-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ExmgNEAW3yRkLovGQ456EbJK5tYl66rrY9IdT8h7S7T0Gu+7dhrglt6KoRSK0lML OiVcFilA/bTifw3uo0nVxA== 0000931763-02-001093.txt : 20020415 0000931763-02-001093.hdr.sgml : 20020415 ACCESSION NUMBER: 0000931763-02-001093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEVEL 8 SYSTEMS INC CENTRAL INDEX KEY: 0000945384 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 112920559 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26392 FILM NUMBER: 02598671 BUSINESS ADDRESS: STREET 1: 8000 REGENCY PARKWAY CITY: CARY STATE: NC ZIP: 27511 BUSINESS PHONE: 2122441234 MAIL ADDRESS: STREET 1: 8000 REGENCY PARKWAY CITY: CARY STATE: NC ZIP: 27511 FORMER COMPANY: FORMER CONFORMED NAME: ACROSS DATA SYSTEMS INC DATE OF NAME CHANGE: 19950517 10-K 1 d10k.txt FORM 10-K FOR 12-31-2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001. [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 of incorporation) (I.R.S. Employer Identification No.) 8000 Regency Parkway, Cary, North Carolina 27511 (Address of principal executive offices, including Zip Code) (919) 380-5000 (Registrant's telephone number, including area code) ----------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of the outstanding voting stock held by non-affiliates of the Registrant as of March 22, 2002 was approximately $19,215,271. There were 19,035,017 shares of Common Stock outstanding as of March 22, 2002. ================================================================================ LEVEL 8 SYSTEMS, INC. Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2001 PART I
Item Page Number Number - ------ ------ 1. Business............................................................................. 1 2. Properties........................................................................... 12 3. Legal Proceedings.................................................................... 12 4. Submission of Matters to a Vote of Security Holders.................................. 12 PART II 5. Market for Level 8 Common Stock and Related Shareholder Matters...................... 13 6. Selected Financial Data.............................................................. 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 28 8. Financial Statements and Supplementary Data.......................................... 28 9. Changes in Accountants............................................................... 28 PART III 10. Directors and Executive Officers of Level 8.......................................... 29 11. Executive Compensation............................................................... 29 12. Security Ownership of Certain Beneficial Owners and Management....................... 29 13. Certain Relationships and Related Transactions....................................... 29 PART IV 14. Index Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 30 SIGNATURES.................................................................................. 35 INDEX TO FINANCIAL STATEMENTS............................................................... F-1 INDEX TO EXHIBITS........................................................................... E-1
PART I Item 1. Business BUSINESS Overview We provide a comprehensive set of integration products, including desktop integration with our new Cicero(R)/ product and server integration and messaging solutions with our Geneva line of products. Our flagship product line, Cicero, is a business integration software product that maximizes end-user productivity, streamlines business operations and integrates systems and applications that would not otherwise work together. By using our Cicero solution, companies can decrease their customer management costs, increase their customer service level and more efficiently cross-sell the full range of their products and services resulting in an overall increase in return on information technology investments. / The key component of the Cicero solution is visual integration at the desktop that consolidates applications that do not inherently work together into a cohesive, simplified work environment embodied in a single look and feel desktop user interface. Cicero is designed to increase the productivity of anyone requiring access to multiple applications and information sources. Cicero provides a unique approach that allows companies to organize components of their existing applications into processes required to complete common tasks. Cicero streamlines all activities by providing a single, seamless user interface for instant access to all systems associated with a task. Cicero provides automatic information sharing among all line-of-business applications and tools. Cicero is ideal for deployment in contact centers where its highly productive, task-oriented user interface promotes user efficiency. We also offer products under our Geneva brand name to provide organizations with systems integration tools and messaging solutions. Our systems integration products include Geneva Enterprise Integrator and Geneva Business Process Automator. Our messaging solution is Geneva Integration Broker. Although we plan to focus our marketing efforts principally on our Cicero solution, we will continue to support our remaining Geneva products. Our Geneva Enterprise Integrator and Business Process Automator products are currently being rewritten in the Java programming language, scheduled to be completed in the 4th quarter of 2002. Until we release the new version of these products, many potential customers may hold off purchasing our current versions. Accordingly, in the short term, we anticipate that our Geneva line of products will generate less revenue than in previous periods. We were incorporated in New York in 1988, and re-incorporated in Delaware in 1999. Our principal executive offices are located at 8000 Regency Parkway, Cary, North Carolina, 27511, and our telephone number is (919) 380-5000. Strategic Realignment Historically, we have been a global provider of software solutions to help companies integrate new and existing applications as well as extend those applications to the Internet. This market segment is commonly known as "Enterprise Application Integration" or "EAI." Historically, EAI solutions work directly at the server or back-office level allowing disparate applications to communicate with each other. Until early 2001, we focused primarily on the development, sale and support of EAI solutions through our Geneva product suite. After extensive strategic consultation with outside advisors and an internal analysis of our products and services, we recognized that a new market opportunity had emerged. This opportunity was represented by the increasing need to integrate applications that are physically resident on different hardware platforms, a typical situation in larger companies. In most cases, companies with large customer bases utilize numerous different, or "disparate," applications that were not designed to effectively communicate and pass information amongst themselves, which leads to enterprise inefficiency. With Cicero, which integrates the functionality of these disparate applications at the desktop, we believe that we have found a novel solution to this disparate application problem. We believe that our existing experience in and understanding of the EAI marketplace coupled with the unique Cicero solution, which approaches traditional EAI needs in a more effective manner, position us to be a competitive provider of business integration solutions to the financial services industry and other industries with large deployed call centers. 1 We originally licensed the Cicero technology and related patents on a worldwide, royalty-free basis from Merrill Lynch, Pierce, Fenner & Smith Incorporated in August of 2000 under a license agreement containing standard provisions and a two-year exclusivity period. On January 3, 2002, the license agreement was amended to extend our exclusive worldwide marketing, sales and development rights to Cicero in perpetuity (subject to Merrill Lynch's rights to terminate in the event of bankruptcy or a change in control of Level 8) and to grant ownership rights in the Cicero trademark. We are indemnified by Merrill Lynch with regard to the rights granted to us by them. Consideration for the original Cicero license consisted of 1,000,000 shares of our common stock. In exchange for the amendment, we granted an additional 250,000 shares of common stock to MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing agreement. Under the royalty sharing agreement, we pay a royalty of 3% of the sales price for each sale of Cicero or related maintenance services. The royalties over the life of the agreement are not payable in excess of $20,000,000. In connection with executing our strategic realignment and focusing on Cicero, we have restructured our business, reduced our number of employees and, in the fourth quarter, sold assets associated with Geneva AppBuilder, Geneva Message Queuing and Geneva XIPC. In April 2001, management reassessed the methodology by which the Company would make operating decisions and allocate resources. Operating decisions and performance assessments are currently based on the following reportable segments: (1) Desktop Integration Products (Cicero), (2) System Integration Products (Geneva Enterprise Integrator and Geneva Business Process Automator) and (3) Messaging and Application Engineering Products (Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and Geneva AppBuilder). As noted above, we have sold most of the assets comprising the Messaging and Application Engineering Products segment. Accordingly, Geneva Integration Broker is the only current software product represented in the Messaging and Application Engineering segment. Market Opportunity Desktop Integration Products--Cicero Our initial target markets for Cicero are the customer contact centers of large consumer oriented business, such as the financial services, insurance and telecommunications industries. Large scale customer contact centers are characterized by large numbers of customer service agents that process phone calls, faxes, e-mails and other incoming customer inquiries and requests. Our goal is to greatly increase the efficiency of customer service agents in our target markets, thereby increasing customer retention and customer satisfaction. This increased efficiency is attained in a non-invasive manner, allowing companies to continue using their existing applications in a more productive manner. Generally, managers of customer contact centers are under pressure to provide increased customer service at the lowest possible cost while dealing with high employee turnover and increasing training costs. Some of the primary challenges faced by customer contact centers include: . Customer Service. Currently, most customer contact centers require multiple transfers to different agents to deal with diverse customer service issues. A one call, one contact system would enhance customer service by avoiding these multiple transfers. Ideally, the customer service agent could provide the call-in customer with multi-channel customer interfaces with timely access to all information that the customer needs. Increasing customer service and customer intimacy is one of the primary metrics on which contact centers are evaluated by management. . Contact Center Staffing. The contact center industry is characterized by increasing staff training costs and complexity, high annual turnover and increasing costs per call. We believe these difficulties stem from increased customer expectations, the ever-increasing complexity and diversity of the computer applications used by customer service agents, and the goals of decreasing training time and increasing the return on investment in the customer service agent. . Industry Consolidation. Many industries in our target market, including the financial services industry, are in a constant state of consolidation. When companies consolidate, the customer contact 2 centers are generally merged to lower overall costs and to reduce redundancies. This consolidation generally leads to re-training and the use of multiple applications handling similar functions that can be quite difficult to integrate successfully. Systems Integration Products and Messaging and Application Engineering Products--The Geneva Products A significant challenge facing global 5000-sized organizations today is the integration and management of critical business applications which run on disparate or otherwise incompatible computer systems. Business and competitive pressures are pushing companies to move towards an eBusiness model as quickly as possible in order to remain competitive and viable in an increasingly online, information-driven economy. eBusiness systems involve a combination of consumer-oriented or business-to-business eCommerce, internal and external data exchange, online customer service, customer relationship management and value chain integration processes. Inter-operability and information exchange between new and legacy systems within the extended enterprise are key components for a successful eBusiness strategy, as is the ability to link those applications and processes in extremely secure and highly reliable ways. Enterprise application integration solutions, including the Geneva line of products developed by Level 8, are designed to provide these capabilities through an open, enterprise-wide infrastructure that can accomplish the complete integration of a company's entire computing systems environment, including technologies enabling eBusiness and eCommerce. Our Solution Cicero-Desktop Integration We have been a provider of software that integrates an enterprise's applications at the server level so that disparate applications can communicate with each other. Based on our experience in the EAI industry, we determined that a compelling product would be one that integrates disparate applications at a visual level in addition to at the server level. As a result, we proceeded to procure an exclusive license to develop and market Cicero. Cicero was developed internally by Merrill Lynch, to increase the efficiency of 30,000 employees that have daily contact with Merrill Lynch customers. When coupled with our existing technologies or with solutions from other EAI vendors, Cicero becomes the comprehensive Cicero solution and provides our customers with a front-to-back integrated system that appears as a single application to the end-user. Cicero is a software product that allows companies to integrate their existing applications into a seamless integrated desktop. Cicero subordinates and controls most Windows-based applications and provides a seamless environment with a consistent look and feel. The end-user can navigate any number of applications whether local, client-server, mainframe legacy or web-browser in a consistent and intuitive way that is completely customizable by their employer. The Cicero solution provides the following key features: . Integrated End-User Environment. The end-user can use all of the applications necessary for his or her job function from a single application with a consistent look and feel. Cicero integrates the execution and functionality of a variety of custom or packaged Windows-based applications. If a software product is designed to provide output into a Windows GUI environment, Cicero can subordinate its presentation and control it through the Cicero environment. . Real-Time Information Center. Cicero is configurable to run a real-time "information center" including incoming message alerts, scrolling headlines and real-time video. Any information that is time-sensitive or actionable can be displayed side-by-side with the currently selected application page. . Context Passing. Cicero carries "context" information between shared applications through a publish and subscribe protocol. Performance efficiency can be optimized by sharing between applications and pre-filing commonly used information such as customer account numbers. . Dynamic Configuration. The Cicero "shell" is constructed at run-time. Selected screens and user interface components are dynamically created and initialized. Existing features are easily added or removed. 3 . Management Tools. Comprehensive tools are built into the system for version management, automatic component updates and user preference configuration. Remote control and diagnostic tools are integrated to provide off-site help desk and troubleshooting. Deployment of the Cicero solution can provide our customers with the following key benefits: . Lower Average Cost Per Call and Average Call Time. Cicero increases the efficiency of the customer service agent by placing all productivity applications within a few mouse clicks and consolidating all standard applications into a single integrated desktop. Cost per call is lowered because the customer service agent is more productive in moving between disparate applications and is able to handle different requests without having to transfer the customer to another customer service agent. . Reduce Staff Cost. Cicero reduces staff cost in two ways. First, by increasing the efficiency of each customer service agent, a contact center can handle the same volume of customer service requests with a smaller staff. Second, because Cicero simplifies the use of all contact center applications, training costs and time can be reduced, placing newly hired staff into productive positions faster than under the current status quo. . Increase Cross-Selling Efficiency. The consolidation of all customer data and customer specific applications can increase the efficiency of cross-selling of products and services. For instance, a Cicero enabled contact center might be configured to inform the customer service agent that the customer, while a brokerage services customer, does not use bill paying or other offered services. On the other hand, Cicero can help prevent customer service agents from selling a product that is inappropriate for that customer or a product or service that the customer already has through the company. Increasing the efficiency of cross-selling can both increase revenues and avoid customer dissatisfaction. . Deliver Best in Class Customer Service. Increasing customer service is one of the primary methods by which a company in highly competitive customer focused industries such as financial services can differentiate itself from its competition. By increasing the efficiency and training level of its agents, decreasing average time per call and increasing effective cross-selling, the Cicero enabled contact center presents its customers with a more intimate and satisfying customer service experience that can aid in both customer retention and as a differentiator for customer acquisition. . Preserve Existing Information Technology Investment. Cicero integrates applications at the presentation level, which allows better use of existing custom designed applications and divergent computing platforms (e.g., midrange, client/server, LAN and Web), which are not readily compatible with each other or with legacy mainframe systems. Linking together the newer computing applications to existing systems helps preserve and increase the return on the investments made by organizations in their information technology systems. Additionally, by visually and structurally linking the flexibility and innovations available on newer computing platforms and applications to the rich databases and functions that are typically maintained on the larger mainframe computers, organizations can utilize this information in new ways. The Cicero solution helps organizations bridge the gap between legacy systems and newer platforms and the result is the extension of existing capabilities to a modern streamlined interface in which the underlying system architectures, such as the Web, mainframe, mid-range or client-server, are transparent to the end-user customer service agent, thereby preserving the existing information technology investment and increasing efficiency between applications. . Support a Broad Range of Applications, Platforms and Standards. The IT departments of larger enterprises need solutions to integrate a broad array of applications and platforms using a wide variety of industry standards to ensure ease of implementation and integration with existing applications. The Cicero solution provides visual application integration solutions that support common industry standards and can handle a wide array of disparate applications and data types while operating on a Windows NT, Windows XP or Windows 2000 platform. The Cicero solution can be used to link custom or packaged applications together regardless of the tools or programming language used to create the application by integrating those applications at the presentation level. 4 . Ease of Implementation and Enhanced Information Technology Productivity. The Cicero solution allows contact center and financial services managers to create comprehensive data transformation and information exchange solutions without the need for non-standard coding. Our products provide pre-built adapters for a wide variety of different systems that are pre-programmed for transforming data into the format required by that system and transporting it using the appropriate transport mechanism. This greatly simplifies and speeds implementation of new solutions into the deployed Cicero framework. For instance, while in operation at Merrill Lynch, Cicero was updated to include software for Siebel Systems over a period of only two days when Merrill Lynch decided to implement the Siebel Systems solution. The Cicero solution allows our target markets to rapidly integrate new and existing applications with little or no customization required. The Geneva Products--Systems Integration and Messaging Solutions Our Geneva software solutions are a line of products for integrating enterprise applications both within the enterprise and between business-to-business partners at the server level. Different computer systems and applications vary widely in the ways in which they send, receive, view and process information. As a result, diverse applications running on different systems cannot work together because information cannot generally be exchanged between them. Our Geneva line of products is designed to enable the sharing of information between disparate systems by automatically transforming the data from one system into the formats and representations that can be used by other application systems. This means organizations can link legacy systems to other legacy systems, to new systems, and also to the Web. In this way, our products can facilitate the delivery of timely enterprise-wide views of critical business information while substantially reducing the need for complex and costly manual programming and ongoing software program modifications. Our software is flexible enough to link together a wide array of applications operating on disparate systems, and can scale to meet the challenges of growth and technological development in even the most heterogeneous computing environments. Most significantly, our products allow enterprises to utilize their core system functions for new uses including Web access. This allows for the full support of eBusiness and eCommerce and closer relationships with business-to-business partners and suppliers. Our Geneva line of products enables rapid eBusiness implementations, reducing installation and integration costs, including the extension of ERP packages, and provides an open platform for integrating new or acquired applications, systems or architectures. Furthermore, the Geneva line of products can be used to link existing operational systems to the Internet, transmitting communications via the Internet as well as between applications. Our Strategy Our short-term goal is to be the recognized global leader in providing complete desktop level application integration to the financial services industry. The following are the key elements of our strategy: . Leverage Our Existing Customers and Experience in the Financial Services Industry. We have had success in the past with our Geneva products in the financial services industry. We intend to utilize these long-term relationships and our understanding of the business to create opportunities for sales of the Cicero solution. . Build on Our Successes to Expand into New Markets. Our short-term goal is to gain a significant presence in the financial services industry with the Cicero solution. The financial services industry is ideal for Cicero because each entity has a large base of installed users that use the same general groups of applications. Cicero, however, can be used in any industry that has large contact centers, such as telecommunications and insurance. . Develop Strategic Partnerships. The critical success factor for customers implementing Customer Relationship Management (CRM) solutions in their contact centers is to have the right balance of 5 technology and service provision. We are implementing a tightly focused strategic teaming approach with a selected group of well-known consultancy firms that specialize in financial services as well as eCRM integrated solutions. Leveraging these organizations, who will provide such integration services as architecture planning, technology integration and business workflow improvement, allows us to focus on core application system needs and how Cicero best addresses them, while our partners will surround the technology with appropriate industry and business knowledge. . Leverage our In-House Expertise in the Cicero Software. Although Cicero was developed internally by Merrill Lynch for use by approximately 30,000 professionals worldwide, we have added members of the Merrill Lynch development team to our Cicero development team. We recruited and hired Anthony Pizi, First Vice President and Chief Technology Officer of Merrill Lynch's Private Technology's Architecture and Service Quality Group, and the Cicero project director as our Chairman, Chief Executive Officer and Chief Technology Officer as well as several of the primary Cicero engineers from Merrill Lynch to support our ongoing Cicero development efforts. Products Desktop Integration Products--Cicero Our flagship product, Cicero, runs on Windows NT, Windows XP, and Windows 2000 to organize applications under a book-chapter-section metaphor that keeps all the application functionality that the user needs within easy reach. For instance, selecting the "memo" tab might cause a Microsoft Word memo-template to be created within the Cicero desktop. The end-user need not even know that they are using Microsoft Word. Moreover, a customer tracking database can be linked with customer relationship management software package. Virtually any application that is used in a customer contact center can be integrated under the Cicero book-chapter metaphor and be used in conjunction with other contact center applications. The patented Cicero technology, as exclusively licensed from Merrill Lynch, consists of several components: The Event Manager, a Component Object Model (COM)-based messaging service; The Context Manager, which administers the "publish and subscribe" protocols; The Shell Script Interpreter, which supports communication with applications that do not support the required COM interfaces; and The Resource Manager, which starts and shuts down applications and ensures recovery from system errors. The system is an application bus with underlying mechanisms to handle the inter-application connections. Functionally, if an end-user opens an application that uses customer account number data, Cicero can display all the other customer account number related applications on his or her desktop, so he or she can move information back and forth between the relevant applications within the Cicero shell. The company can change information providers and applications with minimal disruption to the end-user's ultimate functionality. Beneath its independent user interface, Cicero provides plug in capabilities for other applications. All the applications can communicate with each other through their COM interface or scripting. Cicero allows end-users to access applications in the most efficient way possible, by only allowing them to use the relevant portions of that application. For instance, a contact center customer service representative does not use 90% of the functionality of Microsoft Word, but might need access to a memorandum and other custom designed forms as well as basic editing functionality. Cicero can be set to control access to only those templates and, in a sense, turn-off the unused functionality by not allowing the end-user direct access to the underlying application. Under the same Cicero implementation, however, a different Cicero configuration could allow the employees in the Marketing department full access to Word because they have need of the full functionality. The functionality of the applications that Cicero integrates can be modulated by the business goals of the ultimate client, the parent company. This ability to limit user access to certain functions within applications enables companies to reduce their training burden by limiting the portions of the applications on which they are required to train their customer service representatives. 6 Cicero is an ideal product for large customer contact centers. We believe that Cicero, by combining ease of use, a shorter learning curve and consistent presentation of information will allow our clients to leverage their exiting investments in Customer Relationship Management or CRM applications and further increase customer service, productivity, return on investment and decrease cost both per seat and across the contact center. System Integration Products Our Systems Integration Products include Geneva Enterprise Integrator and Geneva Business Process Automator. Geneva Enterprise Integrator. Geneva Enterprise Integrator is an integration tool that provides unified, real-time views of enterprise business information for eBusiness applications. Real-time integration of back-end enterprise business systems with Web-based applications is an essential component in meeting rising customer expectations of eCommerce, Web-based customer service and enterprise portal applications. Geneva Enterprise Integrator also leverages a high performance, memory-based information cache to provide an infrastructure that will support the performance demands of Internet-style computing. Geneva Enterprise Integrator is currently being rewritten in the Java programming language to improve its operability across platforms and to modernize its functionality. We anticipate that the Java-enabled version will be completed in the 4th quarter of 2002. Geneva Business Process Automator. Geneva Business Process Automator is a product designed for automating the many business processes that an organization uses to run its operations. Business process automation enables the automation of information workflows, designed by business experts, and spanning front and back office systems. Business process automation provides business analysts with a set of easy-to-use tools for defining, changing and refining the exchange of information and the workflow for a domain-specific business process. Geneva Business Process Automator is currently being rewritten in the Java programming language to improve its operability across platforms and to modernize its functionality. We anticipate that the Java-enabled version will be completed in the 4th quarter of 2002. Messaging and Application Engineering Products Our Messaging and Application Engineering Products currently includes Geneva Integration Broker. Geneva Integration Broker. Geneva Integration Broker is a transport independent message broker that enables an organization to rapidly integrate diverse business systems regardless of platform, transport, format or protocol. The key feature of Geneva Integration Broker is its support for XML and other standards for open data exchange on the Internet. The product provides a robust platform for building eBusiness applications that integrate with existing back-office systems. Geneva Integration Broker's support for open data exchange and secure Internet transports make it an excellent platform for building Internet-based business-to-business solutions. Services We provide a full spectrum of technical support, training and consulting services across all of our operating segments as part of our commitment to providing our customers industry-leading business integration solutions. Maintenance and Support We offer customers varying levels of technical support tailored to their needs, including periodic software upgrades, telephone support and twenty-four hour, seven days a week access to support-related information via the Internet. Training Services Our training organization offers a full curriculum of courses and labs designed to help customers become proficient in the use of our products and related technology as well as enabling customers to take full advantage of our field-tested best practices and methodologies. 7 Consulting Services We offer consulting services around our product offerings in project management, applications and platform integration, application design and development and application renewal, along with expertise in a wide variety of development environments and programming languages. We also have an active partner program in which we recruit leading IT consulting and system integration firms to provide services for the design, implementation and deployment of our customer contact center solutions. Our consulting organization supports third party consultants by providing architectural and enabling services. Customers Approximately 30,000 Merrill Lynch personnel are currently using the Cicero technology. We licensed the Cicero technology from Merrill Lynch during 2000 and have developed it to initially sell to the financial services industry. We have recently announced that Nationwide Financial Services has contracted to install the Cicero technology in its Individual Annuities business unit. We anticipate the value of this contract to be approximately $750,000. Our existing Geneva installed customer base includes major corporations around the world such as Amdocs Software Systems Limited, Paine Webber Inc., Siemens Power Transmission & Distribution, Inc., Sikorsky Aircraft Corporation, Sunrider International, EDB 4tel AS, Wells Fargo Bank, N.A., Winstar Wireless, Inc. and United Healthcare Services, Inc. Industries that are significantly represented in our customer base include: financial services, insurance, retail, manufacturing, telecommunications, transportation, and government. No one customer accounted for more than ten percent (10%) of operating revenues in 1999. Merrill Lynch and Winstar Wireless, Inc. individually accounted for more than ten percent (10%) of our operating revenues in 2000. Merrill Lynch holds approximately seven percent (7%) of our outstanding shares of our common stock and has an employee as a member of our Board of Directors. No one customer accounted for more than ten percent (10%) of operating revenues in 2001. Sales and Marketing Sales To reach our potential customer base, we are pursuing several distribution channels, including a direct sales force, as well as third party relationships with systems integrators and IT consulting firms. Our direct sales force focuses on large customers and leverages our industry experience to access target organizations within the financial services vertical market. We believe the financial services' market is a business area to which our products are particularly well suited and that its members possess the financial resources and scale of operations necessary to support the engagement. An important element of our sales strategy is to expand our relationships with third parties to increase market awareness and acceptance of our business integration software solutions. As part of these relationships, we will jointly sell and implement Cicero solutions with strategic partners such as systems integrators. Level 8 will provide training and other support necessary to systems integrators to aid in the promotion of our products. To date we have signed partner agreements with Cisco Systems, Fusive Corp., Pyramid Consulting Services, Inc., Computer Horizons Corp. and IP blue. Our direct sales staff has substantial knowledge of our products and service offerings as well as general experience in the software industry. If we augment our direct sales force, we will recruit sales people with equivalent general experience in the software industry and successful track records in selling enterprise-class software products to the customer contact centers within enterprise organizations. We are organized worldwide into two major geographic divisions for sales of our software products: the Americas and Europe. One general manager heads each of these sales divisions. The international territories currently include the United Kingdom, Italy and France. The General Managers' respective operations include sales and consulting services for new and existing customers. 8 Approximately $7.1 million or 31% of our 2001 revenues were generated from the United States. Approximately $15.6 million or 69% was generated outside the United States. The geographic distribution of our revenues may change in the future. Marketing The target market for our products and services are large companies providing financial services and or customer relationship management to a large existing customer base. Increasing competitiveness and consolidation is driving companies in such businesses to increase the efficiency and quality of their customer contact centers. As a result, customer contact centers are compelled by both economic necessity and internal mandates to find ways to increase internal efficiency, increase customer satisfaction, increase effective cross-selling, decrease staff turnover cost and leverage their investment in current information technology. Our marketing staff has an in-depth understanding of the financial services customer contact center software marketplace and the needs of customers in that marketplace, as well as experience in all of the key marketing disciplines. The staff also has broad knowledge of our products and services and how they can meet customer needs. Core marketing functions include product marketing, marketing communications and strategic alliances. We utilize focused marketing programs that are intended to attract potential customers in our target vertical and to promote Level 8 and our brands. Our programs are specifically directed at our target market such as speaking engagements, public relations campaigns, focused trade shows and web site marketing, while devoting substantial resources to supporting the field sales team with high quality sales tools and collateral. As product acceptance grows and our target markets increase, we will shift to broader marketing programs. Public relations, which include investor and industry analysts, are handled by the corporate marketing staff. The marketing department also produces collateral material for distribution to prospects including demonstrations, presentation materials, white papers, case studies, articles, brochures and data sheets. We also intend to implement a high level strategic partnership program to educate and support our partners with a variety of programs, incentives and support plans. As part of our increased focus on the Cicero product line and initially the financial services customer contact center market, we have significantly decreased our marketing costs while increasing our marketing focus. We intend to continue to fine-tune our sales and marketing staff through continued training to meet our revised needs. We have decreased the marketing and sales budget to conserve financial resources and appropriately direct expenditures in line with our revised business strategy. Research and Product Development In connection with the narrowing of our strategic focus, and in light of the sale of our Geneva AppBuilder product line, we anticipate an overall reduction in research and development costs. We anticipate a continued investment in research and development costs for both our Cicero and remaining Geneva products. Since Cicero is a new product in a relatively untapped market, it is imperative to constantly enhance the feature sets and functionality of the product. Our Geneva products were developed under a proprietary language, which, while protecting the integrity of the intellectual property, also inhibits the sales process. As such, the Company and Amdocs Software Systems Limited ("Amdocs") have entered into a two-year agreement wherein Amdocs will partly subsidize the migration of the Geneva Enterprise Integrator and Geneva Business Process Automator products on the J2EE platform. Under the terms of the agreement, Amdocs will fund approximately $6.5 million of the development project, subject to achievement of certain milestones over a two-year period. As of December 31, 2001, the Company had billed $3,667 of the total $6.5 million under the arrangement. We incurred research and development expense of $7.9 million, $8.9 million and $6.8 million in 2001, 2000 and 1999, respectively. The decrease in research and development costs in 2001 is primarily attributable to the sale of the AppBuilder line of business on October 1, 2001 offset by increased development spending on Cicero. Approximately 100 employees including the AppBuilder software development group were transferred to the new company at that time. The increase in 2000 was the result of the addition of approximately thirty-five developers from the acquisition of Template Software, Inc. ("Template"). 9 The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future success will depend to a substantial degree upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards. Our budgets for research and development are based on planned product introductions and enhancements. Actual expenditures, however, may significantly differ from budgeted expenditures. Inherent in the product development process are a number of risks. The development of new, technologically advanced software products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. The introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruption in customer ordering patterns, as well as ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that we will successfully develop, introduce or manage the transition to new products. We have in the past, and may in the future, experience delays in the introduction of our products, due to factors internal and external to our business. Any future delays in the introduction or shipment of new or enhanced products, the inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect our results of operations, particularly on a quarterly basis. Competition The provision of custom contact center integration software includes a large number of participants in various segments, is subject to rapid changes, and is highly competitive. These markets are highly fragmented and served by numerous firms, many of which address only specific contact center problems and solutions. Clients may elect to use their internal information systems resources to satisfy their needs, rather than using those offered by Level 8. The rapid growth and long-term potential of the market for business integration solutions to the contact centers of the financial services industry make it an attractive market for new competition. Many of our current and possible future competitors have greater name recognition, a larger installed customer base and greater financial, technical, marketing and other resources than we have. Representative Competitors for Cicero . Portal software offers the ability to aggregate information at a single point, but not the ability to integrate transactions from a myriad of information systems on the desktop. Plumtree is a representative company in the Portal market. Representative Competitors for Geneva . In the Enterprise Application Integration market, primary competition comes from NEON, WebMethods, Tibco, Mercator and IBM. . In the Business Process Automation market, primary competition comes from Vitria and IBM. We believe that our ability to compete depends in part on a number of competitive factors outside our control, including the ability of our competitors to hire, retain and motivate senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with our products and services, the price at which others offer comparable services and the extent of our competitors' responsiveness to customer needs. 10 Intellectual Property Our success is dependent upon developing, protecting and maintaining our intellectual property assets. We rely upon combinations of copyright, trademark and trade secrecy protections, along with contractual provisions, to protect our intellectual property rights in software, documentation, data models, methodologies, data processing systems and related written materials in the international marketplace. In addition, Merrill Lynch holds a patent with respect to the Cicero technology. Copyright protection is generally available under United States laws and international treaties for our software and printed materials. The effectiveness of these various types of protection can be limited, however, by variations in laws and enforcement procedures from country to country. We use the registered trademarks "Level 8 Systems" and "Cicero", and the trademarks "Level 8", "Level 8 Technologies", "Geneva", "Geneva Integration Suite", "Geneva Integration Broker", "Geneva Enterprise Integrator", "Geneva Business Process Automator", "SNAP" and "MonitorMQ". All other product and company names mentioned herein are for identification purposes only and are the property of, and may be trademarks of, their respective owners. There can be no assurance that the steps we have taken will prevent misappropriation of our technology, and such protections do not preclude competitors from developing products with functionality or features similar to our products. Furthermore, there can be no assurance that third parties will not independently develop competing technologies that are substantially equivalent or superior to our technologies. Additionally, with respect to the Cicero line of products, there can be no assurance that Merrill Lynch will protect its patents or that we will have the resources to successfully pursue infringers. Although we do not believe that our products infringe the proprietary rights of any third parties, there can be no assurance that infringement claims will not be asserted against our customers or us in the future. In addition, we may be required to indemnify our distribution partners and end users for similar claims made against them. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation, either as a plaintiff or defendant, would cause us to incur substantial costs and divert management resources from productive tasks whether or not said litigation is resolved in our favor, which could have a material adverse effect on our business operating results and financial condition. As the number of software products in the industry increases and the functionality of these products further overlaps, we believe that software developers and licensors may become increasingly subject to infringement claims. Any such claims, with or without merit, could be time consuming and expensive to defend and could adversely affect our business, operating results and financial condition. Employees During the first quarter of 2001, we significantly reduced our number of employees to decrease operating costs and streamline the organization in connection with our newly focused strategy. As of January 31, 2002, we had a total of 120 employees. Our continued success is dependant on our ability to attract and retain qualified employees. We believe that to fully implement our business plan we will be required to enhance our ability to work with the Microsoft Windows NT, Windows XP, and Windows 2000 operating systems by adding additional development personnel. Although we believe that we will be successful in attracting and retaining qualified employees to fill these positions, no assurance can be given that we will be successful in attracting and retaining these employees now or in the future. Our employees are not represented by a union or a collective bargaining agreement. 11 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"). We 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, our 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 our filings with the Securities and Exchange Commission and in materials incorporated therein by reference: there may be a question as to our ability to operate as a going concern, our future success depends on the market acceptance of the Cicero product and successful execution of the new strategic direction; 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 our business because our expenses are largely fixed; our quarterly operating results may vary significantly because we are not able to accurately predict the amount and timing of individual sales and this may adversely impact our stock price; trends in sales of our products and general economic conditions may affect investors' expectations regarding our financial performance and may adversely affect our stock price; our future results may depend upon the continued growth and business use of the Internet; we 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; we may not have the ability to recruit, train and retain qualified personnel; rapid technological change could render the Company's products obsolete; loss of any one of our major customers could adversely affect our business; our business is subject to a number of risks associated with doing business abroad including the effect of foreign currency exchange fluctuations on our results of operations; our products may contain undetected software errors, which could adversely affect our business; because our technology is complex, we may be exposed to liability claims; we may be unable to enforce or defend its ownership and use of proprietary technology; because we are a technology company, our common stock may be subject to erratic price fluctuations; and we may not have sufficient liquidity and capital resources to meet changing business conditions. Item 2. Properties Our worldwide corporate headquarters is located in approximately 12,500 square feet in Cary, North Carolina pursuant to a lease expiring in 2004. The United States operations groups are based in the Cary office, with field offices under office leases in the following locations: Dulles, Virginia; Berkeley, California and Princeton, New Jersey. The foreign operations groups are based in Paris, France with field offices in the following locations: Uxbridge, United Kingdom and Milan, Italy. We also maintain an office in Limerick, Ireland on a set fee arrangement. The research and development and customer support groups are located in Berkeley, California; Princeton, New Jersey and Dulles, Virginia. Item 3. Legal Proceedings From time to time, the Company is a party to routine litigation incidental to its business. As of the date of this Report, the Company was not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders None. 12 PART II Item 5. Market For Registrant's Common Stock and Related Shareholder Matters. Our common stock has been traded on the Nasdaq Stock Market under the symbol "LVEL" Since 1996. We have never declared or paid any cash dividends on our common stock. We anticipate that all of our earnings will be retained for the operation and expansion of our business and do not anticipate paying any cash dividends for common stock in the foreseeable future. The chart below sets forth the high and low stock prices for the quarters of the fiscal years ended December 31, 2000 and 2001.
