<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 11-2920559
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
(919) 380-5000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
DENNIS MCKINNIE, ESQ.
SENIOR VICE PRESIDENT, CHIEF LEGAL AND ADMINISTRATIVE OFFICER; CORPORATE
SECRETARY
LEVEL 8 SYSTEMS, INC.
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
(919) 380-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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SCOTT D. SMITH, ESQ. JOSEPH W. CONROY, ESQ.
ELIOT W. ROBINSON, ESQ. MARK D. SPOTO, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP COOLEY GODWARD LLP
SIXTEENTH FLOOR 2002 EDMUND HALLEY DRIVE
191 PEACHTREE STREET, N.E. SUITE 300
ATLANTA, GEORGIA 30331 RESTON, VIRGINIA 20191-3436
(404) 572-6600 (703) 262-8000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
effective time of the merger of Template Software, Inc. with and into a wholly
owned subsidiary of Level 8 Systems, Inc. as described in the Agreement and Plan
of Merger, dated as of October 19, 1999, attached as Annex A to the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share..... 3,026,704 shares(1) $3.7657(2) $31,039,374(2) $849.95(3)
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</TABLE>
(1) Represents the approximate maximum number of shares issuable upon
consummation of the merger as described in the Registration Statement, based
upon the anticipated maximum number of outstanding shares of Template common
stock at the merger's effective time assuming the exercise of all
outstanding options (8,242,657) and assuming the average trading price for
Level 8 common stock is less than $10.62, resulting in the maximum exchange
ratio of 0.3672 of a Level 8 share issued for each Template share.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Section 6(b) of the Securities Act of 1933, and Rule
457(f)(1), 457(f)(3) and 457(c) thereunder on the basis of (a) 8,242,657,
the anticipated maximum number of Template shares that may be exchanged
pursuant to the merger, multiplied by (b) $3.7657, the average of the high
and low sales prices of Template common stock as reported by The Nasdaq
Stock Market on November 15, 1999, less the $4.00 cash consideration to be
paid by Level 8 for each share of Template common stock.
(3) Pursuant to Section 6(b) of the Securities Act and Rule 457(c) thereunder,
we have calculated the registration fee by multiplying the proposed maximum
aggregate offering by 0.000278. A fee of $7,779 was paid on October 29, 1999
in respect of the merger in connection with the filing of preliminary proxy
materials. Pursuant to Rules 0-11(a)(2) and 14a-6(i)(1) under the Securities
Exchange Act of 1934, the registration fee for this Form S-4 has been
reduced by the amount of the fees previously paid with the filing of our
preliminary proxy materials.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED NOVEMBER 22, 1999
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LEVEL 8 LOGO TEMPLATE LOGO
PROXY STATEMENT/PROSPECTUS PROXY STATEMENT
</TABLE>
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of Level 8 Systems, Inc. and Template Software,
Inc. have agreed to a merger in which Template will be acquired by Level 8 and
merged into a wholly owned subsidiary of Level 8. We believe the combination of
Level 8's and Template's technologies will enhance our ability to bring the next
generation of enterprise application integration solutions to market quickly.
In the merger, Template stockholders will receive in exchange for each of
their Template shares $4.00 in cash plus Level 8 common stock with a value of at
least $3.90, based on the average closing sales prices of Level 8 common stock
for the 10 trading days ending December 9, 1999, so long as this 10 day average
price is more than $10.62 per Level 8 share. If this 10 day average is more than
$13.74, Template stockholders will receive $4.00 in cash plus 0.2838 of a share
of Level 8 common stock. If this 10 day average is less than $10.62, Template
stockholders will receive $4.00 in cash plus 0.3672 of a Level 8 share. The
closing sale price for Level 8 common stock on November 19, 1999 as reported on
The Nasdaq Stock Market was $18.875 per share.
The merger cannot be completed unless Template stockholders and Level 8
stockholders approve the matters related to the merger that are described in
this document. THE BOARDS OF DIRECTORS OF BOTH COMPANIES HAVE APPROVED THE
MERGER AND UNANIMOUSLY RECOMMEND THAT THE STOCKHOLDERS APPROVE THE MATTERS
RELATED TO THE MERGER THAT ARE DESCRIBED IN THIS DOCUMENT.
We are asking Template stockholders to approve and adopt the merger
agreement and approve the merger. BECAUSE THE AFFIRMATIVE VOTE OF THE HOLDERS OF
AT LEAST TWO-THIRDS OF THE OUTSTANDING SHARES OF TEMPLATE COMMON STOCK ENTITLED
TO VOTE AT TEMPLATE'S SPECIAL MEETING IS REQUIRED TO APPROVE THE MERGER, IT IS
IMPORTANT FOR TEMPLATE STOCKHOLDERS TO COMPLETE AND RETURN THE ENCLOSED PROXY
CARD. Template stockholders who hold or have voting control over shares
representing 17.2% of Template's common stock have agreed with Level 8 to vote
those shares in favor of the approval of the merger.
We are asking Level 8 stockholders to approve the issuance of shares of
Level 8 common stock in the merger and an increase in the number of shares of
Level 8 common stock subject to awards under Level 8's 1997 Stock Option Plan.
SINCE LIRAZ SYSTEMS, LTD. AND LEVEL 8 HAVE AGREED TO VOTE SHARES REPRESENTING
52.5% OF THE OUTSTANDING LEVEL 8 VOTING STOCK IN FAVOR OF THE MERGER, APPROVAL
OF THESE MATTERS IS ASSURED.
Whether or not you plan to attend your stockholders meeting, please take
the time to vote by completing and mailing the enclosed proxy card.
This document provides you with detailed information about the proposed
merger and the other proposal that Level 8 stockholders will vote on, and
constitutes the prospectus for the Level 8 common stock to be issued to Template
stockholders in the merger.
YOU SHOULD CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON
PAGE 13 BEFORE VOTING. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THE JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This document is dated November 22, 1999 and is first being mailed to
stockholders on or about November 23, 1999.
<PAGE> 3
REFERENCES TO ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business and
financial information about Level 8 and Template documents that are not included
in or delivered with this document. This information is available to you without
charge upon either written or oral request. You can obtain documents
incorporated by reference in this document by requesting them in writing or by
telephone from the appropriate company at the following addresses and telephone
numbers:
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LEVEL 8 SYSTEMS, INC. TEMPLATE SOFTWARE, INC.
8000 Regency Parkway 45365 Vintage Park Plaza
Cary, North Carolina 27511 Suite 100
Attention: Corporate Secretary Dulles, Virginia 20166
Telephone: (919) 380-5000 Attention: Corporate Secretary
Telephone: (703) 318-1000
</TABLE>
If you would like to request documents, please do so by December 10, 1999
in order to receive them before the Level 8 stockholders meeting.
For additional sources of the documents incorporated by reference and other
information about Level 8 and Template, see "Where You Can Find More
Information" beginning on page 191.
<PAGE> 4
LEVEL 8 LOGO
LEVEL 8 SYSTEMS, INC.
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 15, 1999
TO THE STOCKHOLDERS OF LEVEL 8 SYSTEMS, INC.:
Notice is hereby given that the Special Meeting of Stockholders of Level 8
Systems, Inc. will be held at Level 8's New York offices, 1250 Broadway, 35th
Floor, New York, New York 10001-3782 , on December 15, 1999, at 2:00 p.m., local
time, for the following purposes:
1. To approve the issuance of shares of Level 8 common stock in
accordance with the merger agreement among our company, our wholly owned
subsidiary and Template Software, Inc. As a result of the merger, Template
will become a wholly owned subsidiary of our company. A copy of the merger
agreement is attached as Annex A to the joint proxy statement/prospectus
accompanying this notice.
2. To consider and vote upon an amendment to our 1997 Stock Option
Plan increasing the number of shares of Level 8 common stock subject to
awards under the plan from 2,600,000 to 4,000,000.
3. To transact such other business as may properly come before the
meeting and any adjournment(s) thereof. The board of directors is not aware
of any other business to be presented to a vote of the stockholders at the
special meeting.
The close of business on November 17, 1999 has been fixed as the record
date for determination of stockholders entitled to notice of and to vote at the
meeting.
By Order of the Board of Directors,
/s/ Dennis McKinnie
Dennis McKinnie
Senior Vice President,
Chief Legal and Administrative
Officer;
Corporate Secretary
Cary, North Carolina
November 22, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE SO THAT YOUR
SHARES MAY BE REPRESENTED AT THE MEETING. NO POSTAGE IS NEEDED IF MAILED IN THE
UNITED STATES.
<PAGE> 5
TEMPLATE LOGO
TEMPLATE SOFTWARE, INC.
45365 VINTAGE PARK PLAZA
SUITE 100
DULLES, VIRGINIA 20166
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 17, 1999
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<S> <C>
Time: 9:30 a.m., local time, on December 17, 1999
Place: Template Software, Inc. Headquarters
45365 Vintage Park Plaza
Suite 100
Dulles, Virginia 20166
</TABLE>
Items of Business:
1. To approve and adopt the Agreement and Plan of Merger by and among
Level 8 Systems, Inc., TSAC, Inc., a wholly owned subsidiary of Level
8, and Template and to approve the merger of Template with and into
TSAC. As a result of the merger, each outstanding share of Template
common stock would be converted into the right to receive $4.00 in
cash and a fraction of a share of Level 8 common stock, and Template
would be acquired by a wholly owned subsidiary of Level 8. A copy of
the merger agreement is attached as Annex A to the joint proxy
statement/prospectus accompanying this notice; and
2. To transact such other business as may properly come before the
special meeting or any adjournment thereof.
Record Date: You are entitled to vote if you were a stockholder at the close of
business on November 17, 1999.
Information regarding the merger agreement and the merger and related
matters is contained in the attached joint proxy statement/prospectus and its
appendices.
All stockholders are cordially invited to attend the Template special
meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. FAILURE
TO RETURN A PROPERLY EXECUTED PROXY OR TO VOTE AT THE TEMPLATE SPECIAL MEETING
WILL GENERALLY HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER.
THE BOARD OF DIRECTORS OF TEMPLATE UNANIMOUSLY RECOMMENDS THAT TEMPLATE
STOCKHOLDERS VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT AND APPROVE THE
MERGER.
By Order of the Board of Directors,
/s/ Joseph M. Fox
Joseph M. Fox
Chairman
Dulles, Virginia
November 22, 1999
<PAGE> 6
TABLE OF CONTENTS
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PAGE
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Summary............................. 1
Summary of Selected Historical
Financial Information of Level
8................................. 10
Summary of Selected Historical
Financial Information of
Template.......................... 11
Comparative Per Share Data.......... 12
Risk Factors........................ 13
The Level 8 Special Meeting......... 29
The Template Special Meeting........ 32
Approval of the Merger and Related
Transactions...................... 34
The Merger Agreement................ 65
Unaudited Selected Pro Forma
Combined Financial Information.... 80
Level 8's Business.................. 89
Level 8's Management's Discussion
and Analysis of Financial
Condition and Results of
Operations........................ 109
Level 8's Management and Executive
Compensation...................... 126
Level 8 Certain Relationships and
Related Transactions.............. 133
Level 8 Compliance with Section
16(a) of the Securities Exchange
Act of 1934....................... 135
</TABLE>
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PAGE
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Level 8 Changes in and Disagreements
With Accountants.................. 135
Level 8 Principal Stockholders...... 139
Template's Business................. 142
Template Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 152
Template Year 2000 Compliance
Statement......................... 161
Template's Management and Executive
Compensation...................... 164
Description of Level 8 Capital
Stock............................. 177
Comparison of Stockholders'
Rights............................ 180
Additional Matters for Consideration
by Level 8 Stockholders........... 187
Experts............................. 190
Legal Matters....................... 191
Where You Can Find More
Information....................... 191
Cautionary Note Regarding Forward-
Looking Statements................ 192
Financial Statements................ F-1
Annex A: Agreement and Plan of
Merger by and among Level 8
Systems, Inc., TSAC, Inc.
and Template Software,
Inc........................ A-1
Annex B: Opinion of Advest, Inc..... B-1
Annex C: Opinion of U.S. Bancorp
Piper Jaffray.............. C-1
Annex D: Dissenters' Rights Under
the Virginia Stock
Corporation Act............ D-1
</TABLE>
i
<PAGE> 7
SUMMARY
The summary highlights selected information from this document and does not
contain all of the information that may be important to you. To understand the
merger fully and for a more complete description of the terms of the merger, you
should carefully read this entire document and the other documents to which we
have referred you.
THE COMPANIES (PAGES 89 AND 142)
LEVEL 8 SYSTEMS, INC.
8000 Regency Parkway
Cary, North Carolina 27511
(919) 380-5000
Level 8 specializes in delivering solutions that help companies integrate
their computer applications and equip these applications for electronic
commerce, known as eCommerce. This specialization is called enterprise
application integration. Level 8's products and services are designed to enable
organizations to address information systems integration and management problems
in a simple and cost effective way. We provide customers with solutions which
link their critical business applications internally across the enterprise and
externally with strategic business partners. Our products and services also
enable organizations to link applications to the internet in order to engage in
eCommerce.
TEMPLATE SOFTWARE, INC.
45365 Vintage Park Plaza
Suite 100
Dulles, Virginia 20166
(703) 318-1000
Template provides enterprise-wide software solutions to organizations that
require the integration of their operations and systems in an effort to better
automate their critical business processes. To date, most of our revenues have
been derived from license fees for use of our products and fees for software
services related to the customization of our products, which services include
software development, training, maintenance, systems integration and systems
planning. Our products consist of a set of off-the-shelf software packages, in
the form of templates. Templates are largely completed applications supporting
enterprise application integration and business process automation. We believe
that our reusable template products, along with our software-related services,
allow a mass customization approach to software solution delivery that is
superior to the historical alternatives of buying a packaged solution or
developing a custom application. Our current templates can provide up to 90% of
the code necessary for a complex integration problem or implementation of an
automated business process.
GENERAL
WHAT TEMPLATE STOCKHOLDERS WILL RECEIVE
IN THE MERGER
In the merger, Template stockholders will receive $4.00 in cash plus a
fraction of a share of Level 8 common stock for each of their Template shares.
This fraction will be based on the average closing sales prices of Level 8
common stock for the 10 trading days ending December 9, 1999:
- If this 10 day average is more than $13.74, then Template stockholders
would receive $4.00 in cash plus 0.2838 of a share of Level 8 common
stock for each of their Template shares.
- If this 10 day average is between $10.62 and $13.74, then Template
stockholders would receive $4.00 in cash plus Level 8 common stock valued
at $3.90, based on the 10 day average price, for each of their Template
shares.
- If this 10 day average is less than $10.62, then Template stockholders
would receive $4.00 in cash plus 0.3672 of a share of Level 8 common
stock for each of their Template shares.
See page 66 for a table showing the fraction of a Level 8 share and implied
value that Template stockholders would receive in the merger for each Template
share based upon a range of average closing sales prices for Level 8 common
stock. The closing sales price for
1
<PAGE> 8
Level 8 common stock on November 19, 1999 as reported on The Nasdaq Stock Market
was $18.875. Level 8 will not issue fractional shares but will instead pay cash
for fractional shares of Level 8 that would otherwise be issued. DO NOT SEND IN
YOUR STOCK CERTIFICATES NOW. After the completion of the merger, Level 8 will
send Template stockholders written instructions for exchanging their stock
certificates.
OUR RECOMMENDATIONS TO OUR STOCKHOLDERS
(PAGES 29 AND 32)
TO THE LEVEL 8 STOCKHOLDERS:
The Level 8 board of directors believes that the merger is fair to, and is
in the best interests of, both you and Level 8. The Level 8 board of directors
unanimously recommends that you vote "FOR" the proposal to approve the issuance
of shares of Level 8 common stock in the merger and the proposal to amend Level
8's 1997 Stock Option Plan to increase the number of shares of Level 8 common
stock subject to awards thereunder from 2,600,000 to 4,000,000.
TO THE TEMPLATE STOCKHOLDERS:
The Template board of directors believes that the merger is fair to you and
is in your best interests. The Template board of directors unanimously
recommends that you vote "FOR" the proposal to approve and adopt the merger
agreement and approve the merger.
OPINION OF LEVEL 8'S FINANCIAL ADVISOR (PAGES 42 AND B-1)
In deciding to approve the merger, Level 8's board of directors considered
the opinion of its financial advisor. Level 8's board of directors received an
opinion from its financial advisor, Advest, Inc., that the consideration to be
paid by Level 8 in the merger was fair, from a financial point of view, to Level
8. The opinion is attached as Annex B to this document. We encourage you to read
the opinion carefully.
Advest performed several analyses in connection with delivering its
opinion. These analyses included comparing historical stock prices of Level 8
and Template and comparing the merger to other mergers of other publicly traded
companies.
OPINION OF TEMPLATE'S FINANCIAL ADVISOR (PAGES 48 AND C-1)
In deciding to approve the merger, Template's board of directors considered
the opinion of its financial advisor. Template's board of directors received an
opinion from its financial advisor, U.S. Bancorp Piper Jaffray, Inc., that the
consideration to be received by the holders of Template common stock in the
merger was fair from a financial point of view. The opinion is attached as Annex
C to this document. We encourage you to read the opinion carefully.
U.S. Bancorp Piper Jaffray performed several analyses in connection with
delivering its opinion. These analyses included comparing historical stock
prices of Level 8 and Template and comparing the merger to other mergers of
other publicly traded companies.
VOTE REQUIRED AT LEVEL 8 SPECIAL MEETING (PAGE 30)
The affirmative vote of the holders of a majority of shares of Level 8
common stock, present in person or represented by proxy and entitled to vote at
the Level 8 special meeting, is necessary to approve the issuance of shares of
Level 8 common stock in the merger and to approve the amendment to Level 8's
1997 Stock Option Plan increasing the number of shares of Level 8 common stock
subject to awards under the plan from 2,600,000 to 4,000,000.
VOTE REQUIRED AT TEMPLATE SPECIAL MEETING (PAGE 33)
The affirmative vote of the holders of a at least two-thirds of the
outstanding shares of Template common stock as of November 17, 1999, the
"Template record date," is necessary to approve and adopt the merger agreement
and approve the merger. On the Template record
2
<PAGE> 9
date, there were 4,923,580 shares of Template
common stock outstanding.
VOTING BY PROXY (PAGES 29 AND 32)
You may vote on each proposal by indicating on your proxy card how you want
to vote, and signing and mailing it in the enclosed return envelope. Please
return your proxy card as soon as possible so that your shares may be
represented at your stockholders meeting. If you sign and send in your proxy
card and do not indicate how you wish to vote, your proxy will be counted as a
vote in favor of each of the proposals. If you are a Template stockholder and
you do not vote, or you abstain from voting, it will have the effect of a vote
against the merger.
VOTING BY BROKERS
If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker cannot vote them on the merger. You should
therefore be sure to provide your broker with instructions on how to vote your
shares. Please check the voting form used by your broker to see if it offers
telephone or internet voting.
If you do not give voting instructions to your broker, you will, in effect,
be voting against the merger, unless you appear in person at your respective
stockholders meeting with a proxy from your broker authorizing you to vote your
"street name" shares, and vote in favor of the merger, as applicable.
STOCKHOLDERS AGREEMENT (PAGE 63)
Certain of the executive officers and directors of Template, in their
capacities as stockholders, and certain other stockholders of Template, who, as
of November 17, 1999, collectively hold approximately 17.2% of the outstanding
Template common stock, and Level 8 and its principal stockholders, who, as of
November 17, 1999, collectively have the right to vote 52.5% of the outstanding
Level 8 voting stock, have entered into a stockholders agreement related to the
merger. The parties to the stockholders agreement have agreed to vote all the
shares that they have the right to vote in favor of the merger.
RECORD DATES; VOTING POWER (PAGES 29 AND 32)
You are entitled to vote at the Level 8 special meeting if you own shares
of Level 8 as of the close of business on November 17, 1999, and you are
entitled to vote at the Template special meeting if you own shares of Template
as of the close of business on November 17, 1999.
At the close of business on the Level 8 record date, 8,932,047 shares of
Level 8 common stock were outstanding and entitled to vote at the Level 8
special meeting. You will have one vote at the Level 8 special meeting for each
share of Level 8 common stock you own as of the Level 8 record date.
At the close of business on the Template record date, 4,923,580 shares of
Template common stock were outstanding and entitled to vote at the Template
special meeting. You will have one vote at the Template special meeting for each
share of Template common stock you own as of the Template record date.
QUESTIONS ABOUT THE MEETINGS OR THE MERGER
You may call Beacon Hill Partners, Inc., the proxy solicitor for each of
Level 8 and Template, at 1-800-475-9320 with any questions regarding the
stockholder meetings or the Merger.
SHARE OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES
As of the Level 8 record date, the directors and executive officers of
Level 8, as a group, beneficially owned approximately 11.91% of Level 8 voting
stock.
As of the Template record date, the directors and executive officers of
Template, as a group, beneficially owned approximately 37% of Template common
stock.
3
<PAGE> 10
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 55)
You should note that a number of directors and executive officers of
Template have interests in the merger as employees and/or directors that are
different from, or in addition to, the interests of a Template stockholder.
Certain indemnification arrangements for directors and officers of Template will
be continued. In addition, existing employment agreements of certain of the
officers of Template have "change of control" provisions which may provide
severance benefits to such executive officers. Furthermore, the vesting of stock
options granted to certain directors and executive officers may accelerate as a
result of the merger.
OWNERSHIP OF LEVEL 8 FOLLOWING THE MERGER (PAGE 67)
Depending on the average of the closing sales prices of Level 8 common
stock for the 10 trading day period ending on December 9, 1999, we anticipate
that Template stockholders collectively will receive approximately 1,397,312
shares of Level 8 common stock in the merger based on the number of shares of
Template common stock outstanding on November 17, 1999 and an exchange ratio of
0.2838.
Based on those numbers, and based on the number of shares of Level 8 voting
stock outstanding as of November 17, 1999, existing Template stockholders will
own approximately 13.5% of the Level 8 voting stock outstanding immediately
after the merger. See page 68 for a table showing the approximate number of
shares of Level 8 common stock that Template stockholders would receive in the
merger and the percentage of Level 8 voting stock they would own immediately
after the merger based upon a range of average closing sales prices of Level 8
common stock over 10 trading days.
QUOTATION OF LEVEL 8 COMMON STOCK
It is a condition to the merger that the Level 8 common stock to be issued
in connection with the merger be approved for quotation on The Nasdaq Stock
Market, subject to official notice of issuance. If we complete the merger,
stockholders will then be able to trade the shares of Level 8 common stock they
receive in the merger on The Nasdaq Stock Market. In addition, Template common
stock will no longer be quoted on The Nasdaq Stock Market or any other exchange.
THE MERGER AGREEMENT (PAGE 65)
The merger agreement is attached as Annex A to this document. We encourage
you to read the merger agreement. It is the legal document governing the merger.
WHEN THE MERGER WILL OCCUR
The merger will take place on a date agreed to by Level 8 and Template.
This date will be no later than the second business day after all of the
conditions to closing contained in the merger agreement have been satisfied or
waived. Assuming that all of the conditions in the merger agreement are
satisfied or waived, we anticipate that the merger will occur in December 1999.
After the completion of the merger, the combined company will operate on an
integrated basis.
CONDITIONS TO THE MERGER (PAGE 69)
We will complete the merger only if we satisfy or waive several conditions,
including the following:
- holders of at least two-thirds of the outstanding shares of Template
common stock entitled to vote at the Template special meeting approve and
adopt the merger agreement and approve the merger;
- holders of a majority of shares of Level 8 common stock present in person
or represented by proxy and entitled to vote at the Level 8 special
meeting approve the issuance of Level 8 common stock in the merger and
the amendment to Level 8's 1997 Stock Option Plan increasing the number
of shares of
4
<PAGE> 11
Level 8 common stock subject to awards thereunder from 2,600,000 to
4,000,000;
- all material consents required to be obtained from any government entity
or other person or entity are obtained;
- no court or government entity issues a permanent or preliminary order or
injunction which restrains or prohibits the consummation of the merger;
- no litigation or similar action is pending or threatened by a government
entity seeking to restrain or prohibit the consummation of the merger;
- each party's representations and warranties contained in the merger
agreement continue to be accurate except where the inaccuracies would not
have a material adverse effect on the party;
- each party has complied with its covenants contained in the merger
agreement in all material respects;
- no material adverse change has occurred with respect to Template or Level
8;
- Template and Level 8 not having been notified that any governmental
agency intends to terminate any contract between Template and the U.S.
government or that the U.S. government does not intend to renew any such
contract;
- each party's counsel delivers a tax opinion regarding the tax treatment
of the merger; and
- holders of not more than 1% of the outstanding shares of Template common
stock shall have perfected dissenters' rights.
TERMINATION OF THE MERGER AGREEMENT BY
TEMPLATE AND LEVEL 8 (PAGE 77)
Both companies can mutually agree to terminate the merger agreement at any
time without completing the merger.
Subject to certain exceptions, either company can terminate the merger
agreement if:
- the merger is not completed on or before April 19, 2000;
- a government entity or legal action permanently prohibits the merger;
- the Level 8 stockholders do not approve the issuance of Level 8 common
stock to Template stockholders in the merger and the amendment to Level
8's 1997 Stock Option Plan to increase the number of shares of Level 8
common stock subject to awards thereunder from 2,600,000 to 4,000,000;
- any of the other party's representations or warranties under the merger
agreement shall have been materially inaccurate, or the other party
breaches any of the covenants or agreements under the merger agreement in
any material respect, and fails to cure such inaccuracy or breach; or
- neither of the conditions relating to the delivery of tax opinions by
Level 8's and Template's counsel have been satisfied within 60 days
following the latest stockholders meeting.
TERMINATION OF THE MERGER AGREEMENT BY LEVEL 8 (PAGE 77)
Level 8 can also terminate the merger agreement if:
- the Template stockholders do not approve the merger or do not adopt and
approve the merger agreement;
- the board of directors of Template withdraws or modifies, in a manner
adverse to Level 8, or refuses to reaffirm its approval or recommendation
to the Template stockholders of the merger agreement or the merger; or
- the board of directors of Template (i) solicits, initiates or encourages
an
5
<PAGE> 12
alternative transaction to the merger, (ii) approves, endorses or
recommends an alternative transaction to the merger, or (iii) fails to
recommend a rejection of a tender or exchange offer by a person
unaffiliated with Level 8.
TERMINATION OF THE MERGER AGREEMENT BY TEMPLATE (PAGE 77)
Template can also terminate the merger in the event Template's board of
directors determines that an alternative transaction to the merger constitutes a
superior offer and, prior to Template's special meeting of stockholders,
Template pays to Level 8 the termination fee described below and Template is not
otherwise in default under the terms of the merger agreement with respect to
Template's receipt of an unsolicited superior offer or the solicitation of an
alternative transaction.
EXPENSES AND TERMINATION FEES (PAGE 78)
Each party will pay its own fees and expenses in connection with the
merger, whether or not the merger is completed, except that the parties will
share equally all fees and expenses, other than attorneys' and accountants' fees
and expenses, in connection with the preparation, printing, filing and mailing
of this joint proxy statement/prospectus and the registration statement of which
this joint proxy statement/prospectus is a part (excluding SEC filing fees which
shall be paid by Level 8).
If Level 8 terminates the merger agreement based on the material inaccuracy
in any of Template's representations and warranties, or Template's failure to
comply with any of its covenants or agreements in any material respect under the
merger agreement, then Template must pay to Level 8 $2 million. In the event
Level 8 terminates the merger agreement based on the failure of the merger to
occur on or before April 19, 2000 or based on Template's stockholders failure to
approve the merger or adopt and approve the merger agreement, and an alternative
transaction to the merger was made after October 19, 1999 and has not been
withdrawn prior to the termination of the merger agreement, and within 9 months
of such termination an alternative transaction to the merger is consummated by
Template or Template enters into a definitive agreement with respect to such
alternative transaction, then the foregoing termination fee shall be payable by
Template. In addition, in the event Level 8 terminates the merger agreement
based on any of the other reasons set forth above under the caption "Termination
of the Merger Agreement by Level 8," and within 9 months of such termination an
alternative transaction to the merger is consummated by Template or Template
enters into a definitive agreement with respect to such alternative transaction,
then the foregoing termination fee shall also be payable by Template.
If Template terminates the merger agreement based on a material inaccuracy
in any of Level 8's representations and warranties, or Level 8's failure to
comply with any of its covenants or agreements in any material respect under the
merger agreement, then Level 8 must pay to Template $2 million.
ACCOUNTING TREATMENT (PAGE 61)
For accounting purposes, the merger will be treated as a purchase of
Template by Level 8.
REGULATORY REQUIREMENTS (PAGE 61)
Level 8 and Template are not aware of any material governmental or
regulatory approvals which are required for consummation of the merger, other
than governmental or regulatory approvals under the federal securities laws and
the requirements under the Delaware General Corporation Law and the Virginia
Stock Corporation Act.
TAX CONSEQUENCES TO TEMPLATE STOCKHOLDERS
For U.S. federal income tax purposes, you will be taxed on the lesser of
the cash portion of the consideration or the gain you realize on the exchange.
Your realized gain will equal the excess of the cash and the fair market value
of the Level 8 common stock you receive over the
6
<PAGE> 13
basis of your Template common stock. In addition, you will be taxed on cash
received in lieu of fractional shares. No loss may be recognized as a result of
the exchange of your Template common stock for Level 8 common stock and cash.
Tax matters, however, are very complicated, and the tax consequences of the
merger to you will depend on the facts of your particular situation. We
encourage you to contact your tax advisors to determine the tax consequences of
the merger to you. To review the material U.S. federal income tax consequences
to stockholders in greater detail, see page 57. Level 8 stockholders will not
recognize any gain or loss in connection with the merger.
DISSENTERS' OR APPRAISAL RIGHTS (PAGE 62)
Level 8 is organized under Delaware law, and Template is organized under
Virginia law. Under Delaware law, the stockholders of Level 8 are not entitled
to dissenters' or appraisal rights in connection with the merger. However,
Template stockholders who do not vote to approve the merger agreement or the
merger will be entitled under the Virginia Stock Corporation Act to dissent from
the merger and request an appraisal of, and to be paid the fair value of, their
shares. The provisions of Sections 13.1-729 through 13.1-741 of the Virginia
Stock Corporation Act, which govern the rights of stockholders of Template who
wish to seek appraisal of their shares, are attached to this document as Annex
D.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Both companies have made forward-looking statements in this joint proxy
statement/prospectus. Forward-looking statements are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of operations of Level 8, Template or the
combined company. When words such as "believes," "expects," "anticipates" or
similar expressions are used, we are making forward-looking statements.
You should note that the merger and an investment in securities of Level 8
involve risks and uncertainties that could affect the future financial results
of Level 8. Some of these risks include:
- risks related to the realization of anticipated revenues, profitability
and costs synergies of the combined company;
- the effects of vigorous competition in the markets in which these
entities operate, including the impact on revenues and earnings of
competitive changes to existing price structures;
- the ability of Level 8 or Template to establish a significant presence in
new geographic and service areas;
- the ability to recruit, train and retain qualified personnel;
- changes in technology that may increase the number of competitors Level 8
or Template faces or require significant capital expenditures to provide
competitive services;
- risks associated with the exchange ratio;
- general economic or business conditions that may be less favorable than
expected, resulting in, among other things, lower than expected revenues;
- risks of government contracts;
- interest rate fluctuations, foreign currency rate fluctuations and other
capital market conditions;
- costs of difficulties related to the integration of the businesses of
other entities acquired by Level 8 with that of Level 8 may be greater
than expected;
- necessary technological changes (including changes to address "Year 2000"
data systems issues) may be more difficult or expensive to make than
anticipated;
- risks of international business;
7
<PAGE> 14
- adverse changes may occur in the securities markets; and
- the other "Risk Factors" beginning on page 13 in this joint proxy
statement/prospectus.
MARKETS AND MARKET PRICES
Level 8 common stock is quoted on The Nasdaq Stock Market under the symbol
"LVEL." Template common stock is quoted on The Nasdaq Stock Market under the
symbol "TMPL." Following the completion of the merger, Template common stock
will no longer be quoted on Nasdaq or any exchange.
As of November 17, 1999, there were approximately 100 holders of record of
Level 8 common stock and 8,932,047 shares of common stock outstanding. Template
had approximately 63 holders of record as of November 17, 1999 and 4,923,580
shares of common stock outstanding.
The following table sets forth the closing sales price per share of Level 8
and Template common stock as reported on Nasdaq and the equivalent per share
price, as explained below, of Template common stock on October 19, 1999, the
last trading day before the announcement of the merger, and on November 17,
1999.
<TABLE>
<CAPTION>
LEVEL 8 COMMON TEMPLATE COMMON IMPLIED CONSIDERATION
STOCK PRICE STOCK PRICE PER TEMPLATE SHARE
-------------- --------------- ---------------------
<S> <C> <C> <C>
October 19, 1999.................... $12.00 $5.63 $7.90(1)(3)
November 17, 1999................... $18.94 $8.50 $9.37(2)(3)
</TABLE>
- -------------------------
(1) The equivalent Template per share price represents $3.90 in Level 8 common
stock and $4.00 in cash.
(2) The equivalent Template per share price represents $5.37 in Level 8 common
stock and $4.00 in cash.
(3) The actual exchange ratio may be different as described under the caption
"Merger Consideration" on page 65. The actual prices of Level 8 common stock
and Template common stock, and the implied consideration per Template share
prior to or at the time the merger is completed, cannot be guaranteed or
predicted.
8
<PAGE> 15
The table below sets forth the high and low closing sales prices per share
of Level 8 and Template common stock for the periods indicated, which indicates
how each company's stock price has fluctuated over the quarterly and annual
periods covered. For current price information with respect to Level 8 and
Template common stock, stockholders are urged to consult publicly available
sources. No assurance can be given as to future prices of, or markets for, Level
8 and Template common stock. Level 8 and Template have never declared or paid
any cash dividends on their common stock and do not anticipate declaring or
paying any dividends in the foreseeable future. Certain of Level 8's and
Template's financing documents restrict Level 8's and Template's ability to pay
dividends.
<TABLE>
<CAPTION>
LEVEL 8 TEMPLATE
COMMON STOCK COMMON STOCK(1)
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
First Quarter...................................... $ 8.000 $ 5.875 $ -- $ --
Second Quarter..................................... 15.000 7.125 -- --
Third Quarter...................................... 12.375 8.375 -- --
Fourth Quarter..................................... 15.500 9.750 -- --
Year Ended December 31, 1997
First Quarter...................................... 17.563 10.500 16.250 13.625
Second Quarter..................................... 17.875 10.750 13.125 7.750
Third Quarter...................................... 25.250 15.250 19.125 11.625
Fourth Quarter..................................... 23.500 12.000 14.875 9.750
Year Ended December 31, 1998
First Quarter...................................... 15.875 10.750 15.250 11.250
Second Quarter..................................... 13.250 8.875 14.000 9.250
Third Quarter...................................... 10.500 6.875 12.000 3.875
Fourth Quarter..................................... 9.688 5.375 6.750 3.000
Year Ended December 31, 1999
First Quarter...................................... 15.250 8.750 5.625 3.688
Second Quarter..................................... 12.375 8.250 5.563 3.750
Third Quarter...................................... 13.500 9.375 5.125 3.000
Fourth Quarter (through 11/17/99).................. 18.938 11.875 8.500 4.125
</TABLE>
- -------------------------
(1) Template commenced its initial public offering on January 29, 1997 at a
price of $16.00 per share. Prior to such date, there was no public market
for Template's common stock.
9
<PAGE> 16
SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION OF LEVEL 8
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial information of Level 8 is provided to aid
you in your analysis of the financial aspects of the merger. The summary
financial information presented below is derived from the consolidated financial
statements of Level 8. The information should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information, which are included elsewhere in this joint proxy
statement/prospectus.
For the interim period of 1999, the following includes Level 8, Level 8
Technologies, Momentum Software Corporation, and Seer Technologies, Inc. For
1998, the following information includes Level 8, Level 8 Technologies, and
Momentum since its acquisition in March 1998. For 1997, the following
information includes Level 8, ASU, and Level 8 Technologies. For 1996, the
following information includes Level 8, ASU, and Level 8 Technologies. For 1995,
the following information includes Level 8 and ASU for the full year and Level 8
Technologies since its acquisition in April 1995. For 1994, the following
information includes Level 8 and ASU.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA
Revenue................................. $ 39,016 $ 8,597 $ 10,685 $14,680 $ 7,272 $ 3,012 $ 1,660
Net income (loss) from continuing
operations............................ (10,596) (6,450) (23,688) 1,036 (845) (429) 26
Net income (loss) from continuing
operations per common
share -- basic........................ (1.24) (.86) (3.15) .16 (.14) (.10) .01
Net income (loss) from continuing
operations per common
share -- diluted...................... (1.24) (.86) (3.15) .14 (.14) (.10) .01
Weighted average common shares
outstanding -- basic.................. 8,729 7,498 7,552 6,992 6,076 4,314 3,839
Weighted average common shares
outstanding -- diluted................ 8,729 7,498 7,552 7,561 6,076 4,403 3,839
</TABLE>
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT DECEMBER 31,
------------------ ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency)............ $ (2,145) $ 9,233 $(19,774) $15,826 $11,007 $ 4,103 $(1,679)
Total assets............................ 65,599 28,964 70,770 23,482 20,787 15,059 5,848
Long-term debt, net of current
maturities............................ 11,528 59 1,541 16 23 43 19
Loans from related companies, net....... 4,000 552 12,519 202 331 454 2,015
Stockholders' equity.................... 18,496 20,114 8,892 20,371 18,300 11,499 489
</TABLE>
10
<PAGE> 17
SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION OF TEMPLATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial information of Template is provided to aid
you in your analysis of the financial aspects of the merger. The summary
financial information presented below is derived from the consolidated financial
statements of Template. The information should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information, which are included elsewhere in this joint proxy
statement/prospectus.
The following selected consolidated financial data of Template as of
November 30, 1997 and December 31, 1998 and for the years ended November 30,
1996, November 30, 1997, for the one month ended December 31, 1997 and for the
year ended December 31, 1998, have been derived from Template's consolidated
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, included elsewhere herein. The balance sheet data as of November
30, 1994, 1995 and 1996 and the statement of operations data for the years ended
November 30, 1994 and 1995 have been derived from Template's audited
consolidated financial statements.
<TABLE>
<CAPTION>
ONE
YEAR MONTH
NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, YEAR ENDED NOVEMBER 30,
----------------- ------------ ------------ -----------------------------------
1999 1998 1998 1998 1997 1996 1995 1994
------- ------- ------------ ------------ ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................. $31,369 $28,665 $42,639 $2,145 $26,910 $13,530 $7,091 $6,313
Net income (loss) from continuing
operations........................ (8,134) 560 1,130 (623) 2,380 1,045 327 (275)
Net income (loss) from continuing
operations per common
share -- basic.................... $ (1.19) $ 0.13 $ 0.23 $(0.13) $ 0.58 $ 0.48 $ 0.07 $(0.09)
Net income (loss) from continuing
operations per common share --
diluted........................... $ (1.19) $ 0.11 $ 0.20 $(0.13) $ 0.44 $ 0.23 $ 0.07 $(0.09)
Weighted average common shares
outstanding -- basic.............. 4,951 5,022 5,014 4,676 4,092 2,182 4,656 3,186
Weighted average common shares
outstanding -- diluted............ 4,951 5,804 5,709 4,676 5,419 4,644 4,656 3,186
</TABLE>
<TABLE>
<CAPTION>
AT AT AT DECEMBER 31, AT NOVEMBER 30,
SEPTEMBER 30, AUGUST 31, ----------------- -------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ---------- ------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $15,315 $21,447 $20,716 $22,704 $ 9,009 $ 473 $ 277
Total assets.......................... 40,604 46,380 49,084 42,971 13,985 3,461 3,021
Long-term liabilities................. 1,661 508 1,325 521 790 335 650
Stockholders' equity.................. 32,047 39,736 39,081 37,293 10,043 901 572
</TABLE>
See "Template Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a description of acquisition activity in 1997 and
1998.
11
<PAGE> 18
COMPARATIVE PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Book value per share
Level 8 historical...................................... $2.09 $1.02
Template historical..................................... $6.51 $7.86
Level 8/Template pro forma combined(a).................. $4.91 $3.43
Template pro forma equivalent(a),(b).................... $1.53 $1.07
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FOR THE YEAR
SEPTEMBER 30, ENDED DECEMBER 31,
1999 1998
-------------- ------------------
<S> <C> <C>
Net earnings (loss) per share
Level 8 historical -- basic and diluted................ $(1.24) $(3.32)
Template historical -- basic........................... $(1.19) $ 0.23
Template historical -- diluted......................... $(1.19) $ 0.20
Level 8/Template pro forma combined -- basic and
diluted(a).......................................... $(2.40) $(9.07)
Level 8/Template pro forma equivalent -- basic and
diluted(a),(b)...................................... $(0.75) $(2.83)
</TABLE>
- ---------------
(a) Pro forma combined information reflects pro forma information with Level 8
and the acquisition of Seer Technologies combined with Template. See
"Unaudited Selected Pro Forma Combined Financial Information" on page 80.
(b) The Template pro forma equivalent represents the Level 8/Template book value
or net income (loss) per share multiplied by a Level 8 exchange ratio of
0.31215 reflecting a price of $12.4938.
12
<PAGE> 19
RISK FACTORS
This joint proxy statement/prospectus contains forward-looking statements
that involve known and unknown risks and uncertainties. The actual results of
the combined company may differ materially from those anticipated in these
forward-looking statements. When voting on the merger, you should carefully
consider the risks described below and elsewhere in this document.
RISKS RELATED TO THE MERGER
IF LEVEL 8 AND TEMPLATE ARE NOT SUCCESSFULLY INTEGRATED, THE COMBINED COMPANY'S
BUSINESS WILL BE ADVERSELY AFFECTED.
Integrating Level 8 and Template will be a complex, time-consuming and
expensive process. Before the merger, Level 8 and Template operated
independently, each with its own business, corporate culture, locations,
employees and systems. After the merger, Level 8 and Template must operate as a
combined organization utilizing common information and communication systems,
operating procedures, financial controls, and human resource practices,
including benefit, training and professional development programs.
There may be substantial difficulties, costs and delays involved in
integrating Level 8 and Template. These may include:
- distracting management from the business of the combined company;
- potential incompatibility of corporate cultures;
- potential inability to coordinate research and development efforts
successfully;
- costs and delays in implementing common systems and procedures; and
- operating the combined company at numerous locations around the world.
Any one or all of these factors may increase operating costs or lower
anticipated financial performance. In addition, the combined company may lose
corporate partners, distributors, suppliers, manufacturers and employees. Many
of these factors are also outside the control of either company. Achieving
anticipated synergies and the potential benefits underlying the two companies'
reasons for the merger will depend on successful integration of the two
companies. The failure to integrate Level 8 and Template successfully would have
a material adverse effect on the business, financial condition and results of
operations of the combined company.
THE EXCHANGE RATIO WILL FLUCTUATE DEPENDING ON THE AVERAGE CLOSING SALES PRICES
OF LEVEL 8 COMMON STOCK OVER THE 10 TRADING DAY PERIOD ENDING ON DECEMBER 9,
1999.
The fraction of a share of Level 8 common stock that Template stockholders
receive in exchange for each share of Template common stock in the merger is
known as the exchange ratio. The exchange ratio will depend on the average of
the closing sales prices of Level 8 common stock for the 10 trading day period
ending on the fourth trading day before the stockholders of Level 8 vote on the
issuance of shares of Level 8 common stock in the merger, which is currently
scheduled for December 15, 1999. To the extent that more shares of Level 8
common stock are issued in the merger, Level 8 stockholders will experience a
greater dilution of ownership. Had the Level 8 stockholder meeting been held
13
<PAGE> 20
on November 23, 1999, Template stockholders would have received 0.2838 of a
share of Level 8 common stock, plus $4.00 in cash, for each share of Template
common stock that they own. However, because the exchange ratio may fluctuate
based on the market price of Level 8 common stock, Template stockholders may
receive more than 0.2838 of a share of Level 8 common stock in the merger for
each share of Template common stock that they own. Regardless of this 10-day
average, in no event will Template stockholders receive more than 0.3672 or less
than 0.2838 of a share of Level 8 common stock, plus $4.00 in cash, for each
share of Template common stock that they own.
LEVEL 8 COMMON STOCK HAS EXPERIENCED SIGNIFICANT FLUCTUATIONS IN PRICE AND
VOLUME WHICH WILL AFFECT THE NUMBER AND VALUE OF SHARES ISSUED TO TEMPLATE
STOCKHOLDERS.
In recent years the stock market and the trading price for Level 8 common
stock have experienced significant price and volume fluctuations. The broad
market fluctuations have adversely affected the market price of Level 8 common
stock and may continue to do so in the future. The value of Level 8 common stock
at the time of the special meeting of Template's stockholders, completion of the
merger, the date that Template stockholders receive shares of Level 8 common
stock or the date the stockholders eventually sell their Level 8 shares, may be
significantly different than the price of Level 8 common stock today. Template
stockholders are advised to obtain recent market quotations for Level 8 common
stock. Neither company may terminate the merger agreement or elect not to
complete the merger solely because of changes in their stock prices.
THE PRE-TAX COSTS OF COMPLETING THE MERGER ARE ESTIMATED AT BETWEEN $6 MILLION
AND $7 MILLION AND MAY AFFECT OUR RESULTS OF OPERATIONS, WHICH COULD ADVERSELY
AFFECT OUR STOCK PRICE.
Completion of the merger will result in total pre-tax costs estimated at
between $6 million and $7 million, primarily relating to costs associated with
combining the businesses of the two companies and the fees of financial
advisors, attorneys, consultants and accountants. These costs may cause Level
8's results of operations to be lower than that anticipated by financial
analysts, which could adversely affect Level 8's stock price.
THE FACILITIES SECURITY CLEARANCE REQUIRED TO PERFORM TEMPLATE'S GOVERNMENT
CONTRACTS MIGHT BE OBTAINED BY THE COMBINED COMPANY, OR MIGHT BE TERMINATED
PRIOR TO COMPLETION OF THE CONTRACTS.
Some of Template's contracts with federal government agencies require
access to information which is classified for national security reasons. To
obtain that access and perform these contracts, the combined company must have
an approved "facilities security clearance." Authorizing the facilities security
clearance is highly discretionary with federal authorities. Also the clearance
must be renewed upon any change of ownership; this renewal can only be completed
after the closing of the transaction. While Template has had such a clearance
for a number of years and Template does not anticipate a problem in obtaining
the renewal of the clearance, Level 8 cannot guarantee that the combined company
will obtain the renewal or that the government will not terminate the clearance
prior to completion of the contracts. The majority of Template's contracts with
government federal agencies require the clearance. In the absence of the
clearance, these contracts would be terminated or not be renewed.
14
<PAGE> 21
RISKS RELATED TO THE COMBINED COMPANY
LEVEL 8'S FUTURE SUCCESS DEPENDS ON THE MARKET ACCEPTANCE OF LEVEL 8'S NEW
GENEVA INTEGRATOR.
In April 1999, Level 8 introduced its new Geneva Integrator software
product which Level 8 expects will generate a substantial portion of Level 8's
revenues within the next year. Moreover, Level 8 is re-focusing much of its
business efforts from the middleware to the enterprise application integration
market. Geneva Integrator will be essential to this effort. While a small number
of Level 8's customers have used Geneva Integrator products for limited
applications, Geneva Integrator may not achieve or maintain significant market
acceptance. The market acceptance of Geneva Integrator will depend on a number
of factors, including:
- the success of the initial Geneva Integrator implementations and
customers' willingness to provide favorable references to prospective
customers;
- the rate of market share growth for Microsoft Corporation's Windows
operating system in enterprise information technology environments;
- the accuracy of industry analyst predictions that the focus of
information technology departments will shift to application integration,
development and electronic commerce enablement as Year 2000 problem
remediation efforts begin to wind down in 2000;
- the possible introduction of functionally superior competitive offerings;
- Microsoft's development and provision of equivalent technology as part of
its Windows operating system; and
- Level 8's ability to anticipate evolving market requirements accurately
and deliver enhancements to Geneva Integrator's functionality to meet
those needs within competitive windows of opportunity.
If, because of the comparative attractiveness of competing products, Level
8's inability to ship Geneva Integrator in a timely way, or for any other
reason, Level 8 cannot achieve a rapid and significant level of market
acceptance for the product, then Level 8 may not be able to fulfill its business
plan or successfully transition Level 8 to the enterprise application
integration market. Accordingly, failure of Geneva Integrator to achieve or
maintain significant market acceptance would have a material adverse effect on
Level 8's business, operating results and financial condition.
LEVEL 8 HAS A HISTORY OF LOSSES.
Although Level 8 reported operating income and net income in 1997, Level 8
has experienced operating losses and net losses in 1996 and 1998, and net losses
on a pro forma basis reflecting Level 8's acquisition of Seer Technologies, Inc.
Level 8 incurred net losses of $25.1 million for 1998 ($88.1 million on a pro
forma basis reflecting Level 8's acquisition of Seer) and $10.6 million for the
nine months ended September 30, 1999. At September 30, 1999, Level 8 had working
capital of $2.1 million and an accumulated deficit of $35.8 million. Although
Level 8 has raised $21 million of equity financing from the sale of its Series A
Preferred Stock and warrants, Level 8's ability to generate positive cash flow
is dependent upon Level 8's achieving and sustaining certain cost reductions and
generating sufficient revenues. Part of Level 8's strategy is to grow its
business rapidly
15
<PAGE> 22
through a series of carefully selected, synergistic acquisitions. Accounting for
these acquisitions in accordance with generally accepted accounting principles
and SEC rules and regulations may require Level 8 to amortize intangible assets
for several years after an acquisition or record significant charges for
in-process research and development at the time of acquisition. These charges
are typically non-cash in nature. Therefore, due to these and other factors,
Level 8 expects that it will continue to experience net losses at least through
2000. Level 8 cannot predict with accuracy its future results of operations and
believes that any period-to-period comparisons of its results of operations are
not meaningful. Level 8 expects to increase its operating expenses
significantly, expand its sales and marketing operations and continue to develop
and enhance its products. In the future, Level 8 may not generate sufficient
revenues to pay for all of these operating costs or other expenses. In addition,
dividends of $210,000 per quarter accrue on the outstanding Series A Preferred
Stock and are required to be declared and paid in cash to the extent funds are
legally available for the payment of dividends. If Level 8 fails to generate
sufficient cash to pay these expenses and dividends, Level 8 will need to
identify other sources of financing. Level 8 may not be able to borrow money or
issue more shares of common stock or other securities to meet its cash needs,
and even if Level 8 can complete such transactions, the terms may not be
favorable. See "Level 8 Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more complete description of Level
8's historical financial condition, results of operations and liquidity.
BECAUSE LEVEL 8'S EXPENSES ARE LARGELY FIXED, AN UNEXPECTED REVENUE SHORTFALL
MAY ADVERSELY AFFECT ITS BUSINESS.
Level 8's expense levels are based primarily on its estimates of future
revenues and are largely fixed. A large portion of its expense relates to
headcount that cannot be easily reduced without adversely affecting its
business. Level 8 also intends to hire additional personnel to support the
growth of its business. This expansion will substantially increase its operating
expenses. Level 8 may be unable to adjust spending rapidly enough to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to its planned expenditures would reduce, and possibly
eliminate, any operating income and could materially adversely affect its
business, operating results and financial condition.
BECAUSE LEVEL 8 CANNOT ACCURATELY PREDICT THE AMOUNT AND TIMING OF INDIVIDUAL
SALES, ITS QUARTERLY OPERATING RESULTS MAY VARY SIGNIFICANTLY, WHICH MAY
ADVERSELY IMPACT ITS STOCK PRICE.
Level 8's quarterly operating results have varied significantly in the
past, and Level 8 expects that it will continue to do so in the future. Level 8
has derived, and expects to continue to derive in the near term, a significant
portion of its revenue from relatively large customer contracts or arrangements.
The timing of revenue recognition from those contracts and arrangements has
caused and may continue to cause fluctuations in its operating results,
particularly on a quarterly basis. Level 8's quarterly revenues and operating
results typically depend upon the volume and timing of customer contracts
received during a given quarter and the percentage of each contract which Level
8 is able to recognize as revenue during the quarter. Each of these factors is
difficult to forecast. As is common in the software industry, the largest
portion of software license revenues is typically recognized in the last month
of each fiscal quarter and the third and fourth quarters of each fiscal year.
Level 8 believes these patterns are partly attributable to
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budgeting and purchasing cycles of its customers and its sales commission
policies, which compensate sales personnel for meeting or exceeding periodic
quotas.
Furthermore, because the size of individual sales of the Geneva AppBuilder
and Geneva Integrator products are large and such sales can account for a large
percentage of its revenue, a single sale may have a significant impact on the
results of a quarter. In addition, the substantial commitment of executive time
and financial resources that have historically been required in connection with
a customer's decision to purchase certain of Level 8's products increases the
risk of quarter-to-quarter fluctuations. Typically, the purchase of Level 8's
products involves a significant technical evaluation by the customer, and there
are delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently results in a
lengthy sales process of several months. It also subjects the sales cycle for
Level 8's products to a number of significant risks, including Level 8's
customers' budgetary constraints and internal acceptance reviews. The length of
Level 8's sales cycle may vary substantially from customer to customer. Level 8
typically does not have any material backlog of unfilled software orders, and
product revenue may fluctuate from quarter-to-quarter due to the completion or
commencement of significant assignments, the number of working days in a quarter
and the utilization rate of services personnel. As a result of these factors,
Level 8 believes that a period-to-period comparison of its historical results of
operations is not necessarily meaningful and should not be relied upon as
indications of future performance. In particular, Level 8's revenues in the
third and fourth quarters of its fiscal years may not be indicative of the
revenues for the first and second quarters. Fluctuations in operating results
may have a material adverse effect on Level 8's business, operating results and
financial condition, and could result in volatility of the trading price of
Level 8's common stock. Moreover, if Level 8's quarterly results do not meet the
expectations of Level 8's securities analysts and investors, the trading price
of Level 8's common stock would likely decline.
GENERAL ECONOMIC CONDITIONS MAY AFFECT INVESTORS' EXPECTATIONS REGARDING LEVEL
8'S FINANCIAL PERFORMANCE AND ADVERSELY AFFECT LEVEL 8'S STOCK PRICE.
Certain industries to which Level 8 sells its products, such as the
financial services industry, are highly cyclical. In addition, Level 8 markets
its products and services internationally, and historically a substantial
portion of its revenue has been derived from markets outside the United States.
In the future, Level 8's results may be subject to substantial period-to-period
fluctuations as a consequence of the industry patterns of Level 8's customers,
general or regional economic conditions and other factors. These factors may
also have a material adverse effect on Level 8's business, operating results and
financial condition.
BECAUSE A SUBSTANTIAL AMOUNT OF LEVEL 8'S PRO FORMA REVENUES HAVE BEEN DERIVED
FROM ONE PRODUCT, DECREASED DEMAND FOR THIS PRODUCT COULD ADVERSELY AFFECT LEVEL
8'S BUSINESS.
On a pro forma basis, a substantial amount of Level 8's revenue has been
derived from the Geneva AppBuilder (formerly known as Seer*HPS) products and
services. Over 84% of Level 8's revenue for 1998 on a pro forma basis reflecting
the acquisition of Seer Technologies (but not reflecting the proposed merger
with Template) was derived from the Geneva AppBuilder products and services.
Although Level 8 intends to focus much of its future business efforts on the
enterprise application integration market, Level 8 intends
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<PAGE> 24
to continue to support and enhance the Geneva AppBuilder product. Level 8
anticipates that the Geneva AppBuilder product and related services over the
near term will account for a substantial portion of its revenues. If Level 8's
current or future competitors release new products that provide, or are
perceived as providing, more advanced features, greater functionality, better
performance, better compatibility with other systems or lower prices than Level
8's product line, demand for Level 8's Geneva AppBuilder product or Level 8's
other products and related services will likely decline. A decline in demand
for, or market acceptance of, the Geneva AppBuilder product line as a result of
competition, technological change or other factors could have a material adverse
effect on Level 8's business, operating results and financial condition.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT LEVEL 8'S BUSINESS.
Level 8's success depends to a significant extent on the performance of a
number of key management and technical personnel, loss of one or more of whom
could have a material adverse effect on Level 8's business. Level 8's success
will also depend in part on Level 8's ability to attract and retain qualified
professional, technical, managerial and marketing personnel. In particular,
Level 8 intends to expand its consulting force and its sales and marketing
teams. Competition for such personnel in the software industry is intense. Level
8 may not be successful in attracting and retaining the personnel required to
develop new and technical products to conduct its operations successfully.
LEVEL 8 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.
Level 8 competes in markets that are intensely competitive and feature
rapidly changing technology and evolving standards. To maintain or improve its
position within these markets, or to compete in new markets, Level 8 must
continue to enhance its current products and develop new products in a timely
fashion. Level 8 expects to experience increased competition from current and
potential competitors, many of which have longer operating histories, greater
resources, greater name recognition, more extensive distribution and sales
networks, and a larger, more established customer base. Accordingly, Level 8 may
not be able to provide products and services that compare favorably with the
products and services of its competitors. These competitive pressures could
reduce Level 8's market share or require Level 8 to reduce the price of its
products, either of which could have a material adverse effect on its business,
operating results and financial condition.
ACQUISITIONS MAY AFFECT FUTURE RESULTS OR FAIL TO BE INTEGRATED SUCCESSFULLY.
Part of Level 8's strategy is to grow its business rapidly through
acquisitions, although there can be no guarantee that suitable companies,
divisions or products will be available for acquisition. Future acquisitions
will also entail numerous risks, including Level 8's inability to successfully
assimilate acquired operations and products, its inability to retain key
employees of acquired operations, the diversion of management's attention, and
the difficulties and uncertainties in transitioning to Level 8 key business
relationships from the acquired entities. In addition to paying cash for future
acquisitions, Level 8 may issue additional securities which would be dilutive to
its existing stockholders. Alternatively, Level 8 may assume or incur debt
obligations or large one-time expenses. These factors could have a material
adverse effect on Level 8's business, operating results and financial condition.
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Level 8 may also evaluate, on a case-by-case basis, joint venture
relationships with complementary businesses. Any joint venture investment would
involve many of the same risks posed by an acquisition, particularly those risks
associated with the diversion of our resources, Level 8's inability to generate
sufficient revenues, the management of relationships with third parties and
potential expenses of the joint venture relationship. Any of these risks could
have a material adverse effect on Level 8's business, operating results and
financial condition.
LEVEL 8 MAY NOT HAVE THE RESOURCES TO MANAGE ADDITIONAL GROWTH SUCCESSFULLY.
Level 8's recent growth has placed, and will continue to place, significant
demands on management as well as on its administrative, operational, sales and
financial resources. Level 8's inability to sustain or manage any additional
growth could have a material adverse effect on its business, operating results
and financial condition. To manage additional growth, Level 8 must expand its
sales, marketing and customer support organizations, further develop its
technical expertise so that it can influence and respond to emerging industry
standards, and improve its operational processes and management controls.
RAPID TECHNOLOGICAL CHANGE COULD RENDER LEVEL 8'S PRODUCTS OBSOLETE.
Level 8's markets are characterized by rapid technological change, frequent
new product introductions and enhancements, uncertain product life cycles,
changes in customer requirements and evolving industry standards. The
introduction of new products embodying new technologies and the emergence of
shifting customer demands or changing industry standards could render Level 8's
existing products obsolete and unmarketable which would have a material adverse
effect on its business, operating results and financial condition. Level 8's
future success will depend upon its ability to continue to develop and introduce
a variety of new products and product enhancements to address the increasingly
sophisticated needs of its customers. This will require Level 8 to continue to
make substantial product development investments. Level 8 may experience delays
in releasing new products and product enhancements in the future. Material
delays in introducing new products or product enhancements may cause customers
to forego purchases of Level 8 products and purchase those of its competitors.
LOSS OF LEVEL 8'S RELATIONSHIP WITH MICROSOFT COULD ADVERSELY AFFECT ITS
BUSINESS.
Level 8 has a key strategic relationship with Microsoft. Microsoft has
purchased from Level 8 software originally developed by Level 8 that enables its
Windows NT server platforms to integrate with IBM's MQ Series message-oriented
middleware, which currently represents a significant share of the worldwide
message-oriented middleware market. Microsoft has stated that it intends to ship
a complementary software product developed by Level 8 as part of its Windows
2000 operating system and to make it available to its Windows NT server platform
customers through its website. Microsoft currently recommends Level 8's Geneva
Message Queuing (formerly known as FalconMQ) product as its preferred
implementation of the MSMQ functionality on operating systems other than
Microsoft Windows. Sales of Level 8's Geneva Message Queuing product would be
significantly affected if Microsoft ceases to recommend it or does not include
Level 8's complementary software product as part of its Windows 2000 operating
system.
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LOSS OF ANY ONE OF LEVEL 8'S MAJOR CUSTOMERS COULD ADVERSELY AFFECT ITS
BUSINESS.
A significant portion of Level 8's business is attributable to a limited
number of changing customers. On a pro forma basis after giving effect to the
acquisition of Seer, Level 8's top five customers accounted for 22% of its 1998
revenue. There can be no assurance that these customers or other of Level 8's
current customers will continue to purchase its products in the future. The loss
of any one of Level 8's major customers and/or the failure to attract new
customers could have a material adverse effect upon its business. In addition,
as a result of Level 8's reliance on a limited number of changing customers, its
results of operations have fluctuated in the past and may continue to fluctuate
materially from period to period.
THERE ARE A NUMBER OF RISKS ASSOCIATED WITH DOING BUSINESS ABROAD.
International sales represented approximately 61% of Level 8's 1998
revenues on a pro forma basis after giving effect to the acquisition of Seer
(but not reflecting the proposed merger with Template). Level 8 expects that
such sales will continue to generate a significant portion of its total revenue.
Revenues from Template's non-U.S. subsidiaries and export sales accounted for
approximately 52% of Template's total revenue for 1999. Our revenues from
international sales could be subject to large currency exchange fluctuations,
which in some circumstances could reduce our overall revenue. International
sales also expose us to a risk of loss due to an increase in the value of the
U.S. dollar relative to foreign currencies which would make our products more
expensive to potential foreign customers. Additional risks inherent in our
international business activities include:
- unexpected changes in regulatory requirements;
- tariffs and other trade barriers;
- costs and risks of customizing products for foreign markets;
- longer accounts receivable payment cycles and greater difficulty in
accounts receivable collections;
- difficulties in staffing and managing international operations;
- potentially adverse tax consequences;
- repatriation of earnings;
- the burden of complying with a variety of foreign, legal and regulatory
restrictions;
- political instability;
- possible recessionary environments in economies outside the United
States; and
- reduced protection for intellectual property rights in some countries.
There can be no assurance that these factors, among others, will not have a
material adverse effect on our future international revenue and, consequently,
on our business, operating results and financial condition.
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LEVEL 8'S PRODUCTS MAY HAVE UNKNOWN DEFECTS WHICH COULD HARM LEVEL 8'S
REPUTATION OR DECREASE MARKET ACCEPTANCE OF ITS PRODUCTS.
Because Level 8's customers depend on its products for their critical
systems and business functions, any interruptions caused by unknown defects in
Level 8's products could damage its reputation, cause its customers to initiate
product liability suits against it, increase its product development costs,
divert its product development resources, cause Level 8 to lose revenue or delay
market acceptance of its products, any of which could cause Level 8's business
to suffer. Level 8's product offerings consist of complex software and services,
both internally developed and licensed from third parties. Complex software may
contain errors or defects, particularly when first introduced or when new
versions or enhancements are released. Although Level 8 conducts extensive
testing, it may not discover software defects that affect its current or new
products or enhancements until after they are sold. Such defects could cause
Level 8's customers to experience severe system failures.
THE COMPLEX TECHNOLOGY OF LEVEL 8'S PRODUCTS SUBJECTS IT TO LIABILITY CLAIMS.
Because Level 8's products provide critical database access, integration
and management functions, Level 8 may be subject to significant liability claims
if its customers believe that its products have failed to perform their intended
functions. Level 8's agreements with customers typically contain provisions
intended to limit its exposure to liability claims. However, these contract
provisions may not preclude all potential claims. Liability claims could require
Level 8 to spend significant time and money in litigation or to pay significant
damages. As a result, any such claims, whether or not successful, could have a
material adverse effect on Level 8's reputation and business, operating results
and financial condition.
YEAR 2000 ISSUES MAY CAUSE PROBLEMS WITH LEVEL 8'S SYSTEMS AND EXPOSE IT TO
LIABILITY.
Many currently installed computer systems and software are unable to
distinguish 21st century dates from 20th century dates. This problem arises
because some computers, software and other equipment include programming code in
which calendar year data is abbreviated to only two digits. As a result, such
equipment and systems could fail to operate or fail to produce correct results
if "00" is interpreted to mean 1900, rather than 2000. This "Year 2000 Problem"
is widely expected to increase in frequency and severity as the Year 2000
approaches.
The Year 2000 Problem presents Level 8 with several potential risks
including, but not limited to, the following:
- SOFTWARE SOLD TO CUSTOMERS. Once licensed, Level 8's products interact
with other products that are not developed by Level 8 and operate on
computer systems that are not under Level 8's control. These factors
could affect the performance of Level 8's products if a Year 2000 Problem
existed in a different facet of a customer's information technology
infrastructure.
- INTERNAL INFRASTRUCTURE. The Year 2000 Problem could affect computers,
software and other equipment that Level 8 uses internally as well as
divert management's attention from ordinary business activities. In
addition to computers and related systems, the operation of Level 8's
office and facilities equipment, such as fax machines, photocopiers,
telephone switches, security systems, elevators and other
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common devices may be affected by the Year 2000 Problem. Although Level 8
has made substantial efforts to identify all of the major computers,
software applications and related equipment used for internal operations,
any unforeseen Year 2000 related problems could create additional
expenses and divert management's attention from operations.
- SUPPLIERS/THIRD-PARTY RELATIONSHIPS. There can be no assurance that
Level 8's suppliers or other third parties that Level 8 relies upon will
resolve any or all Year 2000 Problems with their systems on a timely
basis.
- STRAIN ON INFORMATION TECHNOLOGY RESOURCES. The Year 2000 Problem is
currently placing a strain on organizations' information technology
budgets and resources. Some organizations may lack sufficient resources
to undertake the type of integration projects that Level 8's product line
enables at the same time that they are addressing the Year 2000 Problem.
However, Level 8 believes that it is not possible to determine with
complete certainty that all Year 2000 Problems affecting it will be identified
or corrected in a timely manner. If Level 8 fails to identify and correct all
Year 2000 Problems affecting its internal systems, or if Level 8 is forced to
implement its contingency plans, its business, financial condition or results of
operations could be materially adversely affected. In addition, regardless of
whether Level 8 experiences Year 2000 Problems, enterprises may reduce their
spending on software and systems during the latter part of 1999 and into 2000 in
connection with the potential effects of the Year 2000 Problem or to concentrate
their resources on remediation. See "Level 8 Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000" for more
complete information on the Year 2000 Problem.
FAILURE TO MEET PRODUCT DELIVERY DATES COULD ADVERSELY AFFECT LEVEL 8'S
BUSINESS.
Because of the complexity of software products and the possibility of
unforeseen technological problems arising late in the development process, it
has not been uncommon for software companies to miss announced delivery dates
for new products and/or upgrades and modifications to existing products.
Unforeseen technical problems may delay the availability of these products and
services or cause Level 8 to release such products without support for the range
of platforms currently anticipated. Any substantial delays in the availability
of these products and services could have a material adverse effect on Level 8's
business.
LEVEL 8 MAY BE UNABLE TO ENFORCE OR DEFEND ITS OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY.
Level 8's success depends to a significant degree upon its proprietary
technology. Level 8 relies on a combination of patent, trademark, trade secret
and copyright law, and contractual restrictions and passwords to protect its
proprietary technology. However, these measures provide only limited protection,
and there is no guarantee that its protection of proprietary rights will be
adequate. Furthermore, the laws of some jurisdictions outside the United States
do not protect proprietary rights as fully as in the United States. In addition,
Level 8's competitors may independently develop similar technology, duplicate
its products or design around its patents or its other intellectual property
rights. Level 8 may not be able to detect or police the unauthorized use of its
products or technology, and litigation may be required in the future to enforce
Level 8's intellectual property rights, to protect its trade secrets or to
determine the validity and scope of its proprietary rights. Any litigation
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to enforce Level 8's intellectual property rights would be expensive and
time-consuming, would divert management resources and may not be adequate to
protect its business.
Level 8 does not believe that any of its products infringe the proprietary
rights of third parties. However, companies in the software industry have
experienced substantial litigation regarding intellectual property and third
parties could assert claims that Level 8 has infringed their intellectual
property rights. In addition, Level 8 may be required to indemnify its
distribution partners and end-users for similar claims made against them. Any
claims against Level 8 would divert management resources, and could require
Level 8 to spend significant time and money in litigation, pay damages, develop
new intellectual property or acquire licenses to intellectual property that is
the subject of the infringement claims. These licenses, if required, may not be
available on acceptable terms. As a result, intellectual property claims against
Level 8 could have a material adverse effect on Level 8's business, operating
results and financial condition.
AS A TECHNOLOGY COMPANY, LEVEL 8'S COMMON STOCK MAY BE SUBJECT TO ERRATIC PRICE
FLUCTUATIONS.
The market price of Level 8's common stock has fluctuated in the past and
may in the future be subject to significant fluctuations in response to numerous
factors, including: variations in Level 8's annual or quarterly financial
results or those of its competitors; changes by financial research analysts in
their estimates of Level 8's earnings or its failure to meet such estimates;
conditions in the software and other technology industries; announcements of key
developments by competitors; unfavorable developments with respect to Level 8's
proprietary rights; unfavorable publicity affecting Level 8's industry or Level
8; adverse legal events affecting Level 8; and sales of its common stock by
existing stockholders. In addition, from time to time, the stock market
experiences significant price and volume fluctuations, which may affect the
market price of Level 8's common stock for reasons which may or may not be
related to its performance. Recently, such volatility has particularly impacted
the stock prices of publicly traded technology companies. In the past,
securities class action litigation has been instituted against a company
following periods of volatility in the market price of a company's securities.
If similar litigation were instituted against Level 8, it could result in
substantial costs and a diversion of Level 8's management's attention and
resources, which could have an adverse effect on its business.
LEVEL 8 HAS NOT PAID ANY DIVIDENDS ON ITS COMMON STOCK AND IT IS LIKELY THAT NO
DIVIDENDS WILL BE PAID IN THE FUTURE.
Level 8 has never declared or paid cash dividends on its common stock and
it does not anticipate paying any cash dividends on its common stock in the
foreseeable future.
LIRAZ COULD EFFECTIVELY CONTROL MATTERS SUBMITTED TO LEVEL 8'S STOCKHOLDERS.
Liraz Systems, Ltd., an Israeli public company, and its subsidiaries
currently hold 41% of Level 8's outstanding voting stock. As a result, Liraz may
have the effective power to control all matters submitted to Level 8's
stockholders for a vote, including the election of directors and the approval of
mergers and other business combination transactions for which a majority vote is
required. Such control could adversely affect the market price of Level 8's
common stock or delay or prevent a change of control. In addition, a wholly
owned subsidiary of Liraz beneficially owns an additional 2,000,000 shares of
common stock issuable upon the conversion of Level 8's Series A Preferred Stock
and exercise of
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warrants. If Liraz's subsidiary converts all of its Level 8 preferred stock and
exercises all of its Level 8 warrants, Liraz and its subsidiaries would then
hold approximately 52% of Level 8's outstanding common stock, based on the
number of shares of Level 8 common stock outstanding as of November 17, 1999.
Level 8 has the right to direct the voting of another 1,000,000 Level 8 shares
issued to sellers of Seer Technologies stock to Level 8 in December 1998, plus
another 250,000 Level 8 shares issuable upon the exercise of warrants issued to
these sellers. Three of Level 8's directors have relationships with Liraz which
are described in the following paragraph.
SOME OF LEVEL 8'S DIRECTORS HAVE CONFLICTS OF INTEREST INVOLVING LIRAZ.
Liraz, as a principal stockholder of Level 8, and Messrs. Arie Kilman,
Frank J. Klein and Lenny Recanati, who are directors of Level 8, are in
positions involving the possibility of conflicts of interest with respect to
transactions concerning Liraz and Level 8. Mr. Kilman, Level 8's Chairman of the
Board and Chief Executive Officer, is also Chairman of the Board, Chief
Executive Officer, and a significant stockholder of Liraz. Messrs. Klein and
Recanati are executive officers of significant stockholders of Liraz. As of
September 30, 1999, Level 8's total indebtedness to Liraz was approximately $4.6
million. See "Level 8 Certain Relationships and Related Transactions." Level 8
expects to issue common stock to Liraz in exchange for Liraz's guaranty of debt
to be incurred in part to finance the cash portion of the merger consideration
to be paid to Template stockholders. See "Approval of the Merger and Related
Transactions -- Financing of the Merger." Some decisions concerning Level 8's
operations or financial structure may present conflicts of interest between
Level 8 and Liraz and/or its affiliates. For example, if Level 8 is required to
raise additional capital from public or private sources to finance its
anticipated growth and contemplated capital expenditures, Level 8's interests
might conflict with those of Liraz and/or its affiliates with respect to the
particular type of financing sought. In addition, Level 8 may have an interest
in pursuing acquisitions, divestitures, financings or other transactions that,
in Level 8's judgment, could be beneficial to Level 8, even though the
transactions might conflict with the interests of Liraz and/or its affiliates.
If these conflicts do occur, Liraz and its affiliates may exercise their
influence in their own best interests. Level 8 has in the past engaged in
transactions and joint development projects with Liraz.
PROVISIONS OF LEVEL 8'S CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS.
Section 203 of the Delaware General Corporation Law, which prohibits
certain persons from engaging in business combinations with Level 8, may have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
stockholder may consider to be in the holder's best interests. These provisions
of Delaware law also may adversely affect the market price of Level 8's common
stock. Level 8's certificate of incorporation authorizes the issuance, without
stockholder approval, of preferred stock, with such designations, rights and
preferences as may be determined from time to time by the board of directors.
Such designations, rights and preferences established by the board may adversely
affect Level 8's stockholders. In the event of issuance, the preferred stock
could be used, under certain circumstances, as a means of discouraging, delaying
or preventing a change of control of Level 8. Although Level 8 has no present
intention to issue any shares of preferred stock in addition to the preferred
stock issued in June 1999, Level 8 may issue preferred stock in the future. See
"Level 8 Certain Relationships and Related Transactions."
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LEVEL 8 STOCKHOLDERS MAY BE DILUTED BY THE EXERCISE OF OPTIONS AND WARRANTS AND
CONVERSION OF PREFERRED STOCK.
Level 8 has reserved 3,845,000 shares of common stock for issuance under
its employee and director benefit plans and is seeking stockholder approval to
increase the number of shares so reserved by 1,400,000. As of October 31, 1999,
options to purchase an aggregate of 2,419,339 shares of common stock were
outstanding pursuant to Level 8's employee and director benefit plans. Warrants
to purchase an additional 2,780,632 shares of common stock are outstanding.
Level 8 has also reserved 2,100,000 shares of common stock for issuance upon
conversion of the outstanding Series A Preferred Stock. In addition, Level 8
will assume Template options outstanding as of the effective time of the merger,
as described under "The Merger Agreement -- Stock Options" on page 66. The
exercise of such options and warrants or conversion of preferred stock, and
subsequent sale of the underlying common stock in the public market could
adversely affect the market price of Level 8's common stock. Level 8's Series A
Preferred Stock and its outstanding warrants include anti-dilution provisions,
including in some cases adjustments to the applicable conversion price or
exercise price in the event Level 8 issues common stock at a price less than the
conversion price or exercise price then in effect. This would increase the
dilutive impact of future equity offerings at prices less than the conversion
price or exercise price of the outstanding warrants.
FUTURE SALES OF COMMON STOCK BY EXISTING INVESTORS COULD ADVERSELY AFFECT THE
MARKET PRICE OF LEVEL 8 COMMON STOCK.
Future sales of substantial numbers of shares of common stock (including
shares issued upon the exercise of stock options or warrants or conversion of
preferred stock) by Liraz, Level 8 or Level 8's executive officers or principal
stockholders, or the perception that such sales could occur, could adversely
affect the market price of Level 8's common stock. Currently, all outstanding
shares of common stock owned by Level 8's affiliates are eligible for resale in
the public market pursuant to Rule 144 under the Securities Act, except for
1,250,000 shares beneficially owned by Welsh, Carson, Anderson & Stowe and its
affiliates (including 250,000 shares issuable upon warrant exercise), 1,000,000
of which may be resold under Rule 144 after December 31, 1999. Level 8 has
granted registration rights to Liraz and its affiliates covering up to 5,683,120
shares of common stock, including 2,000,000 shares issuable upon conversion of
preferred stock and exercise of warrants. Level 8 has also granted registration
rights to investment funds affiliated with Brown Simpson Capital Management
(covering 1,400,000 shares issuable upon conversion of preferred stock and
exercise of warrants), investment funds affiliated with Seneca Capital Advisors
(covering 800,000 shares issuable upon conversion of preferred stock and
exercise of warrants), stockholders of Momentum Software Corporation (covering
up to 594,866 shares of common stock and warrants to purchase an additional
200,000 shares of common stock), Candle Corporation (covering up to 246,800
shares of common stock) and Hampshire Securities Corporation, the underwriter
for prior offerings of Level 8's common stock (covering warrants to purchase up
to 250,000 shares of common stock). These registration rights enable those
investors to require that Level 8 register resales of their securities. Level 8
previously registered 140,000 of the shares issuable upon exercise of the
warrants held by Hampshire Securities that expire in July 2000. In August 1999,
Level 8 registered the resale of 4,100,000 shares, including the shares of
common stock issuable to Brown Simpson and Seneca Capital investments funds, a
portion of shares issuable to Advanced Systems (which is a subsidiary of Liraz,
our controlling stockholder). In addition, Level 8 has granted Welsh, Carson,
Anderson & Stowe and related parties
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(which together own 1,000,000 shares of common stock and warrants to purchase an
additional 250,000 shares) "piggyback" registration rights which allows them to
include their shares in any registration statement Level 8 files in connection
with an underwritten public offering before January 1, 2001. If these investors
sell a large portion of their securities on the open market at or about the same
time, the market price of Level 8's common stock may decline.
LEVEL 8 IS REQUIRED TO PAY ADDITIONAL AMOUNTS OR ISSUE MORE EQUITY SECURITIES IF
LEVEL 8 DOES NOT TIMELY FULFILL ITS OBLIGATIONS TO THE HOLDERS OF SERIES A 4%
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS.
If Level 8 fails to pay dividends on the Series A Preferred Stock when due,
or Level 8's common stock is delisted from The Nasdaq Stock Market and is not
traded on the New York Stock Exchange or American Stock Exchange, or the rights
of holders of Series A Preferred Stock are adversely affected by a
reclassification of Level 8's common stock, the dividend rate on Level 8's
Series A Preferred Stock would increase to 18% annually, with one-third of such
dividend payable in shares of our common stock for the first 60 days that
dividends accrue at 18% annually. In addition, Level 8 is also required to make
additional payments to holders of the Series A Preferred Stock and warrants in
the event that Level 8 does not fulfill other obligations to the holders,
including keeping the registration statement and prospectus for the underlying
common stock in effect and current and issuing common stock promptly upon
conversion of the Series A Preferred Stock or exercise of warrants. The total
amount of cash payments in respect of the Series A Preferred Stock, including
dividends and any additional amounts required to be paid, is limited to 19%
annually of the liquidation value of the Series A Preferred Stock.
THE COMBINED COMPANY COULD BE ADVERSELY AFFECTED IF THERE WERE ANY SIGNIFICANT
CHANGES IN THE CONTRACTING POLICIES OR FISCAL POLICIES OF THE U.S. FEDERAL
GOVERNMENT.
Template derives a significant portion of its revenues from contracts with
the U.S. federal government, and we believe that the success and development of
the combined company's business will continue to depend on our successful
participation in federal government contract programs. Accordingly, changes in
federal government contracting policies could directly affect our financial
performance. Among the factors that could materially adversely affect Template's
federal government contracting business are:
- budgetary constraints affecting federal government spending generally, or
specific departments or agencies in particular, and changes in fiscal
policies or available funding;
- changes in federal government programs or requirements;
- curtailment of the federal government's use of technology services firms;
- the adoption of new laws or regulations;
- technological developments;
- federal governmental shutdowns (such as that which occurred during the
federal government's 1996 fiscal year);
- competition and consolidation in the information technology industry; and
- general economic conditions.
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These or other factors could cause federal governmental agencies to reduce their
purchases under contracts, to exercise their right to terminate contracts, or
not to exercise options to renew contracts, any of which could have a material
adverse effect on our financial condition, results of operations and debt
service capability.
Many of Template's federal government customers are subject to increasingly
stringent budgetary constraints. Template has substantial contracts in place
with several federal departments and agencies, and Template's continued
performance under these contracts, or award of additional contracts from these
agencies, could be materially adversely affected by spending reductions or
budget cutbacks at these agencies. Such reductions or cutbacks could have a
material adverse effect on our financial condition, results of operations and
debt service capability.
TEMPLATE'S GOVERNMENT CONTRACTS COULD BE TERMINATED PRIOR TO COMPLETION, AND
TEMPLATE MIGHT NOT RETAIN THESE CONTRACTS IN ANY COMPETITIVE REBIDDING PROCESS.
Template derives a substantial portion of its revenues from U.S. federal
government contracts that typically span one or more base years and one or more
option years and are awarded through formal competitive bidding processes. Many
of the option periods cover more than half of the contract's potential duration.
Federal government agencies generally are not required to exercise these option
periods. In addition, Template's contracts typically also contain provisions
permitting a government client to terminate the contract on short notice, with
or without cause. These contracts would be less profitable for Template if the
government client decides not to exercise option periods or to terminate the
contracts. Additionally, Template's contractual costs and revenues are subject
to adjustment as a result of federal government audits.
Upon expiration, if the customer requires further services of the type
provided in the contract, there is frequently a competitive rebidding process,
and there can be no assurance that Template will win any particular bid, or that
Template will be able to replace business lost upon expiration or completion of
a contract. Further, all federal government contracts are subject to protest by
competitors. The unexpected termination of one or more of Template's significant
contracts could result in significant revenue shortfalls. The termination or
nonrenewal of any of Template's significant contracts, short-term revenue
shortfalls, the imposition of fines or damages or Template's suspension or
debarment from bidding on additional contracts could have a material adverse
effect on Level 8's financial condition, results of operations and debt service
capability.
TEMPLATE'S GOVERNMENT CONTRACTS ARE SUBJECT TO AUDIT.
The Defense Contract Audit Agency, "DCAA", and certain other government
agencies, routinely audit and investigate government contracts. These agencies
review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. Any
costs found to be improperly allocated to a specific contract will not be
reimbursed, while costs already reimbursed must be refunded. Therefore, a DCAA
audit could result in a substantial adjustment to Template's revenues. No
material adjustments have resulted from any DCAA audits of Template completed as
of November 30, 1997, and Template believes that adjustments resulting from
subsequent audits will not adversely affect its business. If a government audit
uncovers improper or illegal activities, Template may be subject to civil and
criminal penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines and suspension
or debarment from doing business
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with the federal government. In addition, Template could suffer a serious
reputational harm if allegations of impropriety were made against Template. Any
such government determination of impropriety or illegality, or allegation of
impropriety, could have a material adverse effect on Level 8's financial
condition, results of operations and debt service capabilities.
MANY OF TEMPLATE'S U.S. FEDERAL GOVERNMENT CUSTOMERS SPEND THEIR PROCUREMENT
BUDGETS THROUGH "INDEFINITE DELIVERY, INDEFINITE QUANTITY" CONTRACTS, WHICH
REQUIRES TEMPLATE TO COMPETE FOR POST-AWARD ORDERS.
Budgetary pressures and reforms in the procurement process have caused many
U.S. federal government customers to increasingly purchase goods and services
through "indefinite delivery, indefinite quantity", which Template refers to as
"IDIQ" contracts. These contract vehicles have resulted in increased competition
and pricing pressure requiring that Template make substantial post-award efforts
to realize end-to-end services, including requirements definition, combat system
engineering, test and evaluation, production and support.
TEMPLATE BEARS THE RISK OF COST OVERRUNS AND INFLATION ON ITS FIXED PRICE
CONTRACTS.
A significant number of Template's client projects are performed on a
fixed-price basis and, therefore, Template bears the risk of cost overruns and
inflation. A significant portion of Template's net revenues are recognized on
the percentage-of-completion method which requires revenues to be recorded over
the term of a client contract. Template recognizes revenues attributable to the
sale of software tools upon shipment and revenues attributable to services upon
completion. Template records a loss when current estimates of project costs
exceed unrecognized revenues.
TEMPLATE COULD LOSE ITS INVESTMENTS IN SMALL, START-UP TECHNOLOGY COMPANIES.
Template has made strategic investments in a number of companies that
Template believes have the potential to grow and become important partners of
ours, and we may continue to make strategic investments in the future.
Historically, Template has made these investments in the form of debt that is
convertible into equity of the company that is receiving the investment. There
can be no assurance that these investments will bring us a return on investment.
In addition, because the strategic investments tend to be in small, start-up
technology companies, there is a greater risk that we could lose some or all of
our investment. Any of these results could have a material adverse effect on the
combined company's business, results of operations and financial condition.
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THE LEVEL 8 SPECIAL MEETING
PURPOSE OF THE LEVEL 8 SPECIAL MEETING
The purpose of the Level 8 special meeting is to:
- Consider and vote upon a proposal to approve the issuance of Level 8
common stock in connection with the merger; and
- Consider and vote upon an amendment to Level 8's 1997 Stock Option Plan
increasing the number of shares of Level 8 common stock subject to awards
under the plan from 2,600,000 to 4,000,000.
Holders of Level 8 common stock may also consider and vote upon such other
matters as may be properly brought before the Level 8 special meeting. The
merger will occur only if the merger proposal and the proposal to increase the
number of shares of Level 8 common stock subject to awards under Level 8's 1997
Stock Option Plan are approved.
LEVEL 8 BOARD OF DIRECTORS RECOMMENDATIONS
THE LEVEL 8 BOARD OF DIRECTORS APPROVED THE MERGER AGREEMENT AND THE
MERGER, AND UNANIMOUSLY RECOMMENDS THAT LEVEL 8 STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE ISSUANCE OF SHARES OF LEVEL 8 COMMON STOCK PURSUANT TO THE MERGER
AGREEMENT. THE LEVEL 8 BOARD OF DIRECTORS ALSO UNANIMOUSLY RECOMMENDS A VOTE
"FOR" THE INCREASE IN THE NUMBER OF SHARES UNDER THE 1997 STOCK OPTION PLAN.
DATE, TIME AND PLACE OF MEETING
The Level 8 special meeting will be held on December 15, 1999 at 2:00 p.m.,
local time, at Level 8's New York offices, 1250 Broadway, 35th Floor, New York,
New York 10001-3782.
LEVEL 8 RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Level 8 common stock at the close of business on
the Level 8 record date, November 17, 1999, will be entitled to notice of and to
vote at the Level 8 special meeting. At the close of business on the Level 8
record date, there were 8,932,047 shares of Level 8 common stock outstanding and
entitled to vote.
Each holder of record of Level 8 common stock on the Level 8 record date
will be entitled to one vote for each share held on all matters to be voted upon
at the Level 8 special meeting.
VOTING OF PROXIES
The form of proxy accompanying this joint proxy statement/prospectus is
being solicited on behalf of the Level 8 board of directors for use at the Level
8 special meeting. We ask you to please complete, date and sign the accompanying
proxy and promptly return it in the accompanying envelope or otherwise mail it
to Level 8. Each of the persons named in the Level 8 proxy as a proxy holder is
an officer of Level 8. All shares of Level 8 common stock that are entitled to
vote and that are represented at the Level 8
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special meeting by properly executed proxies received prior to or at the Level 8
special meeting and not duly and timely revoked will be voted at the Level 8
special meeting in accordance with the instructions indicated on such proxies.
If no instructions are indicated, proxies will be voted for the approval of the
issuance of shares of Level 8 common stock pursuant to the merger agreement and
for the approval of the increase in the number of shares of Level 8 common stock
subject to awards under Level 8's 1997 Stock Option Plan.
If any other matters are properly presented for consideration at the Level
8 special meeting, unless otherwise indicated on a proxy, the person named as
proxy and acting thereunder will have the discretion to vote on such matters in
accordance with his best judgment.
SOLICITATION
Level 8 and Template intend to mail this joint proxy statement/prospectus
on or about November 23, 1999 to all stockholders entitled to vote at the
stockholder meetings. This joint proxy statement/prospectus constitutes notice
of the Template special meeting in accordance with Virginia law and notice of
the Level 8 special meeting in accordance with Delaware law.
Level 8 and Template will share equally the entire cost of preparation,
assembly, printing and mailing of this joint proxy statement/prospectus, and any
additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of common stock beneficially owned by
others to forward to such beneficial owners. Level 8 and Template may reimburse
persons representing beneficial owners of common stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other employees of Level 8. No
additional compensation will be paid to directors, officers or other employees
for such services. In addition, Level 8 has retained Beacon Hill Partners to
assist it in the distribution and solicitation of proxies and has agreed to pay
Beacon Hill Partners a fee of $3,500 plus expenses for its services.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Level 8 common stock entitled to vote at
the Level 8 special meeting is necessary to establish a quorum.
The affirmative vote of the holders of a majority of shares of Level 8
common stock present in person or represented by proxy and entitled to vote at
the Level 8 special meeting is necessary to approve the issuance of shares of
Level 8 common stock in the merger and approve the increase in the number of
shares of Level 8 common stock subject to awards under Level 8's 1997 Stock
Option Plan.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes on each proposal. Broker
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non-votes are counted towards a quorum, but are not counted for any purpose in
determining whether a particular matter has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy to vote at the Level 8 special meeting has the
power to revoke it at any time before it is voted. It may be revoked by filing
with the Corporate Secretary of Level 8 at Level 8's principal executive office,
8000 Regency Parkway, Cary, North Carolina 27511, a written notice of revocation
or a duly executed proxy bearing a later date, or it may be revoked by attending
the meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.
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THE TEMPLATE SPECIAL MEETING
PURPOSE OF THE TEMPLATE SPECIAL MEETING
The purpose of the Template special meeting is to consider and vote upon
the approval and adoption of the merger agreement and approval of the merger.
Holders of Template common stock may also consider and vote upon such other
matters as may properly come before the Template special meeting. The merger
will occur only if the proposal is approved.
TEMPLATE BOARD OF DIRECTORS RECOMMENDATIONS
THE TEMPLATE BOARD OF DIRECTORS APPROVED THE MERGER AGREEMENT AND THE
MERGER, AND UNANIMOUSLY RECOMMENDS A VOTE BY THE STOCKHOLDERS OF TEMPLATE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR APPROVAL OF THE MERGER.
DATE, TIME AND PLACE OF MEETING
The Template special meeting will be held on December 17, 1999 at 9:30
a.m., local time, at Template's headquarters, located at 45365 Vintage Park
Plaza, Suite 100, Dulles, Virginia 20166.
TEMPLATE RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Template common stock at the close of business on
the Template record date, November 17, 1999, will be entitled to notice of and
to vote at the Template special meeting. At the close of business on the
Template record date there were 4,923,580 shares of Template common stock
outstanding and entitled to vote.
Each holder of record of Template common stock on the Template record date
will be entitled to one vote for each share held on all matters to be voted upon
at the Template special meeting.
VOTING OF PROXIES
The form of proxy accompanying this joint proxy statement/prospectus is
being solicited on behalf of the Template board of directors for use at the
Template special meeting. We ask you to please complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Template. Each of the persons named in the Template proxy
as a proxy holder is an officer of Template. All shares of Template common stock
that are entitled to vote and that are represented at the Template special
meeting by properly executed proxies received prior to or at the Template
special meeting and not duly and timely revoked will be voted at the Template
special meeting in accordance with the instructions indicated on such proxies.
If no instructions are indicated, proxies will be voted for the approval and
adoption of the merger agreement and approval of the merger. If any other
matters are properly presented for consideration at the Template special
meeting, unless otherwise indicated on a proxy, the person named as proxy and
acting thereunder will have the discretion to vote on such matters in accordance
with his best judgment.
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SOLICITATION
Level 8 and Template intend to mail this joint proxy statement/prospectus
on or about November 23, 1999 to all stockholders entitled to vote at the
stockholder meetings. This joint proxy statement/prospectus constitutes notice
of the Template special meeting in accordance with Virginia law and notice of
the Level 8 special meeting in accordance with Delaware law.
Level 8 and Template will share equally the entire cost of preparation,
assembly, printing and mailing of this joint proxy statement/prospectus, and any
additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of common stock beneficially owned by
others to forward to such beneficial owners. Level 8 and Template may reimburse
persons representing beneficial owners of common stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other employees of Template. No
additional compensation will be paid to directors, officers or other employees
for such services. In addition, Template has retained Beacon Hill Partners to
assist it in the distribution and solicitation of proxies and has agreed to pay
Beacon Hill Partners a fee of $7,500 plus out of pocket expenses for its
services.
VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of at
least a majority of the outstanding shares of Template common stock is necessary
to establish a quorum. Certain directors and officers of Template, in their
capacities as stockholders, who, as of November 17, 1999, collectively held
approximately 17.2% of the outstanding Template common stock, have entered into
a stockholders agreement requiring these stockholders to vote their shares of
Template common stock in favor of the proposal to approve and adopt the merger
agreement and approve the merger.
Approval of the proposal requires approval of at least two-thirds of the
outstanding shares of Template common stock as of the Template record date. All
votes will be tabulated by the inspector of election appointed for the meeting,
who will separately tabulate affirmative and negative votes, abstentions and
broker non-votes. Abstentions and broker non-votes will be counted towards the
tabulation of votes cast on the proposal presented to the stockholders, but will
have the same effect as a vote against approval of the matters being voted upon.
REVOCABILITY OF PROXIES
Any person giving a proxy to vote at the Template special meeting has the
power to revoke it at any time before it is voted. It may be revoked by filing
with the Corporate Secretary of Template at 45365 Vintage Park Plaza, Suite 100,
Dulles, Virginia 20166, a written notice of revocation or a duly executed proxy
bearing a later date, or it may be revoked by attending the meeting and voting
in person. Attendance at the meeting will not, by itself, revoke a proxy.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
In late July 1999, Steven Dmiszewicki, President of Level 8, was reviewing
competitive and complementary products to those offered by Level 8 on the
internet. In doing so he reviewed the Template web site and found the products
offered by Template to be very complementary to those offered by Level 8. He
forwarded the internet address to Arie Kilman, Level 8's Chairman of the Board
and Chief Executive Officer, and Samuel Somech, Level 8's Chief Technology
Officer, and requested that they review the product descriptions contained in
the web site. In the meantime, individuals at Level 8 compiled materials on
Template including its recent SEC filings, information from its web site, a
record of the performance of its publicly traded stock over the prior year, news
releases from the prior year, and information from its stock message boards.
Various outlines and memoranda were prepared from these materials. After a
review of these materials and several days of discussions between Messrs.
Kilman, Dmiszewicki, Somech and others, including Dennis McKinnie, Level 8's
Senior Vice President, Chief Legal and Administrative Officer and Corporate
Secretary, Level 8 decided to contact Template and make a preliminary inquiry
about a possible business combination.
On August 2, Mr. Dmiszewicki had a telephonic conversation with Template's
Chairman of the Board and Co-Chief Executive Officer, Joseph M. Fox, to initiate
preliminary discussions. During that telephone conversation, Mr. Fox outlined
for Mr. Dmiszewicki important considerations from Template's point of view for
any proposed transaction. Following Mr. Dmiszewicki's telephone call with Mr.
Fox, Mr. Dmiszewicki, after consultation with Messrs. Kilman and McKinnie, sent
a letter to Mr. Fox which included general information about Level 8, including
information about its principal stockholder, Liraz Systems Ltd., and the
perceived benefits of a possible business combination with Template. The letter
also set forth general parameters of the transaction and a general valuation
range.
On August 6, Mr. Dmiszewicki received a letter from Mr. Fox stating that
Mr. Dmiszewicki's letter would be brought to the attention of the Template board
of directors.
On August 5, Mr. Dmiszewicki received a telephone call from Template's
financial advisor, U.S. Bancorp Piper Jaffray, to discuss the potential business
combination and Level 8's ability to consummate the transaction. Messrs. Kilman
and Dmiszewicki also met with Bank Hapoalim, New York, to discuss a credit
facility for strategic acquisitions. Based on this meeting, Messrs. Kilman and
Dmiszewicki believed that acquisition funding could be obtained.
Template's board of directors had previously retained U.S. Bancorp Piper
Jaffray on July 15, 1999 to explore potential strategic transactions. Between
July and September, U.S. Bancorp Piper Jaffray met with another participant in
Template's industry and its investment banking firm regarding a possible
business combination. In addition, U.S. Bancorp Piper Jaffray contacted other
possible merger candidates on behalf of Template. During this process, U.S.
Bancorp Piper Jaffray had discussions with these companies, following which U.S.
Bancorp Piper Jaffray indicated to management of Template that none of these
companies had continued interest in pursuing a transaction with Template.
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While preliminary discussions between Level 8 and Template proceeded, Level
8 indicated its desire to review Template's technology and conduct an on-site
visit of Template's offices in Dulles, Virginia. In anticipation of Level 8's
proposed visit, Level 8 forwarded to Mr. Fox a standard nondisclosure agreement.
Mr. Fox requested that Level 8 forward the nondisclosure agreement to its
financial advisor, who, in turn, delivered its form of agreement which provided
for the exchange of information between Level 8 and its representatives, on the
one hand, and Template and its representatives, on the other hand, for the
purpose of evaluating the proposed transaction. Under this agreement, Level 8
agreed to a "standstill" provision effective for two years from the date of the
agreement. After discussion and minor modifications, the agreement was signed by
Level 8 on August 17.
On August 18, members of Level 8's diligence team visited Template's
offices in Dulles, Virginia. At this meeting, Mr. Fox presented an overview of
Template's history, current business and future plans. A technical overview was
presented by Template's Vice President of Technology, David L. Kiker.
Following the meeting in Dulles, Level 8's diligence team assessed
Template's technology and agreed that Template's technology presented an
excellent opportunity for Level 8. Level 8 decided to speak with Template's
financial advisor to determine whether Template would consider an all cash offer
at $6.00 per share of Template common stock. This informal proposal was
communicated to Template and was rejected.
On August 30 and 31, the senior management team of Level 8 held a series of
management meetings at its headquarters in Cary, North Carolina. Among the
topics on the agenda was a discussion of the potential acquisition of Template.
Following these series of meetings, Level 8 decided to retain a financial
advisor to assist Level 8 with its negotiations with Template. After
considerable deliberation, Level 8 decided to retain Advest, Inc.
On September 7, a second Level 8 diligence team visited the offices of
Template in Dulles, Virginia. The meeting focused primarily on Template's
technology and detailed discussions were held regarding technical,
administrative and financial issues. Following this meeting, Level 8 informed
Template that Level 8 intended to present a proposal to acquire Template.
On September 9, Mr. Dmiszewicki sent a letter to Mr. Fox outlining the
proposed terms of a possible business transaction between the two companies. In
that letter, Mr. Dmiszewicki stated that "subject to satisfactory completion of
the necessary steps of the acquisition process," Level 8 would be prepared to
pay the stockholders of Template a value equal to $8.00 per share. The
consideration would be paid half in cash and half in Level 8 common stock. Mr.
Dmiszewicki also stated that Level 8 would be willing to renew its initial
informal proposal to pay $6.00 in cash for each share of Template common stock.
Level 8's proposal contained a number of conditions, including additional
due diligence, stockholder and board of directors approval, receipt of
satisfactory financing by Level 8 and regulatory approval. Level 8's proposal
stated that it intended to deliver a term sheet for Template's consideration by
September 13.
Shortly after the receipt of Level 8's proposal, Template, through its
financial advisor, requested that Level 8 clarify certain portions of its
proposal including, among other things, clarification on valuation, transaction
structure, financing, representations and warranties,
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closing conditions, due diligence, and the timing of the transaction. Messrs.
Kilman and Dmiszewicki, together with Level 8's financial advisor, Advest,
participated in a number of telephone conferences with senior Template officers
and its financial advisor to clarify the provisions contained in Level 8's
proposal.
Over the course of the weekend beginning September 11, Level 8 and Advest,
together with Level 8's legal advisors, Powell, Goldstein, Frazer & Murphy LLP
of Atlanta, Georgia, worked to finalize a term sheet for submission to Template.
Discussions were also held throughout the weekend with members of the Level 8
board of directors regarding the status of the discussions with Template and the
general terms of the proposal.
On September 13, Level 8 sent to Template a preliminary term sheet. In the
cover letter accompanying the term sheet, Level 8 requested Template to enter
into an exclusivity agreement whereby Template would agree not to pursue any
other acquisition proposals until the earlier of the close of business on
November 30, or the execution of a formal merger agreement.
The preliminary term sheet provided for the merger of a wholly owned
subsidiary of Level 8 with and into Template, whereby Template would be the
surviving entity and remain as a wholly owned subsidiary of Level 8. The
preliminary term sheet contemplated a merger consideration of $8.10 per share of
Template common stock, payable a portion in cash and a portion in Level 8 common
stock. The term sheet indicated that, other than provisions regarding
exclusivity, the proposed consideration and other terms were not binding and
were subject to the completion of Level 8's due diligence and other matters,
including the negotiation of a definitive merger agreement. It was proposed that
a merger agreement be signed by November 1.
The parties negotiated the term sheet by telephone over the course of the
week as new drafts of the term sheet were prepared and circulated among the
parties. On September 19, Messrs. Dmiszewicki and Fox called for a
teleconference to reach agreement on the outstanding issues under the term
sheet.
A revised term sheet was prepared and circulated among the parties. The
term sheet addressed the issues discussed during the call and it was believed
that there was general agreement on the proposed transaction. Negotiations
continued, however, over the next two days.
