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 September 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13587
QUERYOBJECT SYSTEMS CORPORATION
Formerly "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)
CrossZ Software Corporation
(Former name of registrant)
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 October 31, 1998 there were 5,121,422 shares of the
Registrant's common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No /X/
================================================================================
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of September 30, 1998 (unaudited)...............................3
Condensed Consolidated Statement of Operations For the three
months and nine months ended September 30, 1998
and 1997 (unaudited) ...............................................4
Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 1998 and 1997 (unaudited)...5
Notes to the Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis or Plan of Operation..........10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........................21
Item 4. Submission of Matters to a Vote of Security Holders................22
Item 5. Other Information..................................................22
Item 6. Exhibits and Reports on Form 8-K...................................22
SIGNATURES...................................................................23
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
(Unaudited)
September 30,
1998
ASSETS
Current assets
Cash and cash equivalents $ 45,820
Accounts receivable, net of allowance for doubtful
accounts of $30,000 259,595
Deferred offering costs 41,340
Restricted certificate of deposit 496,808
Prepaid expenses and other current assets 47,654
Total current assets 891,217
Property and equipment, net 1,034,325
Deposits and other assets 148,180
------------
Total assets $ 2,073,722
------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 766,189
Accrued expenses 855,072
Deferred revenue 52,186
Loan payable to stockholders 457,749
Customer advance 300,000
Capital lease obligations due within one year 203,885
------------
Total current liabilities 2,635,081
Notes payable 410,000
Capital lease obligations 215,834
Deferred rent 269,605
------------
Total liabilities 3,530,520
------------
Stockholders? deficit
Preferred stock, 2,000,000 shares authorized;
none issued and outstanding --
Common stock, $0.001 par value: 30,000,000 shares
authorized; 5,121,422 shares issued and outstanding 5,121
Additional paid-in capital 30,509,181
Accumulated deficit (31,971,100)
------------
Total stockholders' deficit (1,456,798)
------------
Total liabilities and stockholders' deficit $ 2,073,722
------------
See accompanying notes to the Condensed Consolidated Financial Statements.
3
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues
<S> <C> <C> <C> <C>
Software licenses............................... $ 177,500 $ 95,000 $ 312,500 $ 493,750
Services and maintenance........................ 25,064 196,479 86,090 292,856
Total revenues........................ 202,564 291,479 398,590 786,606
Cost of revenues
Software licenses............................... 3,750 3,804 5,250 9,611
Services and maintenance........................ 16,229 70,990 62,140 125,729
Total cost of revenues................ 19,979 74,794 67,390 135,340
Gross Profit......................................... 182,585 216,685 331,200 651,266
Operating expenses
Sales and marketing............................. 975,097 1,283,137 3,443,543 3,344,456
Research and development........................ 596,842 691,932 1,778,098 1,889,663
General and administrative...................... 366,890 356,494 1,217,620 964,929
Total operating expenses.............. 1,938,829 2,331,563 6,439,261 6,199,048
Loss from operations................................. (1,756,244) (2,114,878) (6,108,061) (5,547,782)
Interest income...................................... 11,819 11,000 113,184 38,093
Interest expense..................................... (31,695) (369,365) (109,031) (470,977)
Other income (expense)............................... -- -- (206) 542
Net loss............................................. $ (1,776,120) $(2,473,243) $(6,104,114) $(5,980,124)
------------ ------------- ------------ ------------
Basic net loss per share............................. $ (.35) $ (.98) $ (1.19) $ (2.38)
Weighted average shares used in basic per share
computation (Note 3)............................ 5,121,422 2,534,174 5,119,538 2,517,824
------------ ------------- ------------ ------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
4
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities
<S> <C> <C>
Net loss ................................................ $ (6,104,114) $ (5,980,124)
Adjustments to reconcile net loss to net cash used in
operating activities ....................................
Depreciation and amortization.................................. 310,021 259,616
Amortization of debt discount.................................. -- 179,447
Amortization of debt issuance costs............................ -- 54,781
Loss on sale of computer equipment............................. 206 --
Options issued for consulting services......................... 114,102 164,000
Changes in operating assets and liabilities
Accounts receivable, net....................................... 40,172 393,556
Prepaid expenses and other current assets...... 599 (64,518)
Deferred offering costs........................ (41,340) (636,666)
Deposits and other assets...................................... 2,094 (57,587)
Accounts payable and accrued expenses.......................... (20,865) 712,550
Deferred rent.................................................. 672 9,970
Deferred revenue............................................... 22,151 (4,821)
Net cash used in operating activities................ (5,476,302) (4,969,796)
Cash flows from investing activities
Loan receivable from stockholder......................... (65,000) --
Acquisitions of property and equipment................... (96,278) (462,540)
Purchase of restricted certificate of deposit............ (22,554) (28,448)
Net cash used in investing activities................ (183,832) (490,988)
Cash flows from financing activities
Proceeds from issuance of common stock.................. 10,384 58,220
Proceeds from interim and bridge financing notes payable to
shareholders, net 410,000 4,506,970
Repayment of interim financing notes payable............. -- (500,000)
Release of restricted certificate of deposit............. 403,586 --
Repayment of loan payable to stockholders................ (433,586) (90,000)
Payments of capital lease obligations.................... (163,282) (198,055)
Repayment of loan receivable from stockholder............ 12,300 --
Proceeds from sale-leaseback transaction................. 29,202 409,429
Net cash provided by financing activities.......... 268,604 4,186,564
Net decrease in cash and cash equivalents...................... (5,391,530) (1,274,220)
Cash and cash equivalents at beginning of year................. 5,437,350 1,367,566
Cash and cash equivalents at end of period..................... $ 45,820 $ 93,346
----------- -----------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements.
5
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
(formerly CrossZ Software Corporation)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated 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 consolidated
results of operations for the period ended September 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter,
for the entire fiscal year ending December 31, 1998, or for any future period.
In May 1998, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation changing the name of the Company to
?QueryObject Systems Corporation?.
In May 1998, the Company formed QueryObject Systems Corporation Ltd., a
wholly owned subsidiary based in the United Kingdom. The condensed consolidated
financial statements include the accounts of the Company and its subsidiary. All
significant intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to the condensed financial
statements for the nine months ended September 30, 1997 to conform to the 1998
presentation.
2. Initial Public Offering
On November 20, 1997, the Company's Initial Public Offering ("IPO") of
2,500,000 shares of common stock, $.001 par value (the "Common Stock") at a
price per share of $6.00 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 IPO, all of the Company's then outstanding
preferred stock was converted into an aggregate of 1,697,313 shares of Common
Stock.
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.
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<PAGE>
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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Interest paid during the period................................ $ 85,014 $ 109,983
Schedule of non cash investing and financing activities:
Series D Preferred Stock, issued for dividends........... -- 760,920
Common Stock warrants issued in connection with bridge financing -- 1,512,397
</TABLE>
5. 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.
6. Liquidity and Business Risks
The Company has incurred operating losses since inception, and negative
cash flows from operating activities. As of September 30, 1998, the Company had
an accumulated deficit of $31,971,100. 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. As previously reported,
the Company anticipated that cash generated from operations would be
insufficient to satisfy the Company's liquidity requirements, and therefore the
Company has been seeking to sell additional equity securities through a private
offering to "accredited investors." See "Note 7" below and "Management's
Discussion and Analysis or Plan of Operation -"Liquidity and Capital Resources".
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.
7. Subsequent Events
On October 13, 1998, the Company had the initial closing of a private
placement (the "Series A Private Placement") of $3,500,000 or 1,750,000 Units
(the "Series A Units"), each Series A Unit consisting of one share of Series A
Convertible Preferred Stock (the "Series A Preferred Stock"), and a warrant (the
"Series A Warrants") to purchase 2.5 shares of Common Stock at a per share
exercise price equal to $.50. The Series A Units were sold at a purchase price
of $2.00 per Series A Unit and each share of Series A Preferred Stock is
initially convertible into four shares of Common Stock. At the initial closing
of the Series A Private
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Placement, an amount equal to 20% of the Series A Units were sold and $583,650
(after deduction of commissions and expenses payable to the placement agent) was
paid to the Company. In consideration thereof, the Company issued 350,000 shares
of Series A Preferred Stock and Series A Warrants to purchase an aggregate of
875,000 shares of Common Stock. On November 12, 1998, the Company had the second
closing of the Series A Private Placement. At the second closing, an amount
equal to an additional 20% of the Series A Units were sold and $660,800 was paid
to the Company. In consideration thereof, the Company issued 350,000 shares of
Series A Stock and Series A Warrants to purchase an aggregate of 875,000 shares
of Common Stock. Thereafter, the timing and amount of any transfer of funds will
be made at the sole discretion of a buyer representative (the "Buyer
Representative") and there can be no assurance that there will be any additional
transfer of funds.
On November 3, 1998, the Company had the initial closing of a private
placement (the "Series B Private Placement") of $1,000,000 or 10 Units (the
"Series B Units"), each Series B Unit consisting of ten thousand shares of
Series B Convertible Preferred Stock (the "Series B Preferred Stock"), and
warrants (the "Series B Warrants") to purchase an aggregate of 125,000 shares of
Common Stock at a per share exercise price equal to $.50. The Series B Units
were sold at a purchase price of $100,000 per Series B Unit and each share of
Series B Preferred Stock is initially convertible into twenty shares of Common
Stock. At the initial closing of the Series B Private Placement, an amount equal
to 20% of the Series B Units were sold and $170,900 (after deduction of
commissions and expenses payable to the placement agent) was paid to the
Company. In consideration thereof the Company issued 20,000 shares of Series B
Preferred Stock and Series B Warrants to purchase an aggregate of 250,000 shares
of Common Stock. Thereafter, the timing and amount of any additional transfer of
funds will be made at the sole discretion of the Buyer Representative and there
can be no assurance that there will be any additional transfer of funds.
In connection with the Series A Private Placement and the Series B
Private Placement, the placement agent was granted an option to purchase
additional Series A and Series B Units equal to 10% of the Series A and Series B
Units sold in the respective Private Placements and received a commission and
non-accountable expense allowance equal to 5.6% and 9.3%, respectively, of the
gross proceeds received by the Company in the Series A and Series B Private
Placements. The securities offered and sold in the Series A and Series B Private
Placements have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States by the holders
thereof absent registration or an applicable exemption from registration
requirements. The Company is required to file a Registration Statement with
respect to the underlying shares of Common Stock on or about November 30, 1998.