2000 2001 ------------- ----------- Quarter High Low High Low ------- ------ ------ ----- ----- First.. $49.13 $29.50 $6.38 $2.39 Second. $47.50 $11.25 $3.25 $2.75 Third.. $27.81 $16.00 $4.99 $1.45 Fourth. $18.50 $ 5.00 $3.10 $1.20
The closing price of the common stock on December 31, 2001 was $2.74 per share. As of March 22, 2002, we had 177 registered shareholders of record. Recent Sales of Unregistered Securities On May 21, 2001, the Company issued Arik Kilman, former CEO and Chairman of the Company, 250,000 shares of common stock as part of Mr. Kilman's severance agreement with the Company. Such shares were issued in reliance upon the exemption from registration under Rule 506 of Regulation D and on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. In October 2001, the Company entered into an exchange agreement with its existing preferred shareholders. Under the terms of the agreement, the holders of the Series A and Series B 4% convertible redeemable preferred stock and related common stock warrants received an equal number of preferred shares of the new Series A1 and Series B1 convertible redeemable preferred stock and related warrants. The conversion price of both the Series A1 and Series B1 preferred stock was reduced by 16.7% and 50% respectively, which increased the number of shares of common stock to be issued upon conversion of the preferred shares by 1,428,512 shares to a total of 3,782,519 shares. Additionally, the exercise price for the warrants received in the exchange was reduced to $1.77 per share and the call prices have been reduced accordingly to $5.00 per share for the Series A1 warrants and $7.50 per share for the Series B1 warrants. At total of 1,801,022 warrants were exchanged. The shares issued pursuant to the exchange agreement were issued in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933 for an exchange by an issuer with its exiting security holders. In December 2001, the Company issued 141,658 shares of common stock to a former reseller of the company as part of a settlement agreement with that company. Such shares were issued in reliance upon the exemption from registration under Rule 506 of Regulation D and on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. At December 31, 2001, the Company had received approximately $1.6 million in interest free bridge financing, which was convertible to common stock subject to closing conditions. This amount has been reflected in the accompanying consolidated balance sheet as long-term debt. Subsequent to December 31, 2001, the Company entered into a Securities Purchase Agreement with several investors wherein the Company agreed to sell up to three million shares of its common stock and warrants. The common stock was valued at $1.50 per share and warrants to purchase additional shares were issued with an 13 exercise price of $2.75 per share. This offering closed on January 16, 2002. Of the 3,000,000 shares, the Company sold 2,381,952 shares of common stock for a total of $3.5 million and granted 476,396 warrants to purchase the Company's common stock at an exercise price of $2.75 per share. The warrants expire in three years from the date of grant and have a call feature that forces exercise if the Company's common stock exceeds $5.50 per share. These shares were issued in reliance upon the exemption from registration under Rule 506 of Regulation D and on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. Subsequent to December 31, 2001, the Company entered into a purchase agreement with MLBC, Inc., an affiliate of Merrill Lynch. Pursuant to the Purchase Agreement, we have issued 250,000 shares of our common stock to MLBC, Inc. These shares were issued in reliance on the exemption from registration under Rule 506 of Regulation D and on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. Item 6. Selected Financial Data. The following selected financial data is derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. See Item 7 for a discussion of the entities included in operations.
Year Ended December 31, (in thousands, except per share data) ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- --------- SELECTED STATEMENT OF OPERATIONS DATA Revenue......................................... $14,680 $ 10,685 $ 52,920 $ 82,591 $ 22,659 Net income (loss) from continuing operations.... $ 1,036 $(23,688) $(15,477) $(28,367) $(105,135) Net income (loss) from continuing operations per common and common equivalent share--basic..... $ .15 $ (3.14) $ (1.78) $ (2.10) $ (6.65) Net income (loss) from continuing operations per common and common share--diluted.............. $ .13 $ (3.14) $ (1.78) $ (2.10) $ (6.65) Weighted average common and common equivalent Shares outstanding--basic..................... 6,992 7,552 8,918 14,019 15,958 Weighted average common and common equivalent Shares outstanding--diluted................... 7,561 7,552 8,918 14,019 15,958
At December 31, ------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- ------- -------- ------- SELECTED STATEMENT OF OPERATIONS DATA Working capital (deficiency)........................... $15,826 $(19,554) $ (36) $ 28,311 $(4,968) Total assets........................................... 23,482 70,770 133,58 169,956 35,744 Long-term debt, net of current maturities.............. 16 1,541 22,202 25,000 4,600 Loans from related companies, net of current maturities 202 12,519 4,000 -- -- Stockholders' equity................................... 20,371 8,892 72,221 117,730 13,893
14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. General Information Level 8 Systems is a global provider of business integration software that enables organizations to integrate new and existing information and processes at the desktop with Cicero and at the server level with the Geneva Integration products. Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes. In addition to software products, Level 8 also provides technical support, training and consulting services as part of its commitment to providing its customers industry-leading integration solutions. Level 8's worldwide consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the Global 5000. Level 8 offers services around its integration software products. This discussion contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, liquidity and capital resources and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause its actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. See ''Item 1. Business--Forward Looking and Cautionary Statements.'' The Company's results of operations include the operations of the Company and its subsidiaries. Operations for the subsidiaries acquired during 2000 and 1999 are included from the date of acquisition. Accordingly, the 2001, 2000, and 1999 results of operations include the operations of StarQuest Software, Inc. ("StarQuest"), Template, Seer, and Momentum Software Corporation ("Momentum") since November 28, 2000, December 27, 1999, December 31, 1998, and March 26, 1998, respectively. Unless otherwise indicated, all information is presented in thousands ('000s) except share amounts. As a result of the Company's acquisition activity, the nature of its operations has changed significantly from 1998 to 2001. In March 1998 the Company acquired Momentum, primarily for its XIPC messaging product. The XIPC product has been sold on a stand-alone basis as well as incorporated into the Company's Geneva Message Queuing product, which was internally developed. The acquisition of Seer in December 1998 provided the Seer*HPS application engineering technology as well as significant international operations. Seer*HPS was subsequently renamed Geneva AppBuilder. In early 1999, the Company introduced its first Enterprise Application Integration ("EAI") product, Geneva Integration Broker, which was developed internally. As the Company moved more solidly into the EAI market, it acquired Template in December 1999. The acquisition of Template primarily provided the Company its Enterprise Integration Template and Business Process Template and additional experienced services professionals trained on Template's products. These products were subsequently renamed Geneva Enterprise Integrator and Geneva Business Process Automator. The Company disposed of certain Template consulting operations during early 2000, which were not related to its products and determined to be non-strategic to the Company's future. In August 2000, the Company acquired the rights to Cicero, a comprehensive integrated desktop computer environment from Merrill Lynch, Pierce, Fenner & Smith Incorporated in exchange for 1,000,000 shares of its common stock valued at $22,750. The cost of the technology acquired has been capitalized and amortized over a three year period. In November 2000, the Company acquired StarQuest. The total purchase price of the acquisition was $11,638 and has been accounted for by the purchase method of accounting. As a result of the acquisition of StarQuest, the Company gained an additional product that would enhance its ability to provide integration to Cisco platforms. 15 Due to the Company's acquisition and divestiture activities, year-to-year comparisons of results of operations are not necessarily meaningful. Additionally, as a result of the Company's pursuit of a growth strategy focusing on its software product sales and synergies gained as a result of eliminating duplicative functions, the results of operations are significantly different than the result of combining the previous operations of each acquired company into Level 8. Pro forma comparisons are therefore not necessarily meaningful either. In 2001, the Company shifted its primary focus from selling multiple Enterprise Application Integration ("EAI") products to selling Cicero, a desktop integration package, to the financial services industry with a decreased focus on services. Further, during the last two fiscal quarters of 2001, the Company sold most of the products that comprised its Messaging and Application Engineering segment and thus will have significantly reduced revenue streams within that segment. Business Strategy During the second quarter of 2001, management reassessed how the Company would be managed and how resources would be allocated. Management now makes operating decisions and assesses performance of the Company's operations based on the following reportable segments: (1) Desktop Integration Products, (2) System Integration Products and (3) Messaging and Application Engineering Products. Previous reportable segments were: (1) software, (2) maintenance, (3) services, and (4) research and development. The principal product in the Desktop Integration segment is Cicero. Cicero is a business integration software product that maximizes end-user productivity, streamlines business operations and integrates disparate systems and applications. The products that make up the Systems Integration segment are Geneva Enterprise Integrator and Geneva Business Process Automator. Geneva Enterprise Integrator is an integration tool that provides unified, real-time views of enterprise business information for eBusiness applications. Geneva Business Process Automator is a product designed to work with Geneva Enterprise Integrator for automating the many business processes that an organization uses to run its operations and enables the automation of information workflows spanning front and back office systems. The products that comprise the Messaging and Application Engineering segment are Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and Geneva AppBuilder. Geneva Integration Broker is a transport independent message broker that enables an organization to rapidly integrate diverse business systems regardless of platform, transport, format or protocol. Geneva Message Queuing is an enterprise connectivity product for Microsoft and non-Microsoft applications. The primary use is for transactional, once and only once connectivity of Window-based Web applications to back-office information resources like mainframes and other legacy systems. Geneva XIPC provides similar delivery of information between applications. While Geneva Message Queuing is based around a Microsoft standard, Geneva XIPC is for use with Linux and other brands of UNIX operating systems. Geneva AppBuilder is a set of application engineering tools that assists customers in developing, adapting and managing enterprise-wide computer applications for the Internet/intranets and client/server networks. On October 1, 2001, the Company completed the sale of its Geneva AppBuilder product. Under the terms of the agreement, the Company sold the rights, title and interest in the Geneva AppBuilder product along with all receivables, unbilled and deferred revenues as well as all maintenance contracts. The Geneva AppBuilder product accounted for approximately 79% of total revenue within the Messaging and Application Engineering segment and approximately 59% of total revenue for all segments. As more fully described in Notes 3 and 8 to the Consolidated Financial Statements, the Company received approximately $19 million in cash plus a note receivable for $1 million due February 2002. The Company subsequently liquidated $22 million of its short-term debt using the proceeds received and cash on hand. As part of the sale transaction, approximately 100 employees were transferred over to the acquiring company who also assumed certain facility and operating leases and entered into a sublease arrangement at the Cary, North Carolina facility. While future revenues will be negatively impacted by the sale of Geneva AppBuilder, the associated costs of doing business will be positively impacted by the overall reduction in operating costs. 16 During the quarter ended September 30, 2001, the Company sold two of its messaging products--Geneva Message Queuing and Geneva XIPC to Envoy Technologies, Inc. for $50 in cash and a note receivable for $400. Under the terms of the agreement, Envoy acquired all rights, title and interest to the products along with all customer and maintenance contracts. Results of Operations The following table sets forth, for the years indicated, the Company's results of continuing operations expressed as a percentage of revenue.
Year Ended December 31, ---------------------- 2001 2000 1999 ------ ----- ----- Revenue: Software............................ 10.4 % 55.7 % 30.3 % Maintenance......................... 50.0 % 19.3 % 28.3 % Services............................ 39.6 % 25.0 % 41.4 % ------ ----- ----- Total........................... 100.0 % 100.0 % 100.0 % Cost of revenue: Software............................ 73.5 % 11.9 % 8.0 % Maintenance......................... 16.4 % 6.9 % 10.2 % Services............................ 34.5 % 22.6 % 36.4 % ------ ----- ----- Total........................... 124.4 % 41.4 % 54.6 % Gross profit........................... (24.4)% 58.6 % 45.4 % Operating expenses: Sales and marketing................. 59.5 % 42.6 % 22.7 % Research and product development.... 35.1 % 10.7 % 12.8 % General and administrative.......... 54.9 % 15.3 % 12.9 % Amortization intangible assets...... 45.1 % 17.2 % 13.2 % In-process research and development. 0.0 % 2.2 % 5.6 % Write-off of intangible assets...... 193.5 % -- -- Loss on disposal of asset........... (28.0)% 0.5 % -- Restructuring, net.................. 38.2 % -- 0.7 % ------ ----- ----- Total........................... 398.3 % 88.5 % 67.9 % Loss from operations................ (422.7)% (29.9)% (22.5)% Other income (expense), net......... (39.1)% (3.1)% (5.4)% ------ ----- ----- Loss before taxes................... (461.8)% (33.0)% (27.9)% Income tax provision................ 2.2 % 1.3 % 1.4 % ------ ----- ----- Net loss............................ (464.0)% (34.3)% (29.3)% ====== ===== =====
17 The following table sets forth unaudited data for total revenue by geographic origin as a percentage of total revenue for the periods indicated:
2001 2000 1999 ---- ---- ---- United States 31% 54% 33% Europe....... 60% 35% 56% Asia Pacific. 3% 2% 7% Middle East.. 4% 8% 3% Other........ 2% 1% 1% --- --- --- Total..... 100% 100% 100% === === ===
The table below presents information about reported segments for the twelve months ended December 31, 2001:
Desktop Systems Messaging/Application Integration Integration Engineering TOTAL ----------------- ----------------- --------------------- ----------------- December 31, 2001 December 31, 2001 December 31, 2001 December 31, 2001 Twelve Months Twelve Months Twelve Months Twelve Months Ended Ended Ended Ended ----------------- ----------------- --------------------- ----------------- Total revenue........... $ 134 $ 5,744 $16,781 $ 22,659 Total cost of revenue... 9,427 5,103 13,667 28,197 Gross profit/(loss)..... (9,293) 641 3,114 (5,538) Total operating expenses 18,858 7,840 7,179 33,877 EBITA................... $(28,151) $(7,199) $(4,065) $(39,415)
A reconciliation of segment operating expenses to total operating expense for fiscal year 2001:
2001 ------- Segment operating expenses....... $33,877 Amortization of intangible assets 10,212 Impairment of intangible assets.. 43,853 (Gain)/loss on disposal of assets (6,346) Restructuring, net............... 8,650 ------- Total operating expenses......... $90,246 =======
The table below presents information about previously reported segments for the fiscal years ended December 31:
2001 2000 1999 ---------------- ---------------- --------------- Total Total Total Total Total Total Revenue EBITA Revenue EBITA Revenue EBITA ------- -------- ------- -------- ------- ------- Software................ $ 2,367 $(35,120) $45,998 $ (6,338) $16,030 $(2,549) Maintenance............. 11,328 5,987 15,967 9,312 14,981 8,819 Services................ 8,964 (2,336) 20,626 (958) 21,909 (116) Research and development -- (7,946) -- (10,324) -- (7,767) ------- -------- ------- -------- ------- ------- Total................... $22,659 $(39,415) $82,591 $ (8,308) $52,920 $(1,613) ======= ======== ======= ======== ======= =======
18 A reconciliation of total segment EBITA to net loss for the fiscal years ended December 31:
2001 2000 1999 --------- -------- -------- Total EBITA............................... $ (39,415) $ (8,308) $ (1,613) Amortization of intangible assets......... (10,212) (14,191) (6,959) Impairment of intangible assets........... (43,853) -- -- Gain/(loss) on disposal of assets......... 6,346 (379) -- In-process research and development....... -- (1,800) (2,944) Restructuring............................. (8,650) -- (383) Interest and other income/(expense), net.. (8,850) (2,626) (2,858) --------- -------- -------- Net loss before provision for income taxes $(104,634) $(27,304) $(14,757) ========= ======== ========
EBITA represents loss before income taxes, interest and other income (expense), amortization of goodwill, restructuring charges, gain (loss) on sale of assets and impairment charges. The Company uses EBITA to measure segment performance and profitability. EBITA is not a measure of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States of America, or as a measure of profitability or liquidity. We have included information concerning EBITA one measure of our cash flow and historical ability to service debt and because we believe investors find this information useful. EBITA as defined herein may not be comparable to similarly titled measures reported by other companies. Years Ended December 31, 2001, 2000, and 1999 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 vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of the Company's 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 the recognition of revenue can cause significant variations in operating results from quarter to quarter. Fluctuations in operating results may result in volatility of the price of the Company's common stock. Total revenues decreased 73% in 2001 from 2000 and increased 56% from 1999 to 2000. The significant decrease in revenues in 2001 is the result of the Company's new focus on its newly developed Cicero product, the redevelopment of the Geneva Enterprise Integrator and Business Process Automator products under the J2EE platform which has delayed sales of such products, the sale of substantially all of its Messaging and Application Engineering products as well as a general slowing of the economy. The increase in revenues in 2000 over 1999 is primarily attributable to the acquisitions of companies and technologies disclosed above. Gross profit margins were (24)%, 59% and 45% for 2001, 2000, and 1999, respectively. Software Products. Software product revenue decreased approximately 95% in 2001 from those results achieved in 2000 and increased 187% in 2000 as compared to 1999. The substantial decrease in 2001 is the direct result of the Company's change in strategic focus to the Cicero product and the desktop integration market, a general slowing of the economy and the sale of the Messaging and Application Engineering products during the year. The increase in revenues in fiscal 2000 from fiscal 1999 is primarily attributable to the impact of the acquisitions discussed earlier. For the twelve months ended December 31, 2001, the Systems Integration segment accounted for 25% of total revenues while the Messaging and Application Engineering segment accounted for 74% of revenues. The Company changed its approach to managing and analyzing the business in May 2001 and adopted the line of business approach. Accordingly, there is no comparative data for the year ending December 31, 2000. 19 The gross margin on software products was (604)%, 79% and 74% for the 2001, 2000 and 1999 years ended, respectively. Cost of software is composed primarily of amortization of software product technology, amortization of capitalized software costs for internally developed software and royalties to third parties, and to a lesser extent, production and distribution costs. The increase in cost of software was primarily due to amortization of capitalized software from the acquisition of the Cicero technology and StarQuest which was purchased in the third and fourth quarters of 2000, respectively and the $3,070 write-down of CTRC software to its net realizable value during the third quarter of 2001. The increase in gross margin dollars in fiscal 2000 from fiscal 1999 is the result of significant increases in product revenue from the Seer and Template acquisitions. The software product gross margin for the Desktop Integration segment was (19,602)%. The software product gross margin for the Systems Integration segment was (210)%. The software product gross margin on the Messaging and Application Engineering segment was (312)%. The Systems Integration and Messaging and Application Engineering segments experienced relatively high amounts of amortization of capitalized software. The Company expects to see significant increases in software sales related to the Desktop Integration segment coupled with improving margins on software products as Cicero gains acceptance in the marketplace. The Systems Integration segment revenue is anticipated to increase slightly from fiscal 2001 levels with gross margin remaining relatively consistent. The Messaging and Application Engineering segment revenue is expected to decrease significantly along with related expenses as the majority of the products comprising this segment have been sold. Maintenance. Maintenance revenue for the year ended December 31, 2001 decreased by approximately 29% or $4,639 as compared to the results for the year ended December 31, 2000. The decline in overall maintenance revenues is primarily due to the sale of the majority of the Messaging and Application Engineering products at the beginning of the fourth quarter of 2001 as well as the attrition effect of maintenance customers not offset by new product sales. The Desktop Integration segment accounted for approximately .5% of total maintenance revenue for the year as Cicero was not launched until the late summer. The Systems Integration segment accounted for 64.4% of total maintenance revenues and the Messaging and Application Engineering segment accounted for approximately 35.1% of total maintenance revenues. 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 products increased slightly for the year ended December 31, 2001 to 67%, up from 64% in the previous two years. The Desktop Integration segment had a negative gross margin for the year ended December 31, 2001 as the Cicero product is still in its infancy. The Systems Integration segment had a gross margin of 76.7% for the year while the Messaging and Application Engineering segment had a gross margin of 69.6% for the year. As above, the Company adopted the line of business approach in managing its operations in April 2001 and as such, there is no comparative data for prior years. Maintenance revenues are expected to increase, primarily in the Desktop Integration segment and the System Integration segment. The majority of the products comprising the Messaging and Application Engineering segment have been sold and thus future revenues will be significantly lower as will the cost of maintenance associated with this segment. The cost of maintenance should increase slightly for the Desktop Integration segment while remaining constant for the System Integration segment. Services. Services revenue for the year ended December 31, 2001 decreased by approximately 57% over the same period in 2000 and decreased by 6% in 2000 from 1999. The decline in service revenues in 2001 is primarily attributable to the decline in software sales as well as a reduction in capacity. The decline in service revenues in 2000 from those achieved in 1999 is attributable to a general under utilization of service personnel in the period. 20 The Systems Integration segment accounted for approximately 33% of the total services revenue while the Messaging and Application Engineering segment accounted for approximately 67% of service revenue. Cost of services primarily includes personnel and travel costs related to the delivery of services. Services gross margins were 13%, 10% and 12% for the years ended 2001, 2000 and 1999 respectively. Services revenues are expected to increase for the Desktop Integration segment as the Cicero product gains acceptance. The service revenues in the System Integration segment are expected to remain fairly constant with improved margins from a more efficient utilization of personnel. The Messaging and Application Engineering segment service revenues will decrease dramatically as the majority of the relevant products have been sold. Sales and Marketing. Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses decreased by 62% or approximately $21,692 due to a reduction in the Company's sales and marketing workforce as well as decreased promotional activities. Sales and marketing expenses increased by 193% or approximately $23,168 in 2000 due to increased promotional costs resulting from the Seer and Template acquisitions. Sales and marketing expenses are expected to continue to decrease along all product lines, primarily due to the restructuring efforts completed in the first and second quarters of 2001. The Company's emphasis for the sales and marketing groups will be the Desktop Integration segment. Research and Development. Research and development expenses primarily include personnel costs for product authors, product developers and product documentation and related overhead. Research and development expense decreased by 10% in 2001 over the same period in 2000 and increased by 30% in 2000 as compared to the same period in 1999. The decrease in costs in 2001 are the result of the restructuring efforts completed during the first two quarters of that year and the ability to capitalize certain development costs during the year. The increase in costs in 2000 as compared to 1999 is the result of increased head counts in the development staff as a result of the Template Software acquisition. The Company intends to continue to make a significant investment in research and development while enhancing efficiencies in this area. General and Administrative. General and administrative expenses consist of personnel costs for the executive, legal, financial, human resources, IT and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the year ended December 31, 2001 decreased by 2% over the prior year. In fiscal 2000, general and administrative expenses increased by 86%. Although the percentage increase in general and administrative costs for fiscal 2001 was minimal, the expenses do include a charge of approximately $3.8 million from a significant customer who filed for Chapter 11 Bankruptcy. The increase in general and administrative expenses in 2000 from 1999 is the result of increased professional fees and personnel costs primarily from the Company's acquisition activities. General and administrative expenses are expected to decrease going forward primarily due to the restructuring plan implemented in the first two quarters of 2001 as well as a reduction in costs associated with the sale of Geneva AppBuilder, which was sold on October 1, 2001. Amortization of Goodwill and Other Intangible Assets. Amortization of goodwill and other intangible assets was $10.2 million, a decrease of 28% over the same period in 2000. The reduction in amortization expense is primarily attributable to the sale of Geneva AppBuilder on October 1, 2001 as well as the effect of an impairment on the intangible assets acquired from Template Software and an impairment on the intangible assets acquired from StarQuest. At December 31, 2001, there is no remaining goodwill on the Company's balance sheet. 21 Restructuring. In the first quarter of 2001, the Company announced and began implementation of an operational restructuring to reduce its operating costs and streamline its organizational structure. As a result of this initiative, the Company recorded restructuring charges of $6,650 during the quarter ended March 31, 2001 and an additional charge of $2,000 for the quarter ended June 30, 2001. Restructuring charges have been classified in "Restructuring" on the consolidated statements of operations. This operational restructuring involves the reduction of employee staff throughout the Company in all geographical regions in sales, marketing, services, development and all administrative functions. The restructuring plan included the termination of 191 employees, all of whom had been notified by June 30, 2001 and terminated by December 31, 2001. The plan included a reduction of 83 personnel in the European operations and 108 personnel in the US operations. Employee termination costs comprised of severance-related payments for all employees terminated in connection with the operational restructuring. Termination benefits do not include any amounts for employment-related services prior to termination. Premises obligations primarily relate to the continuation of lease obligations, brokers commissions and leasehold improvements for approximately 60,000 square feet of facilities no longer deemed necessary and costs to exit short-term leases for various sales offices. Amounts expensed relating to lease obligations represent estimates of undiscounted future cash outflows, offset by anticipated third-party sub-lease payments. Marketing obligations related to contracts and services relating to the prior focus of the Company and are no longer expected to be utilized. Other miscellaneous restructuring costs include professional fees, royalty commitments, recruiting fees, excess equipment and other miscellaneous expenses directly attributable to the restructuring. The following table sets forth a summary by category of accrued expenses and cash paid as of December 31, 2001:
Expense Non-Cash Cash Paid Accrued ------- -------- --------- ------- Employee termination................... $5,319 $(1,045) $(4,231) $ 43 Excess office facilities............... 2,110 (156) (1,307) 647 Marketing obligations.................. 288 -- (235) 53 Royalty commitments.................... 725 (360) (365) -- Other miscellaneous restructuring costs 208 -- (98) 110 ------ ------- ------- ---- Total.................................. $8,650 $(1,561) $(6,236) $853 ====== ======= ======= ====
