667).
10.14 Software Distribution Agreement between Hewlett-Packard
Company and the Company dated September 10, 1997
(Incorporated by reference to Exhibit 10.13 to the
Registration Statement on Form SB-2, No. 333-34667).
*11.1 Computation of Pro Forma Net Loss Per Common Share.
*27 Financial Data Schedule
- ---------------------------
* Filed herewith.
(b) Reports on Form 8-K
None.
-33-
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROSSZ SOFTWARE CORPORATION
Dated: March 30, 1998 By: /s/ Alan W. Kaufman
-------------------
Alan W. Kaufman
President
Chief Executive Officer
POWER OF ATTORNEY
The CrossZ Software Corporation and each of the undersigned do hereby
appoint Alan W. Kaufman and Daniel M. Pess and each of them severally, its or
his true and lawful attorney to execute on behalf of CrossZ Software Corporation
and the undersigned any and all amendments to this Annual Report on Form 10-KSB
and to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission; each of such attorneys
shall have the power to act hereunder with or without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Alan W. Kaufman
- ---------------------- President, Chief Executive Officer March 30, 1998
Alan W. Kaufman and Director (Principal Executive
Officer)
/s/ Daniel M. Pess
- ---------------------- Senior Vice President - Finance March 30, 1998
Daniel M. Pess and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Andre Szykier
- --------------------- Director March 30, 1998
Andre Szykier
Chairman of the Board March , 1998
- ----------------------
Mark A. Chroscielewski
-34-
<PAGE>
/s/ Rino Bergonzi
- ---------------------
Rino Bergonzi Director March 30, 1998
/s/ Scott T. Jones
- --------------------- Director March 30, 1998
Scott T. Jones
-35-
<PAGE>
CROSSZ SOFTWARE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants...........................................F-2
Balance Sheet as of December 31, 1997.......................................F-3
Statement of Operations for the years ended December 31, 1997 and 1996......F-4
Statement of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1997 and 1996................................................F-5
Statement of Cash Flows for the years ended December 31, 1997 and 1996......F-6
Notes to the Financial Statements...........................................F-7
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Stockholders of
CrossZ Software Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of CrossZ
Software Corporation (the "Company") at December 31, 1997, and the results of
its operations and its cash flows for the two years then ended 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 incurred negative cash flows from operating activities 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
February 19, 1998
F-2
<PAGE>
CROSSZ SOFTWARE CORPORATION
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1997
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,437,350
Accounts receivable, net of allowance for doubtful
accounts of $30,000 499,767
Restricted certificate of deposit 877,839
Prepaid expenses and other current assets 48,254
-----------------
Total current assets 6,863,210
Property and equipment, net 1,248,261
Deposits and other assets 85,274
-----------------
Total assets $ 8,196,745
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 723,421
Accrued expenses 918,691
Deferred revenue 30,035
Current portion of loan payable to stockholders 891,335
Customer advance 300,000
Capital lease obligations due within one year 205,839
-----------------
Total current liabilities 3,069,321
Capital lease obligations 347,960
Deferred rent 268,933
-----------------
Total liabilities 3,686,214
-----------------
Stockholders' equity
Preferred stock, 2,000,000 shares authorized; none issued and outstanding
Common stock, $0.001 par value: 30,000,000 shares
authorized; 5,110,605 shares issued and outstanding 5,111
Additional paid-in-capital 30,384,706
Accumulated deficit (25,866,986)
Receivable from stockholder (12,300)
-----------------
Total stockholders' equity 4,510,531
-----------------
Commitments and contingencies (Notes 2, 13 and 15)
Total liabilities and stockholders' equity $ 8,196,745
=================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CROSSZ SOFTWARE CORPORATION
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Revenues
Software licenses $ 596,345 $ 851,150
Services and maintenance 415,814 1,051,828
------------ ------------
Total revenues 1,012,159 1,902,978
Cost of revenues
Software licenses 74,605 102,138
Services and maintenance 131,190 376,289
------------ ------------
Total cost of revenues 205,795 478,427
------------ ------------
Gross profit 806,364 1,424,551
------------ ------------
Operating expenses
Sales and marketing 4,575,735 3,145,160
Research and development 2,523,127 1,791,597
General and administrative 1,914,252 1,140,003
------------ ------------
Total operating expenses 9,013,114 6,076,760
------------ ------------
Loss from operations (8,206,750) (4,652,209)
Interest income 77,979 88,288
Interest expense (805,761) (355,314)
Other income 542 1,300
------------ ------------
Loss before extraordinary item (8,933,990) (4,917,935)
Extraordinary loss from early extinguishment of debt (1,629,494) --
------------ ------------
Net loss $(10,563,484) $ (4,917,935)
------------ ------------
Basic loss per share before extraordinary item $ (3.19) $ (2.67)
------------ ------------
Extraordinary item $ (.58) $ --
------------ ------------
Basic net loss per share $ (3.77) $ (2.67)
------------ ------------
Weighted average shares used in basic per share
computation (Note 1) 2,802,532 1,839,418
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
- --------------------------------------------------------------------------------
CROSSZ SOFTWARE CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 39,175 $ 39 29,101 $ 29 188,731 $ 188
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
Net loss
---------- ----------- ---------- ----------- ---------- ------------
Balance at December 31, 1996 32,582 33 17,737 18 230,498 230
Issuance of common stock warrants in
connection with bridge financing
Accretion of excess of redemption value of
Series D preferred stock over fair value
at issuance date
Issuance of options on Series D
preferred stock
Conversion of preferred stock to
common stock upon initial public offering (32,582) (33) (17,737) (18) (230,498) (230)
Conversion of Series D preferred stock to
common stock upon initial public offering
Issuance of common stock upon initial public
offering, net of issuance cost of $2,530,426
Repurchase of common stock
Issuance of common stock options for
consulting services
Common stock options and warrants exercised
Net loss
---------- ----------- ---------- ----------- ---------- ------------
Balance at December 31, 1997 - $ - - $ - - $ -
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Receivable Total
------------------------- Paid-in Accumulated from Stockholders'
Shares Amount Capital Deficit Stockholder (Deficit) Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 791,640 $ 792 $ 3,556,986 $ (8,863,164) $ - $ (5,305,130)
Accretion of excess of redemption
value of Series D preferred stock
over fair value at issuance date (562,839) (562,839)
Issuance of options and warrants
on Series D preferred stock 234,700 234,700
Issuance of Series C preferred stock:
For cash at $9.60 per share 128,623 128,636
In exchange for notes payable 11,007 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 71,950 72 49,505 (12,300) 37,277
Net loss (4,917,935) (4,917,935)
----------- -------- ------------- -------------- --------- ----------------
Balance at December 31, 1996 863,590 864 4,035,258 (14,343,938) (12,300) (10,319,835)
Issuance of common stock warrants in
connection with bridge financing 1,512,397 1,512,397
Accretion of excess of redemption value of
