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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-26392
LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2920559
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
8000 REGENCY PARKWAY, CARY, NORTH CAROLINA 27511
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(919) 380-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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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
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 26, 1999 was approximately $28,131,936. There were
8,720,994 shares of Common Stock outstanding as of March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
Exhibit Index appears on Page E-1.
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LEVEL 8 SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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Item Page
Number Number
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PART I
1. Business........................................................... 1
2. Properties......................................................... 11
3. Legal Proceedings.................................................. 11
4. Submission of Matters to a Vote of Security Holders................ 12
PART II
5. Market for Registrant's Common Stock and Related Shareholder
Matters........................................................... 13
6. Selected Financial Data............................................ 13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14
7A. Quantitative and Qualitative Disclosures About Market Risk......... 23
8. Financial Statements and Supplementary Data........................ 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 23
PART III
10. Directors and Executive Officers of the Registrant................. 23
11. Executive Compensation............................................. 23
12. Security Ownership of Certain Beneficial Owners and Management..... 24
13. Certain Relationships and Related Transactions..................... 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 24
SIGNATURES............................................................... 29
INDEX TO FINANCIAL STATEMENTS............................................ F-1
INDEX TO EXHIBITS........................................................ E-1
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Level 8 Systems, Inc. (the "Company" or "Level 8") is a leading provider
of scaleable enterprise application integration solutions. As new computer
technologies have proliferated in enterprise computing environments, the
integration and management of the applications which rely on them has grown in
complexity. Enterprise application integration (or "EAI") solutions address the
emerging need for information systems to deliver enterprise-wide views of a
company's business information and processes. The Company's products and
services are designed to enable organizations to address information systems
integration and management problems in a simple and cost effective way. The
Company provides customers with solutions to link their critical business
applications internally across the enterprise and externally with strategic
business partners. The Company's products and services also enable organizations
to engage in electronic commerce. Electronic commerce or "E-commerce" refers to
business conducted over the Internet. Currently, Level 8's products and services
are sold worldwide through a network of regional sales offices. To date, the
Company's products and services have been utilized by companies in a wide
variety of industries including banking and financial services, insurance,
retail, manufacturing, data processing, public utilities, and transportation.
Specifically, Level 8's customer base includes major corporations around the
world such as ABN AMRO, Information Technology Services Company, Charles Schwab
& Company, Inc., Credit Suisse First Boston, Italia Telecom, Prudential
Insurance Company of America, Sikorsky Aircraft, TeleDenmark A/S, Telenor A/S
and Montgomery Ward & Co., Incorporated.
From inception in 1988 through 1997, the Company provided systems
integration consulting services, primarily to manufacturing businesses in the
State of California. In October 1994, the Company acquired ProfitKey
International, Inc. ("ProfitKey") and Bizware Computer Systems (Canada) Inc.
and, in April 1995, the Company acquired Level 8 Technologies, Inc. ("Level 8
Technologies"). The Company decided to focus on the middleware business of
Level 8 Technologies and sold substantially all the assets of Bizware for
$230,000 on September 9, 1996, and subsequently changed the Company's name to
Level 8 Systems, Inc. In early 1998, the Company sold its ProfitKey
subsidiary and completed the acquisition of Momentum Software Corporation
("Momentum"). See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -General Information and Recent
Developments."
On November 23, 1998, the Company entered into an agreement with Welsh,
Carson, Anderson & Stowe VI L.P. ("WCAS") and certain other parties affiliated
or associated with WCAS pursuant to which the Company agreed to acquire
approximately 69% of the outstanding voting stock of Seer Technologies, Inc., a
Delaware corporation ("Seer"), from WCAS and its affiliates in exchange for
1,000,000 shares of common stock of the Company and warrants to purchase an
additional 250,000 shares of common stock of the Company at an exercise price of
$12 per share. Pursuant to its agreement with WCAS, the Company acquired 69% of
the voting stock of Seer on December 31, 1998 and has commenced a tender offer
to acquire all of the remaining shares of Seer for $0.35 per share in cash. The
Company has also agreed to acquire any remaining shares of Seer following
completion of the tender offer through a merger at the same $0.35 cash price per
share. The Company expects to complete its acquisition of the entire equity
interest in Seer in the second quarter of 1999.
The Company was incorporated under New York law in 1988 under the name
Advanced Systems U.S.A. (LSU) Inc., and was initially a wholly owned
subsidiary of Liraz Systems Ltd. ("Liraz"), an Israeli public company in the
systems integration business. The Company's principal executive offices are
located at 8000 Regency Parkway, Cary, North Carolina 27511, telephone number
(919) 380-5000.
INDUSTRY BACKGROUND
A significant challenge facing global 5000-sized companies today is the
integration of critical business applications which run on disparate computer
systems. Business and competitive pressures are driving the demand for
information systems that offer enterprise-wide views of a company's business
information. Further, information systems departments of global 5000-sized
companies are compelled by both economic necessity and internal mandates to find
ways to leverage their existing investment in information technology.
EAI solutions, including those developed by the Company, are designed to
provide these capabilities through an open, enterprise-wide infrastructure
that can accomplish the complete integration of a Company's entire
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computing systems environment, including technologies enabling E-commerce. In
addition, EAI encompasses extending the productive life cycle of existing
systems by adding new functionality and by cost-effectively managing all aspects
of the development, deployment, and continued enhancement of existing systems.
Indeed, the Company believes that lines between "new" development and what has
in the past been considered "maintenance" are blurring. More and more of the
"new" development going forward is going to be in the area of enhancing the
functionality of existing systems in an enterprise's computing infrastructure.
Key factors driving the current need for EAI solutions include:
- The current computer systems of many companies were developed in
an era when systems tended to be self-contained. The ability of
the systems to communicate with other systems was not considered
important. As a result, many current systems were not designed to
accommodate communications with different systems.
- Many global 5000-sized companies addressed computer system
development problems by adopting new technologies as they have
emerged. This approach has resulted in increasingly diverse
computing environments that mix a variety of hardware platforms,
operating systems and programming languages.
- Many global 5000-sized companies have made significant recent
investments in ensuring that their existing systems will be able
to function properly in the year 2000 and beyond. The size of the
investment made by these companies addressing year 2000 problems
is forcing information systems departments to find ways to
leverage such investments by extending the life of current
systems.
- Global 5000-sized companies have dramatically increased their use
of the Internet and intranets both to expedite internal
communication and to support business-to-business and
business-to-consumer transactions. This has created strong demand
for an entirely new class of enterprise-wide computer
applications. Meeting this demand in a cost efficient manner
requires modernizing existing systems to enable them to operate
intranet and E-commerce applications, as well as developing new
applications.
- As a result of mergers and acquisitions, the computer systems of
many companies have become considerably more complex at an
enterprise-wide level. The increased complexity results from the
fact that the newly-acquired computer systems are rarely
compatible with the existing computer systems. Furthermore, there
are often redundancies between the respective systems that make
integration more difficult.
PRODUCTS AND SERVICES
The Company's goal is to be a recognized leader in the growing market for
EAI solutions. The Company's solutions combine software products and consulting
services to help enterprises meet their application development, integration and
management needs. FalconMQ, first introduced in early 1998, replicates Microsoft
Corporation's Message Queue Server ("MSMQ") capability on non-Microsoft systems,
thereby enabling non-Microsoft systems to communicate freely with Windows NT
systems using MSMQ. The new Geneva Integration Server, scheduled for official
launch in April 1999 and expected to become one of the Company's leading
products, is designed to provide comprehensive, secure and reliable
interoperability between applications running on disparate and otherwise
incompatible computer systems. As a result of the Seer acquisition, the Company
also offers the Seer*HPS product, which is a set of application development
tools that assists customers in developing and adapting enterprise-wide computer
applications for client/server networks. In addition to its products, the
Company offers a broad range of consulting services in the EAI solutions area.
The Company's consulting staff is highly experienced in large-scale,
enterprise-wide applications and the complex networked computing environments in
which they run. To position the Company as a leading global provider of EAI
solutions, the Company has developed a plan for staged product development and
integration as well as service enhancements which management believes will
enable the Company to effectively accomplish its objectives.
FALCONMQ
In client/server networks, messages that contain information and/or
processing instructions are passed from one system to one or more other systems
for processing. A completion message is returned to the originating system
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when all of the steps in the transaction are completed. In the synchronous
communication model traditionally used within client/server networks, the system
sending the message must wait until it receives a return message that the
transaction was completed before sending the next message to start a new
transaction. This results in a significant amount of wasted system capacity,
since both the client and server systems must sit idle waiting for a response
before moving on to the next task.
Message queuing technology, such as that found in Microsoft's MSMQ
product and IBM's MQ Series, was developed to eliminate the wasted capacity
problem associated with synchronous communication by enabling more sophisticated
asynchronous communication. In asynchronous communication, a client or server
performs a function and then dispatches that function in the form of a "message"
to its opposite member and immediately moves on to perform the next function.
Once the dispatched function has been processed by the opposite member, the
result is then "messaged" back to the client or server for further processing.
In addition, message queuing is used by developers to guarantee reliable data
delivery in applications, even if the network goes down.
FalconMQ is message-oriented middleware technology intended to provide
the asynchronous communication capability of MSMQ on non-Microsoft systems, such
as UNIX systems, MVS operating systems for IBM mainframe computers, IBM AS/400
systems, Sun Microsystems' SOLARUS systems and LINUX systems. FalconMQ is
designed for developers to leverage the power and flexibility of message queuing
on the systems mentioned above. Accordingly, FalconMQ permits the free exchange
of messages over a network between any MSMQ application and any FalconMQ client
applications.
The current version of the FalconMQ product requires that the message
queues themselves reside on a Microsoft Windows NT system. The Company is
developing version 2.0 of FalconMQ, currently targeted for release in early
2000, that will allow message queues to reside on all non-Microsoft systems
supported by FalconMQ. This additional capability of FalconMQ version 2.0 is
designed to enable seamless interconnectivity between applications running on a
broad spectrum of systems on an enterprise-wide basis.
GENEVA INTEGRATION SERVER
The Company's new Geneva Integration Server, scheduled for official
launch in April 1999, has been deployed at a limited number of customer sites
since early 1998 in connection with the implementation of fully integrated
enterprise application systems. The Geneva Integration Server is designed to
provide comprehensive, secure and reliable interoperability between applications
running on disparate and otherwise incompatible computer systems. Because
different computer systems and the applications developed for them vary widely
in the ways in which they send, receive, view and process information,
information can not generally be exchanged between diverse applications running
on different systems. The Geneva Integration Server, which runs on Windows NT
server systems, will enable the sharing of information between disparate systems
by automatically transforming the data from one system into formats and
representations that can be used by other systems. In this way, Geneva
Integration Server can enable timely access to enterprise-wide critical business
information without the need for complex and costly ongoing software program
modifications. Geneva Integration Server's extensive message transformation
capabilities allow Geneva Integration Server to collect messages from existing
systems and transform them into forms that can be exchanged via the Internet and
vice versa, which makes it well-suited to enable existing applications for
E-commerce.
The Company believes that Geneva Integration Server provides the
following advantages to corporate information services departments:
- Improved customer service and reduced time to market by promoting
reuse of the knowledge base embodied in existing applications.
- Reduced time to market in delivering scalable, cost-effective
E-commerce applications.
- Enhanced agility and flexibility of information technology assets
in addressing changing business conditions.
- Improved utilization and the ability to leverage the skills of the
rapidly growing number of developers with Windows NT expertise,
reducing the need for more costly and specialized expertise.
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Geneva Integration Server embodies a core set of translation services,
together with "adapter" modules that allow it to link to many popular systems,
to middleware such as Microsoft's MSMQ and IBM's MQ Series, and to Internet
interfaces such as HTTP, HTML, XML and others. The combination of the
translation services and adapters allows Geneva Integration Server to act as a
liaison with respect to three fundamental elements of inter-system communication
that vary widely between disparate systems: the technical protocols required for
the delivery of messages, the message formats that set forth the manner in which
data will appear in a communication, and the actual content of the message
itself, which often must be transformed in order to permit communication between
incompatible systems.
Geneva Integration Server enhances the ability of information systems
departments to monitor and manage the flow of transactions and tasks across
various applications by providing and tracking information about the nature and
character of data, or "metadata," in a secure medium separate from the data
message itself. This supports system and workflow management to optimize system
performance. For example, metadata may tell a computer that the first four
digits of a particular communication represent the identification code for loan
recipients. If a bank using a traditional system switched from 4-digit to
6-digit identification codes, a labor-intensive search and recoding of the
bank's software programs would be required to process 6-digit codes accurately.
Geneva Integration Server's use of metadata allows a user simply to modify the
definition of that particular type of communication to tell it about 6-digit
codes and Geneva Integration Server automatically ensures that all affected
applications will accurately process the new 6-digit codes.
Geneva Integration Server also has the ability to contain system workflow
procedures in a medium that is separate from the tasks that need to be performed
in order to complete an application requirement. "System workflow procedures"
refers to information regarding the order in which a series of tasks must be
completed in order to complete a given application. For example, when a customer
orders a product the complete transaction may entail a series of interdependent
steps. Geneva Integration Server's workflow management capability tracks the
dependencies between the serial steps in the transaction process. If any of the
serial steps are not completed successfully, Geneva Integration Server would
automatically reset to the beginning before any applications or databases are
updated.
The Company believes that the Geneva Integration Server product is
currently the most comprehensive product of its kind to provide enterprise
application integration capabilities for Microsoft NT server-based environments.
SEER*HPS
Seer*HPS is a set of application development tools that assists customers
in developing, adapting and managing enterprise-wide computer applications for
client/server networks. The product enables users to define in a high level,
simplified language the tasks and operations the users would like an application
to perform. Users can then simply "push a button" and Seer*HPS automatically
generates the necessary software programming to perform the tasks and operations
defined. This significantly speeds the development and deployment of highly
complex, large-scale, custom enterprise applications and greatly enhances the
productivity of programming resources.
Unlike its primary competitors, Seer*HPS includes its own embedded
middleware, enabling communications among Seer*HPS developed application
components across various systems throughout a client/server network. Seer*HPS
enables users to specify which applications or portions of an application are to
be executed on a given system within the computing environment. This enables
workload balancing among systems, which allows customers to utilize available
resources in their respective computing environments more efficiently and
improve system performance.
Seer*HPS stores all of the information pertaining to each
Seer*HPS-developed application in its own centrally located repository. Use of
repository facilitates the efficient enhancement of the functionality of
Seer*HPS applications. Since the repository contains all relevant system data,
Seer*HPS is able to assess automatically the potential impact of any such
proposed changes in functionality. As a result, not only are initial development
time and costs reduced, but on-going system maintenance and enhancement efforts
are simplified as well.
FUTURE INTEGRATION AND DEVELOPMENT OF COMPANY PRODUCTS
FALCONMQ. Currently, FalconMQ requires that all message queues reside on
a Microsoft Windows NT system. FalconMQ Version 2.0, scheduled for release in
early 2000, will permit the message queues to reside on all systems supported by
FalconMQ. The Company also intends to ensure continued compatibility between
FalconMQ
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and Microsoft's MSMQ. As a result, companies can safely build and link
applications using FalconMQ with confidence that their systems will continue to
operate without disruption, with no need for manual programming updates as new
versions of MSMQ are released by Microsoft.
GENEVA INTEGRATION SERVER. The Company intends to enhance Geneva
Integration Server to meet marketplace needs as they evolve. Enhancements
planned through the second quarter of 2000 include strengthening Geneva
Integration Server's ability to support and interact with the MVS operating
system for IBM mainframe computers and the UNIX operating system as well as
applications components based on the Java language, which is typically used for
web-based applications. In the longer term, the Company plans to incorporate the
repository capability found in Seer*HPS into Geneva Integration Server. Among
other things, expanding Geneva Integration Server repository capabilities will
allow information regarding system workflow procedures to be stored in a
comprehensive, enterprise-wide repository and retrieved as needed by the Geneva
Integration Server product. The Company also plans to introduce a new graphical
user interface that will facilitate a customer's reconfiguration of its system.
This interface will represent a customer's system as a schematic diagram, and
reconfiguration of the system will be accomplished by a customer changing the
way the different elements of its system are linked through the schematic
diagram.
SEER*HPS. The Company is currently adapting Seer*HPS to support common
industry standards in order to interact with applications and components that
are not part of a Seer*HPS system. The first step, scheduled for mid-1999, will
be the development of an adapter to link the Seer*HPS middleware layer with
Geneva Integration Server. This link will make available all of the capabilities
of Geneva Integration Server to Seer*HPS customers. Other planned extensions
include providing support for the Java language and "Java Beans" architecture
plus support for other middleware products, such as CORBA and the FalconMQ and
MQ Series products. Longer term product development plans include the creation
of an Information Systems Warehouse based on leading industry standard "core
repository" technologies. The Information Systems Warehouse will manage the
development and interaction of applications across the entire enterprise. The
repository for the current version of Seer*HPS manages the development and
interaction of applications only for Seer*HPS-generated applications.
OTHER PRODUCTS
The XIPC product is an advanced software toolset that greatly simplifies
the development, deployment and management of distributed applications in
complex client/server networks. XIPC manages the different forms of network
communication while showing the developer only a single, simple unified view or
model of the communications taking place. This means that XIPC effectively
shields developers from the complexity of diverse computing environments while
letting them take advantage of all of the capabilities and functionality that
these environments can provide in developing efficient and sophisticated
applications.
In addition, the Company offers other products which it intends to
continue to support and further enhance, but which management does not believe
are material to the Company's business.
SERVICES
The Company provides a full spectrum of consulting services as part of
its commitment to providing its customers industry-leading EAI solutions. The
Company's worldwide consulting team has in-depth experience in developing
successful enterprise-class solutions as well as valuable insight into the
business information needs of customers in global 5000-size companies. The
Company offers consulting services in project management, applications and
platform integration, application design and development, application renewal
and web- and E-commerce enablement, along with expertise in a wide variety of
development environments and programming languages.
In addition, the Company's training organization offers a full curriculum
of courses and labs designed to help customers become proficient in the use of
the Company's products and related technology as well as enabling customers to
take full advantage of the Company's field-tested best practices methodologies.
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SALES AND MARKETING
SALES
The Company derives revenue primarily from software licenses, consulting
services and software maintenance. Presently, almost all of the Company's
revenue is derived from sales of Seer*HPS and related maintenance and consulting
services. Management believes this mix will change significantly over time to
reflect an increasing proportion of revenue resulting from sales of FalconMQ and
Geneva Integration Server.
Seer*HPS and Geneva Integration Server are designed for use primarily in
large-scale, complex computing environments. A customer's decision to use such
products involves a substantial commitment of financial and personnel resources.
Accordingly, a decision to purchase these products typically involves a lengthy
internal review process, often involving a customer's senior management. As a
result, the sales cycle for these products is relatively lengthy, averaging nine
to twelve months. The Company's sales strategy for such products will continue
to involve a complete evaluation of the customer's business, followed by the
identification and sale of solutions incorporating software and related
services. These products and their related services also provide customers the
flexibility to scale up or down and integrate new component products, whether
created by the Company or a third party.
The FalconMQ and XIPC products are by design more project-oriented in
scope. As a result, they are typically sold in smaller configurations than
Seer*HPS or Geneva Integration Server. FalconMQ is typically sold through the
Internet and by telephone and the sales cycle has averaged two to six months.
The Company is evaluating alternative sales strategies for FalconMQ, including a
mix of outsourced telephone sales and indirect channels such as sales through
strategic partners and independent software vendors (known as "ISV's") who could
bundle FalconMQ with applications they develop and sell.
The Company's direct sales staff has substantial knowledge of the
Company's products and service offerings as well as general experience in the
software industry. The Company's direct field sales force is headed by two
general managers -- one for the Americas and one for all other territories that
are the focus of active sales efforts. These currently include the United
Kingdom, France, Spain, Italy, Greece, the Benelux countries, Germany, Austria,
Switzerland, the Scandinavian and eastern bloc countries, Australia and
Asia-Pacific Rim countries. The general managers' respective operations include
sales and consulting services for new and existing customers. On a pro forma
basis, taking into account the business combination between Seer and Level 8,
$26 million (39%) of the Company's 1998 revenue was generated from the Americas
and $41 million (61%) was generated outside the Americas. Since substantially
all of the Company's 1998 revenues were derived from sales of Seer*HPS and
related services, the geographic distribution of the Company's revenues may
change as the Company's revenue mix changes.
MARKETING
The target market for the Company's products and services is global
5000-sized companies. Around the world, global 5000-sized companies are making
substantial expenditures in renovating existing applications for year 2000
compliance. In addition, the rapid development of the Internet and intranet
technology is driving companies to find ways to take advantage of these new
technologies out of competitive necessity. As a result, information systems
departments are compelled by both economic necessity and internal mandates to
find ways to leverage their investment in information technology.
In addition, the lines between "new" development and what has in the past
been considered "maintenance" are blurring. The Company believes more and more
of the "new" development going forward will be in the area of enhancing the
functionality of existing operational systems in an enterprise's current
computing infrastructure, resulting in the identification of new and emerging
markets for EAI solutions.
The Company's marketing staff has an in-depth understanding of the global
software marketplace and the needs of customers in that marketplace. The staff
also has broad knowledge of the Company's products and services and how they can
meet these customer needs, as well as experience in all of the key marketing
disciplines. Marketing is headed by a vice president of worldwide marketing who
manages an international staff, with corporate marketing and core functions
performed by the majority of the staff which is based at corporate headquarters.
Regional marketing programs are supported by corporate staff as well as locally
by staff located in the various regions. The Company also has a vice president
of alliances who identifies potential strategic alliance partners and develops
and manages the Company's relationships with these alliance partners.
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The Company utilizes a wide variety of marketing programs which are
intended to attract potential customers and to promote the Company and its brand
names. The Company uses a mix of market research, analyst updates, seminars,
telemarketing, direct mail, tradeshows, speaking engagements, public relations,
and website marketing in order to achieve these goals. The marketing department
also produces collateral material for distribution to prospects including
demonstrations, presentation materials, white papers, case studies, articles,
brochures, fact sheets, and materials that are specific to the area of interest.
The Company is also implementing an alliance program to support its channel
partners with a variety of programs, incentives, and support plans.
The Company has a key strategic relationship with Microsoft. Microsoft
has licensed from the Company software originally developed by the Company that
enables its Windows NT server platforms to integrate with IBM's MQ Series
message-oriented middleware ("MOM"), which currently represents a significant
share of the worldwide MOM market. Microsoft intends to ship this software as
part of its Windows 2000 operating system and to make it available to its
Windows NT server platform customers through its website. Microsoft recommends
FalconMQ as its preferred implementation of the MSMQ functionality on operating
systems other than Microsoft Windows. The Company is actively exploring
opportunities to continue and expand its relationship with Microsoft in EAI
related areas.
The Company is also actively seeking alliances with other third parties
who provide complementary products and services. In particular, the Company is
targeting the hundreds of companies active in Microsoft's Solution Providers
partner program as potential partners with complementary products and services.
In addition, the Company's Seer subsidiary has an important historical
relationship with IBM in Europe, which in the past has been a major marketer and
distributor of Seer*HPS in Europe.
COMPETITION
The Company competes in markets that are intensely competitive and
characterized by rapidly changing technology and evolving standards. The rapid
growth and long-term potential of the market for EAI solutions make it
attractive to new competition. Many of the Company's competitors have greater
name recognition, a longer installed customer base and significantly greater
financial, technical, marketing, and other resources than the Company. The
Company believes it offers a broader range of EAI solutions than its
competitors, and therefore generally competes on a product-by-product basis.
FALCONMQ
The competition in the message-oriented middleware market is primarily
between Microsoft's MSMQ and IBM's MQ Series. However, since FalconMQ is
designed to link MSMQ-based applications, FalconMQ indirectly competes with
middleware technology designed for IBM's MQ Series message queues product,
including middleware marketed by IBM itself.
GENEVA INTEGRATION SERVER
Geneva Integration Server competes most directly with the MQIntegrator
product from New Era of Networks (known as "NEON"), which enables the
integration of both existing and packaged enterprise resource planning (known as
"ERP") applications through IBM's MQ Series middleware. IBM and NEON recently
announced an agreement whereby NEON's MQIntegrator product will be sold through
IBM's distribution and reseller network. Geneva Integration Server also competes
against a number of other early entrants in the EAI solutions market, such as
the Mercator product line from TSI International Software, Ltd.; TIB
ActiveEnterprise from TIBCO Software, Inc.; and BusinessWare from Vitria
Technology, Inc.
The majority of these competitors focus on the integration of a
customer's existing applications to large ERP packaged applications such as
those provided by SAP, PeopleSoft, Baan and JD Edwards. The most successful of
these competitors have focused their products primarily on mainframe and UNIX
systems. Because Geneva Integration Server takes advantage of advanced features
of Windows NT such as superior security for E-commerce, the Company believes
Geneva Integration Server has a competitive advantage in the current
marketplace.
SEER*HPS
Historically, the primary competitor to Seer*HPS has been Sterling
Software with its Cool:GEN product lines. As the Company repositions Seer*HPS as
one of its EAI solution offerings, it will face new and different
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competitors such as Viasoft and Platinum, who offer repository technologies and
consulting services that they promote as addressing the application renewal and
life cycle management aspects of EAI.
SERVICES
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 with numerous local and regional providers of
consulting and integration services. In this area, the Company also competes
with providers of software packages for particular markets, such as Fourth Shift
Corporation and Symix Systems, Inc. Some of the Company's competitors,
particularly systems integrators, generally have substantially larger
operations, broader product lines with greater name recognition and market
acceptance and significantly greater resources than the Company. However, the
Company's consulting staff's expertise is focused primarily on supporting and
accelerating the productivity of purchasers of the Company's software products.
The Company believes this offers the Company a competitive advantage in selling
services to new and existing customers of the Company's software products.
CUSTOMERS
The Company's products and services are currently used by thousands of
software developers. Hundreds of enterprise-wide applications built and
integrated through the Company's products are used daily by over a million end
users worldwide. The Company's customer base includes major corporations around
the world such as ABN AMRO, Information Technology Services Company, Charles
Schwab & Company, Inc., Credit Suisse First Boston, Italia Telecom, Prudential
Insurance Company of America, Sikorsky Aircraft, TeleDenmark A/S, Telenor A/S
and Montgomery Ward & Co., Incorporated. Industries that are significantly
represented in the Company's customer base include banking and financial
services, insurance, retail, manufacturing, data processing, public utilities,
and transportation. ABN AMRO was the Company's only customer accounting for 10%
or more of 1998 historical operating revenue. On a pro forma basis, after giving
effect to the acquisition of Seer, no one customer accounted for more than 10%
of operating revenues in 1998.
The Company seeks to form strong partnering relationships with customers
in order to gain an in-depth understanding of the business and technology
challenges they face. Notably, the Company maintains a customer advisory board
for Seer*HPS customers that meets regularly. The volunteer members of the
customer advisory board represent the Company's global customer base and act as
a sounding board for new ideas and initiatives, as well as providing a means for
information flow and feedback regarding the Company's products and services. In
conjunction with the customer advisory board, the Company supports several
internet-based special interest groups providing discussion forums focused on
specific areas of technology. The Company also intends to provide customers of
its other products the opportunity to participate in a customer advisory board.
In addition, the Company holds periodic international customer
conferences to present new information, address customer questions and concerns
and provide constructive open forums for customer interaction. In many areas
around the world, local customers hold periodic regional user group meetings
that are supported and encouraged by the Company. The Company also receives a
great deal of feedback through its consulting services and technical support
organization regarding the effectiveness of the Company's products in meeting
customer needs.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has made substantial investments in research and development.
The Company conducts research and development to enhance its existing products
and to develop new products. The Company intends to focus its research and
development efforts on integrating and evolving its Geneva Integration Server,
FalconMQ and Seer*HPS product lines in such a manner that all of these products
can interact with each other to provide customers a comprehensive EAI solution.
Research and development expense increased 100% from 1997 to 1998 and 99% from
1996 to 1997. The increase in 1998 is partially attributable to the acquisition
of Momentum and the personnel added in this area of the Company. The trend in
increasing research and development expenses is a result of the Company's
investment in new products, primarily Geneva Integration Server and Version 2.0
of FalconMQ. This trend is expected to continue with the purchase of Seer, the
Company's continuing attempts to strengthen its messaging products and
completion of the transition into the EAI marketplace.
-8-
<PAGE>
The markets for the Company's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The Company's future success will
depend to a substantial degree upon its ability to enhance its existing products
and to develop and introduce, on a timely and cost-effective basis, new products
and features that meet changing customer requirements and emerging and evolving
industry standards. The Company budgets for research and development based on
planned product introductions and enhancements. Actual expenditures, however,
may significantly differ from budgeted expenditures. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced software products is a complex and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends. The introduction of new or enhanced products
also requires the Company to manage the transition from older products in order
to minimize disruption in customer ordering patterns, as well as ensure that
adequate supplies of new products can be delivered to meet customer demand.
There can be no assurance that the Company will successfully develop, introduce
or manage the transition to new products. The Company has in the past, and may
in the future, experience delays in the introduction of its products, due to
factors internal and external to the Company. Any future delays in the
introduction or shipment of new or enhanced products, the inability of such
products to gain market acceptance or problems associated with new product
transitions could adversely affect the Company's results of operations,
particularly on a quarterly basis.
For additional information, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Years Ended December
31, 1998, 1997 and 1996 - Research and Development."