On September 21, another conference call was held among the parties
including their respective legal and financial advisors to reach agreement on
the outstanding issues under the term sheet. A due diligence team from Level 8,
including its legal and financial advisors, was scheduled to leave for Dulles
that evening and it was important to Level 8 that the term sheet be resolved and
the exclusivity letter executed prior to their departure. The final issues under
the term sheet were resolved by the parties and Template signed the exclusivity
letter agreeing to provide exclusivity to Level 8 until October 11, 1999.
The Level 8 diligence team arrived at Template's offices on September 22,
and began in depth due diligence. Diligence continued through October 1. On
September 27, the due diligence team was joined by members of the
PricewaterhouseCoopers LLP transactions organization who assisted Level 8 in the
due diligence process.
On September 23, the Level 8 board of directors met at the Level 8 offices
in New York to discuss the Template acquisition. At this meeting, management
made a detailed
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presentation which included an overview of Template and its business, a detailed
presentation by Richard Phelps, Senior Vice President of Worldwide Marketing for
Level 8, on the state and future of the enterprise application market, and a
detailed presentation by Mr. Somech on the technology of Template and how it
could be integrated into the Level 8 product set. At the request of Level 8
management, Advest made an informal presentation on certain financial aspects of
the proposed transaction. Mr. Kilman concluded with a presentation on the
financing for the transaction having obtained an oral commitment from Bank
Hapoalim.
After these presentations and lengthy discussions, the Level 8 board
authorized senior management and its legal advisors to continue negotiations
with Template. The board also authorized senior management to continue
negotiations with Bank Hapoalim to secure the necessary commitment for the
required financing. In connection with financing, the board appointed a special
committee consisting of all the independent directors to review the proposed
terms of the financing pertaining to the guaranty to be provided to Bank
Hapoalim by Level 8's principal stockholder, Liraz Systems Ltd., and the
compensation to be paid to Liraz by Level 8 for the Liraz guaranty.
On the afternoon of September 27, 1999, the first draft of the merger
agreement was distributed among the parties.
On September 29, 1999, Mr. Fox, Peter J. Russo, Template's Executive Vice
President, Chief Financial Officer and Secretary, and representatives of Cooley
Godward LLP, Template's outside legal counsel, met with Mr. McKinnie at
Template's headquarters in Dulles, Virginia, to discuss due diligence issues and
a timeframe for negotiation of the merger agreement. Later that afternoon, legal
counsel of each party met to discuss initial issues in the merger agreement.
On September 30 and October 1, Level 8 conducted additional technology due
diligence which covered software development processes and a software code
audit. PricewaterhouseCoopers LLP was retained to assist in conducting the
software code audit. There appeared to be no irregularities.
On October 1, 1999, Template delivered comments to the initial draft of the
merger agreement to Level 8.
On October 2, Ms. Renee Fulk, Level 8's Vice President of Finance, and Mr.
McKinnie traveled to London to commence the international phase of the due
diligence process. A review of the materials produced by Template in response to
the due diligence requests commenced on October 3. Ms. Fulk and Mr. McKinnie
were assisted in their efforts by the London office of PricewaterhouseCoopers
LLP and attorneys from Barnett Alexander Chart. The due diligence team continued
their review and were joined later that day by Mark Scott, International
Controller for Template. Mr. Scott was interviewed for several hours by the due
diligence team. In the meantime at the Template offices in Windsor, England,
Messrs. Dmiszewicki and Kilman met with Dick Collard, Template's Vice President
of European Operations. The due diligence reviews in London were concluded late
afternoon on October 3.
On October 4, Liraz Systems, Ltd., on behalf of Level 8, received a written
commitment letter from Bank Hapoalim for the financing necessary to finance the
cash portion of the merger consideration.
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From October 4 through October 6, representatives of Template, including
Andrew B. Ferrentino, a member of Template's board of directors, Mr. Russo,
Kimberly E. Osgood, Template's Vice President of Finance, Julie Lane, Template's
Corporate Controller, and representatives of Cooley Godward LLP,
PricewaterhouseCoopers LLC, Template's independent accountants, and U.S. Bancorp
Piper Jaffray, Template's financial advisor, visited Level 8's headquarters in
Cary, North Carolina, to conduct business, operations, financial and legal due
diligence investigations.
On October 6, Ms. Fulk traveled to Dusseldorf, Germany with Messrs. Kilman
and Dmiszewicki where the due diligence process continued with a review of
Template's German operations. Ms. Fulk was assisted in her review by members of
the PricewaterhouseCoopers LLP Dusseldorf office and attorneys from Menold
Herrlinger.
During the course of the week the participants began negotiating the terms
of the merger agreement and related documentation. Several conference calls were
conducted among the parties, together with their financial and legal advisors,
in an effort to resolve the initial issues raised in the merger agreement.
On October 7, the Template board convened a special meeting to discuss the
status of the potential transaction with Level 8. At this meeting, Mr. Fox
advised the Template board regarding the status of discussions and negotiations
with Level 8 and the due diligence investigations of the parties. No formal
action was taken by the Template board at this meeting.
On October 10, Level 8 due diligence team members, together with Mr. Kilman
and Mr. Dmiszewicki met in Cary, North Carolina, for presentations on the due
diligence findings. During this meeting and subsequent meetings regarding due
diligence matters it was determined that there were a number of items which were
discovered during the due diligence process which impacted Level 8's preliminary
valuation of Template and the price of the proposed transaction. As a result,
Level 8 indicated to Template that the merger consideration that Level 8 was
willing to offer was $7.90 per share, payable $4.00 in cash and $3.90 in Level 8
common stock.
On October 11, 1999, Level 8 delivered a revised version of the merger
agreement to Template. On that date, Template verbally agreed to extend the
exclusivity period of the term sheet through October 13, 1999.
On October 11, the Level 8 board convened a special meeting by conference
telephone to discuss the status of the potential transaction with Template. At
this meeting, Level 8 senior management reviewed in detail the status of the
negotiations with Template, the merger agreement and related documentation and
the principal open issues. In addition, Advest made a presentation concerning
the financial terms of the proposed transaction. As part of this presentation,
Advest rendered to the Level 8 board an oral opinion, subsequently confirmed in
writing that, as of the date of such opinion, and based on and subject to the
assumptions, limitations, and qualifications set forth in such opinion, the
consideration to be paid by Level 8 in the proposed transaction was fair, from a
financial point of view, to Level 8. Following these presentations, the Level 8
board, by unanimous vote with all directors present, approved the consummation
of the transactions, including the merger, contemplated by the merger agreement
and, in addition, approved the issuance of the shares of Level 8 common stock to
be issued in connection with the merger, the financing with Bank Hapoalim and a
majority of the board approved an
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increase in the number of shares reserved for issuance under Level 8's 1997
Stock Option Plan.
Following discussions held between Template and Level 8, Level 8 delivered
another version of the merger agreement to Template on October 13, 1999. Further
revisions reflecting additional discussions were delivered on October 14 and
October 15.
On October 17, 1999, a special meeting of Template's board was convened for
the purpose of considering the proposed transaction with Level 8. At this
meeting, Messrs. Fox and Russo reviewed the status of the negotiations with
Level 8, the merger agreement and related documentation and issues remaining to
be resolved. Representatives of Cooley Godward LLP explained the principal terms
and conditions of the merger agreement and related documents, and a detailed
discussion followed. At this meeting, U.S. Bancorp Piper Jaffray made a detailed
presentation regarding the financial aspects of the proposed transaction. The
Template board also discussed the impact of the proposed transaction on
Template's shareholder rights plan. Following these discussions, the Template
board, by unanimous vote with all directors present, approved an amendment to
Template's shareholder rights agreement so that the proposed transactions with
Level 8 would not trigger a distribution of rights to Template's shareholders,
and approved the merger agreement as it had been presented to the board subject
to resolution of certain open issues.
On October 19, 1999, a special meeting of Template's board was convened for
the purpose of considering certain final changes to the merger agreement,
including the merger consideration ultimately offered by Level 8 of $7.90 per
share. At this meeting, based upon and subject to certain matters stated in its
opinion, U.S. Bancorp Piper Jaffray delivered to Template's board of directors
its oral opinion, subsequently confirmed by its written opinion dated October
19, 1999, to the effect that the consideration to be received by the holders of
Template common stock pursuant to the merger agreement is fair to such holders
from a financial point of view as of the date of the opinion. The written
opinion of U.S. Bancorp Piper Jaffray is set forth in full as Annex C to this
joint proxy statement/prospectus. A detailed discussion followed. Following
these discussions, the Template board, by unanimous vote with all directors
present, approved the merger agreement and the proposed merger with Level 8, and
recommended that it be submitted to Template's stockholders for approval.
On October 19, a final version of the merger agreement was circulated. The
agreement was executed by the parties that evening. The proposed transaction was
announced the next morning.
Advest delivered to the Level 8 board a written opinion dated October 19
that, subject to the assumptions, limitations and qualifications set forth in
such opinion, the consideration to be paid by Level 8 in the proposed
transaction was fair from a financial point of view to Level 8. The Advest
opinion is attached hereto as Annex B.
LEVEL 8'S REASONS FOR THE MERGER
Level 8's board of directors has unanimously approved the merger agreement
and believes the merger is in the best interests of Level 8 and its
stockholders. LEVEL 8'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT LEVEL 8'S
STOCKHOLDERS VOTE TO APPROVE THE ISSUANCE OF LEVEL 8 COMMON STOCK IN THE MERGER.
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In reaching its unanimous determination to approve the merger and to
recommend the issuance of Level 8 common stock in the merger, the Level 8 board
of directors considered a number of factors. With the assistance of management
and its advisors, the Level 8 board of directors considered the following
potential advantages of the merger:
- Level 8 would become one the largest providers of enterprise application
integration products and services;
- The combination of the Level 8 and Template products would enhance Level
8's ability to provide the first complete set of next generation
enterprise application integration products;
- The combination of the two organizations would increase Level 8 market
share in the enterprise application integration market space and would
increase its ability to grow that market share;
- The combined company would be able to offer its customers a wider array
of services in enterprise application integration;
- Template's existing work for United States government agencies would
facilitate Level 8's entry into the government contracting business;
- The merger would enhance Level 8's ability to compete by increasing Level
8's presence in its current markets and expanding the scope of Level 8's
business to new sectors, such as government contracting;
- Level 8 would gain additional expertise in the implementation of
integration services;
- The combined companies may be able to reduce costs by eliminating
duplicative costs and reducing overhead; and
- The merger is a logical step in pursuing Level 8's growth strategy.
In addition, the Level 8 board of directors considered the following
factors relating to the merger:
- The financial performance and condition, business operations, capital
levels, asset quality and prospects of Template alone and when combined
with Level 8;
- Current industry, economic and market conditions and trends, including
the likelihood of continuing consolidation and increasing competition in
the enterprise application integration market;
- Current and historical trading prices of each company's stock;
- The terms and conditions of the merger agreement, including the amount of
Level 8 common stock to be issued in the merger and the premium over the
recent trading value of Template common stock represented by the
combination of cash and the common stock to be issued to Template
stockholders;
- Template's commitment to complete the merger, as evidenced by the voting
agreement of holders of, as of November 17, 1999, 17.2% of Template's
outstanding common stock;
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- The ability of Level 8 to obtain financing for the transaction on
favorable terms; and
- The presentation delivered by Advest to the Level 8 board and the oral
opinion, subsequently confirmed in writing that, as of the date of such
opinion, and based on and subject to the assumptions, limitations, and
qualifications set forth in such opinion, the consideration to be paid by
Level 8 in the proposed transaction was fair, from a financial point of
view, to Level 8.
The Level 8 board of directors also considered a number of potential risks
relating to the merger, including:
- The potential dilution to stockholders from the issuance of common stock
to Template stockholders;
- The challenge of combining two separate, diversified business enterprises
and the possible diversion of management resources and attention from
other strategic opportunities and operations for an extended period of
time;
- The costs that would be incurred to complete the merger and the potential
difficulties in realizing the benefits expected from the merger in the
amounts and time frames expected, particularly in view of Template's
declining results of operating and financial condition in recent periods;
- The possibility that key Template customers may not support the merger
and could decide to terminate their business with the combined company;
- The potential for a near term decline in Level 8's stock price due to
natural selling pressure resulting from the anticipated issuance of
shares in the merger;
- The potential cash payments for bonuses and severances under existing
agreements with Template employees in connection with the merger, and the
potential dilution resulting from the need to provide Level 8 stock
options to employees of Template to be determined in order to provide
them appropriate equity incentives;
- The potential that the security clearances necessary to continue the
compartmentalized work for the United States government may not be
obtained;
- The potential that Template's results of operations and financial results
may have declined further since its most recent financial statements;
- The interests of certain directors and officers of Level 8 who are
affiliated with Liraz, which would be issued 100,000 to 150,000 shares of
Level 8 common stock in return for Liraz's guaranty of the financing to
complete the merger; and
- The other factors described under "Risk Factors" on page 13, and
"Cautionary Note Regarding Forward-Looking Statements" on page 192.
The Level 8 board of directors considered these and other potential risks
and concluded that management of the combined company should be able to manage
these potential risks appropriately and that the potential benefits of the
merger outweighed the potential risks.
The discussion above is not meant to be exhaustive but includes all
material factors considered by the Level 8 board of directors in making its
determination and
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recommendation to the Level 8 stockholders. The Level 8 board of directors did
not quantify or attach any particular weight to the various factors that it
considered. Individual directors, however, may have given differing weights to
different factors.
Level 8's board of directors did not attempt to analyze the value of the
merger consideration in isolation from its analysis of the business, products
and technology of Template, the strategic merits of the merger or the other
factors discussed above.
The Level 8 board of directors has unanimously determined that the issuance
of Level 8 common stock and an additional payment in cash to the Template
stockholders in the merger is in the best interests of Level 8 and its
stockholders.
OPINION OF LEVEL 8'S FINANCIAL ADVISOR
Level 8 retained Advest to act as its financial advisor in connection with
the merger. Level 8's board of directors selected Advest based on Advest's
qualifications, expertise and reputation, as well as Advest's familiarity with
Level 8. The merger and related transactions contemplated in the merger
agreement are collectively referred to as the "transaction."
At the meeting of Level 8's board of directors on October 11, 1999, Advest
rendered an oral opinion, as of that date and based upon and subject to (1) the
various considerations and limitations later set forth in the written Advest
opinion, and (2) additional diligence steps which were still to be performed
with regard to Template and the transaction, that the consideration proposed to
be paid by Level 8 would be fair, from a financial point of view, to Level 8.
The ultimate price to which the parties agreed at this October 11, 1999 meeting
was $7.90 per share in cash and stock for each share of Template, which was
lower than the value discussed at the September 23, 1999 board of directors
meeting. Advest delivered a written opinion dated October 19, 1999 to Level 8
that as of the date thereof, the consideration to be paid by Level 8 in the
transaction is fair, from a financial point of view, to Level 8.
The full text of the written Advest opinion dated October 19, 1999, which
sets forth, among other things, assumptions made, procedures followed, matters
considered, and limitations on the scope of the review undertaken by Advest in
rendering the Advest opinion, is attached as Annex B to this joint proxy
statement/prospectus. Level 8 stockholders are urged to read the Advest opinion
carefully and in its entirety. Advest was not asked to consider, and its opinion
does not address, the relative merits of the merger as compared to any
alternative business strategy that might exist for Level 8 or the effect of any
other business combination in which Level 8 might engage. The Advest opinion
addresses only the fairness from a financial point of view to Level 8 of the
consideration to be paid by Level 8 in the transaction, as of the date of the
Advest opinion, and does not constitute a recommendation to any stockholder of
Level 8 as to how such stockholder should vote at the Level 8 stockholder
meeting. The summary of the Advest opinion set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of such opinion.
In connection with its opinion, Advest, among other matters, reviewed and
analyzed the following publicly available information as of the date of this
letter:
- annual and quarterly reports on SEC Form 10-K and 10-Q of Template for
the two years ended November 30, 1997, the year ended December 31, 1998
and the quarters ended March 31, 1999 and June 30, 1999, as well as
annual and quarterly
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<PAGE> 49
reports on SEC Form 10-K and 10-Q of Level 8 for the three years ended
December 31, 1998 and the quarters ended March 31, 1999 and June 30,
1999;
- business and financial information regarding companies similar to
Template, including the pricing of these comparable companies' publicly
traded securities;
- the pricing and financial terms of business combinations recently
effected involving companies similar to Template; and
- such other publicly available information, financial studies, analyses,
investigations and market data as Advest deemed relevant.
Advest also reviewed, analyzed and discussed information furnished to it by
Level 8 and Template and their advisors, including:
- a draft of the merger agreement; and
- certain internal and pro-forma financial statements, projections and
other unaudited financial and operating data concerning Template and
Level 8.
Advest's opinion states that it is subject to the following:
- information supplied to Advest by Level 8 and Template in connection with
the preparation of this opinion has not been independently verified;
- no independent appraisal of the assets or liabilities of Level 8 or
Template has been made;
- Advest's opinion has been provided for the information of the Level 8
board of directors in order to evaluate the transaction, and Advest's
opinion does not constitute a recommendation of any kind to any
stockholder of Level 8 or Template as to how they should vote in
connection with the transaction;
- Advest has only consented to the use of its opinion in connection with
the filing and distribution of the joint proxy statement/prospectus, and
any other use of the opinion is subject to the prior written consent of
Advest; and
- Advest has assumed for the purposes of this opinion that there have been
no material changes in the financial condition of Level 8 or Template
from the conditions disclosed in the materials received by Advest.
The following is a summary of the analysis performed by Advest in
preparation of the written Advest opinion dated October 19, 1999, and reviewed
with the Level 8 board of directors in oral form at the meeting held on October
11, 1999.
CERTAIN KEY ASSUMPTIONS
In arriving at the opinion that the consideration to be paid by Level 8 in
the merger was fair, from a financial point of view to Level 8, Advest
considered both quantitative and qualitative factors. As part of this
consideration, Advest compared the estimated per share value of Template's
common stock under several scenarios based on specific terms of the transaction,
to the price per share of Level 8 common stock as of the close of the stock
markets on October 19, 1999.
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COMPARISON TO SIMILAR PUBLIC COMPANIES
Advest compared certain financial information of Template to financial
information of certain companies involved in software development, specifically
Enterprise Application Integration, or "EAI," software companies. Advest
identified six companies that are sufficiently similar to Template to serve as a
basis for determining a reasonable value. The companies considered were: Active
Software, Inc., BEA Systems, Inc., New Era of Networks, Inc., TSI International
Software Ltd., Vitria Technology, Inc., and Tibco Software Inc.
A comparison of such financial information included, but was not limited
to, market capitalization, stock price as a multiple of earnings per share,
total enterprise value, or "TEV," calculated as market value of equity plus
total debt less cash and cash equivalents) as a multiple of latest twelve month
revenues and earnings before interest, taxes, depreciation and amortization, or
"EBITDA," latest twelve month operating margin, and estimated earnings per share
growth rates. Based on these analyses, Advest determined that the appropriate
multiples of TEV/Sales was 0.4 and that the appropriate multiples of TEV/EBITDA
was not meaningful. After applying these multiples, adjustments were applied to
the results in order to derive an estimated price per share of the common stock
of Template. This analysis was provided to the Level 8 board of directors and
was one of the many factors considered by Advest in rendering its opinion. No
conclusions can be independently drawn from such analysis.
RECENT TRANSACTIONS INVOLVING SMALL COMPANIES
Advest examined the pricing and financial terms of recent mergers and
acquisitions of enterprise software companies. The purchase price of these
transactions was used to determine the targets' TEV as a multiple of their
latest twelve month revenues and EBITDA, which in turn were applied to
Template's pro-forma latest twelve month revenues and EBITDA in order to
determine an assessment of value per share of Template. After analyzing the
comparable target companies' business descriptions, relative latest twelve month
revenues and operating margins, among other things, selected transaction
multiples were 2.7 latest twelve month sales, and 50.0 latest twelve month
EBITDA. After applying these multiples, adjustments were applied to the results
in order to derive an estimated price per share of the common stock of Template.
This analysis was provided to the Level 8 board of directors and was one of the
many factors considered by Advest in rendering its opinion. No conclusions can
be independently drawn from such analysis.
DISCOUNTING EXPECTED FUTURE CASH FLOWS
Advest analyzed projected net operating profit after taxes, or "NOPAT," for
Template based on projected future sales and earnings provided by Level 8's and
Template's respective managements. From NOPAT, Advest constructed future free
cash flows by adding back depreciation and amortization, while subtracting
necessary capital expenditures and investments in non-cash working capital.
Estimated free cash flows were discounted using a discount rate that reflects
the weighted average cost of capital for Template. Finally, Advest estimated a
residual value of cash flows that are projected to occur after the discrete
projection period by applying a forward cash flow multiple to the final cash
flow period. Adding the net present value of the discrete period cash flows to
the net present value of the projected residual cash flows results in an
estimate of TEV.
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Adjustments are made to TEV in order to derive an estimate of Template common
stock value per share. This analysis was provided to the Level 8 board of
directors and was one of the many factors considered by Advest in rendering its
opinion. No conclusions can be independently drawn from such analysis.
In connection with the review of the merger by the Level 8 board of
directors, Advest performed a variety of financial and comparative analyses for
purposes of its opinion. While the foregoing summary describes all material
analyses and factors reviewed by Advest with the Level 8 board of directors, it
does not present a complete description of the presentations by Advest to the
Level 8 board of directors or the analyses performed by Advest in arriving at
its opinion. The preparation of a fairness opinion is a complex process and is
not necessarily susceptible to partial analysis or summary description. Advest
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
process underlying the Advest opinion. In addition, Advest may have given
various analyses more or less weight than other analyses, and may have deemed
various assumptions more or less probable than other assumptions, so that the
range of valuation resulting from any particular analysis described above should
not be taken to be Advest's view of the actual value of Template. In performing
its analyses, Advest made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Level 8 or Template. The analyses performed by
Advest are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. In addition, analyses relating to the value of businesses or assets do
not purport to be appraisals or to necessarily reflect the price at which
businesses or assets may actually be sold. The analyses performed were prepared
solely as part of Advest's analysis of the fairness of the consideration to be
paid by Level 8 in the merger, from a financial point of view, to Level 8, and
were provided to the Level 8 board of directors in connection with the delivery
of the Advest opinion.
Advest is a nationally recognized regional investment banking and advisory
firm. Advest, as part of its investment banking business, is continuously
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of Advest's
trading and brokerage activities. Advest or its affiliates may at any time hold
long or short positions, may trade or otherwise effect transactions, for its own
account or for the account of customers, in debt or equity of Level 8.
In connection with Advest's engagement, Level 8 agreed to pay Advest a
retainer of $50,000, milestone payments of $25,000 each upon execution of a
Letter of Intent and execution of a definitive agreement regarding the
transaction, a fee of $100,000 upon rendering orally or in writing a fairness
opinion, and if the transaction is consummated, a success fee equal to 1% of the
consideration to be paid by Level 8 in connection with the transaction, subject
to a minimum success fee of $500,000, which success fee will be reduced by any
retainer and milestone amounts paid to Advest, but not by the amount paid in
connection with Advest's fairness opinion. Level 8 has also agreed to reimburse
Advest for its reasonable out-of-pocket expenses, including attorneys' fees, and
indemnify Advest against certain liabilities, including certain liabilities
under federal securities laws.
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TEMPLATE'S REASONS FOR THE MERGER
Template's board of directors has unanimously approved the merger agreement
and believes that the merger is fair to, and in the best interests of, Template
and its stockholders. TEMPLATE'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
TEMPLATE'S STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
In reaching this unanimous decision, Template's board considered and
reviewed a number of factors relevant to the merger. Included in the factors
considered are the following:
- The Template board's view that the combined business and expertise of
Template and Level 8 create a far more competitive enterprise than
Template individually. In this regard, the Template board considered the
following factors, among others:
- The compatibility of Template's software products with those of
Level 8 and the associated diversification of enterprise application
integration products and services that could be offered by the
combined company, which could decrease risks inherent in Template's
reliance on a limited number of products, services or customers;
- The financial condition, results of operations and business of Level
8, including its management team, historical association with Liraz
(Level 8's principal stockholder) and other industry matters;
- The compatibility of management of Template and Level 8; and
- The enhanced ability of the combined enterprise to raise capital
necessary to fund research, development and sales efforts and to
execute operating strategy;
- The Template board's view that the terms of the merger agreement,
including the parties' mutual representations, warranties and covenants,
were reasonable and the fact that the merger agreement did not contain
any extraordinary conditions to Level 8's obligations to consummate the
merger;
- The Template board's view that the proposed transaction structure, which
included Level 8 common stock, could allow Template stockholders to
participate in the potential upside of the combined company that may
result from the impact of Template products and business on Level 8's
business and stockholder value, while providing Template stockholders
with a fixed amount of cash per share as well;
- The Template board's view that, based in part on the opinion of U.S.
Bancorp Piper Jaffray, the consideration offered to Template's
stockholders, which represented a significant premium over recent trading
prices of Template's common stock, was a fair price to Template's
stockholders;
- The presentation delivered by U.S. Bancorp Piper Jaffray to the Template
board and the written opinion of U.S. Bancorp Piper Jaffray to the effect
that, as of the date of the opinion and based on and subject to the
matters set forth in the opinion, the consideration offered to Template
stockholders was fair, from a financial point of view, to the Template
stockholders;
- The expected tax treatment of the merger;
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<PAGE> 53
- A comparison of selected recent acquisitions and merger transactions in
the enterprise application integration industry, as well as trading
performance for comparable companies in the industry;
- The terms of the stockholders agreement under which holders of 52.5% of
the Level 8 voting stock, as of November 17, 1999, had committed to vote
in favor of the merger agreement;
- The increased market capitalization of Level 8's common stock as compared
to that of Template's common stock;
- The interests of certain directors and executive officers of Template
that are in addition to the interests of Template stockholders generally,
as described below under " -- Interests of Template's Employees and
Directors in the Merger;" and
- The Template board's view that, in order to remain independent, Template
would need to raise significant capital in the near term, and the view
that any effort to raise this capital would be subject to considerable
risk given Template's recent results of operations and financial
condition.
Template's board also considered a number of potentially negative factors
with respect to the merger, including, but not limited to, the following:
- The loss of control over the future operations of Template following the
merger;
- Risks associated with Level 8's product development pipeline;
- The risk that the benefits sought to be achieved in the merger will not
be achieved;
- The historic volatility of the trading price of Level 8's common stock
and the associated risk of a fixed exchange ratio in the event that Level
8's share price falls below $10.62 per share, with the result that the
value of the consideration delivered to Template's stockholders would, at
the time of the merger, be less than anticipated;
- The fact that the stockholders agreement and certain provisions in the
merger agreement (including the "non-solicitation" provisions and
provisions relating to the payment of a $2.0 million termination fee by
Template in certain circumstances) could discourage third parties from
seeking to negotiate a superior proposal for the acquisition of Template;
- The fact that, absent the receipt of an unsolicited superior proposal for
the acquisition of Template, the merger agreement does not allow the
Template board to reassess whether or not the merger with Level 8 is fair
to and in the best interests of Template stockholders;
- The fact that Level 8 would incur significant leverage to finance the
cash portion of the consideration in the merger agreement;
- The risk of management and employee disruption associated with the
merger, including the risk that key personnel might not continue with the
combined company; and
- The other risks described above under "Risk Factors."
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The Template board also discussed with Template's management and U.S.
Bancorp Piper Jaffray the prospects for combination with companies other than
Level 8, the possibility that the benefits discussed above or other benefits
could be achieved through any other combination, and the risks and benefits of
continuing to remain independent.
This discussion of information and factors considered by the Template board
is not intended to be exhaustive but is believed to include certain material
factors considered by the Template board. The Template board did not find it
practicable to, nor did it attempt to, quantify or otherwise assign relative
weight to the factors considered.
OPINION OF TEMPLATE'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated July 15, 1999, Template retained
U.S. Bancorp Piper Jaffray to act as its exclusive financial advisor and, if
requested, to render to the board of directors an opinion as to the fairness,
from a financial point of view, of the consideration to be received by Template
stockholders in the merger (other than Level 8 and its affiliates). The merger
and related transactions contemplated in the merger agreement are collectively
referred to as the "transaction."
U.S. Bancorp Piper Jaffray delivered to the board of directors of Template
on October 19, 1999 its opinion that as of that date and based upon and subject
to the assumptions, factors and limitations set forth in the written opinion and
described below, the consideration proposed to be received by Template
stockholders (other than Level 8 and its affiliates) in the transaction was
fair, from a financial point of view, to those stockholders. A copy of U.S.
Bancorp Piper Jaffray's written opinion is attached to this joint
prospectus/proxy statement as Annex C and is incorporated into this joint
prospectus/proxy statement by reference.
While U.S. Bancorp Piper Jaffray rendered its opinion and provided certain
analyses to Template's board of directors, U.S. Bancorp Piper Jaffray was not
requested to and did not make any recommendation to Template's board of
directors as to the specific form for the transaction or the amount of the
consideration to be received by Template stockholders in the transaction, which
was determined through negotiations between Template and Level 8. U.S. Bancorp
Piper Jaffray's written opinion, which was delivered for use and considered by
Template's board of directors, is directed only to the fairness, from a
financial point of view, of the proposed consideration to be received by
Template stockholders in the transaction, does not address the value of a share
of Template common stock or Level 8 common stock, does not address Template's
underlying business decision to participate in the transaction and does not
constitute a recommendation to any Template stockholder as to how a stockholder
should vote with respect to the transaction.
In arriving at its opinion, U.S. Bancorp Piper Jaffray reviewed:
- a draft of the merger agreement dated October 15, 1999;
- publicly available financial, operating and business information related
to Level 8 and Template;
- publicly available market and securities data of Level 8, Template and
selected public companies deemed comparable to Level 8 and Template;
- analyst report relating to Level 8;
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<PAGE> 55
- to the extent publicly available, financial information relating to
selected transactions in industries deemed comparable to those of
Template and Level 8; and
- internal financial information of Template prepared for financial
planning purposes and furnished by Template management.
In addition, U.S. Bancorp Piper Jaffray visited facilities of Template and
conducted discussions with members of senior management of both Level 8 and
Template concerning the financial condition, current operating results and
business outlook of Level 8, Template and the combined company following the
transaction.
In delivering its opinion to the board of directors of Template, U.S.
Bancorp Piper Jaffray prepared and delivered to the Template board of directors
written materials containing various analyses and other information material to
the opinion. Here is a summary of the analyses contained in those materials.
IMPLIED CONSIDERATION
Assuming the unadjusted consideration set forth in the merger agreement of
$4.00 in cash and $3.90 of Level 8's common stock for each share of Template's
common stock, and assuming Template's fully diluted capitalization as set forth
in the merger agreement, U.S. Bancorp Piper Jaffray calculated the aggregate
implied value of the stock and cash consideration payable in the transaction for
Template common stock to be approximately $48.6 million.
COMPANY MARKET ANALYSIS
U.S. Bancorp Piper Jaffray reviewed the stock trading history of Template
common stock. U.S. Bancorp Piper Jaffray presented the recent Template common
stock trading information contained in the following table:
<TABLE>
<S> <C>
Closing price on October 19, 1999........................... $5.63
30 calendar day closing average............................. 4.76
60 calendar day closing average............................. 4.47
90 calendar day closing average............................. 4.07
180 calendar day closing average............................ 4.27
52 week high trade.......................................... 7.50
52 week low trade........................................... 3.00
</TABLE>
COMPARABLE COMPANY ANALYSIS
U.S. Bancorp Piper Jaffray compared financial information and valuation
ratios relating to Template to corresponding data and ratios from nine
publicly-traded companies deemed comparable to Template (Analysts International,
CACI International, Cambridge Technology, Computer Horizons, ILOG, Merant PLC,
New Era of Networks, Rogue Wave Software and Sterling Software). This group was
selected from companies that are in the business systems integration industry
and have a market capitalization of between $50 million and $2 billion.
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<PAGE> 56
This analysis produced multiples of selected valuation data as follows:
COMPARABLE COMPANIES
<TABLE>
<CAPTION>
TEMPLATE(1) LOW MEAN MEDIAN HIGH
----------- ---- ---- ------ ----
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue(2).............................. 0.9x 0.3x 1.6x 1.2x 6.6x
Company value to estimated calendar year
1999 revenue(3)......................... 0.9x 0.3x 1.4x 1.1x 5.7x
Company value to estimated calendar year
2000 revenue(3)......................... 0.6x 0.3x 1.1x 0.9x 3.9x
Common stock value per share to latest 12
months net income per share(2).......... negative 9.6x 22.3x 16.4x 72.6x
Common stock value per share to
estimated calendar 1999 net income per
share(3)(4)............................. negative 10.7x 21.4x 15.8x 52.3x
Common stock value per share to
estimated calendar 2000 net income per
share(3)(4)............................. 13.0x 9.8x 14.4x 13.3x 19.9x
</TABLE>
- -------------------------
(1) Based on assumed consideration in transaction.
(2) Latest 12 months revenue is based on management's calculations as of
September 30, 1999.
(3) Estimated revenue and net income for Template are based on management
estimates. Estimated earnings for comparable companies are based on IBES
estimates, and estimated revenues for comparable companies are based on
research analysts estimates.
(4) Net income for Template excludes goodwill expense.
MERGER AND ACQUISITION ANALYSIS
U.S. Bancorp Piper Jaffray reviewed certain merger and acquisition
transactions selected by searching SEC filings, public company disclosures,
press releases, industry and popular press reports, databases and other sources
and by applying the following criteria:
- transactions that were announced or completed between January 1, 1996 and
October 19, 1999;
- transactions in which the acquiring company purchased 100% of the target;
- transactions in which the target company operates in select industries
with SIC codes similar to Template; and
- transactions with a value of $25 million to $550 million.
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<PAGE> 57
This search yielded 11 acquisitions as follows:
<TABLE>
<CAPTION>
ACQUIROR TARGET
- -------- ------
<S> <C>
Geac Computer Corp. Ltd............................ JBA Holdings
CompuWare Corp..................................... VIASOFT Inc.
Invensys PLC....................................... Marcam Solutions Inc.
Northrop Grumman Corp.............................. Data Procurement Corp. Inc.
TSI International Software Ltd..................... Braid Group Ltd.
CACI International Inc............................. QuesTech Inc.
Platinum Software Corp............................. Data Works Corp.
Computer Horizons Corp............................. RPM Consulting
Micro Focus Group PLC.............................. Intersolv Inc.
VMARK Software Inc................................. Unidata Inc.
CompuWare Corp..................................... Technalysis Corp.
</TABLE>
U.S. Bancorp Piper Jaffray compared the resulting multiples of selected
valuation data to multiples for Template derived from the implied value payable
in the transaction.
COMPARABLE COMPANIES
<TABLE>
<CAPTION>
TEMPLATE(1) LOW MEAN MEDIAN HIGH
----------- -------- ---- ------ ----
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue(2).......................... 0.9x 0.3x 1.3x 0.8x 4.5x
Company value to latest 12 months net
income(2)(3)........................ negative negative 44.3x 37.8x 72.0x
</TABLE>
- -------------------------
(1) Based on assumed consideration in transaction.
(2) Latest 12 months revenue, operating income and net income are based on
management's calculations as of September 30, 1999.
(3) Net income for Template excludes goodwill expense.
PREMIUMS PAID ANALYSIS
U.S. Bancorp Piper Jaffray reviewed publicly available information for
selected completed merger and acquisition transactions fulfilling the following
criteria:
- transactions completed between January 1, 1998 and October 19, 1999;
- transactions in which the target company operates with primary SIC code
of 7372 (Prepackaged Software) or 7379 (Computer-Related Services);
- transactions in which the acquiring company purchased 100% of a public
target; and
- transactions with a value of $25 million to $550 million.
U.S. Bancorp Piper Jaffray performed its analysis on 37 transactions that
satisfied the criteria, and the table below shows a comparison of those premiums
paid to the premium
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<PAGE> 58
that would be paid to Template stockholders based on the implied value payable
in the transaction. The premium calculations for Template stock are based upon
an assumed announcement date of October 20, 1999.
IMPLIED PREMIUM
COMPARABLE COMPANIES
<TABLE>
<CAPTION>
TEMPLATE(1) LOW MEAN MEDIAN HIGH
----------- --- ---- ------ -----
<S> <C> <C> <C> <C> <C>
One day before announcement.............. 40.4% 1.8% 37.4% 25.6% 145.7%
One week before announcement............. 64.2% 1.1% 53.6% 38.2% 265.0%
One month before announcement............ 56.0% 7.4% 71.5% 56.4% 287.0%
</TABLE>
- -------------------------
(1) Based on assumed consideration in transaction.
PRO FORMA ANALYSIS
U.S. Bancorp Piper Jaffray analyzed pro forma effects resulting from the
impact of the transaction on the projected earnings per share of the combined
company for Level 8's fiscal year ending December 31, 2000 using management
estimates for Template and Level 8. Without taking into account certain
operating synergies that the combined company may realize following consummation
of the transaction, U.S. Bancorp Piper Jaffray determined that the transaction
could be dilutive in 2000 to Level 8's earnings (if non-cash items and
acquisition goodwill from this transaction are included) or accretive to
earnings (if non-cash items and acquisition goodwill from this transaction are
excluded).
TEMPLATE DISCOUNTED CASH FLOW ANALYSIS
U.S. Bancorp Piper Jaffray performed a discounted cash flow analysis for
Template in which it calculated the present value of the projected future cash
flows of Template using internal financial planning data prepared by Template
management. U.S. Bancorp Piper Jaffray estimated a range of theoretical values
for Template based on the net present value of its implied annual cash flows and
a terminal value for Template in 2002 calculated based upon a multiple of
revenue. U.S. Bancorp Piper Jaffray applied a range of discount rates of 25% to
35% and a range of terminal value multiples of 0.5x to 1.0x of forecasted 2002
revenue. This analysis yielded the following results:
<TABLE>
<CAPTION>
PER SHARE EQUITY VALUE OF TEMPLATE
- ----------------------------------
<S> <C>
Low......................................................... $ 6.80
Mid......................................................... 9.53
High........................................................ 12.89
</TABLE>
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<PAGE> 59
ANALYSIS OF LEVEL 8 COMMON STOCK
U.S. Bancorp Piper Jaffray reviewed general background information
concerning Level 8, including publicly available analyst estimates and ratings
of Level 8 common stock and the price performance of Level 8 common stock over
the previous 12 months. U.S. Bancorp Piper Jaffray also reviewed the stock
trading history of Level 8 common stock at the dates or for the periods
indicated below.
<TABLE>
<S> <C>
Closing price on October 19, 1999........................... $12.00
30 calendar day closing average............................. 12.62
60 calendar day closing average............................. 12.28
90 calendar day closing average............................. 11.76
180 calendar day closing average............................ 11.14
52 week high trade.......................................... 16.25
52 week low trade........................................... 5.00
</TABLE>
In addition, U.S. Bancorp Piper Jaffray compared selected financial data
and ratios for Level 8 to the corresponding data and ratios for nine
publicly-traded companies deemed comparable to Level 8 (Active Software,
Computer Associates, IBM, New Era of Networks, Sapient, Sterling Software, Tibco
Software, TSI International Software and Vitria Technology).
This analysis produced multiples of selected valuation data as follows:
COMPARABLE COMPANIES
<TABLE>
<CAPTION>
LEVEL 8(1) MIN MEAN MEDIAN MAX
---------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Company value to latest 12 months
revenue.............................. 3.8x 1.4x 13.3x 8.3x 42.4x
Company value to estimated calendar
year 1999 revenue(2)................. 2.2x 1.2x 12.8x 7.3x 38.3x
Company value to estimated calendar
year 2000 revenue(2)................. 1.6x 1.0x 8.1x 4.9x 23.0x
Common stock value per share to latest
12 months net income per share....... negative 12.7x 39.0x 25.7x 91.9x
Common stock value per share to
estimated calendar 1999 net income
per share(2)......................... negative 12.1x 40.4x 24.0x 101.3x
Common stock value per share value to
estimated calendar 2000 net income
per share(2)......................... 13.0x 9.8x 35.5x 23.8x 66.7x
</TABLE>
- -------------------------
(1) Based on closing price of $12.00 per share on October 19, 1999.
(2) Estimated revenue and net income for Level 8 are based on research analyst's
estimates. Estimated earnings for comparable companies are based on IBES
estimates, and estimated revenues for comparable companies are based on
research analysts estimates.
In reaching its conclusion as to the fairness of the transaction
consideration and in its presentation to Template's board of directors, U.S.
Bancorp Piper Jaffray did not rely on any single analysis or factor described
above, assign relative weights to the analyses or factors considered by it, or
make any conclusion as to how the results of any given
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<PAGE> 60
analysis, taken alone, supported its opinion. The preparation of a fairness
opinion is a complex process and not necessarily susceptible to partial analysis
or summary description. U.S. Bancorp Piper Jaffray believes that its analyses
must be considered as a whole and that selection of portions of its analyses and
of the factors considered by it, without considering all of the factors and
analyses, would create a misleading view of the processes underlying the
opinion.
The analyses of U.S. Bancorp Piper Jaffray are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by the analyses. Analyses relating to the value of
companies do not purport to be appraisals or valuations or necessarily reflect
the price at which companies may actually be sold. No company or transaction
used in any analysis for purposes of comparison is identical to Template, Level
8 or the transaction. Accordingly, an analysis of the results of the comparisons
is not mathematical; rather, it involves complex considerations and judgments
about differences in the companies to which Template and Level 8 were compared
and other factors that could affect the public trading value of the companies.
For purposes of its opinion, U.S. Bancorp Piper Jaffray relied upon and
assumed the accuracy and completeness of the financial statements and other
information provided to it by Template and Level 8 and otherwise made available
to it and did not assume responsibility for the independent verification of that
information. Information prepared for financial planning purposes was not
prepared with the expectation of public disclosure. U.S. Bancorp Piper Jaffray
relied upon assurances from management of Template and Level 8 that the
information provided to it by the respective companies was prepared on a
reasonable basis in accordance with industry practice, and with respect to
financial planning data, reflects the best currently available estimates and
judgment of management of Template and Level 8, and such management was not
aware of any information or facts that would make the information provided to
U.S. Bancorp Piper Jaffray incomplete or misleading.
For purposes of its opinion, U.S. Bancorp Piper Jaffray assumed that the
transaction would qualify as a reorganization for federal income tax purposes,
and that Level 8 would obtain the outside financing described in the Merger
Agreement. U.S. Bancorp Piper Jaffray assumed that neither Template nor Level 8
is a party to any pending transactions other than the transaction or in the
ordinary course of business. U.S. Bancorp Piper Jaffray also assumed that, in
the course of obtaining the necessary regulatory approvals and consents for the
transaction, the purchase price for Template would not be changed.
In arriving at its opinion, U.S. Bancorp Piper Jaffray did not perform any
appraisals or valuations of any specific assets or liabilities of Template or
Level 8, and was not furnished with any such appraisals or valuations. U.S.
Bancorp Piper Jaffray expressed no opinion as to the price at which shares of
Template or Level 8 common stock have traded or at which the shares of Template,
Level 8 or the combined company may trade at any future time. The opinion is
based on information available to U.S. Bancorp Piper Jaffray and the facts and
circumstances as they existed and were subject to evaluation on the date of the
opinion. Events occurring after that date could materially affect the
assumptions used in preparing the opinion. U.S. Bancorp Piper Jaffray has not
undertaken to and is not obligated to affirm or revise its opinion or otherwise
comment on any events occurring after the date it was given.
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<PAGE> 61
U.S. Bancorp Piper Jaffray, as a customary part of its investment banking
business, evaluates businesses and their securities in connection with mergers
and acquisitions, underwritings and secondary distributions of securities,
private placements and valuations for estate, corporate and other purposes.
Template's board of directors selected U.S. Bancorp Piper Jaffray because of its
expertise, reputation and familiarity with the technology industry in general
and with Template in particular. U.S. Bancorp Piper Jaffray maintains a market
in the common stock of Template, has written research reports on Template during
the last 12 months, and acted as co-manager for the initial public offering of
Template's common stock on January 29, 1997. In addition, U.S. Bancorp Piper
Jaffray has a strategic alliance with Nessuah Zannex Ltd. ("NZL"), an Israeli
investment banking firm that has a relationship with Level 8. While this
strategic alliance with NZL contemplates the sharing of revenues in certain
situations, it does not apply to the transaction. In the ordinary course of its
business, U.S. Bancorp Piper Jaffray and its affiliates may actively trade
securities of Template or Level 8 for their own accounts or the accounts of
their customers and, accordingly, may at any time hold a long or short position
in those securities.
Under the terms of the engagement letter dated July 15, 1999, Template has
agreed to pay U.S. Bancorp Piper Jaffray a fee of $300,000 for rendering its
fairness opinion. Such fee is to be credited against the financial advisory fee
described below and is not contingent upon completion of the transaction.
Pursuant to the terms of U.S. Bancorp Piper Jaffray's engagement letter,
Template agreed to pay U.S. Bancorp Piper Jaffray a financial advisory fee equal
to 2% of the aggregate consideration payable in the merger. Template also has
agreed to reimburse U.S. Bancorp Piper Jaffray for travel and other reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of its
legal counsel, and to indemnify U.S. Bancorp Piper Jaffray and related parties
against certain liabilities, including liabilities under the federal securities
laws, arising out of U.S. Bancorp Piper Jaffray's engagement.
INTERESTS OF TEMPLATE'S EMPLOYEES AND DIRECTORS IN THE MERGER
In considering the recommendation of the Template board with respect to the
approval of and adoption of the merger agreement and other transactions related
to the merger, Template stockholders should be aware that certain members of
management and the board of directors of Template have certain interests in the
merger that are in addition to the interests of Template stockholders generally.
All such interests are described below to the extent they are material. Template
believes that, except as described below, such persons do not have any material
interest in the merger that is different from those of Template stockholders
generally. The Template board was aware of, and considered the interests of, its
directors and officers when it approved the merger agreement and the merger.
Indemnification; Directors' and Officers' Liability Insurance. Under the
merger agreement, all rights to indemnification (for acts or omissions occurring
at or prior to the effective time) existing as of the effective time in favor of
the current or former directors and officers of Template and its subsidiaries
will be provided for in the TSAC certificate and bylaws. All rights to
indemnification in favor of such directors and officers with respect to matters
occurring through the effective time of the merger will survive the merger and
continue in full force at least six years from the effective time of the merger.
In addition, subject to certain conditions, for at least six years after the
effective time, Level 8 and TSAC have agreed to maintain Template's current
directors' and officers' insurance and
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<PAGE> 62
indemnification policy (to the extent that such policy provides coverage for
events occurring prior to the effective time) for all persons who were directors
and officers of Template on the date of the merger agreement. Level 8 has
stipulated, though, that it will not pay a premium for such insurance in excess
of 125% of the most recent annual premium rate Template paid prior to the date
the merger agreement was signed.
Effect of Merger on Template Employment Agreements. Peter Russo,
Template's Chief Financial Officer, has entered into an employment agreement
with Template pursuant to which, upon the consummation of a "change of control",
as defined in his employment agreement, of Template, all unvested stock options
of Mr. Russo will become vested and exercisable, and Template will be obligated
to make a cash payment to Mr. Russo equal to eighteen (18) months base salary.
Template is also required to "gross-up" Mr. Russo for any federal excise taxes
under Code Section 4999 on "excess parachute payments" on this cash payment. If
Mr. Russo is terminated by Template without "cause", as defined in his
employment agreement, or if he terminates his employment for good reason, he
will be entitled to payment equal to twelve (12) months base salary plus 100% of
his bonus. In addition, David L. Kiker, Template's Chief Technology Officer, has
entered into an employment agreement with Template pursuant to which, upon the
consummation of a "change of control", as defined in the employment agreement,
of Template, and within a year thereafter, all unvested stock options of Mr.
Kiker will become vested and exercisable. Additionally, if Mr. Kiker is
terminated by Template without "cause", as defined in his employment agreement,
or if he terminates his employment for good reason, he will be entitled to
payment equal to six (6) months base salary plus a prorated portion of his bonus
and will be entitled to continuation of benefits for six (6) months, unless he
takes full-time employment earlier. E. Linwood Pearce, Template's Co-Chief
Executive Officer, has entered into an employment agreement pursuant to which he
is entitled to continuation of his salary through April 30, 2000 regardless of
if he terminates employment and all of his unvested stock options will become
vested on April 30, 2000 or, if earlier, on the date of his termination of
employment. In addition, Mr. Pearce's stock options vest upon a "change of
control" of Template. Seven other Template officers (John F. Codde, Douglas H.
McPhaden, Julie L. Lane, Richard H. Collard, Kimberly E. Osgood, Michael R.
Judd, and Benjamin J. Martindale II) entered into employment agreements with
Template in September and October 1999, pursuant to which, upon the consummation
of a "change of control", as defined in the employment agreements, of Template
coupled with the termination of such officer without "cause", as defined in the
employment agreements, by Level 8 (or, only in the case of Mr. Martindale,
resignation by such officer for "good reason"), within one year after the
merger, all unvested stock options held by such officers will be immediately
vested and exercisable. Additionally, if any of such executive officers is
terminated by Template without "cause", as defined in the employment agreements,
or if any of such executive officers terminates employment for good reason, that
executive officer will be entitled to payment of between six and twelve months
of base salary plus a prorated portion of bonus, and will be entitled to
continuation of benefits for between six and twelve months, unless the executive
takes full-time employment earlier.
Template believes that consummation of the merger will constitute a "change
of control" under all of the employment agreements mentioned above. As of
November 17, 1999, Mr. Pearce, Mr. Russo, Mr. Kiker, Mr. Codde, Mr. McPhaden,
Ms. Lane, Mr. Collard, Ms. Osgood, Mr. Judd and Mr. Martindale collectively held
unvested stock options to purchase an aggregate of 512,322 shares of Template
common stock at a
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<PAGE> 63
weighted average price of $6.38 per share (at exercise prices ranging from $1.98
to $16.00 per share).
AMENDMENT OF TEMPLATE STOCKHOLDER RIGHTS PLAN
Template previously adopted a stockholder rights plan, effective July 3,
1998 (the "Rights Plan"), designed to ensure that Template's stockholders
receive fair and equal treatment in the event of certain strategic transactions
involving Template by effectively requiring parties seeking to acquire Template
to negotiate with Template's board directly. The Rights Plan generally is
triggered by any acquisition of 15% or more of Template's common stock unless
Template's board takes action to render the Rights Plan inapplicable to the
transaction. If Template's board does not take this action, the Rights Plan is
triggered and any transaction would become significantly more expensive for a
bidder.
Prior to approving the merger agreement and the stockholder agreement, on
October 17, 1999, Template's board approved an amendment to the Rights Plan,
which was entered on October 19, 1999, so that the merger with Level 8 and the
related transactions would not trigger Template's Rights Plan. In the merger
agreement, Template agreed not to further amend the Rights Plan without Level
8's consent.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes the material federal income tax
consequences generally applicable to Template stockholders. The discussion is
based on the Internal Revenue Code, related final, temporary and proposed
regulations, administrative interpretations, and court decisions as they
currently exist. Future legislation, regulations, administrative interpretations
or court decisions could change the federal income tax consequences (described
below) of the merger to Template stockholders. This discussion assumes that
Template stockholders hold their Template common stock as capital assets within
the meaning of Section 1221 of the Internal Revenue Code. This discussion does
not address the consequences of the merger under state, local or foreign law,
nor does the discussion address all aspects of federal income taxation that may
be important to a Template stockholder in light of his or her particular
circumstances or tax issues that may be significant to Template stockholders
subject to special rules, such as:
- financial institutions;
- insurance companies;
- foreign individuals and entities;
- tax-exempt entities;
- dealers in securities;
- persons who are subject to the alternative minimum tax provisions of the
Internal Revenue Code;
- persons who acquired Template common stock pursuant to the exercise of an
employee option (or otherwise as compensation);
- persons who acquired or hold Template common stock as part of an
integrated investment, such as a "hedge" or "straddle," composed of
Template common stock and one or more other positions; or
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<PAGE> 64
- persons whose Template common stock is qualified small business stock for
purposes of section 1202 of the Internal Revenue Code.
Accordingly, Template stockholders are urged to consult their own tax advisors
as to the specific tax consequences of the merger, including the applicable
federal, state, local and foreign tax consequences to them of the merger.
None of Template, Level 8, and TSAC intends to secure a ruling from the Internal
Revenue Service regarding the tax consequences of the merger. However, Powell,
Goldstein, Frazer & Murphy LLP, counsel to Level 8, and Cooley Godward LLP,
counsel to Template, are of the opinion that the merger will constitute a
"reorganization" pursuant to Section 368(a) of the Internal Revenue Code. In
addition, it is a condition to the obligation of each party to consummate the
merger that it receive an opinion of its counsel to the effect that the merger
will constitute a reorganization. These opinions do not bind the IRS or the
courts or preclude the IRS or a court from adopting a contrary position.
In addition, the tax opinions assume and are conditioned upon the
following:
- the truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement and in this joint proxy
statement/prospectus, in the tax representations received from Level 8,
TSAC and Template and in all other instruments and documents related to
the formation and operation of Level 8, TSAC and Template examined by and
relied upon by Powell, Goldstein, Frazer & Murphy LLP and Cooley Godward
LLP in connection with their opinions;
- that original documents submitted to counsel are authentic, documents
submitted to counsel as copies conform to the original documents, and
that those documents have been or will be by the effective time of the
merger duly and validly executed and delivered;
- that all covenants contained in the merger agreement and the tax
representations received from Level 8, TSAC and Template are performed
without waiver or breach of any material provision;
- the merger will be reported by Level 8 and Template on their respective
federal income tax returns in a manner consistent with the tax opinions;
- that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without being qualified; and
- that, as of the date of the consummation of the merger, the value of the
Level 8 common stock issued in the merger will represent not less than
45% of the total consideration issued in the merger in exchange for the
Template common stock.
The tax opinions issued by counsel would be rendered invalid in the event
facts, representations, covenants and warranties as represented on the
assumptions made in support of the opinions are incorrect.
FEDERAL INCOME TAX IMPLICATIONS OF THE MERGER TO TEMPLATE STOCKHOLDERS
Assuming the merger is characterized as a "reorganization" for federal
income tax purposes, you will recognize gain (but not loss) when you exchange
your Template common stock for Level 8 common stock and cash pursuant to the
merger (including cash you receive instead of fractional shares). The amount of
gain that will be taxable to a
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Template stockholder, the tax consequences of which are discussed below, will
equal the lesser of the cash you receive in the merger (excluding cash you
receive instead of fractional shares) or the gain you realize on the exchange of
your Template common stock. The gain you realize on your Template common stock
will equal the excess of the total of the cash (excluding cash you receive
instead of fractional shares) plus the fair market value of the Level 8 common
stock that you receive in the merger over your tax basis in your Template common
stock that you surrender in the merger.
Whether your gain will be taxed as capital gain, rather than ordinary
income, will depend upon your circumstances. However, that determination will be
made under the assumption that you, and all other Template stockholders,
received only Level 8 common stock in the merger and that a portion of your
Level 8 common stock were then redeemed by Level 8 for the cash consideration
which you receive. The tests for whether this deemed redemption results in
capital gain or ordinary income are set forth in Internal Revenue Code Sections
302(b)(1), (2), and (3). Pursuant to these tests, if the receipt of cash in such
deemed redemption: (1) is not essentially equivalent to a dividend; (2) is
substantially disproportionate with respect to your interest in Level 8 common
stock after the merger; or (3) completely terminates your interest in Level 8
common stock, which means that you must receive only cash, then any gain you
recognized will be taxed as capital gain. This capital gain will be subject to a
maximum federal capital gains tax rate of 20% if you have held your Template
common stock for more than one year.
You must individually determine whether you have satisfied one of the
redemption tests and qualify for capital gain treatment. However, in applying
these tests you must take into account not only your receipt of cash and/or
Level 8 common stock, but also the consideration received by certain persons
related to you which the Internal Revenue Code treats as having been received by
you. Nevertheless, given the amount of cash consideration being paid in the
merger and the nature of the transaction, it is likely that most of you should
satisfy at least one of the redemption tests.
If you receive both cash and Level 8 common stock in the merger, then you
may not recognize any loss if your tax basis in Template common stock exceeds
the total of the cash, excluding cash received instead of fractional shares,
plus the fair market value of Level 8 common stock you receive in the merger.
You may recognize loss, however, if you receive only cash consideration in the
merger. If you acquired your shares of Template common stock in separate
transactions, then gain or loss must be computed separately with respect to each
identifiable block of Template common stock that you surrender in the merger,
and loss with respect to one block of such stock cannot be used to offset
taxable gain you recognize with respect to another block of such stock.
The tax basis of the Level 8 common stock you receive in the merger will be
the same as your tax basis in the Template common stock that you surrender in
the merger, excluding the amount of tax basis allocable to a fractional share of
Level 8 common stock as discussed below, decreased by the amount of cash you
receive, excluding cash you receive instead of fractional shares, and increased
by the amount of gain taxable to you. The holding period of the Level 8 common
stock that you receive in the merger will include the period during which you
held the Template common stock exchanged in the merger.
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<PAGE> 66
FEDERAL INCOME TAX IMPLICATIONS OF THE MERGER TO TEMPLATE, LEVEL 8 AND TSAC
Assuming the merger is characterized as a "reorganization" for federal
income tax purposes, none of Template, Level 8 and TSAC will recognize any gain
or loss for federal income tax purposes as a result of the merger.
FEDERAL INCOME TAX IMPLICATIONS OF THE RECEIPT OF CASH BY TEMPLATE
STOCKHOLDERS INSTEAD OF FRACTIONAL SHARES
Cash you receive instead of a fractional share of Level 8 common stock will
be treated as if the fractional share was issued to you and then redeemed by
Level 8. You will recognize gain or loss in an amount equal to the difference
between the cash that you receive and your tax basis in your Template common
stock that is allocable to the fractional share of the Level 8 common stock that
is deemed to be issued to you. Generally, the gain or loss should be long-term
capital gain or loss, if you have held your Template common stock for more than
a year when we complete the merger. If, however, you fail to meet any of the
redemption tests discussed above, the cash that you receive instead of the
fractional share of Level 8 common stock may be taxed as ordinary dividend
income.
FEDERAL INCOME TAX IMPLICATIONS OF A FAILURE OF THE MERGER TO QUALIFY AS A
"REORGANIZATION"
In the event that the merger fails to qualify as a "reorganization" for
federal income tax purposes (as a result of an Internal Revenue Service
challenge or otherwise), then you will recognize gain or loss in an amount equal
to the difference between the cash consideration plus the fair market value of
the Level 8 common stock that you receive in the merger and your tax basis in
your Template common stock that you surrender in the merger. Generally, such
gain or loss will be long-term capital gain or loss, if the Template common
stock is a capital asset in your hands and you have held your Template common
stock for more than a year when we complete the merger. Moreover, in such case,
Template will be deemed to have sold all of its assets in a taxable sale to TSAC
as of the time of the merger. Accordingly, Template will recognize gain or loss
equal to the difference between (1) the sum of the cash and the fair market
value of the stock given by Level 8 as consideration in the merger, plus the
amount of Template's liabilities as of the time of the merger, and (2) the
aggregate tax basis that Template has in its assets. The amount of federal
income tax due with respect to any such gain will become a liability of TSAC
after the merger. TSAC's aggregate basis in Template's assets acquired as a
result of the merger will equal the sum of the cash and the fair market value of
the stock given by Level 8 as consideration in the merger, plus the amount of
Template's liabilities as of the time of the merger. This amount will be
allocated among Template's assets based upon their relative fair market values.
FEDERAL INCOME TAX IMPLICATIONS OF THE MERGER TO DISSENTING TEMPLATE
STOCKHOLDERS
Template stockholders who exercise their dissenters' rights with respect to
their Template common stock generally will be treated as if the shares were
issued to them and then redeemed by Level 8 for the amount of cash that they
receive. Accordingly, a dissenting stockholder will recognize gain or loss equal
to the difference between the cash that the stockholder receives and the
stockholder's basis in Template common stock. The nature of the gain will depend
upon a number of factors, including the redemption tests
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<PAGE> 67
described above. If you are considering dissenting, you are strongly urged to
consult your tax advisor as to the particular tax consequences of doing so.
The federal income tax discussion set forth above is intended to provide
only a general summary. It does not address tax consequences that may vary with
individual circumstances. Moreover, this discussion does not address any tax
consequences of the disposition of Template common stock before the merger or
the disposition of Level 8 common stock after the merger. Apart from the federal
income tax consequences discussed in this proxy statement/prospectus, we have
made no attempt to determine any tax that may be imposed on a Template
stockholder who is a citizen or resident of a foreign country, or by any state
or other jurisdiction in which a Template stockholder may be subject to tax.
Accordingly, you are strongly urged to consult your tax advisor to determine the
particular tax consequences to you of the merger, including the applicability
and effect of foreign, state, local and other tax laws to you.
ACCOUNTING TREATMENT
For accounting purposes, the merger will be treated as a purchase of
Template by Level 8.
FINANCING OF THE MERGER
Bank Hapoalim has committed to provide Level 8 with a $25,000,000 to
$35,000,000 five-year term loan in order to fund the cash portion of the
purchase price to be paid to Template stockholders and for general working
capital. Amounts borrowed under the Bank Hapoalim commitment would bear interest
at the London InterBank Offered Rate plus 1.5% annually. Loans under the
commitment would be guaranteed by Liraz Systems Ltd., Level 8's principal
stockholder. In return for the guaranty from Liraz, Level 8 expects to issue
Liraz between 100,000 and 150,000 shares of Level 8 common stock guaranteeing up
to $25,000,000 of loans, and between 100,000 and 150,000 additional shares, not
to exceed 250,000 shares in the aggregate, of Level 8 shares if Level 8 borrows
the full $35,000,000 covered by the Liraz guarantee. The actual number of shares
to be issued to Liraz will be determined by the independent directors of Level 8
based on market conditions and Level 8's financing needs at the time. Level 8
expects to use up to $25,000,000 of this financing to fund the cash portion of
the purchase price to acquire Template and for working capital. At this time,
Level 8 does not plan to borrow more that $25,000,000 guaranteed by Liraz, or to
issue Liraz more than 150,000 shares. Depending on its future financing needs,
Level 8 could borrow additional amounts covered by the Liraz guaranty and would
issue additional shares to Liraz at that time.
REGULATORY REQUIREMENTS
Level 8 and Template are not aware of any governmental or regulatory
approvals which are required for consummation of the merger, other than
governmental or regulatory approvals under the federal securities laws and
applicable state securities and "blue sky" laws, and the requirements under the
Delaware General Corporation Law and the Virginia Stock Corporation Act.
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<PAGE> 68
DISSENTERS' AND APPRAISAL RIGHTS
TEMPLATE.
Each holder of Template common stock has the right to dissent from the
merger in order to demand and perfect dissenter's rights in accordance with the
conditions established by Section 13.1-730 of the Virginia Stock Corporation
Act. The following discussion refers to any holder of Template common stock who
decides to exercise his dissenter's rights in accordance with the Virginia law
as a "dissenter." All of the Template stockholders who signed the stockholders'
agreement have agreed not to exercise any "dissenters" rights for their shares
of Template common stock.
THE DISSENTERS' RIGHTS PROVISIONS UNDER VIRGINIA LAW ARE ATTACHED AS ANNEX
D TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A
COMPLETE STATEMENT OF THE LAW RELATING TO DISSENTERS' RIGHTS AND IS QUALIFIED BY
REFERENCE TO ANNEX D. THIS DISCUSSION AND ANNEX D SHOULD BE REVIEWED CAREFULLY
BY ANY DISSENTER, BECAUSE FAILURE TO COMPLY WITH THE LAW EXACTLY MAY RESULT IN
LOSS OF ANY DISSENTERS' RIGHTS.
Any Template dissenter is entitled to receive the "fair value" of his
shares from Template. The Virginia Supreme Court has explained that a court
determines fair value by looking at all elements of stock value, including
investment value, market value, net asset value, and earning capacity of the
corporation. Virginia law defines "fair value" of Template common stock as the
value of Template common stock just before the stockholders vote on the merger,
"excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable."
The notice announcing the Template special meeting contains a statement
that any holder of Template common stock is entitled to assert dissenter's
rights under the Virginia law with respect to the merger. Any holder of Template
common stock who wishes to assert dissenter's rights must deliver to Template
(before Template's stockholders vote on whether or not to adopt the merger
agreement) written notice of his intent to exercise his dissenter's rights. In
addition, the dissenter cannot vote in favor of the merger.
If the non-dissenting Template stockholders subsequently vote to adopt the
merger agreement, Template will then deliver a written "dissenters' notice" to
each dissenter. The dissenters' notice will:
- state where the dissenter should send his demand that Template pay him
the fair market value for his shares of Template common stock (otherwise
known as a "payment demand");
- state where and when the dissenter should send his certificated shares of
Template common stock (to be traded in for cash);
- inform holders of uncertificated shares of Template common stock if
transfer of such shares may be restricted after Template receives a
payment demand for them;
- supply dissenters with a form for making a payment demand;
- set a date between 30 and 60 days after the date of the dissenters'
notice by which Template must receive all dissenting stockholders'
payment demands; and
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<PAGE> 69
- attach the relevant dissenters' rights laws.
The dissenter must then:
- demand payment;
- state whether he acquired his shares of Template common stock before or
after the date of the dissenters' notice; and
- deposit his share certificates according to the dissenters' notice.
Template will then:
- pay all dissenters the amount Template estimates to be the fair market
value of their shares of Template common stock (plus accrued interest)
within 30 days after receiving a dissenter's payment demand;
- provide the dissenters certain company financial statements;
- explain how Template calculated the fair market value and interest paid;
- explain the dissenters' rights to demand payment under Virginia Stock
Corporation Act sec. 13.1-735. Virginia Stock Corporation Act sec.
13.1-739 allows a dissenter to send Template his own written estimate of
the fair values of his shares and interest due; and
- explain that a dissenter can then reject Template's offer and demand that
Template pay him what he estimates is the fair value of his shares plus
interest due.
Any dispute between Template and a dissenter as to the fair value of shares
or interest due will be resolved by court action in accordance with Virginia
Stock Corporation Act sec. 13.1-740.
IF A DISSENTER FAILS TO COMPLY WITH THE VIRGINIA LAW REGARDING DISSENTERS'
RIGHTS AS STATED IN THE VIRGINIA STOCK CORPORATION ACT, HE WILL LOSE ALL LEGAL
RIGHTS TO DEMAND THAT TEMPLATE PAY HIM THE FAIR MARKET VALUE FOR THESE SHARES OF
TEMPLATE COMMON STOCK. IN VIEW OF THE COMPLEXITY OF THESE VIRGINIA STOCK
CORPORATION ACT PROVISIONS, POTENTIAL DISSENTERS SHOULD CONSULT WITH THEIR LEGAL
ADVISORS.
RESALE OF LEVEL 8 COMMON STOCK
Level 8 common stock issued in connection with the merger will be freely
transferable, except that shares issued to any Template stockholder who is an
affiliate of Template or who becomes an affiliate of Level 8 are subject to
restrictions on resale under federal securities laws. An "affiliate" is defined
generally as including, without limitation, directors, certain executive
officers and other persons who control a company.
STOCKHOLDERS AGREEMENT
Certain of Template's officers and directors, who own in the aggregate
issued and outstanding shares of Template common stock representing 17.2% of the
shares of Template common stock issued and outstanding as of November 17, 1999,
and certain holders of Level 8 common stock representing 52.5% of the shares of
Level 8 common
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stock issued and outstanding as of November 17, 1999, have agreed that, prior to
the earlier of the effective time of the merger or the termination of the merger
agreement, they will vote their shares in favor of the approval of the merger
and the merger agreement, against any other proposed business combination, and
against any proposal that would impede, interfere with, delay, or frustrate the
merger.
The Template stockholders who entered into the stockholders agreement have
also agreed that they will not, in their capacity as stockholders, and will not
authorize any of their representatives to:
- solicit, initiate or encourage the submission or announcement of any
alternative transaction to the merger; or
- participate in any discussions or negotiations regarding, or furnish to
any person any information with respect or in response to, or take any
other action to facilitate any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, any
alternative transaction to the merger.
All Template stockholders who entered into the stockholders agreement with
Level 8 have also agreed to cease, and to ensure any of such stockholders'
representatives cease, any existing discussions with any person that relate to
an alternative transaction to the merger.
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<PAGE> 71
THE MERGER AGREEMENT
GENERAL
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Annex A to this joint proxy
statement/prospectus. This summary is not complete and stockholders are urged to
read the merger agreement in its entirety.
The merger agreement provides for the merger of Template with and into
Level 8's wholly owned subsidiary, TSAC. As a result of the merger, Template
will become a wholly owned subsidiary of Level 8 and the former stockholders of
Template will become stockholders of Level 8. TSAC has been formed solely for
the purpose of effecting the merger, and there will be no other activity in
TSAC. The merger will become effective upon the filing of articles of merger
with the State Corporation Commission of Virginia and a certificate of merger
with the Secretary of State of the State of Delaware or at such later time as
may be specified in the articles of merger and the certificate of merger. It is
currently anticipated that the effective time will in December 1999. There can
be no assurance, however, that the required approvals will be obtained or that
the other conditions to the merger will be satisfied by such date, or at all, or
that the merger agreement will not be terminated. See "-- Conditions to the
Merger" (page 69) and "-- Termination" (page 77).
MERGER CONSIDERATION
If the merger is approved and completed, holders of Template common stock
will receive U.S. $4.00 in cash and a fraction of a share of Level 8 common
stock in exchange for each share of Template common stock that they own. The
fraction of a Level 8 share will be based on the average of the closing sales
prices of a share of Level 8 common stock as reported on The Nasdaq Stock Market
for the 10 trading day period ending on December 9, 1999.
- If this 10-day average closing sales price of Level 8 common stock is
above $13.74, then Template stockholders would receive 0.2838 of a share
of Level 8 common stock plus $4.00 in cash for each Template share.
- If the 10-day average closing sales price of Level 8 common stock is
between $13.74 and $10.62 (including such amounts), then Template
stockholders would receive for each Template share a fraction of a share
of Level 8 common stock valued at $3.90 based on the 10-day average
trading price of Level 8 common stock, plus $4.00 in cash. We will
determine the fraction of a share of Level 8 stock to be issued to
Template stockholders by dividing $3.90 by the 10-day average closing
price of Level 8 common stock.
- If the 10-day average closing sales price of Level 8 common stock is less
than $10.62, Template stockholders would receive 0.3672 of a share of
Level 8 common stock plus $4.00 in cash for each Template share.
We refer to the fraction of a Level 8 share to be issued in exchange for each
Template share as the exchange ratio.
The following table shows the fraction of a share of Level 8 common stock
that Template stockholders would receive for each share of Template common stock
they own
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based upon a range of the average closing sales prices of Level 8 common stock
for the 10 trading days ending on December 9, 1999 also shows the implied value
of that fraction of a share of Level 8 common stock:
<TABLE>
<CAPTION>
THEN EACH TEMPLATE SHARE AND THE IMPLIED VALUE* OF THE
WOULD BE CONVERTED INTO MERGER CONSIDERATION THAT A
$4 IN CASH PLUS THE TEMPLATE STOCKHOLDER
IF THE 10-DAY AVERAGE TRADING FOLLOWING FRACTION OF A WOULD RECEIVE FOR EACH
PRICE* IS: LEVEL 8 SHARE: TEMPLATE SHARE WOULD BE:
- ----------------------------- ------------------------------ -----------------------------
<S> <C> <C>
$10.00...................... 0.3672 $ 7.67
10.50...................... 0.3672 7.86
10.62 (lower collar)....... 0.3672 7.90
11.00...................... 0.3545 7.90
11.50...................... 0.3391 7.90
12.00...................... 0.3250 7.90
12.50...................... 0.3120 7.90
13.00...................... 0.3000 7.90
13.50...................... 0.2889 7.90
13.74 (upper collar)....... 0.2838 7.90
14.00...................... 0.2838 7.97
14.50...................... 0.2838 8.12
15.00...................... 0.2838 8.26
15.50...................... 0.2838 8.40
16.00...................... 0.2838 8.54
16.50...................... 0.2838 8.68
17.00...................... 0.2838 8.82
17.50...................... 0.2838 8.97
18.00...................... 0.2838 9.11
18.50...................... 0.2838 9.25
19.00...................... 0.2838 9.39
19.50...................... 0.2838 9.53
20.00...................... 0.2838 9.68
</TABLE>
- -------------------------
* The "implied value" is based on the 10-day average trading price plus
$4.00 in cash. Implied value may be significantly greater than or less
than the value determined by reference to the actual trading price of
Level 8 common stock at the time of the Level 8 special meeting,
completion of the merger, the date that Template stockholders receive
shares of Level 8 common stock or the date Template stockholders sell the
Level 8 shares.
NO FRACTIONAL SHARES. No fractional shares of Level 8 common stock will be
issued in connection with the merger. Each holder of Template common stock who
would otherwise be entitled to a fraction of a share of Level 8 common stock
will be entitled to receive a cash payment equal to the per share closing sales
price of Level 8's common stock immediately prior to the date on which the
merger occurs multiplied by the fractional interest to which such holder
otherwise would be entitled.
STOCK OPTIONS
At the effective time of the merger, all outstanding options to purchase
Template common stock will be assumed by Level 8. Template has agreed to use its
best efforts,
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without the expenditure of funds, to encourage all holders of Template options
to exercise all their vested options before the effective time of the merger.
From and after the effective time of the merger:
- each Template option assumed by Level 8 may be exercised solely for
shares of Level 8 common stock;
- the number of shares of Level 8 common stock subject to each such
Template option shall be equal to the number of shares of Template common
stock subject to such Template option immediately prior to the effective
time of the merger multiplied by the "option exchange ratio," rounded
down to the nearest whole share, where the "option exchange ratio" equals
the ratio of (i) the sum of U.S. $4.00, plus the product of the exchange
ratio multiplied by the average of the closing sales prices of a share of
Level 8 common stock as reported on The Nasdaq Stock Market for the 10
trading day period ending four trading days before the Level 8 special
meeting, divided by (ii) such 10-day average trading price;
- the per share exercise price under each such Template option shall be
adjusted by dividing the per share exercise price under such Template
option by the option exchange ratio and rounded up to the nearest cent;
- any restriction on the exercise of any such Template option will continue
in full force and effect; and
- the term, exercisability, vesting schedule and other provisions of such
Template option will remain unchanged unless amended or modified by
existing severance or employment agreements in connection with the
merger.
OWNERSHIP OF LEVEL 8 FOLLOWING THE MERGER
Depending on the average of the closing sales prices of Level 8 common
stock for the 10 consecutive trading days ending on the day that is three
trading days prior to the day that the Level 8 stockholders vote on the merger,
we anticipate that Template stockholders will collectively receive approximately
1,397,312 shares of Level 8 common stock in the merger based on the number of
shares of Template common stock outstanding on November 17, 1999. In addition,
up to 941,954 shares of Level 8 common stock will be reserved for issuance upon
the exercise of Template stock options which may be assumed by Level 8 based on
the number of outstanding Template stock options as of November 17, 1999 and an
exchange ratio of 0.2838. Based on these numbers, and based upon the number of
shares of Level 8 common stock outstanding on November 17, 1999, existing
Template stockholders will own approximately 13.5% of the Level 8 common stock
outstanding immediately after the merger, and approximately 12.6% on a fully
diluted basis.
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The following table shows the approximate number of shares of Level 8
common stock that Template stockholders would collectively receive in the merger
and the percentage of Level 8 common stock they would own immediately after the
merger based upon a range of average 10 trading day closing sales prices of
Level 8 common stock and based upon the number of shares of Level 8 common stock
outstanding on November 17, 1999.
<TABLE>
<CAPTION>
AND FORMER
TEMPLATE STOCKHOLDERS
THEN THE FORMER WOULD HOLD THE FOLLOWING
TEMPLATE STOCKHOLDERS PERCENTAGE OF THE
WOULD COLLECTIVELY OUTSTANDING LEVEL 8 SHARES
RECEIVE THE FOLLOWING IMMEDIATELY AFTER
IF THE 10-DAY AVERAGE TRADING PRICE IS: NUMBER OF LEVEL 8 SHARES(1) THE MERGER: (1),(2)
- --------------------------------------- --------------------------- -----------------------------
<S> <C> <C>
10.00.............................. 1,807,939 16.83%
10.50.............................. 1,807,939 16.83%
10.619............................. 1,807,939 16.83%
11.00.............................. 1,745,633 16.35%
11.50.............................. 1,669,736 15.75%
12.00.............................. 1,600,164 15.19%
12.50.............................. 1,536,157 14.67%
13.00.............................. 1,477,074 14.19%
13.50.............................. 1,422,368 13.74%
13.741............................. 1,397,421 13.53%
14.00.............................. 1,397,421 13.53%
14.50.............................. 1,397,421 13.53%
15.00.............................. 1,397,421 13.53%
15.50.............................. 1,397,421 13.53%
16.00.............................. 1,397,421 13.53%
16.50.............................. 1,397,421 13.53%
17.00.............................. 1,397,421 13.53%
17.50.............................. 1,397,421 13.53%
18.00.............................. 1,397,421 13.53%
18.50.............................. 1,397,421 13.53%
19.00.............................. 1,397,421 13.53%
19.50.............................. 1,397,421 13.53%
20.00.............................. 1,397,421 13.53%
</TABLE>
CONVERSION OF TEMPLATE SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
After the effective time of the merger, the exchange agent will mail to the
registered holders of Template common stock a letter of transmittal and
instructions for use in effecting the exchange of Template stock certificates.
Each holder of a Template stock certificate will receive $4.00 in cash for each
share of Template common stock exchanged and a certificate representing the
number of shares of Level 8 common stock into which his or her shares have been
converted. Each holder of Template common stock who would otherwise be entitled
to a fraction of a share of Level 8 common stock will be entitled to receive a
cash payment equal to the per share closing sales price of Level 8's common
stock as reported by The Nasdaq Stock Market on the trading day immediately
prior to
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<PAGE> 75
the date of the merger multiplied by the fractional interest to which such
holder otherwise would be entitled.
If any Template stock certificate has been lost, stolen or destroyed, Level
8 may require the owner of such lost, stolen or destroyed Template stock
certificate to provide an appropriate affidavit and to deliver a bond as
indemnity against any claim that may be made against the exchange agent, Level 8
or Template.
TEMPLATE STOCKHOLDERS SHOULD NOT SURRENDER THEIR TEMPLATE STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT.
EFFECT ON TEMPLATE CERTIFICATES
At the effective time of the merger:
- all outstanding shares of Template common stock will automatically be
converted into the right to receive the cash consideration, Level 8
common stock and cash instead of fractional shares, and all holders of
Template stock certificates will have no further rights as stockholders
of Template; and
- the stock transfer books of Template will be closed.
If, after the effective time of the merger, a Template stock certificate is
presented to the exchange agent, Template or Level 8, such stock certificate
will be canceled and will be exchanged as provided above under the caption
"Conversion of Template Shares; Procedure for Exchange of Certificates."
CORPORATE MATTERS
At the effective time of the merger, the certificate of incorporation and
bylaws of TSAC will be the certificate of incorporation and bylaws of the
surviving corporation. Immediately after the effective time of the merger, the
directors and officers of TSAC will become the directors and officers of the
surviving corporation.
CONDITIONS TO THE MERGER
The respective obligations of Level 8 and TSAC, on the one hand, and
Template, on the other hand, to effect the merger are subject to the
satisfaction or waiver at or prior to the effective time of the merger of each
of the following conditions:
- The merger and the merger agreement and related transactions shall have
been approved by the required vote of Template's stockholders;
- The issuance of Level 8 common stock in the merger and the increase in
the number of shares available under Level 8's 1997 Stock Option Plan
shall have been approved by the required vote of Level 8's stockholders;
- No preliminary or permanent injunction or other order shall have been
issued by any court or by any governmental or regulatory agency, body or
authority which enjoins, restrains or prohibits the transactions
contemplated by the merger agreement or has the effect of making the
merger illegal and which is in effect at the effective time;
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- The Level 8 common stock issuable to Template stockholders in the merger
shall have been approved for quotation on The Nasdaq Stock Market upon
official notice of issuance; and
- The registration statement of which this joint proxy statement/prospectus
forms a part shall have become effective and shall not be the subject of
any stop order or proceedings seeking a stop order.
The obligations of Level 8 and TSAC to effect the merger are also subject
to the satisfaction or waiver, at or prior to the effective time of the merger,
of each of the following conditions:
- The representations and warranties of Template in the merger agreement
must be accurate in all respects as of the signing of the merger
agreement and as of the closing of the merger, unless the failure of such
representations and warranties to be accurate in all respects does not,
individually or in the aggregate, materially and adversely affect the
value of Template and its subsidiaries taken as a whole;
- Template shall have performed in all material respects all obligations
and agreements, and complied in all material respects with all covenants,
contained in the merger agreement to be performed or complied with by it
on or prior to the closing;
- Template and its subsidiaries, taken as a whole, shall not have
experienced any change, event or occurrence that has had or could
reasonably be expected to have a material adverse effect on Template and
its subsidiaries taken as a whole;
- Level 8 shall have received an opinion of counsel that the merger will be
treated for United States federal income tax purposes as a
reorganization;
- All material consents required to be obtained in connection with the
merger and the other transactions contemplated by the merger agreement
shall have been obtained and shall be in full force and effect;
- Template's independent auditors shall have delivered a letter with
respect to certain financial information included in this joint proxy
statement/prospectus;
- Level 8 shall have received letters from affiliates of Template regarding
sales of Level 8 stock following the merger;
- Neither Level 8 nor Template shall have received any notification from
the U.S. federal government that it intends to terminate or not to renew
any of Template's government contracts or that it anticipates that
facility clearances will not be granted to Level 8's wholly owned
subsidiary, TSAC, nor shall Level 8 or Template have a good faith reason
to believe that the foregoing will occur;
- Holders of not more than 1% of the outstanding shares of Template common
stock shall have perfected dissenters' rights; and
- Template shall have provided Level 8 with evidence establishing that an
amount equal to at least 60% of the total claimed by Template as a
federal income tax deduction for its taxable year ended November 30, 1997
for income recognized by Template employees from disqualifying
dispositions of shares of Template common stock that was acquired by such
employees upon the exercise of incentive stock options that were granted
to the employees by Template has either been included
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on one or more Forms W-2 issued by Template to its employees or reported
in one or more affidavits executed by Template employees that such
employees have included the income on his or her federal income tax
return and paid the proper amount of tax with respect thereto.
The obligation of Template to effect the merger is also subject to the
satisfaction or waiver, at or prior to the effective time of the merger, of each
of the following conditions:
- The representations and warranties of Level 8 and TSAC in the merger
agreement must be accurate in all respects as of the signing of the
merger agreement and at and as of the closing of the merger, unless the
failure of such representations and warranties to be accurate in all
respects does not, individually or in the aggregate, materially and
adversely affect the value of Level 8 and its subsidiaries taken as a
whole;
- Each of Level 8 and TSAC shall have performed in all material respects
all obligations and agreements, and complied in all material respects
with all covenants, contained in the merger agreement to be performed or
complied with by it on or prior to the closing;
- Level 8 and its subsidiaries, taken as a whole, shall not have
experienced any change, event or occurrence that has had or could
reasonably be expected to have a material adverse effect on Level 8 and
its subsidiaries taken as a whole; and
- Template shall have received an opinion of counsel that the merger will
be treated for United States federal income tax purposes as a
reorganization.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of Level 8,
TSAC and Template, including representations and warranties relating to:
- due organization, good standing and corporate power;
- authorization, validity and enforceability of the merger agreement;
- capitalization;
- required consents and approvals, and absence of conflicts of the
contemplated transactions with governing documents, and violations of any
agreements and laws;
- filings with the SEC and financial statements;
- absence of changes;
- regulatory compliance;
- compliance with laws;
- litigation;
- employee benefit plans;
- taxes;
- absence of undisclosed liabilities;
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<PAGE> 78
- software;
- intellectual property;
- proprietary assets and no infringement;
- financial advisor fees or commissions; and
- antitrust considerations
The merger agreement contains further representations and warranties by
Template as to:
- the vote required to approve the merger and merger agreement;
- the receipt of a fairness opinion from U.S. Bancorp Piper Jaffray;
- material contracts;
- real property and other assets;
- environmental laws;
- labor matters;
- state takeover statute and Template's Rights Plan;
- government contracts;
- business relationships; and
- insurance.
The merger agreement contains further representations and warranties by
Level 8 and TSAC as to:
- title to properties;
- financing; and
- interim operations of TSAC, Level 8's wholly owned subsidiary formed for
the purpose of acquiring Template.
COVENANTS
The merger agreement requires that, during the period between the signing
of the merger agreement and the effective time of the merger, Template and each
of its subsidiaries will act and carry on their respective operations only in
the ordinary course of business consistent with past practice and will use their
reasonable best efforts to:
- preserve intact their respective business organizations;
- keep available the services of their key officers and employees;
- preserve the goodwill of those engaged in material business relationships
with Template;
- cause certain officers and directors and key employees of Template to
execute employment and/or non-competition agreements with Level 8;
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<PAGE> 79
- encourage all holders of Template's stock options to exercise their
vested stock options; and
- cause Alcatel, N.V. to execute the stockholders agreement.
In addition, Template has agreed that, during the period between the
signing of the merger agreement and the effective time of the merger, unless
otherwise approved by Level 8, it and its subsidiaries will not:
- make any change in their charter or organizational documents;
- subject to specific exceptions, issue, sell, grant, pledge or otherwise
encumber any shares of their capital stock or other securities;
- make any other changes in their capital structure;
- declare, set aside, pay or make any dividend or other distribution with
respect to, or split, combine or reclassify, any shares of their capital
stock or other securities;
- subject to specific exceptions, make or authorize any capital
expenditures in excess of $75,000;
- directly or indirectly acquire, make any investment in, or make any
capital contributions to, any person other than in the ordinary course of
business consistent with past practice;
- directly or indirectly sell, pledge or otherwise dispose of or encumber
any of their properties or assets that are material to their business,
except for sales, pledges or other dispositions or encumbrances in the
ordinary course of business consistent with past practice;
- adopt or enter into a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization, or
other material reorganization or any agreement relating to an alternative
transaction to the merger;
- enter into any agreement, understanding or commitment that restrains,
limits or impedes their ability to compete with or conduct any business
or line of business, except for any such agreement, understanding or
commitment entered into in the ordinary course of business consistent
with past practice;
- plan, announce, implement or effect any reduction in force, lay-off,
early retirement program, severance program or other program or effort
concerning the termination of employment of their employees;
- increase or agree to increase the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration
payable to any of its officers, employees or consultants, or establish
any new compensation or benefit plans or arrangements or amend or agree
to amend any existing benefit plans, except as may be required under
existing agreements or by law and normal, regularly scheduled increases
to Template's non-officer employees consistent with past practices;
- enter into or amend any employment, consulting, severance or similar
agreement with any individual, except with respect to new hires of
non-officer employees in the ordinary course of business consistent with
past practice;
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<PAGE> 80
- make any tax election or settle or compromise any income tax liability of
Template or any of its subsidiaries involving on an individual basis more
than $50,000;
- lend money to any person or entity or incur any indebtedness for borrowed
money other than by drawing under current revolving credit agreements, or
guarantee any indebtedness;
- make any change in its method of accounting or record keeping not
otherwise required by generally accepted accounting principles;
- amend Template's Rights Plan, except as required by the merger agreement;
or
- agree, in writing or otherwise, to take any of the foregoing actions.
NON-SOLICITATION
Template has agreed that it will not directly or indirectly, nor will it
authorize or permit any of its or its officers, directors, investment bankers,
attorneys or other advisors or representatives to, directly or indirectly,
solicit, initiate, knowingly encourage or knowingly induce the submission or
announcement of any Acquisition Proposal (as defined below).
If, however, prior to taking any of those actions:
- neither Template nor any subsidiary or representative of Template or any
of its subsidiaries has violated any of the restrictions set forth above;
- the board of directors of Template concludes in good faith, after and
based upon consultation with outside counsel, that such action is
required in order for the board of directors of Template to comply with
its fiduciary duties to Template's stockholders under applicable law; and
- Template has promptly advised Level 8 orally and in writing of any
request for information or of any Acquisition Proposal, or any inquiry
with respect to or which could reasonably be expected to lead to any
Acquisition Proposal, the material terms and conditions of such request,
Acquisition Proposal or inquiry, and the identity of the person or entity
making any such Acquisition Proposal or inquiry, and at least five
business days have elapsed since the delivery to Level 8 of that notice
and information;
then Template may, prior to the adoption and approval of the merger agreement by
its stockholders, in response to an Acquisition Proposal that has not been
withdrawn and that constitutes a Superior Proposal (as defined below):
- furnish non-public information with respect to Template to the person or
entity who made such Acquisition Proposal pursuant to a customary
confidentiality agreement; and
- participate in discussions or negotiations with such person or entity
regarding the Acquisition Proposal.
The merger agreement also provides that a breach of the non-solicitation
covenant by any advisor or representative of Template would be deemed a breach
by Template.
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<PAGE> 81
Template also agreed, at the time of the signing of the merger agreement,
to immediately cease and cause to be terminated any existing discussions or
negotiations with any person or entity that relate to any Acquisition Proposal.
An "Acquisition Proposal" is any offer, inquiry or proposal for, relating
to or contemplating a merger, consolidation, amalgamation, share exchange,
business combination, issuance of securities, acquisition of securities, tender
offer, exchange offer or other similar transaction or series of transactions:
- in which Template or any of its material subsidiaries is a constituent
company;
- in which a person, entity or group of persons or entities directly or
indirectly acquires all or substantially all of the assets of Template or
any material subsidiary of Template or more than 20% of Template's
business or directly or indirectly acquires beneficial or record
ownership of securities representing, or exchangeable for or convertible
into, more than 20% of the outstanding securities of any class of voting
securities of Template or any material subsidiary of Template; or
- in which Template or any material subsidiary of Template issues
securities representing more than 20% of the outstanding securities of
any class of voting securities of Template or such material subsidiary of
Template.
A "Superior Offer" is any unsolicited, bona fide written offer with respect
to an Acquisition Proposal made by a third person that the board of directors of
Template determines in its good faith judgment (based upon the written advice of
its financial advisor with a copy provided to Level 8) to be more favorable
generally to Template's stockholders than the merger, taking into account all
financial and strategic considerations, including relevant legal, financial,
regulatory and other aspects of such proposal, and the conditions to and
prospects for completion of such proposal other than the merger; provided,
however, that any such offer shall not be deemed to be a "Superior Offer" if any
financing required to complete the transaction contemplated by such offer is not
fully committed unless, in the likely good faith determination of the board of
directors of Template, such financing is likely to be obtained by such party on
a timely basis.
RECOMMENDATION OF TEMPLATE BOARD OF DIRECTORS
The merger agreement provides that the board of directors of Template and
any committee of that board may not withdraw, amend or modify, or propose or
resolve to withdraw or modify, in a manner adverse to Level 8, its approval and
recommendation of the merger agreement or the merger.
However, the board of directors of Template may appropriately withdraw or
modify its approval or recommendation of the merger agreement or the merger if,
prior to the adoption and approval of the merger agreement by the stockholders
of Template:
- the board of directors of Template receives a Superior Offer that is not
withdrawn;
- neither Template nor any subsidiary or representative of Template or any
of its subsidiaries shall have violated any of the non-solicitation
covenants contained in the merger agreement;
- the board of directors of Template concludes in good faith, after and
based upon consultation with its outside counsel, that, in light of such
Superior Offer, the withdrawal or modification of such recommendation is
required in order for it to
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<PAGE> 82
comply with its fiduciary obligations to Template's stockholders under
applicable law; and
- Template provides Level 8 with at least five business days' prior notice
of any meeting of its board of directors at which its board of directors
is expected to consider such Superior Offer.
MEETING OF TEMPLATE STOCKHOLDERS
Template has agreed to:
- call, give notice of, convene and hold a special meeting of its
stockholders for the purpose of voting upon the merger agreement and the
merger; and
- subject to the exception described above under "Recommendation of
Template Board of Directors," include in this joint proxy
statement/prospectus the recommendation of its board of directors that
its stockholders approve and adopt the merger agreement and approve the
merger at the special meeting.
Template's obligation to call, give notice of, convene and hold the special
meeting will not be affected by the disclosure, announcement, commencement,
submission or making of any Superior Offer or other Acquisition Proposal, or by
any withdrawal or modification of the recommendation of the board of directors
of Template with respect to the merger.
REORGANIZATION
Each of Template and Level 8 has agreed not to take any action prior to or
after the effective time that would reasonably be expected to cause the merger
to fail to qualify as a reorganization.
INDEMNIFICATION AND INSURANCE
From and after the effective time of the merger, Level 8 will cause
Template, as a subsidiary of Level 8, to fulfill and honor in all respects the
obligations of Template pursuant to (i) each indemnification agreement currently
in effect between Template and each person who is or was a director or officer
of Template at or prior to the effective time of the merger, and (ii) any
indemnification provision under Template's articles of incorporation or bylaws
as each is in effect on the date hereof. The certificate of incorporation and
bylaws of the surviving corporation will provide for indemnification to the
fullest extent permitted by law.
For six years after the effective time of the merger, Level 8 shall
maintain in effect the current level and scope of directors' and officers'
liability insurance covering those persons who are currently covered by
Template's directors' and officers' liability insurance policy; provided,
however, that in no event shall Level 8 be required to expend in any one year an
amount in excess of 125% of the annual premium currently paid by Template for
such insurance, and provided, further, that if the annual premiums of such
insurance coverage exceed such amount, Level 8 shall be obligated to obtain a
policy with the greatest coverage available for a cost not exceeding such
amount.
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<PAGE> 83
OTHER OBLIGATIONS
The merger agreement contains other covenants including covenants relating
to:
- access to information and records;
- confidentiality;
- filing of this joint proxy statement/prospectus;
- letters from each party's accountants;
- the provision of benefits to Template employees; and
- notification of significant events.
TERMINATION
The merger agreement provides that it may be terminated, and that the
merger may be abandoned at any time prior to the effective time of the merger,
whether before or after approval of the merger by the stockholders of Template:
- by mutual consent authorized by the boards of directors of Level 8 and
Template;
- by either Level 8 or Template, if the effective time of the merger has
not occurred by or on April 19, 2000 unless the effective time has not
occurred on or by April 19, 2000 because the party seeking to terminate
the merger agreement failed to perform any material obligation required
to be performed by it at or prior to the effective time of the merger;
- by either Level 8 or Template, if any government authority prohibits the
merger and the prohibition has become final and non-appealable, so long
as the party seeking to terminate the merger agreement has used its
reasonable best efforts to remove the prohibition;
- by Level 8 if Template's stockholders do not approve the merger and the
merger agreement at the special meeting of Template's stockholders;
- by either Level 8 or Template if Level 8's stockholders do not approve
the issuance of Level 8 common stock in the merger and the proposed
increase in the number of shares subject to award under Level 8's 1997
Stock Option Plan;
- by either party if the other has breached a representation or warranty
that is not curable or breached any covenant or agreement unless the
breach is not cured within 20 days of written notice of the breach;
- by Level 8 if one of the following "Triggering Events" occurs:
-- the board of directors of Template withdraws or modifies in a manner
adverse to Level 8 its approval or recommendation to Template's
stockholders of the merger agreement or the merger;
-- Template fails to include in this joint proxy statement/prospectus the
unanimous recommendation of its board of directors in favor of the
approval of the merger agreement and the merger;
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<PAGE> 84
-- the board of directors of Template does not reaffirm its unanimous
recommendation in favor of the approval of the merger agreement and
the merger within five days after Level 8 requests that the Template
board reaffirm its recommendation following the announcement of any
other Acquisition Proposal;
-- Template breaches any of its non-solicitation obligations in the
merger agreement;
-- the board of directors of Template approves, endorses or recommends
any other acquisition proposal; or
-- a tender or exchange offer relating to securities of Template is
commenced and Template does not send to its security holders, within
ten business days after the commencement of the tender or exchange
offer, a statement disclosing that Template recommends rejection of
that tender or exchange offer.
- by Template following the determination by its board of directors that
another acquisition proposed constitutes a "Superior Offer" as described
under "-- Non-Solicitation" on page 74, if Template has not violated its
covenants regarding non-solicitation and pays Level 8 a $2,000,000 fee as
described below; or
- by either Level 8 or Template if a legal opinion to the effect that the
merger will constitute a reorganization under the Internal Revenue Code
has not been delivered within 60 days following the later of stockholders
meetings of Level 8 and Template, so long as the party seeking to
terminate the merger agreement is not in material breach of the
agreement.
FEES AND EXPENSES
Except as provided below, all fees and expenses incurred in connection with
the merger, the merger agreement and the transactions contemplated by the merger
agreement will be paid by the party that incurred such fees or expenses, whether
or not the merger is consummated. Template has agreed to pay Level 8 a
$2,000,000 fee if:
- Template terminates the merger agreement because Template's board of
directors determines that Template has received a Superior Offer that it
wishes to pursue as described above;
- Level 8 terminates the merger agreement because of a material breach of
Template's representations, warranties, covenants and agreements in the
merger agreement; or
- Template signs a definitive agreement relating to another acquisition
proposal or completes an alternative transaction within nine (9) months
following termination of the merger agreement, and either
-- Level 8 terminated the merger agreement because a Triggering Event
occurred as described above, or
-- the merger agreement is terminated because the effective time of the
merger has not occurred on or before April 19, 2000 or because
Template's stockholders do not approve the merger, and another
Acquisition Proposal has been made after October 19, 1999 and not
withdrawn before the termination date.
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<PAGE> 85
Level 8 has agreed to pay Template a $2,000,000 fee if Template terminates
the merger agreement because of a material breach of Level 8's representations,
warranties, covenants and agreements in the merger agreement.
Level 8 and Template will share equally all fees and expenses, other than
attorneys' and accountants' fees, incurred in connection with the filing,
printing and mailing of this joint proxy statement/prospectus and the related
registration statement, other than SEC filing fees which have been paid by Level
8.
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<PAGE> 86
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet as of September
30, 1999 and the unaudited pro forma combined statements of operations for the
year ended December 31, 1998 and for the nine months ended September 30, 1999
present the pro forma effect of the following transactions: (a) the acquisition
of Template by Level 8, (b) the debt financing obtained by Level 8 in connection
with the acquisition of Template, and (c) Level 8's acquisition of Seer. The
objective of the combined pro forma financial information is to provide
investors with information about the continuing impact of particular completed
or probable transactions by indicating how the transactions might have affected
historical financial statements had they occurred at an earlier date. The pro
forma combined financial statements are presented for illustrative purposes only
and are not necessarily indicative of the combined financial position or results
of operations for future periods or the results that actually would have been
realized had Level 8, Seer, and Template been a combined company during the
specified periods. The pro forma combined financial statements, including the
notes thereto, are qualified in their entirety by reference to, and should be
read in conjunction with, the historical consolidated financial statements of
Level 8, Seer, and Template, including the notes thereto.
Under the terms of the merger agreement, each share of Template common
stock will be exchanged for $4.00 in cash plus $3.90 worth of Level 8 common
stock. The actual number of shares of Level 8 common stock to be exchanged for
each Template share will be based on the average trading price of Level 8 stock
prior to stockholder approval, but will not be less that 0.2838 Level 8 shares
per Template share (if Level 8's average trading price exceeds $13.74) or more
than 0.3672 Level 8 shares per Template share (if Level 8's average trading
price is less than $10.62). As of October 19, 1999, there were 4,922,830 shares
of Template common stock outstanding. Additionally, there are approximately
2,052,684 currently exercisable Template stock options outstanding. The total
amount of cash paid and shares of Level 8 stock issued in the acquisition will
depend upon the ultimate number of outstanding Template stock options exercised
prior to closing. Template stock options not exercised prior to closing will be
exchanged for Level 8 stock options. The pro forma combined financial statements
have been prepared assuming that none of the outstanding stock options are
exercised and that these options are exchanged at closing for 1,505,000 Level 8
stock options with an estimated value of $5 per option for the purpose of
valuing the consideration for the acquisition of Template. This preliminary
estimate has been made solely for the purposes of developing the unaudited pro
forma condensed combined financial information. The options will be valued using
the Black-Scholes option pricing model to calculate the actual consideration
paid at closing. Level 8 does not believe that any change in the consideration
paid would materially impact the pro forma financial information presented
herein, and accordingly, alternative presentations have not been included.
In connection with the acquisition, Level 8 has received a commitment for
additional financing from a commercial lender. The financing will be in the form
of a $25 million term loan, which will be payable five years from closing. The
financing will bear interest at the London Interbank Offered Rate plus one and
one-half percent, payable quarterly. The financing will be guaranteed by Liraz
Systems, Ltd., Level 8's principal stockholder, in exchange for 125,000 shares
of Level 8 common stock to be issued to Liraz at closing. The value of these
125,000 shares has been estimated at approximately $1.6 million by using the
share price average of $12.424, and is included in other assets in the pro forma
combined balance sheet. Level 8 will also have available an additional $15
million in
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financing from this lender, which will also be guaranteed by Liraz in exchange
for additional shares of Level 8 stock. Only borrowings of the original $25
million term loan have been included in the pro forma financial information as
management believes this financing should be adequate for the closing of the
acquisition.
On December 31, 1998, Level 8, as the first step in its acquisition of the
entire equity interest in Seer, acquired beneficial ownership of approximately
69% of the outstanding voting stock of Seer. On April 15, 1999, the Company
completed its cash tender offer for all the outstanding shares of common stock
of Seer and acquired the remaining minority interest in Seer on April 30, 1999
by merger. The acquisition of Seer had a material impact on Level 8's business.
The pro forma combined balance sheet assumes that the acquisition of
Template and closing of the related financing took place on September 30, 1999
and combines Level 8's unaudited September 30, 1999 consolidated balance sheet
and Template's unaudited September 30, 1999 consolidated balance sheet.
