<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
NEW YORK 7372 AND 8742 11-2920559
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
ONE PENN PLAZA
SUITE 3401
NEW YORK, NEW YORK 10119-0002
(212) 244-1234
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------------
ROBERT R. MACDONALD
CHAIRMAN OF THE BOARD
ONE PENN PLAZA
SUITE 3401
NEW YORK, NEW YORK 10119-0002
(212) 244-1234
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
EDWARD W. KERSON, ESQ. ROBERT S. BROWN, ESQ.
Proskauer Rose Goetz & Mendelsohn LLP Brock Fensterstock Silverstein McAuliffe & Wade LLC
1585 Broadway One Citicorp Center
New York, New York 10036-8299 56th Floor
(212) 969-3000 New York, New York 10022-4611
(212) 371-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE(1)
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share............ 1,150,000(2) $11.38 $13,081,250.00 $3,964.02
Representative's Warrants......................... 100,000 $0.001 $100.00 $0.03
Shares of Common Stock Underlying Representative's
Warrants (3).................................... 100,000 $15.36 $1,536,300.00 $465.35
Total Registration Fee............................ - - - $4,429.40
</TABLE>
(1) The price stated is estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457 under the Securities Act of 1933 based
on the average high and low prices reported for the Common Stock on the
Nasdaq National Market on October 30, 1996.
(2) Includes 150,000 shares that the Representative has the option to purchase
to cover over-allotments, if any.
(3) Pursuant to Rule 416, this Registration Statement also registers such
indeterminate number of shares as may become issuable pursuant to the
antidilution provisions of the Representative's Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LEVEL 8 SYSTEMS, INC.
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(b) OF REGULATION S-K)
<TABLE>
<CAPTION>
S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Not Applicable
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Principal and Selling Shareholders
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page; Description of Securities
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Use of Proceeds; Market Price of Common
Stock and Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Pro Forma Selected
Consolidated Statements of Operations; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Certain Relationships and Related Transactions;
Principal and Selling Shareholders; Shares Eligible
for Future Sale; Description of Securities;
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1996
PROSPECTUS
1,000,000 SHARES
LEVEL 8 SYSTEMS, INC.
COMMON STOCK
------------------
Of the 1,000,000 shares (the "Shares") of common stock, par value $.01 per
share (the "Common Stock"), offered hereby, 600,000 Shares are being issued and
sold by Level 8 Systems, Inc. (the "Company") and 400,000 Shares are being sold
by certain Selling Shareholders (as hereinafter defined) of the Company. The
Company will not receive any of the proceeds from the sale of Shares by the
Selling Shareholders. The Common Stock is quoted on the Nasdaq National Market
under the symbol "LVEL." On , 1996, the last reported sale price of the
Common Stock was $ per share. After completion of this offering, Liraz
Systems Ltd. and its wholly-owned subsidiaries will continue to own
approximately 54% (including if the Representative's over-allotment option is
exercised in full) of the outstanding Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.............................................. $ $ $ $
Total(3)............................................... $ $ $ $
</TABLE>
(1) Does not include additional consideration to Hampshire Securities
Corporation, as the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of (a) a % non-accountable
expense allowance and (b) warrants entitling the Representative to purchase
up to 100,000 shares of Common Stock. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of this offering payable by the Company
of $ , including the Representative's non-accountable expense
allowance.
(3) The Company, on the one hand, and certain individual shareholders of the
Company and a corporate selling shareholder (collectively, the "Selling
Shareholders"), on the other, have granted the Representative an option,
exercisable within 45 days after the date of this Prospectus, to purchase on
a pro rata basis up to an additional 30,000 and 120,000 shares of Common
Stock, respectively, on the same terms as set forth above, solely to cover
over-allotments, if any. If the Representative exercises such option in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Shareholders will be $ ,
$ , $ and $ , respectively. See "Principal and
Selling Shareholders" and "Underwriting."
------------------------------
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to, and accepted by them and subject to their
right to reject orders in whole or in part and certain other conditions. It is
expected that delivery of certificates will be made against payment therefor at
the offices of Hampshire Securities Corporation on or about , 1996.
--------------------------
HAMPSHIRE SECURITIES CORPORATION
---------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[flow diagram of three-tier software architecture which is color coded to show
Level 8 products and services]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE
ACT. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF (A) THE
UNDERWRITER'S OVER-ALLOTMENT OPTION, (B) THE REPRESENTATIVE'S WARRANTS, (C) UP
TO 900,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF
OPTIONS THAT MAY BE GRANTED UNDER THE COMPANY'S 1995 STOCK INCENTIVE PLAN (THE
"PLAN") UNDER WHICH OPTIONS TO ACQUIRE 555,100 SHARES HAVE BEEN GRANTED AND ARE
CURRENTLY OUTSTANDING, AND (D) 146,188 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF OTHER WARRANTS CURRENTLY OUTSTANDING. AS USED IN THIS PROSPECTUS AND
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" REFERS TO THE COMPANY AND
ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. CERTAIN CAPITALIZED TERMS
ARE DEFINED IN THE GLOSSARY ON PAGE 48.
THE COMPANY
Level 8 Systems, Inc. (the "Company") believes that it has established
itself as a technology leader in the rapidly growing middleware marketplace. The
Company's middleware products and services, some of which have been developed
pursuant to contracts with International Business Machines Corporation ("IBM")
and Microsoft Corporation ("Microsoft"), utilize messaging and object technology
to solve enterprise-wide integration problems associated with linking legacy
environments, the desktop and the internet. The Company recently entered into
agreements with Candle Corporation ("Candle"), pursuant to which Candle
purchased 246,800 shares of Common Stock for $11 per share and acquired certain
rights to technology developed by the Company and will acquire certain
non-exclusive distribution rights to the Company's products, including Falcon
External Gateways, (which is referred to below) . In addition, the Company,
through its wholly-owned subsidiary, ProfitKey International, Inc.
("ProfitKey"), offers MRP II and shop-floor scheduling packages and related
services.
The Company has experienced substantial growth on a quarter-to-quarter basis
in its middleware products and services operations since last year, as the
Company's focus and operating strategy have evolved from that of an industry
specific ("vertical") software developer to a provider of middleware products
and services.
The Company, through its wholly owned subsidiary, Level 8 Technologies, Inc.
("Level 8"), has been designated an IBM Premier Partner for IBM MQSeries and,
pursuant to a contract with IBM, has ported version 2 of MQSeries to the DEC VMS
platform, will receive royalties from sales of the ported product and has ported
IBM's distributed object product, DSOM. In addition, the Company provides
installation, education, integration and help-desk services in support of IBM
and Level 8 sales of IBM MQSeries licenses. Samuel Somech, a co-founder of Level
8, was the original designer of the transactional messaging product that became
version 1 of MQSeries.
Microsoft has selected the Company to develop messaging gateways (currently
called "Falcon External Gateways") to facilitate communications between
computers running Microsoft's messaging product (currently called "Falcon") and
various non-Microsoft environments. Microsoft developed Falcon as a
transactional messaging system for use within Microsoft Windows NT and Windows
95. Level 8's Falcon External Gateways are being developed and are owned by
Level 8 and facilitate communications of Falcon with IBM MQSeries, mainframes
and UNIX-based systems. Microsoft Falcon and Level 8's Falcon External Gateways
are currently being Beta tested and are expected to be available for shipment in
mid-1997. Microsoft has indicated an intent to promote Level 8's Falcon External
Gateways.
The Company is developing DOT/XM, a product that uses third-party
transactional messaging and distributed object products in a Level 8 designed
tool that facilitates integration of larger, centralized computer systems (so
called "legacy" systems) into modern, open system architectures, by representing
the legacy system as a collection of objects. Consulting services associated
with DOT/XM technology have generated approximately $700,000 of revenue during
the nine months ended September 30, 1996. The first large commercial
installation of DOT/XM is currently taking place at ABN/AMRO Bank.
3
<PAGE>
The Company's expansion plan is to grow primarily on the basis of Level 8
middleware products, such as messaging gateways, DOT/XM and other software tools
that permit access to legacy information from any computing environment. Other
products under development by the Company, and with respect to which the Company
currently is offering consulting services, are (a) a publish/subscribe product
that sends designated data ("publish") to interested users ("subscribers") using
transactional messaging as the delivery mechanism and (b) an
internet-application integration product that uses portions of the DOT/XM
framework to integrate commercial transactions on the internet with the legacy
systems of the selling corporation.
Through its wholly owned subsidiary, ProfitKey, the Company offers
manufacturing resource planning MRP II and shop-floor scheduling software
packages, as well as related installation, training and support services.
Historically, ProfitKey has directed its software packages to job shops and
custom manufacturers, which use ProfitKey's software package to facilitate
"just-in-time" deliveries and efficient scheduling of expensive shop-floor
equipment.
The Company began operations in 1988 as a wholly owned subsidiary of Liraz
Systems, Ltd. (together with its wholly owned subsidiaries, "Liraz"), an Israeli
public company that is a systems integrator. Since 1988, the Company, through
its ASU consulting division ("ASU"), has provided systems integration consulting
services primarily to manufacturing businesses in the State of California. In
October 1994, the Company acquired ProfitKey and Bizware Computer Systems
(Canada) Inc. ("Bizware") and, in April 1995, the Company acquired Level 8. The
Company had its initial public offering in July 1995, selling 1,430,000 shares
at the initial public offering price of $5.50 per share. In July 1996, the
Company decided to focus on the middleware activities of Level 8, and, in that
connection, on September 9, 1996, sold substantially all the assets of Bizware
for $230,000 and subsequently changed its name from Across Data Systems, Inc. to
Level 8 Systems, Inc.
The Company was incorporated in the State of New York in 1988. Its executive
offices are located at One Penn Plaza, Suite 3401, New York, New York
10119-0002, and its phone number at that address is (212) 244-1234.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Outstanding Prior to
this Offering................... 6,236,297 shares
Common Stock offered hereby:
Offered by the Company.......... 600,000 shares
Offered by the Selling
Shareholders.................. 400,000 shares
Total....................... 1,000,000 shares
Common Stock Outstanding After
this Offering................... 6,836,297 shares
Use of Proceeds................... For general corporate and working capital purposes,
which may include increased software development and
marketing activities and the acquisition of software
companies and software licenses for the middleware
market. See "Use of Proceeds."
Risk Factors...................... A purchase of the Shares offered hereby involves a high
degree of risk and immediate and substantial dilution.
Prospective investors should review carefully and
consider the information set forth under "Risk
Factors."
Nasdaq National Market Trading
Symbol.......................... LVEL
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following selected unaudited pro forma consolidated operations and
balance sheet data represent a consolidation, adjusted as described in "Pro
Forma Selected Consolidated Statements of Operations," of the historical
statements of operations and balance sheets of the Company. The Company's
historical financial statements reflect the activities of Level 8 for the
periods beginning April 1, 1995, the date of its acquisition by the Company, the
activities of ProfitKey for the periods beginning October 3, 1994, the date of
its acquisition by the Company, and the activities of Bizware for the periods
from October 28, 1994 through September 9, 1996, the respective dates of its
acquisition and disposition by the Company. The pro forma financial data do not
purport to be indicative of the results that would have been achieved if the
acquisition of Level 8 had been consummated on January 1, 1995 and the sale of
Bizware had been consummated as of December 31, 1994, or of the results that may
be achieved in the future. The following selected unaudited supplemental data of
Level 8 represents unaudited historical data for the three months ended
September 30, 1995 and 1996. These data should be read in conjunction with "Pro
Forma Selected Consolidated Statements of Operations," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the Notes thereto of the Company appearing
elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONSOLIDATED OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED --------------------------
DECEMBER 31, 1995 1995 1996
----------------- ------------ ------------
<S> <C> <C> <C>
Revenue........................................................... $ 10,674,112 $ 8,393,562 $ 9,434,786
Cost of revenue................................................... 5,651,389 4,391,249 5,399,356
----------------- ------------ ------------
Gross margin...................................................... 5,022,723 4,002,313 4,035,430
Operating expense................................................. 4,543,537 3,232,893 4,800,391
----------------- ------------ ------------
Operating income (loss)........................................... 479,186 769,420 (764,961)
Other income (expense)............................................ 62,856 3,604 96,164
----------------- ------------ ------------
Income (Loss) before income taxes................................. 542,042 773,024 (668,797)
Income taxes...................................................... 334,700 448,600 160,700
----------------- ------------ ------------
Net income (loss)................................................. $ 207,342 $ 324,424 $ (829,497)
----------------- ------------ ------------
----------------- ------------ ------------
Net income (loss) per common share(1)............................. $ .04 $ .07 $ (.14)
----------------- ------------ ------------
----------------- ------------ ------------
Weighted average common and common equivalent shares(1)........... 4,777,758 4,396,229 5,985,265
----------------- ------------ ------------
----------------- ------------ ------------
</TABLE>
- ------------------------------
(1) See Note 1 to the Consolidated Financial Statements of the Company.
UNAUDITED SUPPLEMENTAL DATA OF THE LEVEL 8 TECHNOLOGIES, INC. SUBSIDIARY:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996
----------- ------------
<S> <C> <C>
Revenue................................................................................ $ 335,755 $ 2,389,373
Operating income (loss) before amortization of goodwill................................ (147,779) 61,430
Operating income (loss)................................................................ (253,977) (44,063)
</TABLE>
6
<PAGE>
UNAUDITED CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
AS ADJUSTED
ACTUAL (1)
------------- --------------
<S> <C> <C>
Working capital (deficiency).................................. $ 4,616,165
Total assets.................................................. 16,020,923
Long-term liabilities......................................... 394,994
Shareholders' equity (deficit)................................ 11,676,321
</TABLE>
- ------------------------
(1) Adjusted to reflect the issuance of 600,000 Shares in this offering at the
assumed public offering price of $ per Share, less Underwriter's
discounts and commissions of $ and estimated offering fees and
expenses of $ .
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER,
TOGETHER WITH THE OTHER MATTERS REFERRED TO HEREIN, INCLUDING THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO, THE FOLLOWING RISK FACTORS. THIS SECTION
CONTAINS FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD LOOKING
STATEMENTS."
LOSSES FROM RECENT OPERATIONS. The Company has incurred net losses for the
three months ended September 30, 1995, December 31, 1995, March 31, 1996, June
30, 1996 and September 30, 1996 of $42,064, $89,413, $266,971, $557,985 and
$187,626 (which does not include the $1,484,061 loss attributable to the sale of
Bizware), respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, the Company's future plans
are subject to known and unknown risks and uncertainties that may cause the
Company's actual results in future periods to be materially different from any
future performance implied herein. There can be no assurance that the Company's
operations will be profitable.
RISKS ASSOCIATED WITH GROWTH. The Company intends to expand primarily by
increasing sales personnel and other marketing activities and by increasing
software development activities. The Company expects that the expenses related
to the planned expansion generally will precede the Company's realization of the
benefits, if any, of any such expansion. Accordingly, the Company expects that
the incurrence of these expenses will adversely affect the Company's earnings
and working capital in the periods prior to the Company's realization of the
benefits, if any, of such expansion.
Additionally, the Company's results of operation may be affected by any
acquisition consummated by the Company or a reorganization or disposition by the
Company of its existing assets. The Company has considered recently a
reorganization or sale or disposition of businesses which are not essential to
its operations in the middleware market. In connection therewith, the Company
discussed with certain unaffiliated third parties the sale of its subsidiary
ProfitKey. Such talks have been terminated, and the Company presently has no
arrangement, commitment or understanding to sell ProfitKey. If the Company were
to expand in the future by acquisitions of software companies and licenses to
software, there can be no assurance that it would be successful in locating or
acquiring suitable companies and licenses on acceptable terms, or that any
acquired companies could be effectively integrated into, and profitably managed
by, the Company.
DEPENDENCE ON DEVELOPING MARKET FOR MIDDLEWARE. The market for middleware
in software applications is continuing to develop. The major products of the
Company are transactional messaging and distributed object middleware. There can
be no assurance that the Company's transactional messaging and distributed
object middleware will achieve broad market acceptance or that the market for
middleware will continue to grow. Even if transactional messaging and
distributed object middleware achieve broad market acceptance and such market
grows, there can be no assurance that the Company will ever have a significant
share of that market. See "--Consequences of Rapid Technological Change" and
"Business."
CONSEQUENCES OF RAPID TECHNOLOGICAL CHANGE. The software industry is
characterized by rapid technological change, frequent introductions of new
products and systems, changes in customer demands and evolving industry
standards. The introduction of products embodying new technology or adapting
products to the computing market and the emergence of new industry standards
often render existing products obsolete and unmarketable. The Company's success
will depend upon its ability to enhance its existing products and to develop,
introduce or otherwise acquire on a timely basis new products that keep pace
with technological developments and emerging industry standards in order to meet
the changing needs of the Company's customers. There can be no assurance that
the Company will be successful in developing and marketing product enhancements
or new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction or sale of these products or
that the Company's new products and
8
<PAGE>
product enhancements (if any) will adequately meet the requirements of the
marketplace and achieve market acceptance. In addition, there can be no
assurance that technological changes or evolving industry standards will not
render the Company's products and technologies obsolete. See "Business."
COMPETITION. The Company competes in the application software and systems
integration services markets, as well as in the developing market for
transactional messaging and distributed object middleware. Such markets are
highly competitive, and the Company believes competition will intensify in such
markets. The Company competes with developers of middleware, such as Digital
Equipment Corporation, IBM, Candle and Microsoft; with providers of systems
integration services, such as Anderson Consulting, Logica PLC and numerous local
and regional providers; and with providers of software packages for particular
markets, such as Fourth Shift Corporation and Symix Systems, Inc. The Company's
competitors generally have substantially larger operations, have broader product
lines with greater name recognition and market acceptance and have significantly
greater financial, marketing, personnel and operating resources than the
Company. There can be no assurance the Company will successfully compete in any
market in which it conducts, or may conduct, its operations. See "Business."
POSSIBLE NEED FOR ADDITIONAL FINANCING. Based on the Company's operating
plan, the Company believes that the net proceeds of this offering, together with
anticipated funds from operations, will be sufficient to satisfy its capital
requirements and planned software development activities through June 1998,
although there can be no assurance that additional capital will not be required
before such time. In that connection, the Company is developing four new
products for introduction in 1997 that will require additional investments in
development and marketing. In addition, as yet unplanned acquisition and
development opportunities and other contingencies may arise that could require
the Company to obtain additional capital. The Company anticipates that it could
require additional capital in order to finance its current plans for expansion
and its development activities. Sources of funds may include the issuance of
common or preferred stock sold in a public offering or in private placements,
debt securities or bank financing. There can be no assurance that the Company
would be able to obtain capital on a timely basis, on favorable terms, or at
all. If the Company is unable to obtain such financing, or generate funds from
operations sufficient to meet its needs, the Company may be unable to implement
its current plans for expansion and software development. See "Use of Proceeds."
ALLOCATION OF NET PROCEEDS TO GENERAL CORPORATE AND WORKING CAPITAL
PURPOSES. The Company expects to allocate the net proceeds of this offering to
general corporate and working capital purposes, which may include increased
software development and marketing activities and the acquisition of software
companies and software licenses for the middleware market. As a result,
investors will not know in advance how the Company will utilize such net
proceeds. See "Use of Proceeds."
ABSENCE OF PATENT PROTECTION. The Company does not have any patents and has
not filed any patent applications. The Company relies on a combination of trade
secret laws, nondisclosure and other contractual agreements with its employees
and consultants and technical measures to protect its rights in its know-how and
its proprietary products. The foregoing may not afford the Company sufficient
protection for its know-how and products, and other parties may develop similar
know-how and products, duplicate the Company's know-how and products or be
granted patents that would materially and adversely affect the Company's
business.
The Company believes that its products and services do not infringe on the
rights of third parties; however, while the Company has not received notice of
any infringement claims, third parties may assert such claims against the
Company, and such claims could require the Company to enter into licensing
agreements for the technology in question or royalty arrangements or result in
litigation, which could materially and adversely affect the Company's business.
There can be no assurance that the Company could acquire any such license on
terms acceptable to the Company or at all. Any failure of the Company to acquire
such licenses could materially and adversely affect the Company's business and
prospects. See "Business."
9
<PAGE>
DEPENDENCE UPON KEY PERSONNEL. The Company depends upon the continued
efforts and abilities of its senior management personnel, including Arie Kilman,
the Company's Chief Executive Officer, and Samuel Somech, the President of the
Company. Mr. Kilman and Mr. Somech have entered into employment agreements with
the Company. Each of these agreements terminates in the second quarter of 1998.
The loss or unavailability of the services of any of these individuals for any
significant period could have a material adverse effect on the Company's
business and prospects. The Company is the sole beneficiary of key-man life
insurance in the amount of $1,000,000 on the life of Mr. Somech. There can be no
assurance that such insurance will continue to be available on reasonable terms,
or at all. See "Business" and "Management--Employment Agreements."
DEPENDENCE ON MAJOR CUSTOMERS; FLUCTUATIONS OF OPERATING RESULTS. A
significant portion of the Company's business is attributable to a limited
number of changing customers. For the nine months ended September 30, 1996, the
Company's five largest customers accounted for an aggregate of approximately 30%
of the Company's revenue. Such customers and the approximate percentage of
revenues accounted for by each such customer during such period are TransQuest,
Inc. (a wholly owned subsidiary of Delta airlines) (13%), Nelcor Incorporated
(5%), Ascend Communications, Inc. (4%), IBM (4%) and American Express
Corporation (4%). The loss of any such customers combined with the failure to
attract new customers could have a material adverse effect upon the Company. As
a result of the Company's reliance on a limited number of changing customers,
the Company's results have fluctuated, and will continue to fluctuate,
materially from period to period. Accordingly, the results of operations in any
one period may not be indicative of the results of operations for any succeeding
period.
CERTAIN NON-CASH CHARGES TO EARNINGS. The acquisitions of ProfitKey and
Level 8 have been accounted for as purchases. Accordingly, in late 1994 the
Company recorded, in connection with the ProfitKey acquisition, approximately
$2,702,600 for service contracts acquired. In April 1995, the Company recorded
approximately $2,953,800 as excess of cost over net assets acquired, including
other direct costs, for the acquisition of Level 8. As a consequence of the
amortization of these intangible assets, the Company will record amortization
expense of approximately $526,400 each year through 2001, and a reduced amount
each year for 13 years thereafter. In September 1996, the Company recorded a
loss of approximately $1,484,000 in connection with the sale of Bizware. See
"Capitalization," "Pro Forma Selected Consolidated Statements of Operations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto.
FLUCTUATIONS IN PERSONNEL NEEDS; DEPENDENCE UPON CONSULTANTS. Although the
Company has a small number of employees, the Company believes its existing staff
is sufficient in number and expertise to meet its existing requirements.
However, the Company's required staffing levels are likely to change materially
from period to period, depending upon customer requirements. The Company's
successful ability to service significant projects depends, in large part, on
the Company's ability to attract and retain highly qualified technical and
managerial personnel during specific periods. There can be no assurance that the
Company will be able to continue to attract and retain such personnel when
needed, on terms acceptable to the Company, or at all; the failure to do so
would materially and adversely affect the Company.
The Company depends upon the continued services of approximately 14
non-employee consultants who are involved in a variety of tasks, including
developing software, training and on-site programming. The computer industry is
characterized by a high level of employee mobility and aggressive recruiting of
skilled personnel. There can be no assurance that the consultants which the
Company currently engages will continue to work for the Company, or that the
Company will continue to be able to attract and retain consultants when needed,
on reasonable terms, or at all.
CONTROL BY LIRAZ; POTENTIAL CONFLICTS OF INTEREST. At the completion of
this offering, Liraz will own approximately 54% (including if the
Representative's over-allotment option is exercised in full) of the outstanding
shares of Common Stock. Therefore, Liraz will have the ability to control the
election of directors of the Company and the outcome of all issues (except with
respect to certain extraordinary
10
<PAGE>
matters requiring the affirmative vote from holders of two-thirds of outstanding
shares) submitted to a vote of shareholders of the Company. Such control could
adversely affect the market price of the Common Stock or delay or prevent a
change in control of the Company. See "Principal and Selling Shareholders" and
"Description of Securities."
The Company has entered into various agreements with Liraz which the Company
believes are on terms no less favorable than those between unaffiliated parties.
See "Certain Relationships and Related Transactions."
SUBSTANTIAL OPTIONS AND WARRANTS RESERVED. The Company has reserved 900,000
shares of Common Stock for issuance pursuant to the Plan and expects to reserve
additional shares of Common Stock upon adoption of a new plan within the next
year. To date, options to purchase an aggregate of 623,196 shares of Common
Stock have been granted pursuant to the Plan and warrants to purchase an
additional 146,188 shares of Common Stock are outstanding. The Company also will
sell to the Representative in connection with this offering, for nominal
consideration, the Representative's Warrants to purchase an aggregate of 100,000
shares of Common Stock at a price per share equal to 135% of the public offering
price per share, subject to adjustment as provided therein. The exercise of such
options and warrants and subsequent sale of the underlying Common Stock in the
public market could adversely affect the market price of the Company's
securities. The existence of the Representative's Warrants, the outstanding
options issued under the Plan and such other warrants may prove to be a
hinderance to future financings, since the holders of such warrants and options
may be expected to exercise them at a time when the Company will otherwise be
able to obtain additional equity capital on terms more favorable to the Company.
See "-- Possible Need for Additional Financing" and
"Underwriting--Representative's Warrants."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial numbers of
shares of Common Stock (including shares issued upon the exercise of stock
options and warrants) after this offering by the Company, Liraz, the
Representative, or the executive officers or other affiliates of the Company, or
the perception that such sales could occur, could adversely affect the market
price for the Common Stock. In that regard, holders of approximately 68% of the
6,236,297 outstanding shares of Common Stock, including the officers and
directors of the Company, have agreed not to sell publicly or otherwise dispose
of any shares of Common Stock (other than as part of the over-allotment option)
for the period of six months after the date of this Prospectus (the "Lock-Up
Period"), without the prior written consent of the Representative. Beginning
immediately or shortly after the Lock-Up Period, all the shares of Common Stock
currently owned by the Company's affiliates will be eligible for resale in the
public market pursuant to Rule 144 under the Securities Act. In addition, the
Company has granted certain parties, including Candle (which owns 246,800 shares
of Common Stock) and Liraz, registration rights with respect to 4,120,802 shares
of Common Stock (or approximately 60.3% of the Company's outstanding shares
after this offering), which rights may be exercised after , 1997. See
"Shares Eligible for Future Sale--Registration Rights."
DILUTION. The offering price per share of Common Stock is substantially
higher than the net tangible book value per share of the Common Stock at
September 30, 1996. Purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution of $ in the pro forma net
tangible book value per share of Common Stock. To the extent outstanding options
to purchase shares of Common Stock are exercised, there will be further
dilution.
DIVIDEND POLICY. The Company has never declared or paid cash dividends on
the Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. See "Market Price of Common Stock and Dividend Policy."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NEW YORK LAW AND THE AMENDED
CERTIFICATE OF INCORPORATION. Certain provisions of section 912 of the New York
Business Corporation Law (the "BCL"), which prohibit certain persons from
engaging in business combinations with the Company, may be considered to have
11
<PAGE>
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
shareholder may consider to be in the shareholder's best interests. These
provisions of the BCL also may adversely affect the market price for the Common
Stock. The Company's certificate of incorporation authorizes the issuance,
without shareholder approval, of preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Such designations, rights and preferences established by the Board
may adversely affect the relative voting power or other rights of, and may have
a dilutive effect on, holders of the Common Stock. In the event of issuance, the
preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of the Company.
Although the Company has no present intention to issue any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.
See "Description of Securities."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering (after payment of the
estimated offering expenses and underwriting discounts and commissions) are
expected to be approximately $ ($ , if the Representative's
over-allotment option is exercised in full). The Company expects to allocate the
net proceeds of this offering to general corporate and working capital purposes,
which may include increased software development and marketing activities and
the acquisition of software companies and software licenses for the middleware
market.
The Company believes its ability to increase software development and
marketing activities and to take advantage of acquisition opportunities will be
enhanced by the additional capital from this offering. As part of an ongoing
policy of examining software business acquisition opportunities, the Company has
actively considered various acquisitions. The Company currently does not have
any arrangement, commitment or understanding as to any acquisition.
Pending such use of the net proceeds of this offering, the Company will
invest the net proceeds in short-term, interest-bearing securities. The Company
will not receive any proceeds from the sale of Shares by the Selling
Shareholders.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
Since July 27, 1995, the date of the initial public offering of the Common
Stock, the Common Stock has been quoted through the Nasdaq National Market.
Initially, the Common Stock traded under the symbol "ACRS"; as of October 4,
1996, the Common Stock has traded under the symbol "LVEL". The quarterly high
and low reported sales prices for the Common Stock as quoted through the Nasdaq
National Market for the periods indicated are as follows.
<TABLE>
<CAPTION>
HIGH LOW
----- ---
<S> <C> <C>
1995
Third Quarter (from July 27)..................................................... $ 103/8 $ 61/2
Fourth Quarter................................................................... 8 51/2
1996
First Quarter.................................................................... 81/8 51/2
Second Quarter................................................................... 151/2 7
Third Quarter.................................................................... 121/2 81/8
Fourth Quarter (through November ).............................................
</TABLE>
The reported last sale price per share of the Common Stock as quoted through
the Nasdaq National Market on November , 1996, the date immediately preceding
the date of this Prospectus, was $ per share. As of such date, the
Company had 6,236,297 shares of Common Stock outstanding. There were
stockholders of record as of November , 1996.
The Company has never declared or paid any cash dividends on the Common
Stock. The Company intends for the foreseeable future to reinvest earnings, if
any, to fund the development and expansion of its business. The declaration of
dividends in the future will be at the discretion of the Board of Directors and
will depend upon the earnings, capital requirements and financial position of
the Company, general economic conditions and other pertinent factors.
13
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1996, (a) as reflected in the Company's unaudited
consolidated financial statements and (b) as adjusted to reflect the receipt by
the Company of estimated net proceeds of $ from the sale of the Shares
at the public offering price of $ a share. See "Pro Forma Selected
Consolidated Statements of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt and loan from related party.................. $ 130,593 $ 130,593
Long-term debt...................................................................... 26,009 26,009
Loans from related companies........................................................ 360,685 360,685
------------- -------------
Total liabilities............................................................. 517,287 517,287
------------- -------------
Shareholders' equity:
Preferred stock................................................................... -- --
Common stock...................................................................... 62,303 68,303
Additional paid-in capital........................................................ 13,020,141
Retained earnings (deficit)....................................................... (1,400,421) (1,404,421)
Unearned compensation............................................................. (5,702) (5,702)
------------- -------------
Total shareholders' equity.................................................... 11,676,321
------------- -------------
Total capitalization................................................................ $ 12,193,608 $
------------- -------------
------------- -------------
</TABLE>
14
<PAGE>
PRO FORMA SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS
The following selected unaudited pro forma consolidated statement of
operations for the year ended December 31, 1995 and the nine months ended
September 30, 1995 represent a consolidation, adjusted as described in the
accompanying notes, of the audited consolidated statement of operations of the
Company for the year ended December 31, 1995 and unaudited consolidated
statement of operations for the nine months ended September 30, 1995, adjusted
to eliminate the unaudited statement of operations of Bizware for the period
from January 1, 1995 to December 31, 1995 and for the nine months ended
September 30, 1995, respectively (Bizware was sold by the Company on September
9, 1996), and to include Level 8 for the period from January 1, 1995 to April 1,
1995 (Level 8 was acquired by the Company as of April 1, 1995 and, accordingly,
its results of operations are included in the consolidated statement of
operations of the Company from that date). Level 8's acquisition was treated as
a purchase for accounting purposes.
The following selected unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1996 represents a
consolidation, adjusted as described in the accompanying notes, of the unaudited
consolidated statement of operations of the Company to eliminate the unaudited
statements of operations of Bizware for the nine months ended September 30,
1996.
The following statements do not purport to be indicative of the results that
would have been achieved if the sale of Bizware had been consummated prior to
January 1, 1996 or 1995, as the case may be, or the acquisition of Level 8 had
been consummated as of January 1, 1995, or of the results that may be achieved
in the future. The pro forma consolidated statements of operations should be
read in conjunction with, and are qualified in their entirety by reference to,
the Consolidated Financial Statements and the Notes thereto of the Company
appearing elsewhere in this Prospectus.
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
LEVEL 8
SYSTEMS, BIZWARE
INC. COMPUTER LEVEL 8
AND SYSTEMS TECHNOLOGIES, PRO FORMA PRO FORMA
SUBSIDIARIES (CANADA) INC. INC. ADJUSTMENTS AS ADJUSTED
------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS:
Revenue................................... $10,139,024 $ 1,405,856 $1,940,944 $ -- $ 10,674,112
Cost of revenue........................... 4,514,207 109,617 1,246,799 -- 5,651,389
------------ ------------- ------------ ----------- ------------
Gross margin.............................. 5,624,817 1,296,239 694,145 -- 5,022,723
Operating expense......................... 4,781,038 720,964 370,863 112,600(1) 4,543,537
------------ ------------- ------------ ----------- ------------
Operating income.......................... 843,779 575,275 323,282 (112,600) 479,186
Other income (expense) and
minority interest....................... 52,970 (22,486) -- (12,600)(2) 62,856
------------ ------------- ------------ ----------- ------------
Income before income taxes................ 896,749 552,789 323,282 (125,200) 542,042
Income taxes.............................. 278,700 64,100 28,000 92,100(3) 334,700
------------ ------------- ------------ ----------- ------------
Net income................................ $ 618,049 $ 488,689 $ 295,282 $(217,300) $ 207,342
------------ ------------- ------------ ----------- ------------
------------ ------------- ------------ ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------
LEVEL 8 BIZWARE
SYSTEMS, COMPUTER
INC. SYSTEMS LEVEL 8
AND (CANADA) TECHNOLOGIES, PRO FORMA PRO FORMA
SUBSIDIARIES INC. INC. ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS:
Revenue................................. $7,645,505 $1,192,887 $1,940,944 $ -- $8,393,562
Cost of revenue......................... 3,237,573 93,123 1,246,799 -- 4,391,249
----------- ----------- ----------- ----------- -----------
Gross margin............................ 4,407,932 1,099,764 694,145 -- 4,002,313
Operating expense....................... 3,333,057 583,627 370,863 112,600(1) 3,232,893
----------- ----------- ----------- ----------- -----------
Operating income........................ 1,074,875 516,137 323,282 (112,600) 769,420
Other income (expense) and
minority interest..................... (7,413) (23,617) -- (12,600)(2) 3,604
----------- ----------- ----------- ----------- -----------
Income before income taxes.............. 1,067,462 492,520 323,282 (125,200) 773,024
Income taxes............................ 360,000 31,500 28,000 92,100(3) 448,600
----------- ----------- ----------- ----------- -----------
Net income.............................. $ 707,462 $ 461,020 $ 295,282 $(217,300) $ 324,424
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Additional amortization cost related to the acquisition of Level 8, as if
the acquisition occurred on January 1, 1995, was $105,500, plus compensation
cost related to stock options granted in March 1995 to certain Level 8
employees, as if the options were granted on January 1, 1995, and less the
Bizware options.
(2) Additional interest charged at 4% on a loan in the principal amount of
$628,172 from a related company. The loan did not bear interest until July
1, 1995.
(3) Reflects federal taxes on the S-corporation earnings of Level 8 of $100,000,
offset by the related tax reduction for the expenses recorded in connection
with the compensation cost related to the stock options and the interest
charged on the loan from a related company.
16
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996
----------------------------------
LEVEL 8 BIZWARE
SYSTEMS, COMPUTER
INC. SYSTEMS PRO FORMA
AND (CANADA) AS
SUBSIDIARIES INC. ADJUSTED
---------- ----------- ---------
<S> <C> <C> <C>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS:
Revenue................................................. $9,785,718 $ 350,932 $9,434,786
Cost of revenue......................................... 5,562,898 163,542 5,399,356
---------- ----------- ---------
Gross margin............................................ 4,222,820 187,390 4,035,430
Operating expense....................................... 6,833,528 2,033,137 4,800,391
---------- ----------- ---------
Operating loss.......................................... (2,610,708) (1,845,747) (764,961)
Other income (expense).................................. 88,965 (7,199) 96,164
---------- ----------- ---------
Loss before income taxes................................ (2,521,743) (1,852,946) (668,797)
Income taxes (benefit).................................. (25,100) (185,800) 160,700
---------- ----------- ---------
Net loss................................................ $(2,496,643) ($1,667,146) $(829,497)
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations and balance sheet data as of and
for each of the five years in the period ended December 31, 1995 have been
derived from the Company's audited Consolidated Financial Statements and Notes
thereto. The consolidated statement of operations and balance sheet data as of
and for each of the nine months ended September 30, 1996 and 1995 have been
derived from the Company's unaudited consolidated financial statements. In the
opinion of management, such data for each interim period presented below include
all adjustments (consisting only of normal, recurring accruals) necessary to
present fairly the financial position and results of operations of the Company
as of the dates and for the periods indicated on a basis consistent with the
Consolidated Financial Statements. The results for any interim period are not
necessarily indicative of results for a full year. The following table reflects
the activities of ProfitKey only for the periods beginning October 3, 1994, the
date of its acquisition by the Company, for Bizware from October 28, 1994 to
September 9, 1996, the respective dates of its acquisition and disposition by
the Company, and for Level 8 beginning April 1, 1995, the date of its
acquisition by the Company. The following table is qualified in its entirety by
reference to the more detailed financial statements and notes thereto included
elsewhere in this Prospectus.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $ 861,875 $ 948,505 $ 1,312,935 $ 3,596,602 $ 10,139,024 $ 7,645,505 $ 9,785,718
Cost of revenue.................. 612,117 600,059 809,286 1,702,417 4,514,207 3,237,573 5,562,898
--------- --------- ----------- ----------- ------------ ----------- -----------
Gross margin..................... 249,758 348,446 503,649 1,894,185 5,624,817 4,407,932 4,222,820
Operating expense................ 250,750 397,465 532,305 1,227,795 4,781,038 3,333,057 5,349,467
--------- --------- ----------- ----------- ------------ ----------- -----------
Operating income (loss) before
loss on sale of subsidiary..... (992) (49,019) (28,656) 666,390 843,779 1,074,875 (1,126,647)
Loss on sale of subsidiary....... -- -- -- -- -- -- 1,484,061
--------- --------- ----------- ----------- ------------ ----------- -----------
Operating income (loss).......... (992) (49,019) (28,656) 666,390 843,779 1,074,875 (2,610,708)
Other income (expense)........... 2,463 (13,324) (4,056) 50,287 68,261 7,878 88,965
--------- --------- ----------- ----------- ------------ ----------- -----------
Income (loss) before income taxes
and minority interest.......... 1,471 (62,343) (32,712) 716,677 912,040 1,082,753 (2,521,743)
Income tax expense (benefit)..... (1,400) (2,900) -- 133,200 278,700 360,000 (25,100)
--------- --------- ----------- ----------- ------------ ----------- -----------
Income (loss) before minority
interest....................... 2,871 (59,443) (32,712) 583,477 633,340 722,753 (2,496,643)
Minority interest in income of
consolidated subsidiary........ -- -- -- 19,887 15,291 15,291 --
--------- --------- ----------- ----------- ------------ ----------- -----------
Net income (loss)................ $ 2,871 $ (59,443) $ (32,712) $ 563,590 $ 618,049 $ 707,462 $(2,496,643)
--------- --------- ----------- ----------- ------------ ----------- -----------
--------- --------- ----------- ----------- ------------ ----------- -----------
Net income (loss) per common
share.......................... $ -- $ (.02) $ (.01) $ .15 $ .13 $ .16 $ (.42)
--------- --------- ----------- ----------- ------------ ----------- -----------
--------- --------- ----------- ----------- ------------ ----------- -----------
Weighted average common and
common equivalent shares....... 3,839,166 3,839,166 3,839,166 3,839,166 4,777,758 4,396,229 5,985,265
--------- --------- ----------- ----------- ------------ ----------- -----------
--------- --------- ----------- ----------- ------------ ----------- -----------
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
---------------------------------------------------------------- ----------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital
(deficiency)............ $ 108,920 $ 181,812 $ 290,991 $ (1,679,294) $ 4,103,621 $ 4,617,552 $ 4,616,165
Total assets.............. 153,163 338,213 438,340 5,848,838 15,059,198 15,551,035 16,020,923
Long-term liabilities..... 105,518 290,153 425,671 2,054,105 497,822 507,261 394,994
Shareholders' equity
(deficit)............... 6,748 (52,695) (85,407) 489,729 11,498,535 11,630,074 11,676,321
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As described in "Business--General," the Company's only operations prior to
the acquisition of ProfitKey in late 1994 were certain limited consulting
services through its ASU consulting division. The following discussion reflects
the activities of ProfitKey and Level 8 only for the periods from October 3,
1994 and April 1, 1995, the respective dates of acquisition of those companies.
Prior to the acquisition of ProfitKey in October 1994, the Company did not
have any substantial non-cash charges to earnings. Upon the acquisition of
ProfitKey and the subsequent acquisition of Level 8, the Company began to incur
substantial non-cash charges to earnings due to amortization of goodwill
associated with the acquisition of Level 8 and amortization of service contracts
acquired with the ProfitKey acquisition. As a consequence of the amortization of
these intangible assets, the Company will record amortization expense of
approximately $526,400 each year through 2001, and a reduced amount each year
for 13 years thereafter. See "Risk Factors--Certain Non-Cash Charges to
Earnings" and "Capitalization."
In July 1996, the Company decided to focus on the middleware activities of
Level 8. As part of that strategy, on September 9, 1996, the Company sold
substantially all of the assets of Bizware, its wholly owned subsidiary, for
$230,000, and in connection therewith, the Company recognized a loss of
$1,484,061. The results of operations of the Company without Bizware are
reflected in the pro forma information provided elsewhere herein. See "Pro Forma
Selected Consolidated Financial Statements of Operations." The Company also
considered a reorganization or sale or disposition of businesses that were not
essential to its operations in the middleware market. In that connection, the
Company has discussed with certain unaffiliated third parties the sale of
ProfitKey. Such talks have terminated, and the Company presently has no plans to
sell ProfitKey.
The Company's results have fluctuated materially from period to period and
will continue to fluctuate materially in the future because a small number of
the Company's customers, projects and software license sales account for a
significant portion of the Company's revenue, and because such customers and
projects are likely to change from period to period. Accordingly, the results of
operations in any one period may not be indicative of the results of operations
for any succeeding period. See "Risk Factors--Dependence on Major Customers;
Fluctuations of Operating Results."
This Section contains forward-look statements. See "Special Note Regarding
Foward-Looking Statements."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
REVENUE for the nine month period ended September 30, 1996 increased by
approximately $2.1 million (28%) over the nine months ended September 30, 1995.
The increase was attributable primarily to an approximately $3.0 million (294%)
increase in the revenue of Level 8. Approximately $618,000 of the increase of
revenue of Level 8 was attributable to inclusion of the revenue of Level 8 for
the entire 1996 period compared to only the six months of 1995 following the
acquisition of Level 8 on April 1, 1995, and approximately $2.4 million (233%)
was attributable to an increase in revenue of Level 8 during the comparable six
month periods. The increase of the revenue of Level 8 was offset by a decrease
of the revenue of Bizware of approximately $842,000.
COST OF REVENUE for the nine month period ended September 30, 1996 increased
by approximately $2.3 million (72%) over the nine months ended September 30,
1995. The increase was attributable primarily to an approximately $2.0 million
(263%) increase in the cost of revenue of Level 8. Approximately $379,000 of the
increase of cost of revenue of Level 8 was attributable to the inclusion of cost
of revenue of Level 8
19
<PAGE>
for the entire 1996 period compared to only the six months of 1995 following the
acquisition of Level 8 on April 1, 1995, and approximately $1,576,000 (212%) was
attributable to an increase in cost of revenue of Level 8 during the comparable
six month period in 1995. As a percentage of revenue, cost of revenue increased
from 42% for the nine month period in 1995 to 57% for the comparable 1996
period. This increase was attributable primarily to an 86% cost of revenue for
sales in 1996 of $1.1 million of third-party software licenses.
OPERATING EXPENSE for the nine month period ended September 30, 1996
increased by approximately $2.0 million (60%) over operating expenses for the
nine months ended September 30, 1995. The increase was attributable primarily to
Level 8 opening a new office and staffing expenses related thereto and
additional three months of operations in 1996 for Level 8 totaling approximately
$1.2 million. The balance of the increase was due to increased sales and
marketing expense at ProfitKey and increased general corporate overhead. As a
percentage of revenue, operating expense increased from 44% for the nine months
ended September 30, 1995 to 55% for the nine months ended September 30, 1996
(excluding the loss associated with the sale of Bizware).
OTHER INCOME (EXPENSE) for the nine month period ended September 30, 1996
increased to approximately $89,000 from approximately $8,000 during the
comparable nine month period in 1995 primarily due to interest earned from
investment of cash remaining from the Company's July 1995 initial public
offering.
INCOME TAX EXPENSE (BENEFIT) was 1% and 33% of income before taxes and
minority interest for the nine months ended September 30, 1996 and September 30,
1995, respectively. The effective tax rate differed from the federal statutory
tax rate (i.e., 34%) in 1996 primarily due to the nondeductibility of the loss
on the sale of a subsidiary and the change in the deferred tax valuation
allowance.
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY was eliminated
starting April 3, 1995, when the Company acquired the minority interest in
ProfitKey.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE for the year ended December 31, 1995 increased by approximately $6.5
million (182%) over the prior year. The increase was attributable to the
acquisitions of ProfitKey on October 3, 1994, Bizware on October 28, 1994 and
Level 8 on April 1, 1995.
COST OF REVENUE for the year ended December 31, 1995 increased by
approximately $2.8 million (165%) over the prior year. The increase was
attributable primarily to the acquisitions of ProfitKey, Bizware and Level 8. As
a percentage of revenue, cost of revenue decreased from 47% in the year ended
December 31, 1994 to 45% in the year ended December 31, 1995. This decrease was
attributable primarily to lower cost of revenue of Bizware, which resulted from
a high margin contract that concluded during the second quarter of 1995.
OPERATING EXPENSE for the year ended December 31, 1995 increased by
approximately $3.6 million (289%) over the prior year. The increase was
attributable primarily to the acquisitions of ProfitKey, Bizware and Level 8. As
a percentage of revenue, operating expense increased from 34% during the year
ended December 31, 1994 to 47% during the year ended December 31, 1995. This
increase was attributable to an increase in amortization of goodwill and service
contracts from approximately $55,000 during the year ended December 31, 1994 to
approximately $575,000 during the year ended December 31, 1995, higher operating
expenses at Bizware and Level 8 which only had an impact after their dates of
acquisition, and the addition of corporate overhead starting in October 1994.
OTHER INCOME (EXPENSE) had no significant change for the year ended December
31, 1995 from the year ended December 31, 1994.
INCOME TAX EXPENSE was 31% and 19% of income before taxes and minority
interest for the years ended December 31, 1995 and December 31, 1994,
respectively. The effective tax rate for the year ended
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December 31, 1994 differs from the federal statuatory tax rate (i.e., 34%)
primarily due to the effect of foreign tax rates and credits and the utilization
of net operating loss carry forwards.
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY had no significant
change for fiscal year 1995 from fiscal year 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUE for the year ended December 31, 1994 increased by approximately $2.3
million (174%) over the prior year. The increase was attributable to the
acquisitions of ProfitKey and Bizware.
COST OF REVENUE for the year ended December 31, 1994 increased by
approximately $893,000 (110%) over cost of revenue for the prior year. The
increase was attributable primarily to the acquisitions of ProfitKey and
Bizware. As a percentage of revenue, cost of revenue decreased from 62% for the
year ended December 31, 1993 to 47% for the year ended December 31, 1994. This
decrease was primarily attributable to the acquisitions in 1994 of ProfitKey and
Bizware which each had a lower cost of revenue as a percentage of revenue.
OPERATING EXPENSES for the year ended December 31, 1994 increased by
approximately $695,000 (131%) over operating expenses for the prior year. The
increase was attributable primarily to the acquisitions of ProfitKey on October
3, 1994 and Bizware on October 28, 1994. As a percentage of revenue, operating
expense decreased from 41% for the year ended December 31, 1993 to 34% for the
year ended December 31, 1994. This decrease was attributable primarily to the
acquisition in 1994 of Bizware, which had lower operating expense as a
percentage of revenue.
OTHER INCOME (EXPENSE) for the year ended December 31, 1994 increased to
approximately $50,000 from approximately $(4,000) for the prior year. Such
increase was primarily attributable to the settlement of ProfitKey accounts
payable at amounts lower than previously recorded.
INCOME TAX EXPENSE was 19% and 0% of income (loss) before income taxes and
minority interest for the years ended December 31, 1994 and 1993, respectively.
For the year ended December 31, 1993 the Company had a small loss and did not
have a tax benefit.
MINORITY INTEREST INCOME OF CONSOLIDATED SUBSIDIARY began on October 3,
1994, when the Company acquired approximately 92% of the outstanding stock of
ProfitKey.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company funded its operations with cash remaining from its
initial public offering. For the nine months ended September 30, 1996, the
Company used net cash of approximately $640,000 for operations, expended
approximately $1.5 million for capitalized software development, and expended
approximately $600,000 on equipment. In July 1996, Candle acquired 246,800
shares of Common Stock at a price of $11.00 per share, or $2.7 million before
costs of issuance. The funds were invested primarily in short-term,
interest-bearing securities. At September 30, 1996, the Company had working
capital of approximately $4.6 million and a current ratio of 2.17.
During the year ended December 31, 1995, the Company funded its operations
with cash from operations and from the net proceeds of its initial public
offering. Operating and financing activities during the year ended December 31,
1995 generated net cash of approximately $8.3 million. The Company expended
approximately $837,000 for capitalized software development, approximately
$381,000 on equipment and approximately $2.2 million for the acquisition of
Level 8. At December 31, 1995, the Company had working capital of approximately
$4.1 million and a current ratio of 2.34. During the year ended December 31,
1994, the Company funded its operations with cash from operations and funded its
acquisitions of ProfitKey and Bizware with loans from related companies.
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The Company intends to accelerate its software development, expand its sales
force and increase its marketing activities, and the Company may acquire
software businesses and software licenses. To the extent that funds from
operations are not sufficient for these purposes, the Company will fund those
activities from the net proceeds of this offering.
The Company believes that its existing working capital, anticipated funds
generated from operations and the net proceeds of this offering will be
sufficient to fund its working capital and capital expenditure requirements
through June 1998.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The Company adopted FASB
121 as of January 1, 1996.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which encourages, but does not require, a fair value
based method of accounting for employee stock options. As permitted under the
new standard, the Company will continue to account for employee stock options
under APB No. 25, "Accounting for Stock Issued to Employees." The pro forma
disclosures required by this standard will be adopted as of January 1, 1996.
INFLATION AND CHANGES IN PRICES
Inflation has not had a material effect on the Company's operating results
to date.
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BUSINESS
GENERAL
The Company believes that it has established itself as a technology leader
in the rapidly growing middleware marketplace. The Company's middleware products
and services, some of which have been developed pursuant to contracts with IBM
and Microsoft, utilize messaging and object technology to solve enterprise-wide
integration problems associated with linking legacy environments, the desktop
and the internet. The Company recently entered into agreements with Candle,
pursuant to which Candle purchased 246,800 shares of Common Stock for $11 per
share and acquired certain rights to technology developed by the Company and
will acquire certain non-exclusive distribution rights to the Company's
products, including Falcon External Gateways. In addition, the Company, through
its wholly owned subsidiary, ProfitKey, offers MRP II and shop-floor scheduling
packages and related services.
The Company has experienced substantial growth on a quarter-to-quarter basis
in its middleware products and services operations since last year, as the
Company's focus and operating strategy have evolved from that of an industry
specific ("vertical") software developer to a provider of middleware products
and services.
The Company, through its wholly owned subsidiary Level 8, has been
designated an IBM Premier Partner for IBM MQSeries and, pursuant contract with
IBM, has ported version 2 of MQSeries to the DEC VMS platform, will receive
royalties from sales of the ported product and has ported IBM's distributed
object product, DSOM. In addition, the Company provides installation, education,
integration and help-desk services in support of IBM and Level 8 sales of IBM
MQSeries licenses. Samuel Somech, a co-founder of Level 8, was the original
designer of the transactional messaging product that became version 1 of
MQSeries.
Microsoft has selected the Company to develop messaging gateways (currently
called "Falcon External Gateways") to facilitate communications between
computers running Microsoft's messaging product (currently called "Falcon") and
various non-Microsoft environments. Microsoft developed Falcon as a
transactional messaging system for use within Microsoft Windows NT and Windows
95. Level 8's Falcon External Gateways are being developed and are owned by
Level 8 and facilitate communications of Falcon with IBM MQSeries, mainframes
and UNIX-based systems. Microsoft Falcon and Level 8's Falcon External Gateways
are currently being Beta tested and are expected to be available for shipment in
mid-1997. Microsoft has indicated an intent to promote Level 8's Falcon External
Gateways.
The Company is developing DOT/XM, a product that uses third-party
transactional messaging and distributed object products in a Level 8 designed
tool that facilitates integration of larger, centralized computer systems (so
called "legacy" systems) into modern, open system architectures, by representing
the legacy system as a collection of objects. Consulting services associated
with DOT/XM technology have generated approximately $700,000 of revenue during
the nine months ended September 30, 1996. The first large commercial
installation of DOT/XM is currently taking place at ABN/AMRO Bank.
The Company's expansion plan is to grow primarily on the basis of Level 8
middleware products, such as messaging gateways, DOT/XM and other software tools
that permit access to legacy information from any computing environment. Other
products under development by the Company, and with respect to which the Company
currently is offering consulting services, are (a) a publish/subscribe product
that sends designated data ("publish") to interested users ("subscribers") using
transactional messaging as the delivery mechanism and (b) an
internet-application integration product that uses portions of the DOT/XM
framework to integrate commercial transactions on the internet with the legacy
systems of the selling corporation.
Through ProfitKey, the Company offers MRP II and shop-floor scheduling
software packages, as well as related installation, training and support
services. Historically, ProfitKey has directed its software
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packages to job shops and custom manufacturers, which use ProfitKey's software
package to facilitate "just-in-time" deliveries and efficient scheduling of
expensive shop-floor equipment.
The Company began operations in 1988 as a wholly owned subsidiary of Liraz.
Since 1988, the Company, through ASU, has provided systems integration and
consulting services primarily to manufacturing businesses in the State of
California. In October 1994, the Company acquired ProfitKey and Bizware and, in
April 1995, the Company acquired Level 8. The Company had its initial public
offering in July 1995, selling 1,430,000 shares at the initial public offering
price of $5.50 per share. In July 1996, the Company decided to focus on the
middleware activities of Level 8, and, in that connection, on September 9, 1996,
sold substantially all the assets of Bizware for $230,000 and subsequently
changed its name from Across Data Systems, Inc. to Level 8 Systems, Inc.
The table below shows the Company's percentage of net revenues by category
for the years indicated. The revenues for 1995 include the results of ASU,
ProfitKey and Bizware for the full year, and Level 8 from its acquisition on
April 1, 1995. The revenues for 1994 include ASU for the full year, ProfitKey
from its acquisition on October 3, 1994 and Bizware from its acquisition on
October 28, 1994 through its sale on September 9, 1996. The revenues for 1993
include only the results of the Company's ASU consulting division.
PERCENTAGE OF THE COMPANY'S NET SALES BY REVENUE CATEGORY
<TABLE>
<CAPTION>
CONSULTING
AND SERVICES SOFTWARE OTHER TOTAL
--------------- ------------- ----------- -----
<S> <C> <C> <C> <C>
1993...................................................................... 100% 0% 0% 100%
1994...................................................................... 72 25 3 100
1995...................................................................... 70 22 8 100
1996 (through September 30)............................................... 71 23 6 100
</TABLE>
This section contains forward-looking statements. See "Special Note
Regarding Forward Looking Statements."
LEVEL 8 PRODUCTS AND SERVICES
LEVEL 8 PRODUCTS. The Company's expansion plan is to grow primarily on the
basis of middleware products developed by Level 8, such as messaging gateways
and software tools that permit access to legacy information from any computing
environment. Each of the products offers the opportunity to deliver services
with the products and, to the extent that the sale is made directly by the
Company, Level 8 plans to provide the services. The products also will be sold
through other distribution channels, such as Candle, IBM or Microsoft Business
Partners, and those third-party sellers will be encouraged and trained to
provide services. The products are at various stages of development, as
described below. However, there can be no assurance that the development process
will not encounter delays and unforeseen problems, which could materially delay
the commercial introduction of the product or jeopardize the entire product.
FALCON EXTERNAL GATEWAYS. Microsoft has developed a transactional messaging
product, Microsoft Falcon, for use with the Microsoft Windows NT and Windows 95
operating systems. Level 8 was selected by Microsoft to develop components of
software that allow messages to be passed from Falcon to IBM MQSeries and
directly to other systems, such as mainframes and those running the UNIX
operating system (collectively, the "Falcon External Gateways"). Microsoft has
agreed to recommend exclusively Level 8's Falcon External Gateways for the first
year after commercial release of the gateways. IBM has licensed to Level 8
portions of its API from IBM MQSeries for use with the Falcon External Gateways
to facilitate connections between Microsoft Falcon and IBM MQSeries. Microsoft
Falcon and Level 8's Falcon External Gateways are in Beta site testing, and
Microsoft's Falcon and Level 8's Falcon External Gateways are expected to be
available for sale in mid-1997. Level 8's Falcon External Gateways are
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expected to sell for $500 to $10,000 depending on the platform. A gateway will
be purchased for each of the two systems being connected.
