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 June 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13587
QUERYOBJECT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3087939
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
60 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal executive offices)
(516) 228-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 1999 there were 7,073,647 shares of the Registrant's
common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No / /
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of June 30, 1999 (unaudited)................................... 3
Condensed Consolidated Statement of Operations
For the three months and six months ended June 30, 1999
and 1998 (unaudited)...............................................4
Condensed Consolidated Statement of Cash Flows
For the six months ended June 30, 1999 and 1998 (unaudited)....... 5
Notes to the Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis or Plan of Operation......... 9
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...............21
Item 5. Other Information.................................................22
Item 6. Exhibits and Reports on Form 8-K..................................23
SIGNATURES...................................................................24
2
<PAGE>
Part I.
Item 1. Financial Statements
QUERYOBJECT SYSTEMS CORPORATION
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1999
ASSETS
Current assets
<S> <C>
Cash and cash equivalents .................................... $ 283,503
Accounts receivable, net of allowance for doubtful
accounts of $70,000 ....................................... 825,371
Prepaid expenses and other current assets ................. 253,724
------------
Total current assets .................................. 1,362,598
Property and equipment, net ..................................... 818,670
Deposits and other assets ....................................... 68,616
------------
Total assets .......................................... $ 2,249,884
------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable ............................................. $ 874,069
Accrued expenses ............................................. 850,854
Deferred revenue ............................................. 144,060
Deferred rent ................................................ 10,247
Capital lease obligations due within one year ................ 180,964
------------
Total current liabilities ............................. 2,060,194
Deferred rent ................................................... 251,455
Capital lease obligations ....................................... 80,787
------------
Total liabilities ..................................... 2,392,436
------------
Stockholders' deficit
Preferred stock, $.001 par value, 4,000,000 shares authorized;
1,650,500, 95,500 and 1,000 shares of Series A, B and C,
respectively, issued and outstanding ...................... 1,747
Common stock, $0.001 par value: 60,000,000 shares
authorized; 6,805,997 shares issued and outstanding ....... 6,806
Additional paid-in capital ................................... 38,514,209
Accumulated deficit .......................................... (38,665,314)
------------
Total stockholders' deficit ........................... (142,552)
Total liabilities and stockholders' deficit ........... $ 2,249,884
------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues
<S> <C> <C> <C> <C>
Software licenses............................................$ 503,200 $ 60,000 $ 553,200 $ 135,000
Services and maintenance..................................... 26,905 24,165 53,094 61,026
----------- ----------- ------------- -----------
Total revenues..................................... 530,105 84,165 606,294 196,026
Cost of revenues
Software licenses 20,128 750 22,178 1,500
Services and maintenance..................................... 18,870 21,155 37,858 45,911
----------- ----------- ------------- -----------
Total cost of revenues............................. 38,998 21,905 60,036 47,411
----------- ----------- ------------- -----------
Gross profit 491,107 62,260 546,258 148,615
----------- ----------- ------------- -----------
Operating expenses
Sales and marketing 961,289 1,141,228 1,849,974 2,468,446
Research and development..................................... 707,596 614,839 1,239,627 1,181,256
General and administrative................................... 345,392 400,729 692,516 850,730
----------- ----------- ------------- -----------
Total operating expenses........................... 2,014,277 2,156,796 3,782,117 4,500,432
----------- ----------- ------------- -----------
Loss from operations.............................................. (1,523,170) (2,094,536) (3,235,859) (4,351,817)
Interest income................................................... 2,063 38,024 11,312 101,365
Interest expense.................................................. (12,923) (35,924) (27,022) (77,336)
Other (expense) income............................................ (1,288) 25 (1,288) (206)
----------- ----------- ------------- -----------
Net loss..........................................................$(1,535,318) $(2,092,411) $ (3,252,857) $(4,327,994)
=========== =========== ============= ===========
Basic and diluted net loss per common share.......................$ (.24) $ (.41) $ (.54) $ (.85)
----------- ----------- ------------- -----------
Weighted average shares used in per share
computation (Note 2)......................................... 6,467,380 5,120,519 5,978,579 5,118,580
=========== =========== ============= ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities
<S> <C> <C>
Net loss $ (3,252,857) $(4,327,994)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 219,849 204,864
Write-off of computer equipment 1,288 --
Loss on sale of computer equipment -- 206
Options issued for consulting services 257,652 76,499
Changes in assets and liabilities
Accounts receivable, net (548,844) 341,087
Prepaid expenses and other current assets..................... (215,973) (31,286)
Deposits and other assets..................................... 12,415 3,822
Accounts payable and accrued expenses......................... 438,148 (465,976)
Deferred rent................................................. (8,127) 448
Deferred revenue.............................................. 59,269 28,716
Net cash used in operating activities......................... 3,037,180) (4,169,614)
----------- -----------
Cash flows from investing activities
Release of restricted certificate of deposit...................... -- 296,213
Loan receivable from stockholder.................................. -- (65,000)
Acquisitions of property and equipment............................ (78,564) (88,408)
Repayment of stockholder loan..................................... 65,000 --
Purchase of restricted certificate of deposit..................... -- (16,827)
----------- -----------
Net cash (used in) provided by investing activities........... (13,564) 125,978
----------- -----------
Cash flows from financing activities
Proceeds from exercise of common stock warrants and options...... 635,256 10,384
Proceeds from issuance of preferred stock, net.................... 834,517 --
Collection of stock subscriptions receivable, net................. 1,396,000 --
Repayment of notes payable to stockholders........................ (700,000) (326,213)
Payments of capital lease obligations............................. (85,544) (115,534)
Proceeds from notes payable to stockholders....................... 400,000 --
Repayment of loan receivable from stockholder..................... -- 12,300
Proceeds from sale-leaseback transaction.......................... -- 29,202
----------- -----------
Net cash provided by (used in) financing activities........... 2,480,229 (389,861)
----------- -----------
Net decrease in cash and cash equivalents............................... (570,515) (4,433,497)
Cash and cash equivalents at beginning of year......................... 854,018 5,437,350
----------- -----------
Cash and cash equivalents at end of period............................. $ 283,503 $ 1,003,853
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
QUERYOBJECT SYSTEMS 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, 1998. The results of operations
for the period ended June 30, 1999 are not necessarily indicative of the results
to be expected for any subsequent quarter, or for the entire fiscal year ending
December 31, 1999, or for any future period.