The following is a description of the securities issued in the Series A
Private Placement and the Series B Private Placement:
Series A Preferred Stock and Series B Preferred Stock
Stated Value. Each share of Series A Preferred Stock has a stated value
equal to $2.00 (the "Series A Stated Value") and each share of Series B
Preferred Stock has a stated value equal to $10.00 (the "Series B Stated
Value").
8
<PAGE>
Liquidation Preference. Upon a liquidation of the Company (including a
sale by the Company of all or substantially all of its assets or a merger or
consolidation of the Company with another Company where the Company is not the
surviving entity), the assets of the Company available for distribution to the
stockholders of the Company (after payment or provision for liabilities of the
Company), whether from capital, surplus or earnings, shall be distributed in the
following order of priority: (i) the holders of the Series A Preferred Stock and
the Series B Preferred Stock shall rank pari passu with respect to
distributions, (ii) the holders of the Series A Preferred Stock and Series B
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of any Junior Securities (as defined below) of the
Company, an amount equal to the Series A Stated Value and Series B Stated Value,
respectively, for each share of the Series A Preferred Stock and Series B
Preferred Stock then outstanding and (iii) the remaining assets of the Company
available for distribution, if any, to the stockholders of the Company shall be
distributed pro rata to the holders of issued and outstanding shares of Common
Stock.
Ranking. The Series B Preferred Stock will rank pari passu with the
Series A Preferred Stock with respect to rights on liquidation, dissolution or
winding up of the Company. The Series A Preferred Stock and Series B Preferred
Stock will rank senior to all other classes and series of capital stock of the
Company then existing or thereinafter authorized, issued or outstanding,
including, without limitation, the Common Stock, and any other classes and
series of capital stock of the Company then or thereinafter authorized, issued
or outstanding (collectively, "Junior Securities").
Dividends. The holders of the Series A Preferred Stock and Series B
Preferred Stock shall not be entitled to receive any stated dividend payment,
whether in cash or otherwise.
Conversion. The holders of the Series A Preferred Stock have the right,
subject to adjustment to protect against dilution, at the holder's option, at
any time, to convert each share of Series A Preferred Stock into four shares of
Common Stock (the "Series A Conversion Rate") and the holders of the Series B
Preferred Stock have the right, subject to adjustment to protect against
dilution, at the holder's option, at any time, to convert each share of Series B
Preferred Stock into twenty shares of Common Stock (the "Series B Conversion
Rate"). The shares of Common Stock that are issuable upon the conversion of the
Series A Preferred Stock and the Series B Preferred Stock are hereinafter
referred to as the "Conversion Shares."
Voting. The holders of the Series A Preferred Stock and Series B
Preferred Stock are entitled to vote on all matters submitted for a vote to the
stockholders of the Company. The holder of a share of Series A Preferred Stock
and Series B Preferred Stock is entitled to cast that number of votes as equals
the number of votes entitled to be cast by a holder of the shares of Common
Stock into which it is convertible as of the record date of the proposed
stockholder action. The holders of the Series A Preferred Stock and the holders
of the Series B Preferred Stock each vote as separate classes on all matters
upon which the Delaware General Corporation Law specifically requires the
holders of such preferred stock to vote as a separate class.
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Warrants
Each Series A and Series B Warrant entitles the registered holder to
purchase 2.5 shares of Common Stock, subject to adjustment to protect against
dilution, at a per share exercise price equal to $.50 (the "Exercise Price"),
commencing on the date of the closing of the Series A Private Placement and the
Series B Private Placement, respectively, and ending on the third anniversary of
the respective closing, unless extended by the Company, at its discretion. The
Series A and Series B Warrants may be called for redemption by the Company at a
redemption price of $.01 per warrant upon not less than 30 days prior written
notice if the closing price of the Common Stock shall have been at least $1.60
per share (subject to adjustment in the event of a subdivision or combination of
the shares of Common Stock) on 20 trading days during any 30-consecutive day
trading period ending not more than three days prior to the date such notice is
given. The shares of Common Stock that are issuable upon the exercise of the
Series A and Series B Warrants are hereinafter referred to as the "Warrant
Shares."
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 Condensed Consolidated Financial Statements of the Company and the Notes
thereto 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'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 September 30, 1998 had an accumulated deficit of $31,971,100. 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. The Company markets and
sells 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 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, the Company's product line includes products with current sales prices
from $60,000 to over $250,000. As a result, the timing of the receipt and
shipment of a single order can have a significant impact on the Company's
revenues, results of operations and cash flows for a particular period.
11
<PAGE>
Results of Operations
The following table sets forth certain items in the Company's condensed
consolidated statement of operations for the three and nine month periods ended
September 30, 1998 and 1997 ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues
<S> <C> <C> <C> <C>
Software licenses..................................... $ 178 $ 95 $ 313 $ 494
Services and maintenance.............................. 25 196 86 293
------ -------- ------ -------
Total revenues 203 291 399 787
------ -------- ------ -------
Cost of revenues
Software licenses..................................... 4 4 5 10
Services and maintenance.............................. 16 71 62 126
------ -------- ------ -------
Total cost of revenues 20 75 67 136
------ -------- ------ -------
Gross profit.............................................. 183 216 332 651
Operating expenses
Sales and marketing................................... 975 1,283 3,444 3,344
Research and development.............................. 597 692 1,778 1,890
General and administrative............................ 367 356 1,218 965
Total operating expenses 1,939 2,331 6,440 6,199
------ -------- ------ -------
Loss from operations...................................... (1,756) (2,115) (6,108) (5,548)
Interest income......................................... 12 11 113 38
Interest expense........................................ (32) (369) (109) (471)
Other income............................................ -- -- -- 1
-------- -------- -------- -------
Net loss.................................................. $ (1,776) $ (2,473) $ (6,104) $(5,980)
-------- -------- -------- -------
</TABLE>
Revenues
The Company's license revenues have been generated from sales of
QueryObject System. Service revenues have been generated from fees paid by
customers on a project or contract basis for data analysis by the Company using
its proprietary software, and are recognized over the term of the respective
agreements. Maintenance revenues consist of ongoing support and product updates
that are recognized ratably over the term of the contract, which is typically
twelve months.
Total revenues decreased by $88,000, or 31%, from $291,000 in the third
quarter of 1997 to $203,000 in the third quarter of 1998. For the first nine
months, total revenues decreased by $388,000, or 49%, from $787,000 in 1997 to
$399,000 in 1998. These decreases were primarily due to a decrease in service
revenues in the 1998 periods as compared to 1997 as a result of the curtailment
of service-based engagements. The Company recorded license revenue from the sale
of three licenses in the third quarter in 1998, whereas the Company recorded
license revenue from the
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sale of one license in the third quarter of 1997. The Company recorded license
revenue from the sale of five licenses in the nine month period ended in 1998,
whereas the Company recorded license revenue from the sale of two licenses in
the nine month period ended in 1997. However, one license sold in the second
quarter of 1997 was a multi-platform sale pursuant to a master reseller
agreement, and therefore was priced at a significantly higher rate than a single
platform sale. Service and maintenance revenue decreased by $171,000, or 87%,
from $196,000 in the third quarter of 1997 to $25,000 in the third quarter of
1998. For the first nine months, service and maintenance revenue decreased by
$207,000, or 71%, from $293,000 in 1997 to $86,000 in 1998. These decreases were
primarily due to the curtailment of service-based engagements.
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 1.7% and 2.1%, respectively,
for the three month and nine month periods ended September 30, 1998, which
resulted from the sale of three licenses in the third quarter and five licenses
for the nine months. Cost of software license revenues as a percentage of
software license revenues was 4.0% and 1.9%, respectively, for the three month
and nine month periods ended September 30, 1997, which resulted from the sale of
one license in each of the second and third quarters of 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 as a percentage of services and maintenance
revenues were 64.8% and 72.2%, respectively, for the three month and nine month
periods ended September 30, 1998. Cost of services and maintenance revenues as a
percentage of services and maintenance revenues were 36.1% and 42.9%,
respectively, for the three month and nine month periods ended September 30,
1997. The higher percentages during the 1998 periods were primarily due to
higher personnel costs that were necessary for 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 decreased by $308,000, or 24%, from
$1,283,000 in the third quarter of 1997 to $975,000 in the third quarter of
1998. For the first nine months, sales and marketing expenses increased by
$100,000, or 3%, from $3,344,000 in 1997 to $3,444,000 in 1998. The decrease for
the third quarter of 1998 as compared to 1997 was primarily due to reduced
personnel related costs and reduced recruiting costs. The increase for the nine
month periods were primarily due to increased personnel costs, and increased
costs associated with public relations, collateral material and trade shows.
These increases were offset, in part, by reduced recruiting costs in the 1998
periods. 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.
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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 decreased by $95,000, or 14%, from $692,000 in
the third quarter of 1997 to $597,000 in the third quarter of 1998. For the
first nine months, research and development expenses decreased by $112,000, or
6%, from $1,890,000 in 1997 to $1,778,000 in 1998. These decreases were
primarily due to lower personnel related costs and lower recruiting costs as
compared to 1997. 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 $11,000, or 3%, from $356,000 in the third
quarter of 1997 to $367,000 in the third quarter of 1998. For the first nine
months, general and administrative expenses increased by $253,000, or 26%, from
$965,000 in 1997 to $1,218,000 in 1998. These increases were primarily due to
higher consulting fees, increased professional expenses associated with being a
public company and 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,
including investor relations programs.
Interest Income and Interest Expense
Interest income represents income earned on the Company's cash and cash
equivalents. Interest income increased by $1,000, or 9%, from $11,000 in the
third quarter of 1997 to $12,000 in the third quarter of 1998. For the first
nine months, interest income increased by $75,000, or 197%, from $38,000 in 1997
to $113,000 in 1998. These increases were 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 $337,000, or 91%, from
$369,000 in the third quarter of 1997 to $32,000 in the third quarter of 1998.
For the first nine months, interest expense decreased by $362,000, or 77%, from
$471,000 in 1997 to $109,000 in 1998. These decreases were primarily due to the
inclusion in 1997 of accrued interest expense and amortization of debt discount
and debt issuance costs relating to the bridge financings consummated in 1997.
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
14
<PAGE>
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 bridge and interim financings payable. Upon completion of the IPO, all
outstanding shares of then outstanding preferred stock (a total of approximately
1,697,000 shares) were converted into shares of Common Stock.
