SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13587
QUERYOBJECT SYSTEMS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3087939
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
60 Charles Lindbergh Boulevard, Uniondale, New York 11553
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 228-8500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. X
State the issuer's revenues for its most recent fiscal year:
The issuer's revenues for the fiscal year ended December 31, 1998 were $928,505.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference to the price at which the
stock was sold on March 28, 1999 was approximately: $5,670,000. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At March
15, 1999, there were outstanding 6,068,485 shares of the Registrant's Common
Stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy
statement to be filed not later than April 30, 1999 pursuant to Regulation 14A
are incorporated by reference in Items 9 through 12 of Part III of this Annual
Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
QueryObject Systems Corporation (the "Company") develops and markets
proprietary business intelligence software solutions that enable business
managers to make strategic decisions, leveraging existing corporate data.
Through the evolution of technology, businesses operating in transaction
intensive industries, such as telecommunications, healthcare and insurance and
financial services, have dramatically increased their ability to gather and
store large amounts of data generated from various sources. Such data contains
information that, if extracted effectively and efficiently, can be used to
enhance strategic corporate development. While companies have invested heavily
in capturing data, they have only recently begun to focus significant resources
on the management and analysis of such data; consequently, the data gathering
and analysis industry is experiencing significant growth. The Company developed
its products in response to the need by companies to analyze these increasing
volumes of data.
In the third quarter of 1996, the Company began the process of shifting
its focus from using its proprietary technologies to provide contract data
analysis services, to the sale and support of its proprietary products, thereby
enabling customers to do their own analysis. The process was substantially
completed in 1998. Through 1998, the Company has realized limited sales of its
products and in September 1998, implemented a plan to reduce its monthly
operating costs, which included the termination of approximately 20% of the
Company's employees.
The Company was incorporated in Delaware in 1997 and is the successor
by merger to CrossZ International, Inc., a California corporation, incorporated
in 1989. In May 1998, the name of the Company was changed from CrossZ Software
Corporation to QueryObject Systems Corporation to reflect the change in the
Company's focus. Unless otherwise indicated, references to the Company also
include its predecessor.
INDUSTRY BACKGROUND
Data marts are component technologies in the "Business Intelligence" or
more broadly, the "Data Warehousing" market. International Data Corp. ("IDC"), a
leading technology consulting/research company, estimates that the size of the
data warehousing software market will increase to over $5.0 billion by the year
2000, with an annual compound growth rate of approximately 30%. The stimulus for
this growth is the exceptional returns on capital experienced by companies that
have invested in data warehousing and related technologies. IDC studied 62
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companies that invested an average of $2.2 million each in data warehousing and
found that the average return on investment after three years was 401%.
There are generally three components to an enterprise-wide business
intelligence system:
- Data warehouse: where the unprocessed corporate data is stored in one
place. Data warehousing involves the controlled, periodic loading of selected
historical data from various databases into a central repository in a summarized
and standardized format that is made available to users on a read-only basis.
This approach provides users with better access to critical data in the
organization's relational database management systems ("RDBMS"), but users are
not generally familiar enough with database syntax to extract data from data
warehouses without assistance from information technology ("IT") personnel.
- Data mart: subject-specific subsets of the data warehouse. An
advanced form of data mart contains pre-calculated answers stored in a
multidimensional data mart known as a data cube.
- Data analysis: accessing information and discovering and extracting
hidden patterns or trends from databases and data marts.
Despite the size of this market, and the strategic value of the
"business intelligence" available from corporate data, businesses developed
their information systems solely to support transactional data processing,
collecting and storing the data necessary to facilitate such processing.
Therefore, data storage methods designed in contemplation of narrow
transactional goals are being burdened with the new goals of strategic analysis.
Such systems do not fully address the need to transform data into useful
information.
In the business intelligence area, RDBMS are most frequently used as
data repositories, both for historical data as a "data warehouse" and for
analytical data as a "datamart." RDBMS are tuned to optimize support of high
volume on-line transaction processing ("OLTP") applications such as data entry
and do not support the extraction and analysis of that data.
LIMITATIONS OF TRADITIONAL ON-LINE ANALYTICAL PROCESSING PRODUCTS
Although a data warehouse is useful, because it contains all of the
data that can be analyzed, its immense size makes business intelligence analysis
inefficient and unwieldy. Within any data warehouse there will be extraneous
data (data unrelated to the goal of the analysis) that must be disregarded in
any specific or particular analyses. For example, if a company is trying to
determine the most relevant factors in retaining its customers for repeat
purchases, certain elements of each customer's data profile will have a
relatively high correlative value, such as income, gender or occupation, while
other elements will have a relatively low correlative value, such as first name
or social security number. A data warehouse contains all the data elements,
however, it does not contain the additional information necessary to identify
those data elements relevant to a business goal.
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The response to the inefficiencies of the data warehouse has been the
development of the data mart. However, traditional data mart technology is still
based on the relational model employed in the data warehouse and often does not
present that data in a fully transformed form most suitable for analytical as
opposed to storage purposes.
The Company believes enterprises are searching for ways to transcend
these limitations, to develop data marts that more efficiently support Business
Intelligence analytical techniques, in less time, with a more precise
correlation between data mart content and the user's business objectives. At the
same time, such product must use existing hardware and systems and minimize
impact on critical IT resources.
The Company believes that its QueryObject System provides an
enterprise-wide solution to the problems of first generation data mart
technology limitations.
QUERYOBJECT(TM) SYSTEM
QueryObject System employs advanced mathematics to create compact,
portable and accurate representations of data sets, called QueryObjects, from
the data repository. In real-world applications, a QueryObject System-based data
mart can be tens, even hundreds of times smaller than the source data warehouse,
thereby making terabyte-class databases small enough to transport on a standard
laptop. QueryObject System technology can reside on mainframe, midrange (UNIX)
or Windows NT systems. In October 1997, the Company began to implement
full-scale marketing of QueryObject System as a software product. Previous uses
of the QueryObject technology required certain consulting services and was
promoted selectively through direct sales channels, at several industry trade
shows, and to potential business partners. The current release of QueryObject
System has reduced consulting requirements and is capable of running on
additional UNIX operating systems and the Windows NT operating system.
The Company believes that QueryObject System offers the following
advantages over conventional data marts:
o Plug and Play with Raw Data: QueryObject System allows the user to
extract virtually unlimited amounts of raw data directly from existing OLTP and
other systems, without the need to aggregate and then summarize the data.
o Fresher Data: Performing a full scan on a data warehouse to create a
data mart is time intensive, consumes CPU resources, and renders the warehouse
virtually inaccessible to users with other purposes. In fact, most businesses
find it difficult to perform more than one full scan on their data warehouse in
a day and often require a week or more to create a data mart. QueryObject System
was designed specifically for high speed data mart creation without the
management overhead and negative performance implications associated with data
warehouses and other conventional data repositories, allowing users to create
dozens of data marts in a single day. Moreover, because QueryObject System
technology can reside on MVS, UNIX or Windows NT servers, the user can
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create the data mart on the system that makes the most sense for the business
and insulate mission critical applications and databases from the performance
degradation normally associated with full database scans.
o Lower Cost: As a result of their ability to load raw data directly
into QueryObject System, users can reduce or eliminate time-consuming work such
as extracting, cleaning, normalizing, formatting and summarizing data before
loading it into a data warehouse. In addition, large amounts of operational data
can be preserved for future analysis at far lower cost than a data warehouse.
o Greater Scalability and Speed: The Company believes QueryObject based
data marts contain more data in less storage space than traditional data marts
such as Hyperion Essbase and Oracle Express. A single QueryObject can contain
the representation of hundreds of millions of records, tens of thousands of
values in each field or column and billions of potential query answers. The use
of proprietary algorithmic equations allows QueryObject-based data marts to
store more data in a fraction of the storage space needed by conventional data
marts. Even with data marts that measure in the hundreds of millions of records,
the retrieval can often be executed in seconds or less.
o Greater Multi-User Support: QueryObjects can support unlimited
numbers of concurrent users since all possible answers to all possible queries
are contained therein, and impose virtually no degradation on processing, in
contrast to conventional data marts that consume large amounts of processing
power in computing potential answers.
o Greater Mobility: When business intelligence was a function confined
to a small cadre of analysts and specialists, it was acceptable for business
intelligence systems to reside in a single, central location. In contrast,
because QueryObjects can reside on desktops, laptops and Web servers, or be
distributed over local area networks, they allow businesses to deploy complex
data marts to thousands of users in an enterprise, using existing information
technology infrastructure.
THE QUERYOBJECT STRATEGY
The Company's objective is to establish the QueryObject System
technology as a ubiquitous data mart standard for data analysis in data
intensive industries such as telecommunications, healthcare and insurance and
financial services. Key elements of the Company's strategy include:
Establish Technology Leadership. The Company has developed a number of
technologies specifically to meet the scalability, capacity, usability and
functionality requirements of data mart software. In particular, the Company has
developed a proprietary high performance mathematical algorithm suite to compute
and represent all possible answers, univariates, uniques and intermediates
across very large databases. These answers are stored in highly compact formats
that do not require significant server memory or processing power to provide
instantaneous query response. The Company intends to continue to develop what it
believes are innovative technologies and features to address the specific
business requirements of data marts in the areas of performance, scalability,
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data integrity, system administration and decision analysis capabilities. The
Company intends to continue to invest in its technology in order to enhance its
existing data mart products.
Develop Strategic Relationships. To accelerate the adoption of the
QueryObject System as a standard platform business intelligence application, the
Company has begun to form strategic relationships with many providers of
business intelligence software applications, tools and services. The Company
believes that its strategic relationships with hardware and other software
vendors are a key part of its strategy to establish a leadership position in the
business intelligence data delivery market. The Company has established license
agreements and VAR ("value-added resellers") relationships with several
companies, including Amdahl Corporation, Hewlett-Packard Company, and Siemens
Nixdorf Information Systems AG. In addition, the Company has co-marketing
agreements with several companies including Business Objects, Brio Technology,
Inc., Computer Associates and Fujitsu Limited.
Expand Open Systems Approach. The Company seeks to maximize the market
for its products by designing them to adhere to industry standards, which allows
the sharing of data across platforms and software applications. QueryObject
technology operates with a wide range of third-party front-ends, databases and
operating systems via an open architecture that supports Microsoft's open
database connectivity (ODBC) and object linking and embedding database (OLE/DB)
standards and the Java Data Base Connectivity standard (JDBC) designed for
Internet tools. The Company believes that its open systems approach represents a
competitive advantage versus competing solutions that are more proprietary in
nature, and as such intends to continue to adhere to industry standards.