2. Net Loss Per Share
Basic net loss per share is computed by dividing net loss for the
period by the sum of the weighted average number of shares of common stock
outstanding. Options and warrants to acquire common stock and the Series A,
Series B and Series C Convertible Preferred 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.
3. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Interest paid during the period............................ $ 37,163 $ 78,752
Common stock options issued for consulting services........ 257,652 76,499
</TABLE>
4. 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.
5. Liquidity and Business Risks
The Company has incurred operating losses since inception, has incurred
negative cash flows from operating activities, has negative working capital and
had an accumulated deficit of $38,665,314 and $35,412,456 as of June 30, 1999
and December 31, 1998, respectively. The Company has had a limited operating
history as a software product company and has not made significant sales of its
products, therefore, revenues are difficult to predict. The Company anticipates
that its cash and cash equivalent balances, after giving effect to the sale of
Series C
6
<PAGE>
Convertible Preferred Stock (the "Series C Preferred Stock") subsequent to June
30, 1999, may be insufficient to satisfy its operating cash flow requirements in
the foreseeable future. As discussed in Note 6. below, the Company has sold a
total of $3,730,000 (37.3 Units) of Series C Preferred Stock and will continue
to sell additional Series C Preferred Stock until August 31, 1999 or until 45
Units are sold, whichever is earlier. However, there can be no assurances that
the Company will be successful in raising additional funds. See "Risk Factors
That May Affect Future Results" Negative Working Capital; Need for Additional
Funding". The sale of additional equity securities will result in additional
dilution to the Company's stockholders.
6. Series C Convertible Preferred Stock
On June 28, 1999, the Company had the initial closing of 10 Units (the
"Units") of Series C Preferred Stock totaling $1,000,000 in a private placement
(the "Series C Private Placement"). The Series C Private Placement provides for
a minimum of 10 and a maximum of 45 Units at a purchase price of $100,000 per
unit. Each Unit consists of 100 shares of newly-created Series C Convertible
Preferred Stock, $.001 par value, and a Common Stock Purchase Warrant (the
"Warrants") exercisable until December 28, 2001 to purchase 100,000 shares of
Common Stock at an exercise price of $.8625 per share. In the initial closing of
Series C Preferred Stock, the Company received net proceeds of $834,517 and
issued 1,000 shares of Series C Preferred Stock that is convertible into
1,159,426 shares of Common Stock and Warrants to purchase 1,000,000 shares of
Common Stock. Each share of Series C Preferred Stock is convertible into such
number of shares of Common Stock as is equal to the quotient obtained by
dividing $1,000 by the fair market value of the Common Stock, i.e., the average
closing price of the Common Stock in the principal securities market in which it
is then traded for the five trading days immediately preceding the date of the
initial closing of the offering ($.8625).
Subsequent to June 30, 1999, the Company had additional closings which
totaled 27.3 Units or $2,730,000 of such securities receiving net proceeds of
$2,519,650 and issued 2,730 shares of Series C Preferred Stock that is
convertible into 3,165,218 shares of Common Stock and Warrants to purchase
2,730,000 shares of Common Stock. The Company will seek to sell the remaining
7.7 Units until August 31, 1999 unless it extends the termination date.
In connection with the initial closing of the Series C Private
Placement, the placement agent was granted an option to purchase that number of
shares of Common Stock as equals 8% of the number of shares issuable upon the
conversion of the Series C Preferred Stock and received a commission and
non-accountable expense allowance equal to 7% of the gross proceeds received by
the Company in the Series C Private Placement. The securities offered and sold
in the Series C Private Placement 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
September 27, 1999.
7
<PAGE>
The following is a description of the Series C Preferred Stock:
Stated Value. Each share of Series C Preferred Stock has a stated value
(the "Stated Value") equal to $1,000.
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) first, to the holders of the Series A Preferred
Stock and the Series B Preferred Stock to the extent of their liquidation
preference, presently $2.00 per share and $10.00 per share, respectively: (ii)
second, to the holders of the Series C Preferred Stock, prior and in preference
to any distribution to the holders of any Junior Securities an amount equal to
the Stated Value for each share of Series C Preferred Stock then outstanding and
(iii) third, to the holders of issued and outstanding Junior Securities,
including shares of Common Stock.
Ranking. The Series C Preferred Stock will rank junior to the Company's
Series A Preferred Stock and Series B Convertible Preferred Stock with respect
to rights on liquidation, dissolution or winding up of the Company. The Series C
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.
Dividends. The holders of the Series C Preferred Stock shall not be
entitled to receive any stated amount of dividends, whether in cash or
otherwise.
Conversion. The holders of the Series C 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 C Preferred Stock into one thousand
one hundred and fifty nine (1,159) shares of Common Stock.
Voting. The holders of the Series C 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 C 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 C Preferred Stock vote as
a separate class on all matters upon which the Delaware General Corporation Law
specifically requires the holders of such preferred stock to vote as a separate
class.
Warrants
Each Warrant entitles the registered holder to purchase at anytime
until December 28, 2001, 100,000 shares of Common Stock, subject to adjustment
to protect against dilution, at a per share exercise price equal to $.8625. The
Series C Warrants may be called for redemption by
8
<PAGE>
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 $1.20 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.
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, 1998.
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 until 1997
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. In November 1997, the Company began implementation of full-scale
marketing activity for QueryObject System. The Company has a limited operating
history as a software product company and has made only limited sales of its
QueryObject System.
To date, the Company has incurred substantial losses from operations,
and at June 30, 1999, had an accumulated deficit of $38,665,314. The Company
expects to incur substantial operating expenses in the future to support its
product development efforts, establish and expand its domestic and international
sales and marketing capabilities, including recruiting additional indirect
channel partners, and support and expand its technical and management personnel
and organization.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is delayed until such
obligation has been satisfied. Allowances for estimated future returns are
provided for upon shipment.