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 the completion of the IPO.
However, as of September 30, 1998 (approximately 10 months after the IPO), the
Company had negative working capital of $1,744,000. 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 considered various
means of procuring additional financing and had determined that a private
offering of the Company's securities would be in the best interests of the
Company.
In October and November 1998, the Company consummated the initial
closing of the Series A and Series B Private Placement and the second closing of
the Series A Private Placement, pursuant to which the Company received net
proceeds of $1,414,000. See Note 7 to the Condensed Consolidated Financial
Statements. The net proceeds of the Series A and Series B Private Placements
will be used for sales and marketing, research and development, and general
working capital purposes in the proportions of 40%, 40% and 20%, respectively.
As noted in Note 7 to the Condensed Consolidated Financial Statements above, the
timing and amount of any additional transfer of funds shall be made at the sole
discretion of the Buyer Representative and there can be no assurance that there
will be any additional transfer of funds. Assuming that subsequent transfers of
funds are consummated and that the Company's sales forecasts are achieved, the
Company anticipates that these fundings will be sufficient to satisfy the
Company's cash requirements until September 1999. If the Company is unable to
effect subsequent transfers of funds, or obtain other short-term financing, the
Company will lack the cash necessary to continue operating.
In September 1998, the Company borrowed $410,000 from stockholders of
the Company in exchange for unsecured promissory notes (the "Notes Payable").
The Notes Payable bear interest at 12% per annum and are due at the earlier of
March 2000 or the successful consummation of the Series A and Series B Private
Placement. Upon the initial closing of the Series A Private Placement in October
1998, $20,000 of such Notes was converted into Series A Unites. The
15
<PAGE>
balance of the Notes Payable, $390,000, are still outstanding. Further, in
October 1998, the Company borrowed an additional $80,000 from stockholders of
the Company in exchange for notes under similar terms and conditions as set
forth above. In November 1998, the $80,000 notes were repaid.
Under Rule 4310(c)(25)(H)(i) of the Nasdaq Stock Market ("Rule
4310(c)(25)(H)(i)"), 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"). In connection with the Series A Private
Placement and the Series B Private Placement, the Company held a special meeting
of stockholders on August 12, 1998 and at such meeting it received the approval
of the issuance of shares of Common Stock and the granting of warrants
exercisable into Common Stock in excess of the 20% Limitation. However, at such
meeting the Company's stockholders did not specifically approve the issuance of
preferred stock. While under the Delaware General Corporation Law and the terms
of the Company's Amended and Restated Certificate of Incorporation the Company's
Board of Directors has the power to issue the Series A Preferred Stock and
Series B Preferred Stock, the issuance of such preferred stock may violate
Nasdaq Rule 4310(c)(25)(H)(i) since the Series A Preferred Stock and Series B
Preferred Stock were not specifically authorized. If Nasdaq deems such issuance
to be in violation of Nasdaq Rule 4310(c)(25)(H)(i), the Company's Common Stock
may be delisted from Nasdaq and trading, if any, of the Common Stock would
thereafter be conducted on the OTC Bulletin Board. See "Risk Factors -- Possible
Nasdaq and Boston Delisting; Potentially Limited Trading Market."
Prior to the IPO, the Company 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 a bridge financing, through capital and operating equipment leases, the
issuance of notes payable and the Loan Agreement. As of September 30, 1998, the
Company had $46,000 in cash and cash equivalents. Net cash used in operating
activities was $5,476,000 and $4,970,000 for the nine months ended in 1998 and
1997, respectively. For 1998, net cash used in operating activities was
primarily attributable to a net loss of $6,104,000, less depreciation and
amortization of $310,000 and a decrease in accounts receivable of $240,000. For
1997, net cash used in operating activities was primarily attributable to a net
loss of $5,980,000 less depreciation and amortization of $494,000, an increase
in accounts payable and accrued expenses of $713,000, a decrease in accounts
receivable of $394,000 and an increase in deferred offering costs of $637,000.
Net cash provided by financing activities of $4,187,000 in 1997 resulted
primarily from interim and bridge financing notes payable to stockholders and
the proceeds of sale-leaseback transactions.
The Company does not currently have a line of credit with a commercial
bank. Under the Loan Agreement, the Company has outstanding borrowings in the
aggregate principal amount of approximately $458,000, such indebtedness secured
by a security interest in and lien on all of the Company's assets. An addendum
(the "Addendum") to the Loan Agreement provides that H.C.C. Financial, 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 $497,000 as of September 30, 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
16
<PAGE>
Company began repaying the indebtedness under the Loan Agreement, utilizing the
funds on deposit in the restricted Certificate of Deposit. In October 1998, the
remaining balance was repaid in full and the restricted Certificate of Deposit
account was closed.
As of September 30, 1998, the Company's principal commitments consisted
of obligations under operating and capital leases (payable through 2001) and
employment agreements (payable through 1999).
Year 2000 Compliance
The Company is aware of the issues related to the Year 2000 that are
associated with the programming code in existing computer systems. The "Year
2000 problem" may affect every computer operation to varying degrees. Systems
that do not properly recognize the Year 2000 could generate erroneous data or
cause a system to fail. Management is in the process of working with its
programmers and software vendors to affirm that the Company is prepared for the
Year 2000. Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
systems improvements to be Year 2000 compliant. However, significant uncertainty
exists concerning the potential costs and effects associated with any Year 2000
compliance. The Company believes that its current products, on all platforms,
are Year 2000 compliant. Any Year 2000 compliance problem of either the Company
or its customers could materially adversely affect the Company's business,
operating results, financial condition and prospects.
The Company has designed and tested the latest versions of its products
to be Year 2000 compliant. There can be no assurances, however, that the
Company's current products do not contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs to
the Company. It is possible that a significant amount of litigation will arise
out of Year 2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may be
affected by such issues. Although the Company is not aware of any material
operational issues or costs associated with preparing its internal systems for
the Year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in its internal systems.
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.
Company May Not Receive All Proceeds From the Offering: Company May
Discontinue Operations. The receipt by the Company of post-closing installments
under the Series S and Series B Private Placements (the "Post-Closing
Installments") is contingent upon the discretion of the Buyer Representative and
the performance of the obligations of the investors under the subscription
agreement. There is no objective criteria under which the Buyer Representative
will use his decision to require the payment of the Post-Closing Installments.
If the Buyer
17
<PAGE>
Representative determines that the Company should not receive any or all the
Post-Closing Installments or an investor refuses to provide a Post-Closing
Installment, the Company may not receive the necessary funds to continue
operations. Moreover, given the continued operating losses of the Company, there
can be no assurance that the Company will be able to continue its operations
even if all Post-Closing Installments are made.
Working Capital Deficiency; Need For Additional Funding. At September
30, 1998, the Company had a deficiency in working capital of $1,743,864. 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. As previously reported, the Company anticipated that cash
generated from operations would be insufficient to satisfy the Company's
liquidity requirements, and as a result, the Company sold additional equity
securities. See "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources." As described under Note 7 to the Condensed
Consolidated Financial Statements, the Company has received net proceeds of
$1,414,000 from the Series A and Series B Private Placement. Pursuant to the
Series A and Series B Private Placements, the timing and amount of any
additional transfer of funds shall be made at the sole discretion of the Buyer
Representative and there can be no assurance that there will be any additional
transfer of funds. Assuming that subsequent transfers of funds are consummated
and that the Company's sales forecasts are achieved, the Company anticipates
that these fundings would be sufficient to satisfy the Company's cash
requirements until September 1999. If the Company is unable to effect subsequent
transfers of funds, or obtain other short-term financing, the Company will lack
the cash necessary to continue operating.
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in the Independent Accountants' Report. At September
30, 1998, the Company had an accumulated deficit of $31,971,100. For the fiscal
years ended December 31, 1997 and 1996, and for the nine months ended September
30, 1998, the Company incurred net losses of $10,563,484, $4,917,935 and
$6,104,114, 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.
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 nine months ended September 30, 1998 were $1,012,159 and
$398,590, respectively. Total revenues for the periods noted above included four
sales and five sales, respectively, of the Company?s product, the QueryObject
18
<PAGE>
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.
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 September 30, 1998, the Company realized software product revenue from only
twelve 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.
Possible Nasdaq and Boston Stock Exchange Delisting; Potentially
Limited Trading Market. The Common Stock is listed on Nasdaq and the Boston
Stock Exchange. Under 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. As of September 30, 1998, the Company had a deficiency
of $1,456,798 in net tangible assets. Nasdaq has advised the Company that the
Company no longer meets the requirements for continued listing and accordingly
the Company has provided Nasdaq its proposal for achieving compliance. Nasdaq
has requested that the Company provide certain additional information by
November 18, 1998. If Nasdaq determines that the proposal will not warrant
continued listing, Nasdaq will issue a Formal Notice of deficiency and the
Common Stock will be delisted pending a hearing. If the Buyer Representative
authorizes the transfer to the Company of all funds to be raised in the Series A
and Series B Private Placements, the Company will add approximately $3,900,000
(after deducting the estimated commissions or expense allowance that may be
payable in connection with sales made through the placement agent and other
expenses of the Series A and Series B Private Placement) to its net tangible
assets. Due to anticipated and continued losses subsequent to September 30,
1998, however, there can be no assurance that such amount will enable the
Company to meet the Nasdaq requirement of $2,000,000 in net tangible assets for
a sustained period. Moreover, Nasdaq has discretionary power to delist companies
from Nasdaq even if they satisfy the requirements for eligibility. As a result,
there can be no assurance that the Company will continue to meet the standards
for continued listing on Nasdaq even if the Company receives the entire amount
of the Post-Closing Installments. Accordingly, the Company may seek to enter
into a transaction or transactions to raise additional equity capital to ensure
that its Common Stock will continue to be listed on Nasdaq. There can be no
assurance that any additional financing, if required, will be available to the
Company on acceptable terms, if at all. In addition to the failure to meet the
financial requirements, the issuance of Preferred Stock may violate Nasdaq Rule
4310(c)(25)(H)(i) because the issuance of Conversion Shares and Warrant Shares
may exceed the 20% limitation and the Company's stockholders did not
specifically approve the issuance of Preferred Stock. The failure to meet the
maintenance criteria
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<PAGE>
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 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, on August 24, 1998, the Company received a letter from the
Boston Stock Exchange informing the Company that it no longer met the Boston
Stock Exchange's minimum shareholder's equity maintenance requirement of
$500,000. The Company has submitted a written response to the Boston Stock
Exchange indicating that such deficiency has been cured. The Boston Stock
Exchange has requested that the Company complete a listing application prior to
making a determination on the adequacy of the Company's response. If the Boston
Stock Exchange determines that the Company's response is not adequate, trading
in the Company's Common Stock could be suspended on the Boston Stock Exchange
and such Common Stock could be delisted.