Leverage Existing Investments in Information Technology. The Company
believes that it has designed QueryObject System to take advantage of customers'
existing IT investments, thereby accelerating the acceptance of such software.
QueryObject System is designed to leverage investments in personal computer
hardware and software and to integrate data from existing relational databases,
legacy repositories and emerging data warehouses. The Company also leverages
third party-based consulting services and distribution capabilities to enable it
to focus on providing industry leading business intelligence data delivery
software.
Target Horizontal Markets/New Applications and Markets. Because the
delivery of relevant data to business intelligence applications is a critical
corporate function in a wide variety of industries, the Company believes that
its solutions are potentially applicable in a broad range of markets. The
Company is currently targeting customers in telecommunications, financial
services and insurance and health care.
Provide Superior Customer Service. The Company believes that providing
superior customer service is critical for customer success. The Company's
strategy is to deliver technology and services that enable its customers to
implement quickly and cost effectively integrated data mining/data mart
applications. The Company provides its customers with a comprehensive array of
services, including software updates, documentation updates, product maintenance
and emergency response. The
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Company intends to maintain its focus and to continue to invest in service and
support to extend its customer service advantage.
Expand Sales and Marketing Capabilities. The Company intends to expand
its sales and marketing capabilities, both domestically and internationally, by
increasing the size of its direct sales organization and developing an indirect
channel of distributors such as original equipment manufacturers ("OEMs") and
VARs. During 1997, the Company opened an office in the United Kingdom to enter
the European marketplace.
PRODUCTS
The Company's QueryObject System is a highly scaleable and efficient
solution for providing business intelligence applications and users with all the
relevant information from corporate data.
QueryObject System is a powerful OLAP data mart solution that
transforms mainframe size databases into highly compact and portable
mathematical representations that fit onto standard PC laptops. The following
table lists the QueryObject System product line by configuration and operating
system:
Product Configuration Operating System
QueryObject DBA Client Win 95-98/NT
QueryObject Designer Client Win 95-98/NT
QueryObject Engine Server MVS, UNIX, NT
QueryObject Server Personal Edition Client Win 95-98/NT
QueryObject Server, Enterprise Edition Server UNIX, NT
QueryObject Server, Web Edition Server UNIX, NT
QueryObject DBA (Data Base Administrator) provides administrators in a
Windows based environment with a tool to manage the process of reading,
synchronizing and staging source, atomic level data in QueryObject System. Using
standard drag and drop actions, data administrators can map their source data
into the QueryObject System repository, the QueryObject Ready File. The Company
believes that QueryObject DBA users benefit from working with a graphical tool
that understands the complexities of both legacy and warehouse data.
QueryObject Designer enables end users to design and build their own
QueryObjects. Working in a familiar Windows environment, users create
QueryObjects by selecting a subset of the fields from the QueryObject Ready file
using a drag and drop interface. The Company believes that
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the end user benefits from an environment that requires no programming, gives a
visual representation of the QueryObject, and is able to process hundreds of
millions of data records.
QueryObject Engine is designed to (i) work with large quantities of
data, (ii) read a variety of data formats and (iii) process the data into an
analytical repository, and then into multiple QueryObjects. From this staging
area, multiple QueryObjects are produced in an efficient manner on the server.
The Company believes that users are protected from the server environment by
using QueryObject DBA and QueryObject Designer, yet they gain the power of a
server behind their business intelligence system. QueryObject Engine runs on a
wide variety of server platforms from MVS to UNIX to Windows/NT. The resulting
QueryObject can be moved to a user's individual personal computer or managed by
the QueryObject Server.
Unlike other data mart systems that require significant amounts of
preprocessing and data aggregation, QueryObject Engine is able to perform these
tasks automatically for each QueryObject. The Company believes that the ability
to store and build a QueryObject from detail level data allows the user to
explore his data without the constraints of pre-aggregated data sets that might
not represent the data in the manner that the user requires for a particular
business challenge.
QueryObject Server allows the enterprise to locate and manage
QueryObjects on a centralized server infrastructure. QueryObject Server provides
enhanced security and performance across multiple QueryObjects over corporate
internets (Web Edition) or corporate LANs (Enterprise Edition). Users may also
download QueryObjects to their individual personal computers (QueryObject
Server, Personal Edition).
QueryObject contains ODBC, JDBC and OLE/DB interfaces that allow end
users to work within a familiar environment of industry standard business
intelligence data navigation and display tools.
SALES AND MARKETING
The Company markets and sells QueryObject System through its direct
sales organization and intends to increase the proportion of sales through
indirect channel parties such as VARs and OEMs. The direct sales process
involves the generation of sales leads through direct mail and telemarketing or
requests for proposal from prospects. The Company's field sales force conducts
multiple presentations and demonstrations of its products to management and
users at the customer site as part of the direct sales effort. Sales cycles
generally range from three months to six months or longer.
The Company's sales, marketing and related customer support services
organization consisted of 15 full time employees as of December 31, 1998. The
sales staff is based at the Company's corporate headquarters in Uniondale, New
York and its European branch office in London, England. To support its sales
force, the Company engages in direct mail solicitations, telesales and public
relations and presents its products at trade shows.
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The Company employs sales and technical personnel who are teamed to
support a designated account territory within a specified vertical market. The
team is responsible for creating and maintaining local partner relationships and
resolving channel conflicts. To ensure the appropriate level of channel support,
the direct sales force is compensated for sales that are made through indirect
channel partners and those that are made directly to end users. A separate
partnering and business development function is responsible for the recruitment
and maintenance of OEMs and national and global VARs and business partners.
The Company believes that a high level of customer support is important
to the successful marketing and sale of QueryObject System. Maintenance and
support contracts, which are typically for twelve months, are offered with the
initial license, and may be renewed annually at a cost equal to a fixed
percentage of the total license fee paid. Telephone hotline support will be
complemented by an internet site that provides an interactive forum and a
repository for technical tips and skills.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part
on its ability to maintain and enhance its leadership in business intelligence
software technology and develop new products that meet an expanding range of
customer requirements. The Company's research and development organization is
divided into teams consisting of development engineers and quality assurance
engineers. The market addressed by the Company is very sensitive to product
quality and therefore the process is aimed at continuous improvement of product
quality. The product definition is based upon a consolidation of the
requirements from existing customers, from technical support and from
engineering. These are prioritized by the Company's management to fit business
priorities and to meet the Company's vision.
The market for the Company's software is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. Therefore, the life cycles of the Company's products are difficult
to estimate. The Company's future success will depend upon its ability to
enhance on a timely basis its current products, develop and introduce new
products that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers.
As of December 31, 1998, the Company's research and development
organization consisted of 16 full time employees. The Company also utilizes
independent contractors located in Europe for its development activities. During
1998 and 1997, research and development expenses were $2,305,678 and $2,523,127
or 248% and 249% of total revenues, respectively. The Company will continue to
commit substantial resources to research and development in the future.
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PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential in establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
The Company currently has several registered trademarks, and may seek
additional legal protection for its products and trade names. The Company has
invested substantial resources in registering the trademarks and developing
branded products and product lines. There can be no assurance that the steps
taken by the Company to protect these intellectual property assets will be
sufficient to deter misappropriation. Failure to protect these intellectual
property assets could have a material adverse effect on the Company's business
operations. Moreover, although the Company is not aware of any lawsuit alleging
the Company's infringement of intellectual property rights, there can be no
assurance that any such lawsuit will not be filed against the Company in the
future or, if such lawsuit is filed, that the Company would ultimately prevail.
The Company currently has no United States patents or corresponding
patent applications pending elsewhere. Furthermore, there can be no assurance
that others will not develop technologies that are similar or superior to the
Company's technology or design around any patents that may be owned in the
future by the Company. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of its products or to
obtain and use information that it regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights in the United States or abroad will
be adequate or that competitors will not independently develop similar
technology. The Company has entered into source code escrow agreements with a
limited number of its customers and VARs requiring release of source code. Such
agreements provide that such parties will have a limited, non-exclusive right to
use such code in the event that there is a bankruptcy proceeding by or against
the Company, if the Company ceases to do business or if the Company fails to
meet its contractual obligations. The provision of source code may increase the
likelihood of misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company with respect to QueryObject System or
enhancements thereto. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
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competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays and
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, operating
results and financial condition could be materially adversely affected.
COMPETITION
The market in which the Company competes is intensely competitive,
highly fragmented and characterized by rapidly changing technology and a lack of
standards. The Company's current and prospective competitors offer a variety of
data mining and multidimensional data mart software solutions and generally fall
within five categories: (i) vendors of relational database products sold for
analytical (data warehouse and data mart) purposes such as Oracle, Informix,
Sybase, and Microsoft; (ii) vendors of multidimensional database and analysis
software such as Oracle (Express), Hyperion (Essbase) and Microsoft (Plato);
(iii) vendors of OLAP/relational database software such as Informix (Red Brick),
Information Advantage (Decision Suite) and Holistic Systems (Holos); (iv)vendors
of query excelleration products such as Nucleus (Sand Technology) and IQ
(Sybase);and (v) vendors of vertical software applications for budgeting and
financial consolidation, such as Hyperion Software Corporation (Hyperion and
FYPlan) and consulting vendors such as Arthur Andersen and Deloitte & Touche,
who focus on customer applications in the telecommunications, banking, insurance
and retail industries.
The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Also, certain current and potential competitors may have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects additional
competition as other established and emerging companies enter into the OLAP
software market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which would materially adversely
affect the Company's business, operating results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. The Company's current or future indirect
channel partners may establish cooperative relationships with current or
potential competitors of the Company, thereby limiting the Company's ability to
sell its products through
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particular distribution channels. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain new contracts and maintenance
and support renewals for existing contracts on terms favorable to the Company.
Further, competitive pressures may require the Company to reduce the price of
QueryObject System, which would materially adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, and the failure to do so would have a material adverse effect upon
its business, operating results and financial condition.
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of use
and customer support. The Company believes it presently competes favorably with
respect to each of these factors. However, the Company's market is still
evolving and there can be no assurance that the Company will be able to compete
successfully against current and future competitors and the failure to do so
successfully will have a material adverse affect upon the its business,
operating results and financial condition.
EMPLOYEES
As of December 31, 1998, the Company had a total of 36 full time
employees, including 16 in research and development, 15 in sales and marketing
and related customer support services and 5 in administration. None of the
Company's employees is represented by a collective bargaining agreement, nor has
the Company experienced any work stoppage. The Company considers its relations
with its employees to be good.