Level 8's Falcon External Gateway family of products is primarily designed
for customers using Windows NT LANs coexisting with other hardware platforms. By
the year 2000, the installed base for Windows NT has been projected by industry
sources to grow to 7 to 10 million servers. The Company estimates that each of
35,000 IBM mainframes and 1.2 million UNIX systems will be connected via
messaging to multiple Windows NT servers and believes that Falcon Gateways will
permit interfaces between such systems.
The Falcon Gateway product family is designed to provide efficient and
reliable access to IBM mainframes, numerous UNIX platforms such as Sun Solaris,
AIX, HP-UX and AT&T GIS, as well as AS/400, OS/2, Sun OS and VMS. Communication
is accomplished through a reliable message queuing technology offering assured
message delivery, time independent messaging, and a consistent API across all
platforms.
The Falcon Gateway family of products will support three major functional
releases:
FALCON API CLIENT--The Falcon API Client release provides client support
using Remote Procedure Call ("RPC") technology on UNIX and CICS in the MVS
environment. The API Client architecture provides a library of Falcon API
which resides on each client platform, allowing applications to send and
receive Falcon messages and access queues within the Falcon network. Falcon
External Gateway is fully integrated with the native NT service management,
event management, and performance management infrastructure of the Microsoft
Windows NT Server.
FALCON QUEUE TO QUEUE GATEWAY FOR MQSERIES--The Falcon Queue to Queue
Gateway for MQSeries product is the most comprehensive, with a complete
interface to all IBM MQSeries (Version 2) server platforms and IBM MQSeries
for CICS under MVS. Use of this product with any supported MQSeries server
gives Falcon applications access to all 19 IBM MQSeries platforms and their
applications. This product will provide the multitude of existing and new
MQSeries applications easy access to Microsoft Falcon-based networks using
IBMs native MQSeries APIs. This feature also allows Falcon enabled Windows
applications access to IBM MQSeries enabled applications for complete
enterprise information access solutions.
FALCON TRANSIENT DATA QUEUE TO QUEUE--This product will provide queue to
queue support where the remote messaging queues reside on a non-Microsoft
platform. This feature will allow native Falcon networks to access CICS
Transient Data Queue applications and vice versa. Queues are CICS Transient
Data Queues wrapped by Falcon APIs. The CICS user can therefore have both
RPC and store and forward capabilities with the same Falcon APIs.
DISTRIBUTED OBJECT TRANSACTIONS. DOT/XM is a Level 8 developed tool that
facilitates the integration of legacy systems into modern open system
architectures by representing legacy systems as a collection of objects. It
includes a software framework for the server that is the middle-tier in a
three-tier computing architecture. The server responds to requests for
information from a front-end client by reformatting the request for
communication directly to legacy machines in their standard communication format
or via a transactional messaging product such as IBM MQSeries. This "wrapping"
of the legacy machine is accomplished on the server, so that few, if any,
changes to code are necessary on the legacy machine. The server utilizes IBM
MQSeries as the transactional messaging vehicle within the server framework and
optionally to the legacy machine. The server framework also utilizes a
distributed ORB that complies to the CORBA standard, such as DSOM or ORBIX. The
server has a core framework of objects that perform the same functions for all
installations of the server. The framework includes functions such as systems
management, communications and security. The server also has a class library of
business objects from which objects will be selected to perform similar
functions for different operating environments, and it will have custom business
objects designed for the particular customer. An example of a business object is
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"GET CHECKING BALANCE" for a "banking-at-home" application accessing a MVS
mainframe. DOT/ XM has been the basis for a number of consulting projects
totaling approximately $700,000 of revenue during the nine months ended
September 30, 1996. The first large commercial installation of DOT/XM is taking
place at ABN/AMRO Bank. Testing in the cash management application is to begin
in November 1996 and live implementation is planned for March 1997. DOT/XM is
priced at approximately $150,000 for a single service application, with site
licenses expected to be priced in the $500,000 to $1,000,000 range.
Installations include extensive use of services to customize DOT/XM business
objects to particular applications. As Level 8 compiles a library of business
objects, the objects will be resold and, accordingly, consulting services will
decline.
PUBLISH/SUBSCRIBE. The publish/subscribe product uses transactional
messaging products such as MQSeries or Microsoft Falcon as the delivery
mechanism to send designated data ("publish") to interested users
("subscribers"). The alternate technique is for interested users to query the
database on a regular basis to determine if information of interest has been
added to the database. The publish/subscribe product was developed from a
$200,000 consulting project for a major transportation company. It is being
offered currently to new customers as a service using the Company's prior
experience and is planned to be developed into a deliverable product by
mid-1997.
INTERNET-APPLICATION INTEGRATION. Level 8 is developing an
internet-application integration product that uses portions of the DOT/XM
framework to integrate commercial transactions on the internet with applications
running on the legacy systems of the selling corporation. A prototype was
demonstrated at the Object Expo/Java Expo show in New York City during August
1996. The prototype was a home banking application that used JAVA applets to
provide the GUI screen for a client that could be located in the home and used
the internet as the communications link to a server at the bank. The server
accessed information on the customer from an MVS mainframe using IBM MQSeries
and portions of the DOT/XM distributed object framework. Level 8 believes its
technology will be important for companies that desire to conduct commerce on
the internet and need to integrate that commerce with the legacy computers that
are being used in their existing business. Level 8 has proposed projects to
several large institutions and, although there can be no assurance thereof,
expects to enter into contracts during the fourth quarter of 1996 with a select
number of these institutions.
LEVEL 8 SERVICES. Level 8 provides system integration services drawing on
its expertise in transactional messaging and distributed objects and offers a
family of services designed to meet the needs of companies installing third
party transactional messaging products. These services have been provided to
over 40 major corporations including: financial institutions, such as ABN/AMRO
Bank N.A., American Express, Chase Manhattan Bank, Franklin Tempelton Group,
John Hancock Mutual Life Insurance Company, NationsBank Corp., New York
Mercantile Exchange, Trigon Blue Cross/Blue Shield and Travelers Life Insurance;
transportation companies, such as CSX Technology and Transquest (Delta
Airlines); manufacturing companies, such as Motorola Inc., NSK Corp. and Stanley
Tool; retailers, such as K Mart Corp., The Dillon Company, Inc. and The May
Company; and government agencies, such as Fannie Mae. The following packaged
transactional messaging services are being offered for IBM MQSeries and are
likely to be offered for Microsoft Falcon:
MQ/QUICK START. A fixed price service designed to get the customer
started using transactional messaging. Software is installed, configured and
tested for a particular application. Hands-on training is provided to
customer personnel.
MQ/EDUCATIONAL SERVICES. Classroom training in messaging is provided at
the customer's site or at Level 8's Boca Raton, Florida training facility.
Theory is taught in addition to practical applications, including an actual
application workshop.
MQ/FAST TRACK FUNCTIONAL SLICE. Level 8 demonstrates the value of
messaging and proves its business advantage by automating a chosen
application based on an on-site requirements analysis. If
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appropriate, Level 8 will design graphical user interface screens created
for the application and integrate messaging and an application into the
client-server architecture.
MQ/ENTERPRISE ROLLOUT. Level 8 staff assist customers with application
of transactional messaging for multiple applications and provide skills
transfer required to deliver production strength systems.
MQ/HELP CENTER. Level 8 offers continuous helpdesk support which can be
accessed by telephone or facsimile or through the internet.
PROFITKEY PRODUCTS AND SERVICES
ProfitKey offers MRP II and shop-floor scheduling software packages, and
related installation, training and support services, for use by manufacturing
businesses. ProfitKey also offers its customers hardware, which ProfitKey, as a
"reseller," purchases from leading hardware manufacturers.
ProfitKey's principal product, the Rapid Response Manufacturing software
package, addresses the needs of make-to-order job shops and custom
manufacturers. The customers of these make-to-order manufacturers, such as large
automobile companies, frequently impose on their make-to-order suppliers
especially stringent delivery deadlines, which, in turn, result in unusually
complex equipment scheduling and other scheduling requirements for the
make-to-order manufacturer. Rapid Response Manufacturing's particular strength
is its shop-floor scheduler, which is especially useful for manufacturers
attempting to meet the "just-in-time" delivery requirements of their customers.
ProfitKey also offers a fully integrated MRP II software package for
make-to-stock manufacturers.
The Rapid Response Manufacturing software package is comprised of a core
module, plus 20 optional modules to fit the needs of the particular
manufacturer. The software offers a wide range of easy-to-use tools, including:
a workbench-style framework with extensive on-screen inquiry displays, flexible
browse features, pop-up windows and graphs; a variety of loading and scheduling
options; management query tools for custom reports and Windows-based export of
data; bar code entry of labor and job tracking data; and numerous on-screen and
printed reports. The package enables manufacturers to prepare estimates, enter
orders, manage capacity (labor, materials, machines and work centers), schedule
and track jobs, manage inventory, prepare shipping documents and prepare
financial statements.
The software package is priced based on the number and types of modules
ordered, the hardware platform employed and the number of users. Typical
configurations on UNIX and Novell platforms sell for approximately $35,000 to
$40,000; on an AS/400 platform, the package typically sells for approximately
$70,000 to $80,000.
The purchase price of ProfitKey software includes a professional services
audit, which recommends an implementation plan supported by ProfitKey
consultants. A minimum 10-day implementation plan is required, but the typical
audit recommends a plan of 30 to 50 days of support services. The daily rate
charged is between $800 and $1,000, depending upon the length of the contract
and the skills required.
ProfitKey is currently rewriting its software in a fourth generation
language with graphical user interface. The existing version is written in
RM/COBOL and runs on UNIX, AS/400 and DOS platforms and Novell networks and with
ProfitKey's proprietary database or native AS/400 or Oracle databases. The new
product will use an object-oriented programming approach, employing GUPTA's SQL
Windows, and is being designed to run on multiple hardware platforms and
commercial databases. The Company believes the new software will be available in
mid-1997. However, there can be no assurance the development process will not
encounter delays and unforeseen problems, which could materially delay the
commercial introduction of the product or jeopardize the entire project.
ProfitKey offers an 11-hour hotline to its service department for
troubleshooting at an hourly charge or as part of an annual maintenance
contract. ProfitKey's average response time is two hours. ProfitKey
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offers its customers annual maintenance contracts at a cost ranging between 12%
to 15% of the base software license fee, which entitles the customer to
telephone support and new releases of the software.
MARKETS AND MARKETING
The Company sells its products and services primarily in the United States,
with additional sales in Canada and the United Kingdom.
The middleware marketplace is in the early stages of development. The need
for middleware products and services results from the move to distributed
processing and from the proliferation of computer platforms. Businesses that
have these disparate systems need a cost-effective and reliable method to enable
the disparate systems to communicate with each other. Such need has grown as
corporations have spread geographically, have acquired new operations and have
offered new services, such as electronic commerce on the internet, that require
access to information located throughout the enterprise. Companies such as IBM,
Digital Equipment Corporation, Sun Microsystems and Microsoft have introduced
middleware products that work across multiple platforms and that provide
opportunities for add-on products and services, such as those provided by Level
8.
Level 8 markets and sells its products and services by calling directly on
large financial service companies and through referrals to other companies from
its association with hardware and software providers. On August 30, 1996, the
Company sold to Candle, a developer and licensor of software products, all of
the Company's rights to MQ Secure, a security product that the Company developed
for IBM MQSeries. The Company previously had entered into a letter of intent
with Candle pursuant to which the Company agreed to grant to Candle certain
distribution rights and technology licenses to Falcon External Gateways. A
definitive agreement is expected to be entered into during the fourth quarter of
1996. In February 1996, Level 8 entered into a licensing agreement with IBM for
portions of IBM MQSeries technology, which gives IBM certain rights to
distribute Level 8's Falcon External Gateways.
ProfitKey sells into a mature market that has developed specialty products
for particular manufacturing segments. ProfitKey's expertise is in shop floor
scheduling systems, which are most important to make-to-order manufacturers.
These are manufacturers who generally start to manufacture a product only after
an order is received. These manufacturers tend to be small to medium in size.
ProfitKey has targeted facilities with 50 to 200 employees and sells to them
with a direct sales force augmented in some territories by regional agents.
CUSTOMERS
No customer accounted for more than 10% of the Company's revenue in 1995.
For the nine months ended September 30, 1996, one customer had sales of
approximately $1.3 million which represented 13% of the Company's revenues for
that period. See "Risk Factors -- Dependence on Major Customers; Fluctuations of
Operating Results."
COMPETITION
The Company competes in the application software and systems integration
services markets, as well as in the developing market for transactional
messaging and distributed object middleware. Such markets are highly
competitive, and the Company believes competition will intensify in such markets
in the future. The Company competes with developers of middleware, such as
Digital Equipment Corporation, IBM, Candle and Microsoft; with providers of
systems integration services, such as Anderson Consulting and Logica PLC and
numerous local and regional providers of consulting and integration services;
and with providers of software packages for particular markets, such as Fourth
Shift Corporation and Symix Systems, Inc. The Company's competitors generally
have substantially larger operations, have broader product lines with greater
name recognition and market acceptance and have significantly greater financial,
marketing, personnel and operating resources than the Company.
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INTELLECTUAL PROPERTY
The Company does not have any patents and has not filed any patent
applications. The Company relies on a combination of trade secret laws,
nondisclosure and other contractual agreements and technical measures to protect
its rights in its know-how and its proprietary products. The foregoing may not
afford the Company sufficient protection for its know-how and products, and
other parties may develop similar know-how and products, duplicate the Company's
know-how and products or be granted patents that would materially and adversely
affect the Company's business.
The Company believes that its products and services do not infringe the
rights of third parties; however, while the Company has not received notice of
any infringement claims, third parties may assert such claims against the
Company, and such claims could require the Company to enter into licenses with
respect to the technology in question or enter into royalty arrangements or
could result in litigation, which could materially and adversely affect the
Company's business. There can be no assurance that the Company will acquire any
license with terms acceptable to the Company or, at all. Any failure of the
Company to acquire such licenses could materially and adversely affect the
Company's business and prospects.
EMPLOYEES
The Company believes that its employee relations are satisfactory. The
employees are not represented by a labor union, and the Company has never
experienced any labor problems resulting in a work stoppage. As of September 30,
1996, the Company had 111 employees, 19 of whom were engaged in product
development, 57 in consulting and services and 35 in marketing and
administrative functions.
PROPERTY
The Company leases offices in New York, New York (5,125 square feet at an
annual cost of $123,648 with its lease expiring during November 2000), Salem,
New Hampshire (15,600 square feet at an annual cost of $159,900 with its lease
expiring during October 1999), Boca Raton, Florida (39,500 square feet at an
annual cost of $51,348 with its lease expiring during July 1999 and 1,740 square
feet at an annual cost of $22,620 with its lease expiring during December 1996),
Santa Clara, California (1,700 square feet at an annual cost of $30,400 with its
lease expiring during May 1997) and Framingham, Massachusetts (700 square feet
at an annual cost of $15,000 terminable by either party with 30 days' notice).
The Company believes its existing facilities are adequate for its current needs
and that additional space should be available as required.
LEGAL PROCEEDINGS
The Company is subject to certain legal actions which arise out of the
normal course of business. It is management's belief that the outcome of these
actions will not have a material effect on the Company's consolidated financial
position or results of operations.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to each
executive officer and director of the Company as of October 28, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Robert R. MacDonald............................. 52 Chairman of the Board of Directors
Arie Kilman(1)(2)............................... 43 Chief Executive Officer and Director
Samuel Somech................................... 44 President and Director
Joseph J. Di Zazzo.............................. 38 Controller, Chief Accounting Officer, Treasurer
and Secretary
Theodore Fine................................... 59 Director
Frank J. Klein(1)(2)............................ 54 Director
Lenny Recanati(1)(2)............................ 42 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Each director holds office until the Company's next annual meeting of
shareholders and until his successor is elected and qualified. Officers are
elected annually by the Board of Directors and hold office at the discretion of
the Board. The Company's directors receive no additional compensation for
serving on the Board of Directors, other than reimbursement of reasonable
expenses incurred in attending meetings. There are no family relationships among
the Company's directors and executive officers. The Company has agreed that
Candle may select a nominee for the Board of Directors in 1997, and the Company
will use its best efforts to get such nominee elected to the Company's Board of
Directors.
ROBERT R. MACDONALD has served as Chairman of the Board of Directors of the
Company since July 1996 and as a director of the Company since December 1994.
Mr. MacDonald served as President and Chief Executive Officer of the Company
from October 1994 to July 1996. Mr. MacDonald had been employed as President and
Chief Executive Officer of ProfitKey from May 1994 until it was acquired by the
Company in October 1994. Mr. MacDonald has served as Chairman of the Board of
Directors of Land & Sea, Inc., a private manufacturer of marine accessories and
computerized dynamometers, since March 1990, and served as its Chief Executive
Officer from March 1990 to December 1994. Mr. MacDonald received a B.S. in
engineering physics and an M.E. in electrical engineering from Cornell
University, and an M.B.A. from Harvard Business School.
ARIE KILMAN has served as Chief Executive Officer of the Company since July
1996. Prior to such time, Mr. Kilman served as President of the Company from
July 1996 to October 1996 and as Chairman of the Board of Directors of the
Company from December 1994 until July 1996. Mr. Kilman has served as Chairman
and Chief Executive Officer of Level 8 from July 1996. Since 1983, Mr. Kilman
has served as Chairman of the Board of Directors and President of Liraz, a
software consulting and systems integration company, which he founded. Liraz is
an Israeli public company, the shares of which are traded on the Tel Aviv Stock
Exchange. Mr. Kilman received a B.A. in economics and computer science from Bar
Ilan University in Israel. See "Principal and Selling Shareholders--Ownership of
Liraz and Certain of its Affiliates."
JOSEPH J. DI ZAZZO has served as Chief Accounting Officer, Treasurer and
Secretary of the Company since April 1995 and as Controller from January 1995.
Mr. Di Zazzo has been Vice President, Finance of ProfitKey since January 1995,
and was Controller of ProfitKey from May 1992 until January 1995. From June 1991
until May 1992, Mr. Di Zazzo was self-employed in the video business. From April
1987 until
30
<PAGE>
June 1991, he was the Controller of Workstation Technologies, a private computer
workstation value-added reseller. Mr. Di Zazzo received a B.S. in business
administration from Salem State College.
SAMUEL SOMECH has served as President of the Company since October 1996 and
has been a director of the Company since April 1995. From April 1995 to October
1996, Mr. Somech served as Vice President of the Company. Mr. Somech co-founded
Level 8 in February 1994 and has served as its President since April 1995. He
founded Data Voice Systems, Inc. in January 1987 and served as its President
until September 1990, when the company was acquired by System's Strategy, Inc.,
a division of NYNEX. From September 1990 until December 1993, Mr. Somech served
as the Technical Director of the Messaging Group for NYNEX. In January 1994,
Apertus Technologies, Inc. purchased the division from NYNEX, and Mr. Somech
remained at his position until March 1994. Mr. Somech received a B.S. in
electrical engineering from Technion University, Israel, an M.S. in computer
science from Columbia University and an M.B.A. from Baruch College.
THEODORE FINE has served as a director of the Company since April 1995. Mr.
Fine co-founded Level 8 with Mr. Somech in February 1994. Since January 1993,
Mr. Fine has been a management information systems consultant to the financial
community and until July 1996 served as a marketing and sales consultant to the
Company. He previously was Vice President of Technology for the retail
international operations of Citibank, N.A. from March 1974 until December 1992.
Mr. Fine received a B.S. in electrical engineering from the Cooper Union for the
Advancement of Science and Art and an M.S. in electrical engineering from the
University of Southern California.
FRANK J. KLEIN has served as a director of the Company since December 1994.
Since January 1, 1995, Mr. Klein has been the President of PEC Israel Economic
Corporation ("PEC"), a corporation that holds equity interests in companies that
are located in Israel or are Israel related. PEC owns approximately 9.3% of
Liraz. Prior to Mr. Klein's appointment as President of PEC, he served as
Executive Vice President of Israel Discount Bank of New York from 1985. Mr.
Klein served as Executive Vice President of PEC from November 1977 to November
1991 and as Treasurer of PEC from May 1980 to November 1991. He is a director of
PEC, as well as a number of companies affiliated with it, including Elron
Electronics Industries Ltd. and Scitex Corporation Ltd. Mr. Klein holds
bachelors degrees in both law and business from New York University. See
"Principal and Selling Shareholders--Ownership of Liraz and Certain of its
Affiliates."
LENNY RECANATI has served as a director of the Company since December 1994.
During the last 12 years, Mr. Recanati has been a senior manager and director of
Discount Investment Corporation Ltd. ("DIC"), an Israeli company that owns
approximately 9.3% of Liraz. He is Chairman of the Board of Directors of
Ilanot-Discount's Mutual Fund Management Company and is a member of the boards
of directors of a number of Israeli industrial and other enterprises affiliated
with DIC, including: Liraz, Klil Industries Ltd., Caniel-Israel Can Company
Ltd., Elron Electronics Industries Ltd., Super-Sol Ltd., Bayside Land
Corporation Ltd., Tefron Ltd. and Tambour Ltd. Mr. Recanati received his
bachelors degree in economics from the Hebrew University of Jerusalem and holds
an M.B.A. from Columbia University. Mr. Recanati is the son of Jacob Recanati.
See "Principal and Selling Shareholders--Ownership of Liraz and Certain of its
Affiliates."
BOARD COMMITTEES AND MEMBERSHIP
The Board of Directors held 12 meetings during the year ended December 31,
1995. During 1995, all of the incumbent directors attended more than 75% of the
aggregate of the total number of meetings of the Board of Directors (held during
the period for which each person was a director).
On February 21, 1996 the Board of Directors formalized the creation of a
Compensation Committee, which is comprised of Messrs. Kilman, Klein and
Recanati. The Compensation Committee has (i) full power and authority to
interpret the provisions of, and supervise the administration of, the Plan and
(ii) the authority to review all compensation matters relating to the Company.
31
<PAGE>
On February 21, 1996, the Board also formalized the creation of an Audit
Committee, which is comprised of Messrs. Kilman, Klein and Recanati. The Audit
Committee held a formal meeting on May 2, 1996 with the Company's auditors. The
Audit Committee has the following duties: reviewing with the independent
auditors the plans and results of the audit engagement; reviewing the adequacy,
scope and results of the internal accounting controls and procedures; reviewing
the degree of independence of the auditors; reviewing the auditors' fees; and
recommending the engagement of auditors to the full Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all the cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, during
the year ended December 31, 1995 to the Chairmain of the Board of the Company,
the Chief Executive Officer and one named executive officer whose salary and
bonus exceeded $100,000 during the year ended December 31, 1995. Prior to 1995,
the Company was not a reporting company pursuant to Section 13(a) or 15(d) of
the Exchange Act.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS (#) COMPENSATION
- ------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Arie Kilman...................................... 1995 $ 0 $ 0 -- --
Chairman of the Board of Directors(1)
Robert R. MacDonald.............................. 1995 $ 117,500(2) $ 70,000 117,347(3) --
President and Chief Executive 1994 $48,886 $20,000 -- --
Officer(1)
H. Jeffrey Fencer................................ 1995 $ 83,756 $ 42,560 10,410(3) $ 6,768(4)
Vice President(1)
</TABLE>
- ------------------------
(1) Mr. Kilman is currently the Chief Executive Officer of the Company and has
an annual salary of $200,000. Mr. MacDonald is currently Chairman of the
Board of Directors of the Company and has an annual salary of $50,000.
Neither Mr. Kilman nor Mr. MacDonald has received any other compensation
during 1996. Mr. Fencer is no longer employed by the Company.
(2) Mr. MacDonald commenced his employment with ProfitKey in May 1994 and has
served as President and Chief Executive Officer of the Company from October
1994 to July 1996. Accordingly, this number reflects a partial year's
salary.
(3) In February 1993 and October 1994, ProfitKey granted options to purchase
shares of Common Stock to Mr. Fencer and Mr. MacDonald, respectively,
pursuant to ProfitKey's then existing stock option plan. Upon the
acquisition of the minority interest of ProfitKey by the Company in April
1995, the Company converted the ProfitKey options granted to Mr. Fencer and
Mr. MacDonald into options to purchase 5,460 and 58,237 shares of Common
Stock, respectively at $0.69 a share under the Company's Plan.
(4) Includes a car allowance of $4,200 and a payment of $2,568 for insurance
premiums on behalf of Mr. Fencer.
32
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information about individual grants of stock
options made to the Chairman of the Board, the Chief Executive Officer of the
Company and one named executive officer during the year ended December 31, 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------------- ----------- --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arie Kilman.......................... 0 -- -- -- -- --
Robert R. MacDonald.................. 58,237(3) 11.5% $ 0.69 10/25/04 $ 481,620 $ 790,858
59,110(4) 11.7% $ 6.60 07/27/05 $ 139,500 $ 453,374
H. Jeffrey Fencer.................... 5,460(3) 1.1% $ 0.69 02/04/03 $ 40,622 $ 60,606
4,950(4) $0.69 02/02/05 $ 40,937 $ 67,221
</TABLE>
- ------------------------
(1) The exercisability of these options is dependent upon the optionee's
continued employment with the Company. Options were granted at the fair
market value of the Company on the date of grant and expire 10 years from
the date of grant. The option exercise price may be paid (i) in shares of
Common Stock owned by the executive officer, (ii) by delivery of a
promissory note of the executive officer on terms determined by the
Compensation Committee, (iii) by delivery of an irrevocable undertaking by a
broker to deliver promptly to the Company sufficient funds to pay the
exercise price, (iv) by delivery of irrevocable instructions to a broker to
deliver promptly to the Company cash or a check to pay the exercise price,
(v) in cash or (vi) in any combination thereof.
(2) The potential realizable value represents the estimated future gain in the
value of the options over their exercise price which may exist immediately
prior to the scheduled expiration date of the options. The calculation
assumes the specified compounded rates of appreciation in the per share
price of the Common Stock starting on the date of grant and further assumes
that the options will be exercised on their expiration date. The actual
value, if any, which may be realized will depend upon the market price of
the Common Stock on the date the option is exercised. There is no assurance
that the actual value, if any, which may be realized will be at or near the
values estimated by the calculations in the table. The closing market price
of the Common Stock at December 31, 1995 was $6.00 per share.
(3) In February 1993 and October 1994, ProfitKey granted options to purchase
shares of its common stock to Mr. Fencer and Mr. MacDonald, respectively,
pursuant to ProfitKey's then existing stock option plan. Upon the
acquisition of ProfitKey by the Company in April 1995, the Company converted
the ProfitKey options granted to Mr. Fencer and Mr. MacDonald into options
to purchase 5,460 and 58,237 shares of Common Stock, respectively, under the
Plan. In October 1996, Mr. MacDonald exercised his option to purchase 58,237
shares of Common Stock.
(4) All of these options are currently exercisable.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information about unexercised stock options
by the Chief Executive Officer of the Company and one named executive officer
during 1995. No stock options were exercised by the Chief Executive Officer or
such named executive officer during 1995.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
Arie Kilman.................................................... 0/0 --
Robert R. MacDonald............................................ 70,059/47,288 $ 309,238/$0
H. Jeffrey Fencer.............................................. 5,460/4,950 $ 28,993/$26,285
</TABLE>
- ------------------------
(1) The market price of the Common Stock on December 31, 1995 was $6.00 per
share.
33
<PAGE>
DIRECTOR COMPENSATION
The Company's directors receive no additional compensation for serving on
the Board of Directors, other than reimbursement of reasonable expenses incurred
in attending meetings.
EMPLOYMENT AGREEMENTS
Under the employment agreement between the Company and Mr. Kilman, Mr.
Kilman will serve as Chief Executive Officer of the Company until May 1, 1998,
subject to earlier termination under certain circumstances. The agreement also
provides that Mr. Kilman will devote substantially all of his business time to
the affairs of the Company. The Company presently pays Mr. Kilman an annual base
salary of $200,000, and a performance bonus to be established by the Board. If
Mr. Kilman's employment by the Company is terminated for any reason, Mr. Kilman
has agreed that, for one year after such termination and except for his services
for Liraz, he will not engage in any business that competes with the Company
business at the time of the termination.
Under the employment agreement between the Company and Mr. MacDonald, Mr.
MacDonald will serve as Chairman of the Board of Directors of the Company until
May 1, 1998, subject to earlier termination under certain circumstances. The
Company will pay Mr. MacDonald an annual base salary of $50,000 and will pay
$1,200 for each day of service over eight days each quarter. If Mr. MacDonald's
employment by the Company is terminated for any reason, Mr. MacDonald has agreed
that, for one year after such termination, he will not engage in any business
that competes with the Company's business at the time of the termination.
Under the employment agreement between the Company and Joseph J. Di Zazzo,
Mr. Di Zazzo will serve as Controller and Chief Accounting Officer of the
Company until May 1, 1998, subject to earlier termination under certain
circumstances. The Company is paying Mr. Di Zazzo an annual salary of $75,000,
an annual increase of $5,000, and a performance bonus to be established by the
Board. If Mr. Di Zazzo's employment is terminated for any reason, Mr. Di Zazzo
has agreed that, for one year after such termination, he will not engage in any
business that competes with the Company's business at the time of the
termination.
Under the employment agreement between Level 8 and Samuel Somech, Mr. Somech
will serve as President of Level 8 until April 1, 1998, subject to earlier
termination under certain circumstances. The Company will pay Mr. Somech (a) an
annual base salary of $150,000, (b) an annual increase in base salary as
determined by the Board of Directors of Level 8 (the "Level 8 Board"), in its
discretion, (c) a performance bonus determined by the Level 8 Board, and (d) a
car and telephone allowance of $2,000 a month. In the event that Mr. Somech is
terminated prior to April 1, 1998, Level 8 will pay Mr. Somech a termination fee
equal to 50% of the salary Mr. Somech would have received from the date of
termination until April 1, 1998. If Mr. Somech's employment is terminated for
any reason (other than without cause), Mr. Somech has agreed that, for one year
after such termination, he will not directly or indirectly, (i) compete with
Level 8's consulting services in the United States regarding middleware,
messaging or fault-tolerant transaction processing, (ii) engage or participate
in any business that provides consulting services within the United States with
respect to middleware, messaging or fault-tolerant transaction processing, (iii)
solicit or divert business from Level 8 or assist any business in attempting to
do so, (iv) cause any business to refrain from doing business with Level 8 or
(v) solicit or hire any person who was an employee of Level 8 during the term of
his employment agreement or assist any business in attempting to do so.
In addition to the indemnification provided under the Company's certificate
of incorporation and bylaws, the Company has agreed to indemnify each of Messrs.
Kilman, MacDonald and Di Zazzo for all reasonable expenses incurred in
connection with the defense or settlement of any action or suit involving that
individual in his capacity as a director and/or officer of the Company, as long
as he acted in a manner
34
<PAGE>
he reasonably believed to be in, or not opposed to, the best interests of the
Company. Such indemnification will not be available, however, if the particular
individual is judged to be liable for negligence or misconduct in performing his
duties for the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during the year ended
December 31, 1995. Mr. MacDonald and Mr. Somech, officers of the Company during
the last fiscal year, participated in deliberations of the Company's Board of
Directors concerning executive officer compensation. There were no interlocking
relationships between the Company and other entities that might affect the
determination of the compensation of the directors and executive officers of the
Company.
COMPENSATION POLICIES
Since the Compensation Committee has not yet met, it has yet to formulate
compensation policies for senior management and executive officers. However, it
is anticipated that the Compensation Committee will develop a company-wide
program covering all employees and that the goals of such program will be to
attract, maintain and motivate the Company's employees. It is further
anticipated that one of the aspects of the program will be to link an employee's
compensation to his or her performance, and that the grant of stock options or
other awards related to the price of the Common Stock will be used in order to
make an employee's compensation consistent with shareholders' gains. It is
expected that salaries will be set competitively relative to the computer
software industry and that individual experience and performance will be
considered in setting salaries.
CHIEF EXECUTIVE OFFICER COMPENSATION
During 1995 Mr. MacDonald, the Chief Executive Officer of the Company, was
compensated substantially in accordance with his employment agreement with the
Company. See "Employment Agreements." Mr. MacDonald's bonus for 1995 was granted
for Mr. MacDonald's work in connection with the completion of the purchase of
Level 8 by the Company and the completion of the Company's initial public
offering. This bonus was granted in lieu of any additional performance bonus
provided for in Mr. MacDonald's employment agreement.
35
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION OF LEVEL 8
In April 1995, the Company acquired Level 8 from its shareholders, including
Samuel Somech and Theodore Fine, for an aggregate of $2,000,000 and 525,159
shares of Common Stock. In addition, the Company granted Mr. Somech and Mr. Fine
options to purchase 77,805 and 38,902 shares of Common Stock, respectively, at
$5.00 per share. In connection with the acquisition, Level 8 entered into an
employment agreement with Mr. Somech and a consulting agreement with Mr. Fine.
LIRAZ SYSTEMS
SALES OF COMMON STOCK TO LIRAZ EMPLOYEES. In March 1995, the Company sold
an aggregate of 30,331 shares of Common Stock to eight employees of Liraz for
approximately $.82 per share.
BORROWINGS FROM LIRAZ SYSTEMS. Since its formation, Liraz has advanced to
the Company an aggregate of approximately $4,025,000. In March 1995, Liraz
contributed $500,000 of those advances to the capital of the Company in exchange
for 363,983 shares of Common Stock. On July 25, 1995, Liraz contributed the
balance of those advances to the capital of the Company in exchange for 471,264
shares of Common Stock and a promissory note in the principal amount of
$1,228,172. The Company used $600,000 of the net proceeds from its initial
public offering of the Common Stock, which closed on August 1, 1995, to repay a
portion of the note. The promissory note for the remaining indebtedness of
$628,172 bears interest at the rate of 4% a year, with principal and interest
payable quarterly over five years.
AGREEMENT WITH PROFITKEY. In April 1995, ProfitKey and Liraz Systems
entered into an agreement, under which Liraz provided development services in
Israel to accelerate the graphical user interface rewrite of ProfitKey's Rapid
Response Manufacturing software product. Liraz Systems and ProfitKey
collaborated on the technical design and coding of the different software
modules. Under the agreement, ProfitKey retains all rights to the software and
paid $338,000 to Liraz Systems for software development. The Company believes
the terms of the agreement were at arm's length. Work under the agreement was
completed in the third quarter of 1996.
AGREEMENT WITH LEVEL 8. In December 1995, Level 8 and Liraz Systems entered
into a custom computer programming agreement whereby Liraz Systems agreed to
provide development services and to share up to 50% of the development costs
related to the development of certain Falcon External Gateways which Level 8 is
developing pursuant to an agreement between Level 8 and Microsoft. In exchange,
Liraz Systems will receive royalties from sales of the resulting products at the
rate of 30% for the first $2,000,000 of revenues, 20% for the next $1,000,000 of
revenues, and 8% for all revenues in excess of $3,000,000. In connection with
this agreement, Level 8 and Liraz Systems applied for and received an
Israel--U.S. Binational Industrial Research and Development Foundation grant of
$432,000 to offset up to 50% of the development costs incurred by Level 8 and
Liraz Systems on the project.
ONGOING RELATIONSHIP. The Company's President, Arie Kilman, is also
President and Chairman of the Board of Liraz. Liraz has agreed to reimburse the
Company at a rate of $1,200 a day for each day of service Mr. Kilman spends on
matters relating to Liraz. For information regarding Mr. Kilman's employment
agreement with the Company, see "Management--Employment Agreements."
Liraz and the Company may from time to time compete for the same business
opportunity or engage in transactions with each other. In that connection, Liraz
and the Company have agreed that, in the case of any business opportunity
primarily involving North America, the parties will use their best efforts to
make the opportunity available to the Company; in the case of any business
opportunity primarily involving the Middle East, the parties will use their best
efforts to make the opportunity available to Liraz; and, in each other case, the
parties will participate equally in the opportunity. This agreement will
terminate on the earlier of (a) May 1998, subject to renewal thereafter, unless
either party wishes to terminate the
36
<PAGE>
agreement, and (b) the date Liraz ceases to own at least 35% of the outstanding
shares of Common Stock. In addition, the Company and Liraz have agreed that all
other transactions between the two companies will be on terms no less favorable
than those between unaffiliated parties.
See "Principal and Selling Shareholders--Ownership of Liraz and Certain of
its Affiliates" for a description of the relationship between Liraz and Arie
Kilman, Frank J. Klein and Lenny Recanati, directors of the Company.
CANDLE CORPORATION
SALE OF COMMON STOCK TO CANDLE. In July 1996, the Company sold 246,800
shares of Common Stock to Candle for $11 per share.
LETTER OF INTENT. In July 1996, the Company, Level 8 and Candle entered
into a letter of intent regarding certain products. Pursuant to the letter of
intent, Level 8 has agreed to enter into a non-exclusive distribution and
technology license agreement for its Falcon External Gateways and a
non-exclusive technology license agreement for its DOT/XM. The Company is
currently negotiating the terms of the definitive agreements and expects to
enter into such agreements by December 31, 1996.
PRODUCT PURCHASE AGREEMENT. In August 1996, Level 8 and Candle entered into
a product purchase agreement. Pursuant to the agreement, Candle acquired
MQSecure, a transactional messaging security product developed by Level 8, and
in exchange, provided Level 8 with a non-refundable advance of $250,000 against
future royalties to Level 8 of 20% (up to an aggregate of $3.0 million) on sales
of that product.
SOFTWARE AGENCY AGREEMENT. Level 8 entered into a software agency agreement
with Candle in October 1996. Pursuant to the agreement, Level 8 acquired the
non-exclusive right to market within North America certain systems management
products owned by Candle. In exchange, Candle agreed to pay Level 8 a 15%
royalty on the net revenue derived from any sales by Level 8.
37
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of October 31, 1996, and as
adjusted for the sale by the Company of the Shares in this offering, by (a) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (b) each of the Company's executive officers
and directors, (c) all executive officers and directors of the Company as a
group and (d) each Selling Shareholder.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
AMOUNT AND NATURE OF
OWNERSHIP OF COMMON STOCK BENEFICIAL OWNERSHIP AFTER
BEFORE THIS OFFERING(1) THIS OFFERING
-------------------------------- NUMBER OF ----------------------------
PERCENTAGE OF SHARES PERCENTAGE OF
NUMBER OF OUTSTANDING BEING NUMBER OF OUTSTANDING
NAME SHARES SHARES OFFERED(2) SHARES(2) SHARES(2)
- -------------------------- --------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Liraz Systems
Ltd.(3)(4).............. 2,911,863 43.9% -- 2,911,863 40.3%
Liraz Export (1990)
Ltd.(3)(4).............. 962,139 14.5% 150,000 812,139 11.2%
Arie Kilman(5)(6)......... -- (7) -- -- -- --
Robert R.
MacDonald(5)(6)......... 182,740(8) 2.8% 45,661 137,079(8) 1.9%
Samuel Somech(5)(6)....... 235,606(9) 3.6% 60,000 175,606(9) 2.4%
Theodore Fine(6).......... 136,014(10) 2.1% 35,000 101,014(10) 1.4%
Joseph J. Di Zazzo(5)..... 4,388(11) * -- 4,388(11) *
Frank J. Klein(6)......... -- (12) -- -- -- (12) --
Lenny Recanati(6)......... -- (13) -- -- -- (13) --
Milford W. MacDonald...... 27,898 * 15,000 12,898 *
Joel Lenoff............... 19,801 * 19,801 -- --
Mitchell Wasserman........ 19,801 * 19,801 -- --
Richard N. Rakup.......... 14,923 * 14,923 -- --
Jacob Vind................ 10,192 * 10,192 -- --
Michael J. Clare.......... 7,280 * 7,280 -- --
Moti Gutman............... 5,339 * 5,339 -- --
Avishay Hermesh........... 5,339 * 5,339 -- --
Yossi Shemesh............. 3,640 * 3,640 -- --
Elisha Mazali............. 2,184 * 2,184 -- --
Shabtay Efraim............ 2,184 * 2,184 -- --
Marilyn McLean............ 1,460 * 1,460 -- --
Matti Rotter.............. 728 * 728 -- --
Jonathan Korpel........... 728 * 728 -- --
Roger Tedesco............. 480 * 480 -- --
Carol Ann Wingrove........ 260 * 260 -- --
All directors and
executive officers as a 558,748(7)- 418,087(7)-
group (7 individuals)... (13) 8.4% -- (13) 5.8%
</TABLE>
- ------------------------
* Less than 1% of the outstanding Common Stock.
(1) The persons named in this table have sole voting and investment power with
respect to the number of shares indicated as beneficially owned by them.
(2) Assumes no exercise of the Underwriters' over-allotment option. In the event
such option is exercised in full, Liraz Export (1990) Ltd. will sell an
additional 50,000 shares and will beneficially own 762,139 shares, or 10.5%,
of the Common Stock after this offering; Samuel Somech will sell an
additional 30,000 shares and will beneficially own 145,606 shares, or 2.0%,
of the Common Stock after this offering; Robert R. MacDonald will sell an
additional 20,000 shares and will beneficially own 117,079 shares, or 1.6%,
of the Common Stock after this offering; Theodore Fine will sell an
additional 15,000 shares and will beneficially own 86,014 shares, or 1.2%,
of
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<PAGE>
the Common Stock after this offering; and Milford W. MacDonald will sell an
additional 5,000 shares and will beneficially own 7,898 shares, or less than
1%, of the Common Stock after this offering.
(3) Liraz Export (1990) Ltd. is a wholly-owned subsidiary of the Liraz Systems
Ltd. The shares of Liraz Systems Ltd. are owned approximately: 30% by Mr.
Kilman; 9.3% by PEC; 9.3% by DIC; 16% by Mr. Zeev Yannai; and 36% by the
public in Israel.
(4) The address of each of Liraz Systems Ltd. and Liraz Export (1990) Ltd. is 5
Hatzoref Street, Holon 58856, Israel.
(5) The referenced individual is an executive officer of the Company.
(6) The referenced individual is a director of the Company.
(7) Excludes 3,874,002 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Kilman as a result of his position as President, Chief
Executive Officer and the owner of approximately 30% of Liraz. See
"Principal and Selling Shareholders--Ownership of Liraz and Certain of its
Affiliates" below.
(8) Includes 59,110 shares subject to stock options exercisable within 60 days
and excludes 30,432 shares held by family members of Mr. MacDonald.
(9) Includes 88,902 shares subject to stock options exercisable within 60 days
and excludes 88,902 shares subject to stock options not exercisable within
60 days.
(10) Includes 44,451 shares subject to stock options exercisable within 60 days
and excludes 44,451 shares subject to stock options not exercisable within
60 days.
(11) Includes 4,297 shares subject to stock options exercisable within 60 days
and excludes 9,706 shares subject to stock options not exercisable within 60
days.
(12) Excludes 3,874,002 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Klein as a result of his position as an executive officer of
PEC, which owns approximately 9.3% of Liraz. See "Principal and Selling
Shareholders--Ownership of Liraz and Certain of its Affiliates" below.
(13) Excludes 3,874,002 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Recanati as a result of his position as an executive officer of
DIC, which owns approximately 9.3% of Liraz. See "Principal and Selling
Shareholders--Ownership of Liraz and Certain of its Affiliates" below.
OWNERSHIP OF LIRAZ AND CERTAIN OF ITS AFFILIATES
Mr. Kilman is party to a shareholders agreement (the "Shareholders
Agreement") with PEC and DIC, pursuant to which Mr. Kilman, PEC and DIC have
agreed to act together to elect directors of Liraz and for certain other
purposes. The Company has been advised that each of PEC and DIC beneficially
owned approximately 9.3% of the ordinary shares of Liraz as of October 29, 1996.
By virtue of the Shareholders Agreement, each party to the Shareholders
Agreement may be deemed to own beneficially the ordinary shares of Liraz owned
by the other parties. Each party to the Shareholders Agreement disclaims
beneficial ownership of the ordinary shares of Liraz owned by the other parties
to the agreement.
IDB Holding Corporation Ltd. ("IDB Holding") owns approximately 71.48% of
the outstanding shares of IDB Development Corporation Ltd. ("IDB Development").
IDB Development, in turn, owns approximately 70% of the outstanding PEC common
stock and approximately 55% of the outstanding DIC common stock. By reason of
IDB Holding's ownership of IDB Development voting securities, IDB Holding may be
deemed the beneficial owner of the PEC common stock and DIC common stock held by
IDB Development. By reason of their positions with, and control of voting
securities of, IDB Holding, Messrs. Raphael Recanati, of Tel Aviv, Israel, and
Jacob Recanati, of Haifa, Israel, who are brothers, and Leon Recanati, of Tel
Aviv, Israel, and Judith Yovel Recanati, of Herzliya, Israel, who are brother
and sister, may each be deemed to share the power to direct the voting and
disposition of the outstanding shares of PEC common stock and DIC common stock
owned by IDB Development and may each, under existing regulations of the
Commission, therefore be deemed a beneficial owner of these shares. Leon
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<PAGE>
Recanati and Judith Yovel Recanati are the nephew and niece of Raphael and Jacob
Recanati. Companies the Recanati family controls hold approximately 52.4% of the
outstanding ordinary shares of IDB Holding.
The Company has been advised that, as of December 31, 1995, Mr. Zeev Yannai
owned 854,142 ordinary shares of Liraz, which is approximately 16% of the
ordinary shares of Liraz.
Mr. Kilman and Mr. Yannai are parties to an agreement that grants Mr. Kilman
the right to vote Mr. Yannai's shares in Liraz until November 1996. By virtue of
this agreement, Mr. Kilman may be deemed to own beneficially the ordinary shares
of Liraz owned by Mr. Yannai, but Mr. Kilman disclaims beneficial ownership of
those shares.
Mr. Yannai may, by reason of his ownership in Liraz, be deemed to share
voting power and dispositive power with respect to the 3,874,002 shares of
Common Stock owned in the aggregate by Liraz and therefore may be deemed to be
the beneficial owner of those shares.
Except as noted above, the Company believes the beneficial owners referred
to above have sole voting and investment power regarding the shares of Common
Stock shown as being beneficially owned by them.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 6,836,297 shares of
Common Stock outstanding and 900,000 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options pursuant to the Plan and
the exercise of warrants held by the Representative. The 1,000,000 shares of
Common Stock sold in this offering will be freely tradeable without restriction
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company (as that term is defined under the rules and regulations of the
Securities Act), which will be subject to the resale limitations of Rule 144
under the Securities Act. Of the presently outstanding shares of Common Stock,
4,559,756 shares are, and 6,188 shares issuable upon the exercise of the
warrants will be, "restricted securities" for purposes of Rule 144 and may not
be resold in a public distribution, except in compliance with the registration
requirements of the Securities Act, pursuant to a valid exemption from
registration or pursuant to Rule 144.
In general, under Rule 144(e), as currently in effect, a shareholder (or
shareholders whose shares are aggregated), including an affiliate, who has
beneficially owned for at least two years shares of Common Stock that are
treated as "restricted securities," would be entitled to sell publicly, within
any three-month period, up to the greater of 1% of the then outstanding shares
of Common Stock (6,836,297 shares immediately after the completion of this
offering) or the average weekly reported trading volume in the Common Stock
during the four calendar weeks preceding the date on which notice of sale is
given, provided certain requirements are satisfied. In addition, affiliates of
the Company must comply with additional requirements of Rule 144 in order to
sell shares of Common Stock (including shares acquired by affiliates in this
offering). Under Rule 144, a shareholder deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale by him, and who has
beneficially owned for at least three years shares of Common Stock that are
treated as "restricted securities," would be entitled to sell those shares
without regard to the foregoing requirements.
The Company and certain stockholders of the Company, including all Selling
Shareholders, directors and officers, who after this Offering will own 3,945,329
shares of Common Stock (3,830,329, if the Underwriters exercise the
over-allotment option in full) are subject to lock-up agreements (the "Lock-Up
Agreements") with Hampshire Securities Corporation, under which these shares may
not be sold publicly during the Lock-Up Period without the prior written consent
of Hampshire Securities Corporation. Then and soon thereafter, all those shares
will become eligible for sale under Rule 144, and may be resold in the public
market only in compliance with the registration requirements of the Securities
Act, pursuant to a valid exemption from registration or pursuant to Rule 144. In
addition, Liraz has the right, exercisable after the Lock-Up Period, to have its
shares registered under the Securities Act at various times. See "Shares
Eligible for Future Sale--Registration Rights" below.
REGISTRATION RIGHTS
The Company has agreed that after December 27, 1996, at the request of Liraz
(and on no more than two occasions), the Company will file a registration
statement under the Securities Act for an underwritten offering of the Common
Stock owned by Liraz. In addition, if the Company otherwise proposes to register
its Common Stock under the Securities Act, Liraz may request that the Company
register its Common Stock as well (subject to various limitations). All fees and
expenses in excess of $50,000, but excluding accounting fees, incurred in
connection with any registration requested by Liraz will be borne by Liraz. All
fees and expenses, incurred in connection with any other registration will be
borne by the Company, except that Liraz will pay all fees and expenses of its
own counsel and all underwriting discounts and commissions relating to its
Common Stock.
The Company has agreed to file a registration statement with respect to the
Warrant Shares. See "Underwriting."
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<PAGE>
The Company has agreed that during the four-year period beginning on July
27, 1996, the Company will, at the request of the holders of a majority of its
Outstanding Warrants and shares of Common Stock
issued upon the exercise of the Outstanding Warrants (and on no more than one
occasion), file a registration statement under the Securities Act for an
offering of such Common Stock.
In addition, the Company has agreed to give advance notice to holders of the
Outstanding Warrants and the underlying Common Stock of its intention to file a
registration statement, and in one such case, holders of the Outstanding
Warrants and the underlying Common Stock will have the right to require the
Company to include the underlying Common Stock in such registration statement at
the Company's expense.
The Company has agreed, at the request of Candle, to file a registration
statement under the Securities Act for an offering of the Common Stock presently
owned by Candle during the 12-month period beginning on March 1, 1999.
The Company has agreed to use its best efforts to cause each such
registration statement to be declared effective under the Securities Act.
42
<PAGE>
DESCRIPTION OF SECURITIES
The Company's Amended Articles of Incorporation and Bylaws include
provisions which are intended by the Board of Directors to help assure fair and
equitable treatment of the Company's shareholders in the event that a person or
group should seek to gain control of the Company in the future. Such provisions,
which are discussed below, may make a takeover attempt or change in control more
difficult, whether by tender offer, proxy contest or otherwise. Accordingly,
such provisions may be viewed as disadvantageous to shareholders inasmuch as
they might diminish the likelihood that a potential acquirer would make an offer
for the Common Stock (perhaps at an attractive premium over the market price),
impede a transaction favorable to the interests of the shareholders, or increase
the difficulty of removing the incumbent Board of Directors and management, even
if in a particular case removal would be beneficial to the shareholders.
The authorized capital stock of the Company consists of 16,000,000 shares of
capital stock, 15,000,000 of which may be common stock, par value $0.01 per
share, and 1,000,000 of which may be preferred stock. On October 31, 1996, there
were 6,236,297 shares of Common Stock outstanding; no shares of preferred stock
currently are outstanding.
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote on all
matters submitted to a vote of shareholders, including the election of
directors. There is no cumulative voting in the election of directors;
consequently, the holders of a majority of the outstanding shares of Common
Stock can elect all of the directors then standing for election.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor. Holders of Common Stock have no conversion,
redemption or preemptive rights to subscribe to any securities of the Company.
All outstanding shares of Common Stock will be fully paid and nonassessable. In
the event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after provision for payment of liabilities to creditors
and the preferences, if any, of holders of preferred stock. The rights,
preferences and privileges of holders of Common Stock are subject to the rights
of the holders of any shares of preferred stock which the Company may issue in
the future.
CERTAIN ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
PREFERRED STOCK. As described above, the Board of Directors is authorized
to provide for the issuance of shares of preferred stock, in one or more series,
and to fix by resolution and to the extent permitted by the BCL, the terms and
conditions of such series. The Company believes that the availability of the
preferred stock issuable in series will provide it with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs which might arise. Although the Board of Directors has no
present intention to do so, it could issue a series of preferred stock that
could, depending on its terms, either impede or facilitate the completion of a
merger, tender offer or other takeover attempt.
BUSINESS COMBINATIONS. Section 912 of the BCL regulates "business
combinations," a term covering a broad range of transactions between "resident
domestic corporations" (as defined, which term would include the Company) and an
interested shareholder, which is defined as any person beneficially owning 20%
or more of the outstanding voting stock of the resident domestic corporation or
any affiliate or associate of that owner. Under the statute, a resident domestic
corporation may not engage in any business combination with any interested
shareholder, unless (a) if the business combination is to occur within five
years of the date the shareholder acquired 20% or more ownership, either the
business combination or the stock acquisition was previously approved by the
Board of Directors, or (b) the business combination is approved by a majority of
outstanding voting stock (not including shares owned by the interested
43
<PAGE>
shareholder), which approval may not be effectively given until approximately
five years after the interested shareholder first attained 20% ownership (the
"Stock Acquisition Date"), or (c) the business combination occurs after five
years after the interested shareholder's Stock Acquisition Date and the
consideration paid to the non-interested shareholders meets certain stringent
conditions imposed by section 912. The restrictions imposed by section 912 will
not apply to a corporation that amends its by-laws by the affirmative vote of a
majority of its outstanding voting stock (not including shares owned by the
interested shareholder) to "opt out" of section 912; however, an amendment will
not be effective for 18 months after the vote and will not apply to any business
combination where the Stock Acquisition Date precedes the amendment. At this
time, the Company will not seek to "opt out" of section 912 and, therefore, the
restrictions imposed by section 912 will apply to the Company.
Section 912 of the BCL may discourage other persons from making a tender
offer for, or acquisitions of, a number of shares of the Common Stock. This
could have the incidental effect of inhibiting changes in management and also
may prevent temporary fluctuations in the market price of the Common Stock that
often result from actual or rumored takeover attempts. In addition, the limited
liability provisions in the Company's Certificate of Incorporation with respect
to directors and the indemnification provisions in the Company's by-laws may
discourage shareholders from bringing a lawsuit against directors for breach of
their fiduciary duty and also may have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though such an
action, if successful, might otherwise have benefitted the Company and its
shareholders. Furthermore, a shareholder's investment in the Company may be
adversely affected to the extent the Company pays the costs of settlement and
damage awards against the Company's directors and officers pursuant to the
indemnification provisions in the Company's by-laws.
WARRANTS
OUTSTANDING WARRANTS. In connection with its initial public offering, the
Company sold to the Representative 140,000 warrants (the "Outstanding Warrants")
to purchase 140,000 shares of Common Stock. The Outstanding Warrants are
exercisable for a four-year period beginning on July 27, 1996 at a price per
share equal to $7.425. The Outstanding Warrants contain antidilution provisions
providing for adjustment of the exercise upon the occurrence of certain events,
including stock dividends, stock splits, recapitalizations and sales of Common
Stock below the then current market price. The holders of the Outstanding
Warrants have no voting, dividend or other rights as shareholders of the Company
with respect to shares of Common Stock underlying the Outstanding Warrants,
except to the extent the Outstanding Warrants shall have been exercised.
BANK WARRANTS. In connection with the renegotiation of ProfitKey's bank
loan in 1992, warrants were issued to the bank to purchase shares of ProfitKey's
common stock. On April 3, 1995, the warrants were converted into warrants to
purchase 6,188 shares of Common Stock at a price per share equal to $6.87. The
warrants expire on March 31, 1997.
DILUTIVE EFFECT. While any of the Company's warrants are exercisable, a
warrant holder will have the opportunity to profit from a rise in the market
price of the Common Stock, with a resulting dilution in the interest of other
shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company of New York, New York.
44
<PAGE>
UNDERWRITING
The Underwriters named below, for which Hampshire Securities Corporation is
acting as representative, have severally, and not jointly, agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase,
and the Company has agreed to sell, the Shares offered hereby in the amounts set
forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Hampshire Securities Corporation..................................................
-----------
Total.......................................................................
-----------
-----------
</TABLE>
A copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement, to which reference is hereby made. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions. The Underwriters shall be obligated to purchase all the
Shares, if any are purchased.
Through The Representative, the Underwriters have advised the Company that
they propose to offer the Shares to the public at the public offering price set
forth on the cover page of this Prospectus and that they may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD"), and to certain foreign dealers, concessions not in excess of $
per share, of which amount a sum not in excess of $ per share may be reallowed
by such dealers to other dealers who are members of the NASD and to certain
foreign dealers. After the commencement of this offering, the concessions and
reallowances may be changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect of those
liabilities.
The Company has agreed to pay the Representative an expense allowance, on a
non-accountable basis, equal to % of the gross proceeds derived from the sale
of 1,000,000 shares in this offering (including any shares sold by the Selling
Shareholders upon the exercise of the over-allotment option). The Company has
paid $ as an advance on that allowance. The Company also has agreed to pay
certain of the Representative's expenses in connection with this offering,
including expenses in connection with qualifying the shares for sale under the
laws of the states the Representative may designate. See
"Underwriting--Representative's Warrants" below.
