<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 0-26392
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LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 11-2920559
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Penn Plaza, Suite3401, New York, New York 10119
(Address of principal executive offices) (Zip Code)
(212)244-1234
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The aggregate market value of the voting Common Stock held by non-
affiliates of the registrant was $37,560,987 the price of the last reported sale
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on the over-the-counter National Market System on March 18, 1998 reported by
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NASDAQ.
As of March 18, 1998, there were 7,049,192 shares of Common Stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The responses to items 10, 11, 12, and 13 herein are incorporated by
reference to certain information in the Company's Definitive Proxy Statement for
its Annual Meeting of Shareholders to be held May 5, 1998.
<PAGE>
PART I
Item 1. Business
General
Level 8 Systems, Inc. (the "Company" or "Level 8") is seeking to establish
itself as a technology leader in the rapidly growing middleware marketplace. The
Company's middleware products utilize messaging technology to solve enterprise-
wide integration problems associated with linking legacy environments, the
desktop and the Internet. 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 will seek to continue its product focus, permitting the
Company to play a key role in connecting distributed systems and messaging
platforms throughout the world's enterprises. Industry sources have estimated
that the messaging middleware market exceeded $100 million in 1995 and that such
market is expected to grow to over $1.0 billion by the year 2000.
The Company continues to strengthen its strategic alliances in the
marketplace as well as its commitment to providing enterprise messaging
solutions based upon industry standard messaging products from most of the
largest software companies in the world.
The Company, through its wholly-owned subsidiary, Level 8 Technologies,
Inc. ("Level 8 Technologies"), has been designated an IBM Premier Partner for
IBM MQSeries. In addition, the Company has historically been providing
installation, education, integration and help-desk services in support of IBM
and Level 8 Technologies sales of MQSeries licenses. Samuel Somech, co-founder
of Level 8 Technologies, was the original designer of the transactional
messaging product that became version 1 of MQSeries.
In 1995 Microsoft selected Level 8 Technologies to develop a messaging
gateway to facilitate communication between Microsoft(R) Message Queue Server
("MSMQ", also known by its code name "Falcon") and non-Windows platforms. The
FalconMQ product suite of cross-platform and cross-message queue
interoperability products offers shrink-wrapped connectivity solutions to
enterprise software developers. The product suite extends MSMQ, to non-
Windows(R) platforms.
In 1997 Level 8 Technologies was selected by Oracle Corporation to develop
a product that connects Oracle8 Advanced Queuing (AQ) to Microsoft Message Queue
Server (MSMQ). Oracle 8 AQ is the message queuing product introduced with Oracle
8 Enterprise Edition Database.
Also in 1997 Level 8 Technologies announced that that it had signed an
agreement with Unisys Corporation Computer Systems Group (CSG) to make the Level
8 Technologies FalconMQ product available on Unisys CSG's ClearPath HMP
Enterprise Server operating systems. By extending Microsoft MSMQ to the Unisys
platform, Falcon MQ allows organizations already using Unisys high-end server
operating systems access to the reliable, asynchronous messaging capabilities of
Microsoft MSMQ on Windows NT.
By leveraging the relationships Level 8 Technologies has with these
premier technology partners, the Company will be able to provide greater value
to its customers and continually seek new markets and opportunities.
The Company continues to develop other messaging products, tools and
application integration products based on current messaging technology.
In the third quarter of 1997 Level 8 Technologies released an MQSeries
management tool. MonitorMQ is a unified management tool for monitoring MQSeries
networks across multiple platforms from a single, centralized interface that is
web-accessible. This means MonitorMQ gives world-wide access to MQSeries network
information from a Web browser. MonitorMQ provides real-time information about
MQSeries queue managers, applications, queues, events and channels.
Level 8 Technologies has developed more elaborate enterprise integration
solutions including DOT/XM(TM) (Distributed Object Technology/XM), a product
that uses third-party transactional messaging and distributed object products.
DOT/XM is a solution that facilitates the integration of legacy systems into
modern, open system architectures, by representing the legacy system as a
collection of objects. Level 8 Technologies has obtained additional work from
its flagship DOT/XM client, ABN AMRO, in addition to several other financial
services clients.
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In addition, DOT/XM is currently being used to facilitate Web-to-legacy
integration, specifically, for a large book retailer desiring to establish an e-
commerce solution.
Similarly, during the latter part of 1997 Level 8 Technologies launched a
product called EventWorks(TM). EventWorks is a publish/subscribe software
solution utilizing transactional messaging for the effective distribution of
data across the enterprise. The use of this product is applicable not only to
financial service companies performing important transactions, but also to
transportation and other industries engaged in mission critical applications
requiring the simultaneous distribution of data to multiple "subscribers".
In early 1998, the Company completed the acquisition of Momentum Software
Corporation ("Momentum"), which has unique core messaging technology (XIPC)
possessing store and forward capabilities. By combining Momentum's messaging
technology with Level 8 Technologies' messaging technology, Level 8 Technologies
will be able to offer powerful MoM (message-oriented middleware) solutions for
developing and managing distributed enterprise applications. The acquisition of
Momentum should provide Level 8 with additional technical development capacity
and access to additional customers.
Through ProfitKey, the Company offers Enterprise Resource Planning ("ERP")
and constraint-based 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 is
evaluating certain strategic alternatives that include the possible sale of
ProfitKey.
In the Company's continuing effort to focus on middleware, the Company
ceased operating its ASU consulting division on December 31, 1997.
Level 8 Technologies Products and Services
The Company plans to grow primarily on the basis of middleware products
developed by Level 8 Technologies, 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 the Company sells the product directly, Level 8 Technologies also
plans to offer the services. The products also will be sold through other
distribution channels, such as IBM or Microsoft Business Partners, and those
third-party sellers will be encouraged and trained to provide related services.
The Company's products are in various stages of development.
FalconMQ - In the fourth quarter of 1997 the first component of the
FalconMQ product suite, FalconMQ Client was released for general availability
and distribution. FalconMQ Client is a set of application programming interfaces
(APIs) which allow enterprise developers and Independent Software Vendors
("ISV"s) to quickly develop and deploy cross-platform applications that leverage
the power and flexibility of MSMQ on Unix, AS/400, Digital VMS, IBM CICS/MVS
mainframe and Unisys ClearPath HMP systems. FalconMQ Client applications can
exchange MSMQ messages over the network with any MSMQ application using FalconMQ
Client APIs in the "C" or COBOL programming languages. MSMQ applications can
exchange messages with any FalconMQ Client on the network using any of MSMQ's
programming interfaces (e.g., using ActiveX enabled tools such as Microsoft(R)
Visual Basic or Microsoft(R) Visual C++) as if they were communicating with
another MSMQ application.
FalconMQ Bridge for MQSeries provides seamless, wire-level
interoperability between MSMQ applications on Windows NT/95, and IBM's popular
MQSeries 2.0 on over twenty different operating system platforms such as
CICS/MVS and VSE/ESA, leading variants of UNIX, AS/400, Digital VMS and Tandem
NonStop Kernel. FalconMQ Bridge for MQSeries achieves this by supporting message
translation between native formats and by mapping the native IBM MQSeries API
(MQI) to the MSMQ API. FalconMQ Bridge for MQSeries is installed on Windows NT
Server/Enterprise Edition Version 4.0 and does not require separate installation
of any MQSeries software on the Windows NT System. The products sell for $500 to
$10,000, depending on the platform. The FalconMQ Bridge was released in the
first quarter of 1998.
Level 8 Technologies' FalconMQ family of products is designed primarily
for customers using Windows NT LANs co-existing 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
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IBM mainframes and 1.2 million UNIX systems will be connected via messaging to
multiple Windows NT servers. The Company believes that FalconMQ will permit
interfaces between such systems.
DOT/XM - DOT/XM is a powerful transactional framework and tool set that
makes legacy systems services available in a three-tier distributed object
architecture. This is accomplished by using object and messaging technology
across disparate systems, harnessing resources regardless of platform.
DOT/XM uses object technology to wrap legacy systems as objects,
permitting them to integrate with newer systems. The ability to leverage legacy
systems means a company can avoid costly system reengineering. This architecture
provides access to all back-end services from anywhere in the enterprise
regardless of age, operating system or hardware platform.
DOT/XM provides the architecture's middle or business tier. Its main task
is to manage the flow of transactions defined by developers' business rules.
Specifically, a transaction (represented by an object) obtains these rules from
a Business Logic subsystem, transporting them to a Transaction Flow Engine via
message queues. This Transaction Flow Engine interprets these rules and then
routes the transaction to the appropriate back-end system via message queues.
Rule definitions use a scripting language that can be accessed via the
Transaction Flow Builder's graphical user interface. Transactions can be very
simple, accessing a single back-end system, or fairly complex, accessing many
back-end systems and are defined during the design of the domain object model.
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.
EventWorks Publish/Subscribe - This is a shrink-wrapped product that
provides the machinery for enabling event-driven processing. With the majority
of business processing being performed on legacy platforms, any application
integration solution must support legacy platforms and applications. The
EventWorks product provides complete integration of legacy applications with
platforms not connected to the legacy system.
EventWorks follows a transactional publish and subscribe model that allows
applications to "publish" a data object (representing an application level
event) that is asynchronously forwarded to one or more "subscriber"
applications. Publisher and subscriber applications are completely decoupled and
need only know about EventWorks to communicate with one another.
EventWorks provides a mechanism for dynamic data distribution based on
"themes". When an application registers with a particular theme, all information
that EventWorks receives regarding that theme is automatically forwarded to the
registered subscriber applications. This thematic based approach alleviates
publishers of the burden of knowing about the nature of subscribing
applications. EventWorks is a powerful service for application integration that
automatically begins business processing when process-triggering-events occur.
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MonitorMQ is a unified management tool for monitoring MQSeries networks
across multiple platforms from a single centralized interface that is web-
accessible. This means MonitorMQ provides world-wide access to MQSeries network
information from a Web browser. For companies in the initial stages of
developing an MQSeries network or looking for a tool to monitor MQSeries in a
production environment, this sample, low-cost tool for monitoring your MQSeries
data is an ideal solution. MonitorMQ provides real-time information about
MQSeries queue managers, applications, queues, events and channels.
Level 8 Technologies Services. Level 8 Technologies provides systems
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 companies, including: financial
institutions, such as ABN/AMRO Bank N.A., American Express, Chase Manhattan
Bank, Franklin Templeton 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.
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ProfitKey Products and Services
ProfitKey offers ERP and constraint-based scheduling software packages,
and related installation, training and support services for use by manufacturing
businesses. ProfitKey is a value added reseller of various computers, barcode
equipment, and several related software packages.
ProfitKey's principal product, the (R) Rapid Response Manufacturing(R)
Client/Server software package, addresses the needs of make-to-order job shop
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. User preferences will allow users to customize table
displays according to their own needs. Rapid Response Manufacturing
Client/Server's particular strength is its constraint-based 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 the make-to-stock manufacturer.
The Rapid Response Manufacturing(R) Client/Server 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 allows 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 by the number of seats. Typical
configurations on Win NT, UNIX, AS/400 and Novell platforms sell for
approximately $35,000 to $50,000.
The purchase price of ProfitKey software includes a professional services
audit, which recommends an implementation plan supported by ProfitKey
consultants. A minimum 5-day implementation plan is required, but the typical
audit recommends a plan of 20 to 40 days of support services. Our Quick Start
Implementation & Training Program helps assure a complete and successful RRM C/S
implementation in 90-120 days. The daily rate charged is between $900 and $1,100
, depending upon the length of the contract and the skills required.
Rapid Response Manufacturing(R) Client/Server includes scheduling
management, capacity management and cost management. This 32-bit relational
database application maintains high performance and was developed in a powerful
4GL. New features include, RRM Monitor that predicts problems and provides
"drill down" information tools so corrections can be made quickly. Users can
access this information while they're in the office or through the Internet when
they're away. RRM Gateway provides users with the ability to check the status of
a customer's order by using a standard web browser 24 hours a day, 7 days a
week. The character 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.
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 offers its
customers annual maintenance contracts at a cost ranging between 12% and 16% of
the base software license fee, which entitles the customer to telephone support
and new releases of the software.
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The table below shows the Company's percentage of net revenues by category
for the years indicated. The revenues for 1997 include the results of ASU, Level
8 Technologies, Level 8 and ProfitKey. The revenues for 1996 include the results
of ASU, Level 8 Technologies and ProfitKey for the full year and Bizware until
its sale in September 1996. The revenues for 1995 include the results of ASU,
ProfitKey and Bizware for the full year, and Level 8 Technologies 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. The revenues for 1993 include only the results
of the Company's ASU consulting division.
Percentage of Level 8 Net Sales By Revenue Category
Consulting
and Services Software Other Total
------------ -------- ----- -----
1993................................. 100% 0% 0% 100%
1994................................. 72 25 3 100
1995................................. 70 22 8 100
1996................................. 72 22 6 100
1997................................. 69 28 3 100
Markets and Marketing
The Company sells its products and services primarily in the United States, with
additional sales in Canada, Europe and Israel.
The middleware marketplace is in the early stages of development. Industry
sources have estimated that the messaging middleware market exceeded $100
million in 1995 and that such market is expected to exceed $1.0 billion by the
year 2000. The changes that are occurring in today's information economy are
forcing organizations to rethink and broaden their views on the design and
architecture of distributed applications. In fact, the ability to deliver
reliable distributed applications has become a significant competitive
differentiator in many industries and an operating requirement in others. Just
to maintain parity in their industries, businesses need to move beyond familiar
practices.
Until recently, most conventional distributed communication technologies
were tightly coupled, requiring sending and receiving applications to be, online
and able to communicate with each other at the same time over a network.
However, the loosely coupled operational environment of many distributed
applications renders the existing technology inappropriate for broad-based
adoption. For example applications in different physical locations do not always
run at the same time and networks are not always available and reliable. Many
companies are finding solutions in MoM (message-oriented middleware) products.
MoM provides reliable, asynchronous, and loosely coupled communication services.
Level 8 has been engaged in co-marketing and co-promotional activities,
such as industry trade shows and technical conferences, with many other
companies, including Microsoft, IBM, Iona and Unisys, with the goal of adding
value to the Microsoft and IBM messaging products. Companies such as IBM,
Digital Equipment Corporation and Microsoft have introduced MoM products that
work across multiple platforms and that provide opportunities for add-on
products and services, such as those provided by Level 8 Technologies.
Level 8 Technologies 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. Level
8 plans to move in the direction of a product rather than service-oriented
company, Level 8 will aggressively develop more strategic alliances and
relationships in support of growing solid channels of distribution for its
products, particularly the FalconMQ product suite and XIPC.
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 300 employees and sells to them
with a direct sales force augmented in some territories by regional agents.
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Customers
In 1997 ABN AMRO was the only customer that accounted for 10% or more of
the Company's revenue. Revenue attributable to that company was approximately
$2.1 million.
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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.
With the acquisition of Momentum, the Company will be acquiring an
independent message technology product. The market for this product is highly
competitive, and the Company believes competition will intensify in the future.
The Company competes with developers of messaging products and systems, such as
IBM MQSeries.
Candle Corp. has launched its own initiative called Roma to provide some
of the same functionality as our FalconMQ product. The Roma product is a
completely different approach to bridging IBM MQSeries and Microsoft MSMQ than
the Company's FalconMQ product. Candle's Roma product is currently in Beta.
In the publish/subscribe market covered by EventWorks, there are several
companies with competitive products, including Tibco, Neon and Mint. These
products differ substantially from Level 8 EventWorks primarily in that
EventWorks is built over existing industry standard messaging products,
including MQSeries and MSMQ.
In the system integration and consulting services market, the Company
competes with providers of systems integration services, such as Andersen
Consulting and Logica PLC, and numerous local and regional providers of
consulting and integration services, as well as 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.
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 license
agreements 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.
The Company has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 issue. Any of
the Company's programs that have time-sensitive software have been modified to
properly handle Year 2000 issues. However, if such modifications require
additional programming efforts, the Company does not believe it will have a
material effect on the operations of the Company.
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 December 31,
1997, the Company had 143 employees.
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Executive Officers of the Registrant
The names, ages and positions of the executive officers of the Company are
listed below, along with their business experience during the past five years.
The officers are elected annually and serve at the discretion of the Board of
Directors:
<TABLE>
<CAPTION>
Business
Experience During
Name Age Office The Past Five Years
---- --- ------ -------------------
<S> <C> <C> <C>
Arie Kilman 44 Chief Executive Officer and Chairman of the Board of Directors from July 1997,
Chairman of the Board of Chief Executive Officer of the Company since July
Directors 1996, Directors President of the Company from July 1996 to October
1996, Chairman of the Board of Directors of the Company from December
1994 to July 1996. Chairman and Chief Executive Officer of Level 8
Technologies from July 1996. Chairman of the Board and President of
Liraz Systems, Ltd. since 1983.
Joseph J. Di Zazzo 39 Chief Financial Officer; Chief Financial Officer of the Company from July 1997,
Treasurer and Secretary Chief Accounting Officer, Treasurer and Secretary of
the Company since April 1995, Controller since January 1995, Vice
President, Finance of ProfitKey since January 1995,
Controller of ProfitKey from May 1992 to January 1995, self-employed
in video business from June 1991 to May 1992, Controller of Workstation
Technologies from April 1987 to June 1991.
Samuel Somech 44 President and Director President of the Company since October 1996, Director of the Company
since April 1995,Vice President of the Company from April 1995 to
October 1996, President and Chief Operating Officer of Level 8
Technologies since April 1995, Co-founder of Level 8 Technologies in
February 1994, Technical Director, Messaging Group of Apertus
Technologies, Inc. from January 1994 to March 1994, Technical Director,
Messaging Group of NYNEX from September 1990 to December 1993.
</TABLE>
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Item 2. Properties
The Company leases approximately 29,000 square feet of administrative
space. The Company's facilities are as follows:
<TABLE>
<CAPTION>
Ownership Square
Location Function Status Feet
-------- -------- ------ ----
<S> <C> <C> <C>
Salem, New Hampshire Corporate offices ProfitKey Leased 15,600
New York, New York Corporate office of Level 8 and
Level 8 Technologies Leased 5,125
Framingham, Massachusetts Development office for Level 8
Technologies Leased 700
Boca Raton, Florida Development office for Level 8
Technologies Leased 3,950
Boca Raton, Florida Training facility for Level 8
Technologies Leased 1,740
Santa Clara, California Corporate office of ASU Leased 1,750
Manville, New Jersey Sales office Leased 108
West University Place, Washington Sales office Leased 108
</TABLE>
The corporate offices of Level 8 and Level 8 Technologies in New York
are covered by a lease that expires in November 2000. The lease for the
ProfitKey office in Salem, New Hampshire expires in October 1999. The Level 8
Technologies development office lease in Framingham can be terminated by either
party on 30 days notice. The Level 8 Technologies development office lease in
Boca Raton expires in July 1999 and the training office lease in Boca Raton can
be terminated by either party on 15 days notice. The lease for the ASU office in
Santa Clara expires in May 2000. The Manville sales office lease can be
terminated by either party on15 days written notice. The West University Place
lease expires in April 1998.
Item 3. Legal Proceedings
From time to time the Company is involved in litigation relating to
claims arising from its operations in the normal course of business. As of the
date of this filing, neither the Company nor any of its subsidiaries is a party
to any legal proceedings, the adverse outcome of which, in management's opinion,
would have a material adverse effect on the Company's results of operations or
financial position.
Item 4. Submission of Matters To A Vote of Security Holders
No matters were submitted to a vote to the Company's security holders
during the fourth quarter of 1997.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "LVEL". The following table sets forth the high and low
last reported sale prices for the Common Stock for the periods indicated, as
reported by the NASDAQ National Market.
Period High Low
- ------ ---- ---
1995:
Third Quarter (from July 27) 10 3/8 6 1/2
Fourth Quarter 8 5 1/2
1996:
First Quarter 8 1/8 5 1/2
Second Quarter 15 1/2 7
Third Quarter 12 1/2 8 1/8
Fourth Quarter 15 7/8 9 1/4
1997
First Quarter 18 1/4 10 1/4
Second Quarter 18 1/2 10 5/8
Third Quarter 25 7/8 15 7/8
Fourth Quarter 23 7/8 11 1/2
The Company has never declared or paid a cash dividend on its Common
Stock, and it is anticipated that the Company will continue to retain its
earnings for use in its business. Declaration of dividends is within the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements and financial position of the Company, general
economic conditions and other pertinent factors.
As of March 18, 1998, there were 70 holders of record of the Common
Stock of the Company.
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Item 6. Selected Financial Data
The selected financial data presented below has been derived from the
Company's Consolidated Financial Statements. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Operations" and the Consolidated Financial Statements.
For 1997, the following data includes ASU, ProfitKey, Level 8 and Level
8 Technologies. For 1996, the following data includes ASU, ProfitKey, Level 8
and Level 8 Technologies for the full year and Bizware Computer Systems (Canada)
Inc. ("Biware") until its sale in September 1996. For 1995, the following data
includes ASU, ProfitKey, Level 8 and Bizware for the full year and Level 8
Technologies since its acquisition on April 1, 1995. For 1994, the following
data includes ASU, ProfitKey since its acquisition on October 3, 1994 and
Bizware since its acquisition on October 28, 1994. Periods prior to 1994 include
only the operations of ASU.
<TABLE>
<CAPTION>
SELECTED STATEMENT OF OPERATIONS DATA
Year Ended December 31,
----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $ 1,312,935 $ 3,596,602 $10,139,024 $13,075,338 $20,225,280
Net income (loss) ($ 32,712) $ 563,590 $ 618,049 ($2,369,397) $ 1,088,963
Net income (loss) per common and
common equivalent share - basic ($ .01) $ .15 $ .14 ($ .39) $ .16
Net income (loss) per common and
common equivalent share - diluted ($ .01) $ .15 $ .14 ($ .39) $ .14
Weighted average common and common
equivalent shares outstanding - basic 3,839,166 3,839,166 4,314,106 6,076,103 6,992,398
Weighted average common and common
equivalent shares outstanding - diluted 3,839,166 3,839,166 4,403,004 6,076,103 7,561,084
<CAPTION>
SELECTED BALANCE SHEET DATA
At December 31,
---------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $ 290,991 ($1,679,294) $ 4,103,621 $11,007,583 $11,843,145
Total assets 438,340 5,848,838 15,059,198 22,112,453 25,391,972
Long-term debt, net of current maturities 6,771 19,053 43,975 23,297 64,108
Loans from related companies, net 418,900 2,015,165 453,847 330,706 201,751
Shareholders' equity (deficit) (85,407) 489,729 11,498,535 18,300,153 20,371,623
</TABLE>
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's only operations prior to the acquisitions of ProfitKey
and Bizware in October 1994 and Level 8 Technologies in April 1995 were certain
limited consulting services through its ASU consulting division. The following
discussion reflects the activities of the ASU Consulting division through
December 31, 1997 (when that division ceased to operate), ProfitKey from its
acquisition date of October 3, 1994, Bizware from its acquisition date of
October 28, 1994 through its sale on September 9, 1996 and Level 8 Technologies
from April 1, 1995, its acquisition date.
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 acquisitions of Bizware and Level 8 Technologies,
the Company began to incur substantial non-cash charges to earnings due to
amortization of goodwill associated with the acquisitions of Level 8 and
Bizware, amortization of service contracts of ProfitKey and amortization of
software development costs of ProfitKey and Bizware. As a consequence of the
amortization of intangible assets, the Company will record amortization expense
of approximately $529,000 each year through 2001, and a reduced amount each year
for 13 years thereafter.
In July 1996, the Company decided to focus on the middleware activities
of Level 8 Technologies. As part of that strategy, on September 9, 1996, the
Company sold substantially all the assets of Bizware, a wholly-owned subsidiary
in the application software business, for $230,000, and, in that connection, the
Company recognized a loss of $1,484,061. In the Company's continuing effort to
focus on middleware, activities the Company ceased operating its ASU consulting
division and sold the rights to the division's customer base for $65,000 and the
assumption of certain of the division's liabilities totaling $38,148. The
Company will continue to evaluate non-strategic products and product lines and
will consider exiting and or selling as appropriate opportunities arise.
On February 27, 1998 the Company signed a purchase agreement to acquire
Momentum Software Corporation ("Momentum"). Momentum is a privately held
independent software vendor and is a leading provider of asynchronous store and
forward message queuing software used for integrating heterogeneous enterprise
applications. Momentum is a leading provider of enterprise middleware used by
companies worldwide to build multi-platform, multi-tiered distributed
applications using message queuing technology. Momentum has a strong track
record of enabling organizations to build mission critical distributed
applications using Momentum (XIPC), one of the premier message queuing products
in the industry. Under the terms of the agreement Momentum shareholders will
receive 575,000 common shares of Level 8 and warrants to purchase 200,000 common
shares, subject to adjustment to take into account certain fluctuations in the
value of the Level 8 stock. The transaction closed March 26, 1998.
Results of Operations
1997 and 1996
Revenue increased from $13,075,338 in 1996 to $20,225,280 in 1997, an
increase of approximately 55%. The increase was primarily due to increases in
revenue in Level 8 Technologies, ProfitKey and Level 8 of approximately
$7,310,000, $104,000 and $110,000, respectively. Level 8 Technologies revenue
from software increased from approximately $1,485,000 in 1996 to approximately
$4,354,000 in 1997 (193%). The increase in software revenue includes $1,395,000
related to Level 8 Technologies products and $1,474,000 related to third party
software products. Level 8 Technologies revenue from consulting and services
increased from approximately $4,035,000 in 1996 to approximately $8,476,000 in
1997 (110%). Level 8 realized revenue in 1997 of $110,000 as a result of a loan
to a high technology company. ProfitKey revenue increased from approximately
$5,441,000 in 1996 to $5,545,000 in 1997 (2%). These increases were offset by
decreases in revenue at ASU and Bizware of approximately $11,000 and $363,000,
respectively. ASU revenue decreased from approximately $1,751,000 in 1996 to
$1,740,000 in 1997. The decrease in Bizware revenue is the result of the sale of
Bizware in September 1996.
Cost of revenue increased from $7,220,106 in 1996 to $10,423,738 in
1997, an increase of approximately 44%. The increase is primarily related to
increases in cost of revenue in Level 8 Technologies and ProfitKey of
approximately $3,246,000 and $217,000, respectively. The increase in cost of
revenue in Level 8 Technologies is related to increased costs related to
software sales as a result of increased software amortization charges from 1996
to 1997 of approximately $121,000 and an increase in the cost of third party
software products from 1996 to 1997 of approximately $1,150,000. Level 8
Technologies cost of revenue related to consulting services increased from 1996
to 1997 by approximately $2,053,000 as a direct result of the increase in
consulting services
-14-
<PAGE>
revenue. The increase in cost of revenue in ProfitKey is primarily related to
increased cost of consulting services and to a lesser extent, the cost of
software. The increases are offset by decreases in cost of revenue in ASU and
Bizware from 1996 to 1997 of approximately $88,000 and $171,000, respectively.
The decrease in cost of revenue in ASU is primarily related to reducing the cost
of outside consultants used to deliver services. The decrease in cost of revenue
in Bizware is the result of the sale of Bizware in September 1996.
Operating expenses increased from $7,025,028 in 1996 to $8,469,528 in
1997 (21%). The increase is primarily related to increases in Level 8
Technologies and ProfitKey of approximately $1,911,000 and $137,000,
respectively. The increase in operating expenses of Level 8 Technologies is
primarily related to increasing sales and marketing efforts, continued research
and development expenses and continued efforts to build a supporting
infrastructure. The increase in ProfitKey is primarily related to additional
overhead of the field services department. The increases are offset by decreases
in ASU and Bizware of $50,000 and $548,000, respectively. The decrease in ASU is
primarily related to a reduction in employee-related costs. The decrease in
Bizware is the result of the sale of Bizware in September 1996.
Operating expenses, including a one time charge for the loss on the
sale of Bizware of approximately $1,484,000 in 1996 and a gain of approximately
$60,000 related to the sale of ASU in 1997, decreased from $8,509,089 in 1996 to
$8,409,250 in 1997 (1%).
Other income increased from $136,760 in 1996 to $387,571 in 1997
(183%). The increase is related to an increase in interest income of
approximately $239,000 from 1996 to 1997 related to investment of cash from the
Company's second public offering, in December 1996, and interest earned on a
transaction with another high technology company. In addition, interest expense
decreased approximately $12,000 from 1996 to 1997.