Series D preferred stock over fair value
at issuance date (917,571) (917,571)
Issuance of options on Series D
preferred stock 363,800 363,800
Conversion of preferred stock to
common stock upon initial public offering 331,523 331 (50) -
Conversion of Series D preferred stock to 1,365,790 1,366 11,583,231 11,584,597
common stock upon initial public offering
Issuance of common stock upon initial public
offering, net of issuance cost of $2,530,426 2,500,000 2,500 12,467,074 12,469,574
Repurchase of common stock (7,368) (7) (41,993) (42,000)
Issuance of common stock options for
consulting services 321,470 321,470
Common stock options and warrants exercised 57,070 57 101,526 101,583
Net loss (10,563,484) (10,563,484)
----------- -------- ------------- -------------- --------- ----------------
Balance at December 31, 1997 5,110,605 $ 5,111 $ 30,384,706 $ (25,866,986) $(12,300) $ 4,510,531
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CROSS/Z INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
Cash flows from operating activities
<S> <C> <C>
Net loss $(10,563,484) $ (4,917,935)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 373,434 236,751
Write off of leasehold improvements 5,825 --
Amortization of debt discount 318,705 112,200
Amortization of debt issuance cost 100,432 --
Extraordinary loss on extinguishment of debt 1,629,494 --
Options issued for consulting services 685,270 122,500
Changes in assets and liabilities
Accounts receivable, net 320,540 (237,189)
Prepaid expenses and other current assets (17,735) (22,983)
Deposits and other assets (53,318) (505)
Accounts payable and accrued expenses (166,078) (881,074)
Deferred rent 13,293 83,336
Deferred revenue (102,264) (36,772)
------------ ------------
Net cash used in operating activities (7,455,886) (5,541,671)
------------ ------------
Cash flows from investing activities
Acquisitions of property and equipment (590,608) (618,993)
Note receivable from stockholder (42,000) --
Purchase of restricted certificate of deposit (37,785) (840,054)
------------ ------------
Net cash used in investing activities (670,393) (1,459,047)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of Series D preferred stock, net -- 8,643,418
Proceeds from issuance of Series C preferred stock, net -- 128,637
Proceeds from issuance of common stock, net 12,571,157 37,277
Proceeds from Interim and Bridge financings payable, net 5,313,766 --
Repayment of Interim and Bridge financings payable (5,850,000) --
Repayment of notes payable (25,000) (238,992)
Proceeds from loan payable to stockholders -- 15,737
Repayment of loan payable to stockholders (120,000) (132,000)
Payments of capital lease obligations (254,979) (144,200)
Proceeds from sale-leaseback transaction 561,119 --
------------ ------------
Net cash provided by financing activities 12,196,063 8,309,877
------------ ------------
Net increase in cash and cash equivalents 4,069,784 1,309,159
Cash and cash equivalents at beginning of year 1,367,566 58,407
------------ ------------
Cash and cash equivalents at end of year $ 5,437,350 $ 1,367,566
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization
Cross/Z International, Inc. ("CZI") was incorporated in California on
February 6, 1989. In August 1997, CZI incorporated a company in the
state of Delaware under the name CrossZ Software Corporation (the
"Company"). In connection with the Company's IPO (the "IPO") under the
Securities Act of 1933, as amended, and pursuant to a plan of corporate
reorganization, CZI merged with the Company. The Company is the
surviving entity and assumed the name CrossZ Software Corporation. The
Company develops, markets and supports proprietary business
intelligence software solutions that enable business managers to make
strategic decisions based on their corporate data.
Summary of significant accounting policies
Restatement and reclassification for reverse stock splits
On October 29, 1997, the Company's stockholders ratified a one-for-two
reverse stock split on all common and preferred stock. On July 17,
1997, the Company's stockholders 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.
Net loss per common share
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128") beginning with the Company's
fourth quarter of 1997.
Basic net loss per common share is computed by dividing net loss for
the period by the sum of the weighted average number of shares of
common stock issued and outstanding after conversion of all outstanding
preferred stock effected contemporaneously with the IPO. All
outstanding shares of Series A, B, C and D Preferred Stock were
converted as though such conversion occurred at the beginning of the
earliest period presented or the date of issuance in the case of the
Series D. Historical 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 resulting from the Company's
IPO.
At December 31, 1997, outstanding options and warrants to purchase
2,532,177 shares of common stock, with exercise prices ranging from
$.96 to $8.56 could potentially dilute basic earnings per share. Such
options and warrants have not been included in the computation of net
loss per share because to do so would have been antidilutive for the
periods presented.
Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-7
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 ratably over the term of the
contract, generally twelve months.
In October 1997, the AICPA issued Statement of Position 97-2 ("SOP
97-2") on software revenue recognition. The Company believes that the
adoption of this statement will not have a significant impact on the
Company. This statement is effective for fiscal years beginning after
December 15, 1997.
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 "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("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 sales 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 Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Income taxes are computed using the asset and liability
method. Under the asset and liability method specified by SFAS 109,
deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and
laws.
F-8
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Use of estimates
These financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make reasonable estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingencies at
the date of the financial statements. Actual results could differ from
those estimates.
Fair value of financial instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to
the relatively short maturity of these instruments. Loans payable to
stockholder are not traded in the open market and a market price for
such loans 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. 130, "Reporting
Comprehensive Income" ("SFAS 130") On June 30, 1997, the FASB issued
SFAS 130.
This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS 130
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position.
F-9
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
stockholders. 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.
2. Liquidity and Business Risks
The Company has incurred operating losses since inception, has incurred
negative cash flows from operating activities and had an accumulated
deficit of $25,866,986 and $14,343,938 as of December 31, 1997 and
1996, respectively. The Company has had a limited operating history as
a software product company and has not made significant sales of its
products. Therefore, revenues are difficult to predict. Based on its
current operating plan, the Company believes that its current cash and
cash equivalent position is sufficient to meet its working capital and
capital expenditure requirements for the next eight months. If cash
generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company will 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.