INTELLECTUAL PROPERTY
The Company's success is dependent upon developing, protecting and
maintaining its intellectual property assets. The Company relies upon
combinations of copyright, trademark and trade secrecy protections, along
with contractual provisions, to protect its intellectual property rights in
software, documentation, data models, methodologies, data processing systems,
and related written materials in the international marketplace. In addition,
the Company has patents with respect to certain of Seer's products. The
effectiveness of these various types of protection can be limited, however,
by variations in laws and enforcement procedures from country to country.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology, and such protections do not preclude
competitors from developing products with functionality or features similar
to the Company's products. Furthermore, there can be no assurance that third
parties will not independently develop competing technologies that are
substantially equivalent or superior to the Company's technologies. Any
failure by or inability of the Company to protect its proprietary technology
could have a material adverse effect on the Company's business, operating
results and financial condition.
Copyright protection is generally available under United States laws
and international treaties for the Company's software and printed materials.
Seer has obtained patents in the United States and Australia with regard to
the basic application development and deployment technology in the Seer*HPS
product line, and has related patents pending in various countries. Seer has
registered the trademarks "SEER", "Archetype", "CASIM", "Freeway", "NewArc
2000", "Seer*HPS", and "TurboCycler" in the United States, and has active
programs to register the "SEER" mark in other countries where it does
business. The Company has registered the trademark "Level 8 Systems," and
uses the trademarks "Monitor MQ", "Monitor XIPC", "Level 8", "XIPC",
"FalconMQ", "Geneva", "Geneva Integration Server", "NetEssential",
"SeerTalk", "SmartPak" and "The Seer*Method". The Company intends to seek
registration of some of the trademarks including "FalconMQ", "Geneva", and
"Geneva Integration Server."
Although the Company does not believe its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement claims will not be asserted against the Company or its customers in
the future. In addition, the Company may be required to indemnify its
distribution partners and end users for similar claims made against them.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation, either as a plaintiff
or defendant, would cause the Company to incur substantial costs and divert
management resources from productive tasks whether or not such litigation is
resolved in the Company's favor, which could have a material adverse effect on
the Company's business, operating results and financial condition. Parties
making claims against the Company could secure substantial damages, as well as
injunctive or other equitable relief which could effectively block the Company's
ability to license its products in the United States or abroad. Such a judgment
could have a material adverse effect on the Company's business, operating
results and financial condition. If it appears necessary or desirable, the
Company may seek licenses to intellectual property that
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<PAGE>
it is allegedly infringing. There can be no assurance, however, that licenses
could be obtained on commercially reasonable terms, if at all, or that the terms
of any offered license would be acceptable to the Company. The failure to obtain
the necessary licenses or other rights could have a material adverse effect on
the Company's business, operating results and financial condition. As the number
of software products in the industry increases and the functionality of these
products further overlaps, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend and could adversely
affect the Company's business, operating results and financial condition. The
Company is not aware of any currently pending claims that the Company's
products, trademarks or other proprietary rights infringe upon the proprietary
rights of third parties.
EMPLOYEES
As of March 15, 1999, the Company had a total of 366 employees. Of these
employees, 35 were engaged in software sales and marketing, and technical
support; 50 in administration; 102 in research, development, and technical
support; and 179 in consulting and training. The Company's continued success is
dependent on its ability to attract and retain qualified employees. During 1998,
Seer experienced difficulties in recruiting and retaining qualified employees
due, in part, to the uncertainty of its financial position. Seer also reduced
its headcount as part of its revision of its business plan. The Company also
experienced difficulty in recruiting and retaining consultants and research and
development employees during fiscal 1998 due to the intense competition for such
personnel in the software industry. The Company believes that to fully implement
its business plan it will be required to enhance its marketing functions by
adding additional marketing personnel. In addition, the Company believes
additional sales associates will be required to support the Company's sales
operations following the acquisition of Seer. Although the Company believes it
will be successful in attracting and retaining qualified employees to fill these
positions, no assurance can be given that the Company will be successful in
attracting and retaining these employees now or in the future. The Company's
employees are not represented by a union or a collective bargaining agreement.
-10-
<PAGE>
FORWARD LOOKING AND CAUTIONARY STATEMENTS:
Certain statements contained in this Annual Report may constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("Reform Act"). The Company may also make forward
looking statements in other reports filed with the Securities and Exchange
Commission, in materials delivered to shareholders, in press releases and in
other public statements. In addition, the Company's representatives may from
time to time make oral forward looking statements. Forward looking statements
provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or current
fact. Words such as "anticipates," "believes," "expects," "estimates,"
"intends," "plans," "projects," and similar expressions, may identify such
forward looking statements. In accordance with the Reform Act, set forth below
are cautionary statements that accompany those forward looking statements.
Readers should carefully review these cautionary statements as they identify
certain important factors that could cause actual results to differ materially
from those in the forward looking statements and from historical trends. The
following cautionary statements are not exclusive and are in addition to other
factors discussed elsewhere in the Company's filings with the Securities and
Exchange Commission and in materials incorporated therein by reference: the
Company's future success depends on the market acceptance of the new Geneva
Integration Server; an unexpected revenue shortfall may adversely affect the
Company's business because its expenses are largely fixed; the Company's
quarterly operating results may vary significantly because the Company cannot
accurately predict the amount and timing of individual sales and this may
adversely impact the Company's stock price; trends in sales of the Company's
products and general economic conditions may affect investors' expectations
regarding the Company's financial performance and may adversely affect the
Company's stock price; because a substantial amount of the Company's revenues
have historically been derived from Seer*HPS, decreased demand for services
relating to this product could adversely affect the Company's business; the
Company's future results may depend upon the continued growth and business use
of the Internet; the Company may lose market share and be required to reduce
prices as a result of competition from its existing competitors, other vendors
and information systems departments of customers; the Company may not have the
resources to successfully manage the integration of Seer; the Company's future
results may depend upon the successful integration of acquisitions; the Company
may not have the resources to successfully manage additional growth; rapid
technological change could render the Company's products obsolete; if the
Company's relationship with Microsoft weakens, it could adversely affect the
Company's business; the loss of any one of the Company's major customers could
adversely affect the Company's business; the Company's business is subject to a
number of risks associated with doing business abroad including the effect of
foreign currency exchange fluctuations on the Company's results of operations;
the Company's products may contain undetected software errors, which could
adversely affect its business; because the Company's technology is complex, the
Company may be exposed to liability claims; year 2000 issues may cause problems
with the Company's systems and expose the Company to liability; the failure of
the Company to meet product delivery dates could adversely affect its business;
the Company may be unable to enforce or defend its ownership and use of
proprietary technology; because the Company is a technology company, its Common
Stock may be subject to erratic price fluctuations; and the Company may not have
sufficient liquidity and capital resources to meet changing business conditions.
ITEM 2. PROPERTIES.
The Company maintains its principal executive offices in approximately
54,000 square feet of leased space in Cary, North Carolina. The Company also
maintains executive offices in approximately 13,500 square feet of leased space
in New York, New York. As of December 31, 1998, the Company also leased 14
additional offices to provide consulting services to its clients and to
facilitate the development, sale and distribution of its products. The Company
leases office space abroad in Canberra, Melbourne and Sydney, Australia;
Toronto, Canada; Copenhagen, Denmark; London, England; Paris, France; Frankfurt,
Germany; Rome, Italy; Milan, Italy; Madrid, Spain; and Nieuwegein, The
Netherlands. The Company also maintains an office in Limerick, Ireland on a set
fee arrangement.
ITEM 3. LEGAL PROCEEDINGS.
Seer, the Company's 69% subsidiary acquired December 31, 1998, filed a
lawsuit against Saadi Abbas and Cambridge Business Solutions (UK) Limited
("CBS") in December 1997 alleging that Mr. Abbas and CBS had injured Seer by
interfering with Seer's ability to market and sublicense the LightSpeed
Financial Model. Seer obtained a preliminary injunction against Mr. Abbas and
CBS halting their actions. Mr. Abbas and CBS filed counterclaims against Seer
claiming wrongful dismissal of Abbas and breach of the license agreement. Due to
the erosion of the market for the LightSpeed Financial Model, Seer voluntarily
dismissed its claims against Mr. Abbas and CBS in the summer of 1998. Mr. Abbas
and CBS are continuing to pursue their claims against Seer. At the present point
in the litigation, it is impossible to calculate the chances of success in this
litigation. However, Seer
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<PAGE>
intends to continue to vigorously defend against the counterclaim. Seer has made
provisions for its estimated costs to resolve this matter. Management does not
believe at this point in the litigation that any additional amounts required to
ultimately resolve this matter will have a material effect on the financial
position, cash flows, or results of operations of Seer or the Company.
From time to time, the Company is a party to routine litigation
incidental to its business. As of the date of this Report, the Company was not
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
During fiscal years 1997 and 1998, the Common Stock of the Company was
traded on the Nasdaq Stock Market under the symbol "LVEL." The Company has never
declared or paid any cash dividends on its Common Stock. The Company anticipates
that all of its earnings will be retained for the operation and expansion of the
Company's business and does not anticipate paying any cash dividends in the
foreseeable future. The Company's credit agreements require the Company to
obtain approval from its lenders prior to declaration or payment of any cash
dividends on its Common Stock. The chart below sets forth the high and low stock
prices for the quarters of the fiscal years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
---------------------- -----------------------
Quarter High Low High Low
------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
First $ 18.2500 $ 10.2500 $ 16.3125 $ 10.3750
Second $ 18.5000 $ 10.6250 $ 14.0000 $ 8.3750
Third $ 25.8750 $ 15.8750 $ 11.0000 $ 6.5625
Fourth $ 23.8750 $ 11.5000 $ 9.8750 $ 5.0000
</TABLE>
The closing price of the Common Stock on December 31, 1998 was $9.6875 per
share. As of March 26, 1999, the Company had 122 registered shareholders of
record.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.
For 1998, the following data includes the Company, ASU, Level 8
Technologies and Momentum since its acquisition on March 26, 1998. For 1997,
the following data includes the Company, ASU, and Level 8 Technologies. For
1996, the following data includes the Company, ASU, and Level 8 Technologies.
For 1995, the following data includes the Company for the full year and Level
8 Technologies since its acquisition on April 1, 1995. For 1994, the
following data includes the Company and ASU.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA
Revenue $ 1,660 $ 3,012 $ 7,272 $ 14,680 $ 10,685
Net income (loss) from continuing operations 26 (429) (845) 1,036 (23,688)
Net income (loss) from continuing operations
per common and common
equivalent share - basic .01 (.10) (.14) .16 (3.15)
Net income (loss) from continuing operations
per common and common equivalent share - diluted .01 (.10) (.14) .14 (3.15)
Weighted average common and common equivalent
shares outstanding - basic 3,839 4,314 6,076 6,992 7,552
Weighted average common and common equivalent
shares outstanding - diluted 3,839 4,403 6,076 7,561 7,552
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Working capital (deficiency) $(1,679) $ 4,103 $ 11,007 $ 15,826 $(19,774)
Total assets 5,848 15,059 20,787 23,482 70,770
Long-term debt, net of current maturities 19 43 23 16 1,541
Loans from related companies, net 2,015 454 331 202 12,519
Shareholders' equity 489 11,499 18,300 20,371 8,892
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL INFORMATION AND RECENT DEVELOPMENTS
The Company is a leading provider of scaleable enterprise application
integration solutions. As new computer technologies have proliferated in
enterprise computing environments, the integration and management of the
applications which rely on them has grown in complexity. Enterprise application
integration (or "EAI") solutions address the emerging need for information
systems to deliver enterprise-wide views of a company's business information and
processes. The Company's products and services are designed to enable
organizations to address information systems integration and management problems
in a simple and cost effective way. The Company provides customers with
solutions to link their critical business applications internally across the
enterprise and externally with strategic business partners. The Company's
products and services also enable organizations to engage in electronic
commerce. Currently, Level 8's products and services are sold worldwide through
a network of regional sales offices. To date, the Company's products and
services have been utilized by companies in a wide variety of industries
including banking and financial services, insurance, retail, manufacturing, data
processing, public utilities, and transportation.
As part of the Company's strategic shift to the EAI market in the
first quarter of 1998, the Company decided to sell its wholly owned
subsidiary, ProfitKey International Inc. (which sale was completed on April
6, 1998). See Note 3 to Consolidated Financial Statements.
The Company thereupon, on March 26, 1998, acquired Momentum Software
Corporation ("Momentum") in return for 594,866 shares of the Company's common
stock and warrants to purchase 200,000 common shares at an exercise price of
$13.11 per share, subject to additional consideration based on the market value
of the Company's stock on December 1, 1998. In December 1998, the Company issued
notes totaling $3 million in payment of such additional consideration. Momentum
was purchased primarily for its technology, some of which has been integrated
into Level 8's Falcon product set.
The Company's most significant step to date into the EAI marketplace was
the acquisition of a controlling interest in Seer Technologies, Inc. ("Seer") on
December 31, 1998. Seer is one of the software industry's earliest pioneers and
a long-time leader in software application development tools. During 1998, Seer
redirected its focus on emerging market demand for extending the life cycle of
enterprise applications through enterprise application renewal. On November 23,
1998, the Company entered into an agreement with Welsh, Carson, Anderson & Stowe
VI L.P. ("WCAS") and certain other parties affiliated or associated with WCAS
pursuant to which the Company agreed to acquire approximately 69% of the
outstanding voting stock of Seer from WCAS and its affiliates in exchange for
1,000,000 shares of common stock of the Company and warrants to purchase an
additional 250,000 shares of common stock of the Company at an exercise price of
$12 per share. Pursuant to its agreement with WCAS, the Company acquired 69% of
the voting stock of Seer on December 31, 1998 and has commenced a tender offer
to acquire all of the remaining shares of Seer for $0.35 per share in cash. The
Company has also agreed to acquire any remaining shares of Seer following
completion of the tender offer through a merger at the same $0.35 cash price per
share. The Company expects to complete its acquisition of the entire equity
interest in Seer in the second quarter of 1999.
As a result of (i) the purchase of Momentum at the end of the first
quarter of 1999, (ii) the purchase of 69% of the voting stock of Seer on
December 31, 1998, (iii) the pending completion of the purchase of the remaining
31% of the voting stock of Seer, and (iv) the disposition of ProfitKey, the
information within this report is not necessarily indicative of future operating
results. Also, these changes make it difficult to compare the results for the
years presented as the direction of the business has evolved throughout the
period. Unless otherwise specifically indicated, the information in this report
is stated as of December 31, 1998 and does not give effect to the remaining
portion of the pending acquisition of the remaining 31% of Seer. The Company
expects that its results of
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<PAGE>
operations will significantly change with its acquisition of Seer and through
the development of its other technologies as it continues to attempt to
strengthen its position in the EAI marketplace.
This report contains forward-looking statements relating to such matters
as anticipated financial performance, business prospects, technological
developments, new products, research and development activities, the pending
transaction with Seer, liquidity and capital resources, Year 2000 issues and
similar matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause its
actual results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. See "Item 1.
Business - Forward Looking and Cautionary Statements."
[remainder of page intentionally left blank]
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<PAGE>
RESULTS OF OPERATIONS
The Company's 1998 results of operations include the operations of the
Company and its subsidiaries. Operations for the subsidiaries acquired during
1998 are included from the date of acquisition. Accordingly, the 1998 results of
operations include the operations of Momentum since March 26, 1998. The 1998
results of operations do not reflect any of Seer's operations since the
Company's 69% interest in Seer was not acquired until December 31, 1998. The
shareholders of the remaining 31% of the outstanding voting stock were
considered to have shared in the losses of Seer only for their proportionate
share of Seer's net assets. No minority interest for Seer is reflected in the
Company's consolidated balance sheet at December 31, 1998 because Seer had net
liabilities of $25 million at December 31, 1998. The Company has only recorded
69% of the value of the Company's intangible assets, including the value of
in-process technology which has been written off. Subsequent to December 31,
1998, the Company commenced a tender offer for the remaining 31% of Seer. Until
the tender offer is completed, the Company will report only 69% of any net
earnings and 100% of any net losses of Seer. The Company anticipates completing
the tender offer and acquiring the remaining minority interest in Seer during
the second quarter of 1999. Following the acquisition of the minority interest
in Seer, the Company's operations will include all of Seer's operations and the
Company will record the remaining intangible assets of Seer, including an
additional write-off for in-process technology.
The following table sets forth, for the years indicated, the Company's
results of continuing operations expressed as a percentage of revenue.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenue:
Software products 14.5% 29.7% 20.4%
Services 85.5% 69.3% 75.9%
Other -- 1.0% 3.7%
----- ----- -----
Total 100.0% 100.0% 100.0%
Cost of revenue:
Software products 19.3% 17.4% 19.6%
Services 55.9% 34.0% 42.0%
Other -- 0.3% 0.5%
----- ----- -----
Total 75.2% 51.7% 62.1%
----- ----- -----
Gross profit 24.8% 48.3% 37.9%
Operating expenses:
Research and product development 19.8% 7.2% 7.3%
Selling, general and administrative 91.5% 30.5% 40.8%
Amortization of goodwill and 18.1% 2.9% 5.8%
intangibles
Write-off of in-process research and 55.1% -- --
development
Write-off of goodwill 43.1% -- --
Restructuring charges 14.4%
----- ----- -----
Total 242.0% 40.5% 53.9%
Other income (expense), net (0.7)% 3.0% 2.0%
----- ----- -----
Income (loss) before taxes (217.9)% 10.8% (14.0%)
Income tax provision (benefit) 3.8% 3.8% (2.4)%
----- ----- -----
Net income (loss) from continuing operations (221.7)% 7.0% (11.6)%
----- ----- -----
----- ----- -----
</TABLE>
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<PAGE>
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
REVENUE AND GROSS MARGIN. The Company has two categories of
revenue: software products and services. Software products revenue is comprised
primarily of fees from licensing the Company's proprietary software products
and, to a lesser extent, from product development contracts. Services revenue is
comprised of fees for maintaining, supporting, providing periodic upgrades and
consulting and training services related to the Company's software products.
The Company's revenues vary from quarter to quarter, with the largest
portion of revenue typically recognized in the last month of each quarter. The
Company believes that these patterns are partly attributable to the Company's
sales commission policies, which compensate sales personnel for meeting or
exceeding quarterly quotas, and to the budgeting and purchasing cycles of
customers. The Company typically does not have any material backlog of unfilled
software orders, and product revenue in any quarter is substantially dependent
upon orders received in that quarter. Because the Company's operating expenses
are based on anticipated revenue levels and are relatively fixed over the short
term, variations in the timing of recognition revenue can cause significant
variations in operating results from quarter to quarter. Fluctuations in
operating results may result in volatility in the price of the Company's common
stock.
Effective January 1, 1998, the Company adopted Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-4 "Deferral of the Effective Date of Certain Provisions of SOP
97-2." SOP 97-2 requires each element of a software sale arrangement to be
separately identified and accounted for based on the relative fair value of such
element. Revenue cannot be recognized on any element of the sale arrangement if
undelivered elements are essential to the functionality of the delivered
elements.
Adoption of SOP 97-2 resulted in the deferral of license revenue of
approximately $262. In addition, the unique nature of a significant contract
resulted in the deferral of $3,700 of software revenue as of December 31,
1998. At least a portion of the license revenue for these contracts may have
been recognized under SOP 91-1 "Software Revenue Recognition", which was
effective in previous years.
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") will be
effective for the Company's fiscal year beginning January 1, 1999. Retroactive
application is prohibited. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair values of all of the undelivered elements that are not accounted for by
means of long-term contract accounting, (2) VSOE of fair value does not exist
for one or more of the delivered elements, and (3) all revenue recognition
criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of
each delivered element) are satisfied. The provisions of SOP 98-9 that extend
the deferral of certain passages of SOP 97-2 became effective December 15, 1998.
The Company is evaluating the future requirements of SOP 98-9 and the effects,
if any, on the Company's current revenue recognition policies.
Total revenues decreased 27% from 1997 to 1998 and increased 102% from
1996 to 1997. The decrease from 1997 to 1998 was primarily attributable to a
decrease in software products revenue, along with a reduction in services
revenue. The increase from 1996 to 1997 was a result of significant increases in
both software products and services. The gross margins were 25%, 48%, and 38%
for 1998, 1997, and 1996, respectively.
Results for 1998 do not reflect any revenue from an agreement the
Company entered into with Microsoft in August, 1998. Under the agreement, the
Company has agreed to license to Microsoft the source and object codes for
certain software products that enable interoperability between Microsoft's
Message Queue Server running on Microsoft's Windows NT operating systems and
IBM Corporation's MQ Series message software running on a variety of
operating systems. Microsoft accepted the English version of the product in
September and the Japanese version in November. The Company received cash
equal to the $3.7 million total contract value from Microsoft in 1998. Due to
certain limitations with respect to available "vendor specific objective
evidence," all other associated contract revenue has been deferred and will
be recognized beginning in 1999 ratably over the contract's period.
SOFTWARE PRODUCTS. Software products revenue decreased 64% in 1998 in
comparison to 1997 and increased 193% from 1996 to 1997. The gross margins on
software products was (33%), 41%, and 4% for the 1998, 1997, and 1996 fiscal
periods, respectively. Cost of software is composed of production and
distribution costs, amortization of capitalized software and royalties to third
parties.
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The decrease in software revenue from 1997 to 1998 is the result of
the Company's shift in strategic direction primarily relating to the
Company's dispositions and acquisitions in 1998, as well as reduced emphasis
on resales of IBM's MQ Series licenses in favor of the Company's FalconMQ
Products developed by the Company. The decrease in gross margins between 1997
and 1998 is the effect of increased amortization costs, lower software
product revenues, $.38 million of royalties to Liraz under the joint
development agreement described under "-Research and Development." and a
write-off of approximately $.3 million of capitalized technology costs.
Software revenue increased from 1996 to 1997 from sales of products
introduced in 1997 and the resale of IBM's MQ Series. The increase in gross
margins is primarily a result of the increased software revenue, somewhat offset
by increased amortization expense related to products becoming generally
available in 1997.
SERVICES. Services revenue decreased by 10% from 1997 to 1998 and
increased by 84% from 1996 to 1997. Services gross margins were 35%, 51%, and
45% for 1998, 1997, and 1996 respectively. Cost of services primarily includes
personnel and travel costs related to the delivery of services.
The services revenue decline from 1997 to 1998 was primarily
attributable to the decline in software products revenue and the resultant
decline in utilization of billable services. The decline in software
products revenue impacts services revenue as there are fewer new customers
than in the prior year, reducing the base of the customers utilizing the
Company's consulting and training services as part of an overall technology
solution purchase. Gross margins decreased in 1998 in relation to 1997 due to
lower than normal billable utilization of consultants caused by project
delays.
The significant increase in services revenues increase from 1996 to 1997
was a result of the addition of a combination of new consulting and training
services and increases in maintenance services in correlation with the
introduction of new products that created increased market demand. Gross profits
increased in 1997 due to the Company's ability to obtain higher billing rates
than previously earned and high utilization of staff during this growth period.
RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation personnel. Research and development expense increased 100% from
1997 to 1998 and 99% from 1996 to 1997. The increase in 1998 is partially
attributable to the acquisition of Momentum and the personnel added in this area
of the Company. The trend in increasing research and development expenses is a
result of the Company's investment in new products, primarily Geneva Integration
Server, which is scheduled to be released in the second quarter of 1999 and
Version 2.0 of FalconMQ which is expected to be released in early 2000. This
trend is expected to continue with the purchase of Seer, the Company's
continuing attempts to strengthen its messaging products and completion of the
transition into the EAI marketplace.
The Company and Liraz previously had an agreement for the joint
development of certain software for a Microsoft contract. Under the
agreement, Liraz and the Company were each to pay 50% of the total project
development costs. In exchange for providing 50% of such costs, Liraz was
previously entitled to receive royalties of 30% of the first $2 million in
contract revenue, 20% of the next $1 million, and 8% thereafter. On April 1,
1998, the agreement was amended to provide that the Company would reimburse
Liraz's costs of development of $1.5 million and would pay Liraz royalties of
3% of program revenues generated from January 1, 1998 until December 31,
2000. The $1.5 million reimbursement is being amortized over the term of the
revised royalty agreement and was paid to Liraz by the delivery of an 8% note
payable in three installments in 1998, 1999 and 2000. Additional royalties of
$.13 million are payable to Liraz for 1998 sales.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling expenses consist of sales
and marketing expenses for personnel, travel, trade show participation, and
other promotional expenses. General and administrative expenses consist of
personnel costs for the executive, legal, financial, human resources, and
administrative staff and all overhead expenses. Overhead expenses primarily
include office rent, depreciation and lease costs on machinery and equipment,
communications expenses, insurance, allowances for bad debts and other expenses
of operating the Company and its facilities.
Selling, general, and administrative expenses increased 51% in 1997 in
comparison to 1996 and 119% in 1998 in relation to 1997. The increases are
primarily related to additional sales and marketing expenses for new products,
the additional general and administrative support necessary following the
purchase of Momentum, and continued efforts to build a supporting infrastructure
for further acquisitions, such as Seer.
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AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets was $1.9 million in 1998 and $.4 million in
each of 1997 and 1996. The amortization of goodwill in 1997 and 1996 was related
to the purchase of Level 8 Technologies. In 1998, the amortization of goodwill
and other intangible assets related to the purchase of Momentum as well as Level
8 Technologies.
OTHER ITEMS. As a result of the acquisitions of Momentum and Seer, the
Company recorded several nonrecurring charges in 1998. Based on the results
of third-party appraisals, the Company recorded charges totaling $5.9 million
to expense purchased in-process research and development costs, consisting of
$1.2 million and $4.7 million related to the acquisition of Momentum and
Seer, respectively. In the opinion of management and the appraiser, the
acquired in-process research and development had not yet reached
technological feasibility and had no alternative future uses. The value of
the in-process projects was adjusted to reflect the relative value and
contribution of the acquired research and development. In doing so,
management gave consideration to the stage of completion, the complexity of
the work completed to date, the difficulty of completing the remaining
development costs already incurred, and the projected cost to complete the
projects. The value assigned to purchased in-process technology was based on
key assumptions, including revenue growth rates for each technology
considering, among other things, current and expected industry trends,
acceptance of the technologies and historical growth rates for similar
industry products. As a consequence of the Company's transition to an
enterprise application integration solutions provider, the Company abandoned
certain planned development efforts for products acquired in the Momentum
transaction and reassessed the remaining undiscounted projected cash flows
related to the identifiable and unidentifiable intangible assets acquired
from Momentum. It was concluded that, with the principal exception of the
Momentum technology utilized in the Level 8's Falcon product set and the XIPC
products, the goodwill and intangible acquired in the Momentum transaction
should be written off. Accordingly, during the fourth quarter of 1998, the
Company adjusted the carrying value of its identifiable and unidentifiable
assets to their fair value of $32,217, resulting in a non-cash impairment
loss of $4,601.
During the fourth quarter of 1998, the Company reorganized its
existing operations due to its acquisition of Seer. The restructuring
included a staff reduction of 20% (15 employees), the abandonment of certain
leased facilities, and the write-down to fair value of certain capitalized
software costs for product lines which were being discontinued. The Company
recorded a restructuring charge of approximately $1.5 million, which
consisted of approximately $.7 million in personnel-related charges,
approximately $.3 million in costs associated with carrying vacated space
until the lease expiration date, approximately $.2 million of property and
equipment related charges, approximately $.2 million in write-down of
capitalized software costs, and approximately $.1 million in professional
fees related to the restructuring. To date, the Company has paid
approximately $.1 million in cash related to the restructuring. The Company
believes the accrued restructuring cost of $1.0 million at December 31, 1998
represents its remaining cash obligations.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The effective income tax rate for continuing operations
decreased from 35% for 1997 to (2%) for 1998 primarily because an income tax
benefit was not recorded for the net loss incurred in 1998. The Company provided
a full valuation allowance on the total amount of its deferred tax assets at
December 31, 1998 since management does not believe that it is more likely than
not that these assets will be realized.
DISCONTINUED OPERATIONS. The loss on disposal of ProfitKey was
approximately $1.2 million. The loss on discontinued operations related to
ProfitKey was $.14 million for 1998.
IMPACT OF INFLATION. Inflation has not had a significant effect on the
Company's operating results during the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $.7 million in 1996 to $3.3 million
at year end. During 1996, the Company completed a second public offering of
common stock for net proceeds of $9.1 million. Net cash outflow of $1.1 million
used in operating activities in 1996 was partially funded through the 1996
public offering. The net cash used by operations in 1996 consisted of increases
in operating expenses to support headcount growth, principally for sales and
marketing in new functions and regions. Net cash used in investing activities
was $7.2 million, primarily as a result of a net $4.5 million investment in
marketable securities. The Company also invested $1.5 million in property and
capitalized software costs, and $1.2 million was used by the Company's
discontinued operations.
During 1997, cash and cash equivalents increased $3.7 million to $7.0
million at year end. The increase was due primarily to the Company's investment
activities in marketable securities offset by a $1.7 million
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investment for capitalized software development costs and equipment, and
a $1 million use of cash by the Company's discontinued operations. The Company
funded its operations in 1997 with cash remaining from the 1996 offering.
During 1998, cash and cash equivalents decreased by $1 million to $6
million at year end. The decrease in cash is due to the purchase of $.9 million
in equipment, spending of $1.2 million for capitalized software development
costs, and debt service of $1.5 million. This decrease was offset by $1.7
million of cash provided by operations, $.5 million from the sale of ProfitKey,
and $.4 million of net cash acquired from acquisitions. Additionally, the
Company borrowed $12 million from Liraz which was used to pay down Seer's bank
debt on December 31, 1998.
As of December 31, 1998, the Company did not have any material
commitments for capital expenditures. Future maturities on the Company's
outstanding debt at December 31, 1998 include $13.7 million in 1999, $13.3
million in 2000 and $.7 million in 2001. Of such amounts, $.6 million in 1999
and $12.5 million in 2000 are due to Liraz, the Company's controlling
shareholder.