In the event of Nasdaq and Boston Stock Exchange delisting, the
regulations of the Securities and Exchange Commission ("Commission") promulgated
under the 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 is not listed on Nasdaq or a national securities exchange)
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.
Dependence on Significant Customers. For the fiscal year ended December
31, 1997 and for the nine months ended September 30, 1998, one customer in each
period accounted for 65% and 55%, respectively, of the Company's total revenues.
The Company does not know at this time if significant future revenues from these
customers will occur.
20
<PAGE>
Potential Fluctuations in Periodic Results. The Company's revenues may
be subject to significant variation from period to period due to the
discretionary nature of business intelligence data delivery software purchases
and will be difficult to predict. Further, the Company's product line includes
products with sales prices from $60,000 to over $250,000. 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.
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
As a result of the designation and issuance of the Series A Preferred
Stock and Series B Preferred Stock, (i) the rights of the holders of Common
Stock with respect to liquidation, dissolution or winding up of the Company are
junior to those of the holders of the Series A Preferred Stock and Series B
Preferred Stock, (ii) no dividends may be payable on the Common Stock unless
equivalent dividends are declared and paid concurrently to the holders of the
Series A Preferred Stock and Series B Preferred Stock and (iii) the holders of
the Series A Preferred Stock and Series B Preferred Stock are entitled to vote,
on an as-converted basis, on all matters submitted to a vote of the Common
Stockholders of the Company and the holders of the Series A Preferred Stock and
Series B Preferred Stock vote as separate classes on all matters upon which the
Delaware General Corporation Law specifically require the holders of such
preferred stock to vote as separate classes.
On November 19, 1997 the Commission declared effective the Company's
Registration Statement on Form SB-2 (File No. 333-34667) relating to the IPO.
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; $2,579,000 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, $1,451,000 has been used for
research and development including enhancements to existing features and
development of new functions for QueryObject System and $1,260,000 of the
proceeds of the IPO have been used for working capital and general corporate
purposes. As of September 30, 1998 all of the IPO proceeds have been expended.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting of stockholders of the Company on August 12, 1998,
the stockholders approved a proposal that authorizes the Board of Directors of
the Company to determine (i) the number of shares of Common Stock that would be
issued in a private offering (which could exceed 20% or more of the common Stock
outstanding); (ii) the purchase price of such shares of Common Stock and (iii)
whether warrants would be issued in the private offering and, if so, the terms
and conditions of the warrants.
The vote to authorize the Private Placement was as follows:
For Against Abstain
2,774,528 34,995 21,635
Item 5. Other Information
See Note 7 of Notes to the Condensed Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certificate of Designations, Preferences and Other Rights and
Qualifications of Series A Convertible Preferred Stock (Exhibit
99-A)
Certificate of Correction to the Certificate of Designations,
Preferences and Other Rights and Qualifications of Series A
Convertible Preferred Stock (Exhibit 99-B)
Certificate of Designations, Preferences and Other Rights and
Qualifications of Series B Convertible Preferred Stock (Exhibit
99-C)
Form of Warrant Issued in Private Placement (Exhibit 99-D)
Statement of Computation of Net Loss Per Common Share (Exhibit
11.1)
Financial Data Schedule (Exhibit 27.1)
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1998.
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<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: November 13, 1998 QUERYOBJECT SYSTEMS CORPORATION
By: /s/ Daniel M. Pess
----------------------------------------
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
23
QueryObject Systems Corporation EXHIBIT 11.1
Computation of Net Loss Per Common Share
<TABLE>
<CAPTION>
Three Months ended September 30, 1997 Nine months ended September 30, 1997
------------------------------------- ---------------------------------------
Number of Weighted Number of Weighted
Common Days Average Common Days Average
Shares Outstanding Shares Shares Outstanding Shares
-------- ------------ ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Common stock outstanding at January 1, 1997 2,453,710 91 2,453,710 2,453,710 273 2,453,710
Accretion of series D dividends 88,891 91 44,446 88,891 273 44,446
Exercise of common stock options 1,250 91 1,250 1,250 249 1,140
Exercise of common stock options 8,320 91 8,320 8,320 239 7,284
Exercise of common stock options 2,778 90 2,778 2,778 221 2,249
Exercise of common stock options 6,267 91 6,267 6,267 137 3,145
Exercise of common stock options 13,282 91 13,282 13,282 91 4,476
Exercise of common stock options 6,250 60 4,121 6,250 60 1,374
Weighted average shares used in per share 2,534,174 2,517,824
computation ========= =========
Net loss for the period (2,473,243) (5,980,124)
Net less per common share $ (0.98) $ (2.38)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months ended September 30, 1997 Nine months ended September 30, 1997
------------------------------------- ---------------------------------------
Number of Weighted Number of Weighted
Common Days Average Common Days Average
Shares Outstanding Shares Shares Outstanding Shares
-------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Common stock outstanding at January 1, 1998 5,110,605 91 5,110,605 5,110,605 273 5,110,605
Exercise of common stock options 1,875 91 1,875 1,875 259 1,779
Exercise of common stock options 2,118 91 2,118 2,118 258 2,002
Exercise of common stock options 4,584 91 4,584 4,584 230 3,862
Exercise of common stock options 625 91 625 625 215 492
Exercise of common stock options 365 91 365 365 196 262
Exercise of common stock options 1,250 91 1,250 1,250 117 536
Weighted average shares used in per share 5,121,422 5,119,538
computation ========= =========
Net loss for the period (1,776,120) (6,104,114)
Net less per common share $ (0.35) $ (1.19)
========== ==========
</TABLE>
QUERYOBJECT SYSTEMS CORPORATION
CERTIFICATE OF DESIGNATION, PREFERENCES
AND OTHER RIGHTS AND QUALIFICATIONS OF
SERIES A CONVERTIBLE PREFERRED STOCK
QUERYOBJECT SYSTEMS CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the Board of
Directors of the Corporation (the "Board") by the Amended and Restated
Certificate of Incorporation of said Corporation (the "Certificate of
Incorporation"), and pursuant to the provisions of Section 151 of the Delaware
General Corporation Law, there hereby is created, out of the 2,000,000 shares of
Preferred Stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred
Stock consisting of 1,881,000 shares, $.001 par value per share, to be
designated "Series A Convertible Preferred Stock," and to that end the Board
adopted a resolution providing for the designation, preferences and relative,
participating, optional or other rights, and the qualifications, limitations and
restrictions, of the Series A Convertible Preferred Stock, which resolution is
as follows:
RESOLVED, that the Certificate of Designation, Preferences and
Other Rights and Qualifications of Series A Convertible Preferred
Stock, dated October 9, 1998 (the "Certificate of Designation") be and
is hereby authorized and approved, which Certificate of Designation
shall be filed with the Delaware Secretary of State in the form as
follows:
1. Designations and Amount and Rank. One Million Eight Hundred
Eighty-One Thousand (1,881,000) shares of the Preferred Stock of the
Corporation, par value $.001 per share, shall constitute a series of Preferred
Stock designated as "Series A Convertible Preferred Stock" (the "Series A
Preferred Stock"). The Series A Preferred Stock shall rank senior to all classes
and series of capital stock of the Corporation now or hereafter authorized,
issued or outstanding, including, without limitation, the Common Stock, par
value $.01 per share of the Corporation (the "Common Stock"), and any other
classes and series of capital stock of the Corporation now or hereafter
authorized, issued or outstanding (collectively, the "Junior Securities"). In
addition, the Corporation will not issue any class or series of any class or
capital stock that ranks pari passu with the Series A Preferred
<PAGE>
Stock with respect to rights on liquidation, dissolution or winding up of the
Corporation.
2. Dividends.
(a) The holders of the Series A Preferred Stock shall not be
entitled to receive any stated amount of dividends, cash or otherwise, in
connection with such Series A Preferred Stock. No dividends shall be payable
upon any Junior Securities unless equivalent dividends, on an as-converted
basis, are declared and paid concurrently on the Series A Preferred Stock. No
dividends shall be payable on any other class of preferred stock during such
time as the Series A Preferred Stock remains outstanding.
(b) Notwithstanding anything to the contrary provided herein,
unless and until a dividend is paid to other holders of the Corporation's
capital stock, holders of Series A Preferred Stock shall not be entitled to
receive any dividends.
3. Rights on Liquidation, Dissolution or Winding Up,
Etc.
(a) In the event of any voluntary or involuntary
liquidation, dissolution, Change of Control (as hereinafter defined) or winding
up of the Corporation (each, a "Liquidation"), the assets of the Corporation
available for distribution to its stockholders, whether from capital, surplus or
earnings, shall be distributed in the following order of priority:
(i) The holders of Series A Preferred Stock shall be
entitled to receive, prior and in preference to any
distribution to the holders of Common Stock, any other series
or class of Preferred Stock or any other class of the
Corporation's capital stock, whether now existing or hereafter
created, an amount equal to the sum of (A) the greater of (1)
the amount they would have received had they converted all of
the shares of Series A Preferred Stock into shares of Common
Stock immediately prior to such Liquidation and (2) the Stated
Value (as hereinafter defined) per share for each share of
Series A Preferred Stock then outstanding and (B) an amount
equal to all declared but unpaid dividends on such share of
Series A Preferred Stock as of the date of such Liquidation.
The "Stated Value" of each share of Series A Preferred Stock
shall, without adjustment, be $2.00.
(ii) After distribution of the amounts set forth in
Section 3(a)(i) hereof, the remaining assets of the
Corporation available for distribution, if any, to the
stockholders of the Corporation shall be distributed to the
holders of issued and outstanding shares of Common Stock.
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<PAGE>
(b) A "Change of Control" means (i) the direct or indirect
sale, lease, exchange or other transfer of all or substantially all of the
assets of the Corporation to any person or entity or group of persons or
entities acting in concert as a partnership or other group or (ii) the merger or
consolidation of the Corporation with or into another corporation or
corporations with the effect that the then existing stockholders of the
Corporation hold less than 50% of the combined voting power of the then
outstanding securities of the surviving corporation of such merger or the
corporation resulting from such consolidation ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors.