The pro forma combined statements of operations assume that both the
Template and Seer business combinations took place as of the beginning of the
periods presented. The statement of operations for the year ended December 31,
1998 combines Template's consolidated statement of operations for the year ended
December 31, 1998, Level 8's consolidated statement of operations for the year
ended December 31, 1998, and Seer's unaudited consolidated statement of
operations for the twelve month period ended December 31, 1998. Seer's 1998
fiscal year ended on September 30. Seer's twelve month period was derived by
combining the unaudited results for the quarters ended March 31, June 30,
September 30, and December 31, 1998. The statement of operations with the period
ending in September combines Template's and Level 8's unaudited consolidated
statements of operations and the effect of the acquisition of the remaining 31%
interest in Seer on the statement of operations for the nine month period ended
September 30, 1999. For the purposes of the accompanying unaudited pro forma
combined condensed balance sheet, the aggregate purchase price has been
allocated to the net tangible assets acquired, with the remainder recorded as
goodwill on the basis of preliminary estimates of fair values. These preliminary
estimates have been made solely for the purposes of developing the unaudited pro
forma condensed combined financial information. A final determination of
necessary purchase accounting adjustments will be made upon the completion of a
study to be undertaken to determine the fair value of certain of Template's
assets and liabilities, including intangible assets and in-process research and
development. Refer to Note 2 for a discussion of the sensitivity to earnings
that may occur as a result of the final determination of fair value. Assuming
completion of the merger, the actual financial position and results of
operations will differ, perhaps significantly, from the pro forma amounts
reflected herein because of a variety of factors, including access to additional
information, changes in value not currently identified and changes in operating
results between the dates of the pro forma financial data and the date on which
the merger takes place.
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LEVEL 8 SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED AND CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
LEVEL 8 TEMPLATE (NOTE 3) TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 9,567 $ 2,527 $(19,691)(c)
25,000(b) $ 17,403
Marketable securities.............. 4,346 -- 4,346
Accounts receivable, net........... 14,217 9,415 (650)(a) 22,982
Deferred income taxes.............. 4,511 (4,511)(a) --
Note receivable.................... 2,000 -- -- 2,000
Prepaid expenses and other current
assets........................... 2,379 1,412 -- 3,791
-------- ------- -------- --------
Total current assets............. 28,163 22,211 148 50,522
Property and equipment, net.......... 1,777 5,135 -- 6,912
Software development costs, net...... 8,972 3,164 (3,164)(a) 8,972
Goodwill, net........................ 25,713 8,667 30,187(a) 64,567
Note receivable...................... -- 1,000 (1,000)(a) --
Other assets......................... 974 427 1,553(b) 2,954
-------- ------- -------- --------
Total assets..................... $ 65,599 $40,604 $ 27,724 $133,927
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 2,212 $ 6,262 $ -- $ 8,474
Accrued expenses................... 10,879 -- 6,600(a) 17,479
Notes payable, due upon demand..... 5,203 -- -- 5,203
Current portion of long-term
debt............................. 1,361 282 -- 1,643
Income taxes payable............... 1,360 -- -- 1,360
Deferred income.................... 9,293 352 -- 9,645
-------- ------- -------- --------
Total current liabilities........ 30,308 6,896 6,600 43,804
Long-term liabilities:
Long-term debt, net of current
portion.......................... 15,528 68 25,000(b) 40,596
Deferred revenue................... 1,267 -- -- 1,267
Deferred income taxes.............. -- 1,119 -- 1,119
Other liabilities.................. -- 474 -- 474
-------- ------- -------- --------
Total liabilities................ 47,103 8,557 31,600 87,260
Shareholders' equity:
Common stock, $0.01 par value...... -- 52 (52)(e) --
Common stock, $0.001 par value..... 9 -- 2 (c),(e),(b) 11
Treasury stock..................... -- (1,298) 1,298(e) --
Deferred compensation.............. -- (321) 321(e) --
Additional paid-in capital......... 54,562 36,598 (36,598)(e)
26,618(c)
1,551(b) 82,731
Foreign currency translation....... (240) (867) 867(e) (240)
Retained earnings.................. (35,835) (2,117) 2,117(e) (35,835)
-------- ------- -------- --------
Total shareholders' equity....... 18,496 32,047 (3,876) 46,667
Total liabilities and
shareholders' equity.......... $ 65,599 $40,604 $ 27,724 $133,927
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
unaudited pro forma financial statements.
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<PAGE> 89
LEVEL 8 SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS LEVEL 8 ADJUSTMENTS
LEVEL 8 (NOTE 3) ADJUSTED TEMPLATE (NOTE 3) COMBINED
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products........... $ 10,014 $ 10,014 $ 3,887 $ 13,901
Services........... 29,002 29,002 27,482 56,484
-------- ----- -------- ------- ------- --------
Total revenues... 39,016 -- 39,016 31,369 -- 70,385
Cost of revenues:
Products........... 3,063 426(f) 3,489 1,583 5,072
Services........... 19,627 19,627 21,057 40,684
-------- ----- -------- ------- ------- --------
Total cost of
revenues...... 22,690 426 23,116 22,640 -- 45,756
Gross profit......... 16,326 (426) 15,900 8,729 -- 24,629
Operating expenses:
Selling and
marketing........ 8,206 8,206 8,029 16,235
Product
development...... 4,904 4,904 1,497 6,401
General and
administrative... 4,857 4,857 7,337 12,194
In-process research
and
development...... 744 744 744
Amortization of
intangible
assets........... 5,197 516(f) 5,713 5,828(a) 11,541
-------- ----- -------- ------- ------- --------
Total operating
expenses...... 23,908 516 24,424 16,863 5,828 47,115
Loss from
operations......... (7,582) (942) (8,524) (8,134) (5,828) (22,486)
Interest income.... 444 444 231 675
Interest expense... (2,168) (2,168) (8) (1,546)(b) (3,722)
Net foreign
currency
gains/(losses)... (696) (696) -- (696)
-------- ----- -------- ------- ------- --------
Net loss before
income taxes....... (10,002) (942) (10,944) (7,911) (7,374) (26,229)
Income tax
provision(benefit)... 594 594 (2,000) -- (1,406)
-------- ----- -------- ------- ------- --------
Net loss from
continuing
operations......... $(10,596) $(942) $(11,538) $(5,911) $(7,374) $(24,823)
======== ===== ======== ======= ======= ========
Pro Forma net loss
per share, basic
and diluted........ ($ 2.39)
========
Pro Forma weighted
average shares
outstanding, basic
and diluted........ 10,390
========
</TABLE>
The accompanying notes are an integral part of the consolidated
unaudited pro forma financial statements.
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<PAGE> 90
LEVEL 8 SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS LEVEL 8 ADJUSTMENTS
LEVEL 8 SEER (NOTE 3) COMBINED TEMPLATE (NOTE 3) TOTAL
-------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products........... $ 1,552 $ 4,357 $ 5,909 $ 8,014 $ 13,923
Services........... 9,133 52,153 61,286 34,625 95,911
-------- -------- ------- -------- ------- ------- --------
Total revenues... 10,685 56,510 67,195 42,639 -- 109,834
Cost of revenues:
Products........... 2,060 2,043 2,348(d) 6,451 1,686 8,137
Services........... 5,973 41,385 47,358 22,491 69,849
-------- -------- ------- -------- ------- ------- --------
Total cost of
revenues....... 8,033 43,428 2,348 53,809 24,177 -- 77,986
Gross profit......... 2,652 13,082 (2,348) 13,386 18,462 -- 31,848
Operating expenses:
Research and
product
development...... 2,111 10,610 12,721 1,445 14,166
Purchased research
and development.. 5,892 -- 5,892 -- 5,892
Selling, general
and
administrative... 9,777 23,278 33,055 15,897 48,952
Amortization of
goodwill and
other intangible
assets........... 1,933 -- 6,266(d) 8,199 -- 7,771(a) 15,970
Write-off of
goodwill and
other intangible
assets........... 4,601 -- 4,601 -- 4,601
Restructuring
charges.......... 1,540 13,200 14,740 -- 14,740
-------- -------- ------- -------- ------- ------- --------
Total operating
expenses....... 25,854 47,088 6,266 79,208 17,342 7,771 104,321
Income (loss) from
operations......... (23,202) (34,006) (8,614) (65,822) 1,120 (7,771) (72,473)
Interest income...... 283 411 694 758 1,452
Interest expense..... (364) (3,641) 1,462 (2,543) -- (2,061)(b) (4,604)
-------- -------- ------- -------- ------- ------- --------
Net income (loss)
before income
taxes.............. (23,283) (37,236) (7,152) (67,671) 1,878 (9,832) (75,625)
Income tax
provision.......... 405 20,199 20,604 748 21,352
-------- -------- ------- -------- ------- ------- --------
Net income (loss)
from continuing
operations......... $(23,688) $(57,435) $(7,152) $(88,275) $ 1,130 $(9,832) $(96,977)
======== ======== ======= ======== ======= ======= ========
Earnings per share,
basic and diluted
$ (9.50)
========
Weighted average
shares outstanding,
basic and
diluted............ 10,204
========
</TABLE>
The accompanying notes are an integral part of the consolidated
unaudited pro forma financial statements.
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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The pro forma combined balance sheet assumes that the acquisition of
Template and closing of the related financing took place on September 30, 1999
and combines Level 8's unaudited September 30, 1999 consolidated balance sheet
and Template's unaudited September 30, 1999 consolidated balance sheet.
The pro forma combined statements of income assume the business
combinations took place as of the beginning of the periods presented. The
statement of operations for the year ended December 31, 1998 combines Template's
consolidated statement of operations for the year ended December 31, 1998, Level
8's consolidated statement of operations for the year ended December 31, 1998,
and Seer's unaudited consolidated statement of operations for the twelve month
period ended December 31, 1998. Seer's 1998 fiscal year ended on September 30.
Seer's twelve month period was derived by combining the unaudited results for
the quarters ended March 31, June 30, September 30, and December 31, 1998. The
statement of operations with the period ending in September combines Template's
and Level 8's unaudited consolidated statements of operations for the nine month
period ended September 30, 1999.
Level 8 pro forma adjustments in 1999 are to record the increase in
amortization of goodwill and purchased software based on the assumption that the
purchase of the remaining 31% of Seer's outstanding voting stock occurred before
January 1, 1999.
On a combined basis there were no material transactions between Template
and Level 8 during the periods presented.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997, and provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. Level 8 and Template
each adopted SOP 97-2 on January 1, 1998, and Seer adopted SOP 97-2 on October
1, 1998 based on the beginning of their respective fiscal year and in accordance
with the effective dates of the statements.
As Level 8 acquired only 69% of Seer's voting stock, the pro forma combined
provision for income taxes does not represent the amounts that would have
resulted had Seer and Level 8 filed a consolidated income tax return during the
periods presented.
Certain historical amounts in the accompanying financial statements have
been reclassified to create a uniform pro forma presentation. Such
reclassifications had no effect on net income/(loss) or stockholders' equity for
the periods presented.
NOTE 2. GENERAL
The acquisition will be accounted for as a purchase business combination by
Level 8. The accompanying unaudited pro forma combined condensed financial
statements reflect an aggregate purchase price for Template of $52.9 million,
consisting of the following: cash and stock issued to Template stockholders and
direct costs of the acquisition valued at $48.9 million, other indirect costs
related to the acquisition of $4 million, net assets of Template valued at $14
million, and intangible assets with an estimated total value of $38.9 million.
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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of the accompanying unaudited pro forma combined condensed
balance sheet, the aggregate purchase price has been allocated to the net assets
acquired as of September 30, 1999 with the remainder recorded as excess cost
over net assets acquired on the basis of preliminary estimates. These
preliminary estimates have been made solely for the purposes of developing the
unaudited pro forma condensed combined financial information. A final
determination of necessary purchase accounting adjustments will be made upon the
completion of a study to be undertaken to determine the fair value of certain of
Template's assets and liabilities, including intangible assets and in-process
research and development.
Consideration allocated to in-process research and development projects
would be recorded as a charge against net income in the period the acquisition
occurs. Each $1 million of consideration allocated to in-process research and
development would have the effect of increasing net income by $0.2 million
annually by reducing goodwill amortization expense. A preliminary estimate of
in-process research and development will not be available until the completion
of an independent evaluation of each project in process as of the acquisition
date.
Assuming completion of the merger, the actual financial position and
results of operations will differ, perhaps significantly, from the pro forma
amounts reflected herein because of a variety of factors, including access to
additional information, changes in value not currently identified and changes in
operating results between the dates of the pro forma financial data and the date
on which the merger takes place.
Level 8 also expects to incur costs related to the reorganization of
Template's operations in connection with the acquisition, primarily for the
closure of certain facilities and severance costs for employees. However, this
assessment is in its preliminary stage, and these costs cannot be estimated at
this time. No estimates of these costs have been included in the pro forma
financial data.
NOTE 3. PRO FORMA ADJUSTMENTS
(a) Adjustments are to record the estimated valuation of tangible and
intangible assets. As discussed in Note 2, Level 8 expects to record a charge to
earnings at the date of acquisition related to in-process research and
development; however, the independent valuation of intangible assets necessary
for the final allocation of purchase price has not been completed as of the date
of this filing. The final allocation of the purchase price will be based on a
complete independent evaluation of the assets and liabilities of Template. For
purposes of the pro forma balance sheet, all purchase price exceeding the net
assets of Template at September 30, 1999 has been included as excess cost over
net assets acquired.
Software development costs included on the Template historical balance
sheet have been eliminated as this intangible asset will be adjusted to fair
value based upon an independent valuation of intangible assets.
Certain tangible assets, primarily accounts receivable and a long-term note
receivable, have been adjusted to reflect changes in net realizable value
because of a change in strategy for these assets due to the acquisition.
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<PAGE> 93
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets included on the Template historical balance sheet have
been eliminated as these assets may not be able to be utilized by Level 8 after
the acquisition.
The estimated useful life of goodwill is considered to be five years.
The estimated annual amortization charge to income related to goodwill
resulting from the purchase described above approximates $7.7 million. This
charge is reflected in the pro forma combined statements of income.
(b) Adjustments are to record the $25 million loan obtained in connection
with the acquisition. The amount of interest expense incurred by Level 8 is
computed assuming the funds were received on January 1, 1998 and utilizing the
current LIBOR rate plus one and one-half percent.
Liraz will be issued 125,000 shares of Level 8 stock in exchange for their
guarantee of the loan. The cost of the guarantee, estimated at approximately
$1,553, is reflected in the pro forma balance sheet as a deferred loan cost and
will be amortized over the five year term of the loan.
(c) Adjustments are to record the consideration issued in the acquisition.
Under the terms of the merger agreement, each share of Template common stock
will be exchanged for $4.00 in cash plus $3.90 worth of Level 8 common stock.
The actual number of shares of Level 8 common stock to be exchanged for each
Template share will be based on the average trading price of Level 8 stock prior
to stockholder approval, but will not be less that 0.2838 Level 8 shares per
Template share (if Level 8's average trading price exceeds $13.74) or more than
0.3672 Level 8 shares per Template share (if Level 8's average trading price is
less than $10.62). As of October 19, 1999, there were 4,922,830 shares of
Template common stock outstanding. Additionally, there are approximately
2,052,684 currently exercisable Template stock options outstanding. The total
amount of cash paid and shares of Level 8 stock issued in the acquisition will
depend upon the ultimate number of outstanding Template stock options exercised
prior to closing. Template stock options not exercised prior to closing will be
exchanged for Level 8 stock options. The pro forma combined financial statements
have been prepared assuming the following: (1) 4,922,830 Template shares are
outstanding at the time of acquisition and (2) Template stock options that
remain outstanding are exchanged at closing for 1,505,000 Level 8 stock options
with an estimated value of $5 per option for the purpose of valuing the
consideration for the acquisition of Template.
(d) Adjustments are to record the increase in amortization of goodwill and
purchased software and the decrease in interest expense based on the assumption
that the Seer acquisition occurred on January 1, 1998.
(e) Adjustments are to eliminate Template's historical equity balances.
(f) Adjustments are to record the increase in amortization of goodwill and
purchased software based on the assumption that the purchase of the remaining
31% of Seer's outstanding voting stock occurred before January 1, 1999.
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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PRO FORMA EARNINGS PER COMMON SHARE
The unaudited pro forma combined basic earnings per share data is computed
by providing pro forma combined income per share by the weighted average number
of common shares outstanding and the issuance of 1,536,661 shares of common
stock to Template stockholders and 125,000 shares of common stock to Liraz in
exchange for guarantee on the financing. Diluted earnings (loss) per share is
not presented as its inclusion would be anti-dilutive. Potentially dilutive
securities outstanding during the period presented for 1998 include stock
options and stock warrants. Potentially dilutive securities outstanding during
the period presented for 1999 include preferred stock, stock options, and stock
warrants.
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LEVEL 8'S BUSINESS
OVERVIEW
Level 8's software products and services address two of the most pervasive
challenges facing global 5000-sized organizations today:
- The continuous optimization of an enterprise's value through the adoption
of digital technology and the use of the internet as the primary
communications medium ("eBusiness") and using the internet, digital
communications and IT applications to enable the buying and selling
process ("eCommerce") through the internet; and
- Making the computer applications that run their businesses work
effectively together.
These challenges are driven by intensifying competition in the global
marketplace, which is forcing companies to make better and faster business
decisions and find new and better ways to attract and retain customers in order
to compete successfully. To accomplish this, a company must have access to
enterprise-wide views of business information and processes, and mechanisms for
extending their business applications to reach customers via the internet.
Providing these capabilities requires integrating the computer applications, or
enabling them to communicate and interact with one another. However, the
evolution of computing from mainframes to client/server systems and then to the
internet and corporate intranets has resulted in these applications running on a
diverse and typically incompatible mix of new and legacy systems.
Level 8 specializes in delivering solutions that help companies integrate
their computer applications and equip these applications for eBusiness and
eCommerce. This specialization is called enterprise application integration or
"EAI." Level 8's products and services are designed to enable organizations to
address information systems integration and management problems in a simple and
cost effective way. Level 8 provides customers with solutions which link their
critical business applications internally across the enterprise and externally
with strategic business partners. Level 8's products and services also enable
organizations to link applications to the internet in order to engage in
eBusiness and eCommerce.
Level 8's product family consists of three major software products: Geneva
Integrator (introduced initially as Geneva Integration Server); Geneva Message
Queuing (formerly FalconMQ); and Geneva AppBuilder (re-launch of the former
Seer*HPS product).
Level 8's new Geneva Integrator, introduced in April 1999 and expected to
become one of our leading products, 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 generally cannot be readily
exchanged between diverse applications running on different systems. Geneva
Integrator, which runs on Windows NT server systems, will enable the sharing of
information between disparate or otherwise incompatible systems by automatically
transforming the data from one system into formats and representations that can
be used by other systems. As a result, Geneva Integrator can enable timely
access to enterprise-wide critical business information without the need for
complex and costly manual programming and ongoing software program
modifications. Geneva Integrator's extensive message transformation capabilities
also allow Geneva Integrator to collect
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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 eCommerce as well as create new eCommerce and
eBusiness applications.
Geneva Message Queuing is a simple, reliable, cost-effective solution for
connecting enterprise applications. Geneva Message Queuing, 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 use of Geneva Message
Queuing not only links these systems but also provides the full functionality of
Microsoft's MSMQ message queuing technology on other platforms such as UNIX
systems, MVS operating systems for IBM mainframe computers, IBM AS/400 systems,
HP 3000 systems, Sun Microsystems' Solaris systems and LINUX systems.
Geneva AppBuilder is a set of application development tools that assists
customers in developing, adapting and managing enterprise-wide computer
applications for distributed 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 Geneva AppBuilder automatically generates the necessary software
programming to perform the tasks and operations defined. This significantly
accelerates the development and deployment of highly complex, large-scale,
custom enterprise applications and greatly enhances the productivity of
programming resources.
In addition to these products, we offer other products including XIPC, 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.
Level 8 also provides technical support, training and consulting services
as part of its commitment to providing its customers industry-leading enterprise
application integration solutions. Level 8'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. Level 8 offers consulting services around its products for
eBusiness and eCommerce enablement including project management, application and
platform integration, application design and development, application renewal
along with expertise in a wide variety of development environments and
programming languages.
Level 8's goal is to be a recognized global leader in the growing market
for enterprise application integration solutions for eBusiness and eCommerce.
Level 8's solutions combine software products and consulting services to help
enterprises meet their needs for developing, integrating, managing and
internet-enabling applications. To position Level 8 as a leading global provider
of enterprise application integration solutions for eBusiness and eCommerce,
Level 8 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.
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To date, Level 8'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. Level 8's customer base includes major corporations around the
world such as ABN AMRO, Information Technology Services Company, Credit Suisse
First Boston, Italia Telecom, Merrill Lynch, Prudential Insurance Company of
America, Sikorsky Aircraft, Telenor A/S and Montgomery Ward & Co., Incorporated.
Level 8's technologies also provide the infrastructure enabling new internet
eCommerce for customers such as Drugstore.com.
INDUSTRY BACKGROUND
A significant challenge facing global 5000-sized companies today is the
integration and management of critical business applications which run on
disparate or otherwise incompatible computer systems. Business and competitive
pressures are pushing companies to move towards an eBusiness model as quickly as
possible in order to remain competitive and viable in an increasingly online,
information-driven economy. The eBusiness model and the competitive need for
rapid access to business-critical information from across the enterprise are
together driving an increasing demand for internet-enabled information systems
that can also 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 investments in information technology.
Enterprise application integration solutions, including those developed by
Level 8, are designed to provide these capabilities through an open,
enterprise-wide infrastructure that can accomplish the complete integration of a
company's entire computing systems environment, including technologies enabling
eBusiness and eCommerce. Many companies have recently been engaged in efforts to
ensure that their existing computer systems will function properly in the Year
2000 and beyond. As these efforts to prepare existing systems for Year 2000
compliance wind down, information systems departments will need to begin
addressing pent-up demand for new application functionality. However, the new
eBusiness models and the demand for enterprise-wide views of business
information will require that any new applications be integrated into existing
computing environments from their inception.
In addition, enterprise application integration encompasses extending the
productive life cycle and versatility 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, Level 8
believes that lines between "new" development and what has in the past been
considered "maintenance" are blurring, and that more and more of the "new"
development going forward will be in the area of enhancing the functionality of
existing systems in an enterprise's computing infrastructure.
Key factors driving the current need for enterprise application integration
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 emphasized. As a result, many
current systems are not designed to accommodate communications with
different systems.
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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 investments in
ensuring that their existing computer systems will function properly in the
Year 2000 and beyond. The size of the investments 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
increased use 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
support eBusiness and eCommerce 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.
THE LEVEL 8 SOLUTION
The following are key elements to the Level 8 solution:
COMPREHENSIVE INTERNAL AND EXTERNAL SOLUTION. Level 8 delivers
comprehensive solutions for integrating enterprise applications both within the
enterprise and between business partners. Different computer systems and the
applications developed for them vary widely in the ways in which they send,
receive, view and process information. As a result, diverse applications running
on different systems cannot work together because information cannot generally
be exchanged between them. Level 8's Geneva Integrator product is designed to
enable the sharing of information between disparate systems by automatically
transforming the data from one system into the formats and representations that
can be used by other application systems. This means that Geneva Integrator can
link legacy systems to other legacy systems, to new systems, and also to the
web. In this way Geneva Integrator can facilitate the delivery of timely
enterprise-wide views of critical business information while substantially
reducing the need for complex and costly manual programming and ongoing software
program modifications. Geneva Integrator is flexible enough to link together a
wide array of applications operating on disparate systems, and its design allows
it to scale to meet the challenges of growth and technological development in
even the most heterogeneous computing environments. Most significantly, Geneva
Integrator allows enterprises to utilize their core system functions for new
uses. This allows for the full support of eBusiness and eCommerce and closer
relationships with business partners and suppliers.
PRE-PACKAGED MICROSOFT NT SOLUTION. Level 8's Geneva Message Queuing
product is an off-the-shelf solution that links Microsoft Windows NT systems
with non-Microsoft systems, allowing them to directly exchange information in
Microsoft's MSMQ message
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queuing technology's required format. The use of Level 8's Geneva Message
Queuing product not only links these systems but also provides the full
functionality of Microsoft's MSMQ message queuing technology on other systems
such as UNIX systems, MVS operating systems for IBM mainframe computers, IBM
AS/400 systems, SUN Microsystems' Solaris systems, Hewlett Packard's HP/3000
systems, and LINUX systems.
POWERFUL APPLICATION DEVELOPMENT AND MANAGEMENT. Geneva AppBuilder 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 is designed to enable 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 Geneva AppBuilder
automatically generates the necessary software programs to perform the tasks and
operations defined. This significantly accelerates the development and
deployment of highly complex, large-scale, custom enterprise applications and
greatly enhances the productivity of programming resources. The Geneva
AppBuilder product automatically stores all of the information pertaining to
each Geneva AppBuilder-developed application in its own centrally located
repository. Whenever the functionality of an AppBuilder-developed application
must be changed or enhanced, the user simply changes the stored definition of
that particular task or operation or adds a new task or operation to the
repository then "pushes the button" to automatically generate a fully updated
version of the software program. As a result, not only are initial development
time and costs reduced, but on-going system maintenance and enhancement are
greatly simplified as well. Customers using the Geneva AppBuilder product have
been able to develop and manage even the largest and most complex
enterprise-class client/server applications faster and far more cheaply than
would have been possible if traditional manual programming methods were
employed. This speeds the development and deployment of highly complex,
large-scale custom enterprise applications and greatly enhances the productivity
of programming resources. When paired with Geneva Integrator, Geneva AppBuilder
also enables companies to seamlessly incorporate newly developed applications
into existing enterprise environments.
BROAD APPLICATION, PLATFORM DATA TYPE AND STANDARDS SUPPORT. The IT
departments of larger enterprises need solutions to integrate a broad array of
applications, platforms, and data types, and more and more they are looking for
these to be standards-compliant to ensure ease of implementation and use in
existing environments. Level 8's products provide enterprise application
integration solutions that support common industry standards and can handle a
wide array of disparate applications, platforms and data types. Specifically,
Geneva Integrator and Geneva Message Queuing can be used to link internally or
third-party developed applications regardless of the tools or programming
language used. Geneva Integrator ties together applications running on a variety
of popular operating systems such as Windows NT, UNIX, Solaris, MVS, VMS and
many others that run on hardware platforms such as HP, Sun, Compaq/Digital,
Dell, IBM mainframes, RS/6000's and AS/400s, etc. Geneva Integrator can handle
user defined data formats and even proprietary formats such as SAP's "I-docs",
as well as supporting emerging industry standard formats such as Microsoft's COM
format and internet standards such as the Java language, HTTP transport
mechanism, and HTML and XML formats. Geneva Integrator also supports standard
transaction servers including IBM's CICS, Microsoft's MTS and CORBA for UNIX
systems; and data servers such as IBM's Universal Database (UDB, formerly DB2),
Oracle, and Microsoft's SQL-Server.
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PRESERVATION OF EXISTING IT INVESTMENT. Traditionally larger organizations
have relied on mainframe computers to run their core business programs. To date
there has been a tremendous investment in these mainframe or legacy systems.
More recently there has also been large investments in other computing systems
which are not completely compatible with the legacy systems. Linking together
newer computing platforms and applications to existing legacy systems helps
preserve and increase the return on the investments made by organizations.
Additionally, by linking the flexibility and innovations of newer platforms and
applications to the rich databases and functions that are typically maintained
on the larger mainframe computers organizations can utilize data in new ways
that before were either very difficult or expensive. Geneva Integrator and
Geneva Message Queuing help organizations bridge the gap between legacy systems
and newer platforms and the result is the extension of capabilities and the
preservation of investment.
LINKING EXISTING OPERATIONAL SYSTEMS TO THE INTERNET. Geneva Integrator is
designed for transmitting communications via the internet as well as between
applications. It can automatically collect messages or packets of information
and processing instructions, from existing legacy systems and transform them
into forms that can be exchanged via the internet with other applications
running on diverse platforms, and vice versa. This powerful feature means that
the Geneva Integrator can be used to web-enable existing application systems,
expanding their functionality and extending their life cycles by opening them up
for intranet use and internet-based eBusiness and eCommerce.
EASE OF IMPLEMENTATION AND ENHANCED IT PRODUCTIVITY. Geneva Message
Queuing and Geneva Integrator allow IT departments to create comprehensive data
transformation and information exchange solutions without the need for custom
coding. Geneva Integrator provides pre-built adapters for a wide variety of
different systems that are pre-programmed for transforming data into the format
required by that system and transporting it using the transport mechanism used
by that system. This greatly simplifies and speeds development of enterprise
application integration solutions. Geneva Message Queuing allows the IT
department to instantly integrate existing Microsoft NT-based systems with
non-Microsoft based systems with little or no customization required. The result
is that fewer IT department resources are devoted to solving the enterprise
application integration problem, resources which can be redeployed to improve
productivity.
THE LEVEL 8 STRATEGY
Level 8's goal is to be a recognized global leader in the growing market
for enterprise application integration solutions. The following are key elements
of the Level 8 strategy:
LEVERAGE STRATEGIC RELATIONSHIPS. Level 8 intends to expand sales through
both direct and indirect sales channels. As part of this strategy, Level 8
continues to work on strengthening and growing its relationships with Microsoft
and IBM. Microsoft has licensed technology developed by Level 8 that enables
direct communication between its Windows NT MSMQ platform and IBM's MQSeries
messaging technology for mainframes. This technology will be shipped with every
copy of Microsoft's Windows 2000 operating system. Windows 2000 users wishing to
enable their Windows-based applications to communicate with applications on
non-Windows platforms other than mainframes must purchase Geneva Message Queuing
from Level 8. Level 8 is a Microsoft Preferred Solutions Provider, and its
Geneva Integrator product is Microsoft Back-Office Certified, tightly integrated
with Microsoft's Windows Distributed Network Architecture (DNA) framework, and
fully supports Microsoft's recently announced BizTalk server for
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eCommerce. The main emphasis of Level 8's relationship with IBM is around the
AppBuilder product. IBM and Level 8 have many large customers in common,
particularly in Europe, and a large-scale banking application developed using
AppBuilder (then Seer*HPS) is currently being productized by IBM for resale.
Level 8 also actively seeks to form strategic relationships with other key
industry players. In addition, Level 8 has embarked on an aggressive program to
recruit complementary product and service providers for reseller and joint
marketing relationships. Clarus Corporation, a software vendor, and a large
systems integrator have both signed original equipment manufacturers (OEM)
agreements with Level 8. Both intend to market applications based on Geneva
Integrator that will ship with Integrator technology embedded. As our products
and services extend into new markets, Level 8 plans to continue to use
distributors and resellers to sell its products.
EXPAND INTO NEW MARKETS. In the past, Level 8 has served many customers in
the highly demanding financial services, insurance and telecommunications
markets. Level 8's strategy is to apply its experience with these customers to
other vertical markets. Specifically, Level 8 intends to further penetrate the
retail and manufacturing sectors as well as providing internet integration
solutions for any company trying to establish a presence in the emerging
eCommerce sector. Level 8 plans to accomplish this objective by redirecting its
sales and marketing efforts worldwide.
EXPAND WORLDWIDE SALES CAPABILITY. Level 8 targets global 5000-sized
companies. Many of these companies have recently been forced to make significant
investments to resolve Year 2000 issues in their business applications. As a
result, they are highly motivated to leverage that investment and prolong the
productive life cycle of these applications, which in many cases will require
linking them to interoperate and enabling them for eBusiness and eCommerce.
Level 8 intends to capitalize on this need to address enterprise-wide
integration by significantly expanding its direct sales capabilities. Level 8
also intends to continue to expand its global sales coverage through additional
direct sales offices and the expansion of indirect channels. To support indirect
sales Level 8 has already established joint marketing relationships with
original equipment manufacturers, independent software vendors and value added
resellers. For example, Clarus Corporation has built a software application
utilizing Level 8 software which will be shipped with Clarus' application.
LEVERAGE AND EXTEND TECHNOLOGICAL LEADERSHIP. Level 8 seeks to sustain a
leadership position in the global enterprise application integration market by
developing and delivering innovative solutions. Level 8 was the first to offer a
way to extend the functionality of Microsoft's MSMQ message queuing system to
other platforms. Level 8's newest product leverages the advanced communication
and security facilities of the Microsoft NT operating system to provide unique
workflow management and transaction security for integrated applications. Level
8 continues to stress the development of solutions for new and emerging computer
platforms such as Microsoft's BizTalk eCommerce server and its Windows 2000
operating system. In addition, through the recent acquisition of Seer
Technologies, Level 8 can leverage products like Geneva AppBuilder to develop
even more powerful application integration and management tools.
PRODUCTS AND SERVICES
Level 8's solutions combine software products and consulting services to
help enterprises meet their needs for application development, integration,
management and
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internet-enablement needs. Geneva Message Queuing, first introduced in early
1998, replicates Microsoft's (MSMQ) capability on non-Microsoft systems, thereby
enabling non-Microsoft systems to communicate freely with Windows NT systems
using MSMQ. The new Geneva Integrator, launched in April 1999 and expected to
become one of Level 8'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 acquisition of
Seer, Level 8 also offers the Geneva AppBuilder (formerly Seer*HPS) product,
which is a set of application development tools that assists customers in
developing, adapting and managing enterprise-wide computer applications for
client/server networks. In addition to its products, Level 8 offers a broad
range of consulting services in the enterprise application integration solutions
area. Level 8's consulting staff is highly experienced in large-scale,
enterprise-wide applications and the complex networked computing environments in
which they run. To position Level 8 as a leading global provider of enterprise
application integration solutions, Level 8 has developed a plan for staged
product development and integration as well as service enhancements which
management believes will enable Level 8 to effectively accomplish its
objectives.
GENEVA INTEGRATOR
Level 8's new Geneva Integrator, launched 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. Geneva
Integrator is designed to provide comprehensive, secure and reliable
interoperability between applications running on disparate and otherwise
incompatible computer systems. Different computer systems and the applications
developed for them vary widely in the ways in which they send, receive, view and
process information. As a result, diverse applications running on different
systems cannot work together because information cannot generally be exchanged
between them. Geneva Integrator, which runs on Windows NT server systems, will
enable the sharing of information between disparate or otherwise incompatible
systems by automatically transforming the data from one system into formats and
representations that can be used by other systems. As a result, Geneva
Integrator can enable timely access to enterprise-wide critical business
information without the need for complex and costly manual programming and
ongoing software program modifications. Geneva Integrator's extensive message
transformation capabilities also allow Geneva Integrator 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 eBusiness and eCommerce.
Level 8 believes that Geneva Integrator provides the following advantages
to information services departments:
- Reduced time to market in delivering scaleable, cost-effective eBusiness
and eCommerce applications.
- Improved customer service and reduced time to market by promoting reuse
of the knowledge base embodied in existing applications.
- Enhanced agility and flexibility of information technology assets in
addressing changing business conditions.
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- 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.
Geneva Integrator 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 Integrator 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 Integrator 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 Integrator'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 Integrator automatically ensures that all affected applications
will accurately process the new 6-digit codes.
Geneva Integrator 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 Integrator'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 Integrator would
automatically reset to the beginning before any applications or databases are
updated.
Level 8 believes that the Geneva Integrator product is currently the most
comprehensive product of its kind to provide enterprise application integration
capabilities for Microsoft NT server-based environments.
GENEVA MESSAGE QUEUING
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 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 has been completed before sending the next message to start a new
transaction. This delay results in a significant amount of wasted system
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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.
Geneva Message Queuing 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' Solaris systems, HP-3000
systems and LINUX systems. Geneva Message Queuing is designed for developers to
leverage the power and flexibility of message queuing on the systems mentioned
above. Accordingly, Geneva Message Queuing permits the free exchange of messages
over a network between any MSMQ application and any Geneva Message Queuing
client applications.
The current version of the Geneva Message Queuing product requires that the
message queues themselves reside on a Microsoft Windows NT system. Level 8 is
developing version 2.0 of Geneva Message Queuing, currently targeted for release
in early 2000, that will allow message queues to reside on all non-Microsoft
systems supported by Geneva Message Queuing. This additional capability of
Geneva Message Queuing version 2.0 is designed to enable seamless
interconnectivity between applications running on a broad spectrum of systems on
an enterprise-wide basis.
GENEVA APPBUILDER
Geneva AppBuilder 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 is designed to enable 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 Geneva AppBuilder automatically generates the necessary software
programming to perform the tasks and operations defined. This significantly
accelerates the development and deployment of highly complex, large-scale,
custom enterprise applications and greatly enhances the productivity of
programming resources.
Unlike its primary competitors, Geneva AppBuilder includes its own embedded
middleware, enabling communications among Geneva AppBuilder developed
application components across various systems throughout a client/server
network. Geneva AppBuilder 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.
Geneva AppBuilder stores all of the information pertaining to each Geneva
AppBuilder-developed application in its own centrally located repository. Use of
repository
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facilitates the efficient enhancement of the functionality of Geneva AppBuilder
applications. Since the repository contains all relevant system data, Geneva
AppBuilder 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 LEVEL 8 PRODUCTS
GENEVA INTEGRATOR. Level 8 intends to enhance Geneva Integrator to meet
marketplace needs as they evolve. Enhancements planned through the second
quarter of 2000 include a Geneva adapter for the AppBuilder product,
strengthening Geneva Integrator's ability to support and interact with the MVS
operating system for IBM mainframe computers and the UNIX operating system as
well as application components based on the Java language, which is typically
used for web-based applications. In the long term, Level 8 plans to incorporate
the repository capability found in Geneva AppBuilder into Geneva Integrator.
Among other things, expanding Geneva Integrator 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
Integrator product. Level 8 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 easily accomplished by a customer changing
the way the different elements of its system are linked through the schematic
diagram.
GENEVA MESSAGE QUEUING. Currently, Geneva Message Queuing requires that
all message queues reside on a Microsoft Windows NT system. Geneva Message
Queuing version 2.0, scheduled for release in early 2000, will permit the
message queues to reside on all systems supported by Geneva Message Queuing.
Level 8 also intends to provide continued compatibility between Geneva Message
Queuing and Microsoft's MSMQ. As a result, companies can safely build and link
applications using Geneva Message Queuing 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 APPBUILDER. Level 8 is currently adapting Geneva AppBuilder to
support common industry standards in order to interact with applications and
components that are not part of a Geneva AppBuilder system. The first step in
this process was the development of an adapter to link the Geneva AppBuilder
middleware layer with Geneva Integrator. This link makes available all of the
capabilities of Geneva Integrator to Geneva AppBuilder customers. Other planned
extensions include providing support for the Java language and "Java Beans"
architecture, support for the widely used Visual Basic Script (VBScript) as a
rules language for defining tasks and operations, the addition of a "wrappering"
capability that will allow AppBuilder to bring non-AppBuilder generated
application components into its repository to enable users to modify them and
incorporate them into future applications, plus support for other middleware
products, such as CORBA and the Geneva Message Queuing and MQ Series products.
Long 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 Geneva AppBuilder manages
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the development and interaction of applications only for Geneva AppBuilder
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, Level 8 offers other products which it intends to continue to
support and further enhance, but which management does not believe are material
to Level 8's business.
SERVICES
Level 8 provides a full spectrum of technical support, training and
consulting services as part of its commitment to providing its customers
industry-leading enterprise application integration solutions. Level 8 believes
our 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. Level 8 offers
consulting services around its product offerings in project management,
applications and platform integration, application design and development,
application renewal and eBusiness and eCommerce enablement, along with expertise
in a wide variety of development environments and programming languages. Level
8's training organization offers a full curriculum of courses and labs designed
to help customers become proficient in the use of Level 8's products and related
technology as well as enabling customers to take full advantage of Level 8's
field-tested best practices methodologies. Level 8 offers customers varying
levels of technical support tailored to their needs, including periodic software
upgrades, telephone support and twenty-four hour a day/seven day a week access
to support-related information via the internet.
CUSTOMERS
Level 8's products and services are currently used by thousands of software
developers. In addition, hundreds of enterprise-wide applications built and
integrated through Level 8's products are used daily by over a million end users
worldwide. Level 8's customer base includes major corporations around the world
such as ABN AMRO, Information Technology Services Company, Credit Suisse First
Boston, Italia Telecom, Merrill Lynch, Prudential Insurance Company of America,
Sikorsky Aircraft, Telenor A/S and Montgomery Ward & Co., Incorporated.
Industries that are significantly represented in Level 8's customer base include
banking and financial services, insurance, retail, manufacturing, data
processing, public utilities and transportation. Level 8's technologies also
provide the infrastructure enabling new internet eBusinesses for customers such
as Drugstore.com. ABN AMRO was Level 8'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.
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Level 8 seeks to form strong partnering relationships with customers in
order to gain an in-depth understanding of the business and technology
challenges they face. For example, Level 8 maintains a customer advisory board
for Geneva AppBuilder customers that meets regularly. The volunteer members of
the customer advisory board represent Level 8'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 Level 8's products and services. In
conjunction with the customer advisory board, Level 8 supports several
internet-based special interest groups providing discussion forums focused on
specific areas of technology. Level 8 also intends to provide customers of its
other products the opportunity to participate in a similar customer advisory
board.
In addition, Level 8 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 Level 8. Level 8 also receives a great deal of
feedback through its consulting services and technical support organization
regarding the effectiveness of Level 8's products in meeting customer needs.
SALES AND MARKETING
SALES
Level 8 derives revenue primarily from software licenses, consulting
services and software maintenance. Presently, a substantial portion of Level 8's
revenue is derived from sales of Geneva AppBuilder and related maintenance and
consulting services. However, sales of Geneva Message Queuing have been steady,
and recently the Company saw the beginning of a ramp-up in sales of Geneva
Integrator, which it anticipated would occur in late 1999 based on Integrator's
April release and its projected five to seven month minimum sales cycle. The
sales pipeline for Geneva Integrator is strong and continues to grow. Management
believes the revenue mix will change significantly over time to reflect an
increasing proportion of revenue resulting from sales of Geneva Message Queuing
and Geneva Integrator.
Geneva AppBuilder and Geneva Integrator 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, in the case of
AppBuilder as much as nine to twelve months. Level 8'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 Level 8 or a third party.
The Geneva Message Queuing and XIPC products are by design more project-
oriented in scope. As a result, they are typically sold in smaller
configurations than Geneva AppBuilder or Geneva Integrator. Geneva Message
Queuing and XIPC are typically sold through the internet and by telephone, and
the sales cycle has averaged two to six months. Level 8 is exploring alternative
sales strategies for Geneva Message Queuing and XIPC, including a mix of inhouse
telemarketing and indirect channels such as sales through
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strategic partners and independent software vendors (known as "ISV's") who could
bundle Geneva Message Queuing and XIPC with applications they develop and sell.
Level 8's current direct sales staff has substantial knowledge of Level 8's
products and service offerings as well as general experience in the software
industry. As the Company expands its direct sales force, it is recruiting sales
people with equivalent general experience in the software industry and
successful track records in selling enterprise-class software products. Level
8'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 other territories currently include the United Kingdom, Germany,
Scandinavia, Italy and Australia.
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, approximately $26
million or (39%) of Level 8's 1998 revenues was generated from the Americas and
approximately $41 million or (61%) was generated outside the Americas. Since
substantially all of Level 8's 1998 revenues were derived from sales of Geneva
AppBuilder and related services, the geographic distribution of Level 8's
revenues may change as Level 8's revenue mix changes.
Level 8 is also actively seeking alliances with other third parties who
provide complementary products and services. Level 8 has designated key
personnel in the sales organization and chartered them to focus on identifying
potential strategic alliance partners and developing and managing Level 8's
relationships with these alliance partners. In particular, Level 8 is targeting
the hundreds of companies active in Microsoft's Solution Providers partner
program as potential partners with complementary products and services. In
addition, through its acquisition of Seer, Level 8 now has an important
relationship with IBM in Europe, which in the past has been a major marketer and
distributor of Seer*HPS (now Geneva AppBuilder) in Europe.
MARKETING
The target market for Level 8'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. Level 8 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 enterprise application integration solutions.
Level 8's marketing staff has an in-depth understanding of the global
software marketplace and the needs of customers in that marketplace, as well as
experience in all of the key marketing disciplines. The staff also has broad
knowledge of Level 8's products and services and how they can meet these
customer needs. Marketing is headed by a vice president of worldwide marketing
who manages an international staff. Core marketing functions including product
management, product marketing, marketing programs, PR and
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communications are handled by corporate the marketing staff. Regional marketing
programs are supported by corporate staff as well as locally by marketing staff
based in the Company's European headquarters in the UK, with support from local
resources in the regional offices.
Level 8 utilizes a wide variety of marketing programs which are intended to
attract potential customers and to promote Level 8 and its brand names. Level 8
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 all relevant areas of interest. Level
8 is also implementing an alliance cooperative marketing program to support its
channel partners with a variety of programs, incentives and support plans.
Level 8 intends to increase its investment in marketing significantly.
Management intends to grow the Company's marketing staff worldwide and
substantially increase the marketing budget. The marketing staff has already
begun developing targeted marketing programs and initiatives with a goal of
gaining mindshare worldwide and supporting the conversion of that mindshare into
marketshare through sales.
Level 8 has a key strategic relationship with Microsoft. Microsoft has
licensed from Level 8 software originally developed by Level 8 that enables its
Windows NT server platforms to integrate with IBM's MQ Series message-oriented
middleware, which currently represents a significant share of the worldwide
message-oriented middleware market. Microsoft has stated that it 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 currently recommends Geneva Message Queuing as its preferred
implementation of the MSMQ functionality on operating systems other than
Microsoft Windows. Level 8 is also actively exploring opportunities to continue
and expand its relationship with Microsoft in enterprise application integration
related areas.
RESEARCH AND PRODUCT DEVELOPMENT
Level 8 has made substantial investments in research and development. Level
8 conducts research and development to enhance its existing products and to
develop new products. Level 8 intends to focus its research and development
efforts on integrating and evolving its Geneva Integrator, Geneva Message
Queuing and Geneva AppBuilder product lines in such a manner that all of these
products can interact with each other to provide customers a comprehensive
enterprise application integration 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 Level 8. The trend in increasing research and development
expenses is a result of Level 8's investment in new products, primarily Geneva
Integrator and version 2.0 of Geneva Message Queuing. This trend is expected to
continue in connection with Level 8's ongoing efforts to strengthen and evolve
its messaging, enterprise application integration and application development
products.
The markets for Level 8's products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Level 8'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
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basis, new products and features that meet changing customer requirements and
emerging and evolving industry standards. Level 8 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 Level 8 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 Level 8 will successfully
develop, introduce or manage the transition to new products. Level 8 has in the
past, and may in the future, experience delays in the introduction of its
products, due to factors internal and external to Level 8. 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 Level 8's results of operations, particularly
on a quarterly basis. For additional information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Years Ended
December 31, 1998, 1997 and 1996 -- Research and Development."
COMPETITION
Level 8 competes in markets that are intensely competitive and
characterized by rapidly changing technology and evolving standards. These
markets are also characterized by vendor consolidation, such as TIBCO's recent
acquisition of In Concert. The rapid growth and long-term potential of the
market for enterprise application integration solutions make it attractive to
new competition. Many of Level 8's competitors have greater name recognition, a
larger installed customer base and significantly greater financial, technical,
marketing and other resources than Level 8. Level 8 believes it offers a broader
range of enterprise application integration solutions than its competitors, and
therefore generally competes on a product-by-product basis.
GENEVA INTEGRATOR
Geneva Integrator 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 have an agreement in place
whereby NEON's MQIntegrator product will be sold through IBM's distribution and
reseller network. Geneva Integrator also competes against a number of other
early entrants in the enterprise application integration 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., Prospero from Oberon Inc., and Crossworlds Enterprise and
Crossworlds eBusiness from Crossworlds, 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 Integrator takes advantage of advanced features of Windows NT
such as superior security for
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eBusiness and eCommerce, Level 8 believes Geneva Integrator has a competitive
advantage in the current marketplace.
Geneva Integrator is one of the strongest proven solutions available for
global 5000-sized companies whose computing environments include Windows NT
platforms. Integrator leverages the inherent powers of Microsoft technology,
which positions it increasingly as the solution of choice for the growing number
of Global 5000 computing environments that incorporate Microsoft platforms. As
Microsoft platforms achieve increasing deployment throughout global enterprises,
Microsoft's Distributed internet Application Architecture (DNA) and its BizTalk
server for eCommerce will gain increased large enterprise marketshare. Geneva
Integrator is tightly integrated with Microsoft DNA and fully supports the
BizTalk eCommerce server. As a result, Microsoft has stated that it is fully
supportive of the Geneva Integrator business solution, particularly its XML
capabilities, as XML-based application interoperability is a core part of
Microsoft's business-to-business eCommerce strategy. Geneva Integrator's
capabilities also complement Microsoft's own efforts in that respect. In fact,
Microsoft states that "Geneva Integrator provides great value for our customers
who are using the Microsoft Windows platform for enterprise application
integration."
GENEVA MESSAGE QUEUING
The competition in the message-oriented middleware market is primarily
between Microsoft's MSMQ and IBM's MQ Series. However, since Geneva Message
Queuing is designed to link MSMQ-based applications, Geneva Message Queuing
indirectly competes with middleware technology designed for IBM's MQ Series
message queues product, including middleware marketed by IBM itself.
GENEVA APPBUILDER
Historically, the primary competitor to Geneva AppBuilder has been Sterling
Software with its Cool:GEN product lines. As Level 8 repositions Geneva
AppBuilder as one of its enterprise application integration solution offerings,
it will face new and different competitors such as Viasoft and Platinum
(recently absorbed into Computer Associates), who offer repository technologies
and consulting services that they promote as addressing the application renewal
and life cycle management aspects of enterprise application integration.
SERVICES
In the system integration and consulting services market, Level 8 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, Level 8 also competes with providers of
software packages for particular markets, such as Fourth Shift Corporation and
Symix Systems, Inc. However, Level 8's technologies also put it in the position
of offering technologies that complement these integrators' services, paving the
way for alliances and partnerships. However, some of Level 8'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 Level 8. However, Level 8's
consulting staff's expertise is focused primarily on supporting and accelerating
the productivity of purchasers of
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Level 8's software products. Level 8 believes this offers Level 8 a competitive
advantage in selling services to new and existing customers of Level 8's
software products.
INTELLECTUAL PROPERTY
Level 8's success is dependent upon developing, protecting and maintaining
its intellectual property assets. Level 8 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, Level 8 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 Level 8 will prevent misappropriation of its technology, and such
protections do not preclude competitors from developing products with
functionality or features similar to Level 8's products. Furthermore, there can
be no assurance that third parties will not independently develop competing
technologies that are substantially equivalent or superior to Level 8's
technologies. Any failure by or inability of Level 8 to protect its proprietary
technology could have a material adverse effect on Level 8's business, operating
results and financial condition. Copyright protection is generally available
under United States laws and international treaties for Level 8'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.
Level 8 has registered the trademark "Level 8 Systems", and uses the trademarks
"Monitor MQ", "Monitor XIPC", "Level 8", "XIPC", "Geneva Message Queuing",
"Geneva", "Geneva Integrator", "NetEssential", "SeerTalk", "SmartPak" and "The
Seer*Method". Level 8 intends to seek registration of some of the trademarks
including "GMQ", "Geneva", "Geneva AppBuilder", "AppBuilder" and "Geneva
Integrator".
Although Level 8 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 Level 8 or its customers in the future. In
addition, Level 8 may be required to indemnify its distribution partners and end
users for similar claims made against them. Furthermore, Level 8 may initiate
claims or litigation against third parties for infringement of Level 8's
proprietary rights or to establish the validity of Level 8's proprietary rights.
Litigation, either as a plaintiff or defendant, would cause Level 8 to incur
substantial costs and divert management resources from productive tasks whether
or not such litigation is resolved in Level 8's favor, which could have a
material adverse effect on Level 8's business, operating results and financial
condition. Parties making claims against Level 8 could secure substantial
damages, as well as injunctive or other equitable relief which could effectively
block Level 8's ability to license its products in the United States or abroad.
Such a judgment could have a material adverse effect on Level 8's business,
operating results and financial condition. If it appears necessary or desirable,
Level 8 may seek licenses to intellectual property that 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 Level 8. The failure to obtain the necessary
licenses or other rights could have a material adverse effect on
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Level 8'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, Level 8 believes that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, could be time consuming and expensive to defend and could adversely
affect Level 8's business, operating results and financial condition. Level 8 is
not aware of any currently pending claims that Level 8's products, trademarks or
other proprietary rights infringe upon the proprietary rights of third parties.
EMPLOYEES
As of October 31, 1999, Level 8 had a total of 264 employees. Of these
employees: 45 were engaged in software sales and marketing and technical
support; 40 in administration; 78 in research, development and technical
support; and 101 in consulting and training. Level 8'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. Level 8 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. Level 8 believes that to fully implement its
business plan it will be required to enhance its marketing functions by adding
additional marketing personnel. In addition, Level 8 believes additional sales
associates will be required to support Level 8's sales operations. Although
Level 8 believes it will be successful in attracting and retaining qualified
employees to fill these positions, no assurance can be given that Level 8 will
be successful in attracting and retaining these employees now or in the future.
Level 8's employees are not represented by a union or a collective bargaining
agreement.
PROPERTIES
Level 8 maintains its principal executive offices in approximately 54,000
square feet of leased space in Cary, North Carolina. Level 8 also maintains
executive offices in approximately 13,500 square feet of leased space in New
York, New York. As of November 17, 1999, Level 8 also leased 10 additional
offices to provide consulting services to its clients and to facilitate the
development, sale and distribution of its products. Level 8 leases office space
abroad in: Canberra, Melbourne and Sydney, Australia; Copenhagen, Denmark;
London, England; Paris, France; Frankfurt, Germany; Milan, Italy; and
Nieuwegein, The Netherlands. Level 8 also maintains an office in Limerick,
Ireland on a set fee arrangement.
LEGAL PROCEEDINGS
In December 1997, a now wholly-owned subsidiary of Level 8, Seer
Technologies, Inc., instituted litigation in London, England against Saadi Abbas
and Cambridge Business Solutions (UK) Ltd. ("CBS") concerning a dispute over a
license agreement between Seer, CBS and Abbas. These entities counterclaimed
against Seer. The case has proceeded through discovery and various other
procedural events and all that remains of the litigation at this point in time
are various claims against Seer by Abbas and CBS. In July, most of those claims
had been struck out by the court in London as unarguable or otherwise time
barred. Level 8 intends to continue to vigorously defend against the few
remaining claims. Level 8 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
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ultimately resolve this matter will have a material effect on the financial
position, cash flows, or results of operations of Level 8.
On April 6, 1998, Level 8 sold substantially all of the assets and
operations of its wholly owned subsidiary ProfitKey International, Inc.
("ProfitKey"). 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 Level 8 that it
believes there are adjustments totaling $1,466 which would require a reduction
in the purchase price. Level 8 has attempted to negotiate a settlement with the
purchaser and has, pursuant to the terms of the settlement agreement, entered
arbitration proceedings to resolve this matter. Level 8 has made a provision for
its estimate of the purchase price adjustment and the costs to resolve this
matter. Management believes at this time that any additional provision required
to ultimately resolve this matter will not have a material effect on the
financial position, cash flows, or results of operations of Level 8.
John B. Stockton, a stockholder of Seer Technologies at the time of its
merger with a subsidiary of Level 8, has informed Level 8 that he has filed a
petition in the Delaware Court of Chancery asserting that Seer stockholders
perfecting appraisal rights are entitled to receive the fair value of their Seer
shares as determined in an appraisal proceeding under Section 262 of the
Delaware General Corporation Law. Level 8 has not yet been served a copy of the
complaint. Level 8 believes that less than 20,000 shares of Seer Technologies
common stock have validly perfected appraisal rights under Delaware law, and
that the fair value of such shares at the time of the merger does not exceed
$.35 per share of Seer.
From time to time, Level 8 is a party to routine litigation incidental to
its business. As of the date of this Report, Level 8 was not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on Level 8.
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LEVEL 8'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analyses and other information contained in this
prospectus relative to markets for Level 8's products and services, and trends
in revenues and anticipated expense levels, as well as other statements
including words such as "believe," "anticipate," "expect," "estimate," "plan,"
"intend," and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks, and
Level 8's actual results of operations may differ materially from those
contained in the forward-looking statements. For a more detailed discussion of
these business and economic risks, see "Risk Factors." The following discussion
of financial condition and results of operations of Level 8 should also be read
in conjunction with the financial statements included elsewhere in this
prospectus.
GENERAL INFORMATION AND RECENT DEVELOPMENTS
Level 8 is a leading provider of business integration solutions for
eBusiness and eCommerce. As part of Level 8's strategic shift to the enterprise
application integration market in the first quarter of 1998, Level 8 decided to
sell its wholly owned subsidiary, ProfitKey International Inc. (which sale was
completed on April 6, 1998). See Note 3 to Level 8's Consolidated Financial
Statements for the year ended December 31, 1998.
Level 8 thereupon, on March 26, 1998, acquired Momentum Software
Corporation in return for 594,866 shares of Level 8'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 Level 8's
common stock on December 1, 1998. In December 1998, Level 8 issued notes
totaling $3 million in payment of such additional consideration. Momentum
Software was purchased primarily for its technology, some of which has been
integrated into Level 8's Falcon product set.
Level 8's most significant step to date into the enterprise application
integration marketplace was the acquisition of a controlling interest in Seer
Technologies, Inc. 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, Level 8 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 Level 8 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 Level 8 and
warrants to purchase an additional 250,000 shares of common stock of Level 8 at
an exercise price of $12 per share. Pursuant to its agreement with WCAS, Level 8
acquired 69% of the voting stock of Seer on December 31, 1998 and commenced a
tender offer to acquire all of the remaining shares of Seer for $0.35 per share
in cash. In April 1999 Level 8 acquired the remaining 31% of Seer by tender
offer and merger for $0.35 per Seer share in cash. Level 8 paid a total purchase
price of approximately $1.7 million for the remaining 31% of Seer acquired in
the tender offer and merger.
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 completion of the purchase of the remaining 31% of the voting
stock of Seer, and (iv) the disposition of ProfitKey, prior results are not
necessarily indicative of future operating
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results. Also, these changes make it difficult to compare the results for the
periods presented as the direction of the business has evolved throughout the
period.
In order to effect Level 8's strategic shift to the enterprise application
integration market, Level 8 completed a series of dispositions and acquisitions
during 1998 described above. Operations for the subsidiaries acquired are
included in Level 8's results of operations from the date of acquisition.
Accordingly, the results of operations for the first six months of 1998 include
the operations of Momentum Software Corporation since March 26, 1998. The
results of operations for 1998 do not reflect any of Seer's operations since
Level 8 did not acquire an interest in Seer until December 31, 1998. Except as
otherwise indicated, the discussion below relates to the actual results of
operations without giving pro forma effect to the acquisitions and dispositions
in 1998 or the acquisition of the 31% minority interest in Seer in April 1999.
Pro forma combined data assumes the acquisition of Momentum and Seer had each
occurred as of January 1, 1998 and does not purport to be indicative of the
results which would have actually been obtained had the transactions taken place
as of such date or of future results of operations. These acquisitions make it
difficult to compare the actual results of operations for the periods presented.
A discussion of results of operations on a pro forma combined basis has been
included below where considered meaningful for an understanding of Level 8's
results of operations for the 1999 periods. However, pro forma combined results
reflect the operations of the three companies on a separate basis without
consideration for any synergies obtained through the integration of the
companies' operations.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
The following table sets forth, for the periods indicated, Level 8's
unaudited results of continuing operations expressed as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 30,
--------------- ----------------
1999 1998 1999 1998
----- ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Software products.......................... 32.1% 19.2% 25.7% 12.5%
Maintenance................................ 27.6% 11.9% 29.2% 6.6%
Services................................... 40.3% 68.9% 45.1% 80.9%
----- ------ ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue:
Software products.......................... 8.9% 15.2% 7.9% 14.0%
Maintenance................................ 9.4% 4.0% 10.9% 3.9%
Services................................... 33.5% 65.6% 39.4% 52.2%
----- ------ ----- -----
Total................................... 51.8% 84.8% 58.2% 70.1%
Gross profit................................. 48.2% 15.2% 41.8% 29.9%
Operating expenses:
Sales and marketing........................ 22.1% 33.2% 21.0% 21.7%
Research and product development........... 13.0% 24.2% 12.6% 22.9%
General and administrative................. 15.5% 46.7% 12.4% 36.6%
Amortization of goodwill and intangibles... 14.2% 36.9% 13.3% 18.0%
Purchased research and development......... -- -- 1.9% 14.0%
----- ------ ----- -----
Total................................... 64.8% 141.0% 61.2% 113.2%
Loss from operations......................... (16.6)% (125.8)% (19.4)% (83.3)%
Other income (expense), net.................. (1.8)% 1.6% (6.2)% 1.8%
----- ------ ----- -----
Loss before taxes............................ (18.4)% (124.2)% (25.6)% (81.5)%
Income tax provision (benefit)............... 1.5% 0.0% 1.5% (6.5)%
----- ------ ----- -----
Loss from continuing operations.............. (19.9)% (124.2)% (27.1)% (75.0)%
===== ====== ===== =====
</TABLE>
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The following table sets forth unaudited data for total revenue by
geographic origin as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
United States...................................... 35% 99% 32% 99%
Europe............................................. 55% -- 59% --
Asia Pacific....................................... 5% -- 7% --
Other.............................................. 5% 1% 2% 1%
---- ---- ---- ----
Total.................................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
REVENUE AND GROSS MARGIN. Level 8 has three categories of revenue:
software products, maintenance, and services. Software products revenue is
comprised primarily of fees from licensing Level 8's proprietary software
products. Maintenance revenue is comprised of fees for maintaining, supporting,
and providing periodic upgrades to Level 8's software products. Services revenue
is comprised of fees for consulting and training services related to Level 8's
software products.
Level 8's revenues vary from quarter to quarter, with the largest portion
of revenue typically recognized in the last month of each quarter. Level 8
believes that these patterns are partly attributable to Level 8's sales
commission policies, which compensate sales personnel for meeting or exceeding
quarterly quotas, and to the budgeting and purchasing cycles of customers. Level
8 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 Level 8'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 Level 8's common stock.
Effective January 1, 1998, Level 8 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.
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") was effective
for Level 8's fiscal year beginning January 1, 1999. 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.
Total revenues increased significantly for the third quarter and
year-to-date periods of 1999 as compared to the same periods of 1998 primarily
due to the acquisitions of Momentum and Seer during 1998 and increased sales of
software products. The gross margin for the third quarter of 1999 increased
significantly to 48% from 15% for the same
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period of 1998 and improved to 42% in 1999 for the year-to-date period as
compared to 30% for the same period of 1998 due to the increases in software
products revenues.
On a pro forma combined basis, total revenues for the year-to-date period
of 1998 were $54.2 million. The $15.1 million decline in revenue on a pro forma
combined basis is primarily due to a decline in consulting resources employed by
Seer for the first nine months of 1998 compared to the same period of 1999. The
gross margin for the year-to-date period on a pro forma combined basis was
approximately 26%.
SOFTWARE PRODUCTS. Software products revenue increased significantly for
the third quarter and year-to-date periods of 1999 as compared to the same
periods of 1998 primarily due to the sales of products acquired from Seer during
1998 coupled with sales of Level 8's new Geneva Integrator product. In the first
nine months of 1998, Level 8's software sales were primarily resales of IBM's MQ
Series licenses and sales of FalconMQ and XIPC messaging products, now known as
Geneva Message Queuing. Through its acquisitions in 1998, the Company acquired
Momentum's XIPC messaging product and Seer's HPS products, now known as Geneva
AppBuilder, which are used for application development. Additionally, as
discussed above, Level 8 began selling Geneva Integrator, an EAI solution,
during the second quarter of 1999. For purposes of comparative discussions,
Seer*HPS will be referred to as Geneva AppBuilder.
Software products revenue has continued to grow as a percentage of total
revenue, reflecting Level 8's emphasis on expanding product sales. Management
believes software products revenue will continue to grow as a percentage of
total revenue over the next several quarters.
Gross margins on software products increased significantly from 21% for the
third quarter and a negative margin in the year-to-date periods of 1998 to 72%
for the third quarter and 69% for the year-to-date periods of 1999, primarily
due to the increase in Level 8's software products revenue. The increase in
gross margin was offset somewhat by an increase in the cost of software of $.8
million and $1.9 million for the third quarter and year-to-date period. Cost of
software is composed of production and distribution costs, amortization of
capitalized software and royalties to third parties. The increase in cost of
software was primarily due to amortization of capitalized software from
Momentum's and Seer's developed technology, which was valued as part of the
purchase accounting for these business combinations, and royalties for
technology acquired in 1998 from Liraz, Level 8's majority stockholder.
MAINTENANCE. Maintenance revenue increased significantly in the third
quarter and year-to-date periods of 1999 in comparison to the same periods of
1998 primarily due to the addition of Geneva AppBuilder to Level 8's products,
which has historically had a significant revenue stream from maintenance.
Maintenance revenue on a pro forma combined basis for the year-to-date period of
1998 was $10.7 million.
Cost of maintenance is comprised of personnel costs and related overhead
and the cost of third-party contracts for the maintenance and support of Level
8's software products. Gross margins on maintenance increased to 63% for the
year-to-date period of 1999 from 41% for the comparable period of 1998, while it
was consistent at 66% for the third quarter of both 1999 and 1998. The increase
in gross margins is primarily due to the addition of Seer*HPS and XIPC to Level
8's products.
SERVICES. Services revenue increased significantly from the third quarter
and year-to-date periods of 1998 to the same periods of 1999 primarily due to
the acquisition
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of Seer, which for the 1999 year-to-date period, added an average of
approximately 125 consultants to Level 8's consulting staff.
Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins increased from 5% to 17% for
the third quarter, while decreasing from 35% to 13% for the year-to-date period
of 1998 as compared to the same periods of 1999. As a result of changes in the
composition of Level 8's services revenue have caused margins to decline in
1999, since the Seer*HPS-related services have historically generated lower
margins than Level 8's other service offerings. Level 8 is seeking to improve
its consulting margins through better utilization of its consultants and by
retraining the Seer*HPS consulting resources to provide higher margin services
for Level 8's Geneva Integrator and Geneva Message Queuing products. As a result
of these efforts, Level 8 has created a positive trend in 1999, increasing gross
margin from 9% in the first quarter to 17% in the third quarter. Management is
continuing to focus on increasing its services margins.
SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for sales people, travel, and related overhead, as well as trade
show participation and other promotional expenses. Sales and marketing expenses
increased significantly from the third quarter and year-to-date period of 1998
to the same periods of 1999 due to an increase in the size of Level 8's sales
force, both through acquisition and recruiting. The increases in the size of the
number of sales and marketing personnel were necessitated by the reorganization
of Level 8's sales and promotional activities to correspond with its new product
strategy as well as Level 8's expansion into the global marketplace with the
acquisition of Seer. Level 8 intends to continue to increase its spending in the
sales and marketing area in an effort to increase software products revenue
through heightened market awareness and improved acceptance of its products and
expanding its indirect distribution network.
RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation personnel and related overhead. Research and development expense
increased significantly from the third quarter and year-to-date periods of 1998
to the same periods of 1999 due to the addition of an average of approximately
eighty developers in the year-to-date period from Momentum and Seer. Level 8
intends to continue making a significant investment in research and development
while also improving efficiencies in this area.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for the legal, financial, human resources, and administrative
staff and related overhead and all non-allocable corporate costs of operating
Level 8. General and administrative expenses increased 81% and 54% in the third
quarter and year-to-date periods of 1999 as compared to the same periods of
1998. The increases are primarily related to the additional infrastructure
necessary to support Level 8 after the acquisitions of Momentum and Seer. As a
percentage of revenue, general and administrative expense has declined from 37%
in the first nine months of 1998 to 12% in the first nine months of 1999 due to
synergies obtained through Level 8's 1998 acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets,
primarily goodwill, was $1.8 million in the third quarter and $5.2 million in
the year-to-date period of 1999 as compared to $.9 million and $1.6 million in
the respective periods of 1998. The amortization of goodwill in the first three
quarters of 1998 was related to the purchase of Level 8 Technologies in April of
1995 and beginning in the second quarter included
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amortization related to the purchase of Momentum in March, 1998. In the third
quarter and year-to-date period of 1999, the amortization of goodwill and other
intangible assets related to the purchase of Seer, Momentum and Level 8
Technologies. Level 8 will continue to assess the recoverability of its
intangible assets on a quarterly basis based on the net present value of the
expected future cash flows.
PURCHASED RESEARCH AND DEVELOPMENT. Based on the results of a third-party
appraisal, Level 8 recorded a charge in the first quarter of 1998 of $1.2
million to expense purchased in-process research and development costs related
to the acquisition of Momentum. As a result of completing the acquisition of the
remaining 31% of Seer, Level 8 recorded a charge of $.7 million for in-process
research and development costs in the second quarter of 1999.
PROVISION FOR INCOME TAXES. Level 8's effective income tax rate for
continuing operations differs from the statutory rate primarily because an
income tax benefit was not recorded for the net loss incurred in the third
quarter or the year-to-date period of 1999. Because of Level 8's inconsistent
earnings history, the deferred tax assets have been fully offset by a valuation
allowance. The income tax provision for the third quarter and the year-to-date
periods of fiscal year 1999 is primarily related to income taxes from profitable
foreign operations and foreign withholding taxes.
DISCONTINUED OPERATIONS. During 1998, Level 8 disposed of one of its
wholly-owned subsidiaries, ProfitKey International, Inc. The disposal was
accounted for as a discontinued operation. Accordingly, the results of
operations for the year-to-date period of 1998 reflect a $1.0 million loss from
discontinued operations.
IMPACT OF INFLATION. Inflation has not had a significant effect on Level
8's operating results during the periods presented.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The following table sets forth, for the years indicated, Level 8'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 intangibles............ 18.1 2.9 5.8
</TABLE>
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Write-off of in-process research and development...... 55.1 -- --
Write-off of goodwill............................... 43.1 -- --
Restructuring charges............................... 14.4 -- --
------ ----- -----
Total............................................ 242.0 40.6 53.9
Other income (expense), net........................... (0.7) 3.0 2.0
------ ----- -----
Income (loss) before taxes............................ (217.9) 10.7 (14.0)
Income tax provision (benefit)........................ 3.8 3.8 (2.4)
------ ----- -----
Net income (loss) from continuing operations..... (221.7) 6.9 (11.6)
====== ===== =====
</TABLE>
REVENUE AND GROSS MARGIN. 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 Level 8
entered into with Microsoft in August, 1998. Under the agreement, Level 8 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. Level 8 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 associated 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.
The decrease in software revenue from 1997 to 1998 is the result of Level
8's shift in strategic direction primarily relating to Level 8's dispositions
and acquisitions in 1998, as well as reduced emphasis on resales of IBM's MQ
Series licenses in favor of Level 8's Geneva Message Queuing Products developed
by Level 8. 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,
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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 Level 8'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 revenue 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 Level 8'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 Level 8. The trend in increasing research and development expenses is a
result of Level 8's investment in new products, primarily Geneva Integrator and
Version 2.0 of Geneva Message Queuing which is expected to be released in early
2000. This trend is expected to continue with the purchase of Seer, Level 8's
continuing attempts to strengthen its messaging products and completion of the
transition into the enterprise application integration marketplace.
Level 8 and Liraz previously had an agreement for the joint development of
certain software for a Microsoft contract. Under the agreement, Liraz and Level
8 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
Level 8 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
Level 8 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
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administrative support necessary following the purchase of Momentum, and
continued efforts to build a supporting infrastructure for further acquisitions,
such as Seer.
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, Level 8
recorded several nonrecurring charges in 1998. Based on the results of
third-party appraisals, Level 8 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 Level 8's transition to an
enterprise application integration solutions provider, Level 8 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, Level 8 adjusted the carrying
value of its identifiable and unidentifiable intangible assets to their fair
value of $32,217, resulting in a non-cash impairment loss of $4,601.
During the fourth quarter of 1998, Level 8 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. Level 8 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.
Through the end of 1998, Level 8 has paid approximately $.1 million in cash
related to the restructuring. Level 8 believes the accrued restructuring cost of
$1.0 million at December 31, 1998 represents its remaining cash obligations.
PROVISION FOR INCOME TAXES. Level 8 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. Level 8 provided a
full valuation allowance on the total amount of its
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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 Level
8'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, Level 8 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. Level 8 also invested $1.5 million in property and
capitalized software costs, and $1.2 million was used by Level 8'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 Level 8's investment
activities in marketable securities offset by a $1.7 million investment for
capitalized software development costs and equipment, and a $.9 million use of
cash in investing activities by Level 8's discontinued operations. Level 8
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, Level 8
borrowed $12 million from Liraz which was used to pay down Seer's bank debt on
December 31, 1998.
During the fourth quarter of 1998, Level 8 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.
Net cash used in operations during the first three quarters of 1999 was
$7.3 million. Payments of approximately $3.4 million for merger and
restructuring costs related to the acquisition of Seer were two of the primary
components of the net cash outflow in addition to Level 8's normal, recurring
operating expenses. Also, both Level 8 and Seer had lower than anticipated
billings in the fourth calendar quarter of 1998 which contributed to a reduction
in cash received from customers. Level 8 believes this trend was caused
primarily by internal distractions within both companies in the fourth calendar
quarter of 1998 due to the November announcement of the Seer transaction that
was consummated on December 31, 1998.
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Net cash used in investing activities for the first nine months of 1999 was
$4.1 million. As of April 30, 1999, Level 8 acquired the remaining minority
interest in Seer, 3,375,833 shares of common stock, for $0.35 per share in cash.
The total purchase price for the remaining 31% of Seer acquired through the
tender offer and merger in April, 1999 was approximately $1.7 million for Seer's
common stock. There were also $.5 million for other direct costs of the Seer
acquisition paid in the 1999 year-to-date period. As a result of the completion
of the tender offer and merger, Seer became a wholly-owned subsidiary of Level
8. Additionally, capitalized software development costs of $1.2 million,
primarily relating to the Geneva Integrator and Geneva Message Queuing Products.
Net cash provided by financing activities for the first nine months of 1999
was $14.9 million. During the second quarter of 1999, Level 8 issued 21,000
shares of its Series A 4% Convertible Redeemable Preferred Stock for $21 million
and paid down its line of credit by $4 million. During the third quarter of
1999, Level 8 also paid $8 million on its outstanding debt obligations with its
principal stockholder Liraz, adding to the $500,000 paid in the first quarter.
Level 8 funded its cash needs during the first nine months of 1999 with
cash on hand at December 31, 1998, through first quarter operations, through the
issuance of the Series A Preferred Stock and through $6.9 million in net
additional borrowings under its line of credit.
As of September 30, 1999, Level 8 had outstanding borrowings of $15.2
million under a credit facility with a commercial bank shared between Level 8
and it's wholly-owned subsidiary, Seer, (the "Credit Facility") at an interest
rate of 10.25%. During the third quarter, the Credit Facility was amended and
currently provides for borrowings up to the lesser of $25 million or the sum of
80% of eligible receivables and a $10 million term loan payable on March 1,
2001. The receivables-based borrowings under the Credit Facility are due on
demand. The Credit Facility bears interest at the prime rate plus 2% per annum
and has no financial covenant provisions. The receivables based borrowing
instrument terminates on September 1, 2000; however, it is automatically renewed
for successive additional terms of one year each, unless terminated by either
party. The Credit Facility is collateralized by Level 8's accounts receivable,
equipment and intangibles, including intellectual property.
In addition to the Credit Facility, Level 8 has other outstanding
borrowings at September 30, 1999 including (i) $90,000 under a note payable to
Liraz which bears interest at 4% per year and is payable in equal quarterly
installments of $35,000, including interest, (ii) $500,000 under a note payable
to Liraz which bears interest at 8% per year and is payable in annual
installments, (iii) $2.3 million of $3 million notes issued to the sellers of
Momentum which bear interest at 10% per year and are payable in annual
installments, and (iv) $4 million under a loan from Liraz which bears interest
at 12% and is payable on December 15, 2000. All debt payable to Liraz is
subordinate in right of payment to the Credit Facility.
Future maturities on Level 8's outstanding debt at September 30, 1999
include $6 million in 1999, $5.3 million in 2000, and $10.8 million in 2001. Of
such amounts, $4.6 million in 2000 is due to Liraz.
On June 29, 1999, Level 8 Systems, Inc. completed the Series A Preferred
Stock agreement to sell 21,000 shares of Series A 4% Convertible Redeemable
Preferred Stock, for $21 million, convertible into an aggregate of 2,100,000
shares of common stock of
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Level 8. The net proceeds will be used to pay down debt and other general
corporate purposes. Subsequent to the end of the second quarter, Level 8 paid
down $8 million of the $12 million loan from Liraz. The sale of the Series A
Preferred Stock was made in a private transaction exempt from the registration
requirements of the federal securities laws. For a description of the terms of
the Series A Preferred Stock, see "Description of Level 8 Capital
Stock -- Preferred Stock."
Liraz had previously committed to provide Level 8 with up to $7.5 million
of working capital payable upon the earlier of March 31, 2001 or the successful
completion of an earlier financing providing more than $7.5 million in proceeds
to Level 8. As a result of raising more than $7.5 million from the issuance of
preferred stock and warrants in June 1999, the Liraz commitment terminated.
As of September 30, 1999, Level 8 did not have any material commitments for
capital expenditures.
During the first nine months of 1999, Level 8 incurred a net loss of $10.6
million and at September 30, 1999 had a working capital deficit of $2.1 million
and an accumulated deficit of $35.8 million. Level 8's ability to generate
positive cash flow is dependent upon Level 8 achieving and sustaining certain
cost reductions and generating sufficient revenues. Level 8 already implemented
certain steps to, among other things, reduce headcount, restructure operations
and eliminate various costs from the business in order to position itself for
future growth. Following the acquisition of Template, Level 8 intends to
evaluate the operation of the combined company and if appropriate may seek to
divest assets or operations that Level 8 determines are not closely related to
its strategic vision. Level 8 believes that existing cash on hand, cash provided
by future operations and additional borrowings under the Credit Facility 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 Level 8
continues to perform to its operating plan. However, there are future risks due
to the pending Template acquisition, including the completion of the financing
of the acquisition and the successful integration and management of the combined
company. There can be no assurance that Level 8 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 Level 8's business and operations.
YEAR 2000
Level 8 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. Level 8 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," of Level
8's Annual Report on Form 10-K for the year ended December 31, 1998 for a
further discussion of Level 8's products. Level 8's Geneva Message Queuing
products, Geneva Integrator, and other messaging products are capable of
accurately processing, providing, and/or receiving date data from,
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into, and between the twentieth and twenty-first centuries, and the years 1999
and 2000, including leap year calculations. Level 8's Geneva AppBuilder
(formerly 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
Geneva AppBuilder 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
Geneva AppBuilder above 5.2.3K, the century is assigned according to a moving
100-year window. Level 8 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 relates to Geneva AppBuilder versions 5.2.4S and
higher (for the workstation) and 5.2.3K and higher (for the host), which were
released in December 1995. Level 8 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
Geneva AppBuilder product. Level 8 does not believe any of its customers are
using earlier versions of the software.
Level 8 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. Level 8
has attempted to identify the possible errors by making documentation available
to its customers.
With respect to Level 8's Geneva AppBuilder development environment itself,
Level 8 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, Level 8 does not believe this will
cause any Year 2000-related problems except in the limited instance of
migrations spanning the century boundary. Level 8 has made available to its
customers documentation calling their attention to this issue and a workaround.
Accordingly, Level 8 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
Level 8 relating to date-processing issues or that the effect of such claims on
Level 8 will not be material.
INTERNAL INFRASTRUCTURE. Level 8 has identified substantially all of the
major computers, software applications, and related equipment used in connection
with its internal operations that must be modified, upgraded, or replaced to
minimize the possibility
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of a material disruption to its business. The process of modifying, upgrading,
and replacing major systems that have been identified as adversely affected, has
been completed. Although the costs of these steps have not been separately
tracked, Level 8 believes costs specifically incurred to attain Year 2000
compliance are not material.
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.
Level 8 is continuing to assess the potential effect of, and costs of
remediating, the Year 2000 Problem on its office and facilities equipment.
Although Level 8 does not separately track these costs, Level 8 does not
believe the total cost to Level 8 of completing any required modifications,
upgrades, or replacements of these internal systems will have a material adverse
effect on Level 8's financial condition, cash flows, or results of operations.
SUPPLIERS. Level 8 has reviewed information from third party suppliers of
the major computers, software, and other equipment used, operated, or maintained
by Level 8 to identify and, to the extent possible, to resolve issues involving
the Year 2000 Problem. However, Level 8 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 Level 8 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 Level 8's business, financial condition, and results of operation.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. Level 8 does not believe
that the Year 2000 Problem will have a material adverse effect on Level 8'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 Level 8 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 Level 8 could suffer the following consequences:
- a significant number of operational inconveniences and inefficiencies for
Level 8 and its clients that may divert management's time and attention
and financial and human resources from its ordinary business activities;
- a lesser number of serious system failures that may require significant
efforts by Level 8 or its clients to prevent or alleviate material
business disruptions; and
- customers and their IT professionals who are focused on addressing their
own Year 2000 problems may defer orders of Level 8's products, thereby,
having a short-term impact on software products revenue.
CONTINGENCY PLANS. Level 8 has developed contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. 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
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correct on an accelerated schedule any Year 2000 Problems that arise or to
provide manual workarounds for information systems, and similar approaches. If
Level 8 is required to implement any of these contingency plans, it could have a
material adverse effect on Level 8's financial condition and results of
operations.
DISCLAIMER. The discussion of Level 8's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
Level 8's ability to achieve Year 2000 compliance and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
EURO CONVERSION
Several European countries adopted a Single European Currency (the "Euro")
as of January 1, 1999 with a transition period continuing through January 1,
2002. Level 8 is reviewing the anticipated impact the Euro may have on its
internal systems and on its competitive environment. Level 8 believes its
internal systems will be Euro capable without material modification cost.
Further, Level 8 does not presently expect the introduction of the Euro
currency to have an adverse material impact on Level 8's financial condition,
cash flows, or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Prior to the acquisition of Seer, Level 8 was not exposed to significant
risks of foreign currency fluctuation. Following the acquisition of Seer, Level
8's US-based operations now have significant receivables denominated in foreign
currency. Approximately 65% of Level 8's revenues for the first nine months of
1999 were generated by sales outside the United States. Level 8 is exposed to
significant risks of foreign currency fluctuation primarily from receivables
denominated in foreign currency and are subject to transaction gains and losses,
which are recorded as a component in determining net income. Additionally, the
assets and liabilities of Level 8'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 stockholders'
equity. Based upon the foregoing, Level 8 began hedging transactions subsequent
to the second quarter of 1999 in an effort to reduce its exposure to currency
exchange rates. However, as a matter of procedure, Level 8 will trade in
derivative financial instruments other than as a means of hedging against such
risk and not for speculative purposes.
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data from our
statements of income. The statement of income data has been derived from our
unaudited consolidated financial statements, which have been prepared on
substantially the same basis as our audited consolidated financial statements
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for the periods
presented. This information should be read in conjunction with our consolidated
financial statements, related notes and other financial information which are
included elsewhere in this prospectus. Our operating results in any quarter are
not necessarily indicative of the results that may be expected for any future
period.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999:
Net revenues...................................... $13,205 $13,007 $12,803
Gross profit...................................... 4,749 5,398 6,178
Net income (loss)................................. (3,828) (4,224) (2,544)
Net income (loss) per share -- basic.............. (0.44) (0.49) (0.31)
Net income (loss) per share -- diluted............ (0.44) (0.49) (0.31)
1998:
Net revenues...................................... 3,093 3,155 $ 2,349 $ 2,088
Gross profit...................................... 901 1,308 608 (615)
Net income (loss)................................. (2,484) (2,026) (2,918) (17,628)
Net income (loss) per share -- basic.............. (0.35) (0.26) (0.38) (2.29)
Net income (loss) per share -- 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 (loss)................................. 150 222 323 394
Net income (loss) per share -- basic.............. 0.02 0.03 0.05 0.06
Net income (loss) per share -- diluted............ 0.02 0.03 0.04 0.06
</TABLE>
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LEVEL 8'S MANAGEMENT AND EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of Level 8.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Arie Kilman......................... 45 Chairman of the Board, Chief
Executive Officer and Director
Steven Dmiszewicki.................. 37 President
Samuel Somech....................... 44 Chairman Emeritus, Chief Technology
Officer and Director
Dennis McKinnie..................... 42 Senior Vice President, Chief Legal
and Administrative Officer;
Corporate Secretary
Renee Fulk.......................... 31 Vice President of Finance
Michel Berty........................ 59 Director
Robert M. Brill, PhD................ 52 Director
Theodore Fine....................... 62 Director
Frank J. Klein...................... 55 Director
Lenny Recanati...................... 44 Director
</TABLE>
ARIE KILMAN has served as Chairman of the Board of Directors of Level 8
since July 1997. Mr. Kilman has also been Chief Executive Officer of Level 8
since July 1996. He was President of Level 8 from July 1996 to October 1996. He
previously served as Chairman of the Board of Directors of Level 8 from December
1994 to July 1996. Mr. Kilman has served as a Chairman of the Board and Chief
Executive Officer of Liraz since 1983. He is a citizen of Israel.
STEVEN DMISZEWICKI has served as the Chief Operating Officer of Level 8
since January 1999 and as President since June 1999. Mr. Dmiszewicki has served
as Co-President and Chief Financial Officer of Seer since May 1998. From October
1996 to May 1998, he served as Senior Vice President and Chief Financial Officer
of Seer. From July 1996 to October 1996, he was employed by Healthpoint G.P. as
Vice President, Chief Financial and Administrative Officer. From February 1996
to July 1996, Mr. Dmiszewicki served Seer as Vice President and Chief Financial
Officer. From February 1993 until February 1996, Mr. Dmiszewicki served as
Seer's Vice President -- Finance. Mr. Dmiszewicki, a Certified Public
Accountant, obtained his B.S. in Business Administration from Bucknell
University.
SAMUEL SOMECH served as President through June 1999, and as Chairman
Emeritus since June 1999 and Chief Technology Officer of Level 8 since October
1996, a Director of Level 8 since April 1995, Vice President of Level 8 from
April 1995 to October 1996, President and Chief Operating Officer of Level 8
Technologies since April 1995, Technical Director, Messaging Group, of Apertus
Technologies, Inc. from January 1994 to March 1994 and Technical Director,
Messaging Group, of NYNEX from September 1990 to
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December 1993. Mr. Somech co-founded Level 8 Technologies with Theodore Fine in
February 1994. Mr. Somech is a citizen of Israel.
DENNIS MCKINNIE has served as Senior Vice President, Chief Legal and
Administrative Officer and Corporate Secretary of Level 8 since January 1999.
Prior to that, Mr. McKinnie served as Vice President, Chief Legal and
Administrative Officer and Corporate Secretary of Seer since April 1998. Prior
to that, Mr. McKinnie was Vice President and General Counsel of Seer. He has
also served as Corporate Secretary of Seer since February 1996 and as Assistant
Secretary prior thereto. From September 1989 to October 1994, he was associated
with the Atlanta, Georgia law firm of Powell, Goldstein, Frazer & Murphy, where
he was a member of that firm's Technology Litigation Group. Prior to becoming
associated with Powell Goldstein, he was Staff Counsel to the Supreme Court of
the United States. During his 16 years of law practice, he also clerked for the
Alabama Supreme Court and the United States Court of Appeals for the Eleventh
Circuit. Mr. McKinnie holds a B.A. from Union University and a J.D. from the
Cumberland School of Law of Samford University.
RENEE FULK is currently serving as Vice President, Finance for Level 8.
Prior to this position, she served as Seer's Director of Finance for the
Americas Operating Division. From March 1996 to November 1996, she was employed
as Seer's Manager of Financial Reporting. Prior to joining Seer, Ms. Fulk was
with Deloitte & Touche, LLP from August 1990 to March 1996. Ms. Fulk, a
Certified Public Accountant, obtained her B.S. in Accounting from East Carolina
University.
MICHEL BERTY has served as a Director of Level 8 since July 1997. Since
April 1997, Mr. Berty has been the owner of MBY Consultant, Inc. Mr. Berty
currently serves as a director of Sapiens, Mastech, Merant, Elligent and Ascent
Logic. Mr. Berty served as the Chairman of the Board and Chief Executive Officer
of Cap Gemini America (an international information technology consulting firm)
from 1993 to April 1997. From 1986 to 1992, he served as the General Secretary
of the Gemini Sogeti Group (the parent corporation of Cap Gemini America).
ROBERT M. BRILL, PHD. has served as a Director of Level 8 since March 1998.
Dr. Brill was recently elected to the Audit Committee of the Board of Directors.
Dr. Brill also is a General Partner of the New Light Management, L.P., Newlight
Associates (BVI), L.P., Poly Ventures I, LP and Poly Ventures II, LP, venture
capital funds specializing in investments in high technology companies. He is
also a Director of Standard MicroSystems Corporation. Prior to 1989, Dr. Brill
had been the Chief Executive Officer of several high technology companies and
has held executive and technical positions with Harris Corporation and IBM. Dr.
Brill received degrees in engineering physics and physics from Lehigh University
and a PhD. in physics from Brown University.
THEODORE FINE has served as a Director of Level 8 since April 1995. Mr.
Fine co-founded Level 8 Technologies with Mr. Somech in February 1994. Mr. Fine
is also a director and the Chief Executive Officer of Buysmart Enterprises, Inc.
Mr. Fine is also a member of the board of directors of ZMAX Corporation. Since
January 1993, Mr. Fine has been a management information systems consultant to
the financial community and, from April 1995 to July 1996, served as a marketing
and sales consultant to Level 8. From March 1974 to December 1992, Mr. Fine was
Vice President of Technology for Retail International Operations of CitiBank,
N.A.
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FRANK J. KLEIN has served as a Director of Level 8 since December 1994.
Since January 1, 1995, Mr. Klein has been the President of PEC Israel Economic
Corporation ("PEC"), a corporation that holds equity interests in companies
located in Israel or are Israel related. Prior to Mr. Klein's appointment as
President of PEC, he served as Executive Vice President of Israel Discount Bank
of New York from 1985. Mr. Klein has served as Executive Vice President of PEC
from November 1977 to November 1991 and as Treasurer of PEC from May 1990 to
November 1991. He is a director of PEC, as well as a number of companies
affiliated with PEC, including Elron Electronics Industries Limited and Scitex
Corporation Limited. He also is a director of Super-Sol Ltd. and Tefron Ltd.
LENNY RECANATI has served as a Director of Level 8 since December 1994.
During the last twelve years, Mr. Recanati has been a Senior Manager and
Director of Discount Investment Corporation ("DIC"). He is Chairman of the Board
of Directors of Ilanot-Discounts Mutual Fund Management Company and is a member
of the Board of Directors of a number of Israeli industrial and other
enterprises affiliated with DIC, including Liraz, Klil Industries Ltd., Elron
Electronics Industries Ltd., Super-Sol Ltd., Bayside Land Corporation Ltd.,
Tefron Ltd. and Tambour Ltd. Mr. Recanati is a citizen of Israel.
COMMITTEES OF THE BOARD OF DIRECTORS
Messrs. Kilman, Klein and Recanati serve on the Compensation Committee of
the Board of Directors. The Compensation Committee has (i) full power and
authority to interpret the provisions of and supervise the administration of
Level 8's 1995 Stock Incentive Plan, the 1997 Stock Option Plan, Level 8's
Employee Stock Purchase Plan (U.S.), Level 8's International Stock Purchase Plan
and Level 8's Outside Director Stock Incentive Plan, and (ii) the authority to
review all compensation matters relating to Level 8.
Messrs. Brill, Klein and Recanati presently serve on the Audit Committee of
the Board of Directors. The Audit Committee recommends to the Board of Directors
the independent public accountants to be selected to audit Level 8's annual
financial statements and approves any special assignments given to such
accountants. The Audit Committee also reviews the planned scope of the annual
audit, any changes in accounting principles and the effectiveness and efficiency
of Level 8's internal accounting staff.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of Level 8.
DIRECTOR COMPENSATION
Michael Berty is entitled to receive each year, for serving as a director,
$12,000 and has received options to purchase 12,000 shares of Common Stock at an
exercise price of $12.75 per share. None of Level 8's other directors received
additional compensation for serving on the Board of Directors of Level 8 in
1998, other than reimbursement of reasonable expenses incurred in attending
meetings.
In 1999, our stockholders approved our Outside Director Stock Incentive
Plan. Under this plan, our outside directors may be granted an option to
purchase 12,000 shares at a price equal to the fair market value of the common
stock as of the grant date. Newly elected eligible directors are also eligible
to receive an option to purchase 12,000 shares upon initial election or
appointment. The Outside Director Stock Incentive Plan also
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<PAGE> 135
permits eligible director to receive partial payment of director fees in common
shares in lieu of cash, subject to approval by the board of directors. In
addition, the plan permits the Board of Directors to grant discretionary awards
to eligible directors under the plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
by Level 8's current Chief Executive Officer and the four other most highly
compensated executive officers serving or having served at the end of fiscal
1998, whom we refer to as the named executives. The table reflects compensation
earned for each of the last three years or for such shorter period of service as
an executive officer as is reflected below. Neither Gonen Ziv, Joseph Schwartz
nor Robert Lord are currently employed by Level 8, but they are included in the
following table in accordance with SEC rules because they were executive
officers during 1998. Steven Dmiszewicki was not an executive officer of Level 8
until January 27, 1999 and, therefore, is not reflected in the table below. For
information regarding Mr. Dmiszewicki's compensation, see "Employment
Agreements, Termination of Employment and Change-In-Control Arrangements." For
the principal terms of options granted during 1998, see "Option Grants in Fiscal
1998."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------------------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- ------ -------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Arie Kilman,............. 1998 $115,000(2) $96,350(3) 0 $ 0
Chief Executive Officer, 1997 112,500 0 50,000 0
Chairman of the Board 1996 95,000 0 0 0
and Director
Samuel Somech,........... 1998 150,000 7,200 0 0
Chairman Emeritus, 1997 150,000 0 50,000 0
Chief Technology 1996 129,165 0 250,000 0
Officer and Director(4)
Gonen Ziv(5),............ 1998 148,246 1,181 80,000 0
Former Senior Vice
President,
General Manager --
Americas
Joseph Schwartz(6),...... 1998 145,833 0 150,000 0
Former Vice President,
Group Product Manager
Robert Lord(7),.......... 1998 183,647 0 0 17,500(8)
Former Executive Vice
President
</TABLE>
- -------------------------
(1) The indicated amounts do not reflect non-cash compensation in the form of
personal benefits provided by Level 8 that may have value to the recipient.
Although such compensation cannot be determined precisely, Level 8 has
concluded that the aggregate value of such benefits awarded to any named
executive officer did not exceed the lesser of $50,000 or 10% of his salary
and bonus for any fiscal year to which such benefits pertain, except as
described in note 3 below with respect to Mr. Kilman.
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<PAGE> 136
(2) Mr. Kilman's salary for 1998 includes an aggregate of $60,000 paid by Level
8 and $55,000 paid by Liraz.
(3) The indicated amounts reflect compensation paid to Mr. Kilman to pay for
travel expenses to and from New York and living expenses in New York,
including rent for an apartment, an automobile lease and miscellaneous
expenditures related thereto. Liraz has agreed to reimburse Level 8 at a
rate of $3,000 per month for Mr. Kilman's travel expenses.
(4) Mr. Somech was President through June 1999 and Chairman Emeritus thereafter.
(5) Resigned effective April 19, 1999.
(6) Resigned effective June 24, 1999.
(7) Resigned effective December 15, 1998.
(8) The indicated amount reflects a severance payment made to Mr. Lord upon his
termination of employment on December 15, 1998.
The following table sets forth information as to stock options granted to
each named executive during fiscal 1998. Level 8 did not award any stock
appreciation rights ("SARs") during fiscal 1998.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
--------------------------------------- ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ---------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arie Kilman............ 0 0% $ 0 0 $ 0 $ 0
Samuel Somech.......... 0 0 0 0 0 0
Gonen Ziv(1)........... 30,000 2.2 9.00 6/26/08 169,802 430,310
50,000 2.6 7.88 12/15/08 247,784 627,935
Joe Schwartz(2)........ 75,000 5.5 9.00 6/26/08 424,504 1,075,776
75,000 5.5 7.88 12/15/08 371,677 941,902
Robert Lord(3)......... 0 0 0 0 0 0
</TABLE>
- -------------------------
(1) Resigned effective April 19, 1999.
(2) Resigned effective June 24, 1999.
(3) Resigned effective December 15, 1998.
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<PAGE> 137
The following table sets forth information concerning the options exercised
during fiscal 1998 and held at December 31, 1998 by the named executives.
FISCAL 1998 YEAR-END OPTION HOLDINGS AND VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
SHARES DECEMBER 31, OPTIONS AT
ACQUIRED 1998 DECEMBER 31, 1998(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arie Kilman(2)......... 0 $0 33,000 16,667 $ 0 $ 0
Samuel Somech.......... 0 0 461,138 16,667 783,461 0
Gonen Ziv(3)........... 0 0 26,667 53,333 37,001 73,999
Joe Schwartz(4)........ 0 0 50,000 100,000 62,375 124,750
Robert Lord(5)......... 0 0 23,167 16,333 20,963 0
</TABLE>
- -------------------------
(1) Calculated by subtracting the exercise price from $9.6875 per share, the
closing price of Level 8's Common Stock as reported by the Nasdaq Stock
Market on December 31, 1998, and multiplying the difference by the number of
shares underlying each option.
(2) On March 30, 1999, Mr. Kilman voluntarily terminated all of his outstanding
options to purchase 200,000 shares of Common Stock at the request of Level
8's principal stockholder, Liraz Systems. Mr. Kilman is Chairman of the
Board and Chief Executive of Liraz and of Level 8. As a result, Mr. Kilman
no longer holds any options to purchase shares of Common Stock.
(3) Resigned effective April 19, 1999.
(4) Resigned effective June 24, 1999.
(5) Resigned effective December 15, 1998.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Under the employment agreement between Level 8 and Mr. Kilman, Mr. Kilman
will serve as Chief Executive Officer of Level 8 until May 1, 1999, subject to
earlier termination under certain circumstances. The agreement also provides
that Mr. Kilman will devote substantially all his business time to the affairs
of Level 8. In February 1999, this agreement was extended for an additional year
and Mr. Kilman's annual base salary was set at $120,000. Mr. Kilman is eligible
for an incentive bonus up to $75,000 based upon Level 8 achieving certain
performance goals. In February 1999, Mr. Kilman was granted an option to
purchase 150,000 shares of Common Stock. Twenty-five (25%) of these stock
options vested on February 26, 1999, and the remainder vests in three increments
of twenty-five (25%) percent each over the next three years. If Mr. Kilman's
employment by Level 8 is terminated for any reason, Mr. Kilman has agreed that,
for one year after such termination and except for his services for Liraz, he
will not engage in any business that competes with Level 8's business at the
time of the termination. On March 30, 1999, Mr. Kilman voluntarily terminated
all of his outstanding options to
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purchase 200,000 shares of Common Stock. As a result, Mr. Kilman no longer holds
any options to purchase shares of Common Stock.
Under the employment agreement between Level 8 and Mr. Somech, Level 8 pays
Mr. Somech (a) an annual base salary of $150,000, (b) an annual increase in base
salary as determined by the Board of Directors of Level 8, in its discretion,
(c) a performance bonus determined by the Board of Directors of Level 8 and (d)
a car and telephone allowance of $2,000 a month. In the event that Mr. Somech's
employment is terminated prior to November 8, 1999, Level 8 Technologies will
pay Mr. Somech a termination fee equal to 50% of the salary Mr. Somech would
have received from the date of termination until November 8, 1999. If Mr.
Somech's employment is terminated for any reason (other than by Level 8 without
cause), Mr. Somech has agreed that, for one year after such termination, he will
not directly or indirectly (i) compete with Level 8 Technologies' consulting
services in the United States regarding middleware, messaging or fault-tolerant
transaction processing, (ii) engage or participate in any business that provides
consulting services within the United States with respect to middleware,
messaging or fault-tolerant transaction processing, (iii) solicit or divert
business from Level 8 Technologies or assist any business in attempting to do
so, (iv) cause any business to refrain from doing business with Level 8
Technologies or (v) solicit or hire any person who was an employee of Level 8
Technologies during the term of his employment agreement or assist any business
in attempting to do so. On February 26, 1999, Mr. Somech and Level 8 entered
into an amendment to his employment agreement that permits Mr. Somech to retire
from Level 8 at any time during his employment upon three months notice to Level
8. Upon his retirement, Mr. Somech will receive retirement benefits of $20,000
per month for a period of two years and his health care benefits will continue
during this time or until he obtains alternative health care coverage, whichever
is sooner. During his first year of retirement, Mr. Somech has agreed to make
himself available to assist Level 8 and its employees on transition matters.
Mr. Dmiszewicki was elected to serve as the Chief Operating Officer of
Level 8 on January 27, 1999 and as President since June 1999. Under the
employment arrangement between Level 8 and Steven Dmiszewicki effective December
4, 1998, Level will pay to Mr. Dmiszewicki an annual base salary of $200,000. In
addition, he will be eligible to participate in an incentive bonus program based
upon Level 8's attainment of certain performance goals. During the first year of
his employment, Mr. Dmiszewicki will have a bonus potential of up to $200,000.
In the event of termination of Mr. Dmiszewicki's employment, other than
voluntarily or for cause, his base salary will be continued for twelve (12)
months. Mr. Dmiszewicki has also received a stock option to purchase 200,000
shares of Common Stock. Twenty-five (25%) of this stock option vested on
December 4, 1998 and the remainder vests in increments of twenty-five (25%)
percent over the next three years. In addition, he is eligible, at the
discretion of the Compensation Committee of the Board of Directors, to receive
additional options from time to time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Messrs. Kilman, Klein and
Recanati. Mr. Kilman is the Chairman of the Board of Directors and Chief
Executive Officer of Level 8 and its principal stockholder, Liraz. Except for
Mr. Kilman, none of the other members of the Compensation Committee has served
as an executive officer of Level 8 and no executive officer of Level 8 has
served as a member of the Compensation Committee of any other entity of which
Messrs. Kilman, Klein or Recanati have served as
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executive officers. See "Level 8 Principal Stockholders" for a description of
the relationships among Liraz and Messrs. Kilman, Klein and Recanati and
"Certain Relationships and Related Transactions" for a description of
relationships between Liraz and Level 8.
