UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 0-26392
LEVEL 8 SYSTEMS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2920559
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S Employer
or organization) Identification Number)
8000 Regency Parkway, Cary, NC 27511
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(919) 380-5000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15d of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES _ NO X
- -
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
13,594,114 common shares, $.001 par value, were outstanding as of May 11, 2000.
Page 1
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
INDEX
<S> <C>
Page
PART I. Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number
------
Item 1. Financial Statements
Consolidated balance sheets as of March 31, 2000 (unaudited)
and December 31, 1999 . . . . . . . . . . . . . . . . . . . . 3
Consolidated statements of operations for the three months
ended March 31, 2000 and 1999 (unaudited) . . . . . . . . . . 4
Consolidated statements of cash flows for the three months
ended March 31, 2000 and 1999 (unaudited) . . . . . . . . . . 5
Consolidated statements of comprehensive income for the
three months ended March 31, 2000 and 1999 (unaudited). . . . 6
Notes to consolidated financial statements (unaudited). . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . 17
PART II. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
2000 1999
----------- --------------
Assets
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 7,993 $ 6,509
Accounts receivable, less allowance for doubtful accounts
of $1,426 and $1,150 at March 31, 2000 and December 31,
1999, respectively. . . . . . . . . . . . . . . . . . . 22,499 22,199
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Prepaid expenses and other current assets . . . . . . . . . . 5,307 5,134
----------- --------------
Total current assets . . . . . . . . . . . . . . . 37,799 35,842
Property and equipment, net . . . . . . . . . . . . . . . . . 5,741 5,845
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 65,697 69,948
Software product technology, net. . . . . . . . . . . . . . . 19,308 20,488
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,015 1,458
----------- --------------
Total assets . . . . . . . . . . . . . . . . . . . $ 129,560 $ 133,581
=========== ==============
Liabilities and stockholders' equity
Notes payable, due on demand. . . . . . . . . . . . . . . . . $ 6,973 $ 4,996
Current maturities of loan from related company . . . . . . . 519 519
Current maturities of long-term debt. . . . . . . . . . . . . 182 395
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 1,798 2,194
Accrued expenses:
Salaries, wages and related items. . . . . . . . . . . . 4,615 4,172
Merger-related . . . . . . . . . . . . . . . . . . . . . 1,866 4,075
Restructuring. . . . . . . . . . . . . . . . . . . . . . 431 630
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 8,693 8,336
Due to related party. . . . . . . . . . . . . . . . . . . . . 38 41
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . 9,687 9,020
----------- --------------
Total current liabilities. . . . . . . . . . . . . 34,802 34,378
Long-term debt, net of current maturities . . . . . . . . . . 20,379 22,202
Loan from related company, net of current maturities. . . . . 3,000 4,000
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . - 780
Stockholders' equity
Preferred stock. . . . . . . . . . . . . . . . . . . . . - -
Common stock . . . . . . . . . . . . . . . . . . . . . . 14 12
Additional paid-in-capital . . . . . . . . . . . . . . . 120,914 113,507
Accumulated other comprehensive income . . . . . . . . . (233) (159)
Accumulated deficit. . . . . . . . . . . . . . . . . . . (49,316) (41,139)
----------- --------------
Total stockholders' equity . . . . . . . . . . . . 71,379 72,221
----------- --------------
Total liabilities and stockholders' equity . . . . $ 129,560 $ 133,581
=========== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Software . . . . . . . . . . . . . . . . . . . $ 8,233 $ 2,712
Maintenance. . . . . . . . . . . . . . . . . . 3,674 3,883
Services . . . . . . . . . . . . . . . . . . . 7,755 6,610
-------- --------
Total operating revenue. . . . . . . . 19,662 13,205
Cost of revenue:
Software . . . . . . . . . . . . . . . . . . . 1,930 838
Maintenance. . . . . . . . . . . . . . . . . . 1,384 1,600
Services . . . . . . . . . . . . . . . . . . . 6,814 6,018
-------- --------
Total cost of revenue. . . . . . . . . 10,128 8,456
Gross profit . . . . . . . . . . . . . . . . . . 9,534 4,749
Operating expenses:
Sales and marketing. . . . . . . . . . . . . . 7,119 2,619
Research and development . . . . . . . . . . . 2,211 1,679
General and administrative . . . . . . . . . . 3,548 1,167
Amortization of intangible assets. . . . . . . 3,526 1,697
-------- --------
Total operating expenses . . . . . . . 16,404 7,162
Loss from operations . . . . . . . . . . . . . . (6,870) (2,413)
Other income (expense)
Interest income. . . . . . . . . . . . . . . . 39 74
Interest expense . . . . . . . . . . . . . . . (696) (701)
Amortization of loan guaranty. . . . . . . . . (213) --
Net foreign currency gains/(losses). . . . . . (38) (586)
-------- --------
Loss before tax provision. . . . . . . . . . . . (7,778) (3,626)
Income tax provision . . . . . . . . . . . . . . 250 202
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . $(8,028) $(3,828)
======== ========
Net loss per share - basic and diluted . . . . . $ (0.64) $ (0.44)
======== ========
Weighted shares outstanding - basic and diluted. 12,778 8,710
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,028) $(3,828)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 5,414 2,709
Deferred income taxes . . . . . . . . . . . . . . . . . . - (2)
Allowance for doubtful accounts . . . . . . . . . . . . . 273 104
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Trade accounts receivable. . . . . . . . . . . . . . (618) 604
Prepaid expenses and other assets. . . . . . . . . . 196 164
Accounts payable and accrued expenses. . . . . . . . (222) (2,655)
Merger-related and restructuring . . . . . . . . . . (1,217) (1,834)
Deferred revenue . . . . . . . . . . . . . . . . . . (113) (1,350)
-------- --------
Net cash used in operating activities . . . . . (4,315) (6,088)
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . (304) (54)
Payments for acquisitions, net . . . . . . . . . . . . . . . . (466) -
Net proceeds on disposition of Template subsidiary . . . . . . 759 -
Capitalization of software development costs . . . . . . . . . (300) (544)
-------- --------
Net cash used in investing activities . . . . . (311) (598)
Cash flows from financing activities:
Issuance of common shares. . . . . . . . . . . . . . . . . . . 5,505 25
Dividends on preferred shares. . . . . . . . . . . . . . . . . (209) -
Net borrowings on line of credit . . . . . . . . . . . . . . . 1,975 3,325
Payments on borrowings from related company. . . . . . . . . . (1,000) (496)
Payments on capital leases . . . . . . . . . . . . . . . . . . (16) (13)
Payment on other long-term debt. . . . . . . . . . . . . . . . (115) -
-------- --------
Net cash provided by in financing activities. . 6,140 2,841
Effect of exchange rate changes on cash . . . . . . . . . . . . . . (30) (12)
Net increase (decrease) in cash and cash equivalents. . . . . . . . 1,484 (3,857)
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . 6,509 6,078
-------- --------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . $ 7,993 $ 2,221
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
<PAGE>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . $(8,028) $(3,828)
Other comprehensive income, net of tax
Foreign currency translation adjustment (74) (161)
-------- --------
Comprehensive loss . . . . . . . . . . . . . $(8,102) $(3,989)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT 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, 1999. 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 conversion of certain notes payable as described in Note
6.
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. During the period ended March 31, 2000, all of
the Company's subsidiaries were wholly-owned. During the period ended March 31,
1999, all of the Company's subsidiaries were 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 in the losses
of the Seer subsidiary reflected in the consolidated financial statements as of
and for the period ended March 31, 1999.
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 2000 presentation. Such reclassifications had no
effect on previously reported net loss or stockholders' equity.
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 and 2000 include stock options and stock warrants. Additionally, in
the first quarter of fiscal year 2000, potentially dilutive securities included
preferred stock. Dividends of $209 were paid to the holders of Series A
Preferred Stock in the first quarter of 2000.
Page 7
<PAGE>
The following table sets forth the reconciliation of net loss to loss available
to common stockholders:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Net loss . . . . . . . . . . . . . . . $(8,028) $(3,828)
Preferred stock dividends. . . . (148) --
-------- --------
Loss available to common stockholders. $(8,176) $(3,828)
======== ========
Loss per common share:
Net loss per share - basic and diluted $ (0.64) $ (0.44)
======== ========
Weighted common shares outstanding -
basic and diluted. . . . . . . . . . . 12,778 8,710
======== ========
</TABLE>
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 2000 or 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 quarter of fiscal year 2000 and 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. 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 year ended December 31, 1999. Segment data includes a
charge allocating all general and administrative expenses 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 loss before interest, net foreign currency gains/(losses),
taxes and amortization of goodwill and other intangible assets (EBITA).