The Company believes the accrued restructuring costs of $853 of December 31, 2001 represents its remaining cash obligations for the restructuring charges indicated above. During the fourth quarter of 1999, the Company reorganized its existing operations due to its acquisition of Template. The Company's restructuring included a management change in its development and operations areas, the abandonment of certain leased facilities, and closure of its French subsidiary. The Company recorded a restructuring charge of $.55 million, which consisted of approximately $.28 million in costs associated with improving leased space to be subleased, approximately $.23 million in personnel-related charges, and approximately $.04 million in legal and accounting fees to close its French subsidiary. Impairment of Intangible Assets. In May 2001, management reevaluated and modified its approach to managing the business and opted to conduct business and assess the performance of operations under a line-of-business approach. As such, the Company performed an assessment of the recoverability of its long-lived assets under a line-of-business approach, representing a change in accounting principle inseparate from the effect of the change in accounting estimates. This represents an accounting change from the Company's previous policy of assessing impairment of intangible assets at the enterprise level which is accounted for as a change in estimate. 22 The change is reflects management's changed approach to managing the business. The results of an analysis of undiscounted cash flows for each reporting segment indicated that an impairment had occurred in the Systems Integraton segment (i.e. intangible assets acquired in the Template acquisition). The Company then estimated the fair market value of the related assets through a discounted future cash flow valuation technique. The results of this analysis indicated that the carrying values of these assets exceeded their fair market values. The Company reduced the carrying value of these intangible assets by approximately $21,824 as of March 31, 2001 which approximates a net income affect of $1.37 per share. During the third quarter of 2001, the Company was notified by one of its resellers that they would no longer engage in re-sales of the Company's CTRC product, a component of the Messaging and Application Engineering segment. This reseller accounted for substantially all of the CTRC product sales. As a result, the Company performed an assessment of the recoverability of the Messaging and Application Engineering segment. The results of the Company's analysis of undiscounted cash flows indicated an impairment. The Company estimated the fair market value of the related assets through a discounted future cash flow valuation technique. The results of this analysis indicated the carrying value of these intangible assets exceeded their fair market values. The Company has reduced the carrying value of the intangible assets and software product technology by approximately $7,929 and 3,070, respectively, as of September 30, 2001. At December 31, 2001, the Company reassessed the recoverability of its long-lived assets. Using actual undiscounted cash flows where applicable and adjusting projections to reflect updated market conditions and industry trends, the Company identified that a further impairment had occurred with regards to the intangible assets recorded in the Systems Integration segment. Using a discounted future cash flow technique, it was determined that the carrying value of these assets exceeded their fair market value by approximately $14,100. Accordingly, the Company reduced the carrying value of those intangible assets by that amount at December 31, 2001. Provision for 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 2001 or 2000. 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 year ended December 31, 2001 is primarily related to income taxes from profitable foreign operations and foreign withholding taxes. EBITA. EBITA represents loss before income taxes, interest and other income (expense), amortization of goodwill, restructuring charges, gain (loss) on sale of assets, and impairment charges. EBITA for the twelve months ended December 31, 2001 was ($39.4) million as compared to ($8.3) million for the same period of the previous year. The increase in the loss before income taxes, interest and other income and expense, amortization of goodwill, restructuring charges, gain or loss on sale of assets and impairment charges is primarily attributable to the decline in revenues as noted above. EBITA is not a measure of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States of America, or as a measure of profitability or liquidity. We have included information concerning EBITA one measure of our cash flow and historical ability to service debt and because we believe investors find this information useful. EBITA as defined herein may not be comparable to similarly titled measures reported by other companies. Impact of Inflation. Inflation has not had a significant effect on the Company's operating results during the periods presented. Liquidity and Capital Resources Operating and Investing Activities The Company utilized $23.2 million of cash for the twelve months ended December 31, 2001. 23 Operating activities utilized approximately $19.4 million of cash, which is primarily comprised of the loss from operations of $105 million, offset by non-cash charges for depreciation and amortization of approximately $27.8 million and non-cash charges for impairment of intangible assets and software product technology of $46.9 million, $3.8 million for the realized loss on certain marketable securities, and a provision for bad debts in the amount of $3.8 million. In addition, the company, had a reduction in accounts receivable of $10.5 million and used approximately $5.3 million in fulfillment of its obligations to its creditors through its accounts payable. On April 18, 2001, a significant customer voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware. Due to the uncertainty of collection of this debt, the Company wrote-off $3.8 million of related accounts receivable, which was charged to general and administrative expenses in the consolidated statements of operations. The Company generated approximately $20.2 million in cash from investing activities, which is comprised of approximately $19.8 million in proceeds from the sale of assets, including Geneva AppBuilder, and $2.2 million from assets being held for resale offset by capitalization of product software technology of $2.3 million. Geneva AppBuilder accounted for approximately 79% of total revenue within the Messaging and Application Engineering segment and approximately 59% of total revenue for all segments. The Messaging and Application Engineering segment for the year ended December 31, 2001 generated EBITA of $(4,065). The Company utilized approximately $23.6 million of cash during the year for financing activities for the payment of bank debt ($24.0 million) and the payment of dividends (approximately $1.3 million) offset by $1.6 million from bridge financing arrangements. By comparison, in 2000, the Company generated approximately $17.3 million in cash during the year. Net cash used in operations during 2000 was approximately $5.9 million, which is primarily comprised of the net loss for the period of $28.4 million and approximately $4.7 million for fulfillment of vendor obligations and restructuring charges, offset by non-cash charges for depreciation and amortization of approximately $26.1 million, a provision for doubtful accounts of approximately $.5 million and a $2.3 million reduction in accounts receivable. Net cash used for investing activities during 2000 was $8.6 million which consisted of approximately $4.0 million for the purchase of marketable securities, approximately $2.0 million for capital equipment purchases, an investment in a privately held concern for approximately $.4 million, capitalization of software technology of approximately $.7 million and approximately $2.6 million for businesses acquired offset by $1.8 million of cash received from those acquisitions. Financing Activities The Company funded its cash needs during the year ended December 31, 2001 with cash on hand from December 31, 2000 and with cash from operations. The Company has a $3,000 term loan bearing interest at LIBOR plus 1% (approximately 3.13% at December 31, 2001), which is payable quarterly. There are no financial covenants and the term loan is guaranteed by Liraz, the Company's principal shareholder. During 2000, the loan and guaranty were amended to extend the due date from May 31, 2001 to November 30, 2001 and to provide the Company with additional borrowings. In exchange for the initial and amended guarantees, the Company issued Liraz a total of 170,000 shares of the Company's common stock. Based upon the fair market value of the issued, the Company has recorded total deferred costs of $4,013 related to the guaranty. These costs are being amortized in the as a component of interest expense over the term of the guaranty. The Company is attempting to secure a revolving credit facility and on an interim basis has entered into an agreement with two of the executive officers of the Company, which provides for borrowings up to $250 and is 24 secured by accounts and notes receivable. The Company is in negotiations with several external lenders to replace the interim revolving credit facility. In October 2001, the Company entered into an exchange agreement with its existing preferred shareholders. Under the terms of the agreement, the holders of the Series A and Series B 4% Convertible Redeemable Preferred Stock and related warrants received an equal number of newly issued Series A1 and Series B1 Convertible Redeemable Preferred Stock and related warrants. The conversion price of both the Series A1 and Series B1 Preferred Stock has been reduced by 16.7% and 50% respectively, which increases the number of shares of common stock to be issued upon conversion of the Preferred Stock by approximately 1.4 million shares. Additionally, the exercise price for the warrants received in the exchange has been reduced to $1.77 per share and the call prices have been reduced accordingly to $5.00 per share for the Series A1 warrants and $7.50 per share for the Series B1 warrants. The difference in the fair value of the instruments prior to the exchange and subsequent to the exchange has been recorded as a dividend to preferred shareholders in the accompanying Statement of Stockholders Equity. In return, the preferred shareholders have agreed to waive all future dividend payments which approximated $1.7 million per year and modify the anti-dilution provisions that existed under the Series A and Series B Preferred Stock. The Company may issue up to 3 million shares of common stock, warrants, preferred stock or other securities without triggering any anti-dilution provisions. Subsequent to December 31, 2001, the Company entered into a Securities Purchase Agreement with several investors wherein the Company agreed to sell up to three million shares of its common stock and warrants. The common stock was sold at $1.50 per share and warrants to purchase additional shares were issued at an exercise price of $2.75 per share. This offering closed on January 16, 2002. The Company sold 2,381,952 shares of common stock for a total of $3.5 million and granted 476,396 warrants to purchase the Company's common stock at an exercise price of $2.75 per share. The warrants expire in three years from the date of grant and have a call feature that forces exercise if the Company's common stock exceeds $5.50 per share. Further offerings of securities by the Company would trigger the anti-dilution provisions of the Series A1 and Series B1 Preferred Stock and related warrants. At December 31, 2001, the Company had received approximately $1.6 million in interest free bridge financing, which was convertible to common stock subject to closing conditions. This amount has been reflected in the accompanying consolidated balance sheet as short-term debt. The Company has incurred a loss of $105 million and has experienced negative cash flows from operations for the year ended December 31, 2001. At December 31, 2001, the Company had a working capital deficiency of approximately $5.0 million. The Company's future revenues are largely dependent on acceptance of a newly developed and marketed product--Cicero. Accordingly, there may be doubt that the Company can continue as a going concern. To address these issues, the Company is actively promoting and expanding its product line and has entered into preliminary sales negotiations with several significant new customers. Additionally, the Company has successfully completed a private financing round wherein it raised approximately $3.5 million of new funds from several investors. Management is evaluating non-strategic asset sales with third parties and has retained an investment banker to assist in the evaluation. Management expects that it would be successful, if deemed appropriate, in the sale of non-strategic assets. The Company closed the financing disclosed above, expects to be able to raise additional capital and to continue to fund operations and also expects that increased revenues will reduce its operating losses in future periods, however, there can be no assurance that management will be successful in executing as anticipated or in a timely enough manner. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should Level 8 be unable to continue as a going concern. 25 Contractual Obligations Future minimum lease commitments on operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 are as follows:
Lease Lease Commitments Sublease Commitments Total Income Net ----------- -------- ----------- 2002 $3,305 $(1,198) $2,107 2003 2,780 (974) 1,806 2004 2,022 (436) 1,586 2005 1,821 (290) 1,531 2006 1,537 (274) 1,263 ------ $8,293 ------
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 believes its internal systems are Euro capable. Further, the Company does not presently expect the introduction of the Euro currency to have material adverse impact on the Company's financial condition, cash flows, or results of operations. Significant Accounting Policies and Estimates The policies discussed below are considered by us to be critical to an understanding of our financial statements because they require us to apply the most judgment and make estimates regarding matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. With respect to the policies discussed below, we note that because of the uncertainties inherent in forecasting, the estimates frequently require adjustment. Our financial statements and related disclosures, which are prepared to conform with accounting principles generally accepted in the United States of America, require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and accounts receivable and expenses during the period reported. We are also required to disclose amounts of contingent assets and liabilities at the date of the financial statements. Our actual results in future periods could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary. We consider the most significant accounting policies and estimates in our financial statements to be those surrounding: (1) revenues; (2) allowance for doubtful accounts; (3) valuation of notes receivable; (4) valuation of goodwill and long-lived assets; (5) capitalization and valuation of software product technology; (6) valuation of deferred tax assets; and (7) restructuring reserves. These accounting policies, the basis for any estimates and potential impact to our Consolidated Financial Statements, should any of the estimates change, are further described as follows: Revenues. Our revenues are derived principally from three sources: (i) license fees for the use of our software products; (ii) fees for consulting services and training; and (iii) fees for maintenance and technical support. We generally recognize revenue from software license fees when a license agreement has been signed by both parties, the fee is fixed or determinable, collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain. For multiple-element arrangements, we apply the "residual method". According to the residual method, revenue allocated to the undelivered elements is allocated based on vendor specific objective evidence ("VSOE") of fair value of those elements. VSOE is determined by reference 26 to the price the customer would be required to pay when the element is sold separately. Revenue applicable to the delivered elements is deemed equal to the remainder of the contract price. The revenue recognition rules pertaining to software arrangements are complicated and certain assumptions are made in determining whether the fee is fixed and determinable and whether collectability is probable. For instance, in our license arrangements with resellers, estimates are made regarding the reseller's ability and intent to pay the license fee. Our estimates may prove incorrect if, for instance, subsequent sales by the reseller do not materialize. Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to future results. Revenues from services include fees for consulting services and training. Revenues from services are recognized on a time and materials basis as the services are performed and amounts due from customers are deemed collectible and non-refundable. Revenues from fixed price service agreements are recognized on a percentage of completion basis in direct proportion to the services provided. To the extent the actual time to complete such services varies from the estimates made at any reporting date, our revenue and the related gross margins may be impacted in the following period. Allowance for Doubtful Accounts. In addition to assessing the probability of collection in conjunction with revenue arrangements, we continually assess the collectability of outstanding invoices. Assumptions are made regarding the customer's ability and intent to pay and are based on historical trends, general economic conditions, and current customer data. Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to bad debt expense. Valuation of Notes Receivable. We continually assess the collectability of outstanding notes receivable. Assumptions are made regarding the counter party's ability and intent to pay and are based on historical trends and general economic conditions, and current customer data. Should our actual experience with respect to collections differ from our initial assessment, we could incur expense in future periods. Valuation of Goodwill and Long-Lived Assets. We review long-lived assets, goodwill and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that an intangible or long-lived asset should be evaluated for possible impairment, an estimate of the related asset's undiscounted future cash flows over the remaining life of the asset will be made to measure whether the carrying value is recoverable. Any impairment is measured based upon the excess of the carrying value of the asset over its estimated fair value which is generally based on an estimate of future discounted cash flows. For the year ended December 31, 2001, we recorded impairments of goodwill and intangible assets of $43,853, as a result of several events occurring throughout 2001. As of December 31, 2001, the Company had no remaining intangibles recorded. Capitalization and Valuation of Software Product Technology. Our policy on capitalized software costs determines the timing of our recognition of certain development costs. In addition, this policy determines whether the cost is classified as development expense or cost of software revenue. Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Additionally, we review software product technology assets for net realizable value at each balance sheet date. For the year ended December 31, 2001, the Company recorded a write down of software product technology totaling $3,070. Should we experience reductions in revenues because our business or market conditions vary from our current expectations, we may not be able to realize the carrying value of these assets and will record a write down at that time. Valuation of Deferred Tax Assets. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are 27 expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to the extent that it is more likely than not, that we will be unable to utilize deferred income tax assets in the future. At December 31, 2001, we had a valuation allowance of $68,324 against $68,324 of gross deferred tax assets. We considered all of the available evidence to arrive at our position on the net deferred tax asset; however, should circumstances change and alter our judgment in this regard, it may have an impact on future operating results. Restructuring Reserves. As mentioned in Note 19 of our consolidated financial statements, we incurred restructuring charges totaling $8,650 during the year ended 2001. At December 31, 2001, the restructuring liabilities that remain totaled $853. Of this amount, $43 is related to employee termination benefits that we expect to be paid in early 2002. The remaining $810 is for estimated future payments, primarily for rent in excess of anticipated sublease income. Certain assumptions went into this estimate including sublease income expected to be derived from these facilities. Should we negotiate more favorable subleases or reach a settlement with our landlords to be released from our existing obligations, we could realize a favorable benefit to our results of future operations. Should future lease costs, in excess of sublease income, if any, related to these facilities exceed our estimates, we could incur additional expense in future periods. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Approximately 68% of the Company's 2001 revenues were generated by sales outside the United States. The Company is exposed to risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and is 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 are included as a component of accumulated other comprehensive income or loss in shareholders' equity. Item 8. Financial Statements And Supplementary Data The information required by this item appears beginning on page F-1 of this report. See Items 14(a)(1) and (2). Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure On July 11, 2000, Level 8 appointed Deloitte & Touche LLP as its independent auditors. On July 10, 2000, Level 8 dismissed PricewaterhouseCoopers LLP as its independent auditors. The decision to change independent auditors was recommended by the Audit Committee of the Board of Directors and approved by the Board of Directors. During the two most recent fiscal years and any subsequent interim period, none of the Company's independent accountant's reports on the Company's financial statements contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles. 28 PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated by reference to information to be included under the captions "Election of Directors," "Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders. Item 11. Executive Compensation. The information required by this item is incorporated by reference to information to be included under the captions "Election of Directors--Director Compensation" and "--Compensation Committee Interlocks and Insider Participation," "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Stock Performance Graph" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference to information to be included under the caption "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to information to be included under the caption, "Certain Relationships and Related Party Transactions" and "Election of Directors--Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders. 29 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements The following financial statements of the Company and the related report of independent accountants thereon are set forth immediately following the Index of Financial Statements which appears on page F-1 of this report: Independent Auditors' Report Report of Independent Accountants Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 2. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits The exhibits listed under Item 14(c) hereof are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K On October 17, 2001 Level 8 Systems filed a Form 8-K reporting the exchange of its Series A Preferred Stock and Series B Preferred Stock for newly issued Series A1 Preferred Stock and Series B1 Preferred Stock. On October 16, 2001 Level 8 Systems filed a Form 8-K reporting the completion of its asset sale agreement by and between Level 8 and BluePhoenix Solutions (formerly AppBuilder Solutions B.V.), a wholly owned subsidiary of Liraz Systems Ltd. 30 (c) Exhibits
Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated as of October 2, 2000 by and among Level 8 Systems, Inc., Level 8 Technologies Acquisition Corp. and StarQuest Software, Inc. (incorporated by reference to exhibit 10.39 to Level 8's Quarterly Report on Form 10-Q for the period ended September 30, 2000 (exhibits and schedules omitted but will be furnished supplementally to the Securities and Exchange Commission upon request)). 2.2 Asset Purchase Agreement dated as of August 8, 2001 by and between Level 8 Systems, Inc. and AppBuilder Solutions B.V. (incorporated by reference to Exhibit 2.1 to Level 8's Form 8-K filed August 8, 2001) (exhibits and schedules omitted but will be furnished supplementally to the Securities and Exchange Commission upon request)). 3.1 Certificate of Incorporation of Level 8 Systems, Inc., a Delaware corporation (incorporated by reference to exhibit 3.1 to Level 8's Registration Statement on Form S-1/A, filed September 22, 2000, File No. 333-44588). 3.2 Bylaws of Level 8 Systems, Inc., a Delaware corporation (filed herewith). 3.3 Certificate of Designation relating to Series A1 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8's Report on Form 8-K, filed October 17, 2001). 3.4 Certificate of Designation relating to Series B1 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.2 to Level 8's Report on Form 8-K, filed October 17, 2001). 4.1 Registration Rights Agreement dated as of January 16, 2002 by and among Level 8 Systems, Inc. and the Purchasers in the January Private Placement listed on Schedule I thereto (incorporated by reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed January 25, 2001). 4.2 Registration Rights Agreement dated as of January 3, 2002 between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed January 11, 2002). 4.3 Registration Rights Agreement dated June 29, 1999 among Level 8 Systems, Inc. and the Series A investors named on the signature pages thereof (incorporated by reference to exhibit 10.3 to Level 8's Report on Form 8-K filed July 23, 1999). 4.3A First Amendment to Registration Rights Agreement dated as of October 16, 2001, to the Registration Rights Agreement dated as of June 29, 1999, by and among Level 8 Systems, Inc. and the Series A1 investors named on the signature pages thereof (incorporated by reference to exhibit 10.4 to Level 8's Form 8-K, filed October 17, 2001). 4.4 Registration Rights Agreement dated July 20, 2000 among Level 8 Systems, Inc. and the Series B investors named on the signature pages thereof (incorporated by reference to exhibit 10.5 to Level 8's Report on Form 8-K, filed July 31, 2000). 4.4A First Amendment to Registration Rights Agreement dated as of October 16, 2001, to the Registration Rights Agreement dated as of July 20, 2000, by and among Level 8 Systems, Inc. and the Series B1 investors named on the signature pages thereof (incorporated by reference to exhibit 10.5 to Level 8's Form 8-K, filed October 17, 2001). 4.5 Registration Rights Agreement, dated June 13, 1995, between Level 8 Systems, Inc. and Liraz Systems Ltd. (incorporated by reference to exhibit 10.24 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-92230). 4.5A First Amendment to Registration Rights Agreement dated as of August 8, 2001, to the Registration Rights Agreement dated as of June 13, 1995, by and between Across Data Systems, Inc. (Level 8's predecessor) and Liraz Systems Ltd. (incorporated by reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed August 14, 2001).
31
Exhibit Number Description - ------ ----------- 4.6 Form of Registration Rights Agreement among Level 8 Systems, Inc. and the former holders of Series E Preferred Stock of StarQuest Software, Inc. (incorporated by reference to exhibit 4.11 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 4.7 Form of Registration Rights Agreement among Level 8 Systems, Inc. and the former debtholders of StarQuest Software, Inc. (incorporated by reference to exhibit 4.12 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 4.8 Form of Stock Purchase Warrant issued to the Purchasers in the January Private Placement (incorporated by reference to exhibit 10.2 to Level 8's Report on Form 8-K, filed January 25, 2002). 4.9 Form of Stock Purchase Warrant issued to the investors in Series A1 Preferred Stock (incorporated by reference to exhibit 10.2 to Level 8's Report on Form 8-K, filed October 17, 2001). 4.10 Form of Stock Purchase Warrant issued to the investors in Series B1 Preferred Stock (incorporated by reference to exhibit 10.3 to Level 8's Report on Form 8-K, filed October 17, 2001). 4.11 Form of Warrant issued to the former holders of Series E Preferred Stock of StarQuest Software, Inc. (incorporated by reference to exhibit 4.10 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 4.12 Form of Warrant(s) representing the 250,000 Level 8 warrants issued to the WCAS Parties (incorporated by reference to exhibit 8.2(A) to the Seer Technologies, Inc. Annual Report on Form 10-K for the year ended September 30, 1998, File No. 000-26194). 10.1 Securities Purchase Agreement dated as of January 16, 2002 by and among Level 8 Systems, Inc. and the Purchasers in the January Private Placement (incorporated by reference to exhibit 10.1 to Level 8's Report on Form 8-K, filed January 25, 2002). 10.2 Purchase Agreement dated as of January 3, 2002 between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 10.1 to Level 8's Report on Form 8-K, filed January 11, 2002). 10.2A Purchase Agreement dated July 31, 2000 between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.1 to Level 8's Report on Form 8-K, filed August 11, 2000). 10.3 Exchange Agreement dated as of October 16, 2001 among the Company and the investors named on the signature pages thereof (incorporated by reference to exhibit 10.1 to Level 8's Report on Form 8-K, filed October 17, 2001). 10.3A Securities Purchase Agreement dated June 29, 1999 among Level 8 Systems, Inc. and the investors named on the signature pages thereof for the purchase of Series A Preferred Stock (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K filed July 23, 1999). 10.3B Securities Purchase Agreement dated July 20, 2000 among Level 8 Systems, Inc. and the investors named on the signature pages thereof for the purchase of Series B Preferred Stock (incorporated by reference to Exhibit 10.1 to Level 8's Report on Form 8-K filed July 31, 2000). 10.4 Amended PCA Shell License Agreement dated as of January 3, 2002 between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (incorporated by reference to exhibit 10.2 to Level 8's Form 8-K, filed January 11, 2002). 10.4A PCA Shell License Agreement between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.2 to Level 8's Report on Form 8-K, filed September 11, 2000). 10.5 Promissory Note of Level 8 Systems, Inc. dated September 28, 2001 among Level 8 Systems, Inc. and Bank Hapoalim (filed herewith).
32
Exhibit Number Description - ------ ----------- 10.6 Stockholders Agreement among Level 8 Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Liraz Systems Ltd. and certain of its affiliates and Welsh, Carson, Anderson & Stowe VI, L.P. and certain of its affiliates (incorporated by reference to exhibit 10.3 to Level 8's Report on Form 8-K, filed September 11, 2000). 10.7 License Agreement, dated as of December 17, 1998, between BULL and Template Software, Inc. (incorporated by reference to exhibit 10.31 to Template Software, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.8 Agreement, dated June 13, 1995, between the Company and Liraz (incorporated by reference to exhibit 10.23 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-- 92230). 10.9 Master License Agreement dated October 24, 1996 by and between Merrill Lynch, Pierce, Fenner & Smith Incorporated and Seer Technologies, Inc. (incorporated by reference to exhibit 10.23 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.9A Schedule 4 to Master License Agreement dated September 30, 2000 by and between Merrill Lynch, Pierce, Fenner & Smith Incorporated and Level 8 Technologies, Inc. (incorporated by reference to exhibit 10.23A to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.10 Employment Agreement between Anthony Pizi and the Company effective January 1, 2002 (filed herewith).* 10.11 Employment Agreement between John P. Broderick and the Company effective January 1, 2002 (filed herewith).* 10.12 Employment Agreement between Paul Rampel and the Company effective January 1, 2002 (filed herewith).* 10.13 Promissory Note dated January 27 , 2001 of Paul Rampel in favor of Level 8 Systems, Inc. in the amount of $75,000 (incorporated by reference to exhibit 10.25 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.13A Stock Pledge Agreement dated January 27, 2001 between Paul Rampel and Level 8 Systems, Inc. (incorporated by reference to exhibit 10.25A to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.14 Level 8 Systems Inc. 1997 Stock Option Plan, as Amended and Restated (incorporated by reference to exhibit 10.2 to Level 8's Registration Statement of Form S-1/A, filed September 22, 2000, File No. 333-44588).* 10.14A Fifth Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (filed herewith).* 10.15 Level 8's February 2, 1995 Non-Qualified Option Plan (incorporated by reference to exhibit 10.1 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-92230).* 10.16 Template Software, Inc. 1992 Non-Statutory Stock Option Plan (incorporated by reference to an exhibit to Template Software, Inc.'s Registration Statement on Form S-1, filed on November 27, 1996, File No. 333-17063). 10.17 Template Software, Inc. 1992 Incentive Stock Option Plan (incorporated by reference to an exhibit to Template Software, Inc.'s Registration Statement on Form S-- 1, filed on November 27, 1996, File No. 333-17063). 10.18 Lease Agreement for Cary, N.C. offices, dated March 31, 1997, between Seer Technologies, Inc. and Regency Park Corporation (incorporated by reference to exhibit 10.47 to Seer Technologies, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 1997, File No. 000-26194).