The Company has agreed to acquire the remaining equity of Seer and
expects to complete the acquisition of the remaining Seer shares in the second
quarter of 1999 for approximately $1.7 million. In connection with the
acquisition of Seer, the Company committed to fund Seer's operations through
January 15, 2000, if necessary.
During the fourth quarter of 1998, the Company issued $3 million in
notes to the sellers of Momentum as additional consideration, as provided for
in the purchase agreement. These notes bear interest at 10% per year
retroactive to the Momentum acquisition date of March 26, 1998, payable in
four equal installments plus interest on December 1, 1998, November 26, 1999,
November 20, 2000, and November 15, 2001. There are no financial covenants in
these notes.
In connection with the acquisition of 69% of Seer on December 31, 1998,
the Company issued a $12 million note payable to Liraz and applied the proceeds
to pay off Seer's bank debt. In connection therewith, the Company and Liraz
agreed that the Company would effect a pro rata offering to its shareholders of
shares of preferred stock intended to have an aggregate liquidation preference
initially equal to the principal and accrued interest under the note and to be
convertible into an aggregate number of common stock determined by dividing the
aggregate liquidation preference (which will accrete at the rate of 12% a year,
compounded quarterly) by the conversion price. The conversion price would be an
amount equal to the greater of $5.00 and two-third of the average closing price
of a share of the Company's common stock during the 20 trading days ending on
the fifth trading day before the rights offering. Each share of preferred stock
would be entitled to two votes for each share of common stock into which it is
convertible. The preferred stock would be redeemable at the Company's option at
any time after June 30, 2000, upon at least 30 days' notice, at a redemption
price equal to the preferred stock's accreted liquidation preference. The
purchase price for each share of preferred stock to be offered to the Company's
shareholders would equal its initial liquidation preference. Liraz would be
permitted to pay the purchase price for any preferred stock it purchases in the
offering with cash or by reducing the amount payable to it under the $12 million
note. If the rights offering is consummated before June 30, 1999, the Company is
required to use the net proceeds of the rights offering to prepay the unpaid
balance under the $12 million note. In the context of reviewing other financing
alternatives, the Company and Liraz are currently reevaluating the proposed
rights offering and may determine not to proceed with the rights offering.
As of December 31, 1998, Seer had outstanding borrowings of $12.3 million
under its credit facility with a commercial bank (the "Credit Facility") at an
interest rate of 7.75%. Subsequent to December 31, 1998, the Credit Facility was
amended to include the Company as a borrower. As amended, the Credit Facility
provides for borrowings up to the lesser of $25 million or the sum of (i)
eligible receivables, (ii) a $7 million term loan payable in monthly
installments over two years, commencing on January 1, 2000, and (iii) a $2.5
million equipment loan payable over two and one-half years, commencing on April
1, 1999. There are no other financial covenants. The Credit Facility will bear
interest at Prime Rate through June 30, 1999, Prime Rate plus 1% per annum
through June 30, 2000, and Prime Rate plus 2% per annum thereafter. The Credit
Facility as amended is due on demand and terminates on December 31, 1999;
however, it is automatically renewed for successive additional terms of one year
each, unless terminated by either party. The Credit Facility is collateralized
by the Company's accounts receivable, equipment and intangibles, including
intellectual property. The $12 million note and other debt payable to Liraz is
subordinate in right of payment to the Credit Facility.
In early 1999, management began both to effect the various restructuring
actions discussed previously and to implement other cost control and cost
reduction efforts. Management's planned actions also include the sale of
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certain technologies that are not closely related to the Company's current
strategic direction and positioning the Company for the proposed rights offering
or an alternative financing transaction.
The Company incurred a net loss of $26.2 million and has negative
working capital of $20.3 million and an accumulated deficit of $26.4 million
at December 31, 1998. Additionally, Seer, in which the Company acquired a 69%
interest on December 31, 1998, reported a loss of $62.4 million for its most
recent fiscal year. The Company's ability to generate positive cash flow is
dependent upon the Company achieving and sustaining certain cost reductions
and generating sufficient revenues for the year. The Company already
implemented certain steps to, among other things, reduce headcount,
restructure operations and eliminate various costs from the business. As
discussed above, the Company has also renegotiated the Credit Facility to
increase borrowing capacity. Liraz has committed to provide the Company up to
$7.5 million of working capital on an as needed basis, upon thirty days
notice. Advances, if any, made under the commitment would become due and
payable upon the earlier of March 31, 2000 or the successful completion of an
equity financing which provides more than $7.5 million in proceeds to the
Company. The advancement of funds under the commitment is subject to the
Company's acceptance of certain terms including possible conversion of the
outstanding balance, if any, to common stock of the Company and the execution
of appropriate documentation. Management's plans also include the possibility
of raising additional equity financing. The Company believes that existing
cash on hand, cash provided by future operations and additional borrowings
under the Credit Facility and Liraz commitment will be sufficient to finance
its operations and expected working capital and capital expenditure
requirements for at least the next twelve months so long as the Company
continues to perform to its operating plan. However, there can be no
assurance that the Company will be able to continue to meet its cash
requirements through operations or, if needed, obtain additional financing on
acceptable terms, and the failure to do so may have an adverse impact on the
Company's business and operations.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000 Problem" is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
SOFTWARE SOLD TO CONSUMERS. The Company believes that it has
substantially identified potential Year 2000 Problems with the software products
that it develops and markets. See "Item 1. Business - Products and Services,"
for a further discussion of the Company's products. The Company's Seer*HPS
toolset products are designed to allow developers to develop applications that
are Year 2000 compliant, through the use of four-digit year fields which can
accept and accurately represent dates both before and after the Year 2000. Once
a four-digit year is properly input, applications built with the Seer*HPS
toolset can properly process the dates.
Dates may be input into these applications either by entering a
four-digit year or, as a shortcut, by entering the last two digits of the year.
In the latter case, the application assigns a century to the date and "feeds
back" a four-digit year to the user by displaying it on the screen. For all
versions of Seer*HPS above 5.2.3K, the century is assigned according to a moving
100-year window. The Company has made available documentation to its customers
that explains how this moving 100-year window can be adjusted, both on the
workstation platform and on the host. For version 5.2.3K, the century is
assigned a default value of "19". In either case, the user can either accept the
proposed four-digit date or correct it, if the application has assigned the
wrong century in a particular case.
The foregoing description related to Seer*HPS versions 5.2.4S and higher
(for the workstation) and 5.2.3K and higher (for the host), which were released
in December 1995. The Company believes that if operated properly, applications
constructed with these versions in accordance with the product documentation
should not manifest Year 2000-related errors traceable to the Seer*HPS product.
The Company does not believe any of its customers are using earlier versions of
the software.
The Company cannot, however, eliminate the possibility of input errors,
where input is in the form of two-digit years. Among other potential errors, it
is possible to introduce incorrect dates into applications using the shortcut
mentioned above if the operator is inattentive to the feedback, or if the
operator or batch data inputs dates represented as two-digit years, without any
way for the operator to determine which century a given year falls in. The
Company has attempted to identify the possible errors by making documentation
available to its customers.
With respect to the Company's Seer*HPS development environment itself,
the Company is not aware of any Year 2000 issues except the following. The tools
store certain information with respect to objects created using the tools (such
as the dates the object was created or last modified) as two-digit dates.
Because of the way the tools use these dates, the Company does not believe this
will cause any Year 2000-related problems except in the limited instance of
migrations spanning the century boundary. The Company has made available to its
customers documentation calling their attention to this issue and a workaround.
Accordingly, the Company believes that it has fulfilled its obligations
to its customers with respect to Year 2000 functionality. However, the law in
this area is still evolving and lawsuits are being filed against software
companies on an ongoing basis, many of them asserting novel theories of damage
and liability. Accordingly, no assurance can be given that claims will not be
made against the Company relating to date-processing issues or that the effect
of such claims on the Company will not be material.
INTERNAL INFRASTRUCTURE. The Company is currently identifying
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business and has commenced the process of modifying, upgrading, and
replacing major systems that have been identified as adversely affected, and
expects to complete this process by the middle of 1999.
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SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 Problem.
The Company is currently assessing the potential effect of, and costs of
remediating, the Year 2000 Problem on its office and facilities equipment.
The Company's assessment of its internal systems is approximately 80%
complete. Based on its current assessment, the Company does not believe the
total cost to the Company of completing any required modifications, upgrades, or
replacements of these internal systems will have a material adverse effect on
the Company's financial condition, cash flows, or results of operations.
SUPPLIERS. The Company has reviewed information from third party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 Problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, there can be no
assurance that these suppliers will resolve any or all Year 2000 Problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers. Any failure of these third parties to
resolve Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company does not
believe that the Year 2000 Problem will have a material adverse effect on the
Company's business or results of operations. However, management believes that
it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, one cannot accurately predict how many Year
2000 Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could suffer the following consequences:
1. a significant number of operational inconveniences and
inefficiencies for the Company and its clients that may divert
management's time and attention and financial and human resources from
its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its clients to prevent or alleviate
material business disruptions.
CONTINGENCY PLANS. The Company is currently developing contingency plans
to be implemented as part of its efforts to identify and correct Year 2000
Problems affecting its internal systems. The Company expects to complete its
contingency plans by the middle of 1999. Depending on the systems affected,
these plans could include accelerated replacement of affected equipment or
software, short to medium-term use of backup equipment and software, increased
work hours for Company personnel or use of contract personnel to correct on an
accelerated schedule any Year 2000 Problems that arise or to provide manual
workarounds for information systems, and similar approaches. If the Company is
required to implement any of these contingency plans, it could have a material
adverse effect on the Company's financial condition and results of operations.
DISCLAIMER. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
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EURO CONVERSION
Several European countries will adopt a Single European Currency (the
"Euro") as of January 1, 1999 with a transition period continuing through
January 1, 2002. The Company is reviewing the anticipated impact the Euro may
have on its internal systems and on its competitive environment. The Company
believes its internal systems will be Euro capable without material modification
cost. Further, the Company does not presently expect the introduction of the
Euro currency to have an adverse material impact on the Company's financial
condition, cash flows, or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Prior to the acquisition of Seer, the Company was not exposed to
significant risks of foreign currency fluctuation. Following the acquisition of
Seer, the Company's US-based operations now have significant receivables
denominated in foreign currency and are subject to transactions gains and
losses, which are recorded as a component in determining net income.
Additionally, the assets and liabilities of the Company's non-U. S. operations
are translated into U.S. dollars at exchange rates in effect as of the
applicable balance sheet dates, and revenue and expense accounts of these
operations are translated at average exchange rates during the month the
transactions occur. Unrealized translation gains and losses will be included as
an adjustment to shareholders' equity. Based upon the foregoing, the Company
intends to begin hedging transactions in an effort to reduce its exposure to
currency exchange rates. However, as a matter of procedure, the Company will not
invest in speculative financial instruments as a means of hedging against such
risk
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item appears beginning on page F-1 of
this report. See Items 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On January 21, 1999, the Company engaged PricewaterhouseCoopers LLP to
replace Grant Thornton LLP as its independent auditors. For further information
regarding this change, reference is made to the Company's Forms 8-K filed with
the Securities and Exchange Commission (the "Commission") on December 22, 1998
and January 21, 1999 and the Form 8-K/A filed with the Commission on January 11,
1999. Reference is also made to the Letter to the Commission from Grant Thornton
LLP dated January 11, 1999 and filed as Exhibit 99.2 to the Form 8-K/A on
January 11, 1999. On January 28, 1998, the Company engaged Grant Thornton LLP to
replace Lurie, Besikof, Lapidus & Co., LLP. For further information regarding
this change, reference is made to the Company's Forms 8-K filed with the
Securities and Exchange Commission on January 30, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to
information to be included under the captions "Election of Directors,"
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
information to be included under the captions "Election of Directors - Director
Compensation" and "- Compensation Committee Interlocks and Insider
Participation," "Executive Compensation," "Compensation Committee Report on
Executive Compensation" and "Stock Performance Graph" in the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
information to be included under the caption "Beneficial Ownership of Common
Stock" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
information to be included under the caption, "Certain Relationships and Related
Party Transactions" and "Election of Directors - Compensation Committee
Interlocks and Insider Participation" in the Company's Proxy Statement for the
1999 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements:
The following financial statements of the Company and the
related report of independent accountants thereon are set
forth immediately following the Index of Financial
Statements which appears on page F-1 of this report:
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and
1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
3. (a) Exhibits: The following exhibits are filed as part
of this Report. Parenthetical references indicate
incorporation by reference to documents previously
filed by the Company with the Securities and
Exchange Commission.
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2.1 Agreement dated November 23, 1998 among the Company
and Welsh, Carson, Anderson & Stowe VI L.P. ("WCAS")
and related parties (the "WCAS Parties") named
therein relating to the acquisition of capital stock
of Seer Technologies, Inc. by the Company (filed as
exhibit 2.1 to the Seer Technologies, Inc. Form 10-K
for the fiscal year ended September 30, 1998, No.
0-26194, and incorporated herein by reference.)
2.2 Amendment No. 1 to the Agreement dated
November 23, 1998 among the Company and WCAS
and the WCAS Parties relating to the
acquisition of capital stock of Seer (filed
as Exhibit (c)(2) to the Company' s Schedule
13e-3 filed on March 29, 1999 and
incorporated herein by reference).
3.1 Restated Certificate of Incorporation of the
Company (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 the Company (filed as exhibit 3.2
to Registration Statement No. 33-92230 on
Form S-1 and incorporated herein by
reference).
4.1 Form of Warrant(s) representing the 250,000
Level 8 warrants issued to the WCAS Parties
(filed as exhibit 8.2(A) to Seer's Annual
Report on Form 10-K for the year ended
September 30, 1998, No. 0-26194, and
incorporated herein by reference).
10.1 The Company'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 Amended and Restated Employment Agreement,
effective November 8, 1996, between Level 8
Technologies, Inc. ("Level 8 Technologies")
and Samuel Somech (filed as exhibit 10.12 to
Registration Statement No. 33-92230 on Form
S-1/A and incorporated herein by reference).*
10.2A Amendment dated February 26, 1999 to the
Employment Agreement between the Company and
Samuel Somech dated November 8, 1996 (filed
herewith).*
10.3 Consulting Agreement, effective April 1,
1995, between the Company and Theodore Fine
(filed as exhibit 10.13 to Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).*
10.4 Form of Amendment, dated June, 1995, among
the Company, Registrant and Theodore Fine
(filed as exhibit 10.13A to Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).*
10.5 Employment Agreement, dated May 1, 1995,
between the Company and Arie Kilman (filed as
exhibit 10.14 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein
by reference).
10.5A Amendment to Employment Agreement, dated as
of September 18, 1996 between the Company and
Arie Kilman (filed as exhibit 10.14A to
Registration Statement No. 33-9230 on Form
S-1 and incorporated herein by reference).*
10.5B Amendment to Employment Agreement, dated
December 16, 1996, between the Company and
Arie Kilman (filed as exhibit 10.14B to
Registration Statement No. 33-92230 on Form
S-1/A and incorporated herein by reference).*
10.6 Employment Agreement between the Company and
Joseph Schwartz dated June 1, 1998 (filed
herewith).*
10.6A Employment Agreement between the Company and
Gonen Ziv dated
-25-
<PAGE>
April 2, 1998 (filed herewith).*
10.7 Agreement, dated June 13, 1995, between the
Company and Liraz (filed as exhibit 10.23 to
Registration Statement No. 33-92230 on Form
S-1 and incorporated herein by reference).
10.8 Registration Rights Agreement, dated June 13,
1995, between the Company and Liraz (filed as
exhibit 10.24 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein
by reference).
10.9 Form of Warrant Agreement, between the
Company 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).
10.10 Form of Loan Agreement, dated June, 1995,
between the Company 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).
10.11 Form of Loan Agreement, dated June, 1995,
between the Company 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).
10.12 Development Agreement dated July 17, 1995
between Microsoft Corporation and the Company
(filed as exhibit 10.38 to Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.13 Letter Agreement dated June 1, 1995 from Visa
International Service Association to the
Company (filed as exhibit 10.39 to
Registration Statement No. 33-92230 on Form
S-1 and incorporated herein by reference).
10.14 Development Agreement dated December 19, 1995
between Liraz and the Company (filed as
exhibit 10.38 to Registration Statement No.
33-92230 on Form S-1 and incorporated herein
by reference).
10.14A Amendment No. 1 to the Development Agreement
dated December 15, 1995 between Liraz and the
Company (filed herewith).
10.15 Agreement and Plan of Reorganization by and
among the Company, 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 to the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by
reference).
10.16 Form of Employee's Non Competition,
Confidentiality and Invention Assignment
Agreement (filed as exhibit 10.6 to Seer's
Registration Statement No. 33-92050 on Form
S-1 and incorporated herein by reference).
10.17 Form of Consultant's Non Competition,
Confidentiality and Invention Assignment
(filed as exhibit 10-7 to Seer's Registration
Statement No. 33-92050 on Form S-1 and
incorporated herein by reference).
10.18 Lease Agreement, dated December 25, 1992,
between Seer Technologies, Inc. and Capital &
Counties (London, England) (filed as exhibit
10.22 to Seer' Registration Statement No.
33-92050 on Form S-1 and incorporated herein
by reference).
10.19 Employment Agreement between Steven
Dmiszewicki and the
-26-
<PAGE>
Company dated December 4, 1998 (filed
herewith)*
10.20 Credit Agreement between Seer and Greyrock
Business Credit, dated March 26, 1997 (filed
as exhibit 10.46 to Seer's Quarterly Report
on Form 10-Q for the period ended March 31,
1997, No. 0-26194, and incorporated herein by
reference), as amended by the Amendment
thereto dated May 5, 1998 (filed as exhibit
10.53 and incorporated herein by reference).
10.21 Lease Amendment for Seer's Cary Office, dated
March 31, 1997, between Seer and Regency Park
Corporation (Cary, NC) (filed as exhibit
10.47 to Seer's Quarterly Report on Form 10-Q
for the period ended March 31, 1997, No.
0-26194, and incorporated herein by
reference), as amended by Addendum #1 thereto
added July 6, 1998 (filed as exhibit 10.58
and incorporated herein by reference).
10.21A Lease Amendment for Seer's Cary Office, dated
January 21, 1999, between Seer and Regency
Park Corporation (Cary, NC) (filed herewith).
10.22 Amendment to Credit Agreement between Seer
and Greyrock Business Credit, dated May 5,
1998 (filed as exhibit 10.53 to Seer's
Quarterly Report on Form 10-Q for the period
ended March 31, 1998, No. 0-26194, and
incorporated herein by reference; original
agreement is exhibit 10.46 to Seer's
Quarterly Report on Form 10-Q for the period
ended March 31, 1997, No. 0-26194, and
incorporated herein by reference).
10.23 Addendum #1 to the Lease Agreement between
Seer and Regency Park Corporation (Cary, NC),
dated July 6, 1998 (filed as exhibit 10.58 to
Seer's Quarterly Report on Form 10-Q for the
period ended June 30, 1998, No. 0-26194, and
incorporated herein by reference; original
agreement is exhibit 10.47 to Seer's
Quarterly Report on Form 10-Q for the period
ended March 31, 1997, No. 0-26194, and
incorporated herein by reference).
10.24 Amendment dated December 31, 1998 between
Greyrock Capital, a division of NationsCredit
Corporation (formerly Greyrock Business
Credit) and Seer to the Loan and Security
Agreement between Greyrock Business Credit
and Seer dated March 26, 1997, as amended
(filed as exhibit 10.60 to Seer's Annual
Report on Form 10-K for the year ended
September 30, 1998, No. 0-26194, and
incorporated herein by reference).
10.25 Level 8 Guaranty Agreement dated December 31,
1998 (filed as exhibit 10.1 to the Company's
Form 8-K filed as of January 15, 1999, No.
0-26392, and incorporated herein by
reference).
10.26 Level 8 Promissory Note dated December 31,
1998, in favor of Liraz Systems Ltd. in the
principal amount of $12,000,000 (filed as
exhibit 10.2 to the Company's Form 8-K filed
as of January 15, 1999, No. 0-26392, and
incorporated herein by reference).
10.27 Seer Promissory Note dated December 31, 1998,
in favor of Level 8 in the principal amount
of $12,000,000 (filed as exhibit 10.3 to the
Company's Form 8-K filed as of January 15,
1999, No. 0-26392, and incorporated herein by
reference).
10.28 Liraz Agreement dated December 31, 1998
(filed as exhibit 10.4 to the Company's Form
8-K filed as of January 15, 1999, No.
0-26392, and incorporated herein by
reference).
10.29 Amended and Restated Loan and Security
Agreement among Seer, the Company and
Greyrock Capital, a division of NationsCredit
Commercial Corporation, dated March 30, 1999
(filed herewith).
-27-
<PAGE>
11.1 Statement Regarding Computation of Per Share
Earnings (filed herewith).
16.1 Letter from Lurie, Besikof, Lapidus and Co.,
LLP regarding change in certifying accountant
(filed as exhibit 1 to the Company's Form 8-K
filed as of January 28, 1998, No. 0-26392,
and incorporated herein by reference).
16.2 Letter from Grant Thornton LLP regarding
change in certifying accountant, dated
December 22, 1998 (filed as exhibit 16 to the
Company's Form 8-K filed as of December 22,
1998, No. 0-26392, and incorporated herein by
reference).
16.3 Letter from Grant Thornton LLP regarding
change in certifying accountant, dated
January 11, 1999 (filed as exhibit 99.2 to
the Company's Form 8-K/A filed as of January
11, 1999, No. 0-26392, and incorporated
herein by reference).
21.1 List of subsidiaries of the Company (filed
herewith).
23.1 Consent of PricewaterhouseCoopers LLP (filed
herewith).
27.1 Financial Data Schedule for Company (filed
herewith).
* Management contract or compensatory agreement.
(b) Reports on Form 8-K
On October 13, 1998, the Company filed a Form 8-K to announce that the
Company had entered into a license agreement with Microsoft Corporation. On
December 22, 1998, the Company filed a Form 8-K, and on January 11, 1999, the
Company filed a Form 8-K/A, to record the dismissal of its independent auditors,
Grant Thornton LLP. On January 15, 1999, the Company filed a Form 8-K to
announce the acquisition of 69% of the outstanding and issuable common stock of
Seer Technologies, Inc., and on January 21, 1999, the Company filed a Form 8-K
to announce the engagement of PricewaterhouseCoopers LLP as its independent
auditors.
-28-
<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
Chairman of the Board and Chief Executive Officer
Date: March 31, 1999
--------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Date: March 31, 1999 /S/ ARIE KILMAN
------------------ -------------------------------------------------
Arie Kilman
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1999 /S/ STEVEN DMISZEWICKI
------------------ -------------------------------------------------
Chief Operating Officer (Principal Financial and
Accounting Officer)
Date: March 31, 1999 /S/ SAMUEL SOMECH
------------------ -------------------------------------------------
Samuel Somech
President and Director
Date: March 31, 1999 /S/ ROBERT M. BRILL
------------------ -------------------------------------------------
Robert M. Brill
Director
Date: March 31, 1999 /S/ MICHEL BERTY
------------------ -------------------------------------------------
Michel Berty
Director
Date: March 31, 1999 /S/ THEODORE FINE
------------------ -------------------------------------------------
Theodore Fine
Director
Date: March 31, 1999 /S/ LENNY RECANATI
------------------ -------------------------------------------------
Lenny Recanati
Director
Date: March 31, 1999 /S/ FRANK J. KLEIN
------------------ -------------------------------------------------
Frank J. Klein
Director
</TABLE>
-29-
<PAGE>
LEVEL 8 SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Reports of Independent Accountants...................................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................. F-5
Consolidated Statements of Operations................................... F-6
Consolidated Statements of Changes in Shareholders' Equity.............. F-7
Consolidated Statements of Cash Flows................................... F-8
Notes to Consolidated Financial Statements.............................. F-10
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
-----------------
To the Shareholders of Level 8 Systems, Inc.
In our opinion, the accompanying consolidated balance sheet as of
December 31, 1998 and the related consolidated statements of operations,
changes in shareholders' equity and cash flows present fairly, in all
material respects, the financial position of Level 8 Systems, Inc. (the
"Company") and its subsidiaries at December 31, 1998 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. The
financial statements of the Company as of December 31, 1997 and for the year
then ended and for the year ended December 31, 1996 were each audited by
other independent accountants whose reports, dated February 23, 1998 and
January 31, 1997, respectively, expressed unqualified opinions on those
statements.
As explained in Note 14, the Company has entered into certain agreements with
its primary shareholder, Liraz Systems, Ltd.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
March 31, 1999
F-2
<PAGE>
Report of Independent 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.
/s/ Grant Thornton LLP
New York, New York
February 23, 1998 (except for Note 2, as to which the date is February 27, 1998
and Note 3, as to which the date is April 6, 1998)
F-3
<PAGE>
Independent Auditor's Report
-----------------
Shareholders and Board of Directors
Level 8 Systems, Inc.