Income tax expense (benefit) was 39% and (6%) of income before taxes
1997 and 1996, 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 Bizware and the nondeductible goodwill amortization.
1996 and 1995
Revenue increased from $10,139,024 in 1995 to $13,075,338 in 1996, an
increase of approximately 29%. The increase was primarily due to an increase in
Level 8 Technologies revenue of approximately $4,144,000 (201%). Approximately
$618,000 of the increase in revenue of Level 8 Technologies was attributable to
inclusion of the revenue of Level 8 Technologies for the entire year in 1996
compared to only nine months in 1995 following the acquisition of Level 8
Technologies on April 1, 1995, and approximately $3,526,000 was attributable to
an increase in Level 8 Technologies revenue during the comparable nine-month
period. The increase in revenue of Level 8 Technologies was offset, in part, by
a decrease in revenue of Bizware of approximately $1,043,000.
Cost of revenue increased from $4,514,207 in 1995 to $7,220,106 in
1996, an increase of approximately 60%. The increase was primarily related to an
increase in cost of revenue at Level 8 Technologies of approximately $2,319,000
(199%). Approximately $379,000 of the increase in cost of revenue of Level 8
Technologies was attributable to the inclusion of cost of revenue of Level 8
Technologies for the entire year of 1996 compared to only nine months of 1995
following the acquisition of Level 8 Technologies on April 1, 1995, and
approximately $1,940,000 was attributable to an increase in cost of revenue of
Level 8 Technologies during the comparable nine-month period. As a percentage of
revenue, Cost of revenue increased from approximately 45% in 1995 to
approximately 55% in 1996. This increase was primarily attributable to an 84%
cost of revenue for sales in 1996 of $1,485,000 of third-party software
licenses.
Operating expenses for 1996 increased approximately $3,728,000 (78%)
from 1995. The increase in operating expenses includes a one time charge of
$1,484,000 related to the sale of substantially all of the assets of Bizware.
Operating expenses net of the one time charge related to the sale Bizware
increased approximately $2,244,000 (47%) from 1995 to 1996. The increase was
attributable primarily to Level 8 Technologies opening a new office in Boca
Raton, Florida and related staffing expenses and an additional three months of
operations in 1996 for Level 8 Technologies totaling approximately $1,778,000.
The balance of the increase was due to increased sales and marketing expenses at
ProfitKey and increased general corporate overhead. Operating expense for 1996
includes amortization of goodwill and service contracts acquired of $527,786 and
$108,271, respectively, compared to $430,144 and $144,951, respectively, in
1995. As a percentage of revenue, operating expenses, including the one time
charge related to the sale of Bizware, increased from 47% in 1995 to 65% in
1996. Operating expenses, net of the one time charge related to the sale of
Bizware, increased from 47% in 1995 to 54% in 1996.
-15-
<PAGE>
Other income (expense) increased from 1995 to 1996 by approximately
$68,000. The increase was attributable primarily to an increase of approximately
$48,000 in interest earned from investment of cash remaining from the Company's
initial public offering and the Candle investment and a decrease of
approximately $21,000 interest expense from 1995 to 1996 related to a decrease
in the Company's debt.
Income tax expense (benefit) was (6%) and 31% of income before taxes
and minority interest for 1996 and 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 Bizware and the nondeductible
goodwill amortization.
Minority interest in income of consolidated subsidiary was eliminated
starting April 3, 1995, when the Company acquired the minority interest in
ProfitKey.
1995 and 1994
Revenue for the year 1995 increased by approximately $6,500,000 (182%)
over the prior year. The increase was attributable primarily to the acquisitions
of ProfitKey on October 3, 1994, Bizware on October 28, 1994 and Level 8
Technologies on April 1, 1995.
Cost of revenue for the year 1995 increased by approximately $2,800,000
(165%) over the prior year. The increase was attributable primarily to the
acquisitions of ProfitKey, Bizware and Level 8 Technologies. As a percentage of
revenue, cost of revenue decreased from 47% in 1994 to 45% in 1995. This
decrease was attributable primarily to lower cost of revenue for Bizware, which
resulted from a high margin contract that concluded during the second quarter of
1995.
Operating expense for 1995 increased by approximately $3,600,000 (289%)
over the prior year. The increase was attributable primarily to the acquisitions
of ProfitKey, Bizware and Level 8 Technologies. As a percentage of revenue,
operating expense increased from 34% during 1994 to 47% during 1995. This
increase was attributable to an increase in amortization of goodwill and service
contracts from approximately $55,000 during 1994 to approximately $575,000
during 1995, higher operating expenses at Bizware and Level 8 Technologies,
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 during 1995.
Income tax expense was 31% and 19% of income before taxes and minority
interest for 1995 and 1994, respectively. The effective tax rate for 1994
differs from the federal statutory 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 1995.
Liquidity and Capital Resources
In 1997, the Company funded its operations with cash remaining from its
second public offering on December 17, 1996. During the year ended December 31,
1997, the Company used net cash of approximately $552,000 for operations,
expended approximately $1,917,000 for capitalized software development costs and
expended approximately $636,000 on equipment. The proceeds from the Company's
second public offering have been invested primarily in short-term interest-
bearing securities. At December 31, 1997, the Company had working capital of
approximately $11,843,000 and a current ratio of 3.69.
The Company intends to continue 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 its second public offering.
The Company believes that its existing working capital and anticipated
funds generated from operations will be sufficient to fund its working capital
and capital expenditure requirements through December 1998.
-16-
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and the Report of
Independent Public Accountants are presented in the following pages. The
Consolidated Financial Statements filed in Item 8 are as follows:
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Item 9. Change in and Disagreements With Accountants on Accounting and Financial
Disclosure
On January 28, 1998, Level 8 replaced Lurie, Besikof, Lapidus & Co.,
LLP as its independent auditors with Grant Thornton LLP. For further information
regarding this change, reference is made to the Company's Form 8-K filed with
the Securities and Exchange Commission on January 30, 1998. Reference is also
made to the Letter to the Securities and Exchange Commission from Lurie,
Besikof, Lapidus & Co., LLP dated January 29, 1998 and filed as Exhibit 1 to
Form 8K on January 30, 1998.
-17-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Level 8 Systems, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Level 8 Systems, Inc. and
Subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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
misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 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, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
We have also audited Schedule II for the year ended December 31, 1997, listed in
the Index at Item 14(b)2. In our opinion, this schedule for the year ended
December 31, 1997 presents fairly, in all material respects, the information
required to be set forth therein.
GRANT THORNTON LLP
New York, New York
February 23, 1998 (except for Note N, as to which
the date is February 27, 1998)
-18-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Level 8 Systems, Inc.
We have audited the accompanying consolidated balance sheet of LEVEL 8 SYSTEMS,
INC. AND SUBSIDIARIES as of December 31, 1996, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1996.
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, 1996, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
January 31, 1997
-19-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,246,692 $ 3,531,102
Marketable securities 6,524,758
Accounts receivable, less allowance for doubtful
accounts of $517,000 and $282,000, respectively 7,154,988 2,977,260
Income taxes receivable 405,525 591,004
Inventory 460,166 143,874
Prepaid expenses and other assets 547,264 261,182
Deferred income taxes 429,800 331,200
---------- ----------
Total current assets 16,244,435 14,360,380
---------- ----------
PROPERTY AND EQUIPMENT 1,316,922 958,110
---------- ----------
OTHER ASSETS
Excess of cost over net assets of businesses
acquired, net 1,793,375 2,215,347
Service contracts acquired, net 1,689,932 1,834,469
Software development costs, net 4,053,334 2,693,114
Deposits and deferred costs 293,974 51,033
---------- ----------
7,830,615 6,793,963
---------- ----------
$25,391,972 $22,112,453
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of loan from related company $ 128,000 $ 122,000
Current maturities of long-term debt 12,195 8,593
Accounts payable 2,254,238 1,120,070
Accrued expenses 424,131 549,172
Customer deposits 117,243 153,816
Deferred revenue 1,465,483 1,399,146
---------- ----------
Total current liabilities 4,401,290 3,352,797
---------- ----------
OTHER LIABILITIES
Loan from related company, net of current maturities 201,751 330,706
Long-term debt, net of current maturities 64,108 23,297
Deferred income taxes 353,200 105,500
---------- ----------
619,059 459,503
---------- ----------
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 -
7,044,634 and 6,954,366, respectively) 70,446 69,543
Additional paid-in capital 20,603,498 19,506,914
Accumulated deficit (184,212) (1,273,175)
Unearned compensation (118,109) (3,129)
---------- ----------
20,371,623 18,300,153
---------- ----------
$25,391,972 $22,112,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Revenue
Consulting and service $13,924,256 $ 9,357,493 $ 7,060,590
Software 5,567,860 2,856,455 2,257,286
Other 733,164 861,390 821,148
---------- ----------- -----------
20,225,280 13,075,338 10,139,024
---------- ----------- -----------
Cost of revenue
Consulting and service 6,533,409 4,558,098 3,571,535
Software 3,346,825 2,142,423 341,655
Other 543,504 519,585 601,017
---------- ----------- -----------
10,423,738 7,220,106 4,514,207
---------- ----------- -----------
Gross margin 9,801,542 5,855,232 5,624,817
---------- ----------- -----------
Operating expenses
Selling, general and administrative 7,938,318 6,388,971 4,205,943
Amortization of goodwill and service
contracts acquired 531,210 636,057 575,095
---------- ----------- -----------
8,469,528 7,025,028 4,781,038
---------- ----------- -----------
Operating income (loss) before gain
(loss) on sale of businesses 1,332,014 (1,169,796) 843,779
Gain (loss) on sale of businesses 60,278 (1,484,061)
---------- ----------- -----------
OPERATING INCOME (LOSS) 1,392,292 (2,653,857) 843,779
---------- ----------- -----------
Other income (expense)
Interest income 409,792 170,963 122,994
Interest expense (22,221) (34,203) (54,733)
---------- ----------- -----------
387,571 136,760 68,261
---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 1,779,863 (2,517,097) 912,040
Income tax expense (benefit) 690,900 (147,700) 278,700
---------- ----------- -----------
Income (loss) before minority interest 1,088,963 (2,369,397) 633,340
Minority interest in income of
consolidated subsidiary 15,291
---------- ----------- -----------
NET INCOME (LOSS) $ 1,088,963 $ (2,369,397) $ 618,049
========== =========== ===========
Net income (loss) per common share - basic $.16 $(.39) $.14
=== === ===
Net income (loss) per common share -
Diluted $.14 $(.39) $.14
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
-21-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock Additional
------------------------------------- paid-in
Shares Amount capital
------------ ----------- ------------
<S> <C> <C> <C>
Balance at December 31, 1994 3,009,119 $16,710
Recapitalization 10,179 $ (10,179)
Common stock issued
Prior to initial public offering 394,315 3,943 521,057
Level 8 Technologies acquisition 525,159 5,252 1,570,225
Conversion of loan from related company to equity 471,264 4,713 2,045,287
Initial public offering 1,430,000 14,300 5,913,063
Conversion of minority common shares of ProfitKey 91,344 913 273,119
Stock options 1,209 12 988
Other 19,801 3,400
Common stock repurchased (19,801) (198) (3,202)
Net income
Unearned compensation related to issuance of stock options 68,285
Adjustment of unearned compensation (7,341)
Foreign currency translation adjustment
------------ ----------- ------------
Balance at December 31, 1995 5,922,410 59,224 10,371,302
Common stock issued
Candle Corporation 246,800 2,468 2,607,274
Public offering 705,000 7,050 6,470,147
Stock options 80,156 801 58,191
Net loss
Adjustment of unearned compensation
Foreign currency translation adjustment
------------ ----------- ------------
Balance at December 31, 1996 6,954,366 69,543 19,506,914
Common stock issued
Stock options and warrants (net of 29,546 shares surrendered) 90,268 903 506,549
Additional public offering costs (137,365)
Net income
Unearned compensation related to issuance of
nonemployee stock options 263,400
Adjustment of unearned compensation
Tax benefit from stock plans 464,000
------------ ----------- ------------
Balance at December 31, 1997 7,044,634 $70,446 $20,603,498
============ =========== ============
<CAPTION>
Foreign
Retained currency
earnings Unearned translation
(deficit) Compensation adjustments Total
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 478,173 $ (5,154) $ 489,729
Recapitalization
Common stock issued
Prior to initial public offering 525,000
Level 8 Technologies acquisition 1,575,477
Conversion of loan from related company to equity 2,050,000
Initial public offering 5,927,363
Conversion of minority common shares of ProfitKey 274,032
Stock options 1,000
Other 3,400
Common stock repurchased (3,400)
Net income 618,049 618,049
Unearned compensation related to issuance of stock options (68,285)
Adjustment of unearned compensation 34,962 27,621
Foreign currency translation adjustment 10,264 10,264
------------ ---------- ----------- -------------
Balance at December 31, 1995 1,096,222 (33,323) 5,110 11,498,535
Common stock issued
Candle Corporation 2,609,742
Public offering 6,477,197
Stock options 58,992
Net loss (2,369,397) (2,369,397)
Adjustment of unearned compensation 30,194 30,194
Foreign currency translation adjustment (5,110) (5,110)
------------ ---------- ----------- -------------
Balance at December 31, 1996 (1,273,175) (3,129) 18,300,153
Common stock issued
Stock options and warrants (net of 29,546 shares surrendered) 507,452
Additional public offering costs (137,365)
Net income 1,088,963 1,088,963
Unearned compensation related to issuance of
nonemployee stock options (263,400)
Adjustment of unearned compensation 148,420 148,420
Tax benefit from stock plans 464,000
------------ ---------- ----------- -------------
Balance at December 31, 1997 $ (184,212) $(118,109) $ $20,371,623
------------ ---------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,088,963 $ (2,369,397) $ 618,049
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities
Depreciation 337,699 226,808 135,942
Amortization 1,084,444 1,031,413 640,646
(Gain) loss on sale of businesses (60,278) 1,484,061
Tax effect of utilizing deferred tax assets reserved
at date of acquisition 35,300 49,600 448,700
Deferred income taxes 149,100 19,100 (529,700)
Nonemployee stock options expense 120,291
Minority interest in consolidated subsidiary income 15,291
Accrued interest income (45,190)
Changes in operating assets and liabilities, exclusive
of those arising from business acquisitions and sales
Accounts receivable (4,173,179) (1,481,163) 941,612
Income taxes 647,287 (708,096) (218,307)
Inventory (316,201) (18,540) (61,647)
Prepaid expenses and other assets (286,082) (125,350) (77,789)
Deposits and deferred costs (217,941) (15,796) (19,051)
Accounts payable 1,133,907 660,834 (252,954)
Accrued expenses (124,989) 73 (282,237)
Customer deposits (36,573) (59,405) (77,185)
Deferred revenue 66,337 (249,949) 50,757
----------- ------------ ------------
Net cash provided by (used in) operating
activities (551,915) (1,555,807) 1,286,937
----------- ------------ ------------
Cash flows from investing activities
Purchase of marketable securities (1,998,128) (6,524,758) (1,999,772)
Redemption of marketable securities 8,522,886 2,044,962
Purchases of property and equipment (636,193) (676,914) (380,686)
Software development costs (1,917,287) (2,057,345) (836,852)
Employee advances (repayments) 21,225 (9,033)
Proceeds from sale of businesses 65,000 156,667
Payments and advances to former shareholders
of acquired subsidiary (739,678)
Payments received on advances to former shareholders
of acquired subsidiary 236,708
Cost of acquisitions (2,151,302)
Cash acquired in acquisitions 5,669
----------- ------------ ------------
Net cash provided by (used in) investing
activities 4,036,278 (7,036,163) (5,874,946)
----------- ------------ ------------
</TABLE>
-23-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from issuance of common stock $10,469,800 $ 8,393,400
Cost of issuance of common stock $ (137,365) (1,382,861) (1,937,637)
Proceeds from exercise of stock options 507,452 58,992 1,000
Repurchase of common stock (3,400)
Payments on loans from related companies (122,955) (118,141) (907,325)
Loans from related companies 1,513,007
Payments on long-term debt (15,905) (48,216) (82,307)
Proceeds from long-term debt 72,095
----------- ---------- ----------
Net cash provided by financing activities 231,227 8,979,574 7,048,833
----------- ---------- ----------
Effect of exchange rate changes on cash (4,011) (4,620)
----------- ---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 3,715,590 383,593 2,456,204
Cash and cash equivalents at beginning of year 3,531,102 3,147,509 691,305
----------- ---------- ----------
Cash and cash equivalents at end of year $ 7,246,692 $ 3,531,102 $ 3,147,509
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 22,221 $ 34,203 $ 54,733
Income taxes 54,845 183,467 375,916
Supplemental disclosures of noncash financing and
investing activities
Acquisitions of Level 8 Technologies (Note B)
Cost of net assets acquired 3,575,477
Additional direct costs 151,302
Common stock issued (1,575,477)
----------- ---------- ----------
Cash cost of acquisition 2,151,302
Financed the sale of a subsidiary 73,333
Converted loans from related companies into
471,264 shares of common stock 2,050,000
Computer equipment acquired through capital lease 60,318
Deferred unearned compensation related to
issuance of nonemployee stock options 25,000
</TABLE>
The accompanying notes are an integral part of these statements.
-24-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - DESCRIPTION OF THE COMPANY AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
1. The Company
Level 8 Systems, Inc. (Level 8) 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. Level 8 Technologies, Inc. (Level 8 Technologies), a
wholly-owned subsidiary, 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. Level 8 Technologies also sells third-party software through
licensing agreements. ProfitKey International, Inc. (ProfitKey), a
wholly-owned subsidiary, provides computer consulting services and
sells turnkey manufacturing resource planning (MRP II) and scheduling
software packages to manufacturing companies. Bizware Computer Systems
(Canada) Inc. (Bizware), a wholly-owned subsidiary until its sale on
September 9, 1996, sold software packages that provided cost
information used by the petroleum and retail industries to manage and
control individual retail outlets and groups of outlets.
Liraz Systems Ltd. and its wholly-owned subsidiaries own approximately
52% of Level 8's common stock at December 31, 1997.
2. 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 subsidiary, Bizware (through September 9, 1996), collectively
referred to as the Company. All intercompany accounts and transactions
are eliminated in consolidation.
-25-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE A (continued)
3. 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 reported amounts and disclosures in
these financial statements and accompanying notes. Actual results could
differ from those estimates. Significant management estimates relate to
the capitalization and amortization of software development costs,
amortization periods for intangible assets, the allowance for doubtful
accounts, and the valuation allowance for deferred tax assets.
4. Foreign Currency Translation
Revenue and expenses of Bizware were translated at the average exchange
rates prevailing during the years.
5. Fair Value of Financial Instruments
The carrying amounts of financial instruments consisting of cash,
marketable securities, receivables, long-term debt, and accounts
payable approximate their fair values. It is not practicable to
determine the fair value of the loan from the related company due to
the related party nature of the transaction.
6. Revenue Recognition
The Company recognizes revenue from the sale of a software and hardware
system 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. Any unearned receipts from service contracts result in
deferred revenue. Consulting and specialized software development
revenue is recognized as services are rendered.
-26-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE A (continued)
7. 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, 1996, consisting of U.S.
Government agency bonds, are considered to be "available for sale," and
are reported at cost which approximates fair market value.
The Company maintains cash and cash equivalents in bank deposit
accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and does not
believe it is exposed to any significant credit risk on cash and cash
equivalents.
8. Inventory
Inventory is valued at the lower of cost (first-in, first-out) or
market and consists of purchased computers, software and related
equipment.
9. Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using primarily the
straight-line method over the estimated useful lives of the assets,
primarily five to seven years.
10. 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 amortized on a
straight-line basis. The goodwill related to the Level 8 Technologies
acquisition is amortized over seven years and that related to the
Bizware acquisition was over ten years. The remaining Bizware goodwill
was written off when Bizware
-27-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE A (continued)
was sold. The Company periodically assesses the recoverability of
goodwill 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 $1,160,423 and $738,450 at December 31,
1997 and 1996, respectively.
11. Service Contracts Acquired
Service contracts acquired in connection with the acquisition of
ProfitKey are amortized over twenty years based on the past history of
customer retention for service contracts and the Company's commitment
to continually update its product. Upon the cancellation of any service
contract acquired, a pro rata portion of the cost is expensed.
Accumulated amortization was $427,181 and $317,944 at December 31, 1997
and 1996, respectively.
12. 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 (SFAS) 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 future
revenue, are charged to current period operations. The remaining
Bizware software development costs were written off at the date of
sale. Accumulated amortization was $909,780 and $362,248 at December
31, 1997 and 1996, respectively. Amortization of in-process software
development costs totaling $3,691,454 has not begun as of December 31,
1997.
13. Accounting for Stock-Based Compensation
The Company accounts for employee stock options under Accounting
Principles Board Opinion (APB) No. 25 and provides the pro forma
disclosures required by SFAS No. 123.
-28-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE A (continued)
14. Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128). SFAS 128 specifies the compilation, presentation and
disclosure requirements for earnings per share for entities with
publicly held common stock or potential common stock. The requirements
of this statement are effective for interim and annual periods ending
after December 15, 1997. All prior years were restated in accordance
with SFAS 128.
Net income (loss) per common share-basic is determined by dividing the
net income (loss) by the weighted average number of shares of common
stock outstanding. Net income (loss) per common share-diluted is
determined by dividing the net income (loss) by the weighted number of
shares outstanding and dilutive common equivalent shares from stock
options and warrants.
15. Research and Development Costs
Research and development costs are expensed when incurred. Research and
development expenses were approximately $1,236,210, $885,903, and
$302,579 for the years ended December 31, 1997, 1996, and 1995,
respectively.
16. Advertising Expenses
The Company expenses advertising costs as incurred. Sales brochures and
materials are carried as prepaid expenses until they are consumed or
determined to be obsolete. Advertising expenses were approximately
$492,838, $347,534, and $194,174 for the years ended December 31, 1997,
1996 and 1995, respectively.
-29-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE A (continued)
17. Reclassifications
Certain reclassifications were made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
18. Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. The requirements of this
statement will be effective for both interim and annual periods
beginning after December 15, 1997. Management does not believe the
implementation of SFAS 130 will have a material effect on the financial
statements.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
changes how operating segments are reported in annual financial
statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders.
SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated.
SFAS No. 131 need not be applied to interim financial statements in the
initial year of its application. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131
will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
In October 1997, the American Institute of Certified Public Accountants
has issued Statement of Position 97-2 ("SOP 97-2"), Software Revenue
Recognition, which is effective for transactions entered into in fiscal
years beginning after December 15, 1997. Retroactive application of the
provisions of this SOP is prohibited. The SOP 97-2 provides guidance on
applying generally accepted accounting principles in recognizing
revenue on software transactions. This SOP supersedes SOP 91-1,
Software Revenue Recognition. The effect of adopting this new standard
has not been determined.
-30-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE A (continued)
19. Deferred Costs
The Company has deferred costs of $178,374 relating to a proposed
acquisition (Note N) and of $51,471 relating to a proposed common stock
offering. The deferred acquisition costs will be recorded as part of
the purchase price of the acquisition, while the offering costs will be
a reduction of the offering proceeds. There can be no assurance that
either transaction will be consummated. If unsuccessful, the costs will
be charged to operations.
NOTE B - ACQUISITION
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
statements of operations and of cash flows include the transactions of
Level 8 Technologies since the date of acquisition.
-31-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE B (continued)
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>
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Computer equipment $1,564,810 $ 937,583
Furniture 244,639 211,066
Office equipment 194,517 160,726
Leasehold improvements 52,829 50,909
--------- ----------
2,056,795 1,360,284
Less accumulated depreciation 739,873 402,174
--------- ----------
$1,316,922 $ 958,110
========= ==========
</TABLE>
-32-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE D - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued compensation $203,720 $132,712
Accrued professional fees 32,228 138,969
Accrued cost on sale of subsidiary 125,481 143,000
Other accrued expenses 62,702 134,491
------- -------
$424,131 $549,172
======= =======
</TABLE>
NOTE E - LONG-TERM DEBT
Long-term debt consists of three equipment obligations with interest
between 11.8% and 18.4%. Future maturities of long-term debt for the years
ending December 31 are as follows: 1998 - $12,195; 1999 - $22,793; 2000 -
$41,315.
NOTE F - TRANSACTIONS WITH RELATED COMPANIES
The Company has a note payable to Liraz Systems, Ltd. (Liraz) due in equal
quarterly installments of $34,822, including interest at 4%. Interest
expense on the loan for the years ended December 31, 1997, 1996, and 1995
was $16,540, $21,132, and $12,319, respectively.
Future maturities of the loan are as follows:
Year Amount
---- --------
1998 $128,000
1999 133,177
2000 68,574
-------
$329,751
=======
The Company sold a software license to Liraz for $160,000 in 1997.
-33-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE F (continued)
The Company and Liraz had an agreement for the joint development of certain
software for a Microsoft contract. 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 was to receive royalties of 30% of the
first $2,000,000 in contract revenue, 20% of the next $1,000,000, and 8%
thereafter.
On February 16, 1998, the Company and Liraz entered into an amendment to
the original custom computer programming agreement, whereby the original
royalty payment provisions were repealed. Under the new agreement, the
Company will pay Liraz royalties of 3% of Program revenues generated from
January 1, 1998 until December 31, 2000.
In addition, the Company will pay $1,300,000 to Liraz, reflecting Liraz's
expenses incurred in developing the Program. This amount is payable in
three installments as follows:
February 16, 1998 $ 500,000
February 16, 1999 400,000 + 8% interest
February 16, 2000 400,000 + 8% interest
----------
$ 1,300,000
==========
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 recovers 110% to 150% (depending on the elapsed time) of
its payments. The Company estimates its 50% share of the revised total
project development costs to be $1,200,000 before reimbursement of its BIRD
funds of $216,000. The Company capitalizes the software development costs
associated with the project and reduces the capitalized costs by any grant
funds received from BIRD. At December 31, 1997, the Company had capitalized
approximately $1,130,640 after reimbursement of BIRD funds totaling
approximately $216,000.
At December 31, 1997, the Company had accounts receivable of $160,000 and
accounts payable of $14,276 from and to Liraz, respectively.
-34-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE G - COMMON STOCK, UNEARNED COMPENSATION,
STOCK OPTIONS, AND WARRANTS
1. 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.
2. 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 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 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 costs of $1,937,637.
On July 26, 1996, the Company sold 246,800 shares of common stock to
Candle Corporation at $11.00 per share before costs of sale of
$105,058.
-35-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE G (continued)
On December 17, 1996, the Company completed a public offering of
705,000 shares (including 45,000 shares sold pursuant to the
underwriter's exercise of its over-allotment option) at a price of
$11.00 per share before 1996 and 1997 costs of $1,277,803 and $137,365,
respectively.
3. Unearned Compensation
Unearned compensation relates to stock options issued to employees and
nonemployees and represents for employees the difference between the
fair market value of the stock at the grant date and the price to be
paid by the individual and for nonemployees the fair market value of
the options granted. Compensation is recognized as an expense over the
service period and totaled $123,420, $30,194, and $27,621 for the years
ended December 31, 1997, 1996, and 1995, respectively.
4. Stock Options
The Company has 1997 and 1995 Stock Incentive Plans, which permit 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 Plans reserve 1,500,000 shares of common stock for
issuance upon the exercise of awards and provide that the term of each
award be determined by the Board of Directors.
Under the terms of the Plans, 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.
Options granted vest at varying periods up to five years and expire in
ten years.