33
Exhibit Number Description - ------ ----------- 10.18A Addendum #1 to the Lease Agreement for Cary, N.C. offices, dated July 6, 1998 (incorporated by reference to exhibit 10.58 to Seer Technology Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 1998, File No. 000-26194). 10.18B Amendment to Lease Agreement for Cary, N.C. offices, dated January 21, 1999 (incorporated by reference to exhibit 10.21A to Level 8's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.19 Office Lease Agreement, dated April 25, 1996, between Template Software, Inc. and Vintage Park Two Limited Partnership (incorporated by reference to an exhibit to Template Software, Inc.'s Registration Statement on Form S-1, File No. 333-17063). 10.19A Amendment to Office Lease Agreement, dated August 18, 1997, between Template Software, Inc. and Vintage Park Two Limited Partnership (incorporated by reference to an exhibit to Template Software, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 000-21921). 10.20 Lease Agreement, dated December 25, 1992, between Seer Technologies, Inc. and Capital & Counties (London, England) (incorporated by reference to exhibit 10.22 to Seer Technologies, Inc.'s Registration Statement on Form S-1, file No. 33-92050). 10.21 Lease Agreement, dated October 8, 1997, between StarQuest Software, Inc. and Smith and Walters Inc. (incorporated by reference to exhibit 10.14 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.22 Lease Agreement, dated February 23, 2001, between Level 8 Systems, Inc. and Carnegie 214 Associates Limited Partnership (incorporated by reference to exhibit 10.15 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 16.1 Letter from PricewaterhouseCoopers LLP regarding change in certifying accountant, dated August 2, 2000 (incorporated by reference to Exhibit 16 to Level 8's Report on Form 8-K/A filed August 2, 2000, File No.000-26392). 21.1 List of subsidiaries of the Company (filed herewith). 23.1 Consent of Deloitte & Touche LLP (filed herewith). 23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
- -------- * Management contract or compensatory agreement. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LEVEL 8 SYSTEMS, INC. By: /S/ ANTHONY C. PIZI ----------------------------- ANTHONY C. PIZI Chairman of the Board and Chief Executive Officer Date: April 1, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /S/ ANTHONY C. PIZI Chairman of the Board and April 1, 2002 - ----------------------------- Chief Executive Officer Anthony C. Pizi (Principal Executive Officer) /S/ PAUL RAMPEL President and Director April 1, 2002 - ----------------------------- Paul Rampel /S/ JOHN P. BRODERICK Chief Financial April 1, 2002 - ----------------------------- Officer (Principal John P. Broderick Financial and Accounting Officer) /S/ FRANK ARTALE Director April 1, 2002 - ----------------------------- Frank Artale /S/ JOHN BARBANO Director April 1, 2002 - ----------------------------- John Barbano /S/ MICHEL BERTY Director Apri 1, 2002 - ----------------------------- Michel Berty /S/ RICHARD DALY Director April 1, 2002 - ----------------------------- Richard Daly /S/ THEODORE FINE Director April 1, 2002 - ----------------------------- Theodore Fine /S/ BYRON VIELEHR Director April 1, 2002 - ----------------------------- Byron Vielehr 35 INDEX TO FINANCIAL STATEMENTS ----------------- Contents Reports of Independent Accountants........................ F-2 FINANCIAL STATEMENTS Consolidated Balance Sheets............................... F-4 Consolidated Statements of Operations..................... F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Comprehensive Loss............. F-7 Consolidated Statements of Cash Flows..................... F-8 Notes to Consolidated Financial Statements................ F-11
F-1 INDEPENDENT AUDITORS' REPORT ----------------- To the Board of Directors and Stockholders of Level 8 Systems, Inc. Cary, North Carolina We have audited the accompanying consolidated balance sheets of Level 8 Systems, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows and comprehensive loss for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations and working capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ DELOITTE & TOUCHE LLP Raleigh, North Carolina March 25, 2002 F-2 REPORT OF INDEPENDENT ACCOUNTANTS ----------------- To the Board of Directors and Stockholders of Level 8 Systems, Inc. In our opinion, the accompanying consolidated statements of operations, of changes in stockholders' equity and of cash flows for the year ended December 31, 1999 present fairly, in all material respects, the results of operations and cash flows of Level 8 Systems, Inc. (the "Company") and its subsidiaries for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP McLean, Virginia February 18, 2000 F-3 LEVEL 8 SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
December 31, December 31, 2001 2000 ------------ ------------ ASSETS Cash and cash equivalents..................................................................... $ 698 $ 23,856 Available-for-sale securities................................................................. 155 588 Trade accounts receivable, net................................................................ 2,297 21,066 Receivable from related party................................................................. 1,045 Notes receivable.............................................................................. 1,977 1,700 Note receivable from related party............................................................ 1,082 104 Assets held for sale.......................................................................... -- 2,236 Prepaid expenses and other current assets..................................................... 2,044 5,987 --------- -------- Total current assets................................................................... 9,298 55,537 Property and equipment, net................................................................... 1,249 3,309 Intangible assets, net........................................................................ -- 65,422 Software product technology, net.............................................................. 24,406 41,743 Note receivable............................................................................... 500 1,000 Note receivable from related party............................................................ -- 396 Investment in Access International............................................................ -- 1,600 Other assets.................................................................................. 291 949 --------- -------- Total assets........................................................................... $ 35,744 $169,956 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Short term debt............................................................................... $ 245 $ 2,133 Accounts payable.............................................................................. 2,768 2,210 Accrued expenses:............................................................................. Salaries, wages, and related items........................................................ 1,070 4,175 Restructuring............................................................................. 853 210 Merger-related............................................................................ 104 311 Other..................................................................................... 5,760 9,093 Due to related party.......................................................................... 56 59 Deferred revenue.............................................................................. 3,410 9,035 --------- -------- Total current liabilities.............................................................. 14,266 27,226 Long-term debt, net of current maturities..................................................... 4,600 25,000 Warrant liability............................................................................. 2,985 -- Commitments and contingencies (Notes 20 and 21)............................................... Stockholders' equity.......................................................................... Convertible redeemable preferred stock, $0.001 par value, 10,000,000 shares authorized. Series A--21,000 shares issued at December 31, 2000 with 11,570 shares outstanding at December 31, 2000; 0 shares outstanding as of December 31, 2001........ -- -- Series A1--11,570 shares issued and outstanding at December 31, 2001, $1,000 per share liquidation preference (aggregate liquidation value of $11,570)................. -- -- Series B--30,000 shares issued at December 31, 2000; 0 shares outstanding as of December 31, 2001..................................................................... -- -- Series B1--30,000 shares issued and outstanding at December 31, 2001, $1,000 per share liquidation preference (aggregate liquidation value of $30,000)................. -- -- Common stock, $0.001 par value, 40,000,000 authorized; 16,155,559 and 15,785,975 issued and outstanding at December 31, 2001 and 2000, respectively....................... 16 16 Additional paid-in-capital................................................................ 196,043 196,944 Accumulated other comprehensive loss...................................................... (778) (3,903) Accumulated deficit....................................................................... (181,388) (75,327) --------- -------- Total stockholders' equity.......................................................... 13,893 117,730 --------- -------- Total liabilities and stockholders' equity............................................. $ 35,744 $169,956 ========= ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share amounts)
For the Years Ended December 31, 2001 2000 1999 --------- -------- -------- Revenue: Software............................................................ $ 2,367 $ 45,998 $ 16,030 Maintenance......................................................... 11,328 15,967 14,981 Services............................................................ 8,964 20,626 21,909 --------- -------- -------- Total operating revenue....................................... 22,659 82,591 52,920 Cost of revenue: Software............................................................ 16,652 9,844 4,245 Maintenance......................................................... 3,705 5,716 5,391 Services............................................................ 7,840 18,619 19,270 --------- -------- -------- Total cost of revenue......................................... 28,197 34,179 28,906 Gross margin......................................................... (5,538) 48,412 24,014 Operating expenses: Sales and marketing................................................. 13,485 35,177 12,009 Research and product development.................................... 7,946 8,861 6,796 General and administrative.......................................... 12,446 12,682 6,822 In-process research and development................................. -- 1,800 2,944 Amortization of intangible assets................................... 10,212 14,191 6,959 Impairment of intangible assets..................................... 43,853 -- -- (Gain)/loss on disposal of assets................................... (6,346) 379 -- Restructuring, net.................................................. 8,650 -- 383 --------- -------- -------- Total operating expenses...................................... 90,246 73,090 35,913 --------- -------- -------- Loss from operations................................................. (95,784) (24,678) (11,899) Other income (expense): Interest income..................................................... 820 976 579 Interest expense.................................................... (4,346) (3,337) (2,742) Other-than-temporary decline in fair value of marketable securities. (3,845) -- -- Change in fair value of warrant liability........................... (885) -- -- Other expense....................................................... (594) (265) (695) --------- -------- -------- Loss before provision for income taxes............................... (104,634) (27,304) (14,757) Income tax provision................................................. 501 1,063 720 --------- -------- -------- Net loss............................................................. $(105,135) $(28,367) $(15,477) ========= ======== ======== Preferred dividends.................................................. 926 1,036 422 Cumulative effect of accounting change (See Note 1).................. -- 4,785 -- --------- -------- -------- Net loss applicable to common stockholders........................... $(106,061) $(34,188) $(15,899) ========= ======== ======== Loss before cumulative effect of accounting change--basic and diluted $ (6.65) $ (2.10) $ (1.78) Cumulative effect of accounting change--basic and diluted............ -- (0.34) -- --------- -------- -------- Net loss applicable to common stockholders--basic and diluted........ $ (6.65) $ (2.44) $ (1.78) ========= ======== ======== Weighted average common shares outstanding--basic and diluted........ 15,958 14,019 8,918 ========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Common Stock Preferred Stock ------------ --------------- Accumulated Additional Other Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital (Deficit) Income Total ------ ------ ------ ------ ---------- ----------- ------------- --------- Balance at December 31, 1998....... 8,708 $ 87 -- $ 0 $ 34,045 $ (25,240) $ -- $ 8,892 Reclass par value to $0.001........ (79) (79) Shares issued for Template......... 1,531 2 41,586 41,588 Shares issued for private placement......................... 21 19,149 19,149 Shares issued for loan guarantee... 60 1,207 1,207 Conversion of preferred shares..... 206 (2) 0 0 Conversion of warrants............. 1,263 1 12,637 12,638 Exercises of stock options......... 561 1 4,883 4,884 Preferred stock dividend........... (422) (422) Cumulative translation adjustment........................ (159) (159) Net loss........................... (15,477) (15,477) ------ ---- -- ------ -------- --------- ------- --------- Balance at December 31, 1999....... 12,329 $ 12 19 0 113,507 (41,139) (159) 72,221 Shares issued for StarQuest........ 492 1 10,082 10,083 Shares issued for StarQuest debt... 243 0 2,175 2,175 Shares issued for private placement......................... 30 29,532 29,532 Shares issued for loan guarantee... 110 0 2,805 2,805 Shared issued for Cicero Technology purchase............... 1,000 1 22,464 22,465 Shares issued for Momentum debt conversion................... 55 0 1,904 1,904 Conversion of preferred shares..... 738 1 (7) -- -- 1 Conversion of warrants............. 296 0 2,529 2,529 Warrants issued for bank loan...... 775 775 Exercises of stock options......... 523 1 6,386 6,387 Preferred stock dividend........... (1,036) (1,036) Cumulative effect of accounting change............................ 4,785 (4,785) -- Foreign currency translation adjustment........................ (332) (332) Unrealized losses on marketable securities........................ (3,412) (3,412) Net loss........................... (28,367) (28,367) ------ ---- -- ------ -------- --------- ------- --------- Balance at December 31, 2000....... 15,786 $ 16 42 $ 0 $196,944 $ (75,327) $(3,903) $ 117,730 Shares issued as compensation...... 369 0 1,199 1,199 Preferred stock dividend........... (926) (926) Reclassification of warrant liability......................... (2,100) (2,100) Foreign currency translation adjustment........................ (287) (287) Reclassification of unrealized loss included in income--other than temporary decline................. 3,765 3,765 Unrealized losses on marketable securities........................ (353) (353) Net loss........................... _____ (105,135) (105,135) ------ ---- -- ------ -------- --------- ------- --------- Balance at December 31, 2001....... 16,155 $ 16 42 $ 0 $196,043 $(181,388) $ (778) $ 13,893 ====== ==== == ====== ======== ========= ======= =========
The accompanying notes are an integral part of the financial statements. F-6 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands)
For the Years Ended December 31, ------------------------------- 2001 2000 1999 --------- -------- -------- Net loss........................................................... $(105,135) $(28,367) $(15,477) Other comprehensive income, net of tax. Foreign currency translation adjustment........................... (287) (332) (159) Unrealized loss on available-for-sale securities.................. (353) (3,412) -- Reclassification of unrealized loss included in income--other than temporary decline............................................... 3,765 -- -- --------- -------- -------- Comprehensive loss................................................. $(102,010) $(32,111) $(15,636) ========= ======== ========
The accompanying notes are an integral part of the financial statements. F-7 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except share data)
For the Years Ended December 31, ------------------------------- 2001 2000 1999 --------- -------- -------- Cash flows from operating activities: Net loss............................................................................. $(105,135) $(28,367) $(15,477) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....................................................... 27,758 26,078 11,633 Change in fair value of warrant liability........................................... 885 -- -- Stock compensation expense.......................................................... 1,199 -- -- Unrealized loss on marketable securities--other than temporary decline.............. 3,845 -- -- Purchased in-process research and development....................................... -- 1,800 2,944 Impairment of intangible assets and software product technology..................... 46,923 -- -- Provision for doubtful accounts..................................................... 3,812 572 757 (Gain)/loss on disposal of assets................................................... (6,346) 379 -- Other............................................................................... -- 42 172 Changes in assets and liabilities, net of assets acquired and liabilities assumed: Trade accounts receivable and related party receivables............................ 10,454 (2,339) 1 Due from Liraz..................................................................... (3) -- 271 Prepaid expenses and other assets.................................................. 834 1,854 (557) Accounts payable and accrued expenses.............................................. (5,284) (1,223) (4,275) Merger-related and restructuring................................................... 952 (3,526) (4,545) Deferred revenue................................................................... 657 (1,236) (3,811) --------- -------- -------- Net cash used in operating activities............................................ (19,449) (5,966) (12,887) Cash flows from investing activities: Purchases of property and equipment.................................................. (198) (1,972) (353) Cash payments secured through notes receivable....................................... (77) (1,252) -- Repayment of note receivable......................................................... 675 500 -- Purchase of available for sale securities............................................ -- (4,000) -- Investment in Access International................................................... -- (350) -- Cash received from sale of property.................................................. 2,236 -- -- Cash received from sale of line of business assets................................... 19,900 -- -- Payments for businesses acquired..................................................... -- (2,674) (25,340) Cash received from acquisitions, net................................................. -- 1,839 160 Additions to software product technology............................................. (2,310) (726) (1,427) --------- -------- -------- Net cash provided by (used in) investing activities.............................. 20,226 (8,635) (26,960) Cash flows from financing activities: Proceeds from issuance of common shares, net of issuance costs....................... -- 8,915 17,272 Proceeds from issuance of preferred shares, net of issuance costs.................... -- 29,532 19,215 Dividends paid for preferred shares.................................................. (1,345) (789) (250) Proceeds from bridge financing....................................................... 1,600 -- -- Issuance costs of common shares...................................................... -- (187) -- Payments on loans to related party................................................... -- (4,519) (8,628) Payments under capital lease obligations and other liabilities....................... (133) (87) (47) Net borrowings on line of credit..................................................... 245 5,175 6,717 Borrowings under credit facility, term loans and notes payable....................... -- 15,000 10,000 Repayments of term loans, credit facility and notes payable.......................... (24,000) (20,945) (4,000) --------- -------- -------- Net cash (used in) provided by financing activities.............................. (23,633) 32,095 40,279 Effect of exchange rate changes on cash................................................ (302) (147) (1) Net (decrease) increase in cash and cash equivalents................................... (23,158) 17,347 431 Cash and cash equivalents: Beginning of period.................................................................. 23,856 6,509 6,078 --------- -------- -------- End of period........................................................................ $ 698 $ 23,856 $ 6,509 ========= ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes........................................................................ $ 280 $ 497 $ 949 Interest............................................................................ $ 1,339 $ 2,104 $ 1,604
The accompanying notes are an integral part of the consolidated financial statements. F-8 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) (amounts in thousands, except share data) Noncash Investing and Financing Activities 2001 During 2001, the Company issued 369,591 shares of common stock to employees and consultants for retention bonuses, severance and consulting. The shares were valued at $1,199. See Note 13. In September and October 2001, the Company received $400 and $1,000 in notes receivable related to the sale of assets related to the Message Queuing/XIPC and AppBuilder assets, respectively. See Note 3. During 2001, the Company recorded a $3,845 realized loss on marketable securities related to an other-than-temporary decline in fair value. See Note 5. During 2001, the Company performed consulting services valued at $750 in exchange for common shares of a strategic partner. See Note 7. In September 2001, the Company retired a note receivable from related party totaling $495 in exchange for the forfeiture by the director and officer of certain retirement benefits. See Note 8. On October 16, 2001, the Company completed an exchange of 11,570 shares of Series A 4% Convertible Redeemable Preferred Stock ("Series A Preferred Stock") and 30,000 shares of Series B 4% Convertible Redeemable Preferred Stock ("Series B Preferred Stock") for 11,570 shares of Series A1 Convertible Preferred Stock ("Series A1 Preferred Stock") and 30,000 shares of Series B1 Convertible Preferred Stock ("Series B1 Preferred Stock"), respectively. See Note 13. 2000 During 2000, the Company issued 110,000 shares of common stock to a related party in order to obtain a guarantee for an additional $5 million in borrowings from a commercial lender and an extension of the guarantee for the amended term loan. The amended guarantee was valued at $2,805. See Note 11. During 2000, the Company obtained a credit facility from a commercial lender. In connection with this facility, the Company provided warrants to the lender to purchase approximately 173,000 shares of common stock that were valued at $775. See Note 13. During 2000, the Company acquired StarQuest Software, Inc. ("StarQuest") for $850 in cash and approximately $10,138 in stock and warrants. A reconciliation of the cost of the acquisition to the net cash paid for the acquisition is as follows: Fair value of: Assets received............... $ 18,372 Liabilities assumed........... (7,228) Additional direct costs....... (70) Stock and warrants issued..... (10,138) -------- Cash paid..................... (936) Cash acquired................. 15 -------- Net cash paid for acquisition. $ (921) ========
Total acquisition costs for StarQuest was $650, of which $70 were paid in 2000 and the remaining costs paid in 2001. F-9 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) (amounts in thousands, except share data) Immediately subsequent to the acquisition, the Company retired $2,175 of StarQuest's debt obligations by issuing the debtholders approximately 243,000 shares of the Company's common stock. See Note 2. During 2000, the Company purchased 500,000 shares of common stock and warrants to purchase an additional 500,000 shares of common stock of a publicly traded company. The investment was originally recorded at $4,000 and has been revalued to $588, fair value as of December 31, 2000. These shares of common stock are classified as available-for-sale securities. See Note 5. During 2000, the Company acquired the rights to a comprehensive integrated desktop computer environment from Merrill Lynch in exchange for 1,000,000 shares of the Company's common stock. The total consideration including fair value of common stock and transaction expenses was $22,523. See Note 9. During 2000, the Company assigned collection on certain accounts receivable totaling $408 to a strategic partner in exchange for a note receivable from the partner. See Note 8. During 2000, the Company performed consulting services valued at $1,250 in exchange for common shares of a strategic partner. See Note 7. During 2000, the Company converted $1,904 of the Momentum notes to approximately 55,000 shares of the Company's common stock. During August, 2000 the Company paid off the remaining balances due under these notes. See Note 13. 1999 During 1999, the Company acquired all of the common stock of Template Software, Inc. (''Template'') for approximately $63,972. In connection with the acquisition, the Company purchased 5,394,959 shares of Template common stock for $21,579 in cash and 1,531,089 shares of Level 8 common stock. Additionally, Level 8 also issued stock options exercisable for 1,124,023 shares of the Company's common stock in exchange for all of the outstanding Template stock options. See Note 2. A reconciliation of the cost of the acquisition to the net cash paid for the acquisition is as follows: Fair value of: Assets received.................... $ 73,160 Liabilities assumed................ (7,712) Additional direct costs............ (1,129) Stock and stock options issued..... (41,526) -------- Cash paid.......................... (22,793) Cash acquired...................... 160 -------- Net cash paid for acquisition...... $(22,633) ========
During 1999, the Company obtained a guarantee from a related party in order to secure a $10 million term loan to partially finance the Template acquisition. The guarantee was received in exchange for 60,000 shares of the Company's common stock and was valued at $1,209. See Note 11. F-10 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data) NOTE 1. SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Level 8 Systems, Inc. ("Level 8" or the "Company") is a global provider of business integration software that enables organizations to integrate new and existing information and processes at the desktop. Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes. Liraz Systems, Ltd. ("Liraz") and its wholly-owned subsidiaries own approximately 24% of Level 8's outstanding common stock at December 31, 2001 and hold preferred stock convertible into an additional 1,200,000 shares of common stock. Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred a loss of $105 million and has experienced negative cash flows from operations for the year ended December 31, 2001. At December 31, 2001, the Company had a working capital deficiency of approximately $5.0 million. The Company's future revenues are largely dependent on acceptance of a newly developed and marketed product--Cicero. These factors among others may indicate the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should Level 8 be unable to continue as a going concern. To address these issues, the Company is actively promoting and expanding its product line and has entered into preliminary sales negotiations with several significant new customers. Additionally, in January 2002 the Company has successfully completed a private financing round wherein they raised approximately $3.5 million of new funds from several investors. Management is pursuing non-strategic asset sales with third parties and has retained an investment banker to assist in that process. Management expects that it will be successful in the sale of non-strategic assets, able to raise additional capital and to continue to fund operations and also expects that increased revenues will reduce its operating losses in future periods, however, there can be no assurance that management's plan will be executed as anticipated. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. See Notes 2 and 3 regarding the acquisitions and sales of subsidiaries. All of the Company's subsidiaries are wholly-owned for the periods presented, except for Seer Technologies, Inc. (''Seer''). The Company acquired a 69% interest in Seer on December 31, 1998 and the remaining 31% interest on April 30, 1999. All significant inter-company accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America 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. Financial Instruments The carrying amount of the Company's financial instruments, representing accounts receivable, notes receivable, accounts payable and debt approximate their fair value. F-11 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Foreign Currency Translation The assets and liabilities of foreign subsidiaries are translated to U.S. dollars at the current exchange rate as of the balance sheet date. The resulting translation adjustment is recorded in other comprehensive income as a component of stockholders' equity. Statements of operations items are translated at average rates of exchange during each reporting period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, are included in the results of operations as incurred. Cash and Cash Equivalents Cash and cash equivalents include all cash balances and highly liquid investments with a maturity of three months or less from the date of purchase. For these instruments, the carrying amount is considered to be a reasonable estimate of fair value. The Company places substantially all cash and cash equivalents with various financial institutions in both the United States and several foreign countries. At times, such cash and cash equivalents in the United States may be in excess of FDIC insurance limits. Available-for-Sale Securities The Company has made an equity investment in a publicly traded company which has been classified as available for sale securities. This investment is recorded on the balance sheet at fair market value and unrealized gains and losses are recorded in other comprehensive income. The Company has recorded a realized loss of $3,845 relating to an other than temporary decline in the market value of the shares in the accompanying consolidated statement of operations. See Note 5. Property and Equipment Property and equipment purchased in the normal course of business is stated at cost, and property and equipment acquired in business combinations is stated at its fair market value at the acquisition date. All property and equipment is depreciated using the straight-line method over the estimated useful lives of the related assets as follows:
Leasehold improvements The lesser of the lease term or estimated useful life Furniture and fixtures 3 to 5 years Office equipment...... 3 to 5 years Computer equipment.... 3 to 5 years
Expenditures for repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in the Consolidated Statement of Operations. Asset Held For Sale The Company acquired a building in conjunction with its acquisition of Template in Windsor, England. As the Company determined this asset was not needed for its ongoing operations it was placed for sale during 2000. The asset was valued at the lower of cost or fair market value less costs of disposal as of December 31, 2000. The building was sold in February of 2001. See Note 3. Software Development Costs The Company capitalizes certain software costs after technological feasibility of the product has been established. Generally, an original estimated economic life of three to five years is assigned to capitalized software costs, once the product is available for general release to customers. Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. F-12 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Additionally, the Company has recorded software development costs for its purchases of developed technology through acquisitions. See Notes 2 and 9. Capitalized software costs are amortized over related sales on a product-by-product basis at the greater of the amount computed using (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues or (b) the straight-line method over the remaining estimated economic life of the product. See Note 9. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. See Note 9. Intangible Assets Intangible assets consist of both identifiable and unidentifiable assets (goodwill) and are amortized on a straight-line basis over periods from three to seven years. On a periodic basis and whenever changes in events or circumstances indicate that the asset may not be recoverable, the Company assesses the recoverability of intangible assets by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the related operations. If an impairment exists, the amount of such impairment is calculated based on the difference between the carrying amount of the asset and estimated fair value of the asset, which is determined based upon anticipated cash flows discounted at a rate commensurate with the risk involved. In April 2001, management reevaluated and modified its approach to managing the business and opted to conduct business and assess the performance of operations under a line-of-business approach. As a result, the Company changed its accounting policy to assess the recoverability of intangible assets in accordance with the Company's lines of business. Prior to 2001, the Company assessed the recoverability of intangible assets on enterprise level using the projected cash flows of the Company. See Note 10. Long-Lived Assets The Company assesses whether its identifiable assets are impaired as required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, based on an evaluation of undiscounted projected cash flows through the remaining amortization period. If impairment exists, the amount of such impairment is calculated based on the estimated fair value of the asset determined based upon anticipated cash flows discounted at a rate commensurate with the risk involved. Revenue Recognition The Company recognizes license revenue from end-users and third party resellers in accordance with Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue Recognition,' with Respect to Certain Transactions" ("SOP 98-9"). The Company reviews each contract to identify elements included in the software arrangement. SOP 97-2 and SOP 98-9 require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is vendor-specific objective evidence ("VSOE") of the fair values of all of the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. VSOE of the fair value of undelivered elements is established on the price charged for that element when sold separately. Software customers are given no rights of return and a short-term warranty that the products will comply with the written documentation. The Company has not experienced any product warranty returns. Revenue from recurring maintenance contracts is recognized ratably over the maintenance contract period, which is typically twelve months. Maintenance revenue that is not yet earned is included in deferred revenue. Any unearned receipts from service contracts result in deferred revenue. F-13 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue from consulting and training services is recognized as services are performed. Any unearned receipts from service contracts result in deferred revenue. Cost of Revenue The primary components of the Company's cost of revenue for its software products are software amortization on internally developed and acquired technology, royalties on certain products, and packaging and distribution costs. The primary component of the Company's cost of revenue for maintenance and services is compensation expense. Advertising Expenses The Company expenses advertising costs as incurred. Advertising expenses were approximately $1,198, $3,494, and $108, for the years ended December 31, 2001, 2000, and 1999, respectively. Research and Product Development Research and product development costs are expensed as incurred. Income Taxes The Company uses Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" to account for income taxes. This statement requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are generally considered. A valuation allowance is recorded when it is "more likely than not" that recorded deferred tax assets will not be realized. See Note 12. Loss Per Share Basic (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. During 2001, 2000 and 1999, potentially dilutive securities included stock options, warrants to purchase common stock, and preferred stock. The following table sets forth the potential shares that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods presented in ('000's):
2001 2000 1999 ------ ----- ----- Stock options.................................... 4,366 3,876 3,800 Warrants......................................... 2,569 2,662 1,522 Convertible preferred stock...................... 3,782 2,354 1,895 ------ ----- ----- 10,717 8,892 7,217 ====== ===== =====
In 2001, 2000 and 1999, dividends on preferred stock were included in the loss per share calculation. The dividends totaled $926, $1,036 and $422 in 2001, 2000, and 1999, respectively. Accounting Change In November 2000, the Emerging Issues Task Force ("EITF") reached a consensus on EITF 00-27 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", F-14 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) which establishes accounting and reporting standards for the determination of beneficial conversion features in convertible securities. The EITF reached a consensus that an issuer should first allocate the proceeds received in a financing transaction that includes preferred stock convertible into common stock to the preferred stock and any other detachable warrants on a relative fair value basis. The Company has applied the provisions of EITF 00-27, which resulted in a beneficial conversion feature of the Company's Series A and Series B preferred stock of $4,785. As required by EITF 00-27 the beneficial conversion feature was reflected as a cumulative effect of a change in accounting which resulted in an increase in additional paid in capital and accumulated deficit of $4,785 or $.34 per common share, in the fourth quarter of 2000. Stock-Based Compensation The Company has adopted the disclosure provisions of SFAS 123 and has applied Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock-based compensation plans. See Note 13. Warrants The Company has issued warrants to Series A1 and Series B1 preferred stockholders which contain provisions that allow the warrant holders to force a cash redemption for events outside the control of the Company. The fair value of the warrants are accounted for as a liability and are remeasured at each balance sheet date. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the 2001 presentation. Such reclassifications had no effect on previously reported net income or stockholders' equity. Recent Accounting Pronouncements In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") which supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations for all transactions initiated after June 30, 2001 and modifies the application of the purchase accounting method. The provisions of SFAS 141 will be effective for transactions account for using the purchase method that are completed after June 30, 2001. Management does not expect this Statement will have an impact on the consolidated financial statements. In June 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS 142") which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing for goodwill and intangible assets and the identification of reporting units for purposes of assessing potential future impairment of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. SFAS 142 will apply to goodwill and intangible assets arising from transactions completed before and after the statement's effective date. SFAS 142 is effective for fiscal years beginning after December 15, 2001. As the Company has no goodwill remaining on its balance sheet at December 31, 2001, management does not believe that the provisions of this statement will have a material impact on the consolidated financial statements. Goodwill and intangible assets amortization was $10,212 for the twelve months ended December 31, 2001. F-15 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June of 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 applies to the accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, and development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. Adoption of this Statement is required for fiscal years beginning after June 15, 2002. The Company does not believe that adoption of this standard will have an impact on its results of operations and financial position. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," which supercedes Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No. 30, "Reporting Results of Operations--Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 requires that long-lived assets to be disposed of by sale, including discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS 144 also broadens the reporting requirements of discontinued operations to include all components of an entity that have operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. Management is evaluating the effect of this statement on the Company's results of operations and financial position. In January 2002, Emerging Issues Task Force Topic No. D-103, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred, was issued, and considered whether reimbursements received for "out-of-pocket" expenses incurred would be characterized in the income statement as revenue or as a reduction of expenses incurred. The FASB staff believes that the reimbursements received should be characterized as revenue. Reimbursement for "out-of-pocket" expenses in 2001 and 2000 totaled $539 and $1,119, respectively, and will be classified as revenue in future periods. NOTE 2. ACQUISITIONS AND PRO FORMA FINANCIAL STATEMENTS Acquisition of StarQuest On November 28, 2000, the Company acquired StarQuest Software, Inc. ("StarQuest"). Under the terms of the agreement, Level 8 paid $850 in cash and issued 492,000 shares of common stock, net of 8,000 shares forfeited at the direction of the employees acquired in the transaction, valued at $17.2752 and 250,000 warrants valued at $6.00 per share. The total purchase price of the acquisition was $11,638, including $650 of acquisition costs and has been accounted for by the purchase method of accounting. The operations of StarQuest are included in the Company's consolidated results of operations from the date of acquisition. The purchase price was allocated to the assets acquired and liabilities assumed based on the Company's estimates of fair value at the acquisition date. The fair value assigned to intangible assets acquired was based on a valuation prepared by an independent third-party appraisal company of the purchased in-process research and development, developed technology, and assembled workforce of StarQuest. The purchase price exceeded the amounts allocated to tangible and identifiable intangible assets acquired less liabilities assumed by approximately $8,006. This excess of the purchase price over the fair values of assets acquired less liabilities assumed was allocated to goodwill. The warrants were valued at issuance utilizing the Black Scholes option pricing model using the following assumptions: expected life of 3 years, volatility of 121%, exercise price of $30.00 and a risk-free interest rate of 6%. F-16 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The purchase price of the acquisition was allocated as follows:
Cash......................................... $ 15 Accounts receivable.......................... 54 Prepaid expenses and other current assets.... 52 Property and equipment....................... 45 Capitalized software and developed technology 6,600 In-process research and development.......... 1,800 Goodwill and assembled workforce............. 9,806 Accounts payable and accrued liabilities..... (1,789) Debt......................................... (4,475) Deferred revenue............................. (470) ------- Cost of net assets acquired.................. $11,638 =======
Approximately $1,800 of the purchase price represents purchased in-process research and development that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the Consolidated Statement of Operations upon consummation of the acquisition. The value assigned to in-process research and development, based on a valuation prepared by an independent third-party appraisal company, was determined by identifying research projects in areas for which technological feasibility had not been established. The efforts considered included projects related to StarQuest's StarSQL product ($1,200), projects related to StarQuest's CTRC product ($400), and projects related to StarQuest's StarTran product ($200). The value of the in-process projects was adjusted to reflect the relative value and contributions of the required research and development. In doing so, consideration was given to the stage of completion, the difficulty of completing the remaining development costs already incurred, and the projected cost to complete the projects. The discount rate included a factor that takes into account the uncertainty surrounding successful development of the purchased in-process research and development. In conjunction with the acquisition, the Company retired $2,175 of StarQuest's debt obligations by issuing the debtholders approximately 243,000 shares of the Company's common stock. Acquisition of Template On December 27, 1999, the Company acquired Template Software, Inc. (''Template''). Under the terms of the agreement, Level 8 purchased 5,394,959 shares of Template common stock for $21,579 in cash and 1,531,089 shares of Level 8 common stock. Additionally, Level 8 also issued stock options exercisable for 1,124,023 shares of the Company's common stock to assume all of the outstanding Template stock options. The total purchase price of the acquisition was $63,972 and has been accounted for by the purchase method of accounting. The operations of Template are included in the Company's consolidated results of operations from the date of acquisition. The fair value assigned to the common stock was determined based on the 2-day period before and after the announcement of the transaction and the fair value assigned to the options issued was based on a valuation prepared by an independent third-party appraisal company using the Black Scholes Pricing Model. The purchase price was allocated to the assets acquired and liabilities assumed based on the Company's estimates of fair value at the acquisition date. The fair value assigned to intangible assets acquired was based on a valuation prepared by an independent third-party appraisal company of the purchased in-process research and development, developed technology, and assembled workforce of Template. The purchase price exceeded the amounts allocated to tangible and identifiable intangible assets acquired less liabilities assumed by approximately F-17 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $44,371. This excess of the purchase price over the fair value of assets acquired less liabilities assumed was allocated to goodwill. Prior to completing the acquisition, the Company had determined not to continue with certain non-strategic operations of Template in Germany and Austria. These operations were primarily reselling third party software and providing related consulting services. At the time of merger, the Company had entered into an agreement in principle to sell the assets of the German operations, which consist principally of its consulting workforce and certain lease agreements. The Austrian operations were closed down in 2000. Accordingly, the Company has recorded the estimated fair value of these operations at the acquisition date based on its estimate of the net future cash flows from the transactions and associated operations through the wind up period. The fair value of the German and Austrian operating liability was estimated as $25 at the acquisition date. The purchase price of the acquisition was allocated as follows:
Cash......................................... $ 160 Accounts receivable.......................... 6,123 Prepaid expenses and other current assets.... 597 Property and equipment....................... 4,183 Capitalized software and developed technology 12,200 In-process research and development.......... 2,200 Goodwill and assembled workforce............. 47,291 Other assets................................. 431 Assets held for resale....................... (25) Accounts payable............................. (668) Accrued expenses and other liabilities....... (6,445) Deferred revenue............................. (439) Deferred tax liability....................... (1,476) Long-term debt............................... (160) ------- Cost of net assets acquired.................. $63,972 =======
Approximately $2,200 of the purchase price represents purchased in-process research and development that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the Consolidated Statement of Operations upon consummation of the acquisition. The value assigned to in-process research and development, based on a valuation prepared by an independent third-party appraisal company, was determined by identifying research projects in areas for which technological feasibility had not been established. The efforts considered included projects related to Template's Enterprise Integration Template ("EIT") product ($1,298), and projects related to new versions of Template's Business Process Template ("BPT") product ($902). The value of the in-process projects was adjusted to reflect the relative value and contributions of the required research and development. In doing so, consideration was given to the stage of completion, the difficulty of completing the remaining development costs already incurred, and the projected cost to complete the projects. The discount rate included a factor that takes into account the uncertainty surrounding successful development of the purchased in-process research and development. Acquisition of Seer Technologies, Inc. On December 31, 1998, the Company, as the first step in its acquisition of the entire equity interest in Seer, acquired beneficial ownership of approximately 69% of the outstanding voting stock of Seer, which was held by Welsh, Carson, Anderson and Stowe VI L.P. ("WCAS") and certain other parties affiliated or associated with F-18 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) WCAS ("WCAS Parties") in exchange for 1,000,000 shares of the Company common stock and warrants to purchase an additional 250,000 shares of the Company common stock at an exercise price of $12.00 per share ("Step 1"). On April 15, 1999, the Company acquired the remaining minority interest in Seer, for $0.35 in cash per share of the outstanding common stock of Seer ("Step 2"). As a result of Step 2 of the acquisition, Seer became a wholly-owned subsidiary of the Company. The total cost of the acquisition was $7,754 for Step 1 and $1,697 for Step 2 and has been accounted for by the purchase method of accounting. The net book value of Seer's liabilities exceeded its assets on the acquisition dates; therefore, no minority interest in Seer was recorded. The purchase price was allocated to the assets acquired and liabilities assumed based on the Company's estimates of fair value at the acquisition date. The fair value assigned to intangible assets acquired was based on valuations prepared by an independent third-party appraisal company of the purchased in-process research and development, developed technology, installed customer base, assembled workforce, and trademarks of Seer at the completion of Step 1. The purchase price exceeded the amounts allocated to tangible and identifiable intangible assets acquired less liabilities assumed by approximately $18,684 in Step 1. For Step 2, the fair value assigned to intangible assets acquired was based on a valuation of the purchased in-process research and development, developed technology, installed customer base, and assembled workforce of Seer. The Step 2 purchase price was less than the amounts allocated to the tangible and intangible assets acquired by approximately $1,307. This difference between the purchase price and the fair values of assets acquired less liabilities assumed was allocated to goodwill. The cost of the acquisition was allocated as follows:
Step 1 Step 2 Total -------- ------- -------- Cash...................................................... $ 479 $ -- $ 479 Accounts receivable....................................... 14,505 -- 14,505 Prepaid expenses and other current assets................. 1,418 -- 1,418 Property and equipment.................................... 1,614 -- 1,614 Capitalized software and developed technology............. 3,659 3,410 7,069 In-process research and development....................... 4,692 744 5,436 Goodwill, assembled workforce, customer base and trademark 28,344 (1,307) 27,037 Other assets.............................................. 370 -- 370 Accounts payable.......................................... (1,949) -- (1,949) Accrued expenses and other liabilities.................... (13,228) (1,150) (14,378) Deferred revenue.......................................... (7,875) -- (7,875) Notes payable, due on demand.............................. (12,275) -- (12,275) Long-term debt............................................ (12,000) -- (12,000) -------- ------- -------- Cost of net assets acquired............................... $ 7,754 $ 1,697 $ 9,451 ======== ======= ========
Approximately $4,692 for Step 1 and $744 for Step 2, of the purchase price represents purchased in-process research and development that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the Consolidated Statement of Operations upon consummation of the acquisition. The value assigned to in-process research and development, based on a valuation prepared by an independent third-party appraisal company, was determined by identifying research projects in areas for which technological feasibility had not been established. For Step 1, this included Java based projects ($3,105) and application warehousing projects ($1,587). For Step 2, the amount was related to Java F-19 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) based projects only, as there was no change in the status of the application warehouse projects. The value of the in-process projects was adjusted to reflect the relative value and contributions of the required research and development. In doing so, consideration was given to the stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development costs already incurred, and the projected cost to complete the projects. The discount rate included a factor that takes into account the uncertainty surrounding successful development of the purchased in-process research and development. In connection with the Company's purchase of Seer's capital stock from the WCAS Parties, WCAS contributed approximately $17 million to Seer and the Company provided a $12 million subordinated loan to Seer to pay down Seer's bank debt. The funds used by the Company to make the subordinated loan to Seer were borrowed from Liraz Systems Ltd. ("Liraz"), a principal stockholder of the Company. See Note 11. The following unaudited pro forma results of continuing operations assume the acquisition of StarQuest, as described above, occurred as of January 1, 2000 after giving effect to certain adjustments, including amortization of the excess of cost over underlying net assets.