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity, and cash flows of Level 8 Systems, Inc. for the year
ended December 31, 1996. 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
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of their operations and their
cash flows of Level 8 Systems, Inc. for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Lurie, Besikof, Lapidus & Co., LLP
Minneapolis, Minnesota
January 31, 1997, (except for Note 3, as to which the date is April 6, 1998)
F-4
<PAGE>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,078 $ 7,062
Trade accounts receivable, less allowance for doubtful accounts 16,992 6,455
Note receivable for sale of subsidiary 2,000 --
Due from related party 271 --
Income taxes receivable -- 406
Inventory -- 336
Prepaid expenses and other current assets 2,606 421
Net assets from discontinued operations -- 3,577
-------- --------
Total current assets 27,947 18,257
Property and equipment, net 2,682 974
Goodwill and other intangibles, net 32,217 1,793
Capitalized software costs, net 6,753 2,168
Other assets 1,171 290
-------- --------
Total assets $ 70,770 $ 23,482
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable, due on demand $ 12,275 $ --
Current maturities of loan from related party 628 128
Current maturities of long-term debt 799 7
Accounts payable 3,691 1,936
Accrued expenses:
Compensation 318 82
Commissions 1,021 17
Restructuring 973 --
Merger - related 4,803 --
Other 8,275 125
Due to related party 82 --
Customer deposits and deferred revenue 13,075 42
Deferred taxes -- 94
Income taxes payable 1,781 --
-------- --------
Total current liabilities 47,721 2,431
Deferred revenue 97 --
Long-term debt, net of current maturities 1,541 16
Loan from related party, net of current maturities 12,519 202
Deferred income taxes -- 462
-------- --------
Total liabilities 61,878 3,111
-------- --------
Commitments and contingencies (Notes 16 and 17)
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
no shares issued or outstanding at December 31, 1998 and 1997 -- --
Common stock, $0.01 par value, 15,000,000 shares authorized;
8,708,231 and 7,044,634 shares issued and outstanding at
December 31, 1998 and 1997, respectively 87 70
Additional paid-in-capital 34,045 20,603
Accumulated deficit (25,240) (184)
Accumulated other comprehensive income -- (118)
-------- --------
Total shareholders' equity 8,892 20,371
-------- --------
Total liabilities and shareholders' equity $ 70,770 $ 23,482
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating revenue:
Software products $ 1,552 $ 4,354 $ 1,485
Services 9,133 10,171 5,521
Other -- 155 266
-------- -------- --------
Total operating revenue 10,685 14,680 7,272
Cost of revenue:
Software products 2,060 2,554 1,422
Services 5,973 4,995 3,056
Other -- 40 39
-------- -------- --------
Total cost of revenue 8,033 7,589 4,517
Gross profit 2,652 7,091 2,755
Operating expenses:
Research and product development 2,111 1,057 531
Selling, general and administrative 9,777 4,473 2,966
Amortization of goodwill and other intangibles 1,933 422 422
Purchased in-process research and development 5,892 -- --
Write-off of goodwill and other intangibles 4,601 -- --
Restructuring charge 1,540 -- --
-------- -------- --------
Total operating expenses 25,854 5,952 3,919
-------- -------- --------
Income (loss) from operations (23,202) 1,139 (1,164)
Other income (expense):
Interest income 283 410 170
Gain on sale of ASU -- 60 --
Interest expense (364) (20) (25)
-------- -------- --------
Other income (expense), net (81) 450 145
-------- -------- --------
Income (loss) from continuing operations before provision
for income taxes (23,283) 1,589 (1,019)
Income tax provision (benefit) 405 553 (174)
-------- -------- --------
Income (loss) from continuing operations (23,688) 1,036 (845)
Income (loss) from discontinued operations, net of tax (135) 53 (40)
Gain (loss) on disposal of discontinued operations, net of tax (1,233) -- (1,484)
-------- -------- --------
Net income (loss) $(25,056) $ 1,089 $ (2,369)
-------- -------- --------
-------- -------- --------
Income (loss) per share from continuing operations - basic $ (3.14) $ 0.15 $ (0.14)
Income (loss) per share from discontinued operations - basic $ (0.18) $ 0.01 $ (0.25)
-------- -------- --------
Total income (loss) per common share - basic $ (3.32) $ 0.16 $ (0.39)
-------- -------- --------
-------- -------- --------
Income (loss) per share from continuing operations - diluted $ (3.14) $ 0.13 $ (0.14)
Income (loss) per share from discontinued operations - diluted $ (0.18) $ 0.01 $ (0.25)
-------- -------- --------
Total income (loss) per common share - diluted $ (3.32) $ 0.14 $ (0.39)
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding - basic 7,552 6,992 6,076
Weighted average common shares outstanding - diluted 7,552 7,561 6,076
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance as of 12/31/95 5,922 $ 59 $ 10,371 $ 1,096
Common Stock
Private investor 247 2 2,607
Public offering 705 7 6,470
Stock option exercises 81 1 58
Cumulative translation adjustment
Adjustment of unearned compensation
Net loss (2,369)
----- -------- -------- --------
Balance as of 12/31/96 6,955 69 19,506 (1,273)
Stock option and warrant exercises 90 1 507
Additional public offering costs (137)
Net income 464
Unearned compensation related to
issuance of non-employee stock options 263
Adjustment of unearned compensation
Net income 1,089
----- -------- -------- --------
Balance as of 12/31/97 7,045 70 20,603 (184)
Shares issued for Momentum 595 6 6,480
Shares issued for Seer 1,000 10 6,088
Warrants issued for Momentum 654
Warrants issued for Seer 280
Stock option and warrant exercises 68 1 58
Adjustment of unearned compensation (118)
Net loss (25,056)
----- -------- -------- --------
Balance as of 12/31/98 8,708 $ 87 $ 34,045 $(25,240)
----- -------- -------- --------
----- -------- -------- --------
</TABLE>
<TABLE>
Accumulated
Other
Comprehensive
Income Total
------------ --------
<S> <C> <C>
Balance as of 12/31/95 $ (28) $ 11,498
Common Stock
Private investor 2,609
Public offering 6,477
Stock option exercises 59
Cumulative translation adjustment (5) (5)
Adjustment of unearned compensation 30 30
Net loss (2,369)
-------- --------
Balance as of 12/31/96 (3) 18,299
Stock option and warrant exercises 508
Additional public offering costs (137)
Net income 464
Unearned compensation related to
issuance of non-employee stock options (263) --
Adjustment of unearned compensation 148 148
Net income 1,089
-------- --------
Balance as of 12/31/97 (118) 20,371
Shares issued for Momentum 6,486
Shares issued for Seer 6,098
Warrants issued for Momentum 654
Warrants issued for Seer 280
Stock option and warrant exercises 59
Adjustment of unearned compensation 118 --
Net loss (25,056)
-------- --------
Balance as of 12/31/98 $ -- $ 8,892
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
<PAGE>
LEVEL 8 SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(25,056) $ 1,089 $ (2,369)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities, net of assets
and liabilities acquired:
(Income) loss from discontinued operations 135 (53) 40
(Gain) loss on sale of businesses 1,233 (60) 1,484
Depreciation and amortization 3,175 788 458
Deferred income taxes (129) 281 90
Provision for uncollectible accounts 838 332 165
Loss on disposal of property 407 -- --
Purchased in-process research and development 5,892 -- --
Write-off of goodwill and other intangibles 4,601 -- --
Write-down of capitalized software costs 723 -- --
Other -- 120 --
Changes in assets and liabilities:
Trade accounts receivable 3,255 (4,376) (1,969)
Prepaid expenses and other assets (755) (156) (616)
Net assets of discontinued operations -- 507 726
Accounts payable, accrued expenses,
and income taxes payable 2,450 969 930
Customer deposits and deferred revenue 4,888 42 --
-------- -------- --------
Net cash provided by (used in) operating 1,657 (517) (1,061)
activities
Cash flows from investing activities:
Cash received from acquisitions 916 -- --
Cash expenditures for acquisitions (484) -- --
Proceeds from sales of subsidiaries 464 65 157
Change in net assets of discontinued operations -- (888) (1,191)
Purchase of marketable securities -- (1,998) (6,525)
Redemption of marketable securities -- 8,523 2,045
Employee advances (repayments) -- -- (102)
Purchases of property and equipment (941) (516) (413)
Capitalization of software development costs (1,177) (1,156) (1,182)
-------- -------- --------
Net cash provided by (used in) investing (1,222) 4,030 (7,211)
activities
Cash flows from financing activities:
Issuance of common shares 59 507 10,529
Costs of issuance of common shares -- (137) (1,383)
Change in net assets of discontinued operations -- (7) (39)
Payments under capital lease obligations (45) -- --
Borrowings from related party 12,000 -- --
Payments on loans to related party (683) (123) (118)
Paydown of line of credit (12,000) -- --
Payment on other long-term debt (750) (9) (10)
-------- -------- --------
Net cash provided by (used in) financing activities (1,419) 231 8,979
Net increase (decrease) in cash and cash equivalents (984) 3,744 707
Cash and cash equivalents:
Beginning of period 7,062 3,318 2,611
-------- -------- --------
End of period $ 6,078 $ 7,062 $ 3,318
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ -- $ 11 $ 92
-------- -------- --------
-------- -------- --------
Interest $ 293 $ 20 $ 25
-------- -------- --------
-------- -------- --------
Noncash Investing and Financing Activities
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
(continued)
(in thousands, except share and per share data)
During 1998, the Company acquired all of the common stock of Momentum Software
Corporation ("Momentum") for approximately $10,717. In connection with the
acquisition, the Company issued 594,866 shares of common stock, warrants to
purchase an additional 200,000 shares of common stock, and a $3,000 note. See
Note 2.
A reconciliation of the cost of the acquisition to the net cash received from
the acquisition is as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of :
Assets received $ 11,703
Liabilities assumed (986)
Additional direct costs (503)
Stock issued (6,485)
Warrants issued (654)
Note payable issued (3,000)
--------
Cash paid 75
Cash acquired 437
--------
Net cash received
from acquisition $ 362
--------
--------
</TABLE>
During 1998, the Company acquired 69% of the voting stock of Seer Technologies,
Inc. ("Seer") for approximately $7,754. In connection with the acquisition, the
Company issued 1,000,000 shares of common stock and warrants to purchase an
additional 250,000 shares of common stock. See Note 2.
A reconciliation of the cost of the acquisition to the net cash received from
the acquisition is as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of :
Assets received $ 55,081
Liabilities assumed (47,327)
Additional direct costs (966)
Stock issued (6,099)
Warrants issued (280)
--------
Cash paid 409
Cash acquired 479
--------
Net cash received
from acquisition $ 70
--------
--------
</TABLE>
During 1998, the Company renegotiated a royalty arrangement with its majority
shareholder. The arrangement was financed through a $1,500 note. See Note 14.
During 1998, the Company sold its subsidiary ProfitKey International, Inc. in
exchange for $464 in cash at closing and a $2,000 note receivable. See Note 3.
During 1997, the Company acquired certain computer equipment through the
issuance of capital leases totaling $60.
During 1997, the Company recognized deferred unearned compensation expense
related to the issuance of nonemployee stock options totaling $25.
During 1997, the Company sold its ASU consulting division for $65, resulting
in a gain of $60. See note 3.
During 1996, the Company sold its subsidiary Bizware in exchange for $120 in
cash at closing and a $110 note receivable. See Note 3.
The accompanying notes are an integral part of the consolidated
financial statements.
F-9
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
NOTE 1. SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT
ACCOUNTING PRONOUNCEMENTS OPERATIONS
Level 8 Systems, Inc. ("Level 8" or the "Company") is a premier provider of
scaleable enterprise application integration solutions through a combination of
technologies and services that enable organizations to meet their information
systems integration and management needs.
Liraz Systems, Ltd. and its wholly-owned subsidiaries own approximately 57% of
Level 8's outstanding common stock at December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. See Notes 2 and 3 regarding the acquisitions and
sales of subsidiaries. All of the Company's subsidiaries are wholly-owned except
for Seer Technologies, Inc. ("Seer"). The Company acquired a 69% interest in
Seer on December 31, 1998. Seer had net liabilities of $24,535 at the
acquisition date. The shareholders of the remaining 31% of the outstanding
voting stock were deemed to have shared in the losses of Seer only for their
proportionate share of Seer's net assets. Accordingly, there is no minority
interest for the Seer subsidiary reflected in the consolidated balance sheet at
December 31, 1998. Because the acquisition occurred on December 31, 1998, the
consolidated statement of operations does not include Seer's operations for
1998.
All significant intercompany accounts and transactions are eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign subsidiaries of Seer are translated to
U.S. dollars at the current exchange rate as of the balance sheet date.
Statements of operations items are translated at average rates of exchange
during each reporting period.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"),as amended by Statement of
Position 98-4 "Deferral of the Effective Date of Certain Provisions of SOP
97-2." SOP 97-2 requires each element of a software sale arrangement to be
separately identified and accounted for based on the relative fair value of
such element. Revenue cannot be recognized on any element of the sale
arrangement if undelivered elements are essential to the functionality of the
delivered elements.
Adoption of SOP 97-2 resulted in the deferral of license revenue of
approximately $262. In addition, the unique nature of a significant contract
resulted in the deferral of $3,700 of software revenue as of December 31, 1998.
At least a portion of the license revenue for these contracts may have been
recognized under SOP 91-1 "Software Revenue Recognition" which was effective
in previous years.
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") will be
effective for the Company's fiscal year beginning January 1, 1999. Retroactive
application is prohibited. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair values of all of the undelivered elements that are not accounted for by
means of long-term contract accounting, (2) VSOE of fair value does not exist
for one or more of the delivered elements, and (3) all revenue recognition
criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of
each delivered element) are satisfied. The provisions of SOP 98-9 that extend
the deferral of certain passages of SOP 97-2 became effective December 15, 1998.
The Company is evaluating the future requirements of SOP 98-9 and the effects,
if any, on the Company's current revenue recognition policies.
Revenue from recurring maintenance contracts is recognized ratably over the
maintenance contract period, which is typically twelve months. Maintenance
revenue that is not yet earned is included in deferred revenue.
Revenue from consulting and training services is recognized as services are
performed. Any unearned receipts from service contracts result in deferred
revenue.
F-10
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
COST OF REVENUE
The primary components of the Company's cost of revenue for its software
products are packaging and distribution costs, software amortization and
royalties. The primary component of the Company's cost of revenue for services
is compensation expense.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less from the date of purchase.
For these instruments, the carrying amount is considered to be a reasonable
estimate of fair value. The Company places substantially all cash and cash
equivalents with various financial institutions in both the United States and
several foreign countries. At times, such cash and cash equivalents may be in
excess of FDIC insurance limits.
INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or market and
consists of software held for resale.
NET ASSETS OF DISCONTINUED OPERATIONS
As of December 31, 1997, net assets of discontinued operations of ProfitKey
International, Inc. ("ProfitKey") consist primarily of service contracts
acquired, software development costs, and accounts receivable. On April 6, 1998,
the Company sold substantially all assets and operations of ProfitKey. See Note
3.
DEFERRED COSTS
At December 31, 1997, the Company had deferred costs of $178 relating to the
acquisition of Momentum. The deferred acquisition costs were recorded as part of
the purchase price of the acquisition during 1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements The lesser of the lease term
or estimated useful life
Furniture and fixtures 3 to 5 years
Office equipment 3 to 5 years
Computer equipment 3 to 5 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as incurred. The
cost and related accumulated depreciation of property and equipment are removed
from the accounts upon retirement or other disposition and any resulting gain or
loss is reflected in operations.
F-11
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software costs after technological feasibility
of the product has been established. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenue, estimated economic life and
changes in software and hardware technologies.
Capitalized software costs are amortized over related sales on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, an original
estimated economic life of three years is assigned to capitalized software
costs, once the product is available for general release to customers. Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expense. Each quarter, the Company evaluates the value
of its capitalized software costs based on the estimated discounted future cash
flows. See Note 6.
EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED
Excess of Cost over Net Assets of Business Acquired consists of both
identifiable and unidentifiable assets (goodwill) and is amortized on a
straight-line basis over periods from three to seven years. The Company
periodically assesses the recoverability of intangible assets by determining
whether the amortization of the balance over its remaining life can be recovered
through undiscounted future operating cash flows of the related operations. See
Note 7.
COMPREHENSIVE INCOME
During 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 requires additional disclosures with respect to certain
changes in assets and liabilities that previously were not required to be
reported as results of operations for the period. All prior periods have been
presented to conform with the provisions of the statement. Other components
of comprehensive income are included in the consolidated statement of
shareholders' equity and consist of foreign currency translation adjustments
and unearned compensation related to option grants to non-employees.
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 $770, $358, and $154,
for the years ended December 31, 1998, 1997 and 1996, respectively.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development costs are expensed as incurred.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The fair value of acquired in-process research and development ("IPR&D")
projects acquired in business combinations is expensed immediately. The amount
of purchase price allocated to IPR&D is determined based on independent
appraisals obtained by the Company using appropriate valuation techniques,
including percentage-of-completion which utilizes the key milestones to estimate
the stage of development of each project at the date of acquisition, estimating
cash flows resulting from the expected revenue generated from such projects, and
discounting the net cash flows back to their present value. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. At the respective
dates of acquisition, the IPR&D projects had not yet reached technological
feasibility and did not have alternative future uses. As discussed in Note 2,
material risks existed with each IPR&D project, however, management expects that
such projects will be completed.
INCOME TAXES
The Company uses Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" to account for income taxes. This
statement requires an asset and liability approach that recognizes deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, all expected future events
other than enactments of changes in the tax law or rates are generally
considered. A valuation allowance is recorded when it is "more probable than
not" that recorded deferred tax assets will not be realized.
F-12
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
any potentially dilutive securities. Potentially dilutive securities outstanding
during 1998, 1997 and 1996 include stock options and warrants to purchase common
stock of the Company.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS 123 and has applied
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized in the Consolidated Statement of Operations for its
stock option plans.
See Note 10.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 1998 presentation. Such reclassifications had no
effect on previously reported net income or shareholders' equity.
NOTE 2. ACQUISITIONS AND PRO FORMA FINANCIAL STATEMENTS
ACQUISITION OF MOMENTUM
On March 26, 1998, the Company acquired Momentum Software Corporation
("Momentum"). Under the agreement, Level 8 issued 594,866 shares of common stock
and warrants to purchase 200,000 common shares at an exercise price of $13.108
per share. During the fourth quarter of 1998, the Company issued a $3,000 note
as additional consideration as provided in the purchase agreement. The total
cost of the acquisition was approximately $10,717. The acquisition was recorded
utilizing purchase accounting. As a result of the acquisition of Momentum, the
Company incurred a one-time charge to earnings of approximately $1,200 related
to the estimated value of the purchase of in-process research and development
costs. The remaining amount was allocated to other intangibles, goodwill and
software development costs. The results of operations of Momentum are included
in the financial statements since the date of acquisition.
The purchase price was allocated to the assets acquired and liabilities
assumed based on the Company's estimates of fair value at the acquisition
date. The fair value assigned to intangible assets acquired was based on a
valuation prepared by an independent third-party appraisal company of the
purchased in-process research and development, developed technology, and
assembled workforce of Momentum. The purchase price exceeded the amounts
allocated to tangible and intangible assets acquired less liabilities assumed
by approximately $8,615. This excess of the purchase price over the fair
values of assets acquired less liabilities assumed was allocated to goodwill.
The cost of the acquisition was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 437
Accounts receivable 125
Prepaid expenses and other current assets 52
Property and equipment 174
In-process research and development 1,200
Developed technology 1,100
Goodwill 8,615
Accounts payable (507)
Deferred revenue (367)
Long-term debt (112)
--------
Cost of net assets acquired $ 10,717
--------
--------
</TABLE>
Approximately $1,200 of the purchase price represents purchased in-process
research and development that had not yet reached technological feasibility
and had no alternative future use. Accordingly, this amount was immediately
expensed in the Consolidated Statement of Operations upon consummation of the
acquisition. The value assigned to in-process research and development, based
on a valuation prepared by an independent third-party appraisal company, was
determined by identifying research projects, all of which related to either
add-ons or enhancements of Momentum's
F-13
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
existing XIPC product, in areas for which technological feasibility had not
been established. The value of the in-process projects was adjusted to
reflect the relative value and contributions of the required research and
development. In doing so, consideration was given to the stage of completion,
the complexity of the work completed to date, the difficulty of completing
the remaining development costs already incurred, and the projected cost to
complete the projects. The discount rate included a factor that takes into
account the uncertainty surrounding successful development of the purchased
in-process research and development.
ACQUISITION OF SEER TECHNOLOGIES, INC.
On December 31, 1998, the Company, as the first step in its pending
acquisition of the entire equity interest in Seer, acquired beneficial
ownership of approximately 69% of the outstanding voting stock of Seer, which
was held by Welsh, Carson, Anderson and Stowe VI L.P. ("WCAS") and certain
other parties affiliated or associated with WCAS ("WCAS Parties") in exchange
for 1,000,000 shares of the Company common stock and warrants to purchase an
additional 250,000 shares of the Company common stock at an exercise price of
$12.00 per share. The total cost of the acquisition was $7,754 and has been
accounted for by the purchase method of accounting. Because the net book
value of Seer's liabilities exceeded its assets on the acquisition date, no
minority interest in Seer was recorded. Because the acquisition occurred on
December 31, 1998, there are no operations of Seer included in the Company's
consolidated results of operations for the periods presented. The purchase
price was allocated to the assets acquired and liabilities assumed based on
the Company's estimates of fair value at the acquisition date. The fair value
assigned to intangible assets acquired was based on a valuation prepared by
an independent third-party appraisal company of the purchased in-process
research and development, developed technology, installed customer base,
assembled workforce, and trademarks of Seer. The purchase price exceeded the
amounts allocated to tangible and intangible assets acquired less liabilities
assumed by approximately $18,684. This excess of the purchase price over the
fair values of assets acquired less liabilities assumed was allocated to
goodwill.
The cost of the acquisition was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 479
Accounts receivable 14,505
Prepaid expenses and other current assets 1,418
Property and equipment 1,614
Capitalized software and developed technology 3,659
In-process research and development 4,692
Goodwill and other intangibles 28,344
Other assets 370
Accounts payable (1,949)
Accrued expenses and other liabilities (13,228)
Deferred revenue (7,875)
Notes payable, due on demand (12,275)
Long-term debt (12,000)
--------
Cost of net assets acquired $ 7,754
--------
--------
</TABLE>
Approximately $4,692 of the purchase price represents purchased in-process
research and development that had not yet reached technological feasibility
and had no alternative future use. Accordingly, this amount was immediately
expensed in the Consolidated Statement of Operations upon consummation of the
acquisition. The value assigned to in-process research and development, based
on a valuation prepared by an independent third-party appraisal company, was
determined by identifying research projects in areas for which technological
feasibility had not been established, including Java based projects ($3,105)
and application warehousing projects ($1,587). The value of the in-process
projects was adjusted to reflect the relative value and contributions of the
required research and development. In doing so, consideration was given to
the stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development costs already incurred,
and the projected cost to complete the projects. The discount rate included a
factor that takes into account the uncertainty surrounding successful
development of the purchased in-process research and development.
In connection with the Company's purchase of Seer's capital stock from the WCAS
Parties, WCAS contributed approximately $17 million to Seer and the Company
provided a $12 million subordinated loan to Seer to pay down Seer's bank debt.
The funds used by the Company to make the subordinated loan to Seer were
obtained from Liraz Systems Ltd. ("Liraz"), a principal shareholder of the
Company. See Note 8. The Company also has agreed to use its best efforts to
acquire all the remaining shares of Seer's outstanding common stock and has
commenced a tender offer. See Note 19.
In connection with the acquisition of 69% of Seer on December 31, 1998, the
Company and Liraz agreed that the Company would effect a pro rata offering to
its shareholders of shares of preferred stock intended to have an aggregate
liquidation preference initially equal to the principal and accrued interest
under the note and to be convertible into an aggregate number of common stock
determined utilizing an agreed-upon pricing formula. The preferred stock would
be redeemable at the Company's option at any time after June 30, 2000, upon at
least 30 days' notice, at a redemption price equal to the preferred stock's
accreted liquidation preference. The purchase price for each share of preferred
stock to be offered to the Company's shareholders would equal its initial
liquidation preference. Liraz would be permitted to pay the purchase price for
any preferred stock it purchases in the offering with cash or by reducing the
amount payable to it under
F-14
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
the $12 million note. If the rights offering is consummated before June 30,
1999, the Company is required to use the net proceeds of the rights offering to
prepay the unpaid balance under the $12 million note. In the context or
reviewing other financing alternatives, the Company and Liraz are currently
reevaluating the proposed rights offering and may determine not to proceed with
the rights offering.
Under the agreement between Company and the WCAS Parties, the WCAS Parties
agreed that, prior to January 1, 2001, at any meeting of shareholders of the
Company, WCAS Parties shall grant a proxy to one or more individuals named by
the Company to vote all of the WCAS Parties' shares of common stock acquired by
the WCAS Parties in connection with the transaction. Also, subject to limited
exceptions, prior to January 1, 2001, the WCAS Parties may not sell, exchange or
otherwise assign any of its shares of the Company without the prior written
consent of the Company.
The following unaudited pro forma results of continuing operations assume the
transactions described above occurred as of January 1, 1997 after giving effect
to certain adjustments, including amortization of the excess of cost over
underlying net assets.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 67,473 $ 118,146
Net loss from continuing operations before income
taxes and extraordinary items (58,994) (14,844)
Net loss (81,145) (15,770)
Loss per share - basic and diluted (9.34) (1.84)
Weighted average shares outstanding - basic and diluted 8,688 8,587
</TABLE>
The pro forma financial information does not purport to be indicative of the
results of operations which would have actually resulted had the transactions
taken place at the beginning of the periods presented or of future results of
operations.
NOTE 3. DISCONTINUED OPERATIONS
In recent years, the Company has disposed of several wholly-owned subsidiaries.
From October 3, 1994 through the first quarter of 1998, the Company's operations
included the operations of ProfitKey International, Inc. ("ProfitKey").
ProfitKey offered turnkey manufacturing resource planning and scheduling
software packages, and related installation, training and support services for
use by manufacturing businesses. From October 28, 1994 through September 9,
1996, the Company's operations included the operations of Bizware Computer
Systems (Canada) Inc. ("Bizware"). Bizware 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.
Income from discontinued operations consists of the following items for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income (loss) of ProfitKey $ (135) $ 53 $ 132
Net loss of Bizware -- -- (172)
Loss on disposal of ProfitKey, net of tax (1,233) -- --
Loss on disposal of Bizware, net of tax -- (1,484)
------- ------- -------
Total $(1,368) $ 53 $(1,524)
------- ------- -------
------- ------- -------
</TABLE>
SALE OF PROFITKEY
On April 6, 1998, the Company sold substantially all assets and operations of
ProfitKey for $464 at closing and a note receivable from the purchaser of
$2,000. The note is due on April 6, 2000 and bears interest at 9%. According to
the terms of the ProfitKey sale agreement, the purchase price is subject to
adjustment to reflect any variance in working capital from a specified amount.
The purchaser has notified the Company that it believes there are adjustments
totaling $1,466 which would require a reduction in the purchase price. The
Company intends to vigorously contest this claim and has made provision for its
estimate of the purchase price adjustment and the costs to resolve this matter
as part of discontinued operations. Management believes at this time that any
additional provisions required to ultimately resolve
F-15
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
this matter will not have a material effect on the financial position, cash
flows, or results of operations of the Company. The Company recorded a net loss
from the sale of ProfitKey of $1,233.
The disposition of ProfitKey was accounted for as a discontinued operation and,
accordingly, prior periods have been restated. Results of the discontinued
operations of ProfitKey consisted of the following for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales $ 1,156 $ 5,545 $ 5,441
Income (loss) from operations before tax (225) 191 345
Income tax expense (benefit) (90) 138 213
Income (loss) from discontinued operations $ (135) $ 53 $ 132
</TABLE>
For 1998, discontinued operations of ProfitKey includes ProfitKey's results of
operations through the date of sale.
SALE OF BIZWARE
On September 9, 1996, the Company sold substantially all the assets and
operations of Bizware for $120 at closing and a note receivable from the
purchaser for $110. The note receivable was due in six equal monthly
installments and has been fully collected by December 31, 1998. The Company
recorded a loss from the sale of Bizware of $1,484, net of taxes of $0.
The disposition of Bizware was accounted for as a discontinued operation.
Results of the discontinued operations of Bizware consisted of the following for
the year ended December 31:
<TABLE>
<CAPTION>
1996
-----
<S> <C>
Net sales $ 363
Loss from operations before tax (358)
Income tax benefit (186)
Loss from discontinued operations $(172)
</TABLE>
For 1996, discontinued operations of Bizware includes Bizware's results of
operations through the date of sale.
SALE OF ASU
Effective December 31, 1997, the Company sold the business and related assets of
the ASU Consulting division for $65, resulting in a gain of $60 for the year
ended December 31, 1997. The sale of the ASU Consulting division was not
accounted for as a discontinued operation.
NOTE 4. ACCOUNTS RECEIVABLE
Trade accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current trade accounts receivable $ 20,244 $ 6,889
Less: Allowance for doubtful accounts (3,252) (434)
-------- --------
$ 16,992 $ 6,455
-------- --------
-------- --------
</TABLE>
Approximately $4,165 and $1,050 of current trade receivables were unbilled at
December 31, 1998 and 1997, respectively. There were no receivables with payment
terms in excess of one year recorded during the fiscal year ended December 31,
1998.
During 1998, the Company acquired certain trade receivables, net of allowances
for doubtful accounts, in conjunction with its acquisition of Momentum and Seer.
See Note 2.
F-16
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The provision for uncollectible amounts was $838, $332 and $165 for the years
ended December 31, 1998, 1997, and 1996, respectively. Write-offs of accounts
receivable were $736, $95, and $43 for the years ended December 31, 1998, 1997,
and 1996, respectively.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Computer equipment $ 1,922 $ 957
Furniture and fixtures 286 239
Office equipment 312 174
Leasehold improvements 544 51
------- -------
Subtotal 3,064 1,421
Less accumulated depreciation and amortization (382) (447)
------- -------
Total $ 2,682 $ 974
------- -------
</TABLE>
Depreciation and amortization expense was $426, $228, and $36 for the fiscal
years ended December 31, 1998, 1997, and 1996, respectively.
During the fourth quarter of fiscal year 1998, property and equipment was
written down for obsolescence and retirement of assets based in part on the
Company's restructured operations. The write-down totaled $595, of which $188 is
included in the restructuring charges in the Consolidated Statement of
Operations. See Note 15.
NOTE 6. CAPITALIZED SOFTWARE COSTS
For the fiscal years ended December 31, 1998, 1997 and 1996, the Company
capitalized $1,177, $1,156, and $1,182, respectively, of internal costs related
to developing software for sale. The Company also acquired $1,100 and $3,659 in
capitalized software costs through its acquisitions of Momentum and Seer,
respectively. During the fiscal years ended December 31, 1998, 1997 and 1996,
the Company recognized $816, $137, and $0, respectively, of expense related to
the amortization of these costs, which is recorded as cost of software in the
Consolidated Statements of Operations. During the first and fourth quarters of
fiscal year 1998, capitalized software cost was written down to its fair value
based upon an evaluation of its net realizable value. The write downs totaled
$535, of which $241 is included in the restructuring charges in the Consolidated
Statement of Operations. Accumulated amortization of capitalized software costs
is $606 and $121 at December 31, 1998 and 1997, respectively.
NOTE 7. IDENTIFIABLE AND UNIDENTIFIABLE INTANGIBLE ASSETS
Identifiable and unidentifiable intangible assets primarily include goodwill,
existing customer base, assembled workforce and trademarks recorded in
connection with the acquisition of Seer Technologies on December 31, 1998. This
goodwill is being amortized using the straight-line method over seven years.
Also included are goodwill amounts acquired in the purchase of Momentum Software
on March 26, 1998 and Level 8 Technologies on April 1, 1995. These assets are
being amortized over three years and seven years, respectively. At December 31,
1998 and 1997, identifiable and unidentifiable intangible assets consist of the
following:
F-17
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Goodwill, Level 8 Technologies $ 2,954 $ 2,954
Goodwill, Momentum 4,014 --
Goodwill, Seer Technologies 18,684 --
Assembled workforce, Seer Technologies 4,278 --
Customer base, Seer Technologies 4,761 --
Trademark, Seer Technologies 623 --
-------- --------
Subtotal 35,314 2,954
Less accumulated amortization (3,097) (1,161)
-------- --------
Total $ 32,217 $ 1,793
-------- --------
-------- --------
</TABLE>
Amortization expense was $1,933, $422, and $422 for the fiscal years ended
December 31, 1998, 1997, and 1996, respectively.
The Company assesses whether its identifiable and unidentifiable intangible
assets are impaired as required by SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
based on an evaluation of undiscounted projected cash flows through the
remaining amortization period. If an impairment exists, the amount of such
impairment is calculated based on the estimated fair value of the asset
determined based upon anticipated cash flows discounted at a rate
commensurate with the risk involved. As a consequence of the Company's
transition to an enterprise application integration solutions provider, the
Company abandoned certain planned development efforts for products acquired
in the Momentum transaction and reassessed the remaining undiscounted
projected cash flows related to the identifiable and unidentifiable
intangible assets acquired from Momentum. It was concluded that, with the
principal exception of the Momentum technology utilized in the Level 8's
Falcon product set and the XIPC products, the goodwill and intangible assets
acquired in the Momentum transaction should be written off. Accordingly,
during the fourth quarter of 1998, the Company adjusted the carrying value of
its identifiable and unidentifiable assets to their fair value of $32,217,
resulting in a non-cash impairment loss of $4,601.