LEVEL 8 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BORROWINGS AND COMMITMENTS FROM LIRAZ
Under an agreement between Liraz and Level 8 dated December 31, 1998 (the
"Liraz Agreement"), Liraz made a $12 million loan to Level 8, which bears simple
interest at a rate of 12% a year and matures on June 30, 2000. On May 31, 1999,
the Liraz Agreement was amended to change the maturity date from June 30, 2000
to December 15, 2000, and to provide for semiannual interest payments rather
than payment of interest at maturity. No other terms of the loan were amended.
Level 8 used part of the proceeds from the issuance of the Series A Preferred
Stock to make an $8 million payment to Liraz to pay down the balance of the
loan. Liraz had previously committed to provide Level 8 with up to $7.5 million
of working capital payable upon the earlier of March 31, 2001 or the successful
completion of an earlier financing providing more than $7.5 million in proceeds
to Level 8. As a result of raising more than $7.5 million from the issuance of
preferred stock and warrants in June 1999, the Liraz commitment terminated. At
September 30, 1999, Level 8's total indebtedness to Liraz was $4,585,863.
LEVEL 8 LOAN TO SEER
In connection with Level 8's purchase of 69% of the outstanding capital
stock of Seer from Welsh Carson Anderson & Stowe VI L.P. ("WCAS") and certain
other parties affiliated or associated with WCAS ("WCAS Parties") on December
31, 1998, Level 8 provided a $12 million subordinated note to Seer to pay down
Seer's bank debt. The funds used by Level 8 for the subordinated loan to Seer
were obtained from Liraz pursuant to the Liraz Agreement described above. In
addition, Level 8 also agreed to guarantee debt under Seer's revolving credit
facility (i) exceeding $20 million through December 31, 1999, (ii) exceeding $10
million from January 1, 2000 through December 31, 2000, and (iii) without limit
thereafter.
JOINT DEVELOPMENT ARRANGEMENT WITH LIRAZ
Level 8 and Liraz previously had an agreement for the joint development of
certain software for a Microsoft contract. Under the agreement, Liraz and Level
8 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
Level 8 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 were paid to Liraz in 1999 for 1998 sales.
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ONGOING RELATIONSHIP WITH LIRAZ
Level 8's Chief Executive Officer, Arie Kilman, also is Chairman of the
Board and Chief Executive Officer of Liraz. Liraz has agreed to reimburse Level
8 at a rate of $3,000 per month for Mr. Kilman's travel expenses. See "Executive
Compensation and Other Information, Employment Contracts, Termination of
Employment and Change-In-Control Arrangements." Messrs. Kilman, Klein and
Recanati may be deemed to be affiliates of Level 8 based upon their
relationships with Liraz.
Liraz and Level 8 may from time to time compete for the same business
opportunity or engage in transactions with each other. In that connection, Liraz
and Level 8 have agreed that, in the case of any business competing opportunity
primarily involving North America, the parties will use their best efforts to
make the opportunity available to Level 8; in the case of any business competing
opportunity primarily involving the Middle East, the parties will use their best
efforts to make the opportunity available to Liraz; and, in each other case, the
parties will participate equally in the opportunity. This agreement terminates
on the earlier of (a) May 1998, subject to automatic annual renewal thereafter,
unless either party wishes to terminate the agreement, and (b) the date Liraz
ceases to own at least 35% of the outstanding shares of Common Stock.
See "Principal Stockholders" for a description of the relationships among
Liraz and Messrs. Kilman, Klein and Recanati, directors of Level 8.
MOMENTUM ACQUISITION
In March 1998, Level 8 acquired Momentum Software Corporation in
consideration for 575,000 shares of common stock, warrants to purchase an
additional 200,000 shares of common stock for $13.108 per share at any time on
or before March 26, 2003 and contingent consideration, if the average closing
price of the common stock on the 30 trading days immediately preceding the
earlier of December 1, 1998 and the effective date of the filing by Level 8 of a
certain registration statement was less than $21.00. If the average price was
$15.00 or more and less than $21.00, the contingent consideration was a number
of shares of common stock equal to the product of (a) 416.666, and (b) the
number of cents by which $21.00 exceeded such average price; and, if the average
price was below $15.00, the contingent consideration was, at the option of the
Momentum Liquidating Trust, either of the following: (a) 250,000 shares of
common stock; or (b) an installment promissory note with a principal amount of
$3,000,000 payable in four equal annual installments of principal and bearing
interest at the rate of 10% a year. The Trust has opted to take the promissory
note.
ADVANCED SYSTEMS EUROPE B.V. AND LIRAZ
On June 29, 1999, Level 8 completed a $21 million private placement of
21,000 shares of Series A 4% Convertible Redeemable Preferred Stock, convertible
into an aggregate of 2.1 million shares of common stock of Level 8. Holders of
the Series A Preferred Stock are entitled to receive 4% annual cash dividends
payable quarterly and will have one vote per share of Series A Preferred Stock,
voting together with the common stock and not as a separate class except on
certain matters adversely affecting the rights of holders of the Series A
Preferred Stock. The Series A Preferred Stock may be redeemed at the option of
Level 8 at a redemption price equal to the original purchase price at any time
after June 29, 2000 if the closing price of Level 8's common stock over 20
consecutive trading days is greater than $20 per share. The conversion price of
the Series
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A Preferred Stock is subject to certain anti-dilution provisions, including
adjustments in the event of certain sales of common stock at a price of less
than $10 per share. In the event Level 8 breaches its obligations to pay
dividends when due or issue common stock upon conversion, or Level 8's common
stock is delisted, the dividend rate on the Series A Preferred Stock would
increase to 18% per annum (partially payable in shares of common stock at the
option of Level 8 during the first 60 days of such increased dividend rate). As
part of the $21 million financing, Level 8 also issued the investors warrants to
purchase 2.1 million shares of common stock at an exercise price of $10 per
share, subject to adjustment. As long as the Series A Preferred Stock is
outstanding, Level 8 may not purchase shares of its common stock or make
distributions on its common stock without the consent of the holders of 85% of
the outstanding Series A Preferred Stock. Level 8 has agreed to register the
common stock issuable upon conversion of the Series A Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933. Level 8 is
required to make certain payments in the event it is unable to meet its
obligations in connection with the Series A Preferred Stock and warrants, such
as registration under the Securities Act or issuance of shares of common stock
upon conversion or exercise. The aggregate amount of all such payments, together
with dividends on the Series A Preferred Stock, is limited to 19% of the
liquidation value of the Series A Preferred Stock. Investors in the Series A
Preferred Stock and warrants include Advanced Systems Europe B.V. Advanced
Systems Europe purchased $10 million of Series A Preferred Stock and warrants in
the transaction and is a subsidiary of Liraz Systems, Ltd., Level 8's principal
stockholder.
LEVEL 8 COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and regulations of the Securities and Exchange Commission
thereunder require Level 8's directors and executive officers and persons who
own more than 10% of Level 8's Common Stock, as well as certain affiliates of
such persons, to file initial reports of their ownership of Level 8's Common
Stock and subsequent reports of changes in such ownership with the Securities
and Exchange Commission. Directors, executive officers and persons owning more
than 10% of Level 8's Common Stock are required by Securities and Exchange
Commission regulations to furnish Level 8 with copies of all Section 16(a)
reports they file. Based solely on its review of the copies of such reports
received by it and written representations that no other reports were required
for those persons, management believes that Level 8's directors, executive
officers and owners of more than 10% of its Common Stock complied with all
filing requirements in a timely manner during 1998, except that a Form 4
Statement of Changes in Beneficial Ownership for March 1998 for Samuel Somech
has not yet been filed and a Form 4 Statement of Changes in Beneficial Ownership
for December 1998 for Robert Brill was not filed until April 1999.
LEVEL 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
PricewaterhouseCoopers LLP was appointed as Level 8's independent
accountants for fiscal 1998 on January 21, 1999. From January 28, 1998 until
December 15, 1998, Grant Thornton LLP had been designated as Level 8's
independent accountants and had audited Level 8's Consolidated Financial
Statements for fiscal 1997. Prior thereto, Lurie, Besikof, Lapidus & Co., LLP
had been Level 8's auditors.
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APPOINTMENT OF PRICEWATERHOUSECOOPERS TO REPLACE GRANT THORNTON
On December 15, 1998, Level 8 dismissed Grant Thornton as its independent
auditors. The decision to change independent auditors was recommended by the
audit committee of Level 8's board of directors and approved by Level 8's board
of directors following the announcement of the acquisition of Seer by Level 8.
Given the size of Level 8 following the acquisition of Seer Technologies, Level
8 believed that it required a larger firm with greater resources. Grant Thornton
served as independent auditors of Level 8 since January 1998, succeeding Lurie
Besikof who served as independent auditors to Level 8 (and Level 8's predecessor
entities) for the ten years preceding its January 28, 1998 replacement by Grant
Thornton. During fiscal year 1997 and any subsequent 1998 interim period, none
of Grant Thornton's reports on Level 8's financial statements contained an
adverse opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the preparation of Level 8's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998, Level 8 discussed with
Grant Thornton whether Level 8 should recognize as revenue in the third quarter
of 1998 $2.96 million Level 8 had billed Microsoft. Level 8 expressed the view
that all of that revenue should be reflected in the third quarter. Grant
Thornton expressed the view that none of that revenue should be reflected in the
third quarter. After discussion, Level 8 deferred the recognition of all such
revenue and indicated in the Form 10-Q that it was in the process of determining
how long generally accepted accounting principles required Level 8 to continue
to defer recognizing such revenue. Subject to the foregoing, there have been no
disagreements with Grant Thornton regarding any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
In planning and performing the audit of the financial statements of Level 8
for the year ended December 31, 1997, Grant Thornton noted certain internal
control structure matters that it considered reportable conditions under
standards established by the American Institute of Certified Public Accountants.
Reportable conditions involve matters relating to significant deficiencies in
the design or operation of the internal control structure that could adversely
affect the organization's ability to record, process, summarize, and report
financial data consistent with the assertions of management in the financial
statements.
On or about May 7, 1998, Grant Thornton provided Level 8 with an audit
communications letter regarding such reportable conditions. These reportable
conditions are discussed below.
SOFTWARE SERVICE TRANSACTIONS. During 1997, Level 8 began entering into
multi-year contracts that were non-cancelable or included significant
cancellation penalties. To entice customers to sign for this extended period of
time, Level 8 offered substantial discounts or free service periods. Grant
Thornton recommended that Level 8 recognize the complexity of these arrangements
and the need to address the effects on revenue recognition. Due to the unique
circumstances surrounding these types of transactions, Grant Thornton stressed
the importance of Level 8's Chief Financial Officer reviewing these contracts on
a case-by-case basis, with specific emphasis on ensuring proper revenue
recognition by reviewing cancellation provisions and allocations of revenue and
discounts to products covered by the contract. Grant Thornton identified that
there were no standard agreements, each was separately negotiated and
accordingly the terms of each agreement needed to be assessed for revenue
recognition issues. Grant Thornton suggested that this made it difficult for
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Level 8 personnel to determine revenue recognition under SOP 91-1, and may
become an even greater issue under SOP 97-2. Grant Thornton noted that
accounting personnel of Level 8 appeared to be unaware of certain key
transactions, or aspects of transactions, which may have been a result of a lack
of adequate communication.
CASH COLLECTIONS AND BILLINGS. Grant Thornton noted that cash collections
had been "poor" throughout 1997 and early 1998. Grant Thornton identified a
number of factors:
- Lack of written documentation and purchase orders from customers to
support sales, before the amount was invoiced.
- Lack of communication between sales and accounting departments of
delivery and payment terms, leading to problems when collection calls
were made by the accounting staff.
- Long lead times between performance of work and the sending of invoices
to customers.
Grant Thornton recommended that management of Level 8 develop formal credit
and collection policies providing for regular follow-up communication with
customers once accounts are 30 days past due. Grant Thornton also recommended
that management of Level 8 consider using sales personnel to help with
collections, in an appropriate manner. Level 8 paid commissions upon recognition
of a sale, and Grant Thornton recommended that Level 8 consider payment only
after Level 8 is paid. Grant Thornton also recommended that management develop
an objective formula to determine the minimum amount of the allowance for
doubtful accounts.
During its audit of Level 8 for fiscal 1997, Grant Thornton noted items
that gave rise to concerns encompassing the timeliness and efficiency of Level
8's billing process and the accuracy of information provided to customers.
According to Grant Thornton, lack of an efficient process had led to relatively
large amounts being recorded as "unbilled" receivables. In addition, Grant
Thornton noted that numerous problems were encountered when collecting amounts
recorded as overdue with customers stating they had received invoices only days
prior to the collection call. Grant Thornton suggested that systems should be
implemented to ensure all expense claims and time sheets are received on a
timely basis, and unbilled revenue should be maintained at zero or an
insignificant amount.
SOFTWARE DEVELOPMENT COSTS. FASB 86 requires that costs incurred
internally in creating a computer software product shall be charged to expense
when incurred as research and development until technological feasibility has
been established for the product. Technological feasibility is established upon
completion of a detailed program design or, in its absence, completion of a
working model. Thereafter, all software production costs shall be capitalized
and subsequently reports at the lower of unamortized cost or net realizable
value. Capitalized costs are amortized based on current and future revenue for
each product with an annual minimum equal to the straight-line amortization over
the remaining estimated economic life of the product.
Grant Thornton suggested that sensitive decisions relating to
capitalization and amortization of software development costs should be
documented and supported. All details, such as date of and rationale behind
technological feasibility and the date of general availability for sale to the
public, should be recorded.
INSUFFICIENT ACCOUNTING PERSONNEL. According to Grant Thornton, staffing
levels at Level 8 did not appear sufficient to deal with the growth in Level 8's
sales. In addition, the
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accounting clerk at Level 8 resigned effective December 31, 1997, which Grant
Thornton suggested resulted in delays in performing routine accounting functions
such as cash collections and billings as well as providing schedules required to
complete the year-end audit.
Level 8's Chief Financial Officer performed or assisted in practically all
of Level 8's accounting functions, account reconciliations, general ledger
posting, financial reporting and various others. Grant Thornton believed that by
its involvement in such a myriad of activities, chances of errors were
increased. Grant Thornton believed that priorities should be redirected from
daily mundane bookkeeping chores to more important functions. Grant Thornton
recommended that management perform a review of staffing levels at Level 8 and
hire additional staff where required.
LACK OF INTERNAL CONTROLS AND ACCOUNTING SYSTEMS GENERAL. Grant Thornton
reported that the size of Level 8's accounting department precluded strict
segregation of accounting functions and a detailed system of internal controls.
Grant Thornton believed there were a number of areas in which controls and
systems could be improved.
APPOINTMENT OF GRANT THORNTON TO REPLACE LURIE BESIKOF
On January 28, 1998, Level 8 replaced Lurie Besikof as its independent
auditors with Grant Thornton. The decision to change independent auditors was
recommended by the audit committee of Level 8's board of directors and approved
by Level 8's board of directors. The decision was based on advice Level 8
received from the investment banking firm that was providing financial guidance
to Level 8 at the time.
Lurie Besikof served as independent auditors to Level 8 (and Level 8's
predecessor entities) for the ten years preceding its January 28, 1998
replacement. During these ten years, there have been no disagreements with Lurie
Besikof regarding any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
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LEVEL 8 PRINCIPAL STOCKHOLDERS
The following table lists, as of November 17, 1999, the number of shares of
common stock beneficially owned by (1) each current director, (2) our four most
highly compensated executive officers, (3) each person or entity known to us to
be the beneficial owner of more than five percent of our outstanding common
stock, and (4) all current executive officers and directors as a group. In
accordance with SEC rules, shares not currently outstanding that are subject to
options, warrants or conversion rights are treated as outstanding for purposes
of computing the percentage of the outstanding common stock owned by that
stockholder but are not treated as outstanding for the purpose of computing the
percentage of the outstanding common stock owned by any other stockholder.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENT OF CLASS
- ------------------------ ------------- ----------------
<S> <C> <C>
Liraz Systems Ltd.(1).......................... 5,683,120(2) 51.99%
Welsh, Carson, Anderson & Stowe ("WCAS")(3).... 1,250,000(4) 13.61
Brown Simpson Strategic Growth Fund, Ltd.(5)... 620,280 6.49
Brown Simpson Strategic Growth Fund, L.P.(6)... 323,625 3.50
Seneca Capital Advisors, LLC(7)................ 800,000 8.22
Arie Kilman(8)................................. 5,000 *
Samuel Somech(9)............................... 461,138 4.91
Theodore Fine(10).............................. 114,153 1.27
Frank J. Klein(11)............................. 0 *
Lenny Recanati(12)............................. 0 *
Michel Berty(13)............................... 8,000 *
Robert M. Brill(14)............................ 9,328 *
All current directors and executive officers as
a group (7 persons)(15)...................... 1,266,674 11.91
</TABLE>
- -------------------------
* Represents less than one percent of the outstanding shares.
(1) The address of Liraz is 5 Hatzoref Street, Holon 58856 Israel.
(2) Includes 821,257 shares that Liraz may be deemed to share voting power and
dispositive power of common stock with Liraz Export (1990) Ltd., an Israeli
corporation and a wholly-owned subsidiary of Liraz and 2,000,000 shares,
one half of which are shares of common stock issuable upon the conversion
of Series A Preferred Stock and the other one-half of which are shares
issuable upon the exercise of warrants that Liraz may be deemed to share
voting and disposition power with Advanced Systems Europe B.V., a Dutch
corporation and a wholly-owned subsidiary of Liraz. Mr. Arie Kilman is
Chief Executive Officer and Chairman of the Board of Directors and of
Liraz. We have been advised that, as of December 31, 1998, Mr. Kilman owned
1,170,670 ordinary shares of Liraz, which was approximately 19.4% of the
ordinary shares of Liraz. Mr. Kilman may, by reason of his ownership in and
relationship with Liraz, be deemed to share voting power and dispositive
power with respect to the shares of beneficially owned by Liraz and
therefore may be deemed to be the beneficial owner of such shares.
Mr. Kilman is a party to a stockholders' agreement with PEC Israel Economic
Corporation ("PEC") and Discount Investment Corporation Ltd. ("DIC"),
pursuant to which Mr. Kilman, PEC and DIC have agreed to act together to
elect directors of
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Liraz and for certain other purposes. We have been advised that each of PEC
and DIC beneficially own approximately 20.75% of the ordinary shares of
Liraz as of December 31, 1998. By virtue of the stockholders' agreement,
each party to the stockholders' agreement may be deemed to own beneficially
the ordinary shares of Liraz owned by the other parties. Each party to the
stockholders' agreement disclaims any beneficial ownership of the ordinary
shares of Liraz owned by the other parties.
IDB Holding Corporation Ltd. owns approximately 71% of the outstanding
shares of IDB Development Corporation Ltd. IDB Development, in turn, owns
approximately 72% of the outstanding DIC ordinary shares and DIC owns
approximately 81% of the outstanding PEC common stock. By reason of the IDB
Holdings' ownership of IDB Development voting securities and DIC's
ownership of PEC voting securities, IDB Holding may be deemed to be the
beneficial owner of DIC ordinary shares held by IDB Development and PEC
common stock held by DIC. By reason of their positions with, and control of
voting securities of, IDB Holding, Ralphael Recanati of Tel Aviv, Israel,
and Elaine Recanati of Herzliya, Israel, who are brother-in-law and
sister-in-law, and Leon Recanati of Tel Aviv, Israel and Judith Yovel
Recanati of Herzliya, Israel, who are brother and sister, may be each
deemed to share the power to direct the voting and disposition of the
outstanding shares of DIC ordinary shares owned by IDB Development and PEC
common stock held by DIC and may each, under existing regulations of the
Securities and Exchange Commission therefore be deemed a beneficial owner
of the shares. Leon Recanati and Judith Yovel Recanati are the nephew and
niece of Raphael and Elaine Recanati. Companies that the Recanati family
control hold approximately 51.6% of the outstanding shares of IDB Holding.
Excludes 1,250,000 shares of our common stock held by or issuable upon
exercise of warrants held by Welsh, Carson, Anderson and Stowe VI, L.P.
("WCAS VI") and certain parties affiliated or associated with WCAS VI
(collectively, the "WCAS Parties") as described in note 4 below, which
Level 8 has the right to vote pursuant to an agreement between Level 8 and
the WCAS Parties dated November 23, 1998.
(3) The address of WCAS is 320 Park Avenue, Suite 2500, New York, New York
10022.
(4) Includes 944,844 shares of common stock, and 250,000 additional shares of
common stock issuable upon the exercise of warrants held by WCAS VI; 11,290
shares held by WCAS Information Partners II, L.P.; 806 shares held by Trust
U/A dated November 26, 1984 for the Benefit of Eric Welsh; 806 shares by
Trust U/A dated November 26, 1984 for the benefit of Randall Welsh; 806
shares held by Trust U/A dated November 26, 1984 for the benefit of
Jennifer Welsh; 1,613 shares held by Reboul, MacMurray, Hewitt, Maynard and
Kristol; and 35,803 shares held by general partners of WCAS. WCAS is
general partner of each of the foregoing limited partnerships. The
principals of WCAS are Bruce K. Anderson, Russell L. Carson, Anthony J. de
Nicola, James B. Hoover, Thomas E. McInerney, Robert A. Minicucci, Andrew
M. Paul, Richard A. Stowe, Laura Van Buren and Patrick J. Welsh.
(5) The address of Brown Simpson Strategic Growth Fund, Ltd. is Citco Fund
Services, Corporation Center, West Bay Road, P.O. Box 31106, SMB Grand
Cayman, Cayman Islands.
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Represents shares issuable upon conversion of Series A Preferred Stock and
exercise of warrants at an exercise price of $10.00 per share pursuant to the
terms of the Certificate of Designation of Rights, Preferences and Limitations
of the Series A Preferred Stock and the warrants.
(6) The address of Brown Simpson Strategic Growth Fund, L.P. is 152 West 57th
Street, 40th Floor, New York, New York 10019.
Represents shares issuable upon conversion of Series A Preferred Stock and
exercise of warrants at an exercise price of $10.00 per share, pursuant to
the terms of the Certificate of Designation of Rights, Preferences and
Limitations of the Series A Preferred Stock and the warrants.
(7) The address of Seneca Capital Advisors, LLC is 830 Third Avenue, 4th Floor,
New York, New York 10022.
Represents shares issuable upon conversion of Series A Preferred Stock and
exercise of warrants at an exercise price of $10.00 per share, pursuant to
the terms of the Certificate of Designation of Rights, Preferences and
Limitations of the Series A Preferred Stock and the warrants.
(8) Excludes shares owned by Liraz, which may be deemed beneficially owned by
Mr. Kilman as a result of his position as Chairman of the Board and Chief
Executive Officer of Liraz and owner of approximately 22.4% of Liraz. On
March 30, 1999, Mr. Kilman voluntarily terminated all of his outstanding
options exercisable for 200,000 shares of common stock. As a result, Mr.
Kilman no longer holds any options to purchase shares of common stock.
(9) Includes 461,138 shares subject to stock options exercisable within sixty
(60) days; excludes 16,667 shares subject to stock options not exercisable
within sixty (60) days.
(10) Includes 83,068 shares subject to stock options exercisable within sixty
(60) days; excludes 27,834 shares subject to stock options not exercisable
within sixty (60) days.
(11) Excludes 5,683,120 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Klein as a result of his position as an executive officer of
PEC, which owns approximately 20.75% of Liraz.
(12) Excludes 5,683,120 shares owned by Liraz, which may be deemed beneficially
owned by Mr. Recanati as a result of his position as an executive officer
of Discount Investment Corporation Ltd., which owns approximately 20.75% of
Liraz.
(13) Includes 8,000 shares subject to stock options exercisable within sixty
(60) days; excludes 4,000 shares subject to stock options not exercisable
within sixty (60) days.
(14) Includes 4,000 shares subject to stock options exercisable within sixty
(60) days; excludes 8,000 shares subject to stock options not exercisable
within sixty (60) days.
(15) Excludes shares owned by Liraz as described in note 8 and includes
1,147,704 shares issuable upon exercise of options and warrants described
in notes 9 through 14.
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TEMPLATE'S BUSINESS
GENERAL
Template was incorporated in Maryland in 1975 and reincorporated in
Virginia in 1996. Template provides enterprise-wide software solutions to
organizations that require the integration of their operations and systems in an
effort to better automate their critical business processes. To date, most of
Template's revenues have been derived from license fees for use of Template's
products and fees for software services related to the customization of its
products, which services include software development, training, maintenance,
systems integration and systems planning. Template's products consist of a set
of off-the-shelf packages, in the form of templates. Templates are largely
completed applications supporting enterprise application integration ("EAI") and
business process automation. Template believes that its reusable template
products, along with its software-related services, allow a mass customization
approach to software solution delivery that is superior to the historical
alternatives of buying a packaged solution or developing a custom application.
Template's current templates can provide up to 90% of the code necessary for a
complex integration problem or implementation of an automated business process.
Template's solutions are targeted at large-scale, enterprise integration
opportunities and mission-critical applications, such as order handling and
fulfillment, human resource management, and network monitoring systems primarily
in the telecommunications, finance/insurance and government industries. Template
markets its solutions world-wide through its direct sales force, distributors,
value added resellers and systems integrators. In an effort to solidify its
presence world-wide, Template maintains the following wholly-owned subsidiaries:
(1) England: Template Software (U.K.) Limited and Template Software, Limited;
(2) France: Template Software S.A.; (3) Germany: Template Software Holding GmbH
("Template Holding") and Template Software Geschaftsfuhrungs GmbH ("Template
Management"), which Template formed to acquire milestone software GmbH
("Milestone"), (4) Austria: milestone software Ges. mbH; (5) Australia: Template
Software Pty., Ltd.; and (6) Mexico: Template Software de Mexico, S.A. de C.V.
(which is in the process of having its operations wound up). Template also owns
20% of milestone software AG, a Swiss corporation ("Milestone Switzerland"),
which Template acquired in connection with its acquisition of Milestone.
PRODUCTS AND SERVICES
Template's products are a family of templates which Template uses to
implement complex EAI solutions and/or business process automation extensions to
existing departmental systems. Template's aim is to provide solutions to its
customers that support applications in e-commerce, customer-centric process
reengineering, or other market-driven business thrusts. The primary integration
product is the Enterprise Integration Template ("EIT"). EIT supports the rapid
integration of legacy systems, commercial off-the-shelf ("COTS") packages and
other custom applications into a coherent whole able to support enterprise
business processes. Template's other primary products -- the Foundation Template
and its optional components, and the Process Templates -- provide the basis to
rapidly automate complex business processes. These templates have been designed
to interoperate seamlessly and each includes an integrated suite of visual
development tools to enhance the functionality and rapid development of specific
business solutions.
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ENTERPRISE INTEGRATION TEMPLATE. EIT addresses the broadest spectrum of
enterprise integration requirements. It can bring together existing systems and
databases under a common business representation in the form of objects and
present these resources as a service to any other application or business
process. EIT is designed to integrate any type of system or database. It
provides the means to "encapsulate" an application or database and make the
encapsulated data or functions available to other systems that might need to
make use of them. Most competitive offerings in the marketplace attempt to
provide this means of encapsulation in one way or another. Template believes
that EIT is unique and provides more utility because it goes beyond its
competitors and allows the encapsulated services to be included in object
classes that model part or all of the elements of a business process or
enterprise. Business rules and business events can also be modeled. EIT also
provides for the export of the services provided by the object representations
to end-user applications that can be written in any language that conforms to
industry and open system standards for object communication such as Microsoft's
DCOM or the Object Management Group's CORBA standard. Template's process
automation templates described below integrate seamlessly with EIT allowing the
automation of critical business processes with the integration of pre-existing
systems. Template believes that this combination of technologies is well suited
to the implementation of e-commerce applications, re-engineered business
processes (e.g. customer-centric processes), and internet enabled legacy
systems.
Template anticipates that specialized versions of EIT will be created for
certain industries. One such thrust has been initiated in the telecommunications
industry, called Telco Integration in a Box ("TIIB"). Template expects that
these specialized versions will include, at a minimum, EIT and packaged
connectors to market-leading software packages in the targeted industry.
FOUNDATION TEMPLATE. The basic use of Template's Foundation Template is in
the rapid automation of part or all of an enterprise business process. The
Foundation Template, which is based on distributed object technology, is
designed to promote large-scale code reuse and the capture of business rules and
events. The base reusable software in the Foundation Template provides for up to
65%-75% of the code for distributed, multi-process applications, including two
and three tier client-server and peer-to-peer applications. The Foundation
Template includes built-in components and functionality, including dynamic
graphical user interfaces, storage capabilities for database and file access,
facilities to integrate with class libraries and legacy applications and
advanced communications protocols. The Foundation Template also provides
inter-process communications that provide dynamic object sharing and updating
which allow the reconfiguration or scaling of distributed applications with
little or no code changes. To achieve this reconfiguration or scaling, the
Foundation Template provides a facility called the Shared Information Base
("SIB") which provides for inter-process communication among applications
running on a single hardware platform or multiple heterogeneous platforms.
Because multiple Foundation Template application processes can communicate on a
peer-to-peer basis through a shared information base, a developer can easily
scale an application up from a single workstation to a dispersed network of
multiple workstations.
The following are optional components of the Foundation Template:
WEB COMPONENT. Web Component is an extension to the Foundation
Template for creating Web-based, enterprise-wide solutions. Web Component
incorporates the Foundation Template's functionality and provides for the
dynamic generation in real-time of Hypertext Markup Language ("HTML"). As a
result, solutions developed
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with the Foundation Template can be deployed across the internet and
Intranets using internet protocol with HTML coding. Web Component supports
leading web browsers and servers, including those developed by Netscape
Communications Corporation and Microsoft Corporation. Web Component also
takes advantage of emerging standards such as HTML 3.0 and Java.
PROCESS MONITORING COMPONENT ("PMC"). PMC provides for the management
of a highly distributed, multi-process solution from a single location. A
multi-process application can be monitored and managed remotely. Failure of
processes can be detected remotely and in real time. Processes can be
restarted remotely. This type of sophisticated capability is essential for
the operational deployment of enterprise distributed solutions.
GEOGRAPHIC MAPPING COMPONENT ("GMC"). GMC allows the display of data
overlaid on geographic maps. The data overlays are "live" and can be
changed in real time. This type of display is important for enterprise
solutions such as fleet monitoring and management.
PROCESS TEMPLATES. The Process Templates consist of the Workflow
Template and the System Management Template.
WORKFLOW TEMPLATE ("WFT"). WFT is a template for creating workflow
solutions that automate and provide real-time management and control of the
functions and tasks involved in a business process, such as claims
processing and order fulfillment. WFT incorporates the Foundation
Template's functionality and provides the basis for up to 90% of the code
for most workflow solutions. WFT is based on a business operations model
which enables easy development of a rules-based, process oriented workflow
system. WFT provides the versatility to develop workflow solutions that
range from departmental systems to production and enterprise-wide systems.
WFT includes nine high-level editors which provide the visual tools for
workflow business process engineering, analysis and design.
SYSTEM MANAGEMENT TEMPLATE ("SMT"). SMT is a template for creating
solutions that provide real-time monitoring and control of complex physical
processes, such as pipeline management and computer network management. SMT
enables solutions that monitor the status of complex systems and gives
people in an organization the ability to rapidly change the elements of the
system. SMT tightly integrates key management and operation services for
system management with built-in components for managing and routing
commands, monitoring and managing the system management application,
filtering and routing system problems and providing and regulating access
control. SMT also provides a comprehensive list of class libraries,
configuration tools and a base application for system management
application development.
SERVICES. Template has a comprehensive service organization that
helps to ensure successful mass customization of solutions for its
customers based on Template's products. Template provides its customers
with software-related services to specify, design, customize, and deploy
the software solutions necessary to meet its customers' integration and
business process automation needs. Template believes that the availability
of its software-related services is a key factor in customer purchasing
decisions. Template's services have been and are expected to continue to be
an important source of revenues. The fees for Template's solutions services
can be fixed in advance of each stage of the delivery process for which
Template has been engaged.
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Template relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. Template's products are generally licensed to end users
pursuant to a license agreement that restricts the use of the products. In
addition, Template generally enters into confidentiality agreements with its
employees and consultants that limit access to and distribution of its
proprietary information. The degree and scope of legal protection available for
Template's software products may vary in certain foreign countries.
Template has entered into source code escrow agreements with a limited
number of its customers and resellers requiring release of source code in
certain circumstances. Such agreements generally provide that such parties will
have a limited, non-exclusive right to use certain portions of Template's source
code in the event that there is a bankruptcy proceeding by or against Template,
if Template ceases to do business or if Template fails to meet its support
obligations.
SEASONALITY
The operating results of many software and business solutions companies
reflect seasonal trends, and Template expects to be affected by such trends in
the future. Although Template has not experienced consistent seasonal
fluctuations in operational results to date, Template believes that it is likely
that it will experience relatively higher revenues in Template's fiscal quarters
ending on December 31, and relatively lower revenues in its fiscal quarters
ending on March 31, as a result of efforts by its direct sales force to meet
fiscal year-end sales quotas, assuming the projects can be completed and the
corresponding revenue recognized. To the extent future international operations
constitute a higher percentage of Template's total revenues, Template
anticipates that it may also experience relatively weaker demand in the fiscal
quarters ending on September 30 as a result of reduced sales activity in Europe
during the summer months.
BACKLOG
A number of Template's client projects are performed on a fixed-price basis
and, therefore, Template bears the risk of cost overruns and inflation. A
portion of net revenues are recognized on the percentage-of-completion method
which requires revenues to be recorded over the term of a client contract.
Revenues attributable to the sale of software products are recognized upon
shipment and revenues attributable to services are recognized upon completion. A
loss is recorded at the time when current estimates of project costs exceed
unrecognized revenues. Quarterly revenues and operating results can depend on
the significance of client engagements commenced and completed during a quarter,
the number of working days in a quarter and employee utilization rates. The
timing of revenues is difficult to forecast because Template's sales cycle is
relatively long in the case of new clients and may depend on factors such as the
size and scope of assignments and general economic conditions. Template's
software products are typically used to develop applications that are critical
to a customer's business and the purchase of Template's products is often part
of a customer's larger business process reengineering initiative or
implementation of distributed computing. As a result, the license and
implementation of Template's software products and business solutions generally
involves a significant commitment of management attention and resources by
prospective customers. Accordingly, Template's sales process is often subject to
delays associated with a long approval process that typically accompanies
significant initiatives or capital expenditures. Because a high percentage of
Template's expenses are relatively fixed, a variation in the timing of the
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initiation or the completion of client assignments, particularly at or near the
end of any quarter, can cause significant variations in operating results from
quarter to quarter and could result in losses. Template attempts to manage its
personnel utilization rates by closely monitoring project timetables and
staffing requirements for new projects. On a typical project, a significant
number of personnel are provided by Template's clients or third parties. While
professional staff must be adjusted to reflect active projects, Template must
maintain a sufficient number of senior professionals to oversee existing client
projects and participate with Template's sales force in securing new client
assignments. In addition, many of Template's engagements are, and may be in the
future, terminable without client penalty. An unanticipated termination of a
major project could require Template to maintain or terminate under-utilized
employees, resulting in a higher than expected number of unassigned persons or
higher severance expenses.
A significant portion of Template's revenues has been, and Template
believes will continue to be, derived from a limited number of orders placed by
large organizations, and the timing and fulfillment of such orders have caused
and are expected to continue to cause material fluctuations in Template's
operating results, particularly on a quarterly basis. Historically, with the
exception of the federal government, organizations that provide in excess of 10%
of Template's revenues have changed from year to year. For the fiscal year ended
November 30, 1997, Winstar Telecommunications, Inc. and the federal government
in aggregate accounted for more that 10% of Template's total revenue,
representing an aggregate of approximately 36% of total revenue, or 13% and 23%
of total revenue, respectively. For the fiscal year ended December 31, 1998,
each of Winstar Telecommunications, Inc. and the federal government (comprising
three different agencies and contracts) accounted for more than 10% of
Template's total revenue, representing an aggregate of approximately 40% of
total revenue, or 11% and 29% of total revenue, respectively.
GOVERNMENT CONTRACTS
Template has a government business unit comprised of approximately 50
people who provide technical services to government agencies. The principal
function of this group is to administer certain contracts, some of them
classified, between Template and agencies of the federal government. The nature
of this work is technical design and software development which Template has
been performing for the federal government since 1977. Approximately 23% and 29%
of Template's total revenues in fiscal years 1997 and 1998, respectively, were
derived from contracts with the government. Government contracts, by their
terms, generally can be terminated at any time by the government, without cause,
for the convenience of the government. If a government contract is so
terminated, Template would be entitled to receive compensation for the services
provided or costs incurred at the time of termination and a negotiated amount of
the profit on the contract to the date of termination. In addition, all
government contracts require compliance with various contract provisions and
procurement regulations. The adoption of new or modified procurement regulations
could adversely affect Template or increase its costs of competing for or
performing government contracts. Any violation (intentional or otherwise) of
these regulations could result in the termination of such government contracts,
imposition of fines, and/or debarment from award of additional government
contracts. The termination of any of Template's significant government contracts
or the imposition of fines, damages, or suspension from bidding on additional
government contracts could have a material adverse effect on Template.
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COMPETITION
The information technology consulting, software development, enterprise
application integration and business solution markets include a large number of
participants, are subject to rapid changes and are highly competitive. These
markets are highly fragmented and served by numerous firms, many of which serve
only their respective local markets. Clients may elect to use their internal
information systems resources to satisfy their needs for software development
and technical consulting services, rather than using those offered by Template.
In the software development tools market, representative competitors of Template
include, among others, Forte Software, Inc., ViewStar Corporation and ILOG S.A.
In the enterprise application integration market, representative competitors of
Template include, among others, Crossworlds Software, Inc., Vitria Technology,
Inc., and Active Software, Inc. In the information technology consulting market,
representative competitors of Template include, among others, Cambridge
Technology Partners, Inc. and TCSI Corporation. In the business solutions
market, representative competitors of Template include, among others, Electronic
Data Systems and the consulting departments of the "Big Five" accounting firms.
Template believes that its ability to compete depends in part on a number
of competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the ownership
by competitors of software used by potential clients, the development by others
of software that is competitive with Template's products and services, the price
at which others offer comparable services and the extent of its competitor's
responsiveness to customer needs.
SALES AND MARKETING
To reach a broad potential customer base, Template has pursued multiple
distribution channels, including a direct sales force, as well as third party
relationships with distributors, value added resellers and systems integrators.
Template's direct sales force focuses on large customers and leverages its
industry experience to access target organizations within particular vertical
markets. These markets are characterized by business areas to which Template's
services and technology are particularly well-suited, and by participants who
possess the financial resources and scale of operations necessary to support the
engagement of solution providers such as Template. Template identifies leading
organizations in each industry and seeks to provide an initial solution that
builds on one of Template's reusable software templates. Once an initial project
has been successfully completed, Template seeks to offer additional solutions
that automate and enhance other business processes for the client. Template
intends to target additional industries in which its business area experience
and advanced software technology expertise can be applied. An important element
of Template's sales and marketing strategy is to expand its relationships with
third parties to increase market awareness and acceptance of Template's software
solutions. The relationships with each of these groups generally provide for
training and other support necessary to promote the market acceptance of
Template's products.
Template has organized worldwide into two major geographic divisions for
sales and distribution of its solutions: the Americas and Europe/International.
Template previously had an Asia/Pacific geographic division for sales and
distribution, which was discontinued in 1998 and consolidated with
Europe/International until such time as the markets in those areas improve and
stabilize. Within each geographic division, Template intends to establish
industry specific groups to focus on solutions within each targeted area. In the
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Americas, Template has a strong telecommunications industry group and a
well-established federal government industry group. In Europe, Template has an
established presence, with over half of the manpower resources of Template
located in western Europe. Template has a customer base in telecommunications,
insurance and other industries in Europe.
PRODUCT DEVELOPMENT
Template believes that its future success will depend in large part on its
ability to enhance its current family of software products, develop new
products, maintain technological leadership and satisfy an evolving range of
customer requirements for enterprise application integration and business
process automation. Template's product development organization is responsible
for product architecture, core technology and functionality, product testing,
visual tool development and expanding the ability of Template's software
templates to operate with the leading hardware platforms, operating systems,
relational database management systems and networking and communication
protocols. This organization is also responsible for new product development. In
fiscal year 1998, product development expenses were $1.4 million. Management
expects that, as a result of its product development strategy, internally funded
research and development costs may increase significantly in future periods.
There can be no assurance that such increased research and development costs
will result in the successful introduction of new products.
Template attempts to continuously improve its existing products in two
ways. In response to market demands, Template seeks to enhance its current
family of software templates through planned releases. At the same time,
Template tries, on an ongoing basis, to expand its existing family of products
by periodically introducing new template-based products. This effort to enhance
existing products falls into three categories. First, Template adds new visual
development tools to increase the productivity of those using its templates.
Second, Template adds new functionality to its existing templates in the form of
reusable code. Third, as new platforms and standards are introduced into the
market, Template ports its templates to new platforms and standards to enhance
interoperability. Template usually retains the right to enhancements of its
products. However, Template generally assigns ownership of the custom software
components to its clients. In 1998, Template introduced one new product -- the
Enterprise Integration Template -- and two new components -- PMC and GMC.
Template believes that it is advantageously positioned to introduce new
products which exploit market opportunities in a timely fashion due to the
modular reuseability of its core technology. This building block approach allows
Template to create new products very rapidly. EIT is representative of this
ability, in that it was conceived and brought to market in its first version in
less than one year. This agile reaction has positioned Template to be an
important competitor in the EAI market.
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ACQUISITIONS AND ALLIANCES
In 1998, Template acquired the remaining 56% of the issued and outstanding
equity interest of Milestone Austria. Template had previously acquired 44% of
Milestone Austria in 1997.
Template constantly seeks strategic relationships with development
partners, systems integrators, value added resellers and independent software
vendors as a part of its strategy to promote the widespread use of its products
and services. Template believes that these alliances will enhance and increase
its market visibility and penetration. In this regard, Template has entered into
relationships with the following companies:
ALCATEL. Template fosters a relationship with Alcatel Alsthom
Compagnie Generale d'Electricite S.A. ("Alcatel"), one of the worlds
largest telecommunications, energy and transport systems suppliers. Alcatel
employs Template's products and services in a number of its internal
projects and customer engagements.
COMPUTER ASSOCIATES. In October 1997, Template announced a
partnership with Computer Associates International, Inc. to pursue
opportunities in the enterprise computing solutions market.
PRECISE. In March 1998, Template entered into a relationship,
including a $500,000 investment (which has subsequently been repaid in
full), in Precise Connectivity Solutions, Ltd. ("Precise"). Precise creates
software connectors for IBM mainframe and AS/400 computers, and Template's
relationship with Precise gave Template access to this software, which will
aid in the upcoming release of Template's EIT software.
EAGLE EYE. In September 1998, Template entered into a relationship,
including a $1,000,000 investment, in Eagle Eye Technologies, Inc. ("Eagle
Eye"). As part of this relationship, Template is helping Eagle Eye develop
a service operations center, which Template anticipates will help give
Template access to new markets for its products, including transportation
and tracking.
BULL. In December 1998, Template entered into an agreement with BULL,
a large worldwide systems integrator, whereby BULL will have the right to
use and sublicense Template's technology products for use in worldwide
customer engagements.
MANTECH SYSTEMS ENGINEERING CORPORATION ("MANTECH"). In April, 1998,
Template entered into a relationship with ManTech for the purpose of
co-marketing and teaming on selected projects where Template's technology
would be proposed.
EMPLOYEES
As of October 31, 1999, Template had a total of 298 full-time employees, of
which 264 were technical and technical support personnel. None of Template's
employees are subject to a collective bargaining agreement. Template believes
that its relations with its employees are excellent.
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FINANCIAL INFORMATION ABOUT INTERNATIONAL OPERATIONS AND EXPORT SALES
Revenues from foreign subsidiaries and export sales accounted for 49.0% and
51.9% of Template's total revenues in fiscal years 1997 and 1998, respectively.
Template believes that in order to increase sales opportunities and
profitability, it will be required to continue to expand its international
operations. Template has committed and continues to commit significant
management time and financial resources to developing direct and indirect
international sales and support channels. There can be no assurance, however,
that Template will be able to maintain or increase international market demand
for Template's software products and services. To the extent that Template is
unable to do so in a timely manner, Template's international sales will be
limited, and Template's business, operating results and financial condition
would be materially and adversely affected.
PROPERTIES
Template's principal administrative, sales, marketing, and product
development facility occupies approximately 63,000 square feet in Dulles,
Virginia pursuant to a lease which expires in December 2006. Template also
leases sales and support offices in Louisiana, Maryland and Pennsylvania. It
maintains an office in Arlington, Virginia for its government business unit and
maintains one international office in each of the United Kingdom, and France,
two international offices in Austria and four international offices in Germany.
Template believes that its existing facilities are adequate for its current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms as needed.
LEGAL PROCEEDINGS
Template has entered into a settlement agreement with Automated Financial
Systems, Inc. ("AFS") regarding an action that Template had filed that has been
pending since December 23, 1998. A description of the basis of this action is
contained in Template's Annual Report on Form 10-K for the year ended December
31, 1998 (File No. 0-21921). As part of the settlement, AFS paid Template
$260,000 in cash on August 27, 1999 and dismissed its counterclaims against
Template.
On June 30, 1999, Template filed a claim with the National Association of
Securities Dealers for arbitration against Merrill Lynch Pierce Fenner & Smith
seeking compensatory damages of $950,000 plus attorney's fees and lost income
resulting from advice rendered by Merrill Lynch to purchase, and the failure of
Merrill Lynch to divest at Template's instruction, Template's portfolio of zero
coupon long-term bonds. Discovery has commenced in this arbitration. Template
expects that the arbitration will be completed by the end of 1999. Template
cannot predict the outcome of this arbitration proceeding. If Template is not
successful in this arbitration, there could be a material adverse effect on
Template's business, results of operations and financial condition.
On July 15, 1999, Template filed an action against Manugistics, Inc. in the
United States District Court for the Eastern District of Virginia, seeking
compensatory damages of approximately $1,250,000 resulting from breach of
certain representations contained in a license agreement for
Manugistics-developed software that Template had attempted to incorporate into a
project that Template is committed to delivering to an agency of the federal
government. Manugistics has filed a counterclaim against Template, asserting
breach of contract, breach of alleged settlement, and wrongful hiring. On
October 19, 1999, Template filed an amended complaint to include two additional
claims, fraud in the
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inducement and constructive fraud, seeking additional damages of $2,000,000.
Discovery has commenced in the action. No trial date has been set for this
action, and Template cannot currently predict the outcome of this litigation. If
Template is not successful in pursuing these claims, there could be a material
adverse effect on Template's business, results of operations and financial
condition.
In addition, Template is and may from time to time be involved in ordinary
routine litigation incidental to its business. Other than as described above,
Template is not aware of any pending or threatened litigation that could have a
material adverse effect on Template's business, results of operations or
financial condition.
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TEMPLATE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Template provides enterprise-wide software solutions to organizations that
require the integration of their operations and systems in an effort to better
automate their critical business processes. To date, substantially all of
Template's revenues have been derived from license fees for use of Template's
products ("Product Revenue") and fees from software-related services ("Services
Revenue"). These services primarily relate to the customization of Template's
products which includes software development, training, maintenance, systems
integration and systems planning.
Template provides its software products and business solutions to customers
in both domestic and foreign markets under license agreements, service contracts
and purchase orders. Fees for solutions, consisting of a combination of
software-development services provided by Template and licenses to use
Template's products, are typically based on staffing requirements and the
overall scope and timing of the project as agreed upon with the client.
Template's software templates, tools and reusable solutions are typically
licensed separately for development and deployment. Development license fees are
primarily based upon the number of developers who will be using Template's
products. Deployment license fees are based upon the number of end-users, or the
number and power of computing platforms (servers) that execute the specialized
application created with Template technology.
Template recognizes revenue from software products when the related license
agreement has been executed and the software has been shipped to and accepted by
the client. Template recognizes revenue for software-related services based on
the type of contractual arrangement under which the services are performed. In
its commercial business, Template typically contracts on a fixed-price basis or
on a time-and-material basis, depending on the overall project scope, project
risks and client requirements. In its government business, Template typically
contracts on a cost-plus-fixed-fee basis.
Template recognizes revenue from fixed-price contracts using the percentage
of completion method. Revenue from time-and-material contracts is recognized
when the services are performed. Template recognizes revenue from
cost-plus-fixed-fee contracts on the basis of reimbursable contract costs
incurred during the period at provisional billing rates, and year-end
adjustments for actual costs are shown as under (over) billed costs. Management
believes that these cost adjustments are fully allowable under their respective
cost-plus contracts and prevailing government regulations.
Template acquired Template Software S.A. in March 1997 and Milestone in
June 1997 in transactions accounted for using the purchase method. The results
of operations for these two wholly owned subsidiaries are included beginning on
the date of their respective acquisitions. At the date of the acquisition of
Milestone by Template in June 1997, Milestone owned 34% and 20% of the issued
and outstanding equity interests of Milestone Austria and Milestone Switzerland,
respectively. As part of this same transaction, Template contemporaneously
acquired an additional 10% of the issued and outstanding equity interests
Milestone Austria. In March 1998, Template acquired the remaining 56% of the
issued and outstanding equity interests of Milestone Austria. In December 1998,
Template began the process of liquidating its Mexican subsidiary, Template
Software de Mexico S.A. de C.V.
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In 1998, Template changed its fiscal year end from November 30 to December
31.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUE. Total Revenue was $9.1 million for the quarter ended September
30, 1999 compared to $9.9 million for the quarter ended September 30, 1998, a
decrease of $0.8 million or 7.8%. This decrease was primarily attributable to a
decrease in product revenue. Total Revenue for the nine month period ended
September 30, 1999 was $31.4 million compared to $28.7 million for the nine
month period ended September 30, 1998, an increase of $2.7 million or 9.4%. This
growth resulted principally from volume increases in sales of software-related
services for customers such as the National Imagery and Mapping Agency ("NIMA")
in the United States and Commerzbank, Mannesmann and Delvag in Germany.
Product Revenue was $0.5 million for the quarter ended September 30, 1999
compared to $1.2 million for the quarter ended September 30, 1998, a decrease of
$0.7 million or 59.6%. This decrease is primarily attributable to significant
product transactions in the three month period ended September 30, 1998 with
Eagle Eye Technologies, Inc. and Motorola Center Computersysteme with no
transaction of comparable size in the three months ended September 30, 1999. For
the nine month period ended September 30, 1999, Product Revenue was $3.9 million
compared to $5.1 million for the nine month period ended September 30, 1998, a
decrease of $1.2 million or 23.9%. This decrease was primarily attributable to
the decrease in product revenue in Europe. Template believes that penetration
into the German enterprise integration market has not occurred primarily because
German companies are spending their information technology budgets on Year 2000
remediations and SAP implementations. In the three month period ended June 30,
1999, Template realigned its sales strategy in Germany to penetrate the market
with lighter products (i.e., products that have less functionality and
complexities) that are more relative to the enterprise application integration
market. Template is now focussing on reselling Vision Jade and Visual Edge, both
lighter enterprise integration products, in an effort to penetrate our German
customer base. Services Revenue was $8.6 million for the quarter ended September
30, 1999 and September 30, 1998. Services Revenue was $27.5 million for the nine
month period ended September 30, 1999, compared to $23.6 million for the nine
month period ended September 30, 1998, an increase of $3.9 million or 16.7%.
This growth resulted principally from volume increases in sales of
software-related services for customers such as the National Imagery and Mapping
Agency ("NIMA") in the United States and Commerzbank, Mannesmann and Delvag in
Germany.
COST OF REVENUE. Total Cost of Revenue is comprised of salaries and
related benefits for personnel, amortization of capitalized software development
costs and an allocated portion of rent, building services and computer equipment
services and expenses. Total Cost of Revenue was $6.9 million for the quarter
ended September 30, 1999 compared to $5.8 million for the quarter ended
September 30, 1998, an increase of $1.1 million or 19.5%. Total cost of revenue
was $22.6 million for the nine month period ended September 30, 1999 compared to
$15.8 million for the nine month period ended September 30, 1998, an increase of
$6.8 million or 43.0%. Total Cost of Revenue was 76.2% of total revenue for the
quarter ended September 30, 1999 compared to 58.8% of total revenue for the
quarter ended September 30, 1998. For the nine month period ended September 30,
1999, total cost of revenue was 72.2% of total revenue for the nine months ended
September 30, 1999 compared to 55.2% for the comparable period during 1998. The
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increase in the cost of revenue and the related percentage relative to revenue
was attributable to (i) higher technical staff salaries, (ii) utilization of
third party subcontractors in conjunction with Template's implementation of the
NIMA service engagement, (iii) the purchase and integration of a third party
software product with Template's software products, and (iv) lower margins on
service contracts. Also, certain contracts in Germany achieved very low margins
and technical personnel trained in Template's technology in France and Germany
were under-utilized. As a result of these issues, in the three month period
ended June 30, 1999, Template implemented a reduction in force in Europe,
primarily Germany in order to more closely align Template's European cost
structure with its related revenue.
Cost of Product Revenue was $0.5 million for the quarter ended September
30, 1999 compared to $0.3 million for the quarter ended September 30, 1998, an
increase of $0.2 million or 43.6%. Cost of Product Revenue was $1.6 million for
the nine months ended September 30, 1999 compared to $1.1 million for the nine
months ended September 30, 1998, an increase of $0.5 million or 43.7%. The Cost
of Product Revenue increased in the three month and nine month periods ended
September 30, 1999 primarily due to an increase in software amortization
associated with the general availability release of Template's Enterprise
Integration TemplateTM ("EIT").
Cost of Services Revenue was $6.4 million for the quarter ended September
30, 1999 compared to $5.4 million for the quarter ended September 30, 1998, an
increase of $1.0 million or 17.9%. Cost of Services Revenue was $21.0 million
for the nine month period ended September 30, 1999, compared to $14.7 million
for the nine month period ended September 30, 1998, an increase of $6.3 million
or 43.0%. This increase resulted primarily from the cost associated with
staffing the growth in services contracts. Template believes that Service
Revenue gross margins have decreased due to the use of third party
subcontractors, the provision and integration of a third party software product
on the NIMA contract and the low service margins and under-utilization of the
technical staff in Germany. If any of Template's engagements were to be
terminated on short notice, Template would be unable to reduce Cost of Services
Revenue commensurate with the associated decrease in Services Revenue. Any such
termination would have a material adverse effect on Template's business,
operating results and financial condition.
SELLING AND MARKETING. Selling and Marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and Marketing expenses were
$2.9 million for the quarter ended September 30, 1999 compared to $2.3 million
for the quarter ended September 30, 1998, an increase of $0.6 million or 25.6%.
Selling and marketing expenses were $8.0 million for the nine month period ended
September 30, 1999, compared to $7.2 million for the nine month period ended
September 30, 1998, an increase of $0.8 million or 12.2%. These increases
resulted primarily from additional expenditures targeted towards increasing
market awareness including public relations activities, tradeshows and expenses
associated with evaluating and generating proposals. Template has hired and
intends to continue to hire additional sales personnel primarily in the United
States and Germany and is utilizing additional technical staff in sales
activities. Template anticipates its selling and marketing expenses will
continue to increase.
PRODUCT DEVELOPMENT. Product Development expenses were $0.6 million for
the quarter ended September 30, 1999, compared to $0.4 million for the quarter
ended September 30, 1998, an increase of $0.2 million or 65.5%. Product
development expenses were $1.5 million for the nine month period ended September
30, 1999, compared to $1.0
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million for the nine month period ended September 30, 1998, an increase of $0.5
million or 46.6%. This increase resulted primarily from the development of
enhancements to the EIT and the writedown of peripheral product development
efforts that were not strategic to Template's enterprise application integration
focus amounting to approximately $124,000 and $40,000 recorded in the three
month periods ended June 30, 1999 and September 30, 1999, respectively.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses include
costs of corporate services functions including accounting, human resources and
legal services, as well as the corporate executive staff and goodwill
amortization. General and Administrative expenses were $1.7 million for the
quarter ended September 30, 1999 compared to $1.3 million for the quarter ended
September 30, 1998 an increase of $0.4 million or 31.0%. This increase is
primarily attributable to increased personnel, recruiting costs and professional
service fees. General and administrative expenses were $7.3 million for the nine
month period ended September 30, 1999, compared to $4.1 million for the nine
month period ended September 30, 1998, an increase of $3.2 million or 78.9%.
This increase is primarily attributable to costs associated with the reduction
in force in Europe in the three month period ended June 30, 1999, increases in
personnel due to the higher level of revenues during the nine month period ended
September 30, 1999 compared to the same period in 1998 and the recognition of an
impairment loss to the goodwill associated with Template's French acquisition of
approximately $1.0 million. As the result of Template's ongoing evaluation of
the carrying value of its long-lived assets, in the three month period ended
June 30, 1999, Template determined that the sales pipeline in the French
operations did not improve as originally anticipated; therefore, Template
recognized an impairment loss equal to the unamortized balance of the goodwill
associated with the acquisition of the French operation. Goodwill amortization,
exclusive of the $1.0 million goodwill impairment loss, was $169,946 and
$587,772 for the three month period ended September 30, 1999 and September 30,
1998 and $206,468 and $608,811 for the nine months ended September 30, 1999 and
September 30, 1998, respectively.
INCOME TAX (BENEFIT) PROVISION. The Income Tax Benefit was $0.8 million
for the quarter ended September 30, 1999 compared to an Income Tax Provision of
$0.2 million for the quarter ended September 30, 1998. The Income Tax Benefit
for the nine months ended September 30, 1999 was $2.0 million compared to an
Income Tax Provision of $0.6 million for the nine month period ended September
30, 1998. Template's effective tax rate was 25% for the quarter ended September
30, 1999 compared to 87% for the quarter ended September 30, 1998. Template's
effective tax rate was 25% for the nine month period ended September 30, 1999
compared to 46% for the nine month period ended September 30, 1998. These tax
rates reflect the differences in effective tax rates relative to Template having
pre-tax losses in 1999 and pre-tax profits in 1998 along with lower tax rates
applicable to losses in foreign jurisdictions, the effect of the permanent
differences relative to Template's profit/loss and the establishment in 1999 of
valuation allowances for deferred tax assets attributable to net operating
losses in France in the amount of approximately $482,000.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997
REVENUE. Total revenue was $42.6 million in 1998 compared to $26.9 million
in 1997, an increase of $15.7 million or 58.5%. This growth resulted principally
from implementing large scale solutions to customers such as Allied Dunbar,
BULL, Motorola Center Computersysteme ("Motorola"), the National Imagery and
Mapping Agency
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("NIMA"), U.S. Department of the Navy and Winstar Telecommunications.
Additionally, this growth is the result of consolidating 12 months of revenue,
or $14.0 million, and 9 months of revenue, or $2.1 million, from Template's
German and Austrian subsidiaries, respectively, in 1998 versus 5 months of
revenue, or $6.9 million, from Template's German subsidiary in 1997.
Product Revenue was $8.0 million in 1998 compared to $8.5 million in 1997,
a decrease of $0.5 million or 6.2%. Approximately $0.2 million of the decrease
was attributable to a decline in sales of third party software products by
Template's German subsidiary. This decline was primarily due to the shift in the
focus of the German sales force to Company products. Approximately $0.3 million
of the decrease was attributable to sales of Template's products. Template
believes this decline is due to a shift in the marketplace to products that
address integration challenges facing companies today as well as the budget
constraints created by the Year 2000 Issue. Template has positioned its newest
technology, EIT, to address this market shift. Template has also made
organizational changes in its sales operations and its incentive structures to
better focus its resources on product sales in 1999. Services Revenue was $34.6
million in 1998 compared to $18.4 million in 1997, an increase of $16.2 million
or 88.5%. This increase was primarily attributable to the implementation of
solutions for BULL, Allied Dunbar, Motorola, NIMA and the U.S. Department of the
Navy described above.
COST OF REVENUE. Total cost of revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and computer equipment services and expenses. Total cost of
revenue was $24.2 million in 1998 compared to $12.8 million in 1997, an increase
of $11.4 million or 89.0%. This increase was primarily attributable to
additional staff hired to perform services for customers, and the effect of the
consolidation of 12 and 9 months of the German and Austrian subsidiaries,
respectively in 1998 versus 5 and no months in 1997. Additionally, approximately
$1.6 million of subcontract costs were expended in the fourth quarter
attributable to materials costs for the NIMA contract of which minimal markup
was applied. Total cost of revenue was 56.7% of total revenue in 1998, compared
to 47.5% of total revenue in 1997. This percentage increase was primarily
attributable to a decrease in product revenue to overall revenue mix from 31.7%
of total revenue in 1997 to 18.8% of total revenue in 1998.
Cost of Product Revenue was $1.7 million in 1998 compared to $2.1 million
in 1997, a decrease of $0.4 million or 21.2%. This decrease was primarily
attributable to the reduction in the higher royalties incurred upon the sale of
third party software products due to the decrease in the sales of such products.
Cost of Services Revenue was $22.5 million in 1998 compared to $10.6 million in
1997, an increase of $11.8 million or 111.2%. This increase resulted primarily
from the cost associated with staffing the growth in service contracts and the
$1.6 million of third party products and services associated with the NIMA
agreement. Because such staffing is relatively fixed in the short term, if any
of Template's engagements were to be terminated on short notice Template would
be unable to reduce cost of Services Revenue commensurate with the associated
decrease in Services Revenue. Any such termination could have a material adverse
effect on Template's business, operating results and financial condition.
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and marketing expenses were
$9.8 million in 1998 compared to $6.3 million in 1997, an increase of $3.5
million or 55.6%. This increase resulted
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primarily from increased trade show participation, advertising and the full
twelve months consolidation of Template's 1997 acquisitions in Europe. Template
anticipates that selling and marketing expenses will increase in 1999 as
continued emphasis is placed on increasing the name recognition of Template and
its products in the marketplace.
PRODUCT DEVELOPMENT. Product development expenses were $1.4 million in
1998 compared to $1.3 million in 1997, an increase of $0.1 million or 9.9%. This
increase resulted primarily from the development of Template's EIT product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
costs of corporate services functions including accounting, human resources and
legal services, as well as the corporate executive staff. General and
administrative expenses were $6.1 million in 1998 compared to $3.2 million in
1997, an increase of $2.9 million or 94.1%. This increase resulted primarily
from increased goodwill amortization, increased staff, liquidation costs for the
wind up of Template's Mexican subsidiary and increased professional fees. The
amortization of goodwill increased by $0.3 million in 1998 as the result of
consolidating 12 months of the German and French subsidiaries in 1998 compared
to 5 months and 9 months in 1997, respectively. Similarly, the administrative
costs associated with those acquired subsidiaries increased by $0.9 million
resulting from consolidation of those expenses for part of 1997 compared to the
full year of consolidation in 1998. Professional fees increased as the result of
tax planning initiatives and professional advise regarding strategic
investments. Additionally, Template added administrative positions such as a
Contracts Manager and a European Controller in the fourth quarter of 1997.
INCOME TAX PROVISION (BENEFIT). The provision for income taxes was
$748,117 in 1998 compared to $1,768,016 in 1997, a decrease of $1,019,899. This
decrease was attributable to lower pretax earnings in 1998 compared to 1997.
Template's effective tax rate of 40% in 1998 was lower than the effective tax
rate of 43% in 1997 primarily as a result of research and development tax
credits obtained in 1998 that were not applied for in 1997. Template intends to
amend its previous years tax returns to recapture these credits for all open tax
years. Template expects the tax rate to be in the range of 40% to 45% in 1999.
COMPARISON OF YEARS ENDED NOVEMBER 30, 1997 AND NOVEMBER 30, 1996
REVENUE. Total revenue was $26.9 million in 1997 compared to $13.5 million
in 1996, an increase of $13.4 million or 98.9%. This growth resulted principally
from an increase in the size of a customer engagement, the increase in
Template's capacity to provide services through expansion in the number of
software professionals employed globally and acquisitions.
Product Revenue was $8.5 million in 1997 compared to $1.9 million in 1996,
an increase of $6.6 million or 345.0%. Approximately $4.7 million of this
increase was attributable to the sale of development and deployment licenses
associated with several large customer engagements with the remaining $1.9
million being attributable to product revenue realized from five months of
operations of Milestone which was acquired during fiscal 1997. Services Revenue
was $18.4 million in 1997 compared to $11.6 million in 1996, an increase of $6.8
million or 58.2%. This increase was primarily attributable to added service
revenue from newly acquired European operations.
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COST OF REVENUE. Total cost of revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and computer equipment services and expenses. Total cost of
revenue was $12.8 million in 1997 compared to $7.0 million in 1996, an increase
of $5.8 million or 81.9%. This increase was primarily attributable to additional
professional staff hired and added through acquisitions to perform the increased
volume of software services. Total cost of revenue was 47.5% of total revenue in
1997, compared to 51.9% of total revenue in 1996. This percentage decrease was
primarily attributable to an increase in the product revenue to overall revenue
mix from 14.2% of total revenue in 1996 to 31.7% of total revenue in 1997.
Cost of Product Revenue was $2.1 million in 1997 compared to $0.8 million
in 1996, an increase of $1.3 million or 174.1%. This increase was primarily
attributable to the additional cost associated with the products sold by
Milestone which have a higher cost structure. Cost of Services Revenue was $10.6
million in 1997 compared to $6.2 million in 1996, an increase of $4.4 million or
70.3%. This increase resulted primarily from the cost associated with staffing
the growth in services contracts. Because such staffing is relatively fixed in
the short term, if any of Template's engagements were to be terminated on short
notice, Template would be unable to reduce the Cost of Services Revenue
commensurate with the associated decrease in Services Revenue. Any such
termination could have a material adverse effect on Template's business,
operating results and financial condition.
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and marketing expenses were
$6.3 million in 1997 compared to $2.4 million in 1996, an increase of $3.9
million or 165.4%. This increase resulted primarily from Template's enlargement
of its direct sales force and marketing department. The number of sales and
marketing staff increased from 8 to 35 in 1997, 19 of which were added for the
last five months of fiscal 1997 with the acquisition of Milestone.
PRODUCT DEVELOPMENT. Product development expenses were $1.3 million in
1997 compared to $1.0 million in 1996, an increase of $0.3 million or 36.0%.
This increase resulted primarily from the development of Template's Process
Monitoring and Geographic Mapping Components of the Foundation Template,
enhancements to its visual development tools and major new releases of the
Foundation Template and Workflow Template.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
costs of corporate services functions including accounting, human resources and
legal services, as well as the corporate executive staff. General and
administrative expenses were $3.2 million in 1996 compared to $1.5 million in
1996, an increase of $1.7 million or 114.8%. This increase resulted primarily
from the additional administrative staff and expenses of the newly acquired
subsidiaries and the amortization of the purchase price of the subsidiaries in
excess of the net assets acquired of $374,237.
INCOME TAX PROVISION. The provision for income taxes was in $1.8 million
in 1997 compared to $0.6 million in 1996, an increase of $1.1 million. This
increase was attributable to Template's greater pretax profit level in 1997.
Template's effective tax rate of 43% in 1997 was higher than the effective tax
rate of 38% in 1996 primarily as a result of the higher foreign statutory tax
rates and an increase in book-tax permanent differences.
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LIQUIDITY AND CAPITAL RESOURCES
Template's overall cash and cash equivalents were $2.5 million at September
30, 1999, which is an increase of approximately $0.7 million from $1.8 million
as of December 31, 1998. Template's operating activities used cash of $0.3
million for the nine month period ended September 30, 1999. During the nine
month period ended September 30, 1999, cash flow used in operating activities
reflected the net loss, the deferred tax provision and the decrease in deferred
income, partially offset by depreciation and amortization and the decrease in
accounts receivable.
Cash provided by investing activities totaled $1.6 million during the nine
month period ended September 30, 1999. During the nine months ended September
30, 1999 Template invested $0.7 million in property and equipment and
capitalized $1.3 million in software development costs. Additionally, Template
sold $5.2 million and reinvested $2.0 million of marketable securities, netting
$3.2 million for working capital. Precise Connectivity Solutions, Ltd. repaid
its $0.5 million note to Template in full.
Cash used in financing activities totaled $0.5 million for the nine month
period ended September 30, 1999 primarily relating to Template's re-purchase of
common stock in conjunction with its stock buy-back program.
Template has a line of credit under a Loan and Security Agreement (the
"Loan Agreement") with First Union National Bank, previously Signet Bank (the
"Bank"), in the aggregate principal amount of $3.0 million. As of September 30,
1999, there were no amounts outstanding under this line of credit. Template has
been in compliance with all financial and non-financial covenants of the Loan
Agreement. The Loan Agreement bears interest at the LIBOR Market Index Rate (for
the United States Dollar quoted by the British Bankers Association) plus 1.85%.
Template's French subsidiary maintains with Banque Hervet an unsecured line of
credit for 500,000FF plus an additional 500,000FF of credit collateralized by
70% of accounts receivable (approximately $180,000 in aggregate) at an interest
rate of 8.3%. Template's Austrian subsidiary maintains a line of credit with
Raiffeisen Bank for 1,000,000ATS (approximately $85,000), collateralized by 100%
of accounts receivable at an interest rate of 5%. As of September 30, 1999,
515,384FF (approximately $84,000) was outstanding under the French line of
credit and no amounts were outstanding under the Austrian line of credit.
Template's Board of Directors, on September 18, 1998, authorized the
repurchase of up to 500,000 shares of Template's common stock in open market
transactions effected in accordance with Rule 10b-18 of the Securities Exchange
Act of 1934, as amended. During the three and nine month periods ended September
30, 1999, Template purchased 40,600 and 115,800 shares of its common stock for
$140,975 and $486,994, respectively. As of September 30, 1999, Template had
cumulatively repurchased 299,800 shares of its common stock in such transactions
for $1,298,219, at an average purchase price of $4.33 per share.
Template believes its cash balances, cash generated from operations and
borrowings available under its line of credit, will satisfy Template's working
capital and capital expenditure requirements for at least the next twelve
months. In the longer term, Template may require additional sources of liquidity
to fund future operating activities. Such sources of liquidity may include
additional equity offerings or debt financings. There can be no assurances that
such sources of financing will be available to Template, and if they are, that
they will be sufficient to meet Template's liquidity needs at such time.
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IMPACT OF YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year. If Template's
computer programs with date-sensitive functions are not Year 2000 compliant,
they may recognize a date using "00" as the Year 1900 rather than the Year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The majority of Template's systems have been confirmed as Year 2000
compliant as the result of Template's Year 2000 compliance program conducted to
identify and correct any non-compliant software or systems that would cause a
significant detrimental effect on Template. Template has identified its Year
2000 risk in four categories: internal administrative software; internal
operational software and embedded chip technology; external noncompliance by
customers and suppliers; and Company products.
INTERNAL ADMINISTRATIVE SOFTWARE. All of Template's internal
administrative software is "off-the-shelf" commercially available software.
Template gathered data to assess the impact of the Year 2000 on its
administrative systems such as the accounting and human resources systems.
Template's main domestic accounting system has been determined to be
non-compliant and will be replaced with new compliant software. The estimated
cost of such replacement is expected to be approximately $300,000. Template
expects to be in full compliance with its internal administrative financial
systems before December 31, 1999. However, if due to unforeseen circumstances,
the implementation is not completed on a timely basis, the Year 2000 could have
a material impact on the operations of Template. In the event Template
determines some risk that the non-compliant domestic accounting system cannot be
implemented before Year 2000, Template will develop contingency plans
accordingly.
INTERNAL OPERATIONS SOFTWARE AND EMBEDDED CHIP TECHNOLOGY. Template
gathered data to assess the impact of the Year 2000 on its operational systems
such as production systems and communication systems. Template believes its
material, critical systems are Year 2000 compliant resulting from responses from
inquiries made to the applicable vendors. Additionally, as a contingency,
Template believes it can replace any failing system with an alternate
commercially available system in a short time frame.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. Template is continuing
the process of reviewing the state of readiness of its critical suppliers and
service providers to determine the extent to which Template's interface systems
are vulnerable to those third parties' failure to remedy their own Year 2000
issues. This exercise includes compliance inquiries and reviews that will
continue throughout 1999. To the extent that responses to Year 2000 readiness
are unsatisfactory, Template intends to change suppliers or service providers to
those who have demonstrated Year 2000 readiness but cannot be assured that it
will be successful in finding such alternative suppliers and service providers.
Template does not currently have any formal information concerning the Year 2000
compliance status of its customers but has received indications that most of its
customers are working on Year 2000 compliance. In the event that any of
Template's significant customers and suppliers do not successfully and timely
achieve Year 2000 compliance, and Template is unable to replace them with new
customers or alternate suppliers, Template's business or operations could be
adversely affected.
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COMPANY PRODUCTS. Template provides its customers with licensed software
products that are manufactured and developed internally and licensed software
products that are obtained from third party software vendors and resold. The
following compliance statement covers Template's internally produced software
products and is provided to the general public on Template's website.
TEMPLATE YEAR 2000 COMPLIANCE STATEMENT
Template recognizes that most customers use Company software products in
business-critical applications and that customers want to know if Template's
products are "Year 2000 Compliant." The compliance statements below cover
Template's software products: Foundation Template (including the SNAP Template,
Web Component, Geographic Mapping Component and Process Monitoring Component),
Workflow Template ("WFT"), System Management Template ("SMT") and the Enterprise
Integration Template ("EIT").
DEFINITION
There is no single definition of the term "Year 2000 Compliant" that is
generally accepted in the industry. Template has created the definition below
which Template believes meets the letter and the spirit of a notice of
compliance that meets our customer's requirements.
A software product is "Year 2000 Compliant" when: (1) the software product
itself does not fail at or near January 1, 2000 and (2) the software product
provides documented time and date facilities that allow developers to build
software that does not fail at or near January 1, 2000. The phrase at or near
January 1, 2000 specifically includes treating the Year 2000 as a leap year.
COMPLIANCE STATEMENTS
- The Foundation Template (including the SNAP Template, Web Component,
Geographic Mapping Component and Process Monitoring Component) provided
by Template is Year 2000 Compliant.
- The Workflow Template ("WFT") provided by Template is Year 2000
Compliant.
- The Systems Management Template ("SMT") provided by Template is Year 2000
Compliant.
- The Enterprise Integration Template ("EIT") provided by Template is Year
2000 Compliant.
HOW COMPLIANCE IS ACHIEVED
The Foundation Template, WFT, SMT and EIT meet the first criterion because
they employ a single module to obtain or provide time and date information. This
module has been extensively tested in many product development cycles and in
many customer solutions. It handles the Year 2000 as a leap year.
The Foundation Template, WFT, SMT and EIT meet the second criterion because
they use a common data structure for time and date information. All time
requests start by
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getting the operating system time, then developers use one function to convert
operating system time to a single portable SNAP environment data structure.
Developers use this data structure in applications to obtain time and date
information. All time and date information is supplied as integer values. To
provide a portable data structure the conversion algorithm is different for
different operating system environments. The integer value returned for 'year'
is a number representing the number of years since 1900. The year value can be
very large (over 10,000). The integer value will increment continuously at the
turn of the century and beyond. The algorithm used to determine the current year
(1900 + year) remains constant before and after the turn of the century.
When using Template products that are Year 2000 Compliant it is still
possible for application developers to introduce code that will make the overall
application non-compliant.
END OF TEMPLATE YEAR 2000 COMPLIANCE STATEMENT
Template has investigated each third party software vendor whose software
products Template resells regarding Year 2000 compliance of those products.
Template has determined that all of the third party products it currently
resells are Year 2000 compliant based upon the representations of the respective
third party software vendor. In all cases the third party software vendor's
license agreement is passed on to the customer and Template is not a party
thereto.
OTHER
Template does not intend to adopt the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" as they
pertain to financial statement recognition of compensation expense attributable
to option grants, however, Template has disclosed the effects of this
pronouncement in the notes to the financial statements on a pro forma basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of Template is
routinely subjected to a variety of risks. Though Template faces and manages
other types of risks, such as credit and liquidity risks, Template's market risk
arises primarily from risks inherent in currency rate movements and from risk
inherent in Template's marketable securities. Template regularly assesses these
risks and has established policies and business practices to protect against the
adverse effects of these and other potential exposures.
A substantial portion of Template's revenues are generated from
international operations. Revenues from foreign subsidiaries and export sales
accounted for 49.0%, 51.9% and 48.7% of Template's total revenues in fiscal
years 1997 and 1998 and the nine months ended September 30, 1999, respectively,
or $12.3 million, $21.2 million and $15.3 million, respectively. As a result,
Template is subject to numerous international risks. These risks include
unexpected changes in regulatory requirements, export limitations on encryption
technologies, tariffs and other trade barriers, political and economic
instability in foreign markets, difficulty in the staffing, management and
integration of foreign operations, longer payment cycles, greater difficulty in
accounts receivable collection, currency fluctuations and potentially adverse
tax consequences. The uncertainty of the monetary exchange values has caused,
and may in the future cause, some foreign customers to delay new orders or delay
payment for existing orders. These factors may, in the future, contribute to
fluctuations in Template's financial condition and results of operations.
Template believes that Template's currency exchange risk is mitigated somewhat
by the fact that Template
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conducts operations from international as well as domestic locations, allowing
it to minimize the impact of any currency movements by, for example, paying its
German debtors in German deutsche marks. Although Template's results of
operations have not been materially adversely affected to date as a result of
currency fluctuations, the long-term impact of currency fluctuations, including
any possible effect on the business outlook in other developing countries,
cannot be predicted.
The fair value of Template's investments in marketable securities at
September 30, 1999 was $4.3 million. Template's marketable securities portfolio
is invested in (i) short-term securities with at least an investment grade
rating to minimize interest rate and credit risk as well as to provide for an
immediate source of funds with a market value of $1.0 million as of September
30, 1999 and (ii) long-term federally backed zero coupon bonds with a market
value of $3.3 million as of September 30, 1999. In this regard, Template has
gross unrealized losses of approximately $1.1 million from its longer-term
marketable securities as of September 30, 1999, and there can be no assurance
that Template will be able to recoup these losses if realized. Template has
filed an arbitration claim with the National Association of Securities Dealers
against Merrill Lynch with respect to certain of these issues. As a general
matter, although changes in interest rates may affect the fair value of the
marketable securities portfolio and cause unrealized gains or losses, such gains
or losses would not be realized unless the investments are liquidated.
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TEMPLATE'S MANAGEMENT AND EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of Template.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph M. Fox.......................... 65 Chairman of the Board, Co-Chief Executive
Officer and Director
E. Linwood Pearce...................... 54 President, Co-Chief Executive Officer and
Director
Peter J. Russo......................... 53 Executive Vice President, Chief Financial
Officer and Secretary
David L. Kiker......................... 40 Vice President of Technology
J. Kelly Brown......................... 45 Vice President and General Manager of
Government Business Unit
Richard H. Collard..................... 50 Vice President of European Operations
Benjamin J. Martindale II.............. 48 Executive Vice President
Andrew B. Ferrentino................... 59 Director
Dr. Duane A. Adams..................... 61 Director
Dr. Alan B. Salisbury.................. 62 Director
Dr. Gerhard Barth...................... 50 Director
</TABLE>
JOSEPH M. FOX is founder of Template and has served as Chairman since 1978,
and Co-Chief Executive Officer since April 30, 1999. From 1956 until 1977, he
was employed by IBM, the last seven years as Vice President of its Federal
Systems Division, where he oversaw a software development unit comprised of over
4,000 employees and was responsible for many major projects, including the
automation of the Air Traffic Control System in the United States and the United
Kingdom and the automation of the ground and on-board NASA Shuttle control
system.
E. LINWOOD PEARCE joined Template in November 1991 and since that time has
served as its Chief Executive Officer and as a director. Effective January 1,
1999, Mr. Pearce also serves as Template's President. From July 1988 to April
1991, Mr. Pearce was Executive Vice President of Sales, Marketing and Business
Development for Sage Software, Inc. (the predecessor to Intersolv, Inc.). From
October 1985 to May 1988, Mr. Pearce was Executive Vice President and Chief
Operating Officer of Software AG of North America. From 1967 to September 1985,
Mr. Pearce was employed by Applied Data Research, a software products and
services company, most recently as Vice President of Field Operations.
PETER J. RUSSO joined Template in April 1999 as its Executive Vice
President, Chief Financial Officer and Secretary. From June 1997 to April 1999,
Mr. Russo served as Senior Vice President and Chief Financial Officer of
Computer People, Inc. From June 1993 to June 1997, Mr. Russo was Senior Vice
President and Chief Financial Officer of TRC Companies, Inc. From May 1980 to
June 1993, Mr. Russo was Treasurer and Corporate Controller of Gerber
Scientific, Inc.
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DAVID L. KIKER joined Template is November 1985 as a software engineer, and
in June 1991 was appointed to serve as Vice President of Technology. Prior to
1985, Mr. Kiker was employed by National Biomedical Research Foundation for five
years where he was responsible for developing software for medical research
applications.
J. KELLY BROWN joined Template in February 1990 and serves as Vice
President and General Manager of the Company's Government Business Unit. From
1987 to February 1990, Mr. Brown was employed by Quality Systems, Inc., a
government contractor, most recently as Lead Systems Analyst. From July 1986 to
December 1987, Mr. Brown served as Senior Knowledge Engineer of Systems
Designers International, Inc., an International AI Company. From May 1979 to
July 1986, Mr. Brown served as Project Manager and Systems Engineer of Vitro
Corporation, a government contractor. Prior to that time, Mr. Brown was employed
by Westinghouse Corporation as a Field Engineer.
RICHARD H. COLLARD joined Template in January 1995 as Managing Director of
the Company's United Kingdom subsidiary. Mr. Collard was promoted to Vice
President of European Operations for the Company in March 1996. Prior to that
time, Mr. Collard was a founder and spent 10 years with Instrumatic U.K.,
Limited, a supplier of high technology products to professional customers
throughout Europe, the last three years as Executive Vice President. Prior to
that, Mr. Collard managed European Sales for a division of Gould Corporation and
worked for Tektronix, Inc. in the United Kingdom.
BENJAMIN J. MARTINDALE, II joined Template in December 1996 as Vice
President of Marketing, and was promoted to Executive Vice President in October
1998. From October 1995 to December 1996, Mr. Martindale served as Vice
President of Worldwide Marketing for Visix Software, Inc. From May 1995 to
September 1995, Mr. Martindale was Vice President of Marketing with IntelliSys
Systems, Corp. From June 1988 to May 1995, Mr. Martindale served as Director of
North American Marketing for Sybase, Inc.
ANDREW B. FERRENTINO joined the Company in April 1979 as Vice President and
in 1984 was appointed a director. From 1984 through December 1998, Mr.
Ferrentino served as the Company's President and Secretary. From November 1977
until April 1979, Mr. Ferrentino served as a Senior Technical Consultant to
Satellite Business Systems, Inc., a satellite communications company, where he
was responsible for new business development. From 1966 to November 1977, Mr.
Ferrentino served in various management capacities for IBM's Federal Systems
Division, most recently as a Manager of Advanced Technology.
DR. DUANE A. ADAMS has served as a director of Template since January 28,
1997. Dr. Adams is the Vice Provost for Research at Carnegie Mellon University.
From 1992 to 1996, Dr. Adams was the Deputy Director of the Department of
Defense's Advanced Research Projects Agency. Prior to that time, Dr. Adams was
an Associate Dean for Research at Carnegie Mellon University's School of
Computer Science.
DR. ALAN B. SALISBURY has served as a director of Template since January
28, 1997. Since 1993, Dr. Salisbury has served as the President of Learning Tree
International USA, Inc. From 1991 to 1993, Dr., Salisbury served as Executive
Vice President and Chief Operating Officer of the Microelectronics and Computer
Technology Corporation, a research and development consortium owned by 22
companies. From 1987 to 1991, he served as President of Contel Technology
Center, the advanced research and development organization serving Contel
Corporation. Prior to that time, Dr. Salisbury served in the United States Army
as a Major General where he commanded the United States Army
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Information Systems Engineering Command. Dr. Salisbury serves on the Board of
Directors of Learning Tree International, Inc., Sybase, Inc. and TelePad
Corporation.
DR. GERHARD BARTH has served as a director of Template since November 1997.
Since October 1996, Dr. Barth has served as a member of the Board of Management
of Alcatel SEL AG, Stuggart, and Director of Software Technology of Alcatel
Telecom. From November 1992 until September 1996, Dr. Barth served as Director
of Information Technology of Daimler-Benz AG Ulm. From 1988 to 1992, Dr. Barth
served as full professor at the University of Kaiserslautern, where he was
Director of the German Research Center for Artificial Intelligence.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board consists of Drs. Salisbury and
Adams, with Dr. Adams serving as Chairman. Drs. Salisbury and Adams are both
non-employee directors of Template. The purpose of the Compensation Committee is
to administer Template's 1996 Equity Incentive Plan and any other stock benefit
plans, to establish remuneration levels for officers of Template and to
establish and administer executive compensation programs, including an annual
review of the compensation of the Chief Executive Officer. The Compensation
Committee held four meetings during 1998.
The Audit Committee of the Board consists of Drs. Salisbury and Adams, with
Dr. Salisbury serving as Chairman. The Audit Committee recommends to the Board
the independent public accountants to be selected to audit Template's annual
financial statements and approves any special assignments given to such
accountants. The Audit Committee also reviews the planned scope of the annual
audit, any changes in accounting principles and the effectiveness and efficiency
of Template's internal accounting staff. The Audit Committee held one meeting
during 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, Dr. Salisbury and Dr. Adams served on Template's Compensation
Committee. Neither of these individuals was at any time during fiscal 1998, or
at any other time, an officer or employee of Template. No executive officer of
Template served as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of
Template's Board or Compensation Committee; accordingly there were no interlocks
with other companies within the meaning of the SEC's proxy rules during 1998.
DIRECTOR COMPENSATION
Except for ownership of stock options, directors of Template generally do
not receive compensation for services rendered as a director. Template also does
not provide compensation for committee participation or special assignments of
the Board. Template does however reimburse its directors for reasonable travel
expenses to and from Board meetings. Management believes that focusing director
compensation on equity rather than cash reflects Template's efforts to more
closely align director compensation with total shareholder return.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following Summary Compensation Table sets forth
the compensation earned for the fiscal years ended November 30, 1996, November
30, 1997 and December 31, 1998, by Template's Chief Executive Officer and the
four other most highly compensated executive officers (collectively, the "Named
Executive Officers"), each of whose total annual salary and bonus for fiscal
1998 exceeded $100,000 for services rendered in all capacities to Template and
its subsidiaries for that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) ------------------------------------
----------------------------------------- SECURITIES UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS COMPENSATION (# OF SHARES) COMPENSATION
- ------------------------------ ---- -------- ------- ------------ --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
E. Linwood Pearce........... 1998 $210,000 $65,600 0 0 0
President and Chief 1997 183,125 78,950 $125,000 0 0
Executive Officer(2) 1996 170,000 57,500 100,000 0 0
Andrew B. Ferrentino........ 1998 $179,242 $43,700 0 0 0
President and Secretary(3) 1997 170,000 53,030 0 0 0
1996 170,000 57,500 0 0 0
Richard H. Collard.......... 1998 $116,005 $77,871 37,718(4) 15,000 0
Vice President of 1997 114,742 77,703 0 0 0
European Operations 1996 87,312 13,000 0 0 0
J. Kelly Brown.............. 1998 $119,230 $80,000 0 10,000 0
Vice President and 1997 101,520 29,700 0 0 0
General Manager of 1996 100,894 4,000 0 30,000 0
Government Business Unit
David L. Kiker.............. 1998 $157,292 $22,600 0 0 0
Vice President 1997 138,000 25,919 0 0 0
of Technology 1996 128,000 13,000 0 50,000 0
</TABLE>
- -------------------------
(1) In accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted in those instances
where the aggregate amount of such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total of annual
salary and bonus for the Named Executive Officer for such year.
(2) Mr. Pearce assumed the additional office of President effective January 1,
1999. On April 30, 1999, Mr. Pearce became Template's Co-Chief Executive
Officer with Joseph M. Fox.
(3) Mr. Ferrentino resigned from the offices of President and Secretary
effective December 31, 1998.
(4) Represents a car allowance of $16,572 and pension contributions of $21,146.
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OPTION GRANTS IN LAST FISCAL YEAR. The following table presents
information regarding options granted to the Company's Named Executive Officers
during fiscal 1998 to purchase shares of the Company's Common Stock. The Company
has no outstanding stock appreciation rights ("SARs") outstanding and granted no
SARs during fiscal 1998. In accordance with SEC rules, the table shows the
hypothetical "gains" or "option spreads" that would exist for the respective
options based on assumed rates of annual compound stock price of 5% and 10% from
the date the options were granted over the full option term.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- NO. OF ANNUAL RATES
NO. OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR THE
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(4)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION --------------------
NAME GRANTED(1) DURING YEAR(2) ($/SHARE)(3) DATE 5% 10%
- ---- ---------- --------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
E. Linwood Pearce..... 0 0 0 -- 0 0
Andrew B.
Ferrentino.......... 0 0 0 -- 0 0
Richard H. Collard.... 15,000 2.6% $14.00 1/7/05 $85,491 $199,230
J. Kelly Brown........ 10,000 1.7% $14.00 1/7/08 $88,045 $223,123
David L. Kiker........ 0 0 0 -- 0 0
</TABLE>
- -------------------------
(1) The options granted are incentive stock options that become exercisable in
increments of 25% per year beginning on the first anniversary of the date of
grant.
(2) Based on an aggregate of 583,000 options granted to employees during the
fiscal year ended December 31, 1998.
(3) The exercise price per share equaled the fair market value of the Common
Stock on January 7, 1998, the date of grant, as reported on the Nasdaq Stock
Market.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. There can be no assurance provided to any
executive officer or any other holder of Template's securities that the
actual stock price appreciation over the option term will be at the assumed
5% and 10% levels or at any other defined level. Unless the market price of
the Common Stock appreciates over the option term, no value will be realized
from the option grants made to the Named Executive Officers.
OPTION EXERCISES IN FISCAL 1998 AND FISCAL 1998 YEAR-END OPTION
VALUES. The following table shows the number of shares of Common Stock subject
to exercisable and unexercisable stock options held by each of the Named
Executive Officers as of December 31, 1998. The table also reflects the values
of such options based on the positive spread between the exercise price of such
options and the price of the Common Stock as of December 31, 1998, as reported
by the Nasdaq Stock Market.
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<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/98(#) OPTIONS AT 12/31/98(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Linwood Pearce..... 0 0 416,347 133,333 $1,002,937 0
Andrew B.
Ferrentino.......... 0 0 0 0 0 0
J. Kelly Brown........ 0 0 53,250 28,750 95,204 $ 9,334
Richard H. Collard.... 0 0 54,500 27,500 104,538 0
David L. Kiker........ 25,000 $ 280,063(2) 92,500 30,000 168,008 12,445
</TABLE>
- -------------------------
(1) Value of unexercised, in-the-money options is based on a fair market value
of $4.469 per share of Common Stock, as reported by the Nasdaq Stock Market
at the close of business on December 31, 1998.
(2) Calculated as the difference between the exercise price and the fair market
value of the underlying security, as reported by the Nasdaq Stock Market at
the close of business on the exercise date of the underlying option.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
JOSEPH M. FOX. Template and Mr. Fox have entered into an employment
agreement that provides that Mr. Fox will serve as Template's Chairman of the
Board, with a term that expires on December 31, 1999. Under the employment
agreement, Mr. Fox will be paid a base salary of $75,000 per year. The
employment agreement grants Mr. Fox flexibility with respect to his work
schedule. Template may terminate the employment agreement upon Mr. Fox's death,
disability or for cause. If the Board terminates Mr. Fox for cause, Mr. Fox is
not entitled to severance pay. If the Board terminates Mr. Fox without cause,
Mr. Fox is entitled to receive compensation equal to the greater of (i) the
compensation due to Mr. Fox through the end of the employment agreement; or (ii)
12 months of salary and bonus. Mr. Fox himself may terminate the agreement upon
30 days written notice to the Board.
E. LINWOOD PEARCE. Template and Mr. Pearce have entered into an employment
agreement that provides that Mr. Pearce will serve as Template's Co-Chief
Executive Officer and President, with a term that expires on May 1, 2000. Under
the employment contract, Mr. Pearce will be paid a base salary of $240,000 per
year. Mr. Pearce may terminate the employment contract for any reason upon 14
days written notice, and if Mr. Pearce does so, he is entitled to be paid the
compensation due him through the end of the term of the contract, payable in
accordance with Template's regular payroll policies and not in a lump sum. As
part of this employment agreement, Template agreed that, at the expiration or
earlier termination of the employment contract, all stock options granted to Mr.
Pearce that had not vested as of such date would vest in full.
PETER J. RUSSO. Template and Mr. Russo have entered into an employment
agreement that provides that Mr. Russo will serve as Template's Executive Vice
President of Finance and Administration and Chief Financial Officer, with a term
through April 27, 2000, with automatic extensions of one month at the end of
each month during the term of the contract unless either party provides 30 days
notice to the other of its desire not to automatically extend the term. Under
the employment contract, Mr. Russo will be paid a base salary of $200,000 per
year, and is eligible for a bonus of up to $100,000 annually
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<PAGE> 176
upon satisfaction of terms and conditions to be determined by Template's board.
Template has the right to terminate the employment contract with or without
cause, and if such termination is without cause, Template must pay Mr. Russo one
year of base salary plus 100% of maximum bonus payable to Mr. Russo. Mr. Russo
has the right to terminate the employment agreement with or without cause, and
if such termination is with cause, Template must pay Mr. Russo one year of base
salary plus 100% of the maximum annual bonus payable to Mr. Russo. In connection
with his employment agreement, Mr. Russo was also granted stock options to
acquire 200,000 shares of Template common stock, which would vest in full upon a
change of control of Template and remain exercisable for 12 months thereafter.
Furthermore, in the event of a change of control of Template, immediately after
the consummation of this change of control, Template or its successor must pay
Mr. Russo, in a gross amount so that the net payments retained by Mr. Russo
after payment of any tax imposed by Section 4999 of the Internal Revenue Code of
1986 with respect to such payment equals 18 months of Mr. Russo's base salary.
BENJAMIN J. MARTINDALE, II. Template and Mr. Martindale have entered into
an employment agreement that provides that Mr. Martindale will serve as
Template's Executive Vice President, with a term through September 24, 2000,
with automatic extensions of one month at the end of each month during the term
of the contract unless either party provides 30 days notice to the other of its
desire not to automatically extend the term. Under the employment contract, Mr.
Martindale will be paid a base salary of $165,000 per year, and is eligible for
a bonus of up to $60,000 annually upon satisfaction of terms and conditions to
be determined by Template's board. Template has the right to terminate the
employment contract with or without cause, and if such termination is without
cause, Template must pay Mr. Martindale nine months of base salary plus nine
months of Mr. Martindale's annual bonus (based on the bonus earned for the prior
twelve months). Mr. Martindale has the right to terminate the employment
agreement with or without good reason, and if such termination is with good
reason, Template must pay Mr. Martindale nine months of base salary plus nine
months of Mr. Martindale's annual bonus (based on the bonus earned for the prior
twelve months). In connection with Mr. Martindale's employment contract,
Template agreed that, in the event of a change of control of Template and
termination of Mr. Martindale's employment by Template's successor without cause
or by Mr. Martindale with good reason, in each case, within twelve months of the
consummation of the change of control, all stock options granted by Template to
Mr. Martindale will vest in full immediately upon such termination.
DAVID L. KIKER. Template and Mr. Kiker have entered into an employment
agreement that provides that Mr. Kiker will serve as Template's Vice President
of Technology, with a term through October 1, 2000, with automatic extensions of
one month at the end of each month during the term of the contract unless either
party provides 30 days notice to the other of its desire not to automatically
extend the term. Under the employment contract, Mr. Kiker will be paid a base
salary of $195,000 per year, and is eligible for a bonus of up to $60,000
annually upon satisfaction of terms and conditions to be determined by
Template's board. Template has the right to terminate the employment contract
with or without cause, and if such termination is without cause, Template must
pay Mr. Kiker six months of base salary plus six months of Mr. Kiker's annual
bonus (based on the bonus earned for the prior twelve months). Mr. Kiker has the
right to terminate the employment agreement with or without cause, and if such
termination is with cause, Template must pay Mr. Kiker six months of base salary
plus six months of Mr. Kiker's annual bonus (based on the bonus earned for the
prior twelve months). In connection with Mr. Kiker's employment contract,
Template agreed that, in the event of a
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<PAGE> 177
change of control of Template, all stock options granted by Template to Mr.
Kiker will vest in full immediately upon such termination.
RICHARD H. COLLARD. Template and Mr. Collard have entered into a service
agreement that provides that Mr. Collard will serve as Template's Vice President
of European Operations, with a term through December 31, 1999, with automatic
one year extensions unless the service agreement is terminated prior to the end
of the then-current term. Under the service contract, Mr. Collard will be paid a
base salary of L90,000 per year, and is eligible for a bonus of up to L80,000
annually upon satisfaction of terms and conditions to be determined by
Template's board. Mr. Collard will also be reimbursed for the cost of his
automobile lease at a rate of L10,000 per year. Template has the right to
terminate the service contract with or without cause, and if such termination is
without cause, Template must pay Mr. Collard twelve months of base salary plus
twelve months of Mr. Collard's annual bonus (based on the bonus earned for the
prior twelve months). Mr. Collard has the right to terminate the employment
agreement with or without good reason, and if such termination is with good
reason, Template must pay Mr. Collard twelve months of base salary plus twelve
months of Mr. Collard's annual bonus (based on the bonus earned for the prior
twelve months). In connection with Mr. Collard's service contract, Template
agreed that, in the event of a change of control of Template and termination of
Mr. Collard's employment by Template's successor without cause within twelve
months of the consummation of the change of control, all stock options granted
by Template to Mr. Collard will vest in full immediately upon such termination.
KIMBERLY E. OSGOOD. Template and Ms. Osgood have entered into an
employment agreement that provides that Ms. Osgood will serve as Template's Vice
President of Finance, with a term through September 20, 2000, with automatic
extensions of one month at the end of each month during the term of the contract
unless either party provides 30 days notice to the other of its desire not to
automatically extend the term. Under the employment contract, Ms. Osgood will be
paid a base salary of $115,000 per year, and is eligible for a bonus of up to
$34,500 annually upon satisfaction of terms and conditions to be determined by
Template's board. Template has the right to terminate the employment contract
with or without cause, and if such termination is without cause, Template must
pay Ms. Osgood six months of base salary plus six months of Ms. Osgood's annual
bonus (based on the bonus earned for the prior twelve months). Ms. Osgood has
the right to terminate the employment agreement with or without cause, and if
such termination is for cause, Template must pay Ms. Osgood six months of base
salary plus six months of Ms. Osgood's annual bonus (based on the bonus earned
for the prior twelve months). In connection with Ms. Osgood's employment
contract, Template agreed that, in the event of a change of control of Template
and termination of Ms. Osgood's employment by Template's successor without cause
within twelve months of the consummation of the change of control, all stock
options granted by Template to Ms. Osgood will vest in full immediately upon
such termination.
JOHN F. CODDE. Template and Mr. Codde have entered into an employment
agreement that provides that Mr. Codde will serve as Template's Director, USA
Sales, with a term through September 10, 2000, with automatic extensions of one
month at the end of each month during the term of the contract unless either
party provides 30 days notice to the other of its desire not to automatically
extend the term. Under the employment contract, Mr. Codde will be paid a base
salary of $100,000 per year, and is eligible for a bonus of up to 50% of his
base salary annually upon satisfaction of terms and conditions to be determined
by Template's board, based on annual sales of Template's
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<PAGE> 178
products and services. Template has the right to terminate the employment
contract with or without cause, and if such termination is without cause,
Template must pay Mr. Codde six months of base salary plus six months of Mr.
Codde's annual bonus (based on the bonus earned for the prior twelve months).
Mr. Codde has the right to terminate the employment agreement with or without
cause, and if such termination is with cause, Template must pay Mr. Codde six
months of base salary plus six months of Mr. Codde's annual bonus (based on the
bonus earned for the prior twelve months). In connection with Mr. Codde's
employment contract, Template agreed that, in the event of a change of control
of Template and termination of Mr. Codde's employment by Template's successor
without cause within twelve months of the consummation of the change of control,
all stock options granted by Template to Mr. Codde will vest in full immediately
upon such termination.
DOUGLAS H. MCPHADEN. Template and Mr. McPhaden have entered into an
employment agreement that provides that Mr. McPhaden will serve as Template's
Senior Director of Product Marketing, with a term through September 9, 2000,
with automatic extensions of one month at the end of each month during the term
of the contract unless either party provides 30 days notice to the other of its
desire not to automatically extend the term. Under the employment contract, Mr.
McPhaden will be paid a base salary of $135,000 per year, and is eligible for a
bonus of up to $30,000 annually upon satisfaction of terms and conditions to be
determined by Template's board. Template has the right to terminate the
employment contract with or without cause, and if such termination is without
cause, Template must pay Mr. McPhaden six months of base salary plus six months
of Mr. McPhaden's annual bonus (based on the bonus earned for the prior twelve
months). Mr. McPhaden has the right to terminate the employment agreement with
or without cause, and if such termination is with cause, Template must pay Mr.
McPhaden six months of base salary plus six months of Mr. McPhaden's annual
bonus (based on the bonus earned for the prior twelve months). In connection
with Mr. McPhaden's employment contract, Template agreed that, in the event of a
change of control of Template and termination of Mr. McPhaden's employment by
Template's successor without cause within twelve months of the consummation of
the change of control, all stock options granted by Template to Mr. McPhaden
will vest in full immediately upon such termination.
MICHAEL R. JUDD. Template and Mr. Judd have entered into an employment
agreement that provides that Mr. Judd will serve as Template's Vice President of
Government Sales, with a term through September 9, 2000, with automatic
extensions of one month at the end of each month during the term of the contract
unless either party provides 30 days notice to the other of its desire not to
automatically extend the term. Under the employment contract, Mr. Judd will be
paid a base salary of $130,000 per year, and is eligible for a bonus of up to
50% of his base salary annually upon satisfaction of terms and conditions to be
determined by Template's board based on annual sales of Template's products and
services. Template has the right to terminate the employment contract with or
without cause, and if such termination is without cause, Template must pay Mr.