2000 -------- Net sales.......................................................... $ 85,113 Net loss from continuing operations before income taxes............ (33,572) Net loss........................................................... (34,640) Loss applicable to common stockholders............................. (40,461) Loss per share applicable to common stockholders--basic and diluted $ (2.79) Weighted average shares outstanding--basic and diluted............. 14,519
The pro forma financial information does not purport to be indicative of the results of operations which would have actually resulted had the transactions taken place at the beginning of the periods presented or of future results of operations. NOTE 3. DISPOSITIONS Sale of AppBuilder Assets On October 1, 2001, the Company sold its AppBuilder software business to BluePhoenix Solutions, a wholly owned subsidiary of Liraz Systems Ltd. Under the terms of the agreement, the Company sold the rights, title and interest in the AppBuilder product and certain receivables, deferred revenue, maintenance contracts, fixed assets and certain liabilities. The AppBuilder product accounted for approximately 59% of total revenues for the year and approximately 79% of total revenues within the messaging and application engineering segment. The Company received total proceeds of $20,350, $19,000 in cash, a note receivable for $1,000 due February 2002 and a cash payment for the net assets which is subject to final audit and settlement by March 31, 2002. The carrying value of net assets sold was approximately $15,450, resulting gain of approximately $4.9 million has been recorded in the gain on disposal of asset. The Company subsequently liquidated $22,000 of its short-term debt using the proceeds received and cash on hand. In March 2002, the $1,000 note was repaid with cash of $825 and settlement of other liabilities. At December 31, 2001, the $1,000 note was recorded as note receivable from related party and $863 was recorded as receivable related party representing amounts due to the Company from BluePhoenix Solutions for the net asset amount noted above and the reimbursement for certain general and administrative functions performed by the Company. Sale of Message Queuing and XIPC Assets Also during the quarter ended September 30, 2001, the Company sold two of its messaging products--Geneva Message Queuing and Geneva XIPC to Envoy Technologies, Inc. Under the terms of the agreement, Envoy acquired all rights, title and interest to the products along with all customer and maintenance contracts. F-20 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company retained all accounts receivable, received $50 in cash and a note receivable for $400. The resulting gain of $342 has been recorded in the gain on disposal of assets. As of February 28, 2002, the note has been paid in full. Sale of Government Operations In connection with the acquisition of Template, the Company acquired certain classified government contracts and employees who performed services for such. As of May 1, 2000 the Company disposed of its government contracts and employees and certain other related assets and obligations by selling them to a new company formed by certain of the Company's employees. The Company received a note for $1,000 to be paid in five annual payments beginning May 1, 2001 and 4.9% of the outstanding shares of the purchasing company. Due to the uncertainty of collection on the note and valuation of the new company, Level 8 fully reserved the value of the note and valued the investment at $0. During the first quarter of 2001, the Company renegotiated the note to $850, collected this amount and gave up the 4.9% ownership interest of the acquiring company. The gain was included in the gain/loss on disposal of assets. Asset Held for Sale The Company owned a building in Windsor, England from the acquisition of Template Software, Inc. The Company determined that this facility was not needed for ongoing operations and was placed for sale. During the first quarter of 2001, the Company sold the building, fixtures, and certain equipment for approximately $2,236. No gain or loss was recognized. NOTE 4. ACCOUNTS RECEIVABLE Trade accounts receivable consists of the following at December 31:
2001 2000 ------ ------- Current trade accounts receivable.... $2,480 $22,801 Less: allowance for doubtful accounts (183) (1,735) ------ ------- $2,297 $21,066 ====== =======
Approximately $200 and $358 of current trade receivables were unbilled at December 31, 2001 and 2000, respectively. There were no receivables with payment terms in excess of one year recorded during the fiscal year ended December 31, 2001. During 2000 and 1999, the Company acquired certain trade receivables, net of allowances for doubtful accounts, in conjunction with its acquisitions of StarQuest, Template, and Seer. See Note 2. The provision for uncollectible amounts was $3,812, $572, and $757, for the years ended December 31, 2001, 2000, and 1999, respectively. Write-offs of accounts receivable were $5,364, $35, and $3,044, for the years ended December 31, 2001, 2000, and 1999, respectively. Included in the write-offs for 2001 is approximately $3,800 from one customer who filed for Chapter 11 Protection under the U.S. Bankruptcy laws. NOTE 5. AVAILABLE-FOR-SALE SECURITIES On September 29, 2000, the Company purchased 500,000 shares of the common stock and 500,000 warrants to purchase the common stock of a publicly traded e-business service provider for total consideration of $4,000 in cash. The 500,000 shares of common stock represent approximately a seven percent interest in the e-business F-21 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) service provider for total consideration of $4,000 in cash. The 500,000 shares of common stock represent approximately a seven percent interest in the e-business service provider. The 500,000 warrants to purchase common stock have an exercise price of $13.00 per share. At the time of purchase, the fair value of the common stock was recorded using the quoted market price of $6.50 per share and the fair value of the warrants were recorded using the Black Scholes Option Pricing Model at $1.50 per warrant. The shares of common stock are classified as available-for-sale securities. At December 31, 2001, the market value of the common stock was $.29 per share and the fair value of the warrants determined by using the Black Scholes pricing model was $0.02 per share. The realized loss of $3,845 on the available for sale securities has been recorded in the accompanying consolidated statement of operations for 2001, as the Company deemed it to be an other-than-temporary decline in fair value. The common stock was sold subsequent to December 31, 2001. NOTE 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
2001 2000 ------- ------- Computer equipment............................. $ 2,852 $ 5,205 Furniture and fixtures......................... 651 1,035 Office equipment............................... 1,335 1,656 Leasehold improvements......................... 542 972 Land and buildings............................. -- -- ------- ------- Subtotal.................................. 5,380 8,868 Less: accumulated depreciation and amortization (4,131) (5,559) ------- ------- Total..................................... $ 1,249 $ 3,309 ======= =======
Depreciation and amortization expense was $1,308, $1,941, and $1,373, for the years ended December 31, 2001, 2000, and 1999, respectively. NOTE 7. INVESTMENT IN ACCESS INTERNATIONAL During 2001 and 2000, the Company accepted the common stock of one of its customers, Access International, in exchange for consulting services totaling $750 and $1,250, respectively. The fair value of the stock was determined based on the estimated fair value of the stock, which approximated the fair value of the services. The Company also made a cash investment of $350 in July of 2000. On October 1, 2001, the Company sold its interest in Access International to BluePhoenix Solutions as part of the sale of the AppBuilder assets. See Note 3. NOTE 8. NOTES RECEIVABLE AND NOTE RECEIVABLE FROM RELATED PARTY As discussed in Note 3--Dispositions, in conjunction with the sale of the AppBuilder software business to BluePhoenix Solutions, the Company received a note receivable from the purchaser in the amount of $1,000. The note is due on February 28, 2002 and bears interest at 2.36% per annum. In March 2002 the note was settled for $825 in cash and $175 in the settlement of other liabilities. In conjunction with the sale of Geneva Message Queuing and Geneva XIPC products, the Company received a note receivable from the purchaser in the amount of $400. As of December 31, 2001, approximately $275 was outstanding under the note. In February 2002 the note was paid. F-22 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In February 2001, the Company loaned $75 to a director and officer of the Company under a secured note, which bears interest at a rate of 6.5% per annum. The note was payable in full in February 2002. In March 2002, the officer and director returned to the Company 15,000 shares of stock and will repay the remaining $50 over the remainder of 2002. In the fourth quarter of 2000, the Company loaned $495 to a director and officer of the Company under an unsecured note, which bears an interest rate of 6.5%. The note is payable over a period of five years in equal annual installments. In the third quarter of 2001, the Company retired the note in exchange for the forfeiture by the director and officer of certain retirement benefits. In conjunction with the sale of Profit Key on April 6, 1998, the Company received a note receivable from the purchaser for $2,000. The remaining payments at December 31, 2001, on the note total $1,000 and are due in two equal annual installments on March 31. The note bears interest at 9% per annum. During 2000, the Company loaned $1,165 to a strategic partner in the form of $757 in cash and $408 by assignment of accounts receivable. The note bears interest at prime plus 2% and was to be repaid in installments during 2001. The note is guaranteed by the CEO of the strategic partner and secured by stock in the Company. The payer was in default under the repayment schedule and was subsequently acquired by another concern who assumed the payment obligation. In March 2002 the note was repaid. NOTE 9. SOFTWARE PRODUCT TECHNOLOGY During the third quarter of 2000, the Company acquired license rights to Cicero, a comprehensive integrated desktop computer environment from Merrill Lynch in exchange for 1,000,000 shares of its common stock valued at $22,750. Subsequent to December 31, 2001, the Company issued 250,000 shares to MLBC, Inc., an affiliate of Merrill Lynch valued at $620 in order to amend the license. See Note 24. During the fourth quarter of 2000, the Company acquired $6,600 in developed technology through its acquisition of StarQuest. During fiscal year 1999, the Company acquired $3,410 and $12,200 in developed technology through its acquisitions of Seer and Template, respectively. For the fiscal years ended December 31, 2001, 2000, and 1999, the Company capitalized $2,310, $576, and $1,427, respectively, of costs related to developing software for sale. During the fiscal years ended December 31, 2001, 2000, and 1999, the Company recognized $13,342, $8,629, and $3,301, respectively, of expense related to the amortization of these costs, which is recorded as cost of software in the consolidated statements of operations. During the third quarter of fiscal year 2001, the Company reduced the carrying value by $3,070 of the capitalized software cost recorded as part of the StarQuest acquisition to its fair value based upon an evaluation of its net realizable value. Accumulated amortization of capitalized software costs is $17,175, and $12,536 at December 31, 2001 and 2000, respectively. NOTE 10. IDENTIFIABLE AND UNIDENTIFIABLE INTANGIBLE ASSETS Identifiable and unidentifiable intangible assets primarily include goodwill, existing customer base, assembled workforce and trademarks recorded in connection with the Company's previous acquisitions. Goodwill and intangible assets from these acquisitions are being amortized using the straight-line method over periods F-23 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ranging from three to seven years. At December 31, 2001 and 2000, identifiable and unidentifiable intangible assets consist of the following:
2001 2000 ---- -------- Goodwill--Level 8 Technologies......... $-- $ 2,954 Goodwill--Momentum..................... -- 4,014 Goodwill--Seer Technologies............ -- 12,545 Goodwill--Template Software............ -- 44,232 Goodwill--StarQuest Software........... -- 8,006 Assembled workforce--Seer Technologies. -- 5,673 Assembled workforce--Template Software. -- 2,920 Assembled workforce--StarQuest Software -- 1,800 Customer base--Seer Technologies....... -- 6,900 Trademark--Seer Technologies........... -- 621 --- -------- Subtotal........................ -- 89,665 Less accumulated amortization.......... -- (24,243) --- -------- Total........................... $ 0 $ 65,422 === ========
Amortization expense was $10,212, $14,191, and $6,959 for the fiscal years ended December 31, 2001, 2000, and 1999, respectively. Sale of Seer Technologies Assets (AppBuilder) As described in Note 3, Sale of AppBuilder Assets, the Company sold the intangible assets acquired from Seer Technologies to BluePhoenix Solutions (a wholly-owned subsidiary of Liraz), which resulted in a net reduction of $11,052. Asset Impairments During the quarter ended March 31, 2001, management reevaluated and modified its approach to managing the business and decided to conduct business and assess the efficiency of operations under a line-of-business approach, representing a change in accounting principle inseparable from the effect of the change in accounting estimate. As such, the Company performed an assessment of the recoverability of its long-lived assets under a line-of-business approach. The results of its analysis of undiscounted cash flows indicated that an impairment had occurred with regard to the Systems Integration segment (i.e. intangible assets acquired from Template). The Company estimated the fair market value of the related assets through a discounted future cash flow valuation technique. The results of its analysis indicated that the carrying values of these assets exceeded their fair market values. The Company has reduced the carrying value of these intangible assets by approximately $21,824 as of March 31, 2001, which approximates a net income affect of $1.37 per share. During the quarter ended September 30, 2001, the Company was notified by one of its resellers that they would no longer engage in re-sales of the Company's CTRC products acquired from StarQuest. This reseller accounted for substantially all of the product sales and as a result, the Company performed an assessment of the recoverability of the Messaging Application Engineering Segment. The results of the Company's analysis of undiscounted cash flows indicated that an impairment had occurred. The Company estimated the fair market value of the related assets through a discounted future cash flow valuation technique. The results of this analysis indicated that the carrying value of these intangible assets exceeded their fair market values. The Company has reduced the carrying value of these intangible assets by approximately $10,999 as of September 30, 2001, of which $3,070 was recorded as software amortization costs. See Note 9. F-24 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2001, the Company determined that the results of operations and continuing market decline necessitated the reassessment of the recoverability of its long-lived assets included in the Systems Integration segment. The results of its analysis of undiscounted cash flows indicated that an impairment had occurred. The Company estimated the fair market value of the related assets through discounted future cash flow valuation. The results of its analysis indicated the carrying values of these assets exceeded their fair market values. The Company has reduced the carrying value of these intangible assets by approximately $14,100 as of December 31, 2001. Purchase Price Allocation Adjustments During fiscal year 2000, the Company reassessed its estimates of certain asset valuations, merger costs and assumed liabilities related to the Template acquisition, which resulted in a net reduction of approximately $139 to goodwill related to pre-acquisition litigation contingencies and adjustments to accruals and reserves on the books related to the estimated values of those assumed liabilities at the acquisition date. In the fourth quarter of 1999, the Company revised its estimates of certain Seer merger costs and assumed liabilities, which resulted in an approximate $1,300 reduction in goodwill related to pre-acquisition litigation contingencies and acquisition costs. NOTE 11. LONG-TERM DEBT AND CREDIT FACILITIES Notes payable, long-term debt, and notes payable to a related party consist of the following at December 31:
2001 2000 ------ ------- Credit facility (a)............. $ 0 $10,000 Bridge financing ( b)........... 1,600 Term loan (c)................... 3,000 15,000 Note payable-related parties (d) 245 -- Note payable (e)................ -- 2,000 Capital leases (f).............. -- 30 Other notes payable............. -- 103 ------ ------- 4,845 27,133 Less current maturities......... (245) (2,133) ------ ------- $4,600 $25,000 ====== =======
- -------- (a) On October 1, 2001, as part of the closing conditions of the sale of the AppBuilder product line, the Company liquidated its entire indebtedness under this credit facility. At that time the facility was terminated. (b) In December 2001, the Company entered into a stock purchase agreement to sell common stock. As part of the agreement, the Company received a $1,600 advance from investors. The amount was converted to common stock upon the closing of the transaction in January 2001. (c) The Company has a term loan with a commercial bank for $3,000 due November 15, 2003. This loan bears interest at LIBOR plus 1% (approximately 3.13% at December 31, 2001), which is payable quarterly. There are no financial covenants. This loan is guaranteed by Liraz, Level 8's principal shareholder. The Company borrowed $10,000 in 1999 and an additional $5,000 in 2000. In exchange for the initial and amended guarantees of the debt by Liraz, the Company issued Liraz a total of 60,000 and 110,000 shares of the Company's common stock in 1999 and 2000, respectively. Based upon the fair market value of the stock issued, using the quoted market value of the Company's stock per the Nasdaq for the 5-day period prior to F-25 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the agreement, the Company has recorded total deferred costs of $4,013 related to the guaranty. These costs are being amortized in the consolidated statement of operations as a component of interest expense over the term of the guaranty. During 2001, the loan was amended to extend the due date to January 30, 2002 and later as part of the closing conditions on the sale of the AppBuilder product to BluePhoenix Solutions, the maturity was extended to November 15, 2003. As of December 31, 2001 and 2000, there were $388 and $2,702 of unamortized costs classified as prepaid and other current assets in the consolidated balance sheet, respectively. Subsequent to December 31, 2001, and as part of an agreement with Liraz as guarantor of the debt, the Company utilized approximately 10% of the proceeds from its stock sale agreement and further reduced the principal to $2,650. (d) In December 2001, the Company has entered into an agreement with two of the executive officers of the Company, which provides for borrowings from them up to $250 and is secured by accounts and notes receivable. (e) As part of its acquisition of StarQuest, as described in Note 2, the Company assumed a $2,000 note payable with one of its strategic partners. The note is due on February 11, 2001 and bears interest at 6.8%, which is payable quarterly. On February 21, 2001, the note was paid in full. (f) The Company is obligated under various capital leases for certain computer and office equipment providing for aggregate payment, excluding interest, of $30 during 2001. Principal amounts of notes payable and long-term debt maturing over the next two years ending December 31 are as follows:
Notes Payable And Long-Term Debt -------------- 2002................................... $ 245 2003................................... 3,000 ------ Total............................... $3,245 ======
This table above excludes the $1,600 advance from investors as the amount was converted to stock in January 2002. NOTE 12. INCOME TAXES Income tax expense consists of the following as of December 31:
2001 2000 1999 ----- ------ ----- Federal--current....................... $ -- $ -- $ -- State and local--current............... -- -- -- ----- ------ ----- -- -- -- Foreign taxes and withholdings......... 501 1,063 720 ----- ------ ----- Current taxes.......................... 501 1,063 720 Federal--deferred...................... -- -- -- State and local--deferred.............. -- -- -- ----- ------ ----- Deferred taxes......................... -- -- -- Total income tax provision.......... $ 501 $1,063 $ 720 ===== ====== =====
F-26 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of expected income tax at the statutory federal rate with the actual income tax provision is as follows for the years ended December 31:
2001 2000 1999 -------- ------- ------- Expected income tax benefit at statutory rate (34%)..... $(35,540) $(9,283) $(5,017) State taxes, net of federal tax benefit................. (5,158) (1,148) (335) Effect of foreign operations including withholding taxes 801 538 503 Effect of change in valuation allowance................. 38,136 7,719 4,497 Amortization and write-off of non-deductible goodwill... 1,906 2,676 521 In-process research and development--StarQuest.......... -- 30 -- In-process research and development--Template........... -- -- 748 Non-deductible expenses................................. 1,076 531 17 Other................................................... (720) -- (214) -------- ------- ------- Total................................................ $ 501 $ 1,063 $ 720 ======== ======= =======
Significant components of the net deferred tax asset (liability) are as follows:
2001 2000 -------- -------- Current assets: Allowance for doubtful accounts..... $ -- $ 693 Accrued expenses non-tax deductible. 197 200 Deferred revenue.................... 637 267 Noncurrent assets:..................... Loss carryforwards.................. 68,024 28,053 Depreciation and amortization....... (534) 975 -------- -------- 68,324 30,188 -------- -------- Noncurrent liabilities: Depreciation and amortization....... -- -- -------- -------- -- -- -------- -------- Valuation allowance.................... (68,324) (30,188) -------- -------- $ -- $ -- ======== ========
At December 31, 2001, the Company has net operating loss carryforwards of approximately $170,060, which may be applied against future taxable income. These carryforwards will expire at various times between 2005 and 2022. A substantial portion of these carryforwards is restricted to future taxable income of certain of the Company's subsidiaries or limited by Internal Revenue Code Section 382. Thus, the utilization of these carryforwards cannot be assured. Approximately $6,978 of the valuation allowance relates to deferred tax assets for which any subsequently recognized tax benefits will be allocated directly to reduce noncurrent intangible assets purchased from Momentum and StarQuest and the remaining amounts would go to reduce tax expense. Additionally, net operating loss carryforwards include tax deductions for the disqualifying dispositions of incentive stock options. When the Company utilizes the net operating loss related to these deductions, the tax benefit will be reflected in additional paid in capital and not as a reduction of tax expense. The total amount of these deductions included in the net operating loss carryforwards is $21,200. During 1999, the Company acquired the stock of Template. This acquisition was accounted for using the purchase method of accounting. The purchase price of the acquired company was in excess of the carryover tax F-27 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) basis of the assets acquired, resulting in the recognition of a deferred tax liability of $1,476. Since the acquired company and the Company may elect to file a consolidated return on an ongoing basis, the future taxable difference may be offset by the Company's future deductible differences, primarily its net operating loss carryforwards. Therefore, the Company's valuation allowance against its deferred tax asset and its investment in the acquired subsidiary was reduced by $1,476. The undistributed earnings of certain foreign subsidiaries are not subject to additional foreign income taxes nor considered to be subject to U.S. income taxes unless remitted as dividends. The Company intends to reinvest such undistributed earnings indefinitely; accordingly, no provision has been made for U.S. taxes on those earnings. The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 2001 and 2000 since management does not believe that it is more likely than not that these assets will be realized. NOTE 13. STOCKHOLDERS' EQUITY Stock Grants During 2001, the Company issued 369,591 shares of common stock to employees and consultants for retention bonuses, severance, and consulting. The grants represented compensation for services previously performed and were valued and recorded based on the fair market value of the stock on the date of grant which totaled $1,199. Stock Options The Company maintains two stock option plans, the 1995 and 1997 Stock Incentive Plans, which permit the issuance of incentive and nonstatutory stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The Plans reserve a combined total of 7,400,000 shares of common stock for issuance upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. The Company also has a stock incentive plan for outside directors and the Company has set aside 120,000 shares of common stock for issuance under this plan. Under the terms of the Plans, the exercise price of the incentive stock options may not be less than the fair market value of the stock on the date of the award and the options are exercisable for a period not to exceed ten years from date of grant. Stock appreciation rights entitle the recipients to receive the excess of the fair market value of the Company's stock on the exercise date, as determined by the Board of Directors, over the fair market value on the date of grant. Performance shares entitle recipients to acquire Company stock upon the attainment of specific performance goals set by the Board of Directors. Restricted stock entitles recipients to acquire Company stock subject to the right of the Company to repurchase the shares in the event conditions specified by the Board are not satisfied prior to the end of the restriction period. The Board may also grant unrestricted stock to participants at a cost not less than 85% of fair market value on the date of sale. Options granted vest at varying periods up to five years and expire in ten years. In December 1999, as part of its acquisition of Template the Company assumed the three Stock Option Plans of Template; the 1992 Incentive Stock Option Plan, the 1992 Non-Statutory Stock Option Plan and the 1996 Equity Incentive Plan. No further grants may be made under these plans. The options granted under these plans have been converted to options for the Company's common stock. F-28 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Activity for stock options issued under these plans for the fiscal years ending December 31, 2001, 2000, and 1999 is as follows:
Option Weighted Plan Price Per Average Activity Share Exercise Price ---------- ---------- -------------- Balance at December 31, 1998 1,912,094 0.69-16.62 8.85 Granted.................. 1,797,210 8.38-30.25 14.15 Assumed Template options. 1,124,023 3.39-39.29 17.22 Exercised................ (523,225) 0.69-16.62 9.26 Forfeited................ (510,210) 7.88-11.76 9.00 ---------- Balance at December 31, 1999 3,799,892 1.37-39.29 13.65 Granted.................. 2,082,337 7.06-39.31 24.84 Exercised................ (629,554) 4.87-39.31 10.42 Forfeited................ (1,395,158) 1.37-39.29 26.56 ---------- Balance at December 31, 2000 3,857,517 1.37-39.31 15.83 Granted.................. 3,037,581 1.74-6.13 3.60 Forfeited................ (2,528,945) 1.37-39.31 16.38 ---------- Balance at December 31, 2001 4,366,153 1.37-39.31 6.92 ==========
The weighted average grant date fair value of options issued during the years ended December 31, 2001, 2000, and 1999 was equal to $2.59, $17.60 and $9.77 per share, respectively. The fair value of options granted during the fiscal years ended December 31, 2001, 2000 and 1999 was equal to $7,882, $36,641, and $17,550 respectively. There were no option grants issued below fair market value during 2001, 2000 or 1999. Exercises reported in the Consolidated Statements of Stockholder's Equity in 1999 and 2000 are reported net of repurchases of 103,000 and 106,000 respectively. The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using the Black-Scholes option-pricing model, using the following weighted-average assumptions:
2001 2000 1999 ------- ------- ------- Expected life (in years)............... 5 years 5 years 5 years Expected volatility.................... 90% 85% 82% Risk free interest rate................ 4.50% 6.09% 5.44% Expected dividend yield................ 0% 0% 0%
For disclosure purposes, the adjusted estimated fair value of the Company's stock-based awards to employees is amortized over the vesting period. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net loss and loss per share for the fiscal years December 31, 2001, 2000 and 1999 would have been increased to the pro forma amounts indicated below. The Company's adjusted information follows (in thousands, except for per share information):
2001 2000 1999 --------- -------- -------- Net loss, as reported.......................................... $(105,135) $(28,367) $(15,477) Net loss applicable to common stockholders..................... (106,061) (34,188) (15,899) Net loss applicable to common stockholders, as adjusted........ (108,796) (42,356) (22,960) Net loss per share applicable to common stockholders, as reported--basic and diluted.................................. (6.65) (2.44) (1.78) Pro forma net loss per share applicable to common stockholders, as adjusted--basic and diluted............................... (6.82) (3.02) (2.57)
F-29 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2001, 2000 and 1999, options to purchase approximately 1,313,826, 1,667,179, and 1,850,087 shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $1.37 to $39.29. The following table summarizes information about stock options outstanding at December 31, 2001:
Remaining Contractual Number Life for Options Number Exercise Price Outstanding Outstanding Exercisable -------------- ----------- ---------------- ----------- $1.37-- 2.00 1,613,385 9.9 3,684 4.04-- 5.81 841,377 7.8 198,079 6.13-- 9.00 1,042,445 7.2 403,650 9.50--14.00 516,356 3.4 479,022 14.73--20.00 119,157 5.0 97,877 22.10--31.62 60,833 6.6 52,008 34.38--39.31 172,600 7.2 79,506 --------- --------- 4,366,153 1,313,826 ========= =========
Preferred Stock On October 16, 2001, the Company completed an exchange of 11,570 shares of Series A 4% Convertible Redeemable Preferred Stock ("Series A Preferred Stock") and 30,000 shares of Series B 4% Convertible Redeemable Preferred Stock ("Series B Preferred Stock") for 11,570 shares of Series A1 Convertible Preferred Stock ("Series A1 Preferred Stock") and 30,000 shares of Series B1 Convertible Preferred Stock ("Series B1 Preferred Stock"), respectively. Series A1 Preferred Stock and Series B1 Preferred Stock are convertible into an aggregate of 1,388,456 and 2,394,063 shares of the Company's common stock at $8.33 and $12.531 per share, respectively. Additionally, the 753,640 Series A Preferred Stock and 1,047,382 Series B Preferred Stock warrants to issue common stock at $10 and $25.0625, respectively, were adjusted to an exercise price of $1.77. The exchange was made in consideration of the temporary release of the anti-dilution privileges of the Series A Preferred Stockholders and Series B Preferred Stockholders. The fair value of the exchange, as determined by an independent third-party valuation firm, was not accretive to the stockholder thus no dividend was recorded. The exchange of the Series A Preferred Stock for Series A1 Preferred Stock and Series B Preferred Stock for Series B1 Preferred Stock was made in a private transaction exempt from the registration requirements of the federal securities laws. Holders of the Series A1 Preferred Stock and Series B1 Preferred Stock will have one vote per share of Series A1 Preferred Stock and Series B1 Preferred Stock, voting together with the common stock and not as a separate class except on certain matters adversely affecting the rights of holders of the Series A1 Preferred Stock and Series B1 Preferred Stock, respectively. The Series A1 Preferred Stock and Series B1 Preferred Stock may be redeemed at the option of Level 8 at a redemption price equal to the original purchase price at any time if the closing price of Level 8's common stock over 20 consecutive trading days is greater than $16.00 and $25.0625 per share, respectively. The conversion prices of the Series A1 Preferred Stock and Series B1 Preferred are subject to certain anti-dilution provisions, including adjustments in the event of certain sales of common stock at a price of less than $8.33 and $12.531 per share, respectively; provided, that the Company may issue up to 3,000,000 shares without triggering the anti-dilution provisions. In the event the Company breaches its obligations to issue common stock upon conversion, or the Company's common stock is delisted, dividends will be payable on the Series A1 Preferred Stock and Series B1 Preferred Stock at a rate of 14% per annum (partially payable in shares of common stock at the option of the Company during the first 60 days of such dividend rate). F-30 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is required to make certain payments in the event it is unable to meet its obligations in connection with the Series A1 Preferred Stock, Series B1 Preferred Stock and warrants, such as registration under the Securities Act or issuance of shares of common stock upon conversion or exercise. The aggregate amount of all such payments, together with dividends on the Series A1 Preferred Stock and Series B1 Preferred Stock, is limited to 19% of the liquidation value of the respective series of preferred stock. One of the investors in the Series A1 Preferred Stock was Advanced Systems Europe B.V., which is a subsidiary of Liraz, Level 8's principal stockholder. During 2000 and 1999, there were 7,375 and 2,005 shares of preferred stock converted into 737,500 and 206,000 shares of the Company's common stock, respectively. There were 11,570 shares of the Series A1 Preferred Stock and 30,000 shares of Series B1 Preferred Stock outstanding at December 31, 2001. Stock Warrants The Company values warrants based on the Black Scholes pricing model. Warrants granted in 2001 and 2000 were valued using the following assumptions:
