<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-26194
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SEER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3556562
(State of incorporation) (I.R.S. Employer Identification No.)
8000 REGENCY PARKWAY, CARY, NORTH CAROLINA 27511
(Address of principal executive offices, including Zip Code)
(919) 380-5000
(Registrant's telephone number, including area code)
____________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01
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PAR VALUE
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____________________
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of December 24, 1998 was approximately $1,364,000. There were
11,980,633 shares of Common Stock outstanding as of December 24, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
Exhibit Index appears on Page E-1.
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SEER TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Table of Contents
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<TABLE>
<CAPTION>
Item Page
Number Number
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<S> <C>
PART I
1. Business.......................................................... 1
2. Properties........................................................ 7
3. Legal Proceedings................................................. 8
4. Submission of Matters to a Vote of Security Holders............... 8
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 8
6. Selected Financial Data........................................... 9
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 10
7A. Quantitative and Qualitative Disclosures About Market Risk........ 21
8. Financial Statements and Supplementary Data....................... 22
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 22
PART III
10. Directors and Executive Officers of the Registrant................ 22
11. Executive Compensation............................................ 22
12. Security Ownership of Certain Beneficial Owners and Management.... 22
13. Certain Relationships and Related Transactions.................... 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 23
SIGNATURES............................................................ 27
INDEX TO FINANCIAL STATEMENTS......................................... F-1
INDEX TO EXHIBITS..................................................... E-1
</TABLE>
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<PAGE>
PART I
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ITEM 1. BUSINESS.
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GENERAL
Seer Technologies, Inc. (the "Company" or "Seer") is one of the software
industry's earliest pioneers and a long-time leader in software application
development tools. During fiscal year 1998, the Company updated its strategic
direction to capitalize on emerging market demand for extending the life cycle
of enterprise applications. When fully implemented, the updated strategy is
intended to transition the Company from a distributor of application development
tools to a provider of complete solutions for enterprise application renewal.
Enterprise application renewal entails extending the life cycle of
enterprise applications through re-engineering, modernizing through web and e-
commerce enablement, functionally integrating legacy and new applications, and
the incorporation of re-usable application assets and components. Seer's
enterprise application renewal solutions leverage its suite of software products
and its professional consulting services to help Global 5000-sized companies
extend the functionality and increase the return on investment in the mission-
critical enterprise applications needed to efficiently run their businesses and
maintain a crucial competitive edge.
The Company was incorporated in March 1990 as a joint endeavor between IBM
and CS First Boston Securities Corporation. In June and September 1994, the
investment firm of Welsh, Carson, Anderson and Stowe VI L.P. ("WCAS"), together
with certain of its affiliates, acquired an approximately 83.9% equity interest
in the Company. The Company completed its initial public offering in July 1995.
In August 1996 and April 1998, the Company sold 2,094,143 shares of Series A
Convertible Preferred Stock and 1,762,115 shares of Series B Convertible
Preferred Stock to WCAS and certain WCAS affiliates, respectively. The
Preferred Stock is convertible into, and votes as a single class with, the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." At September 30,
1998, WCAS and certain of its affiliates held approximately 69% of the
outstanding voting stock of the Company.
On November 24, 1998, the Company and Level 8 Systems, Inc. ("Level 8")
announced the pending strategic merger of the Company with Level 8. Level 8 is a
leading provider of message queuing and enterprise application integration
technologies that allow end-to-end connectivity between heterogeneous platforms
across the enterprise. As the first step in this transaction, on December 31,
1998, Level 8 acquired approximately 69% of the outstanding voting stock of the
Company from WCAS and its affiliates in exchange for 1,000,000 shares of Level 8
common stock and warrants to purchase an additional 250,000 shares of Level 8 at
an exercise price of $12 per Level 8 share. Level 8 acquired 7,130,894 shares of
the Company's Common Stock, 2,094,143 shares of the Company's Series A
Convertible Preferred Stock, and 1,762,115 shares of the Company's Series B
Convertible Preferred Stock (representing approximately 69% of the outstanding
voting stock of the Company) and therefore may be deemed to control the Company.
In connection with Level 8's purchase of the Company's voting stock from WCAS,
WCAS contributed $17 million to the Company and Level 8 provided the Company a
$12 million subordinated loan to help pay down the Company's bank debt. Level 8
has also agreed to acquire all of remaining shares of the Company's Common Stock
for $0.35 per share in cash as soon as practicable upon completion of required
filings and approvals. In addition, Level 8 has agreed to fund the Company's
operations, as necessary, through January 15, 2000.
Due to the pending transaction outlined above, the information within this
report is not necessarily indicative of future operating results once Seer and
Level 8 have been combined. Unless otherwise specifically indicated, the
information in this report is stated as of September 30, 1998 and does not give
effect to the pending transactions with Level 8.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in only one business segment, with total revenues in
fiscal year 1998 of approximately $64 million. See the Company's consolidated
financial statements at Item 14.
PRODUCTS AND SERVICES
Seer's enterprise application renewal offerings blend services and software
products to provide solutions tailored to meet each customer's unique
requirements. A key component of Seer's solutions offerings is the Seer*HPS
product suite. Seer*HPS is a full-featured client/server application development
environment designed to provide a complete and comprehensive application
delivery vehicle to large IT organizations.
Seer*HPS has long been a leader in reducing the costs and shortening the
development and delivery cycles for large scale enterprise-class applications.
As part of its updated strategy, the Seer*HPS product suite is being extended to
provide a powerful application development engine with internet-enabling
extensions, application interoperability software, and state-of-the-art network
computing capabilities.
SEER*HPS
Seer*HPS is the cornerstone of Seer's infrastructure technologies. It is a
powerful, production-proven development engine that automatically generates
application software based on the business rules and functionality requirements
specified by a developer. This greatly speeds the delivery of even the most
complex high end business applications at a fraction of the cost of traditional
manual programming methods. It also reduces the on-going software maintenance
burden and associated costs by simplifying application updates, providing impact
analysis for proposed software changes, and enabling re-use of previously
developed software.
Management believes that Seer*HPS is the only development engine available
today that can scale from the desktop all the way up to the mainframe. Since
this is a critical element requirement for true enterprise-class applications,
it sets Seer's application development and renewal offerings apart.
LIGHTSPEED WEB
LightSpeed Web, an extension of Seer*HPS, allows applications built in
Seer*HPS to be rapidly developed for the Internet. Because the LightSpeed Web
transaction processing environment extends from a Web server to numerous
hardware platforms--including the mainframe--companies can quickly deploy even
complex enterprise applications to users around the world.
In addition to its LightSpeed Web extensions to Seer*HPS, Seer now offers
toolkits for developing Visual Basic and Java front ends for large scale
enterprise applications. Together, these three web-enabling options make it easy
for companies to take advantage of the enormous commercial opportunities
afforded by the World Wide Web.
YEAR 2000 ISSUES
The Company's Seer*HPS toolset products are designed to allow developers to
develop applications that are Year 2000 compliant, through the use of four-digit
year fields which can accept and accurately represent dates both before and
after the Year 2000. Once a four-digit year is properly input, applications
built with the Seer*HPS toolset can properly process the dates.
Dates may be input into these applications either by entering a four-digit
year or, as a shortcut, by
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entering the last two digits of the year. In the latter case, the application
assigns a century to the date and "feeds back" a four-digit year to the user by
displaying it on the screen. For all versions of Seer*HPS above 5.2.3K, the
century is assigned according to a moving 100-year window. The Company has made
available documentation to its customers that explains how this moving 100-year
window can be adjusted, both on the workstation platform and on the host. For
version 5.2.3K, the century is assigned a default value of "19". In either case,
the user can either accept the proposed four-digit date or correct it, if the
application has assigned the wrong century in a particular case.
The foregoing description related to Seer*HPS versions 5.2.4S and higher
(for the workstation) and 5.2.3K and higher (for the host), which were released
in December 1995. The Company believes that if operated properly, applications
constructed with these versions in accordance with the product documentation
should not manifest Year 2000-related errors traceable to the Seer*HPS product.
The Company does not believe any of its customers are using earlier versions of
the software.
The Company cannot, however, eliminate the possibility of input errors,
where input is in the form of two-digit years. Among other potential errors, it
is possible to introduce incorrect dates into applications using the shortcut
mentioned above if the operator is inattentive to the feedback, or if the
operator or batch data inputs dates represented as two-digit years, without any
way for the operator to determine which century a given year falls in. The
Company has attempted to identify the possible errors by making documentation
available to its customers.
With respect to the Company's Seer*HPS development environment itself, the
Company is not aware of any Year 2000 issues except the following. The tools
store certain information with respect to objects created using the tools (such
as the dates the object was created or last modified) as two-digit dates.
Because of the way the tools use these dates, the Company does not believe this
will cause any Year 2000-related problems except in the limited instance of
migrations spanning the century boundary. The Company has made available to its
customers documentation calling their attention to this issue and a workaround.
Accordingly, the Company believes that it has fulfilled its obligations to
its customer with respect to Year 2000 functionality. However, the law in this
area is still evolving and lawsuits are being filed against software companies
on an ongoing basis, many of them asserting novel theories of damage and
liability. Accordingly, no assurance can be given that claims will not be made
against the Company relating to date-processing issues or that the effect of
such claims on the Company will not be material.
CONSULTING AND TRAINING SERVICES
Seer provides a full spectrum of consulting services as part of its
application renewal solutions. Over the years, Seer's worldwide consulting team
has gained in-depth experience in successful application development as well as
valuable insight into the business information needs of users in Global 5000-
sized companies. Seer's consulting organization offers services in project
management, application design and development, application renewal and web- and
e-commerce enablement along with expertise in a wide variety of development
environments, platforms and programming languages.
In addition, Seer's world-class training organization offers a full
curriculum of courses and labs designed to speed knowledge transfer and help
customers take advantage of Seer's field-tested best practices methodologies.
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<PAGE>
SALES AND MARKETING
SALES
The Company's direct sales staff has substantial knowledge of the Company's
products and service offerings as well as general experience in the software
industry. Seer's direct field sales force is headed by three General Managers,
each of whom is assigned a different geographic responsibility--one for the
Americas and Asia Pacific (AmAP), one for the UK, southern Europe and Africa
(UK-SEMEA) and the other for Scandinavia and northern Europe including Germany,
Austria, Switzerland and the eastern bloc countries (NORDIC). Their respective
operations include sales and consulting for new and existing customers. The
Company's sales strategy has five key aspects: (i) decentralized,
geographically-based management, (ii) direct and indirect sales channels, (iii)
existing account management, (iv) compensation based on achievement of specific
sales objectives, and (v) establishing additional marketing partnerships. The
Company derives revenue primarily from software licenses, consulting services,
and software maintenance. Combined revenue for each region for fiscal year 1998
is as follows: AmAP--$23.8 million, UK-SEMEA--$22.1 million, and NORDIC--$18.1
million. The percentage of the Company's total revenue for fiscal year 1998 for
each region is as follows: AmAP--37%, UK-SEMEA--35% and NORDIC--28%.
The Company's software products have historically been designed for use
primarily in large-scale, complex computing environments. A customer's decision
to use the Company's products involves a substantial financial commitment,
including the license cost, consulting and training expenses, and deployment
service costs as well as a substantial commitment of personnel resources.
Accordingly, a decision to purchase Seer products typically has been made by a
customer's senior management. As a result, the sales cycle for the Company's
products historically has been relatively lengthy, averaging nine to twelve
months. The Company's sales process follows a solution-oriented methodology
based on identifying and meeting the unique needs of each customer's business.
The Company's sales strategy will continue to involve a complete evaluation
of the customer's business followed by the identification and sale of solutions
incorporating software and services that will meet the customer's requirements.
It also provides flexibility to scale up or down and add new Seer component
products or purchase additional services in the future.
MARKETING
To transition Seer from its historical positioning in the enterprise
application development tools market segment and establish the Company as a
leading global provider of enterprise application renewal solutions, the Company
is significantly redirecting its marketing efforts worldwide. The marketing team
has laid out a tactical plan of programs and deliverables carefully integrated
with its strategic plan to enable the Company to effectively reposition itself
while at the same time continuing to meet current and future customer needs.
A key strategic alliance for the Company, both historically and at present,
is with IBM, one of the Company's original stockholders. Transactions resulting
from the Company's relationship with IBM accounted for approximately 38%, 53%,
and 65% of the Company's revenues for fiscal year 1998, 1997 and 1996
respectively, and an even greater portion of the Company's international
revenues for each of those periods. Seer's relationship with IBM exists on both
a formal (in terms of a series of contractual relationships) and an
informal basis. For example, in Europe, IBM acts as a non-exclusive marketer and
distributor of the Company's products to IBM customers.
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<PAGE>
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year Ended September 30, 1998
Compared to the Year Ended September 30, 1997 - Sales and Marketing Expense."
TARGET MARKETS
Global 5000-sized companies in all vertical industries around the world are
making an enormous expenditure in renovating legacy applications for year 2000
compliance. In addition, the explosion of internet and intranet technology is
driving companies to find ways to take advantage of these new technologies out
of competitive necessity. As a result, enterprise IT shops will be compelled by
both economic and internal political necessity to find ways to leverage their
Year 2000 investment and extend the life cycle of newly renovated applications.
This means that the lines between "new" development and what has in the
past been considered "maintenance" are blurring. More and more of the "new"
development going forward is going to be in the areas of enhancing, modernizing,
functionally linking and adding new and internet-enabling functionality to
legacy operational systems within existing enterprise IT infrastructures. As a
result, top industry analysts have identified new and emerging markets for what
they are calling enterprise application renewal and development life cycle
management.
Enterprise application renewal encompasses extending existing or adding new
functionality, upgrading and modernizing, web-enabling, improving software
quality and system security, moving to network computing and functionally
linking to other applications. Development life cycle management involves cost-
effectively managing all aspects of the development, deployment, continued
enhancement and life cycle extension of enterprise applications to leverage,
extend and maximize the return on IT investment.
The emerging markets for application renewal and development life cycle
management are predicted to grow from a combined potential of $13 billion in
calendar 1999 to more than $18 billion by the year 2002 according to industry
analysts. Recent reports also project that IT spending will increase steadily
over the next two years, with focal points -- outside Year 2000 expenditures --
being in mainframe applications, internet/intranet enablement and development
environment and software life cycle management.
Seer intends to take an early and definitive leadership position in the
convergence of these complementary burgeoning markets for enterprise application
renewal and life cycle management. Seer's product suite provides companies with
the enabling technology infrastructure to speed development and re-engineering
of applications. Seer's consulting staff is highly experienced in large-scale
enterprise applications and the complex IT environments in which they run. In
addition, the Company is currently engaged in extending its technology to
deliver new functionality and internet-enabling extensions to enable the
provision of comprehensive application renewal solutions.
COMPETITION
The market for application renewal and life cycle management is a fast-
growing one. It offers tremendous potential to early entrants like Seer, which
enters the market with a proven set of the required infrastructure technologies
and a pool of skilled consultants with extensive expertise in application
development and extension.
To firmly establish a leadership position in this market, the Company must
continue with its plan to enhance its current products and deliver new products
in a timely fashion. The Company believes that competition in the large-scale
enterprise application renewal market today is based primarily on functionality,
scalability, and resulting application performance. The Company believes that
its products and services compete favorably in each of these areas.
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The rapid growth and long-term potential of the application renewal market
make it attractive to new competition. However, at the high end of the market --
the enterprise application arena -- very few companies have at this point in
time appeared to enter this marketspace with as broad a solution offering as
Seer.
Viasoft and Platinum are the primary competitors who have openly entered
the application renewal solution space. Both offer repository technologies and
consulting services which they promote as addressing aspects of application
renewal and life cycle management needs. The size and rapid growth of the
application renewal market may attract additional competitors. Some of the
companies may have longer operating histories and greater financial, technical,
and sales, marketing and other resources than the Company.
CUSTOMERS
Today, Seer's products and services are used by thousands of software
developers. Hundreds of enterprise-class applications built with Seer products
are used daily by over a million end users worldwide. Seer's expanding
international customer base includes some of the world's largest corporations
such as Credit Suisse, TeleDanmark, Telenor, Royal Sun Alliance, National Bank
of Greece, Italia Telecom, and Sikorsky Aircraft. Industries that are
significantly represented in the Company's customer base include banking and
financial services, insurance, retail, manufacturing, data processing, public
utilities, and transportation. No one customer has accounted for more than 10%
of operating revenues for fiscal years 1998, 1997, or 1996.
The Company seeks to form strong partnering relationships with customers in
order to gain an in-depth understanding of the business and technology
challenges they face. This helps Seer meet both the customer's immediate
production requirements and their long-term strategic needs. Seer maintains a
customer advisory board (CAB) that normally meets regularly both in person and
via teleconferencing. The CAB's volunteer members represent the global customer
base, acting as a sounding board for new ideas and initiatives as well as
providing a bi-directional conduit with the customer base for information flow
and feedback regarding the Company's products and services. Also under the
auspices of the CAB, several Special Interest Groups (SIG's) provide internet-
based discussion forums focused on specific areas of technology.
In addition, the Company holds annual international customer conferences to
present new information, address customer questions and concerns, and provide
constructive open forums for customer interaction. In many areas around the
world, local customers hold periodic regional user group meetings that are
supported and encouraged by Seer. The Company also receives a great deal of
feedback through its consulting services and technical support organization
regarding the effectiveness of the Company's products in meeting customer needs.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that the timely development of enhancements to
existing products is essential to meet evolving customer requirements and
maintain a competitive position in the marketplace. Delays or difficulties
associated with new products or product enhancements could have a material
adverse effect on the Company's business, operating results, and financial
condition. The Company conducts research and development to enhance its existing
products and to build new products, both complementary to the existing product
line and in new functional areas. As evidence of its commitment to new product
development, the Company has expensed $12.9 million, $12.3 million, and $16.8
million for product development for fiscal years 1998, 1997, and 1996,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Year Ended September 30,
1998 Compared to the Year Ended September 30, 1997 - Research and Product
Development Expense."
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PATENTS, TRADEMARKS, AND PROPRIETARY RIGHTS
The Company's success is dependent upon maintaining its intellectual
property assets. The Company relies upon combinations of copyright, patent,
trademark and trade secrecy laws, along with contractual provisions, to protect
its intellectual property rights in software, documentation, data models,
methodologies, and related written materials in the international marketplace.
The effectiveness of these various types of protection can be limited, however,
by variations in laws and enforcement procedures from country to country. As a
result, the Company also protects against use of unauthorized copies of its
principal workstation development product through a "data lock" technical
protection system.
Copyright protection is generally available under United States laws and
international treaties for the Company's software and printed materials. Seer
has obtained patents in the United States and Australia with regard to the basic
application development and deployment technology in the Seer*HPS product line,
and has related patents pending in various countries. The Company also has
patents pending with regard to other product technologies. The Company has
registered the trademarks "SEER", "Archetype", "CASIM", "Freeway", "High
Productivity Systems", "NewArc 2000", "Seer*HPS", and "TurboCycler" in the
United States, and has active programs to register the "SEER" mark in other
countries where it does business. The Company also uses the trademarks
"@Seer", "InPrint", "LightSpeed Web", "NetEssential", "Seer*Auditor",
"Seer*Connections", "Seer*AllianceConnections", "Seer*ComplementaryConnections",
"Seer*ComponentConnections", "Seer*ConsultingConnections",
"Seer*ResellerConnections", "Seer*TrainingConnections", "Seer*DCF",
"Seer*Intelligen", "Seer-*Mediator", "Seer*Metrix", "SeerTalk", "SmartPak" and
"The Seer*Method."
EMPLOYEES
As of September 30, 1998, Seer had a total of 411 employees. Of these
employees, 73 were engaged in software sales, marketing, and technical support;
47 in administration; 81 in research and development; and 210 in consulting and
training. The Company's continued success is dependent on its ability to attract
and retain qualified employees. Although the Company experienced difficulty in
recruiting and retaining consultants and research and development employees
during fiscal 1998 due to the intense competition for personnel in the software
industry, the Company believes it has succeeded in attracting and retaining a
sufficient number of qualified employees in all aspects of its operations.
There can be no assurance, however, that the Company will continue to be
successful in the future. The Company's employees are not represented by a
union or a collective bargaining agreement.
ITEM 2. PROPERTIES.
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The Company's principal executive offices are located in approximately
54,000 square feet of leased space in Cary, North Carolina. As of September 30,
1998, the Company also leased 16 additional offices to provide consulting
services to its clients and to facilitate the distribution of its products. The
Company leases office space abroad in Canberra, Melbourne and Sydney, Australia;
Toronto, Canada; Copenhagen, Denmark; London, England; Paris, France; Frankfurt,
Germany; Rome, Italy; Milan, Italy; Madrid, Spain; Nieuwegein, The Netherlands;
Singapore; Seoul, Korea and Stockholm, Sweden. The Company also maintains an
office in Limerick, Ireland on a set fee arrangement.
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ITEM 3. LEGAL PROCEEDINGS.
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In December 1997, the Company filed a lawsuit against Saadi Abbas and
Cambridge Business Solutions (UK) Limited ("CBS") alleging that Mr. Abbas and
CBS had injured the Company by interfering with the Company's ability to market
and sublicense the LightSpeed Financial Model. The Company obtained a
preliminary injunction against Mr. Abbas and CBS halting their actions. Mr.
Abbas and CBS filed counterclaims against the Company claiming wrongful
dismissal of Abbas and breach of the license agreement. Due to the erosion of
the market for the LightSpeed Financial Model, the Company voluntarily dismissed
its claims against Mr. Abbas and CBS in the summer of 1998. Mr. Abbas and CBS
are continuing to pursue their claims against the Company. At the present point
in the litigation, it is impossible to calculate the chances of success in this
litigation. However, the Company intends to continue to vigorously defend
against the counterclaim. The Company has made provisions for its estimated
costs to resolve this matter. Management does not believe at this point in the
litigation that any additional amounts required to ultimately resolve this
matter will have a material effect on the financial position, cash flows, or
results of operations of the Company.
From time to time, the Company is a party to routine litigation incidental
to its business. As of the date of this Report, the Company was not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
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During fiscal years 1998 and 1997, the Common Stock of the Company was
traded on the Nasdaq Stock Market under the symbol SEER. The Company has never
declared or paid any cash dividends on its Common Stock. The Company
anticipates that all of its earnings will be retained for the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future. The Company's credit agreements require the
Company to obtain approval from its lenders prior to declaration or payment of
any cash dividends on its Common Stock. The chart below sets forth the high and
low stock prices for the quarters of the fiscal years ended September 30, 1998
and 1997.
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1997
Quarter High Low High Low
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<S> <C> <C> <C> <C>
1st $9.375 $3.875 $ 6.50 $ 3.00
2nd $ 5.50 $2.625 $ 7.00 $ 3.00
3rd $4.125 $ 1.50 $5.875 $3.875
4th $ 2.50 $ 0.50 $ 8.00 $ 4.25
</TABLE>
The closing price of the Common Stock on September 30, 1998 was $0.75 per share.
As of December 24, 1998, the Company had 299 registered shareholders of record.
On October 13, 1998, the Company was delisted from the Nasdaq Stock Market. The
Common Stock of the Company is now quoted on the Over-the-Counter Bulletin
Board.
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ITEM 6. SELECTED FINANCIAL DATA.
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The following selected financial data is derived from the consolidated
financial statements of the Company. The data should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
Fiscal Years Ended September 30,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue $ 63,964 $103,153 $ 91,657 $111,485 $78,278
Gross profit 16,186 51,312 38,537 72,542 44,901
Income (loss) from operations (39,219) (7,071) (45,112) 9,254 3,451
Net income (loss) (62,440) (9,966) (31,582) 5,152 2,361
Net loss per common share (5.23) (0.85) (2.76) - -
Weighted average common
shares outstanding 11,941 11,707 11,445 - -
Pro forma net income per
common share - - - .45 .21
Pro forma weighted average
common shares outstanding - - - 11,507 10,986
BALANCE SHEET DATA:
Working capital (deficiency) $(39,666) $ (5,961) $ 3,963 $ 34,087 $ 4,777
Total assets 23,195 66,535 78,804 76,444 37,363
Total debt 38,148 22,052 14,379 - 2,700
Senior redeemable
preferred stock - - - - 13,195
Series A & B preferred stock 17,271 12,302 12,302 - -
Total stockholders' equity
(capital deficiency) (36,525) 20,843 30,053 48,438 (2,096)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
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GENERAL INFORMATION AND RECENT DEVELOPMENTS
Seer Technologies, Inc. (the "Company" or "Seer") is one of the software
industry's earliest pioneers and a long-time leader in component-based software
application development. Historically, the Company has been a distributor of
application development tools and related services. During the second and third
quarters of fiscal year 1998, the Company developed a revised business plan,
necessitated by a decline in demand for the Company's application development
tools. The Company attributes the on-going slow-down in the global market for
application development tools primarily to the continued and pervasive diversion
of funds and resources into renovating applications for the Year 2000. In
response to this, Seer completed an in-depth market assessment initiative to
identify opportunities that might broaden its market scope and decrease the
negative impact of the Year 2000 drain on its business. Based on this
assessment, management is now in the process of shifting the company from its
traditional software tools orientation to an updated solutions-focused approach
that blends its consulting services and enabling technologies into whole
solutions that address identified market opportunities. Some of these
opportunities include helping companies leverage the investment they are making
in their Year 2000 renovation efforts by offering a variety of application
renewal solutions that include modernizing applications through internet and
electronic commerce enablement and functional integration with other new and
legacy applications.
As part of its revised business plan, the Company has been restructured to
centralize key functions and consolidate operations around areas of technical
focus to both improve productivity and reduce worldwide infrastructure costs in
line with future business prospects. The changes made to implement this plan
required the Company to record restructuring charges in the second and third
quarters of fiscal year 1998.
On October 13, 1998, the Company was delisted from the Nasdaq Stock Market.
The Common Stock of the Company is currently quoted on the Over-the-Counter
Bulletin Board.