F-10
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
Interest paid during the period $ 374,691 $ 209,787
Schedule of non cash investing and financing activities:
Capital lease obligations entered into during the period 561,119 99,341
Series C Preferred Stock, issued for:
Notes payable - 11,008
Compensation payable to related parties - 54,448
Series D Preferred Stock, issued for:
Notes payable - 575,000
Compensation payable to related parties - 720,767
Consulting services - 165,000
Dividends 917,571 562,839
Series D Preferred options issued for consulting services 321,470 234,700
Common stock warrants issued in connection with
Bridge Financing 1,512,397 -
Common stock options issued for consulting services 363,800 -
Common stock retired in satisfaction of note receivable 42,000 -
</TABLE>
4. Property and Equipment
Property and equipment (net) consisted of the following:
December 31,
1997
Computer equipment and software $ 1,900,010
Furniture and fixtures 204,289
Office equipment 114,096
Leasehold improvements 19,578
-------------
2,237,973
Less: accumulated depreciation and amortization 989,712
-------------
$ 1,248,261
-------------
F-11
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. Accrued Expenses
Accrued expenses included the following:
December 31,
1997
Executive compensation $ 266,039
Compensation and related benefits 234,586
Consulting and professional fees 124,460
Interest 10,268
Commissions 19,708
Other 263,630
--------------
$ 918,691
--------------
6. Borrowing Arrangements
During 1995, the Company issued several promissory notes to its
stockholders, 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. The balance of these notes were
paid out of the proceeds of the IPO.
Loan payable to stockholder
In May 1992, the Company entered into a borrowing arrangement whereby a
stockholder 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 stockholder 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
stockholder could demand repayment until March 1998. The revised
agreement requires the Company to set aside funds in a restricted
account to the extent that the outstanding borrowings exceed 80% of the
Company's accounts receivable and to make monthly payments of $10,000,
plus interest, until March 1998 at which time the entire balance will
be payable. At December 31, 1997, the Company has set aside $877,839 in
a restricted certificate of deposit relating to this obligation.
Interest expense related to this agreement was $114,634 and $190,314
for 1997 and 1996, respectively.
Interim financing
In May 1997, the Company received a $500,000 loan with interest at 10%
per annum, from existing stockholders. The loan was repaid out of the
proceeds of the Bridge Financing, as described below.
In June 1997, the Company received additional loans from two
stockholders each consisting of a $100,000 promissory note bearing
interest of 10% per annum through September 30, 1997 and
F-12
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13% annually thereafter and attached warrants to purchase up to 23,850
shares of common stock at $8.56 per share. These notes were paid out of
the proceeds of the IPO.
In July 1997, the Company borrowed $250,000 which was repaid out of the
proceeds from the Bridge Financing.
Bridge Financing
On July 30, 1997, the Company completed a $4,300,000 Bridge Financing
(the "Bridge Financing"). The gross proceeds to the Company from such
financing were approximately $3,764,000, net of approximately $536,000
of issuance costs.
In connection with the Bridge Financing, the Company issued 43 units,
each consisting of a $100,000 promissory note (the "Bridge Note") and a
warrant (the "Bridge Warrant") allowing the holder to purchase up to
25,000 shares of the Company's common stock at a price of $8.56 per
share. The Bridge Warrants are exercisable on or after July 30, 1998
and expire on July 30, 2003. The Bridge Notes accrued 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 were paid out of the
proceeds of the IPO. As an incentive for early participation, the
Company issued to certain investors, warrants to purchase up to 6,309
shares of common stock at a price of $8.56, in addition to the Bridge
Warrants that were included in the bridge units. A portion of the gross
proceeds from the Bridge Financing was allocated to the Bridge Warrants
based on their estimated fair market value and resulted in $1,512,397
of original issue discount and a corresponding amount of additional
paid in capital.
In October 1997, the Company issued $600,000 of principal amount of
unsecured promissory notes to stockholders of the Company. The notes
bore interest at 15% per annum and were paid out of the proceeds of the
IPO.
On November 25, 1997, the Company repaid the holders of the Bridge
Notes, out of the proceeds of the Company's IPO. Accordingly, the
Company recorded an extraordinary loss of $1,629,494 related to the
early extinguishment of debt. The extraordinary loss was comprised of
$1,193,692 related to unamortized deferred debt discount and $435,802
of unamortized deferred debt issuance costs related to the Bridge
Notes.
7. Stockholders' Equity
Common stock
On November 20, 1997, the Company's IPO of 2,500,000 shares of its
common stock was declared effective, which resulted in net proceeds to
the Company of $12,469,574 before repayment of the Bridge Financing. As
of the closing date of the offering, all of the Company's Convertible
Preferred Stock and Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into 331,523 and 1,365,790 shares of common
stock, respectively.
F-13
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1996, warrants to purchase 56,563 shares of common
stock were outstanding, with exercise prices ranging from $2.40 to
$22.00 per share, and were immediately exercisable. During 1997,
warrants to purchase a total of 30,000 shares were exercised, resulting
in net proceeds to the Company of $72,000. The remainder of the
warrants expired upon completion of the Company's IPO.
During December 1997, the Company granted options to members of the
Advisory Committee to purchase up to 200,000 shares of common stock.
All options have an exercise price of $6.00 per share and are
immediately exercisable. The Company has recognized consulting expense
in its results of operations of $272,000 for the year ended December
31, 1997 related to these options.
Also during 1997, a member of the Board of Directors surrendered 7,386
shares of the Company's common stock as repayment of a note receivable
due the Company in the amount of $42,000. Such shares were retired in
December 1997.
Preferred stock
Authorization of additional preferred stock
In August 1997, the Company 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 the Offering. In addition, certain
"anti-takeover" provisions of the Delaware General Corporation Law,
among other things, may restrict the ability of the stockholders to
expect a merger or business combination or to obtain control of the
Company.
At December 31, 1997, the Company has authorized 2,000,000 shares of
undesignated preferred stock. At December 31, 1996, the Company had
authorized 17,395,012 shares of preferred stock, of which 260,669 had
been designated Series A Convertible Preferred Stock ("Series A");
204,913 had been designated Series B Convertible Preferred Stock
("Series B"); 2,898,837 had been designated Series C Convertible
Preferred Stock ("Series C"); and 14,030,593 had been designated
Mandatorily Redeemable Series D Convertible Preferred Stock ("Series
D").
During 1996, the Company sold 1,022,196 shares of Series D, which
resulted in net proceeds of $8,643,418. In addition, the Company
converted various borrowings and compensation liabilities due to
related parties, totaling $1,295,767 into 151,374 shares of Series D,
and also issued 19,276 shares of Series D in satisfaction of a
liability of $165,000 due for consulting services. At December 31,
1996, a total of 1,258,598 shares of Series D were outstanding. The
redemption value of the Series D was $8.56. Holders of the Series D
were entitled to receive noncompounded cumulative preferential
dividends, payable in additional shares, at a rate equal to 10% of the
redemption value of Series D. In the event of liquidation of the
Company, the Series D holders were entitled, under certain conditions,
to receive $8.56 per share, plus any accrued and unpaid dividends. On
November 25, 1997, the Company completed the IPO of its common stock.
At that time, all issued and outstanding Series D shares, together with
all
F-14
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
accreted shares of Series D were converted into an aggregate of
1,365,790 shares of common stock.