The Company's future operating results depend in significant part upon
the continued service of its key technical and senior management personnel. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will retain
its key managerial or technical personnel or attract such personnel in the
future. The Company has at times experienced and continues to experience
difficulty in recruiting qualified personnel and there can be no assurance that
the Company will not experience such difficulties in the future. The Company,
either directly or through personnel search firms, actively recruits qualified
research and development, financial and sales personnel. If the Company is
unable to hire and retain qualified personnel in the future, such inability
could have a material adverse effect on its business, operating results and
financial condition.
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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 December 31, 1998, we had negative working capital of $391,095. 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.
We sold securities in private placements in October and November 1998
so that we could continue operations. In the private placements, we received
conditional commitments to purchase $4,500,000 of units consisting of
convertible preferred stock and warrants to purchase common stock, of which
payment for all of the units had been made as of February 1999. We received net
proceeds of approximately $3,995,000 from such private placements (of which
$1,395,600 was received subsequent to December 31, 1998). Subsequent to December
31, 1998, we also received proceeds of $341,250 from the exercise of warrants
granted in such private placements. However, given our continued operating
losses, we will need additional financing to continue operations. Our current
projections indicate that our current cash and cash equivalent position will be
insufficient to satisfy our liquidity requirements. As of March 19, 1999, we
have no commitments, agreements or understandings regarding additional
financings and we may be unable to obtain additional financing.
ACCUMULATED DEFICIT; HISTORICAL AND PROJECTED FUTURE OPERATING LOSSES; GOING
CONCERN QUALIFICATION IN INDEPENDENT ACCOUNTANTS' REPORT
At December 31, 1998, our accumulated deficit was $35,412,456. For the
fiscal years ended December 31, 1998, and 1997, we incurred net losses of
$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.
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
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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 1997 were $928,505 and $1,012,159, 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 December 31, 1998, we had software product revenue from only 15 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
Our common stock is listed on the Nasdaq SmallCap Market and the Boston
Stock Exchange. To remain eligible for listing on the Nasdaq SmallCap Market we
must comply with the following:
o our common stock must have a minimum bid price of $1.00;
o we 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; and
o we must have a public float of at least 500,000 shares with a
market value of at least $1,000,000; at least 300 stockholders
must hold our common stock; and at least two market makers
must make a market in it.
In December 1998 Nasdaq notified us that our common stock would be
delisted pending a hearing. The hearing was held on February 19, 1999. As of
March 30, 1999, our common stock
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continued to be listed on Nasdaq. However, Nasdaq has not advised us that our
common stock will continue to be traded on Nasdaq on a long-term basis and we
believe that, absent additional financing, our common stock will be delisted and
that our common stock may be delisted even if we obtain additional financing.
The delisting could occur at any time.
If our common stock is delisted from Nasdaq, we believe the delisting
will be based on, among other things, reservations that Nasdaq has about our
ability to regain and sustain compliance with its net tangible asset
requirements. As of December 31, 1998, we had a deficiency of $14,126 in net
tangible assets. Subsequent to December 31, 1998, we received net proceeds of
$1,395,600 from the October and November 1998 private placements and $341,250
from the exercise of warrants granted in such private placements. Due to actual
and anticipated losses subsequent to December 31, 1998, however, we do not
expect to be able to maintain for any sustained period at least $2,000,000 in
net tangible assets without additional financing. Such additional financing may
be unavailable to us on acceptable terms or at all. As of March 30, 1999, we had
no commitments, understandings or arrangements with respect to any additional
financing.
If our common stock is delisted from Nasdaq, trading if any, therein
would be conducted on the OTC Bulletin Board and the Boston Stock Exchange. The
Boston Stock Exchange will delist our common stock if we have less than $500,000
in net tangible assets. We will not be able to maintain at least $500,000 in net
tangible assets after March 31, 1999 without additional financing. If our common
stock is delisted from Nasdaq and 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 the 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
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will result in our gross margins being lower than if we had sold those products
through our direct sales force.
NEED TO ENHANCE EXISTING PRODUCTS, DEVELOP NEW PRODUCTS AND ADAPT TO RAPID
TECHNOLOGICAL CHANGE
The market for our software is characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. We
cannot easily estimate the life cycles of our products. Our future success will
depend upon our ability to:
o enhance existing products
o develop and introduce new products that keep pace with
technological developments and emerging industry standards
o address the increasingly sophisticated needs of customers
We may be unable to accomplish these tasks. Any delays in the commencement of
commercial shipments of new products and enhancements could cause potential
customers to delay their decision to purchase our products or to choose to not
purchase our products, which would result in delays in or loss of product
revenues. Such delays in or loss of product revenues would have a material
adverse effect on our operating results and financial condition.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
For the fiscal year ended December 31, 1997, one customer accounted for
65%, 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.
COMPETITION
The market for our products is intensely competitive and subject to
rapid technological change. Our current and prospective competitors offer a
variety of data mining and multidimensional data mart software solutions and
generally fall within five categories: (i) vendors of relational database
products sold for analytical (data warehouse and data mart) purposes; (ii)
vendors of multidimensional database and analysis software; (iii) vendors of
OLAP/relational database software; (iv) vendors of query excelleration products:
and (v) vendors of vertical software applications for budgeting and financial
consultation. Our competitors have:
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o longer operating histories
o significantly greater financial, technical and marketing
resources
o greater name recognition
o a larger installed base of customers and products
o well-established relationships with our current and potential
customers
o extensive knowledge of the relational database industry
Our competitors may also be able to offer an integrated hardware and/or software
product that could be more attractive to potential customers. Our competitors
may respond more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion and sale
of their products. We also expect that software industry consolidations may
create more formidable competitors, resulting in price reductions that would
reduce gross margins and erode any market share we may attain, any of which
could materially adversely affect our business, 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 expires in May 1999. We are unsure if we will be
able to agree with either of Messrs. Thompson or Pess on the terms of extensions
to their employment agreements prior to the expiration of these agreements.
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.
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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.
POTENTIAL FLUCTUATIONS IN PERIODIC RESULTS
Our revenues may vary significantly from period to period due to the
discretionary nature of business intelligence data delivery software purchases,
and will be difficult to predict. Sales prices of our products range from
$50,000 to over $275,000. As a result, the timing of the receipt and shipment of
a single order can significantly impact our revenues and results of operations
for a particular period. We anticipate that product revenues in any quarter will
be substantially dependent on orders booked and shipped in that quarter, and we
are unable to predict revenues for any future quarter with any significant
degree of certainty.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
Any new products we develop would be subject to significant technical
risks. Our software products are complex and may contain undetected errors or
failures when we first introduce them or when we release new versions of them.
Although we have not experienced material adverse effects resulting from any
errors to date, our products could contain errors. If our products contain
errors, we could experience a loss of or delay in market acceptance. While we
have not experienced product liability claims to date, our product licensing and
support may entail the risk of such claims.
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A significant product defect or a successful product liability claim brought
against us could have a material adverse effect on our business, operating
results and financial condition.
INTERNATIONAL OPERATIONS
Our international sales in 1998 were approximately $158,000 or 17% of
our total revenue. 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
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
March 19, 1999, the closing price of our common stock has ranged between $.50
and $5.50. The volatility of the market price of our common stock may further
increase if our common stock is delisted from the Nasdaq SmallCap Market. 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
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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
Our Board of Directors has the authority, without further action by the
stockholders, to issue 9,000 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.
NO DIVIDENDS
We have never paid cash dividends on our common stock. We expect to
incur net losses for the foreseeable future.
OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE PREFERRED STOCK
As of March 15, 1999 we have outstanding options to purchase an
aggregate of 5,361,037 shares of our common stock at a weighted average exercise
price of $1.50 per share (including options to purchase 2,786,037 shares at
exercise prices of between $.94 and $5.00 per share which are subject to the
approval of our stockholders of a proposal to an increase the number of shares
reserved for issuance under our stock option plan) and outstanding warrants to
purchase an aggregate of 6,749,382 shares of common stock at a weighted average
exercise price of $1.57 per share. As a result of the October and November 1998
private placements, we also have outstanding shares of convertible preferred
stock that are convertible into an aggregate of 9,556,400 shares of common stock
and outstanding warrants to purchase an aggregate of 5,454,625 shares of common
stock at a conversion price of $.50 per share. The exercise of all of
outstanding warrants and options and/or the conversion of the outstanding
convertible preferred stock would dilute the then-existing stockholders'
percentage ownership of the common stock, and any sales in the public market of
the common stock issuable upon such exercise and conversion could adversely
affect prevailing market prices for the common stock. Moreover, the terms upon
which we would be able to obtain additional equity capital could be adversely
affected because the holders of such securities can be expected to exercise or
convert them at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable to than those provided by such
securities.
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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.
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.
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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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 16,385 square feet of office space in Uniondale, New
York as its principal administrative, sales, marketing and research and
development facility. The lease relating to such facility expires in 2004. In
addition, the Company also leases a sales office on a short-term basis in
London, England. The Company believes that its existing facilities are adequate
for its current needs but anticipates that it will need to seek additional space
in the future. The Company believes that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market. As
described under "Risk Factors That May Affect Future Results -- Nasdaq
Delisting; Potential Limited Trading Market" the Company's Common Stock could be
delisted from the Nasdaq SmallCap Market at any time and as a result the Common
Stock would be traded on the OTC Bulletin Board and the Boston Stock Exchange
(assuming the Company continues to meet the listing requirements of the Boston
Stock Exchange). The table below sets forth the range of closing sale prices of
the Common Stock on the Nasdaq SmallCap Market for the fiscal periods specified.
The Company's Common Stock commenced trading on the Nasdaq SmallCap Market on
November 20, 1997. Prior thereto, there was no public market for the Company's
Common Stock.
Common Stock
High Low
FISCAL 1998
First Quarter ............................... $4.56 $3.00
Second Quarter .............................. 5.50 3.00
Third Quarter ............................... 4.69 1.00
Fourth Quarter .............................. 1.63 .50
FISCAL 1997
Fourth Quarter............................... $6.00 $4.75
As of March 24, 1999, there were 121 record holders of the Company's
Common Stock. The Company believes that there are in excess of 500 beneficial
owners of its Common Stock.
The Company has never paid any dividends on its Common Stock and does
not intend to pay such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for the development and growth
of the Company.
As described under "Management's Discussion and Analysis or Plan of
Operation Liquidity and Capital Resources," the Company has closed on the Series
A Private Placement (as hereinafter defined) and the Series B Private Placement
(as hereinafter defined). The sale of the
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securities in the Series A Private Placement and the Series B Private Placement
was made pursuant to the exemption contained in Section 4(2) of the Securities
Act of 1933, as amended. Southeast Research Partners, Inc. acted as the
placement agent of the Series A Private Placement and the Series B Private
Placement. For more information relating to the Series A Private Placement and
the Series B Private Placement (including the terms of the securities issued in
such private placements), please see "Management's Discussion and Analysis of
Plan of Operation - Liquidity and Capital Resources."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The discussion in this report on Form 10-KSB contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
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 the section above entitled "Risk Factors That May Affect Future Results" in
Item 1 of this report as well as those risks discussed in this section and
elsewhere in this report.