On November 24, 1998, the Company and Level 8 Systems, Inc. ("Level 8")
announced the pending strategic merger of the Company with Level 8. Level 8 is a
leading provider of message queuing and enterprise application integration
technologies that allow end-to-end connectivity between heterogeneous platforms
across the enterprise. As the first step in this transaction, on December 31,
1998, Level 8 acquired approximately 69% of the outstanding voting stock of the
Company from WCAS and its affiliates in exchange for 1,000,000 shares of Level 8
common stock and warrants to purchase an additional 250,000 shares of Level 8 at
an exercise price of $12 per Level 8 share. Level 8 acquired 7,130,894 shares of
the Company's Common Stock, 2,094,143 shares of the Company's Series A
Convertible Preferred Stock, and 1,762,115 shares of the Company's Series B
Convertible Preferred Stock (representing approximately 69% of the outstanding
voting stock of the Company) and therefore may be deemed to control the Company.
In connection with Level 8's purchase of the Company's voting stock from WCAS,
WCAS contributed $17 million to the Company and Level 8 provided the Company a
$12 million subordinated loan to help pay down the Company's bank debt. Level 8
has also agreed to acquire all of remaining shares of the Company's Common Stock
for $0.35 per share in cash as soon as practicable upon completion of required
filings and approvals. In addition, Level 8 has agreed to fund the Company's
operations, as necessary, through January 15, 2000.
Due to the pending transaction outlined above, the information within this
report is not necessarily indicative of future operating results once Seer and
Level 8 have been combined. Unless otherwise specifically indicated, the
information in this report is stated as of September 30, 1998 and does not give
effect to the pending transactions with Level 8.
This report contains forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities, the pending
transaction with Level 8, Year 2000 issues and similar matters. The Private
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Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause its actual results to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The Company's performance, development
and results of operations may be affected by the risks presented by: (i) market
acceptance of the Company's new strategic direction; (ii) continued market
acceptance of the Company's existing technology; (iii) fluctuations in quarterly
operating results and volatility of the price of the Company's common stock;
(iv) competition; (v) the Company's reliance on its relationship with IBM; (vi)
customer concentration; (vii) the potential failure to meet product delivery
dates; (viii) matters relating to international operations; (ix) intellectual
property and proprietary rights; (x) the inability to attract and retain
consultants and development professionals; (xi) the Company's ability to
attract, retain and train qualified sales professionals and the ability of those
sales professionals to perform to quota; and (xii) the sufficiency of the
Company's liquidity and capital resources. See the Company's Registration
Statement on Form S-1 (Registration N. 33-92050) for a more detailed description
of certain risks presented by the Company's operations.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000 Problem" is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
Software Sold to Consumers. The Company believes that it has substantially
identified potential Year 2000 Problems with the software products that it
develops and markets. See "Item 1. Business--Products--Year 2000 Issues."
Accordingly, the Company believes that it has fulfilled its obligations to its
customers with respect to Year 2000 functionality. However, the law in this area
is still evolving and lawsuits are being filed against software companies on an
ongoing basis, many of them asserting novel theories of damage and liability.
Accordingly, no assurance can be given that claims will not be made against the
Company relating to date-processing issues or that the effect of such claims on
the Company will not be material. Expenses related to Year 2000 compliance of
the Company's products are not separately identified but are included as part of
the Company's research and development operating budget.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading,
and replacing major systems that have been identified as adversely affected, and
expects to complete this process by the middle of 1999.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. The Company is currently assessing the potential effect of,
and costs of remediating, the Year 2000 Problem on its office and facilities
equipment.
The Company does not believe the total cost to the Company of completing
any required modifications, upgrades, or replacements of these internal systems
will not have a material adverse effect on the Company's financial condition,
cash flows, or results of operations. Expenses related to Year 2000 compliance
of the Company's internal infrastructure are not separately identified but are
not included as part of the Company's general and administrative operating
budget.
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company to identify and,
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to the extent possible, to resolve issues involving the Year 2000 Problem.
However, the Company has limited or no control over the actions of these third
party suppliers. Thus, while the Company expects that it will be able to resolve
any significant Year 2000 Problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 Problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition, and results of
operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies for
the Company and its clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its clients to prevent or alleviate material
business disruptions.
Contingency Plans. The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the middle of 1999. Depending on the systems affected, these plans
could include accelerated replacement of affected equipment or software, short
to medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
EURO CONVERSION
Several European countries will adopt a Single European Currency (the
"Euro") as of January 1, 1999 with a transition period continuing through
January 1, 2002. The Company is reviewing the anticipated impact the Euro may
have on its internal systems and on its competitive environment. The Company
believes its internal systems will be Euro capable without material modification
cost. Further, the Company does not presently expect the introduction of the
Euro currency to have an adverse material impact on the Company's financial
condition, cash flows, or results of operations.
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REVENUE RECOGNITION
The Company has three categories of revenue: software products, maintenance
and services. Software products revenue is comprised primarily of fees from
licensing the Company's proprietary software products and, to a lesser extent,
from product development contracts. Maintenance revenue is comprised of fees
for maintaining, supporting and providing periodic upgrades of the Company's
software products. Services revenue is comprised primarily of fees for
consulting and training services.
Consistent with the American Institute of Certified Public Accountants
Statement of Position ("SOP") 91-1, "Software Revenue Recognition," the Company
allocates a portion of the software license fee to initial period maintenance
when the maintenance period is greater than three months. The remainder is
recognized as license fee revenue upon delivery of the software product to, and
acceptance by, the customer. Revenue from the initial maintenance period and
subsequently priced maintenance agreements is recognized ratably over the term
of the agreement. Consulting and training services revenue is recognized as the
services are performed.
The Company's revenues vary from quarter to quarter, with the largest
portion of revenue typically recognized in the last month of each fiscal quarter
and the third and fourth quarters of each fiscal year. The Company believes
that these patterns are partly attributable to the Company's sales commission
policies, which compensate sales personnel for meeting or exceeding quarterly
and annual quotas, and to the budgeting and purchasing cycles of customers.
Furthermore, as the size of individual sales is generally large, a single
customer may have a significant impact on a quarter. In addition, the
substantial commitment of executive time and financial resources historically
required of a potential customer to make a decision to purchase the Company's
products increases the risk of quarter-to-quarter fluctuations. The Company
typically does not have any material backlog of unfilled software orders, and
product revenue in any quarter is substantially dependent upon orders received
in that quarter. Because the Company's operating expenses are based on
anticipated revenue levels and are relatively fixed over the short term,
variations in the timing of recognition revenue can cause significant variations
in operating results from quarter to quarter. Fluctuations in operating results
may result in volatility in the price of the Company's common stock.
The American Institute of Certified Public Accountants has issued SOP 97-2,
"Software Revenue Recognition". SOP 97-2 is effective for transactions entered
into in fiscal years beginning after December 15, 1997 and provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company does not expect the application of the SOP
to have a material impact on the Company's financial condition or results of
operations.
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RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the Company's
results of operations expressed as a percentage of revenue.
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Revenue:
Software products 10.9% 33.2% 31.4%
Maintenance 21.2% 14.2% 14.4%
Services 67.9% 52.6% 54.2%
------ ----- ------
Total 100.0% 100.0% 100.0%
Cost of revenue:
Software products 2.8% 1.5% 1.7%
Maintenance 10.1% 8.2% 10.0%
Services 61.8% 40.6% 46.3%
------ ----- ------
Total 74.7% 50.3% 58.0%
Gross profit 25.3% 49.7% 42.0%
Operating expenses:
Sales and marketing 30.2% 29.8% 48.0%
Research and product development 20.2% 12.1% 18.3%
General and administrative 15.6% 14.3% 21.3%
Restructuring charges 20.6% 0.5% 3.3%
------ ----- ------
Total 86.6% 56.7% 90.9%
Other income (expense), net (4.7)% (1.6)% (0.2)%
------ ----- ------
Loss before taxes (66.0)% (8.6)% (49.1)%
Income tax provision (benefit) 31.6% 1.2% (14.9)%
------ ----- ------
Net loss (97.6)% (9.8)% (34.2)%
====== ===== ======
</TABLE>
The following table sets forth data for total revenue by geographic origin as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
United States 27.6% 31.9% 31.5%
Mexico/Canada 2.0% 2.6% 6.0%
South America 1.0% 3.2% 6.6%
Europe 58.8% 50.4% 47.7%
Middle East/Africa 4.0% 1.4% 3.0%
Asia Pacific 6.6% 10.5% 5.2%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
REVENUE. The Company's total revenue decreased 38% for fiscal year 1998 as
compared to the fiscal year 1997. The decrease was primarily attributable to a
decrease in software products revenue, along with declines in services revenue
and maintenance revenue. Revenue declined in all three of the Company's
principal operating regions.
SOFTWARE PRODUCTS. Software products revenue decreased 80% in fiscal year
1998 as compared to fiscal year 1997. Management believes the primary cause of
the decline in software revenue in fiscal year 1998 is the continued diversion
of funds and resources by Global 5000 corporations into renovations of existing
applications for the Year 2000, rather than investing in new applications and
development tools. Software revenue was also adversely impacted during the
second and third quarters of fiscal year 1998 by the restructuring of the
Company, which resulted in a significant decrease in the number of sales and
marketing personnel and caused a significant diversion of management resources.
Also, potential sales of software products to Asian prospects in fiscal year
1998 have been impeded by the downturn in the Asian economy.
Historically, the Company has entered into several marketing and
distribution agreements with IBM throughout the world, comprising 77% and 50% of
total software products revenue for fiscal years 1998 and 1997, respectively.
MAINTENANCE. Maintenance revenue decreased 7% in fiscal year 1998 as
compared to the prior fiscal year. This decline in revenue arose from losses to
the installed customer base, a reduction in maintenance usage, and lower
software products revenue in the first nine months of fiscal year 1998.
SERVICES. Services revenue for the fiscal year 1998 decreased 20% as
compared to fiscal year 1997. This decrease is due to the Company's consulting
and training services being directly related to its software products.
Therefore, the decline in software product sales has negatively impacted
services revenue as well.
GROSS PROFIT. Total gross profit for fiscal year 1998 decreased 68% from
the previous year. Total gross margin decreased to 25% for fiscal year 1998 as
compared to 50% in fiscal year 1997. These decreases are due primarily to the
decrease in software revenue as a percentage of total revenue in fiscal year
1998, as well as declines in margins for the services organization.
Software gross margin declined to 74% for fiscal year 1998 as compared to
95% for fiscal year 1997 primarily due to the decline in software revenue
coupled with an increase in cost of software. For fiscal years 1998 and 1997,
cost of software is primarily amortization of costs previously capitalized.
Amortization of software products increased in fiscal year 1998 due to several
new products becoming generally available in the second half of fiscal year
1997.
Maintenance gross margin increased to 52% for fiscal year 1998 as compared
to 42% for fiscal year 1997. The increase in maintenance gross margin for
fiscal year 1998 was primarily due to a 23% decrease in maintenance costs offset
in part by a decline in revenue. The most significant factors contributing to
the decline in costs is the reduction of vendor-provided support fees and a
reduction in personnel costs. In fiscal year 1997, the Company incurred
significant headcount and travel costs while assisting several customers with an
upgrade to a newer version of Seer*HPS. These costs have declined with
completion of the initiative.
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Services margin for fiscal year 1998 decreased to 9% as compared to 23% for
fiscal year 1997. The decrease in services margin is primarily a result of
lower utilization of billable personnel and increases in personnel costs needed
to keep pace within the inflationary market for technology consulting personnel.
Unforeseen organizational changes by a significant customer in the first quarter
of fiscal year 1998 resulted in the cancellation of a significant contract and
contributed substantially to poor utilization of resources in the first half of
the fiscal year 1998. Also, margins decreased as the Company was not able to
increase billing rates in relation to the increase in costs. This was due to
the inability of the Company to effectively renegotiate contracts to higher
rates at existing customers as a result of the restructuring, the related
diversion of management resources due to the restructuring, and the Company's
weakened financial condition and a lack of new services customers affiliated
with software product sales.
SALES AND MARKETING EXPENSE. Sales and marketing expense for fiscal year
1998 decreased 37% as compared to the previous year. The decrease is a direct
result of the reduction of the Company's sales and marketing force as part of
the Company's revision of its business plan to compensate for the decline in
demand for its software products as previously discussed.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSE. Research and product development
expense increased 3% for fiscal year 1998 compared to fiscal year 1997. The
increase is primarily attributable to an approximate 15% increase in average
personnel costs from fiscal year 1997 to fiscal year 1998, which was offset by a
10% reduction in personnel. During the first quarter of fiscal year 1998, the
Company determined that a significant one-time overall increase in salaries was
necessary to ensure the Company's competitiveness in the recruiting and
retention of research and development personnel. As part of its revised
business plan, the Company has organized the product development, maintenance,
and product management groups into one technical operations group which is
designed to bring efficiency to the development and maintenance processes and
produce overall cost savings in the long term.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
fiscal year 1997 was significantly affected by a $3.8 million allowance for an
account which was determined to be uncollectible. General and administrative
expense, excluding the nonrecurring charge discussed above, decreased 8% from
fiscal year 1997 to 1998. This decrease is attributable to a reduction in the
personnel needed to support the Company as its revenues decreased during fiscal
year 1998.
RESTRUCTURING CHARGES. During the second quarter of fiscal year 1998, the
Company began work on a revised business plan, necessitated by a decline in
demand for the Company's software products. As a result of this effort, at the
end of the second quarter of fiscal year 1998, the Company announced its plans
to streamline its sales and marketing organizations, as well as reorganize its
technical operations into one cohesive unit, providing improved product support
and more focused development of new products. The general and administrative
organization within the Company was also streamlined to support the newly-
restructured operating divisions. The restructuring included a staff reduction
of approximately 5% (31 employees), the abandonment of leased facilities in the
US, Brazil, and Singapore, and the write-down to fair value of certain assets or
accrual of costs related to products, distribution channels, and vendor-provided
product support contracts which were being discontinued. The Company recorded a
restructuring charge of $9 million during the second quarter of fiscal year
1998, which consisted of approximately $1.4 million in personnel-related
charges, approximately $1.1 million of costs associated with carrying vacated
space until the lease expiration date, approximately $2.7 million in write-down
of assets, approximately $3.0 million for contractually obligated product
support services, and approximately $.7 million in professional fees related to
the restructuring.
The Company completed its restructuring in the third quarter of fiscal year
1998 and recorded an additional charge of $4.2 million. An additional staff
reduction of approximately 8% (37 employees) was made in the third quarter of
fiscal year 1998. This restructuring charge consisted of approximately $1.1
million in personnel related-charges, approximately $2.0 million in the write-
down of assets for discontinued distribution channels, and approximately $1.1
million in professional fees related to the restructuring.
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The Company's efforts to settle these restructuring liabilities resulted in
a change in the Company's estimates in regard to the specific categories of
expense, however, the amount of the overall charge has not changed. The revised
estimate reflects a total restructuring charge of $2.5 million for personnel
related charges, approximately $.5 million of premises related costs,
approximately $4.7 million in write-down of assets, approximately $1.1 million
for contractually obligated product support services, and approximately $4.4
million in professional fees and a related legal settlement. See Note 16. To
date, the Company has paid approximately $4.4 million in cash related to the
restructuring. The Company believes the accrued restructuring cost of $4.1
million at September 30, 1998 represents its remaining cash obligations.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Income taxes increased from an expense of $1.2 million for
fiscal year 1997 to an expense of $20.2 million for fiscal year 1998. Due to a
decline in the Company's software revenues, the Company determined during the
fourth quarter of fiscal year 1998 that certain previously available tax
planning strategies were no longer deemed to be prudent or feasible. This
caused the Company to record a full valuation allowance equaling the entire
deferred tax asset balances at September 30, 1998 and accordingly, resulted in
an increase in income tax expense for the fiscal year ended September 30, 1998.
Income taxes paid for fiscal year 1997 and 1998 are primarily for foreign income
taxes and foreign withholding taxes.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
REVENUE. The Company's total revenue increased 13% for fiscal year 1997 as
compared to the previous year. The increase was attributable to increases in
all three categories of revenue -- software products, maintenance, and services.
Revenue in the United States and the Europe, Middle East, and Africa region
remained relatively constant. Revenue in Latin America declined, while revenue
in the Asia Pacific region increased by 5.3 percentage points as a percentage of
the Company's total revenue.
SOFTWARE PRODUCTS. Software products revenue increased 19% in fiscal year
1997 as compared to fiscal year 1996. This increase is attributed to the
Company's establishment of direction and focus under its new management, which
had a favorable impact on its ability to reach new customers. New customer
contracts totaled twenty-eight in fiscal year 1997 as compared to only twelve in
fiscal year 1996, a 133% increase. The expansion of the channel partners
program also had a favorable impact on software product sales, with 10% of
software being sold to or through a non-IBM channel partner during fiscal year
1997. Historically, the Company has entered into several marketing and
distribution agreements with IBM throughout the world, comprising 50% and 74% of
total software products revenue for fiscal years 1997 and 1996, respectively.
MAINTENANCE. Maintenance revenue increased 11% in fiscal year 1997 as
compared to fiscal year 1996. The increase is primarily a result of maintenance
services associated with software sold to both new and existing customers during
fiscal year 1996 and the first three quarters of fiscal year 1997.
SERVICES. Services revenue for the fiscal year 1997 increased 9% as
compared to the previous year. The increase in services revenue is primarily
related to an increase in customer demand for assistance in developing
applications utilizing the Company's licensed products from license sales made
in both the current and prior fiscal years.
GROSS PROFIT. Total gross profit for fiscal year 1997 increased 33% from
the previous year. Total gross margin increased to 50% for fiscal year 1997 as
compared to 42% in fiscal year 1996. These increases are due primarily to the
increase in software revenue as a percentage of total revenue in fiscal year
1997, as well as improvements in margins for the services organization.
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Software gross margin remained relatively constant, 96% for fiscal year
1997 as compared to 95% for fiscal year 1996. For fiscal year 1997 and 1996,
cost of software is primarily amortization of costs previously capitalized.
Maintenance gross margin increased to 42% for fiscal year 1997 as compared
to 31% for fiscal year 1996. The increase in maintenance gross margin for
fiscal year 1997 was primarily due to an 11% increase in maintenance revenue
coupled with an 8% decline in maintenance costs. The most significant factor
contributing to the decline in costs is the reduction in commissions paid to
IBM, which supplies certain levels of maintenance services to European
customers. During the second quarter of fiscal year 1997, the contract was
renegotiated with more favorable terms for the Company.
Services margin for fiscal year 1997 increased to 23% as compared to 15%
for fiscal year 1996. The increase in services margin is primarily a result of
better utilization of billable resources, including employees and third party
contractors, and an increase in billing rates charged to customers.
SALES AND MARKETING EXPENSE. Sales and marketing expense for fiscal year
1997 decreased 30% as compared to the previous year. The decrease is the result
of the reduction of the Company's sales force, primarily in Europe and the
Americas, to reflect progressive changes in the Company's business model, as
well as to make the sales process more efficient. As compared to fiscal year
1996, average sales headcount has decreased 22%. Additionally, sales expense in
fiscal year 1996 included $2.2 million in commissions to IBM for sales of the
Company's software products made by IBM in Latin America and Europe. No such
commissions were payable for sales in Latin America and Europe in fiscal year
1997.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSE. Research and product development
expense decreased 26% for fiscal year 1997 compared to fiscal year 1996. The
decrease is primarily a result of a 20% loss in average employee headcount
through attrition.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
both fiscal years 1997 and 1996 was significantly impacted by adjustments for
uncollectible accounts receivable. In fiscal year 1997, the Company recorded a
$3.8 million allowance for an account which was determined to be uncollectible.
In fiscal year 1996, the Company recorded allowances of $10.1 million for
certain accounts receivable that were determined to be uncollectible and for the
resolution of a customer dispute. General and administrative expense, excluding
the nonrecurring charges discussed above, has remained constant as a percentage
of total revenue at 11% for both fiscal years 1997 and 1996.
RESTRUCTURING CHARGES. During the first quarter of fiscal year 1997, the
Company recorded $.5 million of restructuring expenses related primarily to
severance benefits and the consolidation of leased facilities during the first
quarter of fiscal year 1997. As of September 30, 1997, the Company had paid all
amounts accrued in fiscal years 1997 and 1996 for restructuring. The Company
believes its has no remaining obligations related to the restructuring
undertaken in fiscal years 1997 and 1996.
PROVISION FOR INCOME TAXES. Income taxes increased from a benefit of
($13.7) million for fiscal year 1996 to an expense of $1.2 million for fiscal
year 1997. The effective tax rate decreased from 30% for fiscal year 1997 to
(14.1%) for fiscal year 1997 primarily due to the effect of foreign taxes and
because an income tax benefit was not recorded for the total net loss incurred
in fiscal year 1997.
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LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1996, net cash used in operating and investing
activities totaled $40.5 million. Net cash used in operating activities was
unfavorably impacted by increases in operating expenses to support headcount
growth and by an increase in the time of collection for the Company's accounts
receivable during fiscal year 1996, due partially to extended payment terms
granted to certain software customers. Additionally, the Company recorded
allowances of $10.1 million for certain accounts receivable which were
determined to be uncollectible and for the resolution of a customer dispute.
The Company financed the fiscal year 1996 net cash outflow with the remaining
proceeds from its initial public offering, two credit facilities providing for
combined borrowings up to $32.5 million based on the Company's eligible accounts
receivable, and through the issuance of convertible preferred stock.
During August 1996, the Company sold 2,094,143 shares of its Series A
Convertible Preferred Stock (the "Series A Preferred Stock") to WCAS and certain
WCAS affiliates, resulting in gross proceeds to the Company of $12.5 million.
The net proceeds from the sale of the Series A Preferred Stock, which totaled
$12.3 million, were used for general corporate purposes. The sale of the Series
A Preferred Stock was made in a private transaction exempt from the registration
requirements of the federal securities laws.
Each share of the Series A Preferred Stock may be converted at any time at
the option of the holder into shares of Common Stock at a conversion rate of one
common share for each share of Preferred Stock, subject to adjustment upon the
occurrence of certain events. The Series A Preferred Stock is not entitled to
receive dividends in any fixed amount but will receive dividends on an as
converted basis in the event that a dividend is paid on the Common Stock. The
Series A Preferred Stock will rank senior in right of payment to the Common
Stock. In the event of any liquidation, dissolution or winding up of the
Company, holders of Preferred Stock will be entitled to receive a liquidation
preference of $5.969 per share before payment is made or assets are distributed
to holders of the Common Stock. In addition, the holders of Series A Preferred
Stock are entitled to vote together with the holders of Common Stock on all
matters to be voted on by the stockholders of the Company.
During fiscal year 1997, net cash used in operating and investing
activities was $5.2 million. The Company credits the reduction in cash outflow
from fiscal year 1996 to improvements in the timeliness of collections and
reductions in spending. The reorganization plan implemented during the latter
half of fiscal year 1996 and the first quarter of fiscal year 1997 had a very
favorable impact on operating expenses. The Company financed its net cash
outflow in fiscal year 1997 through two credit facilities providing for combined
borrowing up to $37.5 million for working capital purposes based on the
Company's eligible accounts receivable, as defined in the loan agreements.
During fiscal year 1998, net cash used in operating and investing
activities was $24.3 million. The increase in cash used in operating and
investing activities from fiscal year 1997 is primarily due to the decrease in
software product revenues without a corresponding decrease in sales and
marketing expenses, significantly lower services margins, $4.4 million in
payments related to the restructuring charges, and an increase in interest on
credit facilities. The estimate of the remaining cash obligations at September
30, 1998 related to restructuring charges is $4.1 million. As of September 30,
1998, the Company did not have any material commitments for capital
expenditures.
The Company financed its net cash outflow in fiscal year 1998 through
credit facilities with commercial banks and through the issuance of convertible
preferred stock. At September 30, 1998, the Company maintained two credit
facilities (the "Revolving Facility" and the "Guaranteed Facility") which
provide for combined borrowings of up to $42.5 million. The Revolving Facility
allows for borrowings of up to $25 million, bears interest at the London
Interbank Offered Rate ("LIBOR") plus 5.0% and is collateralized by the
Company's accounts receivable, equipment and intangibles. The Guaranteed
Facility allows for borrowings of up to $17 million and bears interest at the
higher of LIBOR plus 1.25% or .5% plus the prime rate quoted by the Federal
Reserve. Through December 31, 1998, the Guaranteed Facility
-19-
<PAGE>
was guaranteed by WCAS, pursuant to an agreement with the Company. Borrowings
under the Revolving Facility must always exceed borrowings under the Guaranteed
Facility. There are no other financial covenants for either credit facility.
As of September 30, 1998, the Company had outstanding borrowings of $21.2
million under the Revolving Facility and $16.9 million under the Guaranteed
Facility. The interest rates for the Revolving Facility and the Guaranteed
Facility were 10.6% and 8.5% respectively, at September 30, 1998.
Additionally, at September 30, 1998, the Company also had a line of credit
of $.5 million available to enter foreign exchange contracts, which was also
guaranteed by WCAS. At September 30, 1998 the aggregate notional amount of
foreign exchange contracts outstanding was $6.3 million.
On December 22, 1998, the Company's Revolving Facility was amended. The
Revolving Facility now bears interest at the prime rate and terminates on
December 31, 2001. The Revolving Facility is automatically renewed for
successive additional terms of one year each, unless terminated by either
party.
During April 1998, the Company sold 1,762,115 shares of its Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to its primary
shareholder WCAS and certain WCAS affiliates, resulting in gross proceeds to the
Company of $5 million. The proceeds from the sale of the Series B Preferred
Stock were used for general corporate purposes. The sale of the Series B
Preferred Stock was made in a private transaction exempt from the registration
requirements of the federal securities laws. Each share of Series B Preferred
Stock may be converted at any time at the option of the holder into shares of
common stock of the Company at a conversion rate of one common share for each
share of Series B Preferred Stock, subject to adjustment upon the occurrence of
certain events. The Series B Preferred Stock is not entitled to receive
dividends in any fixed amount but will receive dividends on an as converted
basis in the event that a dividend is paid on the Company's common stock. The
Series B Preferred Stock will rank senior in right of payment to the Company's
common stock. In the event of any liquidation, dissolution or winding up of the
Company, holders of Series B Preferred Stock will be entitled to receive a
liquidation preference of $2.8375 per share before payment is made or assets are
distributed to holders of the Company's common stock. In addition, the holders
of Series B Preferred Stock are entitled to vote together with the holders of
common stock and the Series A Preferred Stock on all matters to be voted on by
the stockholders of the Company. The Series B Preferred Stock ranks pari passu
with the Series A Preferred Stock as to liquidation and dividend payments.