During April 1996, the Company issued Series D 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.
The warrants were immediately exercisable at a price of $8.56 and
expired five years from their date of issuance. The aggregate fair
value of these warrants, estimated to be $112,200, was recorded as a
discount to debt and amortized through the closing date of the Series D
placement. In November 1996, the Company issued an additional 2,803
Series D warrants, including 476 to a related party, in exchange for
securing equipment lease lines of credit. These warrants also had an
exercise price of $8.56 per share, were immediately exercisable and
expired ten years from the date of their issuance. Upon completion of
the Company's IPO, the Series D warrants converted into common stock
warrants to purchase an aggregate of 34,053 shares of common stock.
In May 1996, the Company granted options to members of an Advisory
Committee, which included a member of the Board of Directors and three
of the Company's stockholders, to purchase an aggregate of 125,000
shares of Series D. In April 1997, the Company granted further options
to two Advisory Committee member, to purchase an aggregate of 50,000
shares of Series D. All of the options were exercisable at a price of
$8.56 per share, expired five years from the date of their issuance,
and became immediately exercisable upon completion of the IPO. The
Company has recognized consulting expense in its results of operations
of $363,500 and $112,500 for the years ended December 31, 1997 and
1996, respectively. Upon completion of the Company's IPO, the Series D
options converted into common stock options to purchase an aggregate of
175,000 shares of common stock.
The holders of the Series A, B and C were entitled to receive
noncumulative, preferential annual dividends of $1.04, $1.76, and $.76
per share, respectively, when and if declared by the Board of
Directors. No such dividends were declared. In the event of liquidation
of the Company, the holders of Series A, B and C were entitled, under
certain conditions, to receive a distribution in preference to common
stockholders equal to $12.80, $22.00 and $9.60 per share, respectively.
During 1996, certain holders of Series A and B converted 6,593 and
11,364 shares, respectively, into an aggregate of 21,548 shares of
Series C. Upon completion of the Company's IPO, the Series A, B and C
converted into an aggregate of 331,523 shares of common stock.
At December 31, 1996, there were warrants outstanding to purchase up to
7,876 shares of Series B at an exercise price of $22.00, and up to
131,851 shares of Series C at an exercise price of $9.60 per share.
Upon completion of the Company's IPO, the Series B warrants expired,
and the Series C warrants converted into an aggregate of 131,851
warrants to purchase shares of common stock.
8. 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 or consultants. The options generally expire five years
F-15
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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, 1996 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 .96
Additional shares authorized 1,512,500 - -
Granted (791,999) 791,999 .96-6.00
Exercised - (27,070) .96
Canceled 54,305 (54,305) .96-6.00
-------------- ------------- -----------
-
Options outstanding at December 31, 1997 911,500 862,424 $.96-6.00
-------------- ------------- -----------
Options exercisable at December 31, 1997 198,682 $.96-6.00
------------- -----------
</TABLE>
In 1997, the Company granted 23,750 non-qualified stock options to
consultants and recognized consulting expense of $49,470 related to
these options.
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 and 1997 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 1997
and 1996 would have been immaterial.
In October 1997, the Company's Board of Directors and stockholders
authorized an increase in the number of shares reserved for issuance to
1,950,000 pursuant to the Plan.
F-16
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. Major Customers
Sales to major customers, as a percentage of revenues, are as follows:
Year Ended Year Ended
December 31, December 31,
1997 1996
A - 17%
B - 16%
C - 21%
D 65% -
At December 31, 1997, customer D represented 64% of total accounts
receivable.
10. Employee Benefits Plans
The Company has a 401(k) savings plan (the "Savings Plan") covering all
full-time employees and qualifying part time employees. As allowed
under Section 401(k) of the Internal Revenue Code, the Savings 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
Savings Plan up to 20% of their compensation, subject to annual limits.
The Savings Plan permits company contributions, however, none were made
during the years ended December 31, 1997 and 1996.
11. Obligations Under Capital and Operating Leases
The Company is obligated under capital leases for computers and office
equipment through the year 2001. All assets leased under these
agreements have been capitalized and the related obligations are
reflected in the accompanying financial statements based upon the
present value of future minimum lease payments. In addition, the
Company leases its office facilities and certain furniture and
equipment. These operating leases are noncancellable and expire on
various dates through 2004.
F-17
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The future minimum lease payments under capital and operating leases at
December 31, 1997 and the present value of the net minimum lease
payments are as follows:
Operating Capital
Year Ending December 31, Leases Leases
------------ -----------
1998 445,755 258,461
1999 443,346 221,197
2000 354,974 159,628
2001 363,021 5,329
2002 and thereafter 1,143,763 -
------------ -----------
Total minimum lease payments $ 2,750,859 644,615
------------
Less: amounts related to interest 90,816
-----------
Present value of net minimum lease payments 553,799
Less: obligation due within one year 205,839
-----------
Long-term obligation under capital leases $ 347,960
-----------
Included in the above are minimum capital lease payments of $61,691 due
to a related party.
During 1997, the Company refinanced certain equipment purchased during
1997 and at the end of 1996, under a sale/leaseback agreement. These
transactions were accounted for as financings, wherein the property
remains on the books and continues to be depreciated. Financing
obligations representing the proceeds were recorded and are reduced
based upon payments under the lease over a 42 month period.
In November 1996, the Company entered into a $500,000 equipment lease
line of credit. In December 1997, this agreement was amended to provide
the Company with an additional $250,000 line of credit under this
facility, with a three year repayment term. As of December 31, 1997,
$189,000 was available under this line of credit.
Rental expense under operating leases was $453,794 and $337,358 for the
years ended December 31, 1997 and 1996, respectively.
-18-
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. 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, 1997 was:
1997
Deferred rent $ 107,573
Accounts payable 289,368
Accrued expenses 367,477
Deferred revenues 12,014
Customer advances 120,000
Software cost expense 268,804
Net operating loss carryforward 8,801,171
Research and experimental credit carryforwards 144,309
Other deferred tax assets 469,287
----------------
Deferred tax assets 10,580,003
Depreciation (55,750)
Accounts receivable (199,907)
Prepaid expenses (19,302)
----------------
Deferred tax liabilities (274,959)
Net deferred tax assets 10,305,044
Less: valuation allowance (10,305,044)
----------------
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 difference between the statutory
federal tax rate and the Company's effective tax rate is primarily due
to the valuation allowance.