Page 8
<PAGE>
The table below presents information about reported segments for the quarter
ended March 31, 2000:
<TABLE>
<CAPTION>
Research
And
Software Maintenance Services Development Total
---------- ------------ ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 8,233 $ 3,674 $ 7,755 $ - $19,662
Total EBITA . $ (2,467) $ 2,037 $ (301) $ (2,613) $(3,344)
</TABLE>
The table below presents information about reported segments for the quarter
ended March 31, 1999:
<TABLE>
<CAPTION>
Research
And
Software Maintenance Services Development Total
---------- ------------ --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 2,712 $ 3,884 $ 6,610 $ - $13,205
Total EBITA . $ (1,062) $ 3,055 $ 41 $ (2,750) $ (716)
</TABLE>
A reconciliation of total segment EBITA to total consolidated loss before taxes
for the quarters ended March 31 is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
<S> <C> <C>
2000 1999
-------- --------
Total EBITA. . . . . . . . . . $(3,344) $ (716)
Amortization of goodwill . . . (3,526) (1,697)
Other expense, net . . . . . . (908) (1,213)
-------- --------
Total loss before income taxes $(7,778) $(3,626)
======== ========
</TABLE>
The following table presents a summary of revenue by geographic region for the
quarters ended March 31:
<TABLE>
<CAPTION>
Three months ended
March 31,
<S> <C> <C>
2000 1999
------- -------
Australia. . . $ 353 $ 648
Denmark. . . . 958 1,408
France . . . . 1,625 -
Germany. . . . 391 542
Greece . . . . 1,606 408
Italy. . . . . 386 1,278
Norway . . . . 635 608
Switzerland. . 458 1,000
United Kingdom 1,053 1,608
USA. . . . . . 11,225 4,511
Other. . . . . 972 1,194
------- -------
Total revenue. $19,662 $13,205
======= =======
</TABLE>
Presentation of revenue by region is based on the country in which the customer
is domiciled.
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<PAGE>
NOTE 6. LONG-TERM DEBT
In connection with the acquisition of Momentum Software Corporation
("Momentum"), on December 1, 1998, the Company issued notes to various Momentum
shareholders totaling $3,000 payable over three years and bearing an interest
rate of 10% per annum. As of December 31, 1999, the remaining three
installments on the notes totaled $2,250, plus interest. During the first
quarter of 2000, the Company offered to exchange the notes held by former
Momentum shareholders for shares of the Company's common stock at a per share
price based on the average market price for a set period prior to the date the
noteholder accepted the offer. The Company converted $1,904 of the Momentum
notes in exchange for approximately 55,000 shares of common stock in the first
quarter of 2000 as a result of this exchange offer.
NOTE 7. PREFERRED STOCK
During the first quarter of 2000, 7,216 shares of the Company's Series A
Preferred Stock were converted into 721,600 shares of the Company's common
stock.
NOTE 8. CONTINGENCIES
On April 6, 1998, the Company sold substantially all 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 notified the Company that it
believes there are substantial adjustments which would require a reduction in
the purchase price. The Company and the purchaser, pursuant to the terms of
the settlement agreement, entered into arbitration proceedings to resolve this
matter and a decision from the arbitrator is expected soon. 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 filed a lawsuit against Saadi Abbas ("Abbas") and
Cambridge Business Solutions (UK) Limited ("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 1999, most of those
claims were struck out by the court in London, England as unarguable or
otherwise time barred. The Company intends to continue to vigorously defend
against the few remaining claims. 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.
On June 30, 1999, Template Software, Inc., filed a claim with the National
Association of Securities Dealers for arbitration against Merrill Lynch Pierce
Fenner & Smith (''Merrill Lynch'') 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, a portfolio of zero coupon long-term bonds held by Template. On
December 27, 1999, Template Software, Inc. was merged into TSAC, Inc., a wholly
owned subsidiary of the Company. Discovery has commenced in the arbitration. The
Company expects that the arbitration will be completed by the end of summer
2000. The Company cannot at this time predict the outcome of these proceedings.
Management does not believe that the results of this arbitration will have a
material effect on the financial position, cash flows, or results of operations
of the Company.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- ---------------
GENERAL INFORMATION
- --------------------
Level 8 specializes in delivering software solutions that help companies
integrate new and existing computer applications and extend these applications
to the Internet to support 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 business process
automation and application integration in a simple and cost effective way. Level
8 provides customers with software to link their critical business applications
internally across the enterprise and externally with strategic
business-to-business partners and business-to-business consumers via the
Internet.
Level 8 offers a suite of products for eBusiness and eCommerce under the
Geneva brand name. The Geneva Integration Suite has six core components which
the Company believes, together, provide the most complete suite of integration
software products available for eBusiness integration. These components include
Geneva Enterprise Integrator, Geneva Business Process Automator, Geneva
Integration Broker, Geneva Message Queuing, Geneva AppBuilder, and Geneva XIPC.
In addition to these products, 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.
RESULTS OF OPERATIONS
- -----------------------
The Company's results of operations include the operations of the Company
and its subsidiaries. Operations for the subsidiaries acquired during 1999 are
included from the date of acquisition. Accordingly, the 1999 the results of
operations for the first quarter of 1999 do not include the operations of the
Company's subsidiary, TSAC, Inc. (which acquired Template Software, Inc.
("Template")) as the date of acquisition was December 27, 1999.
Page 11
<PAGE>
The following table sets forth, for the periods indicated, the Company's
unaudited results of operations expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Three months ended
March 31,
<S> <C> <C>
2000 1999
------- -------
Revenue:
Software products. . . . . . . . . . . . 41.9% 20.5%
Maintenance. . . . . . . . . . . . . . . 18.7% 29.3%
Services . . . . . . . . . . . . . . . . 39.4% 50.2%
------- -------
Total . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of revenue:
Software products. . . . . . . . . . . . 9.8% 6.3%
Maintenance. . . . . . . . . . . . . . . 7.0% 12.1%
Services . . . . . . . . . . . . . . . . 34.7% 45.5%
------- -------
Total . . . . . . . . . . . . . . . . . . . . 51.5% 64.0%
Gross profit. . . . . . . . . . . . . . . . . 48.5% 36.0%
Operating expenses:
Sales and marketing. . . . . . . . . . . 36.2% 19.8%
Research and product development . . . . 11.2% 12.7%
General and administrative . . . . . . . 18.0% 8.9%
Amortization of goodwill and intangibles 17.9% 12.8%
------- -------
Total . . . . . . . . . . . . . . . . . . . . 83.3% 54.2%
Other income (expense), net . . . . . . . . . (4.6%) (9.2)%
------- -------
Loss before taxes . . . . . . . . . . . . . . (39.4%) (27.4%)
Income tax provision. . . . . . . . . . . . . 1.3% 1.5%
------- -------
Net loss. . . . . . . . . . . . . . . . . . . (40.7%) (28.9%)
======= =======
</TABLE>
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 ended
March 31,
2000 1999
----- -----
<S> <C> <C>
United States 57 % 35 %
Europe. . . . 38 % 57 %
Asia Pacific. 2 % 7 %
Other . . . . 3 % 1 %
----- -----
Total 100 % 100%
===== =====
</TABLE>
Page 12
<PAGE>
REVENUE AND GROSS MARGIN. The Company has three categories of
revenue: software products, maintenance, and services. Software products
revenue is comprised primarily of fees from licensing the Company's
proprietary software products. Maintenance revenue is comprised of fees for
maintaining, supporting, and providing periodic upgrades to the Company's
software products. Services revenue is comprised of fees for consulting and
training services related to the Company's software products.
The Company's revenues may vary from quarter to quarter due to market
conditions, the budgeting and purchasing cycles of customers, and the
effectiveness of its sales force. The Company typically does not have any
material backlog of unfilled software orders, and product revenue in any quarter
is substantially dependent upon orders received in that quarter. Because the
Company's operating expenses are based on anticipated revenue levels and are
relatively fixed over the short term, variations in the timing of recognition
revenue can cause significant variations in operating results from quarter
to quarter. Fluctuations in operating results may result in volatility in the
price of the Company's common stock.
Total revenues increased significantly for the first quarter of 2000 as
compared to the same period of 1999 due to growth in the sales of the
Company's software products including the products acquired with Template during
1999, and due to the services business acquired with Template. The Company's
gross margins improved to 49% for the quarter ended March 31, 2000 from 36%
for the comparable period of 1999.
SOFTWARE PRODUCTS. Due to the Company's focus on sales and marketing,
software products revenue increased significantly for the first quarter or 2000
as compared to the same period of 1999. Software product sales included sales
of products acquired from Template, sales of the Company's existing products,
and $1.8 million of previously deferred license revenue. The Company entered
into an agreement during the first quarter of 2000 with a customer, which
removed the obligations requiring deferral of this revenue under SOP 97-2.
Gross margins on software products increased from a margin of 69% for the
first quarter of 1999 to 77% for the first quarter of 2000 primarily due to the
increase in the Company's software products revenue. The increase in revenue was
offset somewhat by a $1.1 million increase in cost of software. Cost of
software is composed primarily of amortization of purchased technology,
capitalized software costs for internally developed software, and royalties to
third parties for the Company's Geneva Message Queuing product and to a lesser
extent production and distribution costs. The increase in cost of software was
primarily due to amortization of capitalized software from Template's and Seer's
developed technology valued in the purchase transactions.
MAINTENANCE. Maintenance revenue during the first quarter of 2000 was
relatively consistent with the first quarter of 1999. This consistency is the
result of a slight decline in the number of customers purchasing maintenance for
Geneva AppBuilder and Geneva XIPC, which was offset by new maintenance revenue
from Template's customers. Historically, maintenance was not a significant part
of Template's revenue. The Company plans to focus on increasing maintenance for
the historical Template products in future sales.