9
<PAGE>
Results of Operations
The following table sets forth certain items in the Company's
consolidated statements of operations for the three and six month periods ended
June 30, 1999 and 1998 ($ in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues
Software licenses .......... $ 503 $ 60 $ 553 $ 135
Maintenance ................ 27 24 53 61
------- ------- ------- -------
Total revenues ........ 530 84 606 196
------- ------- ------- -------
Cost of revenues
Software licenses .......... 20 1 22 1
Maintenance ................ 19 21 38 46
------- ------- ------- -------
Total cost of revenues . 39 22 60 47
------- ------- ------- -------
Gross profit ..................... 491 62 546 149
------- ------- ------- -------
Operating expenses
Sales and marketing ........ 961 1,141 1,850 2,469
Research and development ... 708 615 1,240 1,181
General and administrative . 345 401 692 851
------- ------- ------- -------
Total operating expenses 2,014 2,157 3,782 4,501
------- ------- ------- -------
Loss from operations ............. (1,523) (2,095) (3,236) (4,352)
Interest income ................ 2 38 11 101
Interest expense ............... (13) (35) (27) (77)
Other expense .................. (1) -- (1) --
------- ------- ------- -------
Net loss ......................... $(1,535) $(2,092) $(3,253) $(4,328)
------- ------- ------- -------
Revenues
The Company's license revenues have been generated from sales of
QueryObject System. Maintenance revenues consist of ongoing support and products
updates and are recognized ratably over the term of the contract, which is
typically twelve months.
Total revenues increased by $446,000, or 531%, from $84,000 in the
second quarter of 1998 to $530,000 in the second quarter of 1999. For the first
six months, total revenues increased by $410,000, or 209% from $196,000 in 1998
to $606,000 in 1999. These increases were primarily due to an increase in
license revenues in the 1999 periods as compared to 1998. The Company recorded
license revenue from the sale of 5 licenses in the second quarter of 1999 as
compared to the sale of 1 license in the second quarter of 1998. The Company
recorded license revenue from the sale of 6 licenses for the first six months of
1999 as compared to the sale of 2 licenses for the first six months of 1998.
Maintenance revenue increased by $3,000, or 13%, from
10
<PAGE>
$24,000 in the second quarter of 1998 to $27,000 in the second quarter of 1999.
For the first six months, maintenance revenue decreased by $8,000, or 13% from
$61,000 in 1998 to $53,000 in 1999. Maintenance revenue is expected to increase
as the Company continues to sell additional licenses.
Cost of Revenues
Cost of software license revenues consists primarily of royalties,
product packaging, documentation and production costs. Cost of software license
revenues as a percentage of software license revenues was 4.0% in the second
quarter of 1999 as compared to 1.3% for the second quarter of 1998. Cost of
software license revenues as a percentage of software license revenues was 4.0%
for the first six months of 1999 as compared to 1.1% for the first six months of
1998. These increases resulted from royalty payments made to third parties in
the 1999 periods.
Cost of maintenance revenues consists primarily of personnel costs in
providing customer support. Cost of maintenance revenues as a percentage of
maintenance revenues were 70.1% and 71.3%, respectively, for the three and six
month periods ended June 30, 1999. Cost of maintenance revenues as a percentage
of maintenance revenues were 87.5% and 75.2%, respectively, for the three month
and six month periods ended June 30, 1998. These decreases in the 1999 periods
were primarily due to a reduced requirement for customer support.
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, consulting expense, advertising related costs,
collateral material and trade shows. Sales and marketing expenses decreased by
$180,000, or 16%, from $1,141,000 in the second quarter of 1998 to $961,000 in
the second quarter of 1999. For the first six months, sales and marketing
expenses decreased by $619,000, or 25%, from $2,469,000 in 1998 to $1,850,000 in
1999. These decreases in the 1999 periods were primarily due to reduced sales
personnel related costs as a result of fewer employees and decreased marketing
expenses. The Company believes that its sales and marketing expenses will
increase in absolute dollars as the Company increases promotion and other
marketing expenses.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel related expenses, recruiting costs
associated with the hiring of software engineers and quality assurance
personnel, consultant costs and depreciation of development equipment. Research
and development expenses increased by $93,000, or 15%, from $615,000 in the
second quarter of 1998 to $708,000 in the second quarter of 1999. For the first
six months, research and development expenses increased by $59,000, or 5%, from
$1,181,000 in 1998 to $1,240,000 in 1999. These increases in the 1999 periods
were primarily due to increased personnel related costs. The Company believes
that a significant level of investment for product research and development is
required to remain competitive and, accordingly, the Company anticipates that it
will continue to devote substantial resources to product research and
development and that these costs will increase in absolute dollars. To date, all
research and development costs have been expensed as incurred.
11
<PAGE>
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, MIS, human resources and general
management, as well as insurance, consulting and professional expenses. General
and administrative expenses decreased by $56,000, or 14%, from $401,000 in the
second quarter of 1998 to $345,000 in the second quarter of 1999. For the first
six months, general and administrative expenses decreased by $159,000, or 19%,
from $851,000 in 1998 to $692,000 in 1999. These decreases in the 1999 periods
were primarily due to a reduction in personnel related costs as a result of
fewer employees and decreased professional expenses. The Company believes that
its general and administrative expenses will increase in absolute dollars.
Interest Income and Interest Expense
Interest income represents income earned on the Company's cash and cash
equivalents. Interest income decreased by $36,000, or 95%, from $38,000 in the
second quarter of 1998 to $2,000 in the second quarter of 1999. For the first
six months, interest income decreased by $90,000, or 89%, from $101,000 in 1998
to $11,000 in 1999. These decreases in the 1999 periods were primarily due to a
lower level of cash and cash equivalents on deposit.
Interest expense generally represents interest on capital equipment
leases, and for the 1998 periods, charges relating to the H.C.C. Financial
Services Loan Agreement (the "Loan Agreement"). Interest expense decreased by
$22,000, or 63%, from $35,000 in the second quarter of 1998 to $13,000 in the
second quarter of 1999. For the first six months, interest expense decreased by
$50,000, or 65%, from $77,000 in 1998 to $27,000 in 1999. These decreases in the
1999 periods were primarily due to payments made to reduce the outstanding
balance under the Loan Agreement during the 1998 periods. The remaining balance
under the Loan Agreement was repaid in full during October 1998.
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 1998 and 1997 and consequently paid no
federal or state income taxes. At December 31, 1998, the Company had net
operating losses and research and experimental tax credit carryforwards of
$29,660,000 and $207,000, respectively, available to offset future federal
taxable income and tax. These net operating loss carryforwards expire at various
dates through 2018. 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.