As of December 31, 1997, the Company has net operating loss and
research and experimental tax credit carryforwards of approximately
$22,000,000 and $144,000, respectively, available to offset future
federal taxable income and tax. These carryforwards will expire at
various dates through 2012. Under Section 382 of the Internal Revenue
Code of 1986, as amended, utilization of prior net operating losses
("NOLs") is limited after an ownership change, as defined in such
Section 382. As a result of previous transactions which involved an
ownership change as defined by Section 382, the Company will be subject
to limitation on the use of its NOLs. Accordingly, there can be no
assurance that a significant amount of the existing NOLs will be
available to the Company.
F-19
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. Commitments
Employment Agreements
The Company has entered into long-term employment agreements with
certain key members of management. The agreements provide each employee
with base annual compensation and incentive 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. The aggregate annual commitments under
these employment agreements are $935,625 and $460,208 for 1998 and
1999, respectively.
14. Subsequent Events
In January 1998, the Company loaned $65,000 to an officer and director
of the Company. This promissory note has a term of 24 months bearing
interest at 8% per annum.
In January 1998, the Company incorporated a wholly-owned subsidiary,
QueryObject Systems Corporation ("QOS"), a Delaware Corporation. It is
the Company's intent, upon stockholder approval, to merge with QOS, and
change the name of the Company from CrossZ Software Corporation to
QueryObject Systems Corporation.
In March 1998, the Chairman of the Board and officer of the Company
tendered his resignation effective May 26, 1998. In conjunction with
the resignation the Company agreed to provide twelve months severance
which will be paid over the period of one year.
<PAGE>
ANNEX B
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1998
As filed on May 15, 1998
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13587
CROSSZ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3087939
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal executive offices)
(516) 228-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of April 30, 1998 there were 5,120,172 shares of the Registrant's
common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No /X/
- --------------------------------------------------------------------------------
<PAGE>
CROSSZ SOFTWARE CORPORATION
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Balance Sheet
As of March 31, 1998 (unaudited)........................ 3
Condensed Statement of Operations
For the three months ended March 31, 1998 and
1997 (unaudited)....................................... 4
Condensed Statement of Cash Flows
For the three months ended March 31, 1998 and
1997 (unaudited)....................................... 5
Notes to the Condensed Financial Statements............ 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............. 15
Item 5. Other Information..................................... 16
Item 6. Exhibits and Reports on Form 8-K...................... 16
SIGNATURES........................................................... 17
<PAGE>
Part I.
FINANCIAL INFORMATION
Item 1. Financial Statements
CROSSZ SOFTWARE CORPORATION
CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31,
1998
ASSETS
Current assets
<S> <C>
Cash and cash equivalents ................................. $ 3,157,002
Accounts receivable, net of allowance for doubtful
accounts of $30,000 ................................... 248,173
Restricted certificate of deposit ......................... 887,060
Prepaid expenses and other current assets ................. 80,792
Total current assets .................................. 4,373,027
Property and equipment, net ..................................... 1,187,412
Deposits and other assets ....................................... 146,369
Total assets .......................................... $ 5,706,808
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .......................................... $ 250,013
Accrued expenses .......................................... 1,176,660
Deferred revenue .......................................... 73,631
Loan payable to stockholders .............................. 861,335
Customer advance .......................................... 300,000
Capital lease obligations due within one year ............. 214,109
Total current liabilities ............................. 2,875,748
Capital lease obligations ....................................... 277,771
Deferred rent ................................................... 269,157
Total liabilities ..................................... 3,422,676
Stockholders' equity
Preferred stock, 2,000,000 shares authorized;
none issued and outstanding ........................... --
Common stock, $0.001 par value: 30,000,000 shares
authorized; 5,120,172 shares issued and outstanding ... 5,120
Additional paid-in capital ................................ 30,393,881
Accumulated deficit ....................................... (28,102,569)
Receivable from stockholder ............................... (12,300)
Total stockholders' equity ............................ 2,284,132
Total liabilities and stockholders' equity ............ $ 5,706,808
------------
</TABLE>
See accompanying notes to Condensed Financial Statements.
5
<PAGE>
CROSSZ SOFTWARE CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
Revenues
<S> <C> <C>
Software licenses ................................... $ 75,000 $ --
Services and maintenance ............................ 36,861 15,190
Total revenues ............................ 111,861 15,190
Cost of revenues
Software licenses ................................... 750 --
Services and maintenance ............................ 24,756 3,570
Total cost of revenues .................... 25,506 3,570
Gross Profit ............................................. 86,355 11,620
Operating expenses
Sales and marketing ................................. 1,327,218 1,074,331
Research and development ............................ 566,417 535,416
General and administrative .......................... 450,001 284,724
Total operating expenses .................. 2,343,636 1,894,471
Loss from operations ..................................... (2,257,281) (1,882,851)
Interest income .......................................... 63,341 18,854
Interest expense ......................................... (41,412) (43,511)
Other (expense) income ................................... (231) 542
Net loss ................................................. $(2,235,583) $(1,906,966)
----------- -----------
Basic net loss per share ................................. $ (.44) $ (.77)
Weighted average shares used in basic per share
computation (Note 3) ................................ 5,112,089 2,470,208
----------- -----------
</TABLE>
See accompanying notes to Condensed Financial Statements.
6
<PAGE>
CROSSZ SOFTWARE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
Cash flows from operating activities
<S> <C> <C>
Net loss ............................................................. $(2,235,583) $(1,906,966)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ..................................... 106,580 94,571
Loss (gain) on sales of computer equipment ........................ 231 (542)
Options issued for consulting services ............................ -- 45,000
Changes in operating assets and liabilities
Accounts receivable, net ........................................ 251,594 228,819
Prepaid expenses and other current assets ....................... (32,538) (3,287)
Deposits and other assets ....................................... 3,906 (12,225)
Accounts payable and accrued expenses ........................... (215,439) (180,261)
Compensation payable to related parties ......................... -- (37,521)
Deferred rent ................................................... 224 3,324
Deferred revenue ................................................ 43,597 557,395
Net cash used in operating activities ................................ (2,077,428) (1,211,693)
Cash flows from investing activities
Loan receivable from stockholder ...................................... (65,000) --
Acquisitions of property and equipment ................................ (45,964) (130,128)
Purchase of restricted certificate of deposit ......................... (9,221) (10,168)
Net cash used in investing activities ................................ (120,185) (140,296)
Cash flows from financing activities
Proceeds from issuance of common stock ............................... 9,185 10,787
Repayment of loan payable to stockholders ............................. (30,000) (30,000)
Payments of capital lease obligations ................................. (61,920) (65,098)
Proceeds from sale-leaseback transaction .............................. -- 312,471
Net cash (used in) provided by financing activities ...................... (82,735) 228,160
Net decrease in cash and cash equivalents ................................ (2,280,348) (1,123,829)
Cash and cash equivalents at beginning of year ........................... 5,437,350 1,367,566
Cash and cash equivalents at end of period ............................... $ 3,157,002 $ 243,737
----------- -----------
</TABLE>
See accompanying notes to Condensed Financial Statements.