4. Voting Rights.
Each holder of shares of Series A Preferred Stock shall be
entitled to such number of votes in respect of such shares of Series A Preferred
Stock as shall equal the number of votes into which the holder of the largest
whole number of shares of Common Stock into which such shares of Series A
Preferred Stock are then convertible pursuant to Section 5 hereof. Such holder
would be entitled, to vote on all matters to which holders of Common Stock shall
be entitled to vote, voting together as a single class with such holders of
Common Stock (except as hereinafter provided) in the same manner and with the
same effect as such holders of Common Stock subject to Article EIGHTH of the
Certificate of Incorporation. The holders of shares of Series A Preferred Stock
shall also vote as a separate class on all matters that the General Corporation
Law of the State of Delaware specifically requires the holders of shares of the
Series A Preferred Stock to vote as a separate class.
5. Conversion of Series A Preferred Stock.
(a) The holders of Series A Preferred Stock shall have the
right, at such holders' option, at any time or from time to time, to convert
each share of Series A Preferred Stock into such whole number of shares of
Common Stock as is equal to the number of fully paid and non-assessable shares
of Common Stock that results from multiplying the number of shares of Series A
Preferred Stock to be converted by the Stated Value and dividing the result by
the Conversion Price (as hereinafter defined) per share for the Series A
Preferred Stock in effect at the time of conversion. The initial Conversion
Price per share of the Series A Preferred Stock shall be $.50. The holder of any
shares of Series A Preferred Stock, exercising the aforesaid right to convert
such shares into shares of Common Stock shall be entitled to receive, in cash,
an amount equal to all declared dividends with respect to such shares of Series
A Preferred Stock up to and including the respective conversion date of such
shares of Series A Preferred Stock.
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<PAGE>
(b) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent designated by the Corporation for
the Series A Preferred Stock, and shall give written notice to the Corporation
at its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
(c) Until such time as all of the Series A Preferred Stock is
converted into Common Stock or redeemed in accordance with Section 6 hereof, the
Company will not issue any Additional Stock (as hereinafter defined) at a price
less than the Conversion Price. "Additional Stock" as used herein shall mean any
shares of Common Stock issued (or deemed to have been issued) or rights,
warrants, options or other exchangeable securities convertible into Common Stock
(including shares of Common Stock held in the Corporation's treasury) by the
Corporation after the date hereof other than:
(A) Common Stock issued or issuable upon conversion
of the Series A Preferred Stock.
(B) Common Stock issuable to employees, advisors,
consultants or outside directors of the Corporation pursuant to stock
options which have been granted as of September 28, 1998.
(C) Common Stock issuable upon the exercise of the
warrants granted in connection with the private placement (the "Private
Placement) of Units consisting of the Series A Preferred Stock and
warrants exercisable for 4,375,000 shares of Common Stock in the
aggregate (the "Authorized Warrants").
(D) Common Stock issuable upon the exercise of
warrants issued or granted prior to the date hereof.
(E) Common Stock issuable upon the exercise of
options granted in connection with the initial public offering of the
Corporation and held by GKN Securities Corp. or
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<PAGE>
Barington Capital Group, and their respective affiliates, designees and
transferees.
(F) Common Stock issuable upon the exercise of
options granted in connection with the Private Placement and held by
Southeast Research Partners, Inc. ("SERP") or affiliates or designees
of SERP.
For the purpose of any computation to be made in accordance
with this Section 5(c), the following provisions shall be applicable. In the
case of the issuance of Common Stock for a consideration in whole or in part
other than cash, the consideration other than cash shall be deemed to be the
fair value thereof as determined in good faith by the Board.
(d) In the event the Corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by the
Corporation or other persons, assets (excluding cash dividends) or options or
rights not referred to in Section 5(c) hereof to the holders of Common Stock,
then, in each such case for the purpose of this Section 5(d), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(e) If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets transaction provided for elsewhere in this Section 5),
provision shall be made so that the holders of the Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of the Series A
Preferred Stock after the recapitalization to the end that the provisions of
this Section 5 (including adjustment of the Conversion Price for the Series A
Preferred Stock then in effect and the number of shares issuable upon conversion
of the Series A Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(f) If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with and into another corporation, or the sale of all or substantially all of
its assets to another corporation, shall be effected while any shares of Series
A Preferred Stock are
-5-
<PAGE>
outstanding in such a manner that holders of shares of Common Stock shall be
entitled to receive stock, securities or assets with respect to or in exchange
for Common Stock, then, as a condition of such reorganization or
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby each holder of Series A Preferred Stock shall thereafter
have the right to receive upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore receivable upon conversion of Series A Preferred Stock, such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such Common Stock immediately theretofore so receivable had
such reorganization or reclassification, consolidation, merger or sale not taken
place, and in such case appropriate provision shall be made with respect to the
rights and interests of the holders of Series A Preferred Stock to the end that
the provisions hereof (including, without limitation, provisions for adjustment
of the Conversion Price of the Series A Preferred Stock and of the number of
shares of Common Stock issuable upon conversion thereof) shall thereafter be
applicable, as nearly as may be possible, in relation to any shares of stock,
securities or assets thereafter deliverable upon the conversion of such shares
of Series A Preferred Stock. Prior to or simultaneously with the consummation or
any such consolidation, merger or sale of the Corporation, the survivor or
successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed or delivered to each holder of Series
A Preferred Stock, the obligation to deliver to such holders of Series A
Preferred Stock such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder of Series A Preferred Stock may be
entitled to receive, and containing the express assumption of such successor
corporation of the due and punctual performance and observance of every
provision of this Certificate of Designation to be performed and observed by the
Corporation and of all liabilities and obligations of the Corporation hereunder
with respect to the Series A Preferred Stock.
(g) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Preferred Stock pursuant to this Section 5, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a statement, signed by its chief financial
officer, setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment, (B) the Conversion Price for
such Series A Preferred Stock at the time in effect, and (C) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of such Series A Preferred
Stock.
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<PAGE>
(h) In the event of any taking by the Corporation of a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of Series A Preferred Stock, at least 20 days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(i) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series A Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series A
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Series A Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to these provisions.
(j) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Series A
Preferred Stock; provided, however, that the Corporation shall not be required
to pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the shares of Series A Preferred Stock in respect of which
such shares are being issued.
(k) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable and free
from all taxes, liens or charges with respect thereto.
(l) Any notice required by the provisions of this Section 5 to
be given to the holders of shares of Series A Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the stock books of the
Corporation.
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<PAGE>
(m) In the event any shares of Series A Preferred Stock shall
be converted pursuant to Section 5 hereof or otherwise reacquired by the
Corporation, the shares so converted or reacquired shall be cancelled. The
Certificate of Incorporation of the Corporation may be appropriately amended
from time to time to effect the corresponding reduction in the Corporation's
authorized capital stock.
-8-
<PAGE>
This Certificate of Designation was signed by the President
and Secretary of the Corporation.
Dated: October 9, 1998
QUERYOBJECT SYSTEMS CORPORATION
By:/s/ Alan W. Kaufman
--------------------------------
Name: Alan W. Kaufman
Title: President
By:/s/ Daniel M. Pess
--------------------------------
Name: Daniel M. Pess
Title: Secretary
-9-
CERTIFICATE OF CORRECTION
TO THE
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND OTHER RIGHTS AND QUALIFICATIONS OF SERIES A CONVERTIBLE
PREFERRED STOCK
OF
QUERYOBJECT SYSTEMS CORPORATION
---------------------
QUERYOBJECT SYSTEMS CORPORATION, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify:
1. The name of the Corporation is QUERYOBJECT SYSTEMS
CORPORATION.
2. The Certificate of Designations, Preferences and Other
Rights and Qualifications of Series A Convertible Preferred Stock of the
Corporation filed with the Secretary of State of Delaware on October 9, 1998
(the "Certificate of Designations") contains an inaccurate record of the
corporate action taken therein, and the Certificate of Designations requires
correction as permitted by subsection (f) of Section 103 of the General
Corporation Law of the State of Delaware.
3. The inaccuracy in the Certificate of Designations is as
follows:
Certain ranking and liquidation provisions contained
in the Certificate of Designations are incorrectly set forth.
4. Section 1 of the Certificate of Designations is corrected
and restated to read in its entirety as follows:
A. Designations and Amount and Rank. One Million Eight Hundred
Eighty-One Thousand (1,881,000) shares of the Preferred Stock of the
Corporation, par value $.001 per share, shall constitute a series of Preferred
Stock designated as "Series A Convertible Preferred Stock" (the "Series A
Preferred Stock"). The Series A Preferred Stock shall rank senior to all classes
and series of capital stock of the Corporation now or hereafter authorized,
issued or outstanding (provided, however, that the Series A Preferred Stock
shall rank pari passu with respect to rights on liquidation, dissolution or
winding up of the Corporation with up to 119,000 shares of Preferred Stock of
the Corporation, par value $.001 per share, constituting a series of Preferred
Stock
<PAGE>
designated as Series B Convertible Preferred Stock (the "Series B Preferred
Stock) that may be designated and issued by the Corporation) including, without
limitation, the Common Stock, par value $.001 per share of the Corporation (the
"Common Stock"), and any other classes and series of capital stock of the
Corporation now or hereafter authorized, issued or outstanding (collectively,
the "Junior Securities"). In addition, the Corporation will not issue any class
or series of any class or capital stock, other than the Series B Preferred
Stock, that ranks pari passu with the Series A Preferred Stock with respect to
rights on liquidation, dissolution or winding up of the Corporation.
5. Section 3 of the Certificate of Designations is corrected
and restated to read in its entirety as follows:
Rights on Liquidation, Dissolution or Winding Up, Etc.
(a) In the event of any voluntary or involuntary liquidation,
dissolution, Change of Control (as hereinafter defined) or winding up of the
Corporation (each, a "Liquidation"), the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
shall be distributed in the following order of priority:
(i) The holders of Series A Preferred Stock shall be
entitled to receive, prior and in preference to any
distribution to the holders of Common Stock, any other series
or class of Preferred Stock (except the Series B Preferred
Stock, if and when such Series B Preferred Stock is designated
and issued) or any other class of the Corporation's capital
stock, whether now existing or hereafter created, an amount
equal to the sum of (A) the greater of (1) the amount they
would have received had they converted all of the shares of
Series A Preferred Stock into shares of Common Stock
immediately prior to such Liquidation and (2) the Stated Value
(as hereinafter defined) per share for each share of Series A
Preferred Stock then outstanding and (B) an amount equal to
all declared but unpaid dividends on such share of Series A
Preferred Stock as of the date of such Liquidation. The
"Stated Value" of each share of Series A Preferred Stock
shall, without adjustment, be $2.00.