Judd six months of base salary plus six months of Mr. Judd's annual bonus (based
on the bonus earned for the prior twelve months). Mr. Judd has the right to
terminate the employment agreement with or without cause, and if such
termination is with cause, Template must pay Mr. Judd six months of base salary
plus six months of Mr. Judd annual bonus (based on the bonus earned for the
prior twelve months). In connection with Mr. Judd's employment contract,
Template agreed that, in the event of a change of control of Template and
termination of Mr. Judd's employment by Template's
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successor without cause within twelve months of the consummation of the change
of control, all stock options granted by Template to Mr. Judd will vest in full
immediately upon such termination.
JULIE L. LANE. Template and Ms. Lane have entered into an employment
agreement that provides that Ms. Lane will serve as Template's Director of
Accounting/Assistant Controller, with a term through September 9, 2000, with
automatic extensions of one month at the end of each month during the term of
the contract unless either party provides 30 days notice to the other of its
desire not to automatically extend the term. Under the employment contract, Ms.
Lane will be paid a base salary of $77,000 per year, and is eligible for a bonus
of up to $15,000, annually upon satisfaction of terms and conditions to be
determined by Template's board. Template has the right to terminate the
employment contract with or without cause, and if such termination is without
cause, Template must pay Ms. Lane six months of base salary plus six months of
Ms. Lane's annual bonus (based on the bonus earned for the prior twelve months).
Ms. Lane has the right to terminate the employment agreement with or without
cause, and if such termination is for cause, Template must pay Ms. Lane six
months of base salary plus six months of Ms. Lane's annual bonus (based on the
bonus earned for the prior twelve months). In connection with Ms. Lane's
employment contract, Template agreed that, in the event of a change of control
of Template and termination of Ms. Lane's employment by Template's successor
without cause within twelve months of the consummation of the change of control,
all stock options granted by Template to Ms. Lane will vest in full immediately
upon such termination.
In addition to the employment and service agreements described above that
contain provisions accelerating vesting of stock options upon a change of
control of Template, Template has agreed that all stock options granted to its
non-employee directors (Messrs. Adams, Barth and Salisbury) will vest in full
immediately upon a change of control of Template. As of October 15, 1999,
Messrs. Adams, Barth and Salisbury held stock options to acquire 50,000, 40,000
and 50,000 shares of Template common stock, respectively.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1996, Alcatel N.V. ("Alcatel") purchased 500,000 shares of
preferred stock of Template that converted automatically into 500,000 shares of
common stock upon the consummation of Template's initial public offering on
January 29, 1997. As a result of this conversion, Alcatel became a beneficial
owner of more than 5% of Template's outstanding common stock. Under agreements
entered into in connection with this investment, Template granted Alcatel
certain registration rights with respect to sales of securities of Template held
by Alcatel. Alcatel also agreed to a "standstill" provision whereby Alcatel and
any of its affiliates would not acquire beneficial ownership of common stock or
any securities convertible into, or exchangeable or exercisable for, shares of
common stock, that when added to the common stock beneficially owned by Alcatel
or its affiliates would exceed 19.9% of the then outstanding shares of Common
Stock. In addition, Template and certain principal shareholders of Template also
entered into a Shareholders' Agreement with Alcatel. Pursuant to this Agreement,
Dr. Gerhard Barth was elected to Template's Board in 1997. Template and the
principal shareholders also agreed to give Alcatel prior notice in the event
Template plans to sell certain assets or capital stock of Template.
Specifically, Template and such principal shareholders agreed to give Alcatel
written and oral notice prior to soliciting any proposal, or participating in
any
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negotiations, regarding a sale of any significant portion of Template's assets
or any sale of common stock representing 5% more of the common stock of Template
issued and outstanding immediately prior to such sale. Template and such
principal shareholders also agreed to promptly advise Alcatel of any request for
information or any proposal by a third party with respect to the foregoing.
These principal shareholders also granted to Alcatel the right to join in
certain sales of common stock held by such shareholders. Template also granted
to Alcatel the right to appoint an observer to attend meetings of Template's
Board in the event a representative designated by Alcatel is not then serving on
Template's Board. All rights and obligations under the terms of the agreement
with Alcatel (except registration rights with respect to Alcatel's common stock)
will terminate if Alcatel ceases to own in the aggregate at least 3% of
Template's fully-diluted Common Stock.
In this regard, during 1997, Alcatel and Template entered into agreements
under which Template provides products and services to Alcatel for Alcatel's
internal use and for resale to its customers. For the year ended December 31,
1998, Template earned $556,081 of revenue from Alcatel.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Template's directors, executive officers and persons who own
beneficially more than 10% of Template's common stock to file reports of
ownership and changes in ownership of such stock with the Securities and
Exchange Commission (the "SEC") and the Nasdaq Stock Market. Directors,
executive officers and greater than 10% shareholders are required by SEC
regulations to furnish Template with copies of all such forms they file. To
Template's knowledge, based solely on a review of the copies of such reports
furnished to Template and written representations that no other reports were
required, all directors, executive officers and greater than 10% shareholders
complied with all applicable Section 16(a) filing requirements except that Mr.
Benjamin J. Martindale, II inadvertently filed a late Form 4, representing one
transaction, in November 1998.
BENEFICIAL OWNERSHIP OF TEMPLATE COMMON STOCK
The following table sets forth information concerning (i) those persons
known by management of Template to own beneficially more than 5% of Template's
outstanding common stock, (ii) the directors of Template, (iii) the executive
officers named in Template's Summary Compensation table included elsewhere
herein and (iv) all current directors and executive officers of Template as a
group. Except as otherwise indicated in the footnotes below, such information is
provided as of November 17, 1999. According to rules adopted by the SEC, a
person is the "beneficial owner" of securities if he or she has or shares the
power to vote them or to direct their investment or has the right to acquire
beneficial ownership of such securities within 60 days through the exercise of
an option, warrant or right, the conversion of a security or otherwise. Except
as otherwise noted, the indicated owners have sole voting and investment power
with respect to shares beneficially owned. An asterisk in the percent of class
column indicates beneficial ownership of less than 1% of the outstanding
Template common stock.
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<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(1)
- ------------------------ -------------------- ----------
<S> <C> <C>
Executive Officers and Directors
Joseph M. Fox(2)................................ 413,167 8.4%
E. Linwood Pearce(3)............................ 621,144 11.3%
J. Kelly Brown(4)............................... 70,500 1.4%
Richard H. Collard(5)........................... 68,250 1.3%
David L. Kiker(6)............................... 165,000 3.3%
Andrew B. Ferrentino(7)......................... 474,857 9.6%
Dr. Duane A. Adams(8)........................... 52,150 1.0%
Dr. Alan B. Salisbury(9)........................ 55,000 1.1%
Dr. Gerhard Barth(10)........................... 40,000 *
All current directors and executive officers
as a group (11 persons)(11)..................... 2,255,059 36.5%
Other Stockholders
Alcatel N.V....................................... 500,000 10.2%
Burgemeester Elsenlaan 170
2288 84 Rijswijk
The Netherlands
Harvard Management Company........................ 432,000 8.8%
600 Atlantic Avenue
Boston, MA 02210
Special Situations Fund........................... 403,700 8.2%
151 East 53(rd) Street, 51(st) Floor
New York, NY 10022
</TABLE>
- -------------------------
* Less than 1%
(1) As of November 17, 1999, Template had 4,923,580 shares of common stock
outstanding. The number of shares of common stock outstanding used in
calculating the percentage for each listed person includes the shares of
common stock underlying options held by such person or entity that are
exercisable within 60 days of November 17, 1999, but excludes shares of
common stock underlying options held by any other person.
(2) Mr. Fox's shares include approximately 29,000 shares of common stock held
by Mr. Fox's children. Pursuant to the Exchange Act rules, Mr. Fox may be
deemed to share voting and investment power with respect to these
approximately 29,000 shares; however, Mr. Fox disclaims beneficial
ownership of all such shares. Mr. Fox is the Chairman of the Board and
Co-Chief Executive Officer of Template. His address is 45365 Vintage Park
Plaza, Dulles, Virginia 20166.
(3) Mr. Pearce's shares include 549,680 shares of common stock subject to
options exercisable by or within 60 days of November 17, 1999 (giving
effect to acceleration provisions contingent upon consummation of the
merger), and 9,000 shares held by Mr. Pearce's two children. Mr. Pearce
disclaims beneficial ownership of all 9,000 such shares. Mr. Pearce is the
President and Co-Chief Executive Officer of Template. His address is 45365
Vintage Park Plaza, Dulles, Virginia 20166.
(4) Mr. Brown's shares consist of 1,000 shares of common stock held jointly
with Mr. Brown's spouse and 69,500 shares of common stock subject to
options exercisable by or within 60 days of November 17, 1999. Mr. Brown is
the Vice
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President and General Manager of the Government Business Unit of Template.
His address is 45365 Vintage Park Plaza, Dulles, Virginia 20166.
(5) All of Mr. Collard's shares are shares of common stock subject to options
exercisable by or within 60 days of November 17, 1999. Mr. Collard is the
Vice President of European Operations of Template. His address is 45365
Vintage Park Plaza, Dulles, Virginia 20166.
(6) Mr. Kiker's shares include 137,500 shares of common stock subject to
options exercisable by or within 60 days of November 17, 1999 (giving
effect to acceleration provisions contingent upon consummation of the
merger). Mr. Kiker is the Vice President of Technology of Template. His
address is 45365 Vintage Park Plaza, Dulles, Virginia 20166.
(7) Mr. Ferrentino's shares include 20,000 shares of common stock held by Mr.
Ferrentino's spouse and 50,000 shares of common stock held by Mr.
Ferrentino's daughter. Mr. Ferrentino disclaims beneficial ownership of all
70,000 such shares not held by him.
(8) Dr. Adams' shares include 550 shares of common stock held by Dr. Adams'
spouse and 50,000 shares of common stock subject to options exercisable by
or within 60 days of November 17, 1999 (giving effect to acceleration
provisions contingent upon consummation of the merger). Dr. Adams disclaims
beneficial ownership of all 550 shares held by his spouse.
(9) Dr. Salisbury's shares include 50,000 shares of common stock subject to
options exercisable by or within 60 days of November 17, 1999 (giving
effect to acceleration provisions contingent upon consummation of the
merger).
(10) All of Dr. Barth's shares are shares of common stock subject to options
exercisable by or within 60 days of November 17, 1999 (giving effect to
acceleration provisions contingent upon consummation of the merger).
(11) Includes all shares stated to be included in the notes above.
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DESCRIPTION OF LEVEL 8 CAPITAL STOCK
The following descriptions of certain provisions of the certificate of
incorporation and bylaws of Level 8 are necessarily general and do not purport
to be complete and are qualified in their entirety by reference to the
certificate of incorporation and bylaws of Level 8 which have been incorporated
by reference herein.
COMMON STOCK
The authorized capital stock of Level 8 consists of 50 million shares, of
which 40 million shares have been designated common stock, par value $.001 per
share. As of November 17, 1999, there were 8,932,047 shares of common stock
issued and outstanding, held by approximately 100 holders of record. The holders
of common stock are entitled to one vote for each share on all matters submitted
to a vote of stockholders. Holders of common stock are entitled to such
dividends as may be declared from time to time by the board of directors out of
funds legally available therefore, subject to the dividend and liquidation
rights of any preferred stock (as described below) that may be issued, and
subject to the dividend restrictions in certain credit facilities and various
other agreements. In the event of the liquidation, dissolution or winding-up of
Level 8, the holders of common stock are entitled to share equally and ratably
in Level 8's assets, if any, remaining after provision for payment of all debts
and liabilities of Level 8 and satisfaction of the liquidation preference of any
shares of preferred stock that may be outstanding. The holders of common stock
have no preemptive, subscription, redemptive or conversion rights. The
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Level 8 is authorized to issue 10 million shares of preferred stock, par
value $.001 per share. The board of directors of Level 8 has authority, without
stockholder approval, to issue shares of preferred stock in one or more series
and to determine the number of shares, designations, dividend rights, conversion
rights, voting power, redemption rights, liquidation preferences and other terms
of any such series. The issuance of preferred stock, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting power of the holders of common stock
and the likelihood that such holders will receive dividend payments and payments
upon liquidation and could have the effect of delaying, deferring, or preventing
a change in control of Level 8. As of the date of this joint proxy
statement/prospectus, 21,000 shares have been designated as Series A 4%
Convertible Redeemable Preferred Stock and are issued and outstanding. There are
no present plans for any further issuances of preferred stock.
Holders of the Series A Preferred Stock are entitled to receive 4% annual
cash dividends payable quarterly and will have one vote per share of Series A
Preferred Stock, voting together with the common stock and not as a separate
class except on certain matters adversely affecting the rights of holders of the
Series A Preferred Stock. The Series A Preferred Stock may be redeemed at the
option of Level 8 at a redemption price equal to the original purchase price at
any time after June 29, 2000 if the closing price of Level 8's common stock over
20 consecutive trading days is greater than $20 per share. The conversion price
of the Series A Preferred Stock is subject to certain anti-dilution provisions,
including adjustments in the event of certain sales of common stock at a price
of less than $10 per share. In the event Level 8 breaches its obligations to pay
dividends
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when due or issue common stock upon conversion, or Level 8's common stock is
delisted, the dividend rate on the Series A Preferred Stock would increase to
18% per annum (partially payable in shares of common stock at the option of
Level 8 during the first 60 days of such increased dividend rate). As part of
the $21 million financing, Level 8 also issued the investors warrants to
purchase 2.1 million shares of common stock at an exercise price of $10 per
share. Level 8 has registered the common stock issuable upon conversion of the
Series A Preferred Stock and exercise of the warrants for resale under the
Securities Act of 1933. Level 8 is required to make certain payments in the
event it is unable to meet its obligations in connection with the Series A
Preferred Stock and warrants, such as registration under the Securities Act or
issuance of shares of common stock upon conversion or exercise. The aggregate
amount of all such payments, together with dividends on the Series A Preferred
Stock, is limited to 19% of the liquidation value of the Series A Preferred
Stock. Investors in the Series A Preferred Stock and warrants include Advanced
Systems Europe B.V., which purchased $10 million of Series A Preferred Stock and
warrants in the transaction, and is a subsidiary of Liraz, Level 8's principal
stockholder. Due to limitations on convertibility and exercisability, as set
forth more fully in the Certificate of Designation of Rights, Preferences and
Limitations of Preferred Stock and the warrants, shares of Series A Preferred
Stock and warrants that have been issued to certain holders may not be
convertible/exercisable at the present time.
DELAWARE LAW AND ANTI-TAKEOVER PROVISIONS
Section 203 of the Delaware General Corporation Law generally prohibits an
interested stockholder from entering into certain types of business combinations
with a Delaware corporation for three years after becoming an interested
stockholder. An "interested stockholder" under the Delaware General Corporation
Law is any person other than the corporation and its majority-owned subsidiaries
who own at least 15% of the outstanding voting stock, or who owned at least 15%
within the preceding three years, and this definition includes affiliates of the
corporation. Briefly described, the prohibited combinations include:
- mergers or consolidations;
- sales, leases, exchanges or other dispositions of 10% or more of (1) the
aggregate market value of all assets of the corporation, or (2) the
aggregate market value of all the outstanding stock of the corporation;
- issuances or transfers by the corporation of its stock that would
increase the proportionate share of stock owned by the interested
stockholder;
- receipt by the interested stockholder of the benefit of loans, advances,
guarantees, pledges or other financial benefits provided by the
corporation; and
- any other transaction, with certain exceptions, that increases the
proportionate share of the stock owned by the interested stockholder.
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A Delaware corporation may choose not to have Section 203 of the Delaware
General Corporation Law apply. Our company has chosen in our certificate of
incorporation, however, to accept the protections of Section 203. Nevertheless,
Section 203 will not apply in the following cases:
- if, before the stockholder became an interested stockholder, the board of
directors approved the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
- if, after the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, subject to technical calculation rules; or
- if, on or after the time the interested stockholder became an interested
stockholder, the board of directors approved the business combination,
and at least two-thirds of the outstanding voting stock which is not
owned by the interested stockholder also ratified the business
combination at a stockholders' meeting.
Because Liraz and certain of its affiliates have beneficially owned more
than 15% of the outstanding voting stock of Level 8 for longer than the
three-year restricted period, the restrictions under the Delaware General
Corporation Law on business combinations generally do not apply to Liraz and its
affiliates.
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COMPARISON OF STOCKHOLDERS' RIGHTS
As a result of the merger, Template's common stockholders will become
holders of Level 8 common stock. The rights of Template's stockholders are
currently governed by the Template charter and bylaws and the laws of Virginia.
Following the merger, the rights of all former holders of Template's common
stock will be governed by the Level 8 charter and bylaws and Delaware law. The
following is a summary comparison of the material differences between the rights
of holders of Template common stock and holders of Level 8 common stock under
the respective charter and bylaws of the companies and under Delaware and
Virginia law. For information on how to obtain copies of the charters and bylaws
of the companies, see "Where You Can Find More Information" on page 191.
AUTHORIZED CAPITAL STOCK
LEVEL 8
- 10,000,000 shares of preferred stock.
- 40,000,000 shares of common stock.
TEMPLATE
- 3,000,000 shares of preferred stock.
- 17,000,000 shares of common stock.
NUMBER AND TERM OF DIRECTORS
LEVEL 8
- Not less than 1 but no more than 9 elected, with exact numbers to be
determined from time to time by the majority of the Board, or by the
affirmative vote of at least 50% of all holders of capital stock entitled
to vote in the election of directors. There are currently seven
directors.
TEMPLATE
- Not less than 3, but no more than 15, elected annually at the
stockholders meeting with the exact number to be determined by a majority
of the Board from time to time. There are currently six directors.
REMOVAL OF DIRECTORS
LEVEL 8
- Pursuant to Delaware law, can be removed with or without cause by a vote
of the majority of the stockholders.
TEMPLATE
- Can be removed with cause at any time by stockholders holding not less
than 75% of the shares entitled to vote at an election of directors at a
special meeting of stockholders called for that purpose.
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SPECIAL MEETING OF STOCKHOLDERS
LEVEL 8
- Can be called at any time by the Board and will be called by the
President, Secretary, or an Assistant Secretary upon written request of
at least 50% of the total number of shares entitled to vote.
TEMPLATE
- Can be called at any time by the Chairman of the Board, the Vice-
Chairman of the Board, the Chief Executive Officer or the President (if
he is also the Chief Executive Officer) or by a majority of the Board.
NOTICE FOR MEETINGS
LEVEL 8
- Notice to stockholders of any meeting requires written notice delivered
not less than ten days nor more than 60 days before the date of the
meeting to each stockholder entitled to vote at such meeting.
TEMPLATE
- Notice to stockholders of any meeting requires written notice delivered
not less than ten days, nor more than 60 days before the date of the
meeting to each stockholder entitled to vote at such meeting.
CHARTER AMENDMENTS
LEVEL 8
- Requires Board approval and the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote.
TEMPLATE
- Requires the affirmative vote of the majority holders of the outstanding
stock entitled to vote at a meeting at which a quorum of the voting group
is present; except that the affirmative vote of at least 75% of the
outstanding shares entitled to vote is required for any amendment to the
sections relating to capital stock or the requirement that 75% of the
holders of the outstanding shares entitled to vote approve a transaction
that involves an affiliated transaction (as defined in Section 13.1-725
of the Virginia Stock Corporation Act).
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AMENDMENT TO BYLAWS
LEVEL 8
- Board has full power to amend, alter and repeal the bylaws, and to adopt
new bylaws. The bylaws may also be amended at a meeting of stockholders
at which a quorum is present by the affirmative vote of a majority of the
outstanding shares present at the meeting, in person or by proxy, and
entitled to vote.
TEMPLATE
- Bylaws may be amended by the affirmative vote of stockholders holding a
majority of the outstanding shares entitled to vote at any annual or
special meeting of stockholders, or by the Board of Directors, except
that the Board shall have no power to change any amendments made by a
majority of the stockholders entitled to vote, if expressly so provided
by such a majority of stockholders.
ADVANCE NOTICE BYLAW PROVISIONS FOR NOMINATION OF DIRECTORS
LEVEL 8
- Level 8's bylaws do not require advance notice for nominations to the
board of directors
TEMPLATE
- Any stockholder entitled to vote in the election of directors generally
may nominate one or more persons for election as directors at a meeting
only if written notice of such stockholder's intent to make such
nomination or nominations has been given, either by personal delivery or
by United States mail, postage prepaid, to the Secretary, not later than
(i) with respect to an election to be held at an annual meeting of
stockholders, ninety (90) days in advance of such meeting, and (ii) with
respect to an election to be held at a special meeting of stockholders
for the election of directors, the close of business on the seventh day
following the date on which notice of such meeting is first given to
stockholders.
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STOCKHOLDER PROPOSALS
LEVEL 8
- Level 8 does not have stockholder proposal provisions in its bylaws.
TEMPLATE
- For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary. To be timely, a stockholder's notice must be
given, either by personal delivery or by United States mail, postage
prepaid, to the secretary, not later than ninety (90) days in advance of
the annual meeting. A stockholder's notice to the secretary must set
forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be
brought before the annual meeting (including the specific proposal to be
presented) and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of the stockholder proposing
such business, (iii) the class and number of shares of Template that are
beneficially owned by the stockholder, and (iv) any material interest of
the stockholder in such business. In the event that a stockholder
attempts to bring business before an annual meeting without complying
with these provisions, the chairman of the meeting shall declare to the
meeting that the business was not properly brought before the meeting in
accordance with the foregoing procedures, and such business will not be
transacted.
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STATE TAKEOVER LAWS APPLICABLE TO THE COMPANIES
LEVEL 8
- Section 203 of the Delaware General Corporation Law restricts a
corporation's right to engage in a business combination with any
interested stockholder within a period of three years from the date that
such stockholder became an interested stockholder. In general, an
interested stockholder is a stockholder who holds 15% or more of the
outstanding voting stock of a Delaware corporation; provided, however, if
such stockholder holds 85% of the outstanding stock, the Board approves
either the transaction in question or the acquisition of shares by the
stockholder, or the transaction is approved by two-thirds of the
company's stockholders other than the stockholder in question, then the
prohibition against a business combination does not apply.
TEMPLATE
- Unless a Virginia corporation expressly elects not to be subject to such
provisions, Section 13.1-728.1, et. seq. of the Virginia Stock
Corporation Act provides that unless voting rights are granted by the
stockholders to an acquiror in a "control share acquisition," as defined
under this Act, the acquiror does not receive voting rights for its
shares. Only Virginia corporations which have more than 300 stockholders
are subject to the provisions regarding control share acquisitions. If
the stockholders of a Virginia corporation grant voting rights in a
control share acquisition in which shares having a majority of votes are
acquired, those stockholders not approving the grant of voting rights may
obtain dissenters rights and can demand fair value for their shares.
Template has expressly elected not to be subject to these provisions.
INSPECTION OF BOOKS AND RECORDS
LEVEL 8
- Under Delaware law, upon making a written request, a stockholder of
record is entitled to inspect the books and records of the corporation
during normal business hours. Pursuant to the Level 8 bylaws, the Board
has the power to determine from time to time whether and to what extent
and to what times and places and under what conditions of any of the
accounts, records, and books of Level 8 are to be open to the inspection
of any stockholder. No stockholder has any right to inspect any account
or book or document of Level 8 except as prescribed by law or authorized
by express resolution of the stockholders or the Board.
TEMPLATE
- Under Virginia law, upon providing five days notice to the corporation, a
stockholder is entitled to inspect the books and records of the
corporation during regular business hours.
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VOTE REQUIRED FOR MERGERS AND
SIMILAR FUNDAMENTAL CORPORATION TRANSACTIONS
LEVEL 8
- Generally requires Board approval and the affirmative vote of the holders
of a majority of the outstanding stock entitled to vote.
TEMPLATE
- Generally requires Board approval and the affirmative vote of the holders
of more than two-thirds of the outstanding stock entitled to vote, except
that the affirmative vote of the holders of 75% or more of the
outstanding stock entitled to vote is required to approve a transaction
that constitutes or involves an affiliated transaction (as defined in
Section 13.1-725 of the Virginia Stock Corporation Act).
VOTE REQUIRED FOR SALES OF ALL OR SUBSTANTIALLY
ALL OF THE CORPORATE ASSETS
LEVEL 8
- Generally requires Board approval and the affirmative vote of the holders
of a majority of the outstanding stock entitled to vote.
TEMPLATE
- Generally requires Board approval and the affirmative vote of the holders
of more than two-thirds of the outstanding stock entitled to vote.
DIVIDENDS
LEVEL 8
- Under Delaware corporate law, a corporation's Board of Directors may
declare and pay dividends either:
- out of surplus, the amount of net assets of the corporation in excess
of all liabilities, including capital stock; or
- if there is no surplus, out of net profits generated in the fiscal year
in which the dividend is declared and/or the preceding fiscal year.
TEMPLATE
- Under Virginia corporate law, a corporation's Board of Directors may
declare distributions to stockholders if, after the distribution, the
corporation can pay its debts as they generally become due or to the
extent the corporation's total assets exceed its total liabilities.
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DISSENTERS' APPRAISAL RIGHTS
LEVEL 8
- No appraisal rights are available for shares of any class or series of
stock, which stock, at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon a merger, is listed on a national securities
exchange, or designated a national market system security on an
interdealer quotation system by the National Association Securities
Dealers, Inc. Level 8's common stock is a Nasdaq National Market
Security.
TEMPLATE
- Each Template stockholder is entitled to dissenters' rights of appraisal
under which the stockholder may receive cash in the amount of the fair
market value of the shares held by such stockholder, in lieu of the
consideration such stockholder would otherwise receive in the
transaction. The fair market value of the shares is determined by either
a court or an agreement between Template and the stockholder. The
limitations on the availability of dissenters' rights under Virginia law
are as provided in Annex D, which sets forth the applicable provisions of
the Virginia Stock Corporation Act.
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ADDITIONAL MATTERS FOR CONSIDERATION BY
LEVEL 8 STOCKHOLDERS
AMENDMENT OF THE LEVEL 8 1997 STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER
BACKGROUND
On October 11, 1999, the Board of Directors of Level 8 approved (subject to
stockholder approval) an amendment to the Level 8 1997 Stock Option Plan which
increases the total number of shares of common stock issuable pursuant to the
1997 Stock Option Plan from 2,600,000 to 4,000,000. The following description of
the 1997 Plan is intended only as a summary and is qualified in its entirety by
reference to the 1997 Plan.
PURPOSE
The purpose of the 1997 Stock Option Plan is to enhance the profitability
and value of Level 8 for the benefit of its stockholders principally by enabling
Level 8 to offer employees and consultants of Level 8 and its subsidiaries and
non-employee directors of Level 8 stock-based incentives in Level 8 in order to
attract, retain and reward such individuals and strengthen the mutuality of
interest between such individuals and Level 8 stockholders.
ELIGIBILITY
All employees and consultants of Level 8 and its subsidiaries and
non-employee directors of Level 8 designated by the board of directors of Level
8 to participate in the 1997 Stock Option Plan are eligible to receive options
under the 1997 Stock Option Plan.
AVAILABLE SHARES
If the proposed amendment is approved, options covering a maximum of
4,000,000 shares of common stock (assuming the amendment to the 1997 Stock
Option Plan is approved) may be issued under the 1997 Stock Option Plan. Options
covering a maximum of 200,000 shares may be granted to any single individual in
any one fiscal year. If an option expires, terminates or is cancelled, the
unissued shares of common stock subject to the option will again be available
under the 1997 Stock Option Plan.
TERMS OF STOCK OPTIONS
Under the 1997 Stock Option Plan, options granted to employees may be in
the form of incentive stock options or nonqualified stock options. Options
granted to consultants or nonemployee directors may only be nonqualified stock
options. The committee that administers the 1997 Plan (see "Administration"
below) (the "Committee") will determine the number of shares subject to each
option, the term of each option (which may not exceed ten years or, in the case
of an incentive stock option granted to a 10% stockholder, five years), the
exercise price per share of stock subject to each option, the vesting schedule
(if any) and the other material terms of the option. No incentive stock option
may have an exercise price less than 100% of the fair market value of the common
stock at the time of the grant (or, in the case of an incentive stock option
granted to a
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10% stockholder, 110% of the fair market value). The exercise price of a
nonqualified stock option will be determined by the Committee.
The option price upon exercise may be paid in cash or, if so determined by
the Committee, in shares of common stock by a reduction in the number of shares
of common stock issuable upon the exercise of the option or by such other method
as the Committee determines. Options may be made exercisable in installments,
and the exercisability of options may be accelerated by the Committee. The
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Committee establishes. At the discretion of the
Committee, options may provide for "reloads" (i.e., a new option is granted for
the same number of shares as the number used by the holder to pay the option
price upon exercise).
Subject to limited exceptions, options are forfeited upon termination of
employment or service. Options are not assignable (except by will or the laws of
descent and distribution).
Options may not be granted after the tenth anniversary of the 1997 Stock
Option Plan's adoption, but options granted prior to that date may be extended
beyond that date.
CHANGE IN CONTROL
Unless otherwise determined by the Committee at the time of the grant, upon
a change in control (as defined in the 1997 Stock Option Plan), all of the
options automatically will become fully exercisable. However, unless otherwise
determined by the Committee at the time of the grant, no acceleration or
exercisability of an option will occur, if the Committee determines prior to a
change in control that the option will be honored or assumed or new rights
substituted immediately following the change in control; provided that, the new
rights or alternative option is based on stock which is or will be traded on an
established securities market, contains at least substantially equivalent terms
and conditions as the option being assumed, and has substantially equal earnings
value.
CERTAIN REORGANIZATIONS
The 1997 Stock Option Plan provides for appropriate adjustments of the
number and kind of shares to be issued upon exercise of an option and of the
exercise price to reflect changes in the capital structure of the corporation,
stock splits, recapitalizations, mergers and reorganizations.
AMENDMENT OR TERMINATION OF THE 1997 STOCK OPTION PLAN
The 1997 Stock Option Plan may be amended by the board of directors of
Level 8, except that stockholder approval of amendments will be required among
other things (a) to the extent stockholder approval is required by 16b-3 under
the Securities Exchange Act of 1934, as amended, and (b) to (i) increase the
maximum number of shares subject to options granted in a fiscal year, (ii)
change the classification of employees eligible to receive awards, (iii) extend
the maximum option period under the 1997 Stock Option Plan, or (iv) increase the
number of shares that may be issued under the 1997 Stock Option Plan. The 1997
Stock Option Plan is effective for 10 years from the date the 1997 Stock Option
Plan was adopted during which time options may be granted.
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ADMINISTRATION
The 1997 Stock Option Plan will be administered by the Committee, which
will include two or more "non-employee" and "outside" directors. However, with
respect to option grants to non-employee directors and any action under the 1997
Stock Option Plan relating to options held by non-employee directors, the
Committee will consist of the entire board of directors. The Committee will
determine the individuals who will receive options and the terms of the options,
which will be reflected in written agreements with the holders. Decisions by the
board of directors or the Committee with respect to the 1997 Stock Option Plan
are final and binding.
BENEFITS TO NAMED EXECUTIVE OFFICERS AND OTHERS
As of December 31, 1998, stock options had been granted to the persons and
groups shown in the table below. The Committee has not yet made any
determination as to which eligible participants will be granted options under
the 1997 Stock Option Plan in the future. Consequently, it is not presently
determinable with respect to the persons and groups shown in the table below,
the benefits and or amounts that will be received in the future by such persons
or groups pursuant to the 1997 Stock Option Plan.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION OPTIONS GRANTED
- ----------------- ---------------
<S> <C>
1998 NAMED EXECUTIVE OFFICERS
Arie Kilman, Chief Executive Officer and Chairman of the
Board..................................................... 0
Samuel Somech, President.................................... 50,000
Gonen Ziv, Former Vice President Technical Services......... 30,000
Joseph Schwartz, Former Vice President, Group Product
Manager................................................... 150,000
Robert Lord, Former Executive Vice President................ 112,000
All 1998 Executive Officers as a Group...................... 542,000
All Non-Executive Directors as a Group...................... 44,000
All Persons Receiving 5% of Options......................... 0
All Non-Executive Officer Employees as a Group.............. 1,299,993
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. An optionee will not recognize income upon the
grant or exercise of an incentive stock option. Instead, the optionee will be
taxed at the time he or she sells the stock purchased pursuant to the option.
The optionee will be taxed on the difference between the price he or she paid
for the stock and the amount for which he or she sells the stock. If the
optionee does not sell the stock within two years from the date of grant of the
option and one year from the date the stock is transferred to the optionee, the
gain will be a long-term capital gain, and Level 8 will not be entitled to a
deduction. If the optionee sells the stock at a gain prior to that time, the
difference between the amount the optionee paid for the stock and the lesser of
the fair market value on the date of exercise or the amount for which the stock
is sold will be taxed as ordinary income and Level 8 will be entitled to a
corresponding deduction; if the stock is sold for an amount in excess of the
fair market value on the date of exercise, the excess amount will be taxed as
capital gain. If the optionee sells the stock for less than the amount he or she
paid for it
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prior to the expiration of the one- or two-year periods indicated, no amount
will be taxed as ordinary income and the loss will be taxed as a capital loss.
Exercise of an incentive stock option may subject an optionee to, or increase an
optionee's liability for, the alternative minimum tax.
NON-QUALIFIED STOCK OPTIONS. An optionee will not recognize income upon
the grant of a non-qualified stock option under the 1997 Stock Option Plan or at
any time prior to the exercise of the option or a portion thereof. Generally, at
the time the optionee exercises a non-qualified option or portion thereof, the
optionee will recognize compensation taxable as ordinary income in an amount
equal to the excess of the fair market value of the underlying stock on the date
the option is exercised over the option price of the stock and Level 8 will then
entitled to a corresponding deduction. At that time, Level 8 will be subject to
income tax withholding requirements and will have the right to require an
optionee who is or was an employee of Level 8 to remit in cash to Level 8 an
amount sufficient to satisfy any federal, state and local tax requirements prior
to the delivery of any certificate or certificates for such shares of stock.
A subsequent taxable disposition of the stock acquired upon exercise of an
option and held as a capital asset will result in a capital gain or loss
measured by the difference between the fair market value of the stock on the
date of the option exercise and the amount realized on later disposition.
THE FOREGOING IS A SUMMARY DISCUSSION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES TO OPTIONEES UNDER THE INTERNAL REVENUE CODE AND SHOULD NOT BE
CONSTRUED AS LEGAL, TAX OR INVESTMENT ADVICE. ALL 1997 STOCK OPTION PLAN
PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES APPLICABLE TO THEM, INCLUDING FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS.
STOCKHOLDER APPROVAL
Level 8's board of directors seeks stockholder approval because such
approval is required under the Internal Revenue Code as a condition to incentive
stock option treatment and will maximize the potential for deductions associated
with any non-qualified options granted under the 1997 Stock Option Plan.
Approval of this proposal will require the affirmative vote of a majority
of the votes cast. As of the record date for the Level 8 special meeting, Liraz
has the right to vote 3,693,120 shares, representing, as of November 17, 1999,
approximately 41% of the outstanding voting stock of Level 8, and has advised
Level 8 that it intends to vote in favor of this proposal. Level 8 has the right
to vote another 1,000,000 shares, representing 11% of the outstanding voting
stock of Level 8, and intends to cause these shares to be voted in favor of this
proposal. Proxies solicited by the Level 8 board of directors will be voted FOR
this proposal, unless stockholders specify otherwise.
THE BOARD OF DIRECTORS OF LEVEL 8 RECOMMENDS A VOTE FOR THE PROPOSED
AMENDMENT TO THE 1997 STOCK OPTION PLAN.
EXPERTS
Level 8's financial statements for the year ended December 31, 1998
included in this joint proxy statement/prospectus have been audited by
PricewaterhouseCoopers LLP,
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independent accountants, and have been included in this joint proxy
statement/prospectus in reliance upon their report given on their authority as
experts in auditing and accounting.
Level 8's financial statements for the year ended December 31, 1997
included in this joint proxy statement/prospectus have been audited by Grant
Thornton LLP, independent auditors, and have been included in this joint proxy
statement/prospectus in reliance upon their report given on their authority as
experts in auditing and accounting.
Level 8's financial statements for the year ended December 31, 1996 which
are included in this joint proxy statement/prospectus have been audited by
Lurie, Besikof, Lapidus & Co., LLP, independent auditors, and have been included
in this joint proxy statement/prospectus in reliance upon their report given on
their authority as experts in auditing and accounting.
The financial statement for Seer Technologies for the fiscal years ended
September 30, 1998, 1997 and 1996 included in this joint proxy
statement/prospectus have been audited by PricewaterhouseCoopers LLP,
independent accountants, and have been included in this joint proxy
statement/prospectus in reliance upon their report given on their authority as
experts in auditing and accounting.
Template's financial statements for the years ended December 31, 1998, 1997
and 1996 included in this joint proxy statement/prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, and have been included in
this joint proxy statement/prospectus in reliance upon their report given on
their authority as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of Level 8 common stock offered hereby and the
federal income tax consequences of the merger, will be passed upon for Level 8
by Powell, Goldstein, Frazer & Murphy LLP, Atlanta, Georgia. Certain federal
income tax matters related to the merger will be passed upon for Template by
Cooley Godward LLP, San Francisco, California.
WHERE YOU CAN FIND MORE INFORMATION
Both Level 8 and Template are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and file reports, proxy and
information statements and other information with the SEC. This information can
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and may be available at the following Regional Offices of the SEC: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of these materials can be obtained at
prescribed rates from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Level 8
and Template make filing under the Exchange Act with the SEC electronically, and
these materials are available at the SEC's Web site (http://www.sec.gov).
Reports, proxy
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statements and other information concerning Level 8 and Template may also be
inspected at The Nasdaq Stock Market, Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
Level 8 filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, as amended, to register with the SEC the Level 8 common
stock to be issued to Template stockholders in the merger. This joint proxy
statement/prospectus constitutes the proxy statement and prospectus of Level 8
and the proxy statement of Template that was filed as part of the registration
statement. Other parts of the registration statement are excluded from this
joint proxy statement/prospectus under the rules and regulations of the SEC.
Reference is made to the registration statement for further information relating
to Level 8, Template and the Level 8 common stock offered by this joint proxy
statement/prospectus. Statements contained in this joint proxy
statement/prospectus concerning the provisions of documents are necessarily
summaries of documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the SEC or attached
as an annex to this joint proxy statement/prospectus.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 regarding the
financial condition, results of operations, cash flows, financing plans,
business strategies and prospects, technological developments, new products,
research and development activities, operating efficiencies or synergies,
budgets, capital and other expenditures, competitive positions, plans and
objectives of management, Year 2000 issues and other matters. Statements in this
document that are not historical facts are hereby identified as "forward-looking
statements" for the purpose of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. Such forward-looking statements, including, without
limitation, those relating to the future business prospects, revenues, working
capital, liquidity, capital needs, interest costs and income, in each case
relating to Level 8 and Template, wherever they occur in this document, are
necessarily estimates reflecting the best judgment of the senior management of
Level 8 and Template and involve a number of risks and uncertainties that could
cause actual results to differ materially from those suggested by the
forward-looking statements. Such forward-looking statements should, therefore,
be considered in light of various important factors, including those set forth
in this document. Important factors that could cause actual results to differ
materially from estimates or projections contained in the forward-looking
statements include, without limitation:
- risks related to the realization of anticipated revenues, profitability
and costs synergies of the combined company;
- the effects of vigorous competition in the markets in which these
entities operate, including the impact on revenues and earnings of
competitive changes to existing price structures;
- the ability of Level 8 or Template to establish a significant presence in
new geographic and service areas;
- the ability to recruit, train and retain qualified personnel;
192
<PAGE> 199
- changes in technology that may increase the number of competitors Level 8
or Template faces or require significant capital expenditures to provide
competitive services;
- risks associated with the exchange ratio;
- general economic or business conditions that may be less favorable than
expected, resulting in, among other things, lower than expected revenues;
- risks of government contracts;
- interest rate fluctuations, foreign currency rate fluctuations and other
capital market conditions;
- costs or difficulties related to the integration of the businesses of
other entities acquired by Level 8 with that of Level 8 may be greater
than expected;
- necessary technological changes (including changes to address "Year 2000"
data systems issues) may be more difficult or expensive to make than
anticipated;
- risks of international business;
- adverse changes may occur in the securities markets; and
- the "Risk Factors" beginning on page 13 in this joint proxy
statement/prospectus.
The words "estimate," "project," "intend," "plan," "expect," "anticipate,"
"believe," "likely," "will" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are found at
various places throughout this document. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date thereof. Neither Level 8 nor Template undertakes any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
You should rely only on the information contained or incorporated by
reference in this joint proxy statement/prospectus about the merger, Level 8 or
Template. We have not authorized anyone to give you any other information. This
joint proxy statement/ prospectus does not apply to you if you are (1) in a
jurisdiction where the activities covered by this joint proxy
statement/prospectus are unlawful, or (2) a person to whom it is unlawful to
direct these activities. The information contained in this joint proxy
statement/prospectus speaks only as of the date on the cover of this proxy
statement/ prospectus unless the information specifically indicates that another
date applies.
Level 8, Level 8 Systems, Geneva, Geneva Integrator, Falcon MQ, Seer and
Seer*HPS are trademarks of Level 8 or its subsidiaries. Template, Template
Software, EIT, SNAP, Foundation Template, Workflow Template, System Management
Template and Web Template are trademarks of Template or its subsidiaries. Other
trademarks referenced in this joint proxy statement/prospectus are trademarks of
their respective legal owners.
193
<PAGE> 200
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEVEL 8 SYSTEMS, INC.
Report of Independent Accountants........................... F-2
Report of Independent Accountants........................... F-3
Independent Auditor's Report................................ F-4
Audited Consolidated Financial Statements as of December 31,
1998 and 1997 and for the years ended December 31, 1998,
1997 and 1996............................................. F-5
Unaudited Consolidated Financial Statements as of September
30, 1999 and December 31, 1998 and for the three and nine
months ended September 30, 1999 and 1998.................. F-37
SEER TECHNOLOGIES, INC.
Report of Independent Accountants........................... F-49
Audited Consolidated Financial Statements as of September
30, 1998 and 1997 and for the years ended September 30,
1998, 1997 and 1996....................................... F-50
Unaudited Consolidated Financials as of December 31, 1998
and September 30, 1998 and for the three months ended
December 31, 1998 and 1997................................ F-75
TEMPLATE SOFTWARE, INC.
Report of Independent Accountants........................... F-83
Audited Consolidated Financial Statements as of November 30,
1997 and December 31, 1998 and for the years ended
November 30, 1996 and 1997, the one month ended December
31, 1997 and the year ended December 31, 1998............. F-84
Unaudited Consolidated Financial Statements as of September
30, 1999 and for the three and nine months ended September
30, 1999 and 1998......................................... F-110
</TABLE>
F-1
<PAGE> 201
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders 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
stockholders' 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 stockholder, Liraz Systems, Ltd.
PricewaterhouseCoopers LLP
Washington, D.C.
March 31, 1999
F-2
<PAGE> 202
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, stockholders' 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.
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> 203
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Level 8 Systems, Inc.
We have audited the accompanying consolidated statements of operations,
changes in stockholders' 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.
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> 204
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 STOCKHOLDERS' 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)
STOCKHOLDERS' 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 stockholders' equity.............................. 8,892 20,371
------- -------
Total liabilities and stockholders' equity.............. $70,770 $23,482
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 205
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> 206
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
-------------- PAID-IN EARNINGS COMPREHENSIVE
SHARE AMOUNT CAPITAL (DEFICIT) INCOME TOTAL
----- ------ ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of 12/31/95...... 5,922 $59 $10,371 $ 1,096 $ (28) $ 11,498
Common Stock:
Private investor........ 247 2 2,607 2,609
Public offering......... 705 7 6,470 6,477
Stock option
exercises............ 81 1 58 59
Cumulative translation
adjustment.............. (5) (5)
Adjustment of unearned
compensation............ 30 30
Net loss.................. (2,369) (2,369)
----- --- ------- -------- ----- --------
Balance as of 12/31/96...... 6,955 69 19,506 (1,273) (3) 18,299
Stock option and warrant
exercises............... 90 1 507 508
Additional public offering
costs................... (137) (137)
Tax benefit from stock
plans................... 464 464
Unearned compensation
related to issuance of
non-employee stock
options................. 263 (263) --
Adjustment of unearned
compensation............ 148 148
Net income................ 1,089 1,089
----- --- ------- -------- ----- --------
Balance as of 12/31/97...... 7,045 70 20,603 (184) (118) 20,371
Shares issued for
Momentum................ 595 6 6,480 6,486
Shares issued for Seer.... 1,000 10 6,088 6,098
Warrants issued for
Momentum................ 654 654
Warrants issued for
Seer.................... 280 280
Stock option and warrant
exercises............... 68 1 58 59
Adjustment of unearned
compensation............ (118) 118 --
Net loss.................. (25,056) (25,056)
----- --- ------- -------- ----- --------
Balance as of 12/31/98...... 8,708 $87 $34,045 $(25,240) $ -- $ 8,892
===== === ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 207
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 activities... 1,657 (517) (1,061)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from acquisitions............................. 916 -- --
Cash expenditures from 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)
Purchase 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 activities... (1,222) 4,030 (7,211)
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> 208
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(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>
<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>
<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 stockholder. 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.
F-9
<PAGE> 209
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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-10
<PAGE> 210
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 OPERATION
Level 8 Systems, Inc. ("Level 8" or the "Company") is a premier provider of
scalable 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 stockholders 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
F-11
<PAGE> 211
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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.
F-12
<PAGE> 212
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
<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.
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.
F-13
<PAGE> 213
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED
Excess of Cost over Net Assets of Business Acquired consists of both
identifiable and unidentifiable intangible 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 stockholders'
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.
F-14
<PAGE> 214
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
EARNINGS (LOSS) PER SHARE
During 1998, the Company adopted the provisions of SFAS No. 128, "Earnings
per Share", which specifies the computation, presentation, and disclosure
requirements for earnings per share. All prior period earnings per share data
has been restated, as applicable, to conform with the provisions of the
statement.
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding and
any potentially dilutive securities. 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 stockholders' equity.
F-15
<PAGE> 215
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
<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 existing XIPC product, in areas for which
technological feasibility had not been established. The value of the in-process
F-16
<PAGE> 216
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
<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>
F-17
<PAGE> 217
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 stockholder 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 stockholders 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 stockholders 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 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 stockholders 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.
F-18
<PAGE> 218
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
F-19
<PAGE> 219
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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
F-20
<PAGE> 220
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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.
F-21
<PAGE> 221
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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:
<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
F-22
<PAGE> 222
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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
F-23
<PAGE> 223
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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-24
<PAGE> 224
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
F-25
<PAGE> 225
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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
receivable.............................. $ 240 $ -- $ 175 $ --
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
F-26
<PAGE> 226
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the exercise of awards and provide that the term of each award be determined by
the Board of Directors.
Under the terms of the Plans, the exercise price of the incentive stock
options may not be less than the fair market value of the stock on the date of
the award and the options are exercisable for a period not to exceed five years
from date of grant. Stock appreciation rights entitle the recipients to receive
the excess of the fair market value of the Company's stock on the exercise date,
as determined by the Board of Directors, over the fair market value on the date
of grant. Performance shares entitle recipients to acquire Company stock upon
the attainment of specific performance goals set by the Board of Directors.
Restricted stock entitles recipients to acquire Company stock subject to the
right of the Company to repurchase the shares in the event conditions specified
by the Board are not satisfied prior to the end of the restriction period. The
Board may also grant unrestricted stock to participants at a cost not less than
85% of fair market value on the date of sale. Options granted vest at varying
periods up to five years and expire in ten years.
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.
F-27
<PAGE> 227
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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-28
<PAGE> 228
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
F-29
<PAGE> 229
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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 stockholders 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 stockholders 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.
F-30
<PAGE> 230
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 an International Stock Purchase
Plan (the "Stock Purchase Plan -- International") for its employees
(collectively, the "Stock Purchase Plans"). The Stock Purchase Plans 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-31
<PAGE> 231
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
F-32
<PAGE> 232
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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
F-33
<PAGE> 233
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
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
F-34
<PAGE> 234
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 renegotiated 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 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.
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <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.
F-35
<PAGE> 235
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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-36
<PAGE> 236
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 9,567 $ 6,078
Accounts receivable, less allowance for doubtful
accounts of $1,664 and $3,252 at September 30, 1999
and December 31, 1998, respectively................. 14,217 16,992
Due from related company.............................. -- 271
Note receivable for sale of subsidiary................ 2,000 2,000
Prepaid expenses and other current assets............. 2,379 2,606
-------- --------
Total current assets................................ 28,163 27,947
Property and equipment, net........................... 1,777 2,682
Intangible assets, net................................ 25,713 32,217
Software development costs, net....................... 8,972 6,753
Other assets.......................................... 974 1,171
-------- --------
Total assets........................................ $ 65,599 $ 70,770
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand.......................... $ 5,203 $ 12,275
Current maturities of loan from related company....... 586 628
Current maturities of long-term debt.................. 775 799
Accounts payable...................................... 2,212 3,773
ACCRUED EXPENSES:
Compensation.......................................... 1,610 1,339
Restructuring......................................... 376 973
Merger-related........................................ 1,420 4,803
Other................................................. 7,473 8,275
Deferred revenue...................................... 9,293 13,075
Income taxes payable.................................. 1,360 1,781
-------- --------
Total current liabilities........................... 30,308 47,721
Long-term debt, net of current maturities............. 11,528 1,541
Loan from related company, net of current
maturities.......................................... 4,000 12,519
Deferred revenue...................................... 1,267 97
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value..................... -- --
Common stock, $0.001 par value........................ 9 87
Additional paid-in-capital............................ 54,562 34,045
Accumulated other comprehensive income................ (240) --
Accumulated deficit................................... (35,835) (25,240)
-------- --------
Total stockholders' equity.......................... 18,496 8,892
-------- --------
Total liabilities and stockholders' equity.......... $ 65,599 $ 70,770
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE> 237
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUE:
Software....................................... $ 4,112 $ 450 $ 10,014 $ 1,077
Maintenance.................................... 3,538 280 11,403 568
Services....................................... 5,153 1,619 17,599 6,952
------- ------- -------- -------
Total operating revenue...................... 12,803 2,349 39,016 8,597
COST OF REVENUE:
Software....................................... 1,135 356 3,063 1,205
Maintenance.................................... 1,199 95 4,249 336
Services....................................... 4,291 1,540 15,378 4,489
------- ------- -------- -------
Total cost of revenue........................ 6,625 1,991 22,690 6,030
Gross profit................................... 6,178 358 16,326 2,567
OPERATING EXPENSES:
Sales and marketing............................ 2,832 781 8,206 1,862
Research and development....................... 1,670 569 4,904 1,973
General and administrative..................... 1,983 1,097 4,857 3,148
In-process research and development............ -- -- 744 1,200
Amortization of intangible assets.............. 1,813 867 5,197 1,545
------- ------- -------- -------
Total operating expenses..................... 8,298 3,314 23,908 9,728
------- ------- -------- -------
Loss from operations......................... (2,120) (2,956) (7,582) (7,161)
OTHER INCOME (EXPENSE):
Interest income................................ 289 72 444 225
Interest expense............................... (563) (34) (2,168) (72)
Net foreign currency gains/(losses)............ 45 -- (696) --
------- ------- -------- -------
Loss before provision for income taxes......... (2,349) (2,918) (10,002) (7,008)
Income tax provision (benefit)................. 195 -- 594 (558)
------- ------- -------- -------
Loss from continuing operations................ (2,544) (2,918) (10,596) (6,450)
DISCONTINUED OPERATIONS:
Loss from discontinued operation, net of tax... -- -- -- (135)
Loss on disposal, net of tax................... -- -- -- (843)
------- ------- -------- -------
Loss from discontinued operations.............. -- -- -- (978)
Net loss..................................... $(2,544) $(2,918) $(10,596) $(7,428)
======= ======= ======== =======
LOSS PER COMMON SHARE:
Loss from continuing operations - basic and
diluted...................................... $ (0.31) $ (0.38) $ (1.24) $ (0.86)
Loss from discontinued operations -- basic and
diluted...................................... -- -- -- (0.13)
------- ------- -------- -------
Net loss per share -- basic and diluted...... $ (0.31) $ (0.38) $ (1.24) $ (0.99)
======= ======= ======== =======
Weighted common shares outstanding -- basic and
diluted...................................... 8,778 7,690 8,729 7,498
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-38
<PAGE> 238
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(10,596) $(7,428)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 8,632 2,366
Deferred income taxes..................................... 2 (934)
Loss from discontinued operations......................... -- 135
Loss on disposal of discontinued operations............... -- 843
Purchased research and development........................ 744 1,200
Write-off of capitalized software costs................... -- 294
Provision for doubtful accounts........................... 484 652
Other..................................................... 172 (247)
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Trade accounts receivable.............................. 2,051 (2,019)
Prepaid expenses and other assets...................... 696 (580)
Accounts payable, income taxes payable, and accrued
expenses (excluding merger-related and
restructuring)....................................... (3,476) (594)
Merger-related and restructuring....................... (3,403) --
Deferred revenue....................................... (2,612) 4,502
-------- -------
Net cash used in operating activities................ (7,306) (1,810)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from acquisition.............................. -- 362
Purchases of property and equipment......................... (173) (1,274)
Payments for acquisitions................................... (2,767) --
Capitalization of software development costs................ (1,167) (643)
-------- -------
Net cash used in investing activities................ (4,107) (1,555)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares................................... 1,328 59
Issuance of preferred shares, net of issuance costs......... 19,245 --
Payments on borrowings from related company................. (8,561) --
Payments on capital leases.................................. (34) --
Net borrowings on line of credit............................ 6,924 --
Payments on line of credit.................................. (4,000) --
Payments on other long-term debt............................ -- (219)
-------- -------
Net cash provided by (used in) financing
activities........................................ 14,902 (160)
Effect of exchange rate changes on cash..................... -- --
Net increase (decrease) in cash and cash equivalents........ 3,489 (3,525)
CASH AND CASH EQUIVALENTS:
Beginning of period......................................... 6,078 7,062
End of period............................................... $ 9,567 $ 3,537
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-39
<PAGE> 239
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss................................... $(2,544) $(2,918) $(10,596) $(7,428)
Other comprehensive income, net of tax
Foreign currency translation
adjustment.......................... (145) -- (240) --
------- ------- -------- -------
Comprehensive loss......................... $(2,689) $(2,918) $(10,836) $(7,428)
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
<PAGE> 240
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations.
Accordingly, these interim financial statements should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for other interim periods or
for the full fiscal year. In the opinion of management, the information
contained herein reflects all adjustments necessary for a fair statement of the
interim results of operations. All such adjustments are of a normal, recurring
nature, except for the acquisition of Seer, non-cash compensation, and the
issuance of preferred stock all occurring in the second quarter.
The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All of the Company's subsidiaries are
wholly-owned for the entire nine month period presented, except for Seer
Technologies, Inc. ("Seer"). The Company acquired a 69% interest in Seer on
December 31, 1998 and the remaining 31% interest on April 30, 1999. Prior to the
completion of the Seer acquisition, Level 8 assumed Seer's net liabilities. The
minority stockholders were deemed to have shared in the losses of Seer only for
their proportionate share of Seer's net assets until April 30, 1999.
Accordingly, there is no minority interest in the losses of the Seer subsidiary
reflected in the consolidated financial statements for the nine month period
ended September 30, 1999.
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the 1999 presentation. Such reclassifications
had no effect on previously reported net income or stockholders' equity.
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") was effective
for the Company's fiscal year beginning January 1, 1999. 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.
F-41
<PAGE> 241
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. BUSINESS COMBINATION
As of April 30, 1999, the Company acquired the remaining minority interest
in Seer, for $0.35 in cash per share of the outstanding common stock of Seer.
The total purchase price for the remaining 31% of Seer was $1,697. As a result
of the completion of acquisition, Seer became a wholly-owned subsidiary of the
Company.
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
of the purchased in-process research and development, developed technology,
installed customer base, and assembled workforce of Seer. The purchase price was
less than the amounts allocated to the tangible and intangible assets acquired
by approximately $1,307. The difference between the purchase price and the fair
values of the assets acquired less liabilities assumed was allocated to
goodwill.
The cost of the acquisition was allocated as follows:
<TABLE>
<S> <C>
In-process research and development......................... $ 744
Developed technology...................................... 3,410
Goodwill and other intangibles............................ (1,307)
Accrued liabilities....................................... (1,150)
-------
Cost of net assets acquired............................... $ 1,697
=======
</TABLE>
Approximately $744 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 was determined by identifying research projects in areas for which
technological feasibility had not been established, primarily the application
warehousing project. 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 research and
development.
NOTE 3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding and
any potentially dilutive securities. Potentially dilutive securities are not
included in the diluted earnings per share calculations if their inclusion would
be anti-dilutive to the basic earnings (loss) per share calculations.
Potentially dilutive securities outstanding during the first quarter of fiscal
year 1999 included stock options and stock warrants. In the second and third
quarters of fiscal year 1999, potentially dilutive securities included stock
options, stock warrants, and
F-42
<PAGE> 242
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock. Dividends of $210 were paid to the holders of Series A
Preferred Stock in the third quarter of 1999. The following table sets forth a
reconciliation to net income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss $(2,544) $(2,918) $(10,596) $(7,428)
Preferred stock dividends (210) -- (210) --
------- ------- -------- -------
Loss available to common share
holders $(2,754) $(2,918) $(10,806) $(7,428)
======= ======= ======== =======
Loss per common share:
Loss from continuing operations
-basic and diluted $ (0.31) $ (0.38) $ (1.24) $ (0.86)
Loss from discontinued operations
-basic and diluted -- -- --
(0.13)
------- ------- -------- -------
Net loss per share -- basic and
diluted $ (0.31) $ (0.38) $ (1.24) $ (0.99)
======= ======= ======== =======
Weighted common shares outstanding -
basic and diluted 8,778 7,690 8,729 7,498
======= ======= ======== =======
</TABLE>
NOTE 4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company's
effective tax rate differs from the statutory rate primarily due to the fact
that no income tax benefit was recorded for the net loss for the first nine
months of fiscal year 1999. Because of the Company's inconsistent earnings
history, the deferred tax assets have been fully offset by a valuation
allowance.
The income tax provision for the first nine months of fiscal year 1999 is
primarily related to income taxes from profitable foreign operations and foreign
withholding taxes.
NOTE 5. USE OF 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.
NOTE 6. SEGMENT INFORMATION
Management of the Company makes operating decisions and assesses
performance of its operations based on the following reportable segments: (1)
Software, (2) Maintenance, (3) Services, and (4) Research and Development.
F-43
<PAGE> 243
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies," included in the Company's
Annual Report on Form 10-K for year ended December 31, 1998. Segment data
includes a charge allocating all corporate-headquarters costs to each of its
operating segments based on each segment's proportionate share of expenses. The
Company evaluates the performance of its segments and allocates resources to
them based on earnings (loss) before interest, taxes and amortization of
goodwill (EBITA).
Comparative information is not available for the same period of 1998
because the Company previously reviewed its operations as one reportable segment
and did not have international operations.
The table below presents information about reported segments for the nine
months period ending September 30, 1999:
<TABLE>
<CAPTION>
RESEARCH
AND
SOFTWARE MAINTENANCE SERVICES DEVELOPMENT TOTAL
-------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Total Revenue................. $10,014 $11,403 $17,599 $ -- $39,016
Total EBITA................. $(2,783) $ 6,576 $ 136 $(5,570) $(1,641)
</TABLE>
A reconciliation of total segment EBITA to total consolidated income before
taxes for the nine months ended September 30, 1999 is as follows:
<TABLE>
<S> <C>
Total EBITA................................................. $ (1,641)
Amortization of goodwill.................................... (5,197)
In-process research and development......................... (744)
Other income/(expense), net................................. (2,420)
--------
Total loss before income taxes............................ $(10,002)
========
</TABLE>
The table below presents information about reported segments for the
quarter ending September 30, 1999:
<TABLE>
<CAPTION>
RESEARCH
AND
SOFTWARE MAINTENANCE SERVICES DEVELOPMENT TOTAL
-------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Total Revenue.................. $4,112 $3,538 $5,153 $ -- $12,803
Total EBITA.......... $ (562) $2,125 $ 98 $(1,968) $ (307)
</TABLE>
A reconciliation of total segment EBITA to total consolidated income before
taxes for the quarter ended September 30, 1999 is as follows:
<TABLE>
<S> <C>
Total EBITA................................................. $ (307)
Amortization of goodwill.................................... (1,813)
In-process research and development......................... --
Other income/(expense), net................................. (229)
-------
Total loss before income taxes............................ $(2,349)
=======
</TABLE>
F-44
<PAGE> 244
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a summary of revenue by geographic region for
the three and nine months ended September 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Australia.................................. $ 490 $ 2,011
Denmark.................................... 1,331 5,244
Germany.................................... 960 2,598
Greece..................................... 290 1,149
Italy...................................... 512 2,393
Norway..................................... 533 1,638
Sweden..................................... 354 1,388
Switzerland................................ 603 2,283
United Kingdom............................. 1,518 4,044
USA........................................ 4,432 12,346
Other...................................... 1,780 3,922
------- -------
Total revenue $12,803 $39,016
======= =======
</TABLE>
Presentation of revenue by region is based on the country in which the
customer is domiciled.
NOTE 7. LONG-TERM DEBT AND CREDIT FACILITIES
On April 21, 1999, the Company's credit facility with a commercial bank was
amended to provide for borrowings up to the lesser of $25,000 or the sum of 80%
of eligible receivables and a $10,000 term loan payable on September 1, 2000.
The receivables-based borrowings under this credit facility are due on demand.
This credit facility bears interest at the prime rate plus 2% per annum and has
no financial covenant provisions. This credit facility terminates on December
31, 2001; however it is automatically renewed for successive terms of one year
each, unless terminated by either party. This credit facility is collateralized
by the Company's accounts receivable, equipment and intangibles, including
intellectual property. On September 24, 1999, the due date of the term loan was
amended from September 1, 2000 to March 1, 2001.
On May 31, 1999 the Company's $12 million loan from Liraz Systems, Ltd.
("Liraz") was amended. The amendment changed the due date from June 30, 2000 to
December 15, 2000 and provides for semiannual interest payments rather than
payment of interest at maturity. No other terms of the loan were amended. During
the quarter ended September 30, 1999, the Company used part of the proceeds from
the issuance of the Series A Preferred Stock to repay $8 million of it's $12
million loan and reduce the balance to $4 million.
NOTE 8. ISSUANCE OF PREFERRED STOCK
On June 29, 1999, Level 8 Systems, Inc. completed its agreement to sell
21,000 shares of Series A 4% Convertible Redeemable Preferred Stock ("Series A
Preferred Stock"), for $21,000, convertible into an aggregate of 2.1 million
shares of common stock
F-45
<PAGE> 245
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Level 8. The proceeds, net of accrued issuance costs of $19,150, will be used
to pay down debt and for other general corporate purposes. The sale of the
Series A Preferred Stock was made in a private transaction exempt from the
registration requirements of the federal securities laws.
Holders of the Series A Preferred Stock are entitled to receive 4% annual
cash dividends payable quarterly and will have one vote per share of Series A
Preferred Stock, voting together with the common stock and not as a separate
class except on certain matters adversely affecting the rights of holders of the
Series A Preferred Stock. The Series A Preferred Stock may be redeemed at the
option of Level 8 at a redemption price equal to the original purchase price at
any time after June 29, 2000 if the closing price of Level 8's common stock over
20 consecutive trading days is greater than $20 per share. The conversion price
of the Series A Preferred Stock is subject to certain anti-dilution provisions,
including adjustments in the event of certain sales of common stock at a price
of less than $10 per share. In the event Level 8 breaches its obligations to pay
dividends when due or issue common stock upon conversion, or Level 8's common
stock is delisted, the dividend rate on the Series A Preferred Stock would
increase to 18% per annum (partially payable in shares of common stock at the
option of Level 8 during the first 60 days of such increased dividend rate). As
part of the $21 million financing, Level 8 also issued the investors warrants to
purchase 2.1 million shares of common stock at an exercise price of $10 per
share. Level 8 has agreed to register the common stock issuable upon conversion
of the Series A Preferred Stock and exercise of the warrants for resale under
the Securities Act of 1933. Level 8 is required to make certain payments in the
event it is unable to meet its obligations in connection with the Series A
Preferred Stock and warrants, such as registration under the Securities Act or
issuance of shares of common stock upon conversion or exercise. The aggregate
amount of all such payments, together with dividends on the Series A Preferred
Stock, is limited to 19% of the liquidation value of the Series A Preferred
Stock. One of the investors in the Series A Preferred Stock included Advanced
Systems Europe B.V., which purchased $10 million of Series A Preferred Stock and
warrants in the transaction, and is a subsidiary of Liraz, Level 8's principal
stockholder.
NOTE 9. REINCORPORATION AND COMMON STOCK
Effective June 23, 1999, the Company completed its re-incorporation under
Delaware law. As a result of the re-incorporation of the Company under Delaware
law, the rights of stockholders of the Company are now governed by the
Certificate of Incorporation and Bylaws of Level 8 Systems, Inc., a Delaware
corporation, and the General Corporation Law of the State of Delaware. In
conjunction with the re-incorporation, the Company changed the par value of its
common stock from $.01 to $.001.
NOTE 10. CONTINGENCIES
LITIGATION. On April 6, 1998, the Company sold substantially all assets
and operations of its wholly owned subsidiary ProfitKey International, Inc.
("ProfitKey"). 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
F-46
<PAGE> 246
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 has attempted to negotiate a settlement with the purchaser and has,
pursuant to the terms of the settlement agreement, entered into arbitration
proceedings to resolve this matter. The Company has made a provision for its
estimate of the purchase price adjustment and the costs to resolve this matter.
Management believes at this time that any additional provision required to
ultimately resolve this matter will not have a material effect on the financial
position, cash flows, or results of operations of the Company.
In December 1997, Seer Technologies, Inc. ("Seer"), a now wholly-owned
subsidiary of the Company, instituted litigation in London, England against
Saadi Abbas ("Abbas") and Cambridge Business Solutions (UK) Ltd. ("CBS")
concerning a dispute over a license agreement between Seer, CBS and Abbas. These
entities counterclaimed against Seer. The case has proceeded through discovery
and various other procedural events and all that remains of the litigation at
this point in time are various claims against Seer by Abbas and CBS. Most of
those claims have been struck out by the court in London as unarguable or
otherwise time barred. The Company intends to continue to vigorously defend
against the few remaining claims. The Company has made provisions for its
estimated costs to resolve this matter. Management does not believe at this
point in the litigation that any additional amounts required to ultimately
resolve this matter will have a material effect on the financial position, cash
flows, or results of operations of the company.
LIQUIDITY. During the first nine months of 1999, the Company incurred a
net loss of $10,596 and has negative working capital of $2,145 and an
accumulated deficit of $35,835 at September 30, 1999. The Company received
$21,000 from the issuance of preferred stock as discussed in Note 8 above and
renegotiated the repayment of certain long-term debt. Additionally, as a result
of issuing more than $7,500 in equity financing, the Company no longer has a
commitment from Liraz for $7,500 in working capital. The Company's ability to
generate positive future cash flow is dependent upon the Company meeting its
operating plan. The Company already implemented certain steps in the first half
of 1999 to, among other things, reduce headcount, restructure operations and
eliminate various costs from the business. The Company believes that existing
cash on hand, cash provided by future operations, additional borrowings under
its current line of credit, and additional new funding to be made available if
the business purchase transaction, as described in Note 12, is consummated, 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.
NOTE 11. FOREIGN CURRENCY EXCHANGE CONTRACTS
In the normal course of business, the Company employs established policies
and procedures to manage its exposure to fluctuations in foreign currency
values. Beginning in
F-47
<PAGE> 247
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
July of 1999, the Company entered into forward exchange contracts primarily to
hedge receivables denominated in foreign currencies against fluctuations in
exchange rates. The Company has not entered into forward foreign exchange
contracts for speculative or trading purposes. At September 30, 1999, the
aggregate notional amount of foreign exchange contracts outstanding was $2,208.
NOTE 12. SUBSEQUENT EVENTS
On October 19, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Template Software, Inc. ("Template") and
with Level 8's wholly-owned subsidiary, TSAC, Inc. ("Subsidiary"). The Merger
Agreement provides for the Company's acquisition of Template by Template's
merger with and into the Subsidiary.
Under the Merger Agreement, each share of Template common stock will be
exchanged for $4.00 in cash plus $3.90 worth of Level 8 common stock. The actual
number of shares of Level 8 common stock to be exchanged for each Template share
will be based on the average trading price of Level 8 stock for the ten trading
days prior to the third trading day before stockholder approval, but will not be
less than 0.2838 Level 8 shares per Template share (if Level 8's average trading
price exceeds $13.74) or more than 0.3672 Level 8 shares per Template share (if
Level 8's average trading price is less than $10.62). The merger is intended to
qualify as a tax-free reorganization, which means that Template stockholders
would generally be permitted to defer taxes on the Level 8 stock portion of the
purchase price.
In connection with the merger, the Company has received a commitment from a
commercial bank for additional financing in the form of a five year term loan
for $25 to $35 million. The financing will be guaranteed by Liraz Systems, Ltd.,
the Company's principal stockholder, in return for between 150,000 and 250,000
shares of the Company's common stock to be determined by the independent
directors of the Company based on market conditions and the Company's financing
needs at closing. The additional financing is subject to the negotiation and
execution of a definitive agreement. The commitment provides for an interest
rate equal to the London InterBank Offered Rate plus 1.5% annually.
The merger is subject to certain conditions to closing, including
stockholder approval, regulatory approval, and necessary consents and filings.
The Company believes the merger will be completed in the fourth quarter of 1999
or the first quarter of 2000.
F-48
<PAGE> 248
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Seer Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material respects, the financial position of Seer
Technologies, Inc. and its subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 18, Level 8 Systems, Inc. has acquired a controlling
interest in the Company.
PricewaterhouseCoopers LLP
Washington, D.C.
December 31, 1998
F-49
<PAGE> 249
SEER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 1,040 $ 4,268
Trade accounts receivable, less allowance for doubtful
accounts................................................. 17,285 31,383
Prepaid expenses and other current assets.................. 1,476 1,947
Deferred income taxes...................................... -- 1,152
--------- --------
Total current assets..................................... 19,801 38,750
Trade accounts receivable, net............................. -- 2,041
Property and equipment, net................................ 1,867 4,528
Capitalized software costs, net............................ 1,140 3,206
Deferred income taxes, net of valuation allowance.......... -- 17,599
Other assets............................................... 387 411
--------- --------
Total assets............................................. $ 23,195 $ 66,535
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand............................... $ 38,148 $ 22,052
Accounts payable........................................... 2,897 4,279
ACCRUED EXPENSES:
Compensation............................................... 744 1,964
Commissions................................................ 1,156 1,536
Restructuring.............................................. 4,064 --
Other...................................................... 3,459 5,241
Deferred revenue........................................... 7,355 7,813
Income taxes payable....................................... 1,644 1,826
--------- --------
59,467 44,711
Deferred revenue........................................... 253 981
Commitments and contingencies (Notes 15 and 16)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock, $0.01 par value, 10,000,000
shares authorized in 1998 and 1997, respectively:
Series A -- 2,094,143 shares issued and outstanding at
September 30, 1998 and 1997, respectively; $5.969 per
share liquidation preference (aggregate liquidation value
of $12,500,000).......................................... 21 21
Series B -- 1,732,115 shares issued and outstanding at
September 30, 1998; $2.874 per share liquidation
preference (aggregate liquidation value of $5,000,000)... 18 --
Common stock $0.01 par value, 30,000,000 shares authorized
in 1998 and 1997, respectively; 11,980,216 and 11,865,167
shares issued and outstanding at September 30, 1998 and
1997, respectively....................................... 120 119
Additional paid-in-capital -- preferred.................... 17,232 12,281
Additional paid-in-capital -- common....................... 58,791 58,486
Cumulative translation adjustments......................... (847) (644)
Accumulated deficit........................................ (111,860) (49,420)
--------- --------
Total stockholder's equity (deficiency).................. (36,525) 20,843
--------- --------
Total liabilities and stockholders' equity............... $ 23,195 $ 66,535
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-50
<PAGE> 250
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
OPERATING REVENUE:
Software products.................................. $ 6,986 $34,244 $ 28,795
Maintenance........................................ 13,557 14,598 13,182
Services........................................... 43,421 54,311 49,680
-------- ------- --------
Total operating revenue.......................... 63,964 103,153 91,657
COST OF REVENUE:
Software products.................................. 1,786 1,545 1,562
Maintenance........................................ 6,480 8,436 9,157
Services........................................... 39,512 41,860 42,401
-------- ------- --------
Total cost of revenue............................ 47,778 51,841 53,120
Gross profit....................................... 16,186 51,312 38,537
OPERATING EXPENSES:
Sales and marketing................................ 19,312 30,693 43,982
Research and product development................... 12,894 12,485 16,789
General and administrative......................... 9,999 14,705 19,878
Restructuring charges.............................. 13,200 500 3,000
-------- ------- --------
Total operating expenses......................... 55,405 58,383 83,649
-------- ------- --------
Loss from operations............................... (39,219) (7,071) (45,112)
OTHER INCOME (EXPENSE):
Interest income.................................... 477 514 648
Interest expense................................... (3,488) (2,181) (802)
-------- ------- --------
Other income (expense), net...................... (3,011) (1,667) (154)
-------- ------- --------
Loss before provision for income taxes............. (42,230) (8,738) (45,266)
Income tax provision (benefit)..................... 20,210 1,228 (13,684)
-------- ------- --------
Net loss........................................... $(62,440) $(9,966) $(31,582)
======== ======= ========
Loss per share -- basic and diluted................ $ (5.23) $ (0.85) $ (2.76)
======== ======= ========
Weighted average common shares outstanding -- basic
and diluted...................................... 11,941 11,707 11,445
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-51
<PAGE> 251
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------ ------------------- PAID-IN CAPITAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PREFERRED
--------- ------ --------- ------ ---------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995...................... -- $-- -- $-- 11,351,948 $114 $ --
Issuance of convertible
preferred shares...... 2,094,143 21 12,281
Issuance of common
shares................ 260,159 2
Cumulative translation
adjustment
Net loss
--------- --- --------- --- ---------- ---- -------
Balance at September 30,
1996.................... 2,094,143 21 -- -- 11,612,107 116 12,281
Issuance of stock....... 263,060 3
Repurchase of common
shares................ (10,000)
Cumulative translation
adjustment
Net loss
--------- --- --------- --- ---------- ---- -------
Balance at September 30,
1997.................... 2,094,143 21 -- -- 11,865,167 119 12,281
Issuance of convertible
preferred shares...... 1,762,115 18 115,049 4,951
Issuance of common
shares................ 1
Cumulative translation
adjustment
Net loss
--------- --- --------- --- ---------- ---- -------
Balance at September 30,
1998.................... 2,094,143 $21 1,762,115 $18 11,980,216 $120 $17,232
========= === ========= === ========== ==== =======
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
ADDITIONAL CUMULATIVE EQUITY/
PAID-IN CAPITAL TRANSLATION ACCUMULATED (CAPITAL
COMMON ADJUSTMENT DEFICIT DEFICIENCY)
--------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995.................. $56,541 $(395) $ (7,822) $ 48,438
Issuance of convertible preferred shares..... 12,302
Issuance of common shares.................... 1,003 1,005
Cumulative translation adjustment............ (110) (110)
Net loss..................................... (31,582) (31,582)
------- ----- --------- --------
Balance at September 30, 1996.................. 57,544 (505) (39,404) 30,053
Issuance of stock............................ 992 995
Repurchase of common shares.................. (50) (50) (100)
Cumulative translation adjustment............ (139) (139)
Net loss..................................... (9,966) (9,966)
------- ----- --------- --------
Balance at September 30, 1997.................. 58,486 (644) (49,420) 20,843
Issuance of convertible preferred shares..... 4,969
Issuance of common shares.................... 305 306
Cumulative translation adjustment............ (203) (203)
Net loss..................................... (62,440) (62,440)
------- ----- --------- --------
Balance at September 30, 1998.................. $58,791 $(847) $(111,860) $(36,525)
======= ===== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-52
<PAGE> 252
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(62,440) $(9,966) $(31,582)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 3,716 4,328 4,408
Deferred income taxes................................ 18,751 (1,159) (16,577)
Provision for uncollectible accounts................. 1,027 4,338 10,158
Write-down of assets................................. 4,792 -- --
Non-cash cost of credit guaranty..................... 98 336 67
Non-cash compensation cost........................... -- 86 --
Changes in assets and liabilities:
Trade accounts receivable......................... 11,929 8,863 (9,043)
Prepaid expenses and other assets................. 340 1,882 28
Accounts payable, accrued expenses, and income
taxes payable................................... (882) (7,899) 2,444
Deferred revenue.................................. (1,186) (2,721) 3,922
-------- ------- --------
Net cash used in operating activities........... (23,855) (1,912) (36,175)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................... (358) (1,031) (2,768)
Capitalization of software development costs........... (128) (1,373) (1,600)
-------- ------- --------
Net cash used in investing activities........... (486) (2,404) (4,368)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares.............................. 208 797 602
Repurchase of common shares............................ -- (100) --
Issuance of preferred shares........................... 5,000 -- 12,500
Preferred stock issuance costs......................... (31) -- (198)
Debt issuance costs.................................... -- (280) --
Net borrowings under lines of credit................... 15,956 7,813 14,379
-------- ------- --------
Net cash provided by financing activities....... 21,133 8,230 27,283
Effect of exchange rate changes on cash................ (20) (23) (13)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents... (3,228) 3,891 (13,273)
CASH AND CASH EQUIVALENTS:
Beginning of period.................................... 4,268 377 13,650
-------- ------- --------
End of period.......................................... $ 1,040 $ 4,268 $ 377
======== ======= ========
Supplemental disclosures of cash flow information:
CASH PAID DURING THE PERIOD FOR:
Income Taxes........................................... $ 1,326 $ 2,400 $ 1,596
======== ======= ========
Interest............................................... $ 3,006 $ 2,040 $ 846
======== ======= ========
</TABLE>
During fiscal years 1998 and 1996, the Company issued 30,000 and 75,000
shares of its common stock, respectively, to Welsh, Carson, Anderson, & Stowe VI
("WCAS") in exchange for WCAS's guaranty of one of the Company's lines of
credit. See Note 5. The Company recorded expense of $98 and $403 related to
these transactions based on the fair market value of the stock on the date of
issuance.
The accompanying notes are an integral part of the consolidated financial
statements.
F-53
<PAGE> 253
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Seer Technologies, Inc. ("Seer" or the "Company") is one of the software
industry's earliest pioneers and a long-time leader in component-based software
application development. Seer helps Global 5000 companies leverage information
technology as a competitive weapon by enabling the deployment and on going
renewal of large-scale, business-critical systems. Seer provides solutions for
the business problems of delivering application functionality, extending the
return on information technology investment and managing enterprise application
life cycles in complex development environments through a combination of
consulting services, best practices methodologies, application assets and
enabling technologies.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions are eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign subsidiaries are translated to U.S.
dollars at the current exchange rate as of the balance sheet date. The resulting
translation adjustment is recorded as a separate component of stockholders'
equity. Statements of operations items are translated at average rates of
exchange during each reporting period. Transaction gains and losses are included
in current operations. Realized and unrealized net losses (gains) for
transactions denominated in foreign currencies were $10, $136, and $556,
respectively, for the fiscal years ended September 30, 1998, 1997, and 1996.
REVENUE RECOGNITION
Revenue from the non-exclusive licensing of existing software products is
recognized when the software is accepted and delivered or installed by the
customer in accordance with the terms of the contract and only if no significant
vendor obligations remain and collection of the resulting receivables is deemed
probable. For license agreements where maintenance is bundled with the software
license for a time period greater than three months, an appropriate portion of
the license fees is deferred and amortized over the initial maintenance period.
Revenue from recurring maintenance contracts is recognized ratably over the
maintenance contract period, which is typically twelve months. Maintenance
revenue that is not yet earned is included in deferred revenue.
Revenue from consulting and training services is recognized as services are
performed.
Proceeds from product development contracts are recorded as deferred
revenue when collected and the revenue is recognized as the development work is
performed.
F-54
<PAGE> 254
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company typically does not grant to its customers a contractual right
to return software products. Accordingly, no provision for estimated returns is
recorded at the time of sale. When approved by management, however, the Company
will accept returns of certain software products and will provide an allowance
for those specific transactions.
COST OF REVENUE
The primary components of the Company's cost of revenue for its software
products are packaging and distribution costs, software amortization and
royalties. The primary components of the Company's cost of revenue for
maintenance are payments under various distribution and marketing agreements
with IBM and customer support. A portion of the costs related to customer
support are deferred and recognized as the service is provided. The primary
component of the Company's cost of revenue for services is compensation expense.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less from the date of purchase.
For these instruments, the carrying amount is a reasonable estimate of fair
value. The Company places substantially all cash and cash equivalents with
various financial institutions in both the United States and several foreign
countries. At times, such cash and cash equivalents may be in excess of FDIC
insurance limits.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<S> <C>
Leasehold improvements................ The lesser of the lease term or
estimated useful life
Furniture and fixtures................ 3 to 5 years
Office equipment...................... 3 years
Computer equipment.................... 4 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as
incurred. The cost and related accumulated depreciation of property and
equipment are removed from the accounts upon retirement or other disposition and
any resulting gain or loss is reflected in operations.
SOFTWARE COSTS
The Company capitalizes certain software costs after technological
feasibility of the product has been established. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including,
F-55
<PAGE> 255
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
but not limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technologies.
All capitalized software costs are amortized over related sales on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, an original
estimated economic life of three years is assigned to capitalized software
costs, once the product is available for general release to customers. Costs
incurred prior to the establishment of technological feasibility 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.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development costs are expensed as incurred.
FORWARD EXCHANGE CONTRACTS
The Company conducts its business in various foreign currencies. As a
result, it is subject to the transaction exposures that arise from foreign
exchange rate movements between the dates that foreign currency transactions are
recorded and the date they are consummated. The Company enters into foreign
exchange forward contracts to hedge the effect of fluctuating foreign currencies
on its results of operations (see Note 11). Gains and losses associated with
exchange rate fluctuations on forward contracts are recorded currently as income
or loss as they offset corresponding gains and losses on the foreign currency
denominated assets or liabilities being hedged. The gains and losses are
computed by multiplying the foreign currency amounts of the forward contracts by
the difference between the quoted market spot rate at the balance sheet date and
the spot rate at the date of inception of the forward contracts. The costs of
the forward contracts are recorded as expense over the lives of the contracts.
Cash flows related to forward exchange contracts are classified in the
Consolidated Statement of Cash Flows in the same categories as the hedged assets
or liabilities.
INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" to account for income taxes.
This statement requires an asset and liability approach that recognizes deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, all expected future events other than
enactments of changes in the tax law or rates are generally considered.
F-56
<PAGE> 256
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS/(LOSS) PER SHARE
During fiscal year 1998, the Company adopted the provisions of SFAS No.
128, "Earnings per Share", which specifies the computation, presentation, and
disclosure requirements for earnings per share. All prior period earnings per
share data has been restated, as applicable, to conform with the provisions of
the statement.
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding and
any potentially dilutive securities. Basic earnings (loss) per share equals
diluted earnings (loss) per share for all periods presented since the inclusion
of potentially dilutive securities would be anti-dilutive to the diluted
earnings (loss) per share calculations. Potentially dilutive securities
outstanding during fiscal years 1996, 1997 and 1998 include stock options,
nonvested stock, and Series A convertible preferred stock. Series B convertible
preferred stock were also potentially dilutive securities outstanding since the
third quarter of fiscal year 1998.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS 123 and has
applied Accounting Principles Board Opinion No. 25 and related Interpretations
in accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized in the Consolidated Statement of
Operations for its stock option plans. See Note 7.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from these estimates.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the 1998 presentation. Such reclassifications
had no effect on previously reported net income or stockholders' equity.
F-57
<PAGE> 257
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Computer equipment.......................................... $ 3,532 $ 12,961
Leasehold improvements...................................... 1,675 2,122
Office equipment............................................ 1,194 1,286
Furniture and fixtures...................................... 1,884 2,354
------- --------
8,285 18,723
Less accumulated depreciation and amortization.............. (6,418) (14,195)
------- --------
$ 1,867 $ 4,528
======= ========
</TABLE>
Depreciation and amortization expense was $2,027, $2,962, and $3,137 for
the fiscal years ended September 30, 1998, 1997, and 1996, respectively.
During the second quarter of fiscal year 1998, property and equipment was
written down for obsolescence and retirement of assets based on the Company's
revised business plan. The write down totaled $901 and is included in
restructuring charges in the Consolidated Statement of Operations. See Note 12.
NOTE 3. CAPITALIZED SOFTWARE COSTS
For the fiscal years ended September 30, 1998, 1997 and 1996, the Company
capitalized $128, $1,372, and $1,600, respectively, of internal costs related to
developing software for sale. During the fiscal years ended September 30, 1998,
1997 and 1996, the Company recognized $1,544, $1,223, and $968, respectively, of
expense related to the amortization of these costs, which is recorded in cost of
revenue, software products, in the Consolidated Statements of Operations.
During the second quarter of fiscal year 1998, capitalized software cost
was written down to its fair value based on the Company's revised business plan.
The write down totaled $650 and is included in the restructuring charges in the
Consolidated Statement of Operations. Accumulated amortization of capitalized
software costs is $4,096 and $2,814 at September 30, 1998 and 1997,
respectively.
F-58
<PAGE> 258
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. ACCOUNTS RECEIVABLE
Trade accounts receivable consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current trade accounts receivable........................... $19,585 $33,355
Less: Allowance for doubtful accounts....................... (2,124) (1,360)
Unamortized discount................................. (176) (612)
------- -------
$17,285 $31,383
======= =======
Noncurrent trade accounts receivable........................ $ -- $ 2,414
Less: Unamortized discount.................................. -- (373)
------- -------
$ -- $ 2,041
======= =======
</TABLE>
Approximately $4,118 and $8,942 of current trade receivables were unbilled
at September 30, 1998 and 1997, respectively. All noncurrent receivables were
unbilled at September 30, 1997. Discounts on receivables with payment terms in
excess of one year were calculated based on an imputed interest rate of 12% for
the fiscal year ended September 30, 1997. There were no receivables with payment
terms in excess of one year recorded during the fiscal year ended September 30,
1998.
The provision for uncollectible amounts was $1,027, $4,338 and $10,158 for
the years ended September 30, 1998, 1997, and 1996, respectively. During the
second and third quarters of fiscal year 1998, accounts receivable was written
down due to a deterioration in specific client relationships as a result of the
Company's revised business plan. The write down totaled $3,000 and is included
in restructuring charges in the Consolidated Statement of Operations. Write-offs
of accounts receivable were $3,263, $12,329, and $1,457 for the years ended
September 30, 1998, 1997, and 1996, respectively.
NOTE 5. CREDIT FACILITIES
At September 30, 1998, the Company maintained two credit facilities (the
"Revolving Facility" and the "Guaranteed Facility") which provided for combined
borrowings of up to $42 million for working capital purposes based on the
Company's eligible accounts receivable, as defined in the loan agreements. The
Revolving Facility allows for borrowings of up to $25 million, bears interest at
the London Interbank Offered Rate ("LIBOR") plus 5.0% and is collateralized by
the Company's accounts receivable, equipment and intangibles. The Guaranteed
Facility allows for borrowings of up to $17 million and bears interest at the
higher of LIBOR plus 1.25% or .5% plus the prime rate quoted by the Federal
Reserve. Until December 31, 1998, the Guaranteed Facility was guaranteed by the
Company's principal stockholder, Welsh, Carson, Anderson, & Stowe VI, L.P.
("WCAS"), pursuant to an agreement with the Company. Borrowings under the
Revolving Facility must always exceed borrowings under the Guaranteed Facility.
There are no other financial covenants for either credit facility. As of
September 30, 1998, the Company had outstanding borrowings of $21,223 under the
Revolving Facility and $16,925 under the Guaranteed Facility. The interest rates
for the Revolving Facility and the Guaranteed Facility were 10.6% and 8.5%,
respectively, at September 30, 1998.
F-59
<PAGE> 259
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal year 1997, the Company incurred approximately $280 in
connection with the renegotiation of its revolving credit facility. The loan
costs were amortized over the initial term of the facility and were fully
amortized at September 30, 1998. The unamortized loan costs of $140 at September
30, 1997 are included in the Consolidated Balance Sheet as a deduction from
notes payable.
In exchange for WCAS' guarantee of its credit facility, the Company issued
30,000 and 75,000 shares of its common stock to WCAS in fiscal years 1998 and
1996, respectively. The Company recorded expense of $98 and $403 related to
these transactions based on the fair market value of the stock on the date of
issuance.
Additionally, at September 30, 1998, the Company had a line of credit of
$500 available to enter foreign exchange forward contracts which was also
guaranteed by WCAS. At September 30, 1998 the aggregate notional amount of
foreign exchange forward contracts outstanding was $6,308.
Subsequent to September 30, 1998, the Company and its lender completed
several amendments to the Revolving Facility and the Guaranteed Facility and the
foreign exchange line of credit were terminated. See Note 18.
NOTE 6. CONVERTIBLE PREFERRED STOCK
During April, 1998, the Company completed its agreement to sell 1,762,115
shares of its Series B Convertible Preferred Stock (the "Preferred Stock") to
WCAS and certain WCAS affiliates, resulting in gross proceeds to the Company of
$5 million.
During August 1996, the Company sold 2,094,143 shares of its newly
authorized Series A Convertible Preferred Stock (the "Preferred Stock") to WCAS
and certain WCAS affiliates, resulting in gross proceeds to the Company of
$12,500. Approximately $198 of expenses was incurred in connection with the
stock issuance and has been recorded in the Consolidated Statement of
Stockholders' Equity (Capital Deficiency) as an offset to the Preferred Stock
proceeds.
Each share of Preferred Stock may be converted at any time at the option of
the holder into shares of Common Stock at a conversion rate of one common share
for each share of Preferred Stock, subject to adjustment upon the occurrence of
certain events. The Preferred Stock is not entitled to receive dividends in any
fixed amount but will receive dividends on an as converted basis in the event
that a dividend is paid on the Common Stock. The Preferred Stock will rank
senior in right of payment to the Common Stock. In the event of any liquidation,
dissolution or winding up of the Company, holders of Series A and Series B
Preferred Stock will be entitled to receive a liquidation preference of $5.969
and $2.8375 per share, respectively, before payment is made or assets are
distributed to holders of the Common Stock. In addition, the holders of
Preferred Stock are entitled to vote together with the holders of Common Stock
on all matters to be voted on by the stockholders of the Company.
The Company is subject to certain restrictions while shares of Preferred
Stock remain outstanding, including restrictions on the Company's ability to
declare dividends, purchase or redeem any outstanding shares of its Common
Stock, create or authorize the creation of
F-60
<PAGE> 260
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional classes of capital stock of the Company, increase the authorized
amount of Preferred Stock, create or authorize the creation of any securities
convertible into shares of Preferred Stock or any other class of capital stock
of the Company.
NOTE 7. STOCK-BASED COMPENSATION PLANS
The Company has a Stock Option and Restricted Stock Purchase Plan pursuant
to which certain employees and officers of the Company have been or will be
granted nonvested stock or stock options to acquire up to a maximum of 2,900,000
shares of the Company's common stock. Option exercise prices are no less than
100% of the fair market value at the date of grant, and vested options may be
exercised for a period of up to ten years from the date of grant. During the
fiscal year ended September 30, 1996, the Company exchanged all options with
exercise prices of $7.50 or more per share for options with an exercise price of
$6.38 per share, which was the fair market value of the Company's common stock
on the date of exchange. During the fiscal year ended September 30, 1998, the
Company exchanged all options held by employees with exercise prices of $4.75 or
more per share for options with an exercise price of $4.59. Effective October 1,
1996, the vesting provisions of the plan were amended so that the nonvested
stock and stock options issued after that date vest over a specified period of
time as determined by the Company's compensation committee when the options are
granted. Vesting provisions for options issued prior to October 1, 1996 were
amended so that any options existing at October 1, 1996 vested over a four year
period.
The Company also has a Stock Option Plan for Non-Employee Directors,
pursuant to which non-employee directors can be granted options to acquire up to
200,000 shares of the Company's common stock, with a maximum of 10,000 options
available per non-employee director. The options vest in one-third increments on
each of the first through third anniversaries of the grant date.
F-61
<PAGE> 261
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity for stock options issued under these plans for the fiscal years
ending September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PLAN OPTION PRICE EXERCISE
ACTIVITY PER SHARE PRICE
----------- -------------- --------
<S> <C> <C> <C>
Balance at September 30, 1995.............. $ 2,147,650 $3.25 - $18.00 $3.38
Granted.................................. 735,450 5.50 - 18.00 9.91
Exercised................................ (185,159) 3.25 - 10.00 3.26
Forfeited................................ (581,696) 3.25 - 14.50 3.64
----------- -------------- -----
Balance at September 30, 1996.............. 2,116,245 3.25 - 18.00 4.74
Granted.................................. 808,625 3.25 - 6.50 4.37
Exercised................................ (243,696) 3.25 - 6.38 3.26
Forfeited................................ (907,805) 3.25 - 6.38 3.64
----------- -------------- -----
Balance at September 30, 1997.............. 1,773,369 3.25 - 18.00 5.31
Granted.................................. 2,240,600 2.84 - 7.88 3.64
Exercised................................ (63,716) 3.25 - 6.38 3.36
Forfeited................................ (1,550,827) 2.84 - 8.25 4.76
----------- -------------- -----
Balance at September 30, 1998.............. $ 2,399,426 $3.25 - $14.50 $3.32
=========== ============== =====
</TABLE>
The weighted average grant date fair value of options issued during the
years ended September 30, 1998, 1997 and 1996 was equal to $1.82, $2.72 and
$3.87 per share, respectively. The fair value of options granted during the
fiscal years ended September 30, 1998, 1997 and 1996 was equal to $4,413, $2,159
and $2,813, respectively. There were no option grants issued below fair market
value during fiscal years 1998, 1997 or 1996.
The fair value of the Company's stock-based awards to employees was
estimated as of the date of the grant using the Black-Scholes option-pricing
model, using the following weighted-average assumptions:
<TABLE>
<S> <C>
Expected life (in years).................................... 3
Expected volatility......................................... 77%
Risk free interest rate..................................... 5.53%
Expected dividend yield..................................... 0%
</TABLE>
F-62
<PAGE> 262
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
fiscal years September 30, 1998, 1997, and 1996 would have been increased to the
pro forma amounts indicated below. The Company's adjusted information follows
(in thousands, except for per share information):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Net loss, as reported.............................. $(62,440) $(9,966) $(31,582)
Net loss, as adjusted.............................. (63,348) (10,591) (31,703)
Pro forma net loss per share, as reported.......... $ (5.23) $ (0.85) $ (2.76)
Pro forma net loss per share, as adjusted.......... $ (5.31) $ (0.90) $ (2.77)
</TABLE>
At September 30, 1998, 1997 and 1996 options to purchase approximately
382,067, 284,015 and 184,348 shares of common stock were exercisable,
respectively, pursuant to the plans at prices ranging from $3.25 to $18.00. The
following table summarizes information about stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
REMAINING
CONTRACTUAL LIFE
NUMBER FOR OPTIONS NUMBER
EXERCISE PRICE OUTSTANDING OUTSTANDING EXERCISABLE
- -------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 2.50 50,000 9.50 50,000
$ 2.84 1,528,150 9.61 --
$ 3.25 234,086 6.12 202,622
$ 3.75 89,375 8.14 23,750
$ 4.59 397,582 9.61 72,130
$ 4.75 20,002 8.33 13,334
$ 5.00 40,000 7.91 10,000
$ 6.38 233 8.79 233
$ 7.00 30,000 8.95 --
$10.00 3,333 6.42 3,333
$14.50 6,665 7.00 6,665
--------- -------
2,399,426 382,067
========= =======
</TABLE>
During the fiscal year ended September 30, 1997, the Company issued 38,500
shares of nonvested stock to employees. The Company recognized compensation
expense with respect to nonvested stock awards equal to the difference between
the market price and the par value of the stock on the grant date. Compensation
expense recognized during fiscal year 1997 for nonvested stock was $172. Of the
total shares issued, 21,750 shares vested during fiscal year 1998, and the
remaining shares were forfeited.
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan for all U.S. employees. Effective January 1,
1997, the Company amended the plan to provide a 25% matching contribution for an
employee's
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SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contribution up to 4% of an employee's salary. Participants must be employed at
December 31 of each calendar year to be eligible for employer matching
contributions. During fiscal year 1998, the Company recorded expense of $257
related to the matching contribution. Prior to this amendment, matching
contributions were made at the discretion of the Board of Directors. For the
year ended September 30, 1996, the Board of Directors did not authorize any
contributions to the 401(k) plan.
The Company also has employee benefit plans for each of its foreign
subsidiaries, as mandated by each country's laws and regulations. Expense
recognized under these plans for the years-ended September 30, 1998, 1997, and
1996 was $669, $684, and $629, respectively.
The Company has an Employee Stock Purchase Plan for its employees. The plan
allows employees to purchase shares of the Company's common stock for 85% of
fair market value. The Company is responsible for the differential in market
value, as well as, all administrative costs of the plan. For fiscal years 1998,
1997, 1996, the Company incurred expenses of $26, $48, and $31, respectively,
for the plan.
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
No one customer accounted for more than 10% of operating revenue for the
fiscal years ended September 30, 1998, 1997, and 1996.
The Company has entered into several marketing and distribution agreements
with IBM throughout the world. Transactions resulting from these agreements are
as follows for the fiscal years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expenses incurred.................................... $ 2,128 $ 1,720 $ 4,907
Revenues generated................................... $24,456 $55,029 $59,493
Percentage of revenues............................... 38% 53% 65%
Percentage of outstanding receivables................ 37% 46% 70%
</TABLE>
As of September 30, 1998 and 1997, the Company had outstanding trade
accounts receivable primarily from 86 and 97 customers, respectively. It is the
policy of the Company to closely monitor all accounts receivable and to record a
provision for uncollectible accounts when the uncollectible amounts are
estimable. Generally, no collateral is required.
NOTE 10. SEGMENT INFORMATION
In 1998, the Company adopted SFAS 131, "Enterprise and Related
Information." SFAS 131 supercedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's relating segment
information. The prior year's segment information has been
F-64
<PAGE> 264
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restated to present the Company's four reportable segments -- (1) Software, (2)
Maintenance, (3) Services, and (4) Research and Development.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes a charge
allocating all corporate-headquarters costs to each of its operating segments
based on each segment's proportionate share of expenses. The Company evaluates
the performance of its segments and allocates resources to them based on
earnings (loss) before interest, taxes, and restructuring charges (EBITR).
The table below presents information about reported segments for the years
ending September 30:
<TABLE>
<CAPTION>
RESEARCH AND
SOFTWARE MAINTENANCE SERVICES DEVELOPMENT TOTAL
-------- ----------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FY 1998
Total Revenue.............. $ 6,986 $13,557 $43,421 $ -- $ 63,964
Total EBITR................ $(16,962) $ 6,267 $(1,031) $(14,293) $(26,019)
-------- ------- ------- -------- --------
FY 1997
Total Revenue.............. $ 34,244 $14,598 $54,311 $ -- $103,153
Total EBITR................ $ (3,203) $ 4,860 $ 5,971 $(14,199) $ (6,571)
-------- ------- ------- -------- --------
FY 1996
Total Revenue.............. $ 28,795 $13,182 $49,680 $ -- $ 91,657
Total EBITR................ $(24,698) $ 2,426 $ (122) $(19,719) $(42,113)
-------- ------- ------- -------- --------
</TABLE>
A reconciliation of total segment revenue to total consolidated revenues
and of total segment EBITR to total consolidated income before taxes, for the
years ended September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Total EBITR........................................ $(26,019) $(6,571) $(42,113)
Restructuring charges.............................. (13,200) (500) (3,000)
Interest expense................................... (3,011) (1,667) (154)
-------- ------- --------
Total loss before income taxes $(42,230) $(8,738) $(45,267)
======== ======= ========
</TABLE>
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<PAGE> 265
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a summary of revenue by geographic region for
the fiscal years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
United States....................................... $17,544 $ 32,864 $28,974
United Kingdom...................................... 8,935 15,899 3,951
Denmark............................................. 6,226 4,420 5,157
Italy............................................... 5,395 12,738 14,770
Switzerland......................................... 3,687 2,965 1,850
Norway.............................................. 3,130 3,561 2,120
Australia........................................... 2,858 4,726 3,167
Germany............................................. 2,780 6,233 9,588
Other............................................... 13,140 19,747 22,080
------- -------- -------
Total revenue..................................... $63,965 $103,153 $91,657
======= ======== =======
</TABLE>
Foreign revenue is based on the country in which the customer is domiciled.
The following table represents a summary of long-lived assets by geographic
region as of September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States........................................... $2,383 $6,208 $7,431
United Kingdom.......................................... 487 979 1,438
Other................................................... 137 547 647
------ ------ ------
Total assets.......................................... $3,007 $7,734 $9,516
====== ====== ======
</TABLE>
The Company's foreign operations are reimbursed by the Company for their
costs plus an appropriate mark-up for profit. Intercompany profits and losses
are eliminated in consolidation.
NOTE 11. FOREIGN CURRENCIES AND FORWARD EXCHANGE CONTRACTS
At September 30, 1998, the Company had approximately $628 and $8,754 U.S.
dollar equivalent cash and trade receivable balances, respectively, denominated
in foreign currencies. At September 30, 1997, the Company had approximately
$1,378 and $15,618 U.S. dollar equivalent cash and trade receivable balances,
respectively, denominated in foreign currencies.