12
<PAGE>
Liquidity and Capital Resources
On November 25, 1997, the Company consummated its initial public
offering ("IPO") whereby it sold 2,500,000 shares of Common Stock 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 analysis of its
cash position was 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 determined that a private offering of the
Company's securities would be in the best interests of the Company.
As a result, in October and November 1998, the Company had the initial
closing of two private placements -- the Series A Private Placement and the
Series B Private Placement. The Series A Private Placement consisted of
1,750,000 Units (the "Series A Units") with a gross sales price of $3,500,000.
The Series B Private Placement consisted of 10 Units (the "Series B Units") with
a gross sales price of $1,000,000. Each Series A Unit consisted of one share of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and a warrant
to purchase 2.5 shares of Common Stock at a per share exercise price equal to
$.50. Each Series B Unit consisted of 10,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred Stock") and warrants to purchase an
aggregate of 125,000 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 Unit and
each share of Series A Preferred Stock share is convertible into four shares of
Common Stock. The Series B Units were sold at a purchase price of $100,000 per
Unit and each share of Series B Preferred Stock is convertible into twenty
shares of Common Stock. The effective purchase price, on a Common Stock
equivalent basis was $.50 per common share, which represented a discount from
the fair market value of the Company's Common Stock on the various dates of
issuance. The Company consummated the final closing on each of the Series A
Private Placement and the Series B Private Placement in February 1999 and
received an aggregate of (1) $3,181,000 from the Series A Private Placement
(after deduction of commissions and expenses payable to the placement agent) and
(ii) $814,000 from the Series B Private Placement (after deduction of
commissions and expenses payable to the placement agent). The Company has also
received $635,256 from the exercise of warrants granted in the Series A Private
Placement and Series B Private Placement, of which $294,006 was received in the
three months ended June 30, 1999.
In connection with the Series A and Series B Private Placements, 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 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.
13
<PAGE>
In June 1999, the Company consummated the initial closing of the Series
C Private Placement, pursuant to which the Company received net proceeds of
$834,517. See Note 6 to the Condensed Consolidated Financial Statements. The net
proceeds of the Series C Private Placement will be used for sales and marketing,
research and development, and general working capital purposes.
During May and June 1999, the Company borrowed $400,000 from
stockholders of the Company in exchange for promissory notes (the "Notes
Payable"). The Notes Payable bear interest at 12% per annum and were due at the
earlier of June 30, 1999 or the successful consummation of the Series C Private
Placement. Upon the initial closing of the Series C Private Placement on June
28, 1999, the Notes were repaid.
As of June 30, 1999, the Company had $284,000 in cash and cash
equivalents and a working capital deficit of $698,000. Net cash used in
operating activities was $3,037,000 and $4,170,000 for the six month period
ended in 1999 and 1998, respectively. For 1999, net cash used in operating
activities was primarily attributable to a net loss of $3,253,000, less
depreciation and amortization of $220,000. For 1998, net cash used in operating
activities was primarily attributable to a net loss of $4,328,000, less
depreciation and amortization of $205,000. Net cash provided by financing
activities was $2,480,000 in 1999, primarily as a result of the collection of
stock subscription receivables, the initial closing of the Series C Private
Placement and the exercise of common stock purchase warrants.
The Company does not currently have a line of credit with a commercial
bank. As of December 31, 1998, the Company's principal commitments consisted of
obligations under operating and capital leases and employment agreements. At
that date, the Company had approximately $347,000 in outstanding borrowings
under capital leases which are payable through 2001. The Company is currently
negotiating new employment agreements with executive officers of the Company.
Pursuant to employment agreements with executive officers of the Company as of
June 30, 1999, the Company's remaining obligation is to pay $54,000 and $0 in
salaries for the years ended December 31, 1999 and 2000, respectively.
As of June 30, 1999, the Company had a deficit in working capital of
$698,000. During 1999, the Company received $1,396,000 in working capital from
the proceeds of the 1998 Private Placement, $854,186 from the initial closing of
the Series C Private Placement and $834,517 from the exercise of warrants
granted in the 1998 Private Placements. The Company has incurred operating
losses since inception, has incurred negative cash flows from operating
activities and had an accumulated deficit of $38,665,314 as of June 30, 1999.
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. The Company anticipates that its cash and cash equivalent
balances, after giving effect to the sale of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") subsequent to June 30, 1999, may be
insufficient to satisfy its operating cash flow requirements in the foreseeable
future. As discussed in Notes 5. and 6. above, the Company has sold a total of
$3,730,000 of Series C Convertible Preferred Stock and will seek to sell
additional Series C Preferred Stock up to 45 Units. However, there can be no
assurances that the Company will be successful in raising additional funds. See
"Risk Factors That May Affect Future Results - Negative Working Capital; Need
for Additional Funding". The sale of additional equity securities will result in
additional dilution to the Company's stockholders.
14
<PAGE>
Year 2000 Compliance
We have commenced an assessment of the readiness of our internal
business information systems for handling the Year 2000 and the Year 2000
compliance of our products. We believe that we will need to modify or replace
portions of our internal business information systems to ensure Year 2000
compliance and we expect that we will successfully address Year 2000 issues
relating to our internal business information systems by the end of fiscal 1999.
We believe that our current products are Year 2000 compliant. However,
it is possible that current or future customers will assert claims against us
with respect to Year 2000 issues and, in the event such claims are asserted and
adjudicated in favor of these customers, our liability could be material. We are
taking steps to identify affected customers and assist them in assessing risks
that may be associated with our products. We may incur increasing costs
regarding customer service related to these actions over the next few years. As
our customer service programs are currently ongoing, we are unsure of the scope
of any resulting Year 2000 issues and potential liability resulting from such
issues. We do not know the potential impact on our business, operating results
and financial condition with respect to these matters.
We have had discussions with our significant vendors, service providers
and large customers to evaluate Year 2000 issues, if any, relating to the
interaction of their systems with our internal systems. We have not yet received
written compliance information from these third parties and we cannot currently
determine when we will receive all of this information. Thus, despite the
initiation of these discussions, we lack the information necessary to estimate
the potential impact of Year 2000 compliance issues relating to these third
parties and their interaction with us and are unsure of when we will receive
such information.