December 2000 Preferred Preferred Commercial StarQuest Series A1 Series B1 Lender Warrants Warrants Warrants Warrants --------------- --------- --------- --------- Expected life (in years).. 4 3 4 4 Expected volatility....... 87% 121% 107.5% 107.5% Risk free interest rate... 5% 6% 4% 4% Expected dividend......... None None None None Fair value of common stock $6.19 $17.28 $1.89 $1.89
In connection with the exchange of Series A Preferred Stock for Series A1 Preferred Stock, the Company exchanged the investors warrants to purchase 753,640 shares of common stock at an exercise price of $10 per share for warrants to purchase 753,640 shares of common stock at an exercise price of $1.77 per share. In connection with the exchange of Series B Preferred Stock for Series B1 Preferred Stock, the Company also exchanged the investors warrants to purchase 1,047,382 shares of common stock at an exercise price of $1.77 per share. The fair value of the preferred stock and warrant exchange, as determined by an independent third party valuation firm, was not accretive to the stockholder thus no dividend was recorded. See "Preferred Stock". The Company may cause the redemption of the Series A1 Preferred Stock warrants and the Series B1 Preferred Stock warrants for $.0001 at any time if the closing price of the Company's common stock over 20 consecutive trading days is greater than $5.00 and $7.50 per share, respectively. The holders may cause the warrants to be redeemed for cash at the difference between the exercise price and the fair market value immediately preceding a redemption event as defined in the warrant. As such, the fair value of the warrants at issuance of $2,100 has been classified as a warrant liability in accordance with EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock". As of December 31, 2001, no warrants have been exercised and the fair value of the liability is $2,985. F-31 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During December 2000, the Company issued a commercial lender rights to purchase up to 172,751 shares of the Company's common stock at an exercise price of $4.3415 in connection with a new credit facility. See Note 11. The warrants were valued at $775 or $4.49 per share and are exercisable until December 28, 2004. As of December 31, 2001, no warrants have been exercised. In connection with the acquisition of StarQuest, the Company issued warrants to purchase 250,000 shares of the Company's common stock. The warrants will have an exercise price of $30 per share. See Note 2. The warrants were valued at $1,500 or $6.00 per share and are exercisable until November 28, 2003. As of December 31, 2001, no warrants have been exercised. In connection with the acquisition of Momentum during 1998, the Company issued warrants to purchase 200,000 shares of the Company's common stock. The warrants have an exercise price of $13.108 per share and expire on March 26, 2003. The warrants were valued at $654 or $3.27 per share. See Note 2. During 2000, 104,597 warrants were exercised, net of 31,248 warrants forfeited in lieu of purchase price, leaving 95,403 of these warrants outstanding at December 31, 2001. In connection with the acquisition of Seer during 1998, the Company issued warrants to purchase 250,000 shares of the Company's common stock. The warrants have an exercise price of $12 per share and expire on December 31, 2002. The warrants were valued at $280 or $1.12 per share. See Note 2. As of December 31, 2001, no warrants have been exercised. In connection with the initial and secondary public offerings, the Company issued 140,000 and 110,000 warrants, respectively, to the underwriter. The warrants are exercisable for four years, commencing one year from the effective dates of the public offerings at exercise prices of $7.43 and $14.85 per share, respectively, and have grant date fair values of $3.82 and $6.85 per share, respectively. Warrants totaling 0, 136,466 and 3,000 were exercised at an exercise price of $7.43 during the years ended December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001, there were no warrants outstanding as the warrants have all expired. Reincorporation and Common Stock Effective June 23, 1999, the Company completed its re-incorporation under Delaware law. As a result of the re-incorporation of the Company under Delaware law, the rights of stockholders of the Company are now governed by the Certificate of Incorporation and Bylaws of Level 8 Systems, Inc., a Delaware corporation, and the General Corporation Law of the State of Delaware. In conjunction with the re-incorporation, the Company changed the par value of its common stock from $.01 to $.001. NOTE 14. EMPLOYEE BENEFIT PLANS As of January 1, 2001 the Company sponsored one defined contribution plan for its U.S. employees--the Level 8 Systems 401(k). On December 31, 2000 the Company amended the Level 8 Systems 401(k) plan to provide a 50% matching contribution up to 6% of an employee's salary. Participants must be eligible Level 8 plan participants and employed at December 31 of each calendar year to be eligible for employer matching contributions. Matching contributions to the Level 8 Plan included in the Consolidated Statement of Operations totaled $7 and $363 for fiscal years 2001 and 2000, respectively. The Company also has employee benefit plans for each of its foreign subsidiaries, as mandated by each country's laws and regulations. There was $260 and $470 in expense recognized under this plan for the years ended December 31, 2001, and 2000, respectively. F-32 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company also has an Employee Stock Purchase Plan (U.S.) for its U.S. employees and the International Stock Purchase Plan, currently available to its UK employees, (collectively, the ''Stock Purchase Plans''). The Stock Purchase Plans allow employees to purchase shares of the Company's common stock for 85% of fair market value. The Stock Purchase Plans are authorized to grant rights to purchase an aggregate maximum of 250,000 shares of common stock. The Company is responsible for the administrative costs of the plans. Expenses related to these plans totaled $95 and $123 during the years ended December 31, 2001 and 2000, respectively. NOTE 15. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK For fiscal year 2001, no customer accounted for more than 10% of operating revenue. Two customers accounted for 11.4% and 11.2% of operating revenues for fiscal year 2000. No customers accounted for more than 10% of operating revenue in fiscal year 1999. As of December 31, 2000 and 2001, the Company had significant balances outstanding from individual customers due to the nature of its operations. It is the policy of the Company to closely monitor all accounts receivable and to record a provision for uncollectible accounts as they become estimable. Generally, no collateral is required. NOTE 16. FOREIGN CURRENCIES As of December 31, 2001, the Company had $321 and $898 US dollar equivalent cash and trade receivable balances, respectively, denominated in foreign currencies. At December 31, 2000, the Company had approximately $1,566 and $5,759 U.S. dollar equivalent cash and trade receivable balances, respectively, denominated in foreign currencies. The more significant trade accounts receivable denominated in foreign currencies as a percentage of total trade accounts receivable were as follows:
2001 2000 ---- ---- Euro................................... 32.2% -- Pound Sterling......................... -- 9.2% Deutsche Mark.......................... -- 1.75% Italian Lira........................... -- 2.69%
NOTE 17. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION During the first quarter of 2001, management reassessed how the Company would be managed and how resources would be allocated. Management now makes operating decisions and assesses performance of the Company's operations based on the following reportable segments: (1) Desktop Integration Products, (2) System Integration Products, and (3) Messaging and Application Engineering Products. Prior to 2001, the Company's reportable segmants were: (1) Software, (2) Maintenance, (3) Services and, (4) Research and development. The historical segments have not been restated as it is impractical to do so. The principal product in the Desktop Integration segment is Cicero. Cicero is a business integration software product that maximizes end-user productivity, streamlines business operations and integrates disparate systems and applications. The products that make up Systems Integration are as follows: Geneva Enterprise Integrator and Geneva Business Process Automator. Geneva Enterprise Integrator is an integration tool that provides unified, real-time views of enterprise business information for eBusiness applications. Geneva Business Process Automator is a F-33 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) product designed to work with Geneva Enterprise Integrator for automating the many business processes that an organization uses to run its operations and enables the automation of information workflows spanning front and back office systems. The products that comprise the Messaging and Application Engineering segment are Geneva Integration Broker, Geneva Message Queuing, Geneva XIPC and Geneva AppBuilder. During the quarter ended September 30, 2001, the Company sold two of its messaging products, Geneva Message Queuing and Geneva XIPC. Also, on October 1, 2001 the Company sold its AppBuilder software business. See Note 3. The CTRC products, a component of the Messaging and Application Engineering segment was not sold. Segment data includes a charge allocating all corporate-headquarters costs to each of its operating segments based on each segment's proportionate share of expenses. The Company evaluates the performance of its segments and allocates resources to them based on earnings (loss) before interest and other income/(expense), taxes, in-process research and development, restructuring and amortization of goodwill (EBITA). While EBITA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flows from operating activities, which are determined in accordance with accounting principles generally accepted in the United States of America, it is included herein to provide additional information with respect to our ability to meet our future debt service, capital expenditure and working capital requirements. EBITA is not necessarily a measure of our ability to fund our cash needs. The non-GAAP measures presented may not be comparable to similarly titled measures reported by other companies. The table below presents information about reported segments for the twelve months ended December 31, 2001:
Desktop Systems Messaging/Application Integration Integration Engineering TOTAL ----------------- ----------------- --------------------- ----------------- December 31, 2001 December 31, 2001 December 31, 2001 December 31, 2001 Twelve Months Twelve Months Twelve Months Twelve Months Ended Ended Ended Ended ----------------- ----------------- --------------------- ----------------- Total revenue........... $ 134 $ 5,744 $16,781 $ 22,659 Total cost of revenue... 9,427 5,103 13,667 28,197 Gross profit/(loss)..... (9,293) 641 3,114 (5,538) Total operating expenses 18,858 7,840 7,179 33,877 EBITA................... $(28,151) $(7,199) $(4,065) $(39,415)
F-34 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of segment operating expenses to total operating expense for fiscal year 2001:
2001 ------- Segment operating expenses....... $33,877 Amortization of intangible assets 10,212 Impairment of intangible assets.. 43,853 (Gain)/loss on disposal of assets (6,346) Restructuring, net............... 8,650 ------- Total operating expenses...... $90,246 =======
The table below presents information about previously reported segments for the fiscal years ended December 31:
2001 2000 1999 ---------------- ---------------- --------------- Total Total Total Total Total Total Revenue EBITA Revenue EBITA Revenue EBITA ------- -------- ------- -------- ------- ------- Software................ $ 2,367 $(35,120) $45,998 $ (6,338) $16,030 $(2,549) Maintenance............. 11,328 5,987 15,967 9,312 14,981 8,819 Services................ 8,964 (2,336) 20,626 (958) 21,909 (116) Research and development -- (7,946) -- (10,324) -- (7,767) ------- -------- ------- -------- ------- ------- Total................ $22,659 $(39,415) $82,591 $ (8,308) $52,920 $(1,613) ======= ======== ======= ======== ======= =======
A reconciliation of total segment EBITA to loss before provision for income taxes for the fiscal years ended December 31:
2001 2000 1999 --------- -------- -------- Total EBITA............................. $ (39,415) $ (8,308) $ (1,613) Amortization of intangible assets....... (10,212) (14,191) (6,959) Impairment of intangible assets......... (43,853) -- -- (Gain)/loss on disposal of assets....... 6,346 (379) -- In-process research and development..... -- (1,800) (2,944) Restructuring........................... (8,650) -- (383) Interest and other income/(expense), net (8,850) (2,626) (2,858) --------- -------- -------- Total loss before income taxes....... $(104,634) $(27,304) $(14,757) ========= ======== ========
The following table presents a summary of long-lived assets by segment as of December 31, 2001:
2001 ------- Desktop Integration.................... $13,323 Systems Integration.................... 9,963 Messaging/Application Engineering...... 2,369 ------- Total assets........................ $25,655 =======
F-35 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents a summary of revenue by geographic region for the fiscal years ended December 31:
December 31, ----------------------- 2001 2000 1999 ------- ------- ------- Australia.............................. $ 141 $ 976 $ 2,429 Denmark................................ 2,428 4,097 4,861 France................................. 492 2,371 6 Germany................................ 776 1,584 3,553 Israel................................. 909 6,778 1,987 Italy.................................. 1,263 2,259 3,370 Norway................................. 579 2,069 2,128 Switzerland............................ 1,229 1,742 2,782 United Kingdom......................... 4,268 9,841 5,055 USA.................................... 7,088 44,573 18,134 Other.................................. 3,486 6,301 8,615 ------- ------- ------- Total revenue....................... $22,659 $82,591 $52,920 ======= ======= =======
Presentation of revenue by region is based on the country in which the customer is domiciled. Only countries with greater than 3% of total revenue are disclosed individually. The following table represents a summary of long-lived assets by geographic region as of December 31:
2001 2000 ------- -------- United States.......................... $25,553 $109,878 United Kingdom......................... -- 411 France................................. 54 113 Other.................................. 48 72 ------- -------- Total assets........................ $25,655 $110,474 ======= ========
The Company's foreign operations are reimbursed by the Company for their costs plus an appropriate mark-up for profit. Intercompany profits and losses are eliminated in consolidation. NOTE 18. RELATED PARTY INFORMATION The Company paid royalties to Liraz of $48 and $15 for the years ended December 31, 2000 and 1999 for products which were developed under a joint development agreement. The agreement expired on December 31, 2000. The Company sold software licenses to Liraz for $0, $280, and $0 in 2001, 2000, and 1999, respectively, for resale to unrelated third parties. Liraz also pays the salaries and expenses of certain company employees and is reimbursed by the Company. Salaries and expenses paid by Liraz amounted to $67, $259, and $372, during 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000, the Company had accounts payable of $56 and $59 to Liraz, respectively. At December 31, 2001 and 2000, the Company had accounts receivable of $1,293 and $306 from Liraz and its affiliates, respectively. The Company exchanged Series A and Series B Preferred stock and warrants for Series A1 and Series B1 preferred stock and warrants. See Note 13. In October 2001, the Company sold its AppBuilder assets to Blue Pheonix for $19 million cash, a note receivable of $1,000 and a payment for net assets of $350. See Note 3. F-36 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 1999, a subsidiary of Liraz purchased convertible preferred stock and warrants from the Company for $10,000 on the same terms as the other investors in the $21,000 offering. In December 1999, Liraz exercised its warrants for 1,000 shares of common stock for an aggregate exercise price of $10,000. Liraz guarantees certain debt obligations of the Company through November 15, 2003. The Company issued common stock to Liraz in exchange for the guaranty. See Note 11. In the third quarter of 2000, the Company had software sales of $6,000 to a customer that currently holds approximately six percent (6%) of our outstanding shares of common stock and has an employee as a member of our Board of Directors. The Company has entered into an agreement with two of the executive officers of the Company, which provides for borrowings up to $250 and is secured by accounts and notes receivable. See Note 11. In the fourth quarter of 2000, the Company loaned $495 to a director and officer of the Company under an unsecured note, which bears an interest rate of 6.5%. The note is payable over a period of five years in equal annual installments. In the third quarter of 2001, the Company retired the note in exchange for the forfeiture by the director and officer of certain retirement benefits. See Note 8. NOTE 19. RESTRUCTURING CHARGES In the first quarter of 2001, the Company began an operational restructuring to reduce its operating costs and streamline its organizational structure. This operational restructuring involves the reduction of employee staff throughout the Company in all geographical regions in sales, marketing, services and development and administrative functions. The Company recorded restructuring charges of $6,650 during the quarter March 31, 2001 and an additional $2,000 during the quarter ending June 30, 2001. The restructuring plan included the termination of 191 employees, all of whom had been notified by June 30, 2001 and terminated by December 31, 2001. The plan included a reduction of 83 personnel in the European operations and 108 personnel in the U.S. Operations. Employee termination costs comprised of severance-related payments for all employees terminated in connection with the operational restructuring. Termination benefits do not include any amounts for employment-related services prior to termination. Premises obligations primarily relate to the continuation of lease obligations, brokers commissions and leasehold improvements for approximately 60,000 square feet of facilities no longer deemed necessary and costs to exit short-term leases for various sales offices. Amounts expenses relating to lease obligations represent estimates of undiscounted future cash outflows, offset by anticipated third-party sub-lease payments. Marketing obligations related to contracts and services relating to the prior focus of the Company and are no longer expected to be utilized. Other miscellaneous restructuring costs include professional fees, royalty commitments, recruiting fees, excess equipment and other miscellaneous expenses directly attributable to the restructuring. F-37 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth a summary by category of accrued expenses and cash paid as of December 31, 2001:
Cash Expense Non-Cash Paid Accrued ------- -------- ------- ------- Employee termination................... $5,319 $(1,045) $(4,231) $ 43 Excess office facilities............... 2,110 (156) (1,307) 647 Marketing obligations.................. 288 -- (235) 53 Royalty commitments.................... 725 (360) (365) -- Other miscellaneous restructuring costs 208 -- (98) 110 ------ ------- ------- ---- Total............................... $8,650 $(1,561) $(6,236) $853 ====== ======= ======= ====
The Company believes the accrued restructuring cost of $853 at December 31, 2001 represents its remaining cash obligations for the restructuring changes included above. During the fourth quarter of 1999, the Company reorganized its existing operations due to its acquisition of Template. The Company's restructuring included a management change in its development and operations areas, the abandonment of certain leased facilities, and closure of its French subsidiary. The Company recorded a restructuring charge of $.55 million, which consisted of approximately $.28 million in costs associated with improving leased space to be subleased, approximately $.23 million in personnel-related charges, and approximately $.04 million in legal and accounting fees to close its French subsidiary. NOTE 20. FUNDED RESEARCH AND DEVELOPMENT In July 2001, the Company and a significant customer entered into a multi-year agreement to fund the development of the next generation of Level 8's Geneva Enterprise Integrator and Geneva Business Process Automator software. The terms of the agreement provide $6.5 million in funding for research and development over 18 months in exchange for future fully paid and discounted licensing arrangement. The Company and its significant customer will eliminate the proprietary code in existence and migrate the GEI and GBPA software to the Java 2 Enterprise Edition (J2EE) environment in order to provide customers with a flexible, common development environment. Payments are refundable upon cancellation of the contract excluding amounts for work performed prior to cancellation. Recognition of the payments has been deferred until the services have been performed and refund provisions have expired. As of December 31, 2001, the Company has received $2,833 in funding payments and had a $944 receivable and $1,592 in deferred revenue under the arrangement. The Company had capitalized $2,310 in software product technology costs associated with the arrangement and subsequently offset those costs with $2,074 which had been earned under the agreement. At December 31, 2001, $236 remained in software product technology which will be offset by future amounts recognized under the agreement. F-38 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 21. LEASE COMMITMENTS The Company leases certain facilities and equipment under various operating leases. Some of these facilities have been subleased. Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2001 are as follows:
Lease Lease Commitments Sublease Commitments Total Income Net ----------- -------- ----------- 2002................................... $3,305 $(1,198) $2,107 2003................................... 2,780 (974) 1,806 2004................................... 2,022 (436) 1,586 2005................................... 1,821 (290) 1,531 2006................................... 1,537 (274) 1,263 ------ $8,293 ======
Rent expense for the fiscal years ended December 31, 2001, 2000, and 1999 was $1,835, $3,255, and $2,940, respectively. Sublease income was $221, $171, and $0 for the fiscal years ended December 31, 2001, 2000 and 1999, respectively. NOTE 22. CONTINGENCIES During the year ended December 31, 2001, the Company was named as a defendant in several actions that ranged from improper dismissal claims to claims for breach of contract. All such claims were settled by December 31, 2001 and totaled $950. Management is not aware of any additional claims that would have a material effect on the financial position or results of operations of the Company. NOTE 23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- (In thousands, except per share data) 2001: Net revenues.................................................. $ 7,938 $ 7,172 $ 5,889 $ 1,660 Gross profit.................................................. (37) 722 (997) (5,226) Net loss...................................................... (48,911) (12,508) (24,958) (18,759) Net loss applicable to common stockholders.................... (49,330) (12,820) (25,273) (18,759) Net loss per share -- basic and diluted....................... $ (3.12) $ (0.81) $ (1.55) $ (1.18) 2000: Net revenues.................................................. $ 19,662 $ 21,081 $ 22,318 $ 19,528 Gross profit.................................................. 9,534 13,347 15,238 10,293 Net loss...................................................... (8,028) (5,527) (4,499) (10,312) Net loss applicable to common stockholders.................... (8,176) (5,644) (4,851) (15,517) Net loss per share -- basic and diluted....................... $ (0.64) $ (0.41) $ (0.34) $ (0.71) Net loss per share applicable to common stockholders -- basic and diluted................................................. $ (0.64) $ (0.41) $ (0.34) $ (1.03)
During the fourth quarter of 2001, the Company reassessed the recoverability of the remaining intangible assets relating to the Template Software acquisition and determined that an impairment of $14.2 million was required. See Note 10. During the fourth quarter of 2000, the Company recorded significant nonrecurring adjustments totaling $1,800. The fourth quarter adjustments related primarily to the acquisition of StarQuest. See Note 2. F-39 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 24. SUBSEQUENT EVENTS In January 2002, the Company amended its August 2000 license agreement with Merrill Lynch. Under the terms of the previous agreement, the Company had a perpetual license to commercialize and sell the Cicero technology, however, the Company's exclusivity under that contract expired in August 2002. The amendment provides for the extension of the exclusive, perpetual license to develop and sell the Cicero application integration software and to obtain ownership of the Cicero registered trademark. In exchange, Merrill Lynch affiliate, MLBC, Inc., will receive 250,000 shares of the Company's common stock. Merrill Lynch now beneficially owns approximately 1.2 million shares of the Company's common stock. In addition, Merrill Lynch and the Company entered into a revenue sharing agreement that provides for royalties to Merril Lynch on future Cicero software sales. Under the agreement, royalties are capped at $20 million. Subsequent to December 31, 2001, the Company entered into a Securities Purchase Agreement with several investors wherein the Company agreed to sell up to three million shares of its common stock and warrants. The common stock was valued at $1.50 per share and warrants to purchase additional shares were offered at $2.75 per share. At December 31, 2001, the Company had received bridge financing of $1.6 million which was convertible to common stock subject to closing conditions. This amount has been reflected in the accompanying balance sheet as long-term debt. This offering closed on January 16, 2002. The Company sold 2,381,952 shares of common stock for a total of approximately $3.5 million and granted 476,396 warrants to purchase the Company's common stock at a price of $2.75 per share. The warrants expire in three years from the date of grant and have a call feature that forces exercise if the Company's common stock exceeds $5.50 per share. F-40 EXHIBITS
Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated as of October 2, 2000 by and among Level 8 Systems, Inc., Level 8 Technologies Acquisition Corp. and StarQuest Software, Inc. (incorporated by reference to exhibit 10.39 to Level 8's Quarterly Report on Form 10-Q for the period ended September 30, 2000 (exhibits and schedules omitted but will be furnished supplementally to the Securities and Exchange Commission upon request)). 2.2 Asset Purchase Agreement dated as of August 8, 2001 by and between Level 8 Systems, Inc. and AppBuilder Solutions B.V. (incorporated by reference to Exhibit 2.1 to Level 8's Form 8-K filed August 8, 2001) (exhibits and schedules omitted but will be furnished supplementally to the Securities and Exchange Commission upon request)). 3.1 Certificate of Incorporation of Level 8 Systems, Inc., a Delaware corporation (incorporated by reference to exhibit 3.1 to Level 8's Registration Statement on Form S-1/A, filed September 22, 2000, File No. 333-44588). 3.2 Bylaws of Level 8 Systems, Inc., a Delaware corporation (filed herewith). 3.3 Certificate of Designation relating to Series A1 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8's Report on Form 8-K, filed October 17, 2001). 3.4 Certificate of Designation relating to Series B1 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.2 to Level 8's Report on Form 8-K, filed October 17, 2001). 4.1 Registration Rights Agreement dated as of January 16, 2002 by and among Level 8 Systems, Inc. and the Purchasers in the January Private Placement listed on Schedule I thereto (incorporated by reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed January 25, 2001). 4.2 Registration Rights Agreement dated as of January 3, 2002 between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed January 11, 2002). 4.3 Registration Rights Agreement dated June 29, 1999 among Level 8 Systems, Inc. and the Series A investors named on the signature pages thereof (incorporated by reference to exhibit 10.3 to Level 8's Report on Form 8-K filed July 23, 1999). 4.3A First Amendment to Registration Rights Agreement dated as of October 16, 2001, to the Registration Rights Agreement dated as of June 29, 1999, by and among Level 8 Systems, Inc. and the Series A1 investors named on the signature pages thereof (incorporated by reference to exhibit 10.4 to Level 8's Form 8-K, filed October 17, 2001). 4.4 Registration Rights Agreement dated July 20, 2000 among Level 8 Systems, Inc. and the Series B investors named on the signature pages thereof (incorporated by reference to exhibit 10.5 to Level 8's Report on Form 8-K, filed July 31, 2000). 4.4A First Amendment to Registration Rights Agreement dated as of October 16, 2001, to the Registration Rights Agreement dated as of July 20, 2000, by and among Level 8 Systems, Inc. and the Series B1 investors named on the signature pages thereof (incorporated by reference to exhibit 10.5 to Level 8's Form 8-K, filed October 17, 2001). 4.5 Registration Rights Agreement, dated June 13, 1995, between Level 8 Systems, Inc. and Liraz Systems Ltd. (incorporated by reference to exhibit 10.24 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-92230).
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Exhibit Number Description - ------ ----------- 4.5 Registration Rights Agreement, dated June 13, 1995, between Level 8 Systems, Inc. and Liraz Systems Ltd. (incorporated by reference to exhibit 10.24 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-92230). 4.5A First Amendment to Registration Rights Agreement dated as of August 8, 2001, to the Registration Rights Agreement dated as of June 13, 1995, by and between Across Data Systems, Inc. (Level 8's predecessor) and Liraz Systems Ltd. (incorporated by reference to exhibit 4.1 to Level 8's Report on Form 8-K, filed August 14, 2001). 4.6 Form of Registration Rights Agreement among Level 8 Systems, Inc. and the former holders of Series E Preferred Stock of StarQuest Software, Inc. (incorporated by reference to exhibit 4.11 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 4.7 Form of Registration Rights Agreement among Level 8 Systems, Inc. and the former debtholders of StarQuest Software, Inc. (incorporated by reference to exhibit 4.12 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 4.8 Form of Stock Purchase Warrant issued to the Purchasers in the January Private Placement (incorporated by reference to exhibit 10.2 to Level 8's Report on Form 8-K, filed January 25, 2002). 4.9 Form of Stock Purchase Warrant issued to the investors in Series A1 Preferred Stock (incorporated by reference to exhibit 10.2 to Level 8's Report on Form 8-K, filed October 17, 2001). 4.10 Form of Stock Purchase Warrant issued to the investors in Series B1 Preferred Stock (incorporated by reference to exhibit 10.3 to Level 8's Report on Form 8-K, filed October 17, 2001). 4.11 Form of Warrant issued to the former holders of Series E Preferred Stock of StarQuest Software, Inc. (incorporated by reference to exhibit 4.10 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 4.12 Form of Warrant(s) representing the 250,000 Level 8 warrants issued to the WCAS Parties (incorporated by reference to exhibit 8.2(A) to the Seer Technologies, Inc. Annual Report on Form 10-K for the year ended September 30, 1998, File No. 000-26194). 10.1 Securities Purchase Agreement dated as of January 16, 2002 by and among Level 8 Systems, Inc. and the Purchasers in the January Private Placement (incorporated by reference to exhibit 10.1 to Level 8's Report on Form 8-K, filed January 25, 2002). 10.2 Purchase Agreement dated as of January 3, 2002 between Level 8 Systems, Inc. and MLBC, Inc. (incorporated by reference to exhibit 10.1 to Level 8's Report on Form 8-K, filed January 11, 2002). 10.2A Purchase Agreement dated July 31, 2000 between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 10.1 to Level 8's Report on Form 8-K, filed August 11, 2000). 10.3 Exchange Agreement dated as of October 16, 2001 among the Company and the investors named on the signature pages thereof (incorporated by reference to exhibit 10.1 to Level 8's Report on Form 8-K, filed October 17, 2001). 10.3A Securities Purchase Agreement dated June 29, 1999 among Level 8 Systems, Inc. and the investors named on the signature pages thereof for the purchase of Series A Preferred Stock (incorporated by reference to exhibit 10.1 to Level 8's Form 8-K filed July 23, 1999). 10.3B. Securities Purchase Agreement dated July 20, 2000 among Level 8 Systems, Inc. and the investors named on the signature pages thereof for the purchase of Series B Preferred Stock (incorporated by reference to Exhibit 10.1 to Level 8's Report on Form 8-K filed July 31, 2000).