A majority of all the Company's existing shareholders have agreed not to
sell publicly the shares of Common Stock they currently own without the prior
written consent of the Representative for six months from the date of this
Prospectus.
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<PAGE>
The Underwriters do not intend to confirm sales of Common Stock offered by
this Prospectus to any accounts over which they exercise discretionary
authority.
In connection with the offering made hereby, certain Underwriters and
selling group members (if any) or their respective affiliates who are qualified
registered market makers on the NASDAQ/NM may engage in passive market making
transactions in the Common Stock on the NASDAQ/NM in accordance with Rule 10b-6A
under the Exchange Act, during the two business day period before commencement
of offers or sales of the Common Stock. The passive market making transactions
must comply with applicable volume and price limits and be identified as such.
In general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for such security; if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
The Company and the Selling Shareholders have granted the Representative an
option, exercisable during the 45-day period commencing on the date of this
Prospectus, to purchase at the public offering price per share less the
Underwriters' discounts and commissions, up to 30,000 and 120,000 shares of
Common Stock, respectively, for the sole purpose of covering over-allotments, if
any. After the commencement of this offering, the Representative may confirm
sales of shares of Common Stock subject to this over-allotment option. Purchases
of shares of Common Stock upon exercise of the over-allotment option will result
in the realization of additional compensation by the Representative.
In connection with this offering, the Company has agreed to sell to the
Representative, individually and not as representative of the several
Underwriters, for $100, warrants to purchase 100,000 shares of Common Stock. The
Representative's warrants are exercisable for four years, commencing one year
from the date of this Prospectus, at a price per share (the "Exercise Price")
equal to 135% of the public offering price per share. The Representative's
Warrants may not be sold, transferred, assigned, pledged or hypothecated for 12
months from the date of this Prospectus, except to members of the selling group
and to officers and partners of the Representative or members of the selling
group. The Representative's Warrants contain antidilution provisions providing
for adjustment of the Exercise Price and the number of shares of Common Stock
issuable upon the exercise thereof upon the occurrence of certain events,
including stock dividends, stock splits, recapitalizations and sales of Common
Stock below the then current market price. The holders of the Representative's
Warrants have no voting, dividend, or other rights as shareholders of the
Company with respect to shares of Common Stock underlying the Representative's
Warrants, except to the extent the Representative's Warrants shall have been
exercised.
The Company has agreed that, at the request of the holders of a majority of
the Representative's Warrants and Warrant Shares (and on no more than two
occasions), the Company will file a registration statement under the Securities
Act for an offering of the Warrant Shares during the four-year period beginning
on the first anniversary of the date of this Prospectus; and the Company has
agreed to use its best efforts to cause each such registration statement to be
declared effective under the Securities Act. In addition, the Company has agreed
to give advance notice to holders of the Representative's Warrants and Warrant
Shares of its intention to file a registration statement, and in one such case,
holders of the Representative's Warrants and the Warrant Shares will have the
right to require the Company to include the Warrant Shares in such registration
statement at the Company's expense.
While the Representative's Warrants are exercisable, the Representative and
any transferee will have the opportunity to profit from a rise in the market
price of the Common Stock, with a resulting dilution in the interest of other
shareholders. In addition, during that period, the terms on which the Company
will be able to obtain additional capital may be adversely affected, since the
Representative is likely to exercise its warrants at a time when the Company
would, in all likelihood, be able to obtain capital by a new offering of
securities on terms more favorable than those provided in the Representative's
Warrants.
The Company has agreed until , 1999, that Hampshire Securities
Corporation may appoint an observer to attend all meetings of the Company's
Board of Directors. The observer has the right to
46
<PAGE>
receive notice of all meetings of the Board of Directors and to attend such
meetings. However, the Board of Directors may exclude the observer from any
meeting at which, in the opinion of the Board, confidential or sensitive matters
are to be discussed. The observer will be entitled to reimbursement for up to
$500 of out-of-pocket expenses for attendance at those meetings. In addition,
the observer will be entitled to indemnification, to the same extent as the
Company's directors. Hampshire Securities Corporation has advised the Company
that its initial designee is an officer of Hampshire Securities Corporation.
LEGAL MATTERS
The validity of the Common Stock being offered by this Prospectus will be
passed upon for the Company by Proskauer Rose Goetz & Mendelsohn LLP, New York,
New York. Certain legal matters will be passed upon for the Underwriters by
Brock Fensterstock Silverstein McAuliffe & Wade LLC, New York, New York.
EXPERTS
The audited financial statements in this Prospectus and elsewhere in the
registration statement of which this Prospectus is a part have been audited by
Lurie, Besikof, Lapidus & Co., LLP, independent public accountants, as indicated
in their reports with respect to those financial statements, and are included in
this Prospectus in reliance upon the authority of that firm as experts in giving
such reports.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Prospectus Summary and under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following general economic
and business conditions: the loss of, or the failure to replace, any significant
customers; changes in business strategy or development plans; the timing and
success of new product introductions; the quality of management; the
availability, terms and deployment of capital; the business abilities and
judgments of personnel; the availability of qualified personnel; and other
factors referenced in this Prospectus. These forward-looking statements speak
only as of the date of this Prospectus. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
47
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Shares offered hereby.
This Prospectus, which forms a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares offered hereby, reference
is made to the Registration Statement. Statements contained in this Prospectus
as to the contents of any contract or other document that has been filed as an
exhibit to the Registration Statement are qualified in their entirety by
reference to such exhibits for a complete statement of their terms and
conditions. The Company also files periodic reports and other information
required to be filed pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Registration Statement and such periodic reports and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street N.W., Washington,
D.C. 20549 or at certain of the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed
by the Commission. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site
(http://www.sec.gov) through which the Registration Statement and the Company's
periodic reports and other information can be retrieved.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"LVEL." Reports and other information concerning the Company may be inspected at
the offices of the National Association of Securities Dealers, 1735 K Street
N.W., Washington, D.C. 20006.
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GLOSSARY
API
Application Program Interface. The software that creates the visual
presentation on a computer screen.
CICS
Specialized software sold by IBM that acts as a transaction monitor to
control access to data and to provide communications.
CORBA
Common Object Request Broker Architecture. A standard for distributed
objects established by the Object Management Group, an affiliation of software
suppliers and customers.
DISTRIBUTED OBJECTS
A group of objects that follow rules that are standard within the computer
programming industry, such that individual objects can be readily shared by
different applications or computers.
DEC VMS
A computer operating system sold by Digital Equipment Corporation for use on
its computers.
DOT/XM
Distributed Object Transactions. The current name for Level 8's product
which combines third-party transactional messaging and distributed object
products in a Level 8 designed tool that facilitates integration of legacy
systems into modern, open systems architectures, by representing the legacy
systems as a collection of objects.
ENTERPRISE MESSAGING
The use of transactional messaging software to allow messages to be sent to
all computer systems in a company.
FALCON
The current name used by Microsoft for Microsoft's product that provides
transactional messaging within the Microsoft environment.
FALCON EXTERNAL GATEWAYS
The current name used by Level 8 for the products developed by Level 8 to
provide gateways between Falcon running in the Microsoft environment and other
software running in the non-Microsoft environment.
FRONT-END CLIENT
Desktop software applications that are the visual interface to server
programs.
49
<PAGE>
JAVA
A computer programming language developed by Sun Microsystems, Inc., and
typically used in an internet environment, that allows application programs to
be written which are portable across different hardware platforms.
LEGACY SYSTEM
A term used to describe the centralized computer systems that typically
exist in large companies, in comparison with the newer, and often distributed,
client-server systems. Typically they are mainframe computers that run most of
the programs and store most of the data used in the operations of a company.
MESSAGING GATEWAYS
Specialized software that translates from one messaging protocol to another.
MIDDLEWARE
Various types of software that facilitate communication among otherwise
incompatible hardware and software.
MRP II
Manufacturing Resource Planning. An integrated application software package
used by manufacturers to manage their manufacturing operations and to report
financial results.
MQSECURE
A transactional messaging security product.
MVS
A computer operating system sold by IBM for use on IBM mainframe computers.
OBJECT
A grouping of software code with associated data that is designed for a
particular purpose.
ORB
Object Request Broker. Specialized software that manages the availability of
software objects for use by various applications.
ORBIX
Iona Corporation's implementation of an ORB that meets the CORBA standard.
PORTED
The process of converting the software code of a product so that the product
operates on a new hardware platform.
THREE-TIER ARCHITECTURE
A computer system architecture that consists of personal computers (the
front-end clients) connected to servers (the middle tier) which communicate with
legacy systems (back-end systems).
TRANSACTIONAL MESSAGING
Specialized middleware that stores and sends discrete computer messages
reliably and securely between computers that utilize different hardware and
software.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES:
Independent Auditor's Report............................................................................... F-2
Consolidated balance sheets as of December 31, 1995 and 1994 and September 30, 1996 (unaudited)............ F-3
Consolidated statements of operations for the years ended December 31, 1993, 1994, and 1995 and the nine
months ended September 30, 1995 and 1996 (unaudited)..................................................... F-4
Consolidated statements of changes in shareholders' equity for the years ended December 31, 1993, 1994, and
1995 and the nine months ended September 30, 1996 (unaudited)............................................ F-5
Consolidated statements of cash flows for the years ended December 31, 1993, 1994, and 1995 and the nine
months ended September 30, 1995 and 1996 (unaudited)..................................................... F-6
Notes to consolidated financial statements................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Level 8 Systems, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of LEVEL 8
SYSTEMS, INC. (formerly Across Data Systems, Inc.) AND SUBSIDIARIES as of
December 31, 1994 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LEVEL 8
SYSTEMS, INC. AND SUBSIDIARIES as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
January 26, 1996 (except for Note 13,
as to which the date is September 9, 1996)
F-2
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30
1994 1995 1996
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $ 691,305 $ 3,147,509 $2,600,756
Marketable securities....................................................... -- 2,044,962 2,497,493
Accounts receivable, less allowance for doubtful accounts of $56,000,
$75,000 and $159,000, respectively........................................ 533,802 1,423,603 2,351,592
Income taxes receivable..................................................... -- -- 597,473
Inventory................................................................... 63,687 125,334 166,471
Prepaid expenses and other assets........................................... 70,216 157,054 265,488
Deferred income taxes....................................................... 266,700 268,000 86,500
---------- ----------- ------------
TOTAL CURRENT ASSETS.................................................... 1,625,710 7,166,462 8,565,773
---------- ----------- ------------
PROPERTY AND EQUIPMENT........................................................ 287,260 586,881 969,933
---------- ----------- ------------
OTHER ASSETS
Excess of cost over net assets of businesses acquired, net.................. 841,743 3,717,393 2,320,839
Service contracts acquired, net............................................. 2,372,532 2,016,850 1,861,371
Software development costs, net............................................. 704,773 1,505,169 2,242,969
Deferred income taxes....................................................... -- 26,400 --
Deposits and deferred costs................................................. 16,820 40,043 60,038
---------- ----------- ------------
3,935,868 7,305,855 6,485,217
---------- ----------- ------------
$5,848,838 $15,059,198 $16,020,923
---------- ----------- ------------
---------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt........................................ $ 71,008 $ 36,131 $ 8,593
Current maturities of loan from related company............................. -- 117,000 122,000
Accounts payable............................................................ 538,905 514,249 1,452,720
Accrued expenses............................................................ 345,730 444,841 618,707
Due to former shareholders of acquired subsidiary........................... 211,107 -- --
Income taxes payable........................................................ 302,926 88,412 --
Customer deposits........................................................... 289,838 213,221 204,606
Deferred revenue............................................................ 1,545,490 1,648,987 1,542,982
---------- ----------- ------------
TOTAL CURRENT LIABILITIES............................................... 3,305,004 3,062,841 3,949,608
---------- ----------- ------------
OTHER LIABILITIES
Long-term debt, net of current maturities................................... 19,053 43,975 26,009
Loans from related companies, net of current maturities..................... 2,015,165 453,847 360,685
Deferred income taxes....................................................... -- -- 8,300
Minority interest........................................................... 19,887 -- --
---------- ----------- ------------
2,054,105 497,822 394,994
---------- ----------- ------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value (authorized--1,000,000 shares; no shares
issued and outstanding)................................................... -- -- --
Common stock, $.01 par value (authorized--15,000,000 shares; issued and
outstanding--3,009,119, 5,922,410 and 6,230,335, respectively)............ 16,710 59,224 62,303
Additional paid-in capital.................................................. -- 10,371,302 13,020,141
Retained earnings (deficit)................................................. 478,173 1,096,222 (1,400,421)
Unearned compensation....................................................... -- (33,323) (5,702)
Foreign currency translation adjustments.................................... (5,154) 5,110 --
---------- ----------- ------------
489,729 11,498,535 11,676,321
---------- ----------- ------------
$5,848,838 $15,059,198 $16,020,923
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Consulting and service..................... $ 1,312,935 $ 2,574,108 $ 7,060,590 $ 4,572,754 $ 6,981,241
Software................................... -- 896,268 2,257,286 1,700,999 2,243,431
Other...................................... -- 126,226 821,148 1,371,752 561,046
----------- ----------- ----------- ----------- ------------
1,312,935 3,596,602 10,139,024 7,645,505 9,785,718
----------- ----------- ----------- ----------- ------------
COST OF REVENUE
Consulting and service..................... 809,286 1,428,400 3,571,535 2,208,452 3,462,191
Software................................... -- 162,090 341,655 248,567 1,688,561
Other...................................... -- 111,927 601,017 780,554 412,146
----------- ----------- ----------- ----------- ------------
809,286 1,702,417 4,514,207 3,237,573 5,562,898
----------- ----------- ----------- ----------- ------------
GROSS MARGIN................................. 503,649 1,894,185 5,624,817 4,407,932 4,222,820
----------- ----------- ----------- ----------- ------------
OPERATING EXPENSE
Selling, general and administrative
expense.................................. 532,305 1,173,071 4,205,943 2,962,315 4,870,391
Amortization of goodwill and service
contracts acquired....................... -- 54,724 575,095 370,742 479,076
----------- ----------- ----------- ----------- ------------
532,305 1,227,795 4,781,038 3,333,057 5,349,467
----------- ----------- ----------- ----------- ------------
OPERATING INCOME (LOSS) BEFORE LOSS ON SALE
OF SUBSIDIARY.............................. (28,656) 666,390 843,779 1,074,875 (1,126,647)
LOSS ON SALE OF SUBSIDIARY................... -- -- -- -- 1,484,061
----------- ----------- ----------- ----------- ------------
OPERATING INCOME (LOSS)...................... (28,656) 666,390 843,779 1,074,875 (2,610,708)
----------- ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE)
Interest income............................ -- 677 122,994 53,602 117,014
Interest expense........................... (4,056) (8,720) (54,733) (45,724) (28,049)
Gain on settlement of accounts payable..... -- 58,330 -- -- --
----------- ----------- ----------- ----------- ------------
(4,056) 50,287 68,261 7,878 88,965
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST.......................... (32,712) 716,677 912,040 1,082,753 (2,521,743)
INCOME TAX EXPENSE (BENEFIT)................. -- 133,200 278,700 360,000 (25,100)
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE MINORITY INTEREST....... (32,712) 583,477 633,340 722,753 (2,496,643)
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY................................. -- 19,887 15,291 15,291 --
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS)............................ $ (32,712) $ 563,590 $ 618,049 $ 707,462 $ (2,496,643)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS) PER COMMON SHARE........... $ (.01) $ .15 $ .13 $ .16 $ (.42)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES..................................... 3,839,166 3,839,166 4,777,758 4,396,229 5,985,265
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL RETAINED CURRENCY
--------------------- PAID-IN EARNINGS UNEARNED TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION ADJUSTMENTS
---------- --------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992................ 2,911,863 $ 10 $ -- $ (52,705) $ -- $
Net loss.................................. -- -- -- (32,712) -- --
---------- --------- ------------ ------------ ------------- ------
BALANCE AT DECEMBER 31, 1993................ 2,911,863 10 -- (85,417) -- --
Common stock issued....................... 97,256 16,700 -- -- -- --
Net income................................ -- -- -- 563,590 -- --
Foreign currency translation adjustment... -- -- -- -- -- (5,154)
---------- --------- ------------ ------------ ------------- ------
BALANCE AT DECEMBER 31, 1994................ 3,009,119 16,710 -- 478,173 -- (5,154)
Common stock issued....................... 19,801 3,400 -- -- -- --
Recapitalization.......................... -- 10,179 (10,179) -- -- --
Common stock issued in connection with the
Level 8 Technologies acquisition........ 525,159 5,252 1,570,225 -- -- --
Conversion of minority common shares of
ProfitKey to Level 8 shares............. 91,344 913 273,119 -- -- --
Common stock issued....................... 394,315 3,943 521,057 -- -- --
Conversion of loans from related companies
to equity............................... 471,264 4,713 2,045,287 -- -- --
Common stock issued in connection with
initial public offering................. 1,430,000 14,300 5,913,063 -- -- --
Common stock repurchased.................. (19,801) (198) (3,202) -- -- --
Exercise of stock options................. 1,209 12 988 -- -- --
Net income................................ -- -- -- 618,049 -- --
Unearned compensation related to issuance
of stock options........................ -- -- 68,285 -- (68,285) --
Adjustment of unearned compensation....... -- -- (7,341) -- 34,962 --
Foreign currency translation adjustment... -- -- -- -- -- 10,264
---------- --------- ------------ ------------ ------------- ------
BALANCE AT DECEMBER 31, 1995................ 5,922,410 59,224 10,371,302 1,096,222 (33,323) 5,110
Exercise of stock options (unaudited)..... 61,125 611 41,565 -- -- --
Net loss for the nine months ended
September 30, 1996 (unaudited).......... -- -- -- (2,496,643) -- --
Adjustment of unearned compensation
(unaudited)............................. -- -- -- -- 27,621 --
Common stock issued (unaudited)........... 246,800 2,468 2,607,274 -- -- --
Foreign currency translation adjustment
(unaudited)............................. -- -- -- -- -- (5,110)
---------- --------- ------------ ------------ ------------- ------
BALANCE AT SEPTEMBER 30, 1996 (unaudited)... 6,230,335 $ 62,303 $ 13,020,141 $ (1,400,421) $ (5,702) $ --
---------- --------- ------------ ------------ ------------- ------
---------- --------- ------------ ------------ ------------- ------
<CAPTION>
TOTAL
------------
<S> <C>
BALANCE AT DECEMBER 31, 1992................ $ (52,695)
Net loss.................................. (32,712)
------------
BALANCE AT DECEMBER 31, 1993................ (85,407)
Common stock issued....................... 16,700
Net income................................ 563,590
Foreign currency translation adjustment... (5,154)
------------
BALANCE AT DECEMBER 31, 1994................ 489,729
Common stock issued....................... 3,400
Recapitalization.......................... --
Common stock issued in connection with the
Level 8 Technologies acquisition........ 1,575,477
Conversion of minority common shares of
ProfitKey to Level 8 shares............. 274,032
Common stock issued....................... 525,000
Conversion of loans from related companies
to equity............................... 2,050,000
Common stock issued in connection with
initial public offering................. 5,927,363
Common stock repurchased.................. (3,400)
Exercise of stock options................. 1,000
Net income................................ 618,049
Unearned compensation related to issuance
of stock options........................ --
Adjustment of unearned compensation....... 27,621
Foreign currency translation adjustment... 10,264
------------
BALANCE AT DECEMBER 31, 1995................ 11,498,535
Exercise of stock options (unaudited)..... 42,176
Net loss for the nine months ended
September 30, 1996 (unaudited).......... (2,496,643)
Adjustment of unearned compensation
(unaudited)............................. 27,621
Common stock issued (unaudited)........... 2,609,742
Foreign currency translation adjustment
(unaudited)............................. (5,110)
------------
BALANCE AT SEPTEMBER 30, 1996 (unaudited)... $ 11,676,321
------------
------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
--------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (32,712) $ 563,590 $ 618,049 $ 707,462 $(2,496,643)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation................................. 19,653 35,475 135,942 84,861 138,241
Amortization................................. -- 68,918 640,646 418,602 798,269
Loss on sale of subsidiary................... -- -- -- -- 1,484,061
Tax effect of utilizing deferred tax assets
that were reserved at date of acquisition.. -- 289,700 448,700 355,500 49,600
Expenses paid by and included in loans from
related companies.......................... -- 13,486 -- -- --
Minority interest in income of consolidated
subsidiary................................. -- 19,887 15,291 15,291 --
Accrued interest income...................... -- -- (45,190) -- --
Gain on settlement of accounts payable....... -- (58,330) -- -- --
Deferred income taxes........................ -- (266,700) (529,700) (430,300) 166,600
Gain on sale of automobile................... -- (2,099) -- -- --
Changes in operating assets and liabilities,
exclusive of those arising from business
acquisitions and sale:
Accounts receivable...................... (73,943) (46,782) 941,612 712,808 (819,696)
Unbilled revenue and client costs--
work-in-process........................ (46,885) 156,136 -- -- --
Income taxes receivable.................. -- -- -- -- (596,299)
Inventory................................ -- (11,870) (61,647) (45,478) (41,137)
Prepaid expenses and other assets........ 6,885 15,835 (77,789) (92,994) (129,667)
Deposits and deferred costs.............. -- 21,193 (19,051) -- (24,820)
Accounts payable......................... 13,253 (226,528) (252,954) (270,691) 988,071
Accrued expenses......................... (16,359) (4,134) (282,237) (302,028) 73,507
Income taxes payable..................... -- 173,175 (218,307) (72,219) (115,417)
Customer deposits........................ -- (472,086) (77,185) 10,563 (8,615)
Deferred revenue......................... -- (853) 50,757 (6,946) (105,680)
--------- ---------- ---------- ---------- -----------
Net cash provided (used) by operating
activities........................... (130,108) 268,013 1,286,937 1,084,431 (639,625)
--------- ---------- ---------- ---------- -----------
INVESTING ACTIVITIES
Purchases of marketable securities............... -- -- (1,999,772) (1,999,772) (2,497,493)
Redemption of marketable securities.............. -- -- -- -- 2,044,962
Purchases of property and equipment.............. (4,614) (68,976) (380,686) (167,569) (600,170)
Software development costs....................... -- (16,073) (836,852) (384,870) (1,509,331)
Payments to former shareholders of acquired
subsidiary..................................... -- -- (445,056) (445,056) --
Advances to former shareholders of acquired
subsidiary..................................... -- -- (294,622) (294,622) --
Payments received on advances to former
shareholders of acquired subsidiary............ -- -- 236,708 225,940 --
Cost of acquisitions............................. -- (1,190,956) (2,151,302) (2,118,217) --
Cash acquired in acquisitions.................... -- 1,439,932 5,669 5,669 --
Proceeds from sale of subsidiary................. -- -- -- -- 120,000
Employee (advances) repayments................... (11,184) 6,401 (9,033) 1,747 21,225
--------- ---------- ---------- ---------- -----------
Net cash provided (used) by investing
activities................................... (15,798) 170,328 (5,874,946) (5,176,750) (2,420,807)
--------- ---------- ---------- ---------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
--------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................... $ -- $ -- $ 72,095 $ 31,912 $ --
Payments on long-term debt................................. (17,721) (34,118) (82,307) (60,860) (45,504)
Loans from related companies............................... 145,000 195,000 1,513,007 1,513,007 --
Payments on loans from related companies................... -- -- (907,325) (878,519) (88,162)
Net proceeds from issuance of common stock................. -- 16,700 6,455,763 6,6,73,498 2,609,742
Proceeds from exercise of stock options.................... -- -- 1,000 889 42,176
Repurchase of common stock................................. -- -- (3,400) (3,400) --
--------- --------- ----------- ----------- -----------
Net cash provided by financing activities............ 127,279 177,582 7,048,833 7,276,527 2,518,252
--------- --------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... -- 17,826 (4,620) 16,843 (4,573)
--------- --------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (18,627) 633,749 2,456,204 3,201,051 (546,753)
CASH AND CASH EQUIVALENTS
Beginning of year.......................................... 76,183 57,556 691,305 691,305 3,147,509
--------- --------- ----------- ----------- -----------
End of year................................................ $ 57,556 $ 691,305 $ 3,147,509 $ 3,892,356 $ 2,600,756
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 4,056 $ 8,720 $ 54,733 $ 35,801 $ 28,448
Cash paid (received) for income taxes...................... -- (63,141) 375,916 493,894 182,660
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES
</TABLE>
In 1993, the Company entered into capital lease obligations for the purchase
of computer equipment and furniture totaling $8,666.
The Company acquired companies as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Cost of net assets acquired (Note 2).............................. $ 2,424,275 $ 3,575,477
Additional direct costs........................................... 154,669 151,302
Common stock issued............................................... -- (1,575,477)
Paid directly by parent company (noncash)......................... (1,387,988) --
------------ ------------
Cash cost of acquisitions......................................... $ 1,190,956 $ 2,151,302
------------ ------------
------------ ------------
</TABLE>
In 1995, the Company converted $2,050,000 of loans from related companies
into 471,264 shares of common stock.
In 1996, the Company sold all the businesss of a subsidiary resulting in a
loss of $1,484,061 (unaudited) (Note 13).
See notes to consolidated financial statements.
F-7
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Level 8 Systems, Inc. (Level 8) (formerly Across Data Systems, Inc.)
develops and sells proprietary vertical application software packages and
provides software consulting and support services to customers located primarily
in the United States and Canada. On October 3, 1994, Level 8 acquired 92% (100%-
owned at April 3, 1995) of ProfitKey International, Inc. (ProfitKey). ProfitKey
provides computer consulting services and sells turnkey manufacturing resource
planning (MRP II) and scheduling software packages to manufacturing companies.
On October 28, 1994, Level 8 also incorporated a 100%-owned Canadian subsidiary,
3077934 Canada, Inc., which in turn acquired 99% (100%-owned at June 30, 1995)
of Bizware Computer Systems (Canada) Inc. (Bizware). Bizware sells software
packages that provide cost information used by the petroleum and retail
industries to manage and control individual retail outlets and groups of
outlets. Effective April 1, 1995, Level 8 acquired 100% of Level 8 Technologies,
Inc. (Level 8 Technologies) (formerly Level 8 Systems, Inc.). Level 8
Technologies specializes in transactional messaging middleware and distributed
object technology. Level 8 Technologies provides consulting services to the
financial services industry and to computer hardware and software providers, and
has begun to package portions of its distributed objects for sale to the
financial services industry. Consulting services are also provided by the A.S.U.
consulting division.
On July 27, 1995, Across completed an initial public offering of 1,430,000
shares of common stock. Liraz System Ltd. owns approximately 65% of the
Company's common stock.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Level 8, its
U.S. subsidiaries, ProfitKey and Level 8 Technologies, and its Canadian
subsidiaries, 3077934 Canada, Inc. and Bizware. All financial information of
subsidiaries is included from the date of acquisition. All intercompany accounts
and transactions are eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements at September 30, 1996, and for the
nine months ended September 30, 1995 and 1996 are unaudited. In the opinion of
management, all adjustments which are necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods covered
were made and are of a normal, recurring nature. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of the interim periods are not necessarily indicative of the results
for the full year.
Bizware was sold on September 9, 1996. The financial statements for the nine
months ended September 30, 1996, include Bizware through the date of sale.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to the
amortization period for intangible assets, the determination of the allowance
for doubtful accounts, and the valuation allowance for deferred tax assets.
F-8
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Canadian subsidiary (Bizware) are translated
at the exchange rates in effect at the balance sheet date. Revenue and expenses
are translated at the average exchange rates prevailing during the year.
Translation adjustments arising from the use of differing exchange rates are
included in the foreign currency translation adjustments account in
shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments consisting of cash,
receivables, long-term debt, and accounts payable approximate their fair values.
It is not practicable to determine the fair value of the loans from related
companies due to the related party nature of the transactions.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of software and hardware
systems at the time of the installation of the system, provided no significant
obligations remain and collection of the resulting receivable is deemed
probable. Revenue from add-on hardware sales is recognized when the hardware is
shipped to the customer. Revenue related to service contracts is recognized
ratably over the terms of the contracts. Consulting and specialized software
development revenue is recognized in accordance with the terms of the contract.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Investments with
original maturities in excess of three months are classified as marketable
securities based on the maturity date.
Marketable securities at December 31, 1995, consisting of U.S. treasury
bills, are considered by management to be "held to maturity," and therefore are
reported at amortized cost which approximates market value. Marketable
securities at September 30, 1996, consist of U.S. government securities, are
considered to be "available for sale," and are reported at cost which
approximates fair value.
CREDIT RISKS
The Company maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company does not believe it is exposed to any significant
credit risk on cash.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or market and
consists of purchased computers, software and related equipment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over the
estimated useful lives of the assets, primarily five to seven years.
F-9
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of the purchase price and related costs over the fair value of
the net assets of businesses acquired (goodwill) is being amortized on a
straight-line basis over ten and seven years for the Bizware and Level 8
acquisitions, respectively. The Company periodically assesses the recoverability
of the excess of cost over the net assets acquired by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations. Accumulated
amortization of goodwill was $14,512, $445,306, and $632,958 (unaudited) at
December 31, 1994 and 1995, and September 30, 1996, respectively.
SERVICE CONTRACTS ACQUIRED
Service contracts acquired in connection with the acquisition of ProfitKey
are amortized over 20 years based on the past history of customer retention for
service contracts and the Company's commitment to continually update their
product. Upon the cancellation of any service contract acquired, a pro rata
portion of the cost is expensed. Accumulated amortization, including termination
of service contracts, was $40,212, $185,163, and $226,920 (unaudited) at
December 31, 1994 and 1995, and September 30, 1996, respectively.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes qualifying software development costs after having
established technological feasibility and ends capitalization when the product
is available for release to customers, consistent with Statement of Financial
Accounting Standards No. 86. The Company amortizes such costs over a three-year
period or the expected useful life of the product, whichever is shorter.
Development costs which are principally attributable to enhancements and
modifications of existing products, and which are expected to provide little or
no additional revenue in future periods, are charged to current period
operations. Accumulated amortization was $14,394, $-0-, and $264,379 (unaudited)
at December 31, 1994 and 1995, and September 30, 1996, respectively.
Amortization of in-process software development costs totaling $1,505,169 has
not begun as of December 31, 1995.
UNDISTRIBUTED EARNINGS OF FOREIGN SUBSIDIARIES
It is the intent of management to permanently reinvest the earnings of its
foreign subsidiaries. Therefore, no deferred taxes are provided for U.S. taxes
on these earnings.
NET INCOME (LOSS) PER COMMON SHARE
Primary earnings per share is determined by dividing the net income (loss)
by the weighted average number of shares of common stock outstanding and
dilutive common equivalent shares from stock options and warrants. Prior to the
initial public offering, in accordance with Securities and Exchange Commission
Regulations, common equivalent shares issued by the Company during the
twelve-month period immediately preceding the Company's initial public offering
were included in the calculation of shares used in computing net income (loss)
per share as if they were outstanding for all periods presented, using the
treasury stock method, even if the effect was anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications were made to the prior period financial statements
to present them on a basis comparable with the current period. The
reclassifications had no effect on previously reported net income or
stockholders' equity.
F-10
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
Effective April 1, 1995, the Company purchased all of the stock of Level 8
Technologies Inc. (Level 8 Technologies) for cash of $2,000,000 and 525,159
shares of common stock valued at $1,575,477 ($3.00 per share). Employees and
shareholders of Level 8 Technologies also received options to purchase an
aggregate of 39,164 shares at $1.37 per share and an aggregate of 116,707 shares
at $5.00 per share, respectively. Additional direct costs of the acquisition
totaled $132,032. Level 8 Technologies was incorporated and commenced operations
on February 24, 1994. The acquisition was accounted for as a purchase and,
accordingly, the 1995 consolidated statement of operations includes the results
of Level 8 Technologies since the date of acquisition.
The cost was allocated as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 5,669
Accounts receivable............................................. 1,826,602
Property and equipment.......................................... 53,626
Excess of cost over net assets acquired......................... 2,828,391
Accounts payable and accrued expenses........................... (586,811)
Other liabilities, primarily deferred income taxes.............. (552,000)
---------
Cost of net assets acquired..................................... $3,575,477
---------
---------
</TABLE>
On October 3, 1994, the Company purchased approximately 93% of the
outstanding Class A preferred stock of ProfitKey International, Inc. (ProfitKey)
and became its majority shareholder. Subsequent to this transaction, the Company
purchased additional common and preferred stock to increase its ownership to
approximately 92% of all outstanding stock. The total cash cost of the stock was
$1,313,075, plus direct costs of the acquisition of $110,900. Service contracts
acquired resulting from the acquisition totaled $2,702,654, including direct
costs. This amount was subsequently reduced by $448,700 and $289,700,
respectively, which represents the 1995 and 1994 effect of utilizing acquired
deferred tax assets for which a valuation allowance had been recognized at the
acquisition date. The amount was further reduced by $39,512 in 1995 which
represents the pro rata portion of the cancelled service contracts acquired. The
Company also entered into an exchange agreement with the remaining preferred
shareholders requiring that all outstanding preferred shares (including those
owned by the Company) be converted into common shares at specified exchange
rates. As of December 31, 1994, all preferred stock was converted into common
stock. On April 3, 1995, the minority common shares of ProfitKey were converted
into Level 8 shares resulting in 100% ownership by the Company.
On October 28, 1994, the Company purchased, through a wholly-owned Canadian
subsidiary incorporated in 1994, 99% of the stock of Bizware Computer Systems
(Canada) Inc. (Bizware) for cash of $1,111,200, plus direct costs of the
acquisition of $63,039, and agreed to pay up to an additional $740,800. The
additional consideration represented 50% of the gross proceeds Bizware could
have received from a customer during the period October 15, 1994 to June 30,
1995. During 1995 and 1994, additional contingent consideration in connection
with the Bizware acquisition totaled $311,649 and $211,017, respectively, and
increased goodwill. Goodwill resulting from this acquisition totaled $1,208,902
and $879,885 at December 31, 1995 and 1994, respectively, including the
additional consideration.
F-11
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The ProfitKey and Bizware acquisitions were accounted for as purchases and,
accordingly, the 1994 consolidated statement of operations includes the results
of operations of these companies since their respective acquisition dates. The
purchase price was allocated to the net assets acquired based on their estimated
fair market values at the acquisition dates, and the excess to service contracts
acquired and to goodwill.
The assets and liabilities of ProfitKey and Bizware recorded as of the
acquisition dates are summarized as follows:
<TABLE>
<CAPTION>
PROFITKEY BIZWARE TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Cash.................................................................. $ 183,368 $ 1,256,564 $ 1,439,932
Other current assets.................................................. 392,394 58,770 451,164
Property and equipment................................................ 227,212 37,256 264,468
Software development costs............................................ 643,819 6,372 650,191
Excess of cost over net assets acquired............................... -- 625,009 625,009
Service contracts acquired............................................ 2,591,754 -- 2,591,754
Deposits.............................................................. 32,738 -- 32,738
Current liabilities................................................... (2,722,238) (872,771) (3,595,009)
Long-term debt........................................................ (35,972) -- (35,972)
------------- ------------ -------------
Cost of net assets acquired........................................... $ 1,313,075 $ 1,111,200 $ 2,424,275
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The following unaudited pro forma financial information shows the results of
operations of the Company as if the Level 8 Technologies, ProfitKey, and Bizware
acquisitions had all occurred on January 1, 1994. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred,
nor is it necessarily indicative of future results of operations of the
consolidated companies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Revenue........................................................ $ 14,722,500 $ 12,080,000
Net income..................................................... $ 1,100,900 $ 798,200
Net income per common share.................................... $ .29 $ .17
Weighted average common and common equivalent shares........... 3,839,166 4,777,758
</TABLE>
F-12
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment........................................................ $ 328,474 $ 598,169 $ 878,582
Furniture................................................................. 33,477 88,921 189,095
Office equipment.......................................................... 37,467 111,910 164,954
Leasehold improvements.................................................... 2,141 48,236 50,909
---------- ---------- -------------
401,559 847,236 1,283,540
Less accumulated depreciation............................................. 114,299 260,355 313,607
---------- ---------- -------------
$ 287,260 $ 586,881 $ 969,933
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Accrued compensation...................................................... $ 114,092 $ 287,418 $ 205,455
Accrued consulting and professional fees.................................. 105,592 10,994 119,269
Accrued costs of sold subsidiary.......................................... -- -- 203,000
Other accrued expenses.................................................... 126,046 146,429 90,983
---------- ---------- -------------
$ 345,730 $ 444,841 $ 618,707
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of various bank and finance company loans, bearing
interest at 10.5% to 18.4%, and are collateralized by equipment. Future
maturities of long-term debt are as follows: 1996-- $36,131; 1997--$17,771;
1998--$11,399; 1999--$9,193; 2000--$5,612.
6. TRANSACTIONS WITH RELATED COMPANIES
Loans from Liraz Systems Ltd. (Liraz) and Liraz Export (1990) Ltd.
(significant shareholders) totaling $3,528,172 were noninterest bearing through
June 30, 1995. On July 1, 1995, the Company converted $2,050,000 of these loans
to equity by issuing 471,264 shares of common stock. The Company paid $250,000
on the loan in April 1995 and made an additional payment of $600,000 from the
initial public offering proceeds in July 1995.
The remaining balance owed to Liraz was converted to a note due in equal
quarterly installments of $34,810, including interest at 4%. Interest expense on
the loan was $12,319 for the year ended December 31, 1995, and $16,290
(unaudited) for the nine months ended September 30, 1996.
F-13
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS WITH RELATED COMPANIES (CONTINUED)
Future maturities of the loan are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------ ----------
<S> <C>
1996.......................................................... $ 117,000
1997.......................................................... 124,096
1998.......................................................... 127,964
1999.......................................................... 133,177
2000.......................................................... 68,610
----------
$ 570,847
----------
----------
</TABLE>
In December 1995, the Company and Liraz entered into a development agreement
for the joint development of certain software for a Microsoft contract obtained
in July 1995. Liraz and the Company will each pay 50% of the total project
development costs. In exchange for providing 50% of the project development
costs, Liraz will receive royalties of 30% of the first $2,000,000 in contract
revenue, 20% of the next $1,000,000, and 8% thereafter.
In addition, the Company and Liraz were awarded an Israel - U.S. Binational
Industrial Research and Development Foundation ("BIRD") grant totaling $432,000.
The BIRD grant will reimburse up to 50% of the development costs of the above
project. Once the products are sold, BIRD will be paid a royalty of 2.5% of
related sales in the first year and 5% in subsequent years until BIRD has
recovered 110% to 150% (depending on the elapsed time) of its payments. The
Company estimates its 50% share of the total project development costs to be
$600,000 before reimbursement of the BIRD Funds of $216,000. The Company is
capitalizing the software development costs associated with the project and will
reduce the capitalized costs by any grant funds received from BIRD. No funds
were received as of December 31, 1995. As of September 30, 1996, the Company had
capitalized approximately $334,700 (unaudited) before reimbursement of BIRD
funds totaling approximately $48,300 (unaudited).
7. PREFERRED STOCK, COMMON STOCK, UNEARNED COMPENSATION, STOCK OPTIONS, AND
WARRANTS
PREFERRED STOCK
On May 31, 1995, the Board of Directors and on June 16, 1995, the
shareholders authorized the Company to issue up to 1,000,000 shares of preferred
stock, $.01 par value. No shares are issued or outstanding.
COMMON STOCK
On March 10, 1995, the Board of Directors and shareholders voted to change
the no par value common stock to $.01 par value, to increase the authorized
common stock from 200 shares to 8,000,000 shares, and to declare a stock split
resulting in the issuance of 200,000 shares for each share outstanding at the
time. On May 12, 1995, the Board of Directors authorized a 1.45593157 to 1
common stock split. Accordingly, all share information was retroactively
adjusted to reflect the recapitalization and stock splits. On May 31, 1995, the
Board of Directors and on June 16, 1995, the shareholders approved an increase
in the authorized shares of common stock from 8,000,000 shares to 15,000,000
shares.
On April 3, 1995, minority common shares of ProfitKey totaling 1,254,725
were converted into 91,344 common shares of Level 8 at an exchange rate of 13.74
shares of ProfitKey stock for one share of Level 8
F-14
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK, COMMON STOCK, UNEARNED COMPENSATION, STOCK OPTIONS, AND
WARRANTS (CONTINUED)
stock. The effect of the conversion increased service contracts acquired by
$238,854, common stock by $913 and additional paid-in capital by $273,119, and
reduced minority interest by $35,178.
On July 27, 1995, the Company completed its public offering of 1,430,000
shares (including 30,000 shares sold pursuant to the underwriter's exercise of
its over-allotment option) at a price of $5.50 per share. The proceeds from the
initial public offering totaled $7,865,000 before expenses of $1,937,637.
In July 1996, the Company sold 246,800 shares of common stock to Candle
Corporation at $11.00 per share (before costs of sale of $.43 per share).
UNEARNED COMPENSATION
Unearned compensation relates to stock options issued to employees and
represents the difference between the fair market value of the stock at the
grant date and the price to be paid by the officer or employee. The original
amount of unearned compensation was $68,285. Compensation is recognized as an
expense over the period the employee performs related services. Compensation
expense was $27,621 for the year ended December 31, 1995, and $18,414
(unaudited) and $27,621 (unaudited) for the nine months ended September 30, 1995
and 1996.
STOCK OPTIONS
On February 2, 1995, the Company adopted the 1995 Stock Incentive Plan,
which permits the issuance of incentive and nonstatutory stock options, stock
appreciation rights, performance shares, and restricted and unrestricted stock
to employees, officers, directors, consultants and advisors. The Plan reserves
900,000 shares of common stock for grant and provides that the term of each
award be determined by the Board of Directors.
Under the terms of the Plan, the exercise price of the incentive stock
options may not be less than the fair market value of the stock on the date of
the award, and the options are exercisable for a period not to exceed five years
from date of grant. Stock appreciation rights entitle the recipients to receive
the excess of the fair market value of the Company's stock on the exercise date,
as determined by the Board of Directors, over the fair market value on the date
of grant. Performance shares entitle recipients to acquire Company stock upon
the attainment of specific performance goals set by the Board of Directors.
Restricted stock entitles recipients to acquire Company stock subject to the
right of the Company to repurchase the shares in the event conditions specified
by the Board are not satisfied prior to the end of the restriction period. The
Board may also grant unrestricted stock to participants at a cost not less than
85% of fair market value on the date of sale.
F-15
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREFERRED STOCK, COMMON STOCK, UNEARNED COMPENSATION, STOCK OPTIONS, AND
WARRANTS (CONTINUED)
Stock option activity during the year ended December 31, 1995, was as
follows:
<TABLE>
<CAPTION>
OPTION PRICE PER
OPTIONS SHARE
--------- ---------------------
<S> <C> <C>
Options outstanding at December 31, 1994.................... -- --
Granted..................................................... 432,459 $ .69--$6.60
ProfitKey options converted................................. 72,742 $.69
Exercised................................................... (1,209) $.69
Terminated.................................................. (14,314) $ .69--$1.37
---------
Options outstanding at December 31, 1995.................... 489,678 $ .69--$6.60
---------
---------
Options exercisable at December 31, 1995, totaled 119,759.
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION, which encourages, but does not require, a fair value based method
of accounting for employee stock options. As permitted under the new standard,
the Company will continue to account for employee stock options under APB No.
25. The proforma disclosures required by this standard will be adopted for the
year ending December 31, 1996.
STOCK WARRANTS
In connection with the renegotiation of ProfitKey's bank loan in 1992,
warrants were issued to the bank to purchase 85,000 shares of ProfitKey's common
stock at a price of $.50 per share. On April 3, 1995, the warrants were
converted into 6,188 Level 8 stock warrants at an exchange rate of 13.74
ProfitKey stock warrants for one Level 8 stock warrant. The warrants are
exercisable at $6.87 per share and expire on March 31, 1997.
In connection with the initial public offering, the Company sold 140,000
warrants to the underwriter for $140. These warrants are exercisable for four
years, commencing one year from the effective date of the initial public
offering, at an exercise price of $7.425 per share.
F-16
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ 320,600 $ 161,900 $ (119,400)
State................................................ -- 20,000 60,000 52,000 (21,100)
Foreign.............................................. -- 90,200 (20,900) 31,400 (100,800)
---------- ---------- ----------- ----------- -----------
-- 110,200 359,700 245,300 (241,300)
---------- ---------- ----------- ----------- -----------
Deferred:
Federal.............................................. -- 4,800 (141,100) 89,100 256,000
State................................................ -- 18,200 (24,900) 25,600 45,200
-- -- 85,000 -- (85,000)
---------- ---------- ----------- ----------- -----------
-- 23,000 (81,000) 114,700 216,200
---------- ---------- ----------- ----------- -----------
$ -- $ 133,200 $ 278,700 $ 360,000 $ (25,100)
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
Income tax expense (benefit) computed at the statutory federal income tax
rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax at statutory federal rate--34%..................... $ (11,100) $ 243,600 $ 310,100 $ 368,100 $ (857,400)
State taxes............................................ -- (19,700) 17,900 45,300 23,000
Effect of foreign tax rates and credits................ -- (40,400) (126,100) (137,700) (61,800)
Change in deferred tax asset valuation allowance....... -- -- (129,000) (46,400) 177,200
Net operating loss carryforward not recognized
(utilized) for financial statement purposes.......... 11,100 (87,700) -- -- 42,200
Rate differences....................................... -- 19,600 38,800 -- --
Nondeductible goodwill amortization.................... -- 13,900 159,100 102,500 136,500
Nondeductible loss on sale of foreign subsidiary....... -- -- -- -- 487,100
Other.................................................. -- 3,900 7,900 28,200 28,100
---------- ---------- ----------- ----------- -----------
Income tax expense (benefit)........................... $ -- $ 133,200 $ 278,700 $ 360,000 $ (25,100)
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
F-17
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Significant components of the net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1994 1995 SEPTEMBER 30, 1996
------------------------ ------------------------ ------------------------
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts
receivable........................... $ 7,400 $ -- $ 22,600 $ -- $ 63,600 $ --
Accrued expenses not currently
deductible for tax purposes.......... 100,200 -- 63,300 -- 76,600 --
Deferred revenue....................... 497,500 -- 451,200 -- 445,700 --
Net operating loss carryforwards....... 115,600 405,400 35,200 370,200 35,200 334,800
Unearned compensation.................. -- -- -- 11,000 -- 22,000
Depreciation and amortization.......... 10,500 -- -- -- -- --
Amounts not currently deductible due to
filing cash basis tax return......... 43,400 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
774,600 405,400 572,300 381,200 621,100 356,800
----------- ----------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
Depreciation and amortization.......... -- -- (39,200) (98,300) -- (356,900)
Change from cash to accrual basis...... -- -- (265,100) (12,900) (82,500) (8,200)
Amounts not currently taxable due to
filing cash basis tax return......... (69,200) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
(69,200) -- (304,300) (111,200) (82,500) (365,100)
----------- ----------- ----------- ----------- ----------- -----------
Deferred tax asset valuation allowance... (438,700) (405,400) -- (243,600) (452,100) --
----------- ----------- ----------- ----------- ----------- -----------
Net deferred tax asset (liability)....... $ 266,700 $ -- $ 268,000 $ 26,400 $ 86,500 $ (8,300)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
No provision has been made for U.S. taxes on approximately $794,000 of
undistributed earnings of its foreign subsidiary as those earnings are
considered to be reinvested in the subsidiary's operations. It is not practical
to estimate the tax that might be payable on the eventual remittance of such
earnings.
At December 31, 1995, the Company has approximately $987,000 of net deferred
timing differences from the ProfitKey acquisition. If future tax benefits of
these deferred timing differences are realized, the tax benefit of approximately
$400,000 will be used to reduce the goodwill resulting from this acquisition.
At December 31, 1995, the Company has approximate net operating loss
carryforwards of $1,014,000 from the acquisition of ProfitKey, which may be
applied against future taxable income. Under Internal Revenue Code Section 382,
as a result of the change in controlling interest of ProfitKey, the Company's
ability to utilize these acquired net operating loss carryforwards is limited to
approximately $88,000 each year. The carryforwards are cumulative if not
utilized each year and expire primarily in the year 2008.
F-18
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. OPERATING LEASES
The Company leases its office facilities under four operating leases
expiring through November 2000. The leases provide for base monthly rents
totaling approximately $29,200 plus an adjustment based on the increase in
operating expenses or lessor's property taxes over the base amounts, as defined
in the leases. One lease contains a three-year renewal option at a rent to be
determined by the parties and another lease contains an option to renew for an
additional five years.
Rent expense was approximately $36,700, $80,100, $271,900, $231,100
(unaudited) and $337,300 (unaudited) for the years ended December 31, 1993,
1994, and 1995, and the nine months ended September 30, 1995 and 1996,
respectively.
Approximate future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------------------------------------------------- ----------
<S> <C>
1996.......................................................... $ 336,900
1997.......................................................... 136,300
1998.......................................................... 123,700
1999.......................................................... 123,700
2000.......................................................... 123,600
Thereafter.................................................... 20,600
----------
$ 864,800
----------
----------
</TABLE>
10. GAIN ON SETTLEMENT OF ACCOUNTS PAYABLE
In 1994, the Company agreed to settle various vendor claims totaling
$129,366 for $71,036. These settlements resulted in a gain on the settlement of
accounts payable of $58,330.
11. SIGNIFICANT CUSTOMERS
Information regarding revenue from significant customers is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A............................... 60.1% 24.0% -- -- --
Customer B............................... -- 11.8% -- -- --
Customer C............................... -- -- -- 10.0% --
Customer D............................... -- -- -- -- 13.4%
</TABLE>
12. FOREIGN OPERATIONS
The Company's foreign operations consist of the operations of Bizware, a
Canadian subsidiary, acquired October 28, 1994. All Bizware sales were to
customers located in North America. Financial
F-19
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FOREIGN OPERATIONS (CONTINUED)
information as of and for the years ended December 31, 1993, 1994, and 1995 and
as of and for the periods ended September 30, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- --------------------------
1993 1994 1995 1995 1996
--------- ---------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ -- $ 565,400 $ 1,405,900 $ 1,192,900 $ 351,000
Operating income................................ -- 378,200 581,900 521,100 (357,000)
Identifiable assets............................. -- 309,000 706,600 661,800 --
</TABLE>
13. SUBSEQUENT EVENTS
SALE OF SUBSIDIARY--BIZWARE
On September 9, 1996, the Company sold Bizware for $230,000, resulting in a
loss on the sale of the subsidiary of $1,484,601. The sales price consisted of
$120,000 in cash and a $110,000 receivable due in six equal monthly installments
through March 1997. In connection with the sale, the Company wrote off goodwill
of $997,027, software development costs of $479,961, property and equipment of
$78,877, and other costs were accrued or expended in connection with the sale
totaling $158,196.
EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) retirement plan for qualified employees. The
Company has not made any contributions to the plan.
EMPLOYMENT AGREEMENTS
The Company signed employment agreements with four officers of the Company
for salaries totaling $475,000 annually through May 1998, plus performance
bonuses for three of the officers.
F-20
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................. 4
Risk Factors....................................... 9
Use of Proceeds.................................... 14
Market Price of Common Stock and Dividend Policy... 14
Capitalization..................................... 15
Pro Forma Selected Consolidated Financial Data..... 16
Selected Consolidated Financial Data............... 19
Management's Discussion and Analysis of Financial
Condition and Results of
Operations....................................... 20
Business........................................... 24
Management......................................... 31
Certain Relationships and Related
Transactions..................................... 37
Principal and Selling Shareholders................. 39
Shares Eligible for Future Sale.................... 41
Description of Securities.......................... 43
Underwriting....................................... 45
Legal Matters...................................... 47
Experts............................................ 47
Available Information..............................
Special Note Regarding Forward-Looking
Statements.......................................
Glossary........................................... 48
Index to Financial Statements...................... F-1
</TABLE>
------------------------
1,000,000 SHARES
LEVEL 8 SYSTEMS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
HAMPSHIRE SECURITIES
CORPORATION
, 1996
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses (other than Underwriters'
expenses and discounts and commissions) in connection with the sale and
distribution of the securities being registered in the offering described in
this Registration Statement, all of which are payable by the Company. All
amounts shown are estimates except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market System
listing fee:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $4,429.40
National Association of Securities Dealers registration fee.....
Legal fees and expenses.........................................
Blue Sky fees and expenses......................................
Printing and engraving expenses.................................
Transfer agent and registrar fees...............................
Miscellaneous expenses..........................................
---------
Total....................................................... $
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has entered into indemnification agreements with certain
directors and executive officers pursuant to the foregoing provisions of its
Bylaws.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information reflects sales by the Company of unregistered
securities within the past three years and reflects a 1.45593157 to 1 stock
split. The issuances by the Registrant of the securities sold in the
transactions referenced below were not registered under the 1933 Act in reliance
on the exemption in Section 4(2) of the 1933 Act.
1. On or about December 31, 1994, the Company sold to its president and
chief executive officer and to the three senior executives of one of the
Company's principal business units an aggregate of 117,058 shares of Common
Stock for approximately $.17 a share.
2. On March 29, 1995, the Company sold to eight senior executives of Liraz
Systems Ltd., the Company's parent, an aggregate of 30,331 shares of Common
Stock for approximately $.82 a share.
3. On March 30, 1995, the Company sold to Liraz Systems Ltd. 363,983 shares
of Common Stock for approximately $1.37 a share.
4. Effective April 1, 1995, the Company issued to the eight shareholders of
Level 8 Systems, Inc. (two of whom became senior executives and directors of the
Company, and the remainder of whom are otherwise sophisticated investors) an
aggregate of 525,159 shares of Common Stock as partial consideration for the
Company's acquisition of Level 8 Systems, Inc.
5. On April 3, 1995, the Company issued to the 41 former minority
shareholders of ProfitKey International, Inc. (substantially all of whom are
employees or former employees, or family members of
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (CONTINUED)
employees or former employees, of ProfitKey International, Inc.), one of the
Company's principal business units, an aggregate of 91,344 shares of Common
Stock pursuant to the merger of ProfitKey International, Inc. with a subsidiary
of the Company.
6. On July 26, 1996, the Registrant sold to Candle Corporation 246,800
shares of Common Stock for approximately $11.00 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Agreement of Sale of Asset, effective September 9, 1996, between Bizware and 3203174 Canada, Inc. (1)
3.1 Restated Certificate of Incorporation of Registrant, as amended.
3.2 By-Laws of Registrant. (2)
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP as to the legality of the securities being
registered.
10.1 1995 Stock Incentive Plan, as amended. (3)
10.2 Stock Purchase Warrant issued by ProfitKey to Fleet Bank-NH for 85,000 shares of common stock of
ProfitKey dated January 28, 1992. (2)
10.3 Letter of agreement, dated May 14, 1993, between Fleet Bank-NH and ProfitKey. (2)
10.4 Consulting Services Agreement, dated March 17, 1994, between Norwest Technical Services, Inc. and
Level 8. (2)
10.5 Letter of Engagement, dated August 16, 1994, between Norwest Mortgage, Inc. and Level 8. (2)
10.6 Stock Purchase Agreement, dated September 28, 1994 among Liraz, R.W. Allsop & Associates II, L.P.,
HLM Partners, L.P., Kitty Hawk Capital, Ltd. and the United States Small Business Administration.
(2)
10.7 Amendment to Stock Purchase Agreement, dated September 29, 1994 among Liraz, R.W. Allsop & Associates
II, L.P., HLM Partners, L.P., Kitty Hawk Capital, Ltd. and the United States Small Business
Administration. (2)
10.8 Letter Agreement, dated February 19, 1995, between Bizware and Joel Leonoff. (2)
10.9 Software Acquisition Agreement dated February 23, 1995 among SASI, Bizware and Registrant. (2)
10.10 Service Agreement, dated March 31, 1995, between Level 8 and Transaction Information Systems, Inc.
(2)
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.11 Form of Amended and Restated Contribution Agreement, effective April 1, 1995, among Registrant and
the shareholders of Level 8. (2)
10.12 Employment Agreement, effective April 1, 1995, between Level 8 and Samuel Somech. (2)
10.12A Amendment to Employment Agreement, dated as of September 18, 1996, among the Company, Level 8 and
Samuel Somech.
10.13 Consulting Agreement, dated April 4, 1995, among Bizware and Daimin Investments Ltd. (2).
10.14 Employment Agreement, dated May 1, 1995, between Registrant and Arie Kilman (2).
10.14A Amendment to Employment Agreement, dated as of September 18, 1996 between Registrant and Arie Kilman.
10.15 Employment Agreement, dated May 1, 1995, between Registrant and Robert R. MacDonald (2).
10.15A Amendment to Employment Agreement, dated February 21, 1996, between Registrant and Robert R.
MacDonald.
10.15B Amendment to Employment Agreement, dated as of July 30, 1996, by and between Registrant and Robert R.
MacDonald.
10.16 Employment Agreement, dated May 1, 1995, between Registrant and
Joseph J. Di Zazzo (1).
10.16A Amendment to Employment Agreement, dated as of October 23, 1996, between Registrant and Joseph J. Di
Zazzo.