While we have not incurred any material expenditures in connection with
identifying or evaluating Year 2000 compliance issues, there can be no assurance
that our Year 2000 compliance costs will continue at this level. Most of our
expenses have related to the opportunity cost of time spent by our employees
evaluating our internal business information systems, our products and the
interaction of our internal business information systems with the internal
systems of third parties. Although we are unaware of any material operational
issues or costs associated with preparing our internal business information
systems and products for the Year 2000, we are unsure that we will avoid serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in our technology. Such unanticipated negative consequences
and/or material costs, if incurred, could have a material adverse effect on our
business, operating results or financial condition.
Because we are unaware of any material Year 2000 compliance issues, we
lack a Year 2000-specific contingency plan. If Year 2000 compliance issues are
discovered, we will evaluate the need for one or more contingency plans relating
to such issues. If we are unable to develop and implement appropriate
contingency plans, as needed, in a timely manner, we may experience delays in,
or increased costs associated with, implementation of changes to address any
such issues, which could have a material adverse effect on our business,
operating results or financial condition.
15
<PAGE>
Risk Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights the most material of the risks.
Negative Working Capital; Need For Additional Funding: At June 30,
1999, we had negative working capital of $697,596. We have had a limited
operating history as a software product company, have not made significant sales
of our products and our revenues are difficult to predict. Given our continued
operating losses, we may need additional financing to continue operations. Our
current projections indicate that our current cash and cash equivalent position
may be insufficient to satisfy our liquidity requirements. Except as provided in
the next paragraph, we have no commitments, agreements or understandings
regarding additional financings and we may be unable to obtain additional
financing.
On June 28, 1999 we sold our first $1,000,000 of securities in a
private placement (the "Series C Private Placement"). The Series C Private
Placement provides for a minimum of 10 and a maximum of 30 units (the "Units")
at a purchase price of $100,000 per unit. We have the ability to increase this
offering to 45 Units at our discretion and have elected to so. Each Unit
consists of 100 shares of newly-created Series C Convertible Preferred Stock,
$.001 par value (the "Series C Preferred Stock"), and a Common Stock Purchase
Warrant (the "Warrant") exercisable until December 28, 2001 to purchase 100,000
shares of Common Stock at an exercise price of $.8625 per share. As a result of
our sale of $1,000,000 of securities on June 28, 1999, we received net proceeds
of $834,517 and issued 1,000 shares of Series C Preferred Stock that is
convertible into 1,159,426 shares of Common Stock and Warrants to purchase
1,000,000 shares of Common Stock. Subsequent to June 30, 1999, we sold
$2,730,000 of such securities receiving net proceeds of $2,519,650 and issued
2,730 shares of Series C Preferred Stock that is convertible into 3,165,218
shares of Common Stock and Warrants to purchase 2,730,000 shares of Common
Stock. We are currently attempting to sell additional Units and will do so until
all 45 Units are sold. Each share of Series C Preferred Stock is convertible
into such number of shares of Common Stock as is equal to the quotient obtained
by dividing $1,000 by the fair market value of the Common Stock, i.e., the
average closing price of the Common Stock in the principal securities market in
which it is then traded for the five trading days immediately preceding the date
of the initial closing of the offering ($.8625).
Accumulated Deficit; Historical and Projected Future Operating Losses;
Going Concern Qualification in Independent Accountants' Report: At June 30,
1999, our accumulated deficit was $38,665,314. For the six months ended June 30,
1999 and the fiscal years ended December 31, 1998, and 1997, we incurred net
losses of $3,252,857, $7,294,032 and $10,563,484, respectively. We have incurred
a net loss in each year of our existence, and have financed our operations
primarily through sales of equity and debt securities. Our expense levels are
high and our revenues are difficult to predict. The independent accountants'
report on our financial statements for the year ended December 31, 1998 states
that our recurring losses from operations, our deficiencies in working capital
and stockholders? equity, and negative cash flow from operating activities raise
substantial doubt about our ability to continue as a going concern.
16
<PAGE>
We expect to incur net losses for the foreseeable future. We may never
achieve or sustain significant revenues or profitability on a quarterly or
annual basis in the future. Our future operating results will depend on many
factors, including:
o product demand
o product and price competition in our industry
o our success in expanding our direct sales force and
establishing indirect channel partners
o our ability to develop and market products and control costs
o the percentage of our revenues that is derived from indirect
channel partners
Limited Operating History; Lack of Substantial Revenue: We have a
limited operating history as a software product company and have made only
limited sales of our products. Our total revenues for the year ended December
31, 1998 and for the six months ended June 30, 1999 were $928,505 and $606,294,
respectively. Prior to 1997, our revenues were derived primarily from contract
data analysis services, which we no longer provide.
Dependence Upon QueryOject System; Uncertain Market Acceptance of
QueryObject System: Substantially all of our revenues for the foreseeable future
are expected to be derived from sales of QueryObject System. Between January 1,
1995 and June 30, 1999, we had software product revenue from only 21 QueryObject
System installations, including those sold pursuant to reseller agreements for
the resellers' own use. We only recently commenced an integrated marketing
effort for our products. Our 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. If we fail to achieve
broad market acceptance of QueryObject System, it would have a material adverse
effect on our business, operating results and financial condition.
Nasdaq Delisting; Potentially Limited Trading Market: Effective with
the close of business on May 6, 1999, our Common Stock was delisted from the
Nasdaq SmallCap Market ("Nasdaq") because of our inability to comply with
certain maintenance standards required for continued listing on Nasdaq,
including the net tangible asset requirement. We fell out of compliance
primarily as a result of continued losses during 1998.
Now that the Common Stock has been delisted from Nasdaq, trading in the
Common Stock is conducted on the OTC Bulletin Board and may continue to be
conducted on the Boston Stock Exchange. The Boston Stock Exchange has notified
us that we may not meet such exchange's continuing listing requirements with
regard to net tangible assets and that it will delist the Common Stock if we
have less than $500,000 in net tangible assets. We may be unable to maintain at
least $500,000 in net tangible assets without additional financing. The Boston
Stock Exchange has advised us that the Common Stock can temporarily continue to
be listed on the Boston Stock Exchange at least until August 16, 1999. At such
time, we must advise the Boston Stock Exchange whether the offering of Series C
Preferred Stock has closed
17
<PAGE>
and how much proceeds we have received from such offering. Based on such
information and our financial condition at such time, the Boston Stock Exchange
may determine to delist the Common Stock.