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Exhibit Number Description - ------ ----------- 10.4 Amended PCA Shell License Agreement dated as of January 3, 2002 between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (incorporated by reference to exhibit 10.2 to Level 8's Form 8-K, filed January 11, 2002). 10.4A PCA Shell License Agreement between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.2 to Level 8's Report on Form 8-K, filed September 11, 2000). 10.5 Promissory Note of Level 8 Systems, Inc. dated September 28, 2001 among Level 8 Systems, Inc. and Bank Hapoalim (filed herewith). 10.6 Stockholders Agreement among Level 8 Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Liraz Systems Ltd. and certain of its affiliates and Welsh, Carson, Anderson & Stowe VI, L.P. and certain of its affiliates (incorporated by reference to exhibit 10.3 to Level 8's Report on Form 8-K, filed September 11, 2000). 10.7 License Agreement, dated as of December 17, 1998, between BULL and Template Software, Inc. (incorporated by reference to exhibit 10.31 to Template Software, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.8 Agreement, dated June 13, 1995, between the Company and Liraz (incorporated by reference to exhibit 10.23 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-- 92230). 10.9 Master License Agreement dated October 24, 1996 by and between Merrill Lynch, Pierce, Fenner & Smith Incorporated and Seer Technologies, Inc. (incorporated by reference to exhibit 10.23 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.9A Schedule 4 to Master License Agreement dated September 30, 2000 by and between Merrill Lynch, Pierce, Fenner & Smith Incorporated and Level 8 Technologies, Inc. (incorporated by reference to exhibit 10.23A to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.10 Employment Agreement between Anthony Pizi and the Company effective January 1, 2002 (filed herewith).* 10.11 Employment Agreement between John P. Broderick and the Company effective January 1, 2002 (filed herewith).* 10.12 Employment Agreement between Paul Rampel and the Company effective January 1, 2002 (filed herewith).* 10.13 Promissory Note dated January 27 , 2001 of Paul Rampel in favor of Level 8 Systems, Inc. in the amount of $75,000 (incorporated by reference to exhibit 10.25 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.13A Stock Pledge Agreement dated January 27, 2001 between Paul Rampel and Level 8 Systems, Inc. (incorporated by reference to exhibit 10.25A to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.14 Level 8 Systems Inc. 1997 Stock Option Plan, as Amended and Restated (incorporated by reference to exhibit 10.2 to Level 8's Registration Statement of Form S-1/A, filed September 22, 2000, File No. 333-44588).* 10.14A Fifth Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (filed herewith).* 10.15 Level 8's February 2, 1995 Non-Qualified Option Plan (incorporated by reference to exhibit 10.1 to Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement on Form S-1, filed May 12, 1995, File No. 33-92230).*
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Exhibit Number Description - ------ ----------- 10.16 Template Software, Inc. 1992 Non-Statutory Stock Option Plan (incorporated by reference to an exhibit to Template Software, Inc.'s Registration Statement on Form S-1, filed on November 27, 1996, File No. 333-17063). 10.17 Template Software, Inc. 1992 Incentive Stock Option Plan (incorporated by reference to an exhibit to Template Software, Inc.'s Registration Statement on Form S-- 1, filed on November 27, 1996, File No. 333-17063). 10.18 Lease Agreement for Cary, N.C. offices, dated March 31, 1997, between Seer Technologies, Inc. and Regency Park Corporation (incorporated by reference to exhibit 10.47 to Seer Technologies, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 1997, File No. 000-26194). 10.18A Addendum #1 to the Lease Agreement for Cary, N.C. offices, dated July 6, 1998 (incorporated by reference to exhibit 10.58 to Seer Technology Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 1998, File No. 000-26194). 10.18B Amendment to Lease Agreement for Cary, N.C. offices, dated January 21, 1999 (incorporated by reference to exhibit 10.21A to Level 8's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). 10.19 Office Lease Agreement, dated April 25, 1996, between Template Software, Inc. and Vintage Park Two Limited Partnership (incorporated by reference to an exhibit to Template Software, Inc.'s Registration Statement on Form S-1, File No. 333-17063). 10.19A Amendment to Office Lease Agreement, dated August 18, 1997, between Template Software, Inc. and Vintage Park Two Limited Partnership (incorporated by reference to an exhibit to Template Software, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 000-21921). 10.20 Lease Agreement, dated December 25, 1992, between Seer Technologies, Inc. and Capital & Counties (London, England) (incorporated by reference to exhibit 10.22 to Seer Technologies, Inc.'s Registration Statement on Form S-1, file No. 33-92050). 10.21 Lease Agreement, dated October 8, 1997, between StarQuest Software, Inc. and Smith and Walters Inc. (incorporated by reference to exhibit 10.14 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 10.22 Lease Agreement, dated February 23, 2001, between Level 8 Systems, Inc. and Carnegie 214 Associates Limited Partnership (incorporated by reference to exhibit 10.15 to Level 8's Annual Report on Form 10-K, filed March 29, 2001). 16.1 Letter from PricewaterhouseCoopers LLP regarding change in certifying accountant, dated August 2, 2000 (incorporated by reference to Exhibit 16 to Level 8's Report on Form 8-K/A filed August 2, 2000, File No.000-26392). 21.1 List of subsidiaries of the Company (filed herewith). 23.1 Consent of Deloitte & Touche LLP (filed herewith). 23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
- -------- * Management contract or compensatory agreement. E-4 EX-3.2 3 dex32.txt BYLAWS OF LEVEL 8 SYSTEMS EXHIBIT 3.2 BYLAWS OF LEVEL 8 SYSTEMS, INC. (a Delaware corporation) as amended February 9, 2001 ARTICLE 1 OFFICES Level 8 Systems, Inc. (the "Corporation") shall at all times maintain a registered office in the State of Delaware and a registered agent at that address but may have other offices located in or outside of the State of Delaware as the Board of Directors may from time to time determine. ARTICLE 2 STOCKHOLDERS' MEETING 2.1 Places of Meetings. All meetings of stockholders shall be held at such place or places inside or outside of the State of Delaware as the Board of Directors may from time to time determine or as may be designated in the notice of meeting or waiver of notice thereof, subject to any provisions of the laws of the State of Delaware. 2.2 Annual Meetings. The annual meeting of stockholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as may be designated from time to time by the Board of Directors within four months after the end of each fiscal year of the Corporation. If the annual meeting is not held on the date designated, it may be held as soon thereafter as convenient and shall be called the annual meeting. Written notice of the time and place of the annual meeting shall be given by mail to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten (10) nor more than sixty (60) days prior to the scheduled date thereof, unless such notice is waived as provided by Article 9 of these Bylaws. 2.3 Special Meetings. Special meetings of stockholders may be called at any time by the Board of Directors and shall be called by the President or Secretary or an Assistant Secretary at the written request of the holders of at least 50% of the total number of shares of stock then outstanding and entitled to vote stating the specific purpose or purposes thereof. Written notice of the time, place and specific purposes of such meeting shall be given by mail to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten (10) nor more than sixty (60) days prior to the scheduled date thereof, unless such notice is waived as provided in Article 9 of these Bylaws. 2.4 Voting. At all meetings of stockholders, each stockholder entitled to vote on the record date, as determined under Section 6.3 of these Bylaws or, if not so determined, as prescribed under the laws of the State of Delaware, shall be entitled to one vote for each share of 1 stock standing of record in his name, subject to any restrictions or qualifications set forth in the Certificate of Incorporation or any amendment thereto. 2.5 Quorum. At any meeting of stockholders, a majority of the number of shares of stock outstanding and entitled to vote thereat, present in person or by proxy, shall constitute a quorum, but a small interest may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice, subject to such limitation as may be imposed under the laws of the State of Delaware. When a quorum is present at any meeting, a majority of the number of shares of stock entitled to vote present thereat shall decide any question brought before such meeting unless the question is one upon which a different vote is required by express provision of the laws of the State of Delaware, the Certificate of Incorporation or these Bylaws, in which case such express provision shall govern. 2.6 Action Without Meeting. Unless otherwise provided in the Certificate of Incorporation or any amendment thereto or by the laws of the State of Delaware, any action required by the laws of the State of Delaware to be taken at any annual or special meeting of stockholders, or any action which may otherwise be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote; if: (i) a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; and (ii) prompt notice of the taking of such action by less than unanimous written consent is given to the other stockholders to the extent and in the manner required by the laws of the State of Delaware. ARTICLE 3 BOARD OF DIRECTORS 3.1 Powers. The business and affairs of the Corporation shall be carried on by or under the direction of the Board of Directors, which shall have all the powers authorized by the laws of the State of Delaware, subject to such limitations as may be provided by the Certificate of Incorporation or these Bylaws. 3.2 Number and Qualification. A Board of Directors shall be elected at each annual meeting of the stockholders, each director so elected to serve until the election and qualifications of his successors or until his earlier resignation or removal as provided in these Bylaws. The initial number of directors shall be such as may be determined by the incorporator and thereafter the number of directors shall be not less than one (1) and not more than nine (10), the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the Board of Directors or by the affirmative vote of the holders of at least 50% of all outstanding shares of capital stock entitled to vote in the election of directors, voting together as a single class, as provided in the Certificate of Incorporation. Each director shall serve for a term of one (1) year or until the election and qualification of his successor or until his earlier resignation or removal as provided in the Certificate or Incorporation or these Bylaws. Any employee of the Corporation or a subsidiary of the Corporation who serves on the Board of Directors shall be deemed to have tendered his resignation from the Board of Directors 2 at the time such employee gives notice of termination of his employment with the Corporation or any subsidiary, as the case may be, or upon the termination of such employment for any reason, whichever occurs first; provided, however, that the Board of Directors, in its sole discretion, may decline to accept the resignation of the former employee from the Board of Directors if the former employee agrees to continue to serve on the Board of Directors notwithstanding the termination of his employment and if the Board of Directors determines that the continued service of the former employee on the Board of Directors is in the best interests of the Corporation and its stockholders. In case of an increase in the number of directors between elections by the stockholders, the additional directorships shall be considered vacancies and shall be filled in the manner prescribed in Article 5 of these Bylaws. Directors need not be stockholders, nor need they be residents of the State of Delaware. 3.3 Compensation. The Board of Directors, or a committee thereof, may from time to time by resolution authorize the payment of fees or other compensation to the directors for services as such to the Corporation, including, but not limited to, fees for attendance at all meetings of the Board of Directors or any committee thereof, and determine the amount of such fees and compensation. Directors shall in any event be paid their traveling expenses for attendance at all meetings of the Board or committee thereof. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor in amounts authorized or otherwise approved from time to time by the Board or any committee thereof. 3.4 Meetings and Quorum. Meetings of the Board of Directors may be held either inside or outside of the State of Delaware. A quorum shall be one-half (1/2) of the then authorized number of directors, but not less than two (2) directors, provided, however, that if a Board of Directors consisting of one (1) director is authorized, then one (1) director shall constitute a quorum. The Board of Directors shall, at the close of each annual meeting of stockholders and without further notice other than these Bylaws, if a quorum of directors is then present or as soon thereafter as may be convenient, hold a regular meeting for the election of officers and the transaction of any other business. At such meeting they shall elect a President and a Secretary and such other officers as they deem proper. The Board of Directors may from time to time provide for the holding of regular meetings with or without notice and may fix the times and places at which such meetings are to be held. Meetings other than regular meetings may be called at any time by the President and must be called by the President or the Secretary or an Assistant Secretary upon the request of any director. Notice of each meeting, other than a regular meeting (unless required by, the Board of Directors), shall be given to each director by mailing the same to each director at his residence or business address at least two (2) days before the meeting or by delivering the same to him personally or by telephone or telegraph at least one (1) day before the meeting unless, in case of exigency, the President or the Secretary shall prescribe a shorter notice to be given personally or 3 by telephone, telegraph, cable or wireless to all or any one or more of the directors at their respective residences or places of business. Notice of any meeting shall state the time and place of such meeting, but need not state the purposes thereof unless otherwise required by the laws of the State of Delaware, the Certificate of Incorporation, the Bylaws or the Board of Directors. 3.5 Committee. The Board of Directors may, by resolution pass by a majority or the entire Board of Directors, provide for an Executive Committee of two or more Directors and shall elect the members thereof to serve at the pleasure of the Board of Directors and may designate one of such members to act as chairman. The Board of Directors may at any time change the membership of the Executive Committee, fill vacancies in it, designate alternate members to replace any absent or disqualified members at any meeting of such committee, or dissolve it. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise any or all of the powers of the Board of Directors in the management or direction of the business and affairs of the Corporation and under the Bylaws to the extent authorized by resolution adopted by a majority of the whole Board of Directors and to such limitations as may be imposed by the laws of the State of Delaware. The Executive Committee may determine its rules of procedure and the notice to be given of its meeting, and it may appoint such other committees and assistants as it shall from time to time deem necessary. A majority of the members of the Executive Committee shall constitute a quorum. The Board of Directors may by resolution provide for such other committees as it deems desirable and may discontinue the same at its pleasure. Each such committee shall have the powers to perform such duties, not inconsistent with law, as may be assigned to it by the Board. 3.6 Conference Telephone Meetings. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting by means of a conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. 3.7 Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. 4 ARTICLE 4 OFFICERS 4.1 Titles and Election. The officers of the Corporation shall be the President, the Secretary and the Treasurer, all of whom shall initially be elected as soon as convenient by the Board of Directors and thereafter, in the absence of earlier resignations or removals, shall be elected at the first meeting of the Board of Directors following each annual meeting of stockholders. Each officer shall hold office at the pleasure of the Board of Directors except as may otherwise be approved by the Board of Directors, or until his earlier resignation, removal under these Bylaws or other termination of his employment. Any person may hold more than one office if the duties can be consistently performed by the same person and to the extent permitted by the laws of the State of Delaware. The Board of Directors, in its discretion, may also at any time elect or appoint one or more Vice Presidents, a Chief Operating Officer and one or more Assistant Secretaries and such other officers as it may deem advisable, each of whom shall hold office at the pleasure of the Board of Directors, except as may otherwise be approved by the Board of Directors, or until his earlier resignation, removal or other termination of employment, and shall have such authority and shall perform such duties as may be prescribed or determined from time to time by the Board of Directors or, if not prescribed or determined by the Board of Directors, the Presidents or the then senior executive officer may prescribe or determine. The Board of Directors may require any officer or other employee or agent to give bond for the faithful performance of his duties in such form and with such sureties as the Board may require. 4.2 Duties. Subject to such extension, limitations, and other provisions as the Board of Directors may from time to time prescribe or determine, the following officers shall have the following powers and duties: (a) President. The President shall exercise the powers and authority and perform all of the duties commonly incident to his office, shall preside at all meetings of the stockholders and of the Board of Directors if he is a director, and shall perform such other duties as the Board of Directors shall specify from time to time. The President or a Vice President, unless some other person is thereunto specifically authorized by the Board of Directors, shall sign all certificates for shares, bonds, debentures, promissory notes, deeds and contracts of the Corporation. (b) Vice President. The Vice President or Vice Presidents shall perform such duties as may be assigned to them from time to time by the Board of Directors or by the President if the Board of Directors does not do so. In the absence or disability of the President, the Vice Presidents in order of seniority may, unless otherwise determined by the Board of Directors, exercise the powers and perform the duties pertaining to the office of President, except that if one or more Vice Presidents has been elected or appointed, the person holding such office in order of seniority shall exercise the powers and perform the duties of the office of President. (c) Secretary. The Secretary or in his absence an Assistant Secretary shall keep the minutes of all meetings of stockholders and of the Board of Directors and any 5 committee thereof, give and serve all notices, attend to such correspondence as may be assigned to him, keep in safe custody the seal of the Corporation, and affix such seal to all such instruments properly executed as may require it, shall perform all of the duties commonly incident to his office and shall have such other duties and powers as may be prescribed or determined from time to time by the Board of Directors or by the President if the Board of Directors does not do so. (d) Treasurer. The Treasurer or in his absence an Assistant Treasurer, subject to the order of the Board of Directors, shall have the care and custody of the monies, funds, securities, valuable papers and documents of the Corporation (other than his own bond, if any, which shall be in the custody of the President), and shall have, under the supervision of the Board of Directors, all the powers and duties commonly incident to his office. He shall deposit all funds of the Corporation in such bank or banks, trust company or trust companies, or with such firm or firms doing a banking business as may be designated by the Board of Directors or by the President if the Board of Directors does not do so. He may endorse for deposit or collection all checks, notes, and similar instruments payable to the Corporation or to its order. He shall keep accurate books of account of the Corporation's transactions, which shall be the property of the Corporation, and together with all of the property of the Corporation in his possession, shall be subject at all times to the inspection and control of the Board of Directors. The Treasurer shall be subject in every way to the order of the Board of Directors, and shall render to the Board of Directors and/or the President of the Corporation, whenever they may require it, an account of all his transactions and of the financial condition of the Corporation. In addition to the foregoing, the Treasurer shall have such duties as may be prescribed or determined from time to time by the Board of Directors or by the President if the Board of Directors does not do so. (e) Assistant Secretaries and Treasurers. Assistants to the Secretaries and Treasurers may be appointed by the President or elected by the Board of Directors and shall perform such duties and have such powers as shall be delegated to them by the President or the Board of Directors. 4.3 Delegation of Authority. The Board of Directors may at any time delegate the powers and duties of any officer for the time being to any other officer, director or employee. 4.4 Compensation. The compensation of the officers of the Corporation shall be fixed by the Board of Directors or a committee thereof, and the fact that any officer is a director shall not preclude him from receiving compensation or from voting upon the resolution providing the same. ARTICLE 5 RESIGNATIONS, VACANIES AND REMOVALS 5.1 Resignations. Any director or officer may resign at any time by giving written notice thereof to the Board of Directors, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof; 6 and unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective. 5.2 Vacancies. (a) Directors. Any vacancy in the Board of Directors caused by reason of death, incapacity, resignation, removal, increase in the authorized number of directors or otherwise, shall be filled by the vote of a majority of the Board of Directors. Any director so filling such a vacancy shall serve until the next annual meeting of stockholders and the election and qualification of his successor or until his earlier resignation or removal as provided in the Certificate of Incorporation or these Bylaws. (b) Officers. The Board of Directors may at any time or from time to time fill any vacancy among the officers of the Corporation. 5.3 Removals. (a) Directors. Except as may otherwise be provided by the General Corporation Law of Delaware, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. (b) Officers. Subject to the provisions of any validly existing agreement, the Board of Directors may at any meeting remove from any office any officer, with or without cause, and may appoint a successor; provided that if action is to be taken to remove the President, the notice of meeting or waiver of notice thereof shall state that one of the purposes of the meeting is to consider and take action on his removal. ARTICLE 6 CAPITAL STOCK 6.1 Certificates of Stock. Every stockholder shall be entitled to a certificate or certificates for shares of the capital stock of the Corporation in such form as may be prescribed or authorized by the Board of Directors, duly numbered and setting forth the number and kind of shares represented thereby. Such certificates shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer or by the Secretary or an Assistant Secretary. Any or all of such signatures may be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before the certificate has been issued, such certificate may nevertheless be issued and delivered by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.2 Transfer of Stock. Shares of the capital stock of the Corporation shall be transferable only upon the books of the Corporation upon the surrender of the certificate or 7 certificates properly assigned and endorsed for transfer. If the Corporation has a transfer agent or registrar acting on its behalf, the signature of any officer or representative thereof may be in facsimile. The Board of Directors may appoint a transfer agent and one or more co-transfer agents and a registrar and one or more co-registrars and may make or authorize such agents to make all such rules and regulations deemed expedient concerning the issue, transfer and registration of shares of stock. 6.3 Record Dates. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or to express consent to corporate action in writing without a meeting, or in order to make a determination of stockholders for any other proper purposes, the Corporation's stock transfer books shall not be closed, but a record date shall be set by the Board of Directors and, upon that date, the Corporation or its transfer agent shall take a record of the stockholders without actually closing the stock transfer books. Such record date shall not be more than sixty (60) days, nor less than ten (10) days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no such record date is fixed by the Board, the record date shall be that prescribed by the laws of the State of Delaware. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6.4 Lost Certificates. In case of loss or mutilation or destruction of a stock certificate, a duplicate certificate may be issued upon such terms as may be determined or authorized by the Board of Directors or the Executive Committee, or by the President if the Board of Directors or the Executive Committee does not do so. ARTICLE 7 FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC. 7.1 Fiscal Year. The fiscal year of the Corporation shall be the calendar year, unless otherwise fixed by resolution of the Board of Directors. 7.2 Bank Deposit, Checks, Etc. The funds of the Corporation shall be deposited in the name of the Corporation or of any division thereof in such banks or trust companies in the United States or elsewhere as may be designated from time to time by the Board of Directors or the Executive Committee, or by such officer or officers as the Board of Directors or the Executive Committee may authorize to make such designations. All checks, drafts or other orders for the withdrawal of funds from any bank account shall be signed by the President or such other person or persons as may be designated from time to 8 time by the Board of Directors or the Executive Committee. The signatures on checks, drafts or other orders for the withdrawal of funds may be in facsimile if authorized in the designation. ARTICLE 8 BOOKS AND RECORDS 8.1 Place of Keeping Books. The books and records of the Corporation may be kept outside of the State of Delaware. 8.2 Examination of Books. Except as may otherwise be provided by the laws of the State of Delaware, the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the power to determine from time to time whether and to what extent and at what times and places and under what conditions any of the accounts, records and books of the Corporation are to be open to the inspection of any stockholder. No stockholder shall have any right to inspect any account or book or document of the Corporation except as prescribed by law or authorized by express resolution of the stockholders or of the Board of Directors. ARTICLE 9 NOTICES 9.1 Requirements of Notice. Whenever notice is required to be given by statute, the Certificate of Incorporation or these Bylaws, it shall not mean personal notice unless so specified, but such notice may be given in writing by depositing the same in a post office, letter box, or mail chute postage prepaid and addressed to the person to whom such notice is directed at the address of such person on the records of the Corporation, and such notice shall be deemed given at the time when the same shall be thus mailed. 9.2 Waivers. Any stockholder, director or officer may, in writing or by telegram or cable, at any time waive any notice or other formality required by statute, the Certificate of Incorporation or these Bylaws. Such waiver of notice, whether given before or after any meeting or action, shall be deemed equivalent to notice. Presence of a stockholder either in person or by proxy at any meeting of stockholders and presence of any director at any meeting of the Board of Directors shall constitute a waiver of such notice as may be required by any statute, the Certificate of Incorporation or these Bylaws. ARTICLE 10 Seal The corporate seal of the Corporation shall be in such form as the Board of Directors shall determine from time to time and may consist of a facsimile thereof or the word "SEAL" enclosed in parentheses. 9 ARTICLE 11 POWERS OF ATTORNEY The Board of Directors or the Executive Committee may authorize one or more of the officers of the Corporation to execute powers of attorney delegating to named representatives or agents power to represent or act on behalf of the Corporation, with or without power of substitution. In the absence of any action by the Board of Directors or the Executive Committee, any officer of the Corporation may execute, for and on behalf of the Corporation, waivers of notice of meetings of stockholders and proxies, or may vote shares directly, for such meetings of any company in which the Corporation may hold voting securities. ARTICLE 12 INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES The Corporation shall indemnify its directors, officers and employees to the extent provided in the Corporation's Certificate of Incorporation. ARTICLE 13 AMENDMENTS Except as provided otherwise by the laws of the State of Delaware, the Certificate of Incorporation or elsewhere in these Bylaws, these Bylaws may be amended or repealed either: (a) at any meeting of stockholders at which a quorum is present by vote of a majority of the number of shares of stock entitled to vote present in person or by proxy at such meeting; or (b) at any meeting of the Board of Directors by a majority vote of the directors then in office; provided that the notice of such meeting of stockholders or directors or waiver of notice thereof contains a statement of the substance of the proposed amendment or repeal. ARTICLE 14 AGREEMENT AMONG STOCKHOLDERS If any provision of these Bylaws shall be inconsistent or in conflict with any written agreement among the stockholders of the Corporation, the applicable provisions of such agreement shall control and take precedence over the terms of these Bylaws notwithstanding any provision of these Bylaws. 10 EX-10.5 4 dex105.txt PROMISSORY NOTE OF LEVEL 8 SYSTEMS EXHIBIT 10.5 This Note supersedes and replaces that certain Promissory Note dated March 28, 2001 in the amount of $15,000,000.00 executed by the Borrower in favor of the Bank, but does not extinguish the indebtedness evidenced thereby. BANK HAPOALIM PROMISSORY NOTE U.S. $3,000,000.00 ------------------------------------------------------------------------- as of September 28, 2001 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 Three 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 ; ------------------------ (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 ______________, 20__. 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 ______________, 20__. (d) |X| In accordance with the attached Rider, but in any event no later than November 15, 2003. 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: 8000 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/ John Broderick ------------------------------------------ Print name: John Broderick ---------------------------------------------- Title or capacity: Chief Financial Officer --------------------------------------- (if signing on behalf of Borrower) (Signature) By: ------------------------------------------ Print Name: ---------------------------------------------- Title or capacity: --------------------------------------- (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 to 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 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, 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 Hapaolim 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 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 Obligation. 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. EX-10.10 5 dex1010.txt EMPLOYMENT AGREEMENT, ANTHONY PIZI EXHIBIT 10.10 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the "Agreement") is made effective this 1st day of January, 2002, by and between LEVEL 8 SYSTEMS, INC., a Delaware corporation (the "Company"), and Anthony Pizi, a resident of the State of New Jersey (the "Employee"). In consideration of the mutual covenants, promises and conditions set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Employee and Employee hereby ---------- accepts such employment upon the terms and conditions set forth in this Agreement. 2. Duties of Employee. Employee's title will be Chief Executive Officer ------------------ and Chief Technology Officer. Employee will be based in New Jersey. Employee agrees to perform and discharge such other duties as may be assigned to Employee from time to time by the Company to the reasonable satisfaction of the Company, and such duties will be consistent with those duties regularly and customarily assigned by the Company to the position of Chief Executive Officer and Chief Technology Officer. In addition, Employee shall serve as Chairman of the Board of Directors so long as he is elected to such post by the Board of Directors according to the By-Laws of the Company. Employee also agrees to comply with all of the Company's policies, standards and regulations and to follow the instructions and directives as promulgated by the Board of Directors of the Company. Employee will devote Employee's full professional and business-related time, skills and best efforts to such duties and will not, during the term of this Agreement, be engaged (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage, without the prior written consent of the Board of Directors of the Company. This Section will not be construed to prevent Employee from (a) investing personal assets in businesses which do not compete with the Company in such form or manner that will not require any services on the part of Employee in the operation or the affairs of the companies in which such investments are made and in which Employee's participation is solely that of an investor; (b) purchasing securities in any corporation whose securities are listed on a national securities exchange or regularly traded in the over-the-counter market, provided that Employee at no time owns, directly or indirectly, in excess of one percent (1%) of the outstanding stock of any class of any such corporation engaged in a business competitive with that of the Company; or (c) participating in conferences, preparing and publishing papers or books, teaching or joining or participating in any professional associations or trade group. 3. Term. The term of this Agreement will be at-will, and can be ---- terminated by either party at any time, with or without cause, subject to the provisions of Section 4 of this Agreement. 4. Termination. ----------- (a) Termination by Company for Cause. The Company may terminate -------------------------------- this Agreement and all of its obligations hereunder immediately, including the obligation to pay Employee severance, vacation pay or any further benefits or remuneration, if any of the following events occur: (i) Employee materially breaches any of the terms or conditions set forth in this Agreement and fails to cure such breach within ten (10) days after Employee's receipt from the Company of written notice of such breach (notwithstanding the foregoing, no cure period shall be applicable to breaches by Employee of Sections 6, 7 or 8 of this Agreement); (ii) Employee commits any other act materially detrimental to the business or reputation of the Company; (iii) Employee engages in dishonest or illegal activities or commits or is convicted of any crime involving fraud, deceit or moral turpitude; or (iv) Employee dies or becomes mentally or physically incapacitated or disabled so as to be unable to perform Employee's duties under this Agreement even with a reasonable accommodation. Without limiting the generality of the foregoing, Employee's inability adequately to perform services under this Agreement for a period of sixty (60) consecutive days will be conclusive evidence of such mental or physical incapacity or disability, unless such inability adequately to perform services under this Agreement is pursuant to a mental or physical incapacity or disability covered by the Family Medical Leave Act, in which case such sixty (60) day period shall be extended to a one hundred and twenty (120) day period. (b) Termination by Company Without Cause. The Company may ------------------------------------ terminate Employee's employment pursuant to this Agreement for reasons other than those stated in Section 4(a) upon at least thirty (30) days' prior written notice to Employee. In the event Employee's employment with the Company is terminated by the Company without cause, the Company shall be obligated to pay Employee a lump sum severance payment equal to one (1) year of Employee's then base salary payable within thirty (30) days of the date of termination. In addition, all Employee's then outstanding but unvested stock options shall vest one hundred percent (100%). Other than the severance payment and vesting of outstanding options set forth in this Section 4(b), Employee will be entitled to receive no further remuneration and will not be entitled to participate in any Company benefit programs following his termination by the Company, whether such termination is with or without cause. Furthermore, should Employee's employment with the Company be terminated without cause, Employee shall be entitled to an award of 200,000 shares of the Company's Common Stock. Employee shall not be entitled 2 to any further remuneration of any kind whatsoever for his termination without cause. (c) Termination by Employee for Cause. In the event there occurs --------------------------------- a substantial change in the Employee's job duties, there is a decrease in or a failure to provide the compensation or vested benefits under this Agreement or there is a Change in Control (as defined below) of the Company, Employee shall have the right to resign his employment and will be entitled to receive a severance payment equal to an award of 200,000 shares of the Company's common stock. For avoidance of doubt, this award shall be in lieu of the 200,000 common stock shares awarded Employee under Section 4(b) above. In addition, all Employee's then outstanding but unvested stock options shall vest one hundred percent (100%). Employee shall have thirty (30) days from the date written notice is given to Employee about either (a) a change in his duties or (b) the announcement and closing of a transaction resulting in a Change in Control of the Company to resign or this Section 4(c) shall not apply. In the event Employee resigns from the Company for any other reason, Employee will not be entitled to receive or accrue any further Company benefits or other remuneration under this Agreement, and Employee specifically agrees that he will not be entitled to receive any severance pay. For purposes of this Section 4, a Change in Control shall be deemed to have occurred if any of the following occur: (i) the merger of consolidation of the Company with or into another unaffiliated entity, or the merger of another unaffiliated entity into the Company or another subsidiary thereof with the effect that immediately after such transaction the stockholders of the Company immediately prior to such transaction hold less than fifty percent (50%) of the total voting power of all securities generally entitled to vote in the election of directors, managers or trustees of the entity surviving such merger or consolidation; (ii) the sale or transfer of more than fifty-one percent (51%) of the Company's then outstanding voting stock (other than a restructuring event which results in the continuation of the Company's business by an affiliated entity) to unaffiliated person or group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended); or (iii) the adoption by the stockholders of the Company of a plan relating to the liquidation or dissolution of the Company. 5. Compensation and Benefits. ------------------------- 3 (a) Annual Salary. During the term of this Agreement and for all ------------- services rendered by Employee under this Agreement, the Company will pay Employee a base salary of Three Hundred Thousand Dollars ($300,000.00) per annum in equal bi-monthly installments. Such annual salary will be subject to adjustments by any increases given in the normal course of business. (b) Incentive Compensation. Employee shall be eligible to receive ---------------------- incentive compensation in the form of a cash bonus equal to One Hundred Fifty Thousand Dollars ($150,000.00) upon the Company reaching sales goals for the calendar year as set forth in the operating plan for the Company which was approved by the Board of Directors. Said bonus will be pro-rated and payable quarterly. (c) Stock Options. On the 1st day of January, 2002, the ------------- Company will issue to Employee, incentive stock options to purchase three hundred thousand (300,000) shares of Level 8 Systems, Inc. common stock pursuant to the terms and conditions of the Level 8 Systems, Inc. Stock Option Plan ("Stock Option Plan"), as amended. Such options will vest at the rate of thirty-three and one-third percent (33.33%) per year for a three-year period beginning on the first day after the common stock of the Company reaches three dollars and 50/100 ($3.50) as quoted on the Nasdaq market, or such other public securities market as the company may be a member of at the time. Employee shall be considered for additional grants of options to purchase shares of Level 8 Systems, Inc. common stock in a manner which is consistent with other senior officers of the Company. However, nothing in this Agreement shall give rise to a contractual right to Employee to receive grants of additional stock options. Further, the Company has no obligation to Employee to create parity with any other Company executives with respect to any options granted to such other executives. 6. Vacation. Employee shall be eligible for four (4) weeks of paid --------- vacation annually, provided that such vacation is scheduled at such times that do not interfere with the Company's legitimate business needs. 7. Other Benefits. Employee will be entitled to such fringe benefits as -------------- may be provided from time-to-time by the Company to its employees, including, but not limited to, group health insurance, life and disability insurance, and any other fringe benefits now or hereafter provided by the Company to its employees, if and when Employee meets the eligibility requirements for any such benefit. The Company reserves the right to change or discontinue any employee benefit plans or programs now being offered to its employees; provided, however, that all benefits provided for employees of the same position and status as Employee will be provided to Employee on an equal basis. 8. Business Expenses. Employee will be reimbursed for all reasonable ----------------- expenses incurred in the discharge of Employee's duties under this Agreement pursuant to the Company's standard reimbursement policies. 4 9. Withholding. The Company will deduct and withhold from the ----------- payments made to Employee under this Agreement, state and federal income taxes, FICA and other amounts normally withheld from compensation due employees. 10. Non-Disclosure of Proprietary Information. Employee recognizes and ----------------------------------------- acknowledges that the Trade Secrets (as defined below)and Confidential Information (as defined below) of the Company and its affiliates and all physical embodiments thereof (as they may exist from time-to-time, collectively, the "Proprietary Information") are valuable, special and unique assets of the Company's and its affiliates' businesses. Employee further acknowledges that access to such Proprietary Information is essential to the performance of Employee's duties under this Agreement. Therefore, in order to obtain access to such Proprietary Information, Employee agrees that, except with respect to those duties assigned to him by the Company, Employee shall hold in confidence all Proprietary Information and will not reproduce, use, distribute, disclose, publish or otherwise disseminate any Proprietary Information, in whole or in part, and will take no action causing, or fail to take any action necessary to prevent causing, any Proprietary Information to lose its character as Proprietary Information, nor will Employee make use of any such information for Employee's own purposes or for the benefit of any person, firm, corporation, association or other entity (except the Company) under any circumstances. For purposes of this Agreement, the term "Trade Secrets" means information, including, but not limited to, any technical or nontechnical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers, or other information similar to any of the foregoing, which derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use. For purposes of this Agreement, the term "Trade Secrets" does not include information that Employee can show by competent proof (i) was known to Employee and reduced to writing prior to disclosure by the Company (but only if Employee promptly notifies the Company of Employee's prior knowledge); (ii) was generally known to the public at the time the Company disclosed the information to Employee; (iii) became generally known to the public after disclosure by the Company through no act or omission of Employee; or (iv) was disclosed to Employee by a third party having a bona fide right both to possess the information and to disclose the information to Employee. The term "Confidential Information" means any data or information of the Company, other than trade secrets, which is valuable to the Company and not generally known to competitors of the Company. The provisions of this Section 6 will apply to Trade Secrets for so long as such information remains a trade secret and to Confidential Information during Employee's employment with the Company and for a period of two (2) years following any termination of Employee's employment with the Company for whatever reason. 