10.17 Agreement between AD/Ventures and Liraz Export Systems Ltd. (2).
10.18 Standard Program Product License Agreement of ProfitKey (2).
10.19 Standard Computer Hardware Purchase Agreement of ProfitKey (2).
10.20 Standard Software License Agreement of Bizware and Standard Escrow Agreement (2).
10.21 Agreement, dated June 13, 1995, between Registrant and Liraz (2).
10.22 Registration Rights Agreement, dated June 13, 1995 between Registrant and Liraz (2).
10.23 Agreement of Purchase and Sale, dated October 28, 1994, among Joel Leonoff, Russell Rothstein,
Mitchell Wasserman, Daimin Investments Ltd., 2993031 Canada Inc., 2962594 Canada Inc., 3077934
Canada Inc., and Bizware Computer Systems (Canada) Inc. (2).
10.24 Addendum, dated February 14, 1995, among Joel Leonoff, Russell Rothstein, Mitchell Wasserman, Daimin
Investments Ltd., 2993031 Canada Inc., 2962594 Canada Inc., 3077934 Canada Inc., and Bizware
Computer Systems (Canada) Inc. (2).
10.25 Form of Warrant Agreement between the Registrant and Hampshire Securities Corporation for 135,000
shares of common stock (2).
10.26 Form of Loan Agreement, dated June , 1995, between Registrant and Liraz regarding Registrant's
agreement to repay the principal amount of $1,228,172 (2).
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.27 Form of Loan Agreement, dated , 1995, between Registrant and Liraz regarding Registrant's agreement
to repay the principal amount of $628,172 (2).
10.28 Form of exchange agreement dated , 1995, between Registrant and Liraz (2).
10.29 Consulting Agreement, dated May 15, 1995, between Registrant and Nellcor Incorporated (2).
10.30 Stock Purchase Agreement, dated September 9, 1994, by and among Liraz Systems, Ltd., Richard T. Lilly
and the other individuals whose names appear on the signature page thereto (2).
10.31 Exchange Agreement, dated September , 1994, between Liraz and the individuals whose names appear
on the signature page thereto (2).
10.32 Stock Purchase Agreement, dated October 17, 1994, by and among Liraz and Gary E. Frashier (2).
10.33 Stock Purchase Agreement, dated October , 1994, by and among Liraz and William Dockins (2).
10.34 Stock Purchase Agreement, dated October 24, 1994, by and among Liraz and Alfred L. Whiting (2).
10.35 Certificate of Ownership and Merger of PK Holdings Inc., into ProfitKey International Inc., dated
March 30, 1995 (2).
10.36 Development Agreement, dated July 17, 1995, between Microsoft Corporation and
Level 8 (2).
10.37 Letter Agreement, dated June 1, 1995, from Visa International Service Association to
Level 8 (2).
10.38 Development Agreement, dated December 19, 1995, between Liraz and Level 8. (4)
10.39 Development Agreement, dated October 23, 1995, between Liraz and ProfitKey. (4)
10.40 Product Purchase Agreement, dated August 30, 1996, between Candle Corporation and Level 8.
10.41 Investment Agreement, dated July 26, 1996, among Registrant, Liraz and Candle Corporation.
10.42 Candle Corporation Software Agency Agreement, dated October 7, 1996, between Candle Corporation and
Level 8.
10.43 IBM Licensing Agreement: NT Client Bridge, dated February 28, 1996, by and between International
Business Machines and Level 8.
10.44 Letter of Intent, dated July 25, 1996, among Candle Corporation, Registrant and Level 8.
</TABLE>
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.45 Form of Warrant Agreement between the Registrant and Hampshire Securities Corporation for 100,000
shares of common stock.
11.1 Statement re: computation of per share income (loss).
21.1 List of Subsidiaries of the Company.
23.1 Consent of Lurie, Besikof, Lapidus & Co., LLP.
24.1 Powers of Attorney (included on page II-7).
</TABLE>
- ------------------------
(1) Previously filed and incorporated herein by reference from the Registrant's
Form 8-K dated September 9, 1996 (File No. 0-26392).
(2) Previously filed and incorporated herein by reference from the Registrant's
Registration Statement on Form S-1 (File No. 33-92230) as declared effective
on July 27, 1995.
(3) Previously filed and incorporated herein by reference from the Registrants'
Form S-8 dated September 19, 1996 (File No. 333-12247) as declared effective
on September 19, 1996.
(4) Previously filed and incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-26392).
(b) Financial Statement Schedules:
The following schedules are filed as part of this Registration Statement,
but not included in the Prospectus:
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
A. UNDERTAKING IN RESPECT OF RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
II-5
<PAGE>
ITEM 17. UNDERTAKINGS (CONTINUED)
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
C. UNDERTAKING WITH RESPECT TO RULE 430A.
The Company undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933 Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933 Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SCHEDULE II
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C
------------------------
ADDITIONS
COLUMN B ------------------------ COLUMN E
----------- CHARGED TO COLUMN D ----------
COLUMN A BALANCE AT CHARGED TO OTHER ----------- BALANCE
- ---------------------------------------------------------- BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) DESCRIBE(2) PERIOD
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Deducted from asset accounts:
Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts......................... $ -- $ 39,319 $ 102,286 $ (85,605) $ 56,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts......................... $ 56,000 $ 96,613 $ -- $ (77,613) $ 75,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Nine months ended September 30, 1996
Deducted from asset accounts:
Allowance for doubtful accounts......................... $ 75,000 $ 112,937 $ -- $ (28,937) $ 159,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
- ------------------------
(1) Allowance for doubtful accounts acquired in connection with ProfitKey
International, Inc. and Bizware Computer Systems (Canada) Inc.
(2) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGES
- ----------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of Registrant, as amended.
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn as to the legality of the securities being
registered.
10.12A Amendment to Employment Agreement, dated as of September 18, 1996, among the Company, Level 8
and Samuel Somech.
10.14A Amendment to Employment Agreement, dated as of September 18, 1996 between Registrant and Arie
Kilman.
10.15A Amendment to Employment Agreement, dated February 21, 1996, between Registrant and Robert R.
MacDonald.
10.15B Amendment to Employment Agreement, dated as of July 30, 1996, by and between Registrant and
Robert R. MacDonald.
10.16A Amendment to Employment Agreement, dated as of October 23, 1996, between Registrant and Joseph
J. Di Zazzo.
10.40 Product Purchase Agreement dated August 30, 1996 between Candle Corporation and Level 8.
10.41 Investment Agreement, dated July 26, 1996, among Registrant, Liraz Systems, Ltd. and Candle
Corporation.
10.42 Candle Corporation Software Agency Agreement, dated October 7, 1996, between Candle
Corporation and Level 8.
10.43 IBM Licensing Agreement: NT Client Bridge, dated February 28, 1996, by and between
International Business Machines and Level 8.
10.44 Letter of Intent, dated July 25, 1996, among Candle Corporation, Registrant and Level 8.
10.45 Form of Warrant Agreement between the Registrant and Hampshire Securities Corporation for
100,000 shares of common stock.
11.1 Statement re: Computation of per share income (loss).
21.1 List of Subsidiaries of the Company.
23.1 Consent of Lurie, Besikof, Lapidus & Co., LLP.
24.1 Powers of Attorney (included on page II-7).
</TABLE>
- ------------------------
(b) Financial Statement--Schedules
The following schedules are filed as part of this Registration Statement,
but not included in the Prospectus:
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the financial statements or notes thereto.
<PAGE>
1,000,000 Shares
LEVEL 8 SYSTEMS, INC.
UNDERWRITING AGREEMENT
_________, 1996
Hampshire Securities Corporation
As Representative of the several
Underwriters named in Schedule I
attached hereto
640 Fifth Avenue
New York, New York 10019
Gentlemen:
The undersigned, Level 8 Systems, Inc., a New York corporation (the
"Company"), and the undersigned shareholders of the Company named in Schedule II
hereto (excluding Liraz Export (1990) Ltd. ("LEL"), the "Individual Selling
Shareholders," and, together with LEL, the "Selling Shareholders") hereby
confirm their agreement with Hampshire Securities Corporation (individually,
"Hampshire," and, as representative of the several underwriters named in
Schedule I hereto, the "Representative") and the underwriters named in Schedule
I hereto (the "Underwriters") as follows:
1. Introduction.
(a) The Company proposes to issue and sell to the Underwriters an
aggregate of 600,000 shares of common stock, par value $.01 per share, of the
Company (the "Common Stock"). Such shares of Common Stock are hereinafter
referred to as the "Company Firm Stock".
(b) Certain Selling Shareholders (the "Firm Selling Shareholders")
propose to sell to the Underwriters an aggregate of 400,000 shares of Common
Stock. Such shares of Common Stock are hereinafter referred to as the "Selling
Shareholder Firm Stock". The Company Firm Stock and the Selling Shareholder
Firm Stock are hereinafter referred to as the "Firm Stock".
<PAGE>
(c) Solely for the purpose of covering over-allotments, if any,
certain Individual Selling Shareholders (the "Individual Additional Selling
Shareholders") propose to grant to Hampshire, individually and not as
Representative, an option (the "Individual Selling Shareholder Over-allotment
Option") to purchase from them, in the aggregate, up to an additional 70,000
shares of Common Stock. Such shares of Common Stock are hereinafter referred
to as the "Individual Selling Shareholder Additional Stock." Solely for the
purpose of covering over-allotments, if any, LEL proposes to grant to Hampshire,
individually and not as Representative, an option (the "LEL Over-allotment
Option," and, together with the Individual Selling Shareholder Over-allotment
Option, the "Selling Shareholder Over-allotment Options") to purchase from them,
in the aggregate, up to an additional 50,000 shares of Common Stock. Such
shares of Common Stock are hereinafter referred to as the "LEL Additional
Stock," and, together with the Individual Selling Shareholder Additional Stock,
the "Selling Shareholder Additional Stock".
(d) Solely for the purpose of covering over-allotments, if any, the
Company proposes to grant to Hampshire, individually and not as Representative,
an option (the "Company Over-allotment Option," and, together with the Selling
Shareholder Over-allotment Options, the "Over-allotment Options") to purchase
from it up to an additional 30,000 shares of Common Stock. Such shares of
Common Stock are hereinafter referred to as the "Company Additional Stock," and,
together with the Selling Shareholder Additional Stock, are hereinafter referred
to as the "Additional Stock." The Firm Stock and the Additional Stock are
hereinafter referred to as the "Stock." The Company Over-allotment Option and
the LEL Over-allotment Option may be exercised by Hampshire only after the
exercise in full of the Individual Selling Shareholder Over-allotment Option;
thereafter, the Company Over-allotment Option and the LEL Over-allotment Option
shall be exercisable ratably.
(d) The Company proposes to sell to Hampshire, individually and not
as Representative, warrants (the "Representative's Warrants") to purchase up to
an aggregate of 100,000 shares of Common Stock (the "Warrant Shares") for an
aggregate purchase price of $________. The Representative's Warrants shall be
substantially in the form filed as an exhibit to the Registration Statement (as
hereinafter defined). The Representative's Warrants and the Warrant Shares are
hereinafter referred to collectively as the "Representative's Securities." The
Stock and the Representative's Securities are hereinafter referred to
collectively as the "Securities."
2. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(1) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed one
or more amendments thereto, on Form S-1 (Registration No. 333-___________),
including in such
<PAGE>
registration statement and each such amendment a related preliminary
prospectus, for the registration of the Securities under the Securities Act
of 1933, as amended (the "Securities Act"). As used in this Agreement, the
term "Registration Statement" shall refer to such registration statement
referred to in the first sentence of this Section 2(a)(1), as amended, on
file with the Commission at the time such registration statement is declared
by the Commission to be effective under the Securities Act (including the
prospectus, financial statements, and exhibits filed as a part thereof,
provided, however, that such registration statement, at the time it is
declared by the Commission to be effective under the Securities Act, may omit
such information as is permitted to be omitted from such registration
statement when it becomes effective under the Securities Act pursuant to Rule
430A of the General Rules and Regulations of the Commission under the
Securities Act (the "Regulations"), which information (the "Rule 430A
Information") shall be deemed to be included in such registration statement
when a final prospectus is filed with the Commission in accordance with Rules
430A and 424(b)(1) or (4) of the Regulations); the term "Preliminary
Prospectus" shall refer to each prospectus included in the Registration
Statement, or any amendments thereto, before the Registration Statement is
declared by the Commission to be effective under the Securities Act, the form
of prospectus omitting Rule 430A Information included in the Registration
Statement when the Registration Statement becomes effective under the
Securities Act, if applicable (the "Rule 430A Prospectus"), and any
prospectus filed by the Company with the consent of the Representative
pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" shall
refer to the final prospectus forming a part of the Registration Statement in
the form first filed with the Commission pursuant to Rule 424(b)(1) or (4) of
the Regulations or, if no such filing is required, the form of final
prospectus forming a part of the Registration Statement.
(2) When the Registration Statement becomes effective under the
Securities Act, and at all times subsequent thereto up to and including the
Closing Date (as defined in Section 3(a)) and each Additional Closing Date (as
defined in Section 3(b)), and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriters or a
dealer, and during such longer period until any post-effective amendment thereto
shall become effective under the Securities Act, the Registration Statement (and
any post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement to the Registration Statement or the Prospectus) will contain all
statements which are required to be stated therein in accordance with the
Securities Act and the Regulations, will comply in all material respects with
the Securities Act and the Regulations, and will not contain any untrue
statement of a material fact or omit to state any
<PAGE>
material fact required to be stated therein or necessary to make the statements
therein (in light of the circumstances under which they were made in the case of
the Prospectus) not misleading and no event will have occurred which should have
been set forth in an amendment or supplement to the Registration Statement or
the Prospectus which has not then been set forth in such amendment or
supplement; if a Rule 430A Prospectus is included in the Registration Statement
at the time it is declared by the Commission to be effective under the
Securities Act, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4)
of the Regulations will contain all Rule 430A Information and all statements
which are required to be stated therein in accordance with the Securities Act or
the Regulations, will comply with the Securities Act and the Regulations, and
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein (in light of the circumstances under which they were made in the case of
the Prospectus) not misleading; and no event will have occurred which should
have been set forth in an amendment or supplement to the Registration Statement
or the Prospectus which has not then been set forth in such amendment or
supplement; and each Preliminary Prospectus, as of the date filed with the
Commission, contained all statements required to be stated therein in accordance
with the Securities Act and the Regulations, complied with the Securities Act
and the Regulations, and did not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; except that no representation or
warranty is made in this Section 2(a)(2) with respect to statements or omissions
made in reliance upon, and in conformity with, written information furnished to
the Company as stated in Section 8(b) with respect to any Underwriter by, or on
behalf of, such Underwriter through the Representative expressly for inclusion
in the Registration Statement, any Preliminary Prospectus, or the Prospectus, or
any amendment or supplement thereto, or with respect to statements or omissions
made in reliance upon, and in conformity with, written information furnished to
the Company as stated in Section 8(c) with respect to any Selling Shareholder
expressly for inclusion in the Registration Statement, any Preliminary
Prospectus, or the Prospectus, or any amendment or supplement thereto.
(3) Neither the Commission nor the "blue sky" or securities authority
of any jurisdiction has issued an order (a "Stop Order") preventing or
suspending the use of, the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, refusing to permit the
effectiveness of the Registration Statement, or suspending the registration or
qualification of the Securities nor has any of such authorities instituted or
threatened to institute any proceedings with respect to a Stop Order.
(4) Any contract, agreement, instrument, lease, or license required
to be described in the Registration Statement or the Prospectus has been
properly described therein. Any contract, agreement, instrument, lease, or
license required to be filed as an exhibit to the Registration Statement has
been filed with the Commission as an exhibit to the Registration
<PAGE>
Statement.
(5) The following corporations are the only subsidiaries (as defined
in the Regulations) of the Company: ProfitKey International, Inc., a Delaware
corporation ("ProfitKey"), Level 8 Systems, Inc., a New York corporation ("Level
8"), and 3077934 Canada, Inc., a Canada corporation ("3077934," and, together
with ProfitKey, Level 8, and 3077934, the "Subsidiaries"). The Company and each
of the Subsidiaries is a corporation duly organized, validly existing, and in
good standing under the laws of its respective jurisdiction of incorporation,
with full power and authority, and all necessary consents, authorizations,
approvals, orders, licenses, certificates, and permits of and from, and
declarations and filings with, all federal, state, local, and other governmental
authorities and all courts and other tribunals, to own, lease, license, and use
its properties and assets and to conduct its business in the manner described in
the Prospectus. The Company and each of the Subsidiaries is duly qualified to
do business as a foreign corporation and is in good standing as such in every
jurisdiction in which its ownership, leasing, licensing, or use of property and
assets or the conduct of its business makes such qualification necessary, except
where the failure to so qualify will not have a material adverse effect on the
business, properties, or financial condition of the Company and the Subsidiaries
taken as a whole.
(6) (i) The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, of which 6,236,297shares are outstanding, and
1,000,000 shares of preferred stock, par value $.01 per share, of which none are
outstanding. Each outstanding share of Common Stock and each outstanding share
of capital stock of each of the Subsidiaries is validly authorized and issued,
fully paid, and nonassessable, without any personal liability attaching to the
ownership thereof, has not been issued and is not owned or held in violation of
any preemptive or similar rights of stockholders and, in each case, is owned
free and clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements and voting trusts. There is no commitment, plan, or
arrangement to issue, and no outstanding option, warrant, or other right calling
for the issuance of, any share of capital stock of the Company or any Subsidiary
or any security or other instrument which by its terms is convertible into, or
exercisable or exchangeable for, capital stock of the Company or any Subsidiary,
except as may be properly described in the Prospectus. There is outstanding no
security or other instrument issued by the Company or any Subsidiary which by
its terms is convertible into, or exercisable or exchangeable for, capital stock
of the Company or any Subsidiary, except as may be properly described in the
Prospectus. The certificates evidencing the Common Stock are in due and proper
form.
(ii) The authorized capital stock of the ProfitKey consists of
25,000,000 shares of common stock, par value $.01 per share, of which 14,086,774
shares are outstanding, and 3,473,149 shares of preferred stock, par value $.01
per share, none of which are outstanding. The Company is the record and
beneficial owner of 14,086,774 shares of common stock, par value $ .01 per
share, of ProfitKey.
<PAGE>
(iii) The authorized capital stock of the Level 8 consists of
200 shares of common stock, without par value, of which 100 shares are
outstanding. The Company is the record and beneficial owner of 100 shares of
common stock, without par value of Level 8.
(iv) The Company is the record and beneficial owner of all of
the outstanding shares of capital stock of 3077934.
(7) The consolidated financial statements of the Company, and the
financial statments of each of ProfitKey and Level 8, each included in the
Registration Statement and the Prospectus fairly present, with respect to the
Company and such Subsidiary, respectively, the financial position, the results
of operations, the cash flows, and the other information purported to be shown
therein at the respective dates and for the respective periods to which they
apply, on a consolidated basis with respect to the Company. Such financial
statements have been prepared in accordance with generally accepted accounting
principles (except to the extent that certain footnote disclosures regarding any
stub period may have been omitted in accordance with the applicable rules of the
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) consistently applied throughout the periods involved, are correct and
complete in all material respects, and are in accordance with the books and
records of the Company. Lurie, Besikof, Lapidus & Co., P.L.L.P., the
accountants whose report on the audited financial statements is filed with the
Commission as a part of the Registration Statement, are, and during the periods
covered by their reports included in the Registration Statement and the
Prospectus were, independent certified public accountants with respect to the
Company and the Subsidiaries within the meaning of the Securities Act and the
Regulations. No other financial statements are required by Form S-1 or
otherwise to be included in the Registration Statement or the Prospectus. There
has at no time been a material adverse change in the financial condition,
results of operations, business, properties, assets, liabilities, or future
prospects of the Company and the Subsidiaries, taken as a whole, from the latest
information set forth in the Registration Statement or the Prospectus, except as
may be properly described in the Prospectus.
(8) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, threatened, or, to
the best knowledge of the Company, in prospect (or any basis therefor) with
respect to the Company or any Subsidiary or any of their respective operations,
businesses, properties, or assets, except as may be described in all material
respects in the Prospectus or such as individually or in the aggregate do not
now have, and will not in the future have, a material adverse effect upon the
operations, business, properties, or assets of the Company and the Subsidiaries
taken as a whole. To the best knowledge of the
<PAGE>
Company, neither the Company nor any Subsidiary is in violation of, or in
default with respect to, any law, rule, regulation, order, judgment, or decree
to which it is subject, except as may be properly described in the Prospectus or
such as in the aggregate do not now have, and will not in the future have, a
material adverse effect upon the operations, business, properties, or assets of
the Company and the Subsidiaries taken as a whole; nor is the Company or any
Subsidiary currently required to take any action in order to avoid any such
violation or default.
(9) The Company and each Subsidiary has good and marketable title to
all properties and assets which the Prospectus indicates are owned by it, free
and clear of all liens, security interests, pledges, charges, encumbrances, and
mortgages, except as may be properly described in the Prospectus or as are not
material to the Company and the Subsidiaries taken as a whole.
(10) Neither the Company or any Subsidiary nor, to the knowledge of
the Company, any other party, is now, or is expected by the Company to be, in
violation or breach of, or in default with respect to, any provision of any
contract, agreement, instrument, lease, license, arrangement, or understanding
which is material to the Company and the Subsidiaries taken as a whole, and each
such contract, agreement, instrument, lease, license, arrangement, and
understanding is in full force and effect and is the legal, valid, and binding
obligation of the parties thereto and is enforceable as to them in accordance
with its respective terms. The Company and each of the Subsidiaries enjoys
peaceful and undisturbed possession under all leases and licenses under which it
is operating. Except as described in the Prospectus, neither the Company nor
any of the Subsidiaries is a party to, or bound by, any contract, agreement,
instrument, lease, license, arrangement, or understanding, or subject to any
charter or other restriction, which has had, or may in the future have, a
material adverse effect on the financial condition, results of operations,
business, properties, assets, liabilities, or future prospects of the Company
and the Subsidiaries taken as a whole. Neither the Company nor any Subsidiary
is in violation or breach of, or in default with respect to, any term of its
respective certificate of incorporation (or other charter document) or by-laws.
(11) The Company and each of the Subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
licenses, know-how, proprietary techniques, including processes and substances,
trademarks, service marks, trade names, and copyrights described or referred to
in the Prospectus as owned or used by it or which are necessary for the conduct
of its respective business as currently conducted as described in the Prospectus
and, to the best knowledge of the Company, its respective business as
contemplated as described in the Prospectus. To the best knowledge of the
Company, all such patents, patent rights, licenses, trademarks, service marks,
and copyrights are (i) valid and enforceable, (ii) not being
<PAGE>
infringed by any third parties which infringement could, singly or in the
aggregate, materially and adversely affect the business, properties, operations,
condition (financial or otherwise), results of operations, income, or business
prospects of the Company and the Subsidiaries taken as a whole, as presently
being conducted or as proposed to be conducted as described in the Prospectus,
and (iii) are uncontested by any third party. The Company has no knowledge of,
nor has it received any notice of, infringement of, or conflict with, asserted
rights of others with respect to any patents, patent rights, inventions, trade
secrets, licenses, know-how, proprietary techniques, including processes and
substances, trademarks, service marks, trade names, or copyrights which in the
aggregate, if the subject of an unfavorable decision, ruling, or finding could
materially and adversely affect the business, properties, operations, condition
(financial or otherwise), results of operations, income, or business prospects
of the Company and the Subsidiaries, as presently being conducted or as proposed
to be conducted as described in the Prospectus, taken as a whole.
(12) Neither the Company or any Subsidiary, nor, to the best knowledge
of the Company, any director, officer, agent, employee, or other person acting
on behalf of the Company or any Subsidiary, has, directly or indirectly: used
any corporate funds for unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe,
rebate, payoff, influence payment, kickback, or other unlawful payment. The
Company's internal accounting controls and procedures are sufficient to cause
the Company and each of the Subsidiaries to comply in all respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(13) The Company has all requisite power and authority to execute,
deliver, and perform each of this Agreement and the Representative's Warrants.
All necessary corporate proceedings of the Company have been duly taken to
authorize the execution, delivery, and performance by the Company of this
Agreement and the Representative's Warrants. This Agreement has been duly
authorized, executed, and delivered by the Company, is the legal, valid, and
binding obligation of the Company, and is enforceable as to the Company in
accordance with its terms, except as rights to indemnity or contribution which
may be limited by federal or state securities law and except as such
enforceability may be limited by bankruptcy, insolvency, or other laws affecting
the rights of creditors generally and subject to general principles of equity.
The Representative's Warrants have been duly authorized by the Company and, when
executed and delivered by the Company, will be legal, valid, and binding
obligations of the Company, each enforceable as to the Company in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, or other laws affecting the rights of creditors generally and
<PAGE>
general principles of equity. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing with, any
federal, state, local, or other governmental authority or any court or other
tribunal is required by the Company or any Subsidiary for the execution,
delivery, or performance by the Company of this Agreement or the
Representative's Warrants, except filings under the Securities Act which have
been or will be made before the Closing Date, and consents consisting only of
consents under "blue sky" or securities laws which have been obtained at or
prior to the date of this Agreement. No consent which has not been obtained of
any party to any contract, agreement, instrument, lease, license, arrangement,
or understanding to which the Company or any Subsidiary is a party, or to which
any of its respective properties or assets are subject, is required for the
execution, delivery, or performance of this Agreement and the Representative's
Warrants; and the execution, delivery, and performance of this Agreement and the
Representative's Warrants will not violate, result in a breach of, conflict
with, result in the creation or imposition of any lien, charge, or encumbrance
upon any properties or assets of the Company or any Subsidiary pursuant to the
terms of, or, with or without the giving of notice or the passage of time or
both, entitle any party to terminate or call a default under, any such contract,
agreement, instrument, lease, license, arrangement, or understanding, or
violate, result in a breach of, or conflict with any term of the certificate of
incorporation (or other charter document) or by-laws of the Company or any
Subsidiary, or violate, result in a breach of, or conflict with, any law, rule,
regulation, order, judgment, or decree binding on the Company or any Subsidiary
or to which any of their respective operations, businesses, properties, or
assets are subject.
(14) The Company Firm Stock and the Company Additional Stock are
validly authorized and, when issued and delivered in accordance with this
Agreement, will be validly issued, fully paid, and nonassessable, without any
personal liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive or similar rights of stockholders, and the
Underwriters will receive good title to the shares of Company Firm Stock and
Company Additional Stock purchased by them, respectively, free and clear of all
liens, security interests, pledges, charges, encumbrances, stockholders'
agreements, and voting trusts. The Selling Shareholder Firm Stock and the
Selling Shareholder Additional Stock are validly authorized and issued, fully
paid, and nonassessable, without any personal liability attaching to the
ownership thereof, and were not issued in violation of any preemptive or similar
rights of stockholders. The Stock conforms to all statements relating thereto
contained in the Registration Statement and the Prospectus.
(15) The Warrant Stock is validly authorized and has been duly and
validly reserved for issuance and, when issued and delivered upon exercise of
the Representative's Warrants in accordance with the terms thereof, will be
validly issued, fully paid, and
<PAGE>
nonassessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive or similar rights
of stockholders; and the holders of the Representative's Warrants will receive
good title to the securities purchased by them upon the exercise of the
Representative's Warrants, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders' agreements, and voting trusts.
The Representative's Securities conform to all statements relating thereto
contained in the Registration Statement and the Prospectus.
(16) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may
otherwise be properly described in the Prospectus, neither the Company nor any
Subsidiary has (i) issued any securities or incurred any material liability or
material obligation, primary or contingent, for borrowed money, (ii) entered
into any material transaction not in the ordinary course of business, (iii)
declared or paid any dividend on its capital stock, except for dividends from
any Subsidiary to the Company, or (iv) experienced any adverse changes or any
development which may materially adversely effect the condition (financial or
otherwise), net assets or stockholders' equity, results of operations, business,
key personnel, assets, or properties of the Company and the Subsidiaries taken
as a whole.
(17) Neither the Company or any of the Subsidiaries nor, to the
Company's knowledge, any of their respective officers, directors, or affiliates
(as defined in the Regulations), has taken or will take, directly or indirectly,
prior to the termination of the offering contemplated by this Agreement, any
action designed to stabilize or manipulate the price of any security of the
Company, or which has caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
any of the Stock.
(18) The Company has obtained from each of its directors and officers
owning Common Stock, other than the Firm Selling Shareholders with respect to
the Selling Shareholder Firm Stock and other than the Additional Selling
Shareholders with respect to the Selling Shareholder Additional Stock, and
shareholders of the Company together representing in the aggregate an excess of
_____________% of the outstanding Common Stock, and _______% of the outstanding
stock options issued pursuant to the the Company's 1995 Stock Incentive Plan,
immediately prior hereto, and has furnished to the Representative a written
agreement, in form and substance satisfactory to counsel for the Underwriters,
that, for a period of six months from the date on which the Registration
Statement is declared by the Commission to be effective under the Securities
Act, he, she, or it will not, without the prior written consent of the
Representative, publicly offer, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, shares of Common Stock or other
securities
<PAGE>
of the Company, including, without limitation, any shares of Common Stock
issuable pursuant to the terms of any employee stock options; provided, however,
that such persons may offer, sell, contract to sell, grant an option for the
sale of, or otherwise dispose of all or any part of his, her, or its shares of
Common Stock or other such security or instrument of the Company during such
period if such transaction is private in nature and the transferee of such
shares of Common Stock or other securities or instruments agrees, prior to such
transaction, to be bound by all of the provisions of such agreement.
(19) The Company is not, and does not intend to conduct its business
in a manner in which it would be required to register as, an "investment
company" as defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and the rules and regulations promulgated
thereunder.
(20) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of the filing
or effectiveness of the Registration Statement, which right has not been
waived.
(21) Except as may be set forth in the Prospectus, neither the Company
nor any Subsidiary has incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder in connection
with the transactions contemplated by this Agreement.
(22) Neither the Company or any of the Subsidiaries, nor any of their
affiliates, is presently doing business with the government of Cuba or with any
person or affiliate located in Cuba. If, at any time after the date on which
the Registration Statement is declared by the Commission to be effective under
the Securities Act or with the Florida Department of Banking and Finance (the
"Florida Department"), whichever is later, and prior to the end of the period
referred to in the first clause of Section 2(a)(2) hereof, the Company or any of
the Subsidiaries or any of their respective affiliates commences engaging in
business with the government of Cuba or with any person or affiliate located in
Cuba, the Company will so inform the Florida Department within 90 days after
such commencement of business in Cuba, and, during the period referred to in
Section 2(a)(2) hereof, will inform the Florida Department within 90 days after
any change occurs with respect to previously reported information.
(23) To the best knowledge of the Company, no officer, director, or
shareholder of the Company has any affiliation or association with the National
Association of Securities Dealers, Inc. (the "NASD") or any member thereof.
(24) Except as disclosed in the Prospectus, the Company and each of
the Subsidiaries has filed all necessary federal, state, local, and foreign
income and franchise tax returns and other reports required to be filed and has
paid all taxes shown as due thereon; and there is no material tax deficiency
which has been, or, to the knowledge of the Company, may reasonably be expected
to be, asserted against the Company or any of the Subsidiaries (other than
claims for which adequate reserve has been made in the Company's financial
statements included in the Registration Statement, the Preliminary Prospectus,
and the Prospectus.
<PAGE>
(25) To the best knowledge of the Company, none of the activities or
business of the Company or any Subsidiary is in violation of, or will cause the
Company or any Subsidiary to violate, any law, rule, regulation, or order of the
United States, any state, county, or locality, or of any agency or body of the
United States or of any state, county, or locality, the violation of which would
have a material adverse effect upon the condition (financial or otherwise),
business, property, prospective results of operations, or net worth of the
Company and the Subsidiaries taken as a whole.
(26) The Stock is quoted on the Nasdaq National Market.
(b) Each of the Selling Shareholders severally and not jointly represents
and warrants to, and agrees with, Hampshire that:
(1) Such Selling Shareholder has (i) caused a negotiated certificate
or negotiated certificates representing the number of shares of Selling
Shareholder Firm Stock and/or the Selling Shareholder Additional Stock, as
applicable, set forth opposite the name of such Selling Shareholder in Schedule
II hereto to be delivered to _______________________ (the "Custodian"), duly
endorsed in blank or together with blank stock powers duly executed, such
certificate or certificates to be held by the Custodian pursuant to a letter of
transmittal and custody agreement for delivery, pursuant to the provisions
hereof, on the Closing Date (as hereinafter defined) or one or more Additional
Closing Dates and (ii) granted an irrevocable power of attorney to Arie Kilman
and Robert R. MacDonald (the "Attorneys") to purchase all requisite stock
transfer tax stamps, to execute this Agreement (including agreeing on the price
at which the Selling Shareholder Firm Stock and the Selling Shareholder
Additional Stock are s to be sold to Hampshire) and thereafter to modify and
amend this Agreement, to settle any dispute relating to the terms of this
Agreement, to waive any condition to the obligations of such Selling
Shareholder, and to execute all other instruments and documents and to perform
all other acts necessary or desirable to carry out the provisions of this
Agreement on behalf of such Selling Shareholder. Such letter of transmittal and
custody agreement, together with such irrevocable power of attorney, are
hereinafter referred to as the "Custodial Agreement".
(2) LEL has all requisite power and authority to execute, deliver,
and perform this Agreement and the Custodial Agreement. All necessary corporate
proceedings of LEL have been duly taken to authorize the execution, delivery,
and performance of this Agreement and the Custodial Agreement. This Agreement
and the Custodial Agreement have been duly executed and delivered by such
Selling Shareholder, are the legal, valid, and binding obligations of such
Selling Shareholder, and are enforceable as to such Selling Shareholder in
accordance with their respective terms, except as rights to indemnity or
contribution may be limited by federal or
<PAGE>
state securities law and except as such enforceability may be limited by
bankruptcy, insolvency, or other laws affecting the rights of creditors
generally and general principles of equity. To such Selling Shareholder's best
knowledge, no consent, authorization, approval, order, license, certificate, or
permit of or from, or declaration or filing with, any federal, state, local, or
other governmental authority or any court or other tribunal is required by such
Selling Shareholder for the execution, delivery, or performance of this
Agreement or the Custodial Agreement, except filings under the Securities Act
which have been or will be made before the Closing Date and such consents
consisting only of consents under "blue sky" or securities laws which have been
obtained at or prior to the date of this Agreement by such Selling Shareholder.
No consent which has not been obtained of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding to which such Selling
Shareholder is a party, or to which any of such Selling Shareholder's properties
or assets are subject, is required for the execution, delivery, or performance
of this Agreement or the Custodial Agreement; and the execution, delivery, and
performance of this Agreement and the Custodial Agreement will not violate,
result in a breach of, conflict with, or result in the creation or imposition of
any lien, charge, or encumbrance upon any properties or assets of such Selling
Shareholder pursuant to the terms of, or, with or without the giving of notice
or the passage of time or both, entitle any party to terminate or call a default
under, any such contract, agreement, instrument, lease, license, arrangement, or
understanding, or, to such Selling Shareholder's best knowledge, violate, result
in a breach of, or conflict with, any law, rule, regulation, order, judgment, or
decree binding on such Selling Shareholder or to which any of such Selling
Shareholder's business, properties, or assets are subject.
(3) Such Selling Shareholder has good title to the shares of Selling
Shareholder Firm Stock and/or Selling Shareholder Additional Stock, as
applicable, to be sold by such Selling Shareholder pursuant to this Agreement,
free and clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts (except those created by this
Agreement and the Custodial Agreement and those which have been terminated prior
to the execution hereof), and, when and if delivered in accordance with this
Agreement, the Underwriters will receive good title to the shares of Selling
Sharehlder Firm Stock, and Hampshire will receive good title to the shares of
Selling Shareholder Additional Stock, purchased by them from such Selling
Shareholder, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements, and voting trusts. The Seeling
Shareholder Firm Stock and the Selling Shareholder Additional Stock conforms to
all statements relating thereto contained in the Registration Statement or the
Prospectus.
(4) Neither such Selling Shareholder nor any of such Selling
<PAGE>
Shareholder's affiliates (as defined in the Regulations) has taken or will take,
directly or indirectly, prior to the termination of the offering contemplated by
this Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which has caused or resulted in, or which might in
the future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company, to facilitate the sale
or resale of any of the Stock.
(5) Such Selling Shareholder has reviewed, and is familiar with, the
Registration Statement and all amendments and supplements thereto, if any, filed
with the Commission prior to the date hereof, and with each Preliminary
Prospectus and the Prospectus contained therein, as supplemented, if applicable,
to the date hereof, and all information relating to such Selling Shareholder,
such Selling Shareholder's shares of Common Stock, and any contractual or other
business relationship between such Selling Shareholder and the Company that is
set forth in the Registration Statement, any such amendment or supplement
thereto, each Preliminary Prospectus, and the Prospectus, or any such supplement
thereof, and all other written information furnished or to be furnished by, or
on behalf of, such Selling Shareholder for use in the Registration Statement,
any such amendment or supplement thereto, any Preliminary Prospectus, and the
Prospectus, or any such supplement thereto, is and, at the Closing Date and each
Additional Closing Date, will be, true, correct, and complete and does not and,
at the Closing Date and each Additional Closing Date, will not, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make such information (in light of the
circumstances under which they were made in the case of the Prospectus) not
misleading.
(6) Such Selling Shareholder has not incurred any liability for a
fee, commission, or other compensation on account of the employment of a broker
or finder in connection with the transactions contemplated by this Agreement.
3. Purchase, Sale, and Delivery of the Stock and the Representative's
Warrants.
(a) On the basis of the representations, warranties, covenants, and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Underwriters, severally and not jointly, agree
to purchase from (i) the Company, and the Company agrees to issue and sell to
the several Underwriters, the numbers of shares of Company Firm Stock set forth
opposite the respective names of the Underwriters in Schedule I hereto, and (ii)
the Firm Selling Shareholders, and the Firm Selling Shareholders agree to issue
and sell to the several Underwriters, the numbers of shares of Selling
Shareholder Firm Stock set forth opposite the respective names of the Firm
Selling Shareholders in Schedule II hereto. The purchase price per share of
the Firm Stock to be paid by the several Underwriters shall be $___________.
The initial public offering price per share of the Firm Stock shall be
$________.
<PAGE>
Payment for the Company Firm Stock by the Underwriters shall be made by
certified or official bank check in New York Clearing House (next day) funds or
by electronic wire transfer of next day funds, payable to the order of the
Company, and payment for the Selling Shareholder Firm Stock by the Underwriters
shall be made by certified or official bank check in New York Clearing House
(next day) funds or by electronic wire transfer of next day funds, payable to
the order of the Custodian, at the offices of Hampshire Securities Corporation,
640 Fifth Avenue, New York, New York 10019, or at such other place in the New
York City metropolitan area as the Representative shall determine and advise the
Company by at least one full days' notice in writing, upon delivery of the Firm
Stock to the Representative for the respective accounts of the Underwriters.
Such delivery and payment shall be made at 9:00 a.m., New York City local time,
on the third business day following the time of the initial public offering, as
defined in Section 11(a) hereof (unless such time and date is postponed in
accordance with the provisions of Section 9(c) hereof), or at such other time as
shall be agreed upon between the Representative and the Company. The time and
date of such delivery and payment are hereinafter referred to as the "Closing
Date."
Certificates representing the Firm Stock shall be registered in such name
or names and in such authorized denominations as the Representative may request
in writing at least two full business days prior to the Closing Date. The
Company shall permit the Representative to examine and package such certificates
for delivery at least one full business day prior to the Closing Date.
(b) Each Individual Individual Additional Selling Shareholder hereby,
severally and not jointly, grants to Hampshire the Individual Selling
Shareholder Over-allotment Option to purchase up to the number of shares of
Individual Selling Shareholder Additional Stock set forth opposite his, her, or
its respective name in Schedule II hereto, as may be necessary to cover
over-allotments, at the same purchase price per share to be paid by the several
Underwriters to the Company for the Firm Stock as provided for in this Section 3
hereof. LEL hereby grants to Hampshire the LEL Over-allotment Option to
purchase up 50,000 shares of LEL Additional Stock, as may be necessary to cover
over-allotments, at the same purchase price per share to be paid by the several
Underwriters to the Company for the Firm Stock as provided for in this Section 3
hereof. The Company hereby grants to Hampshire the Company Over-allotment
Option to purchase up to 30,000 shares of Company Additional Stock, as may be
necessary to cover over-allotments, at the same purchase price per share to be
paid by the several Underwriters to the Company for the Firm Stock as provided
for in this Section 3 hereof. The Over-allotment Options may be exercised only
<PAGE>
to cover over-allotments in the sale of shares by Hampshire. The Company
Over-allotment Option and the LEL Over-allotment Option may be exercised only
after the exercise in full of the Selling Shareholder Over-allotment Option;
thereafter, the Company Over-allotment Option and the LEL Over-allotment Option
shall be exercisable ratably. The shares of Individual Selling Shareholder
Additional Stock purchased by Hampshire in such allocation as Hampshire and the
Company shall agree. The Over-allotment Options may be exercised by Hampshire
on the basis of the representations, warranties, covenants, and agreements of
the Company and the Selling Shareholders herein contained, but subject to the
terms and conditions herein set forth, at any time and from time to time on or
before the forty-fifth day following the date on which the Registration
Statement becomes effective under the Securities Act, by written notice by
Hampshire to the Company and Custodian. Such notice shall set forth the
aggregate number of shares of Additional Stock as to which the Over-allotment
Option is being exercised, the name or names in which the certificates
representing the Additional Stock are to be registered, the authorized
denominations in which the Additional Stock is to be registered, and the time
and date, as determined by Hampshire, when such shares of Additional Stock are
to be delivered (each such time and date are hereinafter referred to as an
"Additional Closing Date"); provided, however, that no Additional Closing Date
shall be earlier than the Closing Date nor earlier than the second business day
after the date on which the notice of the exercise of the Over-allotment Options
shall have been given nor later than the eighth business day after the date on
which such notice shall have been given.
In the event the Company declares or pays a dividend or a distribution on
the Common Stock, whether in the form of cash, shares of Common Stock, or other
consideration, prior to the Additional Closing Date, such dividend or
distribution shall also be paid on the Additional Stock on the later of the
Additional Closing Date and the date on which such dividend or distribution is
payable.
Payment for the shares of Additional Stock by Hampshire shall be made by
certified or official bank check in New York Clearing House (next day) funds or
by electronic wire transfer of next day funds payable to the order of Company in
the case of the Company Additional Stock, and the Custodian, in the case of the
Selling Shareholder Additional Stock, at the offices of Hampshire Securities
Corporation, 640 Fifth Avenue, New York, New York 10019, or at such other place
in the New York City metropolitan area as Hampshire shall determine and advise
the Company by at least one full day's notice in writing, upon delivery of the
shares of Additional Stock to Hampshire
<PAGE>
for its account.
Certificates for the shares of Additional Stock shall be registered in such
name or names and in such authorized denominations as Hampshire may request in
writing at least two full business days prior to the Additional Closing Date
with respect thereto. The Company shall permit Hampshire to examine and package
such certificates for delivery at least one full business day prior to the
Additional Closing Date with respect thereto.
(c) The Company hereby agrees to issue and sell to Hampshire and/or
its designees on the Closing Date the Representative's Warrants to purchase the
Warrant Shares for an aggregate purchase price of $100.00.
Delivery and payment for the Representative's Warrants shall be made on
the Closing Date. The Company shall deliver to Hampshire, upon payment
therefor, certificates representing the Representative's Warrants in the name
or names and in such authorized denominations as Hampshire may request. The
Representative's Warrants shall be exercisable for a period of four years
commencing one year from the date on which the Registration Statement is
declared effective under the Securities Act at an initial exercise price per
Warrant Share equal to $________.
(d) It is understood that Hampshire may (but shall not be obligated
to) make any and all the payments required pursuant to this Section 3 on behalf
of any Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Firm Stock to be purchased by such
Underwriter or Underwriters. Any such payment by the Representative shall not
relieve any such Underwriter or Underwriters of any of its or their obligations
hereunder.
4. Offering. The Underwriters are to make a public offering of the Firm
Stock as soon, on or after the date on which the Registration Statement becomes
effective under the Securities Act, as the Representative deems it advisable so
to do. The Firm Stock is to be initially offered to the public at the initial
public offering price as provided for in Section 3(a) (such price being
hereinafter referred to as the "public offering price"). After the initial
public offering, the Representative may from time to time increase or decrease
the public offering price, in the sole discretion of the Representative, by
reason of changes in general market conditions or otherwise.
5. Covenants.
(a) The Company covenants that it will:
(1) Use its best efforts to cause the Registration Statement to
become effective under the Securities Act as promptly as possible and notify the
Representative and counsel to the Underwriters immediately, and confirm such
notice in writing, (i) when the Registration Statement and any post-effective
amendment thereto become effective under the Securities Act, (ii) of the receipt
of any comments from the Commission or the "blue sky" or securities authority of
any jurisdiction regarding the Registration Statement, any post-effective
amendment thereto, the
<PAGE>
Prospectus, or any amendment or supplement thereto, (iii) of the filing with the
Commission of any supplement to the Prospectus, and (iv) of the receipt of any
notification with respect to a Stop Order or the initiation or threatening of
any proceeding with respect to a Stop Order. The Company will use its best
efforts to prevent the issuance of any Stop Order and, if any Stop Order is
issued, to obtain the lifting thereof as promptly as possible. If the
Registration Statement has become or becomes effective under the Securities Act
with a form of prospectus omitting Rule 430A Information, or filing of the
Prospectus with the Commission is otherwise required under Rule 424(b) of the
Regulations, the Company will file with the Commission the Prospectus, properly
completed, pursuant to Rule 424(b) of the Regulations within the time period
prescribed and will provide evidence satisfactory to the Representative of such
timely filing.
(2) During the time when a prospectus relating to the Firm Stock
or the Additional Stock is required to be delivered hereunder or under the
Securities Act or the Regulations, comply with all requirements imposed upon it
by the Securities Act, as now existing and as hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of, or dealings in, the Stock in accordance with the
provisions hereof and the Prospectus. If, at any time when a prospectus
relating to the Firm Stock or the Additional Stock is required to be delivered
hereunder or under the Securities Act or the Regulations, any event shall have
occurred as a result of which, in the reasonable opinion of counsel for the
Company or counsel for the Underwriters, the Registration Statement or the
Prospectus as then amended or supplemented contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, or if, in the
reasonable opinion of either of such counsel, it is necessary during such period
to amend or supplement the Registration Statement or the Prospectus to comply
with the Securities Act or the Regulations, the Company will immediately notify
you and promptly prepare and file with the Commission an appropriate amendment
or supplement (in form and substance satisfactory to the Representative and
counsel to the Underwriters) which will correct such statement or omission or
which will effect such compliance and will use its best efforts to have any such
amendment declared effective under the Securities Act as soon as possible.
(3) Deliver without charge to each of the several Underwriters
such number of copies of each Preliminary Prospectus as may reasonably be
requested by the Underwriters and, as soon as the Registration Statement, or any
amendment thereto, becomes effective under the Securities Act or a supplement is
filed with the Commission, deliver without charge to the Representative two
signed copies of the Registration Statement, including exhibits, or such
amendment thereto, as the case may be, and two copies of any supplement thereto,
and deliver without charge to each of the several Underwriters such number of
copies of the Prospectus, the Registration Statement, and amendments and
supplements thereto, if any, without exhibits, as the Representative may request
for the purposes contemplated by the Securities Act.
<PAGE>
(4) Endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective under the Securities Act, to qualify the Securities for offering and
sale under the "blue sky" or securities laws of such jurisdictions as may be
designated by the Representative; provided, however, that no such qualification
shall be required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a foreign
corporation doing business in such jurisdiction to which it is not then
subject. In each jurisdiction where such qualification shall be effected, the
Company will, unless the Representative agrees in writing that such action is
not at the time necessary or advisable, file and make such statements or
reports at such times as are or may be required by the laws of such
jurisdiction.
(5) Make generally available, within the meaning of Section
11(a) of the Securities Act and the Regulations, to its security holders as soon
as practicable, but not later than March 31, 1997, an earnings statement, which
need not be certified by independent certified public accountants unless
required by the Securities Act or the Regulations, but which shall satisfy the
provisions of Section 11(a) of the Securities Act and the Regulations, covering
a period of at least 12 months beginning after the date on which the
Registration Statement was declared effective under the Securities Act.
(6) For a period of five years after the date on which the
Registration Statement was declared effective under the Securities Act furnish
you, without charge, the following:
(i) within 90 days after the end of each fiscal year, one
copy of consolidated financial statements certified by independent certified
public accountants, including a balance sheet, statement of income, and
statement of changes in cash flows of the Company and its then existing
subsidiaries, if any, with supporting schedules, prepared in accordance with
generally accepted accounting principles in effect in the United States, as at
the end of such fiscal year and for the 12 months then ended, which may be on a
consolidated basis;
(ii) as soon as practicable after they have been sent to
shareholders of the Company or filed with, or furnished to, the Commission or
the NASD, one copy of each annual and interim financial and other report or
communication sent by the Company to its shareholders or filed with, or
furnished to, the Commission or the NASD;
(iii) as soon as practicable, one copy of every press
release and every material news item and article in respect of the Company or
its affairs which was released by the Company; and
(iv) such additional documents and information with respect
to the Company and its affairs, and the affairs of its subsidiaries, if any, as
the Representative may from time to time reasonably request; provided, however,
that such additional documents and information shall be received by you on a
confidential basis, unless otherwise disclosed to the
<PAGE>
public, and shall not be used in violation of the federal securities laws and
the rules and regulations promulgated thereunder.
(7) Apply the net proceeds received by the Company from the
offering contemplated by this Agreement in the manner set forth under the
heading "Use of Proceeds" in the Prospectus.
(8) Furnish to the Representative as early as practicable prior
to the Closing Date and each Additional Closing Date, if any, as the case may
be, but not less than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which have been
read by the Company's independent certified public accountants, as stated in
their letters to be furnished pursuant to Section 7(e) hereof.
(9) File no amendment or supplement to the Registration
Statement or Prospectus at any time, whether before or after the date on which
the Registration Statement was declared effective under the Securities Act,
unless such filing shall comply with the Securities Act and the Regulations and
unless the Representative shall previously have been advised of such filing and
furnished with a copy thereof, and the Representative shall have approved such
filing in writing (which approval shall not be unreasonably withheld). Until
the completion by the Underwriters of the distribution of the Stock (but in no
event more than nine months after the date on which the Registration Statement
shall have been declared effective under the Securities Act), the Company will
prepare and file with the Commission, promptly upon the Representative's
request, any amendments or supplements to the Registration Statement or the
Prospectus which, in the reasonable opinion of the Representative, may be
necessary or advisable in connection with the distribution of the Stock.
(10) File timely with the Commission an appropriate form to amend
the registration with respect to the Common Stock pursuant to Section 12(g) of
the Exchange Act to include the Stock and comply with all registration, filing,
and reporting requirements of the Exchange Act, which may from time to time be
applicable to the Company.
(11) Comply with all provisions of all undertakings contained in
the Registration Statement.
(12) Prior to the Closing Date or any Additional Closing Date, as
the case may be, issue no press release or other communication, directly or
indirectly, and hold no press conference with respect to the Company or any
Subsidiary, the financial condition, results of operations, business,
properties, assets, liabilities of any of the Company or any Subsidiary, or this
offering, without the prior written consent of the Representative.
(13) Make all filings required to maintain the inclusion of the
Common Stock on the Nasdaq National Market, the New York Stock Exchange, or the
American Stock Exchange, as the case may be, as long as required under the
Exchange Act.
<PAGE>
(14) On the Closing Date, sell to Hampshire, individually and not
as Representative of the several Underwriters, at the price of $.001 per
Warrant, warrants to purchase the Warrant Stock, which Representative's Warrants
shall be substantially in the form set forth as an exhibit to the Registration
Statement.
(15) Until expiration of the Representative's Warrants, keep
reserved sufficient shares of Common Stock for issuance upon exercise of the
Representative's Warrants.
(16) Deliver to the Representative, without charge, within a
reasonable period after the earlier of the last Additional Closing Date or the
expiration of the period during which the Representative may exercise the
Over-allotment Options, four sets of bound volumes of the Registration Statement
and all related materials to the individuals designated by the Representative or
counsel to the Underwriters.
(17) For a period of three years after the date on which the
Registration Statement is declared effective under the Securities Act, provide,
at its sole expense, to the Representative copies of the Company's transfer
sheets on a mutually agreeable basis, if so requested by the Representative.
(18) Will maintain a key-person life insurance payable to the
Company on the life of each of __________________, the ________ of the Company,
and ____________, the _______________ of the Company, each in the amount of at
least $1,000,000, and shall maintain such life insurance in at least such amount
for the period of time equal to the longer of three years from the Closing Date
and the respective terms of the employment agreements between the Company and
such officers.
(19) For a period of three years from the date on which the
Registration Statement becomes effective under the Securities Act, the
Representative shall have the right to appoint a designee as an observer of the
Company's Board of Directors. Such observer will have the right to attend all
meetings of the Board of Directors, but will have no voting rights. Such
observer shall be entitled to receive reimbursement for all out-of-pocket
expenses incurred in attending such meetings, including, but not limited to,
food, lodging and transportation, as long as such costs do not exceed $500 per
meeting, and any fees paid to directors for attending meetings. The
Representative shall be given notice of such meetings at the same time and in
the same manner as directors of the Company are informed. The Representative
and such observer shall be indemnified to the same extent as the other
directors. The Company will use its best efforts to purchase directors' and
officers' insurance in an amount of not less than $2,000,000, provided,
however, that the Company shall not be required to pay more than $50,000 per
year in order to maintain such insurance, and if insurance in such amount is not
available at such cost, the Company shall purchase that amount of such insurance
which is available at a cost of $50,000 per year.
(b) Each Selling Shareholder covenants that it will not:
(1) Subject to the agreement referenced in Section 2(b)(18) of
this Agreement, for a period of 18 months from the date on which the
Registration is declared by the Commission to be effective under the Securities
Act, without the prior written consent of the
<PAGE>
Representative, publicly offer, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, shares of Common Stock or other
securities of the Company, including, without limitation, any shares of Common
Stock issuable pursuant to the terms of any employee stock options.
(2) Take, directly or indirectly, prior to the termination of
the offering contemplated by this Agreement, any action designed to stabilize or
manipulate the price of any security of the Company, or which might in the
future reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company, to facilitate the sale
or resale of any of the Stock.
6. Payment of Expenses.
The Company hereby agrees to pay all expenses (other than fees of counsel
for the Underwriters, except as provided in Section 6(c)) in connection with (a)
the preparation, printing, filing, distribution, and mailing of the Registration
Statement and the Prospectus and the printing, filing, distribution, and mailing
of this Agreement and the Master Agreement Among Underwriters, any Master
Selected Dealer Agreement, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments or supplements thereto supplied to the Underwriters in quantities as
hereinabove stated, (b) the issuance, sale, transfer, and delivery (as
applicable) of the Securities, including any transfer or other taxes payable
thereon, (c) the qualification of the Securities under state or foreign "blue
sky" or securities laws, including the costs of printing and mailing the
preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriters ($___________) and the disbursements in connection therewith, (d)
the filing fees payable to the Commission, the NASD, and the jurisdictions in
which such qualification is sought, (e) any fees relating to the listing of the
Common Stock on the Nasdaq National Market, (f) the cost of printing
certificates representing the shares of Common Stock, (g) the fees of the
transfer agent for the Common Stock, (h) the cost of publication of "tombstone"
advertisements with respect to offerings, not to exceed $15,000, and (i) a
non-accountable expense allowance equal to three percent of the gross proceeds
of the sale of the Company Firm Stock and the Company Additional Stock (less
amounts, if any, previously paid to the Representative in respect of such
non-accountable expense allowance) to the Representative on the Closing Date.
Notwithstanding the foregoing, if the offering contemplated hereby should be
terminated, the Company agrees to pay the Representative only the out-of-pocket
expenses incurred by the Underwriters in connection with this Agreement or the
proposed offer, sale, and delivery of the Stock.
The Individual Selling Shareholders hereby agree to pay a non-accountable
expense
<PAGE>
allowance equal to three percent of the gross proceeds of the sale of any
Selling Shareholder Firm Stock and/or any Selling Shareholder Additional Stock
sold by them to the Representative on the Closing Date or any Additional Closing
Date. LEL hereby agrees to pay a non-accountable expense allowance equal to
three percent of the gross proceeds of the sale of any Selling Shareholder Firm
Stock and/or Selling Shareholder Additional Stock sold by it to the
Representative on the Closing Date or any Additional Closing Date.
7. Conditions of Underwriters' Obligations.
(a) The obligations of the several Underwriters to purchase and pay
for the Firm Stock, as provided herein, and the obligation of Hampshire to
purchase and pay for any Additional Stock and the Representative's Warrants,
each as provided herein, shall be subject, in the discretion of the
Representative or Hampshire, respectively, to the continuing accuracy of the
representations and warranties of the Company contained herein and in each
certificate and document contemplated under this Agreement to be delivered to
the Underwriters, or Hampshire, as applicable, as of the date hereof and as of
the Closing Date or any Additional Closing Date, as the case may be, to the
performance by the Company and each Selling Shareholder, as applicable, of its
respective obligations hereunder, and to the following conditions:
(b) The Registration Statement shall have become effective under the
Securities Act not later than 6:00 P.M., New York City local time, on the date
of this Agreement or such later date and time as shall be consented to in
writing by the Representative; on or prior to the Closing Date, or any
Additional Closing Date, as the case may be, no Stop Order shall have been
issued and no proceeding shall have been initiated or threatened with respect to
a Stop Order; and any request by the Commission for additional information shall
have been complied with by the Company to the reasonable satisfaction of counsel
for the Underwriters. If required, the Prospectus shall have been filed with
the Commission in the manner and within the time period required by Rule 424(b)
under the Securities Act.