-36-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE G (continued)
Stock option activity during the years ended December 31, 1997, 1996
and 1995, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Option price
------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 783,155 $ 7.31 489,678 $4.23
Granted 444,500 8.14 496,620 9.74 432,459 $4.70
Profit Key options converted 72,742 .69
Exercised (91,646) 7.01 (80,156) .73 (1,209) .69
Forfeited (45,705) 11.38 (122,987) 9.10 (14,314) .90
--------- -------- -------
Outstanding, end of year 1,090,304 $ 7.51 783,155 $7.31 489,678 $4.23
========= ====== ======== ==== ======= ====
<CAPTION>
1997 1996 1995
---------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
Options fair Options fair Option fair
granted value Granted value granted value
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average grant
date fair value
Option price less than
stock price 187,420 $6.36 275,300 $3.88
Option price equals
stock price 444,500 $9.35 309,200 7.15 229,901 1.80
------- ------- -------
444,500 $9.35 496,620 $6.85 505,201 $2.93
======= ======= =======
</TABLE>
-37-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE G (continued)
Options outstanding and exercisable as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------ -------------------------
Weighted-
Remaining average
Range of exercise Exercise contractual exercise
prices Options price life-years Options price
------------------- ------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
$ .69 to $ 1.37 41,374 $1.24 7.0 26,426 $1.26
$ 5.00 to $ 5.75 291,220 5.36 7.4 239,346 5.30
$ 8.29 to $ 12.23 566,176 8.90 9.2 210,364 8.96
$ 14.73 to $ 16.03 191,534 8.00 9.8 63,844 8.00
--------- -------
$ .69 to $16.03 1,090,304 $8.31 8.7 539,980 $7.39
========= =======
</TABLE>
If the Company recognized compensation expense based on the fair value
at the grant dates for options under the Plan, consistent with the
method prescribed by Statement of Financial Accounting Standards No.
123, net income (loss) and per share disclosures would change to the
pro forma amounts below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Net income (loss)
As reported $1,088,963 $(2,369,397) $618,049
Pro forma (820,789) (3,524,984) 107,698
Net income (loss) per common share
As reported
Basic .16 (.39) .14
Diluted .14 (.39) .13
Pro forma
Basic (.12) (.58) .02
Diluted (.12) (.58) .02
</TABLE>
-38-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE G (continued)
The fair value of stock options used to compute pro forma net income
(loss) and per share disclosures is the estimated present value at
grant date using the Black-Scholes Option-Pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Risk-free interest rate 6.05% 6.44% 6.32%
Expected life 5 years 5 years 5 years
Expected volatility 77% 75% 68%
Expected dividend rate 0% 0% 0%
</TABLE>
5. Stock Warrants
In connection with the initial and secondary public offerings, the
Company issued 140,000 and 110,000 warrants, respectively, to the
underwriter. The warrants are exercisable for four years, commencing
one year from the effective dates of the public offerings at exercise
prices of $7.43 and $14.85 per share, respectively, and have grant date
fair values of $3.82 and $6.85 per share, respectively.
Prior to 1996, the Company issued 6,188 warrants, exercisable at $6.87
per share and with a grant date fair value of $.53 per share, which
were forfeited on March 31, 1997.
Warrants totaling 18,168 were exercised at an exercise price of $7.43
during the year ended December 31, 1997. There were 231,832 warrants
outstanding and exercisable at December 31, 1997, with a
weighted-average exercise price and grant date fair value of $10.95 and
$5.81, respectively.
The weighted average assumptions used to price the grant date fair
value of warrants are as follows:
<TABLE>
<CAPTION>
December 1996 Initial
offering offering
--------------- -----------
<S> <C> <C>
Risk-free interest rate 6.50% 5.88%
Expected life 4 years 4 years
Expected volatility 76% 68%
Expected dividend rate 0% 0%
</TABLE>
-39-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE H - SALE OF BUSINESSES
Effective December 31, 1997, the Company sold the business and related
assets of the ASU Consulting division for $65,000, resulting in a gain of
$60,278 for the year ended December 31, 1997.
On September 9, 1996, the Company sold Bizware for $230,000, resulting in a
loss on the sale of $1,484,061. The sales price consisted of $120,000 in
cash and $110,000 due in six equal monthly installments through March 1997.
In connection with the sale, the Company wrote off goodwill of $999,126,
software development costs of $501,665, property and equipment of $78,877,
and other costs were accrued or expended in connection with the sale
totaling $134,933.
NOTE I - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal $430,500 $ (97,800) $ 320,600
State 76,000 (17,200) 60,000
Foreign (101,400) (20,900)
------- -------- --------
506,500 (216,400) 359,700
------- -------- --------
Deferred
Federal 156,700 130,700 (141,100)
State 27,700 23,000 (24,900)
Foreign (85,000) 85,000
------- -------- --------
184,400 68,700 (81,000)
------- -------- --------
$690,900 $(147,700) $ 278,700
======= ======== ========
</TABLE>
Income taxes receivable increased by the $464,000 tax benefit derived from
nonqualified stock option transactions, which was credited directly to
additional paid-in capital. The benefit is the tax effected difference
between the market value of the stock issued at the time of exercise and
the option price.
-40-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE I (continued)
Income tax expense (benefit) reconciled to the statutory federal income tax
rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory Federal rate - 34% $ 605,200 $(855,800) $ 310,100
State taxes, net of Federal tax benefit 97,400 300 17,900
Effect of foreign tax rates and credits 7,500 (126,100)
Change in deferred tax asset
valuation allowance (303,600) 381,000 (129,000)
Rate differences 14,900 38,800
Nondeductible goodwill amortization 197,300 181,500 159,100
Nondeductible expenses 34,200 14,200 7,600
Nondeductible loss on sale of foreign subsidiary 106,100
Other 60,400 2,600 300
--------- ---------- -----------
Income tax expense (benefit) $ 690,900 $(147,700) $ 278,700
======== ======== ========
</TABLE>
Significant components of the net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
Current Long-term Current Long-term
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Deferred tax assets
Allowance for uncollectible
accounts receivable $ 206,900 $ 113,000
Accrued expenses not currently
deductible for tax purposes 53,200 51,600
Deferred revenue 458,500 381,400
Loss carryforwards 35,400 $ 399,300 35,200 $ 715,800
Unearned compensation 72,400 22,000
--------- --------- --------- ---------
754,000 471,700 581,200 737,800
--------- --------- --------- ---------
Deferred tax liabilities
Depreciation and amortization (821,700) (455,800)
Change from cash to accrual basis (3,200) (3,200) (6,400) (6,500)
--------- --------- --------- ---------
(3,200) (824,900) (6,400) (462,300)
--------- --------- --------- ---------
Deferred tax asset valuation allowance (321,000) (243,600) (381,000)
--------- --------- --------- ---------
Net deferred tax asset (liability) $ 429,800 $(353,200) $ 331,200 $(105,500)
========= ========= ========= =========
</TABLE>
-41-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE I (continued)
At December 31, 1997, the Company has an approximate capital loss
carryforward of $250,000 from the Bizware sale, which expires in 2011.
At December 31, 1997, the Company also has an approximate net operating
loss carryforward of $835,000 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 the acquired net operating loss
carryforward is limited to approximately $88,000 each year. The
carryforward is cumulative if not utilized each year and expires primarily
in 2008.
NOTE J - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) (numerator) $ 1,088,963 $(2,369,397) $ 618,049
========== ========== ==========
Net income (loss) per common share-basic
Weighted average shares outstanding
(denominator) 6,992,398 6,076,103 4,314,106
========= ========= =========
Per share amount $.16 $(.39) $.14
=== ==== ===
Net income (loss) per common share -
assuming dilution
Weighted average shares outstanding - basic 6,992,398 6,076,103 4,314,106
Options and warrants 568,686 88,898
--------- --------- ---------
Total (denominator) 7,561,084 6,076,103 4,403,004
========= ========= =========
Per share amount $.14 $(.39) $.14
=== ==== ===
</TABLE>
-42-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE J (continued)
Options and warrants to purchase shares of common stock were outstanding
and not included in the computation of per share amounts assuming dilution
due to the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Antidulutive shares due to loss 1,039,343
Exercise prices were greater than the
average market price of the common shares 66,742
</TABLE>
NOTE K - COMMITMENTS
1. Operating Leases
The Company has facilities operating lease agreements expiring through
November 2000. The leases provide for base monthly rents plus an
adjustment based on the increase in operating expenses or lessor's
property taxes over the base amounts, as defined in the leases. Certain
of these leases contain renewal options. Rent expense was approximately
$543,000, $464,000 and $272,000 for 1997, 1996, and 1995, respectively.
Approximate future minimum lease payments are as follows:
Year Amount
---- --------
1998 $458,000
1999 348,000
2000 128,000
-------
$934,000
=======
2. Employment Agreements
The Company has employment agreements with three officers of the
Company for salaries totaling $310,000 annually through May 1998, plus
performance bonuses.
-43-
<PAGE>
Level 8 Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE L - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan for qualified employees. The
Company has not made any contributions to the plan.
NOTE M - FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
There were no foreign operations in 1997. Foreign operations for 1996
consisted of Bizware sales which were to customers located in North
America. Revenue and operating income (loss) relating to foreign operations
were $363,200 and ($350,000), respectively, for the year ended December 31,
1996, and $1,405,900 and $581,900, respectively, for the year ended
December 31, 1995. There were no identifiable assets at December 31, 1996
and $706,600 of identifiable assets at December 31, 1995.
In 1997 one customer accounted for approximately $2.1 million of the
Company's revenue which represents approximately 10% of the Company revenue
for the year. In 1996 one customer accounted for approximately $1.3 million
of the Company's revenue which represented approximately 10% of the
Company's revenue for the year. No customer accounted for more than 10% of
the Company's revenue in 1995.
NOTE N - SUBSEQUENT EVENTS
Pending Acquisition
On February 27, 1998, the Company has signed a contract to acquire Momentum
Software Corporation ("Momentum") in a stock transaction. Momentum is a
privately held independent software vendor. Under the terms of the
agreement, Momentum shareholders will receive 575,000 common shares of
Level 8 stock and warrants for 200,000 shares as well as certain contingent
consideration based on the value of Level 8 stock. This transaction will be
recorded as a purchase for financial reporting purposes.
NOTE O - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company increased its allowance for
doubtful accounts by $275,000 and recorded compensation expense of
approximately $120,000 for options issued to a consultant.
-44-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information relating to directors and executive officers of the
Company is incorporated by reference herein from the Company's definitive
proxy statement in connection with its Annual Meeting of Shareholders to be
held on May 5, 1998, which proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the close
of the Company's fiscal year ended December 31, 1997.
Item 11. Executive Compensation
Certain information relating to remuneration of directors and executive
officers and other transactions involving management is incorporated by
reference herein from the Company's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held May 5, 1998,
which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal
year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Certain information relating to security ownership of certain beneficial
owners and management is incorporated by reference herein from the
Company's definitive proxy statement in connection with its Annual Meeting
of Shareholders to be held on May 5, 1998, which proxy statement will be
filed with the Securities and Exchange Commission not later than 120 days
after the close of the Company's fiscal year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions
Certain information relating to certain relationships and related
transactions is incorporated by reference herein from the Company's
definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 5, 1998, which proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days after
the close of the Company's fiscal year ended December 31, 1997.
-45-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Financial Statements
The following consolidated financial statements are included in Item 8:
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(b)1. Reports on Form-8K
On January 30, 1998, the Company filed Form 8-K to record the change in
independent auditors from Lurie, Besikof, Lapidus & Co., LLP to Grant
Thornton LLP.
2. Financial Statement Schedule
The following consolidated financial statement schedule is included in
Item 14 (b):
Schedule
II - Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since they are
either not required or the information is otherwise included.
3. Listing of Exhibits
Exhibits
- --------
3.1 Restated Certificate of Incorporation of Registrant (filed as exhibit
3.1 to Registration Statement No. 33-92230 on Form S-1 and incorporated
herein by reference).
3.2 By-Laws of Registrant. (filed as exhibit 3.2 to Registration Statement
No. 33-92230 on Form S-1 and incorporated herein by reference).
10.1 Registrant's February 2, 1995 Non-Qualified Option Plan (filed as
exhibit 10.1 to Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.2 Employment Agreement, effective April 1, 1995, between Level 8 and
Samuel Somech (filed as exhibit 10.11 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein by reference).
10.3 Form of Amendment, dated June , 1995, among Level 8, Registrant and
Samuel Somech (filed as exhibit 10.12A to Registration Statement No.
33-92230 on Form S-1 and incorporated herein by reference).
-46-
<PAGE>
10.4 Consulting Agreement, effective April 1, 1995, between Level 8 and
Theodore Fine (filed as exhibit to Registration Statement No. 33-92230
on Form S-1 and incorporated herein by reference).
10.5 Form of Amendment, dated June , 1995, among Level 8, Registrant and
Theodore Fine (filed as exhibit 10.13A to Registration Statement No.
33-92230 on Form S-1 and incorporated herein by reference).
10.6 Employment Agreement, dated May 1, 1995, between Registrant and Arie
Kilman (filed as exhibit to Registration Statement No. 33-92230 on Form
S-1 and incorporated herein by reference).
10.7 Employment Agreement, dated May 1, 1995, between Registrant and Joseph
J. Di Zazzo (filed as exhibit 10.18 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein by reference).
10.8 Agreement, dated June 13, 1995, between Registrant and Liraz (filed as
exhibit 10.23 to Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.9 Registration Rights Agreement, dated June 13, 1995 between Registrant
and Liraz (filed as exhibit 1 to Registration Statement No. 33-92230 on
Form S-1 and incorporated herein by reference).
10.10 Form of Warrant Agreement between the Registrant and Hampshire
Securities Corporation for 135,000 shares of common stock (filed as
exhibit 10.27 to Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.11 Form of Loan Agreement, dated June , 1995, between Registrant and Liraz
regarding Registrant's agreement to repay the principal amount of
$1,228,172 (filed as exhibit 10.28 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein by reference).
10.12 Form of Loan Agreement, dated 1995, between Registrant and Liraz
regarding Registrant's agreement to repay the principal amount of
$628,172 (filed as exhibit 10.29 to Registration Statement No. 33-92230
on Form S-1 and incorporated herein by reference).
10.13 Development Agreement dated July 17, 1995 between Microsoft Corporation
and Level 8 (filed as exhibit 10.38 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein by reference).
10.14 Letter Agreement dated June 1, 1995 from Visa International Service
Association to Level 8 (filed as exhibit 10.39 to Registration Statement
No. 33-92230 on Form S-1 and incorporated herein by reference).
10.15 Development Agreement dated December 19, 1995 between Liraz and Level 8.
(filed as exhibit 10.40 to Registration Statement No. 33-92230 on
Form S-1 and incorporated herein by reference).
10.16 Agreement and Plan of Reorganization by and Among Level 8 Systems, Inc.,
Middleware Acquisition Corporation, Momentum Software Corporation, and
Robert Brill, Bruns Grayson and Hubertus Vandervoort, as Trustees of the
Momentum Liquidating Trust, on Behalf of the Securityholders of Momentum
Software Corporation Dated February 27, 1998 ( filed as Exhibit 10.42)
21.1 List of Subsidiaries of Registrant (filed as exhibit 21.1 to
Registration Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
-47-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Level 8 Systems, Inc.
By: /s/ Arie Kilman
----------------------------------
Arie Kilman
Chief Executive Officer and Director
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arie Kilman Chief Executive Officer and Chairman of March 27, 1998
- ------------------------------------- the Board
(Arie Kilman)
/s/ Samuel Somech President and Director March 27, 1998
- -------------------------------------
(Samuel Somech)
/s/ Joseph J. DiZazzo Chief Financial Officer, March 27, 1998
- ------------------------------------- Treasurer and Secretary
(Joseph J. DiZazzo)
/s/ Michel Berty Director March 27, 1998
- -------------------------------------
(Michel Berty)
/s/ Theodore Fine Director March 27, 1998
- -------------------------------------
(Theodore Fine)
Director March 27, 1998
- -------------------------------------
(Lenny Recanati)
/s/ Frank J. Klein Director March 27, 1998
- -------------------------------------
(Frank J. Klein)
</TABLE>
-48-
<PAGE>
SCHEDULE II
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------------
Balance at Charged to Balance at
Beginning Costs and Charged to Other Deductions- End of
Description of Period Expenses Accounts-Describe Describe(1) Period
----------- --------------- ------------- ----------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 56,000 $ 96,613 $ - ($ 77,613) $ 75,000
=============== ============= ================= ============= ==========
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 75,000 $ 231,000 $ - ($ 26,000) $ 282,000
=============== ============= ================= ============= ==========
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 282,000 $ 350,000 $ - ($ 115,000) $ 517,000
=============== ============= ================= ============= ==========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
-49-
<PAGE>
EXHIBIT 10.42
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
LEVEL 8 SYSTEMS, INC.,
MIDDLEWARE ACQUISITION CORPORATION,
MOMENTUM SOFTWARE CORPORATION,
AND
ROBERT BRILL, BRUNS GRAYSON AND HUBERTUS VANDERVOORT, AS TRUSTEES
OF THE MOMENTUM LIQUIDATING TRUST, ON BEHALF OF
THE SECURITYHOLDERS OF MOMENTUM SOFTWARE CORPORATION
DATED FEBRUARY 27, 1998
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
Exhibit A Trust Agreement
Exhibit B Form of Certificate of Merger
Exhibit C Form of Parent Warrant
Exhibit D Form of Note
Exhibit E Form of Affiliate Letter
Exhibit F Form of Letter Agreement
Exhibit G Form of Registration Rights Agreement
Exhibit H Form of Liraz Voting Agreement
Exhibit I Form of Lock Up Agreement
Exhibit J List of Knowledge Persons
Exhibit K Form of Employee Registration Rights Agreement
<PAGE>
RECITALS
ARTICLE I THE MERGER 2
1.1 The Merger. 2
1.2 Effective Time. 2
1.3 Effect of the Merger. 2
1.4 Certificate of Incorporation; Bylaws. 2
1.5 Directors and Officers. 3
1.6 Effect on Capital Stock. 3
(a) Aggregate Shares of Parent Common Stock. 3
(b) Conversion of Company Capital Stock. 4
(c) Cancellation of Parent-Owned and Company-Owned Stock. 4
(d) Stock Options and Warrants. 4
(e) Capital Stock of Merger Sub. 5
(f) Fractional Shares. 5
(g) Escrow Amount 5
(h) Legends. 5
1.7 Warrant. 5
1.8 Contingent Payment of Additional Shares of Parent
Common Stock or of Note; Effect on Capital Stock. 5
(a) Definitions. 5
(i) "Calculation Date" 6
(ii) "Contingent Consideration" 6
(iii) "Contingent Shares" 6
(iv) "Note" 6
(v) "Stock Value" 6
(vi) "Stock Value Fraction" 6
(b) Contingent Shares. 6
(c) Additional Contingent Shares. 6
(d) Certificates. 7
(e) Fractional Shares. 7
(f) Legends. 7
(g) Adjustments. 7
(h) Assignability. 7
(i) Arbitration. 7
(j) Disputed Amounts. 8
1.9 Dissenting Shares. 8
1.10 Surrender of Certificates. 9
(a) Trustee as Exchange and Company Securityholders Agent. 9
(b) Parent to Provide Merger Consideration. 9
(c) Exchange Procedures. 10
(d) Distributions With Respect to Unexchanged Shares. 11
(e) Transfers of Ownership. 11
(f) No Liability. 12
(g) Right to Vote. 12
1.11 No Further Ownership Rights in Company Capital Stock. 12
1.12 Lost, Stolen or Destroyed Certificates. 12
1.13 Withholding Rights. 12
1.14 Tax Consequences; Exemption from Registration. 12
1.15 Taking of Necessary Action; Further Action. 13
2 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND OF THE TRUST 13
2.1 Organization, Standing and Power. 13
2.2 Company Capital Structure. 13
2.3 Subsidiaries. 14
2.4 Authority. 14
2.5 Company Financial Statements. 15
2.6 No Undisclosed Liabilities. 16
2.7 No Changes 16
<PAGE>
2.8 Tax and Other Returns and Reports. 18
(a) Definition of Taxes. 18
(b) Tax Returns and Audits. 18
2.9 Restrictions on Business Activities. 20
2.10 Title to Properties; Absence of Liens and Encumbrances. 20
2.11 Intellectual Property. 21
2.12 Agreements, Contracts and Commitments. 23
2.13 Compliance with Laws. 25
2.14 Litigation. 25
2.15 Bank Accounts. 25
2.16 Insurance. 25
2.17 Minute Books. 25
2.18 Environmental Matters. 25
2.19 Brokers' and Finders' Fees; Third Party Expenses. 26
2.20 Employee Matters and Benefit Plans. 26
(a) Company ERISA Plans. 26
(b) Pension Plans. 26
(c) Multiemployer or Multiple Employer Plans; Leased Employees. 26
(d) Employee Benefit Plans. 27
(e) Contributions 27
(f) No Post-Employment Obligations. 27
(g) Agreements Terminable at Will; List. 27
(h) COBRA. 27
(i) Employment Matters. 28
(j) Labor. 28
2.21 Suppliers and Customers. 28
2.22 Affiliates; Approval Vote. 29
2.23 Representations Complete. 29
2.24 Organization, Standing and Power. 29
2.25 Authority. 29
2.26 Representations Complete. 30
3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF, PARENT AND MERGER SUB 30
3.1 Organization, Standing and Power. 31
3.2 Authority. 31
3.3 Capital Structure. 32
3.4 SEC Documents; Parent Financial Statements. 33
3.5 No Material Adverse Change. 33
3.6 Litigation. 34
3.7 Intellectual Property. 34
3.8 Restrictions on Business Activities. 36
3.9 Brokers or Finders; Professional Fees. 36
3.10 Conduct in the Ordinary Course. 36
3.11 Interim Operations of Merger Sub. 36
3.12 Third Party Consents. 36
3.13 Agreements with Liraz Systems, Ltd. ("Liraz"). 36
3.14 Tax Returns and Audits. 36
3.15 Compliance with Laws. 37
3.16 Minute Books. 37
3.17 Environmental Matters. 37
3.18 Suppliers and Customers. 38
<PAGE>
3.19 Performance Based Compensation. 38
3.20 Representations Complete. 38
4 ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 38
4.1 Conduct of Business of the Company. 39
4.2 Conduct of Business of the Parent and Merger Sub. 41
5 ARTICLE V ADDITIONAL AGREEMENTS 42
5.1 No Solicitation. 42
5.2 Preparation of Information Statement. 43
5.3 Meeting. 44
5.4 Securities Act Exemption. 44
5.5 Stock Restrictions. 44
5.6 Access to Information. 44
5.7 Public Disclosure. 45
5.8 Reasonable Efforts. 45
5.9 Notification of Certain Matters. 45
5.10 Registration Rights Agreement. 45
5.11 Additional Documents and Further Assurances. 45
5.12 Legal Requirements. 46
5.13 Third Party Consents. 46
5.14 Board of Directors of the Combined Company. 46
5.15 Indemnification. 46
5.16 Stockholder Solicitation Materials. 47
5.17 List of Stockholders, Optionholders and Warrantholders. 47
5.18 NASDAQ Quotation. 47
5.19 Dividends. 47
5.20 Review of Returns. 47
6 ARTICLE VI DOCUMENTS TO BE DELIVERED 48
6.1 Documents to Be Delivered by the Company at Closing. 48
(a) Third Party Consents. 48
(b) Legal Opinion. 48
(c) Certificate of Merger. 48
(d) Affiliates Letter. 48
(e) Resignation. 48
(f) Certificates. 48
(g) Voting Agreement. 48
(h) Lock Up Agreement. 48
(i) Severance Agreements. 48
6.2 Documents to be Delivered by the Parent and Merger Sub at Closing. 48
(a) Legal Opinion. 48
(b) Certificate of Merger. 48
(c) Third Party Consents. 48
(d) Certificates. 48
(e) Registration Rights Agreement. 49
<PAGE>
7 ARTICLE VII CONDITIONS TO THE MERGER 49
7.1 Conditions to Obligations of Each Party to Effect the Merger. 49
(a) Stockholder Approval. 49
(b) Information Statement. 49
(c) No Injunctions or Restraints; Illegality. 49
(d) Tax Returns. 49
(e) Permit. 49
7.2 Additional Conditions to Obligations of the Company. 49
(a) Representations and Warranties. 49
(b) Agreements and Covenants. 50
(c) Board of Directors of Parent. 50
(d) NASDAQ Quotation. 50
(e) Legal Opinion. 50
(f) No Material Adverse Effect. 50
(g) Costs Summary. 50
(h) Closing Date Price. 50
7.3 Additional Conditions to the Obligations of Parent and Merger Sub. 50
(a) Representations and Warranties. 50
(b) Agreements and Covenants. 51
(c) Dissenters' Rights. 51
(d) Consent of Company Warrantholders. 51
(e) Costs Summary. 51
(f) Legal Opinion. 51
(g) No Material Adverse Effect. 51
(h) Opinion of Financial Advisor. 51
(i) Severance Agreements. 51
8 ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW 51
8.1 Survival of Representations and Warranties. 52
8.2 Escrow Arrangements 52
(a) Escrow Fund. 52
(b) Escrow Period; Distribution upon Termination of Escrow Period. 53
(c) Protection of Escrow Fund. 53
(d) Claims Upon Escrow Fund. 54
(e) Objections to Claims. 54
(f) Resolution of Conflicts; Arbitration. 54
(g) Third-Party Claims. 56
(h) Escrow Agent's Duties. 56
(i) Fees. 58
(j) Consequential Damages. 59
9 ARTICLE IX TERMINATION, AMENDMENT AND WAIVER 59
9.1 Termination. 59
9.2 Effect of Termination. 60
9.3 Amendment. 60
9.4 Extension; Waiver. 61
9.5 Parent/Company Payments. 61
(a) Company Payments. 61
(b) Parent Payments. 61
10 ARTICLE X GENERAL PROVISIONS 61
10.1 Notices. 61
10.2 Expenses. 63
<PAGE>
10.3 Interpretation. 63
10.4 Counterparts. 64
10.5 Entire Agreement; Assignment. 64
10.6 Severability. 64
10.7 Other Remedies. 64
10.8 Governing Law. 64
10.9 Rules of Construction. 64
10.10 Specific Performance. 65
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made
---------
and entered into on February 27, 1998 by and among Level 8 Systems, Inc., a New
York corporation ("Parent"); Middleware Acquisition Corporation, a Delaware
------
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"); Momentum
----------
Software Corporation, a Delaware corporation (the "Company") and Robert Brill,
-------
Bruns Grayson and Hubertus Vandervoort (the "Trustees"), as trustees of the
--------
Momentum Liquidating Trust for the benefit of the Company Securityholders (the
"Trust").
-----
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger
Sub believe it is in the best interests of each company and their respective
stockholders that Parent acquire the Company through the statutory merger of the
Company with and into Merger Sub (the "Merger") and, in furtherance thereof,
------
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("Company Capital Stock") and all outstanding
---------------------
options, warrants and other rights to acquire or receive shares of Company
Capital Stock shall be converted into the right to receive their respective
distributive shares of the Merger Consideration (as defined below), after the
payment of all Trust liabilities, computed in accordance with their beneficial
interests in the Trust determined from time to time as set forth in the Trust
Agreement attached hereto as Exhibit A (collectively, "Beneficial Interests")
--------------------
C. Pursuant to the Merger, subject to the terms and conditions of this
Agreement, the Parent shall issue to the Trust shares of Parent common stock, an
amount of cash equal to $75,000, warrants to acquire Parent common stock and
certain other contingent consideration, all as set forth below (collectively,
the "Merger Consideration").
--------------------
D. A portion of the Merger Consideration otherwise issuable by Parent
in connection with the Merger shall be placed in escrow by Parent with an Escrow
Agent (the "Escrow Agent"), the release of which amount shall be contingent
upon certain events and conditions, all as set forth in Article VIII hereof.
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code")
----
F. The Company, Parent, Merger Sub and the Trust desire to make certain
representations and warranties and other agreements in connection with the
Merger.
Page 1
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged intending to be
legally bound hereby the parties agree as follows:
1
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and
the applicable provisions of the Delaware General Corporation Law
("Delaware Law"), the Company shall be merged with and into Merger
------------
Sub, the separate corporate existence of the Company shall cease
and Merger Sub shall continue as the surviving corporation and as
a wholly-owned subsidiary of Parent. The Merger Sub as the
surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation".
---------------------
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 9.1, the closing of the Merger (the "Closing")
-------
will take place as promptly as practicable, but no later than five
(5) business days following satisfaction or waiver of the
conditions set forth in Article VII, at the offices of Parent at 1
Penn Plaza, Suite 3400, New York, New York, unless another place
or time is agreed to by Parent and the Company. The date upon
which the Closing actually occurs is herein referred to as the
"Closing Date". On the Closing Date, the parties hereto shall
------------
cause the Merger to be consummated by filing a Certificate of
Merger (or like instrument) with the Secretary of State of the
State of Delaware (the "Certificate of Merger"), substantially in
---------------------
the form attached hereto as Exhibit B, in accordance with the
relevant provisions of applicable law (the time of acceptance by
the Secretary of State of Delaware of such filing being referred
to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
Page 2
<PAGE>
(a) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the date of
this Agreement, shall be the Certificate of Incorporation of
the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of
Incorporation of the Surviving Corporation shall be amended
to read as follows: "The name of the corporation is MOMENTUM
SOFTWARE CORPORATION".