(ii) After distribution of the amounts set forth in
Section 3(a)(i) hereof, the remaining assets of the
Corporation available for distribution, if any, to the
stockholders
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<PAGE>
of the Corporation shall be distributed to the holders of
issued and outstanding shares of Common Stock.
(b) A "Change of Control" means (i) the direct or indirect
sale, lease, exchange or other transfer of all or substantially all of the
assets of the Corporation to any person or entity or group of persons or
entities acting in concert as a partnership or other group or (ii) the merger or
consolidation of the Corporation with or into another corporation or
corporations with the effect that the then existing stockholders of the
Corporation hold less than 50% of the combined voting power of the then
outstanding securities of the surviving corporation of such merger or the
corporation resulting from such consolidation ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors.
QUERYOBJECT SYSTEMS CORPORATION has caused this Certificate of
Correction of Certificate of Designations to be signed by _______________, its
____________________, this __ day of October, 1998.
QUERYOBJECT SYSTEMS CORPORATION
By:________________________________________
Name:
Title:
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QUERYOBJECT SYSTEMS CORPORATION
CERTIFICATE OF DESIGNATION, PREFERENCES
AND OTHER RIGHTS AND QUALIFICATIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK
QUERYOBJECT SYSTEMS CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the Board of
Directors of the Corporation (the "Board") by the Amended and Restated
Certificate of Incorporation of said Corporation (the "Certificate of
Incorporation"), and pursuant to the provisions of Section 151 of the Delaware
General Corporation Law, there hereby is created, out of the 2,000,000 shares of
Preferred Stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred
Stock consisting of 110,000 shares, $.001 par value per share, to be designated
"Series B Convertible Preferred Stock," and to that end the Board adopted a
resolution providing for the designation, preferences and relative,
participating, optional or other rights, and the qualifications, limitations and
restrictions, of the Series B Convertible Preferred Stock, which resolution is
as follows:
RESOLVED, that the Certificate of Designation, Preferences and
Other Rights and Qualifications of Series B Convertible Preferred
Stock, dated November 2, 1998 (the "Certificate of Designation") be and
is hereby authorized and approved, which Certificate of Designation
shall be filed with the Delaware Secretary of State in the form as
follows:
1. Designations and Amount and Rank. (One Hundred Ten
Thousand) 110,000 shares of the Preferred Stock of the Corporation, par value
$.001 per share, shall constitute a series of Preferred Stock designated as
"Series B Convertible Preferred Stock" (the "Series B Preferred Stock"). Except
for Series A Convertible Preferred Stock ("Series A Preferred Stock") which will
rank pari passu with the Series B Preferred Stock with respect to rights on
liquidation, dissolution or winding up of the Corporation, the Series B
Preferred Stock shall rank senior to all classes and series of capital stock of
the Corporation now or hereafter authorized, issued or outstanding, including,
without limitation, the Common Stock, par value $.01 per share of the
Corporation (the "Common Stock"), and any other classes and series of capital
stock of the Corporation now or hereafter authorized, issued or
<PAGE>
outstanding (collectively, the "Junior Securities"). In addition, except for
Series A Preferred Stock, the Corporation will not issue any class or series of
any class or capital stock that ranks pari passu with the Series B Preferred
Stock with respect to rights on liquidation, dissolution or winding up of the
Corporation.
2. Dividends.
(a) The holders of the Series B Preferred Stock shall not be
entitled to receive any stated amount of dividends, cash or otherwise, in
connection with such Series B Preferred Stock. No dividends shall be payable
upon any Junior Securities unless equivalent dividends, on an as-converted
basis, are declared and paid concurrently on the Series B Preferred Stock and
the Series A Preferred Stock. No dividends shall be payable on any other class
of preferred stock during such time as the Series B Preferred Stock remains
outstanding.
(b) Notwithstanding anything to the contrary provided herein,
unless and until a dividend is paid to other holders of the Corporation's
capital stock, holders of Series B Preferred Stock shall not be entitled to
receive any dividends.
3. Rights on Liquidation, Dissolution or Winding Up,
Etc.
(a) In the event of any voluntary or involuntary
liquidation, dissolution, Change of Control (as hereinafter defined) or winding
up of the Corporation (each, a "Liquidation"), the assets of the Corporation
available for distribution to its stockholders, whether from capital, surplus or
earnings, shall be distributed in the following order of priority:
(i) The holders of Series B Preferred Stock and
Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution to the holders of Common
Stock, any other series or class of Preferred Stock or any
other class of the Corporation's capital stock, whether now
existing or hereafter created, an amount equal to the sum of
(A) the greater of (1) the amount they would have received had
they converted all of their shares of Series B Preferred Stock
and Series A Preferred Stock into shares of Common Stock
immediately prior to such Liquidation and (2) the Investment
Value (as hereinafter defined) and (B) an amount equal to all
declared but unpaid dividends on such share of Series A
Preferred Stock or Series B Preferred Stock as of the date of
such Liquidation. Investment Value shall mean the aggregate
purchase price paid by the purchaser for the units (the
"Units") which included Series A Preferred Stock or Series B
Preferred Stock, as the case may be.
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<PAGE>
(ii) After distribution of the amounts set forth in
Section 3(a)(i) hereof, the remaining assets of the
Corporation available for distribution, if any, to the
stockholders of the Corporation shall be distributed to the
holders of issued and outstanding shares of Common Stock.
(b) A "Change of Control" means (i) the direct or indirect
sale, lease, exchange or other transfer of all or substantially all of the
assets of the Corporation to any person or entity or group of persons or
entities acting in concert as a partnership or other group or (ii) the merger or
consolidation of the Corporation with or into another corporation or
corporations with the effect that the then existing stockholders of the
Corporation hold less than 50% of the combined voting power of the then
outstanding securities of the surviving corporation of such merger or the
corporation resulting from such consolidation ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors.
4. Voting Rights.
Each holder of shares of Series B Preferred Stock shall be
entitled to such number of votes in respect of such shares of Series B Preferred
Stock as shall equal the number of votes into which the holder of the largest
whole number of shares of Common Stock into which such shares of Series B
Preferred Stock are then convertible pursuant to Section 5 hereof. Such holder
would be entitled, to vote on all matters to which holders of Common Stock shall
be entitled to vote, voting together as a single class with such holders of
Common Stock (except as hereinafter provided) in the same manner and with the
same effect as such holders of Common Stock subject to Article EIGHTH of the
Certificate of Incorporation. The holders of shares of Series B Preferred Stock
shall also vote as a separate class on all matters that the General Corporation
Law of the State of Delaware specifically requires the holders of shares of the
Series B Preferred Stock to vote as a separate class.
5. Conversion of Series B Preferred Stock.
(a) The "Stated Value" of each share of Series B Preferred
Stock shall, without adjustment, be $10.00. The holders of Series B Preferred
Stock shall have the right, at such holders' option, at any time or from time to
time, to convert each share of Series B Preferred Stock into such whole number
of shares of Common Stock as is equal to the number of fully paid and
non-assessable shares of Common Stock that results from multiplying the number
of shares of Series B Preferred Stock to be converted by the Stated Value and
dividing the result by the Conversion Price (as hereinafter defined) per share
for the Series B Preferred Stock in
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<PAGE>
effect at the time of conversion. The initial Conversion Price per share of the
Series B Preferred Stock shall be $.50. The holder of any shares of Series B
Preferred Stock, exercising the aforesaid right to convert such shares into
shares of Common Stock shall be entitled to receive, in cash, an amount equal to
all declared dividends with respect to such shares of Series B Preferred Stock
up to and including the respective conversion date of such shares of Series B
Preferred Stock.
(b) Before any holder of Series B Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent designated by the Corporation for
the Series B Preferred Stock, and shall give written notice to the Corporation
at its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series B Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series B Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
(c) Until such time as all of the Series B Preferred Stock is
converted into Common Stock or redeemed in accordance with Section 6 hereof, the
Company will not issue any Additional Stock (as hereinafter defined) at a price
less than the Conversion Price. "Additional Stock" as used herein shall mean any
shares of Common Stock issued (or deemed to have been issued) or rights,
warrants, options or other exchangeable securities convertible into Common Stock
(including shares of Common Stock held in the Corporation's treasury) by the
Corporation after the date hereof other than:
(A) Common Stock issued or issuable upon conversion
of the Series A Preferred Stock or the Series B Preferred Stock.
(B) Common Stock issuable to employees, advisors,
consultants or outside directors of the Corporation pursuant to stock
options which have been granted as of September 28, 1998.
(C) Common Stock issuable upon the exercise of the
warrants (the "Authorized Warrants") granted in connection with the
sale of the Units. The Authorized Warrants are
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<PAGE>
exercisable for 5,625,000 shares of Common Stock in the
aggregate.
(D) Common Stock issuable upon the exercise of other
warrants issued or granted prior to October 9, 1998.
(E) Common Stock issuable upon the exercise of
options granted in connection with the initial public offering of the
Corporation and held by GKN Securities Corp. or Barington Capital
Group, and their respective affiliates, designees and transferees.
(F) Common Stock issuable upon the exercise of
options granted to Southeast Research Partners, Inc. ("SERP") or
affiliates or designees of SERP in connection with the sale of the
Units.
For the purpose of any computation to be made in accordance
with this Section 5(c), the following provisions shall be applicable. In the
case of the issuance of Common Stock for a consideration in whole or in part
other than cash, the consideration other than cash shall be deemed to be the
fair value thereof as determined in good faith by the Board.