(c) (1) At the Closing Date and any Additional Closing Date, as the
case may be, you shall have received the opinion of Proskauer Rose Goetz &
Mendelsohn LLP, counsel for the Company, dated the date of delivery, addressed
to the Underwriters, and in form reasonably satisfactory to counsel for the
Underwriters, with reproduced copies or signed counterparts thereof for each of
the Underwriters, to the effect that:
(i) to the knowledge of such counsel, the only subsidiaries (as
<PAGE>
defined in the Regulations) of the Company are the Subsidiaries. Each of the
Company and each of the Subsidiaries is a corporation duly organized, validly
existing, and in good standing under the laws of its respective jurisdiction of
incorporation, with full power and authority to conduct its business in the
manner described in the Prospectus. The Company and each of the Subsidiaries is
duly qualified to do business as a foreign corporation and is in good standing
in the jurisdictions specified in Annex A to the opinion;
(ii) A. the authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, of which 6,236,297 shares are outstanding,
and 1,000,000 shares of preferred stock, par value $.01 per share, of which none
are outstanding. Each outstanding share of Common Stock and each outstanding
share of capital stock of each of the Subsidiaries is validly authorized and
issued, fully paid, and, subject to section 630 of the New York Business
Corporation Law (the "BCL"), nonassessable and without any personal liability
attaching to the ownership thereof, and none of those shares have been issued
and none are owned or held in violation of any preemptive or similar rights of
stockholders. To the knowledge of such counsel, there is no commitment, plan,
or arrangement to issue, and no outstanding option, warrant, or other right
calling for the issuance of, any share of capital stock of the Company or any
Subsidiary or any security or other instrument which by its terms is convertible
into, or exercisable or exchangeable for, capital stock of the Company or any
Subsidiary, [except as may be properly described in the Prospectus and except
for an outstanding preemptive right to purchase 200 shares of Common Stock]. To
the knowledge of such counsel, there is outstanding no security or other
instrument which by its terms is convertible into, or exercisable or
exchangeable for, capital stock of the Company or any Subsidiary, except as may
be properly described in the Prospectus. The certificates evidencing the Common
Stock are in due and proper form.
B. The authorized capital stock of the ProfitKey consists
of 25,000,000 shares of common stock, par value $.01 per share, of which, to the
knowledge of such counsel, 14,086,744 shares are outstanding, and 3,473,147
shares of preferred stock, par value $.01 per share, none of which, to our
knowledge, are outstanding. The Company is the record and to the knowledge of
such counsel, beneficial owner of 14,086,744 shares of common stock, par value
$.01 per share, of ProfitKey, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders' agreements, and voting trusts.
C. The authorized capital stock of the Level 8 consists
of 200 shares of common stock, no par value, of which, to the knowledge of such
counsel, 100 shares are outstanding. The Company is the record and, to the
knowledge of such counsel, beneficial owner of 100 shares of common stock, no
par value, of Level 8, in each case free and
<PAGE>
clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts.
D. The Company is the record and, to the knowledge of
such counsel, beneficial owner of all of the outstanding shares of capital stock
of 3077934, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements, and voting trusts.
(iii) to the knowledge of such counsel, there is no
litigation, arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending, threatened, or in prospect (or any basis
therefor) with respect to the Company or any Subsidiary or any of their
respective operations, businesses, properties, or assets required to be
described in the Registration Statement or Prospectus that is not so disclosed;
(iv) the Company has all requisite power and authority to
execute, deliver, and perform this Agreement and the Representative's Warrants.
All necessary corporate proceedings of the Company have been taken to authorize
the execution, delivery, and performance by the Company of this Agreement and
the Representative's Warrants. This Agreement has been duly authorized,
executed, and delivered by the Company, is the legal, valid, and binding
obligation of the Company, and, except as rights to indemnity or contribution
may be limited by federal or state securities law, subject to applicable
bankruptcy, insolvency, and other laws affecting the enforceability of
creditors' rights generally and general principles of equity, is enforceable as
to the Company in accordance with its terms. The Representative's Warrants have
been duly authorized by the Company and, when executed and delivered by the
Company, will be the legal, valid, and binding obligations of the Company, each
enforceable as to the Company in accordance with its terms. No consent,
authorization, approval, order, lease or license, certificate, or permit of or
from, or declaration or filing with, any U.S. Federal, New York or Delaware
governmental authority is required by the Company or any Subsidiary for the
execution, delivery, or performance by the Company of this Agreement or the
Representative's Warrants, except filings under the Securities Act which have
been made prior to the Closing Date or Additional Closing Date, as the case may
be, and consents consisting only of consents under "blue sky" or securities
laws. No consent of any party to any contract, agreement, instrument, lease or
license, either filed as an exhibit to the Registration Statement or described
in the Prospectus to which the Company or any Subsidiary is a party, or to which
any of their respective properties or assets are subject, is required for the
execu- tion, delivery, or performance of this Agreement and the Representative's
Warrants; and the execution, delivery, and performance of this Agreement and the
Representative's Warrants will
<PAGE>
not violate, result in a breach of, conflict with, result in the creation or
imposition of any lien, charge, or encumbrance upon any properties or assets of
the Company pursuant to the terms of, or, with or without the giving of notice
or the passage of time or both, entitle any party to terminate or call a default
under, any such contract, agreement, instrument, lease or license, either filed
as an exhibit to the Registration Statement or described in the Prospectus to
which the Company is a party or by which it is bound, violate or result in a
breach of, or conflict with any term of the certificate of incorporation (or
other charter document) or by-laws of the Company, or violate, result in a
breach of, or conflict with any U.S. Federal, New York or Delaware law, rule or
regulation, or, to the knowledge of such counsel, any order, judgment, or
decree, binding on the Company or any Subsidiary or to which any of their
respective operations, businesses, properties, or assets are subject;
(v) each share of Company Firm Stock to be delivered on the
Closing Date, and each share of Company Additional Stock to be delivered on any
Additional Closing Date, is validly authorized and, when issued and delivered in
accordance with the terms hereof, will be validly issued, fully paid, and,
subject to section 630 of the BCL, nonassessable and without any personal
liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive or similar rights of stockholders. The Underwriters
will receive good title to the shares of Company Firm Stock and Company
Additional Stock purchased by them, respectively, and to the best of such
counsel's knowledge, free and clear of all liens, security interests, pledges,
charges, encumberances, stockholders' agreements, and voting trusts. The Stock
conforms to all statements relating thereto contained in the Registration
Statement or the Prospectus;
(vi) the Warrant Stock is validly authorized and has been duly
and validly reserved for issuance pursuant to the terms of the Representative's
Warrants. The Representative's Warrants, when issued and delivered in
accordance with the terms hereof, will be validly issued and delivered. The
Warrant Stock, when issued and delivered in accordance with the Representative's
Warrants, will be validly issued, fully paid, and, subject to section 630 of the
BCL, nonassessable and without any personal liability attaching to the
ownership thereof, and will not have been issued in violation of any preemptive
rights of stockholders. To the best knowedge of such counsel, the
Representative, and any other holders of the Representative's Warrants, will
receive the securities purchased by them upon exercise of the Representative's
Warrants to the best knowledge of such counsel, free and clear of all all liens,
security interests, pledges, charges, encumberances, stockholders' agreements,
and voting trusts. The description of the Representative's Securities conform
to all statements relating thereto contained in the
<PAGE>
Registration Statement or the Prospectus;
(vii) to the knowledge of such counsel, each contract,
agreement, instrument, lease, or license required to be described in the
Registration Statement or the Prospectus has been accurately described therein,
and to the knowledge of such counsel, each contract, agreement, instrument,
lease, or license required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to the Registration
Statement;
(viii) insofar as statements in the Prospectus purport to
summarize the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts, agreements, instruments,
leases, or licenses, such statements have been prepared or reviewed by such
counsel and, to the knowledge of such counsel, accurately reflect the status of
such litigation and provisions purported to be summarized and are correct in all
respects;
(ix) the Company is not an "investment company" as defined
in the Investment Company Act and the rules and regulations thereunder;
(x) to the knowledge of such counsel, no person or entity has
the right to require registration of shares of Common Stock or other securities
of the Company because of the filing or effectiveness of the Registration
Statement; and
(xi) the Registration Statement has become effective under
the Securities Act, the Prospectus has been filed in accordance with Rule 424(b)
of the Regulations, including the applicable time periods set forth therein, or
such filing is not required. To the knowledge of such counsel, no Stop Order
has been issued and no proceeding for that purpose has been instituted or, to
the knowledge of such counsel, threatened. On the basis of the participation of
such counsel in conferences at which the contents of the Registration Statement
and the Prospectus and related matters were discussed, but without independent
verification by such counsel of the accuracy, completeness, or fairness of the
statements contained in the Registration Statement, the Prospectus, or any
amendment or supplement thereto, such counsel has no knowledge that (other than
financial statements and other financial data and schedules which are or should
be contained therein, as to which such counsel need express no opinion): (A) the
Registration Statement, any Rule 430A Prospectus, and the Prospectus, and any
amendment or supplement thereto, does not appear on its face to comply as to
form in all material respects with the requirements of the Securities Act and
the Regulations; (B) any of the Registration Statement at the time it became
effective and on the Closing Date, or any Additional Closing Date, as the case
may be, and any Rule 430A Prospectus or the Prospectus, as of their dates and on
the Closing Date and any Additional Closing Date, as the case may be, or any
amendment or supplement thereto, contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (C) since the date
of effectiveness under the Securities Act of the Registration Statement, any
event has occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the
<PAGE>
Prospectus which has not been set forth in such an amendment or supplement.
In rendering such opinion, counsel for the Company may rely (A) as to
matters involving the application of laws other than the laws of the United
States and the laws of the States of Delaware and New York, to the extent
counsel for the Company deems proper and to the extent specified in such
opinion, upon an opinion or opinions (in form and substance reasonably
satisfactory to counsel for the Underwriters) of other counsel, reasonably
acceptable to counsel for the Underwriters, familiar with the applicable laws,
in which case the opinion of counsel for the Company shall state that the
opinion or opinions of such other counsel are satisfactory in scope, form, and
substance to counsel for the Company and that reliance thereon by counsel for
the Company and the Underwriters is reasonable; (B) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company; and (C) to the extent they deem proper, upon written statements or
certificates of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the Company;
provided that copies of any such opinions, certificates, or statements shall be
annexed as exhibits to the opinion of counsel for the Company.
(2) At the Closing Date and any Additional Closing Date, you shall
have received the favorable opinion of Proskauer Rose Goetz & Mendelsohn LLP,
counsel for the Selling Shareholders, dated the date of delivery, addressed to
the Underwriters, and in form and scope satisfactory to counsel for the
Underwriters, with reproduced copies or signed counterparts thereof for each of
the Underwriters, to the effect that:
(i) LEL has all requisite power and authority to execute,
deliver, and perform this Agreement and the Custodial Agreement. This Agreement
and the Custodial Agreement each have been duly executed and delivered by each
Selling Shareholder, are the legal, valid, and binding obligation of each
Selling Shareholder, and are each enforceable as to each Selling Shareholder in
accordance with its respective terms, except as rights to indemnity or
contribution may be limited by federal or state securities law and subject to
applicable bankruptcy, insolvency and other laws affecting the enforceability of
creditors' rights generally and general principles of equity.
(ii) To such counsel's knowledge, each Firm Selling Shareholder
and each Additional Selling Shareholder has good title to the shares of Selling
Shareholder Firm Stock or Selling Stockholder Additional Stock, respectively,
to be sold by such Selling Shareholder pursuant to this Agreement, and to the
best of such counsel's knowledge, free and clear of all liens, security
interests, pledges, charges, encumbrances, stockholders' agreements, and voting
trusts (except those created by this Agreement and the Custodial Agreement and
those which have been terminated prior to the execution hereof). When delivered
in accordance with the terms of this Agreement, to such counsel's knowledge,
Hampshire shall receive good title to the Selling Shareholder Firm Stock and/or
Selling Shareholder Additional Stock purchased by it from each Firm Selling
Shareholder or Additional Selling Shareholder, respectively, free and clear of
all liens,
<PAGE>
security interests, pledges, charges, encumbrances, stockholders' agreements,
and voting trusts.
In rendering such opinion, counsel for the Selling Shareholders may rely
(A) as to matters involving the application of laws other than the laws of the
United States and the laws of the States of Delaware and New York, to the extent
counsel for the Selling Shareholder deems proper and to the extent specified in
such opinion, upon an opinion or opinions (in form and substance reasonably
satisfactory to counsel for the Underwriters) of other counsel, reasonably
acceptable to counsel for the Underwriters, familiar with the applicable laws,
in which case the opinion of counsel for the Selling Shareholders shall state
that the opinion or opinions of such other counsel are satisfactory in scope,
form, and substance to counsel for the Selling Shareholders and that reliance
thereon by counsel for the Selling Shareholders and counsel for the Underwriters
is reasonable; and (B) as to matters of fact, to the extent proper, on
certificates of responsible officers of the Company; provided, that copies of
any such opinions, certificates, or statements shall be annexed as exhibits to
the opinion of counsel for the Selling Shareholders.
(c) On or prior to the Closing Date and any Additional Closing Date,
as the case may be, the Underwriters shall have been furnished such information,
documents, certificates, and opinions as they may reasonably require for the
purpose of enabling them to review the matters referred to in Section 7(b), and
in order to evidence the accuracy, completeness, or satisfaction of any of the
representations, warranties, covenants, agreements, or conditions herein
contained, or as the Representative may reasonably request.
(d) At the Closing Date or any Additional Closing Date, as the case
may be, (i) the Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be stated
therein in accordance with the Securities Act and the Regulations, and in all
material respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) there shall have been, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, no material adverse change, or any development involving a
prospective material adverse change, in the business, properties, or condition
(financial or otherwise), results of operations, capital stock, long-term or
short-term debt, or general affairs of the Company and its Subsidiaries taken as
a whole from that set forth in the Registration Statement and the Prospectus,
except changes which the Registration Statement and Prospectus indicate might
occur after the date on which the Registration Statement becomes effective under
the Securities Act, and neither the Company nor any Subsidiary shall have
incurred any material liabilities or entered into any agreements not in the
ordinary course of business other than as referred to in the Registration
Statement and Prospectus, (iii) except as set forth in the Prospectus, no
litigation, arbitration,
<PAGE>
claim, governmental or other proceeding (formal or informal), or investigation
shall be pending, threatened, or in prospect (or any basis therefor) with
respect to the Company or any Subsidiary or any of their respective operations,
businesses, properties, or assets which would be required to be set forth in the
Registration Statement, wherein an unfavorable decision, ruling, or finding
would materially adversely affect the business, property, condition (financial
or otherwise), results of operations, or general affairs of the Company or such
Subsidiary, and (iv) the Stock shall have been approved for quotation, and shall
continue to be quoted, upon the Nasdaq National Market.
(e) At the Closing Date and any Additional Closing Date, as the case
may be, you shall have received a certificate of the chief executive officer,
the chief financial officer, and the chief accounting officer of the Company,
dated the Closing Date or such Additional Closing Date, as the case may be, to
the effect, among other things, that (i) the conditions set forth in Sections
7(a) and 7(d) have been satisfied, (ii) as of the date of this Agreement and as
of the Closing Date or such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein were and are
accurate and correct in all materials respects, and (iii) as of the Closing Date
or such Additional Closing Date, as the case may be, the obligations to be
performed by the Company hereunder on or prior to such time have been fully
performed. At Closing Date and any Additional Closing Date, as the case may be,
you shall have received a certificate of a duly appointed attorney-in-fact for
each of the Selling Shareholders, dated such Additional Closing Date, that, as
of the date of this Agreement and as of such Additional Closing Date, the
representations and warranties of each of the Selling Shareholders selling
shares of Common stock on such date contained herein were and are accurate and
correct in all material respects, and that as of the Closing Date or such
Additional Closing Date, as the case may be, the obligations to be performed by
such Selling Shareholders hereunder on or prior thereto have been fully
performed.
(f) At the time this Agreement is executed and at the Closing Date
and any Additional Closing Date, as the case may be, you shall have received a
letter, addressed to the Underwriters, and in form and substance satisfactory to
the Representative, with reproduced copies or signed counterparts thereof for
each of the Underwriters, from Lurie, Besikof, Lapidus & Co., P.L.L.P.,
independent certified public accountants for the Company and the Subsidiaries,
dated the date of delivery:
(i) confirming that they are, and during the period covered by
their report(s) included in the Registration Statement and the Prospectus were,
independent certified public accountants with respect to the Company and each of
the Subsidiaries within the meaning of the Securities Act and the published
Regulations and stating that the answer to Item 10 of the Registration Statement
is correct insofar as it relates to them;
(ii) stating that, in their opinion, the consolidated financial
statements and schedules of the Company and the financial statement of each of
ProfitKey, Bizware, and Level
<PAGE>
8 included in the Registration Statement examined by them comply in form in all
material respects with the applicable accounting requirements of the Securities
Act and the Regulations;
(iii) stating that, on the basis of procedures (but not an
examination made in accordance with generally accepted auditing standards)
consisting of a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim consolidated financial statements), a reading of the
latest available minutes of the stockholders and Boards of Directors of the
Company and the Subsidiaries and committees of such Board of Directors,
inquiries to certain officers and other employees of the Company and the
Subsidiaries responsible for financial and accounting matters, and other
specified procedures and inquiries, nothing has come to their attention that
caused them to believe that: (A) the unaudited consolidated financial statements
and schedules of the Company and the Subsidiaries included in the Registration
Statement and Prospectus do not comply in form in all material respects with the
applicable accounting requirements of the Securities Act and the Exchange Act
and the related published rules and regulations under the Securities Act or the
Exchange Act or are not fairly presented in conformity with generally accepted
accounting principles in effect on the date hereof in the United States (except
to the extent that certain footnote disclosures regarding any stub period may
have been omitted in accordance with the applicable rules of the Commission
under the Exchange Act) applied on a basis consistent with that of the audited
consolidated financial statements appearing therein; (B) there was any change in
the capital stock or consolidated long-term debt of the Company or any decrease
in the net current assets or stockholders' equity of the Company on a
consolidated basis as of the date of the latest available monthly consolidated
financial statements of the Company and the Subsidiaries as of a specified date
not more than five business days prior to the date of such letter, each as
compared with the amounts shown in the March 31, 1995 unaudited consolidated
balance sheet included in the Registration Statement and Prospectus, other than
as properly described in the Registration Statement and Prospectus or any change
or decrease (which shall be set forth therein) which, in the sole discretion of
the Representative, the Representative shall accept, or (C) there was any
decrease in consolidated net sales, consolidated net earnings, or consolidated
net earnings per share of Common Stock during the period from March 31, 1995 to
the date of the latest available monthly unaudited consolidated financial
statements of the Company or to a specified date not more than five business
days prior to the date of such letter, each as compared with the corresponding
period in 1994, other than as properly described in the Registration Statement
and Prospectus or any decrease (which shall be set forth therein) which, the
sole discretion of the Representative, the Representative shall accept;
<PAGE>
and
(iv) stating that they have compared specific numerical data and
financial information pertaining to the Company set forth in the Registration
Statement, which have been specified by the Representative prior to the date of
this Agreement, to the extent that such data and information may be derived from
the general accounting records of the Company, and excluding any questions
requiring an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate procedures
(which procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(g) All proceedings taken in connection with the issuance, sale,
transfer, and delivery of the Securities shall be satisfactory in form and
substance to the Representative and to counsel for the Underwriters, and the
Underwriters shall have received from such counsel for the Underwriters the
opinion, dated as of the Closing Date and the Additional Closing Date, as the
case may be, with respect to such of the matters set forth under Section 7(b),
and with respect to such other related matters, as the Representative may
reasonably request.
(h) The NASD, upon review of the terms of the public offering of the
Stock shall not have objected to the Underwriters' participation in such
offering.
(i) Prior to or on the Closing Date, the Company shall have entered
into the Representative's Warrants with the Representative.
(j) Prior to or on the Closing Date, the Company shall have provided
to you copies of the agreements referred to in Section 2(a)(18).
Any certificate or other document signed by any officer of the Company and
delivered to the Representative or to counsel for the Underwriters as required
under this Agreement shall be deemed a representation and warranty by the
Company hereunder to the Underwriters as to the statements made therein. Any
certificate or other document signed by, or on behalf of, any Selling
Shareholder and delivered to the Underwriters or to counsel for the Underwriters
as required under this Agreement shall be deemed a representation and warranty
by such Selling Shareholder hereunder to the Underwriters as to the statement
made therein. If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or any Additional Closing Date, as the
case may be, is not so fulfilled in all material respects, the Representative
may, on behalf of the several Underwriters, terminate this Agreement in writing
or, if the Representative so elects, in writing waive any such conditions which
have not been fulfilled or extend the time for their fulfillment.
(k) At the Closing Date and any Additional Closing Date, as the case
may be, you shall have received the opinion of Adessky Poulin, Canadian counsel
for the Company, or such
<PAGE>
other Canadian counsel as shall be reasonably satisfactory to counsel for the
Underwriters, dated the date of delivery, addressed to the Underwriters, and in
form and substance reasonably satisfactory to counsel for the Underwriters, with
reproduced copies or signed counterparts thereof for each of the Underwriters.
8. Indemnification and Contribution.
(d) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Underwriter, its officers, directors,
partners, employees, agents, and counsel, each Selling Shareholder, and each
person, if any, who controls any Underwriter or Selling Shareholder within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, against any and all loss, liability, claim, damage, and expense whatsoever
(which shall include, for all purposes of this Section 8, but not be limited to,
attorneys' fees and any and all reasonable expenses incurred in investigating,
preparing, or defending against any litigation, commenced or threatened, or any
claim whatsoever and any and all amounts paid in settlement of any claim or
litigation) as and when incurred arising out of, based upon, or in connection
with, (i) any untrue statement or alleged untrue statement of a material fact
contained in (A) the Registration Statement, any Preliminary Prospectus, or the
Prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto or (B) any application or other document or communication
(for purposes of this Section 8, collectively referred to as an "application")
executed by, or on behalf of, the Company or based upon written information
furnished by, or on behalf of, the Company filed in any jurisdiction in order to
qualify the Securities under the "blue sky" or securities laws thereof or filed
with the Commission or any securities exchange; or any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, unless such statement or omission
was made in reliance upon, and in conformity with, written information furnished
to the Company as stated in Section 8(b) with respect to any Underwriter by, or
on behalf of, such Underwriter through the Representative or as stated in
Section 8(c) with respect to any Selling Shareholder by, or on behalf of, such
Selling Shareholder expressly for inclusion in the Registration Statement, any
Preliminary Prospectus, or the Prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant, or agreement of the Company contained in
this Agreement. The foregoing agreement to indemnify shall be in addition to
any liability the Company may otherwise have, including liabilities arising
under this Agreement.
If any action is brought against an Underwriter or any of its respective
officers, directors, partners, employees, agents, or counsel, any Selling
Shareholder, or any controlling persons of an Underwriter or Selling Shareholder
(an "indemnified party") in respect of which indemnity may be sought against the
Company pursuant to the foregoing paragraph, such indemnified party or parties
<PAGE>
shall promptly notify the Company in writing of the institution of such action
(but the failure so to notify shall not relieve the Company from any liability
it may have other than pursuant to this Section 8(a)) and the Company shall
promptly assume the defense of such action, including, without limitation, the
employment of counsel reasonably satisfactory to such indemnified party or
parties and payment of reasonable expenses. Such indemnified party or parties
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel satisfactory to
such indemnified party or parties to have charge of the defense of such action
or such indemnified party or parties shall have concluded that there may be one
or more legal defenses available to it or them or to other indemnified parties
which are different from, or in addition to, those available to the Company, in
any of which events such reasonable fees and expenses shall be borne by the
Company, and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this
paragraph to the contrary notwithstanding, the Company shall not be liable for
any settlement of any such claim or action effected without its written consent,
which consent shall not be unreasonably withheld. The Company shall not,
without the prior written consent of each indemnified party that is not released
as described in this sentence, settle or compromise any action, or permit a
default or consent to the entry of judgment or otherwise seek to terminate any
pending or threatened action, in respect of which indemnity may be sought
hereunder (whether or not any indemnified party is a party thereto), unless such
settlement, compromise, consent, or termination includes an unconditional
release of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Underwriters and the Selling
Shareholders of the commencement of any litigation or proceedings against the
Company or any of its officers or directors in connection with the sale of the
Securities, the Registration Statement, any Preliminary Prospectus, or the
Prospectus, or any amendment or supplement thereto, or any application.
(e) Each Underwriter severally agrees to indemnify and hold
harmless the Company, the Selling Shareholders, each director of the Company,
each officer of the Company who shall have signed the Registration Statement,
and each other person, if any, who controls the Company or any Selling
Shareholder within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
the Company to the several Underwriters and the Selling Shareholders in Section
8(a), but only with respect to statements or omissions, if any, made in the
Registration Statement, any Preliminary Prospectus, or the Prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
or in any application, in reliance upon, and in conformity with, written
information furnished to the Company as stated in this Section 8(b) with respect
to any Underwriter by, or on behalf of, such Underwriter through the
Representative expressly for inclusion in the Registration Statement, any
Preliminary Prospectus, or the Prospectus, or any amendment or supplement
thereto, or on any application, as the case may be; provided, however, that the
obligation of each Underwriter to provide indemnity under the provisions of this
Section 8(b) shall be limited to the amount which represents the product of (i)
the number of shares of Stock underwritten by such Underwriter hereunder and the
(ii) the underwriting discount per share of Common Stock set forth on the cover
page of the Prospectus. For all purposes of this Agreement, the amounts of the
selling concession and reallowance and the name of each of the Underwriters, and
the number of shares of Firm Stock purchased by each of the Underwriters set
forth in the Prospectus constitute the only information furnished in writing by,
or on behalf of, such Underwriter expressly for inclusion in the Registration
Statement, any Preliminary Prospectus, or the Prospectus (as from time to time
amended or supplemented), or any amendment
<PAGE>
or supplement thereto, any application, as the case may be. If any action shall
be brought against the Company, any Selling Shareholder, or any other person so
indemnified based on the Registration Statement, any Preliminary Prospectus, or
the Prospectus, or any amendment or supplement thereto, or any application, and
in respect of which indemnity may be sought against any Underwriter pursuant to
this Section 8(b), such Underwriter shall have the rights and duties given to
the Company, and the Company, the Selling Shareholders, and each other person so
indemnified shall have the rights and duties given to the indemnified parties,
by the provisions of Section 8(a). The foregoing agreement to indemnify shall
be in addition to any liability the Underwriters may otherwise have, including
liabilities arising out of this Agreement.
(f) Each Selling Shareholder severally agrees to indemnify and
hold harmless the Company, each director of the Company, each officer of the
Company who shall have signed the Registration Statement, each Underwriter, each
officer, director, partner, employee, agent, and counsel of each Underwriter,
and each other person, if any, who controls the Company or any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
the several Underwriters in Section 8(a), but only with respect to (i)
statements or omissions, if any, made in the Registration Statement, any
Preliminary Prospectus, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any application in
reliance upon, and in conformity with, written information furnished to the
Company by, or on behalf of, such Selling Shareholder expressly for inclusion in
the Registration Statement, any Preliminary Prospectus, or the Prospectus, or
any amendment or supplement thereto, or in any application, as the case may be,
or (ii) any breach of any representation, warranty, covenant, or
<PAGE>
agreement of such Selling Shareholder contained in this Agreement. For all
purposes of this Agreement, information with respect to any Selling Shareholder
set forth under "Principal and Selling Shareholders" shall constitute the only
information furnished in writing with respect to such Selling Shareholder by, or
on behalf of, such Selling Shareholder expressly for inclusion in any the
Registration Statement, any Preliminary Prospectus, or the Prospectus (as from
time to time amended or supplemented), or any amendment or supplement thereto,
or in any application, as the case may be. In case any action shall be brought
against the Company, any Underwriter, or any other person so indemnified based
on the Registration Statement, any Preliminary Prospectus, or the Prospectus, or
any amendment or supplement thereto, or on any application, or with respect to
any such breach, and in respect of which indemnity may be sought against any
Selling Shareholder, such Selling Shareholder shall have the rights and duties
given to the Company, and the Company, the Underwriters, and each other person
so indemnified shall have the rights and duties given to the indemnified
parties, by the provisions of Section 8(a). The foregoing agreement to
indemnify shall be in addition to any liability the Selling Shareholders may
otherwise have, including liabilities arising out of this Agreement.
(g) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 8(a),
8(b), or 8(c) (subject to the limitations thereof) but it is found in a final
judicial determination, not subject to further appeal, that such indemnification
may not be enforced in such case, even though this Agreement expressly provides
for indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Securities Act, the Exchange Act, or otherwise,
then the Company (including for this purpose any contribution made by, or on
behalf of, any director of the Company, any officer of the Company who signed
the Registration Statement, and any controlling person of the Company), as one
entity, the Selling Shareholders, as a second entity, and the Underwriters
(including for this purpose any contribution by, or on behalf of, an indemnified
party) as a third entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, so that
the Underwriters, in the aggregate, are responsible for the proportion thereof
equal to the percentage which the underwriting discount and commission per share
of Common Stock set forth on the cover page of the Prospectus represents of the
initial public offering price per share of
<PAGE>
Common Stock set forth on the cover page of the Prospectus and the Company and
the Selling Shareholders are responsible for the remaining portion; provided,
however, that if applicable law does not permit such allocation, then other
relevant equitable considerations such as the relative fault of the Company, the
Selling Shareholders, and the Underwriters in connection with the facts which
resulted in such losses, liabilities, claims, damages, and expenses shall also
be considered. The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company, by the Selling
Shareholders, or by the Underwriters, and the parties' relative intent,
knowledge, access to in- formation, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company, the
Selling Shareholders, and the Underwriters agree that it would be unjust and
inequitable if the respective obligations of the Company, the Selling
Shareholders, and the Underwriters for contribution were determined by pro rata
or per capita allocation of the aggregate losses, liabilities, claims, damages,
and expenses (even if the Underwriters and the other indemnified parties were
treated as one entity for such purpose) or by any other method of allocation
that does not reflect the equitable considerations referred to in this Section
8(d). No person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For purposes of
this Section 8(d), each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
and each officer, director, partner, employee, agent, and counsel of any
Underwriter shall have the same rights to contribution as such Underwriter, each
person, if any, who controls any Selling Shareholder within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, shall
have the same rights to contribution as the Selling Shareholders, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, each officer of the Company
who shall have signed the Registration Statement and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to the provisions of this Section 8(d). Anything in this Section 8(d)
to the contrary notwithstanding, no party shall be liable for contribution with
respect to the settlement of any claim or action effected without its written
consent. This Section 8(d) is intended to supersede any right to contribution
under the Securities Act, the Exchange Act, or otherwise.
9. Default by an Underwriter.
(h) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Stock hereunder, and if the number of shares
of Firm Stock to which the defaults of all Underwriters in the aggregate relate
does not exceed 10% of the number of shares of Firm Stock, which all
Underwriters have agreed to purchase hereunder, then such shares of Firm Stock
to which such defaults relate shall be purchased by the non-defaulting
Underwriters in proportion to their respective commitments hereunder.
(i) If such defaults exceed in the aggregate 10% of the number
of shares of Firm Stock, which all Underwriters have agreed to purchase
hereunder, the Representative may, in its discretion, arrange to purchase itself
or for another party or parties to purchase such shares of Firm Stock to which
such default relates on the terms contained herein. If the Representative does
not arrange for the purchase of such shares of Firm Stock within one business
day after the occurrence of defaults relating to in excess of 10% of the Firm
Stock, then the Company shall be entitled to a further period of one business
day within which to procure another party or parties satisfactory to the
Representative to purchase such shares of Firm
<PAGE>
Stock on such terms. If the Representative or the Company do not arrange for
the purchase of the shares of Firm Stock to which such defaults relate as
provided in this Section 9(b), this Agreement may be terminated by the
Representative or by the Company without liability on the part of the Company
(except that the provisions of Sections 6, 8, 10, and 13 shall survive such
termination) or the several Underwriters, but nothing in this Agreement shall
relieve a defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for any damages occasioned by its default
hereunder.
(j) If the shares of Firm Stock to which such defaults relate
are to be purchased by the non-defaulting Underwriters, or are to be purchased
by another party or parties as aforesaid, the Representative or the Company
shall have the right to postpone the Closing Date for a reasonable period but
not in any event more than seven business days in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus or in any other documents and arrangements with respect to the Firm
Stock, and the Company agrees to prepare and file promptly any amendment or
supplement to the Registration Statement or the Prospectus which in the
reasonable opinion of counsel for the Underwriters may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 as if such party had originally been a
party to this Agreement and had been allocated the number of shares of Firm
Stock actually purchased by it as a result of its original commitment to
purchase Firm Stock and its purchase of shares of Firm Stock pursuant to this
Section 9.
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriters, the
Company, and the Selling Shareholders, including the indemnity and contribution
agreements contained in Section 8, shall remain operative and in full force and
effect regardless of any investigation made by, or on behalf of, any Underwriter
or any indemnified person, or by, or on behalf of, the Company, the Selling
Shareholders, or any person or entity which is entitled to be indemnified under
Section 8(b), and shall survive termination of this Agreement or the delivery of
the Firm Stock and the Additional Stock, if any, to the several Underwriters.
In addition, the provisions of Sections 6, 8, 10, 11, and 13 shall survive
termination of this Agreement, whether such termination occurs before or after
the Closing Date or any Additional Closing Date. Notwithstanding anything in
the second or third sentences of Section 6 hereof to the contrary, and
<PAGE>
in addition to the obligations assumed by the Company pursuant to the first
sentence of Section 6 hereof, if the offering should be terminated, the Company
shall be liable to the Underwriters only for out-of-pocket expenses incurred by
the Underwriters in connection with this Agreement or the proposed, offer, sale,
and delivery of the Securities.
11. Effective Date of This Agreement and Termination Thereof.
(k) This Agreement shall become effective at 9:30 A.M., New York
City local time, on the first full business day following the day on which the
Registration Statement becomes effective under the Securities Act or at the time
of the initial public offering by the Underwriters of the Firm Stock, whichever
is earlier. The time of the initial public offering shall mean the time, after
the Registration Statement becomes effective under the Securities Act, of the
release by the Representative for publication of the first newspaper
advertisement which is subsequently published relating to the Firm Stock or the
time, after the Registration Statement becomes effective under the Securities
Act, when the Firm Stock is first released by the Representative for offering by
the Underwriters or dealers by letter or telegram, whichever shall first occur.
The Representative shall promptly notify the Company of the time of the initial
public offering. The Representative or the Company may prevent this Agreement
from becoming effective without liability of any party to any other party,
except as noted below in this Section 11, by giving the notice indicated in
Section 11(d) before the time this Agreement becomes effective.
(l) If the purchase price of the Firm Stock has not been
determined as provided for in Section 3 prior to 4:30 p.m., New York City local
time, on the fifth full business day after the date on which the Registration
Statement was declared effective under the Securities Act, this Agreement may
be terminated at any time thereafter either by the Representative or by the
Company by giving notice to the other unless before such termination the
purchase price for the Firm Stock has been so determined. If the purchase price
of the Firm Stock has not been so determined prior to 4:30 p.m., New York City
local time, on the tenth full business day after the date on which the
Registration Statement was declared effective under the Securities Act, this
Agreement shall automatically terminate forthwith.
(m) In addition to the right to terminate this Agreement
pursuant to Sections 7 and 9 hereof, the Representative shall have the right to
terminate this Agreement at any time prior to the Closing Date or any Additional
Closing Date, as the case may be, by giving notice to the Company and the
Selling Shareholders, and, if exercised, the Over-allotment Option, at any time
prior to any Additional Closing Date, by giving notice to the Company, (i) if
any domestic or international event, act, or occurrence has materially and
adversely disrupted, or, in the opinion of the Representative, will in the
immediate future materially and adversely disrupt, the securities markets; or
(ii) if there shall have been a general suspension of, or a general limitation
on prices for, trading in securities on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market; or (iii) if there
shall have been an outbreak or increase in the level of
<PAGE>
major hostilities or other national or international calamity; or (iv) if a
banking moratorium has been declared by a state or federal authority; or (v) if
a moratorium in foreign exchange trading by major international banks or persons
has been declared; or (vi) if there shall have been a material interruption in
the mail service or other means of communication within the United States; or
(vii) if the Company shall have sustained a material or substantial loss by
fire, flood, accident, hurricane, earthquake, theft, sabotage, or other calamity
or malicious act, whether or not such loss shall have been insured, or from any
labor dispute or court or government action, order, or decree, which will, in
the opinion of the Representative, make it inadvisable to proceed with the
offering, sale, or delivery of the Firm Stock or the Additional Stock, as the
case may be; or (viii) if any material governmental restrictions shall have been
imposed on trading in securities in general, which restrictions are not in
effect on the date hereof; or (ix) if there shall be passed by the Congress of
the United States or by any state legislature any act or measure, or adopted by
any governmental body or authoritative accounting institute or board, or any
governmental executive, any orders, rules, or regulations, which the
Representative believes likely to have a material adverse effect on the
business, financial condition, or financial statements of the Company or any of
the Subsidiaries or the market for the Common Stock; or (x) if there shall have
been such material and adverse change in the market for the Company's
securities or securities in general or in political, financial, or economic
conditions as in the judgment of the Representative makes it inadvisable to
proceed with the offering, sale, and delivery of the Firm Stock or the
Additional Stock, as the case may be, on the terms contemplated by the
Prospectus.
(n) If the Representative elects to prevent this Agreement from
becoming effective, as provided in this Section 11, or to terminate this
Agreement pursuant to Section 7 of this Agreement or this Section 11, the
Representative shall notify the Company and the Selling Shareholders promptly by
telephone, telex, or telegram, confirmed by letter. If, as so provided, the
Company elects to prevent this Agreement from becoming effective or to terminate
this Agreement, the Company shall notify the Representative and the Selling
Shareholders promptly by telephone, telex, or telegram, confirmed by letter.
(o) Anything in this Agreement to the contrary notwithstanding
other than Section 11(f), if this Agreement shall not become effective by reason
of an election pursuant to this Section 11 or if this Agreement shall terminate
or shall otherwise not be carried out within the time specified herein by reason
of any failure on the part of the Company or any Selling Shareholder
<PAGE>
to perform any covenant or agreement or satisfy any condition of this Agreement
by it to be performed or satisfied, the sole liability of the Company or any
Selling Shareholder to the several Underwriters, in addition to the obligations
the Company and the Selling Shareholders assumed pursuant to the first sentence
of Section 6, will be to reimburse the several Underwriters for such
out-of-pocket expenses (including the fees and disbursements of their counsel)
as shall have been incurred by them in connection with this Agreement or the
proposed offer, sale, and delivery of the Securities, and, upon demand, the
Company and each of the Selling Shareholders, severally, agrees to pay promptly
the full amount thereof to the Representative for the respective accounts of the
Underwriters. Anything in this Agreement to the contrary notwithstanding other
than Section 11(f), if this Agreement shall not be carried out within the time
specified herein for any reason other than the failure on the part of the
Company or any Selling Shareholder to perform any covenant or agreement or
satisfy any condition of this Agreement by it to be performed or satisfied, the
Company and the Selling Shareholders shall have no liability to the several
Underwriters other than for obligations assumed by the Company and the Selling
Shareholders pursuant to Section 6.
(p) Notwithstanding any election hereunder or any termination of
this Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 6, 8, 10, and 13 shall not be in any way affected by
such election or termination or failure to carry out the terms of this Agreement
or any part hereof. Notwithstanding anything in the second or third sentences
of Section 6 hereof to the contrary, and in addition to the obligations assumed
by the Company pursuant to the first sentence of Section 6 hereof, if the
offering should be terminated, the Company shall be liable to the several
Underwriters only for out-of-pocket expenses incurred by the several
Underwriters in connection with this Agreement or the proposed, offer, sale, and
delivery of the Securities.
12. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
by letter, to such Underwriter, c/o Hampshire Securities Corporation, 640 Fifth
Avenue, New York, New York 10019, Attention: Mr. Leo T. Abbe, Executive Vice
President, with a copy to Brock Fensterstock Silverstein McAuliffe & Wade LLC,
One Citicorp Center, 56th Floor, New York, New York 10022, Attention: Robert
Steven Brown, Esq.; or if sent to the Company or any Selling Shareholder, shall
be mailed, delivered, or telexed or telegraphed and confirmed by letter, to the
Company, Level 8 Systems, Inc., ____________, Attention: Mr. Robert R.
MacDonald, Chairman of the Board of Directors, with a copy to Proskauer Rose
Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York 10036, Attention:
<PAGE>
Edward W. Kerson, Esq. All notices hereunder shall be effective upon receipt by
the party to which it is addressed.
13. Parties. Hampshire represents that it is authorized to act as
Representative on behalf of the several Underwriters named in Schedule I hereto,
and the Company and the Selling Shareholders shall be entitled to act and rely
on any request, notice, consent, waiver, or agreement purportedly given on
behalf of the Underwriters when the same shall have been given by Hampshire on
such behalf. Each Selling Shareholder represents that each of the
attorneys-in-fact named in the power of attorney referred to in Section 2(b)(1)
hereof is authorized to act on such Selling Shareholder's behalf, and the
Underwriters and the Company shall be entitled to act and rely upon any request,
notice, consent, waiver, or agreement purportedly given on behalf of such
Selling Shareholder when the same shall have been given by either of such
attorneys-in-fact. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Company, and the Selling
Shareholders and the persons and entities referred to in Section 8 who are
entitled to indemnification or contribution, and their respective successors,
legal representatives, and assigns (which shall not include any buyer, as such,
of the Firm Stock or the Additional Stock), and no other person shall have, or
be construed to have, any legal or equitable right, remedy, or claim under, in
respect of, or by virtue of this Agreement or any provision herein contained.
Notwithstanding anything contained in this Agreement to the contrary, all of the
obligations of the Underwriters hereunder are several and not joint.
14. Construction. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without giving effect to
conflict of laws. Time is of the essence in this Agreement.
15. Consent to Jurisdiction. The Company irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out
of, or relating to, this Agreement, any document or instrument delivered
pursuant to, in connection with, or simultaneously with this Agreement, or a
breach of this Agreement or any such document or instrument. In any such action
or proceeding, the Company waives personal service of any summons, complaint, or
other process and agrees that service thereof may be made in accordance with
Section 12. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear or answer such summons, complaint, or
other process. Should the Company fail to appear or answer within such 30-day
period or such extended
<PAGE>
period, as the case may be, the Company shall be deemed in default and judgment
may be entered against the Company for the amount as demanded in any summons,
complaint, or other process so served.
<PAGE>
If the foregoing correctly sets forth the understandings among the
Representative, the Company, and the Selling Shareholders, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement between us.
Very truly yours,
LEVEL 8 SYSTEMS, INC.
By:
Robert R. MacDonald
Chairman of the Board of Directors
-------------------------------------
Robert R. MacDonald, as Attorney-in-
Fact for each of the Selling
Shareholders
Accepted as of the date first above
written in New York, New York
HAMPSHIRE SECURITIES CORPORATION*
By: -----------------------------------
Leo T. Abbe
Managing Director
*On behalf of itself and the other several
Underwriters named in Schedule I hereto.
<PAGE>
SCHEDULE I
Total
Number
of Shares
to be
Underwriter Purchased
Hampshire Securities Corporation
-----------
Total 1,000,000
<PAGE>
SCHEDULE II
Name of Selling Shareholder
Number of Shares
of Selling
Shareholder Firm
Stock
Number of Shares
of Selling
Shareholder
Additional Stock
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
LEVEL 8 SYSTEMS, INC.
(Under Section 402 of the Business Corporation Law)
FIRST. The name of the corporation is Level 8 Systems, Inc.
SECOND. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Business Corporation
Law. The Corporation is not formed to engage in any act or activity requiring
the consent or approval of any state official, department, board, agency or
other body without such consent or approval first being obtained.
THIRD. The office of the Corporation in the State of New York shall be
located in the county of New York.
FOURTH. The Corporation shall have the authority to issue 16,000,000
shares, consisting of 15,000,000 shares of common stock, par value $.01 per
share, and 1,000,000 shares of preferred stock, par value $.01 per share. The
board of directors may authorize the issuance from time to time of the preferred
stock in one or more series and with such designations and such powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof (which may differ with respect to each series) as the board may fix by
resolution.
FIFTH. The Secretary of State of the State of New York is hereby
designated as the agent of the Corporation upon whom process against the
Corporation may be served. The post office address to which the Secretary of
State shall mail a copy of any proceedings against the Corporation served upon
him is:
Robert R. MacDonald
Across Data Systems, Inc.
382 Main Street
Salem, New Hampshire 03079
SIXTH. A director of the Corporation shall not be liable to the
Corporation or its shareholders for damages for any breach of duty in such
capacity except for:
(i) liability if a judgment or other final adjudication adverse to a
director establishes that his or her acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that the
director personally gained in fact a financial profit or other advantage to
which he or she was not legally entitled or that the director's acts violated
Section 719 of the Business Corporation Law, or
(ii) liability for any act or omission prior to the adoption of this
provision.
Any repeal or modification of this Article by the shareholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification with respect
to acts or omissions occurring prior to such repeal or modification.
SEVENTH. No holder of any shares of any class shall have any preemptive
right to purchase any other shares or securities of any class that may at any
time be sold or offered for sale by the Corporation.
We have subscribed this certificate on the date set forth below and
affirm, under the penalties of perjury, that the statements contained in it are
true.
July 7, 1988
/S/ Elizabeth A. McNally
------------------------
<PAGE>
EXHIBIT 5.1
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036-8299
(212) 969-3000
November 1, 1996
Level 8 Systems, Inc.
One Penn Plaza, Suite 3401
New York, New York 10119
Ladies and Gentlemen:
We have acted as special counsel to Level 8 Systems, Inc. (the
"Company"), a New York corporation, in connection with the preparation and
filing of the Company's Registration Statement on Form S-1 (Registration No.
333- ) (the "Registration Statement") under the Securities Act of 1933,
as amended, relating to the proposed offering by the Company of 600,000 shares
of its common stock (plus up to 30,000 additional shares of its common stock to
cover over-allotments), the proposed offering by certain selling shareholders of
up to 400,000 shares of the Company's common stock (plus up to 120,000 to cover
over-allotments) and the proposed sale of warrants (the "Warrants") to purchase
100,000 shares of the Company's common stock.
We have made such investigation and examined such documents and
records (including certificates of certain public officials and certificates
furnished by officers of the Company) as we have deemed necessary, and on that
basis we are of the following opinion:
1. The shares of the Company's common stock to be offered by the
Company to the public pursuant to the Registration Statement (including the
additional shares issuable to cover over-allotments) have been duly authorized
and, when issued and paid for in the manner described in the Registration
Statement, will be validly issued and fully paid and nonassessable (subject to
Section 630 of the New York Business Corporation Law).
2. The shares of the Company's common stock to be offered by certain
selling shareholders to the public
<PAGE>
Level 8 Systems, Inc.
November 1, 1996
Page 2
pursuant to the Registration Statement have been duly authorized and are
validly issued and fully paid and nonassessable (subject to Section 630
of the New York Business Corporation Law).
3. The Warrants to be sold by the Company pursuant to the
Registration Statement have been duly authorized and, after due execution and
delivery by the parties to the Warrants, will constitute legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms, except as may be limited by bankruptcy, insolvency, or other
similar laws affecting the enforcement of creditors' rights generally and
subject to general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
4. The shares of the Company's common stock issuable upon exercise
of the Warrants have been duly authorized and when issued and paid for in
accordance with their terms of the Warrant, will be validly issued and fully
paid and nonassessable (subject to Section 630 of the New York Business
Corporation Law).
We consent to the use of our name under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement and to the use
of this opinion for filing as exhibit 5.1 to the Registration Statement. In
giving this consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
PROSKAUER ROSE GOETZ & MENDELSOHN LLP
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
The EMPLOYMENT AGREEMENT dated March 31, 1995 and as Amended April 6, 1996 by
and between Across Data Systems, Inc, Level 8 Systems, Inc., and Samuel Somech
is hereby amended as follows:
(3.1) Compensation.
The Annual Salary specified in the Employment Agreement shall be
One Hundred Thousand ($100,000) effective October 1, 1995, and
One Hundred Fifty Thousand ($150,000) effective June 1, 1996
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of September 18, 1996.
ACROSS DATA SYSTEMS, INC.
BY: /s/ Arie Kilman
---------------------------------
Arie Kilman, President, C.E.O.
LEVEL 8 SYSTEMS, INC.
BY: /s/ Arie Kilman
---------------------------------
Arie Kilman, Chairman of the Board
/s/ Samuel Somech
- ------------------------------------------
Samuel Somech
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
The EMPLOYMENT AGREEMENT dated May 1, 1995 by and between Across Data Systems,
Inc., a New York corporation ("ACROSS") and Arie Kilman ("Executive") is hereby
amended by replacing paragraphs 2, 3.1, and 3.2 with the following:
(2) Duties. Executive shall be the President and Chief Executive Officer of
ACROSS, in which capacity Executive shall have full responsibility for the
management of the business operations of ACROSS. The scope of Executive's
authority shall at all times be subject to the direction of the Board of
Directors of ACROSS. Executive shall also perform such additional duties
and functions for and on behalf of ACROSS, consistent with his position
and expertise, which may be reasonably requested of him from time to time
by ACROSS' Board of Directors. Executive agrees that he shall devote
substantially all of his working time, energy, skill and best efforts to
the performance of his duties hereunder in a manner which will faithfully
and diligently further the business and interests of ACROSS. Executive
will also hold the title of Chairman and Chief Executive Officer of Liraz
Systems Ltd., and to the extent that Executive works on affairs of Liraz
that are not related to ACROSS, Liraz will reimburse ACROSS at the rate of
$1,200 per day for the time so spent.
(3.1) Salary. ACROSS shall pay Executive as his base compensation for all
services rendered hereunder starting October 1, 1996, an annual gross
salary of Two Hundred Thousand Dollars ($200,000), payable no less
frequently than monthly. ACROSS shall deduct or cause to be deducted from
such salary all taxes and amounts required by law to be withheld
(3.2) Performance Bonus. The Board of Directors will establish a performance
bonus for the Executive each fiscal year after 1996 based on the then
current scope of responsibilities of the Executive and on the projected
budget for ACROSS. The 1996 performance bonus will be $150,000 if ACROSS
completes a public offering of at least $5 million during 1996.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of September 18, 1996.
ACROSS DATA SYSTEMS, INC.
BY: /s/ Robert R. MacDonald
-----------------------------------------
Robert R. MacDonald, Chairman of the Board
EXECUTIVE
/s/ Arie Kilman
- -----------------------------------
Arie Kilman
<PAGE>
Exhibit 10.15A
AMENDMENT TO EMPLOYMENT AGREEMENT
The EMPLOYMENT AGREEMENT dated May 1, 1995 by and between Across Data Systems,
Inc., a New York corporation ("ACROSS") and Robert R. MacDonald ("Executive") is
hereby amended by replacing paragraphs 3.1 and 3.2 with the following:
3.1 Salary. ACROSS shall pay Executive as his base compensation for all
services rendered hereunder an annual gross salary of One Hundred Twenty
Thousand Dollars ($120,000), payable no less frequently than monthly. Effective
February 21, 1996 the gross salary shall be Two Hundred Thousand Dollars
($200,000). Starting in 1997 the base salary shall increase by Ten Percent (10%)
on each anniversary of the Commencement Date. ACROSS shall deduct or cause to
be deducted from such salary all taxes and amounts required by law to be
withheld.
3.2 Performance Bonus. The Board of Directors shall determine the annual
performance bonus to be paid to the Executive.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of February 21, 1996.
ACROSS DATA SYSTEMS, INC.
BY: /s/ Arik Kilman
------------------------------------
Arik Kilman, Chairman of the Board
EXECUTIVE
/s/ Robert R. MacDonald
- ---------------------------
Robert R. MacDonald
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
The EMPLOYMENT AGREEMENT dated May 1, 1995, as amended February 21, 1996, by and
between Across Data Systems, Inc., a New York corporation ("ACROSS") and Robert
R. MacDonald ("Executive") is hereby amended as follows:
1. Effective August 1, 1996, Executive resigns as President and Chief Executive
Officer of Across Data Systems and also resign as President of 3077934
Canada, Inc., as CEO of Bizware Computer Systems and as CEO of ProfitKey
International, Inc. Executive will be paid on or about August 1 his
accrued vacation at his current $200,000 salary.
2. Effective August 1, 1996, Executive is appointed the Chairman of the Board
of Across Data Systems with a salary of $50,000 per year, to be paid twice
monthly. If Executive is not re-elected, is fired, is asked to resign, or
otherwise is removed from the Chairman position prior to July 31, 1997,
the $50,000 salary will be paid by Across until July 31, 1997.
3. To the extent that Executive is asked to work on Across business affairs
that require more than 8 days of work per quarter, Executive will be paid
excess days at the rate of $1,200 per day. Payment may be made on a
project basis or daily rate by agreement of Executive and Across' CEO, and
may be paid in advance at the discretion of the CEO of Across.
4. Executive will be entitled to Across' group insurance and disability plans,
but will not receive other benefits. Executive shall be reimbursed by
Across for all business expenses incurred by Executive in the course of his
performance of services hereunder.
5. Executive's 58,237 options at $0.69 per share are fully vested and can be
exercised at any time up to 90 days after Executive ceases being a member
of the Board of Directors of Across. Vesting of Executive's 59,110
options at $6.60 per share shall be accelerated so that effective August 1,
1996 all of the options are vested and can be exercised at any time up to
90 days after Executive ceases being a member of the Board of Directors of
Across. Executive's 59,200 options at $13.25 shall be canceled effective
August 1, 1996. Options due to Executive upon achieving $100 million
revenues are canceled effective August 1, 1996.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of July 30, 1996.
ACROSS DATA SYSTEMS, INC.
BY: /s/ Arik Kilman,
--------------------------------
Arik Kilman, Chairman of the Board
EXECUTIVE
/s/ Robert R. MacDonald
- -----------------------------------------
Robert R. MacDonald
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
The EMPLOYMENT AGREEMENT dated May 1, 1995 by and between Level 8 Systems, Inc
(previously Across Data Systems, Inc.), a New York corporation ("ACROSS")
and Joseph J. DiZazzo ("Executive") is hereby amended to raise Executive's
annual salary to $75,000 effective November 1, 1996.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF as of October 23, 1996.
LEVEL 8 SYSTEMS, INC.
BY: /s/ Arie Kilman, President, CEO
-------------------------------------
Arie Kilman, President, CEO
EXECUTIVE
/s/ Joseph J. DiZazzo
- ---------------------------------------------
Joseph J. DiZazzo
<PAGE>
PRODUCT PURCHASE AGREEMENT
This PRODUCT PURCHASE AGREEMENT ("PURCHASE AGREEMENT" OR "AGREEMENT") is
entered into on August 30, 1996 ( EFFECTIVE DATE ), by Candle Corporation, a
California corporation with its principal office at 2425 Olympic Boulevard,
Santa Monica, California 90404 ("BUYER"), and Level 8 Systems Inc., a New
York corporation with its principal office at One Penn Plaza, Suite 3401, New
York, New York 10119 ("SELLER"), and refers to the following facts:
RECITALS:
A. Seller and Buyer own, develop and license software products and
provide services;
B. Buyer, Seller and Seller's parent company, Across Data Systems
Inc. ("ACROSS"), entered into a binding letter of intent ("LOI") on
July 25, 1996;
C. Pursuant to the LOI the parties agreed to enter into the
following agreements :
1. A technology license agreement and a distribution agreement
whereby Seller grants to Buyer: a. distribution rights and a technology
license to Seller's product Falcon External Gateway ("FEG"), currently in
development; and b. a 180 day option to enter into a Technology License for
Seller's product DOT/XM, currently in development;
2. This Purchase Agreement whereby Buyer receives from Seller any
and all title, interests and rights to Seller's product MQ Secure
("PRODUCT"), a security product for IBM MQSeries environments, currently in
field test, with general availability expected in the fourth quarter of 1996;
3. A technology license to the Product to enable Seller to integrate
the Product into its product FEG;
4. An agency agreement whereby Seller acquires non-exclusive
distribution rights for certain Buyer products;
5. A stock purchase agreement whereby Buyer purchases stock from
Across and in return receives a seat on the board of directors of Across;
NOW, THEREFORE, Buyer and Seller agree to enter into the following
Purchase Agreement:
1. DEFINITIONS
1.1 "CUSTOMER" means a company or an affiliate thereof, which licensed
from Seller, prior to the Effective Date, any one or more copies of the Product
under the terms of product license agreements, trial or beta test agreements,
or any other agreements between Seller and Customer.