(b) The Bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
----------------------
prior to the Effective Time shall be the initial director(s) of
the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving
Corporation. The officers of Merger Sub immediately prior to the
Effective Time shall be the initial officers of the Surviving
Corporation, each to hold office in accordance with the Bylaws of
the Surviving Corporation.
1.6 Effect on Capital Stock. Subject to the terms and conditions of
-----------------------
this Agreement, as of the Effective Time, by virtue of the Merger
and without any action on the part of the Parent, the Merger Sub,
the Company or the holder of any shares of the Parent Common Stock
or the Company Capital Stock, the following shall occur:
(a) Aggregate Shares of Parent Common Stock. The Aggregate
---------------------------------------
Shares of Parent Common Stock to be issued by Parent in the
Merger (the "Aggregate Shares of Parent Common Stock") shall
---------------------------------------
be equal to the excess of (i) 575,000, over (ii) a number of
shares of Parent Common Stock as is equal to (x) the
Reimbursable Amount (as defined in Section 10.2(c)), divided
by (y) the average of the last reported sale price per share
of Parent Common Stock in the NASDAQ National Market, as
reported by The Wall Street Journal for each of the thirty
(30) trading days ending on the day of the Special Meeting,
as defined herein (rounded up, if necessary to the next
whole share) ("Closing Date Price"), as further adjusted
------------------
pursuant to Section 1.9. The Aggregate Shares of Parent
Common Stock shall be issued to the Trust on behalf of
holders (collectively, the "Company Securityholders") of (i)
-----------------------
Common Stock of the Company ("Company Common Stock") and of
--------------------
Company immediately preceding the Closing Date Options, when
and if such Company Options are exercised (as defined below)
and Company Warrants (as defined below), when and if such
Company Warrants are exercised pursuant to Section 1.6(d)
below, (ii) Series A Preferred Stock of the Company
("Company Series A"), (iii) Series B Preferred Stock of the
----------------
Company ("Company Series B"), (iv) Series B-1 Preferred
----------------
Stock of the Company ("Company Series B-1"), (v) Series C
------------------
Preferred Stock of the Company ("Company Series C"), (vi)
----------------
Series C-1 Preferred Stock of the Company ("Company Series
--------------
C-1"), (vii) Series D Preferred Stock of the Company
---
("Company Series D") and (viii) Series E Preferred Stock of
----------------
the Company to be issued immediately prior to the Effective
Time to certain key employees of the
Page 3
<PAGE>
Company who will provide transitional and other services in
connection with the Merger ("Company Series E"). (The
----------------
Company Series A, Company Series B, Company Series B-1,
Company Series C, Company Series C-1, Company Series D and
Company Series E are collectively referred to as the
"Company Preferred Series").
------------------------
(b) Conversion of Company Capital Stock. Each share issued and
-----------------------------------
outstanding immediately prior to the Effective Time of
Company Common Stock (other than any shares of Company
Common Stock to be canceled pursuant to Section 1.6(c) and
any Dissenting Shares (as defined and to the extent provided
in Section 1.9(a))) and of Company Preferred Series (other
than any shares of Company Preferred Series to be canceled
pursuant to Section 1.6(c)) shall be canceled and
extinguished and will be converted automatically into
Beneficial Interests.
(c) Cancellation of Parent-Owned and Company-Owned Stock. Each
----------------------------------------------------
share of Company Capital Stock owned by Merger Sub, Parent,
the Company or any direct or indirect wholly-owned
subsidiary of Parent or of the Company immediately prior to
the Effective Time shall be canceled and extinguished
without any conversion thereof.
(d) Stock Options and Warrants.
--------------------------
(i) At the Effective Time, all options and stock
purchase rights to purchase Company Common Stock
(each a "Company Option") then outstanding under the
--------------
Company's 1993 Stock Option Plan (the "Company
-------
Option Plan") or otherwise, whether vested or
-----------
unvested, to the extent they grant their holders
continuing rights therein, and all warrants to
purchase Company Common Stock then outstanding (each
a "Company Warrant") shall be, in connection with
---------------
the Merger, converted into the right to receive a
contingent Beneficial Interest provided for in the
Trust. Parent shall not assume any Company Option or
Company Warrant.
(ii) Notwithstanding the above, in the event a holder of
a Company Warrant has not waived its rights with
respect to any Company Warrant held by it
("Continuing Warrants") as provided in Section
-------------------
7.3(d) hereof, the Trustee shall deliver to Parent
upon the Calculation Date, as defined below, a
number of shares of Parent Common Stock equal to (x)
the fair market value of the Continuing Warrants as
of the Calculation Day (determined pursuant to the
Black-Scholes formula), divided by (y) the Stock
Value (as defined below) as of the Calculation Date.
(iii) Parent shall assume such Continuing Warrants and
such assumed Continuing Warrants shall continue to
have, and be subject to, the same terms and
conditions set forth in the respective warrant
agreements governing such Continuing Warrant
immediately prior to the Effective Time, except that
(A) such Continuing Warrant shall be exercisable for
that number of whole shares of Parent Common Stock
equal to (x) the number of shares of Company Common
Stock issuable upon the exercise of such Continuing
Warrant, multiplied by (y)
Page 4
<PAGE>
the number of shares of Parent Common Stock to be
received by a holder of one share of Company Common
Stock, rounded down to the nearest whole number of
shares of Parent Common Stock and (B) the exercise
price per share for the shares of Parent Common
Stock issuable upon exercise of such Continuing
Warrant shall be equal to (x) the exercise price per
share of Company Common Stock into which such
Continuing Warrant was exercisable immediately prior
to the Effective Time, divided by (y) the number of
shares of Parent Common stock to be received by a
holder of one share of Company Common Stock, rounded
up to the nearest whole cent.
(e) Capital Stock of Merger Sub. Each stock certificate of
---------------------------
Merger Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.
(f) Fractional Shares. No fraction of a share of Parent Common
-----------------
Stock will be issued, but in lieu thereof, if the Trust
would otherwise be entitled to a fraction of a share of
Parent Common Stock (after aggregating all fractional shares
of Parent Common Stock to be received by the Trust) shall be
entitled to receive, without any interest, from Parent an
amount of cash (rounded to the nearest whole cent) equal to
the product of (i) such fraction, multiplied by (ii) Closing
Date Price.
(g) Escrow Amount. The "Escrow Amount" shall equal to the sum of
------------- -------------
(i) 10% of the Merger Consideration as in effect from time
to time and (ii) a number of shares of Parent Common Stock
equal to (w) $250,000, divided by (x) the Stock Value as of
the Effective Time, with the resultant further divided by
(y) the number of shares of Company Common Stock outstanding
as of the Effective Time, with the resultant multiplied by
(z) the aggregate number of Dissenting Shares held by
Dissenting Shareholders, as such terms are defined below.
(h) Legends. Certificates representing shares of Parent Common
-------
Stock delivered pursuant to this Section 1.6 shall bear the
legend referred to in Section 5.5 hereof.
1.7 Warrant. In addition to the shares of Parent Common Stock to which
-------
the Trust is entitled pursuant to Section 1.6, the Trust shall be
entitled to receive a warrant (the "Warrant") to acquire an
-------
aggregate of 200,000 additional shares of Parent Common Stock, in
the form set forth in Exhibit C.
1.8 Contingent Payment of Additional Shares of Parent Common Stock or
-----------------------------------------------------------------
of Note; Effect on Capital Stock. In addition to the shares of
--------------------------------
Parent Common Stock and the Warrant to which the Trust is entitled
pursuant to Section 1.6 and Section 1.7, the Trust shall be
entitled to receive additional shares of Parent Common Stock or
the Note, as defined below, as provided in this Section 1.8.
(a) Definitions. For purposes of this Section 1.8 the following
-----------
terms shall have the meanings indicated below:
Page 5
<PAGE>
(i) "Calculation Date" shall mean the earlier of (i)
----------------
December 1, 1998 or (ii) the effective date of the
filing by the Parent of a registration statement,
other than a registration statement filed pursuant
to the demand registration rights portion of the
Employee Registration Rights Agreement substantially
in the form set forth in Exhibit K.
(ii) "Contingent Consideration" shall mean either the
------------------------
Contingent Shares or the Note.
(iii) "Contingent Shares" shall mean 250,000 shares of the
-----------------
Parent's Common Stock (as adjusted for any
reclassification, recapitalization, split,
combination, stock dividend or the like).
(iv) "Note" shall mean a $3,000,000 installment
----
promissory note issued by Parent, substantially in
the form set forth in ---- Exhibit D.
(v) "Stock Value" shall mean, with respect to any date,
-----------
the average of the last reported sale price per
share of Parent Common Stock in the market on which
it is traded, as reported by The Wall Street Journal
for each of the thirty (30) trading days ending on
the day immediately preceding such date.
(vi) "Stock Value Fraction" shall mean:
--------------------
if the Stock Value as of the Calculation Date is $21 or
more, 0.0; if the Stock Value as of the Calculation Date is
$15 or less, 1.0; otherwise, the value calculated by the
formula ($21.00 - Stock Value)/$6.00.
(b) Contingent Shares. Subject to the provisions of this Section
-----------------
1.8, as promptly as practicable, but in no event later than
30 days, after the Calculation Date:
(i) Parent shall first determine the aggregate number of
shares of Parent Common Stock, if any, to be issued
or delivered pursuant to this Section 1.8 by
multiplying the Contingent Shares by the Company
Stock Value Fraction (the "Payable Contingent
------------------
Shares").
------
(ii) In the event that the Stock Value as of the
Calculation Date is equal to or less than $15, the
Trust shall, at its option, be entitled to receive
the Note from the Parent, in lieu of the Payable
Contingent Shares. Such option shall be exercised by
written notice provided to Parent no later than 10
business days after the Calculation Date. Failure to
provide such notice to Parent shall be deemed an
election to receive the Note.
(c) Additional Contingent Shares. Subject to the provisions of
----------------------------
this Section 1.8, as promptly as practicable, but in no
event later than 30 days, after the Calculation Date,
Page 6
<PAGE>
Parent shall issue a number of additional shares of Parent
Common Stock equal to the excess, if any, of (x) 50,000,
over (y) the product of (1) $1,000,000, divided by (2) the
Stock Value as of the Calculation Date (the "Additional
----------
Contingent Shares")
-----------------
(d) Certificates. Subject to Section 1.10, as promptly as
------------
practicable after the completion of the calculations
described in Section 1.8(b) and Section 1.8(c) hereof,
Parent shall cause its transfer agent (the "Transfer Agent")
--------------
to deliver to the Trust a certificate representing the
number of whole shares of Payable Contingent Shares or
Additional Contingent Shares, as applicable.
(e) Fractional Shares. No fractional shares of Parent Common
-----------------
Stock and no scrip or certificate therefor shall be issued
or delivered pursuant to this Section 1.8. Should the Trust
be entitled to a fractional share interest in Parent Common
Stock pursuant to this Section 1.8, Parent shall pay to the
Trust in lieu of such fractional share interest a dollar
amount equal to such fraction multiplied by the Stock Value
calculated as of the Calculation Date.
(f) Legends. Certificates representing shares of Parent Common
-------
Stock delivered pursuant to this Section 1.8 shall bear the
legend referred to in Section 5.5 hereof.
(g) Adjustments. If between the Effective Time and the date of
-----------
payment of any shares pursuant to this Section 1.8, the
outstanding shares of Parent Common Stock shall be changed
into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or
exchange of shares or if stock dividend thereon shall be
declared with a record date within said period, the number
of shares of Parent Common Stock to be issued or delivered
pursuant to this Section 1.8 shall be correspondingly
adjusted.
(h) Assignability. The right of the Trust to receive Contingent
-------------
Consideration pursuant to this Section 1.8 may not be
assigned or transferred in any manner whatsoever except by
operation of law.
(i) Arbitration. Any dispute, controversy or claim arising in
-----------
connection with the provisions of this Section 1.8 or the
actions, determinations or calculations contemplated thereby
shall be settled by arbitration by three arbitrators to be
appointed as follows: Parent and the Trust shall each shall
select one arbitrator, and the two arbitrators so selected
shall select a third arbitrator, each of which arbitrators
shall be independent and have at least ten years relevant
experience. The arbitrators shall set a limited time period
and establish procedures designed to reduce the cost and
time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the
arbitrators, to discover relevant information from the
opposing parties about the subject matter of the dispute.
The arbitrators shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions,
including attorneys fees and costs, to the same extent as a
court of competent law or equity, should the arbitrators
determine that discovery was sought without substantial
justification or that discovery was refused or objected to
without substantial justification. The decision of
Page 7
<PAGE>
a majority of the three arbitrators as to the validity and
amount of any claim shall be binding and conclusive upon the
parties to this Agreement. Such decision shall be written
and shall be supported by written findings of fact and
conclusions which shall set forth the award, judgment,
decree or order awarded by the arbitrators. The expense of
the arbitration shall be borne as determined by the
arbitrators. Any such arbitration shall be held in New York
City and shall be conducted by, and under the commercial
rules, then in effect, of the American Arbitration
Association.
(j) Disputed Amounts. In the event that the payment of a portion
----------------
of the Contingent Consideration to be paid pursuant to this
Section 1.8 is in dispute, the undisputed portion of the
Contingent Consideration shall be promptly paid in
accordance with the provisions of this Section 1.8 and the
disputed portion shall be paid upon resolution of the
dispute.
1.9 Dissenting Shares.
-----------------
(a) Notwithstanding any provision of this Agreement to the
contrary, any shares of Company Capital Stock ("Dissenting
----------
Shares") held by a holder of Company Capital Stock who has
------
demanded and perfected dissenters' rights for such shares in
accordance with Delaware Law and who, as of the Effective
Time, has not effectively withdrawn or lost such dissenters'
rights ("Dissenting Shareholder"), shall not be converted
----------------------
into or represent a right to receive a portion of the Merger
Consideration, but the holder thereof shall only be entitled
to such rights as are granted by Delaware Law.
(b) Notwithstanding the provisions of Section 1.9(a), if any
Dissenting Shareholder shall effectively withdraw or lose
(through failure to perfect or otherwise) the right to
appraisal, then, as of the later of the Effective Time or
the occurrence of such event, such Dissenting Shareholder's
Dissenting Shares shall automatically be converted into and
represent only the right to receive Beneficial Interests,
without interest thereon, upon surrender of the certificate
representing such shares of Dissenting Shares.
(c) The Company and the Trust shall give Parent (i) prompt
notice of any written demands for appraisal of any shares of
Company Capital Stock, withdrawals of such demands, and any
other instruments served pursuant to Delaware Law and
received by the Company and (ii) the opportunity to
participate in all negotiations and proceedings with respect
to demands for appraisal under Delaware Law. Parent shall
not, except with the prior written consent of the Trust,
voluntarily make any payment with respect to any demands for
appraisal of Company Capital Stock or offer to settle or
settle any such demands.
(d) In the event that it is determined by in a final
nonappealable order of a federal or state court of competent
jurisdiction that a Dissenting Shareholder is entitled to a
consideration with respect to this Dissenting Shares other
than Beneficial Interests, Parent shall pay such Dissenting
Shareholder such consideration, the Aggregate Shares of
Parent Common Stock shall be reduced by a number of Parent
Common Stock
Page 8
<PAGE>
shares equal to (i) such consideration, divided by (ii)
Closing Date Price, and the Trust shall return such number
of shares to the Parent.
1.10 Surrender of Certificates.
-------------------------
(a) Trustee as Exchange and Company Securityholders Agent. In
-----------------------------------------------------
the event that the Merger is approved by Company
Securityholders, each Company Securityholder (except any
Dissenting Shareholders) by virtue of such approval of this
Agreement, will be deemed to have irrevocably constituted
and appointed, effective as of the Effective Time and
without further act of any Company Securityholder, Robert
Brill, Bruns Grayson and Hubertus Vandervoort, as Trustees
for the Trust (together with permitted successors, "Merger
------
Agent"), his true and lawful agent and attorney-in-fact to
-----
enter into any agreement in connection with the transactions
contemplated by this Agreement, to (i) exercise all or any
of the powers, authority and discretion conferred on him
under any provision of the Agreement, (ii) waive any terms
and conditions of any such agreement on behalf of the
Company Securityholders, (iii) give and receive notices and
communications on his behalf and to be his exclusive
representative with respect to any matter, suit, claim,
action or proceeding arising with respect to any transaction
contemplated by any this Agreement, including, without
limitation, the defense, settlement or compromise of any
claim, action or proceeding for which Company or such
Company Securityholders may be entitled to indemnification,
(iv) authorize delivery to Parent of shares of Parent Common
Stock from the Trust assets in satisfaction of claims by
Dissenting Shareholders and from the Escrow Fund in
satisfaction of claims by Parent, (v) object to the
deliveries referred to (iv), above, and (vi) take all
actions necessary or appropriate in the judgment of Merger
Agent for the accomplishment of the foregoing and the Merger
Agent agrees to act as, and to undertake the duties and
responsibilities of, such agent and attorney-in-fact.
Notices or communications to or from the Merger Agent shall
constitute notice to or from each of the Company
Securityholders other than the Dissenting Shareholders. A
decision, act, consent or instruction of the Merger Agent
shall constitute a decision of all the Company
Securityholders other than the Dissenting Shareholders and
the Trust and shall be final, binding and conclusive upon
each of such stockholders, and the Escrow Agent and Parent
may rely upon any such decision, act, consent or instruction
of the Merger Agent as being the decision, act, consent or
instruction of each and every such stockholder of the
Company. The Escrow Agent and Parent are hereby relieved
from any liability to any Company Securityholder for any
acts done by them in reliance on such decision, act, consent
or instruction of the Merger Agent.
(b) Parent to Provide Merger Consideration. As soon as the
--------------------------------------
Parent is notified by the Trust of its readiness to
effectuate a certificate exchange as set forth in this
Section and Section 1.10(c), Parent shall cause the Transfer
Agent to make the Merger Consideration available to the
Merger Agent for exchange in accordance with this Article.
Page 9
<PAGE>
(i) At the Effective Time, the Merger Agent shall notify
the Parent in writing to which Company
Securityholders the Merger Consideration would be
paid if the allocation was based on the fair market
value of the Merger Consideration at the Effective
Time. Parent will deliver the Merger Consideration,
other than the portion thereof attributable to the
Contingent Consideration ("Non-Contingent Merger
---------------------
Consideration") on the Effective Time as follows:
-------------
(1) to the Escrow Agent, the Escrow Amount (other
than the portion thereof attributable to 10% of the
Contingent Merger Consideration); (2) to the Trust,
the excess of (x) the Non-Contingent Merger
Consideration, over (y) the amount delivered to the
Escrow Agent pursuant to the immediately preceding
subparagraph "(1)", multiplied by a fraction (x) the
numerator of which is the portion of the
Non-Contingent Merger Consideration to be paid to
the Company Securityholders whose Company Capital
Shares are delivered to the Transfer Agent
("Delivered Securityholders") and (y) the
-------------------------
denominator of which is the sum of (a) the portion
of the Non-Contingent Merger Consideration payable
to the Delivered Securityholders and (b) the portion
which would have been paid to Company
Securityholders whose Company Capital Shares were
not so delivered ("Undelivered Securityholders") if
---------------------------
such Company Capital Shares had been so delivered;
and (3) the balance (the "Retained Merger
---------------
Consideration") to the Transfer Agent to be held for
-------------
the Undelivered Securityholders pending receipt of
the underlying Company Securityholders' Company
Capital Shares.
(ii) At the Calculation Date, the Merger Agent shall
notify the Parent in writing to which Company
Securityholders, and what portion of, the Merger
Consideration would be paid if the allocation was
based on the fair market value of the Merger
Consideration at the Calculation Date. The Parent
shall, subject to Section 8.2, deliver to the Trust
within five (5) days of receipt of such
notification, the portion of the Contingent
Consideration allocable to Delivered
Securityholders. Subject to Section 1.10(c), the
Transfer Agent shall also deliver the portion of the
Retained Merger Consideration attributable to
Undelivered Securityholders who become Delivered
Securityholders following the delivery referred to
in Section 1.10(b)(i). The Transfer Agent shall
deliver to the Escrow Agent any portion of the
Contingent Merger Consideration required to be paid
to the Escrow Agent pursuant to Section 8.2.
(iii) The Merger Agent shall not distribute to the Company
Securityholders, any of the Merger Consideration
prior to the Calculation Date; provided, however,
-------- -------
that the Merger Agent may distribute a portion
thereof to a Dissenting Shareholder or a Company
Securityholder in settlement of any claims such
persons may have with respect to the Trustee's
computation of their Beneficial Interest or acts of
the Company's directors, upon such Company
Securityholders' tendering of their Company Capital
Shares.
(c) Exchange Procedures.
-------------------
Page 10
<PAGE>
(i) Subject to subsection (b) above, the Merger Agent
shall from time to time deliver written notice to
the Transfer Agent, accompanied with certificates of
Parent Common Stock registered in its name,
directing that Certificates of Parent Common Stock
be issued and delivered to holder of Beneficial
Interests. As soon as practical after the delivery
of such shares of Parent Common Stock to the
Transfer Agent, the Transfer Agent shall deliver
Certificates to the person(s) designated by the
Merger Agent and deliver to the Merger Agent any
remaining shares of Parent Common Stock represented
by the Certificates delivered by the Merger Agent.
(ii) After the termination of the Trust, an Undelivered
Securityholder shall be required to tender his
shares of Company Capital Stock to the Transfer
Agent in order to receive the portion of the Merger
Consideration to which it is entitled.
(iii) Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented
shares of Company Capital Stock will be deemed from
and after the Effective Time, for all corporate
purposes, evidence of the ownership of the
Beneficial Interest into which such shares of
Company Capital Stock shall have been so converted
and the right to receive an amount in cash in lieu
of the issuance of any fractional share in
accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No
------------------------------------------------
dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a
record date after the Effective Time will be paid to the
holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such
Certificate in accordance with Sections 1.10(b) and 1.10(c).
Subject to applicable law, following surrender of any such
Certificate and in addition to shares and/or cash entitled
to such holder under Sections 1.10(b) and 1.10(c), there
shall be paid to the record holder of the certificates
representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, at the time of such
surrender, the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for Beneficial
----------------------
Interests or for shares of Parent Common Stock is to be
issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the certificate so
surrendered will be properly endorsed and otherwise in
proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by
it any transfer or other taxes required by reason of the
issuance of a certificate for shares of Parent Common Stock
in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction
of Parent or any agent designated by it that such tax has
been paid or is not payable.
Page 11
<PAGE>
(f) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.10, none of the Merger Agent, the Surviving
Corporation or any party hereto shall be liable to a holder
of shares of Parent Common Stock or Company Capital Stock
for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar
law.
(g) Right to Vote. The Trust shall have the right to vote the
-------------
shares of Parent Common Stock in the name of the Trust and
the Escrow Agent.
1.11 No Further Ownership Rights in Company Capital Stock. The Merger
----------------------------------------------------
Consideration issued upon the surrender for exchange of shares of
Company Capital Stock in accordance with the terms hereof
(including any cash paid in respect thereof) shall be deemed to
have been issued in full satisfaction of all rights pertaining to
such shares of Company Capital Stock and there shall be no further
registration of transfers on the records of the Surviving
Corporation of shares of Company Capital Stock which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged
as provided in this Article I.
1.12 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
certificate evidencing shares of Company Capital Stock shall have
been lost, stolen or destroyed, the Merger Agent shall issue in
exchange for such lost, stolen or destroyed certificate, upon the
making of an affidavit of that fact by the holder thereof, such
shares of Parent Common Stock and cash for fractional share, if
any, as may be required pursuant to Section 1.6; provided,
however, that Parent may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate to deliver such indemnification as
it may reasonably direct as indemnity against any claim that may
be made against Parent or the Merger Agent with respect to the
certificate alleged to have been lost, stolen or destroyed.
1.13 Withholding Rights. Parent or the Merger Agent shall be entitled
------------------
to deduct and withhold from the Merger Consideration such amounts
as Parent or the Merger Agent may be required to deduct and
withhold with respect to any provision of Federal, state, local or
foreign tax laws. To the extent that amounts are so withheld by
Parent or the Merger Agent, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the
holder of the Shares in respect of which such deduction and
withholding was made by Parent or the Merger Agent.
1.14 Tax Consequences; Exemption from Registration. It is intended by
----------------
the parties hereto that (i) the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code
and (ii) the Parent Common Stock to be issued in the Merger will
be issued in a transaction exempt from registration under the
Securities Act by reason of Rule 506 promulgated thereunder and in
reliance on the representation made by certain Company
Securityholders that such Company Securityholders are "accredited
investors" as that term is defined in rules promulgated under the
Securities Act.
Page 12
<PAGE>
1.15 Taking of Necessary Action; Further Action. If, at any time
------------------------------------------
after the Effective Time, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest
the Surviving Corporation with full right, title and possession to
all assets, property, rights, privileges, powers and franchises of
the Company and Merger Sub, the officers and directors of the
Company and Merger Sub are fully authorized in the names of their
respective corporations or otherwise to take, and will take, all
such lawful and necessary action.
2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND OF THE TRUST
The Company hereby represents and warrants to Parent and Merger Sub that:
2.1 Organization, Standing and Power. The Company is a corporation
--------------------------------
duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has the corporate power
to own its properties and to carry on its business as now being
conducted. Except as set forth in Schedule 2.1, the Company is
duly qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the failure to be so
qualified would have a material adverse effect on the assets
(including intangible assets), financial condition, results of
operations or business (hereinafter referred to as a "Material
--------
Adverse Effect") of the Company. The Company has delivered a true
--------------
and correct copy of its Certificate of Incorporation and Bylaws,
each as amended to date, to Parent.
2.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of
17,500,000 shares of authorized Common Stock, $0.01 par
value, of which 2,032,065 shares are issued and outstanding
and 7,213,329 shares of authorized Preferred Stock, $0.10
par value. The authorized Preferred Stock consists of
1,000,000 shares designated as Series A Preferred Stock, of
which 1,000,000 are issued and outstanding, 2,133,775 shares
designated as Series B Preferred Stock, all of which are
issued and outstanding, 424,364 shares designated as Series
B-1 Preferred Stock, all of which are issued and
outstanding, 2,542,036 shares designated as Series C
Preferred Stock, of which 2,359,279 are issued and
outstanding, 78,654 shares designated as Series C-1
Preferred Stock, all of which are issued and outstanding and
1,034,500 shares designated as Series D Preferred Stock, of
which 947,692 are issued and outstanding. The Company
Capital Stock is held of record by the persons, with the
addresses of record and in the
Page 13
<PAGE>
amounts set forth on Schedule 2.2(a). All outstanding shares
of Company Capital Stock are duly authorized, validly
issued, fully paid and non-assessable and not subject to
preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of the Company or any agreement to
which the Company is a party or by which it is bound.
(b) The Company has reserved 2,536,465 shares of Common Stock
for issuance to employees and consultants pursuant to the
Option Plan, of which 2,018,611 shares are subject to
outstanding, unexercised options and 444,104 shares remain
available for future grant. Schedule 2.2(b) sets forth for
each outstanding Company Option the name of the holder of
such option, the state in which each such holder is
domiciled, the number of shares of Common Stock subject to
such option, the exercise price of such option, including
the extent vested to date and whether the exercisability of
such option will be accelerated and become exercisable by
the transactions contemplated by this Agreement. Except as
described in Schedule 2.2(b), there are no options,
warrants, calls, rights, commitments or agreements of any
character, written or oral, to which the Company is a party
or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Company. Except as described in
Schedule 2.2(b), there are no options, warrants, calls,
rights, commitments or agreements of any character, written
or oral, to which the Company is a party or by which it is
bound obligating the Company to grant, extend, accelerate
the vesting of, change the price of, otherwise amend or
enter into any such option, warrant, call, right, commitment
or agreement. The holders of Company Options or any other
options or rights set forth in Schedule 2.2(b) have been or
will be given, or shall have properly waived, any required
notice prior to the Merger. As a result of the Merger,
Parent will be the record and sole beneficial owner of all
Company Capital Stock and rights to acquire or receive
Company Capital Stock.