7
<PAGE>
CROSSZ SOFTWARE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed financial statements included herein reflect
all adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly state the Company's financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997. The condensed results of operations for the
period ended March 31, 1998 are not necessarily indicative of the results to be
expected for any subsequent quarter, or for the entire fiscal year ending
December 31, 1998, or for any future period.
2. Initial Public Offering
On November 20, 1997, the Company's Initial Public Offering ("IPO") of
2,500,000 shares of common stock was consummated, which resulted in net proceeds
to the Company of $12,469,574 before repayment of certain bridge and interim
financings, including interest thereon, which totaled approximately $5,281,000.
As of the closing date of the offering, all of the Company's Convertible
Preferred Stock and Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into 331,523 and 1,365,790 shares of common stock,
respectively.
3. Net Loss Per Common Share
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128") beginning with the Company's fourth
quarter of 1997.
Basic net loss per common share is computed by dividing net loss for
the period by the sum of the weighted average number of shares of common stock
issued and outstanding after conversion of all outstanding preferred stock
effected contemporaneously with the IPO. All outstanding shares of Series A, B,
C and D Preferred Stock were converted as though such conversion occurred at the
beginning of the earliest period presented or the date of issuance in the case
of the Series D. Historical 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 resulting from the IPO. Options and warrants to
acquire common stock have not been included in the computation of net loss per
share because to do so would have been antidilutive for the periods presented.
4. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Interest paid during the period........................... $31,696 $ 47,416
Schedule of non cash investing and financing activities:
Series D Preferred Stock, issued for dividends -- 251,775
</TABLE>
8
<PAGE>
5. Recent Accounting Pronouncements
American Institute of Certified Public Accountants ("AICPA") Statement
of Position 97-2 ("SOP 97-2")
Prior to 1998, the Company recognized revenue in accordance with the
AICPA Statement of Position 91-1. In October 1997, the AICPA issued SOP 97-2 on
software revenue recognition. The Company has adopted SOP 97-2 in the first
quarter of 1998. The Company believes that the adoption of this statement will
not have a significant impact on the Company.
6. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7. Liquidity and Business Risks
The company has incurred operating losses since inception, has incurred
negative cash flows from operating activities and had an accumulated deficit of
$28,102,569 as of March 31, 1998. The Company has had a limited operating
history as a software product company and has not made significant sales of its
products. Therefore, revenues are difficult to predict. Based on its current
operating plan, the Company believes that its current cash and cash equivalent
position is sufficient to meet is working capital and capital expenditure
requirements for the next four months. It is anticipated that cash generated
from operations will be insufficient to satisfy the Company's liquidity
requirements, and therefore the Company will seek to sell additional equity or
convertible debt securities. To date, the Company has no commitments, agreements
or understandings with respect to such additional financing and there can be no
assurance that the Company will be able to consummate any such transaction. The
sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders.
Item 2. Management's Discussion and Analysis or Plan of Operation
The discussion in this report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" in this Part I, Item 2 as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in "Risk Factors"
in Part I, Item 1 - Business, included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
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 herein.
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 made only limited sales of its QueryObject
System. The Company believes that comparisons of its future operating results to
the operating results presented herein, will not be meaningful. The Company's
future financial performance will depend upon the successful customer acceptance
of QueryObject System.
10
<PAGE>
To date, the Company has incurred substantial losses from operations,
and at March 31, 1998 had an accumulated deficit of $28,102,569. The Company's
operations and activities have been primarily funded through sales of equity and
debt securities, including the closing of the IPO on November 25, 1997. 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.
In November 1997, the Company began implementation of full-scale
marketing activity for QueryObject System. QueryObject System previously
required additional consulting services to implement 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. In 1998, the Company
intends to increase promotional activity, including increased trade show and
partnering activity and public relations. The Company intends to market and sell
QueryObject System through its direct sales force as well as through indirect
channel partners such as Original Equipment Manufacturers ("OEMs") and Value
Added Resellers ("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 and expand its 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 $7,500 to over $250,000, the preponderance of its revenues is
expected to be derived from products with sales prices from $60,000 to $160,000.
As a result, the timing of the receipt and shipment of a single order can have a
significant impact on the Company's revenues, results of operations and cash
flows for a particular period. Results of Operations
11
<PAGE>
The following table sets forth certain items in the Company's
statements of operations for the three months ended March 31, 1998 and 1997 ($
in thousands):
Three Months Ended
March 31,
1998 1997
Revenues
Software licenses ............................. $ 75 $ --
Services and maintenance ...................... 37 15
------- -------
Total revenues ............................. 112 15
------- -------
Cost of revenues
Software licenses ............................. 1 --
Services and maintenance ...................... 25 4
------- -------
Total cost of revenues ..................... 26 4
------- -------
Gross profit ........................................ 86 11
------- -------
Operating expenses
Sales and marketing ........................... 1,327 1,074
Research and development ...................... 566 535
General and administrative .................... 450 285
------- -------
Total operating expenses ................... 2,343 1,894
------- -------
Loss from operations ................................ (2,257) (1,883)
Interest income ................................... 63 19
Interest expense .................................. (42) (44)
Other income ...................................... -- 1
------- -------
Net loss ............................................ $(2,236) $(1,907)
======= =======
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 products updates
and are recognized ratably over the term of the contract, which is typically
twelve months.
Total revenues increased by $97,000, or 647%, from $15,000 for the
three months ended March 31, 1997 ("1997") to $112,000 for the three months
ended March 31, 1998 ("1998"). License revenues were $75,000 in 1998, which
represented one license sale. No license sales were recorded in 1997. Service
and maintenance revenue increased by $22,000, or 147%, from $15,000 in 1997 to
$37,000 in 1998, primarily due to increased maintenance revenues associated with
license sales completed during the year ended December 31, 1997, and are
recognized ratably over a twelve month period.
12
<PAGE>
Cost of Revenues
Cost of software license revenues consists primarily of product
packaging, documentation and production costs. Cost of software license revenues
as a percentage of software license revenues was 1.3% for 1998, which resulted
from the sale of one license. No license revenue was recorded in 1997. Cost of
services and maintenance revenues consist primarily of customer support costs
and direct costs associated with providing services. Cost of services and
maintenance revenues increased as a percentage of services and maintenance
revenues from 26.7% in 1997 to 67.6% in 1998, primarily due to higher personnel
costs necessary to service an expanded customer base.
Operating Expenses
Sales and Marketing. 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, collateral material and
trade shows. Sales and marketing expenses increased by $253,000, or 24%, from
$1,074,000 in 1997 to $1,327,000 in 1998. This increase was primarily due to
increased personnel costs and increased costs associated with public relations
and trade shows. The Company believes that its sales and marketing expenses will
increase in absolute dollars as the Company continues to increase promotion and
other marketing expenses.