The discussion and analysis below should be read in conjunction with
the 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 December 31, 1998, had an accumulated deficit of $35,412,456. The Company
expects to incur substantial operating expenses in the future to support its
product development efforts, establish and expand its domestic and international
sales and marketing capabilities, including recruiting additional indirect
channel partners, and support and expand its technical and management personnel
and organization.
Revenues from the sales of the Company's products are generally
recognized upon the execution of a software licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In instances where a
significant vendor obligation exists, revenue recognition is
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delayed until such obligation has been satisfied. Allowances for estimated
future returns are provided for upon shipment.
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RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
consolidated statements of operations for the years ended December 31, 1998 and
1997 ($ in thousands):
Year Ended December 31,
-----------------------
1998 1997
---- ----
Revenues
Software licenses $ 518 $ 596
Services and maintenance (1) 111 416
Other 300 --
-------- --------
TOTAL REVENUES 929 1,012
-------- --------
Cost of revenues
Software licenses 6 75
Services and maintenance 89 131
-------- --------
TOTAL COST OF REVENUES 95 206
-------- --------
GROSS PROFIT 834 806
-------- --------
Operating expenses
Sales and marketing 4,321 4,576
Research and development 2,306 2,523
General and administrative 1,500 1,914
-------- --------
TOTAL OPERATING EXPENSES 8,127 9,013
-------- --------
LOSS FROM OPERATIONS (7,293) (8,207)
Interest income 118 78
Interest expense (135) (806)
Other income 16 1
-------- --------
LOSS BEFORE EXTRAORDINARY ITEM (7,294) (8,934)
Extraordinary loss from early
extinguishment of debt -- (1,629)
-------- --------
NET LOSS $ (7,294) $(10,563)
======== ========
(1) For the year ended December 31, 1998, services and maintenance
revenue consists entirely of maintenance revenue.
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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 12
months (See Note 1 of Notes to the Consolidated Financial Statements). The
Company has recognized revenue for all periods presented in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2
entitled "Software Revenue Recognition."
Total revenues decreased by $83,000, or 8%, from $1,012,000 for the
year ended December 31, 1997 to $929,000 for the year ended December 31, 1998.
License revenues decreased by $78,000, or 13%, from $596,000 in 1997 to $518,000
in 1998. During 1998, license revenues were derived from the sale of eight
licenses, while during 1997 license revenues were derived from the sale of four
licenses. The license revenue for 1997 resulted primarily from one large
non-recurring multi-platform license sale pursuant to a master reseller
agreement and therefore was priced significantly higher than a single platform
sale. Service and maintenance revenue decreased by $305,000, or 73%, from
$416,000 in 1997 to $111,000 in 1998, primarily due to the curtailment of
service-based engagements. The Company has discontinued the pursuit of
service-based engagements. Service and maintenance revenue in 1998 consists
entirely of maintenance revenues. During 1998 the Company recorded $300,000 of
non-recurring other revenue relating to the Company's completion of a project
for a computer hardware manufacturer whereby the QueryObject System was
engineered to run on their platforms.
COST OF REVENUES
Cost of software license revenues consists primarily of product
packaging, documentation and production costs. Cost of software license revenues
decreased as a percentage of software license revenues from 12.5% in 1997 to
1.1% in 1998, primarily due to lower production and documentation costs. Cost of
services and maintenance revenues consist primarily of customer support costs
and direct costs associated with providing services. Cost of services and
maintenance revenues increased as a percentage of services and maintenance
revenues from 32% in 1997 to 80% in 1998, primarily due to the curtailment of
service-based engagements and personnel costs related to 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, advertising related costs, collateral material and
trade shows. Sales and marketing expenses decreased by $255,000, or 6%, from
$4,576,000 in 1997 to $4,321,000 in 1998, primarily due to reduced sales
personnel related costs and recruiting fees. As previously noted, the Company
has discontinued the pursuit of service-based engagements and accordingly, has
changed the structure of its sales organization to correspond with that which is
required for a software product company, which at this point in time, requires
less sales employees. 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.
-26-
<PAGE>
Research and Development. Research and development expenses consist
primarily of salaries and other personnel related expenses, recruiting costs
associated with the hiring of additional software engineers and quality
assurance personnel, consultant costs and depreciation of development equipment.
Research and development expenses decreased by $217,000, or 9%, from $2,523,000
in 1997 to $2,306,000 in 1998, primarily due to a decrease in consultant costs
and recruiting expense. 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 decreased by $414,000, or 22%, from $1,914,000 in 1997
to $1,500,000 in 1998, primarily due to a decrease in consulting expense. 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 $40,000, or 51%, from $78,000 in 1997
to $118,000 in 1998, primarily due to a higher level of cash and cash
equivalents on deposit during 1998.
Interest expense generally represents charges relating to the H.C.C.
Financial Services Loan Agreement (the "Loan Agreement") and interest expense on
capital equipment leases, and for 1997, interest relating to certain bridge and
interim financings (See Note 6 of Notes to the Consolidated Financial
Statements). Interest expense decreased by $671,000, or 83%, from $806,000 in
1997 to $135,000 in 1998. This decrease was primarily due to the inclusion in
1997 of interest expense and the amortization of debt discount and debt issuance
costs relating to certain bridge and interim financings. In addition, the
outstanding balance of the Loan Agreement was repaid in full during October
1998.
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In August 1997, the Company consummated a bridge financing. The Company
repaid the noteholders of the bridge financing out of the proceeds from its
initial public offering which closed on November 25, 1997 (the "IPO")
Accordingly, in 1997 the Company recorded an extraordinary loss of $1,629,000
relating to the early extinguishment of debt. The extraordinary loss comprised
unamortized deferred debt discount and unamortized deferred debt issuance costs
related to the bridge financing.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company incurred net operating losses in 1998 and 1997 and consequently paid no
federal or state income taxes. At
-27-
<PAGE>
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.
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 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 had 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).
-28-
<PAGE>
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.
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").
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) any remaining assets of the Company
available for distribution 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 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. 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 and the Series B Preferred
Stock.
Conversion. Each share of Series A Preferred Stock is initially
convertible, at any time, into four shares of Common Stock and each share of
Series B Preferred Stock is initially convertible, at any time, into 20 shares
of Common Stock. The Series A Preferred Stock and Series B Preferred Stock were
issued with a conversion ratio that represented a discount from the market value
at the time of issuance. Accordingly, the discount amount is considered
incremental yield (the "beneficial conversion feature"), to the preferred
stockholders and has been accounted for as an embedded dividend to preferred
stockholders. Based on the conversion terms of the Series A Preferred Stock and
Series B Preferred Stock, an embedded dividend of $2,251,438 or $0.44 per share,
was added to net loss in the calculation of net loss per share in 1998.
-29-
<PAGE>
WARRANTS
Each Series A and Series B Warrant entitles the registered holder to
purchase 2-1/2 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.
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 Units. During December
1998, $90,000 of such Notes was repaid. The balance of the Notes Payable,
$300,000, was still outstanding as of December 31, 1998, and was repaid in full
in January 1999. 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.
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 December 31, 1998, the
Company had $854,000 in cash and cash equivalents and a working capital deficit
of $391,000. Net cash used in operating activities was $7,089,000 and $7,456,000
in 1998 and 1997, respectively. For 1998, net cash used in operating activities
was primarily attributable to a net loss of $7,294,000, less depreciation and
amortization of $421,000 and a decrease in accounts receivable of $223,000. For
1997, net cash used in operating activities was primarily attributable to a net
loss of $10,563,000 less an extraordinary loss on extinguishment of debt from a
1997 bridge financing options issued for consulting services and amortization of
debt discount and issuance costs. Net cash provided by financing activities was
$2,727,000 and $12,196,000 in 1998 and 1997, respectively, primarily as a result
of the 1998 Private Placement in 1998 and the IPO in 1997.
The Company does not currently have a line of credit with a commercial
bank. Under the Loan Agreement, a stockholder agreed to advance the Company
funds at an interest rate of 18% per annum, 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 provided that H.C.C. Financial, the lender
thereunder, would not demand payment under the Loan Agreement and required the
Company to maintain a restricted Certificate of Deposit, until the earlier of
March 31, 1998, a material breach by the Company under the Addendum or an event
of default under the Loan Agreement. In April 1998, the Company began repaying
the indebtedness under the Loan Agreement, utilizing the funds on deposit in the
restricted Certificate of Deposit. In October 1998, the remaining balance was
repaid in full and the restricted Certificate of Deposit account was closed.
-30-
<PAGE>
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 (see Note 11 of Notes to the
Consolidated Financial Statements). Pursuant to employment agreements with
executive officers of the Company, the Company is obligated to pay $262,000 and
$0 in salaries for the years ended December 31, 1999 and 2000, respectively.
As of December 31, 1998, the Company had a deficit in working capital
of $341,000. Subsequent to December 31, 1998, the Company received $1,396,000 in
working capital from the proceeds of the 1998 Private Placement and $341,250
from the exercise of warrants granted in the 1998 Private Placement. The Company
has incurred operating losses since inception, has incurred negative cash flows
from operating activities and had an accumulated deficit of $35,412,456 and
$25,866,986 as of December 31, 1998 and 1997, 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 current cash and cash equivalent position and
stock subscriptions receivable will be insufficient to satisfy its liquidity
requirements, and as a result, the Company will seek to sell additional equity
or convertible debt securities. The sale of additional equity or convertible
debt securities could result in additional dilution to the Company's
stockholders.
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-31-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.
The information required by this item is incorporated by
reference from the Company's definitive proxy statement to be filed not later
than April 30, 1999 pursuant to Regulation 14A of the General Rules and
Regulations under the Securities Exchange Act of 1934 ("Regulation 14A").
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by
reference from the Company's definitive proxy statement to be filed not later
than April 30, 1999 pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by
reference from the Company's definitive proxy statement to be filed not later
than April 30, 1999 pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by
reference from the Company's definitive proxy statement to be filed not later
than April 30, 1999 pursuant to Regulation 14A.
-32-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
Number Exhibits
------ --------
3.1 Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form SB-2, No.
333-34667).
3.2 By-laws of the Registrant, as amended (Incorporated
by reference to Exhibit 3.2 to the Registration
Statement on Form SB-2, No. 333-34667).