2.3 Subsidiaries. Except as set forth in Schedule 2.3, the Company
------------
does not have and has never had any subsidiaries or affiliated
companies and does not otherwise own and has never otherwise owned
any shares of capital stock or any interest in, or controlled,
directly or indirectly, any other corporation, partnership,
association, joint venture or other business entity.
2.4 Authority. Subject only to the requisite approval of the Merger by
---------
the Company Securityholders, the Company has all requisite
corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The vote required
of the Company Securityholders to duly approve the Merger is 60%
of the aggregate number of outstanding shares of Company Common
Stock and of the Company Preferred Series (other than the Company
Series E), voting together as one class (with each share of
Company Preferred Series being entitled to a number of votes equal
to the number of whole shares of Common Stock into which such
share of Company Preferred Series could be converted on the record
date for the vote). The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part
of the Company, subject only to
Page 14
<PAGE>
the approval of the Merger by the Company Securityholders. The
Company's Board of Directors has approved the Merger and this
Agreement. This Agreement has been duly executed and delivered by
the Company and constitutes the valid and binding obligation of
the Company, enforceable in accordance with its terms subject to
applicable bankruptcy, insolvency, reorganization, liquidation,
moratorium or other similar laws relating or affecting the rights
of creditors generally and the effect or availability of rules of
law governing specific performance, injunctive relief and other
equitable remedies. Except as set forth on Schedule 2.4, subject
only to the approval of the Merger by the Company Securityholders,
the execution and delivery of this Agreement and the related
agreements attached as exhibits hereto by the Company do not, and,
as of the Effective Time, the performance and consummation of the
transactions contemplated hereby and thereby will not, conflict
with, or result in any violation of, or default under, (with or
without notice or lapse of time, or both), or give rise to a right
of termination, cancellation, forfeiture, or acceleration of any
obligation or loss of any benefit under, or result in the creation
of a lien or encumbrance on any of the properties or assets of
Company (any such event, a "Conflict") pursuant to (i) any
--------
provision of the Certificate of Incorporation or Bylaws of the
Company or (ii) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets
other than any such conflict, violation or default which would not
have a Material Adverse Effect on the Company, which
representation and warranty is limited to the Actual Knowledge (as
defined below) of the Company for purposes of Article VIII. No
consent, waiver, approval, order or authorization of, or
registration, declaration or filing with any third party (so as
not to trigger any Conflict) or, to the Company's knowledge, with
any court, administrative agency or commission or other federal,
state, county, local or foreign governmental authority,
instrumentality, agency or commission ("Governmental Entity"), is
-------------------
required by or with respect to the Company in connection with the
execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby, except for (i) the filing of
the Certificate of Merger with the Delaware Secretary of State and
the filing of other appropriate documents with the relevant
authorities of other jurisdictions in which the Company is
qualified to do business, (ii) such filings and proceedings as
shall be necessary or appropriate to enable the shares of Parent
Common Stock to be issued, as contemplated by this Agreement,
pursuant to an exemption from the registration requirements of the
Securities Act and such other consents, waivers, approvals,
orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities
laws, (iii) the rights of Dissenting Shareholders, (iv) such other
consents, waivers, authorizations, filings, approvals and
registrations the absence of which would not have a Material
Adverse Effect on the Company and (v) such other consents,
waivers, authorizations, filings, approvals and registrations
which are set forth on Schedule 2.4, which representation and
warranty is limited to the Actual Knowledge of the Company for
purposes of Article VIII.
2.5 Company Financial Statements. Schedule 2.5 sets forth the
----------------------------
Company's unaudited balance sheet as of December 31, 1997
("Balance Sheet Date") and the related unaudited statements of
------------------
operations and cash flows for the 12-month period then ended and
the Company's audited balance sheet as of December 31, 1996 (the
"Balance Sheet") and the related audited statements of operations
-------------
and cash flows for the twelve-month period then ended
(collectively, the "Company Financials"), except as set forth in
------------------
Schedule 2.5. The Company Financials have been prepared in
accordance
Page 15
<PAGE>
with generally accepted accounting principles ("GAAP") applied on
----
a basis consistent throughout the periods indicated and consistent
with each other subject, in the case of the unaudited Company
Financials to normal year-end closing and audit adjustments and
the absence of footnotes related thereto (which are not material,
either individually or in the aggregate). The Company Financials
present fairly the financial condition and operating results of
the Company as of the dates and during the periods indicated
therein, subject, in the case of the unaudited financial
statements, to normal year-end adjustments, which will not be
material in amount or significance, which representation and
warranty is limited, except to the extent it relates to Company
Intellectual Property, to the Actual Knowledge of the Company for
purposes of Article VIII.
2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6
--------------------------
and as contemplated by this Agreement, and limited to the Actual
Knowledge of the Company for purposes of Article VIII, the Company
does not have any liability, indebtedness, obligation, expense,
claim, deficiency, guaranty or endorsement of any type, whether
accrued, absolute, contingent, matured or unmatured whether or not
required to be reflected in a balance sheet in accordance with
generally accepted accounting principles, which individually
exceed $5,000 or in the aggregate exceed $15,000, and (i) has not
been reflected in the Balance Sheet, or (ii) has not arisen in the
ordinary course of the Company's business since the Balance Sheet
Date consistent in nature and amount with past practices.
2.7 No Changes. Except as set forth in Schedule 2.7, and limited to
----------
the Actual Knowledge of the Company for purposes of Article VIII,
since the Balance Sheet Date, there has not been, occurred or
arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past
practices;
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company;
(c) capital expenditure or commitment for capital expenditure by
the Company of $5,000 in any individual case or $15,000 in
the aggregate not otherwise disclosed in writing to Parent;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered
by insurance) that would have a Material Adverse Effect;
(e) strike, work stoppage, or claim of wrongful discharge or
other unlawful labor practice or action;
(f) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by
the Company except to the extent such change was requested
by Parent with respect to, among other things, the software
revenue recognition rules pursuant to SOP 97-2;
Page 16
<PAGE>
(g) revaluation by the Company of any of its assets, including
without limitation, writing down the value of inventory or
writing off notes or accounts receivable other than in the
ordinary course of business;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the
Company, or any direct or indirect redemption, purchase or
other acquisition by the Company of any of its capital stock
except repurchases of unvested capital stock under the
Company Option Plan;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers,
directors, employees or advisors, or the declaration,
payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional
salary or compensation to any such person, except, in each
case, to employees who are not officers or directors of the
Company in the ordinary course of business and except as
otherwise contemplated by this Agreement and to severance
payments made in connection with this Agreement in with the
consent of Parent;
(j) sale, lease, license or other disposition of any of the
assets or properties of the Company, except in the ordinary
course of business as conducted on that date and consistent
with past practices;
(k) transfer to any person or entity any rights to the Company
Intellectual Property Rights (as defined in Section 2.11(a)
below) other than licensing of Company Intellectual Property
Rights in the ordinary course of business;
(l) amendment or termination of any material contract, agreement
or license to which the Company is a party or by which it is
bound, which amendments or terminations have not been
specifically disclosed to Parent;
(m) the loan by the Company to any person or entity or the
incurring by the Company of any indebtedness, the
guaranteeing by the Company of any indebtedness, issuance or
sale of any debt securities of the Company or guaranteeing
of any debt securities of others, except for advances to
employees for travel and business expenses in the ordinary
course of business, consistent with past practices;
(n) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account
receivable of the Company other than such waiver or lease
made in the ordinary course of business and without a
Material Adverse Effect on the Company;
(o) commencement or notice or threat of commencement of any
lawsuit or proceeding against or investigation of the
Company or its affairs;
(p) notice of any claim of ownership by a third party of the
Company Intellectual Property Rights or of infringement by
the Company of any third party's intellectual property
Page 17
<PAGE>
rights;
(q) issuance or sale by the Company of any of its shares of
capital stock, or securities exchangeable, convertible or
exercisable therefor, or of any other of its securities,
except to employees in connection with the issuance,
amendment or exercise of any stock options under the
Company's Option Plan or Company Warrants or the issuance of
the Company Series E;
(r) any agreements pursuant to which any other party is granted
marketing, distribution or similar rights of any type or
scope with respect to any products of the Company;
(s) event or condition of any character that has or reasonably
would be expected to have a Material Adverse Effect on the
Company other than revenue fluctuations in the ordinary
course of business, the incurrence of Merger related
expenses (including related severance payments to Company
employees as agreed to with Parent); or
(t) agreement by the Company or any officer or employees thereof
to do any of the things described in the preceding clauses
(a) through (s) (other than as contemplated in the
negotiations with Parent and its representatives regarding
the transactions, including but not limited to payments of
severance to employees of the Company, contemplated by this
Agreement).
2.8 Tax and Other Returns and Reports.
---------------------------------
(a) Definition of Taxes. For the purposes of this Agreement,
-------------------
"Tax" or, collectively, "Taxes", means any and all federal,
--- -----
state, local and foreign taxes, assessments and other
governmental charges, duties, impositions and liabilities,
including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added,
ad valorem, transfer, franchise, withholding, payroll,
recapture, employment, excise and property taxes, together
with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any
agreements or arrangements with any other person with
respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Schedule 2.8:
----------------------
(i) The Company as of the Effective Time will have
prepared and filed all required federal, state,
local and foreign returns, estimates, information
statements and reports ("Returns") otherwise due
-------
relating to any and all Taxes concerning or
attributable to the Company or its operations, and
such Returns have been completed in accordance with
applicable law.
(ii) The Company as of the Effective Time: (A) will have
paid or accrued all Taxes it is required to pay or
accrue and (B) will have withheld with respect to
its employees all federal and state income taxes,
FICA, FUTA and other Taxes
Page 18
<PAGE>
required to be withheld.
(iii) The Company is not currently delinquent in the
payment of any Tax and has not been delinquent in
the payment of any Tax during the three (3) years
preceding the date of this Agreement nor is there
any Tax deficiency outstanding, proposed or assessed
against the Company, nor has the Company executed
any waiver of any statute of limitations on or
extending the period for the assessment or
collection of any Tax.
(iv) No audit or other examination of any Return of the
Company is presently in progress, nor has the
Company been notified of any request for such an
audit or other examination.
(v) The Company does not have any liabilities for unpaid
federal, state, local and foreign Taxes which have
not been accrued or reserved against in accordance
with GAAP on the Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and the Company
has no knowledge of any basis for the assertion of
any such liability attributable to the Company, its
assets or operations.
(vi) The Company has provided to Parent copies of all
federal and state income and all state sales and use
Tax Returns for all periods since January 1, 1994.
(vii) There are (and as of immediately following the
Closing there will be) no liens, pledges, charges,
claims, security interests or other encumbrances of
any sort ("Liens") on the assets of the Company
-----
relating to or attributable to Taxes, other than
Liens for Taxes not yet due and payable.
(viii) None of the Company's assets is treated as
"tax-exempt use property" within the meaning of
Section 168(h) of the Code.
(ix) Immediately prior to the Effective Time, there will
not be any contract, agreement, plan or arrangement,
including but not limited to the provisions of this
Agreement, covering any employee or former employee
of the Company that, individually or collectively,
could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G or
162 of the Code.
(x) Schedule 2.8 contains, which representation and
warranty is limited to the Actual Knowledge of the
Company for purposes of Article VIII, an accurate
and complete descriptions of Company's basis in its
assets, its current and accumulated earnings and
profits, its tax carryovers and its tax elections
which representation and warranty is deemed complied
with for purposes of Article VIII except to the
extent the Company has failed to disclose relevant
information to the Parent. Schedule 2.8 contains,
which representation and warranty is limited to the
Actual Knowledge of the Company for purposes of
Article VIII, a list of net operating losses or
other tax attributes subject, immediately prior to
the Effective Time, to limitation under Sections
269, 382,
Page 19
<PAGE>
383 or 384 of the Code.
(xi) The Company has not filed any consent agreement
under Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by the Company.
(xii) The Company is not a party to a tax sharing or
allocation agreement nor does the Company owe any
amount under any such agreement.
(xiii) The Company is not, and has not been at any time, a
"United States real property holding corporation"
within the meaning of Section 897(c)(2) of the Code.
2.9 Restrictions on Business Activities. Except as set forth on
-----------------------------------
Schedule 2.9 and as otherwise required by applicable law, and
limited to the Actual Knowledge of the Company for purposes of
Article VIII, there is no agreement (noncompete or otherwise),
judgment, injunction, order or decree to which the Company is a
party or otherwise binding upon the Company which has or
reasonably would be expected to have the effect of prohibiting or
materially impairing any business practice of the Company, any
acquisition of property (tangible or intangible) by the Company or
the conduct of business by the Company. Without limiting the
foregoing, the Company has not entered into any agreement under
which the Company is restricted from selling, licensing or
otherwise distributing any of its products to any class of
customers, in any geographic area, during any period of time or in
any segment of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) The Company owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) sets forth a list of all
real property currently leased by the Company, the name of
the lessor and the date of the lease and each amendment
thereto. Except as set forth in Schedule 2.10, all such
current leases are in full force and effect, are valid and
effective in accordance with their respective terms, and
there is not, under any of such leases, any material
existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a
material default).
(b) The Company has, which representation and warranty is
limited to the Actual Knowledge of the Company for purposes
of Article VIII, good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in,
all of its tangible properties and tangible assets, real,
personal and mixed, used or held for use in its business,
free and clear of any Liens, except as reflected in the
Company Financials or in Schedule 2.10(b) and except for
liens for Taxes not yet due and payable and such
imperfections of title and encumbrances, if any, which are
not material in character, amount or extent, and which do
not materially detract from the value, or materially
interfere with the present use, of the property subject
thereto or affected thereby.
Page 20
<PAGE>
2.11 Intellectual Property.
---------------------
(a) The Company owns, or is licensed or otherwise possesses
valid rights to use all patents that are used in the
business of the Company as currently conducted. The Company
owns or is licensed or otherwise possesses valid rights to
use (i) all copyrights, and any applications therefor,
technology, know-how, computer software programs,
development tools or applications (in both source code and
object code form), and tangible or intangible proprietary
information or material that are used in the business of the
Company as currently conducted by the Company and (ii) all
trademarks, tradenames and service marks and any
applications therefor, in either case which are material to
the business of the Company as currently conducted (all of
the foregoing, including the patents, are collectively
referred to as the "Company Intellectual Property Rights").
------------------------------------
(b) Schedule 2.11(b) sets forth a complete list of all patents,
registered and material unregistered trademarks, registered
and unregistered copyrights, trade names and service marks,
and any applications therefor, included in the Company
Intellectual Property Rights, and specifies, where
applicable, the jurisdictions in which each such Company
Intellectual Property Right has been issued or registered or
in which an application for such issuance and registration
has been filed, including the respective registration or
application numbers and the names of all registered owners.
Schedule 2.11(b) sets forth a complete list of all material
licenses, sublicenses and other agreements to which the
Company is a party and pursuant to which the Company or any
other person is authorized to use any Company Intellectual
Property Right (excluding object code end-user licenses
granted to end-users in the ordinary course of business that
permit use of software products without a right to modify,
distribute or sublicense the same ("End-User Licenses")) or
-----------------
trade secret of the Company (and, specifically designating
the agreements pursuant to which any party is granted a
source code license by the Company), and includes the
identity of all parties thereto. The execution and delivery
of this Agreement by the Company, and the consummation of
the transactions contemplated hereby, will neither cause the
Company to be in violation or default under any such
license, sublicense or agreement, entitle any other party to
any such license, sublicense or agreement to terminate or
modify such license, sublicense or agreement nor cause the
release of the source code form of any item of Company
Intellectual Property Rights to any third party.
(c) Except as set forth in Schedule 2.11(c), there are no
outstanding options, licenses or agreements of any kind
relating to any Company Intellectual Property Rights held by
any third party (other than End-User Licenses), nor is the
Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trade
secrets, know-how, processes, trademarks, service marks,
trade names, copyrights, licenses, information, proprietary
rights or other rights of any other person or entity.
Page 21
<PAGE>
(d) Except with respect to the persons set forth in Schedule
2.11(d) to the extent specifically set forth therein, each
item of such Company Intellectual Property rights has been
created, conceived of, reduced to practice or developed by
employees or contractors of Company who have assigned their
rights in such Company Intellectual Property Rights to
Company. Except with respect to the persons set forth in
Schedule 2.11(d) to the extent specifically set forth
therein, Company has taken what it believes to be reasonable
actions to protect the confidentiality of the confidential
Company Intellectual Property Rights and the enforceability
of any trade secrets with respect thereto, (the parties
hereto agreeing that the failure of the Company's employees
set forth in Schedule 2.11(d) to sign confidentiality
agreements is not an unreasonable action hereunder)
including without limitation and as appropriate in each
instance, the acquisition of written non disclosure
agreements from those parties to whom Company has made an
authorized disclosure and who would not otherwise have a
common law or other legal duty or obligation of
non-disclosure. In addition, Company has taken steps
reasonably calculated to protect the confidentiality of
other Company Intellectual Property Rights owned by Company
which are not generally available to the public or customers
of the Company (the parties hereto agreeing that the failure
of the Company's employees set forth in Schedule 2.11(d) to
sign Confidentiality Agreement is not an unreasonable action
hereunder). Except as disclosed in Schedule 2.11(d), each
employee of and consultant to the Company has executed a
proprietary information and inventions agreement and a
nondisclosure agreement substantially in the Company's
standard form. Except as disclosed on Schedule 2.11(d) to
the best of Company's acknowledge, no party that has signed
a proprietary information and inventions agreement or
nondisclosure agreement is in violation of the
confidentiality provisions of that agreement.
(e) Schedule 2.11(e) identifies each license, sublicense,
agreement, permission and right to use granted by a third
party to Company of any Company Intellectual Property
Rights, other than end-user licenses related to "off the
shelf" commercial, business or engineering application
software products not incorporated in any way in any product
licensed, sold, developed or being developed by or for
Company ("Third Party Licenses"). Company has provided
--------------------
Parent with copies of all Third Party Licenses. Except as
disclosed on Schedule 2.11(e), Company is not contractually
liable, nor has it made any contract or arrangement whereby
it may become liable, to any Person for any royalty or other
consideration for the use of any Company Intellectual
Property Rights.
(f) All computer software included in the Company Intellectual
Property Rights is year 2000 compliant (that is, (i) it is
capable, to the extent called for, of correctly processing,
providing and receiving data within and between the 20th and
21st centuries (including accounting for all required leap
year calculations) and (ii) all date fields therein use four
(4) digit year fields).
(g) No claims with respect to the Company Intellectual Property
Rights have been asserted to the Company or are, to the
Company's knowledge, threatened by any person, nor, to the
Company's knowledge, are there any valid grounds for any
bona fide claims (i) to the effect that the manufacture,
sale, licensing or use of any of the products of the
Page 22
<PAGE>
Company infringes on any copyright, patent, trademark,
service mark, trade secret or other proprietary right, (ii)
against the use by the Company of any trademarks, service
marks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and
applications used in the Company's business as currently
conducted, or (iii) challenging the ownership by the
Company, validity or effectiveness of any of the Company
Intellectual Property Rights. All registered trademarks,
service marks and copyrights held by the Company are valid
and subsisting. To the Company's knowledge, the business of
the Company as currently conducted has not and does not
infringe on any proprietary right of any third party. To the
Company's knowledge, there is no unauthorized use,
infringement or misappropriation of any of the Company
Intellectual Property Rights by any third party, including
any employee or former employee of the Company. No Company
Intellectual Property Right or product of the Company or any
of its subsidiaries, which representation and warranty is
limited to the Actual Knowledge of the Company for purposes
of Article VIII, is subject to any outstanding decree,
order, judgment, or stipulation restricting in any manner
the licensing thereof by the Company.
2.12 Agreements, Contracts and Commitments. Except as set forth on
-------------------------------------
Schedule 2.12, and limited to the Actual Knowledge of the Company
for purposes of Article VIII, the Company does not have, is not a
party to nor is it bound by:
(a) any collective bargaining agreements,
(b) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(c) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or
arrangements,
(d) any employment or consulting agreement with an employee or
individual consultant or salesperson, or consulting or sales
agreement, under which a firm or other organization provides
services to the Company, and which, in each case, involves
payments by or to the Company in excess of $15,000 annually
and which is not cancelable within 30 days without a
required payment of not more than $5,000,
(e) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be
increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement,
(f) any fidelity or surety bond or completion bond,
(g) any lease of personal property having an annual value
individually in excess of $5,000,
Page 23
<PAGE>
(h) any agreement of indemnification or guaranty other than in
the ordinary course of business,
(i) any agreement containing any covenant limiting the freedom
of the Company to engage in any line of business or to
compete with any person,
(j) any agreement relating to capital expenditures and involving
future payments in excess of $5,000,
(k) any agreement relating to the disposition or acquisition of
assets or any interest in any business enterprise outside
the ordinary course of the Company's business entered into
on or after January 1, 1996,
(l) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments
relating to the borrowing of money or extension of credit
(other than by the Company's vendors in the ordinary course
of business) , including guaranties referred to in clause
(h) hereof in excess of $5,000,
(m) any construction contracts,
(n) any distribution, joint marketing or development agreement,
(o) any agreement other than End-User Licenses and Third Party
Licenses pursuant to which the Company has granted and which
is still in effect or may grant in the future but prior to
the Effective Time, to any party a source-code license or
option or other right to use or acquire source-code, or
(p) any other agreement that involves annual payment by the
Company of $5,000 or more or which is not cancelable without
more than a $5,000 penalty within thirty (30) days.
Except for such alleged material breaches, violations and defaults, and events
that would not constitute a material breach, violation or default with the lapse
of time, giving of notice, or both, as are all noted in Schedule 2.12, the
Company has not materially breached, violated or defaulted under, or received
notice that it has materially breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract or commitment related to
Intellectual Property Rights required to be set forth on Schedule 2.12 and,
limited to the Actual Knowledge of the Company for purposes of Article VIII, it
has not materially breached, violated or defaulted under, or received notice
that it has materially breached, violated or defaulted under, any of the terms
or conditions of any other agreement, contract or commitment required to be set
forth on Schedule 2.12. Each agreement, contract or commitment listed on
Schedule 2.12 related to Intellectual Property Rights and, limited to the Actual
Knowledge of the Company for purposes of Article VIII, each other agreement,
contract or commitment listed on Schedule 2.12, is in full force and effect and,
except as otherwise disclosed in Schedule 2.12, is not subject to any default
thereunder of which the Company has knowledge by any party obligated to the
Company pursuant thereto.
Page 24
<PAGE>
2.13 Compliance with Laws. The Company has, which representation and
--------------------
warranty is limited to the Actual Knowledge of the Company for
purposes of Article VIII, complied with, is not in violation of,
and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation of
which it should reasonably be aware of, except where any such
non-compliance or violation would not have a Material Adverse
Effect on the Company.
2.14 Litigation. Except as set forth in Schedule 2.14, there is no
----------
action, suit or proceeding of any nature pending or, to the
Company's knowledge, threatened against the Company, its
properties or any of its officers or directors, in their
respective capacities as such. Except as set forth in Schedule
2.14, to the Company's knowledge, there is no investigation
pending or threatened against the Company, its properties or any
of its officers or directors by or before any Governmental Entity.
Schedule 2.14 sets forth, with respect to any pending or known
threatened action, suit, proceeding or investigation, the forum,
the parties thereto, the subject matter thereof and the amount of
damages claimed or other remedy requested. No Governmental Entity
has at any time challenged or questioned in writing to the Company
the legal right of the Company to manufacture, offer or sell any
of its products in the present manner or style thereof.
2.15 Bank Accounts. Schedule 2.15 lists all bank accounts of
-------------
Company, the authorized signatories to the account and the name
and telephone number of a contact person with respect to such
account
2.16 Insurance. Schedule 2.16 sets forth a true and complete list of
---------
Company's current insurance policies and fidelity bonds covering
the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, including names
of carriers, amounts of coverage and premiums therefor. With
respect to such policies, there is no claim by the Company pending
under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such
policies or bonds. All premiums due and payable under all such
policies and bonds have been paid and the Company is otherwise in
compliance with the material terms of such policies and bonds. The
Company has no knowledge of any threatened termination of, or
premium increase with respect to, any of such policies.
2.17 Minute Books. The minute books of the Company made available
------------
upon request to counsel for Parent are the only minute books of
the Company from the date of the Company's incorporation in the
State of Delaware and contain true and correct copies of all
resolutions adopted by the Company's Board of Directors (or
committees thereof) and stockholders for such period.
2.18 Environmental Matters. Except for failures which will not have
---------------------
a Material Adverse Effect on the Company, and limited to the
Actual Knowledge of the Company for purposes of Article VIII, the
Company has met, and continues to meet, all applicable local,
state, federal and national environmental regulations and has
disposed of its waste products and effluents and/or has caused
others to dispose of such waste products and effluents in
accordance with all applicable local,
Page 25
<PAGE>
state, federal and national environmental regulations.
2.19 Brokers' and Finders' Fees; Third Party Expenses. Except as set
------------------------------------------------
forth on Schedule 2.19, the Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated
hereby. Schedule 2.19 sets forth the Company's current reasonable
estimate of all legal, accounting, financial advisory, consulting
and all other fees and expenses of third parties ("Third Party
-----------
Expenses") expected to be incurred by the Company in connection
--------
with the negotiation and effectuation of the terms and conditions
of this Agreement and the transactions contemplated hereby.
2.20 Employee Matters and Benefit Plans.
----------------------------------
(a) Company ERISA Plans. Schedule 2.20(a) contains an accurate
-------------------
and complete list of each Company "employee benefit plan" as
defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), maintained or
-----
contributed to by the Company ("Company ERISA Plans")
-------------------
together with a schedule of all liabilities, whether or not
accrued. The Company ERISA Plans are in compliance with the
applicable provisions of ERISA, the Code and other
applicable law, except for instances of non-compliance that
could not reasonably be expected to have a Material Adverse
Effect on the Company. A complete and correct copy of each
Company Benefit Plan has been provided to Parent. The
Company does not have any stated plan or commitment to
establish any new Company ERISA Plan, to modify any Company
ERISA Plan (except to the extent required by law or to
conform any such Company ERISA Plan to the requirements of
any applicable law, in each case as previously disclosed to
Parent in writing, or as required by this Agreement), or to
enter into any Company ERISA Plan. Each such Company ERISA
Plan which is intended to qualify under Code Section 401(a),
has received (or an application has been filed to receive) a
favorable determination letter from the Internal Revenue
Service with respect to the qualification of the plan under
Section 401(a) of the Code. Nothing has occurred since the
date of the most recent such determination letter that would
cause such Company ERISA Plan to lose its ability to rely on
such determination letter.
(b) Pension Plans. Neither Company nor any other Person or
-------------
entity under common control with Company within the meaning
of Section 414(b), (c) or (m) of the Code and the
regulations thereunder has now or at any previous time,
maintained, established, sponsored, participated in, or
contributed to, any Company ERISA Plan that is subject to
Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA
or Section 412 of the Code.
(c) Multiemployer or Multiple Employer Plans; Leased Employees.
----------------------------------------------------------
At no time has the Company contributed to or been requested
to contribute to any multiemployer or multiple employer
plan. No "leased employee" (within the meaning of Section
414(n) or (o) of the Code) performs any material services
for Company.
Page 26
<PAGE>
(d) Employee Benefit Plans. Schedule 2.20(a) and Schedule
----------------------
2.20(b) list each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement
(written or oral) providing insurance coverage (including
any self-insured arrangements), workers' benefits, vacation
benefits, severance benefits, fringe benefits, disability
benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock purchase, phantom stock, stock
appreciation or other forms of incentive compensation or
post-retirement insurance, compensation or benefits (an
"Employee Benefit Plan") for employees, consultants or
---------------------
directors which is entered into, maintained or contributed
to, as the case may be, by Company.
(e) Contributions. All contributions, premiums or other
-------------
payments (including all employer contributions and employee
salary reduction contributions) which are due have been
timely paid to each Company ERISA Plan and Employee Benefit
Plan and all contributions, premiums or other payments for
any period ending on or before the Effective Time which are
not yet due shall have been paid to each such plan by
Company prior to the Effective Time or shall be accrued in
accordance with the custom and practice of Company.