If the Common Stock is delisted from the Boston Stock Exchange, the
Common Stock could be considered a penny stock. SEC regulations generally define
a penny stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market price of less than $5.00 per
share, subject to certain exceptions. The regulations of the SEC would require
broker-dealers to deliver to a purchaser of Common Stock a disclosure schedule
explaining the penny stock market and the risks associated with it. Various
sales practice requirements are also imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, broker-dealers 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 our Common Stock is traded only on the OTC Bulletin Board and
becomes subject to the regulations applicable to penny stocks, investors may
find it more difficult to obtain timely and accurate quotes and execute trades
in the Common Stock.
Use of Indirect Channel Partners to Increase Sales: As part of our
sales and marketing efforts, we are seeking to develop strategic relationships
with indirect channel partners, such as original equipment manufacturers and
value-added resellers, to increase the number of our customers. We currently are
investing, and intend to continue to invest, significant resources to develop
indirect channel partners. Our results of operations will be adversely affected
if we are unable to attract indirect channel partners to market our products
effectively and provide timely and cost effective customer support and service.
If we successfully sell products through these sales channels, the lower unit
prices we expect to receive for such sales will result in our gross margins
being lower than if we had sold those products through our direct sales force.
Dependence on Significant Customers: For the six months ended June 30,
1999, four customers accounted for 94%, and for the fiscal year ended December
31, 1998, four customers accounted for 80%, of our total revenues. We are unsure
if we will realize significant future revenues from any of these customers. We
also expect that for the foreseeable future a relatively small number of
customers and value added resellers will account for a significant percentage of
our revenues. The loss of any such customer would have a material adverse effect
on our operating results and financial condition.
Dependence Upon Key Personnel; Need to Increase Sales, Marketing,
Development and Technical Personnel: Our future performance depends in
significant part upon the continued service of key technical, sales and senior
management personnel. The loss of the services of one or more of our key
employees, in particular, Robert Thompson, our President and Chief Executive
Officer, or Daniel M. Pess, our Chief Operating and Financial Officer, could
have a material adverse effect on our business, operating results and financial
condition. We have an employment agreement with Mr. Thompson that expires in
October 1999, and an employment agreement with Mr. Pess that expired in May
1999. We are currently negotiating with Messrs. Thompson and Pess on the terms
of new employment agreements.
18
<PAGE>
Our future success also depends on our continuing ability to attract,
train and retain highly qualified technical, sales, marketing, development and
managerial personnel. Competition for such personnel is intense, and we may be
unable to retain key technical, sales, development and managerial employees or
attract, assimilate or retain other highly qualified technical, sales,
development and managerial personnel in the future. If we are unable to hire
such personnel on a timely basis, our business, operating results and financial
condition could be materially adversely affected.
Lack of Proprietary Technology Protection; Risks of Infringement: We
rely primarily on a combination of trade secrets, confidentiality agreements and
contractual provisions to protect our proprietary technology. We license rather
than sell our software and require licensees to enter into license agreements
that impose certain restrictions on their ability to utilize the software. In
addition, we seek to avoid disclosure of our trade secrets, including but not
limited to requiring those persons with access to our proprietary information to
execute confidentiality agreements and restricting access to our source code.
These steps afford only limited protection. We have no patents or patent
applications pending. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products may be difficult and costly, and software piracy may become a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. We are unable to predict whether our means of protecting our
proprietary rights will be adequate or whether competitors will independently
develop the same technology.
From time to time, third parties may assert patent, copyright and other
intellectual property claims against us. If we are unable to license protected
technology that may be used in our products, we could be prohibited from
manufacturing and marketing such products. We also could incur substantial costs
to redesign our products, to defend any legal action taken against us or to pay
damages to any infringed party. Litigation, which could result in substantial
cost to and diversion of our resources, may be necessary to enforce our other
intellectual property rights or to defend ourselves against claimed infringement
of the rights of others.
International Operations: Our international sales for the six months
ended June 30, 1999 and for the fiscal year ended in 1998, were approximately
56% and 17% of our total revenue, respectively. We intend to expand our
international operations and to enter additional international markets, which
will require significant management attention and financial resources and could
adversely affect our business, operating results or financial condition. To
expand international sales successfully, we must establish additional foreign
operations, hire additional personnel and recruit additional international
resellers and distributors. If we are unable to do so in a timely manner, our
growth, if any, in international sales will be limited, and our business,
operating results and financial condition could be materially adversely
affected. We anticipate that our international sales, if any, will be
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and,
therefore, potentially less competitive in those markets. Additional risks
inherent in our future international business activities generally include:
o unexpected changes in regulatory requirements
o tariffs and other trade barriers
o costs of localizing products for foreign countries
o longer accounts receivable payment cycles
19
<PAGE>
Possible Volatility of Securities Prices: The market price of our
common stock has in the past been, and may in the future continue to be,
volatile. For instance, between January 1, 1998 and August 10, 1999, the closing
price of our common stock has ranged between $.47 and $5.50. The volatility of
the market price of our common stock may further increase now that our common
stock has been delisted from Nasdaq. A variety of events may cause the market
price of our common stock to fluctuate significantly, including:
o quarter to quarter variations in operating results
o adverse news announcements
o the introduction of new products
o market conditions in the industry
In addition, the stock market in recent years has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many companies that service the software
industry and that often have been unrelated to the operating performance of such
companies. These market fluctuations may adversely affect the price of our
common stock.
Issuance of Preferred Stock; Anti-Takeover Provisions: As of June 30,
1999, our Board of Directors has the authority, without further action by the
stockholders, to issue 2,083,650 shares of preferred stock on such terms and
with such rights, preferences and designations, including, without limitation
restricting dividends on our common stock, dilution of the voting power of our
common stock and impairing the liquidation rights of the holders of our common
stock, as the Board may determine without any vote of the stockholders. Issuance
of such preferred stock, depending upon the rights, preferences and designations
thereof may have the effect of delaying, deterring or preventing a change in our
control. In addition, certain "anti-takeover" provisions of the Delaware General
Corporation Law, among other things, may restrict the ability of our
stockholders to authorize a merger, business combination or change of control.