Cost of maintenance is comprised of personnel costs and related overhead
and the cost of third-party contracts for the maintenance and support of the
Company's software products. Gross margins on maintenance increased from 59%
for the first quarter of 1999 to 62% for the first quarter of 2000 due to
increases in the installed customer base, while the Company was able to realize
economies of scale. During the first quarter of 2000, the Company ended its
relationship with a third-party support contractor, and will provide these
services with its own personnel in the future.
SERVICES. Services revenue increased 17% from the first quarter of 1999
to the first quarter of 2000 primarily due to the acquisition of Template.
Through the acquisition of Template, the Company became party to government
services contracts which resulted in approximately $2.7 million in revenue in
the first quarter. The Company is currently evaluating various alternatives for
disposing of certain contracts of its government services operations, which are
not related to the Company's products.
Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins increased from 9% to 12% from
the first quarter of 1999 to the first quarter of 2000 primarily due to higher
utilization of billable resources. The Company is seeking to improve its
consulting margins through better utilization of its consultants and by
providing high margin services for its EAI products.
Page 13
<PAGE>
SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for salespeople, travel, and related overhead, as well as trade
show participation and other promotional expenses. Sales and marketing expenses
increased significantly from the first quarter of 1999 to the first quarter of
2000 due to an increase in the size of the Company's sales and marketing
workforce, both through acquisition and recruiting, and through increased
promotional activities. Sales and marketing expenses have also increased as a
percentage of revenue from 20% in the first quarter of 1999 to 36% in the first
quarter of 2000. These increases were necessitated by the Company's sales and
promotional activities to correspond with its emphasis to increase software
product revenue. The Company intends to continue to increase its spending in
the marketing area to increase market awareness and acceptance of its products
and to further establish 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 32% from the first quarter of 1999 to the first quarter of 2000 due to
the addition of an average of thirty-five developers from Template. The Company
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 executive, legal, financial, human resources,
and administrative staff, related overhead, and all non-allocable corporate
costs of operating the Company. General and administrative expenses increased
significantly from the first quarter of 1999 to the first quarter of 2000. The
increases was primarily the result of professional fees and personnel costs due
to the Company's merger activity and to support its growing global organization.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization
of goodwill and other intangible assets was $3.5 million in the first quarter of
2000 and $1.7 million in the first quarter of 1999. The amortization of
goodwill in the first quarter of 1999 was related to the purchases of Seer,
Momentum Software Corporation ("Momentum"), and Level 8 Technologies. During
the first quarter of 2000, amortization of goodwill and other intangibles also
included the amortization of intangible assets acquired with Template. The
Company 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.
PROVISION FOR INCOME TAXES. The Company'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
first quarter of 2000 or 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 quarter of fiscal year 2000
is primarily related to income taxes from profitable foreign operations and
foreign withholding taxes.
IMPACT OF INFLATION. Inflation has not had a significant effect on
the Company's operating results during the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
Net cash used in operations and investing activities during the first
quarter of 2000 was $4.6 million. Payments of approximately $1.2 million for
merger and restructuring costs primarily related to the acquisition of Template
were a primary component of the net cash outflow in addition to the Company's
planned spending to support its sales and marketing efforts. During the first
quarter of 2000, the Company also paid $1 million on its outstanding debt
obligations with its majority shareholder Liraz. The Company funded its cash
needs during the first quarter of 2000 with cash on hand at December 31, 1999,
through first quarter operations, through $5.5 million in proceeds from the
issuance of common stock as a result of the exercise of stock options and
warrants, and through $2 million in additional borrowings under its line of
credit.
As of March 31, 2000, the Company had outstanding borrowings of $17
million under a credit facility with a commercial bank shared between the
Company and its subsidiaries (the "Credit Facility") at an interest rate
of 11%. The Credit Facility 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 December 31, 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 the
Company's accounts receivable, equipment and intangibles, including
intellectual property.
Page 14
<PAGE>
In conjunction with the purchase of Template, the Company entered into a
term loan with a commercial bank for $10 million. The loan bears interest at
LIBOR plus 1% (7.25% at March 31, 2000), which is payable quarterly. This term
loan will be due May 31, 2001 and has no financial covenants. The loan is
guaranteed by Liraz.
In connection with the acquisition of Momentum Software Corporation
("Momentum"), on December 1, 1998, the Company issued notes to various Momentum
shareholders totaling $3,000 payable over three years and bearing an interest
rate of 10% per annum. As of December 31, 1999, the remaining three
installments on the notes totaled $2,250, plus interest. During the first
quarter of 2000, the Company offered to exchange the notes held by former
Momentum shareholders for shares of the Company's common stock at a per share
price based on the average market price for a set period prior to the date the
noteholder accepted the offer. The Company converted $1,904 of the Momentum
notes in exchange for approximately 55,000 shares of common stock in the first
quarter of 2000 as a result of this exchange offer.
In addition to the debt described above, the Company has other outstanding
borrowings at March 31, 2000 including (i) $.1 million under a note payable to
Liraz which bears interest at 4% per year and is payable in equal quarterly
installments of $.035 million, including interest, (ii) $.5 million under a note
payable to Liraz which bears interest at 8% per year and is payable in annual
installments, (iii) a $3 million loan from Liraz which bears interest at 12% and
is payable on December 15, 2001, and (iv) $.2 million of $3 million in notes
issued to the sellers of Momentum which bear interest at 10% per year and are
payable in annual installments. The $3 million loan and other debt payable to
Liraz is subordinate in right of payment to the Credit Facility.
Future maturities on the Company's outstanding debt at March 31, 2000
include $7.7 million in 2000 and $23.4 million in 2001. Of such amounts, $.5
million in 2000 and $3 million in 2001 are due to Liraz.
As of March 31, 2000, the Company did not have any material commitments for
capital expenditures.
During the first quarter of 1999, the Company incurred a net loss of $8
million and has working capital of $2.1 million and an accumulated deficit
of $49.3 million at March 31, 2000. The Company 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 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. The Company may also explore
additional debt or equity financing to expand its operations and take advantage
of market opportunities.
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. The Company is reviewing the anticipated impact the Euro may have on its
internal systems and on its competitive environment. The Company believes its
internal systems will be Euro capable without material modification cost.
Further, the Company does not presently expect the introduction of the
Euro currency to have an adverse material impact on the Company's
financial condition, cash flows, or results of operations.
Page 15
<PAGE>
FORWARD LOOKING AND CAUTIONARY STATEMENTS
- ---------------------------------------------
Certain statements contained in this Annual Report may constitute ''forward
looking statements'' within the meaning of the Private Securities Litigation
Reform Act of 1995 (''Reform Act''). The Company may also make forward looking
statements in other reports filed with the Securities and Exchange Commission,
in materials delivered to shareholders, in press releases and in other public
statements. In addition, the Company's representatives may from time to time
make oral forward looking statements. Forward looking statements provide current
expectations of future events based on certain assumptions and include any
statement that does not directly relate to any historical or current fact. Words
such as ''anticipates,'' ''believes,'' ''expects,'' ''estimates,'' ''intends,''
''plans,'' ''projects,'' and similar expressions, may identify such forward
looking statements. In accordance with the Reform Act, set forth below are
cautionary statements that accompany those forward looking statements. Readers
should carefully review these cautionary statements as they identify certain
important factors that could cause actual results to differ materially from
those in the forward looking statements and from historical trends. The
following cautionary statements are not exclusive and are in addition to other
factors discussed elsewhere in the Company's filings with the Securities and
Exchange Commission and in materials incorporated therein by reference: the
Company's future success depends on the market acceptance of the new Geneva
Integration Suite; general economic or business conditions may be less favorable
than expected, resulting in, among other things, lower than expected revenues;
an unexpected revenue shortfall may adversely affect the Company's business
because its expenses are largely fixed; the Company's quarterly operating
results may vary significantly because the Company is not able to accurately
predict the amount and timing of individual sales and this may adversely impact
the Company's stock price; trends in sales of the Company's products and general
economic conditions may affect investors' expectations regarding the Company's
financial performance and may adversely affect the Company's stock price; the
Company's future results may depend upon the continued growth and business use
of the Internet; the Company's government contracts business is subject to a
number of risks associated with doing business with the federal government; the
Company may lose market share and be required to reduce prices as a result of
competition from its existing competitors, other vendors and information systems
departments of customers; the Company may not have the ability to recruit, train
and retain qualified personnel; the Company may not have the resources to
successfully manage the integration of Template; the Company's future results
may depend upon the successful integration of future acquisitions; the Company
may not have the resources to successfully manage additional growth; rapid
technological change could render the Company's products obsolete; if the
Company's relationship with Microsoft weakens, it could adversely affect the
Company's business; the loss of any one of the Company's major customers could
adversely affect the Company's business; the Company's business is subject to a
number of risks associated with doing business abroad including the effect of
foreign currency exchange fluctuations on the Company's results of operations;
the Company's products may contain undetected software errors, which could
adversely affect its business; because the Company's technology is complex, the
Company may be exposed to liability claims; year 2000 issues may cause problems
with the Company's systems and expose the Company to liability; the failure of
the Company to meet product delivery dates could adversely affect its business;
the Company may be unable to enforce or defend its ownership and use of
proprietary technology; because the Company is a technology company, its common
stock may be subject to erratic price fluctuations; and the Company may not have
sufficient liquidity and capital resources to meet changing business conditions.