(f) No Post-Employment Obligations. Except as set forth in
------------------------------
Schedule 2.20(f), no Company ERISA Plan and Employee Benefit
Plan provides, or has any liability to provide, life
insurance, medical or other employee welfare benefits to any
employee upon his or her retirement or termination of
employment for any reason, except as may be required by
statute, and the Company has never represented, promised or
contracted (whether in oral or written form) to any employee
(either individually or to employees as a group) that such
employee(s) would be provided with life insurance, medical
or other employee welfare benefits upon their retirement or
termination of employment, except to the extent required by
statute.
(g) Agreements Terminable at Will; List. Except as set forth in
-----------------------------------
Schedule 2.20(g), Company does not have any employment
contracts or consulting agreements currently in effect that
are not terminable at will (other than agreements with the
sole purpose of providing for the confidentiality of
proprietary information or assignment of inventions). A list
of all employees, officers and consultants of Company and
their current compensation (including salary, bonus or
commission arrangements or other contingencies) has
previously been delivered to Parent. To the knowledge of
Company, no employee or consultant of Company is in
violation of any term of any employment contract, patent
disclosure agreement, noncompetition agreement, or any other
contract or agreement, or any restrictive covenant relating
to the right of any such employee to be employed thereby, or
to use trade secrets or proprietary information of others,
and the employment of such employees does not subject
Company to any liability.
(h) COBRA. Company has provided, or will have provided prior to
-----
the Effective Time, to individuals entitled thereto all
required notices and coverage, if any, pursuant to
Page 27
<PAGE>
Section 4980B of the Code and the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, with respect
to any "qualifying event" (as defined in Section 4980B(f)(3)
of the Code) occurring prior to and including the Effective
Time, and no tax payable on account of Section 4980B of the
Code has been incurred with respect to any current or former
employees of Company or other qualified beneficiaries (as
defined in Section 4980B(g)(1)(A) of the Code).
(i) Employment Matters. Except as set forth in Schedule
------------------
2.20(g), and limited to the Actual Knowledge of the Company
for purposes of Article VIII, the Company (i) is in material
compliance with all applicable foreign, federal, state and
local laws, rules and regulations respecting employment,
employment practices, immigration or other laws governing
the employment of foreign nationals, terms and conditions of
employment and wages and hours, in each case, with respect
to employees; (ii) has withheld all amounts required by law
or by agreement to be withheld from the wages, salaries and
other payments to employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for
any payment to any trust or other fund or to any
governmental or administrative authority, with respect to
unemployment compensation benefits, social security or other
benefits or obligations for employees (other than routine
payments to be made in the normal course of business and
consistent with past practice).
(j) Labor. No work stoppage or labor strike against the Company
-----
is pending or, to the knowledge of the Company, threatened.
Except as set forth in Schedule 2.20(j), the Company is not
involved in or, to the knowledge of the Company, threatened
with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any
employee, including, without limitation, charges of unfair
labor practices or discrimination complaints, which, if
adversely determined, would, individually or in the
aggregate, result in liability to the Company. The Company
has, which representation and warranty is limited to the
Actual Knowledge of the Company for purposes of Article
VIII, not engaged in any unfair labor practices within the
meaning of the National Labor Relations Act which would,
individually or in the aggregate, directly or indirectly
result in a liability to the Company. Except as set forth in
Schedule 2.20 (j), the Company is not presently, nor has it
been in the past, a party to, or bound by, any collective
bargaining agreement or union contract with respect to
employees and no collective bargaining agreement is being
negotiated by the Company.
2.21 Suppliers and Customers. There are, which representation and
-----------------------
warranty is limited to the Actual Knowledge of the Company for
purposes of Article VIII, no material agreements which commit the
Company to carry on business at fixed prices or prices determined
by an established formula (it being agreed for purposes hereof
that an agreement where the price is based on a fixed percentage
of cost or where the customer may acquire up to a maximum number
of Company products over a term not to exceed on (1) year are not
deemed to be at a fixed price). Except as set forth in the
Schedule 2.21, no customer who accounted for more than 5% of the
Company's sales or purchases by year since January 1, 1995 and no
other customer material to the business of the Company has
terminated its relationship with the Company, has decreased or
delayed
Page 28
<PAGE>
materially, or, to the Company's knowledge, threatened to decrease
or materially delay its usage of the Company's products or
services. The Company is not, which representation and warranty is
limited to the Actual Knowledge of the Company for purposes of
Article VIII, aware of any facts or events which may reasonably be
expected to form the basis for such a decrease or delay. The
Company does not believe that any customer or supplier material to
the business of the Company will terminate or significantly change
its relationship in a manner adverse to the Company following the
consummation of the transactions contemplated under this
Agreement.
2.22 Affiliates; Approval Vote. Schedule 2.22 sets forth those
-------------------------
persons who, in the Company's reasonable judgment, are
"affiliates" of the Company within the meaning of Rule 145 (each
such person an "Affiliate") promulgated under the Securities Act.
---------
The Affiliates will execute by the Effective Time an Affiliate
Letter in the form attached hereto as Exhibit E ("Affiliate
---------
Letters"), each of which will be in full force and effect as of
-------
the Effective Time. The Parent shall be entitled to place
appropriate legends on the certificates evidencing any of the
Parent Common Stock to be received by such Affiliates pursuant to
the terms of the Affiliates Letter, and to issue appropriate stop
transfer instructions to its transfer agent for the, consistent
with the terms of the Affiliate Letters. In addition, the
requisite number of Company Securityholders needed for the
approval and adoption of this Agreement and the Merger have agreed
in writing to vote for approval of this Agreement and the Merger a
special meeting of Company Securityholders for the purpose of
voting upon this Agreement and related matters (the "Special
-------
Meeting").
-------
2.23 Representations Complete. None of the representations or
------------------------
warranties made by the Company in this Agreement (as modified by
the Company disclosure schedules attached hereto (the "Company
-------
Schedules")), nor any statement made in any schedule or
---------
certificate furnished by the Company pursuant to this Agreement,
contains as of the date of this Agreement, any untrue statement of
a material fact, or, which representation and warranty is limited
(except to the extent related to Company Intellectual Property) to
the Actual Knowledge of the Company for purposes of Article VIII,
omits to state, as of the date of this Agreement, any material
fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not
misleading.
The Trust hereby represents and warrants to Parent and Merger Sub that:
2.24 Organization, Standing and Power. The Trust is or, immediately
--------------------------------
prior to the Effective Time, will be, a trust duly organized,
validly existing and in good standing under the laws of the State
of Delaware. The Trust has or, immediately prior to the Effective
Time, will have, the power to own its properties and to carry on
its business as they are proposed to be conducted. The Company has
delivered a true and correct copy of its Trust Agreement to
Parent.
2.25 Authority. The Trust has, or by the Effective Time will have,
---------
all requisite power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. The
Page 29
<PAGE>
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have, or by the Effective
Time will have, been duly authorized by all necessary action on
the part of the Trust, the Trustee and the holders of Beneficial
Interests. This Agreement has or, immediately prior to the
Effective Time, will have, been duly executed and delivered by the
Trust and constitutes the valid and binding obligation of the
Trust, enforceable in accordance with its terms subject to
applicable bankruptcy, insolvency, reorganization, liquidation,
moratorium or other similar laws relating or affecting the rights
of creditors generally and the effect or availability of rules of
law governing specific performance, injunctive relief and other
equitable remedies. The execution and delivery of this Agreement
and the related agreements attached as exhibits hereto by the
Trust do not, and, as of the Effective Time, the performance and
consummation of the transactions contemplated hereby and thereby
will not, conflict with, or result in any violation of, or default
under, (with or without notice or lapse of time, or both), or give
rise to a right of termination, cancellation, forfeiture, or
acceleration of any obligation or loss of any benefit under, or
result in the creation of a lien or encumbrance on any of the
properties or assets of the Trust (any such event, a "Trust
-----
Conflict") pursuant to (i) any provision of the Trust Agreement or
--------
(ii) any mortgage, indenture, lease, contract or other agreement
or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to the Trust or its properties or assets other than any
such conflict, violation or default which would not have a
Material Adverse Effect on the Trust. No consent, waiver,
approval, order or authorization of, or registration, declaration
or filing with any third party (so as not to trigger any Trust
Conflict) or, to the Trustee's knowledge, with any Governmental
Entity, is required by or with respect to the Trust in connection
with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
2.26 Representations Complete. None of the representations or
------------------------
warranties made by the Trust in this Agreement, nor any statement
made in any schedule or certificate furnished by the Trust
pursuant to this Agreement, contains as of the date of this
Agreement, any untrue statement of a material fact, or omits to
state, as of the date of this Agreement, any material fact
necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not
misleading.
3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF, PARENT AND MERGER SUB
Parent and Merger Sub, jointly and severally, represent and warrant (which
representations or warranties, to the extent they relate to the Merger Sub, are
made as of immediately prior to the Effective Time and not as of the date
hereof) to the Company that:
Page 30
<PAGE>
3.1 Organization, Standing and Power. Each of Parent and Merger Sub is
--------------------------------
a corporation duly organized, validly existing and in good
standing under the laws of the State of New York and Delaware,
respectively. Each of Parent and Merger Sub has the corporate
power to own its properties and to carry on its business as now
being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so
qualified would have a Material Adverse Effect on the Parent or
the Merger Sub. Parent and Merger Sub have each delivered a true
and correct copy of their respective Certificates of Incorporation
and Bylaws, as amended to date, to the Company.
3.2 Authority.
---------
(a) Parent and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all
necessary corporate action on the part of Parent and Merger
Sub, and do not require the consent of the stockholders of
the Parent. This Agreement has been duly executed and
delivered by Parent and Merger Sub and constitutes the valid
and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms subject to
applicable bankruptcy, insolvency, reorganization,
liquidation, moratorium or other similar laws relating or
affecting the rights of creditors generally and the effect
or availability of rules of law governing specific
performance, injunctive relief and other equitable remedies.
(b) Subject to satisfaction of the conditions set forth in
Article VII hereto, and except as set forth on Schedule 3.2,
the execution and delivery of this Agreement and the related
agreements by each of the Parent and Merger Sub do not, and
as of the Effective Time the performance and consummation of
the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation,
forfeiture, or acceleration of any obligation or loss of any
benefit under or result in the creation of a lien or
encumbrance on any of the properties or assets of Parent or
Merger Sub (any such event, a "Parent Conflict") pursuant to
---------------
(i) any provision of the Certificate of Incorporation or
Bylaws of the Parent or Merger Sub or (ii) any mortgage,
indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation
applicable to the Parent or Merger Sub or their respective
properties or assets other than any such conflict, violation
or default which would not have a Material Adverse Effect on
the Parent or Merger Sub. No consent, waiver, approval,
order or authorization of, or registration, declaration or
filing with any third party (so as not to trigger any Parent
Conflict) or, to the Parent's knowledge, with any
Governmental Entity, is required by or with respect to the
Company in connection with the execution and delivery of
this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the
Certificate of Merger with the Delaware Secretary of State
and the filing of other appropriate documents with the
relevant authorities of other jurisdictions in which the
Company is qualified to do
Page 31
<PAGE>
business and (ii) such other consents, waivers,
authorizations, filings, approvals and registrations which
are set forth on Schedule 3.2.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 15,000,000 shares
of Common Stock, $0.01 par value, of which 7,044,634 shares
were issued and outstanding as of December 31, 1997 and of
1,000,000 shares of Preferred Stock, $.01 par value, none of
which were issued and outstanding as of December 31, 1997.
The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, 1,000 shares of which are issued and
outstanding and are held by Parent. All outstanding shares
of the capital stock of Parent and Merger Sub are duly
authorized, validly issued, fully paid and non-assessable
and are not subject to preemptive rights created by statute,
the Certificate of Incorporation or Bylaws of either Parent
or Merger Sub or any agreement to which either Parent or
Merger Sub is a party or by which either is bound.
(b) The Parent has reserved 900,000 shares of Common Stock for
issuance to employees and consultants pursuant to the
Parent's 1995 Stock Plan, of which 706,919 shares are
subject to outstanding, unexercised options and 161,361
shares remain available for future grant. The Parent has
reserved 600,000 shares of Common Stock for issuance to
employees and consultants pursuant to the Parent's 1996
Stock Plan, of which 417,385 shares are subject to
outstanding, unexercised options and 171,034 shares remain
available for future grant. Except as described in Schedule
3.3(b), there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral,
to which the Parent is a party or by which it is bound
obligating the Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased
or redeemed, any shares of the capital stock of the Parent.
Schedule 3.3(b) sets forth for each outstanding Parent stock
option (a "Parent Option") the name of the holder of such
-------------
option, the number of shares of Common Stock subject to such
option and the exercise price of such option. Except as
described in Schedule (b), there are no options, warrants,
calls, rights, commitments or agreements of any character,
written or oral, to which the Parent is a party or by which
it is bound obligating the Parent to grant, extend,
accelerate the vesting of, change the price of, otherwise
amend or enter into any such option, warrant, call, right,
commitment or agreement.
(c) The shares of Parent Common Stock to be issued pursuant to
the Merger, when issued, sold and delivered in accordance
with the terms hereof for the consideration described
herein, will, assuming the accuracy of the representations
contained in the Affiliate Letters, and the accuracy of the
representations of the Company Securityholders contained in
the Letter Agreements to be executed by them, and the form
of which is attached hereto as Exhibit F, be duly
authorized, validly issued, fully paid, non-assessable and
will be issued in compliance with all applicable securities
laws and will b free and clear of any liens, claims,
encumbrances or restrictions other than liens or
encumbrances created by or imposed upon the holders thereof.
Page 32
<PAGE>
(d) Except as set forth in Schedule 3.3(d), the Parent (i) has
not granted any Parent Securityholders any registration
rights or (ii) entered into or is aware of any voting
agreements with respect to Parent Securities.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished
------------------------------------------
or made available to the Company true and complete copies of all
reports filed by it with the Securities and Exchange Commission
("SEC") under the Exchange Act for all periods subsequent to
---
December 31, 1995, all in the form so filed (all of the foregoing
being collectively referred to as the "SEC Documents"). As of
-------------
their respective filing dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act, and
none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not
misleading, except to the extent corrected by a document
subsequently filed with the SEC. Parent has made all filings
required under the rules and regulations promulgated by the SEC.
Except for the transactions contemplated hereunder or as set forth
in Schedule 3.4, and limited to the Actual Knowledge of the Parent
for purposes of Article VIII, Parent has no knowledge of any
information not disclosed in the SEC Documents which would be
required to be disclosed in a post-effective amendment if the
Parent had an effective registration with respect to a continuous
offering. The financial statements of Parent, including the notes
thereto, included in the SEC Documents (the "Parent Financial
----------------
Statements") comply as to form in all material respects with
----------
applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting
principles consistently applied (except as may be indicated in the
notes thereto) and present fairly the consolidated financial
position of Parent at the dates thereof and of its operations and
cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal audit adjustments), which
representation and warranty is limited, except to the extent it
relates to Parent Intellectual Property, to the Actual Knowledge
of the Parent for purposes of Article VIII. There has been no
change in Parent accounting policies except as described in the
notes to the Parent Financial Statements.
3.5 No Material Adverse Change. Since the date of the balance sheet
--------------------------
included in the Parent's most recently filed report on Form 10-Q,
Parent has conducted its business in the ordinary course and
except as set forth in Schedule 3.5, there has not occurred: (a)
any material adverse change in the financial condition,
liabilities, assets or business of Parent; (b) any amendment or
change in the Certificate of Incorporation or Bylaws of Parent;
(c) any damage to, destruction or loss of any assets of the
Parent, (whether or not covered by insurance); (d) strike, work
stoppage, or claim of wrongful discharge or other unlawful labor
practice or action; (e) declaration, setting aside or payment of a
dividend or other distribution with respect to the capital stock
of the Parent, or any direct or indirect redemption, purchase or
other acquisition by the Parent of any of its capital stock except
repurchases of unvested capital stock under any Parent Option
Plan; (f) capital expenditure or commitment for capital
expenditure of $15,000 in any individual case or $25,000 in the
aggregate not otherwise disclosed in writing to the Company; (g)
the entering into or consummation of any sale, license or other
disposition or termination of a material asset of the
Page 33
<PAGE>
Parent other than in the ordinary course of business; (h) notice
of any claim of ownership by a third party of the Parent
Intellectual Property Rights (as defined below) or of infringement
by the Parent of any third party's intellectual property rights;
(i) revaluation by the Parent of any of its assets, including
without limitation, writing down the value of inventory or writing
off notes or accounts receivable other than in the ordinary course
of business; or (j) any new loan financing, refinancing or
modifications, that materially, and adversely affects the
financial condition or business of Parent.
3.6 Litigation. There is no action, suit, proceeding, claim,
----------
arbitration or investigation pending, or as to which Parent has
received any notice of assertion against Parent which in any
manner challenges or seeks to prevent, enjoin, alter or materially
delay any of the transactions contemplated by this Agreement.
Except as set forth in the SEC Documents or in Schedule 3.6,
Parent is not aware of any other pending or threatened action,
suit, proceeding, investigation or claim against Parent, its
properties or any of its officers or directors in their respective
capacities as such, or any reasonable basis therefor, that
individually or in the aggregate would reasonably be expected to
have a Material Adverse Effect on Parent. Schedule 3.6 sets forth,
with respect to any pending or known threatened action, suit,
proceeding or investigation, the forum, the parties thereto, the
subject matter thereof and the amount of damages claimed or other
remedy requested. No Governmental Entity has at any time
challenged or questioned in writing to the Parent the legal right
of the Parent to manufacture, offer or sell any of its products in
the present manner or style thereof.
3.7 Intellectual Property.
---------------------
(a) The Parent owns, or is licensed or otherwise possesses valid
rights to use all patents that are used in the business of
the Parent as currently conducted. The Parent owns or is
licensed or otherwise possesses valid rights to use all
trademarks, trade names, service marks, copyrights, and any
applications therefor, technology, know-how, computer
software programs or applications (in both source code and
object code form), and tangible or intangible proprietary
information or material that are used in the business of the
Parent as currently conducted (all of the foregoing,
including the patents, are collectively referred to as the
"Parent Intellectual Property Rights").
-----------------------------------
(b) The execution and delivery of this Agreement by the Parent,
and the consummation of the transactions contemplated
hereby, will neither cause the Parent to be in violation or
default under any such license, sublicense or agreement, nor
entitle any other party to any such license, sublicense or
agreement to terminate or modify such license, sublicense or
agreement.
(c) Except with respect to the persons set forth in Schedule
3.7(c) to the extent specifically set forth therein, Company
has taken what it believes to be reasonable actions to
protect the confidentiality of the confidential Company
Intellectual Property Rights and the enforceability of any
trade secrets with respect thereto, (the parties hereto
agreeing that the failure of the Company's employees set
forth in Schedule 3.7(c) to sign confidentiality agreements
is not an unreasonable action hereunder) including without
limitation and as appropriate in each instance, the
acquisition of written non disclosure
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<PAGE>
agreements from those parties to whom Company has made an
authorized disclosure and who would not otherwise have a
common law or other legal duty or obligation of non-
disclosure. In addition, Company has taken steps reasonably
calculated to protect the confidentiality of other Company
Intellectual Property Rights owned by Company which are not
generally available to the public or customers of the
Company (the parties hereto agreeing that the failure of the
Company's employees set forth in Schedule 3.7(c) to sign
Confidentiality Agreement is not an unreasonable action
hereunder). Except as disclosed in Schedule 3.7(c), each
employee of and consultant to the Company has executed a
proprietary information and inventions agreement and a
nondisclosure agreement substantially in the Company's
standard form. Except as disclosed on Schedule 3.7(c) to the
best of Company's acknowledge, no party that has signed a
proprietary information and inventions agreement or
nondisclosure agreement is in violation of the
confidentiality provisions of that agreement
(d) No claims, including without limitation, arising out of
Section 2.1 of the Parent's July 17, 1995 agreement with
Microsoft Corporation, with respect to the Parent
Intellectual Property Rights have been asserted to Parent or
are, to the Parent's knowledge, threatened by any person,
nor, to the Parent's knowledge, are there any valid grounds
for any bona fide claims (i) to the effect that the
manufacture, sale, licensing or use of any of the products
of the Parent infringes on any copyright, patent, trademark,
service mark, trade secret or other proprietary right, (ii)
against the use by the Parent of any trademarks, service
marks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and
applications used in the Parent's business as currently
conducted, or (iii) challenging the ownership by the Parent,
validity or effectiveness of any of the Parent Intellectual
Property Rights. All registered trademarks, service marks
and copyrights held by the Parent are valid and subsisting.
To Parent's knowledge, the business of the Parent as
currently conducted has not and does not infringe on any
proprietary right of any third party. To the Parent's
knowledge, there is no unauthorized use, infringement or
misappropriation of any of the Parent Intellectual Property
Rights by any third party, including any employee or former
employee of the Parent. No Parent Intellectual Property
Right or product of the Parent or any of its subsidiaries is
subject to any outstanding decree, order, judgment, or
stipulation restricting in any manner the licensing thereof
by the Parent. Except as set forth in Schedule 3.7(d), each
employee of and consultant to the Parent has executed a
proprietary information and inventions agreement
substantially in the Parent's standard form.
(e) All computer software included in the Parent Intellectual
Property Rights is year 2000 compliant (that is, (i) it is
capable, to the extent called for, of correctly processing,
providing and receiving data within and between the 20th and
21st centuries (including accounting for all required leap
year calculations) and (ii) all date fields therein use four
(4) digit year fields).
(f) Parent has complied in all material respects with Section
2.1 of the July 17, 1995 agreement with Microsoft
Corporation and made the Product (as defined therein)
available for commercial distribution.
Page 35
<PAGE>
3.8 Restrictions on Business Activities. There is, which
-----------------------------------
representation and warranty is limited to the Actual Knowledge (as
defined below) of the Parent for purposes of Article VIII, no
agreement, judgment, injunction, order or decree binding upon
Parent that has or could reasonably have the effect of prohibiting
or significantly impairing any business practice of Parent, any
acquisition of property by Parent, or the continuation of the
business of Parent as currently conducted or as currently proposed
to be conducted.
3.9 Brokers or Finders; Professional Fees. No third party shall be
-------------------------------------
entitled to receive any brokerage commissions, finder's fees, or
similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of Parent or Merger Sub.
3.10 Conduct in the Ordinary Course. Since the date of the Parent's
------------------------------
most recently filed report on Form 10-Q, there has not occurred
any amendments or changes in the Certificate of Incorporation or
Bylaws of Parent or any agreement or arrangement made by Parent to
do the same.
3.11 Interim Operations of Merger Sub. Merger Sub was formed solely
--------------------------------
for the purpose of engaging in the transactions contemplated by
this Agreement, has engaged in no other business activities and
has conducted its operations only as contemplated by this
Agreement.
3.12 Third Party Consents. Except as set forth in Schedule 3.12, no
--------------------
consent or approval is needed from any third party in order to
enable Parent and Merger Sub to effect the Merger or any of the
transactions contemplated hereby.
3.13 Agreements with Liraz Systems, Ltd. ("Liraz"). Schedule 3.13
---------------------------------------------
sets forth a correct list of all agreements between the Parent and
Liraz.
3.14 Tax Returns and Audits.
----------------------
(a) Tax and Other Returns and Reports. Except as set forth in
---------------------------------
Schedule 3.14:
(i) The Parent as of the Effective Time will have
prepared and filed all required federal, state,
local and foreign returns, estimates, information
statements and reports ("Returns") otherwise due
-------
relating to any and all Taxes concerning or
attributable to the Company or its operations, and
such Returns have been completed in accordance with
applicable law.
(ii) The Parent as of the Effective Time: (A) will have
paid or accrued all Taxes it is
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<PAGE>
required to pay or accrue and (B) will have withheld
with respect to its employees all federal and state
income taxes, FICA, FUTA and other Taxes required to
be withheld.
(iii) The Parent is not currently delinquent in the
payment of any Tax and has not been delinquent in
the payment of any Tax during the three (3) years
preceding the date of this Agreement nor is there
any Tax deficiency outstanding, proposed or assessed
against the Company, nor has the Company executed
any waiver of any statute of limitations on or
extending the period for the assessment or
collection of any Tax.
(iv) No audit or other examination of any Return of the
Parent is presently in progress, nor has the Company
been notified of any request for such an audit or
other examination.
(v) The Parent does not have any liabilities for unpaid
federal, state, local and foreign Taxes which have
not been accrued or reserved against in accordance
with GAAP on the Parent Financial Statements,
whether asserted or unasserted, contingent or
otherwise, and the Company has no knowledge of any
basis for the assertion of any such liability
attributable to the Company, its assets or
operations.
(vi) There are (and as of immediately following the
Closing there will be) no Liens, on the assets of
the Parent relating to or attributable to Taxes,
other than Liens for Taxes not yet due and payable.
(vii) None of the Parent's assets is treated as
"tax-exempt use property" within the meaning of
Section 168(h) of the Code.
(viii) The Parent is not a party to a tax sharing or
allocation agreement nor does the Parent owe any
amount under any such agreement.
3.15 Compliance with Laws. The Parent has, which representation and
--------------------
warranty is limited to the Actual Knowledge of the Parent for
purposes of Article VIII, complied with, is not in violation of,
and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation of
which it should reasonably be aware of, except where any such
non-compliance or violation would not have a Material Adverse
Effect on the Parent.
3.16 Minute Books. The minute books of the Parent made available upon
------------
request to counsel for Company are the only minute books of the
Parent from the date of the Parent's incorporation in the State of
New York and contain true and correct copies of all resolutions
adopted by the Parent's Board of Directors (or committees thereof)
and stockholders for such period.
3.17 Environmental Matters. Except for failures which will not have a
---------------------
Material Adverse Effect on the Parent, and limited to the Actual
Knowledge of the Parent for purposes of Article VIII, the
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<PAGE>
Parent has met, and continues to meet, all applicable local,
state, federal and national environmental regulations and has
disposed of its waste products and effluents and/or has caused
others to dispose of such waste products and effluents in
accordance with all applicable local, state, federal and national
environmental regulations.
3.18 Suppliers and Customers. There are, which representation and
-----------------------
warranty is limited to the Actual Knowledge of the Parent for
purposes of Article VIII, no material agreements which commit the
Parent to carry on business at fixed prices or prices determined
by an established formula (it being agreed for purposes hereof
that an agreement where the price is based on a fixed percentage
of cost or where the customer may acquire up to a maximum number
of Company products over a term not to exceed on (1) year are not
deemed to be at a fixed price). Except as set forth in the
Schedule 3.18, no customer who accounted for more than 5% of the
Parent's sales or purchases by year since January 1, 1995 and no
other customer material to the business of the Company has
terminated its relationship with the Parent, has decreased or
delayed materially, or, to the Parent's knowledge, threatened to
decrease or delay materially its usage of the Parent's products or
services. The Parent is not aware of any facts or events which may
reasonably be expected to form the basis for such a decrease or
delay. The Parent does not believe that any customer or supplier
material to the business of the Parent will terminate or
significantly change its relationship in a manner adverse to the
Parent following the consummation of the transactions contemplated
under this Agreement.
3.19 Performance Based Compensation. Schedule 3.19 sets forth a
------------------------------
correct list of all material performance based compensation
arrangements of the Parent, except sales based commission plans
and options under the Parent's Option Plans.
3.20 Representations Complete. None of the representations or
------------------------
warranties made by the Parent or Merger Sub (as modified by the
Parent, disclosure schedules attached hereto (the "Parent
Schedules")), nor any statement made in any schedule or
certificate furnished by the Parent or Merger Sub pursuant to this
Agreement, or furnished in or in connection with documents mailed
or delivered to the Company Securityholders in connection with
soliciting their consent to this Agreement and the Merger (to the
extent prepared by the Parent or Merger Sub), contains or will
contain, as of the date of this Agreement, or if made after the
date of this Agreement, on the date such representation, warranty,
or statement is first made, any untrue statement of a material
fact, or, which representation and warranty is limited (except to
the extent related to Parent Intellectual Property) to the Actual
Knowledge of the Parent for purposes of Article VIII, omits or
will omit to state, as of the date of this Agreement, or if made
after the date of this Agreement, the date such representation,
warranty, or statement is first made, any material fact necessary
in order to make the statements contained herein or therein, in
the light of the circumstances under which made, not misleading.