Forward Looking Statements and Associated Risks: Certain
forward-looking statements, including statements regarding our expected
financial position, business and financing plans are contained in this
prospectus or are incorporated in documents annexed as exhibits to this
prospectus. These forward-looking statements reflect our views with respect to
future events and financial performance. The words, "believe," "expect," "plans"
and "anticipate" and similar expressions identify forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from such expectations are disclosed in this prospectus. All
subsequent written and oral forward-looking statements attributable to us are
expressly qualified in their entirety by the cautionary statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. We undertake no obligations to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
20
<PAGE>
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
As described under "Management's Discussion and Analysis or Plan of
Operation -Liquidity and Capital Resources," the Company has closed on the
Series C Private Placement. The sale of the securities in the Series C Private
Placement was made pursuant to the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended. Seaboard Securities, Inc. acted as the
placement agent of the Series C Private Placement. For more information relating
to the Series C Private Placement (including the conversion or exercise terms of
the securities issued in the Private Placement), please see "Management's
Discussion and Analysis of Plan of Operation "Liquidity and Capital Resources."
During the three months ended June 30, 1999, the Company issued an
aggregate of 149,500 shares of Common Stock pursuant to the conversion of Series
A Preferred Stock and Series B Preferred Stock. The Company also issued an
aggregate of 588,012 shares of Common Stock pursuant to the exercise of Warrants
granted in the Series A Private Placement and the Series B Private Placement.
The Warrants had an exercise price of $.50 per share of Common Stock. The
issuance of the shares of Common Stock upon the conversion of the Series A
Preferred Stock and the Series B Preferred Stock and the exercise of the
Warrants was made pursuant to the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company on June 2, 1999,
the stockholders (i) elected seven members of the Board of Directors to serve
until the next annual meeting, (ii) approved an increase in authorized common
stock, (iii) approved an increase in authorized preferred stock, (iv) approved
an amendment to the 1991 stock option plan, and (v) ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accounts for year
ending December 31, 1999.
(i) The vote to elected seven members of the Board of Directors to
serve until the next annual meeting was as follows:
Nominee For Withheld
------- --- --------
Robert A. Thompson 10,972,322 --
Daniel M. Pess 10,972,322 --
Alan W. Kaufman 10,972,322 --
Andre Szykier 10,972,322 --
Rino Bergonzi 10,972,322 --
Irwin Jacobs 10,972,322 --
Amy Newmark 10,972,322 --
21
<PAGE>
(ii) The vote for the approval of an increase in authorized common
stock was as follows:
Common Stock and Preferred Stock Voting Together
For Against Abstain
--- ------- -------
10,957,922 26,750 2,000
Common Stock Voting as a Separate Class
For Against Abstain
--- ------- -------
3,897,922 26,750 2,000
(iii) The vote for the approval of an increase in authorized preferred
stock was as follows:
Common Stock and Preferred Stock Voting Together
For Against Abstain
--- ------- -------
7,980,294 68,075 --
Preferred Stock Voting as a Separate Class
For Against Abstain
--- ------- -------
7,060,000 -- --
(iv) The vote for the approval of amendment to 1991 stock option plan
was as follows:
For Against Abstain
--- ------- -------
7,942,044 84,925 21,400
(v) The vote for ratifying the appointment of PricewaterhouseCoopers
LLP was as follows:
For Against Abstain
--- ------- -------
10,978,122 7,050 1,500
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Company's stockholders are notified that
the deadline for providing the Company timely notice of any stockholder proposal
to be submitted outside of the Rule 14a-8 process for consideration at the
Company's 2000 Annual Meeting of Stockholders (the "Annual Meeting") will be
March 18, 2000. As to all such matters which the Company does not have notice on
or prior to March 18, 2000, discretionary authorization shall be granted to the
designated persons in the Company's proxy statement for the Annual Meeting.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Statement of Computation of Net Loss Per Share (Exhibit 11.1)
Financial Data Schedule (Exhibit 27)
Andre Szykier's Terms of Separation from Employment (Exhibit 99.1)
(b) Reports of Form 8-K
No Reports on Form 8-K were filed during the quarter ended June
30, 1999.
23
<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: August 13, 1999 QUERYOBJECT SYSTEMS CORPORATION
By: /s/ Daniel M. Pess
--------------------------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
24
QUERYOBJECT SYSTEMS CORPORATION EXHIBIT 11.1
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three months ended June 30, 1998 Six months ended June 30, 1998
umber 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 5,110,605 181 5,110,605
Excercise of common stock options 1,875 91 1,875 1,875 167 1,730
" 2,118 91 2,118 2,118 166 1,942
" 4,584 91 4,584 4,584 138 3,495
" 625 91 625 625 123 425
" 365 91 365 365 104 210
" 1,250 25 347 1,250 25 173
Weighted average shares used in per share 5,120,519 5,118,580
computation ----------- -----------
Net loss for the period $(2,092,411) $(4,327,994)
----------- -----------
Net loss per common share $ (0.41) $ (0.85)
----------- -----------
Three months ended June 30, 1999 Six months ended June 30, 1999
umber of Weighted Number of Weighted
Common Days Average Common Days Average
Shares Outstanding Shares Shares Outstanding Shares
Common stock outstanding at January 1, 1999 5,122,985 91 5,122,985 5,122,985 181 5,122,985
Conversion of preferred stock into common 40,000 91 40,000 40,000 134 29,613
Warrant exercise 480,000 91 480,000 480,000 127 336,796
Conversion of preferred stock into common 198,000 91 198,000 198,000 126 137,834
Warrant exercise 15,000 91 15,000 15,000 126 10,442
" 67,500 91 67,500 67,500 125 46,616
" 22,500 91 22,500 22,500 122 15,166
" 10,000 91 10,000 10,000 121 6,685
Conversion of preferred stock into common 25,000 91 25,000 25,000 120 16,575
Warrant excercise 25,000 91 25,000 25,000 118 16,298
" 31,250 91 31,250 31,250 115 19,855
" 31,250 91 31,250 31,250 111 19,164
Conversion of preferred stock into common 12,500 84 11,538 12,500 84 5,801
Warrant exercise 20,000 68 14,945 20,000 68 7,514