The Company is subject to certain restrictions while shares of Preferred
Stock remain outstanding, including restrictions on the Company's ability to
declare dividends, purchase or redeem any outstanding shares of its common
stock, create or authorize the creation of additional classes of capital stock
of the Company, increase the authorized amount of Preferred Stock, create or
authorize the creation of any securities convertible into shares of Preferred
Stock or any other class of capital stock of the Company.
As of December 31, 1998, (i) Level 8 acquired all of the outstanding Common
Stock and Series A and Series B Convertible Preferred Stock from WCAS and its
affiliates, (ii) Level 8 made the Company a $12 million subordinated loan to
help pay down the Company's outstanding bank debt, (iii) WCAS contributed
approximately $17 million to the Company which was used to reduce outstanding
borrowings under the Guaranteed Facility to $0, (iv) the Guaranteed Facility and
the line of credit available for foreign exchange contracts were terminated, and
(v) Level 8 agreed to guarantee any borrowings under the Revolving Facility
exceeding $20 million through December 31, 1999.
Although the Company's results of operations for fiscal year 1998 fell
below expectations for the reasons described in "-Results of Operations" above,
management has implemented changes in its business plan in an effort to improve
the Company's long-term prospects for profitability. In view of the relatively
long lead time necessary to realize profits as a result of these activities,
however, management does not expect a material short-term improvement in the
Company's results of operations as a result of these activities alone. Rather,
as discussed above, the Company's short-term results of operations are more
likely to be affected by the timing of its recognition of software revenue
generated through its existing distribution
-20-
<PAGE>
channels. Because sales of the Company's products typically involve a
substantial commitment of its potential customers' time and resources, the
Company's ability to predict with certainty whether the Company will ultimately
perform in accordance with its operating plan is often limited. Accordingly,
management is unable to predict with certainty whether the Company will
ultimately perform in accordance with its operating plan.
Without giving effect to the Level 8 transaction and the $29 million of
funding provided to the Company in connection therewith, the Company's existing
cash on hand as of September 30, 1998, cash provided by future operations,
borrowing capacity under its existing lines of credit and its other available
sources of liquidity may not have been sufficient to finance its future
operations and expected working capital and capital expenditure requirements. In
view of the Company's liquidity needs and the unlikelihood that other sources of
financing could be obtained given the Company's recent financial performance,
the Company and WCAS explored a number of strategic alternatives, which
culminated in the pending Level 8 transaction. As of the date hereof after
giving effect to the $29 million of funding provided by WCAS and Level 8 which
was used to pay down debt, the Company believes that existing cash on hand, cash
provided by future operations, together with additional borrowing under its
lines of credit will be sufficient to finance its operations and expected
working capital and capital expenditure requirements for the near term, so long
as the Company performs according to its revised operating plan. However, in the
event the merger of the Company and Level 8 is not completed, the Company may
need to seek additional financing from Level 8 or other sources, Level 8 has
confirmed that it intends to fund the Company's operations through January 15,
2000, if necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair market
value. The statement also requires that changes in the derivative's fair market
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning June 15,
1999, with earlier adoption permitted. The Company is currently assessing the
impact of this new statement on its consolidated financial position, liquidity,
and results of operations.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income. SFAS No. 130 is required to be adopted for fiscal years beginning after
December 15, 1997. Upon the effective date of the new statement, the Company
will make the necessary changes to comply with the provisions of the statement
and restate all prior periods presented. The Company does not expect the
adoption of the statement to have a material impact on the Company's financial
condition or results of operations.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2, "Software Revenue Recognition". SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997 and
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company does not expect the
application of the SOP to have a material impact on the Company's financial
condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------
The Company is exposed to a variety of risks, including foreign currency
fluctuation. In the normal course of business, the Company employs established
policies and procedures to manage its exposure to fluctuations in foreign
currency values.
The Company has entered into forward exchange contracts primarily to hedge
receivables and payables denominated in foreign currencies against fluctuations
in exchange rates. The Company has not entered into forward foreign exchange
contracts for speculative or trading purposes. The Company's accounting
policies for these contracts are based on the Company's designation of the
contracts as hedging transactions. The criteria the Company uses for
designating a contract as a hedge include the contract's
-21-
<PAGE>
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on forward foreign
exchange contracts are recognized in income in the same period as gains and
losses on the underlying transactions. If an underlying hedged transaction is
terminated earlier than initially anticipated, the offsetting gain or loss on
the related forward exchange contract would be recognized in income in the same
period. In addition, since the Company enters into forward contracts only as a
hedge, any change in currency rates would not result in any material net gain or
loss, as any gain or loss on the underlying foreign currency denominated balance
would be offset by the gain or loss on the forward contract. The Company
operates in certain countries in Latin America, where there are limited forward
currency exchange markets and thus the Company has unhedged transaction
exposures in these currencies. Information regarding the Company's foreign
currency forward exchange contracts is set forth in Note 11 of Item 14(a)(1) of
this Form 10-K and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The information required by this item appears beginning on page F-1 of this
report. See Items 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
- ----------------------------------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
The information required by this item is incorporated by reference to
information to be included under the captions "Election of Directors,"
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
The information required by this item is incorporated by reference to
information to be included under the captions "Election of Directors - Director
Compensation" and "- Compensation Committee Interlocks and Insider
Participation," "Executive Compensation," "Compensation Committee Report on
Executive Compensation" and "Stock Performance Graph" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
The information required by this item is incorporated by reference to
information to be included under the caption "Beneficial Ownership of Common
Stock" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The information required by this item is incorporated by reference to
information to be included under the caption "Election of Directors -
Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders.
-22-
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Financial Statements:
The following financial statements of the Company and the related
report of independent accountants thereon are set forth
immediately following the Index of Financial Statements which
appears on page F-1 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for each of the three years
in the period ended September 30, 1998
Consolidated Statements of Changes in Stockholders' Equity
(Capital Deficiency) for each of the three years in the period
ended September 30, 1998
Consolidated Statements of Cash Flows for each of the three years
in the period ended September 30, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. (a) Exhibits:
The following exhibits are filed as part of this Report.
Parenthetical references indicate incorporation by reference
to documents previously filed by the Company with the
Securities and Exchange Commission (Commission File
No. 0-26194).
2.1 Agreement dated November 23, 1998 among Level 8 Systems,
Inc. and the WCAS Parties named therein relating to the
acquisition of Capital stock of the Company by Level 8
(filed herewith)
3.1 Certificate of Incorporation (Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-92050), as
amended to include the Certificates of Designation of the
Series A and Series B Convertible Preferred Stock (included
in Exhibits 4.4 and 4.6)
3.2 Amended and Restated By-Laws of the Company (Exhibit 3.2 to
the Company's Registration Statement on Form S-1, No.
33-92050)
-23-
<PAGE>
4.1 Specimen Common Stock certificate (Exhibit 4.1 to the
Company's Registration Statement on Form S-1, No. 33-92050)
4.2 See Exhibits 3.1, 3.2, 4.4 and 4.6 for the provisions of the
Company's Certificate of Incorporation and Bylaws governing
the rights of holders of securities of the Company
4.3 Specimen Preferred Stock Certificate (Exhibit 4.3 to the
Quarterly Report on Form 10-Q for the period ended June 30,
1996, No. 0-26194)
4.4 Certificate of Designation of Series A Convertible Preferred
Stock of the Company (Exhibit 4.4 to the Quarterly Report on
Form 10-Q for the period ended June 30, 1996, No. 0-26194)
4.5 Specimen Preferred Stock certificate of Series B Convertible
Preferred Stock (Exhibit 4.5 to the Quarterly Report on Form
10-Q for the period ended March 31, 1998, No. 0-26194)
4.6 Certificate of Designation of Series B Convertible Preferred
Stock of the Company (Exhibit 4.6 to the Quarterly Report on
Form 10-Q for the period ended March 31, 1998, No. 0-26194)
10.6 Form of Employee's Non-Competition, Confidentiality and
Invention Assignment Agreement (Exhibit 10.6 to the
Company's Registration Statement on Form S-1, No. 33-92050)
10.7 Form of Consultant's Non-Competition, Confidentiality and
Invention Assignment (Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-92050)
10.22 Lease Agreement, dated December 25, 1992, between the
Company and Capital & Counties (London, England) (Exhibit
10.22 to the Company's Registration Statement on Form S-1,
No. 33-92050)
10.29* Form of Stock Option and Restricted Stock Purchase Plan of
the Company (Exhibit 10.29 to the Company's Registration
Statement on Form S-1, No. 33-92050), as amended by the
First Amendment thereto (Exhibit 10.1 to the Company's
Report on Form 10-Q for the Quarterly Period Ended June 30,
1995, No.0-26194) and the Second and Third Amendments
thereto (Appendices A and B to the Company's 1997 Proxy
Statement filed under cover of Schedule 14A, No. 0-26194)
10.30* Form of Stock Option Plan for Non-Employee Directors of the
Company (Exhibit 10.30 to the Company's Registration
Statement on Form S-1, No. 33-92050)
10.31* Form of Incentive Stock Option Agreement (Exhibit 10.31 to
the Company's Registration Statement on Form S-1, No. 33-
92050)
10.32 Stock Purchase Agreement dated June 15, 1994 among the
Company, Welsh, Carson, Anderson & Stowe VI, L.P., WCA
Management Corporation, WCAS Information Partners, L.P., CS
First Boston Securities Corporation, and International
Business Machines Corporation (Exhibit 10.32 to the
Company's Registration Statement on Form S-1, No. 33-92050)
-24-
<PAGE>
10.33 Securities Purchase and Exchange Agreement, dated September
30, 1994, among the Company, WCAS Capital Partners II, L.P.,
WCA Management Corporation, WCAS Information Partners, L.P.,
CS First Boston Securities Corporation, and International
Business Machines Corporation (Exhibit 10.33 to the
Company's Registration Statement on Form S-1, No. 33-92050)
10.35 Form of Indemnification Agreement (Exhibit 10.35 to the
Company's Registration Statement on Form S-1, No. 33-92050).
10.39 Credit Agreement and related Promissory Note between Seer
Technologies, Inc. and NationsBank, N.A. and related
Guaranty between the Company and WCAS, all dated July 15,
1996 (Exhibit 10.39 to the Quarterly Report on Form 10-Q for
the period ended June 30, 1996, No. 0-26194, as amended by
the First Amendment thereto dated March 27, 1997 (Exhibit
10.48) and the Second Amendment thereto dated April 27, 1998
(Exhibit 10.54)
10.41 Preferred Stock Purchase Agreement dated August 8, 1996,
among the Company, WCAS and certain WCAS affiliates named
therein (Exhibit 10.41 to the Quarterly Report on Form 10-Q
for the period ended June 30, 1996, No. 0-26194)
10.42 Stock Agreement dated August 8, 1996, between the Company
and WCAS (Exhibit 10.42 to the Quarterly Report on Form 10-Q
for the period ended June 30, 1996, No. 0-26194)
10.45* Employment Agreement, dated September 23, 1996, between the
Company and Steven Dmiszewicki (Exhibit 10.45 to Annual
Report on Form 10-K for the year ended September 30, 1996,
No. 0-26194)
10.46 Credit Agreement between Seer Technologies, Inc. and
Greyrock Business Credit, dated March 26, 1997 (Exhibit
10.46 to the Quarterly Report on Form 10-Q for the period
ended March 31, 1997, No. 0-26194), as amended by the
Amendment thereto dated May 5, 1998 (Exhibit 10.53)
10.47 Lease Amendment for the Company's Cary Office, dated March
31, 1997, between Seer Technologies, Inc. and Regency Park
Corporation (Cary, NC) (Exhibit 10.47 to the Quarterly
Report on Form 10-Q for the period ended March 31, 1997, No.
0-26194), as amended by Addendum #1 thereto added July 6,
1998 (Exhibit 10.58)
10.48 First Amendment to Credit Agreement dated March 27, 1997
between Seer Technologies, Inc. and NationsBank,
N.A.(Exhibit 10.48 to the Quarterly Report on Form 10-Q for
the period ended March 31, 1997, No. 0-26194; Original
agreement is exhibit 10.39 to the Quarterly Report on Form
10-Q for the period ended June 30, 1996, No. 0-26194)
10.52* Seer Technologies, Inc. Employee Stock Purchase Plan (U.S.)
(Appendix A to the Company's Proxy Statement filed under
cover of Schedule 14A, No. 0-26194)
10.53 Amendment to Credit Agreement between Seer Technologies, Inc
and Greyrock Business Credit, dated May 5, 1998 (Exhibit
10.53 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998, No. 0-26194; Original Agreement
is Exhibit 10.46 to the Quarterly Report on Form 10-Q for
the period ended March 31, 1997, No. 0-26194)
-25-
<PAGE>
10.54 Second Amendment to the Credit Agreement between Seer
Technologies, Inc. and NationsBank, N.A., dated April 27,
1998 (Exhibit 10.54 to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998, No. 0-26194;
Original Agreement is Exhibit 10.39 to the Quarterly Report
on Form 10-Q for the period ended June 30, 1996, No. 0-
26194)
10.55 Agreement between Seer Technologies, Inc. and WCAS, dated
April 27, 1998 (Exhibit 10.55 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1998, No.
0-26194)
10.56 Consent of Series A Convertible Preferred Stock Holders,
dated April 27, 1998 (Exhibit 10.56 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31,
1998, No. 0-26194)
10.57 Preferred Stock Purchase Agreement among Seer Technologies,
Inc., WCAS, and certain WCAS affiliates named therein, dated
April 27, 1998 (Exhibit 10.57 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1998, No.
0-26194)
10.58 Addendum #1 to the Lease Agreement between Seer
Technologies, Inc. and Regency Park Corporation (Cary, NC),
dated July 6, 1998 (Exhibit 10.58 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1998, No.
0-26194; Original agreement is Exhibit 10.47 to the
Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1997, No. 0-26194)
10.59 Maintenance Agreement between Seer Technologies, Inc. and
IBM Ireland Information Services Limited, dated September 8,
1998 (filed herewith)
10.60 Amendment dated December 31, 1998 between Greyrock Capital,
a division of NationsCredit Corporation (formerly Greyrock
Business Credit) and the Company to the Loan and Security
Agreement between Greyrock Business Credit and the Company
dated March 26, 1997, as amended (filed herewith)
21.1 Subsidiaries (filed herewith)
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
* Management contract or compensatory agreement.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the period covered by this
Report.
-26-
<PAGE>
SIGNATURES
----------
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.
SEER TECHNOLOGIES, INC.
By: /s/ Steven Dmiszewicki
----------------------
Steven Dmiszewicki
Co-President and Chief Financial Officer
Date: January 6, 1999
------------------------
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.
Date: January 6, 1999 /s/ Robert A. Minicucci
---------------- -----------------------------------------
Robert A. Minicucci
Chairman of the Board
Date: January 6, 1999 /s/ Steven Dmiszewicki
---------------- -----------------------------------------
Steven Dmiszewicki
Co-President and Chief Financial Officer
Date: January 6, 1999 /s/ Bruce K. Anderson
---------------- -----------------------------------------
Bruce K. Anderson
Director
Date: January 6, 1999 /s/ Frank T. Cary
---------------- -----------------------------------------
Frank T. Cary
Director
Date: January 6, 1999 /s/ Anthony J. deNicola
---------------- -----------------------------------------
Anthony J. deNicola
Director
Date: January 6, 1999 /s/ George L. McTavish
---------------- -----------------------------------------
George L. McTavish
Director
Date: January 6, 1999 /s/ Thomas A. Wilson
---------------- -----------------------------------------
Thomas A. Wilson
Director
-27-
<PAGE>
SEER TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants................................................. F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets....................................................... F-3
Consolidated Statements of Operations............................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficiency)... F-5
Consolidated Statements of Cash Flows............................................. F-6
Notes to Consolidated Financial Statements........................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
_________________
To the Stockholders of Seer
Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material respects, the financial position of Seer
Technologies, Inc. and its subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide reasonable
basis for the opinion expressed above.
As discussed in Note 18, Level 8 Systems, Inc. has acquired a controlling
interest in the Company.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
December 31, 1998
F-2
<PAGE>
SEER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
--------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,040 $ 4,268
Trade accounts receivable, less allowance for doubtful accounts 17,285 31,383
Prepaid expenses and other current assets 1,476 1,947
Deferred income taxes - 1,152
--------- -------
Total current assets 19,801 38,750
Trade accounts receivable, net - 2,041
Property and equipment, net 1,867 4,528
Capitalized software costs, net 1,140 3,206
Deferred income taxes, net of valuation allowance - 17,599
Other assets 387 411
--------- -------
Total assets $ 23,195 $66,535
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand $ 38,148 $ 22,052
Accounts payable 2,897 4,279
Accrued expenses:
Compensation 744 1,964
Commissions 1,156 1,536
Restructuring 4,064 -
Other 3,459 5,241
Deferred revenue 7,355 7,813
Income taxes payable 1,644 1,826
--------- --------
59,467 44,711
Deferred revenue 253 981
Commitments and contingencies (Notes 15 and 16)
Stockholders' equity (deficiency):
Convertible preferred stock, $0.01 par value, 10,000,000 shares
authorized in 1998 and 1997, respectively:
Series A - 2,094,143 shares issued and outstanding at September 30,
1998 and 1997, respectively; $5.969 per share liquidation preference
(aggregate liquidation value of $12,500,000) 21 21
Series B - 1,732,115 shares issued and outstanding at September 30,
1998; $2.874 per share liquidation preference (aggregate liquidation
value of $5,000,000) 18 -
Common stock $0.01 par value, 30,000,000 shares authorized in 1998
and 1997, respectively; 11,980,216 and 11,865,167 shares
issued and outstanding at September 30, 1998 and 1997, respectively. 120 119
Additional paid-in-capital - preferred 17,232 12,281
Additional paid-in-capital - common 58,791 58,486
Cumulative translation adjustments (847) (644)
Accumulated deficit (111,860) (49,420)
--------- --------
Total stockholder's equity (deficiency) (36,525) 20,843
--------- --------
Total liabilities and stockholders' equity $ 23,195 $ 66,535
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended
September 30,
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Operating revenue:
Software products $ 6,986 $ 34,244 $ 28,795
Maintenance 13,557 14,598 13,182
Services 43,421 54,311 49,680
-------- ------- --------
Total operating revenue 63,964 103,153 91,657
Cost of revenue:
Software products 1,786 1,545 1,562
Maintenance 6,480 8,436 9,157
Services 39,512 41,860 42,401
-------- ------- --------
Total cost of revenue 47,778 51,841 53,120
Gross profit 16,186 51,312 38,537
Operating expenses:
Sales and marketing 19,312 30,693 43,982
Research and product development 12,894 12,485 16,789
General and administrative 9,999 14,705 19,878
Restructuring charges 13,200 500 3,000
-------- ------- --------
Total operating expenses 55,405 58,383 83,649
-------- ------- --------
Loss from operations (39,219) (7,071) (45,112)
Other income (expense):
Interest income 477 514 648
Interest expense (3,488) (2,181) (802)
-------- ------- --------
Other income (expense), net (3,011) (1,667) (154)
-------- ------- --------
Loss before provision for income taxes (42,230) (8,738) (45,266)
Income tax provision (benefit) 20,210 1,228 (13,684)
-------- ------- --------
Net loss $(62,440) $(9,966) $(31,582)
======== ======= ========
Loss per share - basic and diluted $ (5.23) $ (0.85) $ (2.76)
======== ======= ========
Weighted average common shares outstanding - basic and diluted 11,941 11,707 11,445
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SEER TECHNOLOGIES , INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Stock Preferred Stock Common Stock Paid-in Capital
Shares Amount Shares Amount Shares Amount Preferred
---------- -------- ---------- -------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 - $ - - $ - 11,351,948 $ 114 $ -
Issuance of convertible preferred shares 2,094,143 21 12,281
Issuance of common shares 260,159 2
Cumulative translation adjustment
Net loss
--------- -------- ---------- --------- ----------- -------- --------------
Balance at September 30, 1996 2,094,143 21 - - 11,612,107 116 12,281
Issuance of stock 263,060 3
Repurchase of common shares (10,000)
Cumulative translation adjustment
Net loss
--------- -------- ---------- --------- ----------- -------- --------------
Balance at September 30, 1997 2,094,143 21 - - 11,865,167 119 12,281
Issuance of convertible preferred shares 1,762,115 18 115,049 4,951
Issuance of common shares 1
Cumulative translation adjustment
Net loss
--------- -------- ---------- --------- ----------- -------- --------------
Balance at September 30, 1998 2,094,143 $ 21 1,762,115 $ 18 11,980,216 $ 120 $ 17,232
========= ======== ========== ========= =========== ======== ==============
<CAPTION>
Total
Stockholders'
Additional Cumulative Equity/
Paid-in Capital Translation Accumulated (Capital
Common Adjustment Deficit Deficiency)
--------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 $ 56,541 $ (395) $ (7,822) $ 48,438
Issuance of convertible preferred shares 12,302
Issuance of common shares 1,003 1,005
Cumulative translation adjustment (110) (110)
Net loss (31,582) (31,582)
------- ------- --------- --------
Balance at September 30, 1996 57,544 (505) (39,404) 30,053
Issuance of stock 992 995
Repurchase of common shares (50) (50) (100)
Cumulative translation adjustment (139) (139)
Net loss (9,966) (9,966)
------- ------- --------- --------
Balance at September 30, 1997 58,486 (644) (49,420) 20,843
Issuance of convertible preferred shares 4,969
Issuance of common shares 305 306
Cumulative translation adjustment (203) (203)
Net loss (62,440) (62,440)
------- ------- --------- --------
Balance at September 30, 1998 $58,791 $ (847) $(111,860) $(36,525)
======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
September 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(62,440) $ (9,966) $(31,582)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,716 4,328 4,408
Deferred income taxes 18,751 (1,159) (16,577)
Provision for uncollectible accounts 1,027 4,338 10,158
Write -down of assets 4,792 - -
Non-cash cost of credit guaranty 98 336 67
Non-cash compensation cost - 86 -
Changes in assets and liabilities:
Trade accounts receivable 11,929 8,863 (9,043)
Prepaid expenses and other assets 340 1,882 28
Accounts payable, accrued expenses,
and income taxes payable (882) (7,899) 2,444
Deferred revenue (1,186) (2,721) 3,922
------- -------- --------
Net cash used in operating activities (23,855) (1,912) (36,175)
Cash flows from investing activities:
Purchases of property and equipment (358) (1,031) (2,768)
Capitalization of software development costs (128) (1,373) (1,600)
-------- -------- ------------
Net cash used in investing activities (486) (2,404) (4,368)
Cash flows from financing activities:
Issuance of common shares 208 797 602
Repurchase of common shares - (100) -
Issuance of preferred shares 5,000 - 12,500
Preferred stock issuance costs (31) - (198)
Debt issuance costs - (280) -
Net borrowings under lines of credit 15,956 7,813 14,379
-------- -------- ------------
Net cash provided by financing activities 21,133 8,230 27,283
Effect of exchange rate changes on cash (20) (23) (13)
-------- -------- ------------
Net increase (decrease) in cash and cash equivalents (3,228) 3,891 (13,273)
Cash and cash equivalents:
Beginning of period 4,268 377 13,650
-------- -------- ------------
End of period $ 1,040 $ 4,268 $ 377
======== ======== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income Taxes $ 1,326 $ 2,400 $ 1,596
======== ======== ============
Interest $ 3,006 $ 2,040 $ 846
======== ======== ============
</TABLE>
During fiscal years 1998 and 1996, the Company issued 30,000 and 75,000 shares
of its common stock, respectively, to Welsh, Carson, Anderson, & Stowe IV
("WCAS") in exchange for WCAS's guaranty of one of the Company's lines of
credit. See Note 5. The Company recorded expense of $98 and $403 related to
these transactions based on the fair market value of the stock on the date of
issuance.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
Seer Technologies, Inc. ("Seer" or the "Company") is one of the software
industry's earliest pioneers and a long-time leader in component-based software
application development. Seer helps Global 5000 companies leverage information
technology as a competitive weapon by enabling the deployment and on going
renewal of large-scale, business-critical systems. Seer provides solutions for
the business problems of delivering application functionality, extending the
return on information technology investment and managing enterprise application
life cycles in complex development environments through a combination of
consulting services, best practices methodologies, application assets and
enabling technologies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions are eliminated in consolidation.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated to U.S.
dollars at the current exchange rate as of the balance sheet date. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity. Statements of operations items are translated at average
rates of exchange during each reporting period. Transaction gains and losses
are included in current operations. Realized and unrealized net losses (gains)
for transactions denominated in foreign currencies were $10, $136, and $556,
respectively, for the fiscal years ended September 30, 1998, 1997, and 1996.
Revenue Recognition
Revenue from the non-exclusive licensing of existing software products is
recognized when the software is accepted and delivered or installed by the
customer in accordance with the terms of the contract and only if no significant
vendor obligations remain and collection of the resulting receivables is deemed
probable. For license agreements where maintenance is bundled with the software
license for a time period greater than three months, an appropriate portion of
the license fees is deferred and amortized over the initial maintenance period.
Revenue from recurring maintenance contracts is recognized ratably over the
maintenance contract period, which is typically twelve months. Maintenance
revenue that is not yet earned is included in deferred revenue.
Revenue from consulting and training services is recognized as services are
performed.
Proceeds from product development contracts are recorded as deferred revenue
when collected and the revenue is recognized as the development work is
performed.
The Company typically does not grant to its customers a contractual right to
return software products. Accordingly, no provision for estimated returns is
recorded at the time of sale. When approved by management, however, the Company
will accept returns of certain software products and will provide an allowance
for those specific transactions.