4
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
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<PAGE>
4.1 Conduct of Business of the Company. During the period from the
----------------------------------
date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, the Company
agrees (except to the extent that Parent shall otherwise consent
in writing and except with respect to the termination of employees
and the combination of the Company's operations with that of the
Parent and other substantial cost reduction measures all as
discussed with or approved by Parent) to carry on its business in
the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, to pay its debts and Taxes when
due, to pay or perform other obligations when due, and, to the
extent consistent with such business, to use all reasonable
efforts consistent with past practice and policies to preserve
intact its present business organization, keep available the
services of its present officers and key employees and preserve
their relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and
ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event not previously discussed with
or approved by Parent which materially adversely effects the
Company or its business. Except as expressly contemplated by this
Agreement or disclosed in Schedule 4.1, the Company shall not,
without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business.
(b) Transfer to any person or entity any rights to the Company
Intellectual Property Rights, except licenses in the
ordinary course of business, including without limitation
End-User Licenses and Third Party Licenses;
(c) Enter into or amend any agreements pursuant to which any
other party is granted marketing, distribution or similar
rights of any type or scope with respect to any products of
the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of
the agreements set forth or described in the Company
Schedules;
(e) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu
of or in substitution for shares of capital stock of the
Company, or repurchase, redeem or otherwise acquire,
directly or indirectly, any shares of its capital stock (or
options, warrants or other rights exercisable therefor),
except upon termination of employment at cost;
(f) Except for the issuance of shares of Company Capital Stock
upon exercise or conversion of presently outstanding Company
Options or Company Preferred Stock or warrants, issue,
grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the
purchase of, any shares of Company Capital Stock or
securities convertible into, or subscriptions, rights,
warrants or options
Page 39
<PAGE>
to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other
convertible securities, without the prior written consent of
Parent;
(g) Cause or permit any amendments to its Certificate of
Incorporation or Bylaws, except as contemplated hereby;
(h) Acquire or agree to acquire by merging or consolidating
with, or by purchasing any assets or equity securities of,
or by any other manner, any business or any corporation,
partnership, association or other business organization or
division thereof, or, other than in the ordinary course of
business, otherwise acquire or agree to acquire any assets
in an amount in excess of $5,000 per single transaction;
(i) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of
business;
(j) Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of
the Company or guarantee any debt securities of others;
(k) Grant any severance or termination pay (i) to any director
or officer or (ii) to any other employee except payments
made pursuant to written agreements outstanding on the date
hereof, or as set forth in the Company Schedules or as
contemplated in this Agreement;
(l) Except as set forth in the Company Schedules or as
contemplated hereunder, adopt or amend any employee benefit
plan, or enter into any employment contract, extend
employment offers, pay or agree to pay any special bonus or
special remuneration to any director or employee, or
increase the salaries or wage rates of its employees,
without the prior written consent of Parent;
(m) Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of
business;
(n) Pay, discharge or satisfy, in an amount in excess of $5,000
(in any one case) or $15,000 (in the aggregate), any claim,
liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction of liabilities reflected
or reserved against in the Company Financial Statements (or
the notes thereto) or identified in the Company Schedules or
that arose in the ordinary course of business subsequent to
Balance Sheet Date or expenses consistent with the
provisions of this Agreement incurred in connection with any
transaction contemplated hereby;
(o) Make or change any material election in respect of Taxes,
adopt or change any accounting method in respect of Taxes,
enter into any closing agreement, settle any
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<PAGE>
claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to
any claim or assessment in respect of Taxes; or
(p) Enter into any strategic alliance, joint development or
joint marketing agreement; or
(q) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (q) above, or
any other action that would prevent the Company from
performing or cause the Company not to perform its covenants
hereunder.
4.2 Conduct of Business of the Parent and Merger Sub. During the
------------------------------------------------
period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective
Time, each of the Parent and Merger Sub agrees (except with
respect to the combination of the Parent's operations with that of
the Company and other substantial cost reduction measures all as
discussed with or approved by Company) to carry on its business in
the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, to pay its debts and Taxes when
due, to pay or perform other obligations when due, and, to the
extent consistent with such business, to use all reasonable
efforts consistent with past practice and policies to preserve
intact its present business organization, keep available the
services of its present officers and key employees and preserve
their relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and
ongoing businesses at the Effective Time. The Parent shall
promptly notify Company of any event not previously discussed with
or approved by Company which materially adversely effects the
Parent or its business. Except as expressly contemplated by this
Agreement or disclosed in Schedule 4.2, neither Parent nor Merger
Sub shall, without the prior written consent of the Company:
(a) Enter into any commitment or transaction not in the ordinary
course of business, except with respect to the sale of all
or substantially all of the assets of, or shares in,
Profitkey International, Inc.
(b) Acquire or agree to acquire by merging or consolidating
with, or by purchasing any assets or equity securities of,
or by any other manner, any business or any corporation,
partnership, association or other business organization or
division thereof, or, other than in the ordinary course of
business, otherwise acquire or agree to acquire any assets
in an amount in excess of $75,000 per single transaction;
(c) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of
business;
(d) Except for the issuance of shares of Parent Common Stock
upon exercise or conversion of presently outstanding Parent
Options or warrants, issue, grant, deliver or sell or
authorize or propose the issuance, grant, delivery or sale
of, or purchase or propose the purchase of, any shares of
Parent Common Stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or
other agreements or
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<PAGE>
commitments of any character obligating it to issue any such
shares or other convertible securities, without the prior
written consent of Company;
(e) Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of
the Parent or guarantee any debt securities of others, in
each case, in excess of $100,000;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu
of or in substitution for shares of capital stock of the
Company, or repurchase, redeem or otherwise acquire,
directly or indirectly, any shares of its capital stock (or
options, warrants or other rights exercisable therefor),
except upon termination of employment at cost; and
(g) Continue to file with the SEC such reports as are required
by applicable law.
5
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 No Solicitation.
---------------
(a) The Company shall not, directly or indirectly, through any
officer, director, employee, representative or agent of the
Company or any of its subsidiaries, (i) solicit, initiate or
encourage any inquiries or proposals regarding any merger,
sale of substantial assets, sale of the outstanding shares
of capital stock (including without limitation by way of a
tender offer) or similar transactions involving the Company
other than the Merger (any of the foregoing inquiries or
proposals being referred to herein as an "Acquisition
Proposals"), (ii) engage in negotiations or discussions
concerning, or provide any nonpublic information to any
person relating to, any Acquisition Proposal or (iii) agree
to, approve or recommend any Acquisition Proposal. Nothing
contained in this Section 5.1(a) shall prevent the Board of
Directors of the Company from considering, negotiating,
discussing, approving and recommending to the stockholders
of the Company a bona fide Acquisition Proposal not
solicited in violation of this Agreement, provided the Board
of Directors of the Company determines in good faith that it
is required to do so in order to discharge properly its
fiduciary duties.
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<PAGE>
(b) Unless otherwise required under the applicable fiduciary
duties of the directors of the Company, the Company shall
promptly notify Parent after receipt of any Acquisition
Proposal, or any material modification of or amendment to
any Acquisition Proposal. Such notice to Acquiror shall
indicate the name of the person making such Acquisition
Proposal, the terms and conditions of such Acquisition
Proposal, and whether the Company is providing or intends to
provide the person making the Acquisition Proposal with
access to information concerning the Company as provided in
Section 5.1(c), and the Company shall furnish Parent with
copies of any written Acquisition Proposal and the contents
of any communications in response thereto. The Company shall
not waive any provisions of any "standstill" agreements
between the Company and any party, except to the extent that
such waiver is, as advised by counsel, required by the
fiduciary duties of the directors of the Company.
(c) If the Board of Directors of the Company receives a request
for nonpublic information by a person who makes, or
indicates that it is considering making, a bona fide
Acquisition Proposal, and the Board of Directors determines
in good faith that it is required to cause the Company to
act as provided in this Section 5.1(c) in order to discharge
properly the directors' fiduciary duties, then, provided
such person has executed a confidentiality agreement with
the Company, the Company may provide such person with access
to information regarding the Company
5.2 Preparation of Information Statement. As soon as practicable after
------------------------------------
the execution of this Agreement, but in no event later than 7days
from the date hereof, Parent and Company shall prepare an
information statement (the "Information Statement") for the
---------------------
Company Securityholders to approve this Agreement, the Certificate
of Merger and the transactions contemplated hereby and thereby.
Company shall use its reasonable commercial efforts, with the
cooperation of Parent, to cause such Information Statement to be
distributed to Company's stockholders as soon as practicable after
the execution of this Agreement. Each of Parent and Company agrees
to provide promptly to the other such information concerning its
business and financial statements and affairs as, in the
reasonable judgment of the providing party or its counsel, may be
required or appropriate for inclusion in the Information
Statement, or in any amendments or supplements thereto, and to
cause its counsel and auditors to cooperate with the other's
counsel and auditors in the preparation of the Information
Statement. Company will promptly advise Parent, and Parent will
promptly advise Company, in writing if at any time prior to the
Effective Time either Company or Parent shall obtain knowledge of
any facts that might make it necessary or appropriate to amend or
supplement the Information Statement in order to make the
statements contained or incorporated by reference therein not
misleading or to comply with applicable law. The Information
Statement shall, subject to Section 5.1, contain the
recommendation of the Board of Directors of Company that the
Company Securityholders approve the Merger and this Agreement and
the conclusion of the Board of Directors of Company that the terms
and conditions of the Merger are fair and reasonable to the
stockholders of Company. Anything to the contrary contained herein
notwithstanding, Company shall not include in the Information
Statement any information with respect to Parent or its Affiliates
or associates, the form and content of which information shall not
have been approved by Parent prior to such inclusion, which
approval shall not be unreasonably withheld.
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<PAGE>
5.3 Meeting. The Company shall call the Special Meeting to be held as promptly
-------
as practicable for the purpose of voting upon this Agreement and related
matters. Subject to Section 5.1 hereof, the Company will, through its
Boards of Directors, recommend to Company Securityholders approval of such
matters. The Company and Parent shall coordinate and cooperate with respect
to the timing of such meeting and the Company shall use its best efforts to
hold such meeting as soon as practicable after the date hereof, giving due
consideration for providing Company Securityholders sufficient notice under
the appraisal provisions of Delaware Law.
5.4 Securities Act Exemption. The Parent Common Stock to be issued pursuant to
------------------------
this Agreement initially will not be registered under the Securities Act,
in reliance on the exemption set forth in Section 4(2) thereof and
Regulation D promulgated thereunder.
5.5 Stock Restrictions. In addition to any legend imposed by applicable state
------------------
securities laws or by any contract which continues in effect after the
Effective Time, the certificates representing the shares of Parent Common
Stock issued to the Affiliates of the Company pursuant to this Agreement
shall bear a restrictive legend (and stop transfer orders shall be placed
against the transfer thereof with Parent's transfer agent), stating
substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR A WRITTEN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND SUBSTANCE, THAT SUCH
TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SAID ACT.
5.6 Access to Information. Subject to any applicable contractual
---------------------
confidentiality obligations (which the Company shall use its best efforts
to cause to be waived) and subject to the terms of the Confidentiality
provisions of the Letter of Intent dated December 5th, 1997 between the
Company and Parent the terms of which to the extent not inconsistent with
the provisions of this Agreement are incorporated herein and made a part
hereof, and survive the execution of this Agreement, each of the Company
and Parent shall afford the other and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (a) all of its properties, books,
contracts, agreements and records, and (b) all other information concerning
the business, properties and personnel (subject to restrictions imposed by
applicable law) of it as the other may reasonably request. In addition, the
Company shall provide to Parent on a weekly basis a report detailing the
Company's cash receipts and disbursements for the prior week. No
information or knowledge obtained in any investigation pursuant to this
Section 5.6 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the
parties to consummate the Merger.
Page 44
<PAGE>
5.7 Public Disclosure. Unless otherwise required by law (including, without
-----------------
limitation, securities laws), prior to the Effective Time, no disclosure
(whether or not in response to an inquiry) of the subject matter of this
Agreement shall be made by any party hereto unless approved by Parent and
the Company prior to release, provided that such approval shall not be
unreasonably withheld. If such disclosure is required by law, the party
required by law to so disclose shall deliver the disclosure to the other
party prior to the disclosure and to the extent possible, incorporate the
other party's comments therein.
5.8 Reasonable Efforts. Subject to the terms and conditions provided in this
------------------
Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated hereby to obtain all necessary waivers, consents
and approvals and to effect all necessary registrations and filings and to
remove any injunctions or other impediments or delays, legal or otherwise,
in order to consummate and make effective the transactions contemplated by
this Agreement for the purpose of securing to the parties hereto the
benefits contemplated by this Agreement; provided that Parent shall not be
required to agree to any divestiture by Parent or the Company or any of
Parent's subsidiaries or affiliates of shares of capital stock or of any
business, assets or property of Parent or its subsidiaries or affiliates or
the Company or its affiliates, or the imposition of any material limitation
on the ability of any of them to conduct their businesses or to own or
exercise control of such assets, properties and stock.
5.9 Notification of Certain Matters. The Company shall use reasonable efforts
-------------------------------
to give prompt notice to Parent, and Parent shall use reasonable efforts to
give prompt notice to the Company, of (i) the occurrence or non-occurrence
of any event, the occurrence or non-occurrence of which is likely to cause
any representation or warranty of the Company or Parent and Merger Sub,
respectively, contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time except as contemplated
by their Agreement (including the Company Schedules) and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of
any notice pursuant to this Section 5.9 shall not limit or otherwise affect
any remedies available to the party receiving such notice.
5.10 Registration Rights Agreement. Parent hereby agrees to grant to the holders
-----------------------------
of Parent Common Stock issued pursuant to this Agreement registration
rights as set forth in the Registration Rights Agreement, the form of which
is attached hereto as Exhibit G (the "Registration Rights Agreement").
-----------------------------
5.11 Additional Documents and Further Assurances. Each party hereto, at the
-------------------------------------------
request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts
Page 45
<PAGE>
and things as may be necessary or desirable for effecting completely the
consummation of this Agreement and the transactions contemplated hereby.
5.12 Legal Requirements. Each of Parent, Merger Sub and Company will take all
------------------
reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation
of the transaction contemplated by this Agreement (including furnishing all
information required in connection with approvals by or filings with any
Governmental Entity) and will promptly cooperate with and furnish
information to any party hereto necessary in connection with any such
filings with or investigations by any Governmental Entity, and any other
such requirements imposed upon any of them or their respective subsidiaries
in connection with a consummation of the transaction contemplated by this
Agreement. Parent shall take such steps as may be necessary to comply with
the securities and blue sky laws of all jurisdictions which are applicable
to the issuance of the Parent Common Stock pursuant hereto. The Company
shall use its reasonable efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Parent Common Stock pursuant
hereto.
5.13 Third Party Consents. As soon as practical following the date hereof Parent
--------------------
and Company will each use its commercially reasonable efforts to obtain all
material consents, waivers and approvals under any of its or its
subsidiaries agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions
contemplated hereby.
5.14 Board of Directors of the Combined Company. The Board of Directors of
------------------------------------------
Parent will take all actions necessary to cause the Board of Directors of
Parent, immediately after the Effective Time, to consist of 7 persons, 6 of
whom shall have served on the Board of Directors of Parent immediately
prior to the Effective Time and one of whom shall be Robert Brill and to
cause Robert Brill to continue to serve as director for a period of two
years after the Calculation Date.
5.15 Indemnification. From and after the Effective Time, Parent and the
---------------
Surviving Corporation jointly and severally shall, indemnify, defend and
hold harmless each person who is now, or has been at any time prior to the
date of this Agreement or who becomes prior to the Effective Time, an
officer, director or an employee of the Company (the "Indemnified Parties")
-------------------
in respect of acts or omissions occurring on or prior to the Effective Time
to the extent provided under the Company's Certificate of Incorporation and
Bylaws and Indemnification Agreements in effect on the date hereof,
including but not limited to payment of legal fees; provided that such
indemnification shall be subject to any limitation imposed from time to
time under applicable law and provided further that it is understood that
the foregoing undertaking shall not grant to any such officers, directors
or employees or other person rights of indemnity against either Parent or
the Surviving Corporation more extensive than those such persons may
currently have against the Company. The provisions of this Section 5.15 are
intended to be for the benefit of, and shall be enforceable by, each
Indemnified Party, his or her heirs and representatives.
Page 46
<PAGE>
5.16 Stockholder Solicitation Materials. The Company shall use is best efforts
----------------------------------
to ensure that the Information Statements to the extent prepared by the
Company do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements contained
therein, in the light of the circumstances under which made, not
misleading.
5.17 List of Stockholders, Optionholders and Warrantholders. Immediately prior
------------------------------------------------------
to the Effective Time, the Company shall deliver to Parent the information
set forth in Schedules 2.2(a) and 2.2(b) current as of immediately prior to
the Effective Time.
5.18 NASDAQ Quotation. Parent shall cause the shares of Parent Common Stock
----------------
issuable pursuant to the Merger to be authorized for quotation on the
NASDAQ, upon official notice of issuance.
5.19 Dividends. After the Effective Time and until the Calculation Date, Parent
---------
shall not declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of the Company, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of its capital stock (or options, warrants or other rights exercisable
therefor), except upon termination of employment at cost.
5.20 Review of Returns. Notwithstanding any other provision of this Agreement,
Parent shall have 10 days from the date hereof to review any Returns
provided to it by the Company in connection with the transactions
contemplated herein and may accept or reject, at its reasonable discretion,
any Return or part thereof. Upon a receipt by Company, no later than the
end of such 10 day period, of a notice to the effect that any Return or
part thereof is not acceptable to Parent, the parties shall deem this
Agreement, for all purposes whatsoever, as if it had never been executed.
The failure of the Parent to timely provide such notice shall be deemed a
waiver by the Parent of its rights pursuant to this Section 5.20.
6
ARTICLE VI
DOCUMENTS TO BE DELIVERED
Page 47
<PAGE>
6.1 Documents to Be Delivered by the Company at Closing. At the Closing, the
---------------------------------------------------
Company shall deliver or shall cause to be delivered, the following
documents to Parent and Merger Sub:
(a) Third Party Consents. Evidence satisfactory to Parent and Merger
--------------------
Sub that the Company has obtained the consents, approvals and
waivers set forth in Schedule 2.4.
(b) Legal Opinion. A legal opinion from counsel to the Company, in form
-------------
and substance reasonably satisfactory to Parent and its counsel.
(c) Certificate of Merger. An executed Certificate of Merger in the
---------------------
form of Exhibit B.
(d) Affiliates Letter. An executed Affiliates Letter.
-----------------
(e) Resignation. The resignation of each director of Company, in form
-----------
and substance reasonably acceptable to Parent, effective as of the
Effective Time.
(f) Certificates. The certificates referred to in Section 7.2(a) and
------------
Section 7.2(b).
(g) Voting Agreement. A voting agreement in favor of Liraz
----------------
substantially in the form attached hereto as Exhibit H executed by
the Trust.
(h) Lock Up Agreement. A lock up agreement substantially in the form
-----------------
attached hereto as Exhibit I executed by each Affiliate and the
Trust.
(i) Severance Agreements. Severance agreements executed by each person
--------------------
in the list to be reasonably agreed to by the parties, including a
waiver of any claims against Company, Parent and Merger Sub.
6.2 Documents to be Delivered by the Parent and Merger Sub at Closing. At the
-----------------------------------------------------------------
Closing, the Parent and Merger Sub shall deliver or shall cause to be
delivered, the following documents to the Company:
(a) Legal Opinion. A legal opinion from Counsel to Parent, in form and
-------------
substance reasonably satisfactory to the Company and its counsel.
(b) Certificate of Merger. An executed Certificate of Merger in the
---------------------
form of Exhibit B.
(c) Third Party Consents. Evidence satisfactory to the Company that the
--------------------
Parent has obtained the consents, approvals and waivers set forth
in Schedule 3.2 and Schedule 3.12.
(d) Certificates. The certificates referred to in Section 7.3(a) and
------------
Section 7.3(b).
Page 48
<PAGE>
(e) Registration Rights Agreement. An executed Registration Rights
-----------------------------
Agreement.
7
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the
following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
--------------------
approved and adopted by the Company Securityholders by the
requisite vote under applicable law and the Company's Certificate
of Incorporation.
(b) Information Statement. The distribution of the Information
---------------------
Statement to all of the Company Securityholders shall have occurred
no later than 7 business days prior to the Effective Time.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
----------------------------------------
order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger
shall be in effect.
(d) Tax Returns. Company shall have filed all Returns required to be
-----------
filed on or before the Closing Date and copies of such Returns
shall have been previously provided to Parent.
(e) Permit. The requirements of all other state securities or "blue
------
sky" laws applicable to the transactions contemplated by this
Agreement shall have been fulfilled.
7.2 Additional Conditions to Obligations of the Company. The obligations of the
---------------------------------------------------
Company to consummate the Merger and the transactions contemplated by this
Agreement shall be subject to the satisfaction at or prior to the Closing
of each of the following conditions, any of which may be waived, in
writing, exclusively by the Company:
(a) Representations and Warranties. The representations and warranties
------------------------------
of Parent and Merger Sub contained in this Agreement shall be true
and correct in all material respects on and as of the Effective
Time with the same effect as though such
Page 49
<PAGE>
representations and warranties had been made on and as of the
Effective Time, except for changes contemplated by this Agreement
and except for such breaches, inaccuracies or omissions of such
representations and warranties which have neither had nor
reasonably would be expected to have a Material Adverse Effect on
Parent; and the Company shall have received a certificate to such
effect signed on behalf of Parent by a duly authorized officer of
Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
------------------------
performed or complied (which performance or compliance shall be
subject to Parent's or Merger Sub's ability to cure as provided in
Section 9.1(e) below) in all material respects with all agreements
and covenants required by this Agreement to be performed or
complied with by them on or prior to the Effective Time, and the
Company shall have received a certificate to such effect signed by
a duly authorized officer of Parent.
(c) Board of Directors of Parent. The Board of Directors of Parent will
----------------------------
take all actions necessary to cause the Board of Directors of
Parent, immediately after the Effective Time, to consist of 7
persons, 6 of whom shall have served on the Board of Directors of
Parent immediately prior to the Effective Time and 1 of whom shall
be Robert Brill.
(d) NASDAQ Quotation. Parent shall have caused the shares of Parent
----------------
Common Stock issuable pursuant to the Merger to be authorized for
quotation on the NASDAQ.
(e) Legal Opinion. The Company shall have received a legal opinion from
-------------
Counsel to Parent, in form and substance reasonably satisfactory to
the Company an its counsel.
(f) No Material Adverse Effect. Since the date hereof, no Material
--------------------------
Adverse Effect to the business or financial condition of the Parent
shall have occurred and be continuing.
(g) Costs Summary. Company shall have received the Costs Summary
-------------
at least two (2) business days prior to the Effective Time.
(h) Closing Date Price. The Closing Date Price shall be no less
------------------
than $8.00.
7.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
-----------------------------------------------------------------
obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the
satisfaction at or prior to the Closing of each of the following
conditions, any of which may be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and
correct in all material respects on and as of the Effective Time
with the same effect as though such representations and warranties
had been made on and as of the Effective Time, except for changes
contemplated by this Agreement (including the Company Schedules)
and except for such breaches, inaccuracies or omissions of such
representations and warranties which
Page 50
<PAGE>
have neither had nor reasonably would be expected to have a
Material Adverse Effect on the Company or Parent; and Parent and
Merger Sub shall have received a certificate to such effect signed
on behalf of the Company by a duly authorized officer of the
Company;
(b) Agreements and Covenants. The Company shall have performed or
------------------------
complied (which performance or compliance shall be subject to the
Company's ability to cure as provided in Section 9.1(d) below) in
all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior
to the Closing Date, and Parent and Merger Sub shall have received
a certificate to such effect signed by a duly authorized officer of
the Company;
(c) Dissenters' Rights. Holders of not more than 5% of the outstanding
------------------
shares of Company Preferred Series shall have exercised, nor shall
they have any continued right to exercise, appraisal, dissenters'
or similar rights under applicable law with respect to their shares
by virtue of the Merger.
(d) Consent of Company Warrantholders. Holders of not more than 5% of
---------------------------------
the outstanding Company Warrants have refused to the waiver of
their right to exercise their Company Warrants directly into shares
of Parent Common Stock after the Effective Time.
(e) Costs Summary. Parent shall have received the Costs Summary at
-------------
least two (2) business days prior to the Effective Time.
(f) Legal Opinion. The Parent shall have received a legal opinion from
-------------
Counsel to Company, in form and substance reasonably satisfactory
to the Parent and its counsel.
(g) No Material Adverse Effect. Since the date hereof, no Material
--------------------------
Adverse Effect to the business or financial condition of the
Company shall have occurred and be continuing.
(h) Opinion of Financial Advisor. Company has received from C. E.
----------------------------
Unterberg, Towbin, its financial advisor, an opinion that the terms
of the Merger are fair to the Company Securityholders as a whole
from a financial point of view.
(i) Severance Agreements. The Parent shall have received the severance
--------------------
agreements referred to in Section 6.1(i).
8
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
Page 51
<PAGE>
8.1 Survival of Representations and Warranties. All of the representations and
------------------------------------------
warranties by the Company in this Agreement or in any instrument delivered
at the Closing pursuant to this Agreement (each as modified by the Company
Schedules) as of the date of this Agreement and all the representations and
warranties by Parent and Merger Sub in this Agreement or in any instrument
delivered at the Closing pursuant to this Agreement shall survive the
Merger and shall continue through the Calculation Date.
8.2 Escrow Arrangements
-------------------
(a) Escrow Fund. At the Effective Time, the Company Securityholders
-----------
will be deemed to have received and deposited with the Escrow Agent
the Escrow Amount (as increased by any additional shares as may be
issued with respect to the Escrow Amount upon any stock split,
stock dividend or recapitalization effected by Parent after the
Effective Time) without any act of any Company Securityholder, to
be maintained for the benefit of the Company Securityholders and to
secure the representations and warranties of the Company hereunder,
such deposit to constitute an escrow fund (the "Escrow Fund") to be
-----------
governed by the terms set forth herein and at Parent's cost and
expense. The Escrow Fund shall be available to compensate,
reimburse, defend, indemnify and hold harmless the Parent and its
affiliates (including the Surviving Corporation) for any claims,
losses, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorneys' fees and expenses and expenses of
investigation and defense incurred by Parent, its officers,
directors or affiliates (including the Surviving Corporation)
directly or indirectly as a result of (i) any material inaccuracy
or breach of a representation or warranty of the Company contained
herein and not waived by the Parent, or in any certificate,
instrument, schedule or document delivered by the Company in
connection with this Agreement or the Merger, (ii) any material
failure by the Company to perform or comply with any covenant
contained herein, (iii) for any untrue statement of a material fact
or omission to state any material fact necessary in order to make
the statements, in the light of the circumstances under which made,
not misleading in any documents mailed, delivered or otherwise
furnished to the Company Securityholders in connection with
soliciting their consent to this Agreement and the Merger, to the
extent prepared by the Company or (iv) any payment made to
Information Builders, Inc. after the date hereof with respect to
the December 31, 1997 termination of its license agreement with
Company (hereinafter individually a "Loss" and collectively
----
"Losses"). Parent may not receive any shares from the Escrow Fund
------
unless and until Officer's Certificates (as defined below)
identifying Losses, the aggregate amount of which exceed $50,000,
have been delivered to the Escrow Agent as provided in paragraph
(d) and either there is no objection thereto or any objection has
been resolved in favor of the Parent in accordance with the
provisions of this Article VIII; in such case, Parent may recover
from the Escrow Fund any Losses so identified in accordance with
the provisions of this Section 8.2. The Escrow Fund shall be the
sole source of damages to Parent arising from any claim hereunder
(other than for damages due to fraud or willful misrepresentation).
Page 52
<PAGE>
(b) Escrow Period; Distribution upon Termination of Escrow Period.