1.2 "AGREEMENTS means the contracts (whether oral or in writing) listed
in Schedule 1, and all correspondence and amendments regarding such agreements
in Seller's Possession or Control.
1.3 "DOCUMENTATION" means the following information in Seller's
Possession or Control: (a) all technical, design, development and
installation information describing the design and development of the
Product, including without limitation source code, source documentation,
source listings and annotations, and test data , the "User's Guides" and all
other such reference manuals and support materials normally distributed to
Customers and potential Customers with the Product.
1.4 "EMPLOYEES" means all officers, agents, affiliates, servants,
contractors, subcontractors and employees of Seller and Buyer.
<PAGE>
1.5 "LIENS" means mortgages, deeds of trust, pledges, security
interests, liens, leases, licenses, liabilities, encumbrances, costs and/or
other similar claims.
1.6 "MARKETING INFORMATION" means the following information in
Seller's Possession or Control: all customer and marketing information and
other materials regarding the Product, including without limitation
strategic data, such as marketing and development plans, forecasts and
forecast assumptions and volumes of Seller which have been or are being
discussed, financial data, including price and cost objectives, price lists,
pricing and quoting policies and procedures; and any kind of Customer data,
such as customer lists, data provided by or about prospective, existing or
past customers.
1.7 "PRODUCT" means the latest version of Seller's software product
known as MQ Secure deliverable to Buyer on the Effective Date, any versions
currently in development and all software programming technology, in both
source and object code form, regardless of the stage of development of any
such technology, any prior version of such programs, any other computer
program which contains a substantial portion of the source code of this
Product, any enhancements, modifications, updates, upgrades and derivative
works and any Documentation.
1.8 "IN SELLER'S POSSESSION OR CONTROL" means in the possession or
under the control of Seller or any of Seller Subsidiary or Affiliate or any
of its respective Employees.
1.9 "A BUYER SUBSIDIARY OR AFFILIATE" OR "A SELLER SUBSIDIARY OR
AFFILIATE" means a person or entity controlled by Buyer or Seller or by a
person or entity controlling Buyer or Seller. For this purpose "control"
means ownership or the right to vote more than 50% of the voting securities
of such entity.
2. PURCHASE AND SALE OF THE PRODUCT. Subject to the terms and conditions
herein set forth, subject to the condition that the Buyer obtains an
assignment of the RSA OEM Master Agreement within ten (10) business days of
the Effective Date and upon the representations and warranties made herein:
2.1(A) SALE OF PRODUCT. On the Effective Date (simultaneously with the
execution of this Agreement), Seller shall sell, grant, transfer, and assign
to Buyer all right, title and interest in and to the Product, including
without limitation any copyrights, tradesecrets, trademarks and patents, and
any rights held by any Seller Affiliate or Subsidiary, free and clear of any
Liens, except as set forth in Schedule 3.6 and shall deliver good, clear and
marketable title to, and possession of, all copies of the Product to Buyer by
electronic transfer, together with such bills of sale, assignments and
instruments of conveyance as Buyer may reasonably request to permit such
delivery. On the Effective Date, title to the Product and risk of loss shall
pass to Buyer.
(B) ASSUMPTION OF CERTAIN LIABILITIES. On the Effective Date, Buyer
shall assumes only those liabilities or obligations regarding the Product
listed in Schedule 2.
2.2 PURCHASE PRICE. Buyer agrees to pay Seller for the transfer of
the Product the following fees:
(A) One Hundred Twenty Five Thousand U.S. Dollars ($125,000.00) in
cash payable to Seller by wire transfer on October 1, 1996 and One Hundred
Twenty Five Thousand US Dollars ($125,000.00) payable when the Product is
generally available to Customers for normal business use upon commercial
terms and conditions but in no event later than January 2, 1997. Such amount
of Two Hundred Fifty Thousand US Dollars ($250,000.00) shall be credited
first towards the compensation due under 2.2(b) below; and
(B) A 20% compensation of the Product list price up to a total of Three
Million ($3,000,000.00) U.S. Dollars (which shall include Buyer's payment of
Two Hundred Fifty Thousand US Dollars) or for a three (3) year period,
whichever comes first, for each Product copy or a major portion thereof,
licensed either as a stand alone or integrated together with other Buyer
products to third parties. In the event Buyer licenses the Product to third
parties
<PAGE>
under an enterprise license containing a siginificant discount from the list
price, the parties will negotiate in good faith a reasonable adjustment of
the foregoing 20% compensation.
2.2.1 Buyer shall pay the compensation to Seller Sixty (60) days after
the end of each calendar quarter, based upon revenue received from third
parties. Concurrent with each quarterly payment, Buyer shall provide Seller
with an accounting of Buyer's net sales revenue for the respective payment
period. At its option and at its own expense, Seller may obtain an independent
accounting of Buyer's net sales of the Product for such payment period. Should
Seller elect to exercise its option pursuant to this Section 2.2.1, Buyer
agrees to cooperate with Seller in such independent accounting, subject to the
confidentiality provision of this Agreement. In the event the parties disagree
on the independent accounting, the parties shall mutually agree to appoint an
independent third party who will arbitrate the dispute subject to the terms of
this Agreement.
2.2.2 The maximum amount of the payments due Seller under this Agreement
shall be Three Million ($3,000,000.00) U.S. Dollars. Buyer shall not owe any
other payments to Seller for the transfer of the Products.
2.3 INDEPENDENCE. Notwithstanding anything to the contrary contained
in this Agreement, Buyer shall have sole and absolute discretion over the
development, use, and naming of the Product, advertising, promotion, marketing,
distribution, pricing, discounting and other exploitation of the Product.
Buyer's decision as to any initial pricing, any price increases or decreases,
and any product use, development and marketing shall be final and conclusive.
2.4 SELLER'S DISTRIBUTION RIGHTS TO PRODUCT. Seller shall have the
right to distribute the Product pursuant to the terms and conditions of a
distribution agreement to be negotiated by the parties. The compensation rates
due under such distribution agreement shall vary between 15% and 50%.
2.5 LICENSE GRANT OF PRODUCT TO SELLER. Subject to the
non-disclosure, indemnity and any other relevant provisions of this Agreement,
Buyer grants to Seller the following licenses to the Product:
2.5.1 A limited, non-exclusive right and license to use, execute, copy
for its internal use only, the object code version of the Product free of
charge; and
2.5.2 A limited, non-exclusive right and license to use, copy, and
create derivative works to the source code version of the Product to integrate
the Product into Seller's product FEG free of charge.
2.5.3 A limited, non-exclusive right and license to sublicense the source
code version of the Product integrated into the FEG and associated distributed
clients to third parties free of charge.
2.5.4 In the event Seller wishes to integrate the Product into any other
products, Buyer and Seller will review each opportunity on a case by case basis.
2.5.5 The rights and licenses granted above are made without
representations and warranties, except that Seller represents and warrants it
has not by its actions encumbered title of the Product rights grant in Section
2.5
2.6 LIABILITIES. Seller will be solely responsible for the
obligations, commitments and liabilities of Seller to its Employees,
distributors, agents, and Customers which arise from the transactions
contemplated by this Agreement or from events up to and including the Effective
Date. Each party shall remain exclusively responsible for the obligations,
commitments and liabilities of its Employees, distributors, and agents after the
Effective Date.
2.7 INVENTIONS. Seller agrees that after the Effective Date any
inventions, works of authorship, designs, concepts, information or ideas
conceived or made by Seller or any Seller Employees, whether solely or jointly
with others, which were or will be incorporated into or used with the Product
("INVENTIONS"), shall belong to Buyer. Seller agrees to assign without further
consideration, and to cause its Employees to assign, all of their
<PAGE>
right, title and interest in and to any such Inventions to Buyer. At Buyer's
expense, Seller will reasonably cooperate with Buyer in obtaining the patents,
copyrights, trademarks or other such rights in such Inventions for Buyer in the
United States and other countries. Seller also agrees that Buyer shall have the
right to keep such Inventions as Proprietary Information if Buyer so chooses.
3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants that each of the following statements is
true, correct and complete as of the date hereof and shall be true as of the
Effective Date:
3.1 EXISTENCE AND RIGHTS. Seller: (a) is a corporation duly organized,
validly existing and in good standing under the laws of the State of New York
without limit as to the duration of its existence, and (b) has all corporate
power and authority to carry out this Agreement and the transactions
contemplated herein.
3.2 AGREEMENT AUTHORIZED. Seller's execution, delivery and performance
of this Agreement has been duly authorized by all necessary corporate and other
action and does not require notice to, or the consent or approval of, any
governmental body or other regulatory authority. This Agreement is a legal,
valid and binding obligation of Seller, enforceable in accordance with its
terms, subject to laws of general application and relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing equitable
remedies.
3.3 NO CONFLICT. Except as set forthin Schedule 3.3, the execution,
delivery and performance of this Agreement will not : (a) modify, breach or
constitute grounds for default under any agreement, indenture, undertaking or
other instrument to which Seller is a party or by which the Product may be bound
or affected; (b) violate any provision of law or any regulation or any order,
judgment, or decree of any court or other agency of government, which could
adversly effect the Product; (c) violate any provision of the Articles of
Incorporation or By-Laws of Seller; or (d) result in the creation or imposition
of (or the obligation to create or impose) any Lien on the Product.
3.4 LIABILITIES. Except as set forth on Schedule 3.4, Seller does not
have any obligations, indebtedness or liabilities, contingent or otherwise,
other than such obligations, indebtedness or liabilities incurred in the
ordinary course of business consistent with prior practice which are not
material to the Product.
3.5 LITIGATION. Except as set forth in Schedule 3.5, there is no
litigation, investigation, arbitration or other proceeding (formal or informal)
pending or, to the best knowledge of Seller, threatened against or affecting the
Product; nor does Seller know or have reason to know of any basis for any such
litigation, investigation, arbitration or other proceeding (formal or informal),
which could adversly effect the Product. Seller is not in default on any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority, and there is no suit, action, investigation or other
proceeding commenced, pending or threatened against or affecting Seller in any
court or before any tribunal or governmental body, in which it is sought to
restrain, prohibit or otherwise adversely affect Seller's ability to perform any
or all its obligations under this Agreement, or the consummation of the
transactions contemplated herein.
3.6 TITLE TO AND CONDITION OF PRODUCT AND INTANGIBLE RIGHTS. Except
regarding the RSA code incorporated into the Product as set forth in Schedule
3.6, Seller has all right, good, clear and marketable title and interest in and
to the Product, including without limitation any rights held by any Seller
Subsidiary or Affiliate. Except as set forth in Schedule 3.6, such Product:
(a) is subject to no Liens, including without limitation any Liens for
non-payment of taxes; (b) the legal rights owned by Seller are adequate and
sufficient to permit Buyer to license or sell the Product; and (c) are either
freely transferable or assignable to Buyer or will not be rendered invalid or
affected in any way by the execution, delivery and performance of this
Agreement. Except as set forth in Schedule 3.6, the Product does not infringe
upon or conflict with any rights of third parties; and to the best knowledge of
Seller, no third party has asserted or is threatening to assert any claim
against Seller concerning such an infringement or conflict.
<PAGE>
3.7 REGISTRATION LIST. Schedule 3.7 lists all patents, copyrights, and
trade and service marks and names, issued or reissued to it, registered, applied
for or pending under Seller's name or assigned to it as of the date hereof, and
that are included in the Product, along with the registration numbers, dates of
issuance and names of the inventors or authors of such patents, marks, names,
and copyrights Seller shall promptly provide any other related information as
reasonably requested by Buyer and available to Seller or under Seller's
Possession or control.
3.8 CONTRACT LIST. Schedule 3.8 lists all written Agreements regarding
the Product or under which Product portion(s) are used, including without
limitation development, trial, license, lease, rental, sale and all related
nondisclosure and/or confidentiality agreements executed by Employees of Seller
(collectively the "AGREEMENTS"), and all other material contracts, commitments
and undertakings (alone or in the aggregate) regarding the Product ("MATERIAL
OBLIGATIONS"), with copies attached. With respect to oral Agreements or
Material Obligations, Schedule 3.8 describes, to the extent reasonably
practical: (a) the parties to the agreements, the nature of the relationships;
(b) the basic terms of the agreements (e.g., exclusive, perpetual license to
use; non-exclusive license to market for five years); (c) the nature of the
technology, rights or information transferred; and (d) whether such agreements
or obligations are assignable in whole or in part to Buyer. All Agreements and
Material Obligations are valid and binding and in full force and effect, except
as noted in Schedule 3.8. Neither Seller nor, to Seller's knowledge, any other
party to such Agreements or Material Obligations is in default, nor to the
knowledge of Seller is there any basis for any claim of default, and Seller has
not waived any right under any Agreements or Material Obligations, except
defaults and waivers immaterial to such Agreements and Material Obligations.
3.9 NO FINDER'S FEES. Neither Seller nor any of its Employees has
employed or incurred any liability to any broker, finder or agent for any
brokerage fees, finder's fees, commissions or other amounts regarding the
transactions contemplated by this Purchase Agreement.
3.10 NO MATERIAL MISSTATEMENTS. Neither this Agreement nor any other
documents, schedules or certificates furnished or to be furnished to Buyer by
or on behalf of Seller hereunder: (a) contains any untrue statement of a
material fact, or (b) omits to state a material fact necessary in order to make
the statements contained herein not misleading. There is no fact known to
Seller or any of its management (other than matters relating to the economy
generally) which, in Seller's opinion, materially and adversely affects the
Product or Seller's ability to carry out the transactions under this Agreement.
4. REPRESENTATION AND WARRANTIES OF BUYER
Buyer represents and warrants that each of the following statements is
true, correct and complete as of the Closing Date:
4.1 EXISTENCE AND RIGHTS. Buyer (a) is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
without limit as to the duration of its existence, and (b) has all corporate
power and authority to carry out this Agreement and the transactions
contemplated herein.
4.2 AGREEMENT AUTHORIZED. Buyer's execution, delivery and performance
of this Agreement has been duly authorized by all necessary corporate and other
action and do not require notice to, or the consent or approval of, any
governmental body or other regulatory authority. This Agreement is a legal,
valid and binding obligation of Buyer, enforceable in accordance with its terms
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and rules of law governing equitable remedies.
4.3 NO CONFLICT. The execution, delivery and performance of this
Agreement will not (a) modify, breach or constitute grounds for the occurrence
or declaration of a default under any agreement, indenture, undertaking or other
instrument to which Buyer is a party or by which any of its material assets may
be bound or affected; (b) violate any provision of law or any regulation or any
order, judgment, or decree of any court or other agency of government, which
could materially effect the summarized financial condition of Buyer subject to
the
<PAGE>
confidentiality provisions set forth in Section 8 below; or (c) violate any
provision of the Articles of Incorporation or By-Laws of Buyer.
4.4 Buyer is not in default on any order, writ, injunction, decree or
demand of any court or other governmental or regulatory authority, and there is
no suit, action, investigation or other proceeding commenced, pending or
threatened against or affecting Buyer in any court or before any tribunal or
governmental body, in which it is sought to restrain, prohibit or otherwise
adversely affect Buyer's ability to perform any or all its obligations under
this Agreement, or the consummation of the transactions contemplated herein.
4.5 NO FINDER'S FEES. Neither Buyer nor any of its employees have
employed or incurred any liability of any broker, finder or agent for any
brokerage fees, finder's fees, commissions or other amounts regarding the
transactions contemplated by this Agreement.
4.6 NO MATERIAL MISSTATEMENTS. Neither this Agreement nor any other
document, schedule or certificate furnished or to be furnished to Seller by or
on behalf of Buyer: (a) contains any untrue statement of a material fact, or
(b) omits to state a material fact necessary in order to make the statements
contained herein not misleading. There is no fact known to Buyer or any of its
management (other than matters relating to the economy generally) which
materially and adversely effects Buyer's ability to carry out the transactions
contemplated by this Agreement.
5. COVENANTS AND AGREEMENTS OF SELLER AND BUYER
5.1 CONDUCT OF BUSINESS From and after the Effective Date of this
Agreement, Seller covenants and agrees:
5.1.1 BUSINESS OPERATIONS. (a) not to transfer, sell or dispose, and has
not transferred, sold or disposed, of the Product or any portions thereof to or
on account of any person, whether in payment of any indebtedness or otherwise;
(b) not to perform and has not performed any act inconsistent with the
representations and warranties of Section 3; and (c) not to make and has not
made any changes (whether by sale, destruction, pledge, lease or otherwise)
regarding the Product, except with Buyer's prior written consent.
5.1.2 CONTRACTS. No contract, obligation, license or other commitment
regarding the Product will be or has been entered into or assumed by or on
behalf of Seller involving incurrence of any Liens.
5.1.3 NO AMENDMENTS. Seller will not terminate, amend or modify, or
allow to be terminated, amended or modified, nor has Seller terminated, amended
or modified or allowed to be terminated, amended or modified any of the
Agreements or Material Obligations or any other agreement or instrument by which
Seller may be bound, if such action would adversely effect the Product or the
ability of Seller to complete this Agreement or the transactions contemplated
hereby.
5.2 COPIES OF THE PRODUCT. On the Effective Date, Seller will
electronically transmit to Buyer at least one complete copy of the Product in
its latest stage of development in Seller's Possession or Control.
5.3 TECHNICAL ASSISTANCE. For a period of two (2) calendar months,
Seller agrees to provide one fulltime employee knowledgeable regarding the
Product, to assist Buyer free of charge with any consulting, education and
technical assistance Buyer may require to make the Product generally available.
Seller agrees to make available to Buyer one additional fulltime employee
knowledgeable regarding the product, to provide an additional sixty (60) days
of telephone assistance to Buyer's Employees free of charge. Should Buyer
require additional training, Seller will provide knowledge regarding the Product
and charge Buyer at an hourly rate of One Hundred and Twenty ($120.00) Dollars,
unless the parties negotiate other fees.
<PAGE>
5.4 CONSENTS. On the Effective Date, Seller will deliver to Buyer all
written consents, if any, necessary to Seller's assignment to Buyer of the
Contracts.
5.5 ASSIGNMENT. On the Effective Date, Seller will deliver to Buyer,
from each person who has authored any portion of the Products, a signed copy of
a short-form copyright assignment or other evidence reasonably acceptable to
Buyer that each such person has no rights to the copyrights in any portion of
the Product, attached as Schedule 4.
5.6 BILL OF SALE. On the Effective Date, Seller will execute and
deliver to Buyer a "Bill of Sale" attached as Schedule 5, and evidence
reasonably acceptable to Buyer that all rights to the assets being transferred
hereunder have been conveyed to Buyer and other evidence of Seller reasonably
acceptable to Buyer that such rights are clear and free of any Liens.
5.7 PURCHASE PRICE. On the Effective Date Buyer will pay to Seller
compensation as set forth in Section 2.2.
6. CONDITION OF SELLER'S OBLIGATIONS
The obligations of Seller to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction on the
Effective Date of the following conditions, any of which may be waived, in
writing, exclusively by Seller:
6.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties of Buyer contained in this Agreement shall be true in all material
respects at and as of the Effective Date, as though made on such date and Buyer
shall have delivered to Seller a certificate, dated on the Effective Date and
signed by an officer of Buyer, to such effect, attached as Schedule 6A.
6.2 COVENANTS. Buyer shall have complied with all agreements and
covenants contained herein to be complied with by Buyer prior to or on the
Effective Date and Buyer shall have delivered to Seller a certificate, dated as
of the Effective Date and signed by an officer of Buyer, to such effect.
6.3 DOCUMENTS. Seller shall have received, in form and substance
satisfactory to Seller and its counsel, each and every other document required
to be delivered to it by this Agreement.
7. CONDITIONS TO BUYER'S OBLIGATIONS
The obligations of Buyer to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction on the
Effective Date of the following conditions, any of which may be waived, in
writing, exclusively by Buyer:
7.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties of Seller contained in this Agreement shall be true and correct on
the Effective Date, as though made as of such date and Seller shall have
delivered to Buyer a certificate, dated of the Effective Date and signed by an
officer of Seller to such effect, attached as Schedule 6B.
7.2 COVENANTS. Seller shall have complied with all agreements and
covenants contained herein to be complied with by Seller prior to or on the
Effective Date and Seller shall have delivered to Buyer a certificate, dated as
of the Effective Date and signed by an officer of Seller to such effect.
7.5 DELIVERY OF THE PRODUCT. Seller shall deliver the Product to Buyer
by electronic transfer on the Effective Date.
<PAGE>
8. CONFIDENTIALITY AND INVENTIONS
8.1 PROPRIETARY INFORMATION. Each party acknowledges that it will have
access to confidential and proprietary information of the other ("PROPRIETARY
INFORMATION"). For purposes of this Agreement, Proprietary Information includes
without limitation, any trade, business or industrial secrets of either party,
and any marketing, financial, customer, business or other related inforamtion
regarding the Product. The parties agree that, upon and after the Effective
Date, all right, title and interest in and to such Product, Marketing
Information, inventions, and any information pertaining to the development,
manufacture, marketing and/or distribution of the Product shall belong to, vest
in, and remain with Buyer.
8.2 IDENTIFICATION AS PROPRIETARY. All other information shall be
confidential only if identified in writing as "confidential" or "proprietary".
8.3 HELD IN CONFIDENCE. All Proprietary Information shall be held in
confidence and neither party shall copy, use, transfer, disclose or exploit the
other party's Proprietary Information to take all reasonable actions to protect
the Proprietary Information in the same manner that a reasonable person protects
its own Proprietary Information, including without limitation access to the
Proprietary Information to those Employees or third parties who reasonably
require such information and who agree to keep such information confidential.
Except as stated in this Agreement, the parties agree that the prohibitions
hereunder against Seller's use or transfer of Proprietary Information include,
but are not limited to the manufacturing, selling, licensing or otherwise
exploiting, directly or indirectly, of any of products or services which embody
or are derived from Proprietary Information, or exercising judgment or
performing analysis or services based upon knowledge of such Proprietary
Information.
After the Effective Date, Seller's Proprietary Information remaining
Seller's property after sale of the Product, shall remain subject to this
Section 8, and all documents and other tangible media regarding such information
(and all copies thereof) given to Buyer by Seller shall be promptly returned to
Seller, and Buyer shall make no further use of such information, and (b) with
respect to Buyer's Proprietary Information (including without limitation the
Product), the agreements of this Section 8 and the Confidentiality Agreement
referenced in this Agreement shall survive and apply, and all documents and
other tangible media pertaining to such information (and all copies thereof)
given to Seller shall be promptly returned to Buyer, and Seller shall make no
further use of such information. No person will be given access to, or a copy
of, any of the information, unless such person has executed a confidentiality
agreement reasonably acceptable to Buyer.
8.4 APPLICABILITY. The provisions of this Section shall not apply to
information which is: available to the public other than by breach of this
Agreement by Seller or its Employees, otherwise rightfully received by Seller or
its Employees from a third party without obligations of confidentiality to
Buyer; independently developed, without incorporation of Proprietary
Information, by Employees of Seller; independently developed by Seller or by
Employees having no access to the Proprietary Information; or disclosed by Buyer
to a third party without restrictions. However, Seller agrees to abide by the
provisions of Section 8, even if Seller has rightfully obtained such information
pursuant to the exceptions outlined in this Section, until Seller has notified
Buyer of such rightful possession and provided a reasonable description of the
method by which such information was obtained, and Buyer has not objected in
writing within fifteen (15) days from receipt of such notice.
8.5 DISCLOSURES. In order to permit Buyer to claim, perfect and
enforce its rights in and to the Proprietary Information, Seller agrees: (i)
to disclose promptly to Buyer in confidence and in writing all Proprietary
Information conceived or made by Seller solely or jointly with others; (ii) to
comply with Buyer's reasonable instructions and to execute and procure all
documents respecting such Proprietary Information as Buyer may reasonably
request to vest, confirm, secure or assign Buyer's right, title and interest
therein (including without limitation related patents and copyrights) in the
United States and any foreign countries; and (iii) to notify and describe to
Buyer in writing all patent and copyright applications related to the Product's
Proprietary Information filed by Seller within five (5) years after the
Effective Date of the contemplated purchase. When Buyer obtains any patent,
copyright or other such protection at its expense (except for labor, overhead
and fixed costs), Seller agrees to
<PAGE>
give Buyer all reasonable assistance in preparing and prosecuting any patent,
copyright or other such application filed by Buyer pursuant to this Section 8,
and shall cause to be executed all assignments and other instruments and
documents as Buyer may consider necessary or appropriate to carry out the
intent of this Section 8.
9. PRODUCT CHANGES
OWNERSHIP. On and after the Effective Date, title and full ownership
rights to any modifications, changes, derivative works and enhancements made to
the Product by Seller or its Employees in the course of providing support and
other services under this Agreement ("CHANGES") shall vest in and remain the
sole property of Buyer. Seller agrees that Buyer may supervise and direct the
development of Changes, that such Changes constitute "works made for hire"
within the meaning of Section 101 of the Copyright Act, and that such Changes
constitute and contain intellectual property rights, and valuable proprietary
assets and trade secrets of Buyer, embodying substantial creative efforts and
Proprietary Information. Seller agrees not to contest the trade secret,
confidential or proprietary status or other intellectual property rights of such
Changes, Buyer's ownership of such Changes or Buyer's ownership of any patents,
copyrights, trade secrets or other proprietary rights in or to such Changes.
Seller expressly agrees that such Changes and other rights and information,
whether oral or written, constitute confidential information of Buyer. In the
event that, notwithstanding the foregoing, title to and ownership of any such
Changes initially vests in Seller then Seller shall and hereby does grant,
transfer and assign all such title and ownership and all rights appurtenant
thereto to Buyer.
10. TERMINATION.
1.1 AGREEMENT TERMINATION. This Agreement may be terminated and the
transactions contemplated herein may be abandoned at any time: (a) by Buyer or
Seller if there has been a material misrepresentation, breach of warranty, or
breach of covenant by the other in any of its representations, warranties, or
covenants set forth herein; or (b) by mutual written agreement of Buyer and
Seller'; or (c) by Buyer, if Buyer cannot obtain an assignment of the RSA OEM
Master Agreement within ten (10) business days after the Effective Date. In
such case this Agreement shall terminate on the date selected by the parties,
except provided that the provisions of Section 8 shall survive. No such
termination shall terminate the parties' obligations under the LOI, except that
a termination by Buyer because of material breach by Seller shall terminate all
of Buyer's obligations regarding the Product under this Agreement except with
respect to Section 8.
10.2 EFFECT OF TERMINATION. If this Agreement is terminated under
Section 10.1, all obligations of the parties shall terminate without liability
of any party to any other party, except that in the event of termination by
reason of Section 10.1 (b) and the breaching party shall be liable for the
expenses (including attorney's fees, expenses of counsel and court costs) of the
other party in connection herewith.
10.3 RIGHTS TO PROCEED. Notwithstanding any contrary provisions in this
Agreement, if any of the conditions specified in Section 5.1 to 5.6 have not
been satisfied, Buyer may proceed with the transactions contemplated hereby
without waiving any of its rights hereunder; and if any of the conditions
specified in Section 5.7 have not been satisfied, Seller may proceed with the
transactions contemplated hereby without waiving any of its rights hereunder.
11. SURVIVAL AND INDEMNIFICATION
11.1 SURVIVAL. All representations, warranties and covenants of Buyer
and Seller are material, shall be deemed to have been relied upon by the other
party and shall survive until three (3) years following the Effective Date (the
"INDEMNIFICATION PERIOD") regardless of any investigation at any time provided
if a party claiming breach by a representation or warranty has given notice to
either party within such a three (3) year period the representation and warranty
for which a breach has been claimed shall survive until the parties agree or a
determination has been made by a court having jurisdiction, (whether before or
after the date of this Agreement) made by or on behalf of Buyer or Seller or
any information any of them may have obtained or have (whether
<PAGE>
before or after the date of this Agreement) in respect thereof and regardless of
any non-exercise by any of them of any termination rights hereunder. Each party
shall have a claim against the other as provided in and subject to the
limitations of Section 11.2 regarding any breach of any representation, warranty
or covenant.
11.2 INDEMNIFICATION
11.2.1 SELLER INDEMNIFICATION OF BUYER. Seller shall defend, indemnify and
hold harmless Candle, its officers, directors, shareholders, agents, employees
and representatives from and against any and all losses, damages, injuries,
causes of action, claims, demands and expenses (whether based upon tort, breach
of contract, patent, trade secret, copyright or other proprietary rights
infringement, or otherwise), including legal, accounting and expert witnesses
fees and expenses, of whatever kind and nature ("LOSS") arising out of or on
account of, or resulting from: (i) Seller's or its successors' or assigns' act
or omission, default in the performance of or breach of any warranty,
representation, referred to herein, or default in the performance of any
warranty, representation, agreement or covenant of any current or prior
Agreements or Material Obligations of Seller ("BREACH"), or (ii) any allegation
or claim by any third party (x) regarding any act or omission or alleged act or
omission constituting (or which, if true, would constitute) a Breach, or (y)
that any of the Product or its use, copying, marketing or other exploitation by
Seller or Buyer or their customers, distributors, successors or assigns
infringes or conflicts with the United States or Canadian rights of any person
not a party hereto (or to the knowledge of Seller or its Employees any other
rights of any such person) except to the extent of modifications to the Product
made by or for Buyer, and, in each instance, which occurs or is incurred, made
or filed during the Indemnification Period (any such Loss being herein referred
to as a "CLAIM").
11.2.2 INDEMNIFICATION OF SELLER. Buyer shall defend, indemnify and hold
harmless Seller (and Seller's assignees upon liquidation to the extent claiming
rights to indemnification to which Seller would have been entitled hereunder)
from and against any and all Losses arising out of or on account of, or
resulting from (i) Buyer's or its successors' or assigns' act or omission,
default in the performance of or breach of any warranty, representation,
agreement or covenant of this Agreement or any other agreement referred to
herein to be executed by Buyer or liability to be assumed by Buyer pursuant to
Section 6.2 hereunder ("BREACH"), or (ii) any allegation or claim by any third
party (x) with respect to any act or omission or alleged act or omission
constituting (or which, if true, would constitute) a Breach, or (y) that any
modification made by or for Buyer to the Product, or the use, copying,
marketing or other exploitation by Buyer or its customers, distributors,
successors or assigns of such modification infringes or conflicts with the
rights of any person not a party hereto and, in each instance, which occurs or
is incurred, made or filed during the Indemnification Period (any such Loss
being herein referred to a "CLAIM").
11.2.3 PROCEDURES FOR INDEMNIFICATION
A. In the event of any Claim hereunder, the party entitled to
indemnification (the "INDEMNITEE") shall, with reasonable promptness, provide
the indemnifying party (the "INDEMNITOR") with written notice (during the
Indemnification Period) and copies of any claims or other documents received;
provided that the Indemnitee's failure to so notify the Indemnitor shall not
relieve the Indemnitor from any liability it might otherwise have on account of
this indemnity, except to the extent that the Indemnitor has been materially
prejudiced by such failure to notify or to the extent that the notice is not
given reasonably promptly after the end of the Indemnification Period.
B. Subject to paragraph C., the Indemnitor may undertake full
responsibility for the defense or prosecution of any claim relating to a
third-party allegation or claim as described in clause (ii) of Sections 13.2.1
and 13.2.2 ("THIRD-PARTY CLAIM") and may contest or settle it on such terms as
the Indemnitor may choose, provided that the Indemnitor shall not have the
right, without the Indemnitee's written consent, to settle any such claim if
such settlement arises from or is part of any criminal action, suit or
proceeding, or contains a stipulation to, confession of judgment with respect
to, or admission or acknowledgment of, any liability or wrongdoing on the part
of the Indemnitee; provided that:
<PAGE>
(i) Notice of the Indemnitor's intention to defend, accompanied by an
acknowledgment in writing in form and substance reasonably satisfactory to
counsel for the Indemnitee that such claim is covered in its entirety by this
indemnity (the "ACKNOWLEDGMENT"), shall be delivered to the Indemnitee within
thirty (30) days from the date of receipt by such Indemnitor of notice of the
institution of such action or proceeding.
(ii) Such defense shall be conducted by attorneys reasonably satisfactory
to the Indemnitee and retained by the Indemnitor at the Indemnitor's cost and
expense (in the manner and to the extent herein set forth), but the Indemnitee
shall have the right to participate in such proceedings and to be separately
represented by attorneys of its own choosing. The Indemnitee shall be
responsible for the costs for such separate representation unless the Indemnitee
has reasonably concluded that the interests of the Indemnitee and of the
Indemnitor in the action conflict in such a manner and to such an extent as to
require, consistent with applicable standards of professional responsibility,
the retention of separate counsel for the Indemnitee, in which case the
Indemnitor shall pay for the separate counsel chosen by the Indemnitee.
(iii) If the Indemnitor fails to deliver the Acknowledgment or fails to
choose counsel reasonably satisfactory to the Indemnitee, the Indemnitor shall
not thereafter be entitled to elect to defend and the Indemnitor shall be bound
by and shall be liable for the result obtained by the Indemnitee, including
without limitation the amount of any judgment or good faith out-of-court
settlement or compromise and all costs and related fees of counsel incurred by
Indemnitee. If at any time the Indemnitee reasonably concludes that the
Indemnitor will be unable to indemnify the Indemnitee for any claim, the
Indemnitee shall be entitled to assume and control the defense with counsel of
its own choosing.
C. Notwithstanding anything to the contrary contained in paragraph B.,
to the extent that any Third-Party Claim against Buyer relates to the Product,
Buyer shall have the right, at its election exercisable at any time by written
notice to Seller specifically referencing this Section 11.2.3C., to undertake
full responsibility for the defense or prosecution of such Claim and to contest
or settle it on such terms as Buyer may choose; provided that Seller's
indemnification obligations shall not apply to the extent the Seller reasonably
objected in writing to Buyer (specifying the reasons for their objection)
within ten (10) business days from Seller's receipt of notice from Buyer of a
proposed settlement or compromise; and provided, further, that Seller's
indemnification obligations shall not apply to Buyer's attorneys' fees incurred
after the date on which Buyer has assumed such control.
12. WARRANTY.
EXCEPT AS SET FORTH HEREIN, THE PRODUCT IS PROVIDED "AS IS" WITHOUT
WARRANTIES OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE PRODUCT IS
WITH BUYER.
EXCEPT WITH RESPECT TO SELLER'S BREACH OF THE WARRANTY OF TITLE AND THE
INDEMNITY SECTION, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY
FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT
LIMITATION LOST PROFITS, ARISING UNDER THIS AGREEMENT. IN NO EVENT SHALL
SELLER'S OR BUYER'S LIABILITY EXCEED THE AMOUNTS PAID PURSUANT TO THIS
AGREEMENT.
<PAGE>
13. COVENANT NOT TO COMPETE
14.1 COVENANT. Subject to Section 2.5, for a period of three (3) years,
commencing on the Closing Date of the contemplated transaction, and ending
three (3) years thereafter, Seller will not, directly or indirectly, within any
county in any state, provision or political subdivision of the United States,
Mexico or Canada, or any other country in which Buyer or Seller conducts
business (the "TERRITORY") pertaining to the development, manufacture, marketing
and/or distribution of any products providing enhanced security for IBM MQ
Series environments and would compete with MQ Secure (the "SELLER BUSINESS"):
(i) develop any code or products as part of a professional services engagement
that performs functions substantially similar to the Product; (ii) engage in any
Seller Business for its own account; or (iii) obtain an interest, as an
individual, partner, shareholder, director, officer, principal, agent, employee,
trustee, consultant, advisor, manager, salesman, operator or in any other
ownership relationship or management capacity, in any entity or association
conducting any Seller Business. (iv) Seller will not develop any code or
products as part of a professional services engagement that performs functions
substnatially similar to the Product.
In additon, Seller will not develop or distribute a product competing with
Candle System Management Solutions, as defined in Attachment 1, for the duration
of the distribution and agency agreements.
In cases where Seller identifies Customers, including Microsoft, with
unique systems management requirements, Buyer and Seller agree to negotiate at
project initiation a strategy for development of solutions to address the
requirements. In these cases, Buyer and Seller agree to discuss the following
issues: who should develop the solution, technology to be utilized, mutual
licensing and distribution arrangements. For any of these Seller customer
solutions which become products, Buyer will automatically retain distribution
rights and technology license rights and the option to purchase these products
at the same royalty rates as Seller's Product FEG subject to mutually
satisfactory negotiated agreements and subject to caps to be negotiated.
13.2. EXCEPTIONS. The foregoing (a) shall not prohibit the ownership by
Seller of up to five percent (5%) of the issued and outstanding capital stock
of a publicly-held corporation carrying on such Seller Business, so long as
Seller does not participate in the control or take an active part in the
management or direction thereof and does not act as consultant or in any other
way render services thereto; and (b) shall apply only for so long as Candle, or
its successors or assignee of the Proprietary Information carries on a business
similar to the Seller Business within such Territory.
13.3 INDEPENDENT OBLIGATIONS. Each covenant and provision of this
Section shall, be construed as a separate agreement, independent of any other
provision of this Agreement, the unenforceability of which shall not preclude
the enforcement of any other of said covenants or provisions or of any other
obligation of Seller hereunder, and the existence of any claim or cause of
action of Seller against Buyer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Buyer of any of
said covenants.
14. GENERAL PROVISIONS
14.1 ASSIGNMENTS. Except as otherwise expressly provided by the terms
of this Agreement, Seller may not transfer or assign this Agreement, except to
the successor or assignee of all or substantially all of its business or
substantially all of its assets upon liquidation, or to the purchaser of all or
substantially all of the right, title and interest in and to the Product, which
successor, assignee or purchaser expressly assumes the relevant obligations of
this Agreement. Any assignment in derogation of the foregoing shall be void.
Buyer may enter into an agreement to assign this Agreement to a third party or
otherwise dispose of the Product, provided that such assignee agrees in writing
to be bound by all the terms of this Agreement.
<PAGE>
14.2 MUTUAL RESPONSIBILITY. Except as otherwise provided herein, each
party shall be responsible for any costs, expenses and claims (including
attorneys' fees and professional and brokers' fees and commissions) arising out
of its negotiation, execution and performance of this Agreement.
14.3 LABOR MATTERS. This Agreement does not constitute an offer by
Buyer to any Employee of Seller to become an Employee of Buyer on or after the
Closing Date or to assume any obligations under any any employee benefit,
pension or welfare plan or program to which Seller is a party or sponsor.
14.4 SOLICITATION OF EMPLOYEES. Each party agrees for a period of
twelve (12) months from the Effective Date not to solicit or hire any of the
employees of the other party, provided, however, that neither party shall be
restricted from hiring any such employee who is solicited by general advertising
or periodicals of general solicitation.
14.5 FORCE MAJEURE. Neither party shall be responsible or liable for
any failure to perform due to acts of God or of a public enemy, acts of a
government or any state or political subdivision thereof, fires, floods,
explosions or other catastrophes, epidemics and quarantine restrictions,
strikes, riots, slowdowns or labor stoppages of any kind, freight embargoes,
unusually severe weather, delays of a supplier due to such causes, or causes
beyond such party's reasonable control. In such events, the performance of such
party's obligations shall be suspended during, but not longer than, the period
of existence of such cause and the period reasonably required to perform the
obligation. Both parties shall use their best efforts to minimize the
consequences of force majeure.
14.6 ALTERATIONS AND WAIVERS. The waiver, amendment, or modification of
any provision of this Agreement or any right, power or remedy hereunder, whether
by agreement of the parties or by custom, course of dealing or trade practice,
shall not be effective unless in writing and signed by the party against whom
enforcement of such waiver, amendment or modification is sought. No failure or
delay by either party in exercising any right, power or remedy with respect to
any of the provisions of this Agreement shall operate as a waiver of such
provisions with respect to such occurrence.
14.7 VALIDITY, FORUM, LAWS AND CONSTRUCTION. (a) Disputes or
controversy (except for those related to copyright and any other intellectual
property claims) between the parties hereto arising under this Agreement or in
any other agreement or document executed and delivered by the parties in
connection with the transactions contemplated hereby shall, upon written demand
of any party hereto, be submitted to and be resolved by binding arbitration in
the City of Los Angeles pursuant to the rules, regulations, practices and
procedures then prevailing of the American Arbitration Association. Any award
or decision rendered shall be made by means of a written opinion explaining the
arbitrator(s)' reasons for the award or decision, and the award or decision
shall be final and binding upon the parties hereto. The arbitrator(s) may not
amend or vary any provision of this Agreement. Judgment on the award renedered
by the arbitrator(s) may be entered in any court having Jurisdiction.
(b)The legal relations between the parties shall be governed by the laws of
the State of California, regardless of the choice of law provisions of
California or any other jurisdiction. Litigation or arbitration of disputes
under this Agreement shall be conducted in Los Angeles, California. The parties
further agree not to disturb such choice of forum, hereby waive the personal
service of any and all process upon them, and consent that such service of
process may be made by certified or registered mail, return-receipt requested,
addressed to the parties as set forth in Section 14.18.
14.8 INJUNCTIVE RELIEF. The parties agree that damages will be an
inadequate remedy in the event of a breach or intended or threatened breach by
Seller or any of its Employees of any of the covenants of Seller, and that any
such breach will cause Buyer great and irreparable injury and damage.
Accordingly, Seller agrees that Buyer shall be entitled, without waiving any
additional rights or remedies otherwise available to Candle, to injunctive and
other such equitable relied in the event of a breach or intended or threatened
breach of any of said covenants by Seller or any Employee of Seller.
<PAGE>
14.9 SEVERABILITY. Subject to the provisions of this Agreement, in the
event any provision of this Agreement or the application of any such provision
shall be held to be illegal or unenforceable in any jurisdiction, such
provision, if not material to the Agreement as a whole, shall, as to such
jurisdiction, be ineffective to the extent of such illegality or
unenforceability; provided, however that such illegal or unenforceable
provision(s) shall be curtailed, limited or eliminated only to the extent and
only in those jurisdictions necessary to remove such liability or
unenforceability with respect to the applicable law in the applicable
jurisdiction as it shall then be applied, but if such provision is material to
the Agreement as a whole, the parties shall use their best efforts to replace
the provision that is contrary to law with a legal one approximating to the
extent possible the original intent of the parties, and if they are unable to do
so, the remainder of the Agreement shall be unenforceable.
14.10 ATTORNEYS' FEES. In the event of any dispute or controversy
arising out of this Agreement, the prevailing party shall be entitled to
reimbursement of its costs, including court and arbitration costs and attorneys'
and expert witnesses' fees and costs.
14.11 PARTIES INDEPENDENT. Each party is an independent contractor, and
this Agreement shall not be construed as creating a partnership, joint venture
or employment relationship between the parties or as creating any other form of
legal association that would impose liability on one party for the act or
failure to act of the other party. Neither of the parties (including its
Employees or others acting on its behalf) is a representative of the other for
any purpose, and no such party has any power or authority to represent, act for,
bind, or otherwise create or assume any obligation on behalf of the other party
for any purpose whatsoever. All financial obligations associated with each
party's business are the sole responsibility of such party.
14.12 CONFIDENTIALITY OF AGREEMENT. Subject to Section 8, each of the
parties represents, warrants and agrees that neither it nor its counsel or
agents will disclose, disseminate or cause to be disclosed or disseminated, the
substance and terms of this Agreement or the Letter of Intent, except where:
(a) disclosure is reasonably necessary to carry out and make effective the terms
of this Agreement; (b) a party hereto is required by law to respond to any
demand for information from any court, governmental entity or governmental
agency, or as otherwise may be required by federal or state laws; (c) disclosure
is necessary to be made to a party's independent accountants and attorneys for
tax audit or other business purposes; and (d) the parties may mutually agree in
writing.
14.13 KNOWLEDGE. For purposes of this Agreement, to know or have
knowledge, or to be aware of or believe, any matter shall mean to know or have
knowledge, be aware or believe, after due inquiry.
14.14 SALES TAXES. Seller shall be solely responsible for the payment of
any and all sales and use taxes and any other taxes or other charges assessed by
any governmental authority on the sale contemplated by this Agreement; provided
Seller shall have no obligation to pay any tax based on Buyer's income. Except
as set forth in the immediately preceding sentence, Buyer shall pay any sales,
use, and withholding taxes and any other taxes imposed by any jurisdiction as a
result of (I) use or ownership of the Product or (ii) the performance of any
provisions of this Agreement.
14.15 BINDING. This Agreement shall be binding upon and inure to the
benefit of each of the parties and, to the extent permitted by Section 14.1,
their respective successors and assigns.
14.16 COMPLETE AGREEMENT; MODIFICATIONS. This Agreement and any
schedules, exhibits and documents referred to herein or executed
contemporaneously herewith constitute the entire agreement among the parties
with respect to the subject matter hereof, and may not be amended, altered or
modified except by a writing signed by the parties. This Agreement supersedes
all prior written, and all prior and contemporaneous oral, agreements,
representations, warranties, statements, promises and understandings with
respect to the subject matter hereof, including without limitation the Letter of
Intent and the non-disclosure license agreement entered into by the parties.
<PAGE>
14.17 NO THIRD-PARTY BENEFICIARIES. Nothing contained in this Agreement
shall be construed to give any person other than Buyer and Sellers any legal or
equitable right, remedy or claim under this Agreement.
14.18 HEADINGS. Section headings are included solely for convenience,
are not to be considered a part of this Agreement, and are not intended to be
full and accurate descriptions of their contents.
14.19 NOTICES. All notices or other communications which shall or may be
given pursuant to this Agreement shall being writing, shall be effective upon
receipt, and shall be delivered by personal delivery, certified or registered
air mail, or by facsimile transmission, addressed as follows (or as is provided
in the future by written notice):
IF TO BUYER CORPORATION: GENERAL COUNSEL, 2425 OLYMPIC BLVD, SANTA MONICA,
CA 90404
IF TO LEVEL 8 INC.:
WITH A COPY TO:
14.20 COUNTERPARTS. This Agreement may be executed in any number of
copies, each of which shall be deemed an original and all of which together
shall constitute one and the same instrument.
14.21 LANGUAGE INTERPRETATION. In the interpretation of this Agreement,
unless the context otherwise requires, (a) words importing the singular shall be
deemed to import the plural and vice versa, (b) words denoting gender shall
include all genders, (c) references to persons shall include corporations or
other bodies and vice versa, and (d) references to parties, sections, schedules,
paragraphs and exhibits of and to this Agreement.
14.22 FURTHER ASSURANCES. Each party agrees to execute and deliver any
and all further documents, and to perform such other acts (including without
limitation the immediate notification of any reissues or extensions of the
patents, trademarks, tradenames and copyrights set forth in Schedule 3.7
hereto), as may be necessary or expedient to carry out and make effective the
purposed and transactions contemplated by this Agreement. Buyer will cooperate
with Seller upon its request, to the extent reasonable (which in no event shall
include the incurrence by Buyer of any Liens), in minimizing sales, use or
other taxes payable in connection with the purchase by Buyer of the Products.
14.23 CUMULATIVE RIGHTS. The rights, powers and remedies of each party
shall be in addition to, and not in limitation of, all rights, powers and
remedies provided at law or in equity, or under any other agreement between the
parties. All of such rights, powers and remedies shall be cumulative, and may
be exercised successively or concurrently.
14.24 ADVICE OF LEGAL COUNSEL. Each party acknowledges and represents
that, in executing this Agreement, it has had the opportunity to seek advice as
to its legal rights from legal counsel and that the person signing on its behalf
has read and understood all of the terms and provisions of this Agreement.
14.25 USE OF NAME. For four (4) years after the Effective Date, Buyer
shall have the right, but not the obligation, to use and publish Seller's
name and biographical material when publicizing, advertising, exploiting, and
distributing the Products; provided Buyer will provide Seller with reasonable
prior notice and copies of such materials, and Seller shall have a right of
continuous approval over such uses, exercisable by written notice to Buyer
specifying the nature of any objection.
<PAGE>
14.26 PARTNERSHIP ALLIANCES. The parties may explore other cooperative
development partnerships that may result in products that could be distributed
by either party. As Buyer formulates its distribution alliances, Seller agrees
to participate in appropriate announcements.
Subject to mutually satisfactory license and other agreements, Seller will
utilize existing Buyer products or components in service engagements wherever
practical and feasible. Where this use of existing Buyer products or components
is not feasible, Seller will build custom components that will integrate with
Buyer's Technology, Candle Command Center products or other Buyer products,
where feasible and practical.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement at Los
Angeles, California, at and as of the day and year first set forth above.
CANDLE CORPORATION LEVEL 8 SYSTEMS, INC.
BY: BY:
--------------------- --------------------------
TITLE: TITLE:
--------------------- ------------------------
DATE: DATE:
--------------------- -------------------------
<PAGE>
SCHEDULE 1
SELLER'S CONTRACTS
A. WRITTEN CONTRACTS - CUSTOMERS LIST
NONE
B. ORAL CONTRACTS
NONE
C. DISTRIBUTION AGREEMENTS
NONE
<PAGE>
SCHEDULE 2
ASSUMPTION OF SELLER'S LIABILITIES
NONE
<PAGE>
SCHEDULE 3
SELLER'S LIABILITY FOR REPRESENTATIONS AND WARRANTIES
SCHEDULE 3.1
Liabilites
Litigation
Title to and Condition of Assets
Intangible Rights
Registration List:
Unregistered intellectual property rights are as follows:
<PAGE>
SCHEDULE 4
INTELLECTUAL PROPERTY ASSIGNMENT
1. I have prepared, written, created, or developed certain software, materials
or works during my employment with Level 8 Systems Inc., a New York corporation
("SELLER"), that are incorporated into the product, known as MQ Secure (THE
"WORKS").
2. I hereby grant, transfer, assign, and convey to Seller, its successors and
assigns, the entire title, right, interest, ownership and all subsidiary rights
in and to the Works, including but not limited to the right to secure any
intellectual property right registration therein and to any resulting
registration in Seller's name as claimant, and the right to secure renewals,
reissues, and extensions of any such copyright or other intellectual property
right registrations in the United States of America or any foreign country;
3. Whether the intellectual property rights in the Works shall be preserved
and maintained or registered in the United States of America or any foreign
country shall be at the sole discretion of Seller.
4. I hereby confirm that Seller and its successors and assigns, own the entire
title, right and interest in the Works, including the right to reproduce,
prepare derivative works based upon the copyright in the Works, distribute by
sale, by rental, lease or lending or by other transfer of ownership; to perform
publicly; and to display, in and to the Works, whether or not the Works
constitute a "work made for hire" as defined in 17 U.S.C. Section 101.
5. I acknowledge that I acted in my capacity as a regular Seller employee at
all times in connection with the Works and that I retain no rights in the Works.
6. I agree to take all actions and cooperate as is necessary to protect the
copyrightability of the Works and further agree to execute any documents that
might be necessary to perfect Seller's ownership of copyrights in the Works or
Seller's successors and assigns;
7. All terms of this Assignment are applicable to any portion or part of the
Works, as well as the Works in their entirety;
DATED: August___, 1996
- ------------------ -----------------------------------
WITNESS: Individual
<PAGE>
SCHEDULE 5
BILL OF SALE
Level 8 Systems Inc., a New York corporation with a principal place of business
at One Penn Plaza, Suite 3401, New York, New York 10119 ("Seller"), in
consideration of One Dollar ($1.00) and other valuable consideration paid by
Candle Corporation, a California corporation with a principal place of business
in Santa Monica, California (Buyer), the receipt of which is hereby
acknowledged, does hereby grant, sell, transfer and deliver to Buyer subject to
the terms of a Purchase Agreement dated August __, 1996 ("the Agreement"), by
and between Seller and Buyer, the following described assets:
All software programming technology, in both source and object code form,
regardless of the stage of development of any such technology, relating to
the software programs known as MQ Secure ("Product"), together with any
related documentation, and any other computer program containing a
substantial portion of the source code of the Product.
TO HAVE AND TO HOLD the Product to Buyer, its successors and assigns, to their
own use and behalf forever. Seller hereby covenants with Buyer that it is the
lawful owner of said Product, and that it is free and clear from all Liensand
subject to the terms of Agreement, that it has good right to sell the same as
aforesaid; and that Seller will warrant and defend the same unto Buyer and its
successors and assigns against the lawful claims and demands of all persons.
Seller sells the Product to Buyer subject to the warranties and representations
contained in Sections 4 and 7 of the Agreement, and apart from the warranties
contained in Sections 4 and 6 Seller makes no other warranties, express or
implied.
IN WITNESS WHEREOF, ____________ in his capacity as President of Seller,
has hereunto set his hand and seal this ____ day of August, 1996.
ATTEST: LEVEL 8 SYSTEMS INC. a _______ corporation
_________________________________ _________________________________________
STATE OF __________________
Personally appeared before me the above named _______________and
acknowledged that the foregoing instrument is his free act and deed in his
capacity as President of Seller, and the free act and deed of said Seller.
Before me,
- ---------------------
Notary Public
<PAGE>
SCHEDULE 6A
CERTIFICATE OF BUYER'S REPRESENTATIONS AND WARRANTIES
Candle Corporation ("BUYER") hereby certifies and warrants that all
representations, warranties and covenants of Buyer contained in Sections ___ and
__of a certain Purchase Agreement by and between Buyer and Seller, dated
____________, 1996 ("AGREEMENT"), and in all statements, certificates, schedules
and other documents delivered pursuant to the Agreement or in connection with
the transactions contemplated thereby, are true and accurate as of the date
herewith. Buyer also certifies and warrants that it has performed and complied
with all covenants, agreements and conditions as required by the Agreement to be
performed or complied with on or before the date hereof.
DATED: ___, 1996
ATTEST:
Its: President
-------------------------
CANDLE CORPORATION
By: Aubrey G. Chernick
Chairman
<PAGE>
SCHEDULE 6B
CERTIFICATE OF SELLER'S REPRESENTATIONS AND WARRANTIES
Level 8 Systems, Inc. ("SELLER") hereby certifies and warrants that all
representations, warranties and covenants of Buyer contained Sections __ and __
of a certain Purchase Agreement by and between Buyer and Seller dated ___, 1996
(the "AGREEMENT"), and in all statements, certificates, schedules and other
documents delivered pursuant to the Agreement or in connection with the
transactions contemplated thereby, are true and accurate as of the date
herewith. Seller also certifies and warrants that it has performed and complied
with all covenants, agreements and conditions as required by the Agreement to
be performed or complied with on or before the date hereof.
DATED: ___, 1996
LEVEL 8 SYSTEMS, INC.
-----------------------
By:
- -------------------
WITNESS Its: President
<PAGE>
ATTACHMENT 1
Candle System Management Solutions includes, but is not limited to the
following:
Performance Management
Systems Automation
Security
Software Distribution
Command and Control
Backup Restore
Event Manager
Configuration
Inventory
Alert Management
Response Time Monitoring
Problem Management
<PAGE>
Exhibit 10.41
INVESTMENT AGREEMENT
DATED JULY 26, 1996
The parties to this agreement are Across Data Systems, Inc., a
Delaware corporation (the "Company"), Liraz Systems Ltd., an Israeli
company that owns shares in the Company ("Liraz"), and Candle Corporation,
a California corporation (the "Purchaser").
The Company, the Purchaser and Level 8 Systems, Inc., a Delaware
corporation ("Level 8"), have entered into a letter of intent dated July
25, 1996 (the "LOI") regarding the transfer of the Shares (as defined in
section 1) and certain software licensing, agency and technology agreements
among the parties to the LOI.
The purpose of this agreement is to implement the sale of the Shares
on the terms set forth below. To the extent any provision of this agreement
conflicts with any provision of the LOI, the provision of this agreement
shall prevail over such provision of the LOI.
The parties agree as follows:
1. SALE AND PURCHASE. Simultaneously with the execution of this
agreement, (a) the Company is issuing and selling to the Purchaser, and the
Purchaser is purchasing from the Company, free and clear of all claims,
liens, charges, security interests and other encumbrances of any nature
("Liens"), 246,800 shares of the Company's common stock, $.01 par
<PAGE>
value per share (the shares being sold, the "Shares"), and (b) in consideration
for the issuance and sale of the Shares to the Purchaser, the Purchaser is
paying the Company, by wire transfer of immediately available funds,
$2,714,800.
2. REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
represents and warrants to the Company as follows:
2.1.1 EXISTENCE AND POWER. The Purchaser is validly existing and in good
standing under the law of its state of incorporation and has the full power
and authority to enter into and perform this agreement and the LOI
(collectively, the "Transaction Documents").
2.1.2 AUTHORIZATION. The execution, delivery and performance of each of
the Transaction Documents have been duly authorized by all necessary action,
and each of the Transaction Documents constitutes the valid and binding
obligation of the Purchaser 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).
2
<PAGE>
2.1.3 CONSENTS OF THIRD PARTIES. The execution, delivery and performance
by the Purchaser of each of the Transaction Documents will not: (a) violate
or conflict with its certificate of incorporation or by-laws; (b) conflict
with, or result in the breach, termination or acceleration of, or constitute
a default under, any lease, mortgage, license, agreement, commitment or other
instrument to which it is a party or by which it or any of its properties are
bound; or (c) constitute a violation of any law, regulation, order, writ,
judgment, injunction or decree applicable to it or any of its properties or
require any governmental consent, registration or approval.