Cost of Revenue
The primary components of the Company's cost of revenue for its software
products are packaging and distribution costs, software amortization and
royalties. The primary components of the Company's cost of revenue for
maintenance are payments under various distribution and marketing agreements
with IBM and customer support. A portion of the costs related to customer
support are deferred and recognized as the service is provided. The primary
component of the Company's cost of revenue for services is compensation expense.
F-7
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less from the date of purchase.
For these instruments, the carrying amount is a reasonable estimate of fair
value. The Company places substantially all cash and cash equivalents with
various financial institutions in both the United States and several foreign
countries. At times, such cash and cash equivalents may be in excess of FDIC
insurance limits.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Leasehold improvements The lesser of the lease term
or estimated useful life
Furniture and fixtures 3 to 5 years
Office equipment 3 years
Computer equipment 4 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as incurred.
The cost and related accumulated depreciation of property and equipment are
removed from the accounts upon retirement or other disposition and any resulting
gain or loss is reflected in operations.
Software Costs
The Company capitalizes certain software costs after technological feasibility
of the product has been established. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenue, estimated economic life and
changes in software and hardware technologies.
All capitalized software costs are amortized over related sales on a product-by-
product basis at the greater of the amount computed using (a) the ratio of
current gross revenues for a product to the total of current and anticipated
future gross revenues or (b) the straight-line method over the remaining
estimated economic life of the product. Generally, an original estimated
economic life of three years is assigned to capitalized software costs, once the
product is available for general release to customers. Costs incurred prior to
the establishment of technological feasibility is charged to research and
development expense. Each quarter, the Company evaluates the value of its
capitalized software costs based on the estimated discounted future cash flows.
Research and Product Development
Research and product development costs are expensed as incurred.
Forward Exchange Contracts
The Company conducts its business in various foreign currencies. As a result,
it is subject to the transaction exposures that arise from foreign exchange rate
movements between the dates that foreign currency transactions are recorded and
the date they are consummated. The Company enters into foreign exchange forward
contracts to hedge the effect of fluctuating foreign currencies on its results
of operations (see Note 11). Gains and losses associated with exchange rate
fluctuations on forward contracts are recorded currently as income or loss as
they offset corresponding gains and losses on the foreign currency denominated
assets or liabilities being hedged. The gains and losses are computed by
multiplying the foreign currency amounts of the forward contracts by the
difference between the quoted market spot rate at the balance sheet date and the
spot rate at the date of inception of the forward contracts. The costs of the
forward contracts are recorded as expense over the lives of the contracts. Cash
flows related to forward exchange contracts are classified in the Consolidated
Statement of Cash Flows in the same categories as the hedged assets or
liabilities.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" to account for income taxes. This statement
requires an asset and liability approach that recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, all expected future events other than enactments of
changes in the tax law or rates are generally considered.
F-8
<PAGE>
Earnings/(Loss) Per Share
During fiscal year 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share", which specifies the computation, presentation, and
disclosure requirements for earnings per share. All prior period earnings per
share data has been restated, as applicable, to conform with the provisions of
the statement.
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding and
any potentially dilutive securities. Basic earnings (loss) per share equals
diluted earnings (loss) per share for all periods presented since the inclusion
of potentially dilutive securities would be anti-dilutive to the diluted
earnings (loss) per share calculations. Potentially dilutive securities
outstanding during fiscal years 1996, 1997 and 1998 include stock options,
nonvested stock, and Series A convertible preferred stock. Series B convertible
preferred stock were also potentially dilutive securities outstanding since the
third quarter of fiscal year 1998.
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS 123 and has applied
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized in the Consolidated Statement of Operations for its
stock option plans. See Note 7.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 1998 presentation. Such reclassifications had no
effect on previously reported net income or stockholders' equity.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computer equipment $ 3,532 $ 12,961
Leasehold improvements 1,675 2,122
Office equipment 1,194 1,286
Furniture and fixtures 1,884 2,354
------- --------
8,285 18,723
Less accumulated depreciation and amortization (6,418) (14,195)
------- --------
$ 1,867 $ 4,528
======= ========
</TABLE>
Depreciation and amortization expense was $2,027, $2,962, and $3,137 for the
fiscal years ended September 30, 1998, 1997, and 1996, respectively.
During the second quarter of fiscal year 1998, property and equipment was
written down for obsolescence and retirement of assets based on the Company's
revised business plan. The write down totaled $901 and is included in
restructuring charges in the Consolidated Statement of Operations. See Note 12.
NOTE 3. CAPITALIZED SOFTWARE COSTS
For the fiscal years ended September 30, 1998, 1997 and 1996, the Company
capitalized $128, $1,372, and $1,600, respectively, of internal costs related to
developing software for sale. During the fiscal years ended September 30, 1998,
1997 and 1996, the Company recognized $1,544, $1,223, and $968, respectively, of
expense related to the amortization of these costs, which is recorded in cost of
revenue, software products, in the Consolidated Statements of Operations.
During the second quarter of fiscal year 1998, capitalized software cost was
written down to its fair value based on the Company's revised business plan.
The write down totaled $650 and is included in the restructuring charges in the
Consolidated Statement of Operations. Accumulated amortization of capitalized
software costs is $4,096 and $2,814 at September 30, 1998 and 1997,
respectively.
F-9
<PAGE>
NOTE 4. ACCOUNTS RECEIVABLE
Trade accounts receivable consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current trade accounts receivable $19,585 $33,355
Less: Allowance for doubtful accounts (2,124) (1,360)
Unamortized discount (176) (612)
------- -------
$17,285 $31,383
======= =======
Noncurrent trade accounts receivable $ - $ 2,414
Less: Unamortized discount - (373)
------- -------
$ - $ 2,041
======= =======
</TABLE>
Approximately $4,118 and $8,942 of current trade receivables were unbilled at
September 30, 1998 and 1997, respectively. All noncurrent receivables were
unbilled at September 30, 1997. Discounts on receivables with payment terms in
excess of one year were calculated based on an imputed interest rate of 12% for
the fiscal year ended September 30, 1997. There were no receivables with
payment terms in excess of one year recorded during the fiscal year ended
September 30, 1998.
The provision for uncollectible amounts was $1,027, $4,338 and $10,158 for the
years ended September 30, 1998, 1997, and 1996, respectively. During the second
and third quarters of fiscal year 1998, accounts receivable was written down due
to a deterioration in specific client relationships as a result of the Company's
revised business plan. The write down totaled $3,000 and is included in
restructuring charges in the Consolidated Statement of Operations. Write-offs
of accounts receivable were $3,263, $12,329, and $1,457 for the years ended
September 30, 1998, 1997, and 1996, respectively.
NOTE 5. CREDIT FACILITIES
At September 30, 1998, the Company maintained two credit facilities (the
"Revolving Facility" and the "Guaranteed Facility") which provided for combined
borrowings of up to $42 million for working capital purposes based on the
Company's eligible accounts receivable, as defined in the loan agreements. The
Revolving Facility allows for borrowings of up to $25 million, bears interest at
the London Interbank Offered Rate ("LIBOR") plus 5.0% and is collateralized by
the Company's accounts receivable, equipment and intangibles. The Guaranteed
Facility allows for borrowings of up to $17 million and bears interest at the
higher of LIBOR plus 1.25% or .5% plus the prime rate quoted by the Federal
Reserve. Until December 31, 1998, the Guaranteed Facility was guaranteed by the
Company's principal stockholder, Welsh, Carson, Anderson, & Stowe VI, L.P.
("WCAS"), pursuant to an agreement with the Company. Borrowings under the
Revolving Facility must always exceed borrowings under the Guaranteed Facility.
There are no other financial covenants for either credit facility. As of
September 30, 1998, the Company had outstanding borrowings of $21,223 under the
Revolving Facility and $16,925 under the Guaranteed Facility. The interest
rates for the Revolving Facility and the Guaranteed Facility were 10.6% and
8.5%, respectively, at September 30, 1998.
During fiscal year 1997, the Company incurred approximately $280 in connection
with the renegotiation of its revolving credit facility. The loan costs were
amortized over the initial term of the facility and were fully amortized at
September 30, 1998. The unamortized loan costs of $140 at September 30, 1997
are included in the Consolidated Balance Sheet as a deduction from notes
payable.
In exchange for WCAS' guarantee of its credit facility, the Company issued
30,000 and 75,000 shares of its common stock to WCAS in fiscal years 1998 and
1996, respectively. The Company recorded expense of $98 and $403 related to
these transactions based on the fair market value of the stock on the date of
issuance.
F-10
<PAGE>
Additionally, at September 30, 1998, the Company had a line of credit of $500
available to enter foreign exchange contracts which was also guaranteed by WCAS.
At September 30, 1998 the aggregate notional amount of foreign exchange
contracts outstanding was $6,308.
Subsequent to September 30, 1998, the Company and its lender completed several
amendments to the Revolving Facility and the Guaranteed Facility and foreign
exchange line of credit were terminated. See Note 18.
NOTE 6. CONVERTIBLE PREFERRED STOCK
During April, 1998, the Company completed its agreement to sell 1,762,115 shares
of its Series B Convertible Preferred Stock (the "Preferred Stock") to WCAS and
certain WCAS affiliates, resulting in gross proceeds to the Company of $5
million.
During August 1996, the Company sold 2,094,143 shares of its newly authorized
Series A Convertible Preferred Stock (the "Preferred Stock") to WCAS and certain
WCAS affiliates, resulting in gross proceeds to the Company of $12,500.
Approximately $198 of expenses was incurred in connection with the stock
issuance and has been recorded in the Consolidated Statement of Stockholders'
Equity (Capital Deficiency) as an offset to the Preferred Stock proceeds.
Each share of Preferred Stock may be converted at any time at the option of the
holder into shares of Common Stock at a conversion rate of one common share for
each share of Preferred Stock, subject to adjustment upon the occurrence of
certain events. The Preferred Stock is not entitled to receive dividends in any
fixed amount but will receive dividends on an as converted basis in the event
that a dividend is paid on the Common Stock. The Preferred Stock will rank
senior in right of payment to the Common Stock. In the event of any
liquidation, dissolution or winding up of the Company, holders of Series A and
Series B Preferred Stock will be entitled to receive a liquidation preference of
$5.969 and $2.8375 per share, respectively, before payment is made or assets are
distributed to holders of the Common Stock. In addition, the holders of
Preferred Stock are entitled to vote together with the holders of Common Stock
on all matters to be voted on by the stockholders of the Company.
The Company is subject to certain restrictions while shares of Preferred Stock
remain outstanding, including restrictions on the Company's ability to declare
dividends, purchase or redeem any outstanding shares of its Common Stock, create
or authorize the creation of additional classes of capital stock of the Company,
increase the authorized amount of Preferred Stock, create or authorize the
creation of any securities convertible into shares of Preferred Stock or any
other class of capital stock of the Company.
NOTE 7. STOCK-BASED COMPENSATION PLANS
The Company has a Stock Option and Restricted Stock Purchase Plan pursuant to
which certain employees and officers of the Company have been or will be granted
nonvested stock or stock options to acquire up to a maximum of 2,900,000 shares
of the Company's common stock. Option exercise prices are no less than 100% of
the fair market value at the date of grant, and vested options may be exercised
for a period of up to ten years from the date of grant. During the fiscal year
ended September 30, 1996, the Company exchanged all options with exercise prices
of $7.50 or more per share for options with an exercise price of $6.38 per
share, which was the fair market value of the Company's common stock on the date
of exchange. During the fiscal year ended September 30, 1998, the Company
exchanged all options held by employees with exercise prices of $4.75 or more
per share for options with an exercise price of $4.59. Effective October 1,
1996, the vesting provisions of the plan were amended so that the nonvested
stock and stock options issued after that date vest over a specified period of
time as determined by the Company's compensation committee when the options are
granted. Vesting provisions for options issued prior to October 1, 1996 were
amended so that any options existing at October 1, 1996 vested over a four year
period.
The Company also has a Stock Option Plan for Non-Employee Directors, pursuant to
which non-employee directors can be granted options to acquire up to 200,000
shares of the Company's common stock, with a maximum of 10,000 options available
per non-employee director. The options vest in one-third increments on each of
the first through third anniversaries of the grant date.
F-11
<PAGE>
Activity for stock options issued under these plans for the fiscal years ending
September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Plan Option Price Exercise
Activity per Share Price
---------- -------------- ----------
<S> <C> <C> <C>
Balance at September 30, 1995 2,147,650 $3.25 - $18.00 $3.38
Granted 735,450 5.50 - 18.00 9.91
Exercised (185,159) 3.25 - 10.00 3.26
Forfeited (581,696) 3.25 - 14.50 3.64
----------
Balance at September 30, 1996 2,116,245 3.25 - 18.00 4.74
Granted 808,625 3.25 - 6.50 4.37
Exercised (243,696) 3.25 - 6.38 3.26
Forfeited (907,805) 3.25 - 6.38 3.64
----------
Balance at September 30, 1997 1,773,369 3.25 - 18.00 5.31
Granted 2,240,600 2.84 - 7.88 3.64
Exercised (63,716) 3.25 - 6.38 3.36
Forfeited (1,550,827) 2.84 - 8.25 4.76
----------
Balance at September 30, 1998 2,399,426 3.25 - 14.50 3.32
==========
</TABLE>
The weighted average grant date fair value of options issued during the years
ended September 30, 1998, 1997 and 1996 was equal to $1.82, $2.72 and $3.87 per
share, respectively. The fair value of options granted during the fiscal years
ended September 30, 1998, 1997 and 1996 was equal to $4,413, $2,159 and $2,813,
respectively. There were no option grants issued below fair market value during
fiscal years 1998, 1997 or 1996.
The fair value of the Company's stock-based awards to employees was estimated as
of the date of the grant using the Black-Scholes option-pricing model, using the
following weighted-average assumptions:
<TABLE>
<S> <C>
Expected life (in years) 3
Expected volatility 77%
Risk free interest rate 5.53%
Expected dividend yield 0%
</TABLE>
For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
fiscal years September 30, 1998, 1997, and 1996 would have been increased to the
pro forma amounts indicated below. The Company's adjusted information follows
(in thousands, except for per share information):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- -----------
<S> <C> <C> <C>
Net loss, as reported $(62,440) $ (9,966) $(31,582)
Net loss, as adjusted (63,348) (10,591) (31,703)
Pro forma net loss per share, as reported $ (5.23) $ (0.85) $ (2.76)
Pro forma net loss per share, as adjusted $ (5.31) $ (0.90) $ (2.77)
</TABLE>
F-12
<PAGE>
At September 30, 1998, 1997 and 1996 options to purchase approximately 382,067,
284,015 and 184,348 shares of common stock were exercisable, respectively,
pursuant to the plans at prices ranging from $3.25 to $18.00. The following
table summarizes information about stock options outstanding at September 30,
1998:
<TABLE>
<CAPTION>
Remaining
Contractual Life
Number for Options Number
Exercise Price Outstanding Outstanding Exercisable
-------------- ----------- ----------------- -----------
<S> <C> <C> <C>
$2.50 50,000 9.50 50,000
$2.84 1,528,150 9.61 -
$3.25 234,086 6.12 202,622
$3.75 89,375 8.14 23,750
$4.59 397,582 9.61 72,130
$4.75 20,002 8.33 13,334
$5.00 40,000 7.91 10,000
$6.38 233 8.79 233
$7.00 30,000 8.95 -
$10.00 3,333 6.42 3,333
$14.50 6,665 7.00 6,665
--------- -------
2,399,426 382,067
========= =======
</TABLE>
During the fiscal year ended September 30, 1997, the Company issued 38,500
shares of nonvested stock to employees. The Company recognized compensation
expense with respect to nonvested stock awards equal to the difference between
the market price and the par value of the stock on the grant date. Compensation
expense recognized during fiscal year 1997 for nonvested stock was $172. Of the
total shares issued, 21,750 shares vested during fiscal year 1988, and the
remaining shares were forfeited.
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for all U.S. employees. Effective January 1,
1997, the Company amended the plan to provide a 25% matching contribution for an
employee's contribution up to 4% of an employee's salary. Participants must be
employed at December 31 of each calendar year to be eligible for employer
matching contributions. During fiscal year 1998, the Company recorded expense
of $257 related to the matching contribution. Prior to this amendment, matching
contributions were made at the discretion of the Board of Directors. For the
year ended September 30, 1996, the Board of Directors did not authorize any
contributions to the 401(k) plan.
The Company also has employee benefit plans for each of its foreign
subsidiaries, as mandated by each country's laws and regulations. Expense
recognized under these plans for the years-ended September 30, 1998, 1997, and
1996 was $669, $684, and $629, respectively.
The Company has an Employee Stock Purchase Plan for its employees. The plan
allows employees to purchase shares of the Company's common stock for 85% of
fair market value. The Company is responsible for the differential in market
value, as well as, all administrative costs of the plan. For fiscal years 1998,
1997, 1996, the Company incurred expenses of $26, $48, and $31, respectively,
for the plan.
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
No one customer accounted for more than 10% of operating revenue for the fiscal
years ended September 30, 1998, 1997, and 1996.
The Company has entered into several marketing and distribution agreements with
IBM throughout the world. Transactions resulting from these agreements are as
follows for the fiscal years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Expenses incurred $ 2,128 $ 1,720 $ 4,907
Revenues generated $24,456 $55,029 $59,493
Percentage of revenues 38% 53% 65%
Percentage of outstanding
receivables 37% 46% 70%
</TABLE>
F-13
<PAGE>
As of September 30, 1998 and 1997, the Company had outstanding trade accounts
receivable primarily from 86 and 97 customers, respectively. It is the policy
of the Company to closely monitor all accounts receivable and to record a
provision for uncollectible accounts when the uncollectible amounts are
estimable. Generally, no collateral is required.
NOTE 10. SEGMENT INFORMATION
In 1998, the Company adopted SFAS 131, "Enterprise and Related Information."
SFAS 131 supercedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's relating segment. The prior year's segment
information has been restated to present the Company's four reportable segments
- - (1) Software, (2) Maintenance, (3) Services, and (4) Research and Development.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies." Segment data includes a charge
allocating all corporate-headquarters costs to each of its operating segments
based on each segment's proportionate share of expenses. The Company evaluates
the performance of its segments and allocates resources to them based on
earnings (loss) before interest, taxes, and restructuring charges (EBITR).
The table below presents information about reported segments for the years
ending September 30:
<TABLE>
<CAPTION>
FY 1998
- -----------------------------------------------------------------------------------------
Research and
(in thousands) Software Maintenance Services Development Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 6,986 $13,557 $43,421 $ - $ 63,964
Total EBITR $(16,962) $ 6,267 $(1,031) $(14,293) $(26,019)
- -----------------------------------------------------------------------------------------
<CAPTION>
FY 1997
- -----------------------------------------------------------------------------------------
Research and
(in thousands) Software Maintenance Services Development Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 34,244 $14,598 $54,311 $ - $103,153
Total EBITR $ (3,203) $ 4,860 $ 5,971 $(14,199) $ (6,571)
- -----------------------------------------------------------------------------------------
<CAPTION>
FY 1996
- -----------------------------------------------------------------------------------------
Research and
(in thousands) Software Maintenance Services Development Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 28,795 $13,182 $49,680 $ - $ 91,657
Total EBITR $(24,698) $ 2,426 $ (122) $(19,719) $(42,113)
- -----------------------------------------------------------------------------------------
</TABLE>
A reconciliation of total segment revenue to total consolidated revenues and of
total segment EBITR to total consolidated income before taxes, for the years
ended September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Total EBITR $(26,019) $(6,571) $(42,113)
Restructuring charges (13,200) (500) (3,000)
Interest expense (3,011) (1,667) (154)
-------- ------- --------
Total loss before income taxes $(42,230) $(8,738) $(45,267)
======== ======= ========
</TABLE>
F-14
<PAGE>
The following table presents a summary of revenue by geographic region for the
fiscal years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
United States $17,544 $ 32,864 $28,974
United Kingdom 8,935 15,899 3,951
Denmark 6,226 4,420 5,157
Italy 5,395 12,738 14,770
Switzerland 3,687 2,965 1,850
Norway 3,130 3,561 2,120
Australia 2,858 4,726 3,167
Germany 2,780 6,233 9,588
Other 13,140 19,747 22,080
------- -------- -------
Total revenue $63,965 $103,153 $91,657
======= ======== =======
</TABLE>
Foreign revenue is based on the country in which the customer is domiciled.
The following table represents a summary of long-lived assets by geographic
region as of September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States $2,383 $6,208 $7,431
United Kingdom 487 979 1,438
Other 137 547 647
------ ------ ------
Total assets $3,007 $7,734 $9,516
====== ====== ======
</TABLE>
The Company's foreign operations are reimbursed by the Company for their costs
plus an appropriate mark-up for profit. Intercompany profits and losses are
eliminated in consolidation.
NOTE 11. FOREIGN CURRENCIES AND FORWARD EXCHANGE CONTRACTS
At September 30, 1998, the Company had approximately $628 and $8,754 U.S. dollar
equivalent cash and trade receivable balances, respectively, denominated in
foreign currencies. At September 30, 1997, the Company had approximately $1,378
and $15,618 U.S. dollar equivalent cash and trade receivable balances,
respectively, denominated in foreign currencies.
The more significant trade accounts receivable denominated in foreign currencies
as a percentage of total trade accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Pound Sterling 10.9% 9.2%
Australian Dollar 1.2% 7.2%
Deutsche Mark 3.5% 2.0%
Brazilian Real 3.1% 4.2%
Italian Lira 8.1% 12.4%
Danish Krona 4.9% 3.1%
</TABLE>
F-15
<PAGE>
The Company enters into forward exchange contracts to hedge the exposures that
arise from foreign exchange movements between dates that foreign currency
denominated receivables and payables are recorded and the date they are paid.
The Company does not engage in foreign currency speculation. The forward
contracts are generally 60 to 90 day forward window contracts having maturities
of less than one year. The table below summarizes, by currency, the contractual
amounts of the Company's forward contracts for the years ended September 30:
<TABLE>
<CAPTION>
1998
- ----
Outbound transactions
As of September 30, 1998
--------------------------------
Original Contract Contract Fair Unrealized
Currency Contracts Drawdowns Balance Value Gain/(Loss)
- -------- --------- ---------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Australian Dollars $ 140 $ (140) $ - $ - $ -
Pound Sterling 16,030 (16,030) - - -
Deutsche Mark 1,322 (1,322) - - -
Irish Punt 1,760 (640) 1,120 1,196 76
------- -------- ------ ------ ---
Total $19,252 $(18,132) $1,120 $1,196 $76
======= ======== ====== ====== ===
<CAPTION>
Inbound Transactions
As of September 30, 1998
--------------------------------
Original Contract Contract Fair Unrealized
Currency Contracts Drawdowns Balance Value Gain/(Loss)
- -------- --------- ---------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Australian Dollars $ 1,427 $ (1,427) $ - $ - $ -
Pound Sterling 10,590 (8,742) 1,848 1,887 (39)
Canadian Dollars 520 (520) - - -
Danish Krona 6,230 (5,870) 360 380 (20)
Deutsche Mark 2,723 (2,177) 546 563 (17)
Dutch Guilder 1,976 (1,739) 237 241 (4)
French Franc 567 (479) 88 93 (5)
Italian Lira 9,860 (8,948) 912 943 (31)
Norwegian Krone 4,450 (4,128) 322 335 (13)
South African Rand 1,760 (1,430) 330 348 (18)
Spanish Peseta 899 (602) 297 299 (2)
Swedish Krone 2,139 (1,891) 248 257 (9)
------- -------- ------ ------ -----
Total $43,141 $(37,953) $5,188 $5,346 $(158)
======= ======== ====== ====== =====
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
1997
----
Outbound transactions
As of September 30, 1997
--------------------------------
Original Contract Contract Fair Unrealized
Currency Contracts Drawdowns Balance Value Gain/(Loss)
- -------- --------- ---------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Australian Dollars $ 389 $ (389) $ - $ - $ -
Pound Sterling 13,264 (7,865) 5,399 5,496 97
Deutsche Mark 3,405 (3,405) - - -
------- -------- ------ ------ ---
Total $17,058 $(11,659) $5,399 $5,496 $97
======= ======== ====== ====== ===
<CAPTION>
Inbound Transactions
As of September 30, 1997
--------------------------------
Original Contract Contract Fair Unrealized
Currency Contracts Drawdowns Balance Value Gain/(Loss)
- -------- --------- ---------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Australian Dollars $ 2,629 $ (2,629) $ - $ - $ -
Pound Sterling 24,430 (22,882) 1,548 1,570 (22)
Canadian Dollars 926 (628) 298 299 (1)
Danish Krona 4,371 (3,880) 491 494 (3)
Deutsche Mark 9,156 (8,719) 437 458 (21)
Dutch Guilder 865 (865) - - -
Italian Lira 21,058 (19,526) 1,532 1,589 (57)
Norwegian Krone 4,456 (4,182) 274 291 (17)
Spanish Peseta 1,303 (1,156) 147 154 (7)
Swedish Krone 5,826 (5,645) 181 185 (4)
Other 1,005 (989) 16 17 (1)
------- -------- ------ ------ -----
Total $76,025 $(71,101) $4,924 $5,057 $(133)
======= ======== ====== ====== =====
</TABLE>
Unrealized gains and losses on forward contracts reflect changes in exchange
rates and are recorded directly in income, as they offset corresponding
unrealized gains and losses on the foreign currency denominated assets being
hedged (see Note 1). Forward contract liabilities related to unrealized losses
are recorded as other accrued expenses in the Consolidated Balance Sheet.
The Company is exposed to exchange related losses on forward contracts should a
transaction with a related forward exchange contract not be consummated by the
forward contract expiration date. In such instances, the Company extends or
repurchases the contract at the then prevailing market rates. Net realized
(gains) losses on the extension or repurchase of contracts totaled ($15), $156,
and $88 for the fiscal years ended September 30, 1998 and 1997, and 1996,
respectively.