F-18
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
NOTE 8. LONG-TERM DEBT AND CREDIT FACILITIES
Notes payable, long-term debt, and notes payable to a related party consist of
the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Credit facility $ 12,275 $ --
Notes payable - Momentum 2,250 --
Capital leases 90 23
-------- --------
14,615 23
Less current maturities (13,074) (7)
-------- --------
$ 1,541 $ 16
-------- --------
-------- --------
Notes payable to a related party 13,147 330
Less current maturities (628) (128)
-------- --------
$ 12,519 $ 202
-------- --------
-------- --------
</TABLE>
At December 31, 1998, one of the Company's subsidiaries, Seer, maintained a
credit facility (the "Revolving Facility") which provides for borrowing for
working capital purposes based on the Company's eligible accounts receivable, as
defined in the loan agreement. The Revolving Facility allows for borrowings of
up to $25,000, bears interest at the prime rate and is collateralized by Seer's
accounts receivable, equipment, and intangibles. There are no financial
covenants for this credit facility. The Company has guaranteed, as of December
31, 1998, Seer's revolving credit facility (i) exceeding $20,000 through
December 31, 1999, (ii) exceeding $10,000 from January 1, 2000 through December
31, 2000, and (iii) without limit thereafter. As of December 31, 1998, the
interest rate on borrowings under the Revolving Facility was 7.75%.
Subsequent to December 31, 1998, the Company amended its Revolving Facility (the
"Amended Facility") to involve the Company as a borrower. The terms of the
Amended Facility allow the Company to maintain outstanding borrowings not to
exceed the lesser of $25,000 or the sum of (a) eligible receivables, as defined
in the Amended Facility, (b) a $7,000 term loan, and (c) a $2,500 equipment
loan. The Amended Facility bears interest at the prime rate until June 30, 1999.
The Amended Facility bears interest at 1% above the prime rate from July 1, 1999
through June 30, 2000. The Amended Facility bears interest at 2% above the prime
rate subsequent to July 1, 2000. The $7,000 term loan is to be repaid in 24
equal monthly installments beginning on January 1, 2000. The $2,500 equipment
loan is to be repaid in 30 equal monthly installments beginning on April 1,
1999.
On December 1, 1998 in connection with the acquisition of Momentum Software
Corporation as described in Note 2, the Company issued notes totaling $3,000
payable over three years. The notes bear interest at 10% per year, retroactive
to the Momentum acquisition date of March 26, 1998, and are due in four equal
installments plus interest on December 1, 1998, November 26, 1999, November 20,
2000, and November 15, 2001. There are no financial covenants in this note.
The Company is obligated under various capital leases for certain computer and
office equipment providing for aggregate payment, excluding interest, of $49
during 1999 and $41 during 2000.
On December 31, 1998 in connection with the acquisition of Seer Technologies,
Inc. as described in Note 2, the Company issued a note payable to a related
party in the amount of $12,000. The note bears interest at 12% per year, payable
at maturity, and is due on June 30, 2000. In addition, if the Company
consummates the rights offering as described in Note 10 before June 30, 1999,
the Company shall pay to the holder of the note the amount of the net proceeds
of the rights offering, to the extent the note shall not have been cancelled in
payment of the subscription price for shares purchased in the rights offering.
On April 1, 1998 in connection with an amendment to a custom computer
programming agreement, the Company issued a note payable to a related party
in the amount of $1,500. The note bears interest at 8% per year and is
payable in three annual installments. The first installment, including
accrued interest, was paid during 1998. The second installment of $450 plus
accrued interest is due on April 1, 1999 and the third installment of $450
plus interest is due on April 1, 2000.
On September 1, 1995, the Company issued a note payable to a related party in
the amount of $628. The note bears interest at 4% per year and is payable in
equal quarterly installments of $35, including interest. As of December 31,
1998, the principal amount outstanding on the note payable is $202.
F-19
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Principal amounts of notes payable and long-term debt and notes payable to a
related party maturing in each of the next five years ending December 31 are as
follows:
<TABLE>
<CAPTION>
Notes Payable Notes Payable
and to a
Long-term Debt Related Party
-------------- -------------
<S> <C> <C>
1999 $13,074 $ 628
2000 791 12,519
2001 750 --
------- -------
Total $14,615 $13,147
------- -------
------- -------
</TABLE>
NOTE 9. INCOME TAXES
Income tax expense (benefit) consists of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal - current $ -- $ 239 $(247)
State and local - current
-- 42 (43)
----- ----- -----
-- 281 (290)
Federal - deferred 344 231 99
State and local - deferred 61 41 17
----- ----- -----
405 272 116
----- ----- -----
Total income tax expense (benefit) $ 405 $ 553 $(174)
----- ----- -----
----- ----- -----
</TABLE>
A reconciliation of expected income tax at the statutory Federal rate with the
actual income tax expense (benefit) is as follows for the fiscal years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected income tax benefit at
statutory rate (34%) $(7,916) $ 540 $ (347)
Loss on sale of discontinued operations (331) -- (468)
Discontinued operations (77) 65 (41)
State taxes, net of federal tax benefit (1,082) 97 --
Effect of foreign tax rates and credits -- -- 8
Effect of change in valuation allowance 6,246 (304) 381
Rate Differences -- -- 15
Amortization and write-off of non-deductible
goodwill 2,787 197 182
In-process research and development - Momentum 408 -- --
Write-off of income tax receivable 406 -- --
Non-deductible expenses 12 34 14
Non-deductible loss on sale of foreign
Subsidiary -- -- 106
Other 121 61 3
------- ------- -------
Total $ 574 $ 690 $ (147)
------- ------- -------
------- ------- -------
Allocated as follows:
Continuing operations 405 553 (174)
Sale of discontinued operations 259 -- --
Discontinued operations (90) 137 27
</TABLE>
Approximately $2,070 of the current year change in the valuation allowance is
due to a valuation allowance offsetting certain deferred tax assets acquired
from Momentum as recorded at the purchase date.
F-20
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Significant components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
1998 1998 1997 1997
Current Long-Term Current Long-Term
------- ------- ------- -------
<S> <C> <C> <C> <C>
Deferred tax assets
Allowance for uncollectible accounts $ 240 $ -- $ 175 $ --
receivable
Accrued expenses non-tax deductible 660 -- 12 --
Deferred revenue 1,621 -- 8 --
Loss carryforwards -- 5,539 35 399
Unearned compensation -- -- -- 73
Depreciation and amortization -- 577 -- --
------- ------- ------- -------
2,521 6,116 230 472
------- ------- ------- -------
Deferred tax liabilities
Depreciation and amortization -- -- -- (931)
Change from cash to accrual basis -- -- (3) (3)
------- ------- ------- -------
-- -- (3) (934)
------- ------- ------- -------
Deferred tax asset valuation allowance (2,521) (6,116) (321) --
------- ------- ------- -------
Net deferred tax (liability) $ -- $ -- $ (94) $ (462)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
At December 31, 1998, the Company also has approximate net operating loss
carryforwards of $13,500, which may be applied against future taxable income.
These carryforwards will expire at various times between 2005 and 2019 with over
$6,500 not expiring until 2019. A substantial portion of these carryforwards is
restricted to future taxable income of certain of the Company's subsidiaries or
limited by Internal Revenue Code Section 382. Thus, the utilization of these
carryforwards cannot be assured. Approximately $2,070 of the valuation allowance
relates to deferred tax assets for which any subsequently recognized tax
benefits will be allocated directly to reduce goodwill or other noncurrent
intangible assets of Momentum.
The Company provided a full valuation allowance on the total amount of its
deferred tax assets at December 31, 1998 since management does not believe that
it is more likely than not that these assets will be realized.
NOTE 10. STOCK OPTIONS, WARRANTS AND RIGHTS
STOCK OPTIONS
The Company has 1995 and 1997 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 a combined
total of 2,300,000 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 entitle 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.
F-21
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Activity for stock options issued under these plans for the fiscal years ending
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Plan Option Price Exercise
Activity Per Share Price
--------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1995 489,678 $ .69-5.75 $ 4.23
Granted 496,620 5.75-10.25 9.74
Exercised (80,156) .69-11.00 .73
Forfeited (122,987) .69-11.00 9.10
---------
Balance at December 31, 1996 783,155 .69-11.00 7.31
Granted 444,500 10.69-16.62 8.14
Exercised (91,646) .69-16.62 7.01
Forfeited (45,705) .69-16.62 11.38
---------
Balance at December 31, 1997 1,090,304 .69-16.62 7.51
Granted 1,293,000 7.25-12.75 8.56
Exercised (38,175) .69-11.76 9.13
Forfeited (433,035) .69-16.62 10.88
---------
Balance at December 31, 1998 1,912,094 .69-16.62 8.85
---------
</TABLE>
The weighted average grant date fair value of options issued during the years
ended December 31, 1998, 1997 and 1996 was equal to $4.37, $9.35 and $6.85 per
share, respectively. The fair value of options granted during the fiscal years
ended December 31, 1998, 1997 and 1996 was equal to $5,652, $4,156 and $3,402,
respectively. There were no option grants issued below fair market value during
1998 or 1997. During 1996, the Company granted 187,420 options at exercise
prices below fair market value. The fair value of options granted below fair
market value was $1,192.
The fair value of the Company's stock-based awards to employees was estimated as
of the date of the grant using the Black-Scholes option-pricing model, using the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (in years) 5 years 5 years 5 years
Expected volatility 52% 77% 75%
Risk free interest rate 5.0% 6.05% 6.44%
Expected dividend yield 0% 0% 0%
</TABLE>
For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
fiscal years December 31, 1998, 1997, and 1996 would have been increased to the
pro forma amounts indicated below. The Company's adjusted information follows
(in thousands, except for per share information):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss), as reported $ (25,056) $ 1,088 $ (2,369)
Net income (loss), as adjusted (27,697) (821) (3,525)
Net income (loss) per share, as reported - basic (3.32) 16 (.39)
Pro forma net income (loss) per share, as adjusted - basic (3.67) (.12) (.58)
Net income (loss) per share, as reported - diluted (3.32) 14 (.39)
Pro forma net income (loss) per share, as adjusted - diluted (3.67) (.11) (.58)
</TABLE>
F-22
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
At December 31, 1998 and 1997, options to purchase approximately 908,638 and
539,980 shares of common stock were exercisable, respectively, pursuant to the
plans at prices ranging from $.69 to $16.62. The following table summarizes
information about stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Remaining
Contractual Life
Number for Options Number
Exercise Price Outstanding Outstanding Exercisable
-------------- ----------- ----------- -----------
<S> <C> <C> <C>
1.37 695 6.25 695
5.00 116,707 6.33 116,707
5.50 105,600 6.58 104,200
5.75 64,250 6.83 57,469
7.25 200,000 10.00 50,000
7.88 395,000 10.00 98,750
8.29 18,000 7.58 16,500
8.50 20,625 9.58 5,156
8.82 9,875 7.42 4,938
9.00 453,125 9.50 108,906
9.56 12,325 7.83 8,713
10.25 250,000 7.92 183,333
10.69 31,750 8.17 15,875
11.76 38,267 8.92 25,511
12.75 30,875 9.25 12,719
14.00 10,000 10.00 2,500
14.73 126,000 8.67 84,000
16.03 15,000 8.50 3,333
16.62 14,000 8.58 9,333
--------- -------
1,912,094 908,638
--------- -------
--------- -------
</TABLE>
As of December 31, 1998, Seer also had a Stock Option and Restricted Stock
Purchase Plan and a Stock Option Plan for Non-Employee Directors, pursuant to
which certain employees, officers, and non-employee directors of Seer had been
granted options to acquire up to 2,720,000 of Seer's common stock. In connection
with the acquisition of Seer by the Company, all of Seer's stock option plans
are being terminated.
Subsequent to December 31, 1998, the Company has adopted a Stock Option Plan for
Non-Employee Directors, pursuant to which non-employee directors can be granted
options to acquire up to 12,000 shares of the Company's common stock, upon being
elected to the Board of Directors. The options vest in one-third increments, on
each of the first through third anniversaries of the grant date.
STOCK WARRANTS
In connection with the acquisition of Momentum during 1998, the Company issued
warrants to purchase 200,000 shares of the Company's common stock. The warrants
have an exercise price of $13.108 per share and expire on March 26, 2003. The
warrants were valued at $654 or $3.27 per share. See Note 2.
In connection with the acquisition of Seer during 1998, the Company issued
warrants to purchase 250,000 shares of the Company's common stock. The warrants
have an exercise price of $12 per share and expire on December 31, 2002. The
warrants were valued at $280 or $1.12 per share. See Note 2.
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.
Warrants totaling 1,200 and 18,168 were exercised at an exercise price of $7.43
during the years ended December 31, 1998 and 1997, respectively.
F-23
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
STOCK RIGHTS
In connection with the issuance of a $12 million note payable to Liraz, the
Company and Liraz agreed that the Company would effect a pro rata offering to
its shareholders of shares of preferred stock intended to have an aggregate
liquidation preference initially equal to the principal and accrued interest
under the note and to be convertible into an aggregate number of common stock
determined by dividing the aggregate liquidation preference (which will
accrete at the rate of 12% a year, compounded quarterly) by the conversion
price. The conversion price would be an amount equal to the greater of $5.00
and two-third of the average closing price of a share of the Company's common
stock during the 20 trading days ending on the fifth trading day before the
rights offering. Each share of preferred stock would be entitled to two votes
for each share of common stock into which it is convertible. The preferred
stock would be redeemable at the Company's option at any time after June 30,
2000, upon at least 30 days' notice, at a redemption price equal to the
preferred stock's accreted liquidation preference. The purchase price for
each share of preferred stock to be offered to the Company's shareholders
would equal its initial liquidation preference. Liraz would be permitted to
pay the purchase price for any preferred stock it purchases in the offering
with cash or by reducing the amount payable to it under the $12 million note.
If the rights offering is consummated before June 30, 1999, the Company is
required to use the net proceeds of the rights offering to prepay the unpaid
balance under the $12 million note.
NOTE 11. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for all qualified Momentum employees (the
"Momentum Plan"). Matching contributions to the Momentum Plan are made at the
discretion of the Board of Directors. For the year ended December 31, 1998, the
Board of Directors did not authorize any contributions to the Momentum Plan.
The Company has a 401(k) plan for all qualified U.S. employees of Seer (the
"Seer Plan"). The Seer Plan provides for a matching contribution of 25% for an
employee's contribution up to 4% of an employee's salary. Because Seer was
acquired on December 31, 1998, the Company did not make any contributions to the
Seer Plan for the year ended December 31, 1998.
The Company has a 401(k) plan for all other qualified employees (the "Level 8
Plan"). Matching contributions to the Level 8 Plan are made at the discretion of
the Board of Directors. For the year ended December 31, 1998, 1997, and 1996,
the Board of Directors did not authorize any contributions to the Level 8 Plan.
Effective January 27, 1999, the Company merged the Momentum Plan and the Level 8
Plan into the Seer Plan and changed the name of the Seer Plan to the Level 8
Systems 401(k) and Profit Sharing Plan (the "Plan"). Participants in the
Momentum Plan and the Level 8 Plan are allowed to roll over the balance of their
accounts in the Momentum Plan and the Level 8 Plan into the Plan. Also effective
January 27, 1999, the Company amended the new Level 8 Plan to provide a 50%
matching contribution for an employee's contribution up to 4% of an employee's
salary and a discretionary match of up to $0.50 on the dollar up to 2% of the
employees salary based on the Company's performance and board of directors
discretion. Participants must be employed at December 31 of each calendar year
to be eligible for employer matching contributions.
In connection with the acquisition of Seer, the Company also has employee
benefit plans for each of its foreign subsidiaries, as mandated by each
country's laws and regulations. There was no expense recognized under these
plans for the years ended December 31, 1998, 1997, and 1996.
Effective January 27, 1999, the Company adopted an Employee Stock Purchase
Plan (U.S.) (the "U.S. Stock Purchase Plan") and the International Stock
Purchase Plan (the "Stock Purchase Plan - International") for its employees.
The Stock Purchase Plan (U.S. and International) allow employees to purchase
shares of the Company's common stock for 85% of fair market value. The
Company is responsible for the differential in market value, as well as
administrative costs of the plans.
NOTE 12. SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, AND FOREIGN
CURRENCIES
One customer accounted for more than 10% of operating revenue for the fiscal
years ended December 31, 1998, 1997, and 1996.
Due to the acquisition of Seer, the Company has entered into several marketing
and distribution agreements with IBM, primarily in the European market. The
percentage of outstanding receivables from IBM-related transactions as of
December 31, 1998, is approximately 24.8%.
As of December 31, 1998, the Company had significant balances outstanding from
individual customers due to the nature of its operations. It is the policy of
the Company to closely monitor all accounts receivable and to record a provision
for uncollectible accounts as they become estimable. Generally, no collateral is
required.
F-24
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
At December 31, 1998, the Company had approximately $219 and $8,527 U.S. dollar
equivalent cash and trade receivable balances, respectively, denominated in
foreign currencies.
The more significant trade accounts receivable denominated in foreign currencies
as a percentage of total trade accounts receivable were as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Danish Krona 8.73%
Pound Sterling 8.53%
Italian Lira 8.33%
</TABLE>
NOTE 13. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
In 1998, the Company adopted SFAS 131, "Enterprise and Related Information."
SFAS 131 supercedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management
approach". The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reporting segment. For the periods presented,
management reviewed the continuing operations as one segment. Due to the
acquisition of Seer, management is reevaluating the "management approach" to
reviewing its operations.
Due to the acquisition of Seer, the Company now operates in a variety of
geographic regions. The following table represents a summary of long-lived
assets by geographic region as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
United States $41,136 $ 4,935 $ 4,051
United Kingdom 416 -- --
Other 100 -- --
------- ------- -------
Total assets $41,652 $ 4,935 $ 4,051
------- ------- -------
------- ------- -------
</TABLE>
The Company's foreign operations are reimbursed by the Company for their costs
plus an appropriate mark-up for profit. Intercompany profits and losses are
eliminated in consolidation.
NOTE 14. RELATED PARTY INFORMATION
During 1995, the Company and Liraz entered into a custom computer programming
agreement for the joint development of certain software. Liraz and the
Company were each to 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 in contract revenue from the
sale of products developed under this agreement, 20% of the next $1,000, and
8% thereafter.
Due to a change in the Company's development plans for this product, during
the first quarter of 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 agreed to reimburse Liraz's costs of development of $1,500 and to pay
Liraz royalties of 3% of program revenues, as defined in the agreement,
generated from January 1, 1998 until December 31, 2000. The Company issued a
note to Liraz for $1,500 for cost reimbursement pursuant to this agreement
and is amortizing the cost of reimbursement over the term of the agreement.
See Note 8. The amortization of the cost reimbursement is included as a
component of cost of software in the consolidated statement of operations
In addition, the Company and Liraz were awarded an Israel - U.S. Binational
Industrial Research and Development Foundation ("BIRD") grant totaling $432. The
BIRD grant provided for reimbursement of up to 50% of the development costs of
the above project. At the point at which the products developed under this grant
are available for sale, 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 reimbursement of development costs. The
Company capitalized the software
F-25
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
development costs associated with Level 8's project development costs and
reduced the capitalized costs by any grant funds received from BIRD. At December
31, 1998, the Company had capitalized approximately $1,249, after reimbursement
of BIRD funds totaling approximately $400.
The Company sold software licenses to Liraz for $15 and $160 in 1998 and 1997,
respectively, for resale to unrelated third parties.
Liraz also pays the salaries and expenses of certain company employees and is
reimbursed by the Company. Salaries and expense paid by Liraz amounted to $568
and $14 during 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had accounts receivable of $271 and
$160 and accounts payable of $82 and $14 from and to Liraz, respectively.
See Note 8 regarding notes payable to Liraz.
In connection with the acquisition of Seer, the Company committed to fund
Seer's operations through January 15, 2000, if necessary.
NOTE 15. RESTRUCTURING CHARGES
During the fourth quarter of 1998, the Company reorganized its existing
operations due to its acquisition of Seer. The restructuring included a staff
reduction in its development and administrative areas of 20% (15 employees),
the abandonment of certain leased facilities, and the write-down to fair
value of certain capitalized software costs for product lines which were
being discontinued. The Company recorded a restructuring charge of
approximately $1,540, which consisted of approximately $706 in
personnel-related charges, approximately $292 in costs associated with
carrying vacated space until the lease expiration date, approximately $188 of
property and equipment related charges, approximately $241 in write-down of
capitalized software costs, approximately $100 in professional fees related
to the restructuring, and approximately $13 for other charges. Through
December 31, 1998, the Company has paid approximately $113 in cash related to
the restructuring. The Company believes the accrued restructuring cost of
$973 at December 31, 1998 represents its remaining cash obligations.
NOTE 16. LEASE COMMITMENTS
The Company leases certain facilities and equipment under various operating
leases. Future minimum lease commitments on operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
1998 are as follows:
<TABLE>
<S> <C> <C>
1999 $ 3,310
2000 2,579
2001 2,030
2002 1,741
2003 1,543
Thereafter 2,570
--------
$13,773
</TABLE>
Rent expense for the fiscal years ended December 31, 1998, 1997 and 1996 was
$790, $378, and $279, respectively.
NOTE 17. CONTINGENCIES
Litigation. Various lawsuits and claims have been brought against the Company
in the normal course of business. Management is of the opinion that the
liability, if any, resulting from these claims would not have a material
effect on the financial position or results of operations of the Company.
In December 1997, Seer filed a lawsuit against Saadi Abbas and Cambridge
Business Solutions (UK) Limited ("CBS") alleging that Mr. Abbas and CBS had
injured Seer by interfering with Seer's ability to market and sublicense the
LightSpeed Financial Model. Seer obtained a preliminary injunction against Mr.
Abbas and CBS halting their actions. Mr. Abbas and CBS filed counterclaims
against Seer claiming wrongful dismissal of Abbas and breach of the license
agreement. Due to the erosion of the market for the LightSpeed Financial Model,
Seer voluntarily dismissed its claims against Mr. Abbas and CBS in the summer of
1998. Mr. Abbas and CBS are continuing to pursue their claims against Seer. At
the present point in the litigation, it is impossible to calculate the chances
of success in this litigation. However, Seer intends to continue to vigorously
defend against the counterclaim. Seer has made provision for its estimated costs
to resolve this matter. Management does not believe at this point in the
litigation that any additional amounts required to ultimately resolve this
matter will have a material effect on the financial position, cash flows, or
results of operations of Seer.
Liquidity. As reflected in the accompanying financial statements, the Company
incurred a net loss of $26.2 million and has negative working capital of
$20.3 million and an accumulated deficit of $26.4 million at December 31,
1998. Additionally, Seer Technologies, Inc. in which the Company acquired a
69% interest on December 31, 1998, reported a loss of $62.4 million for its
most recent fiscal year. The Company's ability to generate positive cash flow
is dependent upon the Company achieving and sustaining certain cost
reductions and generating sufficient revenues for the year. Management has
already implemented certain steps to, among other things, reduce headcount,
restructure operations and eliminate various costs from the business. They
have also re-negotiated the Company's line of credit, to secure increased
borrowing capacity, see Note 8. Management's plans also include the
possibility of raising additional equity financing. Liraz has committed to
provide up to $7.5 million of funding to the company on an as-needed basis
through the earlier of March 31, 2000 or the completion of an equity
financing which provides more than $7.5 million in proceeds to the Company.
The Company believes that existing cash on hand, cash provided by future
operations and additional borrowings under the credit facility and Liraz
commitment will be sufficient to finance its operations and expected working
capital and capital expenditure requirements for at least the next twelve
months so long as the Company continues to perform to its operating plan.
However, there can be no assurance that the Company will be able to continue
to meet its cash requirements through operations of, if needed, obtain
additional financing on acceptable terms, and the failure to do so may have
an adverse impact on the Company's business and operations.
F-26
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1998:
Net revenues $3,093 $3,155 $2,349 $2,088
Gross profit 1,079 1,580 608 (615)
Net loss (2,484) (2,026) (2,918) (17,628)
Net loss per share - basic and diluted ($0.35) ($0.26) ($0.38) ($2.29)
1997:
Net revenues $2,853 $2,767 $2,937 $6,123
Gross profit 1,200 1,502 2,094 2,295
Net income 150 222 323 394
Net income per share - basic $0.02 $0.03 $0.05 $0.06
Net income per share - diluted $0.02 $0.03 $0.04 $0.05
</TABLE>
During the fourth quarter of 1998, the Company recorded significant nonrecurring
adjustments totaling $14,025. These adjustments related primarily to the
acquisition of Seer, the impairment of the note receivable from the sale of a
subsidiary, the impairment of goodwill recorded in connection with the
acquisition of Momentum, and the restructuring charges. See Notes 2, 3, 7, and
15.
During the fourth quarter of 1997, the Company increased its allowance for
doubtful accounts by $275 and recorded compensation expense of approximately
$120 for options issued to a consultant.
The foregoing unaudited selected quarterly financial data differ from the
Company's previously reported quarterly financial data included in its Quarterly
Reports on Form 10-Q for 1998 as a result of a change in the valuation of the
in-process technology of Momentum and certain other adjustments identified in
connection with the audit of the 1998 financial statements. Accordingly, the
Company intends to amend its previously filed Quarterly Reports on Form 10-Q
promptly.
NOTE 19. SUBSEQUENT EVENTS
On February 1, 1999, Level 8 commenced a tender offer for all the remaining
outstanding shares of the common stock of Seer for $0.35 per share, net to the
seller in cash, upon the terms and conditions set forth in the offer to purchase
and the letter of transmittal. The tender offer is expected to be completed in
the second quarter of 1999 for an estimated cost of $1.7 million, plus
expenses. Upon the completion the tender offer and related merger, Seer will
become a wholly-owned subsidiary of the Company.
F-27
<PAGE>
Exhibit 10.2A
AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN LEVEL 8 SYSTEMS, INC. AND
SAMUEL SOMECH
This Agreement when executed by both parties shall constitute an amendment
to the existing employment agreement between Level 8 Systems Inc. (the
"Company") and Samuel Somech, (the "Employee") dated November 8, 1996 (the
"Agreement").
Company and Employee desire to provide for Employee's early retirement
from the Company. In order to accomplish this purpose and in consideration of
the terms convenants and conditions set forth herein, the Agreement is hereby
amended as set forth below.
Amendments to Agreement
1. Article IV Benefits; Expenses section 4.4 is hereby amended by the
addition of the following language:
All unvested options on the date of retirement shall immediately vest.
Employee shall have three (3) years from the date of his retirement to
exercise all vested options.
2. Article V is hereby amended to Read as follows:
ARTICLE V
TERMINATION; DEATH; DISABILITY; RETIREMENT
The following provision is added as section 5.5 and existing section5.5 is
renumbered to be section 5.6.
5.5 Termination by Retirement.
(a) Employee may elect to retire from the Company at any time during his
employment by giving the Company three (3) months notice of intent to
retire.
(b) Upon expiration of the three (3) month notice period, Employee shall
be paid retirement benefits of $20,000 per month for a period of two (2)
years. Employee's healthcare benefits shall continue during this period or
until he obtains other healthcare benefits whichever is sooner.
(c) During the first year of this retirement period, Employee agrees to
make himself reasonably available for consultation with employees of the
Company on transition matters.
Cessation of Authority
Employee understands and agrees that as of the date of his retirement, he will
no longer be authorized to incur any expenses, obligations or liabilities, or to
make any commitments on behalf of the Company.
Continuing Obligations
Employee hereby ratifies and reaffirms the obligations set forth in Article VI
of the Employment Agreement and acknowledges the reasonableness thereof.
Employee further understands that a
Samuel Somech Amendment to Employment Agreement Page 1
<PAGE>
breach of his obligations under Article VI of the Employment Agreement will
constitute a material breach of his Employment Agreement as amended and will
relieve the Company from any further liability or obligation under this
Amendment.
No Other Representations
Employee represents and acknowledges that in executing this Amendment he does
not rely, and has not relied, upon any representation or statement not set forth
herein made by the Company or by any of the Company's agents, representatives,
or attorneys with regard to the subject matter, basis or effect of this
Amendment or otherwise.
All other terms of the Agreement remain unchanged.
This 26th day of February, 1999.
LEVEL 8 SYSTEMS, INC. EMPLOYEE
By: /s/ Arik Kilman /s/ Samuel Somech
------------------------------ --------------------------------------
Name: Arik Kilman Samuel Somech
----------------------------
Title: Chairman of the Board
---------------------------
Samuel Somech Amendment to Employment Agreement Page 2
<PAGE>
Exhibit 10.6
EMPLOYMENT AGREEMENT
AGREEMENT dated June 1, 1998 by and between Level 8 Technologies, Inc., a New
York corporation ("Level 8") and Joseph Schwartz ("Executive").
BACKGROUND
Level 8 desires to employ Executive as a Vice President, Group Product Manager
of Level 8, and Executive desires to be employed by Level 8 as the Vice
President, Group Product Manager upon the terms and conditions herein stated.
NOW THEREFORE, INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual
covenants and agreements stated below, Executive and Level 8 agree as follows:
1. Employment and Term. Level 8 hereby employs Executive and Executive
accepts such employment, subject to all the terms and conditions of this
Agreement, for a term of three (3) years beginning with the date of this
agreement (the "Commencement Date"), unless sooner terminated in
accordance with other provisions hereof.
2. Duties.
2.1 Executive shall be employed as the Vice President, Group Product
Manager of Level 8 and shall perform such duties and functions and hold
such positions as the Board of Directors of Level 8 shall from time to
time determine and in the performance of his duties, comply with the
policies of and be subject to the reasonable direction of the Board of
Directors of Level 8 and the Chief Operating Officer.
2.2 Executive agrees to devote his entire working time, attention and
energies to the performance of the business of Level 8; and Executive
shall not, directly or indirectly, alone or as a member of any
partnership, or as an officer, director or employee of any other
corporation, partnership or other organization, be actively engaged in or
concerned with any other duties or pursuits which interfere with the
performance of his duties hereunder, or which, even if not interfering,
may be inimical to or contrary to the best interest of Level 8.
3. Compensation, Benefits and Exl2enses.
3.1 Salary. Level 8 shall pay Executive as his base compensation for all
services rendered hereunder an annual gross salary of one hundred and
sixty thousand dollars ($160,000), payable no less frequently than in
monthly installments. Level 8 shall also pay to Executive a
non-recoverable draw of seven thousand five hundred dollars ($7,500) per
month. Level 8 shall deduct or cause to be deducted from such salary all
taxes and amounts required by law to be withheld.