4.1 Specimen Certificate of the Registrant's Common
Stock (Incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form SB-2, No. 333-
34667).
4.2 Form of Representative's Purchase Option granted to
GKN Securities Corp. (Incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form
SB-2, No. 333-34667).
4.3 Form of Warrant issued in connection with the July
1997 Private Placement (Incorporated by reference
to Exhibit 4.3 to the Registration Statement on
Form SB-2, No. 333-34667).
4.4 Certificate of Designations, Preferences and Other
Rights and Qualifications of Series A Convertible
Preferred Stock (Incorporated by reference to
Exhibit 99(A) of the Form 10-QSB for the quarterly
period ended September 30, 1998)
4.5 Certificate of Correction to the Certificate of
Designations, Preferences and Other Rights and
Qualifications of Series A Convertible Preferred
Stock (Incorporated by reference to Exhibit 99(B)
to the Form 10-QSB for the quarterly period ended
September 30, 1998).
4.6 Certificate of Designations, Preferences and Other
Rights and Qualifications of Series B Convertible
Preferred Stock (Incorporated by reference to
Exhibit 99(C) to the Form 10-QSB for the quarterly
period ended September 30, 1998).
4.7 Form of Warrant Issued in Private Placement
(Incorporated by reference to Exhibit 99(D) to the
Form 10-QSB for the quarterly period ended
September 30, 1998).
10.1 1991 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.1 to the Registration
Statement on Form SB-2, No. 333-34667).
10.2 Form of Stock Option Agreement for Non-Qualified
Options granted to Advisors (Incorporated by
reference to Exhibit 10.2 to the Registration
Statement on Form SB-2, No. 333-34667).
10.3 Employment Agreement, dated as of May 1, 1997, by
and among, the Company and Daniel M. Pess
(Incorporated by reference to Exhibit 10.5 to the
Registration Statement on Form SB-2, No.
333-34667).
10.4 Employment Agreement, dated as of May 8, 1996, by
and among, the Company and Andre Szykier
(Incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form SB-2, No.
333-34667).
*10.5 Amendment to Employment Agreement, dated as of
December 16, 1998, by and among, the Company and
Andre Szykier.
-33-
<PAGE>
Exhibit
Number Exhibits
------- --------
10.6 Employment Agreement, dated as of September 1,
1997, by and among, the Company and Robert A.
Thompson (Incorporated by reference to Exhibit 10.7
to the Registration Statement on Form SB-2, No.
333-34667).
10.7 Employment Agreement, dated as of October 14, 1997,
by and among, the Company and Alan W. Kaufman
(Incorporated by reference to Exhibit 10.9(a) to
the Registration Statement on Form SB-2, No.
333-34667).
*10.8 Amendment to Employment Agreement, dated as of
January 9, 1999, by and among, the Company and Alan
W. Kaufman.
*11.1 Computation of Net Loss Per Share.
*23 Consent of PricewaterhouseCoopers LLP
*27 Financial Data Schedule
- - ---------------------------
* Filed herewith.
(b) Reports on Form 8-K
None.
-34-
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUERYOBJECT SYSTEMS CORPORATION
Dated: March 29, 1999 By: /s/ Robert Thompson
-------------------------------------
Robert Thompson
President and Chief Executive Officer
POWER OF ATTORNEY
QueryObject Systems Corporation and each of the undersigned do hereby
appoint Robert Thompson and Daniel M. Pess and each of them severally, its or
his true and lawful attorney to execute on behalf of QueryObject Systems
Corporation and the undersigned any and all amendments to this Annual Report on
Form 10-KSB and to file the same with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission; each of
such attorneys shall have the power to act hereunder with or without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ ALAN W. KAUFMAN Chairman of the Board March 29, 1999
- - -----------------------
Alan W. Kaufman
/S/ ROBERT THOMPSON President and Chief Executive March 29, 1999
- - -----------------------
Robert Thompson Officer (Principal Executive
Officer)
/S/ DANIEL M. PESS Executive Vice President, Chief March 29, 1999
- - -----------------------
Daniel M. Pess Operating Officer and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/S/ ANDRE SZYKIER Director March 29, 1999
- - -----------------------
Andre Szykier
/S/ RINO BERGONZI Director March 29, 1999
- - -----------------------
Rino Bergonzi
-35-
<PAGE>
/S/ IRWIN JACOBS Director March 29, 1999
- - -----------------------
Irwin Jacobs
/S/ AMY L. NEWMARK Director March 29, 1999
- - -----------------------
Amy L. Newmark
-36-
<PAGE>
QUERYOBJECT SYSTEMS
CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants...........................................F-2
Consolidated Balance Sheet as of December 31, 1998..........................F-3
Consolidated Statement of Operations for the years
ended December 31, 1998 and 1997.......................................F-4
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the years ended
December 31, 1998 and 1997.............................................F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1998 and 1997.............................................F-6
Notes to the Consolidated Financial Statements..............................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
QueryObject Systems Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Query Object Systems Corporation (the "Company") at
December 31, 1998, and the results of its operations and its cash flows for the
two years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has deficiencies in working capital and stockholders' equity
and has incurred negative cash flows from operating activities that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
Melville, New York
March 19, 1999
F-2
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEET
- - --------------------------------------------------------------------------------
December 31,
1998
------------
ASSETS
Current assets
Cash and cash equivalents $ 854,018
Accounts receivable, net of allowance for doubtful
accounts of $21,900 276,527
Prepaid expenses and other current assets 37,751
------------
TOTAL CURRENT ASSETS 1,168,296
Property and equipment, net 960,236
Deposits and other assets 146,031
------------
TOTAL ASSETS $ 2,274,563
------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 491,442
Accrued expenses 795,333
Capital lease obligations due within one year 175,809
Deferred revenue 84,791
Deferred rent 12,016
------------
TOTAL CURRENT LIABILITIES 1,559,391
Stockholder notes payable 300,000
Capital lease obligations 171,486
Deferred rent 257,812
------------
TOTAL LIABILITIES 2,288,689
------------
Stockholders' Deficit
Preferred stock, $.001 par value: 2,000,000 shares
authorized; 1,731,125 and 100,000
shares of Series A and B, respectively,
issued and outstanding 1,831
Common stock, $.001 par value: 30,000,000 shares
authorized; 5,122,985 shares issued and outstanding 5,123
Additional paid-in-capital 36,910,576
Accumulated deficit (35,412,456)
Stock subscriptions receivable (1,519,200)
------------
TOTAL STOCKHOLDERS' DEFICIT (14,126)
------------
Commitments and contingencies (Notes 2 and 13)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,274,563
------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
----------------------------
<S> <C> <C>
Revenues
Software licenses $ 517,350 $ 596,345
Services and maintenance 111,155 415,814
Other 300,000 --
------------ ------------
TOTAL REVENUES 928,505 1,012,159
Cost of revenues
Software licenses 5,668 74,605
Services and maintenance 88,756 131,190
------------ ------------
TOTAL COST OF REVENUES 94,424 205,795
------------ ------------
GROSS PROFIT 834,081 806,364
------------ ------------
Operating expenses
Sales and marketing 4,321,359 4,575,735
Research and development 2,305,678 2,523,127
General and administrative 1,500,506 1,914,252
------------ ------------
TOTAL OPERATING EXPENSES 8,127,543 9,013,114
------------ ------------
LOSS FROM OPERATIONS (7,293,462) (8,206,750)
Interest income 118,423 77,979
Interest expense (135,498) (805,761)
Other income, net 16,505 542
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (7,294,032) (8,933,990)
Extraordinary loss from early extinguishment of debt -- (1,629,494)
------------ ------------
NET LOSS $ (7,294,032) $(10,563,484)
------------ ------------
CALCULATION OF NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
Net loss (7,294,032) (10,563,484)
Effect of beneficial conversion feature of convertible preferred stock (2,251,438) --
------------ ------------
Net loss available to common stockholders $ (9,545,470) $(10,563,484)
Net loss per share before extraordinary item $ (1.86) $ (3.19)
Extraordinary item -- (0.58)
------------ ------------
Basic and diluted net loss per common share $ (1.86) $ (3.77)
Weighted average shares used in per share computation (Note 1) 5,120,205 2,802,532
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 32,582 $ 33 17,737 $ 18 230,498 $ 230
Issuance of common stock warrants in
connection with bridge financing
Accretion of excess of redemption value of
Series D preferred stock over fair value
at issuance date
Issuance of options on Series D
preferred stock
Conversion of preferred stock to
common stock upon initial public offering (32,582) (33) (17,737) (18) (230,498) (230)
Conversion of Series D preferred stock to
common stock upon initial public offering
Issuance of common stock upon initial public
offering, net of issuance cost of $2,530,426
Repurchase of common stock
Issuance of common stock options for
consulting services
Common stock options and warrants exercised
Net loss
----------- ------------ ---------- -------------- ------------ -----------
Balance at December 31, 1997 - - - - - -
Issuance of Series A & B preferred stock:
For cash and notes, net of issuance costs 1,721,125 1,721 100,000 100
In settlement of bridge notes payable 10,000 10
Beneficial conversion feature of convertible
Series A and B preferred stock
Issuance of common stock options for
consulting services
Receipt of receivable from stockholder
Common stock options exercised
Net loss
----------- ------------ ---------- -------------- ------------ -----------
Balance at December 31, 1998 1,731,125 $ 1,731 100,000 $ 100 - -
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE (DEFICIT)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 863,590 $ 864 $ 4,035,258 $ (14,343,938) $ (12,300) $(10,319,835)
Issuance of common stock warrants in
connection with bridge financing 1,512,397 1,512,397
Accretion of excess of redemption value of
Series D preferred stock over fair value
at issuance date (917,571) (917,571)
Issuance of options on Series D
preferred stock 363,800 363,800
Conversion of preferred stock to
common stock upon initial public offering 331,523 331 (50) -
Conversion of Series D preferred stock to
common stock upon initial public offering 1,365,790 1,366 11,583,231 11,584,597
Issuance of common stock upon initial public
offering, net of issuance cost of $2,530,426 2,500,000 2,500 12,467,074 12,469,574
Repurchase of common stock (7,368) (7) (41,993) (42,000)
Issuance of common stock options for
consulting services 321,470 321,470
Common stock options and warrants exercised 57,070 57 101,526 101,583
Net loss (10,563,484) (10,563,484)
---------- --------- --------------- --------------- ------------ -------------
Balance at December 31, 1997 5,110,605 5,111 30,384,706 (25,866,986) (12,300) 4,510,531
Issuance of Series A & B preferred stock:
For cash and notes, net of issuance costs 4,096,777 (1,519,200) 2,579,398
In settlement of bridge notes payable 19,990 20,000
Beneficial conversion feature of convertible
Series A and B preferred stock 2,251,438 (2,251,438) -
Issuance of common stock options for
consulting services 145,792 145,792
Receipt of receivable from stockholder 12,300 12,300
Common stock options exercised 12,380 12 11,873 11,885
Net loss (7,294,032) (7,294,032)
---------- --------- --------------- --------------- ------------ -------------
Balance at December 31, 1998 5,122,985 $ 5,123 $ 36,910,576 $ (35,412,456) $(1,519,200) $ (14,126)
---------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
-----------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (7,294,032) $(10,563,484)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 420,820 373,434
Write off of leasehold improvements -- 5,825
Amortization of debt discount -- 318,705
Amortization of debt issuance costs -- 100,432
Extraordinary loss on extinguishment of debt -- 1,629,494
Options issued for consulting services 145,792 685,270
Changes in assets and liabilities
Accounts receivable, net 223,240 320,540
Prepaid expenses and other current assets 10,503 (17,735)
Deposits and other assets 4,243 (53,318)
Accounts payable and accrued expenses (355,338) (166,078)
Deferred rent 896 13,293
Deferred revenue 54,756 (102,264)
Customer advance (300,000) --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (7,089,120) (7,455,886)
------------ ------------
Cash flows from investing activities
Acquisitions of property and equipment (132,795) (590,608)
Note receivable from stockholder (65,000) (42,000)
Purchase of restricted certificate of deposit (23,201) (37,785)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (220,996) (670,393)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of Series A and B preferred stock, net 2,579,398 --
Proceeds from issuance of common stock, net 11,885 12,571,157
Proceeds from Notes and Bridge financings payable, net 490,000 5,313,766
Repayment of Notes and Bridge financings payable (170,000) (5,850,000)
Repayment of notes payable -- (25,000)
Proceeds from loan payable to stockholders (891,335) (120,000)
Proceeds from loan receivable from stockholder 12,300 --
Payments of capital lease obligations (235,706) (254,979)
Proceeds from sale-leaseback transaction 29,202 561,119
Release of restricted certificate of deposit 901,040 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,726,784 12,196,063
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,583,332) 4,069,784
Cash and cash equivalents at beginning of year 5,437,350 1,367,566
------------ ------------
Cash and cash equivalents at end of year $ 854,018 $ 5,437,350
------------ ------------
</TABLE>
F-6
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
QueryObject Systems Corporation (formerly CrossZ Software) was
originally incorporated in California in February 1989. In May 1998,
and pursuant to a plan of corporate reorganization, the Company merged
with its wholly owned Delaware subsidiary. The Company develops,
markets and supports proprietary business intelligence software
solutions that enable business managers to make strategic decisions
based on their corporate data.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
QueryObject Systems Corporation and its wholly owned subsidiary. All
significant intercompany transactions have been eliminated in
consolidation.