(d) In the event the Corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by the
Corporation or other persons, assets (excluding cash dividends) or options or
rights not referred to in Section 5(c) hereof to the holders of Common Stock,
then, in each such case for the purpose of this Section 5(d), the holders of the
Series B Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series B Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(e) If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets transaction provided for elsewhere in this Section 5),
provision shall be made so that the holders of the Series B Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series B
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of the Series B
Preferred Stock after the recapitalization to the end that the provisions of
this Section 5 (including adjustment of the Conversion Price for the Series B
Preferred Stock then in effect and the number of
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<PAGE>
shares issuable upon conversion of the Series B Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
(f) If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with and into another corporation, or the sale of all or substantially all of
its assets to another corporation, shall be effected while any shares of Series
B Preferred Stock are outstanding in such a manner that holders of shares of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization or reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby each holder of Series B Preferred Stock
shall thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon conversion of Series B Preferred Stock,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
so receivable had such reorganization or reclassification, consolidation, merger
or sale not taken place, and in such case appropriate provision shall be made
with respect to the rights and interests of the holders of Series B Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Conversion Price of the Series B Preferred
Stock and of the number of shares of Common Stock issuable upon conversion
thereof) shall thereafter be applicable, as nearly as may be possible, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the conversion of such shares of Series B Preferred Stock. Prior to or
simultaneously with the consummation or any such consolidation, merger or sale
of the Corporation, the survivor or successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and mailed or
delivered to each holder of Series B Preferred Stock, the obligation to deliver
to such holders of Series B Preferred Stock such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder of Series B
Preferred Stock may be entitled to receive, and containing the express
assumption of such successor corporation of the due and punctual performance and
observance of every provision of this Certificate of Designation to be performed
and observed by the Corporation and of all liabilities and obligations of the
Corporation hereunder with respect to the Series B Preferred Stock.
(g) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series B Preferred Stock pursuant to this Section 5, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with
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<PAGE>
the terms hereof and prepare and furnish to each holder of Series B Preferred
Stock a statement, signed by its chief financial officer, setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series B Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price for such Series B
Preferred Stock at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of such Series B Preferred Stock.
(h) In the event of any taking by the Corporation of a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of Series B Preferred Stock, at least 20 days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(i) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series B Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series B
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series B Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Series B Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to these provisions.
(j) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Series B
Preferred Stock; provided, however, that the Corporation shall not be required
to pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the shares of Series B Preferred Stock in respect of which
such shares are being issued.
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<PAGE>
(k) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable and free
from all taxes, liens or charges with respect thereto.
(l) Any notice required by the provisions of this Section 5 to
be given to the holders of shares of Series B Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the stock books of the
Corporation.
(m) In the event any shares of Series B Preferred Stock shall
be converted pursuant to Section 5 hereof or otherwise reacquired by the
Corporation, the shares so converted or reacquired shall be cancelled. The
Certificate of Incorporation of the Corporation may be appropriately amended
from time to time to effect the corresponding reduction in the Corporation's
authorized capital stock.
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<PAGE>
This Certificate of Designation was signed by the President
and Secretary of the Corporation.
Dated: November 2, 1998
QUERYOBJECT SYSTEMS CORPORATION
By:______________________________
Name: Alan W. Kaufman
Title: President
By:______________________________
Name: Daniel M. Pess
Title: Secretary
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THIS WARRANT, AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT, HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (SECURITIES). THE
SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY
AND MAY NOT BE OFFERED, SOLD, AGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO
(A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAW, (B) AN OPINION OF COUNSEL. IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR (C)
RULE 144 UNDER THE SECURITIES ACT.
Right to Purchase
______ Shares of Common Stock
$0.001 Par Value
Date: _______, 1998
QUERYOBJECT SYSTEMS CORPORATION
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, ______________ or its
registered assigns ("Holder"), is entitled to purchase from QUERYOBJECT SYSTEMS
CORPORATION, a Delaware corporation ("Company"), at any time or from time to
time until 5.00 p.m., New York City time on the "Expiration Date" (as defined
below) ________________________ (___________________) fully paid and
non-assessable shares of the Company's common stock, par value $0.001 per share
(Common Stocks). Each Warrant will entitle the holder thereof to purchase 2.5
shares of Common Stock for an initial per-share exercise price ("Exercise
Price") of $____________. The number of shares of Common Stock issuable upon
exercise hereunder (warrant Shares) and the Exercise Price herein are subject to
adjustment as provided in Section 3 hereof. The term "Warrants" means this
Warrant and the other warrants of the Company issued in the Company's private
offering ("Private Offering") made pursuant to the Confidential Term Sheet dated
as of September ___, 1998.
This Warrant is subject to the following terms, provisions and
conditions:
1. Manner of Exercise; Issuance of Certificates;
Payment for Shares.
1.1 Exercise Notice. Subject to the provisions
hereof, this Warrant may be exercised by the Holder hereof, in whole or in part,
by the surrender of this Warrant, together with (i) a completed exercise notice
in the form attached hereto as Exhibit 1 ("Exercise Notice"), to the Company on
or before 5:00 p.m. New York City time on any business day at the Company's
<PAGE>
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the Holder hereof) and (ii) payment to the Company in
cash, by check or by wire transfer for the account of the Company, of the
Exercise Price for each of the Warrant Shares specified in the Exercise Notice.
The Warrant Shares so purchased shall be deemed to be issued to the Holder
hereof or such Holder's designee, as the record owner of such shares, as of the
close of business on the date on which this Warrant shall have been so
surrendered, the completed Exercise Notice shall have been delivered and payment
shall have been made for such shares as set forth above.
1.2 Delivery of Certificates. Certificates for the
Warrant Shams so purchased, representing the aggregate number of shares
specified in the Exercise Notice, shall be delivered to the Holder hereof within
a reasonable time, not exceeding five business days, after this Warrant shall
have been so exercised and collection of Holder's payment. The certificates so
delivered shall be in such denominations as may be requested by the Holder
hereof and shall be registered in the name of such Holder or such other name as
shall be designated by such Holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the Holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
Subject to Section 1.5 hereof, upon delivery of an Exercise
Notice and payment for the Warrant Shares to be purchased thereby, the Company's
obligation to deliver certificates for such Warrant Shares shall be absolute and
unconditional and the Company agrees not to assert (and hereby waives to the
fullest extent permitted by law) any defenses against ifs obligation to so
deliver such certificates. In the event the Company fails to deliver such
certificates, the Company understands that the Holder will be entitled to pursue
actual damages (whether or not such failure is caused by the Company's failure
to maintain a sufficient number of authorized shares of Common Stock), and each
Holder shall have the right to pursue all remedies available at law or in equity
(including a decree of specific performance or injunctive relief).
1.3 [Reserved]
1.4 Period of Exercise. This Warrant shall be
exercisable ("Warrant Period") at any time on or after the date
hereof and prior to 5:00 p.m. New York City time on September ___,
2001 ("Expiration Date").
1.5 Rights of Recision. Any Holder that delivers
to the Company an Exercise Notice at any time during the period beginning on the
date the Company first mails notice to the Holders of Warrants of any
contemplated "Corporate Event" (as defined in
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<PAGE>
Section 2.4 hereof) and the day immediately prior to the date the Corporate
Event is to be effected or consummated, shall have the absolute right, in his
discretion, if the Corporate Event is not effected or consummated as
contemplated, to rescind his Exercise Notice by written notice delivered to the
Company within 10 days after the date on which the Company delivers notice to
such Holder of the cancellation of the Corporate Event. Such notice of
cancellation shall be delivered by the Company to each Holder within three days
of the cancellation of any contemplated Corporate Event.
2. Certain Agreements of the Company. The Company hereby
covenants and agrees as follows:
2.1 Shares to be Fully Paid. All Warrant Shares
will, upon issuance in accordance with the terms of this Warrant, be validly
issued, fully paid, and non-assessable and free from all taxes, liens, claims
and encumbrances.
2.2 Reservation of Shares. During the Warrant
Period, the Company shall at all times have authorized, and reserved for the
purpose of issuance upon exercise of this Warrant, a sufficient number of shares
of Common Stock to provide for the exercise of this Warrant.
2.3 No Impairment. The Company will not, by
amendment of its charter or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of al such action as may reasonably be requested by the Holder of
this Warrant in order to protect the exercise privilege of the Holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
non-assessable shares of Common Stock upon the exercise of this Warrant.
2.4 Events Requiring Notice to Holders. The Company shall be
required to give the notice to a Holder upon one or more of the following
events: (i) if the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive any dividend or
distribution or (ii) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
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<PAGE>
Company, or any option, right or warrant to subscribe therefor, or (iii) a
dissolution, liquidation or winding up of the Company, or a sale of all or
substantially all of its property, assets or business, or a merger or
consolidation with another entity in which the Company is either not the
surviving entity or is the surviving entity, but the owners d the Company's
voting capital stock immediately prior to such merger continue to hold at least
50% of the voting securities of the Company after the merger (each such event
being referred to as a "Corporate Event"). The Company shall give written notice
of such Corporate Event to each Holder of a Warrant at least 20 days prior to
the date fixed as a record date or the date of closing the transfer books for
the determination of the stockholders entitled to the benefit of, or to
participate in, or to vote on such Corporate Event. Such notice shall specify
such record date or the date of the closing of the transfer books, as the case
may be.
3. Adjustment Provisions. During the Warrant Period, the
Exercise Price and the number of Warrant Shares issuable upon exercise of this
Warrant shall be subject to adjustment from time to time as provided in this
Section 3.
3.1 Exercise Price Adjustments. The Exercise Price
shall be subject to adjustment from time to time as follows:
3.1.1 Adjustment Due to Stock Split, Stock
Dividend, Etc. If at any time when any Warrants are issued and outstanding, (i)
the number of outstanding shares of Common Stock, as a class, is increased by a
stock split, stock dividend, reclassification or other similar event, the
Exercise Price shall be proportionately reduced; and (ii) if the number of
outstanding shares of Common Stock, as a class, is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Exercise Price shall be proportionately increased.
3.1.2 [Reserved].
3.2 Adjustment in the Aggregate Number of Shares.
Upon each adjustment of the Exercise Price pursuant to the provisions of this
Section 3, the aggregate number of Warrant Shares issuable upon the exercise of
Warrants shall be adjusted to the nearest full number by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
3.3 Adjustment Due to Mergers, Consolidation etc.
If, at any time when any Warrants are issued and outstanding, there shall be
(each of the following being referred to as a "Merger Event") (i) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from
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<PAGE>
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination described in Section 3.1.1 above), (ii) any
consolidation or merger of the Company with any other corporation (other than a
merger in which the Company is the surviving or continuing entity and the owners
of the Company's voting capital stock immediately prior to such merger continue
to hold at least 50% of the voting securities of the Company after the merger),
(iii) any sale or transfer of all or substantially all of the assets of the
Company or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property, then the
Holders of Warrants shall thereafter have the right to receive upon exercise of
their Warrants, upon the basis and upon the Arms and conditions specified herein
and in lieu of shares of Common Stock, such shares of stock, securities and
other property as would have been issuable or payable in connection with the
Merger Event with respect to or in exchange for the number of shares of Common
Stock immediately theretofore issuable and receivable upon the exercise of the
Warrants held by such Holders had such Merger Event not taken place, and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holders of the Warrants to the effect that the provisions
hereof (including, without limitation, provisions for adjustment of the Exercise
Price and the corresponding number of shares of Common Stock issuable upon
exercise of the Warrants) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise thereof. The Company shall not effect any
transaction described in this Section 3.3 unless (x) each Holder of the Warrants
has been mailed written notice of such transaction at least 20 days prior to the
record date for the determination of stockholders entitled to vote with respect
thereto, and (y) the resulting successor or acquiring entity (if not the
Company) assumes by written instrument the obligations of this subsection 3.1.3.