Research and Development. 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, consultant costs and depreciation of development equipment.
Research and development expenses increased by $31,000, or 6%, from $535,000 in
1997 to $566,000 in 1998, primarily due to an increase in software engineering
and quality assurance personnel and related costs, and consultant costs. 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 these costs will increase in absolute dollars.
To date, all research and development costs have been expensed as incurred.
General and Administrative. 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 by $165,000, or 58%, from $285,000 in 1997 to
$450,000 in 1998, primarily due to increased professional expenses associated
with being a public company such as increased professional fees, expenses
related to directors' and officers' insurance and investor relations programs,
and, to a lesser extent, increased personnel related costs and benefits. The
Company believes that its general and administrative expenses will increase in
absolute dollars as it incurs additional costs related to being a public
company.
13
<PAGE>
Interest Income and Interest Expense
Interest income represents income earned on the Company's cash and cash
equivalents. Interest income increased by $44,000, or 232%, from $19,000 in 1997
to $63,000 in 1998, primarily due to a higher level of cash and cash equivalents
on deposit during 1998.
Interest expense generally represents charges relating to the H.C.C.
Financial Services Loan Agreement (the "Loan Agreement") and interest expense on
capital equipment leases. Interest expense decreased by $2,000, or 5%, from
$44,000 in 1997 to $42,000 in 1998. This decrease was primarily due to reduced
outstanding borrowings under the Loan Agreement.
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 1997 and 1996 and consequently paid no
federal or state income taxes. At December 31, 1997, the Company had net
operating losses and research and experimental tax credit carryforwards of
$22,000,000 and $144,000, respectively, available to offset future federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2012. 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. Moreover, while such loss carryforwards are available to
offset future taxable income of the Company, the Company does not expect to
generate sufficient taxable income so as to utilize all or a substantial portion
of such loss carryforwards prior to their expiration.
Liquidity and Capital Resources
On November 25, 1997, the Company consummated the IPO. The Company sold
2,500,000 shares of Common Stock in the IPO and received approximately
$12,470,000 of cash, net of underwriting discounts, commissions and other
offering costs. The Company immediately repaid $5,100,000 plus accrued interest
due on the Bridge Notes and interim financings noted below. Upon completion of
the IPO, all outstanding shares of Series A, Series B, Series C and Series D
Preferred Stock (a total of approximately 1,697,000 shares) were converted into
shares of Common Stock.
Prior to the IPO, the Company had funded its operations primarily
through sales of preferred equity securities, with net proceeds therefrom of
approximately $14,000,000 and, to a lesser extent, through interim financings
and the Bridge Financing, through capital and operating equipment leases, the
issuance of notes payable and the Loan Agreement. As of March 31, 1998, the
Company had $3,157,000 in cash and cash equivalents. Net cash used in operating
activities was $2,077,000 and $1,212,000 in 1998 and 1997, respectively. For
1998, net cash used in operating activities was primarily attributable to a net
loss of $2,236,000, less depreciation and amortization of $107,000. For 1997,
net cash used in operating activities was primarily attributable to a net loss
of $1,907,000 less depreciation and amortization of $95,000 and deferred revenue
of $557,000. Net cash provided by financing activities in 1997 resulted
primarily from the proceeds of sale-leaseback transactions. In addition to the
IPO, since January 1, 1997, the Company's principal sources of capital have been
through several bridge financings whereby the Company received approximately
$6,100,000 in proceeds. The Company repaid promissory notes issued in connection
with such bridge financings either out of proceeds from the IPO or out of
proceeds from a bridge financing consummated in July 1997.
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<PAGE>
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 $861,000, 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 H.C.C., 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 $887,000 as of
March 31, 1998), 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. In
April 1998, the Company began repaying the indebtedness under the Loan
Agreement, utilizing the funds on deposit in the restricted Certificate of
Deposit. The indebtedness is being repaid at the rate of 10% of the outstanding
month end balance each month, for twelve consecutive months, to be followed by a
payment in full of the remaining outstanding balance. Additionally, as of March
31, 1998, the Company has available $189,000 under an equipment leasing line of
credit.
As of December 31, 1997, the Company's principal commitments consisted
of obligations under operating and capital leases and employment agreements. At
that date, the Company had approximately $554,000 in outstanding borrowings
under capital leases which are payable through 2001. Pursuant to employment
agreements with executive officers of the Company, the Company is obligated to
pay $936,000 and $460,000 in salaries for the years ended December 31, 1998 and
1999, respectively.
As of March 31, 1998, the Company had working capital of $1,497,000.
The Company has had a limited operating history as a software product company
and has not made significant sales of its products. Therefore, revenues are
difficult to predict. Based on its current operating plan, the Company believes
that its current cash and cash equivalent position is sufficient to meet its
working capital and capital expenditure requirements for the next four months.
It is more likely than not that cash generated from operations will be
insufficient to satisfy the Company's liquidity requirements beyond four months.
The independent accountants' report for the year ended December 31, 1997 states
that the Company's recurring losses from operations and the Company's negative
cash flow from operating activities raise substantial doubt about the Company's
ability to continue as a going concern. The Company will seek to sell additional
equity or convertible debt securities. To date, the Company has no commitments,
agreements or understandings with respect to such additional financing and there
can be no assurance that the Company will be able to consummate any such
transaction. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders.
Year 2000 Compliance
The Company has assessed and continues to assess the impact of the Year
2000 issue on its operations, including the development of cost estimates for,
and the extent of programming changes required to address, this issue. Although
final cost estimates have yet to be determined, the Company expects that these
Year 2000 costs will not be material to the Company's expenses during 1998 and
1999. The Company does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected.
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Risk Factors That May Affect Future Results
The Company's business involves a number of risks, some of which are
beyond the Company's control. The following discussion highlights some of these
risks and should be read in conjunction with "Risk Factors" in Part I, Item 1 -
Business, included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At March 31,
1998, the Company had an accumulated deficit of $28,102,569. For the fiscal
years ended December 31, 1997 and 1996, and for the three months ended March 31,
1998, the Company incurred net losses of $10,563,484, $4,917,935 and $2,235,583,
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 sales of both equity and debt securities. The Company's
expense levels are high 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,
1997 states that the Company's recurring losses from operations and the
Company's negative cash flow from operating activities raise substantial doubt
about the Company's ability to continue as a going concern.
Dependence Upon New Products; Uncertain Market Acceptance.