3.2 Performance Bonus. `Me Board of Directors and Chief Executive Officer
of Level 8 shall establish a performance bonus for the Executive at the
beginning of each subsequent fiscal year based on the then current
responsibilities of the Executive provided that total compensation shall
be no less favorable to Executive than the one in effect in the previous
year, The performance bonus for 1998 shall be based on all gross sales of
both products and services within the group of products and services
Executive has under his control. Executive shall receive a bonus of one
percent (1%) on all gross sales up to a level of $50k per month, two
percent (2%) on all gross sales between $51k and $150k, three percent (3%)
on all gross sales between $15 Ik and $250k and five percent (5%) on all
gross sales over $25 1 k per month. This performance bonus shall be
applied towards Executive's draw and Executive shall receive on a monthly
basis all bonuses over and above this monthly draw once this monthly draw
has been satisfied.
3.3 Benefits. Executive shall be entitled to participate and shall be
included in any vacation, savings, pension, profit sharing, group
insurance, disability or similar plan or program of Level 8 that is
1
<PAGE>
established for the Company executive level employees, to the extent he is
eligible under the general provisions thereof Executive shall receive
three (3) weeks vacation per year as part of this agreement.
3.4 Business Expenses. Executive shall be reimbursed by Level 8 for all
actual, ordinary, necessary and reasonable expenses incurred by Executive
in the course of his performance of services hereunder. Executive shall
keep an itemized account of such expenses to be rendered to Level 8
monthly in accordance with the Company's travel and living policy.
3.5 Stock Options. As an inducement to Executive to accept employment and
as an incentive for Executive to enhance the value of Level 8 stock, Level
8 agrees to provide the Executive with seventy five thousand (75,000)
stock options. These seventy five thousand (75,000) stock options will
vest 25% immediately and 25% each year over the next three years. The
stock options will be granted at fair value in accordance with Level 8's
stock option program at the next board meeting or meeting of the stock
option committee of the board of directors whichever comes first and in no
case shall the date of this grant be more than thirty (30) days from the
date of this signed agreement.
3.6 Sale of Framework Intellectual Property. Level 8 and Executive desire
to use the Framework intellectual property, as described in Exhibit A
hereto, as the basis for future product development for Level 8. At such
time as Executive becomes vested in one hundred thousand (100,000) options
of Level 8 stock, Executive shall be prohibited from selling the Framework
intellectual property other than in the normal course of selling product
to Level 8 customers.
3.7 Incentive Stock Options. Executive shall receive a total of seventy
five thousand (75,000) stock options. Such stock options shall vest upon
Level 8 achieving cumulative gross product sales targets; twenty-five
thousand (25,000) options upon Level 8 achieving cumulative gross product
sales of five million dollars ($5,000,000) in Framework product or in any
product where the Framework has been embedded; an additional twenty five
thousand (25,000) stock options upon Level 8 achieving cumulative gross
product sales of ten million dollars ($ 1 0,000,000) in Framework product
on in any product where the Framework has been embedded; an additional
twenty five thousand (25,000) stock options upon Level 8 achieving
cumulative gross product sales of fifteen million dollars ($15,000,000) in
Framework product on in any product where the Framework has been embedded.
These seventy five thousand (75,000) options shall be granted to Executive
at the fair value in accordance with Level 8's stock option program at the
next board meeting or meeting of the stock option committee of the board
of directors whichever comes first and in no case shall the date of this
grant be more than thirty (30) days from the date of this signed
agreement. This incentive shall remain in effect until the end of the term
of this agreement.
4. Termination.
4.1 Termination by Death. If Executive dies, Executive's employment and
his rights to salary and benefits in accordance with Section 3 hereunder
shall terminate as of the date of death.
4.2 Termination by Disability. If Executive becomes disabled, Executive
shall continue to receive all of his compensation and benefits in
accordance with Section 3 for a period of three (3) months following the
Onset of Disability (as defined in this section). Any amounts due to
Executive under this section shall be reduced, dollar-for-dollar, by any
amounts received by Executive under any disability insurance policy or
plan provided to Executive by Level 8. "Onset of Disability" means the
first day on which Executive shall be unable to attend to the regular
affairs of Level 8 on a full time basis by reason of physical or mental
incapacity, sickness or infirmity. If Executive remains disabled for three
(3) months following the Onset of Disability, Level 8 may terminate the
Executive's employment and his right to further compensation and benefits
under Section 3.
4.3 Termination for Cause. Level 8 may terminate Executive's employment
and his rights to compensation and benefits in accordance with Section 3
hereunder for Cause (as defined in this Section),
2
<PAGE>
except that Executive shall be entitled to any unpaid portion of his
salary and accrued benefits under Section 3 hereof up to the date of
termination. For the purpose of this Agreement, "Cause" shall mean, (a)
willful misconduct in connection with the Executive's employment (b)
willful failure to perform his employment responsibilities in the best
interest of Level 8 (including, without limitation, breach by the
Executive of any provision of any employment, nondisclosure,
non-competition or other similar agreement between the Executive and Level
8), (c) an act or omission by Executive constituting a felony or resulting
or intended to result directly or indirectly in material gain to or
material personal enrichment of Executive at Level 8's expense or (d)
Executive's habitual drunkenness or misuse of drugs. Level 8 shall provide
written notice to Executive specifying conduct giving rise to such cause.
4.4 Termination By Company other than for Cause. At no time earlier than
the end of the fourth (4) full month from the date of the signing of this
agreement, Level 8 may upon prior two (2) months written notice to
Executive terminate Executive's employment hereunder without Cause.
Executive shall be entitled to two months severance and any accrued
benefits under Section 3 hereof up to the date of termination. Upon such
written notice, Executive may, at his option, elect to terminate
employment at an earlier date and receive pay and benefits for the
duration of the notice period. In the event that Level 8 terminates
Executive for other than cause, the provisions in sections 5 & 6 shall be
nullified, except that executive may not solicit customers of Level 8
insofar as such solicitation would interfere with an active engagement by
Level 8 with a customer.
4.5 Termination by Executive. Executive may upon prior two (2) months
written notice to Level 8 terminate Executive's employment hereunder. Upon
such written notice, Level 8 may, at its option, elect to terminate at an
earlier date Executive's employment and his right to compensation and
benefits in accordance with Section 3 hereunder.
4.6 Procedure upon Termination. Upon termination of his employment,
Executive shall promptly return to Level 8 all materials and property of
Level 8.
5. Non-Competition; Confidentiality. During the term of this Agreement and
for a period of one year thereafter, Executive agrees not to engage in any
business activity which is in competition with business conducted by Level
8 and/or its affiliates. Executive shall keep in confidence, and shall not
divulge or use any information of Level 8 and or its Affiliates which is
confidential by its nature except for purposes of performing his
obligation hereunder.
6. Non-Solicitation. Executive agrees that he will not, during the term of
his employment with Level 8 and for a period of one year thereafter
directly or indirectly, individually or on behalf of other persons, aid or
endeavor to solicit or induce: (a) any employees or consultants of Level 8
or its Affiliates to leave their positions with Level 8 and or its
Affiliates in order to accept a position with another person or entity; or
(b) any clients of Level 8 or its Affiliates to purchase products or
services sold or provided by Level 8 or its Affiliates from another person
or entity. Executive will not otherwise in any manner interfere with the
business of Level 8 or any other clients or customers of Level 8, or its
business or business relationships with any of its clients or customers or
any other person.
7. Applicable Law. This Agreement shall be governed by and construed in
accordance with the Laws of, and litigated in the State of New York
without regard to the conflict of laws rules thereof.
8. Notices. All notices, consents or other communications required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given (a) when delivered personally, (b) five
business days after being mailed by first class certified mail, return
receipt requested, or (c) two business days after being sent by a
nationally recognized express courier service, to the parties at their
respective addresses as follows: if to Level 8, at Arik Kilman, Chief
Executive Officer, I Penn Plaza, Suite 340 1, New York, NY 10 1 19, and if
to Executive, Joseph Schwartz at, 7 Leafwood Terrace, Irvington, NY 10533
In the event of a change in address each party shall notify the other in
writing of the change.
3
<PAGE>
9. Other Provisions. This Agreement sets forth the entire understanding of
the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous, oral or written, expressed or
implied, agreements and understandings. This Agreement shall not be
modified or terminated except in writing. No action taken by Level 8
hereunder, including without mutation any waiver, consent or approval,
shall be effective unless approved by the Chief Operating Officer or the
President and Chief Technology Officer of Level 8. Neither the failure nor
the delay on the part of either party to exercise any right, remedy, power
or privilege under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, remedy, power or
privilege with respect to any occurrence be construed as a waiver of such
right, remedy, power or privilege with respect to any occurrence. No
waiver shall be effective unless it is in writing and is signed by the
party asserted to have granted such waiver. Any headings preceding the
text of any of the Sections or Subsections of this Agreement are inserted
for the convenience of reference only, and shall neither constitute a part
of this Agreement nor affect its construction, meaning or effect.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF on the date first above written.
Level 8 Technologies, Inc.
BY:
/s/ Arik Kilman
- -------------------------------
Arik Kilman, CEO
EXECUTIVE:
/s/ Joseph Schwartz
- -------------------------------
Joseph Schwartz
4
<PAGE>
Level 8 Technologies, Inc. - Joseph Schwartz
Addendum to Termsheet dated April 1, 1997
Level 8 Technologies, Inc. ("Level 8") and Hanover Square Systems, Inc.
(the "Contractor"), a company wholly-owned by Joseph Schwartz ("Joe")
hereby agree to amend paragraph 3 (f) of the Termsheet dated April 1, 1997
as follows:
Options issued pursuant to the terms of the employee stock option plan of
Level 8 Systems, Inc. (the "Parent"), to acquire shares of the Parent,
which options would be granted, and when granted would be immediately
vested, with respect to 1 0,000 shares on the date hereof. The exercise
price of such options shall not exceed the market price of the Parent's
common stock on the date of grant. The number of shares covered by the
options shall be adjusted to reflect any stock splits, dividends, etc.
Any additional options referred to in the Termsheet dated April 1, 1997
are considered terminated as of January 1, 1998 as a result of this
Addendum.
Level 8 Technologies, Inc. Hanover Square Systems, Inc.
/s/ Joseph Schwartz
--------------------------------------
By: /s/ Arik Kilman By: /s/ Joseph Schwartz Joseph Schwartz
------------------------- -------------------------- Date: 2/15/98
Arik Kilman Joseph Schwartz
CEO President
Date: Feb. 15, 1998 Date: 2/15/98
<PAGE>
Exhibit 10.6A
EMPLOYMENT AGREEMENT
AGREEMENT dated April 2, 1998, by and between Level 8 Technologies, Inc., a New
York corporation ("Level 8") and Gonen Ziv ("Executive").
BACKGROUND Level 8 desires to employ Executive as a Vice President Technical
Services of Level 8, and Executive desires to be employed by Level 8 as a Level
8 Vice President Technical Services, upon the terms and conditions herein
stated.
NOW THEREFORE, INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual
covenants and agreements stated below, Executive and Level 8 agree as follows:
1. Employment and Term. Level 8 hereby employs Executive and Executive
accepts such employment, subject to all the terms and conditions of this
Agreement, for a term of three (3) years beginning with the date of [the
merger] (the `Commencement Date"), unless sooner terminated in accordance
with other provisions hereof.
2. Duties.
Executive shall be employed as a Vice President Technical Services of
Level 8 and shall perform such duties and functions and hold such
positions as the Board of Directors of Level 8 shall from time to time
determine and in the performance of his duties, comply with the policies
of and be subject to the reasonable direction of the Board of Directors of
Level 8 and the Chief Operating Officer.
2.1 Executive agrees to devote his entire working time, attention and
energies to the performance of the business of Level 8; and Executive
shall not, directly or indirectly, alone or as a member of any
partnership, or as an officer, director or employee of any other
corporation, partnership or other organization, be actively engaged in or
concerned with any other duties or pursuits which interfere with the
performance of his duties hereunder, or which, even if not interfering,
may be inimical to or contrary to the best interest of Level 8.
2.3 Executive agrees that the "Proprietary Information and Inventions
Agreement" annexed hereto as Exhibit "A' and made a part hereof shall be
deemed to be a part of this Employment Agreement.
3. Compensation, Benefits and Exgenses.
3.1 Salary. Level 8 shall pay Executive as his base compensation for all
services rendered hereunder an annual gross salary of One Hundred Twenty
Thousand Dollars ($120,000), payable no less frequently than monthly.
Level 8 shall deduct or cause to be deducted from such salary all taxes
and amounts required by law to be withheld. The base salary paid to the
Executive shall be reviewed yearly by the Chief Operating Officer which
shall take into account the productivity of Level 8, available resources,
the performance of Executive, the cost of living and other factors deemed
relevant; however the Chief Operating Officer shall have no obligation to
make any adjustments in the salary of the Executive.
Performance Bonus. The Board of Directors and Chief Operating Officer of
Level 8 shall establish a performance bonus for the Executive each fiscal
year based on the then current
1
<PAGE>
responsibilities of the Executive. The Bonus shall be determined based on
sales of X*IPC. The following is the method of calculating the Bonus. The
calculation is done Quarterly and will be based on Quarterly Sales of
X*IPC only not including any maintenance fees. Up to $500,000 in X*IPC
sales the bonus will be 0%. From $500,001 to $2,000,000 in X*IPC sales the
bonus will be 0.75% of X*IPC Sales. From $2,000,001 and up in X*IPC sales
the bonus will be 1.5% of X*IPC sales, retroactive to the first dollar.
3.3 Benefits. Executive shall be entitled to participate and shall be
included in any vacation, savings, pension, profit sharing, group
insurance, disability or similar plan or program of Level 8 that is
established for the Company employees, to the extent he is eligible under
the general provisions thereof. Executive shall receive Three (3) week
vacation per year as part of this agreement.
3.4 Business Expenses. Executive shall be reimbursed by Level 8 for all
actual, ordinary, necessary and reasonable expenses incurred by Executive
in the course of his performance of services hereunder. Executive shall
keep an itemized account of such expenses to be rendered to Level 8
monthly in accordance with the Company's travel and living policy.
4. Stock Options. As an inducement to Executive to accept employment and as
an incentive for Executive to enhance the value of Level 8 Systems, Inc.
stock, Level 8 Systems, Inc. agrees to provide the Executive with 30,000
stock options. The stock options will vest 25% immediately and 25% each
year over the next three years. The stock options will be granted at fair
value in accordance with Level 8 Systems, Inc.'s stock option program. For
any change of control of Level 8 Systems all stock options will vest
immediately.
5. Termination.
5.1 Termination by Death. If Executive dies, Executive's employment and
his rights to salary and benefits in accordance with Section 3 hereunder
shall terminate as of the date of death.
5.2 Termination by Disability. If Executive becomes disabled, Executive
shall continue to receive all of his compensation and benefits in
accordance with Section 3 for a period of three (3) months following the
Onset of Disability (as defined in this section). Any amounts due to
Executive under this section 5.2 shall be reduced, dollar-for-dollar, by
any amounts received by Executive under any disability insurance policy or
plan provided to Executive by Level 8. `Onset of Disability' means the
first day on which Executive shall be unable to attend to the regular
affairs of Level 8 on a full time basis by reason of physical or mental
incapacity, sickness or infirmity. If Executive remains disabled for three
(3) months following the Onset of Disability, Level 8 may terminate the
Executive's employment and his right to further compensation and benefits
under Section 3.
5.3 Termination for Cause. Level 8 may terminate Executive's employment
and his rights to compensation and benefits in accordance with Section 3
hereunder for Cause (as defined in this Section), except that Executive
shall be entitled to any unpaid portion of his salary and accrued benefits
under Section 3 hereof up to the date of termination. For the purpose of
this Agreement, "Cause" shall mean, (a) willful misconduct in connection
with the Executive's employment (b) willful failure to perform his
employment responsibilities in the best interest of Level 8 (including,
without limitation, breach by the Executive of any provision of any
employment, nondisclosure, non-competition or other similar agreement
between the Executive and Level 8), (c) an act or omission by Executive
constituting a felony or resulting or intended to result directly or
indirectly
2
<PAGE>
in material gain to or material personal enrichment of Executive at Level
8's expense or (d) Executive's habitual drunkenness or misuse of drugs.
5.4 Termination By Company Other than for Cause. Level 8 may upon prior
three (3) months written notice to Executive terminate Executive's
employment hereunder without Cause. Executive shall be entitled to any
unpaid portion of his salary and accrued benefits under Section 3 hereof
up to the date of termination. Upon such written notice, Executive may, at
his option, elect to terminate employment at an earlier date and receive
pay and benefits for the duration of the notice period.
5.5 Termination by Executive. Executive may upon prior three (3) months
written notice to Level 8 terminate Executive's employment hereunder. Upon
such written notice, Level 8 may, at its option, elect to terminate at an
earlier date Executive's employment and his right to compensation and
benefits in accordance with Section 3 hereunder.
5.6 Procedure upon Termination. Upon termination of his employment,
Executive shall promptly return to Level 8 all materials and property of
Level 8.
6. Non-Competition: Confidentiality. During the term of this Agreement and
for a period of one year thereafter, Executive agrees not to engage in any
business activity which is in competition with business conducted by Level
8 and/or its affiliates. Executive shall keep in confidence, and shall not
divulge or use any information of Level 8 and or its Affiliates which is
confidential by its nature except for purposes of performing his
obligation hereunder.
7. Non-Solicitation. Executive agrees that he will not, during the term of
his employment with Level 8 and for a period of one year thereafter
directly or indirectly, individually or on behalf of other persons, aid or
endeavor to solicit or induce: (a) any employees or consultants of Level 8
or its Affiliates to leave their positions with Level 8 and or its
Affiliates in order to accept a position with another person or entity; or
(b) any clients of Level 8 or its Affiliates to purchase products or
services sold or provided by Level 8 or its Affiliates from another person
or entity. Executive will not otherwise in any manner interfere with the
business of Level 8 or any other clients or customers of Level 8, or its
business or business relationships with any of its clients or customers or
any other person.
8. Applicable Law. This Agreement shall be governed by and construed in
accordance with the Laws of, and litigated in the State of New York
without regard to the conflict of laws rules thereof.
9. Notices. All notices, consents or other communications required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given (a) when delivered personally, (b) five
business days after being mailed by first class certified mail, return
receipt requested, or (c) two business days after being sent by a
nationally recognized express courier service, to the parties at their
respective addresses as follows: if to Level 8, at Arik Kilman, Chief
Operating Officer, 1 Penn Plaza, Suite 3401, New York, NY 101 19, and if
to Executive, Gonen Ziv at, 628 Norwood Drive, Westfield, NJ 07090. In the
event of a change in address each party shall notify the other in writing
of the change.
10. Other Provisions. This Agreement sets forth the entire understanding of
the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous, oral or written, expressed or
implied, agreements and understandings. This Agreement shall not be
modified or terminated except in writing. No action taken by Level 8
hereunder, including without limitation
3
<PAGE>
any waiver, consent or approval, shall be effective unless approved by the
Chief Operating Officer or the President and Chief Technology Officer of
Level 8. Neither the failure nor the delay on the part of either party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with
respect to any occurrence. No waiver shall be effective unless it is in
writing and is signed by the party asserted to have granted such waiver.
Any headings preceding the text of any of the Sections or Subsections of
this Agreement are inserted for the convenience of reference only, and
shall neither constitute a part of this Agreement nor affect its
construction, meaning or effect.
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF on the date first above written.
Level 8 Technologies, Inc.
BY: /s/ Arik Kilman
----------------------
Arik Kilman, CEO
EXECUTIVE
/s/ Gonen Ziv
----------------------
Gonen Ziv
4
<PAGE>
Exhibit 10.14A
Exhibit No. 10.14
FIRST AMENDMENT
TO
CUSTOM COMPUTER PROGRAMMING AGREEMENT
This Agreement is made and entered into as of April 1, 1998 by and between Level
8 Systems, Inc., a New York corporation, having its principal place of business
at One Penn Plaza, Suite 3401, New York, NY 10119 ("Level 8"), and Liraz Systems
Ltd., an Israeli corporation having its principal place of business at 5
Hatzoref Street, Holon 58856 Israel ("Liraz").
RECITALS
Level 8 and Liraz are parties to that certain Custom Computer Programming
Agreement dated July ___, 1995 (the "Original Agreement") pursuant to which
Liraz undertook to perform certain computer programming services for Level 8 as
part of the development by Level 8 of what eventually became known as FalconMQ
(the "Program") under terms and conditions provided therein. All terms not
otherwise defined herein shall have the meaning assigned to them in the Original
Agreement.
Level 8 is currently undergoing final negotiations with respect to the
acquisition, at a significant expense to Level 8, of an unrelated software
company, with the intent of, among other things, combining that company's
software product with and into the Program and making subsequent improvements
thereto (the "New Product").
It is expected that after a certain transitional period following the
acquisition of the other company, the Product will no longer be available as a
stand alone product and will be replaced in full by the New Product.
Consequently, the computation of Royalties for purposes of the Original
Agreement will no longer be feasible.
The parties desire, in light of these and other circumstances, to amend and
simply the Original Agreement, on the terms and conditions set forth more fully
herein.
Furthermore, Level 8 desires to appoint Liraz, and Liraz agrees to be appointed,
as an authorized reseller of the Program and the New Product, on the terms and
conditions set forth more fully herein.
NOW, THEREFORE, in consideration of the promises, mutual covenants and
agreements set forth herein, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Modifications.
(a) Repeal of Original Royalties Provision. Section 4 of the Original
Agreement, related to Payments, is hereby deleted in its entirety.
(b) New Royalties Provision. In lieu of the provisions set forth in
Section 4 of the Original Agreement, the following shall be applicable.
(1) In consideration for the Services, Level 8 hereby undertakes
to pay Liraz the following royalties:
(i) an amount equal to $1,500,000, reflecting Liraz's
out-of-pocket expenses incurred in developing the Program and
a return thereon, payable in three
<PAGE>
installments, the first of which, in the amount of $600,000,
shall be made simultaneously with the execution of this
Agreement and the second and third installments, each in the
amount of $450,000, payable on the first and second
anniversaries, respectively, of the execution of this
Agreement, in each case together with interest thereon at rate
of 8%, compounded annually, calculated from the date hereof to
the date of payment of such installment; plus
(ii) 3% of Program Revenues or New Product Revenues, as applicable,
generated on or after January 1, 1998 (the "Royalties");
provided, however, that in the event that either (i) a third
party acquires from Level 8 the ownership rights to the
Program or the New Product, or (ii) a change of control of
Level 8 takes place, Level 8 shall have the right to terminate
its obligation to pay Royalties upon terms and conditions
mutually agreed to by the parties.
(2) Royalties shall be payable under March 31, 2001 at which point
the obligation to pay them shall terminate.
(3) For purposes of this Agreement, the term "New Product
Revenues" shall mean the world wide revenues (net of returns,
sales taxes, discounts etc.) generated by Level 8 from the
sale of the New Product.
(4) Royalties accrued during any calendar quarter shall be paid,
subject to any withholding or other deduction imposed by
applicable law, by Level 8 to Liraz within 30 days after the
last day of such calendar quarter.
(5) Each Royalty payment shall be accompanied by a statement,
summarizing the basis of calculating the amount of such
payment. Liraz shall have the right at any time, by its own
personnel or its agents, to audit all sales records which
Level 8 maintains for purposes of this Agreement. Such right
to audit shall be subject to receipt of reasonable notice by
Level 8 and shall be performed during normal business hours.
(6) Level 8 shall have the exclusive right to determine or change
the prices and/or charges set by it with respect to the
Program or the New Product, at its sole discretion and without
notice or approval by Liraz.
(7) Level 8 shall make a good faith allocation to the Program
Revenues or New Product Revenues in instances where the
Program or New Product, as the case may be, is bundled with
other products (e.g., site licenses).
(c) Termination of Funding Obligations. Liraz's obligations under Section
3 of the Original Agreement (relating to Funding and Budget) are
terminated effective March 31, 1998.
(d) Technical Correction. The reference in Section 10(1) of the Original
Agreement to Section 4(g) of the Original Agreement shall be deemed a
reference to Section 1(b)(1)(ii) of this Agreement.
Section 2. Continuation and Claim Waivers.
Except to the extent they are inconsistent with the provisions of this
Agreement, the provisions of the Original Agreement shall remain in force. Each
party hereby acknowledges that it has no claim whatsoever, and it hereby waives
any claim it may have, against the other with respect to any aspect of the
Original Agreement as in effect prior to its amendment by this Agreement.
<PAGE>
Section 3. Appointment as Reseller.
Level 8 hereby appoints Liraz as an authorized reseller of the Program and, when
available, the New Product, in Israel. Liraz hereby undertakes to provide
technical support for end-users of the Program and, when available, the New
Product, in Israel. All other terms and conditions of such reseller arrangement
shall be as agreed to by the parties from time to time.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date
first written above.
Liraz Systems Ltd. Level 8 Systems, Inc.
/s/ M. Gutman /s/ Arie Kilman
- ---------------------------------- ----------------------------------------
Signature Signature
M. Gutman Arie Kilman
- ---------------------------------- ----------------------------------------
Name Name
CEO CEO
- ---------------------------------- ----------------------------------------
Title Title
- ---------------------------------- ----------------------------------------
Date Date
<PAGE>
Exhibit 10.19
December 4, 1998
Steven Dmiszewicki
8605 Bell Grove Way
Raleigh, NC 27615
Dear Steve:
I am delighted to extend our offer for you to assume the role of Chief Operating
Officer of Level 8 Systems, effective upon your acceptance. The details of your
offer are:
Position: Chief Operating Officer
Manager: Reporting to Arik Kilman
Chief Executive Officer
Location: Cary, North Carolina
Salary
You will be paid twice a month at a rate of $8,333.33 per pay period
(equivalent to $200,000.00 annualized). In addition, you will be eligible
to participate in an incentive bonus program based upon attainment of
individual goals. During your first year, your bonus potential for
attainment of individual goals will be $200,000.00.
In the event of your termination, other than voluntary or for cause, your
base salary will be continued for twelve (12) months.
Stock
You will be eligible to receive options to purchase 200,000 shares of
stock, subject to the approval of the Compensation Committee of the Board
of Directors. You will also be eligible at the discretion of the
Compensation Committee for additional options granted from time to time,
based on company and individual performance.
Benefits
You will be eligible for all standard company benefits, including health,
dental, life, and disability insurance.
Vacation & Holiday
Executive officers begin accruing prorated vacation the first of the month
following date of hire up to four weeks per year. In addition, U.S.
employees observe six standard holidays and provides for four "floating"
holidays (also prorated in the first year); the scheduling of which is
arranged between you and your manager.
<PAGE>
Offer of Employment
S. Dmiszewicki
12/4/1998
Page 2
It is a fundamental policy of Level 8 that it does not hire employees or
consultants in order to obtain access to trade secrets or proprietary
information of any of their former employers. By accepting this job offer,
you represent that (i) you will not violate the terms of any
non-competition, non-disclosure and non-solicitation agreements to which
you may be bound by any prior employer and (ii) you will not use any files
or materials in connection with your employment with Level 8 that are
trade secrets of or proprietary information to another firm.
Statement on Employment at Will
I am delighted that you have expressed an interest in Level 8 and am
confident that you will quickly become a key member of the Executive team.
However your employment with Level 8 is terminable at any time by you or
us and this letter does not guarantee employment or constitute an
employment agreement or contract for a year or for any other specified
term.
If there is anything I can do to facilitate your transition into your new role,
I hope you will contact me. Please indicate your acceptance of our offer by
signing one copy of this letter and returning it to Stephanie Price.
Yours sincerely,
/s/ Arik Kilman
Arik Kilman
Chief Executive Officer
Accepted: /s/ Steven Dmiszewicki
<PAGE>
Exhibit 10.21A
ADDENDUM #2
AGREEMENT made this 21st day of January 1999, between REGENCY PARK
CORPORATION, a North Carolina corporation having its principal place of business
in Cary, North Carolina (the "Landlord") and SEER TECHNOLOGIES, INC., a Delaware
corporation having its principal place of business in Cary, North Carolina (the
"Tenant").
W I T N E S S E T H:
WHEREAS, the Landlord and Tenant entered into an Amended and Restated
Lease Agreement dated March 31, 1997 and Addendum #1 dated July 6, 1998 (herein
collectively called the "Lease"), whereby the Landlord leased to the Tenant
premises in a building at 8000 Regency Parkway, Cary, North Carolina (herein
called the "Building"); and
WHEREAS, the Tenant desires to reduce its Premises in the Building.
NOW, THEREFORE, in consideration of the Premises and of the mutual
agreements hereinafter set forth, it is hereby mutually agreed as follows:
1. Effective April 1, 1999, the Annual Rental due under Article 2.01 ANNUAL
RENTAL of the Lease Agreement shall be as follows:
Rental of Eight Hundred Eighty-Seven Thousand Six Hundred Fifty-Eight and
90/100 Dollars ($887,658.90) per year ("Annual Rent"), payable in equal
monthly installments of Seventy-Three Thousand Nine Hundred Seventy-One
and 57/100 Dollars ($73,971.57), in advance, on or before the first day of
each calendar month for the period August 1, 1998, up to and including
March 31, 1999;
Rental of Eight Hundred Seventy-Seven Thousand Four Hundred Eighty-Five
and 00/100 Dollars ($877,485.00) per year ("Annual Rent"), payable in
equal monthly installments of Seventy-Three Thousand One Hundred
Twenty-Three and 75/100 Dollars ($73,123.75) in advance, on or before the
first day of each calendar month for the period April 1, 1999, up to and
including March 31, 2001;
Rental of Nine Hundred Twenty-Seven Thousand Six Hundred Twenty-Seven
Dollars and 00/ ($927,627.00) per year ("Annual Rent"), payable in equal
monthly installments of Seventy-Seven Thousand Three Hundred Two and 25/00
Dollars, in advance, on or before the first day of each calendar month for
the period April 1, 2001, up to and including March 31, 2004;
2. The space as outlined on the floor plan which is attached to Addendum#1,
dated July 6, 1998 as Exhibit G and Exhibit G-1, both for the second
floor, shall be replaced by Exhibit H and Exhibit H-1.