Page 16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
Approximately 43% of the Company's revenues in the first quarter of 2000
were generated by sales outside the United States. The Company 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 the Company's non-U.S. operations are translated into
U.S. dollars at exchange rates in effect as of the applicable balance sheet
dates, and revenue and expense accounts of these operations are translated at
average exchange rates during the month the transactions occur. Unrealized
translation gains and losses will be included as an adjustment to shareholders'
equity.
The Company hedges its foreign currency receivables in an effort to reduce
its exposure to currency exchange rates. However, as a matter of procedure, the
Company will not invest in speculative financial instruments as a means of
hedging against such risk. The Company's accounting policies for these contracts
are based on the Company's designation of the contracts as hedging transactions.
The criteria the Company uses for designating a contract as a hedge include the
contract's effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on forward foreign
exchange contracts are recognized in income in the same period as gains and
losses on the underlying transactions. If an underlying hedged transaction is
terminated earlier than initially anticipated, the offsetting gain or loss on
the related forward exchange contract would be recognized in income in the same
period. In addition, since the Company enters into forward contracts only as a
hedge, any change in currency rates would not result in any material net gain or
loss, as any gain or loss on the underlying foreign currency denominated balance
would be offset by the gain or loss on the forward contract.
Page 17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 6, 1998, the Company sold substantially all 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 notified the Company that it
believes there are substantial adjustments which would require a reduction in
the purchase price. The Company and the purchaser, pursuant to the terms of
the settlement agreement, entered into arbitration proceedings to resolve this
matter and a decision from the arbitrator is expected soon. 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 filed a lawsuit against Saadi Abbas
("Abbas") and Cambridge Business Solutions (UK) Limited ("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 1999,
most of those claims were struck out by the court in London, England as
unarguable or otherwise time barred. The Company intends to continue to
vigorously defend against the few remaining claims. 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.
On June 30, 1999, Template Software, Inc., filed a claim with the National
Association of Securities Dealers for arbitration against Merrill Lynch Pierce
Fenner & Smith (''Merrill Lynch'') 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, a portfolio of zero coupon long-term bonds held by Template. On
December 27, 1999, Template Software, Inc. was merged into TSAC, Inc., a wholly
owned subsidiary of the Company. Discovery has commenced in the arbitration. The
Company expects that the arbitration will be completed by the end of summer
2000. The Company cannot at this time predict the outcome of these proceedings.
Management does not believe that the results of this arbitration will have a
material effect on the financial position, cash flows, or results of operations
of the Company.
From time to time, the Company is a party to routine litigation incidental
to its business. As of the date of this Report, the Company was not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
Page 18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.31 Amendment dated March 27, 2000, to the Promissory Note,
among the Company and Liraz Systems LTD dated
December 31, 1999 (filed herewith).
10.32 Amendment dated March 16, 2000, to the Promissory Note,
among the Company and Bank Hapolim dated December 20,
1999(filed herewith).
27.1 Financial Data Schedule for the Company(filed herewith).
(b) Reports on Form 8-K
None
Page 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Level 8 Systems, Inc.
Date: May 12, 2000 /s/ Steven Dmiszewicki
-------------------
Steven Dmiszewicki
President
Date: May 12, 2000 /s/ Renee D. Fulk
---------------
Renee D. Fulk
Chief Financial Officer
Page 20
<PAGE>
Exhibit 10.31
SECOND AMENDMENT TO THE PROMISSORY NOTE
OF LEVEL 8 SYSTEMS, INC.
IN FAVOR OF LIRAZ SYSTEMS LTD.
This document when executed by Level 8 Systems, Inc. and Liraz Systems,
Ltd. shall amend that certain Promissory Note of Level 8 Systems, Inc. in favor
of Liraz Systems Ltd dated December 31, 1999.
1. The maturity date of the note is hereby changed from December 15,
2000 to December 15, 2001.
All other terms of the Promissory Note shall remain unchanged and fully
enforceable.
This Agreement shall have effect from the 31st day of December, 1999.
LEVEL 8 SYSTEMS, INC. LIRAZ SYSTEMS LTD.
By: /s/ Renee D. Fulk By: /s/ Yossi Shemesh
----------------------- -----------------------
Renee D. Fulk Yossi Shemesh
Title: Chief Financial Officer Title: Chief Financial Officer
EXHIBIT 10.32
This note supercedes and replaces the note dated December 20, 1999 executed
by the Borrower in favor of the Bank in the amount of $10,000,000.00
PROMISSORY NOTE
U.S. $10,000,000.00
--------------
March 16, 2000 New York, New York
- --------------
1. OBLIGATION AND REPAYMENT: For value received, Borrower absolutely and
unconditionally promises to pay to the order of the Bank, at the Office,
without defense, setoff or counterclaim, the principal amount of Ten
Million and 00/100 United States Dollars, together with interest and any
other sum(s) due as specified below. The principal amount of this Note
shall be due and payable as follows (complete one of the following as
applicable):
(A) [ ] ON DEMAND.
(B) On May 31, 2001; and
(C) In consecutive installments, of which each but the last shall be
$_____________ and the last of which shall be equal to the then
unpaid principal balance of this Note. The first such installment
shall be due on ______________, 19__. Each subsequent installment
shall be due on the corresponding day of each month/ quarter/
other __________ thereafter (or if there is no such corresponding
day, on the last day of such period). The remaining principal
balance shall be due on ______________, 19__.
(D) [X] In accordance with the attached Rider.
2. INTEREST: Subject to paragraph A(2) of the Terms and Conditions, interest
shall accrue on the principal amount of this Note outstanding from time
to time at the following rate (the "Loan Rate") (complete one of the
following as applicable):
(A) A fixed rate equal to ______% per year.
(B) A Variable Prime-Based Rate equal to the Prime Rate plus ______%
per year.
(C) [X] In accordance with the attached Rider.
Interest shall be payable monthly/ quarterly/ (other) _____________ and
at any Payment Date and at any time that any part of the principal or any
installment of this Note is paid.
3. RIDERS: IN THE EVENT OF ANY INCONSISTENCY BETWEEN THIS NOTE AND ANY
RIDER(S) TO WHICH THIS NOTE IS SUBJECT, THE PROVISIONS OF SUCH RIDER(S)
SHALL PREVAIL. THIS NOTE IS SUBJECT TO ANY RIDER(S) REFERRED TO IN
PARAGRAPH 1(D) AND/OR 2(C) AND TO THE FOLLOWING RIDER(S), ALL OF WHICH
ARE PART OF THIS NOTE:
Multiple-Loan Rider to Promissory Note
--------------------------------------
(Libor-Based Rate)
4. ADDRESS AND IDENTIFICATION OF BORROWER:
Address: 800 Regency Parkway
---------------------------------------------------------
Cary, NC 27511
---------------------------------------------------------
Telex or similar number:
-----------------------------------------
Answerback:
------------------------------------------------------
Telecopy or similar number:
--------------------------------------
Social Security or Taxpayer ID number:
---------------------------
5. AGREEMENT TO ALL TERMS AND CONDITION; AUTHORIZATION TO COMPLETE BLANKS:
THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH BELOW AND ON
THE REVERSE SIDE OF THIS NOTE. EACH OF THE UNDERSIGNED AGREES TO ALL OF
THE PROVISIONS OF THIS NOTE, INCLUDING THE TERMS AND CONDITIONS AND ANY
RIDER(S). THE BANK IS AUTHORIZED TO COMPLETE ANY BLANK SPACE IN THIS
NOTE. SUCH COMPLETION SHALL BE CONCLUSIVE, FINAL AND BINDING ON BORROWER
IN THE ABSENCE OF MANIFEST ERROR.
6. NO REPRESENTATIONS OR AGREEMENTS BY THE BANK: EACH OF THE UNDERSIGNED
ACKNOWLEDGES THAT THE BANK HAS MADE NO REPRESENTATION, COVENANT,
COMMITMENT OR AGREEMENT TO BORROWER EXCEPT PURSUANT TO ANY WRITTEN
DOCUMENT EXECUTED BY THE BANK.
7. NO REPRESENTATION OF NONENFORCEMENT: EACH OF THE UNDERSIGNED ACKNOWLEDGES
THAT NO REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED OR INDICATED
THAT THE BANK WILL NOT ENFORCE ANY PROVISION OF THIS NOTE, INCLUDING THE
TERMS AND CONDITIONS AND ANY RIDER(S), IN THE EVENT OF LITIGATION OR
OTHERWISE.
8. WAIVER OF JURY TRIAL: BORROWER WAIVES, AND UNDERSTANDS THAT THE BANK
WAIVES, THE RIGHT TO A JURY TRIAL WITH RESPECT TO ANY DISPUTE ARISING
HEREUNDER OR RELATING TO ANY OF THE LIABILITIES; ANY JUDICIAL PROCEEDING
WITH RESPECT TO ANY SUCH DISPUTE SHALL TAKE PLACE WITHOUT A JURY.