2.1.4 LITIGATION. There is no judicial or administrative action or
proceeding pending or, to the best of the knowledge of the Purchaser,
threatened, nor, to the best of the knowledge of the Purchaser, is there any
governmental investigation pending or threatened, that questions the validity
of either of the Transaction Documents or any action taken or to be taken by
it in connection with either of the Transaction Documents. There is no
litigation or proceeding pending or, to the best of the knowledge of the
Purchaser, threatened, nor, to the best of the knowledge of the Purchaser, is
there any governmental investigation pending or threatened, nor is there any
order, injunction or decree outstanding, against the Purchaser that would
have a material adverse effect upon the
3
<PAGE>
Purchaser's ability to perform its obligations under either of the Transaction
Documents.
2.1.5 SEC MATTERS. The Purchaser is an accredited investor (within the
meaning of the rules and regulations under the Securities Act of 1933 (the
"1933 Act")) and is acquiring the Shares for investment and not with a view
to distribution in violation of the 1933 Act. The Purchaser has received and
reviewed copies of the Company's Registration Statement on Form S-1
(Registration No. 33-92230), the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996 and the Company's proxy
statement for its annual meeting of shareholders on May 2, 1996
(collectively, the "SEC Documents"), and the Purchaser understands the
Company may effect one or more of the transactions referred to in the
confidential disclosure letter from the Company to the Purchaser dated this
date. The Purchaser is experienced in the software business, and has had an
adequate opportunity to ask all questions of the Company and its
representatives as it has deemed appropriate in connection with the
acquisition of the Shares.
2.1.6 BROKERS. The Purchaser has not entered into any agreement,
arrangement or understanding with any broker or finder in connection with the
transactions contemplated by the Transaction Documents.
4
<PAGE>
2.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Purchaser as follows:
2.2.1 EXISTENCE AND POWER. Each of the Company and its subsidiaries is
validly existing and in good standing under the law of its state of
incorporation and has the full power and authority to enter into and perform
each of the Transaction Documents to which it is a party.
2.2.2 AUTHORIZATION. The execution, delivery and performance of each of
the Transaction Documents have been duly authorized by all necessary action,
and each of the Transaction Documents constitutes the valid and binding
obligation of the Company and/or its subsidiary 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).
2.2.3 CONSENTS OF THIRD PARTIES. The execution, delivery and performance
by the Company and/or its subsidiary of each of the Transaction Documents to
which it is a party will not: (a) violate or conflict with its certificate
of incorporation or by-laws; (b) conflict with, or result in the breach,
termination or acceleration of, or constitute a default under, any lease,
mortgage, license, agreement, commitment or
5
<PAGE>
other instrument to which it is a party or by which it or any of its
properties are bound; (c) constitute a violation of any law, regulation,
order, writ, judgment, injunction or decree applicable to it or any of its
properties or require any governmental consent, registration or approval; or
(d) result in the creation of any Lien upon its properties or assets.
2.2.4 LITIGATION. There is no judicial or administrative action or
proceeding pending or, to the best of the knowledge of the Company,
threatened, nor, to the best of the knowledge of the Company, is there any
governmental investigation pending or threatened, that questions the validity
of any of the Transaction Documents or any action taken or to be taken by the
Company or any of its subsidiaries in connection with either of the
Transaction Documents. There is no litigation or proceeding pending or, to
the best of the knowledge of the Company, threatened, nor, to the best of the
knowledge of the Company, is there any governmental investigation pending or
threatened, nor is there any order, injunction or decree outstanding, against
the Company or any of its subsidiaries that would have a material adverse
effect upon its ability to perform its obligations under either of the
Transaction Documents.
2.2.5 CAPITALIZATION. The SEC Documents accurately reflect, as of the
respective dates as of which they speak, the information contained therein
respecting the authorized capital stock of the Company, the number of issued
and outstanding shares of common stock of the Company and the number of
shares of common
6
<PAGE>
stock of the Company reserved for issuance under outstanding securities,
benefit arrangements and plans and other agreements and instruments. Since
March 31, 1996, the Company has not issued any securities (other than
pursuant to the Company's stock option plan) or entered into any agreement to
issue any securities. The Company owns all the issued and outstanding shares
of capital stock of each of its subsidiaries. All the issued and outstanding
shares of capital stock of the Company and each of its subsidiaries were duly
authorized for issuance and are validly issued, fully paid and nonassessable.
2.2.6 SEC MATTERS. Assuming the accuracy of the representations and
warranties in section 2.1.5, neither the Company nor any person acting on its
behalf has taken any action that would require the offering, issuance or sale
of the Shares to be registered under the 1933 Act. The SEC Documents taken
as a whole did not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in the light of
the circumstances under which they were made, not misleading as of the
respective dates of the SEC Documents. The Company has filed with the
Securities and Exchange Commission (the "SEC") all documents required to have
been filed by it pursuant to section 13(a) of the Securities Exchange Act of
1934.
2.2.7 BROKERS. Neither the Company nor any of its subsidiaries has
entered into any agreement, arrangement or
7
<PAGE>
understanding with any broker or finder in connection with the transactions
contemplated by the Transaction Documents.
3. REGISTRATION RIGHTS
3.1 DEMAND REGISTRATION. Any time after March 1, 1999 and before
February 29, 2000, upon receipt of a notice (a "Demand Request") from the
Purchaser demanding the Company effect the registration under the 1933 Act of
any or all of the Shares then held by the Purchaser, the Company shall as
promptly as practicable file a registration statement and effect the
registration under the 1933 Act of the Shares specified in the Demand
Request. The Company shall be obligated to effect only one such registration;
however, notwithstanding anything to the contrary in this agreement, if, for
any reason (other than the fault of the Purchaser), such registration fails
to become effective and to provide for the distribution of all the Shares
specified in the Demand Request or the effectiveness is not maintained for at
least 90 days, the Purchaser shall thereafter continue to be entitled to a
registration in accordance with this section 3.1. Notwithstanding anything
to the contrary in this section 3.1, the Company's obligations under this
section 3.1 shall terminate after the Company shall have complied with a
Piggyback Request pursuant to section 3.2.
3.2 PIGGYBACK REGISTRATION. If the Company determines to register under
the 1933 Act for sale to the public any of the Company's securities on a
form that also permits the registration
8
<PAGE>
under the 1933 Act for sale to the public of any of the Shares then held by
the Purchaser, the Company shall within 10 days thereafter give the Purchaser
notice of its intent to effect a registration, and, subject to this section
3, shall include in the registration all the Shares then held by the
Purchaser with respect to which the Company shall have received a notice (a
"Piggyback Request") specifying the number of Shares to be included within 30
days after the Company shall have given the Purchaser the notice pursuant to
this section 3.2.
3.3 OBLIGATION OF PURCHASER. Any Demand Request or Piggyback Request
(a "Request") shall express the present intent to offer for sale to the
public the number of Shares to be included in the registration statement and
contain an undertaking to provide such information and materials and take
such action as may be required to permit the Company to comply with all
applicable requirements of the SEC and to obtain acceleration of the
effective date of the registration statement.
3.4 OBLIGATIONS OF THE COMPANY. With respect to any registration
statement referred to in section 3.1 or 3.2, the Company shall:
(a) promptly notify the Purchaser (i) when the registration statement
becomes effective, (ii) when any post-effective amendment to the
registration statement becomes effective and (iii) of any request by the SEC
for any amendment or supplement to the registration statement or any
prospectus
9
<PAGE>
relating to the registration statement or for additional information;
(b) use reasonable efforts to qualify, not later than the effective
date of the registration statement, the Shares under such "blue
sky" or other state securities laws as the Purchaser may reasonably request
(it being understood, however, that the obligation under this section 3.4(b)
shall not obligate the Company to qualify as a foreign corporation or a dealer
in securities or to execute or file any general consent to service of process
under the law of any such jurisdiction where it is not otherwise subject);
(c) furnish the Purchaser such number of copies of the registration
statement, each amendment to the registration statement, the prospectus
included in each such registration statement and each amendment to each
registration statement, each amendment or supplement to any prospectus and
such other documents as the Purchaser may reasonably request to facilitate the
disposition of the Shares;
(d) if at any time the SEC institutes or threatens to institute
any proceeding for the purpose of issuing a stop order suspending the
effectiveness of any such registration statement, promptly notify the
Purchaser and use reasonable efforts to prevent the issuance of any such stop
order or to obtain its withdrawal as soon as possible; and
10
<PAGE>
(e) insofar as the methods of distribution proposed to be used are
not reflected in the last prospectus filed by the Company as part of the
registration statement or pursuant to Rule 424 under the 1933 Act, the
Purchaser shall promptly provide the Company with a description of the method
or methods of distribution of the Shares from time to time contemplated by the
Purchaser, and the Company shall file any and all amendments and supplements
necessary to include the description in the registration statement.
3.5 EXPENSES OF REGISTRATION. All expenses (excluding underwriting and
brokerage commissions attributable to the Shares to be sold) incurred in
connection with all registrations under this agreement and the "blue sky"
qualifications referred to in section 3.4(b), including, without limitation,
all registration and qualification fees, printers' and accounting fees and
fees and disbursements of counsel for the Company, shall be borne by the
Company. Notwithstanding the foregoing, however, in any registration under
this section 3, the Company shall not be obligated to bear the fees or
expenses of counsel for the Purchaser.
3.6 UNDERWRITING REQUIREMENTS. The Company shall not be required to
include any Shares in any registration statement covering an underwritten
offering, unless the Purchaser accepts the terms of the underwriting and then
only in such quantity as will not, in the written opinion of the managing
underwriter(s), exceed the maximum number of Shares that can be marketed
without
11
<PAGE>
materially and adversely affecting the offering, if any, by the
Company.
3.7 HOLDBACK. At the request of the Company, the Purchaser shall agree
with the underwriters in any underwritten public offering of equity
securities of the Company not to sell or otherwise dispose of any Shares for
up to 180 days after the effective date of any registration statement
covering any such public offering.
3.8 TERMINATION OF OBLIGATIONS. The Company's obligations under this
section 3 shall terminate on the earlier of the fifth anniversary of the date
of this agreement and the date on which the Purchaser owns a number of Shares
less than 2% of the then outstanding shares of the Company's common stock.
4. SURVIVAL; INDEMNIFICATION
4.1 SURVIVAL. All representations, warranties and agreements of each
party shall survive the execution and delivery of this agreement,
notwithstanding any investigation at any time made by or on behalf of the
other party, and shall not be considered waived by consummation of the
transactions contemplated by this agreement, notwithstanding any alleged
knowledge of any breach.
4.2 INDEMNIFICATION. Each party shall indemnify and hold the other party
harmless from and against all losses, liabilities, damages and expenses
(including reasonable
12
<PAGE>
attorneys' fees) resulting from any breach of warranty or agreement or any
misrepresentation by the indemnifying party under this agreement.
5. ELECTION OF DIRECTOR. From time to time before the later of the third
anniversary of this agreement and the date on which, in the good faith
judgment of the Company's board of directors, the Purchaser and the Company
cease to have substantial, ongoing commercial relationships (it being
understood that the renewal or extension of any of the agreements referred to
in the recitals of the LOI (other than the agreement for MQ Secure) would be
deemed to constitute substantial, ongoing commercial relationships), the
Purchaser may designate (by written notice given to the Company and Liraz) a
single individual to be a member of the Company's board of directors. The
Company and Liraz shall, subject to the authority of the Company's board of
directors, cooperate and use all reasonable efforts (including, without
limitation, in the case of Liraz, to vote its shares in the Company) to cause
that designee (or his or her successor) to be elected to the board of
directors as promptly as practicable. Any director so designated may be
removed from the board of directors with or without cause at any time after
the second anniversary of this agreement.
6. MISCELLANEOUS
6.1 GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the law of the state of New
13
<PAGE>
York applicable to agreements made and to be performed wholly in New York.
6.2 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 that party as shall be specified by notice given under this section 6.2):
if to the Company or Liraz, to it, c/o the Company, at:
382 Main Street
Salem, New Hampshire 03079
Attention: President
Fax: (603) 898-7554
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Attention: Edward W. Kerson, Esq.
Fax: (212) 969-2900
if to the Purchaser, to it at:
2425 Olympic Boulevard
Santa Monica, California 90404
Attention: General Counsel
Fax: (310) 582-4056
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
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<PAGE>
transmitting machine of a confirmation slip confirming the number of pages
constituting the notice have been transmitted without error. In the case of
notices 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.
6.3 FURTHER ASSURANCES. Each party shall, from time to time, take such
action and execute and deliver such documents as the other may reasonably
request to carry out the transactions contemplated by this agreement.
6.4 FEES AND EXPENSES. Each party shall be solely responsible for its own
fees and expenses in connection with the transactions contemplated by this
agreement.
6.5 COUNTERPARTS. This agreement may be executed in counterparts, each of
which shall be considered an original, but of which together shall constitute
the same instrument.
6.6 SEPARABILITY. If any provision of this agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and, if
any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
6.7 PUBLICITY. Each party shall consult with and obtain the consent of
the other party before issuing any press
15
<PAGE>
release or making any other public disclosure using the other party's name or
otherwise making reference to the other party, unless the release or
disclosure is required to discharge the party's legal obligations (in which
case the party issuing the release or seeking the disclosure shall consult
with the other party before issuing the release or making the disclosure).
6.8 ATTORNEYS' FEES. In the event of any dispute between or among the
parties to the Transaction Documents, the prevailing party shall be entitled
to attorneys' fees and costs awarded in a final and non-appealable order by a
court having jurisdiction.
6.9 ENTIRE AGREEMENT. The Transaction Documents contain a complete
statement of all the arrangements among the parties with respect to their
subject matter, supersede all existing agreements among them with respect to
that subject matter, may not be changed or terminated orally and any amendment
16
<PAGE>
or modification must be in writing and signed by the party to be charged.
ACROSS DATA SYSTEMS, INC.
By: ------------------------
LIRAZ SYSTEMS LTD.
By: -------------------------
CANDLE CORPORATION
By: --------------------------
17
<PAGE>
INVESTMENT AGREEMENT
---------------------
July 26, 1996
----------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Sale and Purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Representations and Warranties . . . . . . . . . . . . . . . . . . . . 2
2.1 Representations and Warranties of the Purchaser . . . . . . . . . 2
2.1.1 Existence and Power . . . . . . . . . . . . . . . . . . . . 2
2.1.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . 2
2.1.3 Consents of Third Parties . . . . . . . . . . . . . . . . . 3
2.1.4 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1.5 SEC Matters . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1.6 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Representations and Warranties of the Company . . . . . . . . . . .5
2.2.1 Existence and Power . . . . . . . . . . . . . . . . . . . . 5
2.2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . 5
2.2.3 Consents of Third Parties . . . . . . . . . . . . . . . . . 5
2.2.4 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2.5 Capitalization. . . . . . . . . . . . . . . . . . . . . . . 6
2.2.6 SEC Matters . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2.7 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 Demand Registration . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Piggyback Registration. . . . . . . . . . . . . . . . . . . . . . 8
3.3 Obligation of Purchaser . . . . . . . . . . . . . . . . . . . . . 9
3.4 Obligations of the Company. . . . . . . . . . . . . . . . . . . . 9
3.5 Expenses of Registration. . . . . . . . . . . . . . . . . . . . . 11
3.6 Underwriting Requirements . . . . . . . . . . . . . . . . . . . . 11
3.7 Holdback. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.8 Termination of Obligations. . . . . . . . . . . . . . . . . . . . 12
4. Survival; Indemnification. . . . . . . . . . . . . . . . . . . . . . . 12
5. Election of Director . . . . . . . . . . . . . . . . . . . . . . . . . 13
6. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . 15
6.4 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.6 Separability. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.7 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.8 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.9 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 16
(i)
<PAGE>
CANDLE CORPORATION
SOFTWARE AGENCY AGREEMENT
This SOFTWARE AGENCY AGREEMENT ("AGREEMENT") is entered on October 7, 1996
("EFFECTIVE DATE") by CANDLE Corporation with offices at 2425 Olympic Blvd.,
Santa Monica, CA 90404, ("CANDLE") and Level 8 Systems Inc. ("AGENT"), with its
principal place of business at One Penn Plaza, Suite 3401, New York, New York
10119 and refers to the following facts:
RECITALS
1. CANDLE licenses, markets, distributes, and maintains certain software
products;
2. Agent markets software products and wishes to acquire from CANDLE the right
to solicit Candle's Products in the Territory;
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
a. "END-USER" means the entity or person, resident in the Territory,
sublicensing CANDLE's products from CANDLE for its internal use,
pursuant to an End-User License without any right to sublicense.
b. "END-USER LICENSES" "Licenses" mean License and Trial License
Agreements, and any other contracts or agreements entered into with
End-Users regarding the licensing and support of the Products.
c. "PRODUCT(S)" means the object code version of one or more of the
computer programs listed in Schedule A, attached to this Agreement,
which CANDLE may amend from time to time, and any technical
Documentation relating to such programs.
d. "TERRITORY" means North America.
e. "SITE" means a single location of Licensee composed of a single
building or a building complex.
2. APPOINTMENT AND GRANT OF LIMITED MARKETING RIGHTS
a. LICENSE GRANT. CANDLE grants to Agent the following licenses:
i. a non-exclusive, limited right to market and solicit Products to
End-Users located in the Territory;
ii. a limited, non-transferable, non-exclusive right to use the
Products for demonstration purposes. Agent shall have no access to the
source code for the Products.
b. DISTRIBUTION OUTSIDE TERRITORY. Promotion, solicitation or marketing
the Products outside the Territory requires CANDLE's prior express
written consent which Candle may withhold in its discretion.
c. LEGAL ACTION. Agent agrees that CANDLE may bring any legal or
equitable actions, either in its own or Agent's name for: i) breach by
any End-User Licenses, or (ii) infringement of any proprietary and
intellectual property rights of CANDLE.
d. SCOPE OF LICENSE. Agent shall not distribute or enter into
sublicenses regarding the Products with any third parties without
CANDLE's prior written consent which CANDLE may withhold in its
discretion.
e. OTHER RESERVED RIGHTS. CANDLE reserves all rights not specifically
granted to Agent, including, without limitation, the right to create
enhancements and derivative works, and the rights to all its
intellectual property rights. CANDLE may keep all revenue generated
as a result of such activities, and such revenue will not be subject
to this Agreement.
<PAGE>
3. MARKETING OBLIGATIONS OF AGENT
a. PROMOTION EFFORTS. Agent will use its reasonable efforts to solicit
promote and market the Products to End-Users in the Territory by providing
seminars, education, trade shows and similar promotional activities in the
Territory. If Agent prepares any marketing materials on the Products, it
shall submit such materials to CANDLE for its prior written approval.
b. PERSONNEL AND SHARED ASSISTANCE. Within three (3) months following the
execution of this Agreement, and for the duration of this Agreement, Agent
will train and maintain at least one capable person in sales and one in
support: (i) to serve the demands and needs of End-Users in the Territory,
to demonstrate the Products; and (ii) otherwise to carry out the
obligations and responsibilities of Agent set forth in this Agreement.
c. REMOVAL OF TRADEMARKS. Agent agrees not to remove any notices, legends
or marks appearing on or in the packaged materials including the first
screen of the Products and the documented and external packaging materials.
Agent shall reproduce such trademarks and trade names on documents as
necessary to market, advertise, and solicit the Products. Agent may not
market the Products under any other or different names than those specified
by CANDLE. Agent agrees to assist CANDLE in taking any reasonable steps at
CANDLE's cost that may be necessary to protect CANDLE's rights in the trade
names and trademarks of the Products. Agent shall not register or use any
of CANDLE's trademarks or trade names or any word, symbol, or design
confusingly similar thereto, as part of its corporate name.
d. COMPLIANCE WITH LAW. Agent shall be subject to all applicable laws in
performing all its duties under this Agreement. At its own expense, Agent
shall take such necessary action as may be necessary to enable Agent to
obtain and keep current all government licenses, permits and approvals,
necessary or advisable for the promotion, and marketing of the Products in
the Territory.
e. CONFLICTS OF INTEREST. During the term of this Agreement and for
a period of two (2) years after the termination of this Agreement, neither
Agent nor any parent or subsidiary of Agent, shall enter into any agency
agreement to market, promote, license, sell or otherwise make available
during the term of this Agreement, either directly or indirectly, or
through an entity which is in any way financially or contractually related
to Agent, any products which in CANDLE's reasonable opinion substitute for,
are competitive with, or perform functions substantially similar to those
performed by the Products. Candle may immediately terminate this Agreement
if Agent breaches this Section. After the expiration of this, the companies
will renegotiate this term in good faith.
4. MARKETING OBLIGATIONS OF CANDLE
CANDLE represents and warrants as follows:
PRODUCTS. CANDLE will supply Agent at its cost with one copy of the
Products for demonstration purposes and such other materials or
information, including marketing brochures to assist Agent in promoting and
soliciting the Products in the Territory.
5. TERM AND TERMINATION
a. TERM. The term of this Agreement shall commence on ____________ the
Effective Date for a period of one year and shall automatically renew for
one year periods unless either party provides the the other party with one
hundred twenty (120) days prior written notice. Notwithstanding any other
provision, the Agreement may be terminated before the expiration of its
stated term as set forth below.
b. CANDLE TERMINATION FOR CAUSE. CANDLE may promptly terminate this
Agreement at any time before the expiration of its stated term, or
thereafter, in the event that Agent breaches CANDLE proprietary or other
intellectual property rights or makes material misrepresentations to third
parties regarding the Products.
<PAGE>
c. TERMINATION FOR CAUSE. Either party may terminate this Agreement at
any time prior to the expiration of its stated term, or thereafter, in the
event that:
(i) The other party fails to perform any material obligation,
warranty, or defaults on any obligation under this Agreement and such
failure or default continues unremedied for period of thirty (30)
days; or
(ii) Agent is merged, consolidated, sells all or a majority of its
assets, or implements or suffers any substantial change in management
or control effecting a majority of its shares.
d. AUTOMATIC TERMINATION. This Agreement terminates automatically, with
no further action by either party, if a receiver is appointed for either
party or its property, either party makes an assignment for the benefit of
its creditors, any proceedings are commenced by, for or against either
party under any bankruptcy, insolvency or debtor's relief law or either
party is liquidated or dissolved. This Agreement shall also terminate
automatically if Agent ceases usual business operations.
e. NO CONSEQUENTIAL DAMAGES FOR TERMINATION. Under no circumstances will
CANDLE be liable to Agent for damages of any kind, including incidental or
consequential damages, for terminating this Agreement even if advised of
the possibility of such damages.
f. REMEDIES NOT EXCLUSIVE. Except as specifically provided to the
contrary herein, the right of either party to terminate this Agreement is
not an exclusive remedy and either party shall be entitled alternatively or
cumulatively to any and all other remedies available to it.
g. GOODWILL. Agent agrees that any goodwill/or market share created by
the Products or Agent's efforts pursuant to this Agreement will not
generate any separate or additional compensation, clientele indemnity,
termination damages, or special damages of any other kind from CANDLE to
Agent and that any such goodwill belongs to CANDLE. Agent shall invest as
required in its discretion to market and support the Products during the
term of this Agreement, including without limitation building up the
market, and further agrees that Agent's sole return and reimbursement for
this shall be from Agent's share of payments set forth herein and from no
other source. On termination, Agent shall not make any claim, demand, or
request for any additional remuneration whatsoever and shall hold harmless
and indemnify CANDLE against any such claim, demand or request.
6. TERMINATION PROCEDURE
a. EFFECT OF TERMINATION. Upon termination of this Agreement for
whatever reason:
(i) Agent shall no longer solicit or market the Products to End-Users
in the Territory. CANDLE shall no longer compensate Agent for such
activities.
(ii) Agent shall deliver to CANDLE, at no cost to CANDLE, within
thirty (30) days after termination hereof, any existing Candle
customer list, tapes, documentation, inventory, demonstration copies
and materials of whatever kind or nature regarding the Products, in
Agent's possession or control.
(iii) The parties shall use their best efforts to carry out an
orderly termination of their relations and to provide a smooth
transition, from Agent to CANDLE or CANDLE's designated
representative.
(iv) Each End-User may continue to use the Products licensed under
valid End User Licenses, it being understood that the End-Users'
rights set forth are independent of this Agreement and will survive
termination of this Agreement.
<PAGE>
(v) Agent will cease to use any CANDLE trademarks or trade names, and
will promptly return to CANDLE all advertising, promotional, and
similar materials and cancel all advertising and promotion of the
Products.
(vi) For a period of six (6) months after the date of termination,
Agent shall make available to CANDLE for inspection and copying all
books and records of Agent regarding Agent's performance of and
compliance with its obligations, warranties, and representations under
this Agreement.
(vii) Any provision of this Agreement which is by its terms
applicable to periods or actions occurring after expiration or
termination of the Agreement including, without limitation all
provisions regarding solicitation, advertising, proprietary and
intellectual property rights, compensation, warranties and
representations shall survive this Agreement. CANDLE agrees to pay to
Agent any fees regarding Agent's solicitation activities during the
term of this Agreement after the expiration or termination of this
Agreement.
7. LICENSE PROCEDURE
a. END-USER LICENSES. Only CANDLE may enter into license agreements with
End-Users. Once an End-User has agreed to license the CANDLE Products,
Agent shall pass the End-User's name, address and number of Products to
CANDLE so CANDLE can send licenses to the End-User. This Agreement does not
require the Agent to provide technical support, any maintenance and other
similar services required after Licenses with End-Users have been entered
into.
b. DISTRIBUTION OF PRODUCTS. Agent shall notify CANDLE of the name,
address and Products of each End-User who requires Product tapes to be
shipped. Upon receipt of each confirmed order pursuant to an End-User
License, CANDLE will ship the Products to End-User(s) business place
directly. Agent shall not maintain an inventory of the Products tapes at
any of its business places, except copies for demonstration purposes only.
c. DISCONTINUANCE OF PRODUCTS. CANDLE may discontinue to publish,
distribute or license any Products or features at any time, without notice,
and may cancel any orders for such discontinued Products without any
liability to Agent or any other third parties. No such cancellation,
refusal or delay will be deemed a termination (unless CANDLE so advises
Agent) or breach of this Agreement by CANDLE. Notwithstanding the above,
CANDLE will use its best efforts to provide Agent with 90 days prior notice
before taking such actions.
d. CHANNEL CONFLICT. In the event the parties to this Agreement have a
dispute regarding who solicited an End-User for the CANDLE Products, the
parties agree to work out in good faith a reasonable solution to this
conflict. In the event Agent has a dispute with another Candle distributor,
agent or reseller regarding a solicitation of CANDLE Products to an
End-User account, CANDLE shall in good faith arbitrate this dispute.
CANDLE's decision in this dispute shall be final.
8. COMPENSATION, SHIPMENT AND ADMINISTRATION
a. COMPENSATION. CANDLE shall pay to Agent a 15% compensation of the net
revenue (calculated without taking into account any taxes, including
without limitation, any value-added, sales, use, excise, property or other
tax, imposed by any governmental authority arising out of the transactions
under this Agreement which Candle or the End User may have to pay or
collect) received by Candle from the End User for each Product sold.
b. FOLLOW UP SALES. For a period of six (6) months following the
initial sale to an End-User at a particular Site, the obligation set forth
in Section 8.a. shall also apply regarding any follow up sales of the
Products to the same Site. An extension of such six (6) months period
shall be negotiated in good faith by the parties to take into account
transactions, such as pilot or trial sales, extending for longer periods.
<PAGE>
c. QUARTERLY REPORTS. Within three (3) business days after the end of
each calendar quarter during the term of this Agreement and for forty-five
(45) days thereafter, Agent shall provide CANDLE, by facsimile, a prospect
registration form to be agreed on by the parties, for each End-User
License that is expected to be granted during the next quarter, and such
other forms and information as CANDLE may request from time to time to
determine the source of the compensation and other amounts due hereunder.
d. NOTIFICATION. Each party will notify the other in writing of (i) any
claim or proceeding involving the Products within the Territory no later
than ten (10) days after the party learns of such claim or proceeding; (ii)
all claimed and suspected product defects; and (iii) any change in its
management or control or any transfer of more than twenty-five percent
(25%) of its assets or voting power within thirty (30) days thereof.
9. LIMITATION OF WARRANTIES AND INDEMNIFICATION OF AGENT
a. WARRANTY POLICY. CANDLE makes no warranties or representations as to
the performance of the Products or as to services to Agent, to End-User, or
to any other person. CANDLE reserves the right to change its warranty and
service policy set forth in such End-User Licenses or otherwise, at any
time, without further notice and without liability to Agent or any other
person.
b. DISCLAIMER OF WARRANTIES. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
ALL IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY
DISCLAIMED.
c. NO CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL CANDLE BE LIABLE FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF CANDLE HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
d. LIMITED LIABILITY. THE LIABILITY OF CANDLE, IF ANY, FOR DAMAGES
RELATING TO ANY OF THE PRODUCTS SHALL BE LIMITED TO THE ACTUAL LICENSE FEE
RECEIVED BY CANDLE FOR SUCH PRODUCT.
10. INDEMNIFICATION
Each party will defend and indemnify the other party (including reasonable
attorney's fees and costs of litigation) against and hold the other party
harmless from, any claims by any third party resulting from either party's
misrepresentations, regarding the Products.
CANDLE agrees to defend or, at its option, settle any action or claim
based upon a third party's claim of patent, copyright trade name or trade
secret infringement asserted against Agent because of its use of the
Products as delivered by CANDLE, provided that CANDLE is given prompt
notice of the action or claim and the right to control and direct the
investigation, defense and settlement thereof, and further provided that
Agent shall reasonably cooperate with CANDLE in connection with the
foregoing.
11. INTELLECTUAL PROPERTY RIGHTS AND CONFIDENTIALITY
a. INTELLECTUAL PROPERTY RIGHTS. Agent acknowledges CANDLE's exclusive
right, title and interest in and to any patents, copyright, trademarks,
trade names and similar rights which CANDLE may at any time own, adopt, use
or register in the Territory (jointly referred to as the "INTELLECTUAL
PROPERTY RIGHTS") and will not at any time do or cause to be done any act
or thing contradicting or in any way impairing or tending to impair any
part of said right, title and interest. Agent specifically acknowledges
that its appointment as agent and its representation of any Products
identified by any Intellectual Property Rights shall not create in Agent
any right, title, or interest in such rights.
b. CONFIDENTIAL INFORMATION. During the terms of this Agreement, CANDLE
may disclose to Agent certain proprietary information, including but not
limited to technical information, business and financial data and other
trade secrets relating to CANDLE's business ("CONFIDENTIAL INFORMATION").
Agent agrees that this
<PAGE>
Confidential Information constitutes valuable business assets of CANDLE,
the disclosure of which to third parties may cause irreparable damage.
Agent agrees not to disclose the Confidential Information to any parties
without CANDLE's prior written consent. This obligation shall survive the
termination of this Agreement.
Agent agrees that it will only use the Intellectual Property Rights and
Confidential Information to market and maintain the Products, and that,
upon expiration or termination of this Agreement, it will discontinue all
use of the Intellectual Property Rights and Confidential Information
without demand or judicial resolution.
Agent shall promptly notify CANDLE of any infringements, imitations,
illegal use, or misuse of the Intellectual Property Rights and
Confidential Information which come to Agent's attention. Agent agrees to
take any action requested by CANDLE, at CANDLE's reasonable expense, in any
court administrative agencies or otherwise, to prevent the infringement,
imitation or illegal use or misuse of any Intellectual Property Rights and
Confidential Information. Agent agrees to assist CANDLE in protecting
CANDLE's Intellectual Property Rights and Confidential Information in the
Territory and to make promptly available to CANDLE and its attorneys all of
Agent's files, records and other information pertaining to the advertising,
promotion and solicitation of the Products.
12. EXPORT CONTROLS
Agent acknowledges the Products originate in the United States and Agent
agrees to comply with any applicable U.S. laws, regulations, rulings and
executive orders on exportation (including, without limitation, the export
and destination control regulations of the United States Commerce and State
Departments and the anti-boycott regulations of the United States Commerce
and Treasury Departments) and with all applicable laws on import or export
of the Products. Agent warrants and represents that it will not export or
re-export outside the Territory any of the Products, whether directly or
indirectly.
Agent agrees to indemnify CANDLE against any claim, demand, action,
proceeding, investigation, loss, liability, or damage expense suffered or
incurred by CANDLE and arising out of or related to any violation (whether
intentional or unintentional) by Agent of any of the warranties or
covenants in this paragraph and to cooperate with CANDLE at no charge to
CANDLE in responding to and, defending any such claim.
13 GENERAL PROVISIONS
a. MODIFICATIONS AND AMENDMENTS. This Agreement shall not be modified,
amended, canceled or in any way altered, nor may it be modified by custom
and usage of trade or course of dealing, except by an instrument in writing
and signed by both of the parties hereto. All amendments or modifications
of this Agreement shall be binding only if in writing and executed by both
parties.
b. WAIVER. Performance of any obligation required of a party hereunder
may be waived only by a written waiver signed by the other party, which
waiver shall be effective only with respect to the specific obligation
described therein. The waiver by either party hereto of a breach of any
provision of this Agreement by the other shall not operate or be construed
as a waiver of any subsequent breach of the same provision or any other
provision of this Agreement.
c. SEVERABILITY. In the event that any provision is found invalid or
unenforceable pursuant to judicial decree or decision, the remainder of
this Agreement shall remain valid and enforceable according to its terms.
WITHOUT LIMITING THE FOREGOING, IT IS EXPRESSLY AGREED THAT EACH AND EVERY
PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY,
DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES IS INTENDED BY THE PARTIES
TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED
AS SUCH. FURTHER, IT IS EXPRESSLY AGREED THAT IN THE EVENT ANY REMEDY IS
DETERMINED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE, ALL OTHER REMEDIES AND
LIMITATIONS OF LIABILITY AND EXCLUSION OF DAMAGES SET FORTH HEREIN SHALL
REMAIN IN FULL FORCE AND EFFECT.
<PAGE>
d. VALIDITY, FORUM, LAWS AND CONSTRUCTION. (a) Disputes or controversy
(except for those related to copyright and any other intellectual property
claims) between the parties hereto arising under this Agreement or in any
other agreement or document executed and delivered by the parties in
connection with the transactions contemplated hereby shall, upon written
demand of any party hereto, be submitted to and be resolved by binding
arbitration in the City of Los Angeles pursuant to the rules, regulations,
practices and procedures then prevailing of the American Arbitration
Association. Any award or decision rendered shall be made by means of a
written opinion explaining the arbitrator(s)' reasons for the award or
decision, and the award or decision shall be final and binding upon the
parties hereto. The arbitrator(s) may not amend or vary any provision of
this Agreement. Judgment on the award rendered by the arbitrator(s) may be
entered in any court having Jurisdiction.
(b)The legal relations between the parties shall be governed by the laws of
the State of California, regardless of the choice of law provisions of
California or any other jurisdiction. Litigation or arbitration of
disputes under this Agreement shall be conducted in Los Angeles,
California. The parties further agree not to disturb such choice of forum,
hereby waive the personal service of any and all process upon them, and
consent that such service of process may be made by certified or registered
mail, return-receipt requested, addressed to the parties as set forth in
this Agreement.
e. BREACH. Neither party shall be in breach of any of its obligations
hereunder unless and until it shall have been given written notice of such
specifying the nature of such breach and the breaching party shall have
failed to cure such breach within the periods provided for herein, except
in the case of an alleged breach involving misuse of proprietary
information the notice period shall be five (5) business days.
f. ASSIGNMENT. Agent may not assign this Agreement or any of its rights
or obligations hereunder (including without limitation rights and duties of
performance) to any third party or entity, and this Agreement may not be
assigned involuntary or by operation of law, without the CANDLE's prior
written consent.
g. BENEFIT OF SUCCESSORS AND ASSIGNS. All rights and obligations of this
Agreement shall inure to the benefit of the parties and their respective
successors in title and assigns notwithstanding any change in the
constitution or amalgamation or reconstruction of the parties or their
respective successors or assigns.
h. NO PARTNERSHIP OR AGENCY. Nothing in this Agreement shall be
construed as creating a joint venture, partnership, agency, employment
relationship or franchise relationship, nor shall either party have the
right, power or authority to create any obligations or duty, express or
implied, on behalf of the other party hereto, it being understood that the
parties are independent contractors vis-a-vis one another.
i. NO THIRD PARTY BENEFICIARIES. Nothing contained in this Agreement,
express or implied, shall be deemed to confer any rights or remedies upon,
nor obligate any of the parties hereto, to any person or entity other than
such parties, unless so stated to the contrary.
j. EXCUSED PERFORMANCES. Neither party shall be in default of or to
have breached any provision of this Agreement as a result of any delay,
failure in performance or interruption of the Services, resulting directly
or indirectly from Acts of God, acts of civil or military authority, civil
disturbances, fire, transportation contingencies, shortages of facilities,
fuel, energy, labor or materials, or laws, regulations, acts or order of
any government agency or official thereof, other catastrophes, or any other
circumstances beyond its reasonable control.
k. NOTICES. All notices and demands hereunder shall be in writing and
shall be served by personal service telex or by mail at the following
addresses:
FOR CANDLE: CANDLE CORPORATION
General Counsel
2425 Olympic Blvd.
Santa Monica, CA 90404
FOR AGENT: Bruno Lerer
<PAGE>
_______________________________
_______________________________
_______________________________
l. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
m. AUTHORITY TO EXECUTE. Each party to this Agreement represents and
warrants that it has full power to enter into this Agreement.
n. CAPTIONS. The section headings and captions contained herein are for
reference purposes and convenience only and shall not in any way affect the
meaning or interpretation of this Agreement.
o. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
and contact between the parties and supersedes any and all prior and
contemporaneous, oral or written representations, communications,
understandings and agreements between the parties with respect to the
subject matter hereof, all of which representations, communications,
understandings and agreements are hereby canceled to the extent they are
not specifically merged herein. The parties acknowledge and agree that
neither of the parties is entering into this Agreement on the basis of any
representations or promises not expressly contained herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
specified below.
<TABLE>
<CAPTION>
For and on behalf of: Level Systems Inc. For and on behalf of: CANDLE CORPORATION
<S> <C>
Signature: Signature:
-------------------------- --------------------------
Printed Name: Printed Name:
----------------------- -----------------------
Title: Title:
------------------------------ ------------------------------
Date: Date:
------------------------------- -------------------------------
</TABLE>
<PAGE>
EXHIBIT A
LIST OF CANDLE PRODUCTS
Candle Command Center for MQ
MQ Secure
<PAGE>
Execution Copy
28 February 1996
EXHIBIT 10.43
LICENSING AGREEMENT: NT CLIENT BRIDGE
CONTENTS:
1. Definitions
2. Co-ordinators
3. Utilisation of Licence Works
4. Grant of Licence
5. Delivery
6. Term And Termination
7. Modifications and Enhancements
8. Royalties and Accounting
9. Marketing
10. Warranties
11. Indemnification
12. Limitations and Remedies
13. Trademarks, Trade Names and Publicity
14. Confidential Information
15. Dispute Escalation
16. Competitive Products and Services
17. Test of Early IBM Program Materials
18. Rights in Data
19. Inventions
20. General
Attachment A - Agreement for Disclosure of IBM Confidential Information
<PAGE>
Execution Copy
28 February 1996
This AGREEMENT by and between International Business Machines
Corporation with an address for purposes of this AGREEMENT at Old Orchard
Road, Armonk, New York 10504 ("IBM") and Level 8 Systems, 1 Penn Plaza, Suite
3401, New York, New York, 10119, USA ("Level 8").
WHEREAS, Level 8 desires and IBM agrees to licence to Level 8, the
LICENSED WORKS described in this AGREEMENT in accordance with the terms and
conditions of this AGREEMENT for integration into the Level 8 Microsoft to
MQSeries Client Bridge PRODUCT.
NOW THEREFORE the parties agree as follows:
1. DEFINITIONS
"AGREEMENT" shall mean this AGREEMENT, its supplements and Attachments.
"CODE" shall mean computer programming code.
"CUSTOMERS" shall mean both internal and external end users of
PRODUCT(S) distributed by Level 8 or it's SUBSIDIARIES and/or it's authorised
distributors, dealers or remarketers.
"DERIVATIVE WORK" means a work based upon one or more pre-existing
works, such as a revision, enhancement, modification, translation,
abridgement, condensation, expansion or any other form in which a work may be
recast, transformed or adapted, and which, if prepared without authorisation
of the owner of the copyright in such pre-existing work would constitute a
copyright infringement under United States law. A work consisting of
editorial revisions, annotations, elaboration's, or other modifications
which, as a whole, represent an original work of authorship is a DERIVATIVE
WORK.
"DOCUMENTATION" shall mean manuals and other written materials that
relate to particular CODE.
"ENHANCEMENTS" shall mean changes or additions, other than MAINTENANCE
MODIFICATIONS, to object and source code and related documentation, that
improve functions, add functions or improve performance by changes in system
design or coding.
"ERROR" shall mean (1) any programming statement in CODE that renders
the CODE inoperable, causes the CODE to fail to meet the specifications
thereof, or causes
2
<PAGE>
Execution Copy
28 February 1996
incorrect results; or (2) an incorrect or incomplete statement or diagram in
DOCUMENTATION that causes DOCUMENTATION to be inaccurate or inadequate in any
material respect.
"GENERAL AVAILABILITY" or "GENERALLY AVAILABLE" or "GA" means, with
respect to PRODUCT(S), that such is generally available for shipment to
customers.
"HARMFUL CODE" means any computer code, programming instruction or set
of instructions that is intentionally and specifically constructed with the
ability to damage, interfere with or otherwise adversely affect computer
programmes, data files, or hardware without the consent or intent of the
computer user. This definition includes, but is not limited to,
self-propagating programming instructions commonly called viruses and worm.
"IBM PROGRAM MATERIALS" shall mean the Beta versions of i) complete
MQSeries for MVS/ESA VI release 1.1.4, and ii) IBM MQSeries for NT Client
CODE.
"INVENTION" means any invention, improvement, discovery, idea, concept,
know-how, or technique that either party makes, generates, first conceives or
reduces to practice during the term of this AGREEMENT and in performance of
this AGREEMENT.
"LICENSED CODE" shall mean the IBM MQSeries Client for Windows NT CODE.
LICENSED CODE shall include OBJECT CODE and SOURCE CODE for the
client-connection channel table which is used by IBM MQSeries client for
Windows NT code to map the IBM queue manager name to the LU6.2 or TCP/IP
address. If not otherwise specified all other elements of LICENSED CODE
shall be OBJECT CODE only. As detailed below:
1. Beta version of IBM's MQ for Windows NT product. (Client and server)
2. Beta version of Victory (MQ for MVS) VI.1.4
a. Without ASCII/EBCDIC data conversion
b. With data conversion.
3. Internal MQ for NT Server Tables for mapping client names.
a. By providing 3 source modules ..
AMQRCDFA.C, AMQRFILA.C and AMQRFLHA.C
"LICENSED DOCUMENTATION" shall mean DOCUMENTATION that relates to
LICENSED CODE, including documentation of the format of the client-connection
channel table which is used by IBM MQSeries for NT client code to map the IBM
queue manager name to the LU6.2 or TCP/IP address.
3
<PAGE>
Execution Copy
28 February 1996
"LICENSED WORK(S)" shall mean LICENSED CODE and LICENSED DOCUMENTATION,
any part or all of which may be referred to as LICENSED WORK, including any
MAINTENANCE MODIFICATIONS or ENHANCEMENTS.
"MAINTENANCE MODIFICATIONS" means any modification or revisions, other
than ENHANCEMENTS, to code or documentation that correct errors or provide
other incidental corrections.
"OBJECT CODE" shall mean CODE, substantially or entirely in binary form,
which is directly executable by a computer after suitable processing but
without the intervening steps of compilation or assembly.
"PLATFORM" means the combination of the operating system and hardware
architecture on which a PROGRAM operates.
"PROGRAM(S)" means data processing programming CODE consisting of a
plurality of instructions or statements in human readable (source code) or
machine readable (object code) form.
"PRODUCT(S)" shall mean Level 8's gateway between Microsoft's message
queuing product and IBM's MQSeries products. This gateway will run on MS
Window NT and will map MS message queuing and IBM MQSeries names, addresses,
parameters and protocols to each other. The gateway shall constitute an
offering consisting of PRODUCT CODE and PRODUCT DOCUMENTATION, created by
Level 8, including the LICENSED WORKS. Any reference to PRODUCT(S) shall
include the LICENSED WORK(S) incorporated into the PRODUCT(S). PRODUCT CODE
shall mean a CODE offering incorporating LICENSED CODE. PRODUCT
DOCUMENTATION shall mean a documentation offering incorporating LICENSED
DOCUMENTATION.
"RELATED MATERIAL(S)" shall mean IBM materials, other than the LICENSED
WORKS that are identified in supplements to this AGREEMENT, useful in the
design development and/or maintenance of PRODUCT(S). Such RELATED MATERIALS
may exist in written or machine readable form.
"SOURCE CODE" shall mean CODE, other than OBJECT CODE, and related
system documentation, comments and procedural code such as job control
language, which may be printed out or displayed in a form readable and
understandable by a programmer of ordinary skill.
"SUBSIDIARY" shall mean a corporation, company or other entity
4
<PAGE>
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28 February 1996
1) more than fifty percent (50%) of whose outstanding shares or
securities (representing the right to vote for the election of
directors or other managing authority) are, now or hereafter,
owned or controlled, directly or indirectly, by a party hereto, or
2) which does not have outstanding shares or securities, as may be the
case in a partnership, joint venture or unincorporated association,
but more than fifty percent (50%) of whose ownership interest
representing the right to make the decisions for such corporation,
company or other entity is, now or hereafter, owned or controlled,
directly or indirectly, by a party hereto; but such corporation,
company, or other entity shall be deemed to be a SUBSIDIARY only so
long as such ownership or control exist.
2. CO-ORDINATORS
2.1 Each party will designate a co-ordinator with authority to
represent it in all matters concerning the management of this AGREEMENT.
Written correspondence and notices will be copied to all the named
co-ordinators. Each party will provide the other prompt written notice of
replacement of such co-ordinators.
2.2 The Level 8 co-ordinator shall be:
MR. RICHARD COOK
Level 8 Systems
1, Penn Plaza,
New York, New York 10119
USA
Tel: 212 244 1234
Fax: 212 760 2327
2.3 The IBM co-ordinator shall be:
M MR P. GRAINGER IBM United Kingdom Ltd.
Hursley Park
Winchester
Hampshire S021 2JN
England
Tel: + 44 1962 816227
Fax:+ 44 1962 818338
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2.4 Each partys' employees, co-ordinators, managers or agents shall at
all times be considered to be employees of their respective employers. "Level
8" or "IBM" shall be deemed, unless the context otherwise requires, to refer
to and include, respectively, Level 8, Level 8's employees and agents and
IBM, and IBM's employees and agents.
3. UTILISATION OF LICENSED WORKS
3.1 Level 8 agrees that each LICENSED WORK licensed under this
AGREEMENT shall:
3.1.1 be functionally integrated into PRODUCT, either for licensing
as a single PRODUCT entity to third parties or for Level 8's internal use;
and be marketed in the regular course of business by Level 8 to their
SUBSIDIARIES, to their network of authorised distributors, to their dealers,
to their re-marketers or to their CUSTOMERS.
3.2 Level 8 shall not reverse assemble, reverse compile, reverse
engineer or otherwise translate any LICENSED CODE provided by IBM.
3.3 Level 8 shall ensure that it's SUBSIDIARIES, and authorised
third-party distributors, dealers and re-marketers agree to act in a manner
consistent with Level 8's obligations under this AGREEMENT.
3.4 Level 8 shall include a proprietary statement in the PRODUCT (both
object and source code versions), and DOCUMENTATION, which statement is
sufficient to protect IBM's copyright.
3.5 If Level 8 engages in marketing PRODUCT to the United States
Government, each PRODUCT code media label PRODUCT DOCUMENTATION must include
a legend substantially similar to the following: "Note to United States
Government Users - documentation and programs related to restricted rights.
Use, duplication or disclosure is subject to restrictions set forth in GSA
ADP Schedule Contract with Level 8 and/or licensors."
3.6 Level 8 shall make available to IBM a copy of each form of licence
agreement under which PRODUCTS are provided to CUSTOMERS. Such licence
agreement may be in the form of a "shrink wrapped" document affixed to the
PRODUCT package or such licence agreement as may be submitted to IBM. Unless
IBM rejects a proposed agreement, in writing, within ninety (90) days of
submission, it shall be deemed accepted.
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4. GRANT OF LICENCE
4.1 LICENSED CODE
IBM hereby grants to Level 8 a world-wide, non-exclusive licence to
execute, display and perform the LICENSED CODE only when it is integrated in
PRODUCT CODE. Such licence shall also include the further rights of Level 8
to reproduce and distribute, internally and externally, copies of LICENSED
CODE only when integrated in PRODUCT CODE in OBJECT CODE form. Level 8 shall
have the right to authorise others to distribute, but not to reproduce
PRODUCT CODE. Level 8 shall have no right to modify LICENSED CODE to produce
DERIVATIVE WORKS thereof unless the sole reason for the modification is to
correct an ERROR reported by IBM.
4.2 LICENSED DOCUMENTATION
IBM hereby grants to Level 8 a world-wide, non-exclusive licence to
reproduce non-confidential LICENSED DOCUMENTATION and prepare DERIVATIVE
WORKS thereof and to distribute, internally and externally copies of LICENSED
DOCUMENTATION and DERIVATIVE WORKS thereof only when integrated in PRODUCT
DOCUMENTATION.
4.3 IBM also grants to Level 8 the right to sub-licence it's
SUBSIDIARIES under the rights specified in 4.1 and 4.2. Each SUBSIDIARY so
sub-licensed shall be bound by the terms and conditions of this AGREEMENT as
if it were named herein, provided that Level 8 shall pay and account to IBM
for all royalties in respect of the exercise of any sub-licences granted
hereunder. Any sub-licence granted to a SUBSIDIARY shall terminate on the
date such SUBSIDIARY ceases to be a SUBSIDIARY.
5. DELIVERY
5.1 IBM agree to deliver one (1) copy/set of LICENSED WORKS and IBM
PROGRAM MATERIALS. The time and place of delivery and format and media of
LICENSED WORKS shall be mutually agreed between the IBM and Level 8
co-ordinators.
5.2 Level 8 agree to provide evaluation copies of PRODUCT to IBM if
required for CUSTOMER support. The number of copies, time and place of
delivery and format and media of PRODUCT shall be mutually agreed between the
IBM and Level 8 co-ordinators.
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6. TERM AND TERMINATION
6.1 This AGREEMENT shall commence upon signature by both parties and,
subject to the Termination provisions set out herein, shall terminate on 31st
December 1999.
6.2 Each party shall have the right to terminate this AGREEMENT in the
event of a material breach by the other party of its obligations herein. Such
termination shall be made by written notice to the other party and shall
become effective forty five (45) days after giving of such notice, unless the
other party shall have corrected the breach prior to the effective
termination date.
6.3 Neither party may terminate this AGREEMENT at any time without
cause.
6.4 Both parties agree to provide immediate written notification to the
other in the event that more than fifty percent (50%) of the outstanding
shares or securities (representing the right to vote for the election of
directors or other managing authority) of the said party are now, or
hereafter become, owned or controlled directly or indirectly by any third
party entity whether individual or corporate, the other party shall have the
right to terminate this AGREEMENT within ninety (90) days of the
notification. Such termination shall be made by written notice to the said
party and shall become effective immediately.
6.5 The expiration or termination of this AGREEMENT shall not affect
any rights or licences exercised or granted to Level 8 with respect to any
PRODUCT delivered to and installed in Level 8's CUSTOMERS prior to such
expiration or termination, and any corresponding royalty obligations of Level
8 hereunder, shall survive and continue. Except in the event of 6.2 above:
(a) Level 8 may fill any orders received by Level 8, its SUBSIDIARIES, and
its and their authorised distributors, dealers or remarketers and accepted
from CUSTOMERS prior to the effective date of termination, and; (b) Level 8
may continue to provide MAINTENANCE MODIFICATIONS and support to CUSTOMERS.
6.6 In the event of termination under 6.2 or 6.4 of this AGREEMENT
Level 8 shall not provide any ENHANCEMENTS to CUSTOMER PRODUCT installed base.
6.7 In the event of any termination or expiration of this AGREEMENT in
whole or in part then the provisions of the sections entitled:
WARRANTIES,
INDEMNIFICATION,
CONFIDENTIAL INFORMATION
ROYALTIES AND ACCOUNTING
LIMITATION OF REMEDIES, and
GENERAL
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shall survive and shall continue and shall bind the parties and their legal
representatives, successors, heirs and assigns.
6.8 Following expiry of this AGREEMENT, IBM agrees to consider in good
faith any request by Level 8 to extend this AGREEMENT for a further period.
7. MODIFICATIONS, ENHANCEMENTS AND SUPPORT
7.1 During the term of this AGREEMENT IBM may, at it's sole discretion,
offer to Level 8 MAINTENANCE MODIFICATIONS, ENHANCEMENTS and new GA levels to
the LICENSED WORKS subject to section 10.5 below. Should Level 8 accept such
an offer, this will be recorded as an update to this AGREEMENT and will be
subject to the terms and conditions of this AGREEMENT.
7.2 IBM shall have no installation, warranty or maintenance
responsibilities for any PRODUCTS.
7.3 IBM shall provide defect support to Level 8 for the LICENSED CODE
during the term of this AGREEMENT insofar that the defects are reproducible
on IBM's MQSeries for NT Client product.
7.4 Level 8 agrees to provide IBM with evaluation copies of PRODUCT for
support purposes upon written request by the IBM co-ordinator to the Level 8
co-ordinator.
8. ROYALTIES AND ACCOUNTING
8.1 Level 8 shall pay to IBM percentage royalties based on total world
wide PRODUCTS revenue received by Level 8 it's SUBSIDIARIES, it's their,
distributors, dealers and remarketers in the following stages:
A) 11% (eleven percent) of PRODUCTS revenue received by Level 8
for the period of 12 (twelve) calendar months following
PRODUCT GA.
B) 10% (ten percent) of PRODUCTS revenue thereafter received
by Level 8.
8.2 Royalties accrued for the preceding 3 (three) month period shall be
paid to IBM within 90 (ninety) days after the last day of each March, June,
September and December. Each payment shall be accompanied by a statement,
summarising the basis of
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calculating the amount of such payment. Further details of bank accounts and
payment process will be mutually agreed by the IBM and Level 8 co-ordinators.
8.3 For those PRODUCTS installed free of charge at Level 8, its
SUBSIDIARIES, distributors, dealers, remarketers and CUSTOMERS, royalties
shall be paid based on the mean average royalty amount per product paid in
the 3 (three) month accounting period of the installation in question.
8.4 It is understood and agreed that Level 8 may increase or decrease
any prices and/or charges relating to the PRODUCTS without notice to or
approval of IBM. Level 8 will make a good faith allocation to PRODUCTS
revenue in case of PRODUCTS bundling such as site licences.
8.5 Except as otherwise provided herein neither party shall be liable
for the expenses of the other party. No other payments or consideration,
except as provided herein will be made by either party except by mutual
agreement in writing.
9. MARKETING
9.1 Level 8 agrees that it hereby grants to IBM the right to
independently market PRODUCT. IBM is under no obligation to market PRODUCT.
9.2 Level 8 agrees that it will grant IBM the right to market PRODUCT.
IBM's right to market shall be based on most favoured terms, including but
not limited to price. Such marketing rights shall include the right to
license PRODUCT to its internal end users and CUSTOMERS as well as license
its remarketers, dealers, distributors and SUBSIDIARIES, who may in turn
remarket PRODUCT through their remarketer channels and direct channels.
10.0 WARRANTIES
10.1 Level 8 and IBM each represents and warrants to the other that it
is under no obligation or restriction, nor will it assume any such obligation
or restriction that does or would interfere or conflict with the performance
to be rendered under this AGREEMENT.
10.2 IBM represents and warrants to Level 8 that it has title to the
copyright for the LICENSED WORKS and/or that it has been licensed to grant
the rights and licences granted hereunder to Level 8.
10.3 IBM DOES NOT WARRANT THAT: A) THE LICENSED WORKS WILL MEET THE
REQUIREMENTS OF LEVEL 8, IT'S SUBSIDIARIES, OR IT'S AND
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THEIR DISTRIBUTORS, DEALERS OR REMARKETERS OR ANY OF THEIR CUSTOMERS, OR B) THE
OPERATION OF THE LICENSED CODE WILL BE UNINTERRUPTED OR ERROR FREE.
10.4 EXCEPT AS HEREINABOVE PROVIDED IN THIS SECTION 10.0 THE LICENSED
WORKS AND IBM PROGRAM MATERIALS ARE PROVIDED "AS IS", WITHOUT WARRANTY OF ANY
KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
10.5 The remedies for breach of any warranty under this section 10.0 are
subject to the limitations of sections 11.0 and 12.0 below.