The above provisions shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
3.4 Adjustment for Other Events. If any event
occurs as to which the foregoing provisions of this Section 3 are not strictly
applicable or, if strictly applicable, would not fairly and adequately protect
the exercise rights of the Warrants in accordance with the essential intent and
principles of such provisions, then the Board of Directors shall make such
adjustments in the application of such provisions, in accordance with such
essential intent and principles, as shall be reasonably necessary, to protect
such exercise rights as aforesaid, but in no event shall any such adjustment
have the effect of increasing the Exercise Price or decreasing the number of
shares of Common Stock issuable upon exercise of any Warrants.
4. [Reserved]
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<PAGE>
5. Issue Tax. The issuance of certificates for Warrant Shares
upon the exercise of this Warrant shall be made without charge to the Holder of
this Warrant or such Warrant Shares for any issuance tax or other costs in
respect thereof, provided that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than the Holder of this Warrant.
6. No Rights or Liabilities as Stockholder. The Holders of
unexercised Warrants are not entitled, by virtue of being such Holders, to
receive dividends, to vote, and except as provided in Section 2.4 hereof, to
receive notice of stockholders' meetings or to exercise any other rights
whatsoever as stockholders of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder hereof to exercise this Warrant for
Warrant Shares, and no mere enumeration herein of the rights or privileges of
the Holder hereof, shall give rise to any liability of such Holder for the
Exercise Price or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
7. Transfer, Exchange, and Replacement of Warrant.
7.1 Transfer.
7.1.1 Restriction on Transfer. This Warrant and the rights
granted to the Holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed assignment in the
form attached hereto as Exhibit 2, at the office or agency of the Company
referred to in Section 7.5 below; provided, however, that any transfer or
assignment shall be subject to the transferee agreeing to be bound by Section
______ of the Subscription Agreement executed in connection with the Private
Offering ("Subscription Agreements"). Until due presentment for registration of
transfer on the books of the Company, the Company may treat the registered
Holder hereof as the owner and Holder hereof for all purposes, and the Company
shall not be affected by any notice to the contrary.
7.1.2 Exercise or Transfer Without Registration. If, at the
time of the surrender of this Warrant in connection with any exercise, transfer
or exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer or exchange that the
Holder or transferee of this Warrant, as the case may be, furnish to the Company
a written opinion of counsel (which opinion of counsel shall be reasonably
acceptable to the Company) to the effect that such exercise, transfer or
exchange may be made without registration under the Securities Act and under
applicable state securities or blue sky laws.
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<PAGE>
7.2 Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the
office or agency of the Company referred to in Section 7.5 below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of Warrant Shares which may be purchased
hereunder, each of such new Warrants to represent the right to purchase such
number of shares as shall be designated by the Holder hereof at the time of such
surrender.
7.3 Replacement of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
7.4 Cancellation; Payment of Expenses. Upon the surrender of
this Warrant in connection with any transfer, exchange or replacement as
provided in this Section 7, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other then legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation,
execution and delivery of Warrants pursuant to this Section 7.
7.5 Warrant Register. The Company shall maintain, at its
principal executive offices (or at the offices of the transfer agent for the
Warrants or such other office or agency of the Company as it may designate by
notice to the Holder hereon, a register for this Warrant ("Warrant Register"),
in which the Company shall record the name and address of the person in whose
name this Warrant has been issued, as well as the name and address of each
transferee and each prior owner of this Warrant.
8. Registration Rights. The Holder of this Warrant and any
transferee hereof is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in Section ___ of the
Subscription Agreement.
9. Redemption.
9.1 Redemption Rights. The Company may redeem all
(but not less than all) of the Warrants at any time after the registration
statement filed in connection with the Company's initial public offering
("Registration Statement") is declared effective, at the price of $.01 per
Warrant, upon notice referred to in Section 9.2, provided that (i) the Warrant
Shares have been registered for resale by means of the Registration Statement or
any
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<PAGE>
other registration statement; (ii) the Registration Statement is current and
effective at the time the aforementioned notice is sent and through the
redemption period; and (iii) the last sale price of the Common Stock has been at
least 320% of the then Exercise Price on twenty (20) of the thirty consecutive
trading days ending on the third business day prior to the day on which notice
of redemption is given.
9.2 Date Fixed for Redemption; Notice of Redemption.
In the event the Company shall elect to redeem all of the Warrants, the Company
shall fix a date for the redemption and mail a notice of redemption by first
class mail, postage prepaid, not less than 30 days from the date fixed for
redemption to the Holders of the Warrants at their last address as they shall
appear on the registration books. Any notice mailed in the manner herein
provided shall be conclusively presumed to have been duly given whether or not
the registered Holder received such notice.
9.3 Exercise After Notice of Redemption. The Warrants
may be exercised in accordance with Section 1 of this Agreement at any time
after notice of redemption shall have been given by the Company pursuant to
Section 9.2 hereof and prior to the time and date fixed for redemption. On and
after the redemption date, the Holder of the Warrants shall have no further
rights except to receive, upon surrender of the Warrants, the redemption price.
10. Miscellaneous.
10.1 Notices. Any notices required or permitted to be
given under me terms of this Warrant shall be in writing and shall be
sufficiently given if delivered to the addressees in person by overnight courier
service, by confirmed facsimile or, if mailed, postage prepaid certified mail
(return receipt requested), and shall be effective three days after being placed
in the mail if mailed, or upon receipt or refusal of receipt, if delivered
personally or by courier or confirmed telecopy, in each case addressed to a
party. The addresses for such communications shall be:
If to the Company:
QueryObject Systems Corporation
60 Charles Lindbergh Blvd.
Uniondale, New York 11553
Attn: Dan Pess, Senior Vice President
Telecopy: (516) 228-8584
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<PAGE>
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
Attn: David I. Adler, Esq.
and
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
Attn: David Alan Miller, Esq.
Telecopy: (212) 818-8881
and if to the Holder, at such address as such Holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 10.
10.2 Governing Law; Jurisdiction. This Warrant will
be deemed to have been made and delivered in New York City and will be governed
as to validity, interpretation, construction, effect and in all other respects
by the internal laws of the State of New York. The Company and the Holder each
hereby (i) agrees that any legal suit, action or proceeding arising out of or
relating to this Warrant shall be instituted exclusively in New York State
Supreme Court, County of New York, or in the United States District Court for
the Southern District of New York, (ii) waives any objection to the venue of any
such suit, action or proceeding and the right to assert that such forum is not a
convenient forum for such suit, action or proceeding, and (iii) irrevocably
consents to the jurisdiction of the New York State Supreme Court, County of New
York, and the United States District Court for the Southern District of New York
in any such suit, action or proceeding and the Company further agrees to accept
and acknowledge service or any and all process which may be served in any such
suit, action or proceeding in New York State Supreme Court, County of New York
or in the United States District Court for the Southern District of New York and
agrees that service of process upon it mailed by certified mail to its address
shall be deemed in every respect effective service of process upon it in any
suit, action or proceeding.
10.3 Amendments. This Warrant and any provision
hereof may only be amended by an instrument in writing signed by the Company and
the Holder hereof.
10.4 Section Headings. Section headings herein have
been inserted for reference only and shall not be deemed to
-9-
<PAGE>
otherwise affect, in any matter, or be deemed to interpret in whole or part, any
of the terms or provisions of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer.
QUERYOBJECT SYSTEMS CORPORATION
By:____________________________
Name:
Title:
-10-
<PAGE>
EXHIBIT 1
Form to be used to exercise Warrant:
EXERCISE NOTICE
QueryObject Systems Corporation
60 Charles Lindbergh Blvd.
Uniondale, New York 11553
Attn:________________, President
Date:_________________
The undersigned hereby elects to purchase ______ shares of the
Common Stock of QueryObject Systems Corporation, pursuant to terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full, together with all applicable transfer taxes, if any.
Please issue the Warrant Shares in accordance with the
instructions given below.
Please issue a certificate or certificates representing said
shares of the Common Stock in the name of the undersigned or in such other name
as is specified below:
-------------------------------
Signature
------------------------------
Print Name
NOTICE: The signature to his form must correspond
with the name an written upon the Ace of the within Warrant in every particular
without alteration or enlargement or any change whatsoever.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
---------------------------------------------------------------------------
(Print in Block Letters)
Address
------------------------------------------------------------------------
<PAGE>
EXHIBIT 2
Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED,____________________________________ does
hereby soil, assign and transfer unto ______________________ a Warrant to
purchase ___________ shares of Common Stock of QueryObject Systems Corporation
("Company") evidenced by the within and does hereby authorize the Company to
transfer such right on the books of the Company.
Dated:________________________
-------------------------------
Signature
-------------------------------
Print Name
NOTICE: The signature to his forth must correspond
with the name as written upon the face of the within Warrant in emery particular
without alteration or enlargement or any change whatsoever.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,820
<SECURITIES> 0
<RECEIVABLES> 289,595
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 891,217
<PP&E> 2,058,017
<DEPRECIATION> 1,023,692
<TOTAL-ASSETS> 2,073,722
<CURRENT-LIABILITIES> 2,635,081
<BONDS> 0
0
0
<COMMON> 5,121
<OTHER-SE> (1,461,919)
<TOTAL-LIABILITY-AND-EQUITY> 2,073,722
<SALES> 398,590
<TOTAL-REVENUES> 398,590
<CGS> 67,390
<TOTAL-COSTS> 6,506,651
<OTHER-EXPENSES> 206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,031
<INCOME-PRETAX> (6,104,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,104,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,104,114)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