9. EXECUTION OF PROMISSORY NOTE:
Print name of Borrower: Level 8 Systems, Inc.
-------------------------------------------------
(Signature) By: /s/ Steven Dmiszewicki
----------------------------------------------------------
Print name: Steven Dmiszewicki
----------------------------------------------------------
Title or capacity: President
-------------------------------------------------------
(if signing on behalf of Borrower)
(Signature) By: /s/ Dennis McKinnie
----------------------------------------------------------
Print Name: Dennis McKinnie
----------------------------------------------------------
Title or capacity: SVP, Secretary
-------------------------------------------------------
(if signing on behalf of Borrower)
================================================================================
TERMS AND CONDITIONS
Definitions are set forth in paragraph M
A. CALCULATION AND ACCRUAL OF INTEREST: (1) GENERALITY. Interest shall be
calculated on a daily basis on outstanding balances at the Applicable
Rate, divided by 360, on the actual days elapsed. During any time that
the Applicable Rate would exceed the applicable maximum lawful rate of
interest, the Applicable Rate shall automatically be reduced to such
maximum rate. Any interest payment made in excess of such maximum rate
shall be applied as, and deemed to be, in the Bank's sole discretion, (a)
a payment of any of the Liabilities, in such manner as determined by the
Bank, or (b) cash collateral to be retained by the Bank to secure
repayment of this Note. (2) INCREASED RATE. Interest shall accrue at the
Increased Rate upon and after (a) the occurrence of any Debtor Relief
Action, (b) any demand of payment of this Note (if payable on demand) or
(c) the occurrence of any Event of Default (if this Note is payable other
than on demand). (3) ACCRUAL. To the extent permitted by Law, interest
shall accrue at the Applicable Rate on all unpaid Liabilities under this
Note, including but not limited to any unpaid interest and any unpaid
obligation owed pursuant to paragraph B (Indemnification).
B. INDEMNIFICATION: To the extent permitted by Law: (1) TAXES: All payments
under this Note shall be made free and clear of, and without deduction
for, any Taxes. If Borrower shall be required to deduct any Taxes in
respect of any sum payable under this Note, then (a) the sum payable
shall be increased so that the Bank shall receive an amount equal to the
sum the Bank would have received had no deductions been made, and (b)
Borrower shall make such deductions and shall pay the amount deducted to
the relevant Governmental Authority. Borrower shall pay to the Bank on
demand, and shall indemnify and hold the Bank harmless from, any and all
Taxes paid by the Bank and any and all liability (including penalties,
interest and expenses) with respect thereto, whether or not such Taxes
were correctly or legally asserted. Within 30 days after any Taxes are
paid, Borrower shall furnish evidence thereof to the Bank. (2) REGULATORY
COSTS. In the event that in connection
with the transaction(s), contemplated by this Note and/or the Bank's
funding of such transaction(s), the Bank is required to incur any
Regulatory Costs in order to comply with any Law issued after the date of
this Note, then Borrower shall pay the Bank on demand, and shall
indemnify and hold the Bank harmless from any and all such Regulatory
Costs. (3) COSTS AND EXPENSES. Borrower shall pay the Bank on demand, and
shall indemnify and hold the Bank harmless from, any and all costs and
expenses. (4) PREPAYMENT COSTS. If Borrower makes any payment of Prepaid
Principal (voluntarily or not), and if the Applicable Rate with respect
to such Prepaid Principal is not a Variable Prime-Based Rate, then
Borrower shall pay to the Bank an amount sufficient to compensate the
Bank for its Prepayment Costs. Borrower acknowledges that determining the
actual amount of Prepayment Costs may be difficult or impossible in any
specific instance. Accordingly, Borrower agrees that Prepayment Costs
shall be deemed to be the excess, if any, of (i) the product of (A) the
Prepaid Principle, times (B) the Applicable Rate divided by 360, times
(C) the remaining number of days from the date of the payment to the
applicable Payment Date, over (ii) that amount of interest which the Bank
determines that the holder of a Treasury Obligation selected by the Bank
in the amount (or as close to such amount as feasible) of the Prepaid
Principal and having a maturity date on (or as soon after as feasible)
the applicable Payment Date would earn if that Treasury Obligation were
purchased in the secondary market on the date the Prepaid Principal is
paid to the Bank and were held to maturity. Borrower agrees that the
determination of Prepayment Costs shall be based on amounts which a
holder of a Treasury Obligation could receive under these circumstances,
whether or not the Bank actually invests the Prepaid Principal in any
Treasury Obligation. (5) BANK CERTIFICATE. The Bank's certificate as to
any amounts owing under this paragraph shall be prima facia evidence of
Borrower's obligation.
C. SET OFF: Every Account of Borrower with the Bank shall be subject to a
lien and to being set off against the Liabilities. The Bank may at any
time at its option and without notice, except as may be required by law,
charge and/or appropriate and apply all or any part of any such Account
toward the payment of any of the Liabilities.
D. EVENTS OF DEFAULT: The remainder of this paragraph D shall not apply if
this Note is payable on demand. Each of the following shall be an Event
of Default hereunder: (1) NONPAYMENT. (a) The nonpayment when due of any
part of the Liabilities; (b) the prohibition by any Law of payment of any
part of any of the Liabilities; (2) BANKRUPTCY; ADVERSE PROCEEDINGS. (a)
The occurrence of any Debtor Relief Action; (b) the appointment of a
receiver, trustee, committee, custodian, personal representative or
similar official for any Party or for any Material part of any Party's
property; (c) any action taken by any Party to authorize or consent to
any action set forth in subparagraph D(2)(a) or (b); (d) the rendering
against any Party of one or more judgments, orders, decrees and/or
arbitration awards (whether for the payment of money or injunctive or
other relief) which in the aggregate are Material to such Party, if they
continue in effect for 30 days without being vacated, discharged, stayed,
satisfied or performed; (e) the issuance or filing of any warrant,
process, order of attachment, garnishment or other lien or levy against
any Material part of any Party's property; (f) the commencement of any
proceeding under, or the use of any of the provisions of any Law against
any Material part of any Party's property, including but not limited to
any Law (i) relating to the enforcement of judgments or (ii) providing
for forfeiture to, or condemnation, appropriation, seizure or taking
possession by, or on order of any Governmental Authority; (g) the
forfeiture to, or the condemnation, appropriation, seizure or taking
possession by, or on the order of, any Governmental Authority, of any
Material part of any Party's property; (h) any Party being charged with a
crime by indictment, information or the like. (3) NONCOMPLIANCE. (a) Any
Default with respect to any Agreement with or to the Bank, (b) the giving
to the Bank by or on behalf of any Party at any time of any materially
incorrect or incomplete representation, warranty, statement or
information; (c) the failure of any Party to furnish to the Bank, copies
of its financial statements and such other information respecting its
business, properties, condition or operations, financial or otherwise,
promptly when, and in such form as, reasonably required or requested by
the Bank; (d) any Party's failure or refusal, upon reasonable notice from
the Bank, to permit the Bank's representative(s) to visit such Party's
premises during normal business hours and to examine and make
photographs, copies and extracts of such Party's property and of its
books and records; (e) any Party's concealing, removing or permitting to
be concealed or removed, any part of its property with the intent to
hinder or defraud any of its creditors; (f) any Party's making or
suffering any Transfer of any of its property, which Transfer is deemed
fraudulent under the law of any applicable jurisdiction; (g) the
revocation or early termination of any Party's obligations under any
Agreement with or to the Bank (including, but not limited to any of the
Liabilities) or the validity, binding effect or enforceability of any
such obligations being challenged or questioned, whether or not by the
institution of proceedings. (4) ADVERSE CHANGES. (a) the occurrence of a
Material adverse change in any Party's financial condition; (b) the death
or incompetence (if a person) or the dissolution or liquidation (if a
corporation, partnership or other entity) of any Party or such Party's
failure to be and remain in good standing and qualified to do business in
each jurisdiction Material to such Party; (c) any Material Default with
respect to any Material Agreement other than with or to the Bank; (d) any
Default pursuant to which any Person shall have the power to effect an
Acceleration of any Material Debt; (e) any Acceleration or demand of
payment with respect to any Material Debt; (f) any Party's becoming
insolvent, as defined in the Uniform Commercial Code; (g) the Bank's
believing in good faith that the prospect of payment of any of the
Liabilities or of performance of any other obligation of any Party to the
Bank is impaired; (h) the Material suspension of any Party's business;
(i) any Party's Material failure to pay any tax when due; (j) the
expulsion of any Party from any exchange or self-regulatory organization
or any loss, suspension, nonrenewal or invalidity of any Party's Material
license, permit, franchise, patent, copyright, trademark or the like; (k)
the occurrence of any event which gives any Person the right to assert a
lien, levy or right of forfeiture against any Material part of any
Party's property; (l) Borrower's failure to give the Bank notice, within
10 Business Days after Borrower had notice or knowledge, of the
occurrence of any event which, with the giving of notice and/or lapse of
time, would constitute an Event of Default. (5) BUSINESS CHANGES. (a) any
change in Control of any Party; (b) any merger or consolidation involving
any Party; (c) any Party's sale or other Transfer or substantially all of
its property; (d) any bulk sale by any Party; (e) any Material change in
the nature or structure of any Party's business. (6) EXCHANGE CONTROLS.