NET LOSS PER COMMON SHARE
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. For the year
ended December 31, 1997, all then outstanding shares of Series A, B, C
and D Preferred Stock were converted as though such conversion occurred
at the beginning of the earliest period presented or the date of
issuance in the case of the Series D. Historical net loss per share for
1997 has not been presented since such amount is not deemed to be
meaningful due to the significant change in the Company's capital
structure resulting from the Company's IPO.
At December 31, 1998 and 1997, outstanding options and warrants to
purchase 12,033,604 and 2,532,177 shares of common stock, with exercise
prices ranging from $.50 to $8.56 could potentially dilute basic
earnings per share. Such options and warrants, as well as Series A and
B Convertible Preferred Stock issued in 1998, have not been included in
the computation of net loss per share because to do so would have been
antidilutive for the periods presented.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of
Position 97-2 on Software Revenue Recognition. Revenue from product
licensing is generally recognized after execution of a licensing
agreement and shipment of the product, provided that no significant
vendor obligations remain and the resulting receivable is deemed
collectable by management. Service revenues consists of data analysis
using the Company's proprietary software performed for customers on a
project or contract basis and are recognized over the term of the
respective agreements. Maintenance revenues consist of ongoing support
and product updates and are recognized ratably over the term of the
contract, generally twelve months.
F-7
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed using the straight line
method over the estimated useful lives of the assets, generally three
to five years. Assets acquired under capital leases and leasehold
improvements are amortized using the straight-line method over the
shorter of the estimated useful lives of the assets or the terms of the
related leases.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86") requires the capitalization of certain software development
costs once technological feasibility is established, which the Company
defines as the completion of a working model. To date, the period
between achieving technological feasibility and the general
availability of such software has been short and software development
costs qualifying for capitalization have been insignificant.
Accordingly, the Company has expensed all software development costs as
incurred.
ADVERTISING
Advertising costs are included in sales and marketing expenses and are
expensed as incurred. To date advertising costs have not been
significant.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Income taxes are computed using the asset and liability
method. Under the asset and liability method specified by SFAS 109,
deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and
laws.
USE OF ESTIMATES
These consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which require
management to make reasonable estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingencies at the date of the consolidated financial statements.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to
the relatively short term nature of these instruments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
cash equivalents and accounts receivable. The Company places its cash
with high quality financial institutions. The Company performs ongoing
credit evaluations of its customers and generally requires no
collateral. The Company maintains reserves for potential credit losses
and historically such losses have not been significant.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 established a fair
value based method of accounting for stock-based compensation plans.
The
F-8
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
Company has chosen to adopt the disclosure requirements of SFAS 123,
and continue to record stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Under APB 25, the Company has not
recognized compensation expense with respect to such awards because the
exercise price of options granted to employees has approximated the
fair market value of the common stock at the respective grant dates.
2. 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 $35,412,456 and $25,866,986
as of December 31, 1998 and 1997, 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 at December 31, 1998 and anticipated cash flows
from existing financing arrangements (Note 7) will be insufficient to
satisfy its operating cash flow requirements in the foreseeable future.
Accordingly, the Company will seek to sell additional equity or
convertible debt securities, however, there can be no assurances that
the Company will be successful in raising additional funds. The sale of
additional equity or convertible debt securities will result in
additional dilution to the Company's stockholders.
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
----------------------
<S> <C> <C>
Interest paid during the period $ 154,065 $ 374,691
Schedule of non cash investing and financing activities:
Capital lease obligations entered into during the period 29,202 561,119
Series D Preferred Stock, issued for:
Dividends - 917,571
Series D Preferred options issued for consulting services - 321,470
Series A Preferred Stock, issued for:
Bridge Financing 20,000 -
Common stock warrants issued in connection with
Bridge Financing - 1,512,397
Common stock options issued for consulting services 145,792 363,800
Beneficial conversion feature of Series A and B
Convertible Preferred Stock 2,251,438 -
</TABLE>
F-9
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT INCLUDED THE FOLLOWING:
December 31,
1998
------------
Computer equipment and software $ 1,779,772
Furniture and fixtures 195,799
Office equipment 96,602
Leasehold improvements 22,348
---------------
2,094,521
Less: accumulated depreciation and amortization 1,134,285
---------------
$ 960,236
---------------
5. ACCRUED EXPENSES
ACCRUED EXPENSES INCLUDED IN THE FOLLOWING:
December 31,
1998
------------
Executive compensation $ 171,955
Compensation and related benefits 247,632
Consulting and professional fees 168,075
Interest 12,086
Commissions 9,250
Other 186,335
---------------
$ 795,333
---------------
6. BORROWING ARRANGEMENTS
LOAN PAYABLE TO STOCKHOLDER
In May 1992, the Company entered into a borrowing arrangement whereby a
stockholder agreed to advance the Company funds at an interest rate of
18% per annum. Such borrowings were collateralized by the Company's
accounts receivable. In May 1996, the Company was in default of certain
provisions of the agreement, at which time the stockholder and the
Company amended the agreement to reduce the interest rate to the
greater of prime plus 3% or 12% per annum and delay the time that the
stockholder could demand repayment until March 1998. The revised
agreement required the Company to set aside funds in a restricted
account to the extent that the outstanding borrowings exceeded 80% of
the Company's accounts receivable and to make monthly payments of
$10,000, plus interest, until March 1998. The Company paid the
obligation in full during 1998 with funds in the restricted account.
Interest expense related to this agreement was $64,067 and $114,634 for
1998 and 1997, respectively.
F-10
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
LOAN RECEIVABLE FROM STOCKHOLDER
In January 1998, the Company loaned $65,000 to an officer and director
of the Company. This promissory note has a term of 24 months and bears
interest at 8% per annum.
INTERIM FINANCING
In September and October 1998, the Company borrowed a total of $490,000
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 were converted into Series A Units and $170,000
of such Notes were repaid through December 1998. The balance of
$300,000, outstanding at December 31, 1998, was repaid in full in
January 1999.
In May 1997, the Company received a $500,000 loan with interest at 10%
per annum, from existing stockholders. The loan was repaid out of the
proceeds of the Bridge Financing, as described below.
In June 1997, the Company received additional loans from two
stockholders each consisting of a $100,000 promissory note bearing
interest of 10% per annum through September 30, 1997 and 13% annually
thereafter and attached warrants to purchase up to 23,850 shares of
common stock at $8.56 per share. These notes were paid out of the
proceeds of the IPO.
In July 1997, the Company borrowed $250,000 which was repaid out of the
proceeds from the Bridge Financing.
BRIDGE FINANCING
On July 30, 1997, the Company completed a $4,300,000 Bridge Financing
(the "Bridge Financing"). The gross proceeds to the Company from such
financing were approximately $3,764,000, net of approximately $536,000
of issuance costs.
In connection with the Bridge Financing, the Company issued 43 units,
each consisting of a $100,000 promissory note (the "Bridge Note") and a
warrant (the "Bridge Warrant") allowing the holder to purchase up to
25,000 shares of the Company's common stock at a price of $8.56 per
share. The Bridge Warrants are exercisable on or after July 30, 1998
and expire on July 30, 2003. The Bridge Notes accrued interest at a
rate of 10% per annum from July 30, 1997 through September 30, 1997,
and at a rate of 13% per annum thereafter, and were paid out of the
proceeds of the IPO. As an incentive for early participation, the
Company issued to certain investors, warrants to purchase up to 6,309
shares of common stock at a price of $8.56, in addition to the Bridge
Warrants that were included in the bridge units. A portion of the gross
proceeds from the Bridge Financing was allocated to the Bridge Warrants
based on their estimated fair market value and resulted in $1,512,397
of original issue discount and a corresponding amount of additional
paid in capital.