Conversion of preferred stock into common 10,000 65 7,143 10,000 65 3,591
Warrant exercise 155,000 64 109,011 155,000 64 54,807
Conversion of preferred stock into common 25,000 64 17,582 25,000 64 8,840
Warrant excercise 30,000 63 20,769 30,000 63 10,442
Conversion of preferred stock into common 102,000 62 69,495 102,000 62 34,939
Warrant excercise 30,000 61 20,110 30,000 61 10,110
" 86,000 58 54,813 86,000 58 27,558
" 20,000 50 10,989 20,000 50 5,525
" 10,000 48 5,275 10,000 48 2,652
" 4,600 44 2,224 4,600 44 1,118
" 27,400 36 10,840 27,400 36 5,450
" 32,312 35 12,428 32,312 35 6,248
" 43,200 34 16,141 43,200 34 8,115
" 30,000 29 9,560 30,000 29 4,807
" 2,500 26 714 2,500 26 359
" 5,000 22 1,209 5,000 22 608
" 27,000 12 3,560 27000 12 1,790
" 25,000 2 549 25000 2 276
Weighted average shares used in per share computation 6,467,380 5,978,579
Net loss for the period $(1,535,320) $(3,252,857)
----------- -----------
Net loss per common share $ (0.24) $ (0.54)
----------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 283,503
<SECURITIES> 0
<RECEIVABLES> 895,271
<ALLOWANCES> 69,900
<INVENTORY> 0
<CURRENT-ASSETS> 1,362,598
<PP&E> 2,172,481
<DEPRECIATION> 1,353,811
<TOTAL-ASSETS> 2,249,884
<CURRENT-LIABILITIES> 2,060,194
<BONDS> 0
0
1,747
<COMMON> 6,806
<OTHER-SE> (151,105)
<TOTAL-LIABILITY-AND-EQUITY> 2,249,884
<SALES> 606,294
<TOTAL-REVENUES> 606,294
<CGS> 60,036
<TOTAL-COSTS> 3,842,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,022
<INCOME-PRETAX> (3,252,857)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,252,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,252,857)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
June 2, 1999
Andre Szykier
3082 Arbolado Court
Walnut Creek, CA 94598
Dear Andre:
This letter will constitute the mutual agreement between you and QueryObject
Systems Corporation ("QueryObject Systems") on the terms of your separation from
employment with QueryObject Systems. You and QueryObject Systems agree that we
desire to minimize the commitment of time, expense and resources involved in the
termination of your employment by entering into this Separation Agreement, and
accordingly, have agreed as follows:
1. Your employment terminated effective April 30, 1999.
2. You have been paid your earned salary through the effective date of
your termination.
3. You will continue to receive the previously agreed upon payment for
medical insurance of your own choosing and will receive company-paid
dental insurance through April 30, 2004. If you become covered under
any medical or dental insurance plan(s) provided by a subsequent
employer, then the cost of coverage required to be provided by
QueryObject Systems shall be reduced by the amount of coverage provided
by the subsequent employer's plan(s) for so long as such coverage
continues. You will be responsible for notifying QueryObject Systems of
subsequent insurance coverage.
4. You will return to QueryObject Systems Corporation any information you
have about QueryObject Systems practices, procedures, trade secrets,
customer lists, or product marketing. You may keep the laptop, port
replicator, and Canon Multipass already in your possession, however, we
will need you to return the pager. The cellular telephone number will
be transferred to your personal billing, and all other telephones will
be shut off per your instructions.
<PAGE>
5. QueryObject Systems will provide you with the severance payment of
$150,000 payable over the period May 1, 1999 through April 30, 2000 as
well as reimburse you for 106 unused, accrued vacation days payable
over the period of May 1, 1999 through December 31, 1999. (See attached
schedule.) These payments will be made in equal installments over the
period of time indicated in accordance with normal Company payroll
practices less usual payroll deductions.
6. Expenses incurred while traveling or engaged in authorized company
business will be reimbursed upon submission.
7. You agree to abide by all terms and conditions set forth in Sections
1.2, 1.3 and 1.4 of the Proprietary Rights and Separation Agreement
dated as of June 16, 1992 and Section 7 of the Employment Agreement
dated as of May 8, 1996.
8. All currently granted options to purchase Common Stock of the Company
will become fully vested as of April 30, 2000 and will remain
exercisable until December 31, 2000.
9. You waive and release and promise never to assert any and all claims
that you have or might have against QueryObject Systems Corporation and
its predecessors, subsidiaries, related entities, officers, directors,
shareholders, agents, attorneys, employees, successors, or assigns,
arising from or related to your employment with QueryObject Systems
Corporation and/or termination of your employment with QueryObject
Systems Corporation.
These claims include, but are not limited to, claims arising under
federal, state and local statutory or common law, such as the Age
Discrimination in Employment Act, Title VII of the Civil Rights Act of
1964, the New York Human Rights Law, and the law of contract and tort.
10. You will not, unless required or otherwise permitted by law, disclose
to others any information regarding the following:
<PAGE>
Any information regarding QueryObject Systems practices,
procedures, trade secrets, customer lists, or product
marketing.
The terms of this Separation Agreement, the benefit being paid
under it or the fact of its payment, except that you may
disclose this information to your attorney, accountant or
other professional advisor to whom you must make the
disclosure in order for them to render professional services
to you. You will instruct them, however, to maintain the
confidentiality of this information just as you must.
To accept the agreement, please date and sign this letter and return it
to me. (An extra copy for your files is enclosed.)
I am pleased that we were able to part ways on these amicable terms.
QueryObject Systems Corporation and I wish you every success in your
future endeavors.
Sincerely,
Robert Thompson
President and
Chief Executive Officer
Attachment
By signing this letter, I acknowledge that I have had the opportunity to review
this Separation Agreement carefully with an attorney of my choice, that I
understand the terms of the agreement, and that I voluntarily agree to them.
- ------------------------------------- ----------------------
Andre Szykier Date
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
ANDRE SZYKIER
SCHEDULE OF SEPARATION
DESCRIPTION AMOUNT
- ----------- ------
Note Receivable 65,000.00
Accrued Payroll (65,373.00)
Accrued Vacation (576.96 x 106 days) (61,157.76)
Accrued T & E (thru 3/99) (12,949.80)
Officer Life Insurance Premium 5,868.59
Severance (150,000.00)
Total due to A. Szykier (218,611.97)