(a) Any Party's failure to obtain any Exchange Control Permit deemed by
the Bank to be necessary or appropriate; (b) the failure to obtain the
renewal of any such Exchange Control Permit at least 30 days prior to its
expiration.
E. REMEDIES: (1) ACCELERATION AT BANK'S OPTION. Upon any failure to pay this
Note in full on demand (if payable on demand) or (if this Note is payable
other than on demand) upon the occurrence of any Event
2
of Default other than any Debtor Relief Action, then any and all
Liabilities, not then due, shall, at the Bank's option, become
immediately due and payable without notice, which Borrower waives. (2)
AUTOMATIC ACCELERATION. Upon the occurrence of any Debtor Relief Action,
then, whether or not any of the Liabilities are payable upon demand and
notwithstanding paragraph F, any and all Liabilities, not then due, shall
automatically become immediately due and payable without notice or
demand, which Borrower waives. (3) Additional Remedies. The Bank shall
have all rights and remedies available to it under any applicable
Agreement or Law.
F. WAIVER OF PROTEST, ETC.: Notice, presentment, protest, notice of dishonor
and except for such of the Liabilities as are payable on demand, but
subject to subparagraph E(2) demand for payment are hereby waived as to
all of the Liabilities.
G. PAYMENT: (1) MANNER. Any payment by other than immediately available
funds shall be subject to collection, interest shall continue to accrue
until the funds by which payment is made are available to the Bank. If
and to the extent any payment of any of the Liabilities is not made when
due, the Bank is authorized in its discretion to effect payment by
charging any amount so due against any Account of Borrower with the Bank
without notice, except as may be required by law, whether or not such
charge creates an overdraft. (2) Application. Any payment received by the
Bank (including a deemed payment under paragraph A, a set-off under
paragraph C or a charge against an Account under this paragraph G) shall
be applied to pay any obligation of indemnification (including but not
limited to under paragraph B) and to pay any other Liabilities (including
interest thereon and the principal thereof) in such order as the Bank
shall elect in its discretion. Borrower will continue to be liable for
any deficiency. (3) PREPAYMENT. Borrower shall be entitled to pay any
outstanding principal amount or installment under this Note on any
Business Day prior to the applicable Payment Date without the prior
consent of the Bank provided that (a) any such payment shall be together
with payment of all Liabilities then due and all interest accrued on the
Prepaid Principal to the date of such payment, and (b) if the Applicable
Rate with respect to such Prepaid Principal is not a Variable Prime-Based
Rate, any such payment shall be on not less than 5 Business Day's notice
to the Bank and shall be accompanied by any amount required pursuant to
subparagraph B(4). Any such payment shall, unless otherwise consented to
by the Bank, be applied pro rata to the last outstanding principal
amount(s) to become due under this Note in inverse order of maturity. (4)
NON-BUSINESS DAYS. If any payment of any of the Liabilities is due on any
day that is not a Business Day, it shall be payable on the next Business
Day. The additional day(s) shall be included in the compilation of
interest. (5) EXTENSION AT BANK'S OPTION. The Bank shall have the option,
which may be exercise one or more times by notice(s) to Borrower, to
extend the date on which any amount is payable hereunder to one or more
subsequent date(s) set forth in such notice(s).
H. PARTIES; NO TRANSFER BY BORROWER: If Borrower is more than one Person,
all of them shall be jointly and severally liable under the Note. The
obligations under this Note shall continue in force and shall apply
notwithstanding any change in the membership of any partnership executing
this Note, whether arising from the death or retirement of one or more
partners or the accession of one or more new partners. Without the Bank's
written consent, Borrower shall have no right to make any Transfer of any
of the Liabilities, any such purported Transfer shall be void. Subject to
the foregoing, the provisions of this Note shall be binding on Borrower's
executors, administrators, successors and assigns.
I. BANK TRANSFERS: (1) TRANSFERABILITY. Without limiting the Bank's rights
hereunder, the Bank may make a Transfer of all or any part of (a) any
obligation of Borrower to the Bank (including but not limited to any of
the Liabilities); (b) any obligation of any other Party in connection
with any of the Liabilities; (c) any Agreement of any Party in connection
with any of the Liabilities; (d) any collateral, mortgage, lien or
security interest, however denominated, securing any of the Liabilities;
and/or (e) the Bank's rights and, if any, obligations with respect to any
of the foregoing. (2) EXTENT OF TRANSFER. In the event the Bank shall
make any Transfer of any of the foregoing items ("Transferred Items"),
then - to the extent provided by the Bank with respect to such Transfer,
the Transferee shall have the rights, powers, privileges and remedies of
the Bank. The Bank shall thereafter, to the extent of such Transfer, be
forever relieved and fully discharged from all liability or
responsibility, if any, that it may have to any Person with respect
thereto, except for claims, if any, arising prior to or upon such
Transfer. The Bank shall retain all its rights and powers with respect to
any Transferred items to the extent that it has not made a Transfer
thereof. Without limiting the foregoing, to the extent of any such
Transfer, paragraph B (indemnification) shall apply to any Taxes,
Regulatory Costs, Costs and Expenses and Prepayment Costs of, or incurred
by, any Transferee, and paragraphs C (Set-Off) and G(1) (Payment-Manner)
shall apply to any Account of Borrower with any Transferee. (3)
DISCLOSURES. The Bank is authorized to disclose to any prospective or
actual Transferee any information that the Bank may have or acquire about
Borrower and any information about any other Person submitted to the Bank
by or on behalf of Borrower. (4) NEGOTIABILITY DEFENSES WAIVED. IF THIS
NOTE IS NOT A NEGOTIABLE INSTRUMENT, BORROWER WAIVES ALL DEFENSES (EXCEPT
SUCH DEFENSES AS MAY BE ASSERTED AGAINST A HOLDER IN DUE COURSE OF A
NEGOTIABLE INSTRUMENT) WHICH BORROWER MAY HAVE OR ACQUIRE AGAINST ANY
TRANSFEREE WHO TAKES THIS NOTE, OR ANY COMPLETE OR PARTIAL INTEREST IN
IT, FOR VALUE, IN GOOD FAITH AND WITHOUT NOTICE THAT IT IS OVERDUE OR HAS
BEEN DISHONORED OR OF ANY DEFENSE AGAINST OR CLAIM TO IT ON THE PART OF
ANY PERSON.
J. NO ORAL CHANGES; NO WAIVER BY THE BANK; PARTIAL UNENFORCEABILITY. This
Note may not be changed orally. Neither a waiver by the Bank of any of
its options, powers or rights in one or more instances, nor any delay on
the part of the Bank in exercising any of them, nor any partial or single
exercise thereof, shall constitute a waiver thereof in any other
instance. Any provision of this Note which is prohibited, unenforceable
or not authorized in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition, unenforceability or
non-authorization, without invalidating the remaining provisions of the
Note in that or any other jurisdiction and without affecting the
validity, enforceability or legality of such provision in any other
jurisdiction.
K. DISPUTES AND LITIGATION: (1) GOVERNING LAW. This Note and the rights and
obligations of the Bank and Borrower hereunder shall be governed by the
internal laws of the State of New York without giving effect to conflict
of laws principles. (2) JURISDICTION, VENUES AND SERVICE OF PROCESS.
Borrower submits to the nonexclusive jurisdiction of the federal and
state courts in the State of New York in New York County with respect to
any dispute that may be made on Borrower by personal deliver at, or by
mail addressed to, any address to which the Bank is authorized to address
notices to Borrower. (3) WAIVER OF DEFENSES, SETOFFS, COUNTERCLAIMS AND
CERTAIN DAMAGES. Borrower waives the right to assert any defense, setoff
or counterclaim in any proceeding relating in any way to this Note or any
transaction contemplated hereby. The Bank shall not have any liability
for negligence,
3
except solely to the extent required by law and not disclaimable, and
except for its own gross negligence or willful misconduct. In any event,
the Bank shall not have any liability for any special, consequential or
punitive damages. (4) SOVEREIGN IMMUNITY. Borrower irrevocably waives,
with respect to itself and its property, any sovereign immunity that it
may have or hereafter acquire, including but not limited to immunity from
the jurisdiction of any court, from any legal process, from attachment
prior to judgment, from attachment in aid of execution, from execution or
otherwise.
L. NOTICE. Any notice in connection with any of the Liabilities shall be in
writing and may be delivered personally or by cable, telex, telecopy or
other electronic means of communication, or by certified mail, return
receipt requested, addressed (a) to Borrower as set forth herein or to
any other address that the Bank believes to be Borrower's address, and
(b) to the Bank at Bank Hapoalim B.M., 1177 Avenue of the Americas, New
York, New York 10036, Attention Legal Department. Any such notices shall
be addressed to such other address(es) as may be designated in writing
hereafter. All such notices shall be deemed given when delivered
personally or electronically or when mailed, except notice of change of
address, which shall be deemed to have been given when received.