F-66
<PAGE> 266
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The more significant trade accounts receivable denominated in foreign
currencies as a percentage of total trade accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Pound Sterling.............................................. 10.9% 9.2%
Australian Dollar........................................... 1.2 7.2
Deutsche Mark............................................... 3.5 2.0
Brazilian Real.............................................. 3.1 4.2
Italian Lira................................................ 8.1 12.4
Danish Krona................................................ 4.9 3.1
</TABLE>
The Company enters into forward exchange contracts to hedge the exposures
that arise from foreign exchange movements between dates that foreign currency
denominated receivables and payables are recorded and the date they are paid.
The Company does not engage in foreign currency speculation. The forward
contracts are generally 60 to 90 day forward window contracts having maturities
of less than one year. The table below summarizes, by currency, the contractual
amounts of the Company's forward contracts for the years ended September 30:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------
1998 ORIGINAL CONTRACT CONTRACT FAIR UNREALIZED
CURRENCY CONTRACTS DRAWDOWNS BALANCE VALUE GAIN/(LOSS)
- -------- --------- --------- -------- ------ -----------
<S> <C> <C> <C> <C> <C>
OUTBOUND TRANSACTIONS
Australian Dollars....................... $ 140 $ (140) $ -- $ -- $ --
Pound Sterling........................... 16,030 (16,030) -- -- --
Deutsche Mark............................ 1,322 (1,322) -- -- --
Irish Punt............................... 1,760 (640) 1,120 1,196 76
------- -------- ------ ------ -----
Total.................................. $19,252 $(18,132) $1,120 $1,196 $ 76
======= ======== ====== ====== =====
INBOUND TRANSACTIONS
Australian Dollars....................... $ 1,427 $ (1,427) $ -- $ -- $ --
Pound Sterling........................... 10,590 (8,742) 1,848 1,887 (39)
Canadian Dollars......................... 520 (520) -- -- --
Danish Krona............................. 6,230 (5,870) 360 380 (20)
Deutsche Mark............................ 2,723 (2,177) 546 563 (17)
Dutch Guilder............................ 1,976 (1,739) 237 241 (4)
French Franc............................. 567 (479) 88 93 (5)
Italian Lira............................. 9,860 (8,948) 912 943 (31)
Norwegian Krone.......................... 4,450 (4,128) 322 335 (13)
South African Rand....................... 1,760 (1,430) 330 348 (18)
Spanish Peseta........................... 899 (602) 297 299 (2)
Swedish Krone............................ 2,139 (1,891) 248 257 (9)
------- -------- ------ ------ -----
Total.................................. $43,141 $(37,953) $5,188 $5,346 $(158)
======= ======== ====== ====== =====
</TABLE>
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<PAGE> 267
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------
1997 ORIGINAL CONTRACT CONTRACT FAIR UNREALIZED
CURRENCY CONTRACTS DRAWDOWNS BALANCE VALUE GAIN/(LOSS)
- -------- --------- --------- -------- ------ -----------
<S> <C> <C> <C> <C> <C>
OUTBOUND TRANSACTIONS
Australian Dollars....................... $ 389 $ (389) $ -- $ -- $ --
Pound Sterling........................... 13,264 (7,865) 5,399 5,496 97
Deutsche Mark............................ 3,405 (3,405) -- -- --
------- -------- ------ ------ -----
Total.................................. $17,058 $(11,659) $5,399 $5,496 $ 97
======= ======== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
INBOUND TRANSACTIONS
Australian Dollars....................... $ 2,629 $ (2,629) $ -- $ -- $ --
Pound Sterling........................... 24,430 (22,882) 1,548 1,570 (22)
Canadian Dollars......................... 926 (628) 298 299 (1)
Danish Krona............................. 4,371 (3,880) 491 494 (3)
Deutsche Mark............................ 9,156 (8,719) 437 458 (21)
Dutch Guilder............................ 865 (865) -- -- --
Italian Lira............................. 21,058 (19,526) 1,532 1,589 (57)
Norwegian Krone.......................... 4,456 (4,182) 274 291 (17)
Spanish Peseta........................... 1,303 (1,156) 147 154 (7)
Swedish Krone............................ 5,826 (5,645) 181 185 (4)
Other.................................... 1,005 (989) 16 17 (1)
------- -------- ------ ------ -----
Total.................................. $76,025 $(71,101) $4,924 $5,057 $(133)
======= ======== ====== ====== =====
</TABLE>
Unrealized gains and losses on forward contracts reflect changes in
exchange rates and are recorded directly in income, as they offset corresponding
unrealized gains and losses on the foreign currency denominated assets being
hedged (see Note 1). Forward contract liabilities related to unrealized losses
are recorded as other accrued expenses in the Consolidated Balance Sheet.
The Company is exposed to exchange related losses on forward contracts
should a transaction with a related forward exchange contract not be consummated
by the forward contract expiration date. In such instances, the Company extends
or repurchases the contract at the then prevailing market rates. Net realized
(gains) losses on the extension or repurchase of contracts totaled ($15), $156,
and $88 for the fiscal years ended September 30, 1998 and 1997, and 1996,
respectively.
NOTE 12. RESTRUCTURING CHARGES
During the second quarter of fiscal year 1998, the Company began work on a
revised business plan, necessitated by a decline in demand for the Company's
software products. As a result of this effort, at the end of the second quarter
of fiscal year 1998, the Company announced its plans to streamline its sales and
marketing organizations, as well as reorganize its technical operations into one
cohesive unit, providing improved product support and more focused development
of new products. The general and administrative organization within the Company
was also streamlined to support the newly-restructured operating divisions. The
restructuring included a staff reduction of approximately 5% (31 employees), the
abandonment of leased facilities in the US, Brazil, and Singapore, and the
write-down to fair value of certain assets or accrual of costs related to
products,
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<PAGE> 268
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distribution channels, and vendor-provided product support contracts which were
being discontinued. The Company recorded a restructuring charge of $9,000 during
the second quarter of fiscal year 1998, which consisted of approximately $1,400
in personnel-related charges, approximately $1,100 of costs associated with
carrying vacated space until the lease expiration date, approximately $2,700 in
write-down of assets, approximately $3,000 for contractually obligated product
support services, and approximately $700 in professional fees related to the
restructuring.
The Company completed its restructuring in the third quarter of fiscal year
1998 and recorded an additional charge of $4,200. An additional staff reduction
of approximately 8% (37 employees) was made. This restructuring charge consisted
of approximately $1,100 in personnel related-charges, approximately $2,000 in
the write-down of assets for discontinued distribution channels, and
approximately $1,100 in professional fees related to the restructuring.
The Company's efforts to settle these restructuring liabilities resulted in
a change in the Company's estimates in regard to the specific categories of
expense, however, the amount of the overall charge has not changed. The revised
estimate reflects a total restructuring charge of $2,500 for personnel related
charges, approximately $500 of premises related costs, approximately $4,700 in
write-down of assets, and approximately $1,100 for contractually obligated
product support services, and approximately $4,400 in professional fees and
legal settlement. See Note 16. To date, the Company has paid approximately
$4,400 in cash related to the restructuring. The Company believes the accrued
restructuring cost of $4,100 at September 30, 1998 represents its remaining cash
obligations.
During the third quarter of the fiscal year ended September 30, 1996, the
Company developed and implemented a reorganizational plan which included, among
other things, a 9% staff reduction (75 employees) and the abandonment of certain
leased facilities. The Company recorded a restructuring charge of $3,000, which
consisted of approximately $1,400 in personnel-related charges and approximately
$1,600 of costs associated with carrying vacated space until the lease
expiration date. In the first quarter of 1997, the Company recorded an
additional restructuring charge of $500 for severance and lease costs related to
its reorganizational plan. To date, the Company has paid approximately $3,500 in
cash related to the restructuring. The Company believes there are no remaining
obligations related to this restructuring at September 30, 1998.
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<PAGE> 269
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. INCOME TAXES
The provision for income taxes consists of the following for the years
ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ --------
<S> <C> <C> <C>
Federal -- current................................... $ -- $ -- $ --
State and local -- current........................... -- -- --
------- ------ --------
-- -- --
Foreign taxes and withholdings....................... 1,459 2,176 2,501
------- ------ --------
Current taxes...................................... 1,459 2,176 2,501
------- ------ --------
Federal -- deferred.................................. -- (757) (12,832)
State and local -- deferred.......................... -- (191) (3,353)
------- ------ --------
Deferred taxes..................................... -- (948) (16,185)
------- ------ --------
Change in beginning of year valuation allowance.... 18,751 -- --
------- ------ --------
Total income tax expense (benefit).............. $20,210 $1,228 $(13,684)
======= ====== ========
</TABLE>
Seer Technologies, Inc. and its U.S. subsidiary file a consolidated Federal
income tax return. Foreign subsidiaries file income tax returns in their
respective countries. Foreign tax credit carryforwards of approximately $2,268
exist at September 30, 1998. These carryforwards expire from 1999 to 2001 if not
utilized. Federal alternative minimum tax credit carryforwards of $184, which
have no expiration period, also exist at September 30, 1998. The Company's
federal net operating loss carryovers of approximately $89,471 expire in 2011,
2012 and 2018 if not utilized.
Income before provision for income taxes as shown in the Consolidated
Statements of Operations consists of the following for the years ended September
30:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic.......................................... $(43,747) $(11,214) $(47,868)
Foreign........................................... 1,517 2,476 2,602
-------- -------- --------
$(42,230) $ (8,738) $(45,266)
======== ======== ========
</TABLE>
F-70
<PAGE> 270
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of expected income tax at the statutory Federal rate with
the actual income tax expense (benefit) is as follows for the fiscal years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit at statutory rate
(34%).............................................. $(14,351) $(2,971) $(15,391)
Increase (decrease) in income tax expense resulting
from:
Non deductible expenses.......................... 87 213 197
State income taxes............................... (2,957) (1,693) (2,915)
Effect of foreign operations including
withholding taxes............................. 1,236 2,177 2,505
Other............................................ -- 92 (92)
Effect of change in valuation allowance.......... 36,195 3,410 2,012
-------- ------- --------
$ 20,210 $ 1,228 $(13,684)
======== ======= ========
</TABLE>
The components of net deferred tax assets are as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
CURRENT ASSETS:
Deferred revenue............................................ $ 122 $ 303
Accrued liabilities......................................... 1,307 504
Bad debt expense............................................ 786 503
Other....................................................... (36) (158)
-------- -------
Net current deferred tax asset............................ 2,179 1,152
NONCURRENT ASSETS:
Depreciation................................................ 536 465
Deferred revenue............................................ -- 49
Foreign tax credits......................................... 2,268 3,212
Minimum tax credits......................................... 184 184
Research and development tax credit......................... 3,000 2,282
Net operating loss carryforward............................. 33,104 21,446
-------- -------
Net noncurrent deferred tax asset........................... 39,092 27,638
Valuation allowance......................................... (40,850) (8,853)
NONCURRENT LIABILITIES:
Capitalized software costs.................................. (421) (1,186)
-------- -------
Net deferred tax asset.................................... $ -- $18,751
======== =======
</TABLE>
Due to a decline in the Company's software revenues, the Company determined
during the fourth quarter of fiscal year 1998 that certain previously available
tax planning strategies were no longer deemed to be prudent or feasible. This
caused the Company to record a full valuation allowance equaling the entire
deferred tax asset balances at September 30, 1998 and accordingly, resulted in
an increase in income tax expense for the fiscal year ended September 30, 1998.
F-71
<PAGE> 271
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair market
value. The statement also requires that changes in the derivative's fair market
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning June 15,
1999, with earlier adoption permitted. The Company is currently assessing the
impact of this new statement on its consolidated financial position, liquidity,
and results of operations.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is required to be adopted for fiscal years beginning after
December 15, 1997. Upon the effective date of the new statement, the Company
will make the necessary changes to comply with the provisions of the statement
and restate all prior periods presented. The Company does not expect the
adoption of the statement to have a material impact on the Company's financial
condition or results of operations.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2, "Software Revenue Recognition". SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997 and
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The Company does not expect the
application of the SOP to have a material impact on the Company's financial
condition or results of operations.
NOTE 15. LEASE COMMITMENTS
The Company leases certain facilities and equipment under various operating
leases. Future minimum lease commitments on operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of September
30, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 2,870
2000........................................................ 2,092
2001........................................................ 1,392
2002........................................................ 1,242
2003........................................................ 1,242
Thereafter.................................................. 1,541
-------
$10,379
=======
</TABLE>
Rent expense for the fiscal years ended September 30, 1998, 1997 and 1996
was $3,894, $3,655, and $3,370, respectively.
NOTE 16. CONTINGENCIES
Various lawsuits and claims have been brought against the Company in the
normal course of business. Management is of the opinion that the liability, if
any, resulting from
F-72
<PAGE> 272
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these claims would not have a material effect on the financial position or
results of operations of the Company.
In December 1997, the Company filed a lawsuit against Saadi Abbas and
Cambridge Business Solutions (UK) Limited ("CBS") alleging that Mr. Abbas and
CBS had injured the Company by interfering with the Company's ability to market
and sublicense the LightSpeed Financial Model. The Company obtained a
preliminary injunction against Mr. Abbas and CBS halting their actions. Mr.
Abbas and CBS filed counterclaims against the Company claiming wrongful
dismissal of Abbas and breach of the license agreement. Due to the erosion of
the market for the LightSpeed Financial Model, the Company voluntarily dismissed
its claims against Mr. Abbas and CBS in the summer of 1998. Mr. Abbas and CBS
are continuing to pursue their claims against the Company. At the present point
in the litigation, it is impossible to calculate the chances of success in this
litigation. However, the Company intends to continue to vigorously defend
against the counterclaim. The Company has made provision for its estimated costs
to resolve this matter. Management does not believe at this point in the
litigation that any additional amounts required to ultimately resolve this
matter will have a material effect on the financial position, cash flows, or
results of operations of the Company.
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Net revenues............................. $18,356 $ 15,960 $ 15,631 $ 14,017
Gross profit............................. 4,715 2,426 4,286 4,760
Net loss................................. (9,906) (21,275) (10,646) (20,612)
Net loss per share....................... $ (0.83) $ (1.78) $ (0.89) $ (1.72)
1997:
Net revenues............................. $23,125 $ 24,112 $ 26,929 $ 28,987
Gross profit............................. 9,930 11,882 14,417 15,083
Net income (loss)........................ (8,270) (2,436) 89 651
Net income (loss) per share.............. $ (0.71) $ (0.21) $ 0.01 $ 0.05
</TABLE>
Due to a decline in the Company's software revenues, the Company determined
during the fourth quarter of fiscal year 1998 that certain previously available
tax planning strategies were no longer deemed to be prudent or feasible. This
caused the Company to record a full valuation allowance equaling the entire
deferred tax asset balances at September 30, 1998 and accordingly, resulted in
an increase in income tax expense for the fiscal year ended September 30, 1998.
F-73
<PAGE> 273
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. SUBSEQUENT EVENTS
On October 13, 1998, the Company was delisted from the Nasdaq Stock Market.
The Common Stock of the Company is currently quoted on the Over-the-Counter
Bulletin Board.
On November 24, 1998, the Company and Level 8 Systems, Inc. ("Level 8")
announced the pending strategic merger of the Company with Level 8. Level 8 is a
leading provider of message queuing and enterprise application integration
technologies that allow end-to-end connectivity between heterogeneous platforms
across the enterprise. As the first step in this transaction, on December 31,
1998, Level 8 acquired approximately 69% of the outstanding voting stock of the
Company from WCAS and its affiliates in exchange for 1,000,000 shares of Level 8
common stock and warrants to purchase an additional 250,000 shares of Level 8 at
an exercise price of $12 per Level 8 share. On December 31, 1998, Level 8
acquired 7,130,894 shares of the Company's Common Stock, 2,094,143 shares of the
Company's Series A Convertible Preferred Stock, and 1,762,115 shares of the
Company's Series B Convertible Preferred Stock (representing approximately 69%
of the outstanding voting stock of the Company) and therefore may be deemed to
control the Company. In connection with Level 8's purchase of the Company's
voting stock from WCAS, WCAS contributed $17 million to the Company and Level 8
provided the Company a $12 million subordinated loan to help pay down the
Company's bank debt. Level 8 has also agreed to acquire all of remaining shares
of the Company's Common Stock for $0.35 per share in cash as soon as practicable
upon completion of required filings and approvals. In addition, Level 8 has
agreed to fund the Company's operations, as necessary, through January 15, 2000.
On December 22, 1998, the Company's Revolving Facility was amended. The
Revolving Facility now bears interest at the prime rate and terminates on
December 31, 2001. The Revolving Facility is automatically renewed for
successive additional terms of one year each, unless terminated by either party.
F-74
<PAGE> 274
SEER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 479 $ 1,040
Trade accounts receivable, less allowance for doubtful
accounts of $2,153 and $2,124 at December 31, 1998
and September 30, 1998, respectively................ 15,005 17,285
Prepaid expenses and other current assets............. 1,418 1,476
--------- ---------
Total current assets................................ 16,902 19,801
Property and equipment, net........................... 1,614 1,867
Capitalized software costs, net....................... 451 1,140
Other assets.......................................... 370 387
--------- ---------
Total assets........................................ $ 19,337 $ 23,195
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand.......................... $ 12,275 $ 38,148
Accounts payable...................................... 1,949 2,897
ACCRUED EXPENSES:
Compensation.......................................... 318 744
Commissions........................................... 1,021 1,156
Restructuring......................................... 3,335 4,064
Other................................................. 3,318 3,459
Deferred revenue...................................... 7,778 7,355
Income taxes payable.................................. 1,781 1,644
--------- ---------
Total current liabilities........................... 31,775 59,467
Note Payable to majority shareholder.................. 12,000 --
Deferred revenue...................................... 97 253
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series A convertible preferred stock, $.01 par
value............................................... 21 21
Series B convertible preferred stock, $.01 par
value............................................... 18 18
Common stock, $0.01 par value......................... 120 120
Additional paid-in-capital............................ 92,948 76,023
Accumulated other comprehensive income................ (880) (847)
Accumulated deficit................................... (116,762) (111,860)
--------- ---------
Total stockholders' equity (deficiency)............. (24,535) (36,525)
--------- ---------
Total liabilities and stockholders' equity.......... $ 19,337 $ 23,195
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-75
<PAGE> 275
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
REVENUE:
Software products........................................... $ 69 $ 2,698
Maintenance................................................. 3,056 3,449
Services.................................................... 7,778 12,209
------- -------
Total operating revenue................................... 10,903 18,356
COST OF REVENUE:
Software products........................................... 765 507
Maintenance................................................. 1,227 2,183
Services.................................................... 7,301 10,951
------- -------
Total cost of revenue..................................... 9,293 13,641
Gross profit................................................ 1,610 4,715
OPERATING EXPENSES:
Sales and marketing......................................... 1,887 6,893
Research and product development............................ 1,541 3,826
General and administrative.................................. 2,068 3,093
------- -------
Total operating expenses.................................. 5,496 13,812
------- -------
Loss from operations........................................ (3,886) (9,097)
OTHER INCOME (EXPENSE):
Interest income............................................. 68 135
Interest expense............................................ (938) (785)
------- -------
Other expense, net........................................ (870) (650)
------- -------
Loss before provision for income taxes...................... (4,756) (9,747)
Income tax provision........................................ 146 159
------- -------
Net loss.................................................. $(4,902) $(9,906)
======= =======
Basic and diluted loss per share............................ $ (0.41) $ (0.83)
======= =======
Weighted average common shares outstanding -- basic and
diluted................................................... 11,981 11,888
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-76
<PAGE> 276
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(4,902) $(9,906)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 467 1,198
Deferred income taxes..................................... -- (3)
Provision for uncollectible accounts...................... 123 226
Write-down of assets...................................... 476 --
Changes in assets and liabilities:
Trade accounts receivable.............................. 2,120 7,027
Prepaid expenses and other assets...................... 74 208
Accounts payable, accrued expenses, and income taxes
payable.............................................. (2,242) (2,548)
Deferred revenue....................................... 267 (586)
------- -------
Net cash used in operating activities................ (3,617) (4,384)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... -- (126)
Capitalization of software development costs................ -- (128)
------- -------
Net cash used in investing activities................ -- (254)
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to majority shareholder........................ 12,000 --
Capital contribution........................................ 16,925 --
Paydown of lines of credit.................................. (28,925) --
Net borrowings under line of credit......................... 3,052 7,101
Issuance of common shares................................... -- 165
------- -------
Net cash provided by financing activities............ 3,052 7,266
Effect of exchange rate changes on cash..................... 4 (3)
------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (561) 2,625
CASH AND CASH EQUIVALENTS:
Beginning of period......................................... 1,040 4,268
------- -------
End of period............................................... $ 479 $ 6,893
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-77
<PAGE> 277
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Net loss................................................... $(4,902) $(9,906)
Other comprehensive income, net of tax foreign currency
translation adjustment................................... (33) 247
------- -------
Comprehensive loss......................................... $(4,935) $(9,659)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-78
<PAGE> 278
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for fiscal year 1998. The Company's
fiscal year ends September 30. The results of operations for the interim periods
shown in this report are not necessarily indicative of results to be expected
for other interim periods or for the full fiscal year. In the opinion of
management, the information contained herein reflects all adjustments necessary
for a fair statement of the interim results of operations. All such adjustments
are of a normal, recurring nature except for the transaction discussed in Note 7
and the write-down of $476 of capitalized software costs based on management's
evaluation of the asset's net realizable value.
During the first quarter of fiscal year 1999, the company has adopted
Statement of Financial Accounting ("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.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997, and provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The Company adopted
SOP 97-2 at the beginning October 1, 1998, and the Company does not expect the
adoption of this standard to have a material impact on the Company's financial
position or results of operations.
NOTE 2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding and
any potentially dilutive securities. Potentially dilutive securities are not
included in the diluted earnings per share calculations if their inclusion would
be anti-dilutive to the basic earnings (loss) per share calculations.
Potentially dilutive securities outstanding during the first quarter of fiscal
year 1999 include stock options and convertible preferred stock.
NOTE 3. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company's effective tax rate differs from the statutory rate primarily due to
the fact that no income tax benefit was recorded for the net loss for the first
quarter of fiscal year 1999. Because of the Company's inconsistent earnings
history, the deferred tax assets have been fully offset by a valuation
allowance.
F-79
<PAGE> 279
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision for the first quarter of fiscal year 1999 is
primarily related to income taxes from profitable foreign operations and foreign
withholding taxes.
NOTE 4. USE OF 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.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair market value. The statement also requires that changes in
the derivative's fair market value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal
years beginning June 15, 1999, with earlier adoption permitted. The Company is
currently assessing the impact of this new statement on its consolidated
financial position, liquidity, and results of operations.
NOTE 6. SEGMENT INFORMATION
Management of the Company makes operating decisions and assesses
performance of its operations based on the following reportable segments: (1)
Software, (2) Maintenance, (3) Services, and (4) Research and Development.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies," included in the Company's
Annual Report on Form 10-K for fiscal year 1998. Segment data includes a charge
allocating all corporate-headquarters costs to each of its operating segments
based on each segment's proportionate share of expenses. The Company evaluates
the performance of its segments and allocates resources to them based on
earnings (loss) before interest and taxes (EBIT).
The table below presents information about reported segments for the
quarters ending December 31:
<TABLE>
<CAPTION>
RESEARCH
AND
SOFTWARE MAINTENANCE SERVICES DEVELOPMENT TOTAL
-------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Q1 1999 (IN 000S)
Total Revenue................. $ 69 $3,056 $ 7,778 $ -- $10,903
Total EBIT.................... $(3,014) $1,630 $ (710) $(1,792) $(3,886)
Q1 1998 (IN 000S)
Total Revenue................. $ 2,698 $3,449 $12,209 $ -- $18,356
Total EBIT.................... $(5,642) $ 989 $ (132) $(4,312) $(9,097)
</TABLE>
F-80
<PAGE> 280
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of total segment revenue to total consolidated revenues
and of total segment EBIT to total consolidated income before taxes, for the
quarters ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Q1 1999 Q1 1998
------- -------
<S> <C> <C>
Total EBIT.................................................. $(3,886) $(9,097)
Interest expense............................................ (870) (650)
------- -------
Total loss before income taxes............................ $(4,756) $(9,747)
</TABLE>
The following table presents a summary of revenue by geographic region for
the quarters ended December 31:
<TABLE>
<CAPTION>
Q1 1999 Q2 1999
------- -------
<S> <C> <C>
Australia................................................... $ 678 $ 538
Denmark..................................................... 1,249 1,112
Germany..................................................... 541 624
Greece...................................................... 327 168
Italy....................................................... 854 2,026
Norway...................................................... 508 876
South Africa................................................ 409 684
Sweden...................................................... 464 350
Switzerland................................................. 792 892
United Kingdom.............................................. 1,898 3,495
USA......................................................... 2,182 5,478
Other....................................................... 1,001 2,113
------- -------
Total Revenue............................................. $10,903 $18,356
======= =======
</TABLE>
Foreign revenue is based on the country in which the customer is domiciled.
NOTE 7. ACQUISITION BY LEVEL 8
On December 31, 1998, Level 8 Systems, Inc. ("Level 8"), as the first step
in its pending acquisition of the entire equity interest in the Company,
acquired approximately 69% of the outstanding common stock of the Company held
by Welsh, Carson, Anderson and Stowe VI L.P. and certain other parties
affiliated or associated with WCAS ("WCAS") in exchange for 1,000,000 shares of
Level 8 common stock and warrants to purchase an additional 250,000 shares of
Level 8 common stock at an exercise price of $12.00 per share. Level 8 acquired
7,130,894 shares of the Company's common stock, 2,094,143 shares of the
Company's Series A Convertible Preferred Stock, and 1,762,115 shares of the
Company's Series B Convertible Preferred Stock from WCAS representing
approximately 69% of the outstanding common stock of the Company and, as a
consequence, may be deemed to control the Company. As part of the agreement,
Level 8 agreed to commence a tender offer for the remaining outstanding common
stock of the Company as soon as reasonably practicable. See Note 9.
F-81
<PAGE> 281
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with Level 8's purchase of Seer's capital stock from the WCAS
Parties, WCAS contributed approximately $17 million to Seer and Level 8 provided
a $12 million subordinated loan to enable Seer to reduce Seer's bank debt. The
funds used by Level 8 to make the subordinated loan to Seer were obtained from
Liraz Systems Ltd., a principal stockholder of Level 8. In addition, Level 8 has
agreed to fund the Company's operations through January 15, 2000.
NOTE 8. DEBT AGREEMENTS
During the first quarter of 1999, the Company maintained two credit
facilities -- the Revolving Facility and the Guaranteed Facility.
On December 22, 1998, the Company's Revolving Facility was amended. The
Revolving Facility now bears interest at the prime rate and terminates on
December 31, 2001. The Revolving Facility is automatically renewed for
successive additional terms of one year each, unless terminated by either party.
Level 8 has agreed to guarantee any borrowings under the Revolving Facility
exceeding $20 million through December 31, 1999, exceeding $10 million from
January 1, 2000 through December 31, 2000, and without limit thereafter.
As of December 31, 1998, Level 8 made the Company a $12 million
subordinated loan to help pay down the Company's outstanding bank debt and WCAS
contributed approximately $17 million to the Company, which was also used to
reduce outstanding borrowings under the Guaranteed Facility to $0. Additionally,
the Guaranteed Facility and the line of credit available for foreign exchange
contracts were terminated on December 31, 1998. The principal amount of the note
payable to Level 8 shall bear interest, compounded quarterly, at a rate per
annum equal to the weighted average interest rate from time to time on the
Company's other indebtedness for borrowed money. Interest shall be payable upon
maturity in June, 2002.
NOTE 9. SUBSEQUENT EVENTS
On February 1, 1999, Level 8 commenced a tender offer for all the remaining
outstanding shares of the common stock of the Company at $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 scheduled to expire
on March 2, 1999.
F-82
<PAGE> 282
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Template Software, Inc.
In our opinion the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), changes
in shareholders' equity and cash flows, present fairly, in all material
respects, the financial position of Template Software, Inc. and its subsidiaries
(the "Company") at November 30, 1997 and December 31, 1998, and the results of
their operations and their cash flows for the years ended November 30, 1996 and
1997, for the one month ended December 31, 1997, and for the year ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PriceWaterhouseCoopers LLP
McLean, VA
March 17, 1999
F-83
<PAGE> 283
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 2,739,075 $ 1,830,806
Marketable securities....................................... 13,317,901 8,221,300
Accounts receivable, net.................................... 10,474,254 15,751,823
Income tax receivable....................................... 235,848 19,780
Deferred income taxes....................................... 406,172 1,872,580
Prepaid expenses and other current assets................... 688,577 1,698,639
----------- -----------
Total current assets...................................... 27,861,827 29,394,928
----------- -----------
Property, plant and equipment, net.......................... 2,193,932 5,422,931
Software development costs, net............................. 1,490,776 2,601,474
Goodwill, net............................................... 10,710,555 10,298,088
Deferred income taxes....................................... 408,328 --
Note receivable............................................. -- 1,040,667
Other assets................................................ 306,075 326,018
----------- -----------
Total assets.............................................. $42,971,493 $49,084,106
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,431,162 $ 2,642,350
Accrued expenses............................................ 2,717,618 4,101,615
Revolving credit agreement.................................. 33,553 166,797
Current portion of long-term debt........................... 91,667 229,373
Capital lease obligations................................... 54,023 55,209
Income taxes payable........................................ 34,639 46,465
Deferred income............................................. 794,832 1,437,014
----------- -----------
Total current liabilities................................. 5,157,494 8,678,823
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion...................... 84,028 --
Capital lease obligations, noncurrent....................... 127,226 76,602
Deferred income taxes....................................... -- 827,030
Other liabilities........................................... 309,450 421,083
----------- -----------
Total liabilities......................................... 5,678,198 10,003,538
----------- -----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10) SHAREHOLDERS'
EQUITY:
Preferred Stock, $0.01 par value per share; 3,000,000 shares
authorized; no shares issued and outstanding as of
November 30, 1997 and December 31, 1998, respectively..... -- --
Common Stock, $0.01 par value per share; 17,000,000 shares
authorized; 4,675,433 shares issued and outstanding as of
November 30, 1997 and 5,153,755 shares issued and
4,969,755 shares outstanding, as of December 31, 1998..... 46,755 51,538
Additional paid-in capital.................................. 35,088,542 36,619,503
Deferred compensation....................................... (1,177,920) (727,243)
Accumulated other comprehensive income...................... 49,752 154,156
Retained earnings........................................... 3,286,166 3,793,839
Common stock in treasury, at cost no shares and 184,000
shares as of November 30, 1997 and December 31, 1998...... -- (811,225)
----------- -----------
Total shareholders' equity................................ 37,293,295 39,080,568
----------- -----------
Total liabilities and shareholders' equity................ $42,971,493 $49,084,106
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-84
<PAGE> 284
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH
NOVEMBER 30, ENDED YEAR ENDED
------------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Products..................... $ 1,918,568 $ 8,539,387 $ 95,292 $ 8,014,139
Services..................... 11,611,543 18,371,005 2,050,140 34,625,087
----------- ----------- ---------- -----------
Total revenues............. 13,530,111 26,910,392 2,145,432 42,639,226
----------- ----------- ---------- -----------
COST OF REVENUES:
Products..................... 782,804 2,145,552 162,509 1,685,913
Services..................... 6,245,888 10,639,845 1,646,626 22,491,322
----------- ----------- ---------- -----------
Total cost of revenues..... 7,028,692 12,785,397 1,809,135 24,177,235
----------- ----------- ---------- -----------
Gross profit................. 6,501,419 14,124,995 336,297 18,461,991
----------- ----------- ---------- -----------
OPERATING EXPENSES:
Selling and marketing........ 2,362,648 6,270,769 706,861 9,758,355
Product development.......... 966,088 1,314,770 127,694 1,444,474
General and administrative... 1,473,062 3,163,587 403,096 6,139,040
----------- ----------- ---------- -----------
Total operating expenses... 4,801,798 10,749,126 1,237,651 17,341,869
----------- ----------- ---------- -----------
Income (loss) from
operations................. 1,699,621 3,375,869 (901,354) 1,120,122
Interest income (expense),
net........................ (22,130) 872,613 45,477 615,300
Other income (expense),
net........................ 12,079 (100,673) (38,515) 142,905
----------- ----------- ---------- -----------
Net income (loss) before
income taxes............... 1,689,570 4,147,809 (894,392) 1,878,327
Income tax benefit
(provision)................ (644,502) (1,768,016) 271,855 (748,117)
----------- ----------- ---------- -----------
Net income (loss)............ $ 1,045,068 $ 2,379,793 $ (622,537) $ 1,130,210
=========== =========== ========== ===========
OTHER COMPREHENSIVE INCOME
(LOSS):
Foreign currency translation
adjustment................. -- 49,752 (46,029) 272,846
Unrealized loss on marketable
securities, net of taxes... -- -- -- (122,413)
----------- ----------- ---------- -----------
Comprehensive income
(loss)..................... $ 1,045,068 $ 2,429,545 $ (668,566) $ 1,280,643
=========== =========== ========== ===========
Earnings (loss) per share
basic...................... $ 0.48 $ 0.58 $ (0.13) $ 0.23
=========== =========== ========== ===========
Shares used in computing
basic earnings (loss) per
share...................... 2,182,260 4,091,566 4,676,304 5,013,528
=========== =========== ========== ===========
Earnings (loss) per share
diluted.................... $ 0.23 $ 0.44 $ (0.13) $ 0.20
=========== =========== ========== ===========
Shares used in computing
diluted earnings (loss) per
share...................... 4,643,919 5,419,150 4,676,304 5,708,932
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-85
<PAGE> 285
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- ------------------ --------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- ------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30,
1995...................... 195,847 $ 385,701 0 $ 0 1,808,924 $ 18,089 423,006 $ 4,230
Retirement of stock held
in treasury........... (195,847) (385,701) 0 0 (48,936) (489) 0 0
Issuance of Class B
Common Stock.......... 0 0 0 0 0 0 64,014 640
Issuance of Convertible
Preferred Stock Series
A..................... 0 0 500,000 5,000 0 0 0 0
Exchange of Class A and
Class B Common Stock.. 0 0 0 0 (1,759,988) (17,600) (487,020) (4,870)
Net income.............. 0 0 0 0 0 0 0 0
-------- --------- -------- ------- ---------- -------- -------- -------
Balance, November 30,
1996.................... 0 0 500,000 5,000 0 0 0 0
Conversion of Series A
Convertible Preferred
Stock................. 0 0 (500,000) (5,000) 0 0 0 0
Initial public offering
of common stock,
$16.00 per share, net
of expenses........... 0 0 0 0 0 0 0 0
Exercise of stock
options............... 0 0 0 0 0 0 0 0
Common Stock issued in
connection with
business acquisitions,
$12.18 -- $14.90 per
share................. 0 0 0 0 0 0 0 0
Translation
Adjustment............ 0 0 0 0 0 0 0 0
Deferred compensation
related to stock
options granted below
fair market value..... 0 0 0 0 0 0 0 0
Amortization of Deferred
Compensation.......... 0 0 0 0 0 0 0 0
Expenses related to
issuance of Series A
Convertible Preferred
Stock in 1996......... 0 0 0 0 0 0 0 0
Tax benefit associated
with exercise of stock
options............... 0 0 0 0 0 0 0 0
Net Income.............. 0 0 0 0 0 0 0 0
-------- --------- -------- ------- ---------- -------- -------- -------
Balance, November 30,
1997.................... 0 0 0 0 0 0 0 0
Exercise of stock
options............... 0 0 0 0 0 0 0 0
Translation
Adjustment............ 0 0 0 0 0 0 0 0
Forfeitures of stock
options............... 0 0 0 0 0 0 0 0
Amortization of Deferred
Compensation.......... 0 0 0 0 0 0 0 0
Tax benefit associated
with exercise of stock
options............... 0 0 0 0 0 0 0 0
Net Loss................ 0 0 0 0 0 0 0 0
-------- --------- -------- ------- ---------- -------- -------- -------
Balance, December 31,
1997.................... 0 0 0 0 0 0 0 0
Exercise of stock
options............... 0 0 0 0 0 0 0 0
Issue Stock related to
FY97 contingent
consideration......... 0 0 0 0 0 0 0 0
Translation
Adjustment............ 0 0 0 0 0 0 0 0
Gain on investment...... 0 0 0 0 0 0 0 0
Forfeitures of stock
options............... 0 0 0 0 0 0 0 0
Amortization of Deferred
Compensation.......... 0 0 0 0 0 0 0 0
Purchase of Treasury
Shares................ 0 0 0 0 0 0 0 0
Tax benefit associated
with exercise of stock
options............... 0 0 0 0 0 0 0 0
Net Income.............. 0 0 0 0 0 0 0 0
-------- --------- -------- ------- ---------- -------- -------- -------
Balance, December 31,
1998.................... 0 $ 0 0 $ 0 0 $ 0 0 $ 0
======== ========= ======== ======= ========== ======== ======== =======
</TABLE>
F-86
<PAGE> 286
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL DEFERRED ACCUMULATED EARNINGS TREASURY
------------------- PAID-IN COMPEN- COMPREHENSIVE (ACCUM. STOCK AT
SHARES AMOUNT CAPITAL SATION INCOME DEFICIT) COST TOTAL
--------- ------- ----------- ----------- ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30,
1995...................... 0 $ 0 $ 969,491 $ 0 $ 0 $ (138,695) $(337,801) $ 901,015
Retirement of stock held
in treasury............ 0 0 48,389 0 0 0 337,801 0
Issuance of Class B
Common Stock........... 0 0 96,108 0 0 0 0 96,748
Issuance of Convertible
Preferred Stock Series
A...................... 0 0 7,995,000 0 0 0 0 8,000,000
Exchange of Class A and
Class B Common Stock... 2,247,008 22,470 0 0 0 0 0 0
Net income............... 0 0 0 0 0 1,045,068 0 1,045,068
--------- ------- ----------- ----------- --------- ---------- --------- -----------
Balance, November 30,
1996..................... 2,247,008 22,470 9,108,988 0 0 906,373 0 10,042,831
Conversion of Series A
Convertible Preferred
Stock.................. 500,000 5,000 0 0 0 0 0 0
Initial public offering
of common stock, $16.00
per share, net of
expenses............... 1,400,000 14,000 19,749,359 0 0 0 0 19,763,359
Exercise of stock
options................ 344,675 3,447 684,035 0 0 0 0 687,482
Common Stock issued in
connection with
business acquisitions,
$12.18 -- $14.90 per
share.................. 183,750 1,838 2,998,114 0 0 0 0 2,999,982
Translation Adjustment... 0 0 0 0 49,752 0 0 49,752
Deferred compensation
related to stock options
granted below fair market
value.................... 0 0 1,584,905 (1,584,905) 0 0 0 0
Amortization of Deferred
Compensation........... 0 0 0 406,985 0 0 0 406,985
Expenses related to
issuance of Series A
Convertible Preferred
Stock in 1996.......... 0 0 (75,096) 0 0 0 0 (75,096)
Tax benefit associated
with exercise of stock
options................ 0 0 1,038,207 0 0 0 0 1,038,207
Net Income............... 0 0 0 0 0 2,379,793 0 2,379,793
--------- ------- ----------- ----------- --------- ---------- --------- -----------
Balance, November 30,
1997..................... 4,675,433 46,755 35,088,542 (1,177,920) 49,752 3,286,166 0 37,293,295
Exercise of stock
options................ 2,250 23 898,181 0 0 0 0 4,455
Translation Adjustment... 0 0 0 0 (46,029) 0 0 (46,029)
Forfeitures of stock
options................ 0 0 (14,400) 14,400 0 0 0 0
Amortization of Deferred
Compensation........... 0 0 0 32,483 0 0 0 32,483
Tax benefit associated
with exercise of stock
options................ 0 0 2,500 0 0 0 0 2,500
Net Loss................. 0 0 0 0 0 (622,537) 0 (622,537)
--------- ------- ----------- ----------- --------- ---------- --------- -----------
Balance, December 31,
1997..................... 4,677,683 46,778 35,081,074 (1,131,037) 3,723 2,663,629 0 36,664,167
Exercise of stock
options................ 424,730 4,247 898,181 0 0 0 0 902,428
Common stock issued in
connection with 1997
business
acquisitions........... 51,342 513 (513) 0 0 0 0 0
Translation Adjustment... 0 0 0 0 272,846 0 0 272,846
Gain on investment....... 0 0 0 0 (122,413) 0 0 (122,413)
Forfeitures of stock
options................ 0 0 (14,651) 14,651 0 0 0 0
Amortization of Deferred
Compensation........... 0 0 0 389,143 0 0 0 389,143
Purchase of treasury
shares................. (184,000) 0 0 0 0 0 (811,225) (811,225)
Tax benefit associated
with exercise of stock
options................ 0 0 655,412 0 0 0 0 655,412
Net Income............... 0 0 0 0 0 1,130,210 0 1,130,210
--------- ------- ----------- ----------- --------- ---------- --------- -----------
Balance, December 31,
1998..................... 4,969,755 $51,538 $36,619,503 $ (727,243) $ 154,156 $3,793,839 $(811,225) $39,080,568
========= ======= =========== =========== ========= ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-87
<PAGE> 287
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MONTH YEAR
YEAR ENDED NOVEMBER 30, ENDED ENDED
-------------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 1,045,068 $ 2,379,793 $ (622,537) $ 1,130,210
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of discounts on marketable securities..... -- (76,608) (18,463) (112,664)
Depreciation and amortization of property, plant and
equipment............................................ 117,121 354,569 59,137 559,048
Provision for losses on accounts receivable............ -- 98,026 (3,831) 114,910
Deferred rent amortization............................. 2,272 89,569 4,947 96,519
Deferred compensation amortization..................... -- 406,985 32,483 389,143
Amortization of capitalized software development
costs................................................ 252,260 394,770 37,874 584,738
Goodwill amortization.................................. -- 374,237 46,579 803,701
Deferred tax provision................................. 61,410 632,240 (294,603) 169,261
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF
ACQUISITIONS:
Accounts receivable..................................... (708,163) (6,156,891) 1,077,883 (6,056,081)
Current year income tax receivable...................... -- (235,848) -- 216,092
Prepaid expenses and other assets....................... (521,911) (195,754) 108,426 (462,611)
Accounts payable and accrued liabilities................ 920,907 (1,449,207) 311,579 1,402,352
Income taxes payable.................................... 492,498 (532,097) 16,520 (6,557)
Deferred income......................................... (104,870) (276,327) (140,323) 758,179
----------- ------------ ---------- -----------
Net cash provided by (used in) operating
activities......................................... 1,556,592 (4,192,543) 615,671 (413,760)
----------- ------------ ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities...................... -- (43,169,673) -- (5,201,293)
Proceeds from sales and maturities of marketable
securities............................................. -- 29,928,380 -- 10,231,580
Capital expenditures and leasehold improvements......... (652,359) (933,403) (166,063) (3,566,909)
Capitalization of software development costs............ (395,303) (1,167,452) (84,194) (1,649,114)
Issuance of note receivable............................. -- -- -- (1,540,667)
Acquisitions of businesses, net of cash acquired........ -- (7,356,848) -- (57,539)
----------- ------------ ---------- -----------
Net cash used in investing activities................ (1,047,662) (22,698,996) (250,257) (1,783,942)
----------- ------------ ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................. 275,000 -- -- 269,123
Payments on notes payable............................... (363,632) (91,667) (7,639) (214,515)
Revolving credit facility, net.......................... (161,330) (47,839) 310,282 (233,592)
Income tax benefit related to stock options............. -- 1,038,207 2,500 655,413
Payments on capital lease obligations................... (21,340) (49,759) (4,334) (62,176)
Proceeds from issuance of capital stock, net of
expenses............................................... 8,000,000 19,688,264 -- --
Proceeds from sale of common stock under stock
programs............................................... 96,748 687,482 4,455 902,428
Purchase of treasury shares............................. -- -- -- (811,225)
----------- ------------ ---------- -----------
Net cash provided by financing activities............ 7,825,446 21,224,688 305,264 505,456
----------- ------------ ---------- -----------
Effect of exchange rate changes on cash................. -- 8,766 15,543 97,756
----------- ------------ ---------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 8,334,376 (5,658,085) 686,221 (1,594,490)
Cash and cash equivalents at beginning of period........ 62,784 8,397,160 2,739,075 3,425,296
----------- ------------ ---------- -----------
Cash and cash equivalents at end of period.............. $ 8,397,160 $ 2,739,075 $3,425,296 $ 1,830,806
----------- ------------ ---------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................. $ 46,668 $ 91,367 $ 5,944 $ 123,404
Cash paid for income taxes.............................. $ 90,594 $ 810,140 $ 2,099 $ 91,598
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired through capital
leases................................................. $ 247,086 $ -- $ -- $ 17,073
RETIREMENT OF TREASURY STOCK:
Class A Common Stock.................................... $ 67,560 $ -- $ -- $ --
Preferred Stock......................................... $ 270,241 $ -- $ -- $ --
CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK:
Series A Convertible Preferred Stock.................... $ -- $ (5,000) $ -- $ --
Common Stock............................................ $ -- $ 5,000 $ -- $ --
BUSINESS ACQUISITIONS, NET OF CASH ACQUIRED:
Working capital, other than cash acquired............... $ -- $ 2,714,547 $ -- $ 374,129
Property and equipment.................................. $ -- $ (699,939) $ -- $ (43,985)
Cost in excess of net assets of companies acquired,
net.................................................... $ -- $(11,084,792) $ -- $ (383,774)
Other non-current assets................................ $ -- $ (1,356,073) $ -- $ (3,909)
Non-current liabilities................................. $ -- $ 69,428 $ -- $ --
Fair market value of common stock issued................ $ -- $ 2,999,981 $ -- $ --
NON CASH INVESTING ACTIVITIES:
Fair value adjustment to deferred tax asset acquired.... $ -- $ -- $ -- $ (54,039)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-88
<PAGE> 288
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
BUSINESS
Template Software, Inc. (the "Company") provides enterprise-wide software
solutions to organizations that require the integration of their operations and
systems in an effort to better automate their critical business processes. The
Company's solutions are targeted at large-scale, mission-critical applications,
such as order handling and fulfillment, human resource management, and network
monitoring systems primarily in the telecommunications, finance/insurance and
government industries.
RECAPITALIZATION OF COMMON STOCK
The Company, formerly a Maryland corporation, elected to change its capital
structure in October 1996, and reincorporated into Template Software, Inc., a
Virginia corporation (the "Recapitalization"). Pursuant to the Recapitalization,
the Company (i) exchanged its Class A and Class B Common Stock for an equal
amount of shares of a single class of $0.01 par value, common stock ("Common
Stock") and (ii) increased the Company's authorized capital stock to 20,000,000
shares, which consisted of 17,000,000 shares of Common Stock and 3,000,000
shares of a new class of preferred stock ("Preferred Stock"). The preferences,
limitations and relative rights of the Preferred Stock, which is issuable in
series, are determined by the Board of Directors upon designation.
REGISTRATION STATEMENT
In January 1997, the Company completed an underwritten public offering of
2,100,000 shares of its common stock; 1,400,000 shares of Common Stock for the
account of the Company and 700,000 shares of Common Stock for the accounts of
selling security holders, with an aggregate offering price of $16.00 per share
registered. The expenses incurred for the Company's account in connection with
the issuance and distribution of the securities were $1,568,000 of underwriting
discounts and commissions and $1,068,641 of other expenses for a total expense
of $2,636,641. The net offering proceeds to the Company were $19,763,359. From
the effective date of the Registration Statement, through the end date of the
period covered by this report, the Company used $7,414,387 to acquire other
businesses, $8,211,006 to purchase temporary investments in marketable
securities, $1,500,000 to invest in convertible promissory notes of other
businesses, and the remaining $2,637,966 in property, plant and equipment. There
has not been a material change in the use of proceeds described in the Company's
prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Template
Software, Inc. and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
F-89
<PAGE> 289
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Prior to December 15, 1997, the Company recognized revenue in accordance
with the American Institute of Certified Public Accountants' (AICPA) Statement
of Position (SOP) 91-1, "Software Revenue Recognition." Subsequent to December
15, 1997, the Company began recognizing revenue in accordance with SOP 97-2,
"Software Revenue Recognition." SOP 97-2 was amended on March 31, 1998 by SOP
98-4 "Deferral of the effective date of a provision of SOP 97-2." In December
1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition," which amends SOP 98-4, and is effective after December 31, 1998.
Management has assessed these new statements and believes that their adoption
will not have a material effect on the timing of the Company's revenue
recognition or cause changes to its revenue recognition policies. The Company
licenses the rights to use its software products to customers under perpetual
license agreements, and provides product support and enhancements under annual
maintenance agreements. Revenue from product licensing arrangements is generally
recognized after execution of a licensing agreement and shipment of the product,
provided that no significant Company obligations remain and the resulting
receivable is deemed collectible by management. Services revenue includes
consulting, product support and maintenance and training. The Company defers and
recognizes product support and maintenance revenue ratably over the terms of the
contract period, which is generally one year. The Company recognizes training
and consulting revenue as the services are provided.
Customization is sometimes involved in the development of a software
solution by the Company. Under these circumstances, the Company's revenues are
derived from contracts of various types. Revenue from federal government agency
cost-plus-award-fee contracts is recognized to the extent of costs incurred plus
a proportionate amount of the fee. Revenues from fixed-price contracts is
recognized using the percentage-of-completion method based on the relationship
of actual costs incurred to total costs estimated to be incurred over the
duration of the contract. Fees under federal government agency contracts may be
increased or decreased in accordance with certain provisions which measure
actual performance against established targets or other criteria. Such fee
adjustments are included in revenues at the time the amounts can be reasonably
determined. Provisions for anticipated contract losses are recognized at the
time they become evident.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and short-term
repurchase agreements which have original maturities of three months or less. As
of December 31, 1998 the Company has not experienced any losses on these
investments.
MARKETABLE SECURITIES
Marketable securities at November 30, 1997 and December 31, 1998 consisted
of direct obligations of the United States Government, municipalities and
commercial paper with strong credit ratings. These investments are considered
available-for-sale as defined by Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company's investments are held for an
F-90
<PAGE> 290
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unspecified period of time and are sold to meet its liquidity needs.
Accordingly, the Company has classified these investments as current assets.
Available-for-sale securities are reported at fair value based generally on
quoted market prices with unrealized gains and losses, net of taxes, recorded in
shareholders equity until realized. At November 30, 1997, amortized cost of
marketable securities approximated market; therefore, no adjustment was made to
shareholders equity as a result of changes in market value to these securities.
At December 31, 1998, unrealized loss from marketable securities was $197,441,
net of taxes of $75,028. Interest income is accrued as earned.
<TABLE>
<CAPTION>
FAIR VALUE YEAR ENDED
----------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
U.S. government securities (maturity of less than 1
year)............................................. $ 4,986,146 $ --
U.S. government securities (maturity of 29 years)... -- 4,056,300
U.S. corporate debt securities (maturities of less
than 1 year)...................................... 3,366,755 --
Municipal obligations (maturities of 23-27 years
with 7 day call feature).......................... 4,965,000 4,165,000
----------- ----------
Total............................................. $13,317,901 $8,221,300
=========== ==========
</TABLE>
INVENTORY
The Company's European subsidiaries maintain an inventory of various third
party software licenses for resale. The inventory is recorded at cost and is
accounted for using the FIFO method. The inventory balance, which is included in
prepaid expenses and other current assets in the consolidated balance sheet, was
$57,711 and $358,253 as of November 30, 1997 and December 31, 1998,
respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents,
marketable securities and accounts receivable. The Company limits the amount of
investment exposure in any one financial instrument and minimizes the amount of
cash it maintains in foreign currencies by maintaining sufficient cash in U.S.
dollars. To date, the impact of exchange rates on foreign cash balances has been
immaterial. The Company sells products and services to customers without
requiring collateral, however, the Company routinely assesses the financial
strength of its customers and maintains allowances for anticipated losses.
For the years ended November 30, 1996 and 1997, for the one month period
ended December 31, 1997 and for the year ended December 31, 1998, revenues from
federal government agencies represent 20%, 23%, 20% and 29%, respectively, of
total consolidated revenues. With the exception of federal government agencies,
there were two customers (28% from Customer A and 20% from Customer B) for the
year ended November 30, 1996, one customer (13% from Customer C) for the year
ended November 30, 1997, one customer for the one month ended December 31, 1997
(13% from Customer D) and one
F-91
<PAGE> 291
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customer (11% from Customer E) for the year ended December 31, 1998, that
accounted for more than 10% of total consolidated revenues.
With the exception of federal government agencies, there was one customer
at November 30, 1997 that accounted for 11% of total consolidated accounts
receivable and no customers at December 31, 1998 that accounted for greater than
10% of total consolidated accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash, cash equivalents, accounts receivable, notes
receivable, accounts payable and accrued expenses, and obligations under capital
leases approximate fair value due to the relatively short maturity of these
instruments. Marketable securities held as available-for-sale have been adjusted
to fair market value with any unrealized gain or loss included as a component of
shareholders equity until realized. The carrying amounts of the revolving credit
agreement and notes payable approximate fair value because these financial
instruments contain variable interest rates which reprice frequently.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences of temporary differences and income tax credits. Temporary
differences are primarily the result of the differences between the tax bases of
assets and liabilities and their financial reporting amounts. Deferred tax
assets and liabilities are measured by applying enacted statutory tax rates
applicable to the future years in which deferred tax assets or liabilities are
expected to be settled or realized. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of the taxes payable for the current period and the
change during the period in deferred tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues, expenses,
gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of shareholders'
equity. Transaction gains and losses, which are included in the statement of
operations, are immaterial for all periods presented.
EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average of common shares
F-92
<PAGE> 292
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding assuming conversion of dilutive common stock equivalent shares from
common stock options.
The following table reconciles the weighted average number of common shares
outstanding during each period for basic and diluted earnings (loss) per share.
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
NOVEMBER NOVEMBER DECEMBER DECEMBER
30, 30, 31, 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
basic............................ 2,182,260 4,091,566 4,676,304 5,013,528
Diluted impact of common shares
issuable on exercise of stock
options.......................... 2,461,659 1,327,584 -- 695,404
Weighted average shares outstanding
diluted.......................... 4,643,919 5,419,150 4,676,304 5,708,932
</TABLE>
Common stock equivalents are included in the computation of diluted net
income (loss) per share using the treasury stock method. For the one month ended
December 31, 1997, stock options granted by the Company to purchase 1,089,091
common shares, were not included in the computation because the effect was
anti-dilutive.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
five years for office furniture and equipment, three years for computer
equipment and software and forty years for office buildings. Amortization of
leasehold improvements is computed using the straight line method over the
shorter of the assets useful life or the lease term. When assets are retired or
sold, the cost and related accumulated depreciation and amortization are removed
from the accounts, and any gain or loss is reflected in operations. Maintenance
and repairs are charged to expense when incurred, and the cost of significant
additions and improvements is capitalized.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes the direct costs associated with the development of
software products in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Research costs are charged to product development expense
prior to the development of a detailed program design or a working model. Costs
incurred subsequent to the product release, and research and development
performed under contract are charged to operations.
Capitalized costs are amortized over the estimated product life using the
greater of the straight-line method or the ratio of current product revenues to
total projected future revenues. Software development costs at November 30, 1997
and December 31, 1998 are presented net of accumulated amortization of
$3,401,811 and $4,024,423, respectively. Amortization expense related to
software development costs was $252,260, $394,770,
F-93
<PAGE> 293
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$37,874 and $584,738, respectively, for the years ended November 30, 1996 and
1997, for the one month ended December 31, 1997 and for the year ended December
31, 1998, respectively.
GOODWILL
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase business combinations. Goodwill
is being amortized on a straight-line basis over periods ranging from 10 to 15
years. Goodwill at November 30, 1997 and December 31, 1998 is presented net of
accumulated amortization of $374,237 and $1,224,517, respectively.
LONG-LIVED ASSETS
The Company evaluates the recoverability of the carrying value of property
and equipment and intangible assets in accordance with the provisions of
Statement of Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of". The Company considers historical
performance and anticipated future results in its evaluation of potential
impairment. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of these assets in relation to the operating
performance of the business and future and undiscounted cash flows expected to
result from the use of these assets. Impairment losses are recognized when the
sum of expected future cash flows are less than the assets' carrying value. No
such impairment losses have been recognized to date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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 results could differ from those estimates.
RECENT ACCOUNTING STANDARDS
As of December 31, 1998, the Company has adopted SFAS No. 130, "Reporting
Comprehensive Income," which 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. In addition, the Company
adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the manner in which public
companies report information about operating segments, products and services,
geographic areas and major customers in annual and interim financial statements.
The Company accounts for all operations under one segment.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for all
fiscal quarters of fiscal
F-94
<PAGE> 294
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years beginning after June 15, 1999. The Company has not determined the effort
of adopting this standard.
3. CHANGE IN FISCAL YEAR
In the fourth quarter of 1998, the Company changed its fiscal year end from
November 30 to December 31 effective with the fiscal year ending December 31,
1998. The accompanying financial statements include audited statements of
operations and comprehensive income (loss), shareholders' equity and cash flows
for the one month transition period ended December 31, 1997.
4. ACQUISITIONS OF BUSINESSES AND STRATEGIC VENTURES
KRYSTAL INGENIERIE S.A.
On March 4, 1997, the Company consummated its acquisition of all of the
issued and outstanding capital stock of Krystal Ingenierie S.A. ("Krystal"), a
corporation organized under the laws of the Republic of France in a transaction
accounted for as a purchase business combination. The total consideration of
$1,460,005 consisted of: (1) the exchange of an aggregate of 48,064 shares of
the Company's common stock (the "Common Stock") for 2,500 shares of Krystal held
by Kuhner, representing all of the issued and outstanding capital stock of
Krystal; (2) the exchange an aggregate of 45,686 additional shares of the
Company's Common Stock for certain indebtedness of Krystal owed to Kuhner in the
aggregate amount of FF 3,914,331 ($677,179 at March 4, 1997); and (3)
acquisition costs of $63,224. The shares of common stock issued were valued at
the approximate weighted average price per share of $14.90 (based on volume of
shares traded during the period from February 24, 1997 to February 28, 1997).
Concurrently with the closing of the Krystal acquisition, Krystal's name was
formally changed to Template Software S.A. The excess of the purchase price over
the fair value of the net tangible liabilities acquired of $1,306,511 was
allocated to goodwill and will be amortized over its estimated useful life of 10
years.
MILESTONE SOFTWARE GMBH AND MILESTONE SOFTWARE GES. MBH
On June 27, 1997, the Company acquired all of the issued and outstanding
equity interests of milestone software GmbH, a German limited liability company
("Milestone"), which included 34% of the issued and outstanding equity interests
of milestone software, Ges. mbH, an Austrian corporation ("Milestone-Austria"),
from Milestone's three owners, Klaus Dieter Jansen ("Jansen"), Heinz-Dieter
Dietrich ("Dietrich") and NeSBIC III, C.V., for an aggregate cash purchase price
of DM 12,000,000 ($6,970,800 at June 27, 1997) plus acquisition costs of
$480,567. This transaction was accounted for as a purchase business combination.
An additional 10% interest of Milestone-Austria was acquired from Dietrich and
Jansen in exchange for 90,000 shares of the Company's Common Stock. The shares
of common stock issued were valued at the approximate weighted price per share
of $12.18 (based on the volume of shares traded during the period June 10, 1997
to June 16, 1997. The excess of the purchase price over the fair value of the
net tangible liabilities acquired of $9,271,281 was allocated to goodwill at the
acquisition date and will to be amortized over its estimated useful life of 15
years.
F-95
<PAGE> 295
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition agreement also provides for the Company to issue $507,000
of equivalent shares of common stock to Dietrich and Jansen on both November 30,
1997 and 1998 if certain profit objectives are met over the five month and
twelve month periods ended November 30, 1997 and 1998, respectively. The profit
objective for the five month period ended November 30, 1997 was met.
Consequently, the company issued an additional 51,342 shares of common stock to
Dietrich and Jansen in February 1998.
The fair value of these shares of $507,000 has been allocated to goodwill
as of November 30, 1997. The profit objective for the twelve month period ended
November 30, 1998 was not met; therefore, no contingent consideration was
provided.
MILESTONE SOFTWARE GES. MBH
On March 30, 1998, the Company acquired the remaining 56% of the issued and
outstanding equity interests of milestone software Ges. mbH, an Austrian
corporation, for an aggregate cash purchase price of $100,000 plus acquisition
expenses of $34,837. The Company assumed liabilities of $248,937. The excess of
the purchase price over the fair value of the net liabilities acquired of
$383,774 was allocated to goodwill and is being amortized over its estimated
useful life of 14.2 years. The final allocation of the purchase price is subject
to the completion of management's due diligence, however, that allocation is not
expected to differ materially from the initial allocation. As a result of this
transaction, the Company owns 100% of Milestone Austria.
The acquisition agreement also provides for additional contingent
consideration not to exceed $250,000 of equivalent shares of common stock to all
of the selling shareholders if certain revenue and profit objectives are met by
the Company's fiscal year end. The profit objectives were not met; therefore, no
contingent consideration was provided.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Milestone-Austria as if
the acquisition had occurred December 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales........................................... $28,091,901 $42,954,754
Net income (loss)................................... 2,385,353 1,058,069
Earnings per common share -- diluted................ $ 0.44 $ 0.19
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the combinations been in effect on
December 1, 1996. In addition, they do not purport to be indicative of future
results of operations on the consolidated entities.
F-96
<PAGE> 296
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRECISE CONNECTIVITY SOLUTIONS LTD.
On March 30, 1998, the Company entered into a Convertible Note Purchase
Agreement ("Note Agreement") with Precise Connectivity Solutions Ltd.
("Precise"), an Israeli limited corporation, pursuant to which the Company
purchased a Note from Precise for an aggregate purchase price of $500,000 due on
March 30, 1999 with a 9% percent interest rate per annum. The Note is
convertible at the option of the Company or Precise into that number of
fully-paid, non-assessable shares of Preferred Stock of Precise equal to eight
percent (8%) of the issued and outstanding capital stock of Precise, on a fully-
diluted basis, including such shares of Preferred Stock. The note receivable is
included in prepaid expenses and other current assets in the consolidated
balance sheet as of December 31, 1998.
EAGLE EYE TECHNOLOGIES STRATEGIC RELATIONSHIP
On September 1, 1998, the Company entered into a strategic relationship
with Eagle Eye Technologies, Inc. ("Eagle Eye") to sell software and related
services to Eagle Eye with respect to the creation by Eagle Eye of its Service
Operations Center (the "SOC"). The SOC supports the operations of the Global
Locating System, a satellite-based location and messaging system.
In connection therewith, the Company invested $1,000,000 in Eagle Eye in
return for (i) a promissory note (the "Convertible Promissory Note") that is
convertible, at the Company's option, into 66,695 shares of common stock of
Eagle Eye ("Eagle Eye Common Stock") and (ii) a warrant (the "Warrant") that
gives the Company the right to purchase an additional 66,695 shares of Eagle Eye
Common Stock for an additional $1,000,000. Interest on the Convertible
Promissory Note accrues at the rate of 12% per annum, payable together with
principal in a single lump sum on September 1, 2000, unless converted into Eagle
Eye Common Stock prior to that date. The Convertible Promissory Note is
prepayable by Eagle Eye in whole, but not in part, at any time prior to
maturity. The Convertible Promissory Note may be converted at any time prior to
the date that is 30 days after the date on which Eagle Eye notifies the Company
that the aggregate amount of payments made by Eagle Eye to the Company exceeds
$1,000,000 (the "Notification Date"). The Warrant is exercisable by the Company,
in whole or in part, at any time beginning on the Notification Date and ending
on the date that is 12 months after the Notification Date.
Furthermore, under the Financing Agreement, the Company also agreed to make
available to Eagle Eye an additional $500,000, which may be loaned to Eagle Eye
at Eagle Eye's request, on substantially the same terms as set forth in the
Convertible Promissory Note, except that such additional indebtedness would be
convertible, at the Company's option, into 33,348 shares of Eagle Eye Common
Stock. As of December 31, 1998, no amounts were loaned to Eagle Eye under this
provision.
F-97
<PAGE> 297
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
GOVERNMENT:
Billed........................................ $ 3,109,725 $ 4,864,392
Unbilled...................................... 65,798 2,244,649
Retainage..................................... 87,652 97,013
----------- -----------
3,263,175 7,206,054
----------- -----------
DOMESTIC:
Billed........................................ 1,690,101 2,494,031
Unbilled...................................... 4,971 --
----------- -----------
1,695,072 2,494,031
----------- -----------
FOREIGN:
Billed........................................ 5,534,199 5,255,038
Unbilled...................................... 530,525 1,474,056
----------- -----------
6,064,724 6,729,094
----------- -----------
Total....................................... 11,022,971 16,429,179
Less: allowance for doubtful accounts......... (548,717) (677,356)
----------- -----------
$10,474,254 $15,751,823
=========== ===========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Data processing equipment..................... $1,526,474 $2,205,576
Office furniture and equipment................ 1,240,335 2,231,512
Leasehold improvements........................ 453,533 645,934
Building...................................... -- 2,050,808
---------- ----------
3,220,342 7,133,830
Less: accumulated depreciation................ (1,026,410) (1,710,899)
---------- ----------
$2,193,932 $5,422,931
========== ==========
</TABLE>
F-98
<PAGE> 298
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Revolving credit facility........................... $ 33,553 $ 166,797
======== =========
Long-term debt consists of the following:
Term Loan........................................... $175,695 $ 229,373
Less current portion................................ (91,667) (229,373)
-------- ---------
Long-term portion................................... $ 84,028 $ --
======== =========
</TABLE>
REVOLVING CREDIT FACILITIES
The Company has a revolving credit facility (the "Facility") under a Loan
Agreement (the "Loan Agreement") with First Union National Bank, successor by
merger to Signet Bank, (the "Bank") in the aggregate principal amount of $3.0
million with an expiration date of June 30, 1999. As of December 31, 1998, there
were no amounts outstanding under this Facility. Availability of the funds under
the Loan Agreement is also subject to the Company's compliance with certain
covenants customary with commercial loans, including covenants related to
maintenance of certain levels of tangible net worth and a certain ratio of
current assets to current liabilities. The Loan Agreement further imposes
restrictions on creation of debt, merger, sale of assets, loans or advances,
guarantees, payment of dividends or repurchase of capital stock without the
Bank's consent. As of November 30, 1997 and for certain compliance periods
during the two years ended November 30, 1997, the Company was not in compliance
with the foregoing financial covenants for which waivers were obtained. During
the year ended December 31, 1998, the Company was in compliance with all
financial and non-financial covenants. The Company obtained the Bank's consent
in connection with the Board of Directors approved stock repurchase program. The
Facility bears interest at the LIBOR Market Index Rate (for the United States
Dollar quoted by the British Bankers Association) plus 1.85%. On August 3, 1998,
the Bank issued a letter of credit on the Company's behalf as a performance
guarantee for a German customer in the amount of DEM 1,700,000 (approximately
$1.0 million).
The Company's French subsidiary maintains with Banque Hervet an unsecured
line of credit for 500,000FF plus an additional 500,000FF of credit
collateralized by 70% of accounts receivable (approximately $180,000 in
aggregate) at an interest rate of 8.3%. The Company's Austrian subsidiary
maintains a line of credit with Raiffeisen Bank for 1,000,000ATS (approximately
$85,000), collateralized by 100% of accounts receivable at an interest rate of
5%. As of December 31, 1998, 568,845FF (approximately $101,596) and 765,005ATS
(approximately $65,201), was outstanding under the French and Austrian lines of
credit, respectively.
F-99
<PAGE> 299
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBORDINATED NOTE PAYABLE
In December 1991, the Company repurchased 101,554 shares of Class A Common
Stock and 406,316 shares of Convertible Preferred Stock from a minority
shareholder for $300,000 in cash and a subordinated note in the amount of
$400,860 (the "Subordinated Note"). The Subordinated Note, as amended, requires
annual interest payments through March 1995 and quarterly principal and interest
payments of $31,000, beginning in April 1995. The Subordinated Note bears
interest at 2% above the prime rate. Any remaining balance is due January 1,
1999. Stock representing the unpaid portion of the note is held in treasury, and
is being retired as the principal is repaid.
In October 1996, the balance of the Subordinated Note was paid in full and
all of the remaining, underlying shares of Preferred Stock and Class A Common
Stock held in treasury were retired. The repayment of the Subordinated Note was
financed with a $275,000, three year term loan pursuant to the Loan Agreement
from the Company's commercial bank (the "Term Loan"). The Term Loan bears
interest at the prime rate plus 1/4% (8.75% at November 30, 1997 and 8.00% at
December 31, 1998) and requires monthly principal payments of $7,639, beginning
in November 1996. The balance of the Subordinated Note was $76,389 as of
December 31, 1998.
In January 1998, the Company financed its Directors and Officers insurance
premiums with AI Credit Corporation in the amount of $269,123 at an annual
percentage rate of 9.16%. The Company makes monthly payments of $12,803 with the
note maturing in December 1999. The balance of this note was $152,984 as of
December 31, 1998.
8. CAPITAL STOCK
STOCK OPTION PLANS
The Company has three Stock Option Plans, the 1992 Incentive Stock Option
Plan, the 1992 Non-Statutory Stock Option Plan and the 1996 Equity Incentive
Plan. The 1992 Plans replace the Company's former 1986 Incentive Stock Option
Plan and the 1984 Incentive Stock Option Plan. No further grants may be made
under the 1992 plans.
In October 1996, the Company established the 1996 Equity Incentive Plan
(1996 Equity Plan). Under the 1996 Equity Plan, which is administered by the
Compensation Committee of the Board of Directors, a variety of awards, including
stock options, stock appreciation rights, stock awards and incentive awards may
be made to the Company's employees and directors. Initially, 1,000,000 shares of
Common Stock were reserved for issuance under the 1996 Equity plan. On April 28,
1998, the shareholders voted to increase the number of authorized shares under
such plan from 1,000,000 to 2,500,000.
Options granted under the Company's stock option plans generally vest over
a four year period and expire either three months after termination of
employment, or seven to ten years after date of grant. Options to purchase
1,309,313 shares were vested and exercisable at December 31, 1998.
F-100
<PAGE> 300
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the years ended November 30, 1996 and 1997, for
the one month ended December 31, 1997, and for the year ended December 31, 1998
is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
1984 1986 1992 1996 AVERAGE
INCENTIVE INCENTIVE INCENTIVE INCENTIVE EXERCISE
STOCK PLAN STOCK PLAN STOCK PLAN STOCK PLANS TOTAL PRICE
---------- ---------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, November
30, 1995............. 120,120 156,749 1,386,366 -- 1,663,235 $ 1.84
Granted............ -- -- 618,300 -- 618,300 4.58
Exercised.......... (14,014) -- (50,000) -- (64,014) 1.51
Forfeited.......... (13,106) -- (23,500) -- (36,606) 1.98
------- ------- --------- --------- --------- ------
Outstanding, November
30, 1996........... 93,000 156,749 1,931,166 -- 2,180,915 $ 2.63
Granted............ -- -- -- 1,190,712 1,190,712 12.38
Exercised.......... (81,000) (70,249) (193,426) -- (344,675) 1.99
Forfeited.......... -- -- (32,750) (14,000) (46,750) 5.03
------- ------- --------- --------- --------- ------
Outstanding, November
30, 1997........... 12,000 86,500 1,704,990 1,176,712 2,980,202 $ 6.56
Granted............ -- -- -- -- -- --
Exercised.......... -- (1,500) (750) -- (2,250) 1.98
Forfeited.......... -- -- (4,500) (48,000) (52,500) 1.96
------- ------- --------- --------- --------- ------
Outstanding, December
31, 1997........... 12,000 85,000 1,699,740 1,128,712 2,925,452 $ 6.47
Granted............ -- -- -- 583,000 583,000 9.80
Exercised.......... (12,000) (55,500) (350,980) (6,250) (424,730) 2.12
Forfeited.......... -- -- (13,000) (274,875) (287,875) 11.38
------- ------- --------- --------- --------- ------
Outstanding, December
31, 1998........... -- 29,500 1,335,760 1,430,587 2,795,847 $ 7.31
======= ======= ========= ========= ========= ======
</TABLE>
The range of exercise prices for options outstanding at December 31, 1998
was $1.38 to $16.00. The following table summarizes additional information about
stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE EXERCISE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER PRICE OF
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISABLE
- --------------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.3800-$1.980............. 970,885 5 years $ 1.779 820,260 $ 1.743
$4.0625-$6.000............. 587,875 8 years 5.362 194,375 6.000
$9.0000-$12.875............ 534,712 9 years 9.837 123,219 9.696
$14.0000-$16.000........... 702,375 9 years 14.680 171,459 15.134
--------- ---------
2,795,847 1,309,313
========= =========
</TABLE>
F-101
<PAGE> 301
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". In accordance with SFAS No. 123, the Company applies APB Opinion
25 and related Interpretations in accounting for its stock option plans. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed by SFAS No. 123, net income
(loss) and net income (loss) per common share would have been reduced to the pro
forma amounts shown below (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH YEAR
NOVEMBER 30, ENDED ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) -- as
reported.............. $1,045,068 $2,379,793 $(622,537) $1,130,210
Net income (loss) -- pro
forma................. 988,901 1,956,444 (657,816) (876,785)
Earnings (loss) per
common share -- as
reported.............. 0.23 0.44 (0.13) 0.20
Earnings (loss) per
common share -- pro
forma................. 0.21 0.34 (0.14) (0.17)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR
ENDED ONE MONTH YEAR
NOVEMBER 30, ENDED ENDED
------------ DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
---- ---- ------------ ------------
<S> <C> <C> <C> <C>
Expected dividend yield............ 0.0% 0.0% -- 0.0%
Risk-free interest rate............ 6.4 6.5 -- 5.1
Expected volatility................ 70.0 70.0 -- 70.0
Expected life (in years)........... 5 5 -- 5
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's options. The weighted average
estimated fair values of employee stock options granted during the years ended
November 30, 1996 and 1997, for the one month period ended December 31, 1997 and
for the year ended December 31, 1998 were $2.90, $7.83, $0 and $6.09 per share,
respectively.
F-102
<PAGE> 302
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the initial public offering of the Company's Common Stock, the
fair value of the Company's Common Stock was determined through an independent
valuation. The Company calculated deferred compensation expense of $1,634,527
related to certain options granted during the years ended November 30, 1995 and
1996 and will recognize compensation expense over the vesting period of those
stock options. The Company did not record any adjustments for deferred
compensation expense as of November 30, 1995 and 1996 since it did not have a
material effect on total shareholders' equity. During the year ended November
30, 1997, for the one month ended December 31, 1997 and for the year ended
December 31, 1998, the company recorded $406,985, $32,483 and $389,143 of
deferred compensation expense, respectively.
9. INCOME TAXES
Foreign (loss) income before income taxes was ($13,819), $1,017,199,
($390,203) and $173,926 for the years ended November 30, 1996 and 1997, for the
one month ended December 31, 1997 and for the year ended December 31, 1998,
respectively.
The benefit (provision) for income taxes for the years ended November 30,
1996 and 1997, for the one month ended December 31, 1997 and for the year ended
December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH YEAR
NOVEMBER 30, ENDED ENDED
----------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CURRENT:
Federal......................... $(485,853) $ (981,736) $ -- $ (83,150)
State........................... (97,239) (118,808) -- (58,688)
Foreign......................... -- (35,232) (20,249) (62,543)
--------- ----------- -------- ---------
(583,092) (1,135,776) (20,249) (204,381)
--------- ----------- -------- ---------
DEFERRED:
Federal......................... (54,670) (91,042) 169,781 (319,370)
State........................... (2,179) (3,473) 18,864 (29,663)
Foreign......................... (4,561) (537,725) 103,459 (194,703)
--------- ----------- -------- ---------
(61,410) (632,240) 292,104 (543,736)
--------- ----------- -------- ---------
Total benefit (provision)..... $(644,502) $(1,768,016) $271,855 $(748,117)
========= =========== ======== =========
</TABLE>
F-103
<PAGE> 303
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax assets (liabilities) at November 30, 1997 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Capitalized software.................................. $(563,439) $ (988,560)
Deferred revenue...................................... 165,153 297,459
Allowance for doubtful accounts....................... 99,800 79,354
Accrued liabilities................................... 141,219 336,375
Deferred compensation................................. 154,663 --
Net operating loss carryforward....................... 733,859 1,120,750
Goodwill.............................................. 47,844 196,598
Research and development credits...................... -- 100,000
Other................................................. 35,401 (56,426)
--------- ----------
$ 814,500 $1,085,550
Valuation allowance................................... -- (40,000)
--------- ----------
Total............................................... $ 814,500 $1,045,550
========= ==========
</TABLE>
During 1998, the Company recorded a valuation allowance of $40,000. The
valuation allowance at December 31, 1998 relates to the future utilization of
foreign net operating loss carryforwards that the Company has determined are not
realizable at this time.
As of December 31, 1998, the Company has research and development tax
credits of $100,000 which will be utilized to offset future taxes payable. In
addition, as of November 30, 1997 and December 31, 1998, the Company had net
operating loss carryforwards of approximately $1.9 million and $1.7 million,
respectively, related to its foreign operations. The research and development
tax credits and the net operating loss carryforwards begin to expire in 1999.
F-104
<PAGE> 304
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's tax provision for the years ended November 30, 1996 and 1997,
the one month ended December 31, 1997 and the year ended December 31, 1998
differs from the statutory rate for Federal income taxes as a result of the tax
effect of the following factors:
<TABLE>
<CAPTION>
YEAR ENDED MONTH
--------------------------- ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statutory rate................ (34)% (34)% 34% (34)%
State income taxes, net of
federal benefit.......... (4)% (4) 2 (5)
Permanent differences....... (1)% (2) (1) 4
Foreign rate differential... -- (3) (5) (10)
Research and development
credits.................. -- -- -- 5
Other......................... 1 % -- -- --
--- --- --- ---
Effective tax rate.......... (38)% (43)% 30% (40)%
=== === === ===
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
PENDING LITIGATION
On December 23, 1998, the Company filed an action against Automated
Financial System, Inc, ("AFS") in the United States District Court for the
Eastern District of Virginia seeking compensatory damages of approximately
$950,000 resulting from AFS's failure to pay fees to the Company pursuant to a
February, 1998 consulting agreement. AFS has filed a counterclaim against the
Company, asserting breach of contract, deceit and fraud, seeking an unspecified
amount of money damages for lost profits, loss of business and other economic
damages. The Company has filed a motion to dismiss the counterclaim, which is
pending. Discovery has commenced in the action. The Company cannot currently
predict the outcome of this litigation. If the Company is not successful in
pursuing these claims, there could be a material adverse effect on the Company's
business, results of operations and financial condition.
In addition, the Company is and may from time to time be involved in
ordinary routine litigation incidental to its business. Other than is described
above, the Company is not aware of any pending or threatened litigation that
could have a material adverse effect on the Company's business, results of
operation or financial condition.
OPERATING LEASES
During September 1996, the Company entered into a noncancelable operating
lease for the corporate headquarters that expires in December 2006. As an
incentive to lease this space, the landlord provided a rent abatement through
December 1996. Additionally, the lease contains an escalation clause that
provides for an increase in base rent beginning in
F-105
<PAGE> 305
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 1997 and a renewal clause whereby the Company has the option to renew
the lease for a period of five additional years.
During 1997, the Company entered into a sublease agreement for a portion of
its leased office space that continued through December 31, 1998. Rent expense
was reduced by approximately $56,000, $8,000 and $206,000 for the year ended
November 30, 1997, for the one month ended December 31, 1997 and for the year
ended December 31, 1998, respectively, due to this rental income.
The Company also leases certain office equipment and other office space
under noncancelable operating leases which expire at various dates through 2008.
Certain operating leases provide for adjustments relating to changes in real
estate taxes and other operating expenses. Rent expense under all leases is
recognized ratably over the lease terms. Rent expense under all operating leases
was approximately $706,902, $1,508,707, $188,500 and $2,123,435, respectively,
for the years ended November 30, 1996 and 1997, for the one month ended December
31, 1997 and for the year ended December 31, 1998.
CAPITAL LEASES
The company leases certain office equipment under arrangements that meet
the criteria requiring capitalization as prescribed by Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" ("SFAS No. 13"). Included
in the balance sheets are the following amounts at November 30, 1997 and
December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Office furniture and equipment................ $210,042 $210,042
Data processing equipment..................... 37,044 54,117
Less: accumulated amortization................ (69,372) (131,052)
-------- --------
$177,714 $133,107
======== ========
</TABLE>
Future minimum lease payments, under all leases, at December 31, are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1999...................................................... $1,329,295 $ 63,884
2000...................................................... 1,135,430 49,333
2001...................................................... 1,149,910 32,916
2002...................................................... 1,180,751 --
2003...................................................... 1,216,176 --
Thereafter................................................ 3,773,210 --
---------- --------
Total minimum payments.......................... $9,784,772 146,134
==========
Less: portion representing interest....................... 14,322
--------
Present value of capital lease obligations................ $131,811
========
</TABLE>
F-106
<PAGE> 306
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
NOVEMBER 30, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Accrued payroll, bonus and vacation................... $1,871,569 $2,314,890
Accrued commissions................................... 106,553 92,713
Accrued subcontractor's fees.......................... 22,857 461,309
Accrued value added tax............................... 371,339 624,107
Accrued acquisition costs............................. 160,872 --
Other accrued expenses................................ 184,428 608,596
---------- ----------
$2,717,618 $4,101,615
========== ==========
</TABLE>
12. RELATED PARTY TRANSACTIONS
In November 1996, Alcatel Alsthom Compagnie Generale d'Electricite S.A.
("Alcatel") invested $8.0 million in the Company in the form of Preferred Stock
at the equivalent of $16.00 per share of Common Stock. The costs related with
the issuance of the Preferred Stock was $75,096. Coincident with the Company's
initial public offering of stock, the Preferred Stock converted to Common Stock
at a one to one conversion rate. During 1997, Alcatel and the Company entered
into agreements whereby the Company provides products and services to Alcatel
for their internal use and for resale to their customers. For the year ended
November 30, 1997, for the one month ended December 31, 1997 and for the year
ended December 31, 1998, the Company earned $1,712,683, $145,802 and $556,081 of
revenue from Alcatel, respectively. Accounts receivable from Alcatel as of
November 30, 1997 and December 31, 1998 were $785,314 and $31,177, respectively.
13. EMPLOYEE BENEFIT PLANS
DEFERRED COMPENSATION PLAN
The Company maintains a deferred compensation profit-sharing plan under
section 401(k) of the Internal Revenue Code. Under the plan, domestic employees
may elect to defer up to 12% of their salary, subject to Internal Revenue
Service limits. The Company contributes a matching 50% of the first 4% of
employee contributions. In addition, the plan allows for the Company to make
discretionary contributions based on the participants salary. Total Company
contributions to the plan were $100,003, $129,917, $16,815 and $196,972 for the
years ended November 30, 1996 and 1997, for the one month ended December 31,
1997 and for the year ended December 31, 1998, respectively.
INCENTIVE BONUS PLAN
The Company has an incentive bonus plan whereby the Board of Directors
authorized the officers to grant awards to nominated employees in recognition of
exceptional
F-107
<PAGE> 307
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributions. Awards totaling $50,850, $101,375, $0 and $27,833, were given to
employees (excluding executives) for the years ended November 30, 1996 and 1997,
for the one month ended December 31, 1997 and for the year ended December 31,
1998, respectively.
14. SEGMENT INFORMATION
The Company provides software products and services worldwide. Revenue from
foreign operations and identifiable assets of foreign operations were less than
10% of consolidated revenue and assets in 1996. Summarized financial information
by geographic region for 1997 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
SALES
SALES TO BETWEEN INCOME IDENTIFIABLE
UNAFFILIATED GEOGRAPHIC FROM ASSETS AT CAPITAL DEPRECIATION/
CUSTOMERS AREAS OPERATIONS YEAR END EXPENDITURES AMORTIZATION
------------ ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Year ended November
30, 1997:
United States...... $14,630 $2,745 $2,266 $39,790 $ 461 $204
Europe............. 12,188 606 1,103 18,733 432 145
Americas/Pacific... 92 60 7 133 40 6
Eliminations....... -- (3,411) -- (15,685) -- --
Consolidated....... $26,910 $ -- $3,376 $42,971 $ 933 $355
Month ended December
31, 1997:
United States...... $ 937 $ 121 $ (549) $40,679 $ 119 $ 29
Europe............. 1,231 193 (293) 18,333 47 29
Americas/Pacific... (23) 11 (59) 134 0 1
Eliminations....... -- (325) -- (15,827) -- --
Consolidated....... $42,639 $ -- $ (901) $43,319 $ 166 $ 59
Year ended December
31, 1998:
United States...... $21,345 $1,519 $1,103 $45,649 $ 516 $280
Europe............. 21,235 1,045 (15) 24,467 3,041 267
Americas/Pacific... 59 95 32 52 10 12
Eliminations....... -- 2,659 -- (20,792) -- --
Consolidated....... $42,639 $ -- $1,120 $49,376 $3,567 $559
</TABLE>
Intercompany revenues between geographic areas are accounted for as transfer
fees which are intended to cover primarily software development and cost of
goods sold. The Company did not derive more than 10% of its total consolidated
revenue from export sales for the years 1996, 1997 and 1998.
F-108
<PAGE> 308
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. LIQUIDATION OF MEXICAN SUBSIDIARY
On December 1, 1998, the Company commenced liquidation of its Mexican
subsidiary formed in 1997. The Company pursued this course of action as the
result of the losses incurred since the inception of that operation coupled with
the instability of Mexico's economic environment. The total cost related to the
liquidation of this subsidiary was approximately $175,000 as of December 31,
1998. The Company has accrued the remaining costs associated with this
liquidation in the amount of $83,127 as of December 31, 1998. Management
believes these accrued costs represent all remaining obligations of the Company
with regard to the liquidation of this subsidiary.
F-109
<PAGE> 309
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 2,527 $ 1,831
Marketable securities................................. 4,346 8,221
Accounts receivable, net.............................. 9,415 15,752
Deferred income taxes................................. 4,511 1,873
Note receivable....................................... -- 500
Prepaid expenses...................................... 1,173 732
Other current assets.................................. 239 486
------- -------
Total current assets................................ 22,211 29,395
Property and equipment, net........................... 5,135 5,423
Software development costs, net....................... 3,164 2,601
Goodwill, net......................................... 8,667 10,298
Other assets.......................................... 1,427 1,367
------- -------
Total assets........................................ $40,604 $49,084
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................. $ 6,262 $ 6,791
Current portion of long-term debt..................... 282 451
Deferred income....................................... 352 1,437
------- -------
Total current liabilities........................... 6,896 8,679
------- -------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion................ 68 76
Deferred income taxes................................. 1,119 827
Other long-term liabilities........................... 474 421
------- -------
Total liabilities................................... 8,557 10,003
------- -------
SHAREHOLDERS' EQUITY:
Common stock.......................................... 52 52
Additional paid-in capital............................ 36,598 36,619
Deferred compensation................................. (321) (727)
Accumulated other comprehensive income (loss)......... (867) 154
Retained earnings..................................... (2,117) 3,794
Treasury stock........................................ (1,298) (811)
------- -------
Total shareholders' equity.......................... 32,047 39,081
------- -------
Total liabilities and shareholders' equity.......... $40,064 $49,084
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-110
<PAGE> 310
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Products.......................... $ 490 $ 1,214 $ 3,887 $ 5,106
Services.......................... 8,598 8,646 27,482 23,559
---------- ---------- ---------- ----------
Total Revenues............... 9,088 9,860 31,369 28,665
---------- ---------- ---------- ----------
COST OF REVENUES:
Products.......................... 500 349 1,583 1,102
Services.......................... 6,422 5,447 21,057 14,727
---------- ---------- ---------- ----------
Total cost of revenues....... 6,922 5,796 22,640 15,829
---------- ---------- ---------- ----------
Gross profit...................... 2,166 4,064 8,729 12,836
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling and marketing............. 2,950 2,348 8,029 7,157
Product development............... 586 354 1,497 1,021
General and administrative........ 1,690 1,289 7,337 4,098
---------- ---------- ---------- ----------
Total operating expenses..... 5,226 3,991 16,863 12,276
---------- ---------- ---------- ----------
Income (loss) from operations..... (3,060) 73 (8,134) 560
Interest expense................ 58 128 231 437
Other income.................... (7) 36 (8) 210
---------- ---------- ---------- ----------
Net income (loss) before income
taxes........................... (3,009) 237 (7,911) 1,207
Income tax provision (benefit).... (762) 207 (2,000) 557
---------- ---------- ---------- ----------
Net income (loss)................. $ (2,247) $ 30 $ (5,911) $ 650
========== ========== ========== ==========
Earnings (loss) per
share -- basic.................. $ (0.46) $ 0.01 $ (1.19) $ 0.13
========== ========== ========== ==========
Shares used in computing basic
earnings (loss) per share....... 4,901,909 5,120,860 4,951,050 5,021,608
========== ========== ========== ==========
Earnings (loss) per
share -- diluted................ $ (0.46) $ 0.01 $ (1.19) $ 0.11
========== ========== ========== ==========
Shares used in computing diluted
earnings (loss) per share....... 4,901,909 5,669,497 4,951,050 5,803,578
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-111
<PAGE> 311
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Net income (loss)................... $(2,247) $ 30 $(5,911) $650
Foreign currency translation
adjustment........................ 283 338 (474) 280
Unrealized loss on marketable
securities, net of taxes.......... (48) -- (547) --
------- ---- ------- ----
Comprehensive income (loss)......... $(2,012) $368 $(6,932) $930
======= ==== ======= ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-112
<PAGE> 312
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
------- -------
<S> <C> <C>
Cash flows used in operating activities..................... $ (264) $ (11)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable
securities................................................ 5,165 8,400
Purchase of marketable securities........................... (2000) (5,201)
Purchase of convertible note................................ -- (1,500)
Proceeds from note receivable............................... 500 --
Capital expenditures and leasehold improvements............. (670) (3,390)
Capitalization of software development costs................ (1,348) (1,220)
Acquisition costs, net of cash acquired..................... -- (58)
------- -------
Net cash provided (used in) by investing activities....... 1,647 (2,969)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving credit facility, net.............................. (69) 487
Increase in notes payable................................... 102 269
Payments on notes payable................................... (158) (157)
Capital lease obligations................................... (41) (29)
Income tax benefit related to stock options................. 9 634
Proceeds from sale of common stock under stock programs..... 122 861
Purchase of common stock.................................... (487) (501)
------- -------
Net cash provided by (used in) financing activities....... 522 1,564
------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (165) (77)
------- -------
Net increase (decrease) in cash and cash equivalents........ 696 (1,493)
Cash and cash equivalents, beginning of period.............. $ 1,831 $ 3,425
======= =======
Cash and cash equivalents, end of period.................... $ 2,527 $ 1,932
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-113
<PAGE> 313
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of Template Software, Inc. and subsidiaries ("Template")
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly Template's consolidated financial position as of September 30,
1999 and the results of operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in Template's 1998 Annual Report on Form
10-K. The results of operations for the nine months ended September 30, 1999 are
not necessarily indicative of the operating results to be expected for the full
year.
NOTE B -- MERGER WITH LEVEL 8 SYSTEMS, INC.
On October 20, 1999, Template announced that it had entered into an
Agreement and Plan of Merger dated as of October 19, 1999 (the "Merger
Agreement") with Level 8 Systems, Inc., a Delaware corporation ("Level 8") and
Level 8's wholly-owned subsidiary, TSAC, Inc., a Delaware corporation (the
"Subsidiary"). The Merger Agreement provides for Level 8's acquisition of
Template by Template's merger with and into the Subsidiary (the "Merger").
Under the Merger Agreement, each share of Template's common stock will be
exchanged for $4.00 in cash plus $3.90 worth of Level 8 common stock, subject to
adjustment. The actual number of shares of Level 8 common stock to be exchanged
for each Template share will be based on the average trading price of Level 8
stock for the 10 trading days prior to the third trading day before Level 8's
shareholder approval, but will not be less than 0.2838 Level 8 shares per
Template share (if Level 8's average trading price exceeds $13.74) or more than
0.3672 Level 8 shares per Template share (if Level 8's average trading price is
less than $10.62). The Merger is intended to qualify as a tax-free
reorganization, which means that Template shareholders would generally be
permitted to defer taxes on the Level 8 stock portion of the merger
consideration.
In connection with the Merger, on October 17, 1999 Template's Board of
Directors approved an amendment to the Rights Agreement by and between Template
and First Union National Bank dated as of July 3, 1998 (the "Rights Agreement").
The amendment provides that neither Level 8 nor the Subsidiary will be
considered an "Acquiring Person" (as that term is defined in the Rights
Agreement), and that the execution, delivery and consummation of the Merger
Agreement will not cause the occurrence of a "Distribution Date" or a "Stock
Acquisition Date" (as these terms are defined in the Rights Agreement). The
amendment thus ensures that the Merger will not trigger the distribution of
rights to Template's shareholders under the Rights Agreement. In addition, in
connection with the Merger Agreement, Template has agreed not to further amend
the Rights Agreement without the consent of Level 8.
The Merger is subject to certain conditions to closing, including
shareholder approval, regulatory approval, and necessary consents and filings.
F-114
<PAGE> 314
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9 (SOP 98-9), "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." The
provisions of this SOP that extend the deferral of the application of certain
passages of SOP 97-2 are effective December 15, 1998. All other provisions of
this SOP are effective for transactions entered into in fiscal years beginning
after March 15, 1999. Earlier adoption is permitted as of the beginning of
fiscal years or interim periods for which financial statements or information
have not been issued. Retroactive application of the provisions of this SOP are
prohibited. The adoption of SOP 98-9 is not expected to have a material impact
on Template's operating results, financial position or cash flows.
NOTE D -- INCOME TAXES
The Income Tax Benefit was $0.8 million for the quarter ended September 30,
1999 compared to an Income Tax Provision of $0.2 million for the quarter ended
September 30, 1998. The Income Tax Benefit for the nine months ended September
30, 1999 was $2.0 million compared to an Income Tax Provision of $0.6 million
for the nine month period ended September 30, 1998. Template's effective tax
rate was 25% for the quarter ended September 30, 1999 compared to 87% for the
quarter ended September 30, 1998. Template's effective tax rate was 25% for the
nine month period ended September 30, 1999 compared to 46% for the nine month
period ended September 30, 1998. These tax rates reflect the differences in
effective tax rates relative to Template having pre-tax losses in 1999 and
pre-tax profits in 1998 along with lower tax rates applicable to losses in
foreign jurisdictions, the effect of the permanent differences relative to
Template's profit/loss and the establishment in 1999 of valuation allowances for
deferred tax assets attributable to net operating losses in France in the amount
of approximately $482,000.
NOTE E -- EARNINGS PER SHARE
Earnings per share is presented in accordance with SFAS No. 128, Earnings
per Share. Basic earnings per share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average of
common shares outstanding after giving effect to all dilutive potential common
shares that were outstanding during the period.
F-115
<PAGE> 315
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares outstanding --
basic............................... 4,901,909 5,120,860 4,951,050 5,021,608
Potential common shares related to
stock options....................... -- 548,637 -- 781,970
--------- --------- --------- ---------
Weighted average shares outstanding --
diluted............................. 4,901,909 5,669,497 4,951,050 5,803,578
========= ========= ========= =========
</TABLE>
Template did not have any dilutive common shares during the three and nine
month periods ended September 30, 1999. Net income (loss) reported was not
adjusted for the computation of basic or diluted earnings per share. In 1999,
443,857 and 395,815 shares primarily related to the inclusion of the effect of
potential stock options exercises were not included in the computation of
diluted earnings per share for the three and nine month periods ended September
30, 1999, respectively, because to do so would have been antidilutive for those
periods.
F-116
<PAGE> 316
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LEVEL 8 SYSTEMS, INC.,
TSAC, INC.
AND
TEMPLATE SOFTWARE, INC.
DATED AS OF OCTOBER 19, 1999
<PAGE> 317
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER.............................................. A-1
Section 1.1 The Merger.............................................. A-1
Section 1.2 Closing................................................. A-1
Section 1.3 Effective Time.......................................... A-2
Section 1.4 Effects of the Merger................................... A-2
Section 1.5 Certificate of Incorporation; Bylaws.................... A-2
Section 1.6 Directors; Officers..................................... A-2
Section 1.7 Tax Consequences........................................ A-2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS................................ A-3
Section 2.1 Effect on Capital Stock................................. A-3
Section 2.2 Stock Options........................................... A-4
ARTICLE III EXCHANGE OF CERTIFICATES................................ A-4
Section 3.1 Exchange of Certificates................................ A-4
ARTICLE IV REPRESENTATIONS AND WARRANTIES.......................... A-7
Section 4.1 Representations and Warranties of Company............... A-7
Section 4.2 Representations and Warranties of Parent and Merger
Sub..................................................... A-26
ARTICLE V CONDUCT OF BUSINESS OF COMPANY.......................... A-32
Section 5.1 Conduct of Business of Company.......................... A-32
ARTICLE VI ADDITIONAL COVENANTS.................................... A-34
Section 6.1 Preparation of the Joint Proxy Statement/Prospectus and
Form S-4................................................ A-34
Section 6.2 Accountants' Letters.................................... A-35
Section 6.3 Stockholders Meeting; Board Recommendation.............. A-35
Section 6.4 Access to Information, Confidentiality.................. A-37
Section 6.5 Reasonable Best Efforts................................. A-38
Section 6.6 Public Announcements.................................... A-38
Section 6.7 No Solicitation; Acquisition Proposals.................. A-38
Section 6.8 Consents, Approvals and Filings......................... A-40
Section 6.9 Company Options......................................... A-40
Section 6.10 Employee Benefit Matters................................ A-41
Section 6.11 Affiliates and Certain Stockholders..................... A-42
Section 6.12 Nasdaq Listing.......................................... A-42
Section 6.13 Rights Agreement........................................ A-42
Section 6.14 Indemnification and Insurance........................... A-42
Section 6.15 Tax Treatment........................................... A-43
Section 6.16 Subsidiaries' Directors and Officers.................... A-43
Section 6.17 Stockholders Agreement.................................. A-43
Section 6.18 Financing............................................... A-43
Section 6.19 Employment Agreements and Noncompetition Agreements..... A-43
Section 6.20 Tax Matters............................................. A-43
ARTICLE VII CONDITIONS PRECEDENT.................................... A-44
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger.................................................. A-44
Section 7.2 Conditions to Obligations of Parent and Merger Sub...... A-44
Section 7.3 Conditions to Obligation of Company..................... A-46
</TABLE>
i
<PAGE> 318
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER....................... A-47
Section 8.1 Termination............................................. A-47
Section 8.2 Effect of Termination................................... A-49
Section 8.3 Amendment............................................... A-49
Section 8.4 Extension; Waiver....................................... A-50
Section 8.5 Procedure for Termination, Amendment, Extension or
Waiver.................................................. A-50
ARTICLE IX GENERAL PROVISIONS...................................... A-50
Section 9.1 Nonsurvival of Representations and Warranties........... A-50
Section 9.2 Fees and Expenses....................................... A-50
Section 9.3 Definitions............................................. A-50
Section 9.4 Notices................................................. A-52
Section 9.5 Interpretation.......................................... A-53
Section 9.6 Entire Agreement; Third-Party Beneficiaries............. A-53
Section 9.7 Governing Law........................................... A-53
Section 9.8 Assignment.............................................. A-53
Section 9.9 Enforcement............................................. A-53
Section 9.10 Severability............................................ A-54
Section 9.11 Counterparts............................................ A-54
EXHIBIT A Plan of Merger
EXHIBIT B Affiliate Letter
</TABLE>
ii
<PAGE> 319
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of October 19, 1999 (this
"Agreement"), is made and entered into by and among Level 8 Systems, Inc., a
Delaware corporation ("Parent"), TSAC, Inc., a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and Template Software, Inc., a
Virginia corporation ("Company"). Parent, Merger Sub and Company are sometimes
hereinafter collectively referred to as the "Parties."
RECITALS:
WHEREAS, the respective Boards of Directors of the Parties have determined
that it would be advisable and in the best interests of their respective
corporations and their respective stockholders for Parent to acquire Company, by
means of a merger of Company with and into Merger Sub (the "Merger"), on the
terms and subject to the conditions set forth in this Agreement;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition to each of the Parties' willingness to enter into this Agreement,
Parent and Company have entered into a Stockholders Agreement, dated as of the
date hereof (the "Stockholders Agreement"), with each of the stockholders named
on the signature pages thereof, pursuant to which each such stockholder has
agreed, among other things, to vote all shares of capital stock of Company and
Parent owned by such stockholder in favor of the adoption of this Agreement and
the transactions contemplated by this Agreement;
WHEREAS, the Parties desire to make certain representations, warranties and
covenants in connection with the Merger and to prescribe various conditions to
the consummation of the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained in this Agreement, the Parties hereto hereby agree as
follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. On the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Delaware General Corporation
Law (the "DGCL") and the Virginia Stock Corporation Act (the "VSCA"), the Merger
shall be effected and Company shall be merged with and into Merger Sub at the
Effective Time (as defined in Section 1.3). At the Effective Time, the separate
existence of Company shall cease and Merger Sub shall continue as the surviving
corporation (sometimes hereinafter referred to as the "Surviving Corporation").
Section 1.2 Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Article VIII, and subject to the satisfaction or waiver of all of the conditions
set forth in Article VII, the closing of the Merger (the "Closing") will take
place at 10:00 a.m. on the second business
A-1
<PAGE> 320
day (the "Closing Date") following satisfaction or waiver of all of the
conditions set forth in Article VII, other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the fulfillment or
waiver of those conditions, at the offices of Powell, Goldstein, Frazer & Murphy
LLP, 191 Peachtree Street, N.E., Suite 1600, Atlanta, Georgia 30303, unless
another date, time or place is agreed to in writing by the Parties hereto.
Section 1.3 Effective Time. The Parties hereto shall file with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
and the State Corporation Commission of Virginia (the "Virginia Commission") on
the Closing Date (or on such other date as Parent and Company may agree) a
certificate and/or articles of merger and any other appropriate documents,
including a plan of merger, in the form attached hereto as Exhibit A (the "Plan
of Merger"), executed in accordance with the relevant provisions of the DGCL and
VSCA, and make all other filings or recordings required under the DGCL and VSCA
in connection with the Merger. The Merger shall become effective upon the filing
of the certificate and/or articles of merger with the Delaware Secretary of
State and the Virginia Commission, or at such later time as is specified in the
certificate and/or articles of merger (the "Effective Time").