NOTE 12. RESTRUCTURING CHARGES
During the second quarter of fiscal year 1998, the Company began work on a
revised business plan, necessitated by a decline in demand for the Company's
software products. As a result of this effort, at the end of the second quarter
of fiscal year 1998, the Company announced its plans to streamline its sales and
marketing organizations, as well as reorganize its technical operations into one
cohesive unit, providing improved product support and more focused development
of new products. The general and administrative organization within the Company
was also streamlined to support the newly-restructured operating divisions. The
restructuring included a staff reduction of approximately 5% (31 employees), the
abandonment of leased facilities in the US, Brazil, and Singapore, and the
write-down to fair value of certain assets or accrual of costs related to
products, distribution channels, and vendor-provided product support contracts
which were being discontinued. The Company recorded a restructuring charge of
$9,000 during the second quarter of fiscal year 1998, which consisted of
approximately $1,400 in personnel-related charges, approximately $1,100 of costs
associated with carrying vacated space until the lease expiration date,
approximately $2,700 in write-down of assets, approximately $3,000 for
contractually obligated product support services, and approximately $700 in
professional fees related to the restructuring.
The Company completed its restructuring in the third quarter of fiscal year 1998
and recorded an additional charge of $4,200. An additional staff reduction of
approximately 8% (37 employees) was made. This restructuring charge consisted
of approximately $1,100 in personnel related-charges, approximately $2,000 in
the write-down of assets for discontinued distribution channels, and
approximately $1,100 in professional fees related to the restructuring.
F-17
<PAGE>
The Company's efforts to settle these restructuring liabilities resulted in a
change in the Company's estimates in regard to the specific categories of
expense, however, the amount of the overall charge has not changed. The revised
estimated reflects a total restructuring charge of $2,500 for personnel related
charges, approximately $500 of premises related costs, approximately $4,700 in
write-down of assets, and approximately $1,100 for contractually obligated
product support services, and approximately $4,400 in professional fees and
legal settlement. See Note 16. To date, the Company has paid approximately
$4,400 in cash related to the restructuring. The Company believes the accrued
restructuring cost of $4,100 at September 30, 1998 represents its remaining cash
obligations.
During the third quarter of the fiscal year ended September 30, 1996, the
Company developed and implemented a reorganizational plan which included, among
other things, a 9% staff reduction (75 employees) and the abandonment of certain
leased facilities. The Company recorded a restructuring charge of $3,000, which
consisted of approximately $1,400 in personnel-related charges and approximately
$1,600 of costs associated with carrying vacated space until the lease
expiration date. In the first quarter of 1997, the Company recorded an
additional restructuring charge of $500 for severance and lease costs related to
its reorganizational plan. To date, the Company has paid approximately $3,500
in cash related to the restructuring. The Company believes there are no
remaining obligations related to this restructuring at September 30, 1998.
NOTE 13. INCOME TAXES
The provision for income taxes consists of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Federal - current $ - $ - $ -
State and local - current - - -
-------------- --------------- ---------------
- - -
Foreign taxes and withholdings 1,459 2,176 2,501
------- ------ --------
Current taxes 1,459 2,176 2,501
------- ------ --------
Federal - deferred - (757) (12,832)
State and local - deferred - (191) (3,353)
------- ------ --------
Deferred taxes - (948) (16,185)
------- ------ --------
Change in beginning of year
valuation allowance 18,751 - -
------- ------ --------
Total income tax expense (benefit) $20,210 $1,228 $(13,684)
======= ====== ========
</TABLE>
Seer Technologies, Inc. and its U.S. subsidiary file a consolidated Federal
income tax return. Foreign subsidiaries file income tax returns in their
respective countries. Foreign tax credit carryforwards of approximately $2,268
exist at September 30, 1998. These carryforwards expire from 1999 to 2001 if
not utilized. Federal alternative minimum tax credit carryforwards of $184,
which have no expiration period, also exist at September 30, 1998. The
Company's federal net operating loss carryovers of approximately $89,471 expire
in 2011, 2012 and 2018 if not utilized.
Income before provision for income taxes as shown in the Consolidated Statements
of Operations consists of the following for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Domestic $(43,747) $(11,214) $(47,868)
Foreign 1,517 2,476 2,602
-------- -------- --------
$(42,230) $ (8,738) $(45,266)
======== ======== ========
</TABLE>
F-18
<PAGE>
A reconciliation of expected income tax at the statutory Federal rate with the
actual income tax expense (benefit) is as follows for the fiscal years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected income tax benefit at
statutory rate (34%) $(14,351) $(2,971) $(15,391)
Increase (decrease) in income tax
expense resulting from:
Non deductible expenses 87 213 197
State income taxes (2,957) (1,693) (2,915)
Effect of foreign operations including
withholding taxes 1,236 2,177 2,505
Other - 92 (92)
Effect of change in valuation allowance 36,195 3,410 2,012
-------- ------- --------
$ 20,210 $ 1,228 $(13,684)
======== ======= ========
</TABLE>
The components of net deferred tax assets are as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Deferred revenue $ 122 $ 303
Accrued liabilities 1,307 504
Bad debt expense 786 503
Other (36) (158)
-------- -------
Net current deferred tax asset 2,179 1,152
Noncurrent assets:
Depreciation 536 465
Deferred revenue - 49
Foreign tax credits 2,268 3,212
Minimum tax credits 184 184
Research and development tax credit 3,000 2,282
Net operating loss carryforward 33,104 21,446
-------- -------
Net noncurrent deferred tax asset 39,092 27,638
Valuation allowance (40,850) (8,853)
Noncurrent liabilities:
Capitalized software costs (421) (1,186)
-------- -------
Net deferred tax asset $ - $18,751
======== =======
</TABLE>
Due to a decline in the Company's software revenues, the Company determined
during the fourth quarter of fiscal year 1998 that certain previously available
tax planning strategies were no longer deemed to be prudent or feasible. This
caused the Company to record a full valuation allowance equaling the entire
deferred tax asset balances at September 30, 1998 and accordingly, resulted in
an increase in income tax expense for the fiscal year ended September 30, 1998.
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair market
value. The statement also requires that changes in the derivative's fair market
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning June 15,
1999, with earlier adoption permitted. The Company is currently assessing the
impact of this new statement on its consolidated financial position, liquidity,
and results of operations.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income.
SFAS No. 130 is required to be adopted for fiscal years beginning after December
15, 1997. Upon the effective date of the new statement, the Company will make
the necessary changes to comply with the provisions of the statement and restate
all prior periods presented. The Company does not expect the adoption of the
statement to have a material impact on the Company's financial condition or
results of operations.
F-19
<PAGE>
The American Institute of Certified Public Accountants has issued Statement of
Position 97-2, "Software Revenue Recognition". SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997 and
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company does not expect the
application of the SOP to have a material impact on the Company's financial
condition or results of operations.
NOTE 15. LEASE COMMITMENTS
The Company leases certain facilities and equipment under various operating
leases. Future minimum lease commitments on operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of September
30, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 2,870
2000 2,092
2001 1,392
2002 1,242
2003 1,242
Thereafter 1,541
-------
$10,379
=======
</TABLE>
Rent expense for the fiscal years ended September 30, 1998, 1997 and 1996 was
$3,894, $3,655, and $3,370, respectively.
NOTE 16. CONTINGENCIES
Various lawsuits and claims have been brought against the Company in the normal
course of business. Management is of the opinion that the liability, if any,
resulting from these claims would not have a material effect on the financial
position or results of operations of the Company.
In December 1997, the Company filed a lawsuit against Saadi Abbas and Cambridge
Business Solutions (UK) Limited ("CBS") alleging that Mr. Abbas and CBS had
injured the Company by interfering with the Company's ability to market and
sublicense the LightSpeed Financial Model. The Company obtained a preliminary
injunction against Mr. Abbas and CBS halting their actions. Mr. Abbas and CBS
filed counterclaims against the Company claiming wrongful dismissal of Abbas and
breach of the license agreement. Due to the erosion of the market for the
LightSpeed Financial Model, the Company voluntarily dismissed its claims against
Mr. Abbas and CBS in the summer of 1998. Mr. Abbas and CBS are continuing to
pursue their claims against the Company. At the present point in the
litigation, it is impossible to calculate the chances of success in this
litigation. However, the Company intends to continue to vigorously defend
against the counterclaim. The Company has made provision for its estimated
costs to resolve this matter. Management does not believe at this point in the
litigation that any additional amounts required to ultimately resolve this
matter will have a material effect on the financial position, cash flows, or
results of operations of the Company.
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(Unaudited)
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- -------- -------- --------
<S> <C> <C> <C> <C>
1998:
Net revenues $18,356 $ 15,960 $ 15,631 $ 14,017
Gross profit 4,715 2,426 4,286 4,760
Net loss (9,906) (21,275) (10,646) (20,612)
Net loss per share ($0.83) ($1.78) ($0.89) ($1.72)
1997:
Net revenues $23,125 $ 24,112 $ 26,929 $ 28,987
Gross profit 9,930 11,882 14,417 15,083
Net income (loss) (8,270) (2,436) 89 651
Net income (loss) per share ($0.71) ($0.21) $ 0.01 $ 0.05
</TABLE>
Due to a decline in the Company's software revenues, the Company determined
during the fourth quarter of fiscal year 1998 that certain previously available
tax planning strategies were no longer deemed to be prudent or feasible. This
F-20
<PAGE>
caused the Company to record a full valuation allowance equaling the entire
deferred tax asset balances at September 30, 1998 and accordingly, resulted in
an increase in income tax expense for the fiscal year ended September 30, 1998.
NOTE 18. SUBSEQUENT EVENTS
On October 13, 1998, the Company was delisted from the Nasdaq Stock Market. The
Common Stock of the Company is currently quoted on the Over-the-Counter Bulletin
Board.
On November 24, 1998, the Company and Level 8 Systems, Inc. ("Level 8")
announced the pending strategic merger of the Company with Level 8. Level 8 is a
leading provider of message queuing and enterprise application integration
technologies that allow end-to-end connectivity between heterogeneous platforms
across the enterprise. As the first step in this transaction, on December 31,
1998, Level 8 acquired approximately 69% of the outstanding voting stock of the
Company from WCAS and its affiliates in exchange for 1,000,000 shares of Level 8
common stock and warrants to purchase an additional 250,000 shares of Level 8 at
an exercise price of $12 per Level 8 share. On December 31, 1998, Level 8
acquired 7,130,894 shares of the Company's Common Stock, 2,094,143 shares of the
Company's Series A Convertible Preferred Stock, and 1,762,115 shares of the
Company's Series B Convertible Preferred Stock (representing approximately 69%
of the outstanding voting stock of the Company) and therefore may be deemed to
control the Company. In connection with Level 8's purchase of the Company's
voting stock from WCAS, WCAS contributed $17 million to the Company and Level 8
provided the Company a $12 million subordinated loan to help pay down the
Company's bank debt. Level 8 has also agreed to acquire all of remaining shares
of the Company's Common Stock for $0.35 per share in cash as soon as practicable
upon completion of required filings and approvals. In addition, Level 8 has
agreed to fund the Company's operations, as necessary, through January 15, 2000.
On December 22, 1998, the Company's Revolving Facility was amended. The
Revolving Facility now bears interest at the prime rate and terminates on
December 31, 2001. The Revolving Facility is automatically renewed for
successive additional terms of one year each, unless terminated by either
party.
F-21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- ----------
<C> <S> <C>
2.1 Agreement dated November 23, 1998 among Level 8 Systems, Inc. and the E-4
WCAS Parties named therein relating to the acquisition of capital
stock of the Company by Level 8 (filed herewith)
3.1 Certificate of Incorporation (Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-92050), as amended to
include the Certificates of Designation of the Series A and Series B
Convertible Preferred Stock (included in Exhibits 4.4 and 4.6)
3.2 Amended and Restated By-Laws of the Company (Exhibit 3.2 to the
Company's Registration Statement on Form S-1, No. 33-92050)
4.1 Specimen Common Stock certificate (Exhibit 4.1 to the Company's
Registration Statement on Form S-1, No. 33-92050)
4.2 See Exhibits 3.1, 3.2, 4.4 and 4.6 for the provisions of the
Company's Certificate of Incorporation and Bylaws governing the
rights of holders of securities of the Company
4.3 Specimen Preferred Stock certificate (Exhibit 4.3 to the Quarterly
Report on Form 10-Q for the period ended June 30, 1996, No.
0-26194)
4.4 Certificate of Designation of Series A Convertible Preferred Stock of
the Company (Exhibit 4.4 to the Quarterly Report on Form 10-Q for the
period ended June 30, 1996, No. 0-26194)
4.5 Specimen Preferred Stock certificate of Series B Convertible
Preferred Stock (Exhibit 4.5 to the Quarterly Report on Form 10-Q for
the period ended March 31, 1998, No. 0-26194)
4.6 Certificate of Designation of Series B Convertible Preferred Stock of
the Company (Exhibit 4.6 to the Quarterly Report on Form 10-Q for the
period ended March 31, 1998, No. 0-26194)
10.6 Form of Employee's Non-Competition, Confidentiality and Invention
Assignment Agreement (Exhibit 10.6 to the Company's Registration
Statement on Form S-1, No. 33-92050)
10.7 Form of Consultant's Non-Competition, Confidentiality and Invention
Assignment (Exhibit 10.7 to the Company's Registration Statement on
Form S-1, No. 33-92050)
10.22 Lease Agreement, dated December 25, 1992, between the Company and
Capital & Counties (London, England) (Exhibit 10.22 to the Company's
Registration Statement on Form S-1, No. 33-92050)
10.29* Form of Stock Option and Restricted Stock Purchase Plan of the
Company (Exhibit 10.29 to the Company's Registration Statement on
Form S-1, No. 33-92050), as amended by the First Amendment thereto
(Exhibit 10.1 to the Company's Report on Form 10-Q for the Quarterly
Period Ended June 30, 1995, No.0-26194) and the Second and Third
Amendments thereto (Appendices A and B to the Company's 1997 Proxy
Statement filed under cover of Schedule 14A, No. 0-26194)
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <S> <C>
10.30* Form of Stock Option Plan for Non-Employee Directors of the Company
(Exhibit 10.30 to the Company's Registration Statement on Form S-1,
No. 33-92050)
10.31* Form of Incentive Stock Option Agreement (Exhibit 10.31 to the
Company's Registration Statement on Form S-1, No. 33-92050)
10.32 Stock Purchase Agreement dated June 15, 1994 among the Company,
Welsh, Carson, Anderson & Stowe VI, L.P., WCA Management Corporation,
WCAS Information Partners, L.P., CS First Boston Securities
Corporation, and International Business Machines Corporation (Exhibit
10.32 to the Company's Registration Statement on Form S-1, No.
33-92050)
10.33 Securities Purchase and Exchange Agreement, dated September 30, 1994,
among the Company, WCAS Capital Partners II, L.P., WCA Management
Corporation, WCAS Information Partners, L.P., CS First Boston
Securities Corporation, and International Business Machines
Corporation (Exhibit 10.33 to the Company's Registration Statement on
Form S-1, No. 33-92050)
10.35 Form of Indemnification Agreement (Exhibit 10.35 to the Company's
Registration Statement on Form S-1, No. 33-92050).
10.39 Credit Agreement and related Promissory Note between Seer
Technologies, Inc. and NationsBank, N.A. and related Guaranty between
the Company and WCAS, all dated July 15, 1996 (Exhibit 10.39 to the
Quarterly Report on Form 10-Q for the period ended June 30, 1996, No.
0-26194, as amended by the First Amendment thereto dated March 27,
1997 (Exhibit 10.48) and the Second Amendment thereto dated April 27,
1998 (Exhibit 10.54))
10.41 Preferred Stock Purchase Agreement dated August 8, 1996, among the
Company, WCAS and certain WCAS affiliates named therein (Exhibit
10.41 to the Quarterly Report on Form 10-Q for the period ended June
30, 1996, No. 0-26194)
10.42 Stock Agreement dated August 8, 1996, between the Company and WCAS
(Exhibit 10.42 to the Quarterly Report on Form 10-Q for the period
ended June 30, 1996, No. 0-26194)
10.45* Employment Agreement, dated September 23, 1996, between the Company
and Steven Dmiszewicki (Exhibit 10.45 to Annual Report on Form 10-K
for the year ended September 30, 1996, No. 0-26194)
10.46 Credit Agreement between Seer Technologies, Inc. and Greyrock
Business Credit, dated March 26, 1997 (Exhibit 10.46 to the Quarterly
Report on Form 10-Q for the period ended March 31, 1997, No.
0-26194), as amended by the Amendment thereto dated May 5, 1998
(Exhibit 10.53)
10.47 Lease Amendment for the Company's Cary Office, dated March 31, 1997,
between Seer Technologies, Inc. and Regency Park Corporation (Cary,
NC) (Exhibit 10.47 to the Quarterly Report on Form 10-Q for the
period ended March 31, 1997, No. 0-26194), as amended by Addendum #1
thereto added July 6, 1998 (Exhibit 10.58)
10.48 First Amendment to Credit Agreement dated March 27, 1997 between Seer
Technologies, Inc. and NationsBank, N.A.(Exhibit 10.48 to the
Quarterly Report on Form 10-Q for the period ended March 31, 1997;
Original agreement is exhibit 10.39 to the Quarterly Report on Form
10-Q for the period ended June 30, 1996, No. 0-26194)
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <C>
10.52 Seer Technologies, Inc. Employee Stock Purchase Plan (U.S.) (Appendix
A to the Company's Proxy Statement filed under cover of Schedule 14A,
No. 0-26194)
10.53 Amendment to Credit Agreement between Seer Technologies, Inc and
Greyrock Business Credit, dated May 5, 1998 (Exhibit 10.53 to the
Company's Quarterly Report on Form 10-Q for the period ended March
31, 1998, No. 0-26194; Original Agreement is Exhibit 10.46 to the
Quarterly Report on Form 10-Q for the period ended March 31, 1997,
No. 0-26194)
10.54 Second Amendment to the Credit Agreement between Seer Technologies,
Inc. and NationsBank, N.A., dated April 27, 1998 (Exhibit 10.54 to
the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1998, No. 0-26194; Original Agreement is Exhibit 10.39 to
the Quarterly Report on Form 10-Q for the period ended June 30, 1996,
No. 0-26194)
10.55 Agreement between Seer Technologies, Inc. and WCAS, dated April 27,
1998 (Exhibit 10.55 to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, No. 0-26194)
10.56 Consent of Series A Convertible Preferred Stock Holders, dated April
27, 1998 (Exhibit 10.56 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998, No. 0-26194)
10.57 Preferred Stock Purchase Agreement among Seer Technologies, Inc.,
WCAS, and certain WCAS affiliates named therein, dated April 27, 1998
(Exhibit 10.57 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998, No. 0-26194)
10.58 Addendum #1 to the Lease Agreement between Seer Technologies, Inc.
and Regency Park Corporation (Cary, NC), dated July 6, 1998 (Exhibit
10.58 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998, No. 0-26194; Original agreement is Exhibit 10.47
to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1997, No. 0-26194)
10.59 Maintenance Agreement between Seer Technologies, Inc. and IBM Ireland E-33
Information Services Limited, dated September 8, 1998 (filed herewith)
10.60 Amendment dated December 31, 1998 between Greyrock Capital, a E-40
division of NationsCredit Corporation (formerly Greyrock Business
Credit) and the Company to the Loan and Security Agreement between
Greyrock Business Credit and the Company dated March 26, 1997, as
amended (filed herewith)
21.1 Subsidiaries (filed herewith) E-46
23.1 Consent of PricewaterhouseCoopers L.L.P. (filed herewith) E-49
27.1 Financial Data Schedule (filed herewith) E-50
</TABLE>
* Management contract or compensatory plan or agreement
E-3
<PAGE>
EXHIBIT 2.1
AGREEMENT
Dated November 23, 1998
------------------------
The parties to this agreement are Level 8 Systems, Inc., a New York
corporation ("Level 8"), and the parties listed under "WCAS Parties" at the end
of this agreement (each, a "WCAS Party" and, collectively, the "WCAS Parties").
The parties wish to provide for the acquisition by Level 8 of all the shares
of capital stock of Seer Technologies, Inc., a Delaware corporation (the
"Company"), the WCAS Parties own, and all the rights the WCAS Parties have to
acquire shares of capital stock of the Company (collectively, the "WCAS
Securities") on the terms set forth in this agreement.
Accordingly, the parties agree as follows:
1. Exchange. At the Closing (as defined in section 2), (a) each WCAS Party
--------
shall (i) assign and transfer to Level 8 or a subsidiary of Level 8 all the WCAS
Securities now owned or acquired by it prior to the Closing, free and clear of
any adverse claim, and (ii) contribute to the capital of the Company, or cause
to be contributed to the capital of the Company, the percentage of the amount
referred to in section 7.1(d) set forth beside its name on schedule 7.1(g), and,
in consideration therefor, (b) Level 8 shall issue to the WCAS Parties an
aggregate of 1,000,000 shares of common stock of Level 8 (the "Level 8 Shares")
and warrants (the "Level 8 Warrants") to purchase an aggregate of up to 250,000
Level 8 Shares for $12.00 a share (which may be paid in cash or by reducing the
number of Level 8 Warrants as provided in clause (ii)(B) of the first sentence
of paragraph 1(b) of exhibit 8.2(a)) at any time before 5:00 p.m., New York
time, on the fourth anniversary of the Closing, free and clear of any adverse
claim.
2. Closing. The closing of the transactions contemplated by section 1 (the
-------
"Closing") shall take place at 10:00 a.m., New York time, at the offices of
Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, on the third
business day following the fulfillment of all the conditions specified in
sections 7.1(h) and (k) and 7.2(d) and (f). At the Closing, the parties shall
execute and deliver, or use all reasonable efforts to cause to be executed and
delivered, the documents and other items referred to in section 8.
3. Termination. If the Closing shall not have occurred on or before January
-----------
31, 1999, Level 8 or the WCAS Parties may terminate this agreement by notice
given to the others. However, the termination of this agreement pursuant to the
preceding sentence shall not relieve a party of liability for any breach of
warranty or agreement, or misrepresentation, prior to such termination.
4. Representation and Warranties of the WCAS Parties. Each WCAS Party,
-------------------------------------------------
severally and not jointly, represents and warrants to Level 8 with respect to
itself as follows:
4.1 Authority. Each WCAS Party has the full authority to execute, deliver and
---------
perform this agreement, and this agreement constitutes the valid and binding
obligation of that WCAS Party,
E-4
<PAGE>
enforceable against it in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
in general and subject to general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
4.2 Consents of Third Parties. The execution, delivery and performance of this
-------------------------
agreement by each WCAS Party will not: (a) violate or conflict with that WCAS
Party's partnership agreement; (b) conflict with, or result in the breach of,
or constitute a default under, any lease, agreement, commitment or other
instrument to which that WCAS Party is a party or by which that WCAS Party or
its properties are bound; or (c) constitute a violation of any law, regulation,
order, writ, judgment, injunction or decree applicable to that WCAS Party or any
of that WCAS Party's properties or require any governmental consent or approval.
4.3 WCAS Securities. Each WCAS Party owns all the WCAS Securities to be
---------------
assigned and transferred by it to Level 8 under section 1. The shares of
capital stock of the Company included in the WCAS Securities to be assigned and
transferred to Level 8 under section 1 are duly authorized, validly issued,
fully paid and non-assessable, and free and clear of any adverse claim.
4.4 Litigation. To the best of the knowledge of each WCAS Party, there is no
----------
judicial or administrative action, proceeding or investigation pending or
threatened against it or the Company that questions the validity of this
agreement or any action taken or to be taken by it in connection with this
agreement.
4.5 Investment. Each WCAS Party will be acquiring the Level 8 Shares and Level
----------
8 Warrants, and any Level 8 Share issuable upon exercise of the Level 8
Warrants, for investment purposes and not with a view to resale or distribution
in violation of applicable securities laws.
4.6 Related Party Transactions. Except as set forth in the Company's proxy
--------------------------
statement for the Company's last annual meeting or in the Company's reports
filed with the Securities and Exchange Commission (the "SEC") pursuant to
section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and
except as provided in section 6.6, neither the Company nor any of its
subsidiaries has engaged in any transaction with any WCAS Party or any affiliate
of any WCAS Party since September 30, 1995.
5. Representations and Warranties of Level 8. Level 8 represents and warrants
-----------------------------------------
to the WCAS Parties as follows:
5.1 Authorization. The execution, delivery and performance of this agreement
-------------
and the Level 8 Warrants by Level 8 have been duly authorized by all necessary
corporate action of Level 8, and this agreement constitutes, and, upon execution
and delivery of the Level 8 Warrants, the Level 8 Warrants will constitute, the
valid and binding obligations of Level 8, enforceable against it in accordance
with their respective terms, except to the extent enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general and subject to general
principles of equity (regardless of whether enforceability is considered in a
proceeding in equity or at law).
5.2 Consents of Third Parties. The execution, delivery and performance of this
-------------------------
agreement and the Level 8 Warrants by Level 8 will not: (a) violate or
conflict with the certificate of incorporation or by-laws of Level 8; (b)
conflict with, or result in the breach of, or constitute a default under, any
lease,
E-5
<PAGE>
agreement, commitment or other instrument to which Level 8 or any of its
subsidiaries is a party or by which Level 8's or such subsidiaries' properties
are bound; or (c) constitute a violation of any law, regulation, order, writ,
judgment, injunction or decree applicable to Level 8 or any of its subsidiaries
or Level 8's or such subsidiaries' properties or require any governmental
consent or approval.
5.3 Litigation. To the best of the knowledge of Level 8, there is no judicial
----------
or administrative action, proceeding or investigation pending or threatened that
questions the validity of this agreement or the Level 8 Warrants or any action
taken or to be taken by Level 8 in connection with this agreement or the Level 8
Warrants.
5.4 Investment. Level 8 will be acquiring the WCAS Securities for investment
----------
purposes and not with a view to resale or distribution in violation of
applicable securities laws.