3. Effective April 1, 1999, Article 2, Paragraph 2.02.01 OPERATING EXPENSES
of the Lease Agreement shall be amended to reflect that the Tenant's share
of Operating Expenses over the Base Operating Expenses shall now be
thirty-seven and thirteen one hundredths percent (34.61%) for the "Second
Term" as per Lease.
4. Effective April 1, 1999, Article 2, Paragraph 2.02.02 REAL ESTATE TAXES
shall be amended to reflect that the Tenant's share of Real Estate Taxes
over the Base Real Estate Taxes shall now be thirty-seven and thirteen one
hundredths percent (34.61%) for the "Second Term" as per the Lease.
5. The reduction Premises constitutes approximately three thousand six
hundred fifty-six (3,656) rentable square feet.
<PAGE>
6. The "Occupied Premises" as defined in the Amended and Restated Lease
Agreement constitutes fifty thousand one hundred forty-two (50,142)
rentable square feet.
7. The Tenant shall pay to the Landlord as a one time payment to be made no
later than February 15, 1999, Ninety-Six Thousand Nine Hundred Sixty and
00/100 Dollars ($96,960.00).
8. Except as herein modified, the Amended and Restated Lease Agreement shall
continue in full force and effect.
IN WITNESS WHEREOF, this instrument has been duly executed by the parties
hereto as of the day and year first above written.
REGENCY PARK CORPORATION
Landlord
Corporate Seal
By:
-------------------------------------
Eric Salomon
Vice President
ATTEST:
- ------------------------------------
Assistant Secretary
SEER TECHNOLOGIES, INC.
Tenant
Corporate Seal
By:
-------------------------------------
Title:
----------------------------------
ATTEST:
- ------------------------------------
Secretary
<PAGE>
LOAN AND SECURITY AGREEMENT
BORROWERS: SEER TECHNOLOGIES, INC. ("SEER")
LEVEL 8 SYSTEMS, INC. ("LEVEL 8")
ADDRESS: 8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
DATE: MARCH 31, 1999
This Loan and Security Agreement is entered into on the above date between
GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation
("Greyrock"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA
90024 and the borrowers named above (jointly and severally, the "Borrower"),
whose chief executive office is located at the above address ("Borrower's
Address"). The Schedule to this Agreement (the "Schedule") being signed
concurrently is an integral part of this Agreement. (Definitions of certain
terms used in this Agreement are set forth in Section 8 below.) *
*AS TO SEER, THIS AGREEMENT AMENDS AND RESTATES IN ITS ENTIRETY THE LOAN AND
SECURITY AGREEMENT BETWEEN SEER AND GREYROCK DATED MARCH 26, 1997. ALL OTHER
SECURITY AGREEMENTS AND OTHER DOCUMENTS AND AGREEMENTS BETWEEN SEER AND GREYROCK
CONTINUE IN FULL FORCE AND EFFECT.
1. LOANS.
1.1 LOANS. Greyrock will make loans to Borrower (the "Loans"), in amounts
determined by Greyrock in its sole * discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit, Borrower
shall immediately pay the amount of the excess to Greyrock, without notice or
demand.
* REASONABLE BUSINESS
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement or in another written agreement signed by
Greyrock and Borrower. Interest shall be payable monthly, on the last day of the
month. Interest may, in Greyrock's discretion, be charged to Borrower's loan
account, and the same shall thereafter bear interest at the same rate as the
other Loans.
1.3 FEES. Borrower shall pay Greyrock the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Greyrock and are not
refundable.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Greyrock a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, all money, all collateral in which Greyrock
is granted a security interest pursuant to any other present or future
agreement, all property now or at any time in the future in Greyrock's
possession, and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products of the
foregoing, and all books and records related to any of the foregoing.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Greyrock to enter into this Agreement and to make Loans,
Borrower represents and warrants to Greyrock as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
1
<PAGE>
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (iii) do not violate Borrower's articles or certificate of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Greyrock 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Greyrock at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule*.
*, WHICH WRITTEN NOTICE SHALL BE DEEMED AUTOMATICALLY TO AMEND THE SCHEDULE
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Greyrock now has, and will
continue to have, a first-priority perfected and enforceable security interest
in all of the Collateral, subject only to the Permitted Liens, and Borrower will
at all times defend Greyrock and the Collateral against all claims of others. So
long as any Loan is outstanding which is a term loan, none of the Collateral now
is or will be affixed to any real property in such a manner, or with such
intent, as to become a fixture. Borrower is not and will not become a lessee
under any real property lease pursuant to which the lessor may obtain any rights
in any of the Collateral and no such lease now prohibits, restrains, impairs or
will prohibit, restrain or impair Borrower's right to remove any Collateral from
the leased premises. Whenever any Collateral is located upon premises in which
any third party has an interest (whether as owner, mortgagee, beneficiary under
a deed of trust, lien or otherwise), Borrower shall, whenever requested by
Greyrock, use its best efforts to cause such third party to execute and deliver
to Greyrock, in form acceptable to Greyrock, such waivers and subordinations as
Greyrock shall specify, so as to ensure that Greyrock's rights in the Collateral
are, and will continue to be, superior to the rights of any such third party.
Borrower will keep in full force and effect, and will comply with all the terms
of, any lease of real property where any of the Collateral now or in the future
may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the * Collateral in
good working condition, ordinary wear and tear excepted, and Borrower will
not use the * Collateral for any unlawful purpose. Borrower will ** advise
Greyrock in writing of any material loss or damage to the * Collateral.
* EQUIPMENT
** PROMPTLY
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now
or in the future delivered to Greyrock have been, and will be, prepared in
conformity with generally accepted accounting principles * and now and in the
future will completely and fairly reflect the financial condition of Borrower,
at the times and for the periods therein stated**. Between the last date covered
by any such statement provided to Greyrock and the date hereof, there has been
no material adverse change in the financial condition or business of Borrower.
Borrower is now and will continue to be solvent.
* (GAAP)
**, EXCEPT THAT UNAUDITED FINANCIAL STATEMENTS MAY NOT CONTAIN ALL THE NOTES
REQUIRED BY GAAP AND ARE SUBJECT TO NORMAL YEAR-END ADJUSTMENTS
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by applicable
law, and Borrower has timely paid, and will timely pay, all applicable taxes,
assessments, deposits and contributions now or in the future owed by Borrower.
Borrower may, however, defer payment of any contested taxes, provided that
Borrower (i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings
2
<PAGE>
promptly and diligently instituted and conducted, (ii) notifies Greyrock in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in * additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or any other governmental agency. Borrower shall, at all
times, utilize the services of an outside payroll service providing for the
automatic deposit of all payroll taxes payable by Borrower.
* ANY MATERIAL AMOUNT OF
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Greyrock in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes.
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants
to Greyrock as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed, bona fide, existing, unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services, in the ordinary course of Borrower's business*.
*, EXCEPT FOR RECEIVABLES WITH RESPECT TO MAINTENANCE, SERVICES AND CUSTOM
DEVELOPMENT WORK, FOR WHICH BORROWER CUSTOMARILY BILLS IN ADVANCE, AS TO WHICH
RECEIVABLES BORROWER REPRESENTS AND WARRANTS TO GREYROCK THAT SUCH RECEIVABLES
ARE THE UNDISPUTED, BONA FIDE, EXISTING OBLIGATIONS OF THE ACCOUNT DEBTORS AND
BORROWER HAS NO REASON TO BELIEVE SUCH RECEIVABLES WILL NOT BE COLLECTED.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Greyrock as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all * signatories and endorsers ** have the capacity to contract. All sales
and other transactions underlying or giving rise to each Receivable shall comply
with all applicable laws and governmental rules and regulations. All *
signatures and endorsements *** on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
* BORROWER
** AND, TO BORROWER'S KNOWLEDGE, ALL OTHER SIGNATORIES AND ENDORSERS
*** AND, TO BORROWER'S KNOWLEDGE, ALL OTHER SIGNATURES AND ENDORSEMENTS
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Greyrock transaction reports and loan requests, schedules and
assignments of all Receivables, and schedules of collections, all on
Greyrock's standard forms; provided, however, that Borrower's failure to
execute and deliver the same shall not affect or limit Greyrock's security
interest and other rights in all of Borrower's Receivables, nor shall
Greyrock's failure to advance or lend against a specific Receivable affect or
limit Greyrock's security interest and other rights therein. * by Greyrock,
Borrower shall furnish Greyrock with copies (or, at Greyrock's request,
originals) of all contracts, orders, invoices, and other similar documents,
and all original shipping instructions, delivery receipts, bills of lading,
and other evidence of delivery, for any goods the sale or disposition of
which gave rise to such Receivables, and Borrower warrants the genuineness of
all of the foregoing. Borrower shall also furnish to Greyrock an aged
accounts receivable trial balance in such form and at such intervals as
Greyrock shall request. In addition, Borrower shall deliver to Greyrock the
originals of all instruments, chattel paper, security agreements, guarantees
and other documents and property evidencing or securing any Receivables,
immediately upon receipt thereof and in the same form as received, with all
necessary indorsements.
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* UPON REASONABLE REQUEST
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Greyrock, and Borrower shall deliver all such payments and proceeds to Greyrock,
within one business day after receipt of the same, in their original form, duly
endorsed, to be applied to the Obligations in such order as Greyrock shall
determine.
4.5 DISPUTES. Borrower shall notify Greyrock promptly of all disputes or
claims relating to Receivables on the regular reports to Greyrock. Borrower
shall not forgive, or settle any Receivable for less than payment in full, or
agree to do any of the foregoing, except that Borrower may do so, provided that:
(i) Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Greyrock on the regular reports provided to Greyrock; (ii) no
Default or Event of Default has occurred and is continuing; and (iii) taking
into account all such settlements and forgiveness, the total outstanding Loans
and other Obligations will not exceed the Credit Limit.
4.6 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Greyrock). In the event any attempted return occurs
after the occurrence of any Event of Default*, Borrower shall (i) not accept any
return without Greyrock's prior written consent, ** (ii) hold the returned
Inventory in trust for Greyrock.
* THAT IS CONTINUING
** AND
4.7 VERIFICATION. Greyrock may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Greyrock or such other name as Greyrock may choose, and Greyrock or
its designee may, at any time, notify Account Debtors that it has a security
interest in the Receivables.
4.8 NO LIABILITY. Greyrock shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring * in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Greyrock be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Greyrock from liability for
its own gross negligence or willful misconduct.
* IN GOOD FAITH
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Greyrock, in such form and amounts as Greyrock
may reasonably require, and Borrower shall provide evidence of such insurance to
Greyrock, so that Greyrock is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Greyrock as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Greyrock. Upon receipt of the proceeds of any such
insurance, Greyrock shall apply such proceeds in reduction of the Obligations as
Greyrock shall determine in its sole discretion, except that, provided no
Default or Event of Default has occurred and is continuing, Greyrock shall
release to Borrower insurance proceeds with respect to Equipment totaling less
than $100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Greyrock may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Greyrock may, but
is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Greyrock copies of all reports made to insurance companies.
5.2 REPORTS. Borrower, at its expense, shall provide Greyrock with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Greyrock shall from time to time reasonably
specify.
5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
business day's notice, Greyrock, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
Greyrock shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Greyrock shall have the right to
disclose any such information * to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $600 per person per day (or such higher amount as shall represent
Greyrock's then current standard charge
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for the same), plus reasonable out-of-pockets expenses. Borrower shall not be
charged more than $3,000 per audit (plus reasonable out-of-pockets expenses),
nor shall audits be done more frequently than four times per calendar year,
provided that the foregoing limits shall not apply after the occurrence of **
Event of Default, nor shall they restrict Greyrock's right to conduct audits
at its own expense (whether or not ** Event of Default has occurred).
Borrower will not enter into any agreement with any accounting firm, service
bureau or third party to store Borrower's books or records at any location
other than Borrower's Address, without first obtaining Greyrock's written
consent, which may be conditioned upon such accounting firm, service bureau
or other third party agreeing to give Greyrock the same rights with respect
to access to books and records and related rights as Greyrock has under this
Agreement.
* IN CONFIDENCE
** AN
5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other
disposition of any Collateral shall be delivered, in kind, by Borrower to
Greyrock in the original form in which received by Borrower not later than the
following business day after receipt by Borrower, to be applied to the
Obligations in such order as Greyrock shall determine; provided that, if no
Default or Event of Default has occurred and is continuing, and if no term loan
is outstanding hereunder, then Borrower shall not be obligated to remit to
Greyrock the proceeds of the sale of Equipment * which is sold in the ordinary
course of business, in a good-faith arm's length transaction. Except for the
proceeds of the sale of Equipment * as set forth above, Borrower shall not
commingle proceeds of Collateral with any of Borrower's other funds or property,
and shall hold such proceeds separate and apart from such other funds and
property and in an express trust for Greyrock. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
* COLLATERAL
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower
shall not, without Greyrock's prior written consent *, do any of the following:
(i) merge or consolidate with another corporation or entity **; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
*** transaction outside the ordinary course of business; (iv) sell or transfer
any Collateral, except that, provided no Default or Event of Default has
occurred and is continuing, Borrower may (a) sell finished Inventory in the
ordinary course of Borrower's business, and (b) if no term loan is outstanding
hereunder, sell Equipment in the ordinary course of business, in good-faith
arm's length transactions; (v) store any Inventory or other Collateral with any
warehouseman or other third party; (vi) sell any Inventory on a sale-or-return,
guaranteed sale, consignment, or other contingent basis; (vii) make any loans of
any money or other assets****; (viii) incur any debts, outside the ordinary
course of business, which would have a material, adverse effect on Borrower or
on the prospect of repayment of the Obligations; (ix) guarantee or otherwise
become liable with respect to the obligations of another party or entity; (x)
pay or declare any dividends on Borrower's stock (except for dividends payable
solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise
acquire, directly or indirectly, any of Borrower's stock*****; (xii) make any
change in Borrower's capital structure which would have a material adverse
effect on Borrower or on the prospect of repayment of the Obligations; or (xiii)
dissolve or elect to dissolve; or (xiv) agree to do any of the foregoing.
* NOT TO BE UNREASONABLY WITHHELD
** (EXCEPT FOR A SUBSIDIARY OF BORROWER)
*** MATERIAL
**** OTHER THAN ADVANCES TO EMPLOYEES IN THE ORDINARY COURSE OF BUSINESS NOT
TO EXCEED, IN THE AGGREGATE TOTAL, $250,000
*****, EXCEPT FOR ORDINARY COURSE REPURCHASES FROM EMPLOYEES UPON TERMINATION
OF EMPLOYMENTS IN AN AMOUNT NOT TO EXCEED, IN THE AGGREGATE TOTAL, $1,000,000
PER CALENDAR YEAR
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Greyrock with respect to any Collateral or in any
manner relating to Borrower, Borrower shall, without expense to Greyrock, make
available Borrower and its officers, employees and agents, and Borrower's books
and records, without charge, to the extent that Greyrock may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.
5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify Greyrock in
writing of any change in its officers or directors, the opening of any new bank
account or other deposit account, and any material adverse change in the
business or financial affairs of Borrower.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Greyrock, to execute all documents and take all actions, as Greyrock * may deem
reasonably necessary or useful in order to perfect and maintain Greyrock's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
* REASONABLY
5.9 INDEMNITY. Borrower hereby agrees to indemnify Greyrock and hold Greyrock
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses (including
* attorneys' fees), of every nature, character and description, which Greyrock
may sustain or incur based upon or arising out of any of the Obligations, any
actual or alleged failure to collect and pay over any
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<PAGE>
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Greyrock and Borrower, any actual or alleged failure of
Greyrock to comply with any writ of attachment or other legal process relating
to Borrower or any of its property, or any other matter, cause or thing
whatsoever occurred, done, omitted or suffered to be done by Greyrock **
relating to Borrower or the Obligations (except any such amounts sustained or
incurred as the result of the gross negligence or willful misconduct of Greyrock
or any of its directors, officers, employees, agents, attorneys, or any other
person affiliated with or representing Greyrock). Notwithstanding any provision
in this Agreement to the contrary, the indemnity agreement set forth in this
Section shall survive any termination of this Agreement and shall for all
purposes continue in full force and effect.
* REASONABLE
** IN GOOD FAITH
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity
date set forth on the Schedule (the "Maturity Date"); provided that the Maturity
Date shall automatically be extended, and this Agreement shall automatically and
continuously renew, for successive additional terms of one year each, unless one
party gives written notice to the other, not less than sixty days prior to the
next Maturity Date, that such party elects to terminate this Agreement effective
on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity
Date as follows: (i) by Borrower, effective three business days after written
notice of termination is given to Greyrock; or (ii) by Greyrock at any time
after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Greyrock under
this Section 6.2, Borrower shall pay to Greyrock a termination fee (the
"Termination Fee") in the amount shown on the Schedule. The Termination Fee
shall be due and payable on the effective date of termination and thereafter
shall bear interest at a rate equal to the highest rate applicable to any of the
Obligations.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding letters of
credit issued based upon an application, guarantee, indemnity or similar
agreement on the part of Greyrock, then on such date Borrower shall provide to
Greyrock cash collateral in an amount equal to 110% * of the face amount of all
such letters of credit plus all interest, fees and costs due or (in Greyrock's
** estimation) likely to become due in connection therewith, to secure all of
the Obligations relating to said letters of credit, pursuant to Greyrock's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Greyrock's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Greyrock, Greyrock may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Greyrock, nor shall any such termination relieve Borrower of any
Obligation to Greyrock, until all of the Obligations have been paid and
performed in full. Upon payment and performance in full of all the Obligations
and termination of this Agreement, Greyrock shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be reasonably required to terminate Greyrock's security interests.
* 100%
** REASONABLE
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall
give Greyrock immediate written notice thereof: (a) Any warranty,
representation, statement, report or certificate made or delivered to
Greyrock by Borrower or any of Borrower's officers, employees or agents, now
or in the future, shall be untrue or misleading in a material respect; or (b)
Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time shall exceed the Credit Limit ++++; or (d) Borrower
shall fail to perform any non-monetary Obligation which by its nature cannot
be cured; or (e) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within 5* business days after the date
performance is due; or (f) any levy, assessment, attachment, seizure, lien or
encumbrance (other than a Permitted Lien) is made on all or any part of the
Collateral which is not cured within 10 ** days after the occurrence of the
same; or (g) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or (i)
dissolution, termination of existence, *** insolvency or business failure of
Borrower or any Guarantor; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit
of creditors by, or the commencement of any proceeding by Borrower or any
Guarantor under any reorganization, bankruptcy,
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insolvency, arrangement, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, now or in the future in effect; or (j) the
commencement of any proceeding against Borrower or any Guarantor under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect, which is not cured by the dismissal thereof within 45 days
after the date commenced; or (k) revocation or termination **** of, or *****
limitation or denial of liability upon, any guaranty of the Obligations or
any attempt to do any of the foregoing; or (l) revocation or termination ****
of, or ***** limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset pledged by any
third party to secure any or all of the Obligations, or any attempt to do any
of the foregoing, or commencement of proceedings by or against any such third
party under any bankruptcy or insolvency law; or (m) Borrower makes any
payment on account of any indebtedness or obligation which has been
subordinated to the Obligations other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits or terminates its
subordination agreement + or (n) ++; or (o) Borrower shall generally not pay
its debts as they become due, or Borrower shall conceal, remove or transfer
any part of its property, with intent to hinder, delay or defraud its
creditors, or make or suffer any transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p)
there shall be a material adverse change in Borrower's business or financial
condition+++. Greyrock may cease making any Loans hereunder during any of the
above cure periods, and thereafter if an Event of Default has occurred.
++++AND SUCH EXCESS SHALL NOT BE REPAID BY BORROWER ON DEMAND BY GREYROCK
* 10
** 20 BUSINESS
*** OR
**** (WITHOUT GREYROCK'S CONSENT)
***** MATERIAL
+, WHICH LIMITATION OR TERMINATION HAS A MATERIALLY ADVERSE EFFECT ON
GREYROCK
++ LEVEL 8 SHALL OWN LESS THAN 70% OF THE ISSUED AND OUTSTANDING SHARES OF
STOCK OF SEER, OR THERE SHALL BE A CHANGE IN THE RECORD OR BENEFICIAL OWNERSHIP
OF AN AGGREGATE OF MORE THAN 40% OF THE OUTSTANDING SHARES OF STOCK OF LEVEL 8,
IN ONE OR MORE TRANSACTIONS, COMPARED TO THE OWNERSHIP OF OUTSTANDING SHARES OF
ITS STOCK IN EFFECT ON THE DATE HEREOF
+++; PROVIDED THAT NO OCCURRENCE OR CONDITION SHALL BE DEEMED TO BE A
MATERIAL ADVERSE CHANGE IN BORROWER'S BUSINESS OR FINANCIAL CONDITION HEREUNDER
TO THE EXTENT THAT SUCH OCCURRENCE OR CONDITION IS CONSISTENT IN ALL MATERIAL
RESPECTS WITH BORROWER'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 1996; OR (Q) THE FAILURE OF SEER
TECHNOLOGIES BENELUX B.V. OR SEER TECHNOLOGIES IRELAND LIMITED (COLLECTIVELY
"SUBSIDIARIES") TO EXECUTE AND DELIVER TO GREYROCK A CONTINUING GUARANTY OF ALL
OBLIGATIONS OF BORROWER TO GREYROCK, COLLATERALIZED BY A WRITTEN SECURITY
INTEREST IN THOSE ASSETS OF SUBSIDIARIES DESIGNATED BY GREYROCK AND ANY RELATED
DOCUMENTS REASONABLY REQUESTED BY GREYROCK ON OR BEFORE 10 DAYS AFTER THE DATE
HEREOF (IF NOT ALREADY COMPLETED).
++++AND SUCH EXCESS SHALL NOT BE REPAID BY BORROWER ON DEMAND BY GREYROCK
7.2 REMEDIES. Upon the occurrence and during the continuance of any Event
of Default, and at any time thereafter, Greyrock, at its option, and without
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following*: (a) Cease making Loans
or otherwise extending credit to Borrower under this Agreement or any other
document or agreement; (b) Accelerate and declare all or any part of the
Obligations to be immediately due, payable, and performable, notwithstanding
any deferred or installment payments allowed by any instrument evidencing or
relating to any Obligation; (c) Take possession of any or all of the
Collateral wherever it may be found, and for that purpose Borrower hereby
authorizes Greyrock without judicial process to enter onto any of Borrower's
premises without interference to search for, take possession of, keep, store,
or remove any of the Collateral, and remain on the premises or cause a
custodian to remain on the premises in exclusive control thereof, without
charge for so long as Greyrock ** deems it necessary in order to complete the
enforcement of its rights under this Agreement or any other agreement;
provided, however, that should Greyrock seek to take possession of any of the
Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond
and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover
possession thereof; and (iii) any requirement that Greyrock retain possession
of, and not dispose of, any such Collateral until after trial or final
judgment; (d) Require Borrower to assemble any or all of the Collateral and
make it available to Greyrock at places designated by Greyrock which are
reasonably convenient to Greyrock and Borrower, and to remove the Collateral
to such locations as Greyrock may deem advisable; (e) Complete the
processing, manufacturing or repair of any Collateral
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prior to a disposition thereof and, for such purpose and for the purpose of
removal, Greyrock shall have the right to use Borrower's premises, vehicles,
hoists, lifts, cranes, equipment and all other property without charge; (f)
Sell, lease or otherwise dispose of any of the Collateral, in its condition
at the time Greyrock obtains possession of it or after further manufacturing,
processing or repair, at one or more public and/or private sales, in lots or
in bulk, for cash, exchange or other property, or on credit, and to adjourn
any such sale from time to time without notice other than oral announcement
at the time scheduled for sale. Greyrock shall have the right to conduct such
disposition on Borrower's premises without charge, for such time or times as
Greyrock deems reasonable, or on Greyrock's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Greyrock may
directly or through any affiliated company purchase or lease any Collateral
at any such public disposition, and if permissible under applicable law, at
any private disposition. Any sale or other disposition of Collateral shall
not relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Greyrock to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open
mail addressed to Borrower and remove therefrom payments made with respect to
any item of the Collateral or proceeds thereof, and, in Greyrock's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables, General Intangibles and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and state
income tax returns and the books and records utilized in the preparation
thereof or referring thereto. All reasonable attorneys' fees, expenses,
costs, liabilities and obligations incurred by Greyrock with respect to the
foregoing shall be added to and become part of the Obligations, shall be due
on demand, and shall bear interest at a rate equal to the highest interest
rate applicable to any of the Obligations. Without limiting any of Greyrock's
rights and remedies, *** of any Event of Default, the interest rate
applicable to the Obligations shall be increased by an additional four
percent per annum.
*, SUBJECT, IN EACH CASE, TO COMPLIANCE WITH THE CODE
** REASONABLY
*** DURING THE CONTINUATION
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Greyrock agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Greyrock, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in
cash or by cashier's check or wire transfer is required; (vi) With respect to
any sale of any of the Collateral, Greyrock may (but is not obligated to) direct
any prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Greyrock shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of any
Event of Default, without limiting Greyrock's other rights and remedies,
Borrower grants to Greyrock an irrevocable power of attorney coupled with an
interest, authorizing and permitting Greyrock (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to do
any or all of the following, in Borrower's name or otherwise, but Greyrock
agrees to exercise the following powers in a commercially reasonable manner: (a)
Execute on behalf of Borrower any documents that Greyrock may, in its sole *
discretion, deem advisable in order to perfect and maintain Greyrock's security
interest in the Collateral, or in order to exercise a right of Borrower or
Greyrock, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements; (b) Execute
on behalf of Borrower any document exercising, transferring or assigning any
option to purchase, sell or otherwise dispose of or to lease (as lessor or
lessee) any real or personal property which is part of Greyrock's Collateral or
in which Greyrock has an interest; (c) Execute on behalf of Borrower, any
invoices relating to any Receivable, any draft against any Account Debtor and
any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice
of Lien, claim of mechanic's, materialman's or other lien, or assignment or
satisfaction of mechanic's, materialman's or other lien; (d) Take control in any
manner of any cash or non-cash items of payment or proceeds of Collateral;
endorse the name of Borrower upon any instruments, or documents, evidence of
payment or Collateral that may come into Greyrock's possession; (e) Endorse all
checks and other forms of remittances received by Greyrock; (f) Pay, contest or
settle any lien, charge, encumbrance, security interest and adverse claim in or
to any of the Collateral, or any judgment based thereon, or otherwise take any
action to terminate or discharge the same; (g) Grant extensions of time to pay,
compromise claims and settle Receivables and General Intangibles for less than
face value and execute all releases and other documents in connection therewith;
(h) Pay any sums required on account of
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Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Greyrock the same rights of access and other rights with
respect thereto as Greyrock has under this Agreement; and (k) Take any action or
pay any sum required of Borrower pursuant to this Agreement and any other
present or future agreements. Any and all reasonable sums paid and any and all
reasonable costs, expenses, liabilities, obligations and reasonable attorneys'
fees incurred by Greyrock with respect to the foregoing shall be added to and
become part of the Obligations, shall be payable on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. In no event shall Greyrock's rights under the foregoing power of
attorney or any of Greyrock's other rights under this Agreement be deemed to
indicate that Greyrock is in control of the business, management or properties
of Borrower.
* REASONABLE
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
or other disposition of the Collateral shall be applied by Greyrock first to the
reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by Greyrock in the exercise of its rights under this Agreement, second
to the interest due upon any of the Obligations, and third to the principal of
the Obligations, in such order as Greyrock shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other persons legally
entitled thereto; Borrower shall remain liable to Greyrock for any deficiency.
If Greyrock, in its sole discretion, directly or indirectly enters into a
deferred payment or other credit transaction with any purchaser at any sale of
Collateral, Greyrock shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of
purchase price or deferring the reduction of the Obligations until the actual
receipt by Greyrock of the cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Greyrock shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Greyrock and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Greyrock of one or more of its rights or remedies shall not be deemed an
election, nor bar Greyrock from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Greyrock to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable.
"AFFILIATE" means, with respect to any Person, a director, officer, or any
parent or subsidiary of such Person, or any Person controlling, controlled by
or under common control with such Person.
"AGREEMENT" and "THIS AGREEMENT" means this Loan and Security Agreement and
all modifications and amendments thereto, extensions thereof, and replacements
therefor.
"BUSINESS DAY" means a day on which Greyrock is open for business.
"CODE" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"COLLATERAL" has the meaning set forth in Section 2.1 above.
"DEFAULT" means any event which with notice or passage of time or both, would
constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code.