M. DEFINITIONS. The following definitions apply in this Note: (1)
ACCELERATION. Any acceleration of payment of requirement of prepayment of
any Debt, or any Debt's becoming due and payable prior to stated
maturity. (2) ACCOUNT: (a) the balance of any account of Borrower with
any Person, (b) any claim of Borrower against any Person and/or (c) any
property in the possession or custody of, or in transit to, any Person,
whether for safekeeping, collection, pledge or otherwise, as to which
Borrower has any right, power or interest, in each case whether existing
now or hereafter, in any jurisdiction worldwide, and whether or not
disconnected in the same currency as any of the Liabilities. (3)
AGREEMENT. Any agreement or instrument (including but not limited to this
Note), no matter when made, under which any Party is obligated to any
Person. (4) APPLICABLE RATE. Whichever of the Loan Rate or Increased Rate
is the applicable interest rate at any time. (5) BANK: Bank Hapoalim B.M.
(6) BORROWER. The Person(s) executing this Note at paragraph 9 or any one
or more of them. "Borrower" may refer to one or more Persons. (7)
BUSINESS DAY. Any day on which both (a) banks are regularly open for
business in New York City and (b) the Office is open for ordinary
business in the Bank's discretion, the Office may be closed on any
Saturday, Sunday, legal holiday or other day on which it is lawfully
permitted to close. (8) CONTROL. The power, alone or in conjunction with
others, directly or indirectly, through voting securities, by contract or
otherwise, to direct or cause the direction of a Person's management and
policies. (9) COSTS AND EXPENSES. Any and all reasonable costs and
expenses (including but not limited to attorneys' fees and disbursements)
incurred in connection with the Borrower and/or the Liabilities,
including but not limited to those for (a) any action taken, whether or
not by litigation, to collect, or to protect rights or interests with
respect to, or to preserve any collateral securing, any of the
Liabilities; (b) compliance with any legal process or any order or
directive of any Governmental Authority with respect to any party; (c)
any litigation or administrative proceeding relating to any Party and/or
(d) any amendment, modification, extension or waiver with respect to any
of the Liabilities. (10) DEBT. Any Party's obligation of any sort (in
whole or in part for the payment of money to any Person, whether (a)
absolute or contingent, (b) secured or unsecured, (c) joint, several or
independent, (d) nor or hereafter existing, or (e) due or to become due.
(11) DEBTOR RELIEF ACTION. The commencement by any Party or (unless
dismissed or terminated within 30 days) against any Party of any
proceeding under any law of any jurisdiction (domestic or foreign)
relating to bankruptcy, reorganization, insolvency, arrangement,
composition, receivership, liquidation, dissolution, moratorium or other
relief of financially distressed debtors, or the making by any Party of
any assignment for the benefit of creditors. (12) DEFAULT. Any breach,
default or event of default under, or any failure to comply with, any
provision of any Agreement. (13) EVENT OF DEFAULT. Any event set forth in
paragraph D. (14) EXCHANGE CONTROL PERMIT. Any permit or license issued
by a Governmental Authority outside the United States under which any
Party is permitted (a) to incur and pay any of the Liabilities in the
United States in any currency(ies) in which denominated or (b) to enter
into, incur and, or perform any other obligation or Agreement. (15)
GOVERNMENTAL AUTHORITY. Any domestic or foreign, national or local (a)
government, (b) governmental, quasi-governmental or regulatory agency or
authority, (c) court or (d) central bank or other monetary authority.
(16) INCREASED RATE. (a) If the Loan Rate is a Variable Prime-Based Rate,
the Increased Rate with respect to the entire outstanding principal
balance shall be the Loan Rate plus 2% per year; (b) if the Loan Rate is
not a Variable Prime-Based Rate, the Increased Rate with respect to any
amount of principal or installment shall be (i) the Loan Rate plus 2% per
year prior to the applicable Payment Date and (ii) the Prime Rate plus 4%
per year on or subsequent to the applicable Payment Date. (17) LAW. Any
treaty, law, regulation, rule, Judgment, order, decree, guideline,
interpretation or request (whether or not having the force of law) issued
by any Governmental Authority. (18) LIABILITIES. (a) any and all of the
Debt evidenced by this Note, and any and all other Debt of Borrower to,
or held or to be held by, the Bank in any jurisdiction worldwide for its
own account or as agent for another or others, whether created directly
or acquired by Transfer or otherwise, and (b) any and all obligations of
any other Party with respect to any of such Debt. (19) LOAN RATE. The
interest rate determined under paragraph 2. (20) MATERIAL. Material to
the business or financial condition of any Party on a consolidated or
consolidating basis. (21) OFFICE. The Bank's office at 1177 Avenue of the
Americas, New York, New York 10036, or such other place as the Bank may
specify by notice. (22) PARTY. (a) borrower; (b) any maker co-maker or
endorser or any Agreement evidencing or any guarantor surety,
accommodation party or indemnitor with respect to, or any Person that
provides any collateral as security for, or any Person that issues a
subordination, comfort letter, standby letter of credit, repurchase
agreement, put agreement, option, other Agreement or other credit support
with respect to any of the Liabilities; (c) if any Party is a partnership
or joint venture, any general partner or joint venturer in such Party,
and (d) any Person (i) that is under the Control of any Party and (ii)
whose business or financial condition is Material to such Party. (23)
PAYMENT DATE. Any Business Day on which any part of the principal or any
installment of this Note becomes due and payable under paragraph 1 (and
not on account of an Acceleration). (24) PERSON. Any person, partnership,
joint venture, company, corporation, uncorporated organization or
association, trust, estate, Governmental Authority, or any other entity.
(25) PREPAID PRINCIPAL. Any amount of principal or any installment of
this Note which Borrower pays prior to the applicable Payment Date for
such amount. (26) PREPAYMENT COSTS. All losses, costs and expenses
incurred as a result of receiving Prepaid Principal and of reinvesting it
at rate(s) which may be less than the Applicable Rate
4
for such Prepaid Principal. (27) PRIME RATE. The Bank's New York Branch's
stated Prime Rate as reflected in the books and records as such Prime
Rate may change from time to time. The Bank's determination of its Prime
Rate shall be conclusive and final. The Prime Rate is a reference rate
and not necessarily the lowest interest rate charged by the Bank. (28)
REGULATORY COSTS. Any and all costs and expenses of complying with any
Law, including but not limited to with respect to (a) any reserves or
special deposits maintained for or with, or pledges to, any Governmental
Authority, or (b) any capital, capital equivalency ledger account, ratio
of assets to liabilities, risk-based capital assessment or any other
capital substitute, risk-based or otherwise. (29) Taxes. Any and all
present and future taxes, levies, imposts, deductions, charges and
withholdings in any jurisdiction worldwide, and all liabilities with
respect thereto, which are imposed with respect to this Note or to any
amount payable under this Note, excluding taxes determined on the basis
of the net income of a Person or of any of its offices. (30) TRANSFER.
Any negotiation, assignment, participation, conveyance, grant of a
security interest, lease, delegation, or any other direct or indirect
transfer of a complete or partial, legal, beneficial, economic or other
interest or obligation. (31) TRANSFEREE. Any Person to whom a Transfer is
made. (32) TRANSFERRED ITEMS. Items defined in paragraph I. (33) TREASURY
OBLIGATIONS. A note, bill or bond issued by the United States Treasury
Department as a full faith and credit general obligation of the United
States. (34) VARIABLE PRIME-BASED RATE. Any Applicable Rate which is
determined based on the Prime Rate. Any such rate shall change
automatically when and as the Prime Rate changes.
5
Multiple-Loan Rider to Promissory Note
(Libor-Based Rate)
This Rider is referred to in paragraph 2(c) of, and constitutes a part of, a
note of Borrower to the Bank dated March 16, 2000.
===============================================================================
SPECIFIC TERMS
(a) Margin: 1.00% per year
(b) Interest Period: (__) _________ days [x] 1, 2 or 3 months and [x] as
agreed from time to time
(c) Minimum Draw Amount: U.S. $500,000.00 [ ] None
----------------
(d) Minimum Multiple Amount: U.S. $ [ ] None
------------
===============================================================================
Borrower agrees to the above Specific Terms and to all of the Terms and
Conditioning set forth below.
Print Borrower's Name: Level 8 Systems, Inc.
------------------------------------------------------
(Signature) By: /s/ Steven Dmiszewicki (Signature) By: /s/ Dennis McKinnie
------------------------
- ---------------------
Print Name and : Steven Dmiszewicki, Print Name and : Dennis McKinnie,
title President title SVP
TERMS AND CONDITIONS
Certain capitalized terms are defined in paragraph 4.