6. Certain Agreements.
------------------
6.1 Access to Information. Prior to the Closing, each WCAS Party shall use
---------------------
reasonable efforts to enable Level 8 to make such additional investigation of
the business and properties of the Company and its subsidiaries as Level 8 may
wish, and, upon reasonable notice, to cause the Company to give Level 8 and its
counsel, accountants and other representatives reasonable access, during normal
business hours throughout the period prior to the Closing, to the property,
books, agreements, records, files and personnel of the Company and its
subsidiaries and to cause the Company to furnish Level 8 during that period
copies of documents and information concerning the Company and its subsidiaries
as Level 8 may reasonably request. Level 8 shall, and shall cause its counsel,
accountants and other agents and representatives to, hold all such information
and documents in accordance with and subject to the terms of the confidentiality
agreement previously executed by Level 8 with respect to this transaction.
6.2 Conduct of the Business Pending the Closing. Prior to the Closing, each
-------------------------------------------
WCAS Party shall use reasonable efforts to cause the Company and its
subsidiaries to comply with the following provisions:
6.2.1. The Company and its subsidiaries shall operate their businesses in the
ordinary course consistent with past practice, and shall not take any
extraordinary action or make any extraordinary commitment (including the
adoption of any material employee benefit plan or benefit arrangement or the
acquisition, disposition or winding-up of a business) without the prior approval
of Level 8.
6.2.2. The Company shall promptly notify Level 8 of, and furnish Level 8 any
information Level 8 may reasonably request with respect to the occurrence of,
any event or the existence of any facts that would result in the information in
the Company's filings with the SEC since September 30, 1997, taken as a whole
(the "SEC Information"), containing any misstatement of a material fact, or
omitting to state a material fact, about the Company and its subsidiaries, as if
the filings were made at any time on or after the date of this agreement.
6.2.3. The Company shall not declare, set aside or pay any dividends or other
distributions in respect of its shares of capital stock, redeem, purchase or
otherwise acquire any shares of its capital stock or issue, sell or encumber any
shares of its capital stock or forgive any of its indebtedness.
6.2.4. The Company shall not amend its certificate of incorporation or by-laws
or enter into any merger or consolidation agreement.
6.2.5. Except as contemplated by this agreement, neither the Company nor its
subsidiaries shall amend
E-6
<PAGE>
any of their loan agreements or incur any indebtedness for borrowed money (other
than under their existing loan agreements).
6.3. Governmental Filings. Prior to the Closing, as promptly as practicable,
--------------------
each party shall make, or cause to be made, and shall cooperate with each other
party in making, all required governmental filings, including, without
limitation, all appropriate filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), in order to carry out this agreement,
and shall take, or cause to be taken, such further action as may reasonably be
required in connection therewith.
6.4. Acquisition of Minority.
-----------------------
6.4.1. Immediately after the Closing, Level 8 shall, or shall cause a
subsidiary (the "Sub") to, commence (within the meaning of Rule 14d-2 under the
Exchange Act) an offer to purchase all the outstanding shares of common stock of
the Company (other than the WCAS Securities) at a price of $0.35 a share, net to
the seller in cash (the "Offer"), and, subject to the conditions of the Offer,
shall use all reasonable efforts to make and consummate the Offer as promptly as
permitted by law. The obligation of Level 8 or the Sub to consummate the Offer
and accept for payment and pay for any shares tendered pursuant to the Offer
shall be subject to the conditions set forth in schedule 6.4.1.
6.4.2. Neither Level 8 nor the Sub shall, without the prior written consent of
the WCAS Parties, decrease the amount or change the form of consideration
payable in the Offer or decrease the number of shares sought pursuant to the
Offer, change the conditions of the Offer or impose any additional conditions of
the Offer. The conditions of the Offer are for the sole benefit of Level 8 or
the Sub and may be asserted by Level 8 or the Sub regardless of the
circumstances giving rise to the non-fulfillment of any such conditions or may
be waived by Level 8 or the Sub in whole or in part.
6.4.3. As soon as practicable on the date of commencement of the Offer, Level 8
or the Sub shall file with the SEC (i) a Tender Offer Statement on Schedule 14D-
1 with respect to the Offer, which will contain the offer to purchase and form
of the related letter of transmittal (which, together with any supplements or
amendments to those documents, are collectively referred to as the "Offer
Documents"), and (ii) Rule 13E-3 Transaction Statement on Schedule 13E-3 (which,
as amended or supplemented, is referred to as the "Schedule 13E-3") with respect
to the Offer. Level 8 or the Sub shall cause the Offer Documents and the
Schedule 13E-3 to comply in all material respects with the provisions of
applicable federal securities laws and, on the date filed with the SEC and on
the date first published, sent or given to the Company's shareholders, not to
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
(except that neither shall be responsible with respect to information supplied
by the Company or any WCAS Party in writing specifically for inclusion in the
Offer Documents). Level 8 shall promptly correct any information provided by it
for use in the Offer Documents and the Schedule 13E-3, if and to the extent such
information shall have become false or misleading in any material respect, and
Level 8 or the Sub shall take all steps necessary to cause the Offer Documents
and the Schedule 13E-3 as so corrected to be filed with the SEC and to be
disseminated to holders of shares, in each case as and to the extent required by
applicable federal securities laws.
6.4.4. Level 8 shall, or shall cause the Sub to, use its best efforts to acquire
as promptly as practicable after the completion of the Offer, through a merger,
all the outstanding shares of common stock of the Company it shall not have
acquired at the Closing or in the Offer for $0.35 a share, in cash.
E-7
<PAGE>
6.4.5. The Company and its shareholders are intended beneficiaries of this
section 6.4.
6.5. Other Pre-Closing Action. Each party shall use reasonable efforts to
------------------------
cause the fulfillment as soon as practicable of all the conditions to its
obligation to consummate the transactions under section 1.
6.6. Expenses. Each party shall bear its own expenses in connection with this
--------
agreement and all obligations to be performed by it under this agreement, except
that it is understood and agreed that the Company shall bear up to $75,000 of
the expenses of the WCAS Parties in connection with this agreement and their
obligations to be performed under this agreement.
6.7. Publicity. Without otherwise limiting any party's rights under this
---------
agreement or otherwise, prior to the Closing (or, if earlier, the termination of
this agreement), each party shall consult with and obtain the consent of the
other parties before issuing any press release or making any similar public
disclosure concerning this agreement or the transactions referred to in this
agreement, unless, in the reasonable judgment of the party issuing the release
or making the disclosure, the release or disclosure is required as a matter of
law (in which case it shall consult as set forth above before issuing the
release or making the disclosure).
6.8. Transfer Taxes. Each party shall pay all sales, stock transfer and other
--------------
similar taxes and fees in respect of the transfer of securities by it under this
agreement.
6.9. Other Transactions. Each WCAS Party agrees that, prior to the Closing
------------------
(or, if earlier, the termination of this agreement), it shall not, and shall use
reasonable efforts not to permit its officers, directors or other agents
(collectively, the "Agents"), directly or indirectly, to (a) take any action to
solicit, initiate, encourage, accept or agree to any Acquisition Proposal (as
defined below), (b) engage in negotiations with any person or entity that, to
the best of its, his or her knowledge, may be considering making, or has made,
an Acquisition Proposal or (c) except in accordance with section 6.7, disclose
any non-public information relating to the Company or afford access to the
assets, books or records of the Company to any person or entity that, to the
best of its, his or her knowledge, may be considering making, or has made, an
Acquisition Proposal. As used in this section 6.9, the term "Acquisition
Proposal" means any offer or proposal for, or any indication of interest in, any
merger or other business combination involving the Company, or the acquisition
of any equity interest in, or any material portion of the assets of, the
Company, other than the transactions contemplated by this agreement.
7. Conditions to Closing.
---------------------
7.1. Conditions to Obligation of Level 8. The obligation of Level 8 to
-----------------------------------
consummate the transactions under section 1 is subject to the fulfillment, prior
to or at the Closing, of each of the following conditions (any or all of which
may be waived by Level 8):
(a) the representations and warranties of each WCAS Party to Level 8 shall be
true and correct in all material respects at and as of the time of the Closing
with the same effect as though made again at and as of that time;
(b) the agreements to be performed or complied with by each WCAS Party and the
Company prior to or at the Closing shall have been performed and complied with
by them;
(c) each WCAS Party shall have furnished Level 8 with a certificate (dated the
date of the Closing) with respect to itself to the effect set forth in
clauses (a) and (b) above;
E-8
<PAGE>
(d) the WCAS Parties shall have contributed to the capital of the Company, or
caused to be contributed to the capital of the Company, an aggregate amount
equal to the lesser of $17,000,000 or the amount of the Company's
outstanding liabilities and obligations to NationsBank, N.A. (the "Bank")
at the Closing (which amount shall not be less than the amount outstanding
at the close of business on November 18, 1998), which the Company shall use
at the Closing to pay all such liabilities and obligations to the Bank;
(e) each WCAS Party shall have executed and delivered to the Company a release
of all claims arising out of the contributions and payment referred to in
clause (d) above in form and substance satisfactory to Level 8;
(f) the Company and Greyrock Capital shall have executed and delivered
documents and instruments that reflect the terms set forth in schedule
7.1(f) in form and substance satisfactory to Level 8;
(g) the Company's authorized capital stock shall be comprised of 30,000,000
shares of common stock, 11,980,633 of which shall be outstanding, and
10,000,000 shares of preferred stock, of which 2,094,143 shares of Series A
Preferred Stock and 1,762,115 shares of Series B Preferred Stock shall be
outstanding. The WCAS Parties shall own the numbers of each class and
series of capital stock of the Company set forth on schedule 7.1(g). There
shall be no other outstanding shares or options or rights of any kind to
acquire any shares of any class of securities or any securities convertible
into any shares of any class of securities of the Company, nor shall there
be any obligations to issue any such options, rights or securities;
(h) Level 8 shall have received not less than $12,000,000 from Liraz Systems
Ltd. ("Liraz") to fund the obligations under section 9.1;
(i) there shall not be in effect any injunction or restraining order issued by
a court of competent jurisdiction in any action or proceeding against the
consummation of the transactions under this agreement;
(j) the SEC Information shall not contain any misstatement of a material fact,
or omit to state a material fact, about the Company and its subsidiaries,
as if the SEC Information were stated again as of the Closing, and there
shall have been no material adverse change in the business of the Company
and its subsidiaries taken as a whole since September 30, 1998; and
(k) the waiting period under the HSR Act shall have expired or terminated.
7.2. Conditions to Obligations of the WCAS Parties. The obligations of the
---------------------------------------------
WCAS Parties to consummate the transactions under section 1 are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions
(any or all of which may be waived by the WCAS Parties):
(a) the representations and warranties of Level 8 to the WCAS Parties shall be
true and correct in all material respects at and as of the time of the
Closing with the same effect as though made again at and as of that time;
(b) the agreements to be performed or complied with by Level 8 prior to or at
the Closing shall have been performed and complied with by Level 8;
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<PAGE>
(c) Level 8 shall have furnished each WCAS Party with a certificate (dated the
date of the Closing) to the effect set forth in clauses (a) and (b) above;
(d) Level 8 shall have received not less than $12,000,000 from Liraz to fund
the obligations under section 9.1;
(e) there shall not be in effect any injunction or restraining order issued by
a court of competent jurisdiction in any action or proceeding against the
consummation of the transactions under this agreement;
(f) the waiting period under the HSR Act shall have expired or terminated; and
(g) the WCAS Parties shall have received a release from the Bank from all
liabilities and obligations to the Bank in respect of the Company's and its
subsidiaries' liabilities and obligations to the Bank, which release shall
be in form and substance reasonably satisfactory to the WCAS Parties.
8. Documents and Items to be Delivered at the Closing.
--------------------------------------------------
8.1. Documents and Items to be Delivered by the WCAS Parties. At the Closing,
-------------------------------------------------------
the respective WCAS Parties shall deliver, or cause to be delivered, to Level 8
the following:
(a) stock certificates evidencing all their respective WCAS Securities, duly
endorsed in blank or accompanied by stock transfer powers, and with all
required stock transfer tax stamps attached;
(b) the respective certificates referred to in section 7.1(c);
(c) the respective releases referred to in section 7.1(e); and
(d) evidence of the payment referred to in section 7.1(d).
8.2. Documents and Items to be Delivered by Level 8. At the Closing, Level 8
----------------------------------------------
shall deliver, or cause to be delivered, to the WCAS Parties, the following:
(a) stock certificates representing the Level 8 Shares and the Level 8 Warrants
(in the form of exhibit 8.2(a)) referred to in section 1 in the names and
denominations set forth in schedule 8.2(a);
(b) the certificate referred to in section 7.2(c); and
(c) evidence of its receipt of the funds referred to in section 7.2(d).
9. Post-Closing Agreements.
-----------------------
9.1. Funding of the Company. Immediately after the Closing, Level 8 shall
----------------------
provide the Company with $12,000,000 in the form of a capital contribution or a
long-term loan.
9.2. Transactions with the Company. Prior to the consummation of the merger
-----------------------------
referred to in section 6.4.4, Level 8 shall not engage in any transaction with
the Company on terms less favorable to the Company than the terms on which an
unaffiliated third party would engage in such transaction.
E-10
<PAGE>
9.3. Voting and Transfer Restrictions.
--------------------------------
9.3.1. Prior to January 1, 2001 (the "Outside Date"), at any meeting of
shareholders of Level 8, each WCAS Party shall grant a proxy to one or more
individuals named by Level 8 from time to time to vote all that WCAS Party's
Level 8 Shares as Level 8 may from time to time request by notice given to that
WCAS Party not fewer than three business days before a particular meeting.
9.3.2. Prior to the Outside Date, no WCAS Party may sell, exchange or otherwise
assign or transfer any Level 8 Shares without the prior written consent of Level
8. Nothing in the preceding sentence, however, shall be deemed to prohibit any
transfer of any Level 8 Shares to a partner or affiliate of a WCAS Party, as
long as that partner or affiliate agrees to be bound by the provisions of this
section 9.3.
9.3.3. All certificates evidencing Level 8 Shares issued under this agreement
or upon exercise of the Level 8 Warrants shall bear the following legends:
"The shares evidenced by this certificate were issued in a transaction
exempt from the registration requirements of the Securities Act of
1933, and such shares may not be transferred in the absence of an
opinion of counsel satisfactory to the Company that such transfer may
be effected without registration under the Securities Act of 1933."
"The voting and transfer of the shares evidenced by this certificate
are subject to the provisions of an agreement dated November 23,
1998, a copy of which is on file at the office of the Company."
9.3.4. If, at any time before the Outside Date, Level 8 determines to file a
registration statement under the Securities Act of 1933 for an underwritten sale
to the public of shares of its common stock in whole or in part by any of Level
8's shareholders, Level 8 shall, each such time, promptly give each WCAS Party
written notice of its intent to file a registration statement and shall include
all shares held by any WCAS Party with respect to which Level 8 has received a
written request within 15 days after Level 8 has given notice to the WCAS Party
as set forth above specifying the number of shares to be included.
Notwithstanding the foregoing, however, in connection with any such offering,
Level 8 shall not be required to include a WCAS Party's shares in the offering,
unless the WCAS Party shall have accepted the terms of the underwriting and then
only in such quantity as will not, in the written opinion of the underwriter,
exceed the maximum number of shares that can be marketed without materially and
adversely affecting the offering. If, as a consequence of the provisions of the
preceding sentence, the number of a WCAS Party's shares included in the offering
is reduced, such reduction shall be made pro rata among the shareholders to be
included in the offering on the basis of the percentage of shares of the
shareholders to be included, and the percentage of the reduction shall not be
more than the percentage of reduction applicable to any other selling
shareholder in the offering. The rights with respect to such offering by any
WCAS Party whose shares are included shall not be less, and the obligations with
respect to such offering by any such WCAS Party shall not be greater, than those
of any other shareholder whose shares are included in such offering.
9.4. Related Party Transactions. Until the earlier of the Outside Date or the
--------------------------
first date on which the WCAS Parties no longer beneficially own (as defined in
the rules under the Exchange Act) at least 50% of the shares of common stock of
Level 8 represented by the Level 8 Shares and the Level 8 Shares issuable upon
exercise of the Level 8 Warrants issued pursuant to section 1, Level 8 shall
not, and shall not permit any of its subsidiaries to, engage in any transaction
with Liraz or any affiliate of Liraz on
E-11
<PAGE>
terms less favorable to Level 8 or any such subsidiary than the terms on which
an unaffiliated third party would engage in such transaction.
9.5. Further Assurances. From time to time after the Closing, each party shall
------------------
take such action and execute and deliver such documents as the others may
reasonably request to carry out the transactions contemplated by this agreement.
9.6. D&O Matters.
-----------
9.6.1. Level 8 agrees that, for a period of six years after the Closing and
except to the extent otherwise required by law, it shall cause the certificate
of incorporation and by-laws of the Company to contain provisions with respect
to indemnification and exculpation from liability no less favorable to the
individuals who, on or prior to the Closing, were directors, officers, employees
or agents of the Company (collectively, the "Indemnified Parties") than those
set forth in the Company's certificate of incorporation and by-laws in effect
immediately before the Closing.
9.6.2. For a period of six years after the Closing, Level 8 shall use all
reasonable efforts to cause the Company to maintain directors' and officers'
liability insurance covering those Indemnified Parties who are currently covered
by the Company's directors' and officers' liability insurance policy on terms no
less favorable to those Indemnified Parties than the terms of the insurance
coverage in effect on the date of the Closing for Level 8's own directors and
officers.
9.6.3. The Indemnified Parties and the Company are intended beneficiaries of
this section 9.6.
10. Indemnification.
---------------
10.1. General.
-------
10.1.1. Subject to the provisions of this section 10, each WCAS Party shall
indemnify and hold Level 8 harmless from and against all losses, liabilities,
damages and expenses (including reasonable attorneys' fees) resulting from any
breach of warranty or agreement, or any misrepresentation, by it under this
agreement.
10.1.2. Subject to the provisions of this section 10, Level 8 shall indemnify
and hold each WCAS Party harmless from and against all losses, liabilities,
damages and expenses (including reasonable attorneys' fees) resulting from any
breach of warranty or agreement, or any misrepresentation, by it under this
agreement.
10.2. Exclusivity. Except as specifically set forth in this agreement, no
-----------
party to this agreement has made, or shall have liability for, any
representation, warranty or agreement, express or implied, in connection with
the transactions contemplated by this agreement, including any representation or
warranty, express or implied, as to the accuracy or completeness of any
information regarding the Company or Level 8.
10.3. Survival; Manner of Claims. The representations and warranties in this
--------------------------
agreement shall survive the Closing. However, a party shall have no liability
under this agreement for breach of warranty or misrepresentation, unless a claim
therefor is asserted by another party in a written notice setting forth the
representations and warranties with respect to which the claim is made, the
facts giving rise to and the alleged basis for the claim and the amount of
liability asserted by reason of the claim.
E-12
<PAGE>
10.4. Defense of Claims by Third Parties. If any claim is made against a party
----------------------------------
that, if sustained, would give rise to a liability of another party under this
agreement, the party against whom the claim is made shall promptly cause notice
of the claim to be delivered to the other party or parties and shall afford the
other party or parties and its or their counsel, at its or their sole expense,
the opportunity to defend or settle the claim. The failure to provide the
notice referred to above shall not relieve the indemnifying party of liability
under this agreement, except to the extent the indemnifying party has actually
been prejudiced by such failure. If any claim is compromised or settled without
the consent of the indemnifying party, no liability shall be imposed upon the
indemnifying party by reason of the claim.
11. Miscellaneous.
-------------
11.1. Finders. Each party represents and warrants to the others that it has
-------
not employed or utilized the services of any broker or finder in connection with
this agreement or the transactions contemplated by this agreement.
11.2. Governing Law. This agreement shall be governed by and construed in
-------------
accordance with the law of the state of New York, without giving effect to its
conflicts of law principles.
11.3. Headings. The section headings of this agreement are for reference
--------
purposes only, and are to be given no effect in the construction or
interpretation of this agreement.
11.4. Notices. All notices and other communications under this agreement shall
-------
be in writing and may be given by any of the following methods: (a) personal
delivery; (b) facsimile transmission; (c) registered or certified mail,
postage prepaid, return receipt requested; or (d) overnight delivery service.
Notices shall be sent to the appropriate party at its address or facsimile
number given below (or at such other address or facsimile number for such party
as shall be specified by notice given under this section 11.4):
(a) if to a WCAS Party, to:
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue
New York, New York 10022-6815
Fax no.: (212) 893-9563
Attention: Robert A. Minicucci
with a copy to:
Reboul, MacMurray, Hewitt, Maynard &
Kristol
45 Rockefeller Plaza
New York, New York 10011
Fax no.: (212) 841-5725
Attention: Robert A. Schwed, Esq.
(b) if to Level 8, to:
E-13
<PAGE>
Level 8 Systems, Inc.
1250 Broadway, 35th Floor
New York, New York 10001
Fax no.: (212) 760-2327
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Fax no.: (212) 969-2900
Attention: Edward W. Kerson, Esq.
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or (c)
in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming that the
number of pages constituting the notice have been transmitted without error. In
the case of noticed sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
11.5. Separability. The invalidity or unenforceability of any provision of
------------
this agreement shall not affect the validity or enforceability of any other
provision of this agreement, which shall remain in full force and effect.
11.6. Waiver. Any party may waive compliance by any other party with any
------
provision of this agreement. No waiver of any provision shall be construed as a
waiver of any other provision. Any waiver must be in writing and signed by the
waiving party.
11.7. Counterparts. This agreement may be executed in counterparts, each of
------------
which shall be an original, but all of which together shall constitute one and
the same agreement.
E-14
<PAGE>
11.8. Entire Agreement. This agreement (with its schedules and exhibits)
----------------
contains, and is intended as, a complete statement of all the terms of the
arrangements among the parties with respect to the matters provided for,
supersedes all previous agreements and understandings among the parties with
respect to those matters, cannot be changed or terminated orally and any
amendment or modification must be in writing and signed by the parties to be
charged.
LEVEL 8 SYSTEMS, INC.
By: /s/ Arik Kilman
WCAS PARTIES:
WELSH, CARSON, ANDERSON
& STOWE VI, L.P.
By: WCAS VI Partners, L.P., General
Partner
By: /s/ Laura Van Buren
General Partner
WCAS INFORMATION PARTNERS, L.P.
By: WCAS INFO Partners,
General Partner
By: /s/ Laura Van Buren
General Partner
Attorney-in-fact
WCAS CAPITAL PARTNERS II
By: /s/ Laura Van Buren
General Partner
/s/ Laura Van Buren*
Patrick J. Welsh
/s/ Laura Van Buren*
Russell L. Carson
E-15
<PAGE>
/s/ Laura Van Buren*
Bruce K. Anderson
/s/ Laura Van Buren*
Richard H. Stowe
/s/ Laura Van Buren*
Andrew M. Paul
/s/ Laura Van Buren*
Thomas E. McInerney
/s/ Laura Van Buren
Laura Van Buren
/s/ James B. Hoover
James B. Hoover
/s/ Richard H. Stowe, as
Trustee for the Benefit of the IRA of
Richard H. Stowe
By: /s/ Richard H. Stowe
* As Attorney-in-Fact /s/ Laura Van Buren*
Anthony J. de Nicola
DELAWARE CHARTER TRUST CO., as
Trustee for the Benefit of the
IRA Rollover of James B. Hoover
By: /s/ James B. Hoover
/s/ Laura Van Buren*
Robert A. Minicucci
E-16
<PAGE>
TRUST U/A DATED 11/26/84 for the
Benefit of Eric Welsh (Carol
Ann Welsh, Trustee)
By: /s/ Carol Ann Welsh
TRUST U/A DATED 11/26/84 for the
Benefit of Randall Welsh (Carol
Ann Welsh, Trustee)
By: /s/ Carol Ann Welsh
TRUST U/A DATED 11/26/84 for the
Benefit of Jennifer Welsh (Carol
Ann Welsh, Trustee)
By: /s/ Carol Ann Welsh
/s/ David P. Bellet
David F. Bellet
* as Attorney-in-Fact REBOUL, MACMURRAY, HEWITT,
MAYNARD & KRISTOL
By: /s/ Robert A. Schwed
E-17
<PAGE>
Schedule 6.4.1
--------------
Notwithstanding any other provisions of the Offer, and in addition to (and
not in limitation of) Level 8's or the Sub's right to amend the Offer at any
time in its sole discretion, but subject to the provisions of section 6.4 of the
agreement to which this schedule 6.4.1 is attached (the "Agreement") (terms used
herein and not otherwise defined having the meanings ascribed to such terms in
the Agreement), neither Level 8 nor the Sub shall be required to accept for
payment, or pay for, and may delay the acceptance for payment, or the payment,
of, any tendered shares of common stock of the Company, if, at or before the
time of payment for any such shares (whether or not any shares have theretofore
been accepted for payment or paid for pursuant to the Offer), (a) the Closing
shall not have occurred or (b) there shall have been any action or position
taken, or threatened, or any statute, rule, regulation, judgment, order or
injunction promulgated, enacted, entered or enforced, by any state, federal or
foreign government or governmental authority or by any court, domestic or
foreign, that may reasonably be expected to (i) make the acceptance for payment
of, or the payment for, some or all of the shares illegal or otherwise
prohibited, or restrict or delay consummation of the Offer, (ii) impose
limitations on the ability of Level 8 or the Sub to acquire or hold or to
exercise effectively all rights of ownership of common stock of the Company,
including, without limitation, the right to vote any shares of common stock of
the Company purchased by either of them on all matters properly presented to the
shareholders of the Company or (iii) prohibit or impose any material limitation
on Level 8's or the Sub's ownership or operation of all or a material portion of
the assets or business of the Company or any of its subsidiaries or affiliates.
E-18
<PAGE>
SCHEDULE 7.1.(F)
AMENDMENT TO LOAN DOCUMENTS
BORROWER: SEER TECHNOLOGIES, INC.