In October 1997, the Company issued $600,000 of principal amount of
unsecured promissory notes to stockholders of the Company. The notes
bore interest at 15% per annum and were paid out of the proceeds of the
IPO.
On November 25, 1997, the Company repaid the holders of the Bridge
Notes, out of the proceeds of
F-11
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
the Company's IPO. Accordingly, the Company recorded an extraordinary
loss of $1,629,494 related to the early extinguishment of debt. The
extraordinary loss was comprised of $1,193,692 related to unamortized
deferred debt discount and $435,802 of unamortized deferred debt
issuance costs related to the Bridge Notes.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
On November 20, 1997, the Company's IPO of 2,500,000 shares of its
common stock was declared effective, which resulted in net proceeds to
the Company of $12,469,574 before repayment of the Bridge Financing. As
of the closing date of the offering, all of the Company's Convertible
Preferred Stock and Mandatorily Redeemable Convertible Preferred Stock
outstanding was converted into 331,523 and 1,365,790 shares of common
stock, respectively.
At December 31, 1996, warrants to purchase 56,563 shares of common
stock were outstanding, with exercise prices ranging from $2.40 to
$22.00 per share, and were immediately exercisable. During 1997,
warrants to purchase a total of 30,000 shares were exercised, resulting
in net proceeds to the Company of $72,000. The remainder of the
warrants expired upon completion of the Company's IPO.
During December 1997, the Company granted an option to a member of its
Advisory Committee to purchase up to 200,000 shares of common stock.
The option had an initial exercise price of $6.00 per share and was
immediately exercisable. In conjunction with the stock option repricing
discussed in Note 8,the Board of Directors approved the repricing of
this option in November 1998 to $.94. The Company has recognized
consulting expense in its results of operations of $272,000 for the
year ended December 31, 1997 related to this option. No additional
consulting expense was recognized in 1998 based on the Company's common
stock.
During 1997, a member of the Board of Directors surrendered 7,386
shares of the Company's common stock as repayment of a note receivable
due to the Company in the amount of $42,000. Such shares were retired
in December 1997.
PREFERRED STOCK
In October and November 1998, the Company had the initial closing of
two private placements. 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 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 ten
thousand shares of Series B Convertible 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 Series A 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 Series B share 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. As of December
31, 1998, 1,731,125 and 100,000 shares of Series A and Series B,
respectively, were issued. All subscriptions receivable as of December
31, 1998 were received by the Company in January and February 1999.
F-12
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
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.
The following is a description of the securities issued in the Series A
and Series B Private Placements:
STATED VALUE
Each share of Series A Preferred Stock has a stated value equal to
$2.00 and each share of Series B Preferred Stock has a stated value
equal to $10.00.
LIQUIDATION PREFERENCE
Upon a liquidation, merger or consolidation of the Company, where the
Company is not the surviving entity, the assets of the Company will be
available for distribution to the stockholders, after payment or
provision for liabilities of the Company, in the following order of
priority: (i) the holders of the Series A and Series B Preferred Stock
shall rank pari passu with respect to distributions, (ii) the holders
of the Series A and Series B Preferred Stock shall be entitled to
receive preference to any distribution to the holders of any Junior
Securities of the Company, an amount equal to the Series A and Series B
Stated Value , respectively, for each share of the Series A and Series
B Preferred Stock then outstanding and (iii) the remaining assets of
the Company available for distribution, if any, shall be distributed
pro rata to the holders of issued and outstanding shares of Common
Stock.
DIVIDENDS
The holders of the Series A and Series B Preferred Stock shall not be
entitled to receive any stated dividend payment.
CONVERSION
The holders of the Series A and Series B Preferred Stock have the
right, at the holder's option, to convert each share of Series A and
Series B Preferred Stock into four shares and twenty shares,
respectively, of Common Stock.
The Series A and Series B convertible Preferred Stock were issued with
a conversion ratio that represented a discount from the market value at
the time of issuance. Accordingly, the discount amount is considered
incremental yield (the "beneficial conversion feature"), to the
preferred stockholders and has been accounted for as an embedded
dividend to preferred stockholders. Based on the conversion terms of
the Series A and Series B convertible Preferred Stock, an embedded
dividend of $2,251,438 or $0.44 per share, was added to net loss in the
calculation of net loss per share in 1998.
VOTING
The holders of the Series A and Series B Preferred Stock are entitled
to vote on all matters submitted for a vote to the stockholders of the
Company. The holders of a share of Series A and Series B shares are
entitled to vote with holders of common stock, on an as-converted
basis.
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,
F-13
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
commencing on the date of the initial closing of the Series A and
Series B shares Private Placements, respectively, and ending on the
third anniversary of such closings. 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 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.
8. EMPLOYEE STOCK OPTIONS
In 1991, the Board of Directors approved the 1991 Incentive Stock Plan
(the "Plan") which was subsequently amended and allows the Board to
grant either incentive or non-qualified stock options to the Company's
employees or consultants. The options generally expire five years from
the date of grant. Individuals owning more than 10% of the total
combined voting power of all classes of stock of the Company are not
eligible to participate in the Plan unless the option price is at least
110% of the fair market value of the common stock at the date of grant.
A summary of the activity under the stock option plan is as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE
AVAILABLE FOR SHARES UNDER PRICE
GRANT OPTION PER SHARE
-------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 1, 1997 136,694 151,800 $ .96
Additional shares authorized 1,512,500 -- --
Granted (791,999) 791,999 .96-6.00
Exercised -- (27,070) .96
Canceled 54,305 (54,305) .96-6.00
---------- --------- ---------
Options outstanding at December 31, 1997 911,500 862,424 .96-6.00
Additional shares authorized 3,856,000 --
Granted (3,836,113) 3,836,113 .94-6.00
Exercised -- (12,380) 0.96
Canceled 300,121 (300,121) .96-6.00
---------- --------- ---------
Options outstanding at December 31, 1998 1,231,508 4,386,036 $.94-6.00
---------- --------- ---------
Options exercisable at December 31, 1998 $447,073 $.94-6.00
---------- --------- ---------
</TABLE>
The Company granted 959,800 and 23,750 non-qualified stock options to
consultants and recognized consulting expense of $145,792 and $49,470
related to these options in 1998 and 1997 respectively.
The Company accounts for stock options granted to employees under APB
25 and has adopted SFAS 123 for disclosure purposes. Because options
granted to employees in 1998 and 1997 had exercise prices equal to or
greater than the fair market value of the underlying common stock at
the respective grant dates, as determined by the Company's management,
compensation expense has not been recognized in results of
F-14
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
operations. The pro forma impact of SFAS 123 on the Company's results
of operations related to options granted during 1998 and 1997 was
immaterial to the Company's actual results of operations.
In October 1997, the Company's Board of Directors and stockholders
authorized an increase in the number of shares reserved for issuance to
1,950,000 pursuant to the Plan. In November 1998, the Company's Board
of Directors approved an additional increase in the number of shares
reserved for issuance to 5,806,000. This increase is pending
stockholder approval. The Board of Directors also approved a repricing
of 1,168,186 options previously granted pursuant to the Plan to a per
share exercise price of $.94, the fair market value on the date of the
repricing. The repriced options, which had original exercise prices of
between $.96 and $6.00 per share, will have the same vesting terms as
the original option grants. All options issued during November 1998 and
thereafter will have a term of seven years from the date of grant.
Options issued to employees will vest over a three-year period and
options issued to non-employees will vest over two years.
9. MAJOR CUSTOMERS
Sales to major customers, as a percentage of revenues, are as follows:
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
A 32% -
B 24% -
C 10% -
D 14% 65%
At December 31, 1998, customers C and D represented 33% and 40% of
total accounts receivable, respectively.
International sales for the year ended December 31, 1998 were $157,500,
or 17% of total revenues. International sales were not material during
1997.
10. EMPLOYEE BENEFITS PLANS
The Company has a 401(k) savings plan (the "Savings Plan") covering all
full-time employees and qualifying part time employees. As allowed
under Section 401(k) of the Internal Revenue Code, the Savings Plan
provides tax-deferred salary reductions for eligible employees.
Employees are eligible to participate after a ninety-day service
requirement. Participants may make voluntary contributions to the
Savings Plan up to 20% of their compensation, subject to annual limits.
The Savings Plan permits company contributions, however, none were made
during the years ended December 31, 1998 and 1997.
F-15
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
11. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
The Company is obligated under capital leases for computers and office
equipment through the year 2001. All assets leased under these
agreements have been capitalized and the related obligations are
reflected in the accompanying consolidated financial statements based
upon the present value of future minimum lease payments. In addition,
the Company leases its office facilities and certain furniture and
equipment. These operating leases are noncancellable and expire on
various dates through 2004.
The future minimum lease payments under capital and operating leases at
December 31, 1998 and the present value of the net minimum lease
payments are as follows:
Operating Capital
Year Ending December 31, Leases Leases
--------------------------
1999 $ 461,563 $ 207,303
2000 355,191 170,842
2001 363,534 10,001
2002 389,905 --
2003 and thereafter 378,950 --
---------- ----------
Total minimum lease payments $1,949,143 388,146
---------- ----------
Less: amounts related to interest 40,851
----------
Present value of net minimum lease payments 347,295
Less: obligation due within one year 175,809
----------
Long-term obligation under capital leases $ 171,486
----------
During 1997 and 1998, the Company refinanced certain equipment
purchased during 1997 and 1996, under a sale/leaseback agreement. These
transactions were accounted for as financings, wherein the property
remained on the books and continues to be depreciated. Financing
obligations representing the proceeds were recorded and are reduced
based upon payments under the lease over a 42 month period.
In November 1996, the Company entered into a $500,000 equipment lease
line of credit. In December 1997, this agreement was amended to provide
the Company with an additional $250,000 line of credit under this
facility, with a three year repayment term. As of December 31, 1998
this line of credit had expired.
Rental expense under operating leases was $445,755 and $453,794 for the
years ended December 31, 1998 and 1997, respectively.
F-16
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
12. INCOME TAXES
The tax effect of temporary differences and carryforwards that give
rise to significant portions of the deferred tax assets and liabilities
at December 31, 1998 was:
1998
------------
Deferred rent $ 107,932
Accounts payable 196,577
Accrued expenses 318,133
Deferred revenues 33,916
Software cost expense 268,804
Net operating loss carryforward 11,862,015
Research and experimental credit carryforwards 207,515
Other payable 120,000
Other deferred tax assets 450,184
------------
Deferred tax assets 13,565,076
Depreciation (245,080)
Accounts receivable (110,611)
Prepaid expenses (15,100)
------------
Deferred tax liabilities (370,791)
Net deferred tax assets 13,194,285
Less: valuation allowance (13,194,285)
------------
Net deferred tax assets $ --
------------
The Company has recorded a full valuation allowance against its net
deferred tax assets since management believes that based upon the
available objective evidence it is more likely than not that these
assets will not be realized. The difference between the statutory
federal tax rate and the Company's effective tax rate is primarily due
to the valuation allowance.