1. Advances. Borrower may receive a Loan in any principal amount upon
Borrower's request to the Bank and the Bank's agreement thereto, subject
to all of the following conditions:
(a) Agreement of the Bank and Borrower. Subject to subparagraphs 1(b),
1(c) and 2(b), the Bank and Borrower shall have agreed, not later
than the Determination Time, with respect to the Loan's (i)
principal amount, (ii) LIBOR-Base Rate and (iii) Interest Period;
provided, however, that if the Bank determines that by such
Determination Time, Borrower has failed or declined to agree on
the LIBOR-Based Rate and/or Interest Period with respect to such
Outstanding Principal Amount, then interest on such Outstanding
Principal Amount shall accrue at the LIBOR-Based Rate without the
agreement of Borrower, and the Interest Period shall be of the
same duration as
the Interest Period just ended with respect to such Outstanding
Principal Amount or, if there was no such prior Interest Period,
one month.
(b) Applicable limitations. (i) The applicable Payment Date shall not
be later than the Due Date; (ii) the total of the Outstanding
Principal Amounts of all Loans shall not exceed the principal
amount set forth in the Note; (iii) the principal amount of any
single Loan request shall be not less than any Minimum Draw Amount
set forth under Specific Terms; and (iv) the principal amount of
any single Loan request shall be an integral multiple of any
Minimum Multiple Amount set forth under Specific Terms.
(c) Borrower's request and agreement. Borrower's request for a Loan
and Borrower's agreement to the terms thereof shall be
communicated to the Bank in any form that is acceptable in each
instance to the Bank in its sole discretion, which may include
telephone, telex, telecopy or a writing executed by Borrower.
Borrower shall have provided the Bank with documentation,
satisfactory in form and substance to the Bank in its sole
discretion, confirming the authority of the person(s) agreeing to
such terms on behalf of Borrower.
2. Payment of Principal and Interest. Subject to the other provisions of the
Note:
(a) Obligation and Time of Repayment. Each Outstanding Principal
Amount shall be due and payable at the applicable Payment Date.
(b) Loan Rate. Interest on any Outstanding Principal Amount shall
accrue at the LIBOR-Based Rate; provided, however, that if the
Bank determines (i) that by the Determination Time (A) by reason
of circumstances affecting the London Interbank Market generally,
adequate and fair means do not exist for ascertaining an
applicable LIBOR rate or it is impractical for the Bank to fund or
continue to fund the Outstanding Principal Amount during the
applicable Interest Period, or (B) quotes for funds in United
States Dollars in sufficient amounts comparable to the relevant
Outstanding Principal Amount and for the duration of the
applicable Interest Period would not be available to the Bank in
the London Interbank Market, or (C) quotes for funds in United
States Dollars in the London Interbank Market will not accurately
reflect the cost to the Bank of making a Loan or of funding the
relevant Outstanding Principal Amount during the applicable
Interest Period, or (ii) that at any time the making or funding of
loans, or charging of interest at rates, based on LIBOR shall be
unlawful or unenforceable for any reason, then as long as such
circumstance(s) shall continue, interest on the relevant
Outstanding Principal Amount shall accrue at the Alternate Rate.
(c) Payment and Calculation of Interest. Interest shall be payable (i)
at each Payment Date or (whenever the Applicable Rate is a
variable Prime-Based Rate) monthly, (ii) at the Due Date and (iii)
at any time that any Outstanding Principal Amount or part thereof
is paid. Interest shall be calculated as set forth in the Note.
3. Bank's Conclusive Determinations and Schedule. The Bank's determination
with respect to any matter hereunder shall be conclusive, final and
binding on Borrower, absent manifest
2
error. The Bank shall from time to time record the date and amount of
each Loan, the Applicable Rate, each date on which any part of principal,
interest or any other amount shall be due and payable, and the amount and
date of each payment of principal, interest or any other amount, on a
schedule, which in the Bank's discretion may be computer-generated, and
which is incorporated in, and is a part of, the Note and this Rider (the
"Schedule"). The Schedule shall be conclusive, final and binding upon
Borrower, absent manifest error; provided, however, that the failure of
the Bank to record any of the foregoing shall not limit or otherwise
affect the obligation of Borrower to pay all amounts owed to the Bank
under the Note. Without limiting the foregoing, Borrower acknowledges
that the Interest Period and the Applicable Rate with respect to any
Outstanding Principal Amount are subject to the Bank's consent ordinarily
negotiated between Borrower and the Bank by telephone, and Borrower
agrees that in the event of any dispute as to any of the terms of any
Loan, the determination of the Bank and its respective entry with respect
thereto on its books and records and/or on the Schedule shall be
conclusive, final and binding on Borrower, absent manifest error.
4. Definitions. Each capitalized term not defined herein shall have the
meaning ascribed thereto in the Note. The following definitions apply in
this Rider and in the Note, and shall prevail over any different
definitions in the Note.
(a) Alternate Rate: an annual Variable Prime-Based Rate equal to the
Prime Rate plus the Margin.
(b) Applicable Rate: whichever of the Loan Rate or Increased Rate is
the applicable interest rate at any time with respect to any
Outstanding Principal Amount.
(c) Determination Time: 12:00 noon (or any later time determined by
the Bank in its sole discretion), New York City time, of a Working
Day that is three Working Days prior to the date of the Loan.
(d) Due Date: the date set forth in paragraph 1(b) of the Note or, if
the Bank has extended such date pursuant to paragraph G(5) of the
Note or by an agreement with Borrower, such extended date.
(e) Interest Period: any term of 1 day, 1 week, 1 to 6, 9 or 12
months, or such other term as may be acceptable to the Bank in its
discretion, as set forth above under Specific Terms or, if not so
set forth, as selected or agreed to by the Bank in its discretion.
A term shall not be considered as "Interest Period" during any
period that the Applicable Rate is a Variable Prime-Based Rate.
Each Interest Period shall commence immediately at the end of the
preceding Interest Period, if any; if there had been no
immediately preceding Interest Period with respect to any
Outstanding Principal Amount, the Interest Period shall commence
on the first Business Day on which (i) such amount shall be
outstanding and (ii) the Applicable Rate is not a Variable
Prime-Based Rate. If any Interest Period would otherwise come to
an end on a day which is not a Working Day, its termination shall
be postponed to the next day that is a Working Day unless it would
thereby terminate in the next calendar month. In such
3
case, such Interest Period shall terminate on the immediately
preceding Working Day.
(f) LIBOR: the rate or rates established by the New York Branch of the
Bank two Working Days prior to the date of the Loan, by applying
the following: (i) the British Bankers Association ("BBA")
Interest Settlement Rates for U.S. Dollars, as defined in the BBA
official definitions and reflected on the Telerate BBA pages, for
the applicable amounts and interest periods, which rates reflect
the offered rates at which deposits are being quoted to prime
banks in the London Interbank Market at 11:00 A.M. London Time
calculated as set forth in said BBA official definition; or (ii)
such other recognized source of London Eurodollar deposit rates as
the Bank may determine from time-to-time. In the event the
applicable BBA page or pages shall be replaced by another Telerate
page or other Telerate pages for quoting London Eurocurrency
rates, then rates quoted on said replacement page or pages shall
be applied. If the Bank determines that London Eurocurrency rates
are no longer being quoted (temporarily or permanently) on any
Telerate pages or that Telerate is no longer functioning
(temporarily or permanently) in substantially the same manner as
on the date hereof, then the Bank shall notify the Borrower of a
substitute, publicly available reference for the determination of
LIBOR. If the Bank determines in its sole discretion that LIBOR
cannot be determined or does not represent its effective cost of
maintaining Loans under this Note, then interest shall accrue at
the effective cost to the Bank to maintain the Loans (as
determined by the Bank in its sole discretion).
(g) LIBOR-Based Rate: an annual rate equal to LIBOR plus the Margin,
as determined by the Bank.
(h) Loan: (i) any loan advanced by the Bank to the Borrower under the
Note; (ii) any rollover by the Bank of any such loan that is
otherwise due and payable or (iii) any conversion of the
Applicable Rate for any Outstanding Principal Amount from a rate
that is a Variable Prime-Based Rate to one that is not, or vice
versa.
(i) Loan Rate: the interest rate determined under subparagraph 1(a)
and/or 2(b).
(j) Margin: as set forth under Specific Terms or, if not so set forth,
2% per year.
(k) Note: the note of which this Rider is a part (including any and
all riders and amendments to the Note).
(l) Outstanding Principal Amount: the outstanding principal amount of
each Loan.
(m) Payment Date: the last Business Day of the applicable Interest
Period or, if the applicable Loan Rate is a Variable Prime-Based
Rate, the Due Date.
(n) Working Day: a Business Day on which banks are regularly open for
business in London.
4
<TABLE> <S> <C>
<CAPTION>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FIELD AS PART OF
THE ANNYUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,993
<SECURITIES> 0
<RECEIVABLES> 23,925
<ALLOWANCES> 1,426
<INVENTORY> 0
<CURRENT-ASSETS> 37,799
<PP&E> 10,726
<DEPRECIATION> 4,985
<TOTAL-ASSETS> 129,560
<CURRENT-LIABILITIES> 34,802
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 71,365
<TOTAL-LIABILITY-AND-EQUITY> 129,560
<SALES> 0
<TOTAL-REVENUES> 19,662
<CGS> 0
<TOTAL-COSTS> 10,128
<OTHER-EXPENSES> 16,416
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 696
<INCOME-PRETAX> (7,778)
<INCOME-TAX> 250
<INCOME-CONTINUING> (8,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,028)
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