ADDRESS: 8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
DATE: DECEMBER __, 1998
THIS AMENDMENT ("Amendment") is entered into as of the above date between
GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation (formerly
Greyrock Business Credit) ("GBC"), and the borrower named above ("Borrower")
with respect to the Loan and Security Agreement between GBC and Borrower, dated
March 26, 1997 (as amended from time to time, the "Loan Agreement"). (This
Amendment, the Loan Agreement, all other prior written amendments to the Loan
Agreement signed by GBC and the Borrower, and all other written documents and
agreements between GBC and the Borrower are referred to herein collectively as
the "Loan Documents". Capitalized terms used but not defined in this Amendment,
shall have the meanings set forth in the Loan Agreement.)
Subject to the conditions set forth below, the parties agree to amend the
Loan Agreement as follows, effective on ___________:
1. CREDIT LIMIT. Section 1 of the Schedule is amended in its entirety to
read as follows:
"1. CREDIT LIMIT (Section 1.1): Loans ("Receivable Loans") up to the sum
----------------------------
of the following percentages of Borrower's Eligible Receivables (as defined
in Section 8 above), provided that the total outstanding balance of
Receivable Loans shall not at any time exceed $25,000,000:
"(i) 80% of the amount of eligible U.S. accounts; plus
----
"(ii) the lesser of 80% of Unbilled Receivables (as defined in
Section 8 above) or $3,000,000; plus
----
"(iii) the lesser of 80% of the amount of eligible Australian
accounts or $2,000,000; plus
----
"(iv) 80% of the amount of eligible Irish accounts; plus
----
"(v) 80% of the amount of eligible Netherlands accounts."
2. INTEREST RATE. Section 2 of the Schedule is amended in its entirety
to read as
E-19
<PAGE>
follows:
"2. Interest Rate (Section 1.2): The interest rate in effect
-------------
throughout each calendar month during the term of this Agreement shall be
the following:
Period Interest Rate
------ -------------
Amendment Effective Date Prime Rate
through December 31, 1999
January 1, 2000 through Prime Rate plus 1%
December 31, 2000 per annum
January 1, 2001 and Prime Rate plus 2%
thereafter per annum
"Interest shall be calculated on the basis of a 360-day year for the actual
number of days elapsed. The interest rate applicable to all Loans shall be
adjusted monthly as of the first day of each month, and the interest to be
charged for each month shall be based on the highest "Prime Rate" in effect
during said month.
" `Amendment Effective Date' means the date the Amendment to Loan Documents
between Borrower and GBC dated December __, 1998 is effective.
" `Prime Rate' means the actual `Reference Rate' or the substitute therefor
of the Bank of America NT & SA (or its successor) whether or not that rate
is the lowest interest rate charged by said bank. If the Prime Rate, as
defined, is unavailable, `Prime Rate' shall mean the highest of the prime
rates published in the Wall Street Journal on the first business day of the
month, as the base rate on corporate loans at large U.S. money center
commercial banks."
3. MATURITY DATE. Section 4 of the Schedule is amended in its entirety to
--------------
read as follows:
"4. Maturity Date (Section 6.1): December 31, 2001, subject to
----------------------------
automatic renewal as provided in Section 6.1 above, and early termination
as provided in Section 6.2 above."
4. ADDITIONAL PROVISIONS. The following new Section 8 is added to the
----------------------
Schedule:
"8. Additional Provisions.
---------------------
"(1) Guaranty. Borrower shall concurrently cause Level 8
--------
Systems, Inc., a New York corporation (`Level 8') to execute and deliver to
GBC a Continuing Guaranty with respect to the Obligations, on GBC's
standard form (the `Level 8 Guaranty'), provided that Level 8's liability
under the Level 8 Guaranty shall be limited to the `Guaranty Limit' as
defined below. The
E-20
<PAGE>
Guaranty Limit shall be an amount equal to the following (plus all interest
on the obligations of Level 8 under the Level 8 Guaranty, plus all
reasonable costs incurred in enforcing the obligations of Level 8 under the
Level 8 Guaranty):
"(a) During the period from the date of the Level 8 Guaranty to
December 31, 1999, the Guaranty Limit shall be an amount equal to the
amount of the Obligations at the Determination Date (as defined below) in
excess of $20,000,000.
"(b) During the period from January 1, 2000 to December 31, 2000
the Guaranty Limit shall be an amount equal to the amount of the
Obligations at the Determination Date (as defined below) in excess of
$10,000,000.
"From and after January 1, 2001 the liability of Level 8 under the Level 8
Guaranty shall not be limited.
" `Determination Date' shall mean, at any date, the date a written notice
of acceleration of the Obligations is given by GBC to Borrower or Level 8,
which is not subsequently waived in writing or rescinded in writing. The
Level 8 Guaranty shall continue in full force and effect after any such
waiver or rescission of a written notice of acceleration.
"Borrower shall cause the Level 8 Guaranty to continue in effect until this
Loan Agreement has been terminated and all of the Obligations have been
paid and performed in full.
"(2) Level 8. Without GBC's prior written consent: (a) Borrower
-------
shall not, and shall not permit any of its subsidiaries to, engage in any
transactions with Level 8 or Level 8's other affiliates on terms less
favorable to Borrower or such subsidiaries than the terms on which an
unaffiliated third party would engage in such transaction; and (b) Borrower
shall not make any transfer of funds or other property to Level 8 or Level
8's other affiliates (other than Borrower's subsidiaries), other than
payments not in contravention of clause (a) above; and (c) Borrower shall
not pay or declare any distributions or dividends, or redeem or repurchase
any of its stock or other securities from Level 8 or any of Level 8's other
affiliates.
"(3) Streamlined Provisions. At such time as the total unpaid
-----------------------
principal balance of all outstanding Loans is $13,000,000 or less, the
following provisions (the `Streamlined Provisions') shall apply:
"(a) Daily reporting of transactions and daily schedules and
assignments of Receivables and schedules of collections, called for by
Section 4.3 of this Loan Agreement, will not be required. Instead, the
Borrower shall provide GBC with a monthly Borrowing Base Certificate, in
such form as GBC shall from time to time specify, within 10 days after the
end of each month. In the event, as of the end of any month, the total of
all Loans and all other Obligations exceeds the Credit Limit, Borrower
shall immediately pay the
E-21
<PAGE>
amount of the excess to GBC.
"(b) Delivery of the proceeds of Receivables and other
Collateral within one business day after receipt, as called for by Sections
4.4 and 5.4 of this Loan Agreement will not be required.
"(c) The Streamlined Provisions shall immediately terminate if
any Event of Default or any event which, with notice or passage of time or
both, would constitute an Event of Default, occurs and is continuing.
"(d) While the Streamlined Provisions are in effect, the total
principal balance of the Loans may not, thereafter, exceed $13,000,000,
unless Borrower elects, by at least three Business Days' prior written
notice to GBC, to terminate the Streamlined Provisions. In the event
Borrower wishes to terminate the Streamlined Provisions, Borrower shall
provide GBC with such information relating to the Receivables and other
Collateral as GBC shall specify in order to enable GBC to complete its
normal Receivables and Collateral review, at least three Business Days
prior to the date the Streamlined Provisions are to terminate.
"(e) Upon termination of the Streamlined Provisions under clause
(c) or (d) above, the Borrower shall, then and thereafter, provide GBC with
the daily reporting of transactions and daily schedules and assignments of
Receivables and schedules of collections, as called for by Section 4.3 of
the Loan Agreement, and the Borrower shall deliver all proceeds of
Receivables and other Collateral to GBC, within one business day after
receipt, as called for by Sections 4.4 and 5.4 of the Loan Agreement."
5. DELETE TERMINATION FEE. The portion of Section 3 of the Schedule, which
-----------------------
presently reads as follows: "Termination Fee: $20,000 per month for each month
(or portion thereof) from the effective date of termination to the Maturity
Date." is amended to read as follows:
"Termination Fee: None."
6. WELSH CARSON--CONFORMING CHANGES.
---------------------------------
(a) The portion of Section 7.1(n) of the Loan Agreement, which
presently reads as follows: "Welsh Carson Anderson & Stowe VI, L.P., a Delaware
limited partnership's equity ownership decreases to less than 51%" is amended to
read as follows:
"Level 8's equity ownership decreases to less than 51%".
(b) Section 7.1(r) of the Loan Agreement (which relates to a Guaranty
by Welsh Carson Anderson & Stowe VI, L.P. of certain obligations of the Borrower
to NationsBank, N.A.) is hereby deleted from the Loan Agreement.
7. CONDITIONS. This Amendment is subject to the following conditions
-----------
precedent, which the Borrower agrees to use its best efforts to satisfy on or
before December 31, 1998. If, for any reason, said conditions are not satisfied
by said date, the amendments to the Loan
E-22
<PAGE>
Documents set forth in Sections 1 through 6 above shall be of no further force
or effect.
(a) Level 8 Guaranty. Level 8 shall have executed and delivered the
----------------
Level 8 Guaranty (as defined above).
(b) Level 8 Agreement. Level 8 shall have executed and delivered a
-----------------
letter agreement to GBC agreeing to the provisions of Section 8(2) above which
is being added to the Schedule.
(c) Subordinated Debt. Level 8 shall have made a subordinated loan
-----------------
to Borrower in the amount of not less than $12,000,000, the proceeds of which
shall be paid to GBC to be applied to the existing Term Loan and next to the
Receivable Loans. Said subordinated loan shall be subject to a subordination
agreement in favor of GBC in form satisfactory to GBC in its discretion, and
shall not permit principal or interest payments thereon during the term of the
Loan Agreement or while any Obligations are outstanding.
(d) Stock Ownership. Level 8 shall have acquired a majority of the
----------------
outstanding shares of voting stock of the Borrower.
(e) Outstanding NationsBank Loan. The presently outstanding loan from
----------------------------
NationsBank N.A. to the Borrower shall be paid and performed in full.
8. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that all
--------------------
representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.
9. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other
------------------
Loan Documents set forth in full all of the representations and agreements of
the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
Borrower: GBC:
SEER TECHNOLOGIES, INC. GREYROCK CAPITAL,
a Division of NationsCredit Commercial
Corporation
By
---------------------------
President or Vice-President
By
----------------------------
By Title:
----------------------------
Secretary or Ass't Secretary
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<PAGE>
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the Continuing Guarantees of the
undersigned, all of which are hereby ratified and affirmed. This Consent may be
executed in counterparts. The signatures of the undersigned shall be fully
effective even if other persons named below fail to sign this Consent.
SEER TECHNOLOGIES IRELAND LIMITED SEER TECHNOLOGIES BENELUX B.V.
By By
------------------------------- ------------------------------
Title Title
---------------------------- ---------------------------
By By
------------------------------- ------------------------------
Title Title
---------------------------- ---------------------------
E-24
<PAGE>
Schedule 7.1(g)
<TABLE>
<CAPTION>
Series A Series B
Preferred Preferred Common
Stock Stock Stock Percentage
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VI, 1,978,643 1,664,920 6,335,132 94.4842%
L.P.
WCAS Information Partners, L.P. 23,643 19,895 74,446 1.1290%
WCAS Capital Partners II 0 0 446,189 --
Patrick J. Welsh 11,822 9,947 37,225 0.5645%
Trust U/A dated 11/26/84 for the 1,688 1,421 5,317 0.0806%
Benefit of Eric Welsh
Trust U/A dated 11/26/84 for the 1,688 1,421 5,317 0.0806%
Benefit of Randall Welsh
Trust U/A dated 11/26/84 for the 1,688 1,421 5,317 0.0806%
Benefit of Jennifer Welsh
Russell L. Carson 16,887 14,210 53,174 0.8064%
Bruce K. Anderson 16,887 14,210 58,174 0.8064%
Richard H. Stowe 6,753 5,683 12,761 0.3226%
Richard H. Stowe, as Trustee for
the Benefit of the IRA of Richard 0 0 8,506 --
H. Stowe
Andrew M. Paul 4,052 3,410 13,261 0.1935%
Thomas E. McInerney 3,377 2,842 11,635 0.1613%
Laura Van Buren 675 568 2,126 0.0322%
James B. Hoover 5,066 4,263 15,952 0.2419%
Delaware Charter Trust Co., as
Trustee for the Benefit of the IRA 1,688 1,421 5,317 0.0806%
Rollover of James B. Hoover
Robert A. Minicucci 8,443 7,105 26,587 0.4032%
Anthony J. deNicola 1,012 852 3,188 0.0484%
David F. Bellet 6,754 5,684 21,270 0.3227%
Reboul, MacMurray, Hewitt, 3,377 2,842 0 0.1613%
Maynard & Kristol --------- --------- --------- --------
2,094,143 1,762,115 7,130,894 100.0000%
========= ========= ========= ========
</TABLE>
E-25
<PAGE>
EXHIBIT 8.2(A)
NEITHER THIS WARRANT NOR ANY SHARES ACQUIRED UPON EXERCISE OF THIS WARRANT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR UNDER ANY STATE
SECURITIES LAWS. NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM SUCH REGISTRATION.
Warrant No. __ For the Purchase of _______ Shares
LEVEL 8 SYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, ____________ _____________________
or its successors in interest, assigns or transferees (collectively, the
"Warrant Holder") is entitled to subscribe for and purchase from Level 8
Systems, Inc., a New York corporation (the "Company"), ______ shares of the
Company's common stock (the "Warrant Shares") for $12.00 a share. The number of
Warrant Shares and the purchase price for each Warrant Share are subject to
adjustment from time to time as provided in this Warrant (such purchase price,
as so adjusted from time to time, the "Exercise Price").
1. Exercise.
--------
(a) This Warrant may be exercised at any time and from time to time, in whole
or in part, on or prior to 5:00 p.m., New York time, on December 31, 2002.
(b) This Warrant may be exercised by the Warrant Holder, in whole or in part,
by (i) delivering to the Company a duly executed notice of exercise in the
form of annex A and (ii) at the Warrant Holder's option, either (A)
delivering a check payable to (or wire transfer to the account of) the
Company in an amount equal to the product of (1) the Exercise Price and (2)
the number of Warrant Shares as to which this Warrant is being exercised
(such product, the "Total Exercise Price") or (B) delivering to the Company
a letter (the "Cashless Exercise Letter") pursuant to which the Warrant
Holder surrenders a portion of the Warrant having a Deemed Value (as
defined below) equal to the Total Exercise Price. For these purposes, (i)
the term "Deemed Value" means the product of (A) an amount equal to (1) the
Market Price (as defined below) of a share of the Company's common stock,
reduced by (2) the Exercise Price, and (B) the number of Warrant Shares as
to which the Warrant is then being surrendered pursuant to the Cashless
Exercise Letter, and (ii) the term "Market Price" means the average market
price of the Company's common stock on the 20 trading days preceding the
date of exercise; if the common stock at the time is listed on any national
securities exchange, the Market Price on any day shall be the last sale
price of the common stock on that day; if the common stock is not so listed
but is traded on NASDAQ,
E-26
<PAGE>
the Market Price on any day shall be the last reported sale price on that day,
or, if no sale price shall have been reported, the mean between the bid and
asked prices on that day, all as reported in the Wall Street Journal.
(c) This Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date of delivery of a duly executed notice of
exercise, together with the amount (in cash or by delivering the Cashless
Exercise Letter) payable or deliverable upon exercise of this Warrant.
Thereafter, the rights of the Warrant Holder, as such, with respect to the
number of Warrant Shares as to which this Warrant is being exercised (and,
if applicable, surrendered as payment pursuant to the Cashless Exercise
Letter) shall cease, and the Warrant Holder shall be deemed to be the
record holder of the shares of common stock issuable upon such exercise.
As soon as practicable after the exercise of this Warrant, the Company
shall issue in the name of and deliver to the Warrant Holder, or as the
Warrant Holder (upon payment by the Warrant Holder of any applicable
transfer taxes) may direct, a certificate or certificates for the number of
fully paid and nonassessable shares of common stock to which the Warrant
Holder shall be entitled upon such exercise. In the event of partial
exercise of this Warrant and, if applicable, partial surrender of this
Warrant pursuant to the Cashless Exercise Letter, this Warrant shall be
delivered to the Company, and the Company shall issue and deliver to the
Warrant Holder a new Warrant evidencing the rights to purchase the
remaining Warrant Shares, which new Warrant shall in all other respects be
identical to this Warrant.
2. Certain Adjustments. This Warrant shall be subject to adjustment as
-------------------
follows:
(a) In case the Company shall (i) pay a stock dividend or make a
distribution to holders of common stock in shares of its common stock, (ii)
subdivide its outstanding shares of common stock, (iii) combine its
outstanding shares of common stock into a smaller number of shares or (iv)
issue by reclassification of its shares of common stock any shares of
capital stock of the Company, (v) the Exercise Price shall be increased or
decreased, as the case may be, to an amount that shall bear the same
relation to the Exercise Price in effect immediately prior to such action
as the total number of shares outstanding immediately prior to such action
shall bear to the total number of shares outstanding immediately after such
action and (vi) this Warrant automatically shall be adjusted so that it
shall thereafter evidence the right to purchase the kind and number of
Warrant Shares or other securities the Warrant Holder would have owned and
would have been entitled to receive after such action, if this Warrant had
been exercised immediately prior to such action or any record date with
respect thereto. An adjustment made pursuant to this subparagraph (a) shall
become effective retroactively immediately after the record date, in the
case of a dividend or distribution of common stock, and shall become
effective immediately after the effective date, in the case of a
subdivision, combination or reclassification.
(b) In case the Company shall fix a record date for the making of a
distribution to all holders of common stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of (i) assets (other than cash
dividends or cash distributions payable out of consolidated net income or
retained earnings or dividends payable in common stock), (ii) evidences of
indebtedness or other debt or equity securities of the Company, or of any
corporation other than the Company (except for the common stock of the
Company) or (iii) subscription rights, options or warrants to purchase any
of the foregoing assets or securities, whether or not such rights, options
or warrants are immediately exercisable (hereinafter collectively called
"Distributions on Common stock"), the Company shall make provision for the
Warrant Holder to receive upon exercise of this Warrant, a proportional
amount (depending upon the extent to which this Warrant is exercised) of
such
E-27
<PAGE>
assets, evidences of indebtedness, securities or such other rights, as
if such Warrant Holder had exercised this Warrant on or before such record
date.
(c) In case of any consolidation or merger of the Company with or into
another corporation or the sale of all or substantially all the assets of
the Company to another corporation, this Warrant thereafter shall be
exercisable for the kind and amount of shares of stock or other securities
or property to which a holder of the number of shares of common stock of
the Company deliverable upon exercise of this Warrant would have been
entitled upon such consolidation, merger or sale; and, in such case,
appropriate adjustment shall be made in the application of the provisions
in this paragraph 2, to the end that the provisions set forth in this
paragraph 2 (including provisions with respect to changes in and
adjustments of the Exercise Price) shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
securities or property thereafter deliverable upon the exercise of this
Warrant.
(d) Upon the occurrence of each adjustment or readjustment of the
Exercise Price or any change in the number of Warrant Shares or in the
shares of stock or other securities or property deliverable upon exercise
of this Warrant pursuant to this paragraph 2, the Company at its expense
shall promptly compute such adjustment or readjustment and change in
accordance with the terms hereof and furnish to each Warrant Holder a
certificate signed by the chief financial officer of the Company, setting
forth such adjustment or readjustment and change and showing in detail the
facts upon which such adjustment or readjustment and change is based.
(e) The Company shall not be required upon the exercise of this Warrant
to issue any fraction of shares, but shall make any adjustment therefor by
rounding the number of shares obtainable upon exercise to the next higher
whole number of shares.
3. Notice to Warrant Holder. If at any time,
------------------------
(a) the Company shall take any action which would require an adjustment
in the Exercise Price or in the number of Warrant Shares pursuant to
paragraph 2; or
(b) the Company shall authorize the granting to the holders of its
common stock of any Distributions on Common Stock as set forth in paragraph
2(b), and notice thereof shall be given to holders of common stock; or
(c) the Company shall issue any additional shares of common stock or
declare any dividend (or any other distribution) on its common stock (other
than its regular quarterly dividends); or
(d) there shall be any capital reorganization or reclassification of
the common stock (other than a change in par value or from par value to no
par value or from no par value to par value of the common stock), or any
consolidation or merger to which the Company is a party, or any sale or
transfer of all or substantially all the assets of the Company; or
(e) there shall be a voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then, in any one or more of said cases, the Company shall give written notice to
the Warrant Holder, not
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<PAGE>
fewer than 20 days before any record date or other date set for definitive
action, or of the date on which such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up shall take place,
as the case may be. Such notice shall also set forth such facts as shall
indicate the effect of such action (to the extent such effect may be known at
the date of such notice) on the current Exercise Price and the kind and amount
of the Warrant Shares and other securities and property deliverable upon
exercise of this Warrant. Such notice shall also specify the date as of which
the holders of the Common Stock of record shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up, as the case may be.
4. Transfer of Rights. This Warrant is transferable, in whole or in part, at
------------------
the option of the Warrant Holder upon delivery of the Warrant Assignment Form
annexed as annex B, duly executed. The Company shall execute and deliver a new
Warrant or Warrants in the form of this Warrant with appropriate changes to
reflect the issuance of subsequent Warrants, in the name of the assignee or
assignees named in such instrument of assignment and, if the Warrant Holder's
entire interest is not being transferred or assigned, in the name of the Warrant
Holder, and this Warrant shall promptly be cancelled. Any transfer or exchange
of this Warrant shall be without charge to the Warrant Holder and any new
Warrant or Warrants issued shall be dated the date hereof. The term "Warrant"
as used herein includes any Warrants into which this Warrant may be divided or
for which it may be exchanged.
5. Rights of Warrant Holder. The Warrant Holder shall not, by virtue hereof,
------------------------
be entitled to any voting or other rights of a shareholder of the Company,
either at law or equity, and the rights of the Warrant Holder are limited to
those expressed in this Warrant.
6. Miscellaneous.
-------------
(a) This Warrant shall be construed in accordance with and governed by
the law of the state of New York without regard to principles of
conflicts and choice of laws.
(b) The caption headings used in this Warrant are for convenience of
reference only and shall not be construed in any way to affect the
interpretation of this Warrant.
(c) Any notice pursuant to this Warrant shall be sufficiently given if
sent by first-class mail, postage prepaid, or delivered by
facsimile transmission, addressed as follows:
if to the Company, to it at:
1250 Broadway
35th Floor
New York, New York 10001
Attention: Chief Financial Officer
Facsimile No.: (212) 760-2327
(or to such other address as the Company may have furnished in writing
to the Warrant Holder for this purpose);
E-29
<PAGE>
if to the Warrant Holder, to it at such address as the Warrant Holder may
have furnished in writing to the Company for this purpose.
Date:
-----------------
LEVEL 8 SYSTEMS, INC.
By:
-----------------------
Name:
Title:
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<PAGE>
ANNEX A
-------
COMMON STOCK PURCHASE WARRANT
-----------------------------
Notice of Exercise
_______________, 19__
To: LEVEL 8 SYSTEMS, INC.
The undersigned, pursuant to the provisions set forth in Warrant No. __,
hereby irrevocably elects and agrees to purchase ______ shares of the Company's
common stock covered by such Warrant, and makes payment herewith in full
therefor of the Total Exercise Price of $___________ in cash.
The undersigned hereby represents that the undersigned is exercising such
Warrant for its own account or the account of an affiliate for investment
purposes and not with the view to any offering or distribution and that the
Warrant Holder will not sell or otherwise dispose of the underlying Warrant
Shares in violation of applicable securities laws. [When applicable: If said
number of shares is less than all the shares purchasable hereunder, the
undersigned requests that a new Warrant evidencing the rights to purchase the
remaining Warrant Shares (which new Warrant shall in all other respects be
identical to the Warrant exercised hereby) be registered in the name of
___________, whose address is
_________________________
_________________________
_________________________]
Signature:
----------------------
Printed Name:
-------------------
Address:
-------------------------
-------------------------
-------------------------
E-31
<PAGE>
ANNEX B
-------
ASSIGNMENT
FOR VALUE RECEIVED, ____________________ hereby sells, assigns and
transfers all its rights as set forth in Warrant No. ___ with respect to the
shares of the Company's common stock covered thereby as set forth below unto:
Name of Assignee(s) Address(es) No. of Shares
- ------------------- ----------- -------------
- ------------------- ---------------- --------------
----------------
All notices to be given by the Company to the Warrant Holder pursuant to
paragraph 3 of Warrant No. ___ shall be sent to the Assignee(s) at the above
listed address(es), and, if the number of shares being hereby assigned is fewer
than all the shares covered by Warrant No. ___, then also to the undersigned.
The undersigned requests that the Company execute and deliver, if
necessary to comply with the provisions of paragraph 4 of Warrant No.___, a new
Warrant or, if the number of shares being hereby assigned is fewer than all the
shares covered by Warrant No. ___, new Warrants in the name of the undersigned,
the assignee and/or the assignees, as appropriate.
Dated: , 19
----------- --
Signature:
----------------------
Printed Name:
-------------------
Address:
------------------------
------------------------
------------------------
E-32
<PAGE>
EXHIBIT 10.59
This Maintenance Agreement is made this 7th day of September 1998.
BY AND BETWEEN:
1. IBM Ireland Information Services Limited whose registered office is at 2
Burlington Road, Dublin 4, Ireland ("IISL")
AND
2. Seer Technologies, Inc. whose principal office is at 8000 Regency
Parkway, Cary, North Carolina 27511, USA ("Seer")
RECITALS:
A. On 6th April 1992 the parties entered into a Master Distribution and
License Agreement ("MDLA"). Article 6.2.3, together with Attachment 5,
thereof describes certain support and maintenance services. These
services were supplied by IISL, on behalf of Seer, to third parties in
EMEA.
B. On 14th February 1997, the parties amended the MDLA ("Amendment"). The
Amendment provided that IISL supply certain support and maintenance
services, on behalf of Seer, to third parties in EMEA, in the period from
1st January 1997 until 31st December 1999. In consideration of the
supply of these services, Seer agreed to pay certain fees as defined in
the Amendment.
C. Each party acknowledges that the MDLA and the Amendment are complex and
out of date.