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL, the VSCA and the Plan of Merger.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all property of Company and Merger Sub shall vest in the
Surviving Corporation, and all liabilities of Company and Merger Sub shall
become the liabilities of the Surviving Corporation.
Section 1.5 Certificate of Incorporation; Bylaws. At the Effective Time,
(a) the certificate of incorporation of Merger Sub as in effect at the Effective
Time shall, from and after the Effective Time, be the certificate of
incorporation of the Surviving Corporation until thereafter changed or amended
in accordance with the provisions thereof and applicable law, and (b) the bylaws
of Merger Sub as in effect at the Effective Time shall, from and after the
Effective Time, be the bylaws of the Surviving Corporation until thereafter
changed or amended in accordance with the provisions thereof and applicable law.
Section 1.6 Directors; Officers. From and after the Effective Time, the
directors and officers of Merger Sub shall be the directors and officers of the
Surviving Corporation, until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
Section 1.7 Tax Consequences. For federal income tax purposes, the Merger
is intended to constitute a reorganization within the meaning of Section 368 of
the Code. The parties to this Agreement hereby adopt this Agreement as a "plan
of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations.
A-2
<PAGE> 321
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
Section 2.1 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of shares of
Company's common stock, par value $0.01 per share ("Shares"), or any shares of
capital stock of Merger Sub:
(a) Common Stock of Merger Sub. Each share of common stock, par value
$0.01 per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into and become one validly issued,
fully paid and nonassessable share of common stock, par value $0.01 per
share, of the Surviving Corporation.
(b) Cancellation of Treasury Shares and Parent-Owned Shares. Each
Share issued and outstanding immediately prior to the Effective Time that
is owned by Company or any Subsidiary (as defined in Section 9.3(k)) of
Company or by Parent, Merger Sub or any other Subsidiary of Parent (other
than shares in trust accounts, managed accounts, custodial accounts and the
like that are beneficially owned by third parties) shall automatically be
canceled and retired and shall cease to exist, and no cash or other
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Shares. Each Share issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares (as
defined in Section 3.1(j) and Shares to be canceled and retired in
accordance with Section 2.1(b)) shall be converted into the right to
receive (i) U.S. $4.00 in cash (the "Cash Consideration"), and (ii) that
number of shares of common stock, par value $0.001 per share ("Common
Stock"), of Parent equal to the Exchange Ratio (the "Stock Consideration,"
and together with the Cash Consideration, the "Merger Consideration"). The
"Exchange Ratio" shall be a fraction, the numerator of which is U.S. $3.90
and the denominator of which is the Average Trading Price of Parent's
Common Stock. The term "Average Trading Price" shall mean the average of
the closing sales prices of a share of Parent Common Stock on The Nasdaq
Stock Market for the ten consecutive trading days immediately preceding the
third trading day immediately preceding the date on which a meeting of
Parent's stockholders called for the purpose of voting on the Merger
("Parent Stockholders Meeting") shall have been held and a final vote of
Parent's stockholders adopting and approving this Agreement and the
transactions contemplated hereby shall have been taken. Notwithstanding
anything to the contrary contained herein, (A) in the event the Average
Trading Price is less than $10.62 (the "Base Price"), then the Exchange
Ratio shall be 0.3672, and (B) in the event the Average Trading Price is
more than $13.74, then the Exchange Ratio shall be 0.2838. In the event
there is no such closing sales price on a day within the ten day periods
referenced in this Section 2.1 (c), the closing sales price on the day
nearest preceding such day shall be utilized.
(d) Anti-Dilution. In the event of any stock dividend, stock split,
reclassification, recapitalization, combination or exchange of shares with
respect to, or rights issued in respect of, Parent Common Stock on or after
the date hereof and prior to the Effective Time, the Exchange Ratio shall
be adjusted accordingly.
A-3
<PAGE> 322
Section 2.2 Stock Options. At and as of the Effective Time, all Company
Options (as defined in Section 4.1(d)), which have not otherwise been exercised
or cancelled as provided in Section 6.9, shall be assumed by Parent in
accordance with Section 6.9.
ARTICLE III
EXCHANGE OF CERTIFICATES
Section 3.1 Exchange of Certificates.
(a) Exchange Agent. Prior to or concurrently with the Effective Time,
Parent shall enter into an agreement with such bank or trust company as may be
designated by Parent (the "Exchange Agent"), which shall provide that Parent
shall deposit with the Exchange Agent as of the Effective Time, for the benefit
of the holders of Shares, for exchange in accordance with this Article III,
through the Exchange Agent, the aggregate Cash Consideration, sufficient cash
payable in lieu of any fractional shares of Common Stock and certificates
representing the shares of Common Stock (such Cash Consideration and shares of
Common Stock, together with any dividends or distributions with respect thereto
with a record date after the Effective Time, and any cash payable in lieu of any
fractional shares of Common Stock, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding
Shares.
(b) Letters of Transmittal; Surrender of Certificates. As soon as
reasonably practicable after the Effective Time, Parent shall instruct the
Exchange Agent to mail to each holder of record (other than Company or any of
its Subsidiaries or Parent, Merger Sub or any other Subsidiary of Parent)
holding a certificate or certificates that, immediately prior to the Effective
Time, evidenced outstanding Shares (the "Certificates"), (i) a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Parent may reasonably specify), and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent together with such letter of transmittal, duly executed, and such other
customary documents as may be required pursuant to such instructions, the holder
of such Certificate shall be entitled to receive in exchange therefor the
applicable amount of Cash Consideration and a certificate representing the
number of whole shares of Common Stock (and cash in lieu of fractional shares of
Common Stock as contemplated by this Section 3.1) that the aggregate number of
Shares previously represented by such Certificate shall have been converted into
the right to receive pursuant to Section 2.1(c), and the Certificate so
surrendered shall forthwith be canceled. No interest shall be paid or accrued on
any cash payable upon the surrender of any Certificate. If payment is to be made
to a person other than the person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the surrendered Certificate or established to the satisfaction of
Parent and the Surviving Corporation that such taxes have been paid or are not
applicable.
(c) Distributions with Respect to Unexchanged Shares. No Cash
Consideration and no dividends or other distributions with respect to Common
Stock with a record date after
A-4
<PAGE> 323
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Common Stock issuable upon the surrender of such
Certificate pursuant to Section 3.1(b), and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 3.1(e),
and all such Cash Consideration, dividends, other distributions and cash in lieu
of fractional shares of Common Stock shall be paid by Parent to the Exchange
Agent and shall be included in the Exchange Fund, in each case until the
surrender of such Certificate pursuant to Section 3.1(b). Subject to the effect
of applicable escheat or similar laws, following the surrender of any such
Certificate pursuant to Section 3.1(b) there shall be paid to the holder of the
certificate representing the whole shares of Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the applicable
amount of Cash Consideration and the amount of dividends or other distributions
with respect to such whole shares of Common Stock with a record date after the
Effective Time theretofore paid with respect to such whole shares of Common
Stock, and the amount of any cash payable in lieu of a fractional share of
Common Stock to which such holder is entitled pursuant to Section 3.1(e), and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with respect to such whole shares of Common Stock with a record
date after the Effective Time but prior to such surrender and with a payment
date subsequent to such surrender payable with respect to such whole shares of
Common Stock.
(d) Cancellation and Retirement of Shares, No Further Rights. As of the
Effective Time, all Shares (other than Dissenting Shares and Shares to be
canceled in accordance with Section 2.1(b)) issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a Certificate theretofore representing any such Shares shall cease to have
any rights with respect thereto (including without limitation the right to
vote), except the right to receive the Merger Consideration, without interest,
upon surrender of such Certificate in accordance with Section 3.1(b), and until
so surrendered, each such Certificate shall represent for all purposes only the
right to receive the Merger Consideration, without interest. The Merger
Consideration paid upon the surrender for exchange of Certificates in accordance
with the terms of this Article III shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Shares theretofore represented by
such Certificates.
(e) No Fractional Shares.
(i) No certificates or scrip representing fractional shares of Common
Stock shall be issued upon the surrender for exchange of Certificates which
have been converted pursuant to Section 2.1(c), and such fractional share
interests shall not entitle the owner thereof to vote or to any rights of a
stockholder of Parent.
(ii) In lieu of any such fractional shares, each holder of Shares who
would otherwise have been entitled to a fraction of a share of Common Stock
upon surrender of Certificates for exchange pursuant to this Section 3.1
(after taking into account all Certificates delivered by such holders) will
be paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (A) the per share closing sales price of Parent's
Common Stock (as reported on The Nasdaq Stock Market) on the trading day
immediately prior to the date on which the Effective Time occurs, by (B)
the fractional interest to which such holder otherwise would be entitled.
Such amount in cash shall be deemed to be substituted for any such
fractional share and constitute a portion of the Merger Consideration with
respect to the related Shares. The fractional share interest of each holder
of Shares
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<PAGE> 324
will be aggregated, and no holder of Shares will receive cash in an amount
equal to or greater than the value of one full share of Parent's Common
Stock.
(f) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Parent, in (i) direct obligations
of the United States of America with maturities of 90 days or less, (ii)
obligations for which the full faith and credit of the United States of America
is pledged to provide for the payment of principal and interest, or (iii)
interest bearing accounts of commercial banks with capital exceeding $500
million. Any net earnings with respect to the Exchange Fund shall be the
property of and paid over to Parent 180 days after the Effective Time, and
Parent shall include any income earned by the Exchange Fund on its applicable
Tax Returns (as defined in Section 4.1(o)(i)) and pay any Taxes (as defined in
the last paragraph of Section 4.1(o)) with respect thereto.
(g) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates for 180 days after the
Effective Time shall be delivered to Parent, upon demand, and any holders of
Certificates that have not theretofore complied with this Article III shall
thereafter look only to Parent, and only as general creditors thereof, for
payment of their claim for any Merger Consideration, any cash in lieu of
fractional shares of Common Stock and any dividends or distributions with
respect to Common Stock provided for in Section 3.1(c).
(h) No Liability. None of Parent, Merger Sub, the Surviving Corporation or
the Exchange Agent shall be liable to any person in respect of any payments or
distributions payable from the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to five years after the
Effective Time (or immediately prior to such earlier date on which any Merger
Consideration in respect of such Certificate would otherwise escheat to or
become the property of any Governmental Entity (as defined in Section 4.1(c)),
any amounts payable in respect of such Certificate shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
(i) Withholding Rights. Parent shall be entitled to deduct and withhold,
or cause to be deducted or withheld, from the consideration otherwise payable
pursuant to this Agreement to any holder of Shares, Company Options or
Certificates such amounts as are required to be deducted and withheld with
respect to the making of such payment under the Code, or any provision of
applicable state, local or foreign tax law. To the extent that amounts are so
deducted and withheld, such deducted and withheld amounts shall be treated for
all purposes of this Agreement as having been paid to such holders in respect of
which such deduction and withholding was made.
(j) Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, Shares that are issued and outstanding immediately prior to the
Effective Time and that are held by stockholders who have complied with the
procedures for appraisal set forth in the VSCA (the "Dissenting Shares") shall
not be converted into or be exchangeable for the right to receive the Merger
Consideration, unless and until such holder shall have failed to perfect or
shall have effectively withdrawn or lost his, her or its right to appraisal and
payment under the VSCA. If such holder shall have so failed to perfect or shall
have effectively withdrawn or lost such right, his, her or its Shares shall
thereupon be deemed to have been converted into and to have become exchangeable
for, as of the Effective Time, the right to receive the Merger Consideration,
without any interest thereon. Company shall
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<PAGE> 325
not settle, compromise or pay any amount with respect to any claim for appraisal
in connection with the Merger without the prior written consent of Parent.
Holders of Dissenting Shares shall be entitled only to such rights as may be
granted to such holder under the VSCA, and from and after the Effective Time, a
holder of Dissenting Shares shall not be entitled to exercise any of the voting
rights or other rights of a stockholder of Surviving Corporation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Company. Company represents
and warrants to Parent and Merger Sub, as of the date hereof and as of the
Closing Date (unless specifically made as of another date), as follows:
(a) Organization and Standing. Each of Company and each Subsidiary of
Company is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated and
has the requisite corporate power and authority to carry on its business as
now being conducted. Each of Company and each Subsidiary of Company is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect (as defined in Section 9.3(h)) on
Company. Company has furnished to Parent true, complete and correct copies
of the articles of incorporation and bylaws or comparable governing
documents of Company and each Subsidiary of Company, in each case as
amended to the date of this Agreement. A true, correct and complete list of
all Subsidiaries of Company, together with the jurisdiction of
incorporation of each such Subsidiary and the percentage of each such
Subsidiary's capital stock owned by Company or another Subsidiary, is set
forth in Section 4.1(a) of the Disclosure Schedule (as defined in Section
9.3(c)).
(b) Authority; Noncontravention; and Corporate Power. Company has the
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by Company and the consummation by Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Company, subject, in the case of the
Merger, to the adoption of this Agreement by its stockholders as
contemplated by Section 6.3. This Agreement has been duly executed and
delivered by Company and, assuming that this Agreement constitutes a valid
and binding obligation of Parent and Merger Sub, constitutes a valid and
binding obligation of Company, enforceable against Company in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and to general principles of
equity. None of Company or its Subsidiaries is in violation of its articles
of incorporation (or the comparable governing documents) or bylaws. Except
as specified in Section 4.1(b) of the Disclosure Schedule, the execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof
will not, (i) conflict with any of the provisions of the articles of
incorporation or bylaws of
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<PAGE> 326
Company or the comparable governing documents of any Subsidiary of Company,
in each case as amended to the date of this Agreement, (ii) subject to the
governmental filings and other matters referred to in the next following
sentence, conflict with, result in a breach of or default (with or without
notice or lapse of time, or both) under, or give rise to a material
obligation, a right of termination, cancellation or acceleration of any
obligation or a loss of a material benefit under, or require the consent of
any person under, any indenture or other agreement, permit, concession,
franchise, license or similar instrument or undertaking to which Company or
any of its Subsidiaries is a party or by which Company or any of its
Subsidiaries or any of their respective assets is bound or affected, or
(iii) subject to the governmental filings and other matters referred to in
Section 4.1(c), contravene any domestic or foreign law, rule or regulation
or any order, writ, judgment, injunction, decree, determination or award
currently in effect, which, in the case of clauses (ii) and (iii) above
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Company.
(c) Consents and Approvals. No consent, approval or authorization of,
or declaration or filing with, or notice to, any domestic or foreign court,
governmental agency or regulatory authority (a "Governmental Entity") or
any other third party which has not been received or made (or has been
received or made but is not otherwise in full force and effect) is required
by or with respect to Company or any of its Subsidiaries in connection with
the execution and delivery of this Agreement by Company or the consummation
by Company of the transactions contemplated hereby, except for (i) the
filing with the Securities and Exchange Commission (the "SEC") of (A) the
Joint Proxy Statement/Prospectus (as hereinafter defined), and (B) such
reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with this Agreement and
the transactions contemplated hereby, (ii) the approval of the Merger by
Company's stockholders, (iii) the filing of the certificate and/or articles
of merger with the Virginia Commission and the Delaware Secretary of State
and appropriate documents with the relevant authorities of other states in
which Company is qualified to do business, (iv) such other consents,
approvals, authorizations, filings or notices as are specified in Section
4.1(c) of the Disclosure Schedule, and (v) any other consents, approvals,
authorizations, filings or notices the failure to make or obtain which
could not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on Company.
(d) Capital Structure. The authorized capital stock of Company
consists solely of (i) 17,000,000 Shares and 3,000,000 shares of preferred
stock, par value $0.01 per share, of Company ("Preferred Shares"). At the
close of business on October 15, 1999, (i) 4,922,830 Shares were issued and
outstanding, (ii) no Preferred Shares were issued and outstanding, (iii)
3,306,702 Shares were subject to issuance pursuant to outstanding options
to purchase Shares pursuant to Company's 1986 Incentive Stock Option Plan,
1992 Incentive Stock Option Plan, 1992 Incentive Stock Option Plan -- Class
B, 1992 Non-Statutory Stock Option Plan, and the 1996 Equity Incentive Plan
(collectively, the "Option Plans"). There are no outstanding options under
the Company's 1984 Incentive Stock Option Plan. Stock options granted by
Company pursuant to the Option Plans that are currently in effect or that
have been in effect and otherwise are referred to in this Agreement are
referred to herein as "Company Options." There are no Company Options other
than Company Options outstanding under the Option Plans. Section 4.1(d) of
the Disclosure Schedule sets forth the
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following information with respect to each Company Option outstanding as of
the date of this Agreement: (i) the particular plan (if any) pursuant to
which such Company Option was granted; (ii) the name of the optionee; (iii)
the number of Shares subject to such Company Option; (iv) the exercise
price of such Company Option; (v) the date on which such Company Option was
granted; and (vi) the extent to which such Company Option is vested and
exercisable as of October 15, 1999. All Company Options vest as set forth
in Section 4.1(d) of the Disclosure Schedule. The Company has delivered to
Parent accurate and complete copies of all Option Plans pursuant to which
Company has ever granted stock options, and the forms of all stock option
agreements evidencing such options. Except as set forth in Section 4.1(d)
of the Disclosure Schedule and as otherwise contemplated in this Agreement,
there are no commitments or agreements of any nature to which Company is
bound obligating Company to accelerate the vesting of any Company Option.
Except as set forth in this Section 4.1(d), at the close of business on
October 19, 1999, no shares of capital stock or other equity securities of
Company were issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of Company are duly authorized, validly issued,
fully paid and nonassessable and are not subject to preemptive rights.
Except as specified above or in Section 4.1(d) of the Disclosure Schedule
or as contemplated by the Stockholders Agreement, neither Company nor any
Subsidiary of Company has or, at or after the Effective Time will have, any
outstanding option, warrant, call, subscription or other right, agreement
or commitment which (A) obligates Company or any Subsidiary of Company to
issue, sell or transfer, or repurchase, redeem or otherwise acquire, any
shares of the capital stock of Company or any Subsidiary of Company, (B)
restricts the transfer of any shares of capital stock of Company or any of
its Subsidiaries, or (C) relates to the voting of any shares of capital
stock of Company or any of its Subsidiaries. No bonds, debentures, notes or
other indebtedness of Company or any Subsidiary of Company having the right
to vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which the stockholders of Company or any
Subsidiary of Company may vote are issued or outstanding. Except as
specified in Section 4.1(d) of the Disclosure Schedule, all the outstanding
shares of capital stock of each Subsidiary of Company have been duly
authorized and are validly issued, fully paid and nonassessable and are
owned by Company, by one or more Subsidiaries of Company or by Company and
one or more of such Subsidiaries, free and clear of all Liens (as defined
in Section 9.3(g)). Except as set forth in Section 4.1(d) of the Disclosure
Schedule, neither Company nor any of its Subsidiaries has any contract,
commitment or other obligation to repurchase, redeem or otherwise acquire
any Shares or any capital stock of any of Company's Subsidiaries, or make
any investment (whether by loan, capital contribution or otherwise) in any
person. Except as set forth in Section 4.1(d) of the Disclosure Schedule,
neither Company nor any of its Subsidiaries owns, or has any contract,
commitment or other obligation to acquire, any other securities of any
person or any direct or indirect equity or ownership interest in any other
business.
(e) SEC Documents. Company has filed all required reports, schedules,
forms, statements and other documents with the SEC since January 28, 1997
(such reports, schedules, forms, statements and other documents are
hereinafter referred to as the "SEC Documents"). As of their respective
dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC
Documents,
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and none of the SEC Documents as of such dates contained any untrue
statements of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The consolidated financial statements of Company included in the SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited
consolidated quarterly statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may
otherwise be indicated in the notes thereto) and fairly present the
consolidated financial position of Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited quarterly statements, to normal year-end audit adjustments).
(f) Absence of Certain Changes or Events; No Undisclosed Material
Liabilities.
(i) Except as disclosed in the SEC Documents filed by Company and
publicly available prior to the date of this Agreement (the "Filed SEC
Documents") or specified in Section 4.1(f) of the Disclosure Schedule,
since the date of the most recent audited financial statements included
in the Filed SEC Documents, Company and its Subsidiaries have conducted
their businesses only in the ordinary course, and there has not been:
(A) any change, event or occurrence which has had or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Company; (B) any declaration, setting aside or payment of any
dividend or other distribution in respect of shares of Company's capital
stock, or any redemption or other acquisition by Company of any shares
of its capital stock; (C) any increase in the rate or terms of
compensation payable or to become payable by Company or its Subsidiaries
to their directors, officers or key employees, except increases
occurring in the ordinary course of business consistent with past
practices; (D) any entry into, or increase in the rate or terms of, any
bonus, insurance, severance, pension or other employee or retiree
benefit plan, payment or arrangement made to, for or with any such
directors, officers or key employees, except increases occurring in the
ordinary course of business consistent with past practices or as
required by applicable law; (E) any entry into any agreement, commitment
or transaction by Company or any of its Subsidiaries which is material
to Company and its Subsidiaries taken as a whole, except for agreements,
commitments or transactions entered into in the ordinary course of
business consistent with past practice; (F) any change by Company in
accounting methods, principles or practices, except as required or
permitted by generally accepted accounting principles; (G) any write-off
or write-down of, or any determination to write-off or write-down, any
asset of Company or any of its Subsidiaries or any portion thereof which
write-off, write-down or determination exceeds $50,000 individually or
$100,000 in the aggregate; (H) any announcement or implementation of any
reduction in force, lay-off, early retirement program, severance program
or other program or effort concerning the termination of employment of
employees of Company or its Subsidiaries; or (I) any announcement of or
entry into any agreement, commitment or transaction by Company or any of
its Subsidiaries to do any of the things described in the preceding
clauses (A) through (H) otherwise than as expressly provided for herein.
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(ii) Except as disclosed in the Filed SEC Documents or specified in
Section 4.1(f) of the Disclosure Schedule and liabilities incurred in
the ordinary course of business consistent with past practice since the
date of the most recent financial statements included in the Filed SEC
Documents, there are no liabilities of Company or its Subsidiaries of
any kind whatsoever, whether accrued, contingent, absolute, due, to
become due, determined, determinable or otherwise required by generally
accepted accounting principles ("GAAP") to be reflected on a
consolidated balance sheet of Company and its consolidated Subsidiaries
or in the notes, exhibits or schedules thereto, having, or which could
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Company.
(g) Real Property; Other Assets.
(i) Section 4.1(g)(i) of the Disclosure Schedule sets forth all of
the real property owned in fee by Company and its Subsidiaries (the
"Owned Real Property").
(ii) Company or one of its Subsidiaries has good and marketable fee
simple title to each parcel of Owned Real Property and good and
marketable title to each other asset reflected in the latest balance
sheet of Company included in the Filed SEC Documents (other than any
such other asset disposed of or consumed in the ordinary course of
business or as specified on Section 4.1(g)(ii) of the Disclosure
Schedule) free and clear of all Liens except (A) those reflected or
reserved against in the latest balance sheet of Company included in the
Filed SEC Documents, (B) taxes and general and special assessments not
in default and payable without penalty and interest, (C) those Liens set
forth on Section 4.1(g)(ii) of the Disclosure Schedule, and (D) such
other Liens and other imperfections of title, if any, as do not detract
from the value or materially interfere with the present use of the
property affected thereby.
(iii) Section 4.1(g)(iii) of the Disclosure Schedule sets forth a
true and complete list, and Company has heretofore made available to
Parent true, correct and complete copies of all leases, subleases and
other agreements (the "Real Property Leases") under which Company or any
of its Subsidiaries uses or occupies or has the right to use or occupy,
now or in the future, real property or facility (the "Leased Real
Property"), including all modifications, amendments and supplements
thereto. Except as set forth in Section 4.1(h)(iii) of the Disclosure
Schedule or in each case where the failure could not reasonably be
expected to have, individually, a Material Adverse Effect on Company:
(A) Company or one of its Subsidiaries has a valid and subsisting
leasehold interest in each parcel of Leased Real Property free and clear
of all Liens and each Real Property Lease is in full force and effect;
(B) all rent and other sums and charges payable by Company or its
Subsidiaries as tenants thereunder are current in all respects; (C) no
termination event or condition or uncured default on the part of Company
or any such Subsidiary or, to Company's knowledge, the landlord, exists
under any Real Property Lease; (D) to Company's knowledge, Company or
one of its Subsidiaries is the sole undisputed lessee of each Leased
Real Property, is in actual possession thereof and is entitled to quiet
enjoyment thereof in accordance with the terms of the applicable Real
Property Lease; and (E) no consent or approval from the lessor under the
Real Property Leases is
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required for the consummation by Company of the transactions
contemplated hereby.
(iv) To Company's knowledge, each parcel of the Owned Real Property
has (A) full and unencumbered legal access to a publicly dedicated
street, (B) adequate water supply, storm and sanitary sewage or septic
facilities, telephone, gas, and electrical facilities, and all other
required public utilities, and (C) no easements are required or
necessary for the full access and use of each parcel of Owned Real
Property.
(v) To Company's knowledge, Company's, or any of its Subsidiaries',
current use of the Owned Real Property and the Leased Real Property and
the improvements and buildings located thereon and the presently
anticipated future use of the Owned Real Property and the Leased Real
Property in connection with the operation of Company's, or any of its
Subsidiaries', business is in compliance in all material respects and
substantially conforms with all applicable zoning and building
regulation requirements.
(h) Software.
(i) Section 4.1(h)(i) of the Disclosure Schedule sets forth under
the caption "Owned Software" a true, correct and complete list of all
material computer programs (source code or object code) which were
developed for or on behalf of, or have been purchased by, Company or any
Subsidiary of Company and which are currently used internally by Company
or which have been distributed by Company or any of its Subsidiaries and
all material computer programs under development by Company or its
Subsidiaries but not currently distributed (collectively, the "Owned
Software"), and Section 4.1(h)(i) of the Disclosure Schedule sets forth
under the caption "Licensed Software" a true, correct and complete list
of all material computer programs (source code or object code) licensed
to Company or any Subsidiary of Company by another person which are
currently used internally by Company or which have been distributed by
Company or any of its Subsidiaries, whether as integrated or bundled
with any of Company's or its Subsidiaries' computer programs or as a
separate stand-alone product (specifically excluding any off-the-shelf
computer program that is validly and properly licensed under a
shrink-wrap license) (collectively, the "Licensed Software" and,
together with the Owned Software, the "Software").
(ii) Except as specified in Section 4.1(h)(ii) of the Disclosure
Schedule, Company, directly or through its Subsidiaries, has good,
marketable and exclusive title to, and the valid and enforceable power
and unqualified right to sell, license, lease, transfer, use, create
derivative works of, or otherwise exploit, all versions and releases of
the Owned Software and all copyrights thereof, free and clear of all
Liens. Company, directly or through its Subsidiaries, is in actual
possession of the source code and object code for each computer program
included in the Owned Software, and Company, directly or through its
Subsidiaries, is in possession of all other documentation, including
without limitation all related engineering specifications, program flow
charts, installation and user manuals and know-how necessary for the
effective use of the Software as currently used in Company's business or
as offered or represented to Company's customers or potential customers.
Company, directly or through its Subsidiaries, is in actual
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possession of the object code and user manuals for each computer program
included in the Licensed Software. The Software constitutes all of the
computer programs necessary to conduct Company's business as now
conducted, and includes all of the computer programs licensed or offered
for license to Company's customers and potential customers or otherwise
used in the development, marketing, licensing, sale or support of the
products and the services presently offered by Company. Except as
specified in Section 4.1(h)(ii) of the Disclosure Schedule, no person
other than Company and its Subsidiaries has any right or interest of any
kind or nature in or with respect to the Owned Software or any portion
thereof or any rights to sell, license, lease, transfer, use or
otherwise exploit the Owned Software or any portion thereof.
(iii) Section 4.1(h)(iii) of the Disclosure Schedule sets forth a
true, correct and complete list, by computer program, of (A) all persons
other than Company and its Subsidiaries that have been provided with the
source code or have a right to be provided with the source code
(including any such right that may arise after the occurrence of any
specified event or circumstance, either with or without the giving of
notice or passage of time or both) for any of the Owned Software, and
(B) all source code escrow agreements relating to any of the Owned
Software (setting forth as to any such escrow agreement the source code
subject thereto and the names of the escrow agent and all other persons
who are actual or potential beneficiaries of such escrow agreement), and
identifies with specificity all agreements and arrangements pursuant to
which the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby would entitle any
third party or parties to receive possession of the source code for any
of the Owned Software or any related technical documentation. Except as
specified in Section 4.1(h)(iii) of the Disclosure Schedule, no person
(other than Company and its Subsidiaries and any person that is a party
to a contract referred to in clause (F) of Section 4.1(k) that restricts
such person from disclosing any information concerning such source code)
is in possession of, or has or has had access to, any source code for
any computer program included in the Owned Software.
(iv) There are no defects in any computer program included in the
Software that would materially adversely affect the functioning thereof
in accordance with any published specifications therefor or in
accordance with any warranties given with respect thereto. Without
limiting the generality of the foregoing, all of the Software has the
following properties and capabilities: (A) the capability to correctly
recognize and accurately process dates expressed as a four-digit number
(or the binary equivalent or other machine readable iteration thereof)
(collectively, "Four-Digit Dates"); (B) the capability to accurately
execute calculations using Four-Digit Dates; (C) the functionality (both
on-line and batch), including entry, inquiry, maintenance and update, to
support processing involving Four-Digit Dates; (D) the capability to
generate interfaces and reports that support processing involving
Four-Digit Dates; (E) the capability to generate and successfully
transition, without human intervention, into the year 2000 using the
correct system date and to thereafter continue processing with
Four-Digit Dates; (F) the capability to provide correct results in
forward and backward data calculations spanning century boundaries,
including the conversion of pre-2000 dates currently stored as two-digit
dates; and (G) the capability to correctly recognize leap years,
including the year 2000, and to properly process date
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calculations involving or spanning leap years. Each computer program
included in the Software is in machine readable form and contains all
current revisions. Section 4.1(h)(iv) of the Disclosure Schedule sets
forth a true, correct and complete list of current claims of defects by
customers of Company or any of its Subsidiaries under warranties or
support and maintenance agreements.
(v) Except as specified in Section 4.1(h)(v) of the Disclosure
Schedule, none of the sale, license, lease, transfer, use, reproduction,
distribution, modification or other exploitation by Company or any
Subsidiary of Company of any version or release of any computer program
included in the Software obligates or will obligate Company or any
Subsidiary of Company to pay any royalty, fee or other compensation to
any other person.
(vi) Neither Company nor any of its Subsidiaries markets, or has
marketed, and none of them have supported or is obligated to support,
any Licensed Software separate from the Owned Software.
(vii) Except as specified in Section 4.1(h)(vii) of the Disclosure
Schedule: (A) no material agreement, license or other arrangement
pertaining to any of the Software (including, without limitation, any
development, distribution, marketing, user or maintenance agreement,
license or arrangement) to which Company or any Subsidiary of Company is
a party will terminate or become terminable by any party thereto as a
result of the execution, delivery or performance of this Agreement or
the consummation of the transactions contemplated hereby; and (B) all
licenses covering Licensed Software are of perpetual duration (subject
to provisions allowing Company to terminate and provisions allowing the
respective licensors to terminate in the event of a breach by Company).
(i) Intellectual Property.
(i) Section 4.1(i)(i) of the Disclosure Schedule sets forth a true,
correct and complete list (including, to the extent applicable,
registration, application or file numbers) of all patents, and all
material copyrights, trade dress, trademarks, trade names, service
marks, domain names and other material intellectual property rights,
including, without limitation, trade secrets, processes, formulae,
designs and know-how used by Company or any Subsidiary of Company in
connection with the conduct of Company's business, and all registrations
of or applications for registration of any of the foregoing, including
any additions thereto or extensions, continuations, renewals or
divisions thereof (setting forth the registration, issue or serial
number and a description of the same) (collectively, the "Intellectual
Property"). Parent has heretofore been furnished with true, correct and
complete copies of each registration or application for registration
covering any of the Intellectual Property or Software which is
registered with, or in respect of which any application for registration
has been filed with, any Governmental Entity.
(ii) The Intellectual Property includes all of the material
intellectual property rights owned by or licensed by or to Company and
its Subsidiaries that are necessary to conduct Company's business as it
is now conducted, and includes all of the material intellectual property
rights owned by or licensed by or to Company and its Subsidiaries that
are used in the development, marketing, licensing or support of the
Software or are licensed by Company to, or offered for
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license to, Company's customers or potential customers. Except as
specified in Section 4.1(i)(ii) of the Disclosure Schedule, (A) Company,
directly or through its Subsidiaries, has good, marketable and exclusive
title to, and the valid and enforceable power and unqualified right to
use, the Intellectual Property free and clear of all Liens, and (B) no
person or entity other than Company and its Subsidiaries has any right
or interest of any kind or nature in or with respect to the Intellectual
Property or any portion thereof or any rights to use, market or exploit
the Intellectual Property or any portion thereof.
(iii) For purposes of this Section 4.1(i), the term "Intellectual
Property" shall not be deemed to include the Software, which is treated
in Section 4.1(h).
(j) No Infringement. Except as specified in Section 4.1(j) of the
Disclosure Schedule, neither the existence nor the sale, license, lease,
transfer, use, reproduction, distribution, modification or other
exploitation by Company, any Subsidiary of Company or any of their
respective successors or assigns of any Owned Software or Intellectual
Property (and, to Company's knowledge, the Licensed Software), as such
Software or Intellectual Property, as the case may be, is or was, or is
currently contemplated to be sold, licensed, leased, transferred, used or
otherwise exploited by such persons, does, did or will (A) infringe on any
patent, trademark, copyright or other right of any other person,(B)
constitute a misuse or misappropriation of any trade secret, know-how,
process, proprietary information or other right of any other person or a
violation of any relevant agreement governing the license of the Licensed
Software to Company or its Subsidiaries, or (C) entitle any other person to
any interest therein, or right to compensation from Company, any Subsidiary
of Company or any of their respective successors or assigns, by reason
thereof, in each case, except as could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company.
Except as specified in Section 4.1(j) of the Disclosure Schedule, neither
Company nor any of its Subsidiaries has received any complaint, assertion,
threat or allegation or otherwise has notice of any lawsuit, claim, demand,
proceeding or investigation involving matters of the type contemplated by
the immediately preceding sentence or has knowledge of any facts or
circumstances that could reasonably be expected to give rise to any such
lawsuit, claim, demand, proceeding or investigation. Except as specified in
Section 4.1(j) of the Disclosure Schedule, and except as provided in the
relevant agreements governing the license of the Licensed Software to
Company or its Subsidiaries, there are no restrictions on the ability of
Company, any Subsidiary of Company or any of their respective successors or
assigns to sell, license, lease, transfer, use, reproduce, distribute,
modify or otherwise exploit any Software or Intellectual Property.
(k) Material Contracts. There have been made available to Parent and
its representatives true, correct and complete copies of all of the
following contracts to which Company or any of its Subsidiaries is a party
or by which any of them is bound (collectively, the "Material Contracts"):
(A) contracts with any current officer, director or employee of Company or
any of its Subsidiaries; (B) contracts pursuant to which Company or any of
its Subsidiaries licenses other persons to use any of the Software or has
agreed to support, maintain, upgrade, enhance, modify, port, or consult
with respect to any of the Software, or pursuant to which other persons
license Company or any of its Subsidiaries to use the Licensed Software;
(C) contracts (1) for the sale of any of the assets of Company or any of
its Subsidiaries, other than contracts entered into in the ordinary course
of business, or (2) for the grant to any
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person of any preferential rights to purchase any of its assets; (D)
contracts by which Company has agreed to design, develop, author or create
any new custom, or customized software for any third party; (E) contracts
which restrict Company or any of its Subsidiaries from competing in any
line of business or with any person in any geographical area or which
restrict any other person from competing with Company or any of its
Subsidiaries in any line of business or in any geographical area; (F)
contracts which restrict Company or any of its Subsidiaries from disclosing
any information concerning or obtained from any other person or which
restrict any other person from disclosing any information concerning or
obtained from Company or any of its Subsidiaries; (G) indentures, credit
agreements, security agreements, mortgages, guarantees, promissory notes
and other contracts relating to the borrowing of money; and (H) all other
agreements, contracts or instruments entered into outside of the ordinary
course of business or which are material to Company. Except as specified in
Section 4.1(k) of the Disclosure Schedule or as could not reasonably be
expected to have a Material Adverse Effect on Company, all of the Material
Contracts are in full force and effect and are the legal, valid and binding
obligation of Company and/or its Subsidiaries, enforceable against them in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability,
to general principles of equity (regardless of whether enforcement is
sought in a proceeding at law or in equity). Except as specified in Section
4.1(k) of the Disclosure Schedule, neither Company nor any of its
Subsidiaries is in breach or default (with or without notice or lapse of
time, or both) in any material respect under any Material Contract nor, to
the knowledge of Company, is any other party to any Material Contract in
breach or default (with or without notice or lapse of time, or both)
thereunder in any material respect. Except as described or listed in
Section 4.1(k) of the Disclosure Schedule, neither Company nor any of its
Subsidiaries is a party to any existing contract, obligation or commitment
of any type in any of the following categories: (1) any sales contract,
including any open bid or quotation, which is of an open-end or blanket
nature; (2) contracts for the purchase of materials, supplies or equipment
which have not been entered into in the ordinary course of business and
consistent with past practice or for capital expenditures in excess of
$75,000; (3) contracts with distributors, manufacturers' representatives or
sales agents, except those which are terminable at the option of Company or
any of its Subsidiaries on 60 days' notice or less without incurring any
liability in excess of $50,000; (4) contracts under which Company or any of
its Subsidiaries has, except by way of endorsement of negotiable
instruments for collection in the ordinary course of business and
consistent with past practice, become absolutely or contingently or
otherwise liable for (aa) the performance of any other person, firm or
corporation under a contract, or (bb) the whole or any part of the
indebtedness or liabilities of any other person, firm or corporation; (5)
powers of attorney outstanding from Company or any of it Subsidiaries other
than as issued in the ordinary course of business and consistent with past
practice with respect to customs, insurance, patent, trademark or tax
matters, or to agents for service of process; (6) contracts under which any
amount payable by Company or any of its Subsidiaries is dependent upon the
revenues or profits of Company or any of its Subsidiaries (other than
employment contracts containing bonus payment provisions dependent on
Company's or any of its Subsidiaries' financial performance which are
contained in Section 4.1(k) of the Disclosure Schedule); (7) contracts with
any party for the loan of money or availability of credit to or from
Company or any of its Subsidiaries (except trade
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credit extended by Company or any of its Subsidiaries to its or their
customers or travel advances to its or their employees in the ordinary
course of business and consistent with past practice); or (8) any hedging,
option, derivative or other similar transaction.
(l) Litigation, etc. Except as disclosed in the Filed SEC Documents
or as specified in Section 4.1(l) of the Disclosure Schedule, (i) there is
no suit, claim, action or proceeding (at law or in equity) pending or, to
the knowledge of Company, threatened against Company or any of its
Subsidiaries, and to the knowledge of Company, there is no investigation
pending or threatened against Company or any of its Subsidiaries, in each
case, before any court or other Governmental Entity, (ii) neither Company
nor any of its Subsidiaries is subject to any outstanding order, writ,
judgement, injunction, decree or arbitration order or award, and (iii) to
the knowledge of Company, no event, fact or circumstance which could
reasonably be expected to give rise to a suit, claim, action, or proceeding
(at law or in equity) against Company or any of its Subsidiaries exist
that, in any such case described in clauses (i), (ii) and (iii), could
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Company. As of the date hereof, there are no
suits, claims, actions, proceedings or investigations pending or, to the
knowledge of Company, threatened, seeking to prevent, hinder, modify or
challenge the transactions contemplated by this Agreement.
(m) Compliance with Applicable Laws. All federal, state, local and
foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights (collectively, "Permits")
necessary for each of Company and its Subsidiaries to own, lease or operate
its properties and assets and to carry on its business as now conducted
have been obtained or made, and there has occurred no default (with or
without notice or lapse of time or both) under any such Permit, except for
the lack of Permits and for defaults under Permits which lack or default
could not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on Company. Except as disclosed in the Filed SEC
Documents or in Section 4.1 (m) of the Disclosure Schedule, Company and its
Subsidiaries are in compliance with all applicable statutes, laws,
ordinances, rules, orders and regulations of any Governmental Entity,
except for non-compliance which could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company.
(n) Environmental Laws. Except as specified in Section 4.1(n) of the
Disclosure Schedule, to Company's knowledge: (i) neither Company nor any of
its Subsidiaries has violated or is in violation of any Environmental Law
(as defined in Section 9.3(d)); (ii) none of the Owned Real Property or
Leased Real Property (including without limitation soils and surface and
ground waters) has been or are contaminated with any Hazardous Substance
(as defined in Section 9.3(e)); (iii) neither Company nor any of its
Subsidiaries is potentially liable or liable for any off-site
contamination; (iv) neither Company nor any of its Subsidiaries has any
notice of an actual liability, remediation obligation or reporting duty
under any Environmental Law; (v) no assets of Company or any of its
Subsidiaries are subject to pending or threatened Liens under any
Environmental Law; (vi) Company and its Subsidiaries have all Permits
required under any Environmental Law ("Environmental Permits"); and (vii)
Company and its Subsidiaries are in compliance with their respective
Environmental Permits.
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(o) Taxes. Except as specified in Section 4.1(o) of the Disclosure
Schedule:
(i) Except where the failure to do so could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Company, each of Company and each Subsidiary of Company (and
any affiliated or unitary group of which any such person was a member)
has (A) timely filed all federal, state, local and foreign returns,
declarations, reports, estimates, information returns and other
statements of any kind ("Returns") required to be filed by or for it in
respect of any Taxes (as defined in the last paragraph of this Section
4.1(o)) and has caused such Returns as so filed to be true, correct and
complete, (B) established reserves that are reflected in Company's most
recent financial statements included in the Filed SEC Documents and that
as so reflected are adequate for the payment of all Taxes with respect
to the results of operations of Company and its Subsidiaries through the
date of such financial statements, and (C) timely withheld and paid over
to the proper taxing authorities all Taxes required to be so withheld
and paid over through the date hereof. Each of Company and each
Subsidiary of Company (and any affiliated or unitary group of which any
such person was a member) has timely paid all Taxes with respect to any
Returns referred to in the immediately preceding sentence and that
became due and payable on or before the date hereof.
(ii) (A) There has been no taxable period since 1991 for which a
Return of Company or any of its Subsidiaries has been examined on audit
by the Internal Revenue Service (the "IRS") or an applicable state,
local or foreign taxing authority that remains open as of the date
hereof, and (B) except for alleged deficiencies which have been finally
and irrevocably resolved, Company has not received formal or informal
notification that any deficiency for any Taxes, the amount of which
could reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on Company, has been or will be proposed,
asserted or assessed against Company or any of its Subsidiaries by any
federal, state, local or foreign taxing authority or court with respect
to any period.
(iii) Neither Company nor any of its Subsidiaries has (A) executed
or entered into with the IRS or any other taxing authority any agreement
or other document that continues in force and effect beyond the
Effective Time and that extends or has the effect of extending the
period for assessments or collection of any Taxes, (B) executed or
entered into with the IRS or any other taxing authority any closing
agreement or other similar agreement (nor has Company or any of its
Subsidiaries received any ruling, technical advice memorandum or similar
determination) affecting the determination of Taxes required to be shown
on any Return not yet filed, or (C) requested any extension of time to
be granted to file after the Effective Date any Return required by
applicable law to be filed by it.
(iv) Neither Company nor any of its Subsidiaries has made an
election under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by
Company or any of its Subsidiaries. None of the assets of Company or any
of its Subsidiaries is required to be treated as being owned by any
other person pursuant to the "safe harbor" leasing provisions of Section
168(f)(8) of the Internal Revenue Code of 1954 as formerly in effect.
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(v) Neither Company nor any of its Subsidiaries is a party to, is
bound by or has any obligation under any tax sharing agreement or
similar agreement or arrangement.
(vi) Company has no pending application with the IRS under Section
481(a) of the Code requesting a change in accounting method or
otherwise.
(vii) Neither Company nor any of its Subsidiaries is, or has been,
a United States Real Property Holding Corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
(viii) Except for the group of which Company is presently the
common parent, Company has never been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code, and each
of Company's Subsidiaries has never been a member of an affiliated group
of corporations, within the meaning of Section 1504 of the Code, except
where Company was the common parent of such affiliated group.
For purposes of this Agreement, "Taxes" shall mean all federal, state,
local, foreign or other jurisdiction taxes including, but without
limitation, income, property, sales, excise, employment, payroll,
franchise, withholding and other taxes, tariffs, charges, fees, levies,
imposts, duties, licenses or other assessments of every kind and
description, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority.
(p) Benefit Plans. Section 4.1(p) of the Disclosure Schedule sets
forth a true, correct and complete list of all the employee benefit plans
(as that phrase is defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) maintained or
contributed to for the benefit of any current or former employee, officer
or director of Company or any of its Subsidiaries ("Company ERISA Plans")
and any other benefit or compensation plan, program or arrangement
maintained or contributed to for the benefit of any current or former
employee, officer or director of Company or any of its Subsidiaries
(Company ERISA Plans and such other plans being referred to as "Company
Plans"). Company has furnished to Parent and its representatives a true,
correct and complete copy of every document pursuant to which each Company
Plan is established or operated (including any summary plan descriptions),
a written description of any Company Plan for which there is no written
document, and the three most recent annual reports, financial statements
and actuarial valuations with respect to each Company Plan, if required.
Except as specified in Section 4.1(p) of the Disclosure Schedule:
(i) No member of Company Group (as defined below) maintains, or has
at any time established or maintained, or has at any time obligated to
make, or made, contributions to or under any multiemployer plan (as
defined in Section 3(37) and Section 4001(a)(3) of ERISA).
(ii) None of Company Plans promises or provides retiree health or
life insurance benefits to any person (other than continuation health
coverage benefits under the Consolidated Omnibus Budget Reconciliation
Act).
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(iii) None of Company Plans provides for payment of a benefit, the
increase of a benefit amount, the payment of a contingent benefit or the
acceleration of the payment or vesting of a benefit by reason of the
execution of this Agreement or the consummation of the transactions
contemplated by this Agreement.
(iv) Neither Company nor any of its Subsidiaries has an obligation
to adopt, or is considering the adoption of, any new Company Plan or,
except as required by law, the amendment of an existing Company Plan.
(v) The IRS has issued favorable determination letters to the
effect that each Company ERISA Plan intended to be qualified under
Section 401(a) of the Code qualifies under Code Section 401(a) and that
any related trust is exempt from taxation under Code Section 501(a), and
such determination letters remain in effect and have not been revoked.
Copies of the most recent determination letters and any outstanding
requests for a determination letter with respect to each Company ERISA
Plan have been delivered to Parent. Except as disclosed in Section
4.1(p) of the Disclosure Schedule, no Company ERISA Plan has been
amended since the issuance of each respective determination letter. The
Company ERISA Plans currently comply in form with the requirements under
Code Section 401(a), other than changes required by statutes,
regulations and rulings for which amendments are not yet required.
No issue concerning the qualification of Company ERISA Plans is
pending before or, to the knowledge of Company, is threatened by the
IRS. The Company ERISA Plans have been administered in all material
respects according to their terms (except for those terms which are
inconsistent with the changes required by statutes, regulations, and
rulings for which changes are not yet required to be made, in which case
Company ERISA Plans have been administered in accordance with the
provisions of those statutes, regulations and rulings) and in all
material respects in accordance with the requirements of Code Section
401(a), in each case, except as could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Company. Neither Company nor any of its Subsidiaries or any other
entities which now or in the past constitute a single employer within
the meaning of Code Section 414 (the "Company Group") or any fiduciary
of any Company ERISA Plan has done anything that would adversely affect
the qualified status of Company ERISA Plans or the related trusts.
Any Company ERISA Plan which is required to satisfy Code Section
401(k)(3) and 401(m)(2) has been tested for compliance with, and has
satisfied the requirements of, Code Section 401(k)(3) and 401(m)(2) for
each plan year ending prior to the Closing Date.
(vi) Each Company Plan has been operated in accordance with its
terms and the requirements of all applicable law, in each case, except
as could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect on Company.
(vii) No member of Company Group nor any other "disqualified
person" or "party in interest" (as defined in Code Section 4975 and
ERISA Section 3(14), respectively) with respect to Company Plans, has
engaged in any "prohibited transaction" (as defined in Code Section 4975
or ERISA Section 406). All
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members of Company Group and all "fiduciaries" (as defined in ERISA
Section 3(21)) with respect to Company Plans, including any members of
Company Group which are fiduciaries as to a Company ERISA Plan, have
complied in all respects with the requirements of ERISA Section 404. No
member of Company Group and no party in interest or disqualified person
with respect to Company Plans has taken or omitted any action which
could lead to the imposition of an excise tax under the Code or a fine
under ERISA. Except as disclosed in the Disclosure Schedule, no member
of Company Group is subject to any material liability, tax or penalty
whatsoever to any person whomsoever as a result of any member of Company
Group engaging in a prohibited transaction under ERISA or the Code, and
Company Group has no knowledge of any circumstances which reasonably
might result in any such material liability, tax or penalty as a result
of a breach of fiduciary duty under ERISA.
(viii) No member of Company Group maintains or has maintained an
"employee benefit pension plan" within the meaning of ERISA Section 3(2)
that is or was subject to Title IV of ERISA or has incurred any direct
or indirect liability under, arising out of or by operation of Title IV
of ERISA in connection with the termination of, or withdrawal from, any
Company ERISA Plan or other retirement plan or arrangement, and no fact
or event exists that could reasonably be expected to give rise to any
such liability.
(ix) Each member of Company Group has made full and timely payment
of, or has accrued pending full and timely payment, all amounts which
are required under the terms of each of Company Plans and in accordance
with applicable laws to be paid as a contribution to each Company Plan
and no excise taxes are assessable as a result of any nondeductible or
other contributions made or not made to a Company Plan. The assets of
all Company Plans which are required under applicable laws to be held in
trust are in fact held in trust, and the assets of each such Company
Plan equal or exceed the liabilities of each such plan. The liabilities
of each other plan are properly and accurately reported on the financial
statements and records of Company. The assets of each Company Plan are
reported at their fair market value on the books and records of each
plan.
(x) There are no claims relating to Company Plans, other than
routine claims for benefits.
(xi) Each member of Company Group has complied with the
continuation coverage requirements of Section 1001 of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended, and ERISA
Sections 601 through 608. Each member of Company Group has also complied
with the portability, access, and renewability provisions of Section K,
Chapter 100 of the Code and Section 701 et. seq. of ERISA.
(xii) Except as set forth in Section 4.1(p)(xii) of the Disclosure
Schedule, no member of Company Group is obligated, contingently or
otherwise, under any agreement to pay any amount which would be treated
as a "parachute payment," as defined in Code Section 280G(b) (determined
without regard to Code Section 280G(b)(2)(A)(ii)).
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(xiii) None of Company Plans provide for benefits or other
participation therein, and Company has received no claims or demands for
participation in or benefits under any Company Plan, by any individual
classified or treated by Company as an independent contractor.
The representations and warranties set forth in this Section 4.1(p)
shall be true and correct as if made with respect to the equivalent rules
and regulations governing employee benefits and related matters in the
United Kingdom and Germany.
(q) Absence of Changes in Benefit Plans. Except as disclosed in the
Filed SEC Documents or in Section 4.1(q) of the Disclosure Schedule, since
the date of the most recent audited financial statements included in the
Filed SEC Documents, neither Company nor any of its Subsidiaries has
adopted or agreed to adopt any collective bargaining agreement or any
Company Plan.
(r) Labor Matters.
(i) Except as disclosed in the Filed SEC Documents or specified in
Section 4.1(r)(i) of the Disclosure Schedule, neither Company nor any of
its Subsidiaries is a party to any employment, labor or collective
bargaining agreement, and there are no employment, labor or collective
bargaining agreements which pertain to employees of Company or any of
its Subsidiaries. Company has heretofore delivered to Parent true,
complete and correct copies of the agreements referred to in the
previous sentence, together with all amendments, modifications,
supplements or side letters affecting the duties, rights and obligations
of any party thereunder.
(ii) No employees of Company or any of its Subsidiaries are
represented by any labor organization and, to the knowledge of Company,
no labor organization or group of employees of Company or any of its
Subsidiaries has made a pending demand for recognition or certification.
There are no representation or certification proceedings or petitions
seeking a representation proceeding presently pending or threatened in
writing to be brought or filed with the National Labor Relations Board
or any other labor relations tribunal or authority and, to the knowledge
of Company, there are no organizing activities involving Company or any
of its Subsidiaries pending with any labor organization or group of
employees of Company or any of its Subsidiaries.
(iii) Except as specified in Section 4.1(r)(iii) of the Disclosure
Schedule, there are no (A) unfair labor practice charges, grievances or
complaints pending or threatened in writing by or on behalf of any
employee or group of employees of Company or any of its Subsidiaries, or
(B) complaints, charges or claims against Company or any of its
Subsidiaries pending, or threatened in writing to be brought or filed,
with any Governmental Entity or arbitrator based on, arising out of, in
connection with, or otherwise relating to the employment or termination
of employment of any individual by Company or any of its Subsidiaries.
(s) State Takeover Statutes; Company Rights Plan. As of the date
hereof and at all times on or prior to the Effective Time, the restrictions
applicable to business combinations contained in affiliated transactions
and control share acquisitions contained in the VSCA or any other
applicable state takeover statute, are, and will be, inapplicable to the
execution, delivery and performance of this Agreement and to the
consummation of the Merger and the other transactions contemplated by this
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Agreement. Prior to the execution of the Stockholders Agreement, the Board
of Directors of Company approved the Stockholders Agreement and the
transactions contemplated thereby. The Board of Directors of Company has
taken all actions so that the Rights Agreement, dated as of July 3, 1998,
between Company and First Union National Bank, as rights agent (the
"Company Rights Plan") has been amended to (i) render Company Rights Plan
inapplicable to Parent, the Merger and the other transactions contemplated
by this Agreement, (ii) ensure that (A) none of Parent or its Subsidiaries
is an Acquiring Person (as defined in Company Rights Plan) pursuant to
Company Rights Plan by virtue of the execution of this Agreement or the
Stockholders Agreement or the consummation of the Merger or the other
transactions contemplated hereby, and (B) a Distribution Date (as such term
is defined in Company Rights Plan) does not occur, and the Rights (as such
term is defined in Company Rights Plan) will not become distributable,
nonredeemable or exercisable, by reason of the execution of this Agreement,
the Stockholders Agreement the consummation of the Merger, or the
consummation of the transactions contemplated hereby.
(t) Brokers. No broker, investment banker, financial advisor or other
person, other than U.S. Bancorp Piper Jaffray, the fees and expenses of
which will be paid by Company, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated hereby based upon arrangements made by or on
behalf of Company.
(u) Written Opinion of Financial Advisor. Company has received the
written opinion of U.S. Bancorp Piper Jaffray, dated October 19, 1999 (a
true and complete copy of which has been delivered to Parent by Company),
to the effect that, based upon and subject to the matters set forth therein
and as of the date thereof, the Merger Consideration is fair to the holders
of Shares from a financial point of view.
(v) Voting Requirements. The affirmative vote of the holders of at
least two-thirds of the outstanding Shares entitled to vote at Company
Stockholders Meeting (as defined in Section 6.3(a)) with respect to the
adoption of this Agreement, voting together as a single class, is the only
vote of the holders of any class or series of Company's capital stock or
other securities required in connection with the consummation by Company of
the Merger and the other transactions contemplated hereby to be consummated
by Company.
(w) Government Contracts. Section 4.1(w) of the Disclosure Schedule
lists all contracts, leases, agreements, licenses, commitments or
understandings, subcontracts, written or oral, between Company, or any of
its Subsidiaries, and a Governmental Entity ("Government Contracts"), which
have not been administratively closed out, including all labor task orders
and level of effort with the United States Government of Company or any of
its Subsidiaries. The representations and warranties in this Section 4.1(w)
with respect to Government Contracts shall take precedence over any
inconsistent representations or warranties in any other Section of Article
IV of this Agreement, and the representations and warranties of this
Section 4.1(w) apply and relate only to Government Contracts to which
Company or any of its Subsidiaries is a party. Except as set forth in
Section 4.1(w) of the Disclosure Schedule:
(i) Company and each of its Subsidiaries is not nor have their
predecessors been a party to any contractual obligation or subject to
any applicable law requirement involving organizational or institutional
conflicts of interest such that
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would result in the termination of any Government Contract, that would
impose any material limitation on Company's or its Subsidiaries' ability
to perform such Government Contract or to continue their business as
presently conducted, or that would impose any material limitation upon
Parent's submission of a proposal in response to any resolicitation of
any Government Contracts.
(ii) No payment has been made by Company or its Subsidiaries or
their predecessors, or to their knowledge, by any person authorized to
act on their behalf, to any person in connection with any Government
Contract of Company or its Subsidiaries or their predecessors, in
violation of applicable United States or foreign procurement laws or
regulations, United States criminal or civil laws relating to bribes or
gratuities, or in violation of the Foreign Corrupt Practices Act or
other requirements of law.
(iii) With respect to each Government Contract to which Company or
any of its Subsidiaries is, or any of their predecessors was, a party:
(A) representations and certifications executed, acknowledged or set
forth in or pertaining to such Government Contract were complete and
correct in all material respects as to their effective date, and each of
Company, its Subsidiaries and their predecessors has complied in all
material respects with all such representations and certifications; (B)
neither the United States Government nor any prime contractor,
subcontractor or other person has notified Company, its Subsidiaries or
their predecessors, either orally (to Company's knowledge) or in
writing, that Company, its Subsidiaries or their predecessors have
breached or violated any applicable law, or, for any Government
Contract, any certificate, representation, clause, provision or
requirement pertaining thereto; and (C) no termination for convenience
or termination for default has occurred within the last five years and
no cure notice or show cause notice is currently in effect pertaining to
such Government Contract.
(iv) To Company's knowledge, (A) neither Company, its Subsidiaries,
their predecessors nor any of their respective directors, officers or
employees is (or during the last five years has been) under
administrative, civil, or criminal investigation or indictment by any
Governmental Entity, with respect to any alleged irregularity,
misstatement or omission arising under or relating to any Government
Contract, and (B) during the last five years, Company, its Subsidiaries
and their predecessors have not conducted or initiated any internal
investigation or made a voluntary disclosure to the United States
Government in connection with Government Contracts.
(v) To Company's knowledge, there exists (A) no outstanding claims
against Company, its Subsidiaries or their predecessors, either by the
United States Government or by any prime contractor, subcontractor,
vendor or other third party, arising under or relating to any Government
Contract, and (B) except as disclosed in Section 4.1(l) of the
Disclosure Schedule, no disputes between Company, its Subsidiaries or
their predecessors and the United States Government under the Contracts
Disputes Act or any other federal statute or between Company, or its
Subsidiaries or their predecessors and any prime contractor,
subcontractor or vendor arising under or relating to any such Government
Contract.
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(vi) To Company's knowledge, neither Company, any of its
Subsidiaries, any of their predecessors nor any person while serving as
director, officer or employee of Company, any of its Subsidiaries or any
of their predecessors during the last five years has been (A) suspended
or debarred from doing business with the United States Government, or
(B) the subject of a finding of nonresponsibility or ineligibility for
United States Government contracting.
(vii) Neither Company, any of its Subsidiaries, nor any of their
predecessors is, and to Company's knowledge, no other party is, in
material breach of or in default under any Government Contract.
Furthermore, (A) Company and each of its Subsidiaries is and has been,
and their predecessors were, in compliance with all applicable law
requirements pertaining to the award and performance of Government
Contracts, (B) Company, its Subsidiaries and their predecessors have had
at all times all authorizations required in connection with the award
and performance of their Government Contracts, (C) all of the Government
Contracts were competitively awarded, and (D) neither Company, any of
its Subsidiaries nor any of their predecessors has received any written
notice of violation of any applicable law requirement or authorization
which could result in the loss of any security clearance, the inability
to continue to perform Government Contracts or to obtain future
Government Contracts or the suspension or debarment from government
contracting. Neither Company, any of its Subsidiaries nor any of their
predecessors is subject to any judgment, writ, decree or injunction of
any Governmental Entity relating to the award and performance of
Government Contracts or any transaction or activities incidental
thereto.
(viii) With respect to each Government Contract to which Company or
any of its Subsidiaries is or any of their predecessors was a party: (A)
all contract reporting required to be submitted to the applicable
Governmental Entity is up-to-date, and each of Company, its Subsidiaries
and their predecessors has complied in all material respects with all
such contract reporting obligations pursuant to the applicable laws; (B)
the internal accounting system used to track costs of operations and
contract performance of Company and each of its Subsidiaries is in full
compliance with the Cost Accounting Standards as set forth in 49 Code of
Federal Regulations, Chapter 99, and as otherwise required by applicable
laws, if required; (C) the Cost and Pricing Data (as defined in the
Federal Acquisition Regulation, 48 Code of Federal Regulations, Chapter)
previously supplied to the applicable Governmental Entity is accurate,
complete and current; and (iv) the internal cost accounting and labor
accounting system of Company and each of its Subsidiaries is adequate to
properly allocate employee time.
(ix) With respect to each Government Contract, there are currently
no domestic civil, criminal or administrative actions, suits, written
claims, written allegations of defective pricing, defective products and
services, cost mischarging or violations of the cost accounting
standards under any applicable law, hearings or proceedings pending
(including but not limited to those which are likely to result in the
suspension or debarment of Company or any of its Subsidiaries from
contracting with the United States Government) or, to the knowledge of
Company, threatened against Company or any of its Subsidiaries.
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(x) Company has not granted "unlimited rights" or "Government
Purpose License Rights," or any unlimited-quantity, agency-wide, or site
licenses in any of the Software to any Governmental Entity; no
Governmental Entity has claimed such rights and none is entitled
thereto.
(x) Insurance. Company has insurance policies and fidelity bonds
covering its and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of
Company. All premiums due and payable under all such policies and bonds
have been paid, and Company is otherwise in full compliance with the terms
and conditions of all such policies and bonds, except where the failure to
have made payment or to be in full compliance could not reasonably be
expected to have a Material Adverse Effect. The reserves established by
Company in respect of all matters as to which Company self-insures,
including for workers' compensation and workers' medical coverage, are
adequate and appropriate. Section 4.1(x) of the Disclosure Schedule sets
forth a true and complete list of all insurance policies, fidelity bonds
and self-insurance provisions of Company.
(y) Business Relationships. The relationships of Company and its
Subsidiaries with their significant customers, distributors, licensors,
designers and suppliers are satisfactory in all material respects to the
Company and, to Company's knowledge, the execution of this Agreement and
the consummation of the Merger and the other transactions contemplated
hereby will not materially adversely affect the relationships of Company
and its Subsidiaries with such customers, distributors, licensors,
designers and suppliers.
(z) HSR Compliance. The Company is not a person (nor is it included
in a person), that has total assets of $100 million or more or annual net
sales of $100 million or more, within the meaning of, and all as determined
in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
Section 4.2 Representations and Warranties of Parent and Merger
Sub. Parent and Merger Sub represent and warrant to Company, as of the date
hereof and as of the Closing Date (unless specifically made as of another date),
as follows:
(a) Organization and Standing. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated. Except as disclosed
in Section 4.2(a) of the Disclosure Schedule, each of Parent and Merger Sub
is duly qualified or licensed to do business and is in good standing in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent. Parent has furnished to
Company true, complete and correct copies of the certificates of
incorporation and bylaws of Parent and Merger Sub, in each case, as amended
to the date of this Agreement.
(b) Authority; Noncontravention; and Corporate Power. Parent and
Merger Sub have the requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by Parent and Merger Sub and the
consummation by Parent and Merger Sub of the transactions contemplated
hereby have been duly authorized by the
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respective Boards of Directors of Parent and Merger Sub and have been duly
approved by Parent as sole stockholder of Merger Sub and, except for the
approval by the affirmative vote of holders of the requisite number of
shares of Parent Common Stock with respect to the issuance of Parent Common
Stock in the Merger pursuant to this Agreement and the adoption of a
proposal to increase the number of Parent Common Stock under Parent's 1997
Stock Option Plan, no other corporate proceedings on the part of Parent or
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of Parent and Merger Sub and, assuming this Agreement
constitutes a valid and binding obligation of Company, constitutes a valid
and binding obligation of each of Parent and Merger Sub, enforceable
against each such party in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and to
general principals of equity. None of Parent or its Subsidiaries is in
violation of its certificate of incorporation or bylaws. Except as
specified in Section 4.2(b) of the Disclosure Schedule, the execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby and compliance with the provisions of this Agreement
will not (i) conflict with any of the provisions of the certificate of
incorporation or bylaws of Parent or the certificate of incorporation or
bylaws of Merger Sub, in each case as amended to the date of this
Agreement, (ii) subject to the governmental filings and other matters
referred to in the following sentence, conflict with, result in a breach of
or default (with or without notice or lapse of time, or both) under, or
give rise to a material obligation, a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or
require the consent of any person under, any indenture, or other agreement,
permit, concession, franchise, license or similar instrument or undertaking
to which Parent or Merger Sub is a party or by which Parent or Merger Sub
or any of their respective assets is bound or affected, or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, contravene any law, rule or regulation, or any order, writ,
judgment, injunction, decree, determination or award currently in effect,
which, in the case of clauses (ii) and (iii) above, could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent. Except as disclosed in Section 4.2(b) of the Disclosure
Schedule, no consent, approval or authorization of, or declaration or
filing with, or notice to, any Governmental Entity or third party which has
not been received or made is required by or with respect to Parent or
Merger Sub in connection with the execution and delivery of this Agreement
by Parent or Merger Sub or the consummation by Parent or Merger Sub, as the
case may be, of any of the transactions contemplated hereby, except for (A)
the filing with the SEC of the Form S-4 (as defined in Section 6.1(c)) and
the declaration of effectiveness of the Form S-4 and such reports under the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (B) the filing of the certificate and/or
articles of merger with the Virginia Commission and the Delaware Secretary
of State and appropriate documents with the relevant authorities of other
states in which Company is qualified to do business, (C) such other
consents, approvals, authorizations, filings or notices as are specified in
Section 4.2(b) of the Disclosure Schedule, and (D) any other consents,
approvals, authorizations, filings or notices the failure to make or obtain
which could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent.
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(c) Capital Structures. The authorized capital stock of Parent
consists of (i) 40,000,000 shares of Common Stock, and (ii) 10,000,000
shares of preferred stock, par value $0.001 per share, of which 21,000
shares have been designated Series A 4.0% Convertible Redeemable Preferred
Stock ("Series A Preferred Stock"). At the close of business on October 13,
1999, (A) 8,873,791 shares of Common Stock were issued and outstanding, (B)
21,000 shares of Series A Preferred Stock were issued and outstanding, (C)
3,620,000 shares of Common Stock were reserved for issuance pursuant to
Parent's employee and director benefit plans, of which options to purchase
2,570,554 shares were outstanding, (D) 2,780,632 shares of Common Stock
were reserved for issuance pursuant to outstanding warrants, and (E)
2,100,000 shares of Common Stock were reserved for issuance upon conversion
of the Series A Preferred Stock. Except as set forth in the immediately
preceding sentence, at the close of business on October 13, 1999, no shares
of capital stock or other equity securities of Parent were issued, reserved
for issuance or outstanding. All outstanding shares of capital stock of
Parent are, and all shares of Common Stock which may be issued pursuant to
this Agreement will be, when issued, duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights. The authorized
capital stock of Merger Sub consists of 1,000 shares of common stock, $0.01
par value per share, 1,000 of which have been validly issued, are fully
paid, and nonassessable, and are owned by Parent. No bonds, debentures,
notes or other indebtedness of Parent having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote)
on any matters on which the stockholders of Parent may vote are issued or
outstanding. Except as set forth above, Parent does not have any
outstanding option, warrant, call, subscription or other right, agreement
or commitment which obligates Parent to issue, sell or transfer,
repurchase, redeem or otherwise acquire any shares of the capital stock of
Parent.
(d) SEC Documents. Parent has filed all required reports, schedules,
forms, statements and other documents with the SEC since January 1, 1997
(such reports, schedules, forms, statements and other documents are
hereinafter referred to as the "Parent SEC Documents"). As of their
respective dates, or if amended, as of the date of such amendment, the
Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable
to such Parent SEC Documents, and none of the Parent SEC Documents as of
such dates contained any untrue statements of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The consolidated financial statements of
Parent included in the Parent SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared
in accordance with generally accepted accounting principles (except, in the
case of unaudited consolidated quarterly statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may otherwise be indicated in the notes thereto) and fairly
present the consolidated financial position of Parent and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited quarterly statements, to normal year-end audit adjustments).
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(e) Absence of Certain Changes or Events. Except as disclosed in the
Parent SEC Documents filed by Parent and publicly available prior to the
date of this Agreement (the "Filed Parent SEC Documents") or specified in
Section 4.2(e) of the Disclosure Schedule, since the date of the most
recent audited financial statements included in the Filed Parent SEC
Documents, Parent and its Subsidiaries have conducted their business only
in the ordinary course consistent with past practice, and there has not
been: (i) any change, event or occurrence which has had or could reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent; (ii) any declaration, setting aside or payment of any
dividend or other distribution in respect of shares of Parent's capital
stock other than regular quarterly dividends on Parent's outstanding Series
A Preferred Stock, or any redemption or other acquisition by Parent of any
shares of its capital stock; (iii) any change by Parent in accounting
methods, principles or practices, except as required or permitted by
generally accepted accounting principles; or (iv) any announcement of or
entry into any agreement, commitment or transaction by Parent or any of its
Subsidiaries to do any of the things described in the preceding clauses (i)
through (iii) otherwise than as expressly provided for herein.
(f) Brokers. No broker, investment banker, financial advisor or other
person, other than Advest Financial Advisors and except as disclosed in
Section 4.2(f) of the Disclosure Schedule, the fees and expenses of which
will be paid by Parent, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on
behalf of Parent or Merger Sub.
(g) Interim Operations of Merger Sub. Merger Sub was formed solely
for the purpose of engaging in the transactions contemplated hereby, has
engaged in no other business activities and has conducted its operations
only as contemplated hereby.
(h) Financing. In order the finance the Merger, Parent has obtained a
commitment letter (the "Commitment Letter") from Bank Hapoalim (the
"Bank"), pursuant to which the Bank has committed, subject to the terms and
conditions thereof, to provide Parent and Merger Sub with financing in an
aggregate amount of up to $35 million (the "Financing"), a true, complete
and correct copy of which has previously been provided to Company. Subject
to the terms and conditions of the Commitment Letter (including the
conditions to funding specified therein) and this Agreement, the Financing
is sufficient to consummate the Merger.
(i) No Undisclosed Material Liabilities. Except as disclosed in the
Parent SEC Documents and liabilities incurred in the ordinary course of
business consistent with past practice since the date of the most recent
financial statements included in the Filed Parent SEC Documents, there are
no liabilities of Parent or its Subsidiaries of any kind whatsoever,
whether accrued, contingent, absolute, due, to become due, determined,
determinable or otherwise, required by GAAP to be reflected on a
consolidated balance sheet of Parent and its Subsidiaries or in the notes,
schedules or exhibits thereto, having, or which could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent.
(j) No Undisclosed Defaults. Except as disclosed in the Parent SEC
Documents, Parent and its Subsidiaries are not in default in any material
obligation or covenant on its part to be performed under any lease or
contract that is material to the business of Parent and its Subsidiaries.
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(k) Title to Properties. Parent or one of its Subsidiaries has good
and marketable title to each material asset reflected in the latest balance
sheet of Parent included in the Parent SEC Documents (other than any such
asset disposed of or consumed in the ordinary course of business and any
asset, the lack of good and marketable title could not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on
Parent), free and clear of all Liens except those Liens that are reflected
in the financial statements included in the Parent SEC Documents and those
Liens that could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on Parent.
(l) Software.
(i) Parent, directly or through its Subsidiaries, has good,
marketable and exclusive title to, and the valid and enforceable power
and unqualified right to sell, license, lease, transfer, use, create
derivative works of, or otherwise exploit, all versions and releases of
all material computer programs (source code or object code) which were
developed for or on behalf of, or have been purchased by, Parent or any
of its Subsidiaries and which are currently used internally by Parent or
which have been distributed by Parent or any of its Subsidiaries and all
material computer programs under development by Parent or its
Subsidiaries but not currently distributed ("Parent Owned Software") and
all copyrights thereof, except in such cases which, individually or in
the aggregate, could not reasonably be expected to have a Material
Adverse Effect on Parent.
(ii) Except as disclosed in Parent SEC Documents, there are no
known defects in any computer program included in the Parent Owned
Software or any material computer programs licensed to Parent or any of
its Subsidiaries ("Parent Licensed Software" and, together with Parent
Owned Software, "Parent Software") that would adversely affect the
functioning thereof in accordance with any published specifications
therefor or in accordance with any warranties given with respect thereto
or that would cause the Parent Software to fail to have the properties
and capabilities set forth in Section 4.1(h)(iv).
(m) Intellectual Property. Except as disclosed in the Parent SEC
Documents, Parent and/or one of its Subsidiaries has all material
intellectual property rights (by ownership, valid license or otherwise)
that are necessary to conduct their business as it is now conducted.
(n) No Infringement. Except as disclosed in the Parent SEC Documents,
neither the existence nor the sale, license, lease, transfer, use,
reproduction, distribution, modification or other exploitation by Parent or
any Subsidiary of Parent of any material Parent Owned Software or material
intellectual property, as such Parent Owned Software or intellectual
property, as the case may be, is sold, licensed, leased, transferred, used
or otherwise exploited by such persons, does (i) infringe on any patent,
trademark, copyright or other right of any other person, (ii) constitute a
misuse or misappropriation of any trade secret, know-how, process,
proprietary information or other right of any other person, or (iii)
entitle any other person to any interest therein, or right to compensation
from Parent or any Subsidiary of Parent by reason thereof, in each case,
except as could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent.
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(o) Litigation. Except as disclosed in the Filed SEC Documents or as
specified in Section 4.2(o) of the Disclosure Schedule, (i) there is no
suit, claim, action or proceeding (at law or in equity) pending or, to the
knowledge of Parent, threatened against Parent or any of its Subsidiaries,
and to the knowledge of Parent, there is no investigation pending or
threatened against Parent or any of its Subsidiaries, in each case, before
any court or other Governmental Entity, (ii) neither Parent nor any of its
Subsidiaries is subject to any outstanding order, writ, judgement,
injunction, decree or arbitration order or award, and (iii) to the
knowledge of Parent, no event, fact or circumstance which could reasonably
be expected to give rise to a suit, claim, action or proceeding (at law or
in equity) against Parent or any of its Subsidiaries exist that, in any
such case described in clauses (i), (ii) and (iii) could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent. As of the date hereof, there are no suits, claims,
actions or proceedings pending or, to the knowledge of Parent, threatened,
seeking to prevent, hinder, modify or challenge the transactions
contemplated by this Agreement.
(p) Compliance with Applicable Laws. Except as disclosed in the
Parent SEC Documents, all Permits necessary for each of Parent and its
Subsidiaries to own, lease or operate its properties and assets and to
carry on its business as now conducted have been obtained or made, and
there has occurred no default (with or without notice or lapse of time or
both) under any such Permit, except for the lack of Permits and for
defaults under Permits which lack or default could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent. Except as disclosed in the Parent SEC Documents, Parent
and its Subsidiaries are in compliance with all applicable statutes, laws,
ordinances, rules, orders and regulations of any Governmental Entity,
except for non-compliance which could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent.
(q) Taxes. Except as set forth in the Parent SEC Documents, as of the
date of this Agreement, Parent and each of its Subsidiaries has filed all
Tax returns and reports required to be filed by it and has paid all Taxes
with respect to such Returns (as defined in Section 4.1(o)), and the most
recent financial statements contained in the Filed SEC Documents reflect an
adequate reserve for all Taxes of the Parent and its Subsidiaries for all
taxable periods and portions thereof through the date of such financial
statements. As of the date of this Agreement, no material deficiencies for
any Taxes have been proposed, asserted or assessed against the Parent or
its Subsidiaries, nor is there, to the knowledge of the Parent after
reasonable inquiry, any reasonable basis for the assertion of any such
deficiency. No requests for waivers of the time to assess any such Taxes
are pending as of the date of this Agreement. Proper amounts have been
withheld by the Parent and its Subsidiaries from employee compensation
payments for all periods in compliance with the Tax withholding provisions
of applicable laws, except where the failure to withhold proper amounts
could not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect on the Parent or its Subsidiaries. As of the date
of this Agreement, none of the federal income tax Returns of Parent or its
Subsidiaries have been examined by the IRS for the fiscal years through
December 31, 1998. Parent has not taken any action nor does it have any
knowledge of any fact or circumstance that is reasonably likely to prevent
the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
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(r) Benefit Plans. Except as disclosed in the Parent SEC Documents,
with respect to all material employee benefit plans (as defined in ERISA)
maintained or contributed to for the benefit of any current or former
employee, officer or director of Parent or any of its Subsidiaries ("Parent
ERISA Plans") and any other material benefit or compensation plan, program
or arrangement maintained or contributed to for the benefit of any current
or former employee, officer or director of the Parent or any of its
Subsidiaries (Parent ERISA Plans and such other plans being referred to as
"Parent Plans") are in material compliance with ERISA and the Code, if
applicable, and such Parent Plans have been operated in material compliance
with ERISA and the Code and any Parent Plan intended to be so qualified
under Section 401(a) of the Code has been determined by the IRS to be so
qualified and, to the Company's knowledge, nothing has occurred to cause
the loss of such qualified status.
(s) HSR Compliance. The Parent is not a person (nor is it included in
a person), that has total assets of $100 million or more or annual net
sales of $100 million or more, within the meaning of, and all as determined
in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
ARTICLE V
CONDUCT OF BUSINESS OF COMPANY
Section 5.1 Conduct of Business of Company. Except as expressly provided
for herein (including, without limitation, Section 6.9 hereof relating to
Company Options), during the period from the date of this Agreement to the
Effective Time, Company shall, and shall cause each of its Subsidiaries to, act
and carry on its business only in the ordinary course of business consistent
with past practice and, to the extent consistent therewith, use reasonable best
efforts to preserve intact its current business organizations, keep available
the services of its current key officers and employees and preserve the goodwill
of those engaged in material business relationships with Company, and to that
end, without limiting the generality of the foregoing, Company shall not, and
shall not permit any of its Subsidiaries to, without the prior written consent
of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, securities or other property) in respect
of, any of its outstanding capital stock (other than, with respect to a
Subsidiary of Company, to its corporate Parent), (ii) split, combine or
reclassify any of its outstanding capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its outstanding capital stock, or (iii)
purchase, redeem or otherwise acquire any shares of its outstanding capital
stock or any rights, warrants or options to acquire any such shares,
except, in the case of this clause (iii), for the acquisition of Shares
from holders of Company Options in full or partial payment of the exercise
price payable by such holder upon exercise of Company Options;
(b) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible
into or exchangeable for, or any rights, warrants or options to acquire,
any such shares, voting securities or convertible or exchangeable
securities, other than upon the exercise of Company Options outstanding on
the date of this Agreement;
(c) amend its articles of incorporation, bylaws or other comparable
charter or organizational documents;
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(d) directly or indirectly acquire, make any investment in, or make
any capital contributions to, any person other than in the ordinary course
of business consistent with past practice;
(e) directly or indirectly sell, pledge or otherwise dispose of or
encumber any of its properties or assets that are material to its business,
except for sales, pledges or other dispositions or encumbrances in the
ordinary course of business consistent with past practice;
(f) (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, other than indebtedness owing to or
guarantees of indebtedness owing to Company or any direct or indirect
wholly owned Subsidiary of Company, or (ii) make any loans or advances to
any other person, other than to Company or to any direct or indirect wholly
owned Subsidiary of Company and other than routine travel advances to
employees or customer trade credit consistent with past practice, except,
in the case of clause (i), for borrowings under existing credit facilities
described in the Filed SEC Documents in the ordinary course of business
consistent with past practice;
(g) grant or agree to grant to any officer, employee or consultant any
increase in wages or bonus, severance, profit sharing, retirement, deferred
compensation, insurance or other compensation or benefits, or establish any
new compensation or benefit plans or arrangements, or amend or agree to
amend any existing Company Plans, except as may be required under existing
agreements or by law and normal, regularly scheduled increases in respect
of non-officer employees consistent with past practices;
(h) enter into or amend any employment, consulting, severance or
similar agreement with any individual, except with respect to new hires of
nonofficer employees in the ordinary course of business consistent with
past practice;
(i) adopt or enter into a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other material reorganization or any agreement relating to an Acquisition
Proposal (as defined in Section 6.3);
(j) make any tax election or settle or compromise any income tax
liability of Company or of any of its Subsidiaries involving on an
individual basis more than $50,000;
(k) make any change in any method of accounting or accounting practice
or policy, except as required by any changes in generally accepted
accounting principles;
(l) enter into any agreement, understanding or commitment that
restrains, limits or impedes Company's ability to compete with or conduct
any business or line of business, except for any such agreement,
understanding or commitment entered into in the ordinary course of business
consistent with past practice;
(m) plan, announce, implement or effect any reduction in force,
lay-off, early retirement program, severance program or other program or
effort concerning the termination of employment of employees of Company or
its Subsidiaries;
(n) except as previously approved by the Board of Directors of Company
prior to the date hereof and as identified to Parent prior to the date
hereof, authorize or commit to make capital expenditures in excess of
$75,000;
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(o) amend the Company Rights Plan except as required by this
Agreement; or
(p) authorize any of, or commit or agree to take any of, the foregoing
actions in respect of which it is restricted by the provisions of this
Section 5.1.
ARTICLE VI
ADDITIONAL COVENANTS
Section 6.1 Preparation of the Joint Proxy Statement/Prospectus and Form
S-4. As soon as practicable following the date hereof:
(a) Company and Parent shall jointly prepare for inclusion in the Form
S-4 a joint proxy statement/prospectus (the "Joint Proxy
Statement/Prospectus") relating to the Merger in accordance with the
Securities Act and the Exchange Act and the rules and regulations under the
Securities Act and the Exchange Act, with respect to the transactions
contemplated hereby. Company, Parent and Merger Sub shall cooperate with
each other in the preparation of the Joint Proxy Statement/Prospectus.
Company and Parent shall use all reasonable efforts to respond promptly to
any comments made by the SEC with respect to the Joint Proxy
Statement/Prospectus, to cause the Form S-4 to be declared effective under
the Securities Act as promptly as practicable after the filing thereof with
the SEC and to cause the Joint Proxy Statement/Prospectus to be mailed to
the stockholders of Parent and Company at the earliest practicable date
after the Form S-4 is declared effective by the SEC.
(b) Parent shall prepare and file with the SEC the Form S-4. Each of
Company and Parent shall use all reasonable efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable
after such filing. Parent shall also take any action (other than qualifying
to do business in any jurisdiction in which it is not now so qualified)
required to be taken under any applicable state securities laws in
connection with the issuance of Common Stock in the Merger, and Company
shall furnish all information concerning Company and the holders of the
Shares as may be reasonably requested in connection with any such action.
(c) The Company agrees that none of the information supplied or to be
supplied by Company specifically for inclusion or incorporation by
reference in, or which may be deemed to be incorporated by reference in,
(i) the registration statement on Form S-4 to be filed with the SEC by
Parent in connection with the issuance by Parent of shares of Common Stock
in the Merger (the "Form S-4") will, at the time the Form S-4 becomes
effective under the Securities Act and at any time thereafter it is amended
or supplemented, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) the Joint Proxy
Statement/Prospectus will, at the time it is mailed to the stockholders of
each of Company and Parent, and at any time thereafter it is amended or
supplemented, and at the time of the Company Stockholders Meeting and
Parent Stockholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, at the time and in light
of the circumstances under which they are made, not misleading. The Company
agrees that the Joint Proxy Statement/Prospectus will comply as to form in
all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations thereunder, except with respect
to statements made or incorporated by
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reference therein based on information supplied by Parent or Merger Sub
specifically for inclusion or incorporation by reference therein, or which
may be deemed to be incorporated by reference therein.
(d) Parent and Merger Sub each agrees that none of the information
supplied or to be supplied by Parent or Merger Sub for inclusion or
incorporation by reference in, or which may be deemed to be incorporated by
reference in, (i) the Form S-4 will, at the time the Form S-4 becomes
effective under the Securities Act and at anytime thereafter it is amended
or supplemented, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) the Joint Proxy Statement/
Prospectus will, at the time it is mailed to the stockholders of each of
Parent and Company and at any time thereafter it is amended or
supplemented, and at the time of the Company Stockholders Meeting and
Parent Stockholder Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, at the time and in light
of the circumstances under which they are made, not misleading. Parent and
Merger Sub each agrees that the Form S-4 and the Joint Proxy
Statement/Prospectus will comply as to form in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules
and regulations thereunder, except with respect to statements made or
incorporated by reference therein based on information supplied by Company
specifically for inclusion or incorporation by reference therein, or which
may be deemed to be incorporated by reference therein.
Section 6.2 Accountants' Letters.
(a) Company shall use its best efforts to cause to be delivered to Parent a
"comfort" letter of PricewaterhouseCoopers LLP, Company's independent public
accountants, dated a date within two business days before the date on which the
Form S-4 shall become effective, and a "comfort" letter of
PricewaterhouseCoopers LLP, dated a date within two business days before the
Closing Date, each addressed to Company and Parent, related to the performance
by PricewaterhouseCoopers LLP of its procedures with respect to the financial
statements and other financial information contained in or incorporated by
reference in the Form S-4, in form and substance reasonably satisfactory to
Parent and customary in scope and substance for letters delivered by independent
accountants in connection with registration statements similar to the Form S-4.
(b) Parent shall use its best efforts to cause to be delivered to Company a
"comfort" letter of PricewaterhouseCoopers LLP, Parent's independent public
accountants, dated a date within two business days before the date on which the
Form S-4 shall become effective, and a "comfort" letter of
PricewaterhouseCoopers LLP, dated a date within two business days before the
Closing Date, each addressed to Company and Parent, relating to the performance
by PricewaterhouseCoopers LLP of its procedures with respect to the financial
statements and other financial information of Parent contained in or
incorporated by reference in the Form S-4, in form and substance reasonably
satisfactory to Company and customary in scope and substance for letters
delivered by independent accountants in connection with registration statements
similar to the Form S-4.
Section 6.3 Stockholders Meeting; Board Recommendation.
(a) Company shall take all action necessary, in accordance with the VSCA,
the Exchange Act and other applicable law and its articles of incorporation and
bylaws, to
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convene and hold a special meeting of the stockholders of Company (the "Company
Stockholders Meeting") as promptly as practicable after the date hereof for the
purpose of considering and voting upon this Agreement and to solicit proxies
pursuant to the Joint Proxy Statement/Prospectus in connection therewith.
Company shall ensure that the Company Stockholders Meeting is called, noticed,
convened, held and conducted, and that all proxies solicited in connection with
the Company Stockholders Meeting are solicited, in compliance with all
applicable legal requirements. Notwithstanding Section 6.3(c), Company's
obligation to call, give notice of, convene and hold the Company Stockholders
Meeting in accordance with this Section 6.3(a) shall not be limited or otherwise
affected by the commencement, disclosure, announcement or submission of any
Superior Offer (as defined below) or other Acquisition Proposal (as defined
below), or by any withdrawal, amendment or modification of the recommendation of
the Board of Directors of Company with respect to the Merger.
(b) Subject only to Section 6.3(c) hereof: (i) the Board of Directors of
Company shall unanimously recommend that Company's stockholders vote in favor of
and adopt and approve this Agreement and approve the Merger at the Company
Stockholders Meeting; (ii) the Joint Proxy Statement/Prospectus shall include a
statement to the effect that the Board of Directors of Company has unanimously
recommended that Company's stockholders vote in favor of and adopt and approve
this Agreement and approve the Merger at the Company Stockholders Meeting; and
(iii) neither the Board of Directors of Company nor any committee thereof shall
withdraw, amend or modify, or propose or resolve to withdraw, amend or modify,
in a manner adverse to Parent, the unanimous recommendation of the Board of
Directors of Company that Company's stockholders vote in favor of and adopt and
approve this Agreement and approve the Merger. For purposes of this Agreement,
said recommendation of the Board of Directors of Company shall be deemed to have
been modified in a manner adverse to Parent if said recommendation shall no
longer be unanimous.
(c) Nothing in Section 6.3(b) shall prevent the Board of Directors of
Company from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger at any time prior to the adoption and approval of this
Agreement by Company's stockholders if (i) a Superior Offer is made to Company
and is not withdrawn, (ii) neither Company nor any of its directors, officers,
affiliates, or legal or financial advisors ("Representatives") shall have
violated any of the covenants set forth in this Section 6.7, (iii) the Board of
Directors of Company concludes in good faith, after and based upon consultation
with its outside counsel, that, in light of such Superior Offer, the withdrawal,
amendment or modification of such recommendation is required in order for the
Board of Directors of Company to comply with its fiduciary obligations to
Company's stockholders under applicable law, and (iv) Company provides Parent
with at least five business days prior written notice of any meeting or written
consent of Company's Board of Directors at which such Board of Directors is
expected to consider or act upon such Superior Offer, which notice shall include
a copy of such Superior Offer with the name of the person making such Superior
Offer.
(d) For purposes of this Agreement, "Acquisition Proposal" means an
inquiry, offer or proposal regarding any of the following (other than the
transactions contemplated by this Agreement) involving Company or its
Subsidiaries: (i) any merger, reorganization, consolidation, share exchange,
recapitalization, business combination, liquidation, dissolution, or other
similar transaction involving, or, any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of, all or any significant portion of the assets
or 20% or more
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of the equity securities of, Company or any of its Subsidiaries, in a single
transaction or series of related transactions which could reasonably be expected
to interfere with the completion of the Merger; (ii) any tender offer or
exchange offer for 20% or more of the outstanding shares of capital stock of
Company or the filing of a registration statement under the Securities Act in
connection therewith; or (iii) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
(e) For purposes of this Agreement, a "Superior Offer" means an
unsolicited, bona fide written offer with respect to an Acquisition Proposal
made by a third person that the Board of Directors of Company determines in its
good faith judgment (based upon the written advice of its financial advisor and
a copy of which shall have been provided to Parent) to be more favorable
generally to Company's stockholders than the Merger, taking into account all
financial and strategic considerations, including relevant legal, financial,
regulatory and other aspects of such proposal, and the conditions to and
prospects for completion of such proposal than the Merger; provided, however,
that any such offer shall not be deemed to be a "Superior Offer" if any
financing required to complete the transaction contemplated by such offer is not
fully committed unless, in the good faith determination of the Board of
Directors of Company, such financing is likely to be obtained by such party on a
timely basis.
(f) Nothing contained in this Section 6.3 shall prohibit Company from
taking and disclosing to its stockholders a position contemplated by Rule 14d-9
or Rule 14e-2 promulgated under the Exchange Act or from making any disclosure
to Company's stockholders which, in the good faith judgment of the Board of
Directors of Company after consultation with outside counsel, is required under
applicable law; provided that Company does not withdraw or modify, or propose to
withdraw or modify, its position with respect to the Merger or approve or
recommend, or propose to approve or recommend, an Acquisition Proposal unless
Company and its Board of Directors have complied with all the provisions of this
Article VI.
Section 6.4 Access to Information, Confidentiality.
(a) Upon reasonable notice, Company shall, and shall cause each of its
Subsidiaries to, afford to Parent and to Parent's officers, employees, counsel,
financial advisors and other representatives access during the period prior to
the Effective Time to all its properties, books, contracts, commitments,
Returns, personnel and records and, during such period, Company shall, and shall
cause each of its Subsidiaries to, furnish as promptly as practicable to Parent
such information concerning its business, properties, financial condition,
operations and personnel as Parent may from time to time reasonably request. Any
such investigation by Parent shall not affect the representations or warranties
contained in this Agreement. Except as required by law, Parent will hold, and
will cause its directors, officers, employees, accountants, counsel, financial
advisors and other representatives and affiliates to hold, any non-public
information obtained from Company in confidence to the extent required by, and
in accordance with the provisions of, the letter agreement dated August 17,
1999, between Parent and Company with respect to confidentiality and other
matters, and Parent agrees that, prior to the Effective Time, it will not use
any such non-public information to, directly or indirectly, divert or attempt to
divert any business, customer or employee of Company or any of its Subsidiaries.
(b) Upon reasonable notice, Parent shall, and shall cause each of its
Subsidiaries to, afford to Company and to Company's officers, employees,
counsel, financial advisors and
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other representatives access during the period prior to the Effective Time to
all its properties, books, contracts, commitments, Returns, personnel and
records and, during such period, Parent shall, and shall cause each of its
Subsidiaries to, furnish as promptly as practicable to Company such information
concerning its business, properties, financial condition, operations and
personnel as Company may from time to time reasonably request. Any such
investigation by Company shall not affect the representations or warranties
contained in this Agreement. Except as required by law, Company will hold, and
will cause its directors, officers, employees, accountants, counsel, financial
advisors and other representatives and affiliates to hold, any non-public
information obtained from Parent in confidence to the extent required by, and in
accordance with the provisions of, the letter agreement, dated August 17, 1999,
between Parent and Company with respect to confidentiality and other matters,
and Company agrees that, prior to the Effective Time, it will not use any such
non-public information to, directly or indirectly, divert or attempt to divert
any business, customer or employee of Parent or any of its Subsidiaries.
Section 6.5 Reasonable Best Efforts. On the terms and subject to the
conditions set forth in this Agreement, each of the Parties shall use its
reasonable best efforts to take, or cause to be taken, all actions, and do, or
cause to be done, and assist and cooperate with the other Parties in doing, all
things necessary, proper or advisable (a) to consummate and make effective, in
the most expeditious manner practicable, the Merger and the other transactions
contemplated hereby, including the satisfaction of the respective conditions set
forth in Article VII, (b) to facilitate the ability of Parent and the Surviving
Corporation to obtain facility security clearances from the appropriate
Government Entities for each of Company's facilities currently having such
facility security clearances and appropriate security clearances for personnel
of the Surviving Corporation, (c) to avoid the termination for convenience by
any Governmental Entity or non-renewal of any Government Contract, and (d) to
maintain Company's current customer relationships.
Section 6.6 Public Announcements. Parent and Merger Sub, on the one hand,
and Company, on the other hand, shall consult with each other before issuing,
and provide each other the opportunity to review and comment upon, any press
release, SEC filing (including without limitation the Form S-4 and the Joint
Proxy Statement/Prospectus) or other public statements with respect to the
transactions contemplated hereby, including the Merger, and shall not issue any
such press release or make any such public statement prior to such consultation,
except as may be required by applicable law, by court process or by obligations
pursuant to the rules of The Nasdaq Stock Market.
Section 6.7 No Solicitation; Acquisition Proposals.
(a) From the date of this Agreement until the earlier of the Effective Time
or termination of this Agreement pursuant to Article VIII and subject only to
Section 6.7(b) of this Agreement, Company shall not directly or indirectly, and
shall not authorize or permit any Representative of Company directly or
indirectly to:
(i) solicit, initiate, knowingly encourage or knowingly induce the
making, submission or announcement of any Acquisition Proposal or take any
action that could reasonably be expected to lead to an Acquisition
Proposal;
(ii) furnish any non-public information regarding Company to any
person in connection with or in response to an Acquisition Proposal;
(iii) engage in discussions or negotiations with any person with
respect to any Acquisition Proposal;
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(iv) approve, endorse or recommend any Acquisition Proposal; or
(v) enter into any letter of intent or similar document or any
contract, agreement, commitment or understanding, written or oral,
contemplating or otherwise relating to any Acquisition Proposal.
Without limiting the generality of the foregoing, Company acknowledges and
agrees that any violation of any of the restrictions set forth in this Section
by any Representative of Company, whether or not such Representative is
purporting to act on behalf of Company, shall be deemed to constitute a breach
of this Section 6.7 by Company. In addition to the foregoing, Company shall
provide Parent with at least five business days prior written notice of any
meeting of Company's Board of Directors at which Company's Board of Directors is
reasonably expected to consider a Superior Offer.
Nothing in this Section 6.7(a) shall prevent the Company from filing with
the SEC a report on Form 8-K with respect to this Agreement.
(b) Nothing in Section 6.7(a) shall prevent Company, prior to the adoption
and approval of this Agreement by Company's stockholders, from furnishing
non-public information regarding Company to, or entering into discussions with,
any person in response to a Superior Offer that is submitted by such person and
not withdrawn if, in either case:
(i) neither Company nor any Representative of Company shall have
breached any of the covenants set forth in this Section 6.7;
(ii) the Board of Directors of Company concludes in good faith, after
and based upon consultation with its outside legal counsel, that such
action is required in order for the Board of Directors of Company to comply
with its fiduciary obligations to Company's stockholders under applicable
law;
(iii) at least five business days prior to furnishing any such
non-public information to, or entering into discussions with, such person,
Company gives Parent written notice of the discussions with such person;
(iv) Company receives from such person an executed confidentiality
agreement containing customary limitations on the use and disclosure of all
non-public written and oral information furnished to such person by or on
behalf of Company, including standstill provisions no less favorable to
Company then such agreements between Company and Parent; and
(v) five business days prior to furnishing any such non-public
information to such person, Company furnishes such non-public information
to Parent or, if such non-public information has previously been provided
to Parent, specifically identifies the non-public information to be
furnished to such third party.
(c) Company shall promptly (and in any event, within 24 hours) advise
Parent orally and in writing of any request for information or of any
Acquisition Proposal, or any inquiry with respect to or which could reasonably
be expected to lead to any Acquisition Proposal, the material terms and
conditions of such request, Acquisition Proposal or inquiry, and the identity of
the person making any such Acquisition Proposal or inquiry. Company shall keep
Parent fully informed of the status and details of any such request, Acquisition
Proposal or inquiry.
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Section 6.8 Consents, Approvals and Filings. Upon the terms and subject to
the conditions hereof, each of the parties hereto shall (a) make promptly its
respective filings, and thereafter make any other required submissions under the
Securities Act and the Exchange Act, with respect to the Merger and the other
transactions contemplated hereby, and (b) use its reasonable best efforts to
take, or cause to be taken, all appropriate action, and to do, or cause to be
done, and assist and cooperate with the other Parties in doing, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the other transactions contemplated
hereby, including without limitation using its reasonable best efforts to obtain
all licenses, permits, consents, approvals, authorizations, qualifications and
orders of Governmental Entities and parties to contracts with Company and its
Subsidiaries as are necessary for the consummation of the Merger and the other
transactions contemplated hereby and to fulfill the conditions to the Merger;
provided, however, that in no event shall Parent or any of its Subsidiaries be
required to agree or commit to divest, hold separate, offer for sale, abandon,
limit its operation or similar action with respect to any material assets
(tangible or intangible) or any business interest of it or any of its
Subsidiaries (including, without limitation, the Surviving Corporation after
consummation of the Merger) in connection with or as a condition to receiving
the consent or approval of any Governmental Entity (including, without
limitation, under the HSR Act). In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall use their reasonable best efforts to take all such action.
Section 6.9 Company Options.
(a) Company shall use its best efforts (without the expenditure of funds)
to encourage all holders of Company Options to exercise their vested Company
Options prior to the Effective Time. To the extent that Parent in its discretion
deems it appropriate to grant options to purchase Parent Common Stock ("Parent
Options") as of the Effective Time to a person holding Company Options prior to
the Effective Time, Company shall use its best efforts (without the expenditure
of funds) to encourage such holder of Company Options to accept the Parent
Options on the terms and conditions proposed by Parent and agree to forfeit and
cancel all unexercised Company Options held by such holder as of the Effective
Time. Parent agrees to identify to Company the holders of Company Options to be
granted Parent Options contingent upon the cancellation of Company Options as of
the Effective Time, and the material terms of the Parent Options to be granted,
sufficiently prior to the Effective Time to communicate this information to the
holders of such Company Options.
(b) Subject to the terms of this Agreement, at the Effective Time, all
remaining rights with respect to Shares of Company under each Company Option
then outstanding, whether vested or unvested, shall be converted into and become
rights with respect to Parent Common Stock, and Parent shall assume each such
Company Option in accordance with the terms (as in effect as of the date of this
Agreement) of the stock option plan under which it was issued and the stock
option agreement by which it is evidenced. From and after the Effective Time,
(i) each Company Option assumed by Parent may be exercised solely for shares of
Parent Common Stock, (ii) the number of shares of Parent Common Stock subject to
each such Company Option shall be equal to the number of Shares subject to such
Company Option immediately prior to the Effective Time multiplied by the Option
Exchange Ratio (as defined below), rounded down to the nearest whole share,
(iii) the per share exercise price under each such Company Option
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shall be adjusted by dividing the per share exercise price under such Company
Option by the Option Exchange Ratio and rounded up to the nearest cent and (iv)
any restriction on the exercise of any such Company Option shall continue in
full force and effect and the term, exercisability, vesting schedule and other
provisions of such Company Option shall otherwise remain unchanged; provided,
however, that each Company Option assumed by Parent in accordance with this
Section 6.9(b) shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, division or subdivision of
shares, stock dividend, reverse stock split, consolidation of shares,
reclassification, recapitalization or other similar transaction subsequent to
the Effective Time. For purposes of this Section, "Option Exchange Ratio" means
the ratio of (x) the sum of $4.00, plus the product of the Exchange Ratio
multiplied by the Average Trading Price, divided by (y) the Average Trading
Price.