As of December 31, 1998, the Company has net operating loss and
research and experimental tax credit carryforwards of approximately
$29,660,000 and $207,000, respectively, available to offset future
federal taxable income and tax. These carryforwards will expire at
various dates beginning in 2007 through 2018. Under Section 382 of the
Internal Revenue Code of 1986, as amended, utilization of prior net
operating losses ("NOLs") is limited after an ownership change, as
defined in such Section 382. As a result of previous transactions which
involved an ownership change as defined by Section 382, the Company
will be subject to limitation on the use of its NOLs. Accordingly,
there can be no assurance that a significant amount of the existing
NOLs will be available to the Company.
F-17
<PAGE>
QUERYOBJECT SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------
13. COMMITMENTS
EMPLOYMENT AGREEMENTS
The Company has entered into long-term employment agreements with
certain key members of management. The agreements provide each employee
with base annual compensation and incentive compensation payable upon
attaining certain corporate targets as determined by the Board of
Directors. The agreements provide that in the event of the termination,
other than for cause, the executives will be entitled to between six
and twelve months of severance. The aggregate annual commitments under
these employment agreements are $262,292 and $0 for 1999 and 2000,
respectively.
In March 1998, the former Chairman of the Board and officer of the
Company tendered his resignation effective May 26, 1998. In conjunction
with the resignation the Company agreed to provide twelve months
severance which will be paid over the period of one year.
<PAGE>
December 16, 1998
Mr. Andre Szykier
3082 Arbolado Court
Walnut Creek, CA 94598
Dear Andre:
This letter serves as a term sheet that will be the basis on which to
formalize an agreement. It refers to your current and future involvement as both
an employee and board member with QueryObject Systems, and your involvement in
the new "knowledge management" subsidiary (NewCo for the purposes of this
letter), which we have proposed establishing.
1) QueryObject Systems will extend your contract as an Officer of the
Company for the period from January 1, 1999 to April 30, 1999. During
this period, you will devote the majority of your efforts to building a
business plan for NewCo.
2) At least for the 1999 fiscal year, subject to shareholder re-approval,
you will remain as both a member of the QueryObject Board of Directors,
and (in that roll) as titular Chief Technology Officer.
3) You will exercise best efforts to present to the QueryObject Board of
Directors at its February meeting a viable business plan for a
knowledge management subsidiary (NewCo) which will sub-license the
QueryObject technology and apply it into a new-to-QueryObject market
application.
4) As additional compensation for the duties outlined in 10, 2) and 3),
the new option grant proposed at this week's board meeting(75,000
shares) will be revised to 150,000 shares. Attached to this grant to
you will be a special convertibility feature outlined in 7) below.
5) Pursuant to item 3), QueryObject System will cover all normal operating
expenses occurred in preparation of this business plan.
6) At the February Board Meeting, the Board will examine your business
plan with a view to financing and managing NewCo.
7) If the Board agrees to go ahead with NewCo:
<PAGE>
-We will establish a legal structure of NewCo as a wholly-owned
subsidiary of QueryObject Systems;
-You may elect, at point of incorporation, to convert the shares grant
outlined in 5) to a 20% equity option in the Portion of NewCo owned by
QueryObject Systems, such equity stake to be protected from dilution as
a percentage of QueryObject holdings for a period of 18 months from
date of incorporation;
-and, we will exercise best efforts to provide the seed infrastructure
and raise the capital necessary to develop NewCo until such time as it
can be offered to outside investors for venture or operational funding.
8) If the Board elects not to proceed with NewCo:
-Subject to your contractual obligation with respect to the non-compete
and intellectual property rights of QueryObject Systems and your
entering into a re-licensing agreement for any QueryObject technology
that is appropriate for NewCo, you may exercise the option to acquire
full right to the proposed venture in exchange for re-payment or normal
costs such as T&E, legal advice, incorporation expenses, investment and
technology consultants and other material expenses associated with the
venture, and incurred by QOS during the period from January 1, 1999
onward.
-QOS will agree not to enter into a competitive knowledge management
initiative except when it is a direct and logical extension of its then
current business, for a period of not less than 24 months from the date
you are assigned rights to NewCo.
9) Unless you are offered a further contract extension by the Board of
Directors, and elect to accept it, effective May 1, 1999, you will
cease active employment with QueryObject Systems and your current
contractual severance agreement will go into effect.
This will provide salary for one year to April 30, 2000, paid in
accordance with normal company policy at your current annual rate of
$150,000 per annum. In addition, the Company will agree to continue
medical and dental benefits or a period of five years from May 1, 1999,
or until you acquire such benefits by virtue of employment or other
means. All then existing options will become fully vested by April 30,
2000, and must be exercised by December 31, 2000. Payment for your
accrued vacation and any outstanding expenses through April 30, 1999
will be discharged in equal installments over the period to December
31, 1999.
The above fairly reflect my understanding of our agreement. If you are in
agreement, please sign and return a copy and, based on this letter, Dan Pess
will draw up any contractual documents that may be required.
<PAGE>
Andre, as we discussed yesterday, the essence of QOS is not just this Company,
not the current or the past employees, it is a profoundly interesting
technological idea that we live in a number of iterations. I am very excited
about this direction, and the market timing for its success, and look forward to
working closely with you on it.
Sincerely,
/s/ Robert Thompson
Robert Thompson
President and CEO
I am in agreement with the above:
/s/ Andre Szykier 12/31/98
- - --------------------------------- -------------------------
Andre Szykier Date
January 8, 1999
Alan W. Kaufman
C/O QueryObject Systems Corporation
60 Charles Lindbergh Blvd.
Uniondale, NY 11553
The Terms and Conditions set forth below serve as an amendment and extension to
the Employment/Consulting Agreement (the "Agreement") dated October 14, 1997
between Alan W. Kaufman and QueryObject Systems Corporation (the "Company"),
formerly "CrossZ Software Corporation".
TERMS AND CONDITIONS:
1. The Agreement is hereby extended for a one-year period ending October
13, 1999. All terms of the Agreement remain in full force and effect,
except to the extent that it is modified herein.
2. Your capacity as an officer of the Company has been changed from
"President and Chief Executive Officer" to "Chairman of the Board", as
approved by the Board of Directors of the Company on December 9, 1998.
3. Any stock options granted to you by the Company subsequent to the
initial grant included in the Agreement, will be subject to the same
continuity of vesting provisions as defined therein.
4. During the period of this extension of the Agreement, you will be
entitled to unlimited paid vacation days. However, you will use your
best efforts to be available to perform your role as Chairman of the
Board and to continue to represent the Company where required.
<PAGE>
Please indicate your acknowledgment and agreement with the Terms and Conditions
as set forth herein, by signing below.
Agreed To: /S/ Daniel M. Pess
----------------------------------
Daniel M. Pess
Executive Vice President - Finance
/s/ Alan W. Kaufman
----------------------------------
Alan W. Kaufman
QUERYOBJECT SYSTEMS CORPORATION EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
- - --------------------------------------------------------------------------------
Year Ended December 31, 1998
- - --------------------------------------------------------------------------------
Common Stock 5,110,605 01/01/98 12/31/98 364 5,110,605
1,875 01/14/98 12/31/98 351 1,803
2,118 01/15/98 12/31/98 350 2,031
4,584 02/12/98 12/31/98 322 4,044
625 02/27/98 12/31/98 307 526
365 03/18/98 12/31/98 288 288
1,250 06/05/98 12/31/98 209 716
1,563 11/16/98 12/31/98 45 192
--------- ------------
At December 31, 1998 5,122,985 5,120,205
--------- ------------
Net loss before effect of beneficial conversion
feature of convertible preferred stock $(7,294,032)
Effect of beneficial conversion feature of
convertible preferred stock (2,251,438)
------------
Net loss available to common stockholders $(9,545,470)
=============
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (1.86)
EXTRAORDINARY ITEM -
------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (1.86)
=============
Year Ended December 31, 1997
- - --------------------------------------------------------------------------------
Common Stock 863,589 01/01/97 12/31/97 364 863,589
ABC & D 1,590,121 01/01/97 12/31/97 364 1,590,121
Accreted Dividends 107,192 various 11/21/97 163 47,854
1,250 01/24/97 12/31/97 341 1,171
8,007 02/03/97 12/31/97 331 7,281
313 02/03/97 12/31/97 331 285
2,778 02/21/97 12/31/97 313 2,389
6,267 05/16/97 12/31/97 229 3,943
13,282 06/30/97 12/31/97 184 6,714
6,250 08/01/97 12/31/97 152 2,610
521 10/15/97 12/31/97 77 110
IPO & Warrant
excercise 2,517,500 11/21/97 12/31/97 40 276,648
903 12/15/97 12/31/97 16 40
Retirement (7,368) 12/20/97 12/31/97 11 (223)
--------- -----------
At December 31, 1997 5,110,605 2,802,532
--------- -----------
Net Loss per share before extraordinary item $ (8,933,990)
Extraordinary loss from early extinguishment of debt (1,629,494)
-----------
Net loss available to common stockholders $(10,563,484)
===========
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (3.19)
EXTRAORDINARY ITEM (0.58)
-----------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (3.77)
===========
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-69101) and
Registration Statement on Form S-8 (No. 333-72337) of our report dated March 19,
1999, relating to the consolidated financial statements of QueryObject Systems
Corporation, appearing on page F-2 of this Annual Report on Form 10-KSB, dated
March 31, 1999.
PricewaterhouseCoopers LLP
Melville, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 854,018
<SECURITIES> 0
<RECEIVABLES> 298,427
<ALLOWANCES> 21,900
<INVENTORY> 0
<CURRENT-ASSETS> 1,168,296
<PP&E> 2,094,521
<DEPRECIATION> 1,134,285
<TOTAL-ASSETS> 2,274,563
<CURRENT-LIABILITIES> 1,559,321
<BONDS> 0
0
1,831
<COMMON> 5,123
<OTHER-SE> (21,080)
<TOTAL-LIABILITY-AND-EQUITY> 2,274,563
<SALES> 928,505
<TOTAL-REVENUES> 928,505
<CGS> 94,424
<TOTAL-COSTS> 8,221,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,498
<INCOME-PRETAX> (7,294,032)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,294,032)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,294,032)
<EPS-PRIMARY> (1.86)
<EPS-DILUTED> (1.86)
</TABLE>