Substantially all of the Company's revenues for the foreseeable future are
expected to be derived from sales of QueryObject System. Between January 1, 1995
and March 31, 1998, the Company realized software product revenue from only
eight QueryObject System installations, one of which (sold in 1995) was a
pre-production beta version. Further, the Company has recently 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 the development of new and enhanced versions of the
product. The failure to achieve broad market acceptance of QueryObject System
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 year ended December
31, 1997 and for the three months ended March 31, 1998 were $1,012,159 and
$111,861, respectively. Total revenues for the periods noted above included four
sales and one sale, respectively, of QueryObject System. Prior to 1997, the
Company's revenues were derived primarily from contract services provided to
customers using the Company's proprietary data analysis technology. The Company
has discontinued this business. The Company believes that comparisons of its
future operating results to operating results presented herein will not be
meaningful.
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Limited Working Capital; Need For Additional Funding. At March 31,
1998, the Company had working capital of $1,497,279. The Company has had a
limited operating history as a software product company and has not made
significant sales of its products. Therefore, revenues are difficult to predict.
Based on its current operating plan, the Company believes that its current cash
and cash equivalent position is sufficient to meet its working capital and
capital expenditure requirements for the next four months. It is more likely
than not that cash generated from operations will be insufficient to satisfy the
Company's liquidity requirements beyond four months, and as a result, the
Company will seek to sell additional equity or convertible debt securities. To
date, the Company has no commitments, agreements or understandings with respect
to such additional financing and there can be no assurance that the Company will
be able to consummate any such transaction. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders.
Potentially Limited Trading Market; Possible Volatility of Stock Price.
The Common Stock is listed on the Nasdaq SmallCap Market ("Nasdaq"). Under
recently implemented Nasdaq rules, in order for the Company to remain eligible
for listing on Nasdaq, (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 currently satisfies Nasdaq listing and
maintenance standards, the Company believes that without additional financing
(of which there can be no assurance), the Company could have less than
$2,000,000 in net tangible assets by June 30, 1998. 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. As a
result of such delisting of the Common Stock from Nasdaq, it may be more
difficult for investors to dispose of, or to obtain accurate quotations as to
the market value of, the Common Stock.
The regulations of the Securities and Exchange Commission
("Commission") promulgated under the Securities Exchange Act of 1934, as
amended, require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market. In the absence of an active
trading market, holders 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.
17
<PAGE>
Dependence on Significant Customers. For the fiscal year ended December
31, 1997 and for the three months ended March 31, 1998, one customer in each
period accounted for 65% and 67%, respectively, of the Company's total revenues.
The Company does not know at this time if significant future revenues from these
customers will occur.
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 $7,500 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.
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Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On November 19, 1997 the Commission declared effective the Company's
Registration Statement on Form SB-2 (File No. 333-34667) relating to the initial
public offering ("IPO") of 2,500,000 shares of common stock, $.001 par value
(the "Common Stock") of the Company at a price per share of $6.00. Subsequent to
the information provided in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997, the Company has used proceeds of the IPO as
follows; $1,062,000 has been 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, $525,000 has been used for research and
development including enhancements to existing features and development of new
functions for QueryObject System and $546,000 of the proceeds of the IPO have
been used for working capital and general corporate purposes. The remaining
amount of the proceeds from the IPO, $3,157,000, have been invested temporarily
in investment grade, short-term, interest bearing instruments.
Item 5. Other Information
Pursuant to a separation agreement (the "Separation Agreement") dated
as of March 10, 1998, by and between the Company and Mark A. Chroscielewski, Mr.
Chroscielewski's employment agreement and employment with the Company was
terminated effective March 10, 1998. Mr. Chroscielewski will continue to serve
as the Company's Chairman of the Board until May 26, 1998. The Separation
Agreement provides for a severance payment of $150,000 payable over a one-year
period beginning March 10, 1998 and a payment of $151,896 in settlement of
unpaid and accrued salary and vacation owed to Mr. Chroscielewski. The Company
also agreed to extend the terms of all of the stock options that had previously
been granted to Mr. Chroscielewski until December 31, 1999 and enter into a
reseller agreement relating to the Company's products with an entity to be
formed by Mr. Chroscielewski. Pursuant to the Separation Agreement, Mr.
Chroscielewski has agreed until March 10, 1999 not to (i) compete with the
Company and (ii) take such actions as attempting to acquire control of the
Company or initiating a tender or exchange offer, merger or other business
combination.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Separation Agreement, as amended, between the Company and Mark A.
Chroscielewski (Exhibit 10.15)
Statement of Computation of Net Income Per Share (Exhibit 11.1)
Financial Data Schedule (Exhibit 27.1)
Reports of Form 8-K
No Reports on Form 8-K were filed during the quarter ended March
31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 13, 1998 CROSSZ SOFTWARE CORPORATION
By: /s/ Daniel M. Pess
------------------------------------------------
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
<PAGE>
PRELIMINARY COPY
FOR INFORMATION OF THE SECURITIES AND EXCHANGE COMMISSION ONLY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
QUERYOBJECT SYSTEMS CORPORATION
PROXY -- SPECIAL MEETING OF STOCKHOLDERS
AUGUST 12, 1998
The undersigned, a stockholder of QueryObject Systems Corporation, a
Delaware corporation (the "Company"), does hereby appoint Alan W. Kaufman and
Daniel M. Pess, and each of them, the true and lawful attorneys and proxies with
full power of substitution, for and in the name, place and stead of the
undersigned, to vote all of the shares of Common Stock of the Company which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Stockholders of the Company (the "Special Meeting") to be held at the
Company's principal executive offices, located at 60 Charles Lindbergh
Boulevard, Uniondale, New York 11553, on Wednesday, August 12, 1998 at 10:00
A.M., local time, or at any adjournment or adjournments thereof.
The undersigned hereby instructs said proxies or their substitutes:
1. TO APPROVE THE SHARE ISSUANCE PROPOSAL.
______ FOR _____ AGAINST _____ ABSTAIN
2. DISCRETIONARY AUTHORITY:
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER AND FURTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH ANY DIRECTIONS HEREINBEFORE
GIVEN. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO APPROVE THE
ISSUANCE IN A PRIVATE PLACEMENT OF SHARES OF COMMON STOCK OF THE COMPANY
REPRESENTING 20% OR MORE OF THE NUMBER OF ISSUED AND OUTSTANDING SHARES OF SUCH
COMMON STOCK.
The undersigned hereby revokes any proxy or proxies heretofore given,
and ratifies and confirms that all the proxies appointed hereby, or any of them,
or their substitutes, may lawfully do or cause to be done by virtue hereof. The
undersigned hereby acknowledges receipt of a copy of the Notice of Special
Meeting and Proxy Statement, both dated July 24, 1998, a copy of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997 and a copy of
the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1998.
Dated _______________________ 1998
_____________________________ (L.S.)
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