(c) Company shall take all action that may be necessary (under the plans
pursuant to which Company Options are outstanding and otherwise) to effectuate
the provisions of this Section 6.9 and to ensure that, from and after the
Effective Time, holders of Company Options have no rights with respect thereto
other than those specifically provided in this Section 6.9. Following the
Closing Date, Parent will send to each holder of an assumed Company Option a
written notice setting forth (i) the number of shares of Parent Common Stock
subject to each assumed Company Option and (ii) the exercise price per share of
Parent Common Stock issuable upon exercise of the assumed Company Option. It is
the intention of the Parties that the Company Options assumed by Parent qualify
following the Effective Time as incentive stock options (as defined in Section
422 of the Code) to the extent that such Company Options qualified as incentive
stock options immediately prior to the Effective Time. Parent shall take all
necessary corporate action to reserve for issuance a sufficient number of shares
of Parent Common Stock for delivery upon exercise of Company Options assumed in
accordance with this Section 6.9. Within 60 days following the Effective Time,
Parent shall file with the SEC a registration statement on Form S-8 relating to
the shares of Parent Common Stock issuable with respect to Company Options
assumed by Parent in accordance with this Section 6.9.
Section 6.10 Employee Benefit Matters.
(a) Participants in any Company Plans that have been disclosed in Section
4.1(p) of the Disclosure Schedule and are in effect at the Effective Time will
continue to be sponsored by and maintained without material change (except as
required by law) by the Parent and Surviving Corporation until such time as
those Company Plans are merged into Parent's benefit plans or the participants
in the Company Plan otherwise become covered under the Parent's benefit plans.
Parent shall, and shall cause its Subsidiaries following the Effective Time
(including the Surviving Corporation) to, honor and provide for prompt payment
of all accrued obligations and benefits under all Company Plans and employment
or severance agreements between Company and persons who are or had been
employees of Company or any of its Subsidiaries at or prior to the Effective
Time ("Covered Employees") that are specifically identified in the Disclosure
Schedule, all in accordance with their respective terms.
(b) If Covered Employees are included in any benefit plan of Parent or its
Subsidiaries, Parent agrees that the Covered Employees shall receive credit
under such plan (other than any such plan providing for sabbaticals) for service
prior to the Effective Time with Company and its Subsidiaries to the same extent
such service was counted under similar Company Plans for purposes of
eligibility, vesting, eligibility for retirement (but not for benefit accrual)
and, with respect to vacation, disability and severance, benefit
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accrual. If Covered Employees are included in any medical, dental or health plan
other than the plan or plans they participated in at the Effective Time, Parent
agrees that any such plans shall not include pre-existing condition exclusions,
except to the extent such exclusions were applicable under the similar Company
Plan at the Effective Time, and shall provide credit for any deductibles and
co-payments applied or made with respect to each Covered Employee in the
calendar year of the change.
(c) Notwithstanding anything in this Agreement to the contrary, from and
after the Effective Time, the Surviving Corporation will have sole discretion
over the hiring, promotion, retention, firing and other terms and conditions of
the employment of employees of the Surviving Corporation. Except as otherwise
provided in this Section 6.10, nothing herein shall prevent Parent or the
Surviving Corporation from amending or terminating any Company Plan in
accordance with its terms.
Section 6.11 Affiliates and Certain Stockholders. Prior to the Closing
Date, Company shall deliver to Parent a letter identifying all persons who are,
at the time the Merger is submitted for approval to the stockholders of Company,
"affiliates" of Company for purposes of Rule 145 under the Securities Act.
Company shall use its best efforts to cause each such person to deliver to
Parent on or prior to the Closing Date a written agreement substantially in the
form attached as Exhibit A hereto. Parent shall not be required to maintain the
effectiveness of the Form S-4 or any other registration statement under the
Securities Act for the purposes of resale of Common Stock by such affiliates,
and the certificates representing Common Stock received by such affiliates in
the Merger shall bear a customary legend regarding applicable Securities Act
restrictions.
Section 6.12 Nasdaq Listing. Parent shall use its best efforts to cause
the shares of Common Stock to be issued in the Merger to be approved for listing
on The Nasdaq Stock Market, subject to official notice of issuance, prior to the
Closing Date.
Section 6.13 Rights Agreement. The Board of Directors of Company shall
take all further action (in addition to that referred to in Section 4.1(s))
requested in writing by Parent in order to render the Rights inapplicable to (a)
the Merger and the other transactions contemplated by this Agreement and the
Stockholders Agreement, and (b) Company following the Effective Time. Except as
provided above with respect to the Merger and the other transactions
contemplated by this Agreement and the Stockholders Agreement, the Board of
Directors of Company shall not, without the consent of Parent (i) amend the
Rights Agreement, or (ii) take any action with respect to, or make any
determination under, the Rights Agreement, including a redemption of the rights
or any action to facilitate an Acquisition Proposal.
Section 6.14 Indemnification and Insurance.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of Company
pursuant to (i) each indemnification agreement currently in effect between
Company and each person who is or was a director or officer of Company at or
prior to the Effective Time and (ii) any indemnification provision under
Company's articles of incorporation or bylaws as each is in effect on the date
hereof (the persons to be indemnified pursuant to the agreements or provisions
referred to in clauses (i) and (ii) of this Section 6.14 shall be referred to
as, collectively, the "Indemnified Parties"). The certificate of incorporation
and bylaws of Merger Sub will provide for indemnification to the fullest extent
permitted by law.
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(b) For six years after the Effective Time, Parent shall maintain in effect
the current level and scope of directors' and officers' liability insurance
covering those persons who are currently covered by Company's directors' and
officers' liability insurance policy; provided, however, that in no event shall
Parent be required to expend in any one year an amount in excess of 125% of the
annual premium currently paid by Company for such insurance, and provided,
further, that if the annual premiums of such insurance coverage exceed such
amount, Parent shall be obligated to obtain a policy with the greatest coverage
available for a cost not exceeding such amount.
(c) This Section 6.14 shall survive the consummation of the Merger and the
Effective Time, is intended to benefit and may be enforced by Company, Parent,
the Surviving Corporation and the Indemnified Parties, and shall be binding on
all successors and assigns of Parent and the Surviving Corporation.
Section 6.15 Tax Treatment. Except as may be required by the terms of this
Agreement, each of Parent and Company shall not (before or after the Effective
Time) take any action and shall not (before or after the Effective Time) fail to
take any action which action or failure to act would prevent, or would be
reasonably likely to prevent, the Merger from qualifying as a reorganization
within the meaning of Section 368 of the Code. At or prior to the filing of the
Form S-4, Company and Parent shall execute and deliver to Cooley Godward LLP and
to Powell, Goldstein, Frazer & Murphy LLP tax representation letters in
customary form. Parent, Merger Sub and Company shall each confirm to Cooley
Godward LLP and to Powell, Goldstein, Frazer & Murphy LLP the accuracy and
completeness as of the Effective Time of the tax representation letters
delivered pursuant to the immediately preceding sentence. Following delivery of
such tax representation letters, each of Parent and Company shall use its
reasonable best efforts to cause Cooley Godward LLP and Powell, Goldstein,
Frazer & Murphy LLP to deliver to it a tax opinion satisfying the requirements
of Item 601 of Regulation S-K promulgated under the Securities Act. In rendering
such opinions, each of such counsel shall be entitled to rely on the tax
representation letters referred to in this Section 6.15.
Section 6.16 Subsidiaries' Directors and Officers. To the extent requested
by Parent, Company shall use its reasonable best efforts to obtain and deliver
to Parent prior to the Closing Date the resignation of each director and officer
of each of Company's Subsidiaries.
Section 6.17 Stockholders Agreement. Company shall use its reasonable best
efforts to cause Alcatel, N.V. to execute the Stockholders Agreement promptly.
Section 6.18 Financing. Parent shall use its reasonable best efforts to
obtain, and Company shall use its reasonable best efforts to cooperate with
Parent in obtaining, the Financing described in the Commitment Letter.
Section 6.19 Employment Agreements and Noncompetition Agreements. Company
shall use its reasonable best efforts to cause the persons listed in Section
6.19 of the Disclosure Schedule to execute and deliver, prior to the Effective
Time, Employment Agreements and Noncompetition Agreements on terms reasonably
satisfactory to Parent and such persons.
Section 6.20 Tax Matters. Parent shall use its reasonable best efforts to
provide Parent and Merger Sub with the documentation described in Section 7.2(k)
with respect to the full amount of the federal income tax deduction referred to
in Section 7.2(k).
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ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or written waiver on or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been adopted by
the affirmative vote of holders of the requisite number of Shares, and the
issuance of Parent Common Stock in the Merger pursuant to this Agreement
and an increase in the number of shares of Parent Common Stock subject to
awards under Parent's 1997 Stock Option Plan shall have been approved by
the affirmative vote of holders of the requisite number of shares of Parent
Common Stock, each in the manner required pursuant to each of Parent's and
Company's respective certificate or articles of incorporation and the DGCL,
the VSCA, the rules of The Nasdaq Stock Market and other applicable laws.
(b) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect, and there shall not be
pending or threatened by any Governmental Entities any suit, action or
proceeding seeking to restrain or prohibit the Merger; provided, however,
that the party invoking this condition shall have complied with its
obligations under Section 6.8.
(c) Nasdaq Listing. The shares of Common Stock issuable to Company's
stockholders pursuant to the Merger shall have been approved for listing on
The Nasdaq Stock Market, subject to official notice of issuance.
(d) Form S-4. The Form S-4 shall have been declared effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
Section 7.2 Conditions to Obligations of Parent and Merger Sub. The
obligation of each of Parent and Merger Sub to effect the Merger is further
subject to satisfaction or written waiver on or prior to the Closing Date of the
following conditions:
(a) Representations and Warranties. Representations and warranties of
Company contained in this Agreement (other than representations and
warranties expressly made only as of a specific date, which shall be
accurate as of such date) shall have been accurate in all respects as of
the date of this Agreement and shall be accurate in all respects as of the
Closing Date as if made on and as of the Closing Date (it being understood
that, for purposes of determining the accuracy of such representations and
warranties, all materiality qualifications contained in such
representations and warranties shall be disregarded), except for any such
failure which, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on Company, and Parent and
Merger Sub shall have received a certificate signed on behalf of Company by
an authorized officer of Company to such effect.
(b) Performance of Obligations of Company. Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent and
Merger Sub shall have
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received a certificate signed on behalf of Company by an authorized officer
of Company to such effect.
(c) No Material Adverse Change. Since the date of this Agreement,
Company and its Subsidiaries, taken as a whole, shall not have experienced
any change, event or occurrence that has had or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Company.
(d) Consents. All consents, authorizations, orders and approvals of
(or filings or registrations with) any Governmental Entity or any other
person required to be obtained or made prior to the Effective Time in
connection with the execution, delivery and performance of this Agreement
shall have been obtained or made, except for the filing of the articles of
merger pursuant to Section 1.3 and except where the failure to have
obtained or made such consents, authorizations, orders, approvals, filings
or registrations could not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on Parent or the Surviving
Corporation.
(e) Affiliate Letters. Parent shall have received from each person
identified as an "affiliate" of Company pursuant to Section 6.11 an
executed copy of an agreement in the form attached as Exhibit B hereto.
(f) Comfort Letters. Parent shall have received "comfort" letters
from PricewaterhouseCoopers LLP, Company's independent public accountants,
dated a date within two business days before the date on which the Form S-4
shall become effective, and a date within two business days of the Closing
Date (or such other date reasonably acceptable to Parent) with respect to
certain financial statements and other financial information included in
the Form S-4 in customary form.
(g) Tax Opinion. The opinion of Powell, Goldstein, Frazer & Murphy
LLP, counsel to Parent, in form and substance reasonably satisfactory to
Parent, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and based on the letters
referred to in Section 6.15, shall have been delivered to Parent and not
have been withdrawn or modified in any material respect; provided, however,
that if Powell, Goldstein, Frazer & Murphy LLP does not render such opinion
or withdraws or modifies such opinion, this condition shall nonetheless be
deemed to be satisfied if counsel to Company or special tax counsel
reasonably acceptable to Parent renders such opinion to Parent. In
rendering such opinion, such firm may rely on such representations,
warranties and certificates as it deems reasonable or appropriate under the
circumstances.
(h) Government Contracts. No authorized representative of a
Governmental Entity shall have notified Parent or Company that such
Governmental Entity (i) intends to terminate any of the Government
Contracts or does not intend to renew any Government Contract, or (ii)
anticipates that facility security clearances will not be granted to the
Surviving Corporation following the Effective Time for Company facilities
currently having such clearance, nor shall any Party have a good faith
reason to believe that any existing Government Contract will be terminated
for convenience of the government or not renewed or facility security
clearances withheld from the Surviving Corporation, assuming that in each
case Parent complies with applicable rules and regulations and uses its
reasonable best efforts to maintain the Government Contracts and obtain
facility security clearances. Parent shall have received a
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certificate signed on behalf of Company by Joseph M. Fox and Joseph Kelly
Brown to such effect, as it relates to Company.
(i) Additional Closing Documents. Company shall have furnished to
Parent and Merger Sub such additional certificates, opinions and other
documents as Parent may have reasonably requested as to any of the
conditions set forth in this Section 7.2.
(j) Dissenting Shares. Holders of not more than one percent (1%) of
the outstanding Shares shall have perfected dissenters' rights of their
Shares in the manner required by the VSCA.
(k) Tax Matters. The Company shall have provided Parent and Merger
Sub with evidence establishing that an amount equal to at least 60% of the
total claimed by Company as a federal income tax deduction on the Company's
U.S. corporation income tax return (Form 1120) for its taxable year ended
November 30, 1997, for income recognized by employees of the Company from
disqualifying dispositions (within the meaning of Section 422(a) of the
Code) of Company stock that was acquired by such employees upon the
exercise of incentive stock options (as defined in Section 422(b) of the
Code) that were granted to the employees by the Company has either been
included (a) on one or more Forms W-2 or W-2c (for the calendar year 1996)
issued by the Company to its employees or (b) in one or more affidavits
executed by Company employees, which state, under penalties of perjury,
that the signatory has included the income from the disqualifying
disposition on his or her federal income tax return for the calendar year
1996 and paid the proper amount of tax with respect thereto.
Section 7.3 Conditions to Obligation of Company. The obligation of Company
to effect the Merger is further subject to satisfaction or written waiver on or
prior to the Closing Date of the following conditions:
(a) The representations and warranties of Parent and Merger Sub
contained in this Agreement (other than representations and warranties
expressly made as of a certain date, which shall be accurate as of such
date) shall have been accurate in all respects as of the date of this
Agreement and shall be accurate in all respects as of the Closing Date as
if made on and as of the Closing Date (it being understood that, for
purposes of determining the accuracy of such representations and
warranties, all materiality qualifications contained in such
representations and warranties shall be disregarded), except for any such
failure which, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on Parent, and Company shall
have received a certificate signed on behalf of Parent and Merger Sub by an
authorized officer of Parent to such effect.
(b) Performance of Obligations of Parent and Merger Sub. Each of
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Closing Date, and Company shall have received a certificate signed
on behalf of Parent by an authorized officer of Parent to such effect.
(c) No Material Adverse Change. Since the date of this Agreement,
Parent and its Subsidiaries, taken as a whole, shall not have experienced
any change, event or occurrence that has had or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent.
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(d) Tax Opinion. The opinion of Cooley Godward LLP, counsel to
Company, in form and substance reasonably satisfactory to Company, to the
effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, and based on the letters referred to in
Section 6.15, shall have been delivered to Company and not have been
withdrawn or modified in any material respect; provided, however, that if
Cooley Godward LLP does not render such opinion or withdraws or modifies
such opinion, this condition shall nonetheless be deemed to be satisfied if
counsel to Parent or special tax counsel reasonably acceptable to Company
renders such opinion to Company. In rendering such opinion, such firm may
rely on such representations, warranties and certificates as it deems
reasonable or appropriate under the circumstances.
(e) Additional Closing Documents. Parent and Merger Sub shall have
furnished to Company such additional certificates and other documents as
Company may have reasonably requested as to any of the conditions set forth
in this Section 7.3.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination.
(a) This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Effective Time, notwithstanding
adoption thereof by the stockholders of Parent and Company, in any one of the
following circumstances:
(i) By mutual written consent duly authorized by the Boards of
Directors of Parent and Company;
(ii) By Parent or Company, if the Effective Time shall not have
occurred on or before April 19, 2000, otherwise than as a result of any
material breach of any provision of this Agreement by the party seeking to
effect such termination;
(iii) By Parent or Company, if any federal or state court of competent
jurisdiction or other Governmental Entity shall have issued an order,
decree or ruling, or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable, provided
that neither party may terminate this Agreement pursuant to this Section
8.1 (a)(iii) unless such party has used its reasonable best efforts to
remove such order, decree, ruling or injunction;
(iv) By Parent, if the Company Stockholders Meeting shall have been
held and this Agreement shall not have been adopted by the affirmative vote
of the holders of the requisite number of Shares;
(v) By Parent or Company, if the Parent Stockholders Meeting shall
have been held and either the issuance of Parent Common Stock in the Merger
pursuant to this Agreement or the proposed increase in the number of shares
of Parent common stock subject to options under Parent's 1997 Stock Option
Plan shall not have been approved by the affirmative vote of the requisite
number of shares of Parent Common Stock;
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(vi) By Parent, if a Triggering Event shall have occurred. A
"Triggering Event" shall be deemed to have occurred if (A) the Board of
Directors of Company or any committee thereof shall for any reason have
withdrawn or shall have amended or modified in a manner adverse to Parent
its unanimous recommendation in favor of the adoption and approval of the
Agreement or the approval of the Merger, (B) Company shall have failed to
include in the Joint Proxy Statement/Prospectus the unanimous
recommendation of the Board of Directors of Company in favor of the
adoption and approval of the Agreement and the approval of the Merger, (C)
the Board of Directors of Company fails to reaffirm its unanimous
recommendation in favor of the adoption and approval of the Agreement and
the approval of the Merger within five (5) business days after Parent
requests in writing that such recommendation be reaffirmed at any time
following the announcement of an Acquisition Proposal, (D) taken any of the
actions described in Section 6.7(a), whether or not permitted by Section
6.7(b), (E) the Board of Directors of Company or any committee thereof
shall have approved, endorsed or recommended any Acquisition Proposal or
(F) a tender or exchange offer relating to securities of Company shall have
been commenced by a person unaffiliated with Parent and Company shall not
have sent to its security holders pursuant to Rule 14d-9 or Rule 14e-2
promulgated under the Exchange Act within ten (10) business days after such
tender or exchange offer is first published, sent or given, a statement
disclosing that Company recommends rejection of such tender or exchange
offer.
(vii) By Parent if any of Company's representations and warranties
contained in this Agreement shall have been materially inaccurate as of the
date of this Agreement or shall have become materially inaccurate as of the
Closing Date as if made on such date, or if any of Company's covenants and
agreements contained in this Agreement shall have been breached in any
material respect, provided, however, that Parent may not terminate this
Agreement under this Section 8.1(vii) on account of an inaccuracy in
Company's representations and warranties that is curable by Company or on
account of a breach of covenant or agreement by Company that is curable by
Company unless Company fails to cure such inaccuracy or breach within
twenty (20) days after receiving written notice from Parent of such
inaccuracy or breach;
(viii) By Company if any of the Parent's representations and
warranties contained in this Agreement shall have been materially
inaccurate as of the date of this Agreement or shall have become materially
inaccurate as of the Closing Date as if made on such date, or if any of the
Parent's covenants and agreements contained in this Agreement shall have
been breached in any material respect, provided, however, that Company may
not terminate this Agreement under this Section 8.1(viii) on account of an
inaccuracy in the Parent's representations and warranties that is curable
by the Parent or on account of a breach of covenant or agreement by the
Parent that is curable by the Parent unless the Parent fails to cure such
inaccuracy or breach within twenty (20) days after receiving written notice
from Company of such inaccuracy or breach.
(ix) By Company, following the determination by Company's Board of
Directors that an Acquisition Proposal constitutes a Superior Offer and
prior to the adoption and approval of this Agreement and the Merger at
Company Stockholders Meeting, if: (A) Company is not in material breach of
its obligations under Section 6.7 of this Agreement, (B) each of the
conditions set forth in Section 6.3(c) have been satisfied and (C)
concurrent with Company's notice of termination pursuant to this
subsection,
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Company shall pay Parent the termination fee described in paragraph (b)
below. No termination pursuant to this subsection shall be effective until
such termination fee is paid to Parent.
(x) By Parent or Company if neither of the conditions set forth in
Section 7.2(g) nor Section 7.3(d) relating to the delivery of tax opinions
have been satisfied within 60 days following the date of the later of the
Parent Stockholders Meeting or the Company Stockholders Meeting, provided
that the party seeking to effect such termination is not in material breach
of any provision of this Agreement.
(b) If this Agreement is terminated pursuant to Section 8.1(a)(vii) or (ix)
then, in such event, Company shall pay to Parent a fee in the amount of
$2,000,000 (the "Fee"), payable in immediately available funds within one
business day after termination in the case of termination pursuant to Section
8.1(a)(vii) or concurrent with termination in the case of termination by Company
pursuant to Section 8.1(a)(ix). If this Agreement is terminated:
(A) pursuant to Section 8.1(a)(ii) or (iv), and an Acquisition
Proposal has been made after the date hereof and (unless the party making
such Acquisition Proposal or an affiliate thereof ultimately consummates a
transaction or enters into an agreement that would otherwise require the
payment of the Fee pursuant to this sentence) is not withdrawn prior to the
termination of this Agreement; or
(B) pursuant to Section 8(a)(vi), and in either the case of (A) or
(B), within nine (9) months after such termination (1) an Acquisition
Proposal relating to Company is consummated, or (2) Company enters into a
definitive agreement with respect to an Acquisition Proposal, then Company
shall pay the Fee to Parent in immediately available funds at or prior to
the consummation of such Acquisition Proposal, or within one business day
following the date of execution of such definitive agreement, whichever is
earlier. If this Agreement is terminated pursuant to Section 8.1(a)(viii)
then, in such event, Parent shall pay to Company the Fee in immediately
available funds within one business day after termination. Both Company and
Parent agree that the payment of the Fee, either by Company or by Parent as
appropriate under this Section 8.1(b), shall be the sole and exclusive
remedy upon termination of this Agreement pursuant to Section 8.1(a)(vii)
or (viii), except in the case of violation of Sections 6.3 or 6.7 of this
Agreement or willful or intentional breach of this Agreement.
Section 8.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.1(a) hereof, this Agreement
(except for the provisions of Section 4.1(t), Section 4.2(f), the last sentence
of Section 6.4(a), the last sentence of 6.4(b), Section 6.6, paragraph (b) of
Section 8.1, this Section 8.2 and Article IX) shall forthwith become void and
cease to have any force or effect, without any liability on the part of any
party hereto or any of its affiliates; provided, however, that nothing in this
Section 8.2 shall relieve any party to this Agreement of liability for any
willful or intentional breach of this Agreement.
Section 8.3 Amendment. Subject to applicable provisions of the DGCL and
the VSCA, at any time prior to the Effective Time, the Parties hereto may modify
or amend this Agreement by written agreement executed and delivered by duly
authorized officers of the respective parties; provided, however, that after
adoption of this Agreement by the stockholders of either of Parent or Company,
no amendment shall be made which would
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reduce the amount or change the type of consideration into which each Share
shall be converted upon consummation of the Merger. This Agreement may not be
modified or amended except by written agreement executed and delivered by duly
authorized officers of each of the respective parties.
Section 8.4 Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement, or (c)
subject to Section 8.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in a written instrument executed and delivered by a duly authorized
officer on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.
Section 8.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of Parent, Merger Sub
or Company, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. Except as
contemplated in Section 8.2, none of the representations and warranties in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time. This Section 9.1 shall not limit any covenant or
agreement of the parties which by its terms contemplates performance after the
Effective Time.
Section 9.2 Fees and Expenses. Each party hereto shall pay its own
expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the transactions contemplated hereby, except
that Parent and Company shall share equally all of the costs and expenses (other
than attorneys' and accountants' fees and expenses) incurred in connection with
(a) the preparation, filing, printing and mailing of the Form S-4 and the Joint
Proxy Statement/Prospectus (excluding SEC filing fees, which shall be paid by
Parent).
Section 9.3 Definitions. For purposes of this Agreement:
(a) an "Affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "Business day" means any day other than Saturday, Sunday or any
other day on which banks in the City of New York are required or permitted
to close;
(c) "Disclosure Schedule" means the disclosure schedule delivered by
each party to the other simultaneously with the execution of this
Agreement;
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(d) "Environmental Laws" means any federal, state or local law, rule,
regulation or decision relating to: (i) releases or threatened releases of
Hazardous Substances or materials containing Hazardous Substances; (ii) the
manufacture, handling, transport, use, treatment, storage or disposal of
Hazardous Substances or materials containing Hazardous Substances; or (iii)
otherwise relating to pollution of the environment or the protection of
human health;
(e) "Hazardous Substances" means: (i) those substances defined as
"hazardous substances," "pollutants" or "contaminants," "hazardous waste,"
"hazardous chemicals" and the like in or regulated under the following
federal statutes and their state counterparts, as each may be amended from
time to time, and all regulations thereunder: the Hazardous Materials
Transportation Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the
Federal Insecticide, Fungicide and Rodenticide Act and the Clean Air Act;
(ii) petroleum and petroleum products including crude oil and any fractions
thereof; (iii) natural gas, synthetic gas and any mixtures thereof usable
for fuel, (iv) radon; (v) asbestos; and (vi) any other substance,
regardless of physical form, that is subject to any Environmental Laws;
(f) "Knowledge" means the actual knowledge of any executive officer of
Company or Parent, as the case may be;
(g) "Liens" means, collectively, all pledges, claims, liens, charges,
mortgages, conditional sale or title retention agreements, hypothecations,
collateral assignments, security interests, easements and other
encumbrances of any kind or nature whatsoever;
(h) "Material Adverse Effect" or "Material Adverse Change" means any
event, occurrence, failure of event or occurrence, change, effect, state of
affairs, breach, default, violation, fine, penalty or failure to comply
(each, a "circumstance"), individually or taken together with all other
circumstances contemplated by or in connection with any or all of the
applicable representations and warranties made in this Agreement which
could reasonably be expected to: (i) materially adversely effect the
business, properties, assets, condition (financial or otherwise), or
results of operations of Parent or Company, in each case, including its
respective Subsidiaries together with it taken as a whole, or (ii) impair
Parent or Company, as the case may be, of its ability to perform its
obligations under this Agreement and to consummate the transactions
contemplated hereby. In no event shall any of the following constitute a
Material Adverse Effect or a Material Adverse Change: (i) a change in the
trading prices of either of Parent's or Company's equity securities between
the date of this Agreement and the Effective Time, in and of itself; (ii)
effects, changes, events, circumstances or conditions generally affecting
the business application integration industry in which either Parent or
Company operate or arising from changes in general business or economic
condition, and not specifically relating to such party; (iii) effects,
changes, events, circumstances or conditions directly attributable to (A)
out-of-pocket fees and expenses (including, without limitation, legal,
accounting, investigatory, investment banking, and other fees and expenses)
incurred in connection with the transactions contemplated by the Agreement
or (B) the payment by Parent or Company of all amounts due to any officers
or employees of Company under employment contracts, non-competition
agreements, employee benefit plans or severance arrangements as specified
in the Disclosure Schedule; (iv) any effects,
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changes, events, circumstances or conditions resulting from any change in
law or generally accepted accounting principles, which affect generally
entities such as Parent and Company; and (v) any effects, changes, events,
circumstances or conditions resulting from compliance by Parent or Company
with the express terms of this Agreement or action taken with the prior
informed written consent of the other party.
(i) "Person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
(j) a "Subsidiary" of any person means any other person of which (i)
the first mentioned person or any Subsidiary thereof is a general partner,
(ii) voting power to elect a majority of the board of directors or others
performing similar functions with respect to such other person is held by
the first mentioned person and/or by any one or more of its Subsidiaries,
or (iii) at least 50% of the equity interests of such other person is,
directly or indirectly, owned or controlled by such first mentioned person
and/or by any one or more of its Subsidiaries.
Section 9.4 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(i) if to Parent or to Merger Sub, to
Level 8 Systems, Inc.
8000 Regency Parkway
Cary, N.C. 27511
Attention: W. Dennis McKinnie, Esq.
Telecopy: (919) 380-5121
with a copy (which shall not constitute notice) to:
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Suite 1600
Atlanta, GA 30303
Attention: Scott D. Smith, Esq.
Eliot W. Robinson, Esq.
Telecopy: (404) 572-6999
(ii) if to Company, to
Template Software, Inc.
45365 Vintage Park Plaza
Suite 100
Dulles, VA 20166
Attention: Joseph M. Fox
Telecopy: (703) 318-8325
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with a copy (which shall not constitute notice) to:
Cooley Godward LLP
2002 Edmund Halley Drive, Suite 300
Reston, VA 20191-3436
Attention: Joseph W. Conroy, Esq.
Mark D. Spoto, Esq.
Telecopy: (703) 262-8100
Section 9.5 Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for convenience of reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
Section 9.6 Entire Agreement; Third-Party Beneficiaries. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement (except for the Stockholders Agreement and the
letter agreement referenced in the last sentence of Section 6.4(a) and 6.4(b)).
Except for the provisions of Article II and Section 6.14, this Agreement is not
intended to confer upon any person (including without limitation any employees
or former employees of Company), other than the parties hereto, any rights or
remedies.
Section 9.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof, except to the extent the internal laws of the Commonwealth of
Virginia expressly apply to the Merger as it relates to Company.
Section 9.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement may be assigned or delegated, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties, and any such assignment without
such prior written consent shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
Section 9.9 Enforcement. Irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. Accordingly, the parties shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions of this Agreement
in the Court of Chancery in and for New Castle County in the State of Delaware
(or, if such court lacks subject matter jurisdiction, any appropriate state or
federal court in New Castle County in the State of Delaware), this being in
addition to any other remedy to which they are entitled at law or in equity.
Each of the parties hereto (a) shall submit itself to the personal jurisdiction
of the Court of Chancery in and for New Castle County in the State of Delaware
(or, if such court lacks subject matter jurisdiction, any appropriate state or
federal court in New Castle County in the State of Delaware) in the event any
dispute arises out of this Agreement or any of the transactions contemplated
hereby, (b) shall not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, and
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(c) shall not bring any action relating to this Agreement or any of the
transactions contemplated hereby in any court other than the Court of Chancery
in and for New Castle County in the State of Delaware (or, if such court lacks
subject matter jurisdiction, any appropriate state or federal court in New
Castle County in the State of Delaware).
Section 9.10 Severability. Whenever possible, each provision or portion of
any provision of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
Section 9.11 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same instrument and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
[signature page follows]
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IN WITNESS WHEREOF, Parent, Merger Sub and Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
LEVEL 8 SYSTEMS, INC.
By: /s/ STEVEN DMISZEWICKI
-----------------------------------
Name: Steven Dmiszewicki
Title: President
TSAC, INC.
By: /s/ DENNIS MCKINNIE
-----------------------------------
Name: Dennis McKinnie
Title: Senior Vice President, Chief
Legal and Administrative
Officer
TEMPLATE SOFTWARE, INC.
By: /s/ JOSEPH M. FOX
-----------------------------------
Name: Joseph M. Fox
Title: Chairman
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ANNEX B
October 19, 1999
Board of Directors
Level 8 Systems, Inc.
8000 Regency Parkway
Cary, North Carolina 27511
Members of the Board:
Level 8 Systems, Inc. ("Level 8"), TSAC, Inc. ("TSAC"), a wholly owned
subsidiary of Level 8 and Template Software, Inc. ("Template") are expected to
enter into an Agreement and Plan of Merger (the "Agreement"), whereby Template
will be merged with and into TSAC (the "Merger"). As a result of the Merger,
each outstanding share of Template common stock will be converted into the right
to receive U.S. $4.00 in cash and a fraction of a share of Level 8 common stock
having a value of U.S. $3.90, based on a 10 day trailing average of the closing
prices of the Company's common stock, subject to adjustment as set forth in the
Agreement (collectively with the Merger, the "Transaction"). The terms and
conditions of the Transaction are more fully set forth in the Agreement. At the
completion of the Transaction, Template will become a wholly-owned subsidiary of
Level 8.
You have asked us whether, in our opinion, the consideration to be paid by
Level 8 in the Transaction is fair, from a financial point of view, to Level 8.
Advest, as part of its investment banking business is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, private placements of equity and debt and negotiated
underwritings.
In connection with this opinion, Advest has, among other matters, reviewed
and analyzed publicly available information as of the date of this letter
including, but not limited to (i) annual and quarterly reports on SEC Form 10-K
and 10-Q of Template for the two years ended November 30, 1997, the year ended
December 31, 1998 and the quarters ended March 31, 1999 and June 30, 1999; as
well as annual and quarterly reports on SEC Form 10-K and 10-Q of Level 8 for
the three years ended December 31, 1998 and the quarters ended March 31, 1999
and June 30, 1999; (ii) business and financial information regarding companies
similar to Template, including the pricing of these comparable companies'
publicly traded securities; (iii) the pricing and financial terms of business
combinations recently effected involving companies similar to Template; and (iv)
such other publicly available information, financial studies, analyses,
investigations and market data as Advest deemed relevant. In addition, Advest
also reviewed, analyzed and discussed information furnished by Template and
Level 8 and their advisors, including: (i) the draft Agreement and Plan of
Merger; and (ii) certain internal and pro-forma financial statements,
projections and other unaudited financial and operating data concerning Template
and Level 8.
We have, among other things, performed the following analyses and
investigations: (i) we compared the proposed purchase price per share to the
trading range of Template's common stock; (ii) we compared the proposed purchase
price and its implied ratios to sales, earnings, book value and cash flow
("multiples") to the same multiples calculated from current public market
valuations of publicly traded companies deemed similar to
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Template; (iii) we compared the proposed purchase price and its implied
multiples of sales and cash flow to the same multiples as calculated from
valuations established in recent transactions of companies deemed similar to
Template; (iv) we analyzed and compared the proposed purchase price to the value
of estimated future free cash flows discounted to their current value; and (v)
we analyzed Template's historical trading activity, including volume and price
relationships. In addition, we performed such other analysis and investigations
and took into account such other matters and information as we deemed necessary.
Level 8 has agreed to pay Advest a fee for delivery of this opinion as well
as other advisory services rendered in connection with the Transaction. This
opinion is necessarily based on economic, market and other conditions as they
exist and can only be evaluated by us as of the date of this letter.
In preparing this opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by Level 8 or
Template, and we have not independently verified such information, nor have we
undertaken an independent appraisal of the assets or liabilities of Level 8 or
Template. Our opinion expressed herein is provided for the information of the
Board of Directors of Level 8 in its evaluation of the Transaction and does not
constitute a recommendation of any kind to any stockholder of Level 8 or
Template as to how such stockholder should vote at the stockholders' meeting to
be held in connection with the Merger. We understand and consent that our
opinion will be filed with the Securities and Exchange Commission and may be
included with proxy materials mailed to stockholders of Level 8. Any other use
or publication of all or part of this opinion must be granted by written consent
of Advest. We have assumed for purposes of this opinion that there have been no
material changes in the financial condition of Level 8 or Template from the
conditions disclosed in the materials received by us.
In reliance upon and subject to the foregoing, it is our opinion that, as
of the date hereof, the consideration to be paid by Level 8 in the Transaction
is fair, from a financial point of view, to Level 8.
Very truly yours,
ADVEST, INC.
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ANNEX C
US BANCORP PIPER JAFFRAY
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402
612-342-6000
October 19, 1999
Board of Directors
Template Software, Inc.
45365 Vintage Park Plaza
Dulles, VA 20166
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of common stock (the "Common Stock") of Template
Software, Inc. (the "Company") of the consideration to be received by holders of
Common Stock, pursuant to an Agreement and Plan of Merger (the "Agreement") to
be entered into among the Company, Level 8 Systems, Inc. (the "Parent") and
Template Acquisition Corporation (the "Purchaser"), a wholly owned subsidiary of
the Parent. The Agreement provides for the merger (the "Merger") of the Company
with and into the Purchaser, and in connection therewith each share of Common
Stock will be converted and exchanged for (i) US$4.00 in cash, and (ii) the
number of shares, or fraction thereof, of Parent Common Stock having a value of
US$3.90, based on a 10 day trailing average of the closing prices of the Parent
Common Stock, subject to adjustment as set forth in the Agreement. The Merger
and the transactions contemplated therein are collectively referred to as the
"Transaction." The terms and conditions of the Transaction are more fully set
forth in the Agreement.
U.S. Bancorp Piper Jaffray, Inc. ("U.S. Bancorp Piper Jaffray"), as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
underwriting and secondary distributions of securities, private placements and
valuations for estate, corporate and other purposes. We have acted as financial
advisor to the Company in connection with the Agreement and will receive a fee
for services which is contingent upon consummation of the Transaction. We will
also receive a fee for providing this opinion. This opinion fee is not
contingent upon the consummation of the Transaction. The Company has also agreed
to indemnify us against certain liabilities in connection with our services.
U.S. Bancorp Piper Jaffray makes a market in the Common Stock, has written
research reports on the Company during the last 12 months, and acted as
co-manager for the initial public offering of Common Stock on January 29, 1997.
In addition, U.S. Bancorp Piper Jaffray has a strategic alliance with Nessuah
Zannex Ltd. ("NZL"), an Israeli investment banking firm that has a relationship
with the Parent. While the strategic alliance with NZL contemplates the sharing
of revenues in certain situations, it does not apply to the Transaction. In the
ordinary course of our business, we and our affiliates may actively trade
securities of the Company and the Parent for our own account or the account of
our customers and accordingly, we may at any time hold a long or short position
in such securities.
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In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. We
have reviewed the draft dated October 15, 1999 of the Agreement. We also have
reviewed financial and other information that was publicly available or
furnished to us by the Company and Parent, including information provided during
discussions with the management of each company. In addition, we have compared
certain financial data of the Company and Parent with various other companies
whose securities are traded in public markets, reviewed prices and premiums paid
in certain other business combinations and conducted other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by the Company and the
Parent or otherwise made available to us and have not assumed responsibility
independently to verify such information. We have further relied upon the
assurances of the Company's and the Parent's management that the information
provided has been prepared on a reasonable basis in accordance with industry
practice, and, with respect to financial planning data, reflects the best
currently available estimates and judgment of the Company's and the Parent's
management and that they are not aware of any information or facts that would
make the information provided to us incomplete or misleading. We have assumed
that Parent will obtain the outside financing described in the Agreement (the
"Financing"), and that the Transaction will qualify as a reorganization under
the United States Internal Revenue Code. Without limiting the generality of the
foregoing, for the purpose of this opinion, we have assumed that neither the
Company nor the Parent are party to any pending transaction, including external
financing, recapitalizations, acquisitions or merger discussions, other than the
Transaction (including the Financing) or in the ordinary course of business. In
arriving at our opinion, we have assumed that all the necessary regulatory
approvals and consents required for the transaction will be obtained in a manner
that will not change the purchase price for the Company.
In arriving at our opinion, we have not performed any appraisals or
valuations of any specific assets of liabilities of the Company, and have not
been furnished with any such appraisals or valuations. We express no opinion
regarding the liquidation value of any entity. Without limiting the generality
of the foregoing, we have undertaken no independent analysis of any pending or
threatened litigation, possible unasserted claims or other contingent
liabilities, to which the Company, the Parent or any of their respective
affiliates is a party or may be subject and, at the Company's direction and with
its consent, our opinion makes no assumption concerning, and therefore does not
consider, the possible assertions of claims, outcomes or damages arising out of
any such matters.
This opinion is necessarily based upon the information available to us and
facts and circumstances as they exist and are subject to evaluation on the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We are not expressing any opinion
herein as to the price at which shares of Common Stock or Parent Common Stock
have traded or may trade at any future time. We have not undertaken to reaffirm
or revise this opinion or otherwise comment upon any events occurring after the
date hereof and do not have any obligation to update, revise or reaffirm this
opinion.
This opinion is directed to the Board of Directors of the Company and is
not intended to be and does not constitute a recommendation to any stockholder
of the Company. We were not requested to opine as to, and this opinion does not
address, the basic business decision to proceed with or effect the Transaction.
Except with respect to the use of this
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opinion in connection with the prospectus/proxy statement relating to the
Merger, this opinion shall not be published or otherwise used, nor shall any
public references to us be made, without our prior written approval.
Based upon and subject to the foregoing and based upon such other factors
as we consider relevant, it is our opinion that the consideration to be received
in the Transaction pursuant to the Agreement for the Common Stock of the Company
is fair, from a financial point of view, to the holders of Common Stock of the
Company (other than Parent and its affiliates) as of the date hereof.
Sincerely,
U.S. BANCORP PIPER JAFFRAY, INC.
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ANNEX D
DISSENTERS' RIGHTS UNDER THE
VIRGINIA STOCK CORPORATION ACT
ARTICLE 15
DISSENTERS' RIGHTS
Section 13.1-729 Definitions. In this article:
"Corporation" means the issuer of the shares held by a dissenter
before the corporate action, except that (i) with respect to a merger,
"corporation" means the surviving domestic or foreign corporation or
limited liability company by merger of that issuer, and (ii) with respect
to a share exchange, "corporation" means the acquiring corporation by share
exchange, rather than the issuer, if the plan of share exchange places the
responsibility for dissenters' rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under sec. 13.1-730 and who exercises that right when and
in the manner required by sec.sec. 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
Section 13.1-730 Right to dissent.
(A) A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following corporate
actions:
(1) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by
sec. 13.1-718 or the articles of incorporation and the shareholder is
entitled to vote on the merger or (ii) if the corporation is a subsidiary
that is merged with its parent under sec. 13.1-719;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
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(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation if the shareholder was entitled to vote
on the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that
such dissenter's rights shall not apply in the case of (i) a sale or
exchange pursuant to court order, or (ii) a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
(4) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(B) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
(C) Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
(1) The articles of incorporation of the corporation issuing such
shares provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange
to accept for such shares anything except:
(a) Cash;
(b) Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving or
acquiring corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date fixed
to determine the shareholders entitled to receive notice of and to vote
at the meeting at which the plan of merger or share exchange is to be
acted on, were either listed subject to notice of issuance on a national
securities exchange or held of record by at least 2,000 record
shareholders or members; or
(c) A combination of cash and shares or membership interests as set
forth in subdivisions 2 a and 2 b of this subsection; or
(3) The transaction to be voted on is an "affiliated transaction" and
is not approved by a majority of "disinterested directors" as such terms
are defined in sec. 13.1-725.
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(D) The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
(1) The proposed corporate action is abandoned or rescinded;
(2) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(3) His demand for payment is withdrawn with the written consent of
the corporation.
(E) Notwithstanding any other provision of this article, no shareholder of
a corporation located in a county having a county manager form of government and
which is exempt from income taxation under sec. 501 (c) or sec. 528 of the
Internal Revenue Code and no part of whose income inures or may inure to the
benefit of any private share holder or individual shall be entitled to dissent
and obtain payment for his shares under this article.
Section 13.1-731 Dissent by nominees and beneficial owners.
(A) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(B) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
Section 13.1-732 Notice of dissenters' rights.
(A) If proposed corporate action creating dissenters' rights under
sec. 13.1-730 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and be accompanied by a copy of this
article.
(B) If corporate action creating dissenters' rights under sec. 13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in sec. 13.1-734.
Section 13.1-733 Notice of intent to demand payment.
(A) If proposed corporate action creating dissenters' rights under
sec. 13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights (i) shall deliver to the corporation
before the vote is taken written notice of his intent to demand payment for his
shares if the proposed action is effectuated and (ii) shall not vote such shares
in favor of the proposed action.
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(B) A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
Section 13.1-734 Dissenters' notice.
(A) If proposed corporate action creating dissenters' rights under
sec. 13.1-730 is authorized at a shareholders' meeting, the corporation, during
the ten-day period after the effectuation of such corporate action, shall
deliver a dissenters' notice in writing to all shareholders who satisfied the
requirements of sec. 13.1-733.
(B) The dissenters' notice shall:
(1) State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before or after that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date of delivery of the dissenters' notice; and
(5) Be accompanied by a copy of this article.
Section 13.1-735 Duty to demand payment.
(A) A shareholder sent a dissenters' notice described in sec. 13.1-734
shall demand payment, certify that he acquired beneficial ownership of the
shares before or after the date required to be set forth in the dissenters'
notice pursuant to subdivision 3 of subsection B of sec.13.1-734, and, in the
case of certificated shares, deposit his certificates in accordance with the
terms of the notice.
(B) The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
(C) A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
Section 13.1-736 Share restrictions.
(A) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received.
(B) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
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Section 13.1-737 Payment.
(A) Except as provided in sec. 13.1-738, within thirty days after receipt
of a payment demand made pursuant to sec. 13.1-735, the corporation shall pay
the dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
(B) The payment shall be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the
corporate action creating dissenters' rights, an income statement for that
year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
(3) A statement of the dissenters' right to demand payment under
sec. 13.1-739; and
(4) A copy of this article.
Section 13.1-738 After-acquired shares.
(A) A corporation may elect to withhold payment required by sec. 13.1-737
from a dissenter unless he was the beneficial owner of the shares on the date of
the first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
(B) To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under sec. 13.1-739.
Section 13.1-739 Procedure if shareholder dissatisfied with payment or
offer.
(A) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate (less any payment under sec. 13.1-737), or reject the
corporation's offer under sec. 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under sec. 13.1-737 or offered under sec. 13.1-738 is less than the fair value
of his shares or that the interest due is incorrectly calculated.
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(B) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares.
Section 13.1-740 Court action.
(A) If a demand for payment under sec. 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(B) The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
(C) The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(D) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
(E) The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
(F) Each dissenter made a party to the proceeding is entitled to judgment
(i) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation or (ii) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under sec. 13.1-738.
Section 13.1-741 Court costs and counsel fees.
(A) The court in an appraisal proceeding commenced under sec. 13.1-740
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters did not act in good faith in demanding
payment under sec. 13.1-739.
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(B) The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sec.sec. 13.1-732 through 13.1-739; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed did not act in good faith with respect to the rights
provided by this article.
(C) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
(D) In a proceeding commenced under subsection A of sec. 13.1-737 the court
shall assess the costs against the corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of directors, officers, employees and agents of corporations for liabilities
arising under the Securities Act of 1933, as amended.
The registrant's certificate of incorporation and bylaws provide for
indemnification of the registrant's directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law.
STATUTORY PROVISIONS
Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to eliminate or limit the
personal liability of members of its board of directors to the corporation or
its stockholders for monetary damages for violations of a director's fiduciary
duty of care. The provision would have no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. In addition, no provision may eliminate or limit the liability of a
director for breaching his duty of loyalty, failing to act in good faith,
engaging in intentional misconduct or knowingly violating a law, paying an
unlawful dividend or approving an illegal stock repurchase, or obtaining an
improper personal benefit.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify any person who was or is a party to or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. No indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for expenses which the court shall deem proper. Additionally, a
corporation is required to indemnify its directors and officers against expenses
to the extent that the directors or officers have been successful on the merits
or otherwise in any action, suit or proceeding or in defense of any claim, issue
or matter.
An indemnification can be made by the corporation only upon a determination
that indemnification is proper in the circumstances because the party seeking
indemnification has met the applicable standard of conduct as set forth in the
Delaware General Corporation Law. The indemnification provided by the Delaware
General Corporation Law shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. A corporation
also has the power to purchase and maintain insurance on
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behalf of any person, whether or not the corporation would have the power to
indemnify him against such liability. The indemnification provided by the
Delaware General Corporation Law shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of the person.
THE COMPANY'S CHARTER PROVISIONS
Our company's certificate of incorporation limits a director's liability
for monetary damages to our company and our stockholders for breaches of
fiduciary duty except under the circumstances outlined in the Delaware General
Corporation Law as described above under "Statutory Provisions."
Our company's certificate of incorporation extends indemnification rights
to the fullest extent authorized by the Delaware General Corporation Law to
directors and officers involved in any action, suit or proceeding where the
basis of the involvement is the person's alleged action in an official capacity
or in any other capacity while serving as a director or officer of our company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are either filed herewith or
incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.1 -- Agreement dated November 23, 1998 among Level 8 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
Level 8 (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 Level 8 and WCAS and the WCAS Parties relating to the
acquisition of capital stock of Seer (filed as Exhibit
(c)(2)) to Level 8's Schedule 13e-3 filed on March 29, 1999
and incorporated herein by reference).
2.3 -- Agreement and Plan of Merger dated as of October 19, 1999,
by and among Level 8, TSAC, Inc., and Template Software,
Inc. (filed as exhibit 2.1 to Level 8's Current Report on
Form 8-K filed November 15, 1999, and incorporated herein by
reference).
3.1 -- Restated Certificate of Incorporation of Level 8 (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 Level 8 (filed as exhibit 3.2 to Registration
Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
3.3 -- Certificate of Designation relating to Series A 4%
Convertible Redeemable Preferred Stock (filed as exhibit 3.3
to Level 8's Current Report on Form 8-K filed July 23, 1999,
No. 000-2639, and incorporated herein by reference).
</TABLE>
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<PAGE> 388
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.4 -- Amended and Restated Articles of Incorporation of Template
(filed pursuant to Template's Registration Statement on Form
S-1 (Registration No. 333-17063), and incorporated herein by
reference).
3.5 -- Bylaws of Template (filed pursuant to Template's
Registration Statement on Form S-1 (Registration No.
333-17063), and incorporated herein by reference).
4.1 -- Registration Rights Agreement, between Template and Alcatel
N.V., dated November 27, 1996 (filed pursuant to Template's
Registration Statement on Form S-1 (Registration No.
333-17063), and incorporated herein by reference).
4.2 -- Shareholders' Agreement dated November 27, 1996, between
Template, Joseph M. Fox, E. Linwood Pearce, Andrew B.
Ferrentino and Alcatel, N.V. (filed pursuant to Template's
Registration Statement on Form S-1 (Registration 333-17063)
filed with the Securities and Exchange Commission on
November 27, 1996, and incorporated herein by reference).
4.3 -- Registration Rights Agreement dated as of March 3, 1997,
between Template and Alain Kuhner (filed pursuant to
Template's Current Report on Form 8-K, dated March 4, 1997,
and filed on March 19, 1997 (File No. 0-21921), and
incorporated herein by reference).
4.4 -- Registration Rights Agreement dated as of March 3, 1997
between Template, Heinz-Dieter Dietrich, and Klaus-Dieter
Jansen (filed pursuant to Template's Annual Report on Form
10-K, dated March 2, 1998, (File No. 0-21921), and
incorporated herein by reference).
4.5 -- 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. 000-26194, and incorporated herein
by reference).
+4.6 -- Certificate of Level 8 Systems, Inc. Common Stock (filed
herewith).
+5.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
the legality of the common stock being registered (filed
herewith).
+8.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
the federal income tax consequences of the merger (filed
herewith).
+8.2 -- Opinion of Cooley Godward LLP regarding the federal income
tax consequences of the merger (filed herewith).
10.1 -- Level 8'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 and Samuel Somech (filed
as exhibit 10.12 to Registration Statement No. 33-92230 on
Form S-1/A, and incorporated herein by reference).*
</TABLE>
II-3
<PAGE> 389
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.2A -- Amendment dated February 26, 1999 to the Employment
Agreement between Level 8 and Samuel Somech dated November
8, 1996 (filed as exhibit 10.2A to Level 8's Annual Report
on Form 10-K for the year ended December 31, 1998, No.
0-26392, and incorporated herein by reference).
10.3 -- Consulting Agreement, effective April 1, 1995, between Level
8 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 Level 8,
Registrant and Theodore Fine (filed as exhibit 10.13A to
Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).*
10.5 -- Employment Agreement, dated May 1, 1995, between Level 8 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 Level 8 and Arie Kilman (filed as exhibit
10.14A to Registration Statement No. 33-92230 on Form S-1
and incorporated herein by reference).*
10.5B -- Amendment to Employment Agreement, dated December 16, 1996,
between Level 8 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 -- Template's 1992 Incentive Stock Option Plan (filed pursuant
to Template's Registration Statement on Form S-1
(Registration No. 333-17063), filed with the Securities and
Exchange Commission on November 27, 1996, and incorporated
herein by reference).*
10.7 -- Template's 1992 Incentive Stock Option Plan, Class B (filed
pursuant to Template's Registration Statement on Form S-1
(Registration No. 333-17063), filed with the Securities and
Exchange Commission on November 27, 1996, and incorporated
herein by reference).*
10.8 -- Template's 1992 Non-Statutory Stock Option Plan (filed
pursuant to Template's Registration Statement on Form S-1
(Registration No. 333-17063), filed with the Securities and
Exchange Commission on November 27, 1996, and incorporated
herein by reference).*
10.9 -- Employment Agreement, dated as of October 24, 1996, between
Template and E. Linwood Pearce (filed pursuant to Template's
Registration Statement on Form S-1 (Registration No.
333-17063), filed with the Securities and Exchange
Commission on November 27, 1996, and incorporated herein by
reference).*
10.10 -- Office Lease Agreement, dated April 25, 1996, between
Template and Vintage Park Two Limited Partnership (filed
pursuant to Template's Registration Statement on Form S-1
(Registration No. 333-17063), originally filed with the
Securities and Exchange Commission on November 27, 1996,
incorporated herein by reference).*
</TABLE>
II-4
<PAGE> 390
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.11 -- Share Purchase Agreement, dated March 27, 1998, between
Template Software Holding Ges. MbH and Christian Hofer,
Irene Hofer, and Michael Hofer, shareholders of Milestone
Software Ges. Mbh (filed pursuant to Template's Current
Report on Form 8-K (File No. 0-21921), dated March 30, 1997,
and filed April 6, 1998, and incorporated herein by
reference).*
10.12 -- Consulting Agreement, dated as of December 17, 1996, between
Template and WinStar Telecommunications, Inc. (filed
pursuant to Template's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 (File No. 0-21921), and
incorporated herein by reference).
10.13 -- License Agreement, dated as of February 28, 1997, between
Template and WinStar Telecommunications, Inc., as amended by
Amendment One to License Agreement, dated February 28, 1997
(filed pursuant to Template's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1997 (File No. 0-21921), and
incorporated herein by reference).
10.14 -- Sales and Purchase Agreement dated April 1997, between
Template Software (UK) Limited and British American
Financial Services IT & Group Services Limited (filed
pursuant to Template's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 (File No. 0-21921), and
incorporated herein by reference).
10.15 -- Amendment dated October 17, 1997 to Employment Agreement,
dated as of October 24, 1996, between Template and E.
Linwood Pearce (filed pursuant to Template's Current Report
on Form 8-K dated June 27, 1997, and incorporated herein by
reference).*
10.16 -- Rights Agreement, dated as of July 3, 1998, between Template
and First Union National Bank, as Rights Agent (filed
pursuant to Template's Current Report on Form 8-K, dated
July 3, 1997 (File No. 0-21921), and incorporated herein by
reference).
10.17 -- Amendment to Office Lease Agreement, dated August 18, 1997,
between Template and Vintage Park Two Limited Partnership
(filed pursuant to Template's Annual Report dated March 2,
1998 (File No. 0-21921), and incorporated herein by
reference).
10.18 -- Template's 1996 Equity Incentive Plan, as amended (filed
pursuant to Template's Registration Statement on Form S-8
(Registration No. 333-52241), filed with the Securities and
Exchange Commission on May 8, 1998, and incorporated herein
by reference).*
10.18A -- Financing Agreement, dated September 1, 1998, between
Template and Eagle Eye Technologies, Inc. (filed pursuant to
Template's Quarterly Report on Form 10-Q, for the quarter
ended August 31, 1998 (File No. 0-21921), incorporated
herein by reference).
10.19 -- Convertible Promissory Note, dated September 1, 1998, of
Eagle Eye Technologies, Inc. (filed pursuant to Template's
Quarterly Report on Form 10-Q, for the quarter ended August
31, 1998 (File No. 0-21921), incorporated herein by
reference).
</TABLE>
II-5
<PAGE> 391
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.20 -- Warrant to Purchase Common Stock, dated September 1, 1998,
between Template and Eagle Eye Technologies, Inc. (filed
pursuant to Template's Quarterly Report on Form 10-Q, for
the quarter ended August 31, 1998 (File No. 0-21921),
incorporated herein by reference).
10.21 -- Loan Agreement, dated June 30, 1998, between Template and
First Union National Bank (filed pursuant to Template's
Quarterly Report on Form 10-Q, for the quarter ended August
31, 1998 (File No. 0-21921), incorporated herein by
reference).
10.22 -- Employment Agreement between the Company and Joseph Schwartz
dated June 1, 1998 (filed as exhibit 10.6 to Level 8
Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, No. 0-26392, and incorporated
herein by reference).*
10.22A -- Employment Agreement between the Company and Gonen Ziv dated
April 2, 1998 (filed as exhibit 10.6A to Level 8 Systems,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998, No. 0-26392, and incorporated herein by
reference).*
10.23 -- 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).
10.24 -- Registration Rights Agreement, dated June 13, 1995, between
Level 8 and Liraz (filed as exhibit 10.24 to Registration
Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
10.25 -- Form of Warrant Agreement, between Level 8 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).
10.26 -- Form of Loan Agreement, dated June 1995, between Level 8 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).
10.27 -- Form of Loan Agreement, dated June 1995, between Level 8 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).
10.28 -- Development Agreement dated July 17, 1995 between Microsoft
Corporation and Level 8 (filed as exhibit 10.38 to
Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.29 -- Letter Agreement dated June 1, 1995 from Visa International
Service Association to Level 8 (filed as exhibit 10.39 to
Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.30 -- Development Agreement dated December 19, 1995 between Liraz
and Level 8 (filed as exhibit 10.38 to Registration
Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
</TABLE>
II-6
<PAGE> 392
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.30A -- Amendment No. 1 to the Development Agreement dated December
15, 1995 between Liraz and Level 8 (filed as exhibit 10.14A
to Level 8's Annual Report on Form 10-K for the year ended
December 31, 1998, No. 0-26392, and incorporated herein by
reference).
10.31 -- Agreement and Plan of Reorganization by and among Level 8,
Middleware Acquisition Corporation, Momentum Software
Corporation, and Robert Brill, Bruns Grayson and Hubertus
Vandervoort (filed as exhibit 10.15 to Level 8 Systems,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998, No. 0-26392, and incorporated herein by
reference).
10.32 -- 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).
10.33 -- 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).
10.34 -- Lease Agreement, dated December 25, 1992, between Seer
Technologies, Inc. and Capital & Counties (London, England)
(filed as exhibit 10.22 to Seer's Registration Statement No.
33-92050 on Form S-1 and incorporated herein by reference).
10.35 -- Employment Agreement between Steven Dmiszewicki and Level 8
dated December 4, 1998 (filed as exhibit 10.19 to Level 8
Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, No. 0-26392, and incorporated
herein by reference).*
10.36 -- 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).
10.37 -- 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).
10.37A -- Lease Amendment for Seer's Cary Office, dated January 21,
1999, between Seer and Regency Park Corporation (Cary, NC)
(filed as exhibit 10.21A to Level 8 Systems, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998,
No. 0-26392, and incorporated herein by reference).
10.38 -- 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).
</TABLE>
II-7
<PAGE> 393
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.39 -- 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).
10.40 -- 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).
10.41 -- Amendment dated March 31, 1999, to the Loan and Security
Agreement between Level 8, Seer, and Greyrock Capital, a
division of NationsCredit Commercial Corporation (formerly
Greyrock Business Credit) (filed as exhibit 10.30 to Form
10-Q for the quarter ended March 31, 1999 No. 0-26392, and
incorporated herein by reference).
10.42 -- Amendment dated April 21, 1999 to the Loan Documents between
Level 8, Seer, and Greyrock Capital, a division of
NationsCredit Commercial Corporation (formerly Greyrock
Business Credit) (filed as exhibit 10.30 to Form 10-Q for
the quarter ended March 31, 1999 No. 0-26392, and
incorporated herein by reference).
10.43 -- Amendment dated April 21, 1999, to amend the Schedule to
Loan and Security Agreement between Level 8, Seer, and
Greyrock Capital, a division of NationsCredit Commercial
Corporation (formerly Greyrock Business Credit) (filed as
exhibit 10.30 to Form 10-Q for the quarter ended March 31,
1999 No. 0-26392, and incorporated herein by reference).
10.44 -- Amendment dated April 29, 1999, to amend the Amendment to
Schedule Agreement between Level 8, Seer, and Greyrock
Capital, a division of NationsCredit Commercial Corporation
(filed as exhibit 10.30 to Form 10-Q for the quarter ended
March 31, 1999 No. 0-26392, and incorporated herein by
reference).
10.45 -- Agreement, dated March 30, 1999, between Template and PCS
Precise Connectivity Solutions Ltd. (filed pursuant to
Template's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (File No. 0-21921), incorporated herein
by reference).
10.46 -- Employment Agreement, dated as of April 30, 1999 between
Template and E. Linwood Pearce (filed pursuant to Template's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 0-21921), incorporated herein by
reference)*.
10.47 -- Employment Agreement, dated as of April 27, 1999, between
Template and Peter Russo (filed pursuant to Template's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 0-21921), incorporated herein by
reference).*
</TABLE>
II-8
<PAGE> 394
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.48 -- Agreement NMA201-98-C-0089, dated September 30, 1998,
Modification PZ0001, dated November 30, 1998 and
Modification PZ0002 dated December 31, 1998, by and between
Template and National Imagery and Mapping Agency (filed
pursuant to Form 10-Q for the quarter ended June 30, 1999,
and incorporated herein by reference).
10.49 -- Level 8 Guaranty Agreement dated December 31, 1998 (filed as
exhibit 10.1 to Level 8's Current Report on Form 8-K filed
as of January 15, 1999, No. 0-26392, and incorporated herein
by reference).
10.50 -- 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 Level 8's Current Report on Form
8-K filed as of January 15, 1999, No. 0-26392, and
incorporated herein by reference).
10.51 -- 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 Level 8's Current Report on Form 8-K filed
as of January 15, 1999, No. 0-26392, and incorporated herein
by reference).
10.52 -- Liraz Agreement dated December 31, 1998 (filed as exhibit
10.4 to Level 8's Current Report on Form 8-K filed as of
January 15, 1999, No. 0-26392, and incorporated herein by
reference).
10.53 -- Amended and Restated Loan and Security Agreement among Seer,
Level 8 and Greyrock Capital, a division of NationsCredit
Commercial Corporation, dated March 30, 1999 (filed as
exhibit 10.29 to Level 8's Annual Report on Form 10-K for
the year ended December 31, 1998, No. 0-26392, and
incorporated herein by reference).
10.54 -- Employment Agreement, dated as of December 21, 1998, between
Template and Andrew B. Ferrentino (filed pursuant to
Template's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).*
10.55 -- Consultant Agreement, dated as of January 1, 1999, between
Template and Dr. Alan B. Salisbury (filed pursuant to
Template's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).*
10.56 -- Securities Purchase Agreement dated June 29, 1999 among
Level 8 and the investors named on the signature pages
thereof (filed as exhibit 10.1 to Level 8's Current Report
on Form 8-K filed on July 23, 1999, No. 000-26392, and
incorporated herein by reference).
10.57 -- Form of Warrants issued June 29, 1999 in connection with the
sale of Series A 4% Convertible Redeemable Preferred Stock
(filed as exhibit 10.2 to Level 8's Current Report on Form
8-K filed on July 23, 1999, No. 000-26392, and incorporated
herein by reference).
10.58 -- Registration Rights Agreement dated June 29, 1999 among
Level 8 and the investors named on the signature pages
thereof (filed as exhibit 10.3 to Level 8's Current Report
on Form 8-K filed on July 23, 1999, No. 000-26392, and
incorporated herein by reference).
</TABLE>
II-9
<PAGE> 395
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.59 -- Amendment dated September 24, 1999, to the Loan and Security
Agreement among Seer, Level 8, and Greyrock Capital, a
division of Banc of America Commercial Finance Corporation,
dated March 31, 1999 (filed as Exhibit 10.34 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, and incorporated herein by reference).
10.60 -- Stockholders Agreement between Level 8, Template, and
various stockholders of Level 8 and Template (filed as
Exhibit 10.1 to Level 8's Current Report on Form 8-K filed
November 15, 1999, and incorporated herein by reference).
10.61 -- Service Agreement, dated as of September 24, 1999, between
Template and Richard Hugh Collard (filed pursuant to
Template's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by
reference).*
10.62 -- Employment Agreement, dated as of September 24, 1999,
between Template and Benjamin J. Martindale (filed pursuant
to Template's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by
reference).*
10.63 -- Employment Agreement, dated as of October 1, 1999, between
Template and David L. Kiker (filed pursuant to Template's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).*
10.64 -- Employment Agreement, dated as of February 25, 1999, between
Template and Joseph M. Fox (filed pursuant to Template's
1999 Annual Report on Form 10-K, and incorporated herein by
reference).*
10.65 -- License Agreement, dated as of December 17, 1998, between
BULL and Template (filed pursuant to Template's 1999 Annual
Report on Form 10-K, and incorporated herein by reference).
</TABLE>
<TABLE>
<CAPTION>
<C> <C> <S>
16.1 -- Letter from Lurie, Besikof, Lapidus and Co., LLP regarding
change in certifying accountant (filed as exhibit 1 to Level
8's Current Report on 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 Level 8's Current Report on 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 Level 8's Current Report on Form 8-K/A filed
as of January 11, 1999, No. 0-26392, and incorporated herein
by reference).
21.1 -- Subsidiaries of Level 8 (filed as exhibit 21.1 to Level 8
Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, No. 0-26392, and incorporated
herein by reference).
21.2 -- Subsidiaries of Template (filed pursuant to Template's
Annual Report on Form 10-K for the year ended December 31,
1998, and incorporated herein by reference).
</TABLE>
II-10
<PAGE> 396
<TABLE>
<CAPTION>
<C> <C> <S>
+23.1 -- Consent of PricewaterhouseCoopers LLP relating to Level 8's
audited financial statements (filed herewith).
+23.2 -- Consent of PricewaterhouseCoopers LLP relating to Seer
Technologies' audited financial statements (filed herewith).
+23.3 -- Consent of PricewaterhouseCoopers LLP relating to Template
Software's audited financial statements (filed herewith).
+23.4 -- Consent of Grant Thornton LLP (filed herewith).
+23.5 -- Consent of Lurie, Besikof, Lapidus & Co., LLP (filed
herewith).
23.6 -- Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibit 5.1).
23.7 -- Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibit 8.1).
23.8 -- Consent of Cooley Godward LLP (included in Exhibit 8.2).
24.1 -- Power of Attorney (included on signature page).
+99.1 -- Form of proxy card of Level 8 (filed herewith).
+99.2 -- Form of proxy card of Template Software (filed herewith).
</TABLE>
- -------------------------
+ Filed herewith.
* Management contract or compensatory agreement.
(b) 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.
(c) Item 4(b) Reports.
See Annex B and Annex C to the joint proxy statement/prospectus.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(b) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 (Section 230.415 of this chapter),
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement relating
to the
II-11
<PAGE> 397
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-12
<PAGE> 398
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cary, State of North Carolina on November 22, 1999.
LEVEL 8 SYSTEMS, INC.
By: /s/ STEVEN DMISZEWICKI
-----------------------------------
Steven Dmiszewicki
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the persons whose signature
appears below appoints and constitutes Steven Dmiszewicki and Dennis McKinnie,
and each of them, his true and lawful attorney-in-fact and agent, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to execute any and all
amendments (including post-effective amendments) to the within registration
statement, and to file the same, together with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission and such other agencies, offices and persons as may be required by
applicable law, granting unto each said attorney-in-fact and agent, each acting
alone, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent, each acting alone, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARIE KILMAN Chairman of the Board and November 22, 1999
- ------------------------------------------ Chief Executive Officer
Arie Kilman (Principal Executive
Officer)
/s/ STEVEN DMISZEWICKI President November 22, 1999
- ------------------------------------------
Steven Dmiszewicki
/s/ SAMUEL SOMECH Director, Chairman November 22, 1999
- ------------------------------------------ Emeritus and Chief
Samuel Somech Technology Officer
</TABLE>
II-13
<PAGE> 399
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RENEE FULK Vice President of Finance November 22, 1999
- ------------------------------------------ (Principal Financial
Renee Fulk and Accounting Officer)
/s/ MICHEL BERTY Director November 22, 1999
- ------------------------------------------
Michel Berty
/s/ ROBERT M. BRILL Director November 22, 1999
- ------------------------------------------
Robert M. Brill
/s/ THEODORE FINE Director November 22, 1999
- ------------------------------------------
Theodore Fine
/s/ FRANK J. KLEIN Director November 22, 1999
- ------------------------------------------
Frank J. Klein
/s/ LENNY RECANATI Director November 22, 1999
- ------------------------------------------
Lenny Recanati
</TABLE>
II-14
<PAGE> 400
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.1 -- Agreement dated November 23, 1998 among Level 8 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
Level 8 (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 Level 8 and WCAS and the WCAS Parties relating to the
acquisition of capital stock of Seer (filed as Exhibit
(c)(2)) to Level 8's Schedule 13e-3 filed on March 29, 1999
and incorporated herein by reference).
2.3 -- Agreement and Plan of Merger dated as of October 19, 1999,
by and among Level 8, TSAC, Inc., and Template Software,
Inc. (filed as exhibit 2.1 to Level 8's Current Report on
Form 8-K filed November 15, 1999, and incorporated herein by
reference).
3.1 -- Restated Certificate of Incorporation of Level 8 (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 Level 8 (filed as exhibit 3.2 to Registration
Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
3.3 -- Certificate of Designation relating to Series A 4%
Convertible Redeemable Preferred Stock (filed as exhibit 3.3
to Level 8's Current Report on Form 8-K filed July 23, 1999,
No. 000-2639, and incorporated herein by reference).
3.4 -- Amended and Restated Articles of Incorporation of Template
(filed pursuant to Template's Registration Statement on Form
S-1 (Registration No. 333-17063), and incorporated herein by
reference).
3.5 -- Bylaws of Template (filed pursuant to Template's
Registration Statement on Form S-1 (Registration No.
333-17063), and incorporated herein by reference).
4.1 -- Registration Rights Agreement, between Template and Alcatel
N.V., dated November 27, 1996 (filed pursuant to Template's
Registration Statement on Form S-1 (Registration No.
333-17063), and incorporated herein by reference).
4.2 -- Shareholders' Agreement dated November 27, 1996, between
Template, Joseph M. Fox, E. Linwood Pearce, Andrew B.
Ferrentino and Alcatel, N.V. (filed pursuant to Template's
Registration Statement on Form S-1 (Registration 333-17063)
filed with the Securities and Exchange Commission on
November 27, 1996, and incorporated herein by reference).
4.3 -- Registration Rights Agreement dated as of March 3, 1997,
between Template and Alain Kuhner (filed pursuant to
Template's Current Report on Form 8-K, dated March 4, 1997,
and filed on March 19, 1997 (File No. 0-21921), and
incorporated herein by reference).
</TABLE>
<PAGE> 401
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
4.4 -- Registration Rights Agreement dated as of March 3, 1997
between Template, Heinz-Dieter Dietrich, and Klaus-Dieter
Jansen (filed pursuant to Template's Annual Report on Form
10-K, dated March 2, 1998, (File No. 0-21921), and
incorporated herein by reference).
4.5 -- 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. 000-26194, and incorporated herein
by reference).
+4.6 -- Certificate of Level 8 Systems, Inc. Common Stock (filed
herewith).
+5.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
the legality of the common stock being registered (filed
herewith).
+8.1 -- Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
the federal income tax consequences of the merger (filed
herewith).
+8.2 -- Opinion of Cooley Godward LLP regarding the federal income
tax consequences of the merger (filed herewith).
10.1 -- Level 8'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 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 Level 8 and Samuel Somech dated November
8, 1996 (filed as exhibit 10.2A to Level 8's Annual Report
on Form 10-K for the year ended December 31, 1998, No.
0-26392, and incorporated herein by reference).
10.3 -- Consulting Agreement, effective April 1, 1995, between Level
8 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 Level 8,
Registrant and Theodore Fine (filed as exhibit 10.13A to
Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).*
10.5 -- Employment Agreement, dated May 1, 1995, between Level 8 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 Level 8 and Arie Kilman (filed as exhibit
10.14A to Registration Statement No. 33-92230 on Form S-1
and incorporated herein by reference).*
10.5B -- Amendment to Employment Agreement, dated December 16, 1996,
between Level 8 and Arie Kilman (filed as exhibit 10.14B to
Registration Statement No. 33-92230 on Form S-1/A and
incorporated herein by reference).*
</TABLE>
<PAGE> 402
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.6 -- Template's 1992 Incentive Stock Option Plan (filed pursuant
to Template's Registration Statement on Form S-1
(Registration No. 333-17063), filed with the Securities and
Exchange Commission on November 27, 1996, and incorporated
herein by reference).*
10.7 -- Template's 1992 Incentive Stock Option Plan, Class B (filed
pursuant to Template's Registration Statement on Form S-1
(Registration No. 333-17063), filed with the Securities and
Exchange Commission on November 27, 1996, and incorporated
herein by reference).*
10.8 -- Template's 1992 Non-Statutory Stock Option Plan (filed
pursuant to Template's Registration Statement on Form S-1
(Registration No. 333-17063), filed with the Securities and
Exchange Commission on November 27, 1996, and incorporated
herein by reference).*
10.9 -- Employment Agreement, dated as of October 24, 1996, between
Template and E. Linwood Pearce (filed pursuant to Template's
Registration Statement on Form S-1 (Registration No.
333-17063), filed with the Securities and Exchange
Commission on November 27, 1996, and incorporated herein by
reference).*
10.10 -- Office Lease Agreement, dated April 25, 1996, between
Template and Vintage Park Two Limited Partnership (filed
pursuant to Template's Registration Statement on Form S-1
(Registration No. 333-17063), originally filed with the
Securities and Exchange Commission on November 27, 1996,
incorporated herein by reference).*
10.11 -- Share Purchase Agreement, dated March 27, 1998, between
Template Software Holding Ges. MbH and Christian Hofer,
Irene Hofer, and Michael Hofer, shareholders of Milestone
Software Ges. Mbh (filed pursuant to Template's Current
Report on Form 8-K (File No. 0-21921), dated March 30, 1997,
and filed April 6, 1998, and incorporated herein by
reference).*
10.12 -- Consulting Agreement, dated as of December 17, 1996, between
Template and WinStar Telecommunications, Inc. (filed
pursuant to Template's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 (File No. 0-21921), and
incorporated herein by reference).
10.13 -- License Agreement, dated as of February 28, 1997, between
Template and WinStar Telecommunications, Inc., as amended by
Amendment One to License Agreement, dated February 28, 1997
(filed pursuant to Template's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1997 (File No. 0-21921), and
incorporated herein by reference).
10.14 -- Sales and Purchase Agreement dated April 1997, between
Template Software (UK) Limited and British American
Financial Services IT & Group Services Limited (filed
pursuant to Template's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 (File No. 0-21921), and
incorporated herein by reference).
10.15 -- Amendment dated October 17, 1997 to Employment Agreement,
dated as of October 24, 1996, between Template and E.
Linwood Pearce (filed pursuant to Template's Current Report
on Form 8-K dated June 27, 1997, and incorporated herein by
reference).*
</TABLE>
<PAGE> 403
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.16 -- Rights Agreement, dated as of July 3, 1998, between Template
and First Union National Bank, as Rights Agent (filed
pursuant to Template's Current Report on Form 8-K, dated
July 3, 1997 (File No. 0-21921), and incorporated herein by
reference).
10.17 -- Amendment to Office Lease Agreement, dated August 18, 1997,
between Template and Vintage Park Two Limited Partnership
(filed pursuant to Template's Annual Report dated March 2,
1998 (File No. 0-21921), and incorporated herein by
reference).
10.18 -- Template's 1996 Equity Incentive Plan, as amended (filed
pursuant to Template's Registration Statement on Form S-8
(Registration No. 333-52241), filed with the Securities and
Exchange Commission on May 8, 1998, and incorporated herein
by reference).*
10.18A -- Financing Agreement, dated September 1, 1998, between
Template and Eagle Eye Technologies, Inc. (filed pursuant to
Template's Quarterly Report on Form 10-Q, for the quarter
ended August 31, 1998 (File No. 0-21921), incorporated
herein by reference).
10.19 -- Convertible Promissory Note, dated September 1, 1998, of
Eagle Eye Technologies, Inc. (filed pursuant to Template's
Quarterly Report on Form 10-Q, for the quarter ended August
31, 1998 (File No. 0-21921), incorporated herein by
reference).
10.20 -- Warrant to Purchase Common Stock, dated September 1, 1998,
between Template and Eagle Eye Technologies, Inc. (filed
pursuant to Template's Quarterly Report on Form 10-Q, for
the quarter ended August 31, 1998 (File No. 0-21921),
incorporated herein by reference).
10.21 -- Loan Agreement, dated June 30, 1998, between Template and
First Union National Bank (filed pursuant to Template's
Quarterly Report on Form 10-Q, for the quarter ended August
31, 1998 (File No. 0-21921), incorporated herein by
reference).
10.22 -- Employment Agreement between the Company and Joseph Schwartz
dated June 1, 1998 (filed as exhibit 10.6 to Level 8
Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, No. 0-26392, and incorporated
herein by reference).*
10.22A -- Employment Agreement between the Company and Gonen Ziv dated
April 2, 1998 (filed as exhibit 10.6A to Level 8 Systems,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998, No. 0-26392, and incorporated herein by
reference).*
10.23 -- 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).
10.24 -- Registration Rights Agreement, dated June 13, 1995, between
Level 8 and Liraz (filed as exhibit 10.24 to Registration
Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
</TABLE>
<PAGE> 404
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.25 -- Form of Warrant Agreement, between Level 8 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).
10.26 -- Form of Loan Agreement, dated June 1995, between Level 8 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).
10.27 -- Form of Loan Agreement, dated June 1995, between Level 8 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).
10.28 -- Development Agreement dated July 17, 1995 between Microsoft
Corporation and Level 8 (filed as exhibit 10.38 to
Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.29 -- Letter Agreement dated June 1, 1995 from Visa International
Service Association to Level 8 (filed as exhibit 10.39 to
Registration Statement No. 33-92230 on Form S-1 and
incorporated herein by reference).
10.30 -- Development Agreement dated December 19, 1995 between Liraz
and Level 8 (filed as exhibit 10.38 to Registration
Statement No. 33-92230 on Form S-1 and incorporated herein
by reference).
10.30A -- Amendment No. 1 to the Development Agreement dated December
15, 1995 between Liraz and Level 8 (filed as exhibit 10.14A
to Level 8's Annual Report on Form 10-K for the year ended
December 31, 1998, No. 0-26392, and incorporated herein by
reference).
10.31 -- Agreement and Plan of Reorganization by and among Level 8,
Middleware Acquisition Corporation, Momentum Software
Corporation, and Robert Brill, Bruns Grayson and Hubertus
Vandervoort (filed as exhibit 10.15 to Level 8 Systems,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998, No. 0-26392, and incorporated herein by
reference).
10.32 -- 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).
10.33 -- 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).
10.34 -- Lease Agreement, dated December 25, 1992, between Seer
Technologies, Inc. and Capital & Counties (London, England)
(filed as exhibit 10.22 to Seer's Registration Statement No.
33-92050 on Form S-1 and incorporated herein by reference).
10.35 -- Employment Agreement between Steven Dmiszewicki and Level 8
dated December 4, 1998 (filed as exhibit 10.19 to Level 8
Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, No. 0-26392, and incorporated
herein by reference).*
</TABLE>
<PAGE> 405
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.36 -- 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).
10.37 -- 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).
10.37A -- Lease Amendment for Seer's Cary Office, dated January 21,
1999, between Seer and Regency Park Corporation (Cary, NC)
(filed as exhibit 10.21A to Level 8 Systems, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998,
No. 0-26392, and incorporated herein by reference).
10.38 -- 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).
10.39 -- 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).
10.40 -- 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).
10.41 -- Amendment dated March 31, 1999, to the Loan and Security
Agreement between Level 8, Seer, and Greyrock Capital, a
division of NationsCredit Commercial Corporation (formerly
Greyrock Business Credit) (filed as exhibit 10.30 to Form
10-Q for the quarter ended March 31, 1999 No. 0-26392, and
incorporated herein by reference).
10.42 -- Amendment dated April 21, 1999 to the Loan Documents between
Level 8, Seer, and Greyrock Capital, a division of
NationsCredit Commercial Corporation (formerly Greyrock
Business Credit) (filed as exhibit 10.30 to Form 10-Q for
the quarter ended March 31, 1999 No. 0-26392, and
incorporated herein by reference).
</TABLE>
<PAGE> 406
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.43 -- Amendment dated April 21, 1999, to amend the Schedule to
Loan and Security Agreement between Level 8, Seer, and
Greyrock Capital, a division of NationsCredit Commercial
Corporation (formerly Greyrock Business Credit) (filed as
exhibit 10.30 to Form 10-Q for the quarter ended March 31,
1999 No. 0-26392, and incorporated herein by reference).
10.44 -- Amendment dated April 29, 1999, to amend the Amendment to
Schedule Agreement between Level 8, Seer, and Greyrock
Capital, a division of NationsCredit Commercial Corporation
(filed as exhibit 10.30 to Form 10-Q for the quarter ended
March 31, 1999 No. 0-26392, and incorporated herein by
reference).
10.45 -- Agreement, dated March 30, 1999, between Template and PCS
Precise Connectivity Solutions Ltd. (filed pursuant to
Template's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (File No. 0-21921), incorporated herein
by reference).
10.46 -- Employment Agreement, dated as of April 30, 1999 between
Template and E. Linwood Pearce (filed pursuant to Template's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 0-21921), incorporated herein by
reference)*.
10.47 -- Employment Agreement, dated as of April 27, 1999, between
Template and Peter Russo (filed pursuant to Template's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 0-21921), incorporated herein by
reference).*
10.48 -- Agreement NMA201-98-C-0089, dated September 30, 1998,
Modification PZ0001, dated November 30, 1998 and
Modification PZ0002 dated December 31, 1998, by and between
Template and National Imagery and Mapping Agency (filed
pursuant to Form 10-Q for the quarter ended June 30, 1999,
and incorporated herein by reference).
10.49 -- Level 8 Guaranty Agreement dated December 31, 1998 (filed as
exhibit 10.1 to Level 8's Current Report on Form 8-K filed
as of January 15, 1999, No. 0-26392, and incorporated herein
by reference).
10.50 -- 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 Level 8's Current Report on Form
8-K filed as of January 15, 1999, No. 0-26392, and
incorporated herein by reference).
10.51 -- 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 Level 8's Current Report on Form 8-K filed
as of January 15, 1999, No. 0-26392, and incorporated herein
by reference).
10.52 -- Liraz Agreement dated December 31, 1998 (filed as exhibit
10.4 to Level 8's Current Report on Form 8-K filed as of
January 15, 1999, No. 0-26392, and incorporated herein by
reference).
</TABLE>
<PAGE> 407
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.53 -- Amended and Restated Loan and Security Agreement among Seer,
Level 8 and Greyrock Capital, a division of NationsCredit
Commercial Corporation, dated March 30, 1999 (filed as
exhibit 10.29 to Level 8's Annual Report on Form 10-K for
the year ended December 31, 1998, No. 0-26392, and
incorporated herein by reference).
10.54 -- Employment Agreement, dated as of December 21, 1998, between
Template and Andrew B. Ferrentino (filed pursuant to
Template's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).*
10.55 -- Consultant Agreement, dated as of January 1, 1999, between
Template and Dr. Alan B. Salisbury (filed pursuant to
Template's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference).*
10.56 -- Securities Purchase Agreement dated June 29, 1999 among
Level 8 and the investors named on the signature pages
thereof (filed as exhibit 10.1 to Level 8's Current Report
on Form 8-K filed on July 23, 1999, No. 000-26392, and
incorporated herein by reference).
10.57 -- Form of Warrants issued June 29, 1999 in connection with the
sale of Series A 4% Convertible Redeemable Preferred Stock
(filed as exhibit 10.2 to Level 8's Current Report on Form
8-K filed on July 23, 1999, No. 000-26392, and incorporated
herein by reference).
10.58 -- Registration Rights Agreement dated June 29, 1999 among
Level 8 and the investors named on the signature pages
thereof (filed as exhibit 10.3 to Level 8's Current Report
on Form 8-K filed on July 23, 1999, No. 000-26392, and
incorporated herein by reference).
10.59 -- Amendment dated September 24, 1999, to the Loan and Security
Agreement among Seer, Level 8, and Greyrock Capital, a
division of Banc of America Commercial Finance Corporation,
dated March 31, 1999 (filed as Exhibit 10.34 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, and incorporated herein by reference).
10.60 -- Stockholders Agreement between Level 8, Template, and
various stockholders of Level 8 and Template (filed as
Exhibit 10.1 to Level 8's Current Report on Form 8-K filed
November 15, 1999, and incorporated herein by reference).
10.61 -- Service Agreement, dated as of September 24, 1999, between
Template and Richard Hugh Collard (filed pursuant to
Template's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by
reference).*
10.62 -- Employment Agreement, dated as of September 24, 1999,
between Template and Benjamin J. Martindale (filed pursuant
to Template's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by
reference).*
10.63 -- Employment Agreement, dated as of October 1, 1999, between
Template and David L. Kiker (filed pursuant to Template's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).*
</TABLE>
<PAGE> 408
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.64 -- Employment Agreement, dated as of February 25, 1999, between
Template and Joseph M. Fox (filed pursuant to Template's
1999 Annual Report on Form 10-K, and incorporated herein by
reference).*
10.65 -- License Agreement, dated as of December 17, 1998, between
BULL and Template (filed pursuant to Template's 1999 Annual
Report on Form 10-K, and incorporated herein by reference).
</TABLE>
<TABLE>
<CAPTION>
<C> <C> <S>
16.1 -- Letter from Lurie, Besikof, Lapidus and Co., LLP regarding
change in certifying accountant (filed as exhibit 1 to Level
8's Current Report on 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 Level 8's Current Report on 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 Level 8's Current Report on Form 8-K/A filed
as of January 11, 1999, No. 0-26392, and incorporated herein
by reference).
21.1 -- Subsidiaries of Level 8 (filed as exhibit 21.1 to Level 8
Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, No. 0-26392, and incorporated
herein by reference).
21.2 -- Subsidiaries of Template (filed pursuant to Template's
Annual Report on Form 10-K for the year ended December 31,
1998, and incorporated herein by reference).
+23.1 -- Consent of PricewaterhouseCoopers LLP relating to Level 8's
audited financial statements (filed herewith).
+23.2 -- Consent of PricewaterhouseCoopers LLP relating to Seer
Technologies' audited financial statements (filed herewith).
+23.3 -- Consent of PricewaterhouseCoopers LLP relating to Template
Software's audited financial statements (filed herewith).
+23.4 -- Consent of Grant Thornton LLP (filed herewith).
+23.5 -- Consent of Lurie, Besikof, Lapidus & Co., LLP (filed
herewith).
23.6 -- Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibit 5.1).
23.7 -- Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibit 8.1).
23.8 -- Consent of Cooley Godward LLP (included in Exhibit 8.2).
24.1 -- Power of Attorney (included on signature page).
+99.1 -- Form of proxy card of Level 8 (filed herewith).
+99.2 -- Form of proxy card of Template Software (filed herewith).
</TABLE>
- -------------------------
+ Filed herewith.
* Management contract or compensatory agreement.
<PAGE> 1
EXHIBIT 4.6
LEVEL 8
NUMBER SHARES
LS
LEVEL 8 SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 52729M 10 2
SEE REVERSE FOR CERTAIN DEFINITIONS
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
LEVEL 8 SYSTEMS, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
and the shares represented hereby are issued under and shall be subject to all
the provisions of the Certificate of Incorporation and the By-Laws of the
Corporation, and all the amendments from time to time made thereto. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, N.Y.) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
Dated:
CORPORATE
SEAL /s/
SECRETARY CHAIRMAN & CEO
<PAGE> 2
LEVEL 8 SYSTEMS, INC.
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, A COPY OF THE DESIGNATIONS, POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. ANY SUCH REQUESTS MAY BE ADDRESSED TO THE SECRETARY
OF THE CORPORATION.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT- __________ Custodian _________
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants
in common Act __________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP OR POSTAL CODE, OF
ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------------------
------------------------------------------------------------------
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- --------------------------------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCK BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5.1
OPINION LETTER
[POWELL, GOLDSTEIN, FRAZER & MURPHY LLP LETTERHEAD]
NOVEMBER 22, 1999
LEVEL 8 SYSTEMS, INC.
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
RE: LEVEL 8 SYSTEMS, INC. REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have acted as counsel to Level 8 Systems, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of a Registration Statement on Form S-4 (the "Registration
Statement") for the registration under the Securities Act of 1933, as amended
(the "Act"), of shares of the Company's common stock, $.001 par value (the
"Shares"). As set forth in the Registration Statement the Shares are to be
issued in connection with the consummation of the merger of Template Software,
Inc., a Virginia corporation ("Template"), with and into TSAC, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company ("TSAC"), pursuant to
the terms of the Agreement and Plan of Merger, dated as of October 19, 1999 (the
"Merger Agreement"), by and among the Company, TSAC and Template. This opinion
is delivered in accordance with the requirements of Item 601(b)(5) of Regulation
S-K promulgated under the Act.
In our capacity as Company's counsel, we have examined the Registration
Statement and the joint proxy statement/prospectus included therein, in the form
filed by the Company with the Securities and Exchange Commission on November 22,
1999, and originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records, agreements, documents and other
instruments of the Company relating to the authorization and issuance of the
Shares and such other matters as we have deemed relevant and necessary as a
basis for the opinion hereinafter set forth.
In conducting our examination, we have assumed without independent
investigation or inquiry, the genuineness of all signatures, the legal capacity
of all natural persons, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified, conformed or reproduced copies and the authenticity of the
originals of such documents, and the due execution and delivery of all documents
where due execution and delivery are a prerequisite to the effectiveness
thereof. The opinion set forth herein is limited to the Delaware General
Corporation Law and the federal laws of the United States of America.
Based upon the foregoing, and in reliance thereon, and subject to the
limitations and qualifications set forth herein, we are of the opinion that the
Shares to be issued pursuant to the Merger Agreement have been duly authorized
and, when issued, will be validly issued, fully paid and nonassessable.
<PAGE> 2
Level 8 Systems, Inc.
November 22, 1999
Page 2
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the joint proxy statement/prospectus which is a part of the
Registration Statement.
Very truly yours,
/s/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
-------------------------------------------
POWELL, GOLDSTEIN, FRAZER &
MURPHY LLP
<PAGE> 1
EXHIBIT 8.1
[POWELL, GOLDSTEIN, FRAZER & MURPHY LLP LETTERHEAD]
November 22, 1999
Level 8 Systems, Inc.
8000 Regency Parkway
Cary, North Carolina 27511
Re: Registration Statement on Form S-4 of Level 8 Systems, Inc. ("Level 8")
containing the Proxy Statement/Prospectus for Level 8 and the Proxy
Statement for Template Software, Inc. ("Template") dated
November 22, 1999 (the "Proxy Statement/Prospectus")
Gentlemen:
You have requested our opinion concerning certain of the federal income tax
consequences of certain of the transactions described in the Proxy
Statement/Prospectus; specifically, the tax consequences of the merger of
Template with and into TSAC, Inc., a wholly owned subsidiary of Level 8
("TSAC"), with TSAC as the survivor of the merger (the "Merger"). In connection
with rendering this opinion we have made certain assumptions and relied upon
certain representations, including representations of the management of Level 8
and Template, as to the facts upon which this opinion is based.
Based upon the assumptions and the representations, we are of the opinion
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. Accordingly, we confirm that the
discussions of the tax consequences resulting therefrom, as set forth in the
Proxy Statement/Prospectus under the subheadings "Federal Income Implications of
the Merger to Template Stockholders" and "Federal Income Tax Implications of the
Merger to Template, Level 8 and TSAC" appearing under "Approval of the Merger
and Related Transactions - Material Federal Income Tax Consequences," to the
extent that they constitute matters of law or legal conclusions are accurate in
all material respects.
The opinion addresses only the effect under the federal income tax laws of
the Merger, and we express no opinion with respect to the applicability thereto,
or the effect thereon, of other federal laws, the laws of any state or other
jurisdiction, or as to any matters of municipal law or the laws of any other
local agencies within any state.
We hereby consent to the filing of this opinion as an exhibit to such Proxy
Statement/Prospectus and the reference to our firm and the above-mentioned
opinion under the heading "Approval of the Merger and Related Transactions -
Material Federal Income Tax Consequences" included in the Proxy
Statement/Prospectus. In giving such consent, we do not thereby admit that we
are acting within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, and the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Powell, Goldstein, Frazer & Murphy LLP
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<PAGE> 1
EXHIBIT 8.2
COOLEY GODWARD LLP ATTORNEYS AT LAW Palo Alto, CA
650 843-5000
One Maritime Plaza Menlo Park, CA
20th Floor 650 843-5000
San Francisco, CA San Diego, CA
94111-3580 619 550-6000
Main 415 693-2000 Boulder, CO
Fax 415 951-3699 303 546-4000
November 22, 1999 Denver, CO
www.cooley.com 303 606-4800
ROBERT H. MILLER
415 693-2178
[email protected]
Template Software, Inc.
45365 Vintage Park Plaza
Suite 100
Dulles, Virginia 20166
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger dated as of October 19, 1999 (the "Reorganization
Agreement") by and among Level 8 Systems, Inc., a Delaware corporation
("Parent"), TSAC, Inc., a Delaware corporation and wholly owned subsidiary of
Parent ("Merger Sub"), and Template Software, Inc., a Virginia corporation (the
"Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
(A) the Reorganization Agreement;
(B) the Registration Statement;
(C) those certain tax representation letters dated November 20
and 22, 1999, and delivered to us by Parent, Merger Sub and the Company
containing certain representations of Parent, Merger Sub and the
Company (the "Tax Representation Letters"); and
(D) such other instruments and documents related to the
formation, organization and operation of Parent, Merger Sub and the
Company and related to the consummation of the Merger and the other
transactions contemplated by the Reorganization Agreement as we have
deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
<PAGE> 2
COOLEY GODWARD LLP
Template Software, Inc.
November 22, 1999
Page Two
(A) Original documents submitted to us (including signatures
thereto) are authentic, documents submitted to us as copies conform to
the original documents, and that all such documents have been (or will
be by the Effective Time) duly and validly executed and delivered where
due execution and delivery are a prerequisite to the effectiveness
thereof;
(B) All representations, warranties and statements made or
agreed to by Parent, Merger Sub and the Company, their managements,
employees, officers, directors and stockholders in connection with the
Merger, including, but not limited to, those set forth in the
Reorganization Agreement (including the exhibits thereto) and the Tax
Representation Letters are true and accurate at all relevant times;
(C) All covenants contained in the Reorganization Agreement
(including exhibits thereto) and the Tax Representation Letters are
performed without waiver or breach of any material provision thereof;
(D) The Merger will be reported by Parent and the Company on
their respective federal income tax returns in a manner consistent with
the opinion set forth below;
(E) Any representation or statement made "to the best of
knowledge" or similarly qualified is correct without such
qualification; and
(F) The opinion dated November 22, 1999, rendered by Powell,
Goldstein, Frazer & Murphy LLP to Parent pursuant to the Reorganization
Agreement has been delivered and has not been withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, it is correct in all material respects.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. No opinion is expressed as to
the federal income tax treatment that
<PAGE> 3
COOLEY GODWARD LLP
Template Software, Inc.
November 22, 1999
Page Three
may be relevant to a particular investor in light of personal circumstances or
to certain types of investors subject to special treatment under the federal
income tax laws (for example, financial institutions, insurance companies,
foreign individuals and entities, tax-exempt entities, dealers in securities,
persons who are subject to the alternative minimum tax provisions of the Code,
persons who acquired their shares of Company capital stock pursuant to the
exercise of an employee option (or otherwise as compensation), persons whose
shares of Company capital stock are qualified small business stock for purposes
of Section 1202 of the Code, or persons who acquired Company capital stock as
part of an integrated investment, such as a "hedge," "straddle," or other risk
reduction transaction, composed of Company capital stock and one or more other
positions).
No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any transaction whatsoever, including
the Merger, if all of the transactions described in the Reorganization Agreement
are not consummated in accordance with the terms of the Reorganization Agreement
and without waiver of any material provision thereof. To the extent that any of
the representations, warranties, statements and assumptions material to our
opinion and upon which we have relied are not accurate and complete in all
material respects at all relevant times, our opinion would be adversely affected
and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with the filing of the
Registration Statement. It is intended for the benefit of the Company and the
Company's stockholders and may not be relied upon or utilized for any other
purpose or by any other person and may not be made available to any other person
without our prior written consent.
<PAGE> 4
COOLEY GODWARD LLP
Template Software, Inc.
November 22, 1999
Page Four
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the reproduction and filing of this opinion as an exhibit to
the Registration Statement.
Sincerely,
COOLEY GODWARD LLP
/s/ Robert H. Miller
RHM:ls
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of Level
8 Systems, Inc. of our report dated March 31, 1999 relating to the financial
statements of Level 8 Systems, Inc. which appears in such Registration
Statement. We also consent to the references to us under the headings "Summary
of Selected Financial Information", "Background of the Merger", "Changes in and
Disagreements With Accountants" and "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
November 19, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of Level
8 Systems, Inc. of our report dated December 31, 1998 relating to the financial
statements of Seer Technologies, Inc. which appears in such Registration
Statement. We also consent to the references to us under the headings "Summary
of Selected Financial Information", "Background of the Merger", "Changes in and
Disagreements With Accountants" and "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
November 19, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of Level
8 Systems, Inc. of our report dated March 17, 1999 relating to the financial
statements of Template Software, Inc. which appears in such Registration
Statement. We also consent to the references to us under the headings "Summary
of Selected Financial Information", "Background of the Merger", "Changes in and
Disagreements With Accountants" and "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
November 19, 1999
<PAGE> 1
EXHIBIT 23.4
We have issued our report dated 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) accompanying the consolidated financial statements of Level 8 Systems,
Inc. for the year ended December 31, 1997, contained in the Registration
Statement and Joint Proxy Statement/Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Joint Proxy
Statement/Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
GRANT THORNTON LLP
New York, New York
November 19, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Level 8 Systems, Inc. of our report dated January 31, 1997, except for Note 3,
as to which the date is April 6, 1998, relating to the financial statements of
Level 8 Systems, Inc. which appears in such Registration Statement. We also
consent to the references to us under the headings "Changes in and
Disagreements With Accountants" and "Experts" in such Registration Statement.
/s/ Lurie, Besikof, Lapidus & Co., LLP
Minneapolis, Minnesota
November 19, 1999
<PAGE> 1
EXHIBIT 99.1
PROXY -- COMMON STOCK LEVEL 8 SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 15, 1999
STEVEN DMISZEWICKI and DENNIS MCKINNIE, or either of them, with full power
of substitution, are hereby appointed proxies to vote all shares (unless a
lesser number is specified on the other side) of common stock, par value $.001
per share, of Level 8 Systems, Inc. (the "Company") that the undersigned would
be entitled to vote at the Special Meeting of Stockholders of the Company to be
held on December 15, 1999 at Level 8's New York offices, at 1250 Broadway, 35th
Floor, New York, New York 10001-3782 at 2:00 p.m., local time, and any
adjournments thereof, with all powers the undersigned would possess if
personally present, for (i) the approval of the issuance of shares of the
Company's common stock in accordance with the merger agreement among the
Company, our wholly owned subsidiary, TSAC, Inc., and Template Software, Inc.,
and (ii) the approval of an amendment to the Company's 1997 Stock Option Plan as
described in the joint proxy statement/prospectus, and in their discretion with
respect to matters incident to the conduct of the meeting and matters as to
which the Board of Directors does not know, as of a reasonable time before the
solicitation of this proxy, are to be presented at the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED FOR
PROPOSAL 1 AND PROPOSAL 2, AND IN THE DISCRETION OF THE PROXY HOLDER(S) WITH
RESPECT TO OTHER MATTERS PROPERLY BROUGHT BEFORE THE MEETING, INCLUDING ANY
ADJOURNMENTS THEREOF.
- --------------------------------- DETACH HERE --------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF PROPOSAL 1 AND PROPOSAL 2.
NO. 1 Proposal to approve the issuance of shares of common stock in accordance
with the merger agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on the Next Page)
NO. 2 Proposal to approve an amendment to the Company's 1997 Stock Option Plan
to increase the number of shares of common stock subject to awards under
the plan from 2,600,00 to 4,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
DATED:
- -------------------------------------------------------------------------------,
1999
--------------------------------
--------------------------------
Signature(s) of Stockholder(s)
Please mark and date the proxy and sign your name as it appears hereon. If
executed by a corporation, a duly authorized officer must sign by name and
title. Executors, administrators and trustees must so indicate when signing. If
shares are held jointly, EACH holder must sign.
<PAGE> 1
EXHIBIT 99.2
TEMPLATE SOFTWARE, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 17, 1999
The undersigned hereby appoints JOSEPH M. FOX and PETER J. RUSSO, and each
of them, as attorneys and proxies of the undersigned, each with full power of
substitution, as proxies to vote all of the shares of stock of Template
Software, Inc. which the undersigned may be entitled to vote at the Special
Meeting of Shareholders of Template Software, Inc. to be held at the
headquarters of Template Software, Inc., 45365 Vintage Park Plaza, Suite 100,
Dulles, Virginia 20166, on Friday, December 17, 1999 at 9:30 a.m. (local time),
and at any and all postponements, continuations and adjournments thereof, with
all powers that the undersigned would possess if personally present, upon and in
respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting. The undersigned hereby acknowledges
receipt of the Notice of the Special Meeting of Shareholders of Template
Software, Inc. and the accompanying Joint Proxy Statement/Prospectus.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
PROPOSAL DESCRIBED BELOW, AS MORE SPECIFICALLY DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE
VOTED IN ACCORDANCE THEREWITH.
- --------------------------------- DETACH HERE --------------------------------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL.
PROPOSAL 1: Approval and adoption of the Agreement and Plan of Merger, dated as
of October 19, 1999, by and among Template Software, Inc., Level 8
Systems, Inc. and TSAC, Inc., and the transactions contemplated
thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(To be signed on other side)
(Continued from other side)
DATED:
--------------------------------
--------------------------------
--------------------------------
SIGNATURE(s)
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add their titles. If signer is
a corporation, please give full corporate name and have a duly authorized
officer sign, stating title. If signer is a partnership, please sign in
partnership name by authorized person.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