D. The parties have agreed to terminate the MDLA and the Amendment, and
replace them with this Agreement, which sets out the terms and conditions
under which IISL shall supply Level 2 support and maintenance services,
and Seer, Level 3 support and maintenance services, as follows:
TERMS AGREED:
1. Interpretation
References in this Agreement to:
1.1 "Maintenance Period" means the period from 1st October 1998 until 30th
September 1999 inclusive;
1.2 "Services" means, individually and collectively, the support and
maintenance services for HPS Software and Additional Software, as
supplied by IISL, Affiliated IBM Company or Seer to, or for the benefit
of, the Customer, as more particularly described in Clause 3 below;
1.3 "Customer" shall refer to those customers in EMEA where Seer has, at its
sole option, decided that Services shall be supplied by IISL or
Affiliated IBM Company, and to no other customer or third party;
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<PAGE>
1.4 "Response Times" means the response times as more particularly described
in the Appendix to this Agreement;
1.5 "HPS Software", "Additional Software", "Seer Related Company" and
"Affiliated IBM Company" shall bear the same meaning as set out in the
MDLA;
1.6 "Software" means, individually or collectively, HPS Software, Additional
Software or any part thereof;
1.7 "MDLA" means the Master Distribution and License Agreement between IISL
and Seer and dated 6th April 1992, together with Attachments 1 - 6
thereto, as modified by the Amendment;
1.8 "Amendment" means the amendment to the Master Distribution and License
Agreement between IISL and Seer and dated 14th February 1997; and
1.9 "Agreement" means these terms and conditions, and the Appendix attached
hereto.
1.10 "Effective Date" means the date on which the Agreement is deemed to be
executed as defined in Clause 4.5 below.
2. Termination of MDLA and Amendment
2.1 Save in respect of those terms and conditions which are intended to
survive termination or expiry without renewal, the MDLA and Amendment
shall terminate upon the Effective Date of this Agreement.
3. Services
3.1 Level 1 support shall be supplied by the relevant Affiliated IBM Company
("Level 1 Provider"), such services being the subject of a separate
agreement(s) between Seer (or a Seer Related Company) and the relevant
Affiliated IBM Company for the Customer.
3.2 Throughout the Maintenance Period, IISL shall, in relation to the
Software, use all reasonable endeavours to meet the Response Times, in
the provision of the following Level 2 support to Customers:
(a) Analyse, and determine the source of, the reported problem, and
including but not limited to verifying that the location of the
reported problem is in the Software or other product;
(b) Verify the error impact on the Customer, and in particular
whether the reported problem is a Severity Level 1 or 2 (as
defined in the Appendix to this Agreement);
(c) Search Seer Incident Tracking System for existing information;
(d) Contact Seer (or Level 3 provider) if assistance is needed from
Seer (or Level 3 provider) to investigate and resolve the
reported problem;
E-34
<PAGE>
(e) Ensure effective communication between the Level 1 Provider (as
defined in Clause 3.1 above) and Seer (or Level 3 provider) until
such time as the reported problem is closed by the Customer;
(f) If the reported problem is an error or "bug", develop a
workaround or escalate to Seer if a PTF is required; and
(g) Copy snapshot of Seer Incident Tracking System data periodically.
3.3 Throughout the Maintenance Period, Seer shall, in relation to the
Software, at no extra charge, use all reasonable endeavours to meet the
Response Times in the provision of the following Level 3 support to IISL
as follows:
(a) supply support periodically in the form of a PTF or general
maintenance updates;
(b) supply Seer Incident Tracking System data snapshot periodically;
and
(c) Distribute PTF electronically (via Seer FTP site) if necessary,
followed by shipment of tape/diskette in such format as Seer
shall deem appropriate with any associated documentation or
instructions.
3.4 Seer shall not be required to provide any Services in respect of errors
or defects in the Software caused by or arising from:
(a) modifications to the Software made by IISL, Affiliated IBM
Company or the Customer without Seer's prior written approval;
(b) accident, neglect, misuse, or improper programming by IISL,
Affiliated IBM Company or the Customer;
(c) failure or fluctuations in electrical power or hardware
equipment; or
(d) failure by IISL, Affiliated IBM Company or Customer in fulfilling
their obligations to Seer.
4. Charges
4.1 In consideration of the availability and supply of the Services as more
particularly described in Clause 3.2 above, Seer shall pay to IISL the sum
of eight hundred thousand United States Dollars (US$800,000) in four equal
installments in accordance with the following payment schedule
Amount (US$) Invoice Date Payment Date
(See Note)
200,000 15th October 1998 15th November 1998
200,000 15th January 1999 15th February 1999
200,000 15th April 1999 15th May 1999
200,000 15th July 1999 15th August 1999
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<PAGE>
Note:
Notwithstanding the use of United States Dollars in the above table, IISL shall
invoice Seer in Irish punts using the exchange rate specified in the Wall Street
Journal on the last working day immediately preceding the relevant invoice date.
In the event that the exchange rate as published in the Wall Street Journal on
the date specified above, deviates by more than 5% from the exchange rate
applying on the Effective Date, either party may, upon written notice to the
other, invoke the Periodic Review procedure specified in Clauses 5.3 - 5.5
below.
4.2 Save as otherwise expressly provided above or as otherwise agreed by the
parties in writing, all payments shall be made within 30 days of receipt
of invoice by wire transfer to the other's designated account.
4.3 All sums specified in this Agreement are exclusive of VAT, which may be
added to any invoice due under this Agreement.
4.4 Seer shall pay to IISL the sum of eight hundred and twenty one thousand,
three hundred and twenty Irish punts (I(Pounds)821,320) in respect of
Services already supplied and where IISL has invoiced Seer prior to the date
of this Agreement. This amount shall be paid in two (2) equal installments
as follows:
Amount (Irish (Pounds)) Payment Date
410,660 15th September 1998
410,660 15th October 1998
4.5 This Agreement will be executed on the date (the "Effective Date") on
which the second instalment, defined in Clause 4.4 above, reaches IISL's
bank account.
5. Additional Services & Changes:
5.1 Any additional services over and above the Services as more particularly
described in Clause 3 above, or any extension of the Services beyond the
Maintenance Period, shall be the subject of a separate agreement, and
charges.
5.2 All changes, modifications or variations to the Services shall be in
writing and signed by the parties. No change to the Services shall be
undertaken in the absence of such written agreement.
Periodic Review:
5.3 Without prejudice to Clauses 5.1 and 5.2 above or any other part of this
Agreement, on or around 31st March 1999, Seer and IISL shall meet to
review generally the maintenance business for the Software in EMEA,
together with the terms, conditions and charges of this Agreement.
5.4 The underlying purpose of such a review is for the parties to consider
whether, in the light of the then prevailing economic circumstances, it
is in the commercial interests of either party to continue with this
Agreement without modification.
E-36
<PAGE>
5.5 In the event that one or other of the parties decides that a modification
to the Agreement is required, the parties shall, in good faith, negotiate
an amendment to this Agreement, with a view to ensuring that, at all
times, this Agreement reflects a profit-making business for each party.
During the course of these negotiations, and without prejudice to the
termination provisions set forth in Clause 7 below, the parties shall
continue to provide the Services.
6. Warranty & Limitation of Liability
6.1 IISL and Seer shall exercise all reasonable care and skill in fulfilling
the tasks assigned to them, in accordance with the best practices of the
computing services industry.
6.2 Save as expressly provided above, all Services are supplied "AS IS"
without warranty of any kind.
6.3 Neither party shall be liable to the other for any loss or damage
howsoever arising in contract, tort or otherwise, irrespective of whether
such loss or damage was reasonably foreseeable, and irrespective of
whether such loss or damage is direct, indirect, special, consequential,
incidental or punitive or is a loss of anticipated savings, or goodwill,
or is a loss of contracts, or arises from the delivery (including non-
delivery) of any Services, or arises from any delay.
7. Termination
7.1 This Agreement shall remain in force during the Maintenance Period UNLESS
terminated in accordance with this Clause 7.
7.2 Either party may terminate this Agreement at any time, with or without
cause, upon 90 days prior written notice to the other.
7.3 Either party may terminate this Agreement immediately upon written notice
where the other commits a breach incapable of remedy, or fails to remedy
any other breach within 30 days of receipt of written notice thereof.
7.4 Either may terminate this Agreement immediately upon written notice where
the other is dissolved or has a receiver, administrator, administrative
receiver or other similar officer appointed over all or part of its
assets or enters into an arrangement or assignment for the benefit of its
creditors or is wound up (other than for the purposes of a bona fide
amalgamation or reconstruction).
7.5 This Agreement shall lapse upon the expiry of the Maintenance Period.
8. Miscellaneous
8.1 No Hiring. Neither party shall induce, solicit, hire or employ, either
directly or indirectly, any employee of the other, or any of the other's
subsidiary or affiliated companies for: (a) the Maintenance Period; or
(b) a period of six (6) months after that employee's termination of
employment, whichever period is the greater.
E-37
<PAGE>
8.2 Assignment. This Agreement is personal to IISL. IISL may not assign,
part with or transfer this Agreement without the prior written consent of
Seer OTHER THAN to an Affiliated IBM Company. Seer reserves the right to
assign, transfer or sub-contract this Agreement to any third party.
8.3 Force Majeure. Neither party shall be liable for delay or failure to
perform any of its obligations under this Agreement where such delay or
failure results from any circumstances beyond its reasonable control.
The party affected shall be excused performance of such obligation for as
long as such circumstance prevails.
8.4 Amendment. This Agreement shall not be amended except by a subsequently
dated written amendment signed by duly authorised representatives on
behalf of each party.
8.5 Waiver. The failure of any party to enforce, at any time or for any
period of time, any provision of this Agreement shall not be construed as
a waiver of such provision and shall in no way affect that party's right
later to enforce it.
8.6 Severability. If any provision of this Agreement is void or
unenforceable at law, such provision shall be severed and the remainder
of the Agreement shall continue in full force and effect.
8.7 Whole Agreement: This Agreement constitutes the entire understanding and
agreement of the parties in relation to the subject matter hereof.
8.8 Notices. Any notice required to be given under this Agreement shall be
given in writing and sent by overnight mail, return receipt requested to
the relevant address given at the head of this Agreement.
Notices to Seer should be addressed to the "General Counsel, Seer
Technologies, Inc.".
Notices to IISL should be addressed to _________________________________.
8.9 Clause Headings. Clause headings are included for information purposes
only and do not form part of this Agreement.
8.10 Governing Law. This Agreement shall be governed by the laws of North
Carolina, USA.
AGREED:
Signed by: __________________ Signed by: __________________
/s/ Steven Dmiszewicki /s/ J. Dermody
For and on behalf of Seer For and on behalf of IBM Ireland
Technologies, Inc. Information Services Limited
Name: Steven Dmiszewicki Name: J. Dermody
Title: President Title: Solution Centre Manager
Date: September 8, 1998 Date: September 7, 1998
E-38
<PAGE>
APPENDIX
RESPONSE TIMES
SERVICE LEVELS
IISL AND Seer shall, in the provision of the support and maintenance services
described in Clauses 3.2 and 3.3 above, use all reasonable endeavours to meet
the following response times:
Severity Initial Temporary Final
Level Response Resolution Resolution
1 1 hour 1 day CSD
2 1 day 7 days CSD
where:
"Severity Level 1 "means a critical condition affecting the Customer's
production environment with no acceptable workaround.
Requires constant dedicated Customer and IISL resources.
"Severity Level 2 "means a severe restriction, but not a complete obstacle,
to the Customer's ability to use the Software. No
acceptable workaround. Seer may request Customer
resources as necessary.
E-39
<PAGE>
EXHIBIT 10.60
AMENDMENT TO LOAN DOCUMENTS
BORROWER: SEER TECHNOLOGIES, INC.
ADDRESS: 8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
DATE: DECEMBER 22, 1998
THIS AMENDMENT ("Amendment") is entered into as of the above date between
GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation (formerly
Greyrock Business Credit) ("GBC"), and the borrower named above ("Borrower")
with respect to the Loan and Security Agreement between GBC and Borrower, dated
March 26, 1997 (as amended from time to time, the "Loan Agreement"). (This
Amendment, the Loan Agreement, all other prior written amendments to the Loan
Agreement signed by GBC and the Borrower, and all other written documents and
agreements between GBC and the Borrower are referred to herein collectively as
the "Loan Documents". Capitalized terms used but not defined in this Amendment,
shall have the meanings set forth in the Loan Agreement.)
Subject to the conditions set forth below, the parties agree to amend the
Loan Agreement as follows, effective on ___________:
1. CREDIT LIMIT. Section 1 of the Schedule is amended in its entirety to
read as follows:
"1. Credit Limit (Section 1.1): Loans ("Receivable Loans") up to the sum
----------------------------
of the following percentages of Borrower's Eligible Receivables (as defined
in Section 8 above), provided that the total outstanding balance of
Receivable Loans shall not at any time exceed $25,000,000:
"(i) 80% of the amount of eligible U.S. accounts; plus
----
"(ii) the lesser of 80% of Unbilled Receivables (as defined in
Section 8 above) or $3,000,000; plus
----
"(iii) the lesser of 80% of the amount of eligible Australian
accounts or $2,000,000; plus
----
"(iv) 80% of the amount of eligible Irish accounts; plus
----
"(v) 80% of the amount of eligible Netherlands accounts."
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<PAGE>
2. INTEREST RATE. Section 2 of the Schedule is amended in its entirety
to read as follows:
"2. Interest Rate (Section 1.2): The interest rate in effect
-------------
throughout each calendar month during the term of this Agreement shall be
the following:
Period Interest Rate
------ -------------
Amendment Effective Date Prime Rate
through December 31, 1999
January 1, 2000 through Prime Rate plus 1% per annum
December 31, 2000
January 1, 2001 and thereafter Prime Rate plus 2% per annum
"Interest shall be calculated on the basis of a 360-day year for the actual
number of days elapsed. The interest rate applicable to all Loans shall be
adjusted monthly as of the first day of each month, and the interest to be
charged for each month shall be based on the highest "Prime Rate" in effect
during said month.
" `Amendment Effective Date' means the date the Amendment to Loan Documents
between Borrower and GBC dated December 22, 1998 is effective.
" `Prime Rate' means the actual `Reference Rate' or the substitute therefor
of the Bank of America NT & SA (or its successor) whether or not that rate
is the lowest interest rate charged by said bank. If the Prime Rate, as
defined, is unavailable, `Prime Rate' shall mean the highest of the prime
rates published in the Wall Street Journal on the first business day of the
month, as the base rate on corporate loans at large U.S. money center
commercial banks."
3. MATURITY DATE. Section 4 of the Schedule is amended in its entirety to
--------------
read as follows:
"4. Maturity Date (Section 6.1): December 31, 2001, subject to
----------------------------
automatic renewal as provided in Section 6.1 above, and early termination
as provided in Section 6.2 above."
4. ADDITIONAL PROVISIONS. The following new Section 8 is added to the
----------------------
Schedule:
"8. Additional Provisions.
---------------------
"(1) Guaranty. Borrower shall concurrently cause Level 8
--------
Systems, Inc., a New York corporation (`Level 8') to execute and deliver to
GBC a Continuing Guaranty with respect to the Obligations, on GBC's
standard form
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<PAGE>
(the `Level 8 Guaranty'), provided that Level 8's liability under the Level
8 Guaranty shall be limited to the `Guaranty Limit' as defined below. The
Guaranty Limit shall be an amount equal to the following (plus all interest
on the obligations of Level 8 under the Level 8 Guaranty, plus all
reasonable costs incurred in enforcing the obligations of Level 8 under the
Level 8 Guaranty):
"(a) During the period from the date of the Level 8 Guaranty to
December 31, 1999, the Guaranty Limit shall be an amount equal to the
amount of the Obligations at the Determination Date (as defined below) in
excess of $20,000,000.
"(b) During the period from January 1, 2000 to December 31, 2000
the Guaranty Limit shall be an amount equal to the amount of the
Obligations at the Determination Date (as defined below) in excess of
$10,000,000.
"From and after January 1, 2001 the liability of Level 8 under the Level 8
Guaranty shall not be limited.
" `Determination Date' shall mean, at any date, the date a written notice
of acceleration of the Obligations is given by GBC to Borrower or Level 8,
which is not subsequently waived in writing or rescinded in writing. The
Level 8 Guaranty shall continue in full force and effect after any such
waiver or rescission of a written notice of acceleration.
"Borrower shall cause the Level 8 Guaranty to continue in effect until this
Loan Agreement has been terminated and all of the Obligations have been
paid and performed in full.
"(2) Level 8. Without GBC's prior written consent: (a) Borrower
-------
shall not, and shall not permit any of its subsidiaries to, engage in any
transactions with Level 8 or Level 8's other affiliates on terms less
favorable to Borrower or such subsidiaries than the terms on which an
unaffiliated third party would engage in such transaction; and (b) Borrower
shall not make any transfer of funds or other property to Level 8 or Level
8's other affiliates (other than Borrower's subsidiaries), other than
payments not in contravention of clause (a) above; and (c) Borrower shall
not pay or declare any distributions or dividends, or redeem or repurchase
any of its stock or other securities from Level 8 or any of Level 8's other
affiliates.
"(3) Streamlined Provisions. At such time as the total unpaid
-----------------------
principal balance of all outstanding Loans is $13,000,000 or less, the
following provisions (the `Streamlined Provisions') shall apply:
"(a) Daily reporting of transactions and daily schedules and
assignments of Receivables and schedules of collections, called for by
Section 4.3 of this Loan Agreement, will not be required. Instead, the
Borrower shall provide GBC with a monthly Borrowing Base Certificate, in
such form as GBC shall from time to time specify, within 10 days after the
end of each month. In
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<PAGE>
the event, as of the end of any month, the total of all Loans and all
other Obligations exceeds the Credit Limit, Borrower shall immediately pay
the amount of the excess to GBC.
"(b) Delivery of the proceeds of Receivables and other
Collateral within one business day after receipt, as called for by Sections
4.4 and 5.4 of this Loan Agreement will not be required.
"(c) The Streamlined Provisions shall immediately terminate if
any Event of Default or any event which, with notice or passage of time or
both, would constitute an Event of Default, occurs and is continuing.
"(d) While the Streamlined Provisions are in effect, the total
principal balance of the Loans may not, thereafter, exceed $13,000,000,
unless Borrower elects, by at least three Business Days' prior written
notice to GBC, to terminate the Streamlined Provisions. In the event
Borrower wishes to terminate the Streamlined Provisions, Borrower shall
provide GBC with such information relating to the Receivables and other
Collateral as GBC shall specify in order to enable GBC to complete its
normal Receivables and Collateral review, at least three Business Days
prior to the date the Streamlined Provisions are to terminate.
"(e) Upon termination of the Streamlined Provisions under clause
(c) or (d) above, the Borrower shall, then and thereafter, provide GBC with
the daily reporting of transactions and daily schedules and assignments of
Receivables and schedules of collections, as called for by Section 4.3 of
the Loan Agreement, and the Borrower shall deliver all proceeds of
Receivables and other Collateral to GBC, within one business day after
receipt, as called for by Sections 4.4 and 5.4 of the Loan Agreement."
5. DELETE TERMINATION FEE. The portion of Section 3 of the Schedule, which
-----------------------
presently reads as follows: "Termination Fee: $20,000 per month for each month
(or portion thereof) from the effective date of termination to the Maturity
Date." is amended to read as follows:
"Termination Fee: None."
6. WELSH CARSON--CONFORMING CHANGES.
---------------------------------
(a) The portion of Section 7.1(n) of the Loan Agreement, which
presently reads as follows: "Welsh Carson Anderson & Stowe VI, L.P., a Delaware
limited partnership's equity ownership decreases to less than 51%" is amended to
read as follows:
"Level 8's equity ownership decreases to less than 51%".
(b) Section 7.1(r) of the Loan Agreement (which relates to a Guaranty
by Welsh Carson Anderson & Stowe VI, L.P. of certain obligations of the Borrower
to NationsBank, N.A.) is hereby deleted from the Loan Agreement.
7. CONDITIONS. This Amendment is subject to the following conditions
-----------
precedent,
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<PAGE>
which the Borrower agrees to use its best efforts to satisfy on or before
December 31, 1998. If, for any reason, said conditions are not satisfied by said
date, the amendments to the Loan Documents set forth in Sections 1 through 6
above shall be of no further force or effect.
(a) Level 8 Guaranty. Level 8 shall have executed and delivered the
----------------
Level 8 Guaranty (as defined above).
(b) Level 8 Agreement. Level 8 shall have executed and delivered a
-----------------
letter agreement to GBC agreeing to the provisions of Section 8(2) above which
is being added to the Schedule.
(c) Subordinated Debt. Level 8 shall have made a subordinated loan
-----------------
to Borrower in the amount of not less than $12,000,000, the proceeds of which
shall be paid to GBC to be applied to the existing Term Loan and next to the
Receivable Loans. Said subordinated loan shall be subject to a subordination
agreement in favor of GBC in form satisfactory to GBC in its discretion, and
shall not permit principal or interest payments thereon during the term of the
Loan Agreement or while any Obligations are outstanding.
(d) Stock Ownership. Level 8 shall have acquired a majority of the
----------------
outstanding shares of voting stock of the Borrower.
(e) Outstanding NationsBank Loan. The presently outstanding loan from
----------------------------
NationsBank N.A. to the Borrower shall be paid and performed in full.
8. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that all
--------------------
representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.
9. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other
------------------
Loan Documents set forth in full all of the representations and agreements of
the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
Borrower: GBC:
SEER TECHNOLOGIES, INC. GREYROCK CAPITAL,
A Division of NationsCredit Commercial
Corporation
By /s/ Steven Dmiszewicki
President or Vice-President By /s/ Richard Suhl
Title: President
By /s/ Dennis Mckinnie
Secretary or Ass't Secretary
E-44
<PAGE>
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the Continuing Guarantees of the
undersigned, all of which are hereby ratified and affirmed. This Consent may be
executed in counterparts. The signatures of the undersigned shall be fully
effective even if other persons named below fail to sign this Consent.
SEER TECHNOLOGIES IRELAND LIMITED SEER TECHNOLOGIES BENELUX B.V.
By /s/ Dennis McKinnie By /s/ Steven Dmiszewicki
Title Title
----------------------------- --------------------------
By /s/ Steven Dmiszewicki By /s/ Dennis McKinnie
Title Title
----------------------------- --------------------------
E-45
<PAGE>
EXHIBIT 21.1
SEER TECHNOLOGIES, INC.
List of Subsidiaries
DOMESTIC COMPANIES
Parent Company:
SEER Technologies, Inc.
Date of Incorporation: 03/06/90
State of Incorporation: Delaware
Subsidiary:
SEER Technologies (Worldwide Holdings) Limited
Date of Incorporation: 02/26/92
State of Incorporation: Delaware
FOREIGN SUBSIDIARIES
Argentina:
SEER Technologies de Argentine S.A.
Date of Incorporation: 09/20/96
Australia:
SEER Technologies Australia Pty Limited
Date of Registration: 08/09/93
Barbados:
SEER Technologies FSC, Inc.
Date of Registration: 12/27/95
Benelux:
Seer Technologies Benelux B.V.
Date of Registration: 09/25/92
E-46
<PAGE>
Brazil:
SEER Technologies do Brazil Ltda.
Date of Registration: 12/09/93
Canada:
SEER Technologies Canada, Inc.
Domestic Province: Ontario
Date of Registration: 05/18/94
Denmark:
SEER Technologies Denmark ApS
Date of Registration: 04/01/94
France:
SEER Technologies France S.A.R.L.
Date of Incorporation: 06/09/95
Germany:
SEER Technologies Europe (Deutschland) GmbH
Date of Registration: 11/19/92
Hong Kong:
SEER Technologies Hong Kong Limited
Date of Registration: 12/14/94
Ireland:
SEER Technologies Ireland Limited
Date of Registration: 03/11/95
Italy:
SEER Technologies Italia S.r.L.
Date of Registration: 08/07/92
E-47
<PAGE>
Mexico:
SEER Technologies de Mexico S.A. de C.V.
Date of Registration: 11/08/95
Korea:
SEER Korea Co., Limited
Date of Registration: 07/07/97
Sweden:
SEER Technologies Nordic AB
Date of Registration: 07/09/92
Singapore:
SEER Technologies Singapore Pty Lte.
Date of Incorporation: 02/11/95
Spain:
SEER Technologies Espana, S.L.
Date of Registration: 07/22/93
United Kingdom:
SEER Technologies (U.K.) Limited
Date of Registration: 01/07/92
E-48
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
__________
We consent to the incorporation by reference in the registration statement
of Seer Technologies, Inc. on Forms S-8 (File Nos. 33-97856 and 33-97858) of our
report dated December 31, 1998, on our audits of the consolidated financial
statements of Seer Technologies, Inc., as of September 30, 1998, and for the
three years in the period ended September 30, 1998, which report is included in
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
January 11, 1999
E-49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 1,040 4,268
<SECURITIES> 0 0
<RECEIVABLES> 19,585 35,769
<ALLOWANCES> 2,300 2,345
<INVENTORY> 0 0
<CURRENT-ASSETS> 19,801 38,750
<PP&E> 8,285 18,723
<DEPRECIATION> 6,418 14,195
<TOTAL-ASSETS> 23,195 66,535
<CURRENT-LIABILITIES> 59,467 44,711
<BONDS> 0 0
0 0
39 21
<COMMON> 120 119
<OTHER-SE> (36,684) 20,703
<TOTAL-LIABILITY-AND-EQUITY> 23,195 66,535
<SALES> 0 0
<TOTAL-REVENUES> 63,964 103,153
<CGS> 0 0
<TOTAL-COSTS> 47,778 51,841
<OTHER-EXPENSES> 54,378 54,045
<LOSS-PROVISION> 1,027 4,338
<INTEREST-EXPENSE> 3,488 2,181
<INCOME-PRETAX> (42,230) (8,738)
<INCOME-TAX> (20,210) (1,228)
<INCOME-CONTINUING> (62,440) (9,966)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (62,440) (9,966)
<EPS-PRIMARY> (5.23) (.85)
<EPS-DILUTED> (5.23) (.85)
</TABLE>