11.0 INDEMNIFICATION
11.1 IBM will, at its own expense, defend Level 8 and its CUSTOMERS (to
the extent that Level 8 has agreed to defend its CUSTOMERS under Level 8's
standard agreements) against any claim that arises out of any alleged breach
of warranty given by IBM in subsection 10.2 above, or that arises out of any
claim that the LICENSED WORKS infringe the patent, copyright or trade secret
rights of a third party, and IBM will pay resulting costs, damages and
attorney's fees finally awarded by a court for such a claim, subject to
subsections 11.1a) through c) and 11.3 below:
a) IBM's obligation under this section 11.0 is conditioned on Level
8's agreement that if all or any of the LICENSED WORKS are, in IBM's opinion,
likely to become the subject of such a claim, Level 8 will permit IBM, at
IBM's option and expense, either to procure the right for Level 8 to continue
marketing and using such LICENSED WORKS or to replace or modify them so that
they become non-infringing while still providing the same functionality.
b) If neither the foregoing alternatives is available on terms which
are commercially reasonable, either party may terminate this AGREEMENT.
c) IBM shall have no obligation with respect to any claim: (i)
based upon Level 8's modification of LICENSED WORKS; (ii) based upon use of
LICENSED WORKS not authorised hereunder; (iii) based upon aspects of PRODUCT
not provided by IBM; or (iv) based upon use of such PRODUCT in combination
with equipment, data or other programs not provided by IBM.
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d) This subsection 11.1 states IBM's entire obligation to Level 8
regarding actions based on subsection 10.1 above. Other actions, including
those based on subsection 10.1 above, will be subject to limitations set
forth in section 12.0 below.
11.2 Level 8 will, at its own expense, defend IBM and its SUBSIDIARIES
against any claim that PRODUCT or any third party CODE and/or any Level 8
CODE in the PRODUCT, alone or in combination with any LICENSED CODE,
infringes a patent trademark copyright or trade secret right of a third party
or otherwise results in a claim against IBM not subject to the
indemnification under subsection 11.1 above.
11.3 Level 8 will, at its own expense, defend IBM and its SUBSIDIARIES
against any claim that arises out of any alleged misrepresentation made by
Level 8 or its SUBSIDIARIES, or its or their distributors, dealers, or
remarketers, to its CUSTOMERS or any breach of warranty or any representation
given by Level 8 in this AGREEMENT; or any breach of any obligation of Level
8 under this AGREEMENT.
11.4 Subject to subsection 11.5 below, Level 8 will pay resulting costs,
damages and attorney's fees finally awarded by a court for any claim
contemplated in subsections 11.2 or 11.3.
11.5 To qualify for such defence and payment, the indemnified party must:
1) give the indemnifying party prompt written notice of any such
claim; and
2) allow the indemnifying party to control the defence, and co-operate
with the indemnifying party in the defence and all related settlement
negotiations.
12.0 LIMITATIONS AND REMEDIES
12.1 In no event will either party be liable for any lost profits, lost
savings, incidental damages or other economic consequential damages, even if
advised of the possibility of such damages. In addition, neither party will
be liable for any damages claimed by the other party based on any third party
claim, except as provided in section 11.0 above, other than claims for
infringement of patents, copyrights or other intellectual property rights.
12.2 It is agreed that IBM's liability shall be unlimited for copyright
infringement. In all other cases direct damages shall be limited to $100,000
(one hundred thousand US dollars).
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12.3 It is agreed that Level 8's liability shall be unlimited for
copyright infringement. In all other cases direct damages shall be limited
to $100,000 (one hundred thousand US dollars).
13.0 TRADEMARKS, TRADE NAMES AND PUBLICITY
13.1 Except as otherwise provided herein or by separate written
agreement, each party agrees not to use the other party's name, trade names,
trademarks, or any other designation without prior written consent.
13.2 Level 8 will include an appropriate acknowledgement that MQSeries
is a trademark of IBM in any publications (including marketing literature and
advertising material) where MQSeries is used in conjunction with PRODUCT.
13.3 Level 8 will not juxtapose MQSeries directly with a Level 8 trade
name, trademark or any acronym therefor in the name of any MQSeries product,
regardless whether a visual connector is used between MQSeries and the trade
name or acronym therefor. For purposes of this AGREEMENT, a "trade name"
shall be defined as a name under which Level 8 transacts business.
13.4 Level 8 acknowledges that MQSeries, together with the goodwill of
the business symbolised thereby, are
13.5 Level 8 agrees not to take any action which will interfere with or
challenge IBM's rights in MQSeries.
13.6 Except as otherwise expressly provided to the contrary in this
AGREEMENT, nothing shall be construed as authorising Level 8 to use any IBM
trademark or trade name, or any trademark or trade name that is confusingly
similar to any IBM trademark or trade name.
13.7 When featuring the MQSeries trademark, Level 8 shall use the
artwork provided by IBM and adhere to any guidelines for such artwork use
that IBM may provide.
13.8 The terms and conditions of the AGREEMENT shall be treated by the
parties as INFORMATION as defined in Agreement HUR830D including any detail
or nature of LICENSED CODE.
13.9 Any press releases or public announcements which contain
information not previously announced relating to this AGREEMENT shall be made
only with the prior review and written consent of the other party.
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14. CONFIDENTIAL INFORMATION
14.1 Level 8 agree that the content of this contract is deemed
confidential and that they will not disclose it's content in part or whole,
to any third party without the prior written consent of IBM which shall not
be unreasonably withheld.
14.2 Any press releases or public announcements which contain
information not previously announced relating to this AGREEMENT shall be made
only with the prior review and written consent of the other party.
14.3 The parties agree that whenever possible, all information exchanged
will be non-confidential. Any disclosure of IBM confidential information
("INFORMATION") will be made under the terms of the AGREEMENT for the
Disclosure of IBM Confidential Information, Agreement Number HUR830D dated 14
September 1994 a copy of which is shown in Attachment A.14.3 No Level 8
information shall be deemed to be received in confidence by IBM unless, and
to the extent that, such information is covered by separate terms to be
agreed in writing by the parties.
14.4 For the avoidance of doubt the IBM MQFAP DOCUMENT and any IBM
Source code are IBM Confidential and subject to the terms of Agreement
HUR830D dated 14 September 1994 a copy of which is shown in Attachment A.
15. DISPUTE ESCALATION
15.1 In the event that a dispute arises between IBM and Level 8
pertaining to any matters related to this AGREEMENT, the following escalation
procedure shall apply:
15.2 The IBM Co-ordinator and the Level 8 Co-ordinator shall make a good
faith effort to resolve the dispute as soon as possible. In the event that
they cannot resolve such dispute within fifteen (15) business days, the
matter may, at the option of either party be submitted, for discussion and
resolution to the nominated senior executives within each party.
15.3 Submission of a dispute to all levels of management as described in
this dispute escalation provision shall be a prerequisite to giving notice of
termination for breach.
16.0 COMPETITIVE PRODUCTS AND SERVICES
16.1 Subject to section 17.0
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16.1.1 Nothing in this AGREEMENT shall be construed to limit or impair
any right of either party to market, directly or indirectly, other products
or services competitive with those offered by the other party.
16.1.2 IBM shall be free to market, directly or indirectly, the LICENSED
WORKS or any portion or combination of LICENSED WORKS, to others.
17.0 TEST OF EARLY IBM PROGRAM MATERIALS
17.1 IBM agrees to provide Level 8 with early beta versions of the IBM
PROGRAM MATERIALS.
17.2 Level 8 are authorised to use the IBM PROGRAM MATERIALS only on the
designated machines, a list of designated machines will be agreed by the IBM
and Level 8 co-ordinators, only for development and testing of PRODUCT. For
purposes of this AGREEMENT, use is defined as copying any portion of the IBM
PROGRAM MATERIALS into the designated machine(s) and/or transmitting them to
the designated machine(s) for processing of the machine instructions or
statements contained therein.
17.3 The license granted under this AGREEMENT for the designated
Machine(s) may be temporarily transferred to (1) backup Machine(s) if the
designated Machine(s) is/are inoperative, and (2) another machine for
assembly or compilation of the IBM PROGRAM MATERIALS If the configurations of
the designated Machine(s) are such that the IBM Program Materials cannot be
assembled or compiled on the designated Machine(s).
17.4 Level 8 shall not copy, in whole or part, without IBM's written
permission, the IBM PROGRAM MATERIALS which are provided in printed form
under this Agreement. Any IBM PROGRAM MATERIALS which are provided in
machine-readable form may be copied, in whole or in part, in printed or
machine-readable form in sufficient number for your use with the designated
Machine(s). Level 8 agree to maintain appropriate records of the number and
location of all such copies which, together with the original of the IBM
PROGRAM MATERIALS, shall be the property of IBM. If a copyright notice is
included on the IBM PROGRAM MATERIALS, Level 8 will reproduce and include the
copyright notice, in accordance with the copyright in instructions provided
by IBM, on any such copies.
17.5 No right to use, print, copy or display the IBM Program Materials,
in whole or in part, is granted except as expressly provided in this
Agreement. You shall not reverse assemble, reverse compile, or otherwise
translate the IBM PROGRAM MATERIALS.
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18.0 RIGHTS IN DATA
18.1 Level 8 agree that IBM may utilise all written reports,
suggestions, improvements and any other materials, information, ideas,
concepts and know-how (including corrections to problems in the LICENSED
WORKS and IBM PROGRAM MATERIALS) whether written or oral, furnished by Level
8 to IBM in connection with this AGREEMENT for all business purposes, without
accounting to Level 8. Level 8 grant IBM a world-wide, unrestricted,
irrevocable and royalty-free license to include the foregoing in any IBM
licensed programs or other IBM offering.
19. INVENTIONS
19.1 An INVENTION made within the term of and in performance of this
AGREEMENT will be treated as follows:
a) if made by personnel of Level 8 , it shall be the property of Level
8. Level 8 hereby grants to IBM an irrevocable, nonexclusive, world-wide,
paid-up license under such invention, all patent applications filed
therefore, and all patents issued thereon.
b) if made by personnel of both parties, it and all patent
applications filed therefor and all patents issued thereon shall be jointly
owned by the parties. Each party shall have the right to grant licences to
third parties or assign its rights therein without accounting to the other
party.
19.2 All expenses incurred in obtaining and maintaining any such jointly
owned patent shall be equally shared, but if either party shall elect not to
file a patent application in any country the other shall have the right to
obtain and maintain a patent in that country at its or their own expense and
shall have full control of the prosecution and maintenance thereof even
though title thereto shall remain joint as aforesaid.
19.3 All licenses granted to either party include the unrestricted right
to make, have made, use, lease, sell or otherwise transfer any apparatus, and
to practice any method, covered by the INVENTION. Such license shall include
the right of the licensee to grant sublicenses to its SUBSIDIARIES.
19.4 Nothing in this section grants any rights under any copyrights of
either party.
19.5 Except as otherwise specifically provided herein, nothing contained
in this AGREEMENT shall be deemed to grant any license under any patent or
patent applications arising out of any other inventions of either party.
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20.0 GENERAL
20.1 Nothing contained in this AGREEMENT shall relieve either party of
any other duties or obligations or other performance called for in any other
agreement.
20.2 Level 8 may not assign its rights or delegate or subcontract its
duties or obligations under this AGREEMENT without prior written consent from
IBM. Any attempt to do so is void.
20.3 Each party is and shall remain an independent contractor as to the
other with respect to all performance rendered pursuant to this AGREEMENT.
Neither party nor any employee of either party shall be considered an
employee or agent of the other for any purpose. Neither party nor its
employees shall have authority to bind or make commitments on behalf of the
other party for any purpose and shall not hold itself or themselves out as
having such authority. Each party assumes full responsibility for its actions
and the actions of its personnel in rendering performance pursuant to this
AGREEMENT, and each party shall have sole responsibility for the supervision,
daily direction and control, payment of salary (including withholding of
income taxes and social security), worker's compensation, disability benefits
and the like of its personnel. Each party assumes fall responsibility for
the acts of all of its subcontractors.
20.4 Neither party shall be responsible for any delay in its performance
or failure to fulfil its obligations under this AGREEMENT due to causes
beyond its reasonable control, provided however, each party shall in good
faith attempt to remedy such failure or delay.
20.5 Neither party may bring an action, regardless of form arising out
of this AGREEMENT, more than two years after the cause of action has arisen.
20.6 If there is a conflict between the terms and conditions of this
AGREEMENT and its Attachment, those of the AGREEMENT prevail. Except as
expressly modified by the Attachment, the terms and conditions of this
AGREEMENT remain in full force and effect.
20.7 If any provision of this AGREEMENT is held by a court of competent
jurisdiction to be contrary to law, the remaining provisions of the AGREEMENT
will remain in full force and effect.
20.8 Each party shall, at its own expense, comply with any governmental
laws, statute, ordinance, administrative order, rule or regulation relating
to its duties, obligations and
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performance under this AGREEMENT and shall procure all licences and pay all
fees and other charges required thereby.
20.9 Both parties shall comply with all applicable government export
laws and regulations.
20.10 The parties hereby expressly waive any right to jury trial and
agree that any proceeding hereunder shall be tried by a judge without a jury.
20.11 All notices, requests, consents and other communications under
the AGREEMENT shall be in writing and shall be effective only upon receipt.
All such written notices shall be delivered by a traceable method prepaid, to
the AGREEMENT co-ordinators.
20.12 The laws of state of New York govern this AGREEMENT and the
relationship which arises as a result of this AGREEMENT, and in the event of
any dispute arising the courts of the state of New York shall have
non-exclusive jurisdiction.
20.13 The section references herein are for the purpose of
convenience only.
20.14 Any loans by either party to the other will be subject to
mutually agreed terms and conditions.
20.15 This AGREEMENT may only be amended in writing. Such amendment
shall only be effective if countersigned by both parties. Any reproduction
of this AGREEMENT by reliable means will be considered an original of this
document.
20.16 Any reference to IBM and Level 8 includes their SUBSIDIARIES.
20.17 Wherever consent or approval is required from a party, such
approval shall not be unreasonably withheld or delayed.
20.18 Failure by either party to insist on strict performance or to
exercise a right when entitled does not prevent that party from doing so at a
later time in relation to that default or a subsequent one.
20.19 This statement of the AGREEMENT supersedes all proposals or
other prior agreements, oral or written, and all other communications between
the parties relating to this subject. The parties acknowledge that they have
read this AGREEMENT and its Attachments, understand them, and agree to be
bound by their terms and conditions. Further, they agree that the complete
and exclusive statement of the agreement between the parties relating to this
subject consists of 1) this AGREEMENT, 2) the Attachment and 3) any
amendments thereto. ("AGREEMENT")
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SIGNED FOR AND ON BEHALF OF IBM SIGNED FOR AND ON BEHALF OF LEVEL 8
/s/ /s/
- ----------------------------------- -----------------------------------
Authorised Signature Authorised Signature
DAVID S. JAMES ROBERT R. MACDONALD
- ----------------------------------- -----------------------------------
Name Name
SOFTWARE CONTRACT RELATIONS MANAGER PRESIDENT
- ----------------------------------- -----------------------------------
Title Title
1ST MARCH 1996 MARCH 6, 1996
- ----------------------------------- -----------------------------------
Date Date
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Exhibit 10.44
LETTER OF INTENT
This binding Letter of Intent ("LOI"), dated July 25, 1996 ("EFFECTIVE DATE"),
among Candle Corporation ("CANDLE"), Across Data Systems Inc. ("ACROSS") and
Level 8 Systems Inc. ("LEVEL 8") refers to the following facts:
RECITALS:
a. Candle develops and licenses software products and provides services to
third parties;
b. Level 8, a wholly owned subsidiary of Across, develops and licenses
software products and provides services and currently develops Falcon
External Gateway ("FEG"), an interface between the Microsoft message
queuing product and IBM's MQSeries and/or CICS. Field test for FEG may
begin in the third quarter of 1996, with general availability expected in
the first quarter of 1997. Candle wishes to receive distribution rights
and a technology license to FEG from Level 8;
c. Level 8 developed and owns MQ Secure ("MQ SECURE"), a security product
for IBM MQSeries environments, currently in field test, with general
availability expected in the fourth quarter of 1996. Candle wishes to
acquire any and all title, interests and rights to MQ Secure from Level 8;
d. The parties, Level 8 and Candle, wish to enter into the following
agreements: (1) an agency agreement for certain Candle products, (2) a
distribution agreement and a technology license for FEG; (3) an technology
license (sufficient to facilitate incorporation into the Candle product
set) for the Level 8 product DOT/XM ("DOT/XM"); and (4) a purchase
agreement for MQ Secure;
e. Candle wishes to purchase stock from Across pursuant to a investment
agreement and receive a seat on Across' board of directors;
NOW, THEREFORE, the parties agree to the following terms;
1. DISTRIBUTION AGREEMENT BETWEEN LEVEL 8 AND CANDLE FOR FEG
1.1 Candle will distribute FEG non-exclusively, worldwide (except in
Israel) for a period of three years to third parties. For a period of one
year Level 8 will refer any Microsoft customer leads for the FEG outside
North America to Candle. Microsoft customer leads for the FEG will be shared
for at least one year by both Candle and Level 8 in North America. Candle
will market, price and distribute the FEG in its sole discretion. Candle
shall pay Level 8 a royalty of 50% for each license sold up to $5 million of
total sales per year, 40% for each license sold over $5 million of total
sales per year and 50% on each maintenance agreement entered into by Candle.
The royalty is based on Level 8's suggested retail price, except for large
enterprise opportunities for which the parties will negotiate a volume
purchase price. Candle will recruit and will make every effort to negotiate
with Microsoft
<PAGE>
distributors/partners to distribute FEG and selected Candle solutions
worldwide. Level 8 may recommend specific Microsoft Alliance Partners to
Candle distributors which Candle will seek to recruit. Level 8 shall not
enter into any distribution, agency or similar agreements for FEG with any
Candle competitors as listed in Attachment 1 of this LOI, for a period of
three years, after which the companies will renegotiate this term in good
faith.
1.2 Outside of North America and Israel, Level 8 may sell FEG as a
dealer through Candle only. Level 8 will pay Candle the same 50% royalty
described in Section 1.1 above, less Candle's applicable dealer discount. In
Israel, Level 8 will have exclusive marketing rights as a dealer and will pay
to Candle a 50% royalty on FEG less Candle applicable dealer discount and
maintenance revenue received by Level 8 for licenses and maintenance
contracts with third parties.
1.3 Candle will provide Level 1 and Level 2 support for FEG licenses
and Level 8 will provide level 3 support. Annual maintenance fees charged to
customers shall be 15% of the then current FEG list price.
1.4 In addition, Level 8 shall pay Candle a (xx/12 x 7.5%) royalty on
any FEG Products licensed to cover Candle's support services costs during the
warranty period (initial xx months).
2. AGENCY AGREEMENT BETWEEN LEVEL 8 AND CANDLE FOR CANDLE PRODUCTS
2.1 Level 8 may act as Candle's agent for certain products ("CANDLE
PRODUCT(S)") non-exclusively in North America only and receive an agency fee
of 15% of the net revenue for each Candle Product sold. For
additional/support functions the parties will negotiate higher percentages.
Level 8 shall not enter into any agency agreements with any Candle
competitors, for products that compete with Candle Products, for a period of
two years, after which the companies will renegotiate this term in good
faith. Level 8 may consult and recommend any product on the market.
3. PURCHASE AGREEMENT BETWEEN LEVEL 8 AND CANDLE FOR MQ SECURE
3.1 No later than August 2, 1996, Candle shall acquire from Level 8
any and all rights, title and interest to MQ Secure. For each copy of MQ
Secure or a major portion thereof, licensed either as a stand alone or
integrated together with Candle Products to third parties, Candle agrees to
pay to Level 8 a 20% royalty of MQ Secure list price up to a total royalty of
three million U.S. dollars or a three year period, whichever comes first.
Candle will pre-pay two hundred and fifty thousand U.S. dollars in royalties
payable within ten (10) days of the execution of the purchase agreement or
August 12, 1996 whichever occurs first. Candle shall owe no other fees to
Level 8, Across, or third parties. Candle understands there is an RSA
licensed component of MQ Secure which will require a usage agreement to be
negotiated for Candle.
2
<PAGE>
4. TECHNOLOGY LICENSE AGREEMENT BETWEEN LEVEL 8 AND CANDLE FOR FEG AND
DOT/XM
4.1 Candle may obtain from Level 8 a technology license to FEG and DOT/XM
(sufficient to enable Candle to facilitate incorporation into the Candle
Products), to create in its sole discretion derivative works ("DERIVATIVE
WORKS"). In Candle's sole discretion and at its option, to be exercised
within 180 days from the Effective Date, Candle may obtain a technology
license for DOT/XM. In the event Candle exercises its option to obtain a
technology license for DOT/XM, the parties will negotiate in good faith a
non-competition clause. Candle shall own all rights, title and interest to
the Derivative Works. Candle may incorporate the FEG and DOT/XM, if
licensed, or any portion thereof, into other products for distribution to
third parties.
4.2 The parties will negotiate in good faith any support and/or other
requirements.
4.3 Candle shall pay to Level 8 a royalty of 9.5% of the sales price
of the Derivative Works with a cap of two million dollars and will acquire
from Across and not its shareholders 246,800 common shares of Across for a
price of $11 per share for a total price of $2,714,800, and Candle will
receive a seat on Across' board of directors, subject to a mutually
satisfactory investment agreement executed by Candle and Across no later than
July 26, 1996.
5. SERVICES FOR FEG AND DOT/XM BETWEEN CANDLE AND LEVEL 8
5.1 Upon mutual agreement, Candle will perform system testing and
installation process testing/verification ("SERVICES") on FEG and DOT/XM
("PRODUCTS") or any other Level 8 products (including new releases) prior to
any marketing/distribution activities. In addition, Level 8 shall pay Candle
a 5% royalty on all Level 8 products licensed for which Services were
provided.
5.2 Candle and Level 8 will each provide specifically defined
installation, configuration and consulting services ("QUICK START SERVICES")
for FEG to their respective customers, at approximately $10,000 per customer.
Candle and/or Level 8 will receive a referral fee of at least 15% of the
Quick Start Services service revenue for any Quick Start Service opportunity
identified, qualified, sold and referred to each other.
5.3 Candle will provide fulfillment functions, such as worldwide sales for
FEG, manufacturing, packaging, shipping, ordering, error and exception
handling for a fee of 8% of the sales price up to a cap of $100 per product
shipped.
6. GENERAL
6.1 CHANNEL CONFLICT. The parties will manage channel conflict
issues arising out of any distribution arrangements in good faith. Each
company will name a contact person, responsible for channel conflict
management and any other issues between the companies.
3
<PAGE>
6.2 CONFIDENTIALITY. Except to the extent required by law or
mutually, expressly authorized by Candle and Level 8 beforehand and in
writing, neither Candle, Across, Level 8 nor their shareholders shall,
between the Effective Date of this LOI, and the execution of the agreements
referred to in this LOI, discuss the terms of this LOI. Level 8 and Across,
their officers and shareholders, shall use their best efforts to preserve the
goodwill between Level 8, Across and their customers, agents, and employees.
Each company shall keep confidential and not disclose to any third
party any oral or written information, received from the other company and
marked "Confidential" or "Proprietary". The parties will execute a separate
confidentiality agreement which will supersede this Section 6.2.
6.3 COSTS. Each company shall pay its own costs incurred during the
term of this LOI, unless otherwise agreed in writing. Each company retains
its trademarks and servicemarks and will grant the other appropriate
trademark licenses to distribute the products of the other party.
6.4 DUE DILIGENCE. The execution of the investment agreement shall
be subject to the approval of the board of directors of both companies, and
the execution of the distribution, agency, purchase, services, and technology
license agreements shall be subject to the satisfactory outcome of any due
diligence review by Candle's staff, to be completed by August 24, 1996, and
the execution of a software escrow agreement for FEG and potentially DOT/XM.
6.5 NON-COMPETITION. Candle will not develop a product competing
with FEG for the duration of the distribution agreement plus two years.
Notwithstanding the above, Candle may incorporate FEG or any portion thereof
into other products subject to compensation as set forth in the
technology/license agreements.
Level 8 will not develop or distribute a product competing with Candle
System Management Solutions, as defined in Attachment 2, for the duration of
the distribution and agency agreements.
In cases where Level 8 identifies customers, including Microsoft, with
unique systems management requirements, Candle and Level 8 agree to negotiate
at project initiation a strategy for development of solutions to address the
requirements. In these cases, Candle and Level 8 agree to discuss the
following issues: who should develop the solution, technology to be utilized,
mutual licensing and distribution arrangements. For any of these Level 8
customer solutions which become products Candle will automatically retain
distribution rights and technology license rights and the option to purchase
these products at the same royalty rates as FEG as specified in this LOI,
subject to mutually satisfactory negotiated agreements and subject to caps to
be negotiated.
6.6 PARTNERSHIP ALLIANCES. The parties may explore other cooperative
development partnerships that may result in products that could be
distributed by either party.
4
<PAGE>
As Candle formulates its distribution alliances, Level 8 and Across agree to
participate in appropriate announcements.
Subject to mutually satisfactory license and other agreements, Level 8
will utilize existing Candle products or components in service engagements
wherever practical and feasible. Where this use of existing Candle products
or components is not feasible, Level 8 will build custom components that will
integrate with Candle Technology, Candle Command Center products or other
Candle products, where feasible and practical.
Level 8 agrees to support Candle's development of Falcon and FEG systems
management and monitoring products.
6.7 TRAINING. The parties shall negotiate in good faith the amount
of training each party will provide to certain employees of the other party
for its respective software products, in no event later than December 1996,
unless otherwise agreed in writing.
6.8 WARRANTIES. The parties agree that mutually satisfactory
warranties will be negotiated in good faith.
6.9 TERMINATION. Pursuant to Section 6.4, Candle may terminate this
LOI in the event the due diligence is unsatisfactory to Candle. In the event
of such termination, or expiration, the non-disclosure obligations of this
LOI shall survive. Except as set forth herein, upon the expiration or
termination of this LOI, neither party shall have any continuing obligation
to the other.
6.10 INTEGRATION CLAUSE. This LOI constitutes the entire agreement
among Across, Level 8 and Candle regarding the subject matter and supersedes
all prior discussions, negotiations and communications with respect thereto.
This LOI may be amended only in writing, and signed by both parties. Any
attempted oral amendment shall be null and void. This LOI may not be
assigned by either party without the prior, written consent of the other
5
<PAGE>
party. Any attempted assignment in derogation of the foregoing shall be null
and void. In the event of a dispute, the prevailing party shall be entitled
to attorneys' fees as awarded by a court having jurisdiction.
Candle Corporation Across Data Systems
By: --------------------------- By: -------------------------
Name: ------------------------- Name: ------------------------
Date: ------------------------- Date: -------------------------
Level 8 Systems, Inc.
By: --------------------------
Name: ------------------------
Date: ------------------------
6
<PAGE>
ATTACHMENT 1
LIST OF COMPETITORS:
Apertus
Boole and Babbage
BMC Corporation
Computer Associates International
Compuware
Landmark
MAXM
Platinum
Tivoli Systems
Technology Investment Inc.
7
<PAGE>
ATTACHMENT 2
Candle System Management Solutions includes, but is not limited to the
following:
Performance Management
Systems Automation
Security
Software Distribution
Command and Control
Backup Restore
Event Manager
Configuration
Inventory
Alert Management
Response Time Monitoring
Problem Management
8
<PAGE>
THE SECURITIES REPRESENTED HEREBY AND ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
HOWEVER, NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN.
THIS WARRANT IS NOT EXERCISABLE PRIOR TO ________, 1997.
VOID AFTER 5:00 P.M. NEW YORK CITY LOCAL TIME, ________, 2001.
LEVEL 8 SYSTEMS, INC.
Warrants for the Purchase
of
100,000 Shares of Common Stock, Par Value $.01 Per Share
No. HSC2-1
THIS CERTIFIES that, for receipt in hand of $100.00 and other value
received, HAMPSHIRE SECURITIES CORPORATION (together with all permitted assigns,
the "Holder") is entitled to subscribe for, and purchase from, LEVEL 8 SYSTEMS,
INC., a New York corporation (the "Company"), upon the terms and conditions set
forth herein, at any time or from time to time after) _________, 1997, New York
City local time until 5:00 P.M. New York City local time on __________, 2001
(the "Exercise Period"), up to an aggregate of 100,000 shares of common stock,
par value $.01 per share (the "Common Stock"). This Warrant is initially
exercisable at $________ per share; provided, however, that upon the occurrence
of any of the events specified in Section 5 hereof, the rights granted by this
Warrant, including the exercise price and the number of shares of Common Stock
to be received upon such exercise, shall be adjusted as therein specified. The
term "Exercise Price" shall mean, depending on the context, the initial exercise
price (as set forth above) or the adjusted exercise price per share.
This Warrant is the Representative's Warrant or one of the Representative's
Warrants (collectively, including any Representative's Warrant issued upon the
exercise or transfer of any
<PAGE>
such Representative's Warrants in whole or in part, the "Warrants") issued
pursuant to the Underwriting Agreement, dated _______, 1996 (the "Underwriting
Agreement"), among the Company, the selling stockholders of the Company named
therein, and Hampshire Securities Corporation, as representative (the
"Representative") of the several underwriters named therein. As used herein,
the term "this Warrant" shall mean and include this Warrant and any Warrant or
Warrants hereafter issued as a consequence of the exercise or transfer of this
Warrant in whole or in part. This Warrant may not be sold, transferred,
assigned, or hypothecated until _______, 1997, except that it may be
transferred, in whole or in part, to (i) one or more officers or partners of the
Holder (or the officers or partners of any such partner); (ii) any other
underwriting firm or member of the selling group which participated in the
public offering of shares of Common Stock which commenced on _________, 1996 (or
the officers or partners of any such firm); (iii) a successor to the Holder, or
the officers or partners of such successor; (iv) a purchaser of substantially
all of the assets of the Holder; or (v) by operation of law. The term the
"Holder" as used herein shall include any transferee to whom this Warrant has
been transferred in accordance with the above.
Each share of Common Stock issuable upon the exercise hereof shall be
hereinafter referred to as a "Warrant Share".
1. This Warrant may be exercised during the Exercise Period, either in
whole or in part, by the surrender of this Warrant (with the election at the end
hereof duly executed) to the Company at its office at _____________, or at such
other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the product of the Exercise Price and the number of Warrant
Shares for which this Warrant is being exercised.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares,
the Holder shall be deemed to be the holder of record of the Warrant Shares,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing the Warrant Shares with respect to which this Warrant
was exercised shall not then have been actually delivered to the Holder. As
soon as practicable after each such exercise of this Warrant, the Company shall
issue and deliver to the Holder a certificate or certificates representing the
Warrant Shares issuable upon such exercise, registered in the name of the Holder
or its designee. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
Warrant evidencing the right of the Holder to purchase the balance of the
aggregate number of Warrant Shares purchasable hereunder as to which this
Warrant has not been
<PAGE>
exercised or assigned.
3. Any Warrants issued upon the transfer or exercise in part of this
Warrant shall be numbered and shall be registered in a warrant register (the
"Warrant Register") as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes, and shall not be bound to recognize any equitable
or other claim to, or interest in, such Warrant on the part of any other person,
and shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable on the books of the Company only upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his, her, or its authority shall be produced. Upon any registration
of transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Warrants, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company represents that all
shares of Common Stock issuable upon exercise of this Warrant are duly
authorized and, upon receipt by the Company of the full payment for such Warrant
Shares, will be validly issued, fully paid, and nonassessable, without any
personal liability attaching to the ownership thereof and will not be issued in
violation of any preemptive or similar rights of stockholders.
5. (a) The Exercise Price for the Warrant in effect from time to time,
and the number of shares of Common Stock issuable upon exercise of the Warrant,
shall be subject to adjustment, as follows:
<PAGE>
(i) In the event that the Company shall at any time after the
date hereof (A) declare a dividend on the outstanding Common Stock payable in
shares of its capital stock, (B) subdivide the outstanding Common Stock, (C)
combine the outstanding Common Stock into a smaller number of shares, or (D)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each case,
the Exercise Price per Warrant Share in effect at the time of the record date
for the determination of stockholders entitled to receive such dividend or
distribution or of the effective date of such subdivision, combination, or
reclassification shall be adjusted so that it shall equal the price determined
by multiplying such Exercise Price by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action, and the denominator of which shall be the number of shares of Common
Stock outstanding after giving effect to such action. Such adjustment shall be
made successively whenever any event listed above shall occur and shall become
effective at the close of business on such record date or at the close of
business on the date immediately preceding such effective date, as applicable.
(ii) In the event that the Company shall fix a record date for
the determination of stockholders entitled to receive issuance of rights or
warrants to be issued to all holders of Common Stock entitling such stockholders
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the then Current Market Price (as defined below) per
share of Common Stock on such record date, the Exercise Price in effect at the
time of such record date shall be adjusted so that the same shall equal the
price determined by multiplying such Exercise Price in effect immediately prior
to the date of such issuance by a fraction, the numerator of which shall be the
sum of the number of shares of Common Stock outstanding on such record date and
the number of additional shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such Current Market Price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding on
such record date and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants; and, to the extent that shares of Common Stock are not
<PAGE>
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants, the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock (or securities
convertible into Common Stock) actually delivered.
(iii) In the event the Company shall fix a record date for the
determination of stockholders entitled to receive (including any such
distribution made to the stockholders of the Company in connection with a
consolidation or merger in which the Company is the continuing corporation in a
distribution to all holders of Common Stock) evidences of its indebtedness,
cash, or assets (other than distributions and dividends payable in shares of
Common Stock), or rights, options, or warrants to subscribe for or purchase
shares of Common Stock, or securities convertible into, or exchangeable for,
shares of Common Stock (excluding those referred to in paragraph (ii) above) in
a distribution to all holders of Common Stock, then, in each case, the Exercise
Price in effect at the time of such record date shall be adjusted by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock on such record date, less the fair market value (as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error) of the portion of the evidences of
indebtedness or assets so to be distributed, or of such rights, options, or
warrants, or convertible or exchangeable securities, or the amount of such cash,
applicable to one share of Common Stock, and the denominator of which shall be
such Current Market Price per share of Common Stock on such record date. Such
adjustment shall be made successively whenever any event listed above shall
occur and become effective at the close of business on such record date.
(iv) For a period of three years from the effective date of the
Registration Statement, if the Company shall issue shares of Common Stock for a
consideration per share (the "Offering Price") less than the Current Market
Price per share of Common Stock on the date the Company fixes the offering price
of such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying such
Exercise Price by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such additional shares and the number of shares of Common Stock which the
aggregate consideration received (determined as provided in Subsection (i)
below) for the issuance of such additional shares would purchase at such Current
Market Price per share of Common Stock, and the denominator of which shall be
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. Such adjustment shall be made successively whenever
such an issuance is made. Notwithstanding anything herein to the contrary, no
adjustment pursuant to this paragraph (a)(iv) of Section 5
<PAGE>
shall take place as a result of the issuance of shares of Common Stock (1) in
any of the transactions described in Subsection (i) above, (2) upon exercise of
options granted to the Company's employees, officers, or directors under
securities ownership or compensation plans adopted by the Board of Directors of
the Company, (3) upon exercise of options or warrants outstanding at __________,
1996 and this Warrant, (4) to shareholders of any corporation which merges with
the Company or any wholly-owned subsidiary of the Company in proportion to their
stock holdings of such corporation immediately prior to, or upon, such merger
and (5) in a bona fide public offering pursuant to a firm commitment
underwriting, but only if no adjustment is required pursuant to any other
Subsection of this Section 5.
(v) For a period of three years from the effective date of the
Registration Statement, if the Company shall issue any securities convertible
into, or exchangeable for, Common Stock (excluding securities issued in
transactions described in Subsections (ii) and (iii) above) for a consideration
per share of Common Stock (the "Conversion Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(i) below) less than the Current Market Price per share of Common Stock in
effect immediately prior to the issuance of such securities, the Exercise Price
in effect immediately prior to the date of such issuance shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying such Exercise Price by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
the issuance of such securities and the number of shares of Common Stock which
the aggregate consideration received (determined as provided in Subsection (i)
below) for such securities would purchase at such Current Market Price per share
of Common Stock, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to such issuance and the
maximum number of shares of Common Stock deliverable upon conversion of, or in
exchange for, such securities at the initial conversion or exchange price or
rate. Such adjustment shall be made successively whenever such an issuance is
made. Notwithstanding anything herein to the contrary, no adjustment pursuant
to this paragraph (a)(v) of Section 5 shall take place as a result of the
issuance of securities convertible into, or exchangeable for, shares of Common
Stock pursuant to an employee, officer, or director securities ownership or
compensation plan adopted by the Board of Directors of the Company and no
further adjustment to the Exercise Price shall be made upon the actual
conversion or exchange of the securities into Common Stock.
(b) The Current Market Price per share of Common Stock on any date
shall be deemed to be the average of the daily closing prices for the 10
consecutive trading days immediately
<PAGE>
preceding the date in question. The closing price for each day shall be the
last reported sales price regular way or, in case no such reported sale takes
place on such day, the closing bid price regular way, in either case on the
principal national securities exchange (including, for purposes hereof, the
NASDAQ National Market System) on which the Common Stock is listed or admitted
to trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the highest reported bid price for the Common
Stock as furnished by the National Association of Securities Dealers, Inc.
through the Nasdaq SmallCap Market or a similar organization if the Nasdaq
SmallCap Market is no longer reporting such information. If, on any such date,
the Common Stock is not listed or admitted to trading on any national securities
exchange and is not quoted on the Nasdaq SmallCap Market or any similar
organization, the fair value of a share of Common Stock on such date, as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error, shall be used.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
(d) In any case in which this Section 5 shall require that an
adjustment in the number of Warrant Shares be made effective as of a record date
for a specified event, the Company may elect to defer, until the occurrence of
such event, issuing to the Holder, if the Holder exercised this Warrant after
such record date, the Warrant Shares, if any, issuable upon such exercise over
and above the number of Warrant Shares issuable upon such exercise on the basis
of the number of shares of Common Stock in effect prior to such adjustment;
provided, however, that the Company shall deliver to the Holder a due bill or
other appropriate instrument evidencing the Holder's right to receive such
additional shares of Common Stock upon the occurrence of the event requiring
such adjustment.
(e) Whenever there shall be an adjustment as provided in this Section
5, the Company shall within 15 days thereafter cause written notice thereof to
be sent by registered mail, postage prepaid, to the Holder, at its address as it
shall appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares issuable and
the Exercise Price thereof after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof,
which officer's certificate shall be conclusive evidence of the correctness of
any such adjustment absent manifest error.
(f) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of this
Warrant. If any fraction of a share
<PAGE>
of Common Stock would be issuable on the exercise of this Warrant (or specified
portions thereof), the Company shall purchase such fraction for an amount in
cash equal to the same fraction of the Current Market Price of such share of
Common Stock on the date of exercise of this Warrant.
(g) No adjustment in the Exercise Price per Warrant Share shall be
required if such adjustment is less than $.10; provided, however, that any
adjustments which by reason of this Section 5 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
(h) Whenever the Exercise Price payable upon exercise of this Warrant
is adjusted pursuant to Subsections (a)(i), (a)(ii), (a)(iii), (a)(iv), or
(a)(v) above, the number of Warrant Shares issuable upon exercise of this
Warrant shall simultaneously be adjusted by multiplying the number of Warrant
Shares theretofore issuable upon exercise of this Warrant by the Exercise Price
in effect on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(i) For purposes of any computation respecting consideration received
pursuant to Subsections (a)(iv) and (a)(v) above, the following shall apply:
(i) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for
any commissions, discounts, or other expenses incurred by
the Company for any underwriting of the issue or
otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common Stock for
a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the
fair market value thereof as determined in good faith by
the board of directors of the Company (irrespective of
the accounting treatment thereof), the determination of
which shall be a conclusive absent manifest error; and
(iii) in the case of the issuance of securities convertible
into, or exchangeable for, shares of Common Stock, the
aggregate consideration received therefor shall be deemed
to be the consideration received by the Company for the
issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon
the conversion or exchange thereof (the consideration in
each case to be determined in the same manner as provided
in clauses (i) and (ii) of this Subsection (i)).
(j) Notwithstanding anything herein to the contrary, if any
adjustment under this Section 5 of the Exercise Price or the number of shares of
Common Stock or other securities issuable upon exercise of this Warrant shall be
determined by the National Association of Securities
<PAGE>
Dealers, Inc. (the "NASD") to violate either or both of Section
44(c)(6)(B)(vi)(7) or Section 44(c)(6)(B)(vi)(8) of Article III of the Rules of
Fair Practice of the NASD, and such determination shall not be subject to
further appeal or review, the violative provisions or provisions shall be deemed
to be amended to the minimum extent necessary to cause each such provision to
comply with the applicable violated paragraph of Section 44 of the NASD Rules of
Fair Practice.
6. (a) In case of any capital reorganization, other than in the cases
referred to in Section 5(a) hereof, or the consolidation or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the continuing corporation and which does not result in
any reclassification of the outstanding shares of Common Stock or the conversion
of such outstanding shares of Common Stock into shares of other stock or other
securities or property), or in the case of any sale, lease, or conveyance to
another corporation of the property and assets of any nature of the Company as
an entirety or substantially as an entirety (such actions being hereinafter
collectively referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of this Warrant (in lieu of the number of Warrant
Shares theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the respective number of Warrant
Shares which would otherwise have been deliverable upon the exercise of this
Warrant would have been entitled upon such Reorganization if this Warrant had
been exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the board
of directors of the Company, shall be made in the application of the provisions
herein set forth with respect to the rights and interests of the Holder so that
the provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of this Warrant. Any such adjustment shall be made by, and set
forth in, a supplemental agreement between the Company, or any successor
thereto, and the Holder, with respect to this Warrant, and shall for all
purposes hereof conclusively be deemed to be an appropriate adjustment. The
Company shall not effect any such Reorganization unless, upon or prior to the
consummation thereof, the successor corporation, or if the Company shall be the
surviving corporation in any such Reorganization and is not the issuer of the
shares of stock or other securities or property to be delivered to holders of
shares of the Common Stock outstanding at the effective time thereof, then such
issuer, shall assume by written instrument the obligation to deliver to the
Holder such shares of stock, securities, cash, or other property as such Holder
shall be entitled to purchase in accordance with the foregoing provisions. In
the event of sale, lease, or conveyance or other transfer of all or
substantially all of the assets of the Company as part of a plan for liquidation
of the Company, all rights to exercise this Warrant shall terminate 30 days
after the Company gives written notice to the Holder that such sale or
conveyance or other transfer has been
<PAGE>
consummated.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Warrant (other than a change in par value
or from a specified par value to no par value, or as a result of a subdivision
or combination, but including any change in the shares into two or more classes
or series of shares), or in case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing corporation
and in which there is a reclassification or change (including a change to the
right to receive cash or other property) of the shares of Common Stock (other
than a change in par value, or from no par value to a specified par value, or as
a result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Holder or holders of this
Warrant shall have the right thereafter to receive upon exercise of this Warrant
solely the kind and amount of shares of stock and other securities, property,
cash, or any combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of Warrant Shares for which
this Warrant might have been exercised immediately prior to such
reclassification, change, consolidation, or merger. Thereafter, appropriate
provision shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders
of Common Stock entitling them to purchase any additional shares of Common Stock
or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock or any consolidation, merger, sale, lease, or conveyance of
property, as described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company; or
<PAGE>
(e) to take any other action which would cause an adjustment to the
Exercise Price per Warrant Share;
then, and in any one or more of such cases, the Company shall give written
notice thereof by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price per Warrant Share.
8. The issuance of any shares or other securities upon the exercise of
this Warrant and the delivery of certificates or other instruments representing
such shares or other securities shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time during the five-year period commencing on
__________, 1997, the Company shall file a registration statement (other than on
Form S-4, Form S-8 or any successor form) with the Securities and Exchange
Commission (the "Commission") while any Registrable Securities (as hereinafter
defined) are outstanding, the Company shall give all the then holders of any
Registrable Securities (the "Eligible Holders") at least 15 days prior written
notice of the filing of such registration statement. If requested by any
Eligible Holder in writing within 10 days after receipt of any such notice, the
Company shall, at the Company's sole expense (other than the fees and
disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Registrable Securities sold by any
Eligible Holder), register or qualify all or, at each Eligible Holder's option,
any portion of the Registrable Securities of any Eligible Holders who shall have
made such request, concurrently with the registration of such other securities,
all to the extent requisite to permit the public offering and sale of the
Registrable
<PAGE>
Securities through the facilities of all appropriate securities exchanges and
the over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable. Notwithstanding the foregoing, if the
managing underwriter of any such offering shall advise the Company in writing
that, in its opinion, the distribution of all or a portion of the Registrable
Securities requested to be included in the registration concurrently with the
securities being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then the
Registrable Securities to be offered for the accounts of the Eligible Holders
shall be eliminated entirely or reduced pro rata as to all Eligible Holders who
requested registration on the basis of the relative number of Registrable
Securities each such Eligible Holder has requested to be included in such
registration, to the extent necessary to reduce the total amount advised by such
managing underwriter; provided, however, that no securities may be offered in
such registration for the account of persons other than the Company (including
for this purpose any affiliate of the Company) by virtue of their having
"piggyback" registration rights or otherwise, unless the Registrable Securities
requested to be included in such registration are included on a pro rata basis
(by percentage of each class of securities) as to such other persons and the
Eligible Holders requesting registration and provided, further that nothing in
this Section 9 (a) shall be implied to permit the Company to include in such
registration, shares of any person other than persons holding "piggyback"
registration rights unless the Registrable Securities requested to be included
in such registration are included. As used herein, "Registrable Securities"
shall mean the Warrants and the Warrant Shares which, in each case, have not
been previously sold pursuant to a registration statement or Rule 144
promulgated under the Act.
(b) If, on any one occasion during the five-year period commencing on
___________, 1997, the Company shall receive a written request from Eligible
Holders who in the aggregate own (or upon exercise of all Warrants then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercises would be included) in the Registrable
Securities (the "Majority Holders"), to register the sale of all or part of such
Registrable Securities (a "Demand Registration"), the Company shall, as promptly
as practicable, prepare and file with the Commission a registration statement
sufficient to permit the public offering and sale of the Registrable Securities
through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable, at the Company's expense (other than the
fees and disbursements of counsel for the Eligible Holders and
<PAGE>
underwriting discounts, if any, payable in respect of the Registrable Securities
sold by the Eligible Holders). Within three business days after receiving any
request contemplated by this Section 9(b), the Company shall give written notice
to all the other Eligible Holders, advising each of them that the Company is
proceeding with such registration and offering to include therein all or any
portion of any such other Eligible Holder's Registrable Securities, provided
that the Company receives a written request to do so from such Eligible Holder
within 10 days after receipt by him, her, or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall use its best efforts to cause the Registrable
Securities so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as the Holder or such holders
may reasonably request; provided, however, that the Company shall not be
required by reason of this Section 9(c) to register or qualify the Registrable
Securities in any jurisdiction where, as a result thereof, the Company would be
subject to service of general process or to taxation as a foreign corporation
doing business in such jurisdiction to which the Company is not then subject.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Registrable Securities covered thereby. The Company shall in no
event be required to keep any such registration or qualification in effect for a
period in excess of nine months from the date on which the registration
statement is declared effective under the Act; provided, however, that, if the
Company is required to keep any such registration or qualification in effect
with respect to securities other than the Registrable Securities beyond such
period, the Company shall keep such registration or qualification in effect as
it relates to the Registrable Securities for so long as such registration or
qualification remains or is required to remain in effect in respect of such
other securities.
(e) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such
<PAGE>
reasonable number of copies of each prospectus contained in such registration
statement and each supplement or amendment thereto (including each preliminary
prospectus), all of which shall conform to the requirements of the Act and the
rules and regulations thereunder, and such other documents, as any Eligible
Holder may reasonably request to facilitate the disposition of the Registrable
Securities included in such registration.
(f) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish each Eligible Holder of any Registrable
Securities so registered with an opinion of its counsel (reasonably acceptable
to the Eligible Holders) to the effect that (i) the registration statement has
become effective under the Act and no order suspending the effectiveness of the
registration statement, or preventing or suspending the use of the registration
statement, any preliminary prospectus, any final prospectus or any amendment or
supplement thereto, has been issued, nor has the Commission or any securities or
blue sky authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order, (ii) the registration statement and
each prospectus forming a part thereof (including each preliminary prospectus),
and any amendment or supplement thereto, complies as to form with the Act and
the rules and regulations thereunder, and (iii) such counsel has no knowledge of
any material misstatement or omission in such registration statement or any
prospectus, as amended or supplemented. Such opinion shall also state the
jurisdictions in which the Registrable Securities have been registered or
qualified for sale pursuant to the provisions of Section 9(c).
(g) In the event of a registration pursuant to the provision of this
Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Registrable
Securities.
(h) The Company agrees that until all the Registrable Securities have
been sold under a registration statement or pursuant to Rule 144 under the Act,
it shall keep current in filing all reports, statements, and other materials
required to be filed with the Commission to permit holders of the Registrable
Securities to sell such securities under Rule 144 under the Act.
(i) Except for rights in existence on the date hereof, the Company
will not, without the written consent of the Majority Holders, grant to any
persons the right to request the Company to register any securities of the
Company, provided that the Company may grant such registration rights to other
persons so long as such rights are not prior to the rights of the Eligible
Holders.
10. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel,
<PAGE>
and each person, if any, who controls any such person within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), from and against any and all loss, liability,
charge, claim, damage, and expense whatsoever (which shall include, for all
purposes of this Section 10, without limitation, reasonable attorneys' fees and
reasonable expenses incurred in investigating, preparing, or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), as and when
incurred, arising out of, based upon, or in connection with, (i) any untrue
statement or alleged untrue statement of a material fact contained in (A) any
registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
relating to the offer and sale of any of the Registrable Securities, or (B) any
application or other document or communication (in this Section 10, referred to
collectively as an "application") executed by, or on behalf of, the Company or
based upon written information furnished by, or on behalf of, the Company filed
in any jurisdiction in order to register or qualify any of the Registrable
Securities under the securities or "blue sky" laws thereof or filed with any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon, and
in conformity with, written information furnished to the Company with respect to
such Eligible Holder by, or on behalf of, such person expressly for inclusion in
any registration statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Warrant. The foregoing agreement to indemnify shall
be in addition to any liability the Company may otherwise have, including
liabilities arising under this Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability it may have other than pursuant to this Section
10(a)) and the Company shall promptly assume the defense of such action,
including, without limitation, the employment of counsel reasonably satisfactory
to such indemnified party or parties and payment of reasonable expenses. Such
indemnified party or parties shall have the right to employ its or their own
counsel in any
<PAGE>
such case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless the employment of such counsel shall
have been authorized in writing by the Company in connection with the defense of
such action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or such indemnified party or parties shall have concluded that
there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from, or in addition to, those available
to the Company, in any of which events such reasonable fees and expenses shall
be borne by the Company, and the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties. Anything
in this paragraph to the contrary notwithstanding, the Company shall not be
liable for any settlement of any such claim or action effected without its
written consent, which consent shall not be unreasonably withheld. The Company
shall not, without the prior written consent of each indemnified party that is
not released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Eligible Holders of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of any Registrable Securities
or any preliminary prospectus, prospectus, registration statement, or amendment
or supplement thereto, or any application relating to any sale of any
Registrable Securities.
(b) Each Eligible Holder severally agrees to indemnify and hold
harmless the Company, each director of the Company, each officer of the Company
who shall have signed any registration statement relating to Registrable
Securities held by such Eligible Holder, and each other person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
the Company to the Eligible Holders in Section 10(a), but only with respect to
statements or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon,
and in conformity with, written information furnished to the Company with
respect to any Eligible Holder by, or on behalf of, such Eligible Holder
expressly for inclusion in any such
<PAGE>
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or any application,
and in respect of which indemnity may be sought against any Eligible Holder
pursuant to this Section 10(b), such Eligible Holder shall have the rights and
duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified parties,
by the provisions of Section 10(a). The foregoing agreement to indemnify shall
be in addition to any liability the Eligible Holder may otherwise have.
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof), but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by, or on behalf of,
any director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company), as one entity,
and the Eligible Holders of the Registrable Securities included in such
registration in the aggregate (including for this purpose any contribution by,
or on behalf of, an indemnified party), as a second entity, shall contribute to
the losses, liabilities, claims, damages, and expenses whatsoever to which any
of them may be subject, on the basis of relevant equitable considerations such
as the relative fault of the Company and such Eligible Holders in connection
with the facts which resulted in such losses, liabilities, claims, damages, and
expenses. The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by such Eligible
Holders, and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement, alleged statement, omission,
or alleged omission. The Company and the Eligible Holders agree that it would
be unjust and inequitable if the respective obligations of the Company and the
Eligible Holders for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages, and expenses
(even if the Eligible Holders and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 10(c). In no
case shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of shares of Common Stock owned (or which would be owned upon
exercise of all Registrable Securities) by it and
<PAGE>
included in such registration as compared to the number of shares of Common
Stock owned (or which would be owned upon exercise of all Registrable
Securities) by all Eligible Holders and included in such registration. No
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section
10(c), each person, if any, who controls any Eligible Holder within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee, agent, and counsel of each such Eligible Holder or
control person shall have the same rights to contribution as such Eligible
Holder or control person and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed any such registration
statement, each director of the Company, and its or their respective counsel
shall have the same rights to contribution as the Company, subject in each case
to the provisions of this Section 10(c). Anything in this Section 10(c) to the
contrary notwithstanding, no party shall be liable for contribution with respect
to the settlement of any claim or action effected without its written consent.
This Section 10(c) is intended to supersede any right to contribution under the
Act, the Exchange Act, or otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof, the
Warrant Shares issued on exercise of the Warrants shall be subject to a stop
transfer order and the certificate or certificates representing the Warrant
Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. HOWEVER, SUCH SECURITIES MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR
(iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon receipt by the Company of reasonably
satisfactory indemnification, the Company shall execute and deliver to the
Holder thereof a new Warrant of like date, tenor, and denomination.
13. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
14. This Warrant shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of
<PAGE>
conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the courts of
the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of, or relating to, this
Warrant, any document or instrument delivered pursuant to, in connection with,
or simultaneously with, this Warrant, or a breach of this Warrant or any such
document or instrument. In any such action or proceeding, the Company waives
personal service of any summons, complaint, or other process and agrees that
service thereof may be made in accordance with Section 12 of the Underwriting
Agreement. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear to answer such summons, complaint, or
other process. Should the Company so served fail to appear or answer within
such 30-day period or such extended period, as the case may be, the Company
shall be deemed in default and judgment may
<PAGE>
be entered against the Company for the amount as demanded in any summons,
complaint, or other process so served.
Dated:
LEVEL 8 SYSTEMS, INC.
By:
--------------------------
Robert R. MacDonald
Chairman of the Board of Directors
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________ a Warrant to purchase __________ shares of
Common Stock, par value $.01 per share, of Level 8 Systems, Inc., a New York
corporation (the "Company"), and does hereby irrevocably constitute and appoint
___________ attorney to transfer such Warrant on the books of the Company, with
full power of substitution.
Dated: _________________
Signature_______________________
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
<PAGE>
ELECTION TO EXERCISE
To: Level 8 Systems, Inc.
[ADDRESS]
The undersigned hereby exercises his, her, or its rights to purchase shares
of Common Stock, par value $.01 per share ("the Common Stock"), of Level 8
Systems, Inc. a New York corporation (the "Company"), covered by the within
Warrant and tenders payment herewith in the amount of $_____ in accordance with
the terms thereof, and requests that certificates for the securities
constituting such shares of Common Stock be issued in the name of, and delivered
to:
(Print Name, Address, and Social Security
or Tax Identification Number)
and, if such number of shares of Common Stock shall not constitute all such
shares of Common Stock covered by the within Warrant, that a new Warrant for the
balance of the shares of Common Stock covered by the within Warrant shall be
registered in the name of, and delivered to, the undersigned at the address
stated below.
Dated: Name
------------------------ --------------------
(Print)
Address:
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(Signature)
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENTS
EXHIBIT 11.1
<TABLE>
<CAPTION>
Year Ended December 31 Nine Months Ended September 30
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1993 1994 1995 1995 1996
----------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
PRIMARY:
WEIGHTED AVERAGE COMMON SHARES 2,911,863 2,911,863 4,314,106 3,896,557 5,985,265
COMMON STOCK EQUIVALENTS 177,795 177,795 88,898 - -
COMMON STOCK EQUIVALENTS
PURSUANT TO SAB TOPIC 4D 749,508 749,508 374,754 499,672 -
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WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,839,166 3,839,166 4,777,758 4,396,229 5,985,265
----------------------------------- --------------------------------
----------------------------------- --------------------------------
FULLY DILUTED:
WEIGHTED AVERAGE COMMON SHARES 2,911,883 2,911,863 4,314,106 4,396,229 5,985,265
COMMON STOCK EQUIVALENTS 177,795 177,795 88,898 - -
COMMON STOCK EQUIVALENTS
PURSUANT TO SAB TOPIC 4D 749,508 479,508 374,754 - -
----------------------------------- --------------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,839,166 3,839,166 4,777,758 4,396,229 5,985,265
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</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
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JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
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Level 8 Technologies, Inc. New York
ProfitKey International, Inc. Delaware
<PAGE>
INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULE
Board of Directors and Shareholders
Level 8 Systems, Inc.
We consent to the use in this Registration Statement relating to 1,000,000
shares of Common Stock of LEVEL 8 SYSTEMS, INC. on form S-1 of our report
dated January 26, 1996 (except for Note 13, as to which the date is September
9, 1996) appearing in the Prospectus,which is a part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of LEVEL 8 SYSTEMS,
INC. listed in Item 16. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
November 1, 1996