"ELIGIBLE RECEIVABLES" MEANS RECEIVABLES ARISING IN THE ORDINARY COURSE OF
BORROWER'S BUSINESS FROM THE SALE OF GOODS OR RENDITION OF SERVICES, WHICH
GREYROCK, IN ITS REASONABLE BUSINESS JUDGMENT, SHALL DEEM ELIGIBLE FOR
BORROWING, BASED ON SUCH CONSIDERATIONS AS GREYROCK MAY FROM TIME TO TIME DEEM
APPROPRIATE. WITHOUT LIMITING THE FACT THAT THE DETERMINATION OF WHICH
RECEIVABLES ARE ELIGIBLE FOR BORROWING IS A MATTER OF GREYROCK'S REASONABLE
BUSINESS DISCRETION, THE FOLLOWING (THE "MINIMUM ELIGIBILITY REQUIREMENTS") ARE
THE MINIMUM REQUIREMENTS FOR A RECEIVABLE TO BE AN ELIGIBLE RECEIVABLE: (I) THE
RECEIVABLE MUST NOT BE OUTSTANDING FOR MORE THAN 90 DAYS FROM ITS DUE DATE, (II)
THE RECEIVABLE MUST NOT BE SUBJECT TO ANY CONTINGENCIES (INCLUDING RECEIVABLES
ARISING FROM SALES ON CONSIGNMENT, GUARANTEED SALE OR OTHER TERMS PURSUANT TO
WHICH PAYMENT BY THE ACCOUNT DEBTOR MAY BE CONDITIONAL) EXCEPT FOR RECEIVABLES
WITH RESPECT TO MAINTENANCE, SERVICES AND CUSTOM DEVELOPED WORK, FOR WHICH
BORROWER CUSTOMARILY BILLS IN ADVANCE, (III) THE RECEIVABLE MUST NOT BE OWING
FROM AN ACCOUNT DEBTOR WITH WHOM THE BORROWER HAS ANY DISPUTE (WHETHER OR NOT
RELATING TO THE PARTICULAR RECEIVABLE), (IV) THE RECEIVABLE MUST NOT BE OWING
FROM AN AFFILIATE OF BORROWER, (V) THE
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RECEIVABLE MUST NOT BE OWING FROM AN ACCOUNT DEBTOR WHICH IS SUBJECT TO ANY
INSOLVENCY OR BANKRUPTCY PROCEEDING, OR WHOSE FINANCIAL CONDITION IS NOT
ACCEPTABLE TO GREYROCK, OR WHICH, FAILS OR GOES OUT OF A MATERIAL PORTION OF ITS
BUSINESS, (VI) THE RECEIVABLE MUST NOT BE OWING FROM AN ACCOUNT DEBTOR TO WHOM
BORROWER IS OR MAY BE LIABLE FOR GOODS PURCHASED FROM SUCH ACCOUNT DEBTOR OR
OTHERWISE. IF MORE THAN 50% OF THE RECEIVABLES OWING FROM AN ACCOUNT DEBTOR ARE
OUTSTANDING MORE THAN 90 DAYS FROM THEIR DUE DATE (WITHOUT REGARD TO UNAPPLIED
CREDITS) OR ARE OTHERWISE NOT ELIGIBLE RECEIVABLES, THEN ALL RECEIVABLES OWING
FROM THAT ACCOUNT DEBTOR WILL BE DEEMED INELIGIBLE FOR BORROWING. GREYROCK MAY,
FROM TIME TO TIME, IN ITS DISCRETION, REVISE THE MINIMUM ELIGIBILITY
REQUIREMENTS, UPON WRITTEN NOTICE TO THE BORROWER.
"EQUIPMENT" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"EVENT OF DEFAULT" means any of the events set forth in Section 7.1 of this
Agreement.
"GENERAL INTANGIBLES" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Greyrock, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including life insurance, key man insurance,
credit insurance, liability insurance, property insurance and other insurance),
tax refunds and claims, computer programs, discs, tapes and tape files, claims
under guaranties, security interests or other security held by or granted to
Borrower, all rights to indemnification and all other intangible property of
every kind and nature (other than Receivables).
"GUARANTOR" means any Person who has guaranteed any of the Obligations.
"INVENTORY" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including all raw materials,
work in process, finished goods and goods in transit), and all materials and
supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"LIBOR RATE" means (i) the one-month London Interbank Offered Rate for
deposits in U.S. dollars, as shown each day in The Wall Street Journal (Eastern
Edition) under the caption "Money Rates - London Interbank Offered Rates
(LIBOR)"; or (ii) if the Wall Street Journal does not publish such rate, the
offered one-month rate for deposits in U.S. dollars which appears on the Reuters
Screen LIBO Page as of 10:00 a.m., New York time, each day, PROVIDED that if at
least two rates appear on the Reuters Screen LIBO Page on any day, the "LIBOR
Rate" for such day shall be the arithmetic mean of such rates; or (iii) if the
Wall Street Journal does not publish such rate on a particular day and no such
rate appears on the Reuters Screen LIBO Page on such day, the rate per annum at
which deposits in U.S. dollars are offered to the principal London office of The
Chase Manhattan Bank, in the London interbank market at approximately 11:00
A.M., London time, on such day in an amount approximately equal to the
outstanding principal amount of the Loans, for a period of one month, in each of
the foregoing cases as determined in good faith by Greyrock, which determination
shall be conclusive absent manifest error.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Greyrock, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Greyrock in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, loan fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement between Borrower and Greyrock.
"PERMITTED LIENS" means the following: (i) purchase money security interests
in * specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens which are subordinate to the security interest in favor of Greyrock and
are consented to in writing by Greyrock
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(which consent shall not be unreasonably withheld); (v) security interests being
terminated substantially concurrently with this Agreement; (vi) liens of
materialmen, mechanics, warehousemen, carriers, or other similar liens arising
in the ordinary course of business and securing obligations which are not
delinquent; ** (vii) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (i) or (ii) *** above, provided that any extension, renewal or
replacement lien is limited to the property encumbered by the existing lien and
the principal amount of the indebtedness being extended, renewed or refinanced
does not increase; (viii) **** Liens in favor of customs and revenue authorities
which secure payment of customs duties in connection with the importation of
goods. Greyrock will have the right to require, as a condition to its consent
under subparagraph (iv) above, that the holder of the additional security
interest or lien sign an intercreditor agreement on Greyrock's then standard
form, acknowledge that the security interest is subordinate to the security
interest in favor of Greyrock, and agree not to take any action to enforce its
subordinate security interest so long as any Obligations remain outstanding, and
that Borrower agree that any uncured default in any obligation secured by the
subordinate security interest shall also constitute an Event of Default under
this Agreement.
* INVENTORY AND
** (VII) LIENS INCURRED AGAINST DEPOSITS MADE IN THE ORDINARY COURSE OF
BUSINESS IN CONNECTION WITH WORKER'S COMPENSATION, UNEMPLOYMENT INSURANCE AND
SOCIAL SECURITY BENEFITS;
(VIII) LIENS AGAINST CASH SECURING THE PERFORMANCE OF BIDS, TENDERS,
STATUTORY OBLIGATIONS, SURETY AND OTHER OBLIGATIONS OF A LIKE NATURE INCURRED IN
THE ORDINARY COURSE OF BUSINESS;
(IX) LIENS UPON ANY REAL PROPERTY ACQUIRED OR IMPROVED BY BORROWER OR AN
AFFILIATE THEREOF THAT ARE INCURRED WITHIN SIX (6) MONTHS AFTER SUCH ACQUISITION
OR IMPROVEMENT TO SECURE OR PROVIDE FOR THE PAYMENT OF ANY PART OF THE PURCHASE
PRICE OF SUCH REAL PROPERTY OR THE COST OF SUCH IMPROVEMENT;
(X) LIENS IN FAVOR OF GREYROCK;
(XI)
*** (IV) OR (IX)
**** (XII)
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
OTHER TERMS. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Greyrock
(including proceeds of Receivables and payment of the Obligations in full) shall
be deemed applied by Greyrock on account of the Obligations three Business Days
after receipt by Greyrock of immediately available funds. Greyrock shall not,
however, be required to credit Borrower's account for the amount of any item of
payment which is unsatisfactory to Greyrock in its * discretion, and Greyrock
may charge Borrower's Loan account for the amount of any item of payment which
is returned to Greyrock unpaid.
* REASONABLE
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may
be applied, and in Greyrock's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Greyrock shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNT. Greyrock may, in its discretion, require that
Borrower pay monetary Obligations in cash * to Greyrock, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans.
* IMMEDIATELY AVAILABLE FUNDS
9.4 MONTHLY ACCOUNTINGS. Greyrock shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed * correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Greyrock), unless Borrower
notifies Greyrock in writing to the contrary within sixty days after each
account is rendered, describing the nature of any alleged errors or admissions.
* REBUTTABLY PRESUMED
9.5 NOTICES. All notices to be given under this Agreement shall be in writing
and shall be given either personally or by reputable private delivery service or
by regular first-class mail, or certified mail return receipt requested,
addressed to Greyrock or Borrower at the
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addresses shown in the heading to this Agreement, or at any other address
designated in writing by one party to the other party. All notices shall be
deemed to have been given upon delivery in the case of notices personally
delivered, or at the expiration of one business day following delivery to the
private delivery service, or two business days following the deposit thereof in
the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any court
of competent jurisdiction to be void or unenforceable, such defect shall not
affect the remainder of this Agreement, which shall continue in full force and
effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Greyrock and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. THERE ARE NO ORAL
UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT
SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE PARTIES
IN CONNECTION HEREWITH.
9.8 WAIVERS. The failure of Greyrock at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Greyrock shall not waive or
diminish any right of Greyrock later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Greyrock shall be deemed to have been
waived by any act or knowledge of Greyrock or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Greyrock and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Greyrock on which Borrower is or may in any way be liable, and notice of any
action taken by Greyrock, unless expressly required by this Agreement.
9.9 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Greyrock.
9.10 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.11 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Greyrock for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Greyrock, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Greyrock incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Greyrock's security interest in, the Collateral; and otherwise represent
Greyrock in any litigation relating to Borrower. If either Greyrock or Borrower
files any lawsuit against the other predicated on a breach of this Agreement,
the prevailing party in such action shall be entitled to recover its reasonable
costs and attorneys' fees, including (but not limited to) reasonable attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. All attorneys' fees and costs to which
Greyrock may be entitled pursuant to this Paragraph shall immediately become
part of Borrower's Obligations, shall be due on demand, and shall bear interest
at a rate equal to the highest interest rate applicable to any of the
Obligations.
9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Greyrock; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Greyrock, and any prohibited assignment
shall be void. No consent by Greyrock to any assignment shall release Borrower
from its liability for the Obligations.
9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.14 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Greyrock, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Greyrock,
its directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent
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jurisdiction by the filing of a complaint within one year after the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based, and the service of a summons and complaint on an officer of
Greyrock, or on any other person authorized to accept service on behalf of
Greyrock, within thirty (30) days thereafter. Borrower agrees that such one-year
period is a reasonable and sufficient time for Borrower to investigate and act
upon any such claim or cause of action. The one-year period provided herein
shall not be waived, tolled, or extended except by the written consent of
Greyrock in its sole discretion. This provision shall survive any termination of
this Loan Agreement or any other present or future agreement.
9.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Greyrock acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Greyrock or Borrower under any
rule of construction or otherwise.
9.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Greyrock and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Greyrock * to enter into this Agreement, Borrower (i)
agrees that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Greyrock's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
* THE PARTIES
9.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GREYROCK EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GREYROCK AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF GREYROCK OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GREYROCK OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
In witness whereof, the parties hereto have executed and delivered this
Agreement under seal the date first above written.
BORROWER:
SEER TECHNOLOGIES, INC.
BY
------------------------------------------------
PRESIDENT OR VICE PRESIDENT
BY
------------------------------------------------
SECRETARY OR ASS'T SECRETARY
BORROWER:
LEVEL 8 SYSTEMS, INC.
BY
------------------------------------------------
PRESIDENT OR VICE PRESIDENT
BY
------------------------------------------------
SECRETARY OR ASS'T SECRETARY
GREYROCK:
GREYROCK CAPITAL,
A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION
BY
------------------------------------------------
TITLE
------------------------------------------------
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SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWERS: SEER TECHNOLOGIES, INC.
LEVEL 8 SYSTEMS, INC.
ADDRESS: 8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
DATE: MARCH 31, 1999
This Schedule is an integral part of the Loan and Security Agreement between
GREYROCK CAPITAL, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION
("Greyrock") and the above-borrower ("Borrower") of even date.
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: $25,000,000 (the
"Dollar Limit") at any one time outstanding; or the sum
of the following subparagraphs (a), (b) and (c):
(a) RECEIVABLE LOANS. Loans ("Receivable Loans") up to
the sum of the following percentages of Borrower's
Eligible Receivables (as defined in Section 8 above):
(i) 80% of the amount of eligible U.S. accounts;
PLUS
(ii) the lesser of 80% of Unbilled Receivables (as
defined below) or $7,000,000; PLUS
(iii) the lesser of 80% of the amount of eligible
Australian Receivables or $2,000,000; PLUS
(iv) 80% of the amount of eligible Irish
Receivables; PLUS
(V) 80% of the amount of eligible Netherlands
Receivables.
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As used herein "Unbilled Receivables" shall mean
Receivables with respect to which the invoice and other
necessary billing documentation have not been submitted
to the applicable Account Debtor in connection with a
completed (or contracted) sale of goods, rendition of
services or licensing of software but which otherwise
qualify as Eligible Receivables for purposes of the
Loan Agreement.
Receivable Loans will be made separately to each
Borrower based on the Receivables of each Borrower.
Loans with respect, but subject to the dollar limits
set forth above, which shall apply to the total
Receivable Loans to all Borrowers.
(b) TERM LOAN. A Loan (the "Term Loan") in the original
principal amount of $7,000,000, which shall be made
concurrently herewith to Seer.
(c) EQUIPMENT LOAN. A Loan (the "Equipment Loan") in
the original principal amount of $2,500,000, which
shall be made concurrently herewith to Seer.
(d) FOREIGN ACCOUNTS. Notwithstanding the foregoing,
Loans will not be made with respect to Australian,
Irish or Netherlands Receivables unless and until the
following conditions are satisfied:
(i) Borrower or one of its subsidiaries has good
title to the Receivables, free and clear of all
liens, security interests and encumbrances (other
than in favor of Greyrock);
(ii) if the Receivables are owned by a subsidiary of
Borrower, such subsidiary shall execute and deliver
to Greyrock a continuing guaranty in form and
substance satisfactory to Greyrock with respect to
all of the Obligations and a security agreement or
other documentation specified by Greyrock, granting
to Greyrock a first priority perfected security
interest in all of such Receivables and all such
subsidiary's other assets, and Greyrock shall
receive such opinions, certificates and other
documents in connection therewith as it shall
specify; and
(iii) if the Receivables are owned by Borrower,
Borrower shall execute and deliver to Greyrock a
security agreement or other supplemental or
additional documentation specified by Greyrock,
confirming the grant to Greyrock a first priority
perfected security interest in all of such
Receivables and Greyrock shall receive such
opinions, certificates and other documents in
connection therewith as it shall specify.
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Borrower shall cause all of the foregoing documents and
agreements and security interests to continue in full
force and effect throughout the term of this Agreement.
(e) TERM LOAN AND EQUIPMENT LOAN--REPAYMENT TERMS
(1) The Term Loan shall be disbursed concurrently
herewith and shall be repaid in 24 equal monthly
installments of $291,667 each, commencing on JANUARY
1, 2000 and continuing on the same day of each month
thereafter until paid in full; provided that as
provided in Section 6.3 above the entire unpaid
principal balance of the Term Loan and all other
Obligations shall be due an payable on termination
of this Agreement.
(2) The Equipment Loan shall be disbursed
concurrently herewith and shall be repaid in 30
equal monthly installments of $83,333 each,
commencing on APRIL 1, 1999 and continuing on the
same day of each month thereafter until paid in
full; provided that as provided in Section 6.3 above
the entire unpaid principal balance of the Equipment
Loan and all other Obligations shall be due an
payable on termination of this Agreement.
(3) Accrued interest on the Term Loan and the
Equipment Loan shall be paid monthly on the last day
of each month as provided in Section 1.2 above and
Section 2 below.
(4) The Term Loan and Equipment Loan after being
repaid in whole or in part may not be reborrowed.
LETTER OF CREDIT SUBLIMIT Greyrock, in its reasonable business discretion, will
from time to time during the term of this Agreement
issue letters of credit for the account of the
Borrower ("Letters of Credit"), in accordance
with a Letter of Credit Agreement of even date,
in an aggregate amount at any one time outstanding
not to exceed $500,000, upon the request of the
Borrower, provided that, on the date the Letters
of Credit are to be issued, Borrower has available
to it Loans in an amount equal to or greater than
the face amount of the Letters of Credit to be
issued, and provided that no further LCs will be
issued after SEPTEMBER 30, 1999. Fees for the
Letters of Credit shall be as provided in said
Letter of Credit Agreement. The Credit Limit set
forth above and the Loans available under this
Agreement at any time shall be reduced by the face
amount of Letters of Credit from time to time
outstanding.
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2. INTEREST.
INTEREST RATE (Section 1.2):
The interest rate in effect throughout each calendar
month during the term of this Agreement shall be the
following, which shall be applicable to all Loans
(including without limitation the Receivable Loans, the
Term Loan and the Equipment Loan) and all other
Obligations:
<TABLE>
<CAPTION>
PERIOD INTEREST RATE
------ -------------
<S> <C>
Date hereof through
June 30, 1999 Prime Rate
July 1, 1999 through
June 30, 2000 Prime Rate plus 1% per annum
July 1, 2000 and
thereafter Prime Rate plus 2% per annum
</TABLE>
Interest shall be calculated on the basis of a 360-day
year for the actual number of days elapsed. The
interest rate applicable to all Loans shall be adjusted
monthly as of the first day of each month, and the
interest to be charged for each month shall be based on
the highest "Prime Rate" in effect during said month.
"Prime Rate" shall mean the actual "Reference Rate' or
the substitute therefor of the Bank of America NT & SA
(or its successor) whether or not that rate is the
lowest interest rate charged by said bank. If the Prime
Rate, as defined, is unavailable, "Prime Rate" shall
mean the highest of the prime rates published in the
Wall Street Journal on the first business day of the
month, as the base rate on corporate loans at large
U.S. money center commercial banks."
3. FEES (Section 1.3/Section 6.2):
Loan Fee: NOT APPLICABLE
Termination Fee: NOT APPLICABLE
4
<PAGE>
NSF Check Charge: $15.00 per item.
Wire Transfers: $15.00 per transfer.
4. MATURITY DATE
(Section 6.1): DECEMBER 31, 1999, subject to automatic renewal as
provided in Section 6.1 above, and early termination as
provided in Section 6.2 above.
5. REPORTING. (Section 5.2):
Borrower shall provide Greyrock with the following:
1. Annual financial statements, as soon as
available, and in any event within 90 days following
the end of Borrower's fiscal year, certified by
independent certified public accountants acceptable
to Greyrock.
2. Quarterly unaudited financial statements, as soon
as available, and in any event within 45 days after
the end of each fiscal quarter of Borrower.
3. Monthly unaudited financial statements, as soon
as available, and in any event within 30 days after
the end of each month.
4. Monthly Receivable agings, aged by invoice date,
within 10 Business Days after the end of each month
which is not a fiscal quarter end and 15 Business
Days after the end of each month which is a fiscal
quarter end.
5. Monthly accounts payable agings, aged by invoice
date, and outstanding or held check registers within
10 Business Days after the end of each month which
is not a fiscal quarter end and 15 Business Days
after the end of each month which is a fiscal
quarter end.
6. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): None
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): None
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): None
5
<PAGE>
OTHER LOCATIONS AND
ADDRESSES
(Section 3.3): See Exhibit A hereto
MATERIAL ADVERSE
LITIGATION
(Section 3.10): None
7. OTHER COVENANTS:
Borrower shall at all times comply with all of the
following additional covenants:
(1) SEER COPYRIGHT FILINGS. Seer has previously
executed and delivered to Greyrock a Security
Agreement in Copyrighted Works (the "Seer Copyright
Agreement"), which shall continue in full force and
effect. Borrower represents and warrants to Greyrock
that the Seer Copyright Agreement covers all of
Seer's computer software, the licensing of which
results in Receivables and that all such software
has been registered with the United States Copyright
Office. Without limiting the generality of the
foregoing, Borrower represents and warrants that all
of the software listed on Exhibit B to the Seer
Copyright Agreement is included in the software
listed on Exhibit A to the Seer Copyright Agreement,
which is registered with the United States Copyright
Office.
(2) LEVEL 8 COPYRIGHT FILINGS. Concurrently, Level 8
is executing and delivering to Greyrock a Security
Agreement in Copyrighted Works (the "Level 8
Copyright Agreement"). Within 45 days after the date
hereof, Borrower shall (i) cause all of Level 8's
computer software, the licensing of which results in
Receivables, to be filed for registration with the
United States Copyright Office, (ii) complete the
Exhibits to the Level 8 Copyright Agreement with all
of the information called for with respect to such
software, (iii) cause the Level 8 Copyright
Agreement to be filed for recordation in the United
States Copyright Office, and (iv) provide evidence
of such recordation to Greyrock.
(3) EQUITY. On or before MAY 31, 1999, Borrower
shall raise not less than $10,000,000 cash proceeds
of the issuance by Borrower of equity or
subordinated debt securities, and on or before said
date, Borrower shall provide Greyrock with written
evidence of the same satisfactory to Greyrock in its
discretion. Without limiting any of the other terms
of this Agreement, a breach of this Section 7(3)
shall constitute an Event of Default under this
Agreement.
(4) GUARANTIES. Concurrently each Borrower shall
execute an unlimited Cross-Corporate Continuing
Guaranty with respect to the other Borrower, and
Borrower shall cause the same to
6
<PAGE>
continue in full force and effect throughout the
term of this Agreement. Borrower represents and
warrants that (i) each of its subsidiaries is listed
on Exhibit B hereto, (ii) the subsidiaries shown
thereon as foreign subsidiaries (other than the
subsidiaries incorporated in Ireland, Australia and
the Netherlands) are and shall at all times continue
to be sales offices only without significant assets,
and (iii) the subsidiaries shown thereon as U.S.
subsidiaries are and shall at all times continue to
be dormant corporations without assets. Each
Borrower shall, within 45 days after the date
hereof, cause all of the subsidiaries listed on
Exhibit B to execute and deliver to Greyrock
Continuing Guaranties with respect to Borrower and
security agreements and other documents as Greyrock
shall specify in order to grant Greyrock a
first-priority security interest in all of the
assets of said subsidiaries.
(5) UCC FILINGS. Borrower represents and warrants
that all indebtedness secured by the following UCC-1
Financing Statements has been paid and performed in
full, and Borrower shall cause the following UCC-1
Financing Statements to be terminated of record and
shall provide evidence of the same to Greyrock
within 10 days after the date hereof:
<TABLE>
<CAPTION>
FILING OFFICE FILING DATE FILE NO. SECURED PARTY
------------- ----------- ------- -------------
<S> <C> <C> <C>
Florida Secy of 06/12/96 960000121248 Tech Data Corporation
State.
New York Secy of 09/14/94 188514 Merrill Lynch Business
State Financial Services Inc.
New York Secy of 06/13/96 118047 Tech Data Corporation
State
</TABLE>
(6) BANK ACCOUNTS. Within 30 days after the date
hereof, Borrower shall cause its banks located in the
United States, to execute and deliver such
documentation as Greyrock shall reasonably specify in
order to provide Greyrock with a first-priority
perfected security interest in the same.
7
<PAGE>
Borrower: Borrower:
Seer Technologies, Inc. LEVEL 8 SYSTEMS, INC.
By By
------------------------------------ -------------------------------
President or Vice President President or Vice President
By By
------------------------------------ -------------------------------
Secretary or Ass't Secretary Secretary or Ass't Secretary
Greyrock:
Greyrock Capital,
a Division of NationsCredit Commercial Corporation
By
---------------------------------
Title
------------------------------
8
<PAGE>
EXHIBIT A
SEER TECHNOLOGIES, INC.-LOCATIONS
LEVEL 8 SYSTEMS, INC.-LOCATIONS
9
<PAGE>
EXHIBIT B
U.S. SUBSIDIARIES
FOREIGN SUBSIDIARIES
10
<PAGE>
EXHIBIT 11.1
LEVEL 8 SYSTEMS, INC.
STATEMENT REGARDING THE COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amount)
<TABLE>
<CAPTION>
For the years ended
December 31,
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net income (loss) (numerator)
Continuing operations (23,688) 1,036 (845)
Discontinued operations (1,368) 53 (1,524)
--------- ------- --------
$(25,056) $ 1,089 $(2,369)
--------- ------- --------
--------- ------- --------
Net income (loss) per common shares - basic
Weighted average shares outstanding (denominator) 7,552 6,992 6,076
Per share amount
Continuing operations $ (3.14) $ 0.15 $ (0.14)
Discontinued operations $ (0.18) $ 0.01 $ (0.25)
--------- ------- --------
Total $ (3.32) $ 0.16 $ (0.39)
--------- ------- --------
--------- ------- --------
Net income (loss) per common share - assuming dilution
Weighted average shares outstanding - basic 7,552 6,992 6,076
Option and warrants - 569 -
--------- ------- --------
Total assuming dilution (denominator) 7,552 7,561 6,076
Per share amount
Continuing operations $ (3.14) $ 0.13 $ (0.14)
Discontinued operations $ (0.18) $ 0.01 $ (0.25)
--------- ------- --------
Total $ (3.32) $ 0.14 $ (0.39)
--------- ------- --------
--------- ------- --------
</TABLE>
Options and warrants to purchase shares of common stock outstanding and not
included in the computation of per share amounts assuming the dilution due
to the following:
<TABLE>
<CAPTION>
For the year ended
December 31,
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Anti-dilutive shares due to loss 2,612 - 1,039
</TABLE>
<PAGE>
EXHIBIT 21.1
LEVEL 8 SYSTEMS, INC.
LIST OF SUBSIDIARIES
DOMESTIC COMPANIES
Parent Company:
Level 8 Systems, Inc.
Date of Incorporation: 07/07/88
State of Incorporation: New York
Subsidiary:
SEER Technologies, Inc.
Date of Incorporation: 03/06/90
State of Incorporation: Delaware
Level 8 Technologies, Inc.
Date of Incorporation: 02/24/94
State of Incorporation: New York
SEER Technologies (Worldwide Holdings) Limited
Date of Incorporation: 02/26/92
State of Incorporation: Delaware
ProfitKey International, Inc.
Date of Incorporation: 05/17/85
State of Incorporation: Delaware
Momentum Software Corporation
Date of Incorporation: 03/27/90
State of Incorporation: Delaware
Transfer Flow, Inc.
Date of Incorporation: 12/11/95
State of Incorporation: Delaware
<PAGE>
FOREIGN SUBSIDIARIES
Argentina:
SEER Technologies de Argentine S.A.
Date of Incorporation: 09/20/96
Australia:
SEER Technologies Australia Pty Limited
Date of Registration: 08/09/93
Barbados:
SEER Technologies FSC, Inc.
Date of Registration: 12/27/95
Benelux:
Seer Technologies Benelux B.V.
Date of Registration: 09/25/92
Brazil:
SEER Technologies do Brazil Ltda.
Date of Registration: 12/09/93
Canada:
SEER Technologies Canada, Inc.
Domestic Province: Ontario
Date of Registration: 05/18/94
3020126 Canada Inc.
Domestic Province: Canada
Date of Registration: 10/28/94
Denmark:
SEER Technologies Denmark ApS
Date of Registration: 04/01/94
<PAGE>
France:
SEER Technologies France S.A.R.L.
Date of Incorporation: 06/09/95
Germany:
SEER Technologies Europe (Deutschland) GmbH
Date of Registration: 11/19/92
Ireland:
SEER Technologies Ireland Limited
Date of Registration: 03/11/95
Italy:
SEER Technologies Italia S.r.L.
Date of Registration: 08/07/92
Mexico:
SEER Technologies de Mexico S.A. de C.V.
Date of Registration: 11/08/95
Korea:
SEER Korea Co., Limited
Date of Registration: 07/07/97
Sweden:
SEER Technologies Nordic AB
Date of Registration: 07/09/92
Spain:
SEER Technologies Espana, S.L.
Date of Registration: 07/22/93
United Kingdom:
SEER Technologies (U.K.) Limited
Date of Registration: 01/07/92
<PAGE>
Momentum Software (Europe) Limited
Date of Incorporation: 03/17/95
State of Incorporation: United Kingdom
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
statements on Form S-8 (File Nos. 333-12247, 333-64637), and on Form S-3
(File No. 333-22979) of Level 8 Systems, Inc. of our report dated March 31,
1999 which is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
April 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 6,078 7,062
<SECURITIES> 0 0
<RECEIVABLES> 20,244 6,889
<ALLOWANCES> 3,252 434
<INVENTORY> 0 336
<CURRENT-ASSETS> 27,947 18,257
<PP&E> 3,064 1,421
<DEPRECIATION> 382 447
<TOTAL-ASSETS> 70,770 23,482
<CURRENT-LIABILITIES> 47,721 2,431
<BONDS> 0 0
0 0
0 0
<COMMON> 87 70
<OTHER-SE> 8,892 20,301
<TOTAL-LIABILITY-AND-EQUITY> 70,770 23,482
<SALES> 0 0
<TOTAL-REVENUES> 10,685 14,680
<CGS> 0 0
<TOTAL-COSTS> 8,033 7,589
<OTHER-EXPENSES> 25,016 5,560
<LOSS-PROVISION> 838 332
<INTEREST-EXPENSE> 364 20
<INCOME-PRETAX> (23,283) 1,589
<INCOME-TAX> 405 553
<INCOME-CONTINUING> (23,688) 1,036
<DISCONTINUED> (1,368) 53
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (25,056) 1,089
<EPS-PRIMARY> (3.32) 0.16
<EPS-DILUTED> (3.32) 0.14
</TABLE>