-------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall
terminate at 5:00 p.m., New York time on the Calculation Date (the
"Escrow Period"). Such amount (or some portion thereof) that is
-------------
necessary in the reasonable judgment of Parent, subject to the
objection of the Merger Agent and the subsequent arbitration of the
matter in the manner provided in Section 8.2(f) hereof, to satisfy
any unsatisfied claims concerning facts and circumstances existing
prior to the termination of such Escrow Period as are specified in
any Officer's Certificate delivered to the Escrow Agent prior to
termination of such Escrow Period, may be retained in the Escrow
Fund after termination of the Escrow Period. As soon as all such
claims have been resolved as evidenced by the written memorandum of
the Merger Agent and Parent, the Escrow Agent shall deliver to the
Trust such portion of the balance of the Escrow Fund that is not
required to satisfy such claims, as certified by the Trustee to
represent the portion of the Merger Consideration payable to
Delivered Securityholders and to the Transfer Agent the remaining
portion of the Escrow Fund for the benefit of Undelivered
Securityholders who are entitled to a portion of the Merger
Consideration in such amounts as certified to the Transfer Agent by
the Trustee. If no Officer's Certificate pertaining to unsatisfied
claims is delivered to the Escrow Agent prior to the termination of
the Escrow Period, upon termination of the Escrow Period, the
Escrow Agent, without further authorization or instruction, shall
distribute the remainder of the Escrow Fund as provided in the
previous sentence.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust
fund in accordance with the terms of this Agreement and not
as the property of Parent and shall hold and dispose of the
Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued
upon a stock split) ("New Shares") in respect of Parent
----------
Common Stock in the Escrow Fund which have not been released
from the Escrow Fund shall be deposited with the Escrow
Agent and added to the Escrow Fund and become a part
thereof. New Shares issued in respect of shares of Parent
Common Stock which have been released from the Escrow Fund
shall not be added to the Escrow Fund but shall be
distributed to the distributee thereof. Cash dividends on
Parent Common Stock held in the Escrow Fund shall not be
added to the Escrow Fund but shall be distributed to the
Trust on behalf of Delivered Securityholders in accordance
with their respective Beneficial Interests, with the balance
delivered to the Transfer Agent for the benefit of
Undelivered Securityholders.
(iii) Except as otherwise provided in this Article VIII, the Trust
shall have all indicia of ownership, including, without
limitation, voting rights with respect to the shares of
Parent Common Stock contributed to the Escrow Fund (and on
any
Page 53
<PAGE>
voting securities added to the Escrow Fund in respect of
such shares of Parent Common Stock) and rights to receive
distributions thereon.
(d) Claims Upon Escrow Fund.
-----------------------
(i) Upon receipt by the Escrow Agent at any time on or before
the last day of the Escrow Period of a certificate signed by
the President of Parent (an "Officer's Certificate") (A)
---------------------
stating that Parent has paid or properly accrued or
reasonably anticipates that it will have to pay or accrue
Losses, and (B) specifying in reasonable detail the
individual items of Losses included in the amount so stated,
the date each such item was paid or properly accrued, or the
basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which
such item is related, the Escrow Agent shall, subject to the
provisions of Section 8.2(e) hereof, deliver to Parent out
of the Escrow Fund, as promptly as practicable, shares of
Parent Common Stock held in the Escrow Fund in an amount
equal to such Losses.
(ii) Claims by or relating to Dissenting Shareholders shall be
deemed claims on the Escrow Fund until settled and
satisfied.
(iii) For the purposes of determining the number of shares of
Parent Common Stock to be delivered to Parent out of the
Escrow Fund pursuant to Section 8.2(d)(i) hereof, each share
of Parent Common Stock shall be valued at the Stock Value as
of such date.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such
certificate shall be delivered to the Merger Agent and counsel for
the Trust and for a period of thirty (30) days after receipt of
such Officer's Certificate by the Merger Agent, the Escrow Agent
shall make no delivery to Parent of any Escrow Amounts pursuant to
Section 8.2(d) hereof unless the Escrow Agent shall have received
written authorization from the Merger Agent to make such delivery.
After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of shares of Parent Common Stock from the
Escrow Fund in accordance with Section 8.2(d) hereof, provided that
no such payment or delivery may be made if the Merger Agent shall
object in a written statement to the claim made in the Officer's
Certificate, and such statement shall have been delivered to the
Escrow Agent prior to the expiration of such thirty (30) day
period, to the extent of the amount so objected.
(f) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Merger Agent shall so object in writing to any
claim or claims made in any Officer's Certificate, the
Merger Agent and Parent shall attempt in good faith for
thirty (30) days to agree upon the rights of the respective
parties with respect to each of such claims. If the Merger
Agent and Parent should so agree, a memorandum setting forth
such agreement shall be prepared and signed by both parties
and shall be furnished to the Escrow Agent. The Escrow
Page 54
<PAGE>
Agent shall be entitled to rely on any such memorandum and
distribute shares of Parent Common Stock from the Escrow
Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after such good faith
negotiation, either Parent or the Merger Agent may demand
arbitration of the matter unless the amount of the damage or
loss is at issue in pending litigation with a third party,
in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by
arbitration conducted by three arbitrators. Parent and the
Merger Agent shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator,
each of which arbitrators shall be independent and have at
least ten years relevant experience. The arbitrators shall
set a limited time period and establish procedures designed
to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgment of the
arbitrators, to discover relevant information from the
opposing parties about the subject matter of the dispute.
The arbitrators shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions,
including attorneys fees and costs, to the same extent as a
court of competent law or equity, should the arbitrators
determine that discovery was sought without substantial
justification or that discovery was refused or objected to
without substantial justification. The decision of a
majority of the three arbitrators as to the validity and
amount of any claim in such Officer's Certificate shall be
binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in Section 8.2(e) hereof, the
Escrow Agent shall be entitled to act in accordance with
such decision and make or withhold payments out of the
Escrow Fund in accordance therewith. Such decision shall be
written and shall be supported by written findings of fact
and conclusions which shall set forth the award, judgment,
decree or order awarded by the arbitrators.
(iii) Any such arbitration shall be held in New York City and
shall be conducted by, and under the commercial rules then
in effect, of the American Arbitration Association. For
purposes of this Section 8.2(f), in any arbitration
hereunder in which any claim or the amount is at issue,
Parent shall be deemed to be the Prevailing Party in the
event that the arbitrators award Parent 50% or more of the
disputed amount; otherwise, the Parent shall be deemed to be
the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each
arbitrator, the administrative costs of the arbitration, and
the expenses, including without limitation, reasonable
attorneys' fees and costs, incurred by the other party to
the arbitration. Judgment upon any award rendered by the
arbitrators may be entered in any court having jurisdiction;
provided, however, that in no event will the Non-Prevailing
Party be required to pay any legal fees and costs of the
Prevailing Party in an amount in excess of one-third of the
disputed amount awarded the Prevailing Party. The Merger
Agent may pay such amounts (including without limitation
unreimbursed
Page 55
<PAGE>
expenses of counsel for the Company Securityholders and
Parent, arbitrator fees and administrative costs) by
distributing shares of Parent Common Stock held by the Trust
or from the Escrow Fund with respect to which Parent has not
made a claim; provided, however, that no shares of Parent
Common Stock may be distributed from the Escrow Fund prior
to the termination of the Escrow Period and such shares may
be distributed only to the extent that such shares are not
required to satisfy any claim for Losses.
(g) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim, which Parent believes may result in a demand against
the Escrow Fund, Parent shall notify the Merger Agent of such
claim, and the Merger Agent, as representative for the Company
Securityholders, shall be entitled, at the expense of the Company
Securityholders, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any
such claim; provided, however, that except with the consent of the
Merger Agent, no settlement of any such claim with third-party
claimants shall alone be determinative of the amount of any claim
against the Escrow Fund. In the event that the Merger Agent has
consented to any such settlement and acknowledged that the claim is
a valid claim against the Escrow Fund, the Merger Agent shall have
no power or authority to object under any provision of this Article
VIII to the amount of any claim by Parent against the Escrow Fund
with respect to such settlement amount.
(h) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth in
this Article VIII, and as set forth in any additional
written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed
by an officer of Parent and the Merger Agent and approved
by the Escrow Agent, and may rely and shall be protected in
relying or refraining from acting on any Officer's
Certificate, memorandum, instruction or other instrument
reasonably believed to be genuine and to have been signed
or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted
hereunder as Escrow Agent while acting in good faith and in
the exercise of reasonable judgment, and any act done or
omitted pursuant to the advice of counsel shall be
conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties
hereto or by any other person, excepting only orders or
process of courts of law, and is hereby expressly
authorized to comply with and obey orders, judgments or
decrees of any court. In case the Escrow Agent obeys or
complies with any such order, judgment or decree of any
court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such
compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without
jurisdiction.
Page 56
<PAGE>
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties
executing or delivering or purporting to execute or deliver
this Agreement or any documents or papers deposited or
called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to
this Agreement or any documents deposited with the Escrow
Agent.
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses,
or expenses, except for gross negligence or willful
misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (A) any act or
failure to act made or omitted in good faith, or (B) any
action taken or omitted in reliance upon any instrument,
including any written statement or affidavit provided for
in this Agreement that the Escrow Agent shall in good faith
believe to be genuine, nor will the Escrow Agent be liable
or responsible for forgeries, fraud, impersonations, or
determining the scope of any representative authority. In
addition, the Escrow Agent may consult with legal counsel
in connection with Escrow Agent's duties under this
Agreement and shall be fully protected in any act taken,
suffered, or permitted by him/her in good faith in
accordance with the advice of counsel. The Escrow Agent is
not responsible for determining and verifying the authority
of any person acting or purporting to act on behalf of any
party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject
matter of this Agreement, its terms or conditions, the
Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow
Agent may hold all documents and shares of Parent Common
Stock and may wait for settlement of any such controversy
by final appropriate legal proceedings or other means as,
in the Escrow Agent's discretion, may be required, despite
what may be set forth elsewhere in this Agreement. In such
event, the Escrow Agent will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an
action of interpleader requiring the parties to answer and
litigate any claims and rights among themselves. The Escrow
Agent is authorized to deposit with the clerk of the court
all documents and shares of Parent Common Stock held in
escrow, except all costs, expenses, charges and reasonable
attorney fees incurred by the Escrow Agent due to the
interpleader. The parties jointly and severally agree to
immediately pay the Escrow Agent, to the extent not
previously reimbursed, such amounts so incurred by the
Escrow Agent upon the Escrow Agent's demand therefor, which
demand may be made at any time before or after completion
of such action of interpleader. Upon initiating such
action, the Escrow Agent shall be fully released and
discharged of and from all obligations and liability
imposed by the terms of this Agreement.
Page 57
<PAGE>
(vii) Parent, the Surviving Corporation and the Trust agree jointly
and severally to indemnify and hold the Escrow Agent harmless
against any and all losses, claims, damages, liabilities, and
expenses, including reasonable costs of investigation, counsel
fees, and disbursements that may be imposed on Escrow Agent or
incurred by Escrow Agent in connection with the performance of
his/her duties under this Agreement, including but not limited
to any litigation arising from this Agreement or involving its
subject matter; provided, however, that in the event the Escrow
Agent shall be the Prevailing Party in connection with any
claim or action initiated by any Company Securityholder, then
such Company Securityholder or Company Securityholders shall be
responsible for the indemnification of the Escrow Agent to the
full extent provided by this paragraph.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to Parent and the Merger Agent;
provided, however, that no such resignation shall become
effective until the appointment of a successor escrow agent
which shall be accomplished as follows: Parent and the Merger
Agent shall use their best efforts to mutually agree on a
successor escrow agent within thirty (30) days after receiving
such notice. If Parent and the Merger Agent fail to agree upon
a successor escrow agent within such time, the Escrow Agent
shall have the right to appoint a successor escrow agent
authorized to do business in the state of New York. In
addition, any company into which the Escrow Agent is merged or
with which it is consolidated, or any company to which the
Escrow Agent transfers a substantial amount of its Global
Escrow business, shall be the successor to the Escrow Agent
without the execution or filing of any paper or any further act
on the part of any of the parties, anything herein to the
contrary notwithstanding. The successor escrow agent shall
deliver notification of such appointment to Parent and Merger
Agent and it shall, without further acts, be vested with all
the estates, properties, rights, powers, and duties of the
predecessor escrow agent as if originally named as escrow
agent. Thereafter, the predecessor escrow agent shall be
discharged from any further duties and liability under this
Agreement.
(i) Fees. All fees of the Escrow Agent for performance of its duties here
----
under shall be paid by Parent in accordance with the fee schedule
attached as Schedule 8.2(i). It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be
considered compensation for ordinary services as contemplated by this
Agreement. In the event that the conditions of this Agreement are not
promptly fulfilled, or if the Escrow Agent renders any service not
provided for in this Agreement, or if the parties request a
substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any
litigation pertaining to this escrow or its subject matter, the Escrow
Agent shall be reasonably compensated for such extraordinary services
and reimbursed for all costs, attorney's fees, and expenses occasioned
thereby. Parent promises to pay these sums upon
Page 58
<PAGE>
demand.
(j) Consequential Damages. In no event shall the Escrow Agent be liable
---------------------
for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the
Escrow Agent has been advised of the likelihood of such loss or damage
and regardless of the form of action.
9
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. Except as provided in Section 9.2 below, this Agreement may be
-----------
terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not occurred
within 60 days of the date hereof (provided that the right to
terminate this Agreement under this Section 9.1(b)(i) shall not be
available to any party whose willful failure to fulfill any
obligation hereunder has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date); (ii)
there shall be a final nonappealable order of a federal or state
court in effect preventing consummation of the Merger; or (iii)
there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any
Governmental Entity that would make consummation of the Merger
illegal;
(c) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed
applicable to the Merger, by any Governmental Entity, which would:
(i) prohibit Parent's or the Company's ownership or operation of any
portion of the business of the Company or (ii) compel Parent or the
Company to dispose of or hold separate, as a result of the Merger,
any portion of the business or assets of the Company or Parent; in
either case, the unavailability of which assets or business would
have a Material Adverse Effect on Parent or would reasonably be
expected to have a Material Adverse Effect on Parent's ability to
realize the benefits expected from the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in
Page 59
<PAGE>
this Agreement on the part of the Company and as a result of such
breach the conditions set forth in Section 7.3(a) or 7.3(b), as the
case may be, would not then be satisfied; provided, however, that if
such breach is curable by the Company within thirty (30) days
through the exercise of its reasonable best efforts, then for so
long as the Company continues to exercise such reasonable best
efforts Parent may not terminate this Agreement under this Section
9.1(d) unless such breach is not cured within thirty (30) days (but
no cure period shall be required for a breach which by its nature
cannot be cured);
(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this
Agreement on the part of Parent or Merger Sub and as a result of
such breach the conditions set forth in Section 7.2(a) or 7.2(b), as
the case may be, would not then be satisfied; provided, however,
that if such breach is curable by Parent or Merger Sub within thirty
(30) days through the exercise of its reasonable best efforts, then
for so long as Parent or Merger Sub continues to exercise such
reasonable best efforts the Company may not terminate this Agreement
under this Section 9.1(e) unless such breach is not cured within
thirty (30) days (but no cure period shall be required for a breach
which by its nature cannot be cured); or
(f) by Parent, if the Board of Directors of the Company shall have
withheld, withdrawn or modified in a manner adverse to the Parent
its recommendation in favor of adoption and approval of this
Agreement and approval of the Merger; or
(g) by either Parent or the Company if the Agreement shall not receive
the requisite vote for approval and adoption by the Company
Securityholders.
Where action is taken to terminate this Agreement pursuant to Section
9.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
9.2 Effect of Termination. Subject to Section 9.5, in the event of termination
---------------------
of this Agreement as provided in Section 9.1, this Agreement shall
forthwith become void and, there shall be no liability or obligation on the
part of Parent, Merger Sub or the Company, or their respective officers,
directors or Company Securityholders, provided that the provisions of this
Article IX, the confidentiality provisions hereof and Section 10.2 shall
remain in full force and effect and survive any termination of this
Agreement.
9.3 Amendment. Except as is otherwise required by applicable law, prior to the
---------
Closing, this Agreement may be amended by the parties hereto at any time by
execution of an instrument in writing signed by Parent and by the Company.
Except as is otherwise required by applicable law, after the Closing, this
Agreement may be amended by the parties hereto at any time by execution of
an instrument in writing signed by Parent and the Trustee; provided,
however, that no
Page 60
<PAGE>
amendment may be made to the Merger Consideration and the components
thereof after approval of this Agreement and Merger by the Company
Securityholders.
9.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
-----------------
Merger Sub, on the one hand, and the Company, on the other, may, to the
extent legally allowed, (i) extend the time for the performance of any of
the obligations of the other party hereto, (ii) waive any inaccuracies in
the representations and warranties made to such party contained herein or
in any document delivered pursuant hereto, and (iii) waive compliance with
any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
9.5 Parent/Company Payments.
-----------------------
(a) Company Payments. If (x) the Company Securityholders fail to approve
----------------
this Agreement and the Merger or (y) an intentional breach by the
Company of any material representation, warranty covenant or
intentional failure to comply with any other material obligation
hereunder, the Company shall pay Parent an amount equal to $500,000
within one business day following the earlier to occur of (A)
termination of this Agreement and (B) the failure to obtain the
required vote upon a vote taken at a meeting of Company
Securityholders duly convened therefor or any adjournment thereof of
the Company.
(b) Parent Payments. Upon the termination of this Agreement as a result
---------------
of an intentional breach by the Parent of any material
representation, warranty covenant or intentional failure to comply
with any other material obligation hereunder, the Parent shall pay
Company an amount equal to $500,000 within one business day
following the termination of this Agreement.
10
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by a
nationally recognized commercial delivery service, or mailed by registered
or certified mail (return receipt requested) or sent via facsimile (with
acknowledgment of complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by
like notice):
Page 61
<PAGE>
(a) if to Parent or Merger Sub, to:
1 Penn Plaza, Suite 3401
New York, NY 10019
Attention: Mr. Joseph DiZazzo
Telephone No.: 212-244-1234
Facsimile No.: 212-760-2327
with a copy to:
Bruno Dov Lerer, Esq.
655 Third Avenue, 20th floor
New York, NY 10017
Telephone No.: 212-949-8999
Facsimile No.: 201-490-2990
(b) If to the Company, to:
777 Terrace Avenue
Hasbrouck Heights, New Jersey 07604
Attention: Mr. Joseph Valley
Telephone No.: 201-288-5373
Facsimile No.: 201-288-5474
with a copy to:
H. David Berkowitz, Esq.
Snow Becker Krauss, PC.
605 Third Avenue
New York, NY 10158
Telephone No.: 212-455-0316
Facsimile No.: 201-949-7052
(c) If to the Trustee:
Robert Brill, Trustee
Momentum Liquidating Trust
Newport Management, LLC.
500 North Broadway, Suite 144
Jericho, NY 11793
Telephone No.: 516-433-0090
Facsimile No.: 516-433-0412
with a copy to:
H. David Berkowitz, Esq.
Snow Becker Krauss, PC.
Page 62
<PAGE>
605 Third Avenue
New York, NY 10158
(d) If to the Escrow Agent:
10.2 Expenses.
--------
(a) If the Merger is not consummated, all fees and expenses incurred in
connection with the Merger including, without limitation, Third
Party Expenses, incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby, shall be the
obligation of the respective party incurring such fees and expenses.
(b) Subject to Section 10.2(c), if the Merger is consummated, all fees
and expenses incurred in connection with the Merger including Third
Party Expenses incurred by Company in connection with the
negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby (the "Company
-------
Transaction Costs"), shall be the obligation of the Surviving
-----------------
Corporation.
(c) Company shall deliver to Parent, at least two (2) business days
prior to the Effective Time, an officer's certificate certifying the
aggregate amount of Company Transaction Costs which the Company
believes it incurred or to be incurred (the "Costs Summary"). Parent
-------------
shall be entitled to make the adjustment referred to in Section
1.6(a) with respect to that portion of the Company Transaction Costs
(the "Reimbursable Amount") equal to the sum of (i) amounts incurred
-------------------
for Company employee termination costs in excess of $330,000 and the
employer's shares of related payroll taxes such as FICA and FUTA),
(ii) the investment banking and similar fees paid to C. E.
Unterberg, Towbin, (iii) 50% of the aggregate legal fees incurred by
all parties hereto and (v) $75,000. The above-mentioned $75,000 is
part of the Merger Consideration and shall be paid by the Parent to
the Trust upon the Effective Time.
10.3 Interpretation. The words "include," "includes" and "including" when used
--------------
herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each
case to mean any contract, commitment or other agreement, whether oral or
written, that is legally binding. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
Page 63
<PAGE>
10.4 Counterparts. This Agreement may be executed in two or more counterparts,
------------
all of which shall be considered one and the same agreement and shall
become effective when two or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
10.5 Entire Agreement; Assignment. This Agreement, the schedules and exhibits
----------------------------
hereto, and the documents and instruments and other agreements among the
parties hereto referenced herein: (a) constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof; (b) are not intended to
confer upon any other person any rights or remedies hereunder; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
10.6 Severability. In the event that any provision of this Agreement or the
------------
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement
with a valid and enforceable provision that will achieve, to the extent
possible, the economic, business and other purposes of such void or
unenforceable provision.
10.7 Other Remedies. Except as otherwise provided herein, any and all remedies
--------------
herein expressly conferred upon a party will be deemed cumulative with and
not exclusive of any other remedy conferred hereby, or by law or equity
upon such party, and the exercise by a party of any one remedy will not
preclude the exercise of any other remedy.
10.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, regardless of the laws
that might otherwise govern under applicable principles of conflicts of
laws thereof. Each of the parties hereto agrees that process may be served
upon them in any manner authorized by the laws of the State of New York
for such persons and waives and covenants not to assert or plead any
objection which they might otherwise have to such jurisdiction and such
process.
10.9 Rules of Construction. The Company and Parent hereto agree that they have
---------------------
been represented by counsel during the negotiation and execution of this
Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement
or other document will be construed against the party drafting such
agreement or document.
Page 64
<PAGE>
10.10 Specific Performance. The parties hereto agree that irreparable damage
--------------------
will occur in the event that any of the provisions of this Agreement are
not performed in accordance with their specific terms or are otherwise
breached. It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to
any other remedy to which they are entitled at law or in equity.
Page 65
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Merger Agent and the
Escrow Agent have caused this Agreement to be signed as of the date first
written above.
Level 8 Systems, Inc. Momentum Software Corporation
By: By:
--------------- ---------------
Name: Name:
------------- -------------
Title: Title:
------------ ------------
Momentum Liquidating Trust
By:
---------------
Name: , Trustee
-------------
Middleware Acquisition Corporation
By:
---------------
Name:
-------------
Title:
------------
ESCROW AGENT (as to the provisions of Article VIII only)
- ----------------
- ----------------
- ----------------
Page 66
<PAGE>
DEFINITIONS
Actual Knowledge - the conscious awareness of facts or other information by,
- ----------------
with respect to the Parent or the Company, as applicable, named in
Exhibit J.
Additional Contingent Shares - Section 1.8(c)
- ----------------------------
Affiliate - Section 2.22
- ---------
Affiliate Letters - Section 2.22
- -----------------
Aggregate Shares of Parent Common Stock - Section 1.6(a)
- ---------------------------------------
Agreement - the Preamble
- ---------
Balance Sheet - Section 2.5
- -------------
Balance Sheet Date - Section 2.5
- ------------------
Beneficial Interests - the Recitals
- --------------------
Calculation Date - Section 1.8(a)
- ----------------
Certificates - Section 1.10(c)
- ------------
Certificate of Merger - Section 1.2
- ---------------------
Closing - Section 1.2
- -------
Closing Date - Section 1.2
- ------------
Closing Date Price - Section 1.6(a)
- ------------------
Code - the Recitals
- ----
Company - the Preamble
- -------
Company Capital Stock - the Recitals
- ---------------------
Company Common Stock - Section 1.6(b)
- --------------------
Company ERISA Plans - Section 2.20(a)
- -------------------
Company Intellectual Property Rights - Section 2.11(a)
- ------------------------------------
Page 67
<PAGE>
Company Financials - Section 2.5
- ------------------
Company Option - Section 1.6(d)
- --------------
Company Option Plan - Section 1.6(d)
- -------------------
Company Preferred Series - Section 1.6(c)
- ------------------------
Company Warrant - Section 1.6(d)
- ---------------
Common Exchange Ratio - Section 1.6(b)
- ---------------------
Company Schedules - Section 2.28
- -----------------
Company Securityholders - Section 1.6(a)
- -----------------------
Company Series A - Section 1.6(a)
- ----------------
Company Series B - Section 1.6(a)
- ----------------
Company Series B-1 - Section 1.6(a)
- ------------------
Company Series C - Section 1.6(a)
- ----------------
Company Series C-1 - Section 1.6(a)
- ------------------
Company Series D - Section 1.6(a)
- ----------------
Company Series E - Section 1.6(a)
- ----------------
Company Transaction Costs - Section 10.2(c)
- -------------------------
Conflict - Section 2.4
- --------
Contingent Consideration - Section 1.8(a)
- ------------------------
Contingent Shares - Section 1.8(a)
- -----------------
Continuing Warrants - Section 1.6(d)
- -------------------
Costs Summary - Section 10.2(c)
- -------------
Delaware Law - Section 1.1
- ------------
Delivered Securityholders - Section 1.10
- -------------------------
Page 68
<PAGE>
Dissenting Shares - Section 1.9(a)
- -----------------
Dissenting Shareholder - Section 1.9(a)
- ----------------------
Effective Time - Section 1.2
- --------------
Employee Benefit Plan - Section 2.21(d)
- ---------------------
End-User Licenses - Section 2.11(a)
- -----------------
ERISA - Section 2.20(a)
- -----
Escrow Agent - the Recitals
- ------------
Escrow Amount - Section 1.6(g)
- -------------
Escrow Fund - Section 8.2(a)
- -----------
Escrow Period - Section 8.2(b)
- -------------
Information Statement - Section 5.2
- ---------------------
GAAP - Section 2.5
- ----
Governmental Entity - Section 2.4
- -------------------
Indemnified Parties - Section 5.15
- -------------------
Liens - Section 2.8(b)(vii)
- -----
Liraz - Section 3.13
- -----
Loss and Losses - Section 8.2(a)
- ---------------
Material Adverse Effect - Section 2.1
- -----------------------
Merger - the Recitals
- ------
Merger Consideration - the Recitals
- --------------------
Merger Agent - Section 1.10
- ------------
Merger Sub - the Preamble
- ----------
New Shares - Section 8.2(c)(ii)
- ----------
Page 69
<PAGE>
Non-Contingent Merger Consideration - Section 1.10
- -----------------------------------
Note - Section 1.8(a)
- ----
Officer's Certificate - Section 8.2(d)
- ---------------------
Parent - the Preamble
- ------
Parent Common Stock - the Recitals
- -------------------
Parent Conflict - Section 3.2(b)
- ---------------
Parent Financial Statements - Section 3.4
- ---------------------------
Parent Intellectual Property Rights - Section 3.7(a)
- -----------------------------------
Parent Option - Section 3.3(b)
- -------------
Parent Schedules - Section 3.20
- ---------------
Payable Contingent Shares - Section 1.8(b)
- -------------------------
Reimbursable Amount - Section 10.2(c)
- -------------------
Registration Rights Agreement - Section 5.10
- -----------------------------
Retained Merger Consideration - Section 1.10
- -----------------------------
Returns - Section 2.8(b)
- -------
SEC - Section 3.4
- ---
SEC Documents - Section 3.4
- -------------
Securities Act - Section 1.12
- --------------
Special Meeting - Section 2.22
- ---------------
Stock Value - Section 1.8(a)
- -----------
Stock Value Fraction - Section 1.8(a)
- --------------------
Surviving Corporation - Section 1.1
- ---------------------
Tax or Taxes - Section 2.8(a)
- ------------
Third Party Expenses - Section 2.19
- --------------------
Page 70
<PAGE>
Third Party Licenses - Section 2.11(e)
- --------------------
Transfer Agent - Section 1.8
- --------------
Trust - the Preamble
- -----
Trust Conflict - Section 2.25
- --------------
Trustee - the Preamble
- -------
Undelivered Securityholders - Section 1.10
- ---------------------------
Warrant - Section 1.7
- -------
Page 71
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,246,692
<SECURITIES> 0
<RECEIVABLES> 7,154,988
<ALLOWANCES> 0
<INVENTORY> 460,166
<CURRENT-ASSETS> 16,244,435
<PP&E> 1,316,922
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,391,972
<CURRENT-LIABILITIES> 4,401,290
<BONDS> 0
0
0
<COMMON> 70,466
<OTHER-SE> 20,301,177
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</TABLE>