11. Non-Solicitation Covenants. Employee agrees that during Employee's --------------------------- employment by the Company and for a period of one (1) year following the termination of Employee's 5 employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of or on behalf of any other individual or entity, divert, solicit or attempt to divert or solicit any individual or entity (i) who is a client of the Company at any time during the six (6)-month period prior to Employee's termination of employment with the Company ("Client"), or was actively sought by the Company as a prospective client, and (ii) with whom Employee had material contact while employed by the Company to provide similar services or products as such provided by Employee for the Company to such Clients or prospects. Employee further agrees and represents that during Employee's employment by the Company and for a period of one (1) year following any termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of, or on behalf of any other individual or entity, divert, solicit or hire away, or attempt to divert, solicit or hire away, to or for any individual or entity which is engaged in providing similar services or products to that provided by the Company, any person employed by the Company for whom Employee had supervisory responsibility or with whom Employee had material contact while employed by the Company, whether or not such employee is a full-time employee or temporary employee of the Company, whether or not such employee is employed pursuant to written agreement and whether or not such employee is employed for a determined period or at-will. For purposes of this Agreement, "material contact" exists between Employee and a Client or potential Client when (1) Employee established and/or nurtured the Client or potential Client; (2) the Client or potential Client and Employee interacted to further a business relationship or contract with the Company; (3) Employee had access to confidential information and/or marketing strategies or programs regarding the Client or potential Client; and/or (4) Employee learned of the Client or potential Client through the efforts of the Company providing Employee with confidential Client information, including but not limited to the Client's identify, for purposes of furthering a business relationship. 12. Existing Restrictive Covenants. Except as provided in Exhibit B, ------------------------------ Employee has not entered into any agreement with any employer or former employer (a) to keep in confidence any confidential information or (b) to not compete with any former employer. Employee represents and warrants that Employee's employment with the Company does not and will not breach any agreement which Employee has with any former employer to keep in confidence confidential information or not to compete with any such former employer. Employee will not disclose to the Company or use on its behalf any confidential information of any other party required to be kept confidential by Employee. 13. Return of Proprietary Information. Employee acknowledges that as a --------------------------------- result of Employee's employment with the Company, Employee may come into the possession and control of Proprietary Information, such as proprietary documents, drawings, specifications, manuals, notes, computer programs, or other proprietary material. Employee acknowledges, warrants and agrees that Employee will return to the Company all such items and any copies or excerpts thereof, and any other properties, files or documents obtained as a result of Employee's employment with the Company, immediately upon the termination of Employee's employment with the Company. 6 14. Proprietary Rights. During the course of Employee's employment with ------------------- the Company, Employee may make, develop or conceive of useful processes, machines, compositions of matter, computer software, algorithms, works of authorship expressing such algorithm, or any other discovery, idea, concept, document or improvement which relates to or is useful to the Company's Business (the "Inventions"), whether or not subject to copyright or patent protection, and which may or may not be considered Proprietary Information. Employee acknowledges that all such Inventions will be "works made for hire" under United States copyright law and will remain the sole and exclusive property of the Company. Employee also hereby assigns and agrees to assign to the Company, in perpetuity, all right, title and interest Employee may have in and to such Inventions, including without limitation, all copyrights, and the right to apply for any form of patent, utility model, industrial design or similar proprietary right recognized by any state, country or jurisdiction. Employee further agrees, at the Company's request and expense, to do all things and sign all documents or instruments necessary, in the opinion of the Company, to eliminate any ambiguity as to the ownership of, and rights of the Company to, such Inventions, including filing copyright and patent registrations and defending and enforcing in litigation or otherwise all such rights. Employee will not be obligated to assign to the Company any Invention made by Employee while in the Company's employ which does not relate to any business or activity in which the Company is or may reasonably be expected to become engaged, except that Employee is so obligated if the same relates to or is based on Proprietary Information to which Employee will have had access during and by virtue of Employee's employment or which arises out of work assigned to Employee by the Company. Employee will not be obligated to assign any Invention which may be wholly conceived by Employee after Employee leaves the employ of the Company, except that Employee is so obligated if such Invention involves the utilization of Proprietary Information obtained while in the employ of the Company. Employee is not obligated to assign any Invention that relates to or would be useful in any business or activities in which the Company is engaged if such Invention was conceived and reduced to practice by Employee prior to Employee's employment with the Company. Employee agrees that any such Invention is set forth on Exhibit "A" to this Agreement. 15. Remedies. Employee agrees and acknowledges that the violation of any of -------- the covenants or agreements contained in Sections 6, 7, and 10 of this Agreement would cause irreparable injury to the Company, that the remedy at law for any such violation or threatened violation thereof would be inadequate, and that the Company will be entitled, in addition to any other remedy, to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages or posting a bond. 16. Severability. In case one or more of the provisions contained in ------------ this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, the parties agree that it is their intent that the same will not affect any other provision in this Agreement, and this Agreement will be construed as if such invalid or illegal or unenforceable provision had 7 never been contained herein. It is the intent of the parties that this Agreement be enforced to the maximum extent permitted by law. 17. Entire Agreement. This Agreement embodies the entire agreement of the ---------------- parties relating to the subject matter of this Agreement and supersedes all prior agreements, oral or written, regarding the subject matter hereof. No amendment or modification of this Agreement will be valid or binding upon the parties unless made in writing and signed by the parties. 18. Governing Law. This Agreement is entered into and will be interpreted ------------- and enforced pursuant to the laws of the State of New Jersey. The parties hereto hereby agree that the appropriate forum and venue for any disputes between any of the parties hereto arising out of this Agreement shall be any federal court in the state where the Employee has his principal place of residence and each of the parties hereto hereby submits to the personal jurisdiction of any such court. The foregoing shall not limit the rights of any party to obtain execution of judgment in any other jurisdiction. The parties further agree, to the extent permitted by law, that a final and unappealable judgment against either of them in any action or proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified exemplified copy of which shall be conclusive evidence of the fact and amount of such judgment. 19. Surviving Terms. Sections 4, 6, 7, 10, 11 and 14 of this Agreement --------------- shall survive termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: EMPLOYEE: LEVEL 8 SYSTEMS, INC. By: --------------------------------- -------------------------------------- Name: Anthony Pizi -------------------------------- Title: ------------------------------- 8 EXHIBIT A INVENTIONS ---------- Employee represents that there are no Inventions. ------------------------ Employee Initials 9 EXHIBIT B EXISTING RESTRICTIVE COVENANTS ------------------------------ 10 EX-10.11 6 dex1011.txt EMPLOYMENT AGREEMENT, JOHN BRODERICK EXHIBIT 10.11 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the "Agreement") is made effective the 1st day of January, 2002, by and between LEVEL 8 SYSTEMS, INC., a Delaware corporation (the "Company"), and John P. Broderick, a resident of the New Jersey (the "Employee"). In consideration of the mutual covenants, promises and conditions set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Employee and Employee hereby ---------- accepts such employment upon the terms and conditions set forth in this Agreement. 2. Duties of Employee. Employee's title will be Chief Financial Officer ------------------ and Secretary and Employee will report directly to the President of the Company. Employee will be based in New Jersey, but will travel to the Cary, North Carolina office as often as the job requirements dictate. Employee agrees to perform and discharge such other duties as may be assigned to Employee from time to time by the Company to the reasonable satisfaction of the Company, and such duties will be consistent with those duties regularly and customarily assigned by the Company to the position of Chief Financial Officer and Secretary. Employee agrees to comply with all of the Company's policies, standards and regulations and to follow the instructions and directives as promulgated by the President of the Company. Employee will devote Employee's full professional and business-related time, skills and best efforts to such duties and will not, during the term of this Agreement, be engaged (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage, without the prior written consent of the President of the Company. This Section will not be construed to prevent Employee from (a) investing personal assets in businesses which do not compete with the Company in such form or manner that will not require any services on the part of Employee in the operation or the affairs of the companies in which such investments are made and in which Employee's participation is solely that of an investor; (b) purchasing securities in any corporation whose securities are listed on a national securities exchange or regularly traded in the over-the-counter market, provided that Employee at no time owns, directly or indirectly, in excess of one percent (1%) of the outstanding stock of any class of any such corporation engaged in a business competitive with that of the Company; or (c) participating in conferences, preparing and publishing papers or books, teaching or joining or participating in any professional associations or trade group, so long as the President of the Company approves such participation, preparation and publication or teaching prior to Employee's engaging therein. 3. Term. The term of this Agreement will be at-will, and can be ---- terminated by either party at any time, with or without cause, subject to the provisions of Section 4 of this Agreement. 4. Termination. ----------- (a) Termination by Company for Cause. The Company may terminate -------------------------------- this Agreement and all of its obligations hereunder immediately, including the obligation to pay Employee severance, vacation pay or any further benefits or remuneration, if any of the following events occur: (i) Employee materially breaches any of the terms or conditions set forth in this Agreement and fails to cure such breach within ten (10) days after Employee's receipt from the Company of written notice of such breach (notwithstanding the foregoing, no cure period shall be applicable to breaches by Employee of Sections 6, 7 or 8 of this Agreement); (ii) Employee commits any other act materially detrimental to the business or reputation of the Company; (iii) Employee engages in dishonest or illegal activities or commits or is convicted of any crime involving fraud, deceit or moral turpitude; or (iv) Employee dies or becomes mentally or physically incapacitated or disabled so as to be unable to perform Employee's duties under this Agreement even with a reasonable accommodation. Without limiting the generality of the foregoing, Employee's inability adequately to perform services under this Agreement for a period of sixty (60) consecutive days will be conclusive evidence of such mental or physical incapacity or disability, unless such inability adequately to perform services under this Agreement is pursuant to a mental or physical incapacity or disability covered by the Family Medical Leave Act, in which case such sixty (60) day period shall be extended to a one hundred and twenty (120) day period. (b) Termination by Company Without Cause. The Company may ------------------------------------ terminate Employee's employment pursuant to this Agreement for reasons other than those stated in Section 4(a) upon at least thirty (30) days' prior written notice to Employee. In the event Employee's employment with the Company is terminated by the Company without cause, the Company shall be obligated to continue Employee's regular then current salary, less all legal deductions, for the equivalent of six (6) months, on the first payday following the termination of Employee. In addition, the Company shall continue Employee's medical, dental, vision, life insurance and long term disability benefits at employee rates for six (6) months, beginning on the day following the termination date. Employee contributions will be deducted with each paycheck. Other than the severance payment and continued benefits set forth in this Section 4(b), Employee will be entitled to receive no further remuneration and will not be entitled to participate in any Company benefit 2 programs following his termination by the Company, whether such termination is with or without cause. (c) Termination by Employee for Cause. In the event there occurs --------------------------------- a Change in Control (as defined below) of the Company, Employee shall have the right to resign his employment and will be entitled to a continuation of Employee's regular then current salary, less all legal deductions, for the equivalent of six (6) months, on the first payday following the termination of Employee and an additional severance payment of 50,000 shares of the Company's common stock. In addition, all Employee's then outstanding but unvested stock options shall vest one hundred percent (100%) and the Company shall continue Employee's medical, dental, vision, life insurance and long term disability benefits at employee rates for six (6) months, beginning on the day following the termination date. Employee contributions will be deducted with each paycheck. Employee shall have thirty (30) days from the date written notice is given to Employee about the announcement and closing of a transaction resulting in a Change in Control of the Company to resign or this Section 4(c) shall not apply. In the event Employee resigns from the Company for any other reason, Employee will not be entitled to receive or accrue any further Company benefits or other remuneration under this Agreement, and Employee specifically agrees that he will not be entitled to receive any severance pay. For purposes of this Section 4, a Change in Control shall be deemed to have occurred if any of the following occur: (i) the merger of consolidation of the Company with or into another unaffiliated entity, or the merger of another unaffiliated entity into the Company or another subsidiary thereof with the effect that immediately after such transaction the stockholders of the Company immediately prior to such transaction hold less than fifty percent (50%) of the total voting power of all securities generally entitled to vote in the election of directors, managers or trustees of the entity surviving such merger or consolidation; (ii) the sale or transfer of more than fifty-one percent (51%) of the Company's then outstanding voting stock (other than a restructuring event which results in the continuation of the Company's business by an affiliated entity) to unaffiliated person or group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended); or (iii) the adoption by the stockholders of the Company of a plan relating to the liquidation or dissolution of the Company. 5. Compensation and Benefits. ------------------------- 3 (a) Annual Salary. During the term of this Agreement and for all ------------- services rendered by Employee under this Agreement, the Company will pay Employee a base salary of Two Hundred Thousand Dollars ($200,000.00) per annum in equal bi-monthly installments. Such annual salary will be subject to adjustments by any increases given in the normal course of business. (b) Incentive Compensation. Employee shall be eligible to ---------------------- participate in any Company sponsored corporate bonus plans. 6. Vacation. Employee shall be eligible for four (4) weeks of paid --------- vacation annually, provided that such vacation is scheduled at such times that do not interfere with the Company's legitimate business needs. 7. Other Benefits. Employee will be entitled to such fringe benefits as -------------- may be provided from time-to-time by the Company to its employees, including, but not limited to, group health insurance, life and disability insurance, and any other fringe benefits now or hereafter provided by the Company to its employees, if and when Employee meets the eligibility requirements for any such benefit. The Company reserves the right to change or discontinue any employee benefit plans or programs now being offered to its employees; provided, however, that all benefits provided for employees of the same position and status as Employee will be provided to Employee on an equal basis. 8. Business Expenses. Employee will be reimbursed for all reasonable ------------------ expenses incurred in the discharge of Employee's duties under this Agreement pursuant to the Company's standard reimbursement policies. 9. Withholding. The Company will deduct and withhold from the ----------- payments made to Employee under this Agreement, state and federal income taxes, FICA and other amounts normally withheld from compensation due employees. 10. Non-Disclosure of Proprietary Information. Employee recognizes and ----------------------------------------- acknowledges that the Trade Secrets (as defined below) and Confidential Information (as defined below) of the Company and its affiliates and all physical embodiments thereof (as they may exist from time-to-time, collectively, the "Proprietary Information") are valuable, special and unique assets of the Company's and its affiliates' businesses. Employee further acknowledges that access to such Proprietary Information is essential to the performance of Employee's duties under this Agreement. Therefore, in order to obtain access to such Proprietary Information, Employee agrees that, except with respect to those duties assigned to him by the Company, Employee shall hold in confidence all Proprietary Information and will not reproduce, use, distribute, disclose, publish or otherwise disseminate any Proprietary Information, in whole or in part, and will take no action causing, or fail to take any action necessary to prevent causing, any Proprietary Information to lose its character as Proprietary Information, nor will Employee make use of any such information for Employee's own purposes or for the benefit of any person, 4 firm, corporation, association or other entity (except the Company) under any circumstances. For purposes of this Agreement, the term "Trade Secrets" means information, including, but not limited to, any technical or nontechnical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers, or other information similar to any of the foregoing, which derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use. For purposes of this Agreement, the term "Trade Secrets" does not include information that Employee can show by competent proof (i) was known to Employee and reduced to writing prior to disclosure by the Company (but only if Employee promptly notifies the Company of Employee's prior knowledge); (ii) was generally known to the public at the time the Company disclosed the information to Employee; (iii) became generally known to the public after disclosure by the Company through no act or omission of Employee; or (iv) was disclosed to Employee by a third party having a bona fide right both to possess the information and to disclose the information to Employee. The term "Confidential Information" means any data or information of the Company, other than trade secrets, which is valuable to the Company and not generally known to competitors of the Company. The provisions of this Section 6 will apply to Trade Secrets for so long as such information remains a trade secret and to Confidential Information during Employee's employment with the Company and for a period of two (2) years following any termination of Employee's employment with the Company for whatever reason. 11. Non-Solicitation Covenants. Employee agrees that during Employee's -------------------------- employment by the Company and for a period of one (1) year following the termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of or on behalf of any other individual or entity, divert, solicit or attempt to divert or solicit any individual or entity (i) who is a client of the Company at any time during the six (6)-month period prior to Employee's termination of employment with the Company ("Client"), or was actively sought by the Company as a prospective client, and (ii) with whom Employee had material contact while employed by the Company to provide similar services or products as such provided by Employee for the Company to such Clients or prospects. Employee further agrees and represents that during Employee's employment by the Company and for a period of one (1) year following any termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of, or on behalf of any other individual or entity, divert, solicit or hire away, or attempt to divert, solicit or hire away, to or for any individual or entity which is engaged in providing similar services or products to that provided by the Company, any person employed by the Company for whom Employee had supervisory responsibility or with whom Employee had material contact while employed by the Company, whether or not such employee is a full-time employee or temporary employee of the Company, whether or not such employee is employed pursuant to written agreement and whether or not such employee is employed for a determined period or at- 5 will. For purposes of this Agreement, "material contact" exists between Employee and a Client or potential Client when (1) Employee established and/or nurtured the Client or potential Client; (2) the Client or potential Client and Employee interacted to further a business relationship or contract with the Company; (3) Employee had access to confidential information and/or marketing strategies or programs regarding the Client or potential Client; and/or (4) Employee learned of the Client or potential Client through the efforts of the Company providing Employee with confidential Client information, including but not limited to the Client's identify, for purposes of furthering a business relationship. 12. Existing Restrictive Covenants. Except as provided in Exhibit B, ------------------------------ Employee has not entered into any agreement with any employer or former employer (a) to keep in confidence any confidential information or (b) to not compete with any former employer. Employee represents and warrants that Employee's employment with the Company does not and will not breach any agreement which Employee has with any former employer to keep in confidence confidential information or not to compete with any such former employer. Employee will not disclose to the Company or use on its behalf any confidential information of any other party required to be kept confidential by Employee. 13. Return of Proprietary Information. Employee acknowledges that as a --------------------------------- result of Employee's employment with the Company, Employee may come into the possession and control of Proprietary Information, such as proprietary documents, drawings, specifications, manuals, notes, computer programs, or other proprietary material. Employee acknowledges, warrants and agrees that Employee will return to the Company all such items and any copies or excerpts thereof, and any other properties, files or documents obtained as a result of Employee's employment with the Company, immediately upon the termination of Employee's employment with the Company. 14. Proprietary Rights. During the course of Employee's employment with ------------------ the Company, Employee may make, develop or conceive of useful processes, machines, compositions of matter, computer software, algorithms, works of authorship expressing such algorithm, or any other discovery, idea, concept, document or improvement which relates to or is useful to the Company's Business (the "Inventions"), whether or not subject to copyright or patent protection, and which may or may not be considered Proprietary Information. Employee acknowledges that all such Inventions will be "works made for hire" under United States copyright law and will remain the sole and exclusive property of the Company. Employee also hereby assigns and agrees to assign to the Company, in perpetuity, all right, title and interest Employee may have in and to such Inventions, including without limitation, all copyrights, and the right to apply for any form of patent, utility model, industrial design or similar proprietary right recognized by any state, country or jurisdiction. Employee further agrees, at the Company's request and expense, to do all things and sign all documents or instruments necessary, in the opinion of the Company, to eliminate any ambiguity as to the ownership of, and rights of the Company to, such Inventions, including filing copyright and patent registrations and defending and enforcing in litigation or otherwise all such rights. 6 Employee will not be obligated to assign to the Company any Invention made by Employee while in the Company's employ which does not relate to any business or activity in which the Company is or may reasonably be expected to become engaged, except that Employee is so obligated if the same relates to or is based on Proprietary Information to which Employee will have had access during and by virtue of Employee's employment or which arises out of work assigned to Employee by the Company. Employee will not be obligated to assign any Invention which may be wholly conceived by Employee after Employee leaves the employ of the Company, except that Employee is so obligated if such Invention involves the utilization of Proprietary Information obtained while in the employ of the Company. Employee is not obligated to assign any Invention that relates to or would be useful in any business or activities in which the Company is engaged if such Invention was conceived and reduced to practice by Employee prior to Employee's employment with the Company. Employee agrees that any such Invention is set forth on Exhibit "A" to this Agreement. 15. Remedies. Employee agrees and acknowledges that the violation of any of -------- the covenants or agreements contained in Sections 10, 11 and 14 of this Agreement would cause irreparable injury to the Company, that the remedy at law for any such violation or threatened violation thereof would be inadequate, and that the Company will be entitled, in addition to any other remedy, to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages or posting a bond. 16. Severability. In case one or more of the provisions contained in this ------------ Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, the parties agree that it is their intent that the same will not affect any other provision in this Agreement, and this Agreement will be construed as if such invalid or illegal or unenforceable provision had never been contained herein. It is the intent of the parties that this Agreement be enforced to the maximum extent permitted by law. 17. Entire Agreement. This Agreement embodies the entire agreement of the ---------------- parties relating to the subject matter of this Agreement and supersedes all prior agreements, oral or written, regarding the subject matter hereof. No amendment or modification of this Agreement will be valid or binding upon the parties unless made in writing and signed by the parties. 18. Governing Law. This Agreement is entered into and will be interpreted ------------- and enforced pursuant to the laws of the State of New Jersey. The parties hereto hereby agree that the appropriate forum and venue for any disputes between any of the parties hereto arising out of this Agreement shall be any federal court in the state where the Employee has his principal place of residence and each of the parties hereto hereby submits to the personal jurisdiction of any such court. The foregoing shall not limit the rights of any party to obtain execution of judgment in any other jurisdiction. The parties further agree, to the extent permitted by law, that a final and unappealable judgment against either of them in any action or proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a 7 certified exemplified copy of which shall be conclusive evidence of the fact and amount of such judgment. 19. Surviving Terms. Sections 4, 10, 11, 14, 15 and 18 of this Agreement --------------- shall survive termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: EMPLOYEE: LEVEL 8 SYSTEMS, INC. By: ------------------------------------- ----------------------------------- Name: John P. Broderick ----------------------------------- Title: --------------------------------- 8 EXHIBIT A INVENTIONS ---------- Employee represents that there are no Inventions. ----------------------------- Employee Initials 9 EXHIBIT B EXISTING RESTRICTIVE COVENANTS ------------------------------ 10 EX-10.12 7 dex1012.txt EMPLOYMENT AGREEMENT, PAUL RAMPEL EXHIBIT 10.12 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the "Agreement") is made effective this 1st day of January, 2002, by and between LEVEL 8 SYSTEMS, INC., a Delaware corporation (the "Company"), and Paul Rampel, a resident of the State of California (the "Employee"). In consideration of the mutual covenants, promises and conditions set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. The Company hereby employs Employee and Employee hereby ---------- accepts such employment upon the terms and conditions set forth in this Agreement. 2. Duties of Employee. Employee's title will be President and Employee ------------------ will report directly to the Chief Executive Officer of the Company. Employee will be based in California. Employee agrees to perform and discharge such other duties as may be assigned to Employee from time to time by the Company to the reasonable satisfaction of the Company, and such duties will be consistent with those duties regularly and customarily assigned by the Company to the position of President. Employee agrees to comply with all of the Company's policies, standards and regulations and to follow the instructions and directives as promulgated by the Chief Executive Officer of the Company. Employee will devote Employee's full professional and business-related time, skills and best efforts to such duties and will not, during the term of this Agreement, be engaged (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage, without the prior written consent of the Chief Executive Officer of the Company. This Section will not be construed to prevent Employee from (a) investing personal assets in businesses which do not compete with the Company in such form or manner that will not require any services on the part of Employee in the operation or the affairs of the companies in which such investments are made and in which Employee's participation is solely that of an investor; (b) purchasing securities in any corporation whose securities are listed on a national securities exchange or regularly traded in the over-the-counter market, provided that Employee at no time owns, directly or indirectly, in excess of one percent (1%) of the outstanding stock of any class of any such corporation engaged in a business competitive with that of the Company; or (c) participating in conferences, preparing and publishing papers or books, teaching or joining or participating in any professional associations or trade group, so long as the Chief Executive Officer of the Company approves such participation, preparation and publication or teaching prior to Employee's engaging therein. 3. Term. The term of this Agreement will be at-will, and can be ---- terminated by either party at any time, with or without cause, subject to the provisions of Section 4 of this Agreement. 4. Termination. ----------- (a) Termination by Company for Cause. The Company may terminate -------------------------------- this Agreement and all of its obligations hereunder immediately, including the obligation to pay Employee severance, vacation pay or any further benefits or remuneration, if any of the following events occur: (i) Employee materially breaches any of the terms or conditions set forth in this Agreement and fails to cure such breach within ten (10) days after Employee's receipt from the Company of written notice of such breach (notwithstanding the foregoing, no cure period shall be applicable to breaches by Employee of Sections 6, 7 or 8 of this Agreement); (ii) Employee commits any other act materially detrimental to the business or reputation of the Company; (iii) Employee engages in dishonest or illegal activities or commits or is convicted of any crime involving fraud, deceit or moral turpitude; or (iv) Employee dies or becomes mentally or physically incapacitated or disabled so as to be unable to perform Employee's duties under this Agreement even with a reasonable accommodation. Without limiting the generality of the foregoing, Employee's inability adequately to perform services under this Agreement for a period of sixty (60) consecutive days will be conclusive evidence of such mental or physical incapacity or disability, unless such inability adequately to perform services under this Agreement is pursuant to a mental or physical incapacity or disability covered by the Family Medical Leave Act, in which case such sixty (60) day period shall be extended to a one hundred and twenty (120) day period. (b) Termination by Company Without Cause. The Company may ------------------------------------ terminate Employee's employment pursuant to this Agreement for reasons other than those stated in Section 4(a) upon at least thirty (30) days' prior written notice to Employee. In the event Employee's employment with the Company is terminated by the Company without cause, the Company shall be obligated to pay Employee a lump sum severance payment equal to one (1) year of Employee's then base salary payable within thirty (30) days of the date of termination; an amount equal to the prorated bonus earned having received credit for bonus earnings up to the date of termination and Employee shall be entitled to an award of 100,000 shares of the Company's Common Stock. In addition, all Employee's then outstanding but unvested stock options shall vest one hundred percent (100%). Employee will have twelve (12) months from the date of termination to exercise his stock options. Other than the severance payments and vesting of outstanding options set forth in this Section 4(b), Employee will be entitled to receive no further remuneration and will not be entitled to participate in any Company benefit 2 programs following his termination by the Company, whether such termination is with or without cause. (c) Termination by Employee for Cause. In the event there --------------------------------- occurs a substantial change in the Employee's job duties, there is a decrease in or a failure to provide the compensation or vested benefits under this Agreement or there is a Change in Control (as defined below) of the Company, Employee shall have the right to resign his employment and will be entitled to receive a severance payment equal to one (1) year of Employee's then base salary payable within thirty (30) days of the date of termination; an amount equal to the prorated bonus earned having received credit for bonus earnings up to the date of termination , except if there is a failure to provide compensation or vested benefits in the event of insolvency by the Company, in which case no severance payment shall be made, but in any case, Employee shall receive an award of 100,000 shares of the Company's common stock. For avoidance of doubt, this award shall be in lieu of the 100,000 common stock shares awarded Employee under Section 4(b) above. In addition, all Employee's then outstanding but unvested stock options shall vest one hundred percent (100%). Except in the case of a Change in Control (as defined below), Employee will have twelve (12) months from the date of termination to exercise his stock options. Employee shall have thirty (30) days from the date written notice is given to Employee about either (a) a change in his duties or (b) the announcement and closing of a transaction resulting in a Change in Control of the Company to resign or this Section 4(c) shall not apply. In the event Employee resigns from the Company for any other reason, Employee will not be entitled to receive or accrue any further Company benefits or other remuneration under this Agreement, and Employee specifically agrees that he will not be entitled to receive any severance pay. For purposes of this Section 4, a Change in Control shall be deemed to have occurred if any of the following occur: (i) the merger of consolidation of the Company with or into another unaffiliated entity, or the merger of another unaffiliated entity into the Company or another subsidiary thereof with the effect that immediately after such transaction the stockholders of the Company immediately prior to such transaction hold less than fifty percent (50%) of the total voting power of all securities generally entitled to vote in the election of directors, managers or trustees of the entity surviving such merger or consolidation; (ii) the sale or transfer of more than fifty-one percent (51%) of the Company's then outstanding voting stock (other than a restructuring event which results in the continuation of the Company's business by an affiliated entity) to unaffiliated person or group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended); or 3 (iii) the adoption by the stockholders of the Company of a plan relating to the liquidation or dissolution of the Company. 5. Compensation and Benefits. ------------------------- (a) Annual Salary. During the term of this Agreement and for all ------------- services rendered by Employee under this Agreement, the Company will pay Employee a base salary of Two Hundred Thousand Dollars ($200,000.00) per annum in equal bi-monthly installments. Such annual salary will be subject to adjustments by any increases given in the normal course of business. (b) Incentive Compensation. Employee shall be eligible to receive ---------------------- incentive compensation in the form of a cash bonus equal to One Hundred Fifty Thousand Dollars ($150,000.00) upon the Company reaching anticipated operating income results as set forth in the operating plan for the Company subject to approval by the Board of Directors. (c) Repayment of Outstanding Note. Upon execution of the ----------------------------- Agreement, Employee shall surrender to Company fifteen thousand (15,000) shares of the Company's common stock as partial repayment for the outstanding loan with the Company evidenced by a Promissory Note and Stock Pledge Agreement. In addition, Employee shall pay to the Company an amount equal to Fifty Thousand Dollars ($50,000.00) payable in equal monthly installments of Five Thousand Dollars ($5,000.00), which amount shall be taken from employees paychecks through December 31, 2002. Upon receipt of the common stock and payment in full of the amount referenced in this paragraph, Level 8 will cancel the Promissory Note and Stock Pledge Agreement. If, prior to December 31, 2002 there occurs a Change in Control of the Company or in the event of insolvency, Employee shall be forgiven of the remaining payments from the date of closing of such transaction under this Section 5(c). 6. Vacation. Employee shall be eligible for four (4) weeks of paid --------- vacation annually, provided that such vacation is scheduled at such times that do not interfere with the Company's legitimate business needs. 7. Other Benefits. Employee will be entitled to such fringe benefits as -------------- may be provided from time-to-time by the Company to its employees, including, but not limited to, group health insurance, life and disability insurance, and any other fringe benefits now or hereafter provided by the Company to its employees, if and when Employee meets the eligibility requirements for any such benefit. The Company reserves the right to change or discontinue any employee benefit plans or programs now being offered to its employees; provided, however, that all benefits provided for employees of the same position and status as Employee will be provided to Employee on an equal basis. 4 8. Business Expenses. Employee will be reimbursed for all reasonable ----------------- expenses incurred in the discharge of Employee's duties under this Agreement pursuant to the Company's standard reimbursement policies. 9. Withholding. The Company will deduct and withhold from the ----------- payments made to Employee under this Agreement, state and federal income taxes, FICA and other amounts normally withheld from compensation due employees. 10. Non-Disclosure of Proprietary Information. Employee recognizes and ----------------------------------------- acknowledges that the Trade Secrets (as defined below) and Confidential Information (as defined below) of the Company and its affiliates and all physical embodiments thereof (as they may exist from time-to-time, collectively, the "Proprietary Information") are valuable, special and unique assets of the Company's and its affiliates' businesses. Employee further acknowledges that access to such Proprietary Information is essential to the performance of Employee's duties under this Agreement. Therefore, in order to obtain access to such Proprietary Information, Employee agrees that, except with respect to those duties assigned to him by the Company, Employee shall hold in confidence all Proprietary Information and will not reproduce, use, distribute, disclose, publish or otherwise disseminate any Proprietary Information, in whole or in part, and will take no action causing, or fail to take any action necessary to prevent causing, any Proprietary Information to lose its character as Proprietary Information, nor will Employee make use of any such information for Employee's own purposes or for the benefit of any person, firm, corporation, association or other entity (except the Company) under any circumstances. For purposes of this Agreement, the term "Trade Secrets" means information, including, but not limited to, any technical or nontechnical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers, or other information similar to any of the foregoing, which derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use. For purposes of this Agreement, the term "Trade Secrets" does not include information that Employee can show by competent proof (i) was known to Employee and reduced to writing prior to disclosure by the Company (but only if Employee promptly notifies the Company of Employee's prior knowledge); (ii) was generally known to the public at the time the Company disclosed the information to Employee; (iii) became generally known to the public after disclosure by the Company through no act or omission of Employee; or (iv) was disclosed to Employee by a third party having a bona fide right both to possess the information and to disclose the information to Employee. The term "Confidential Information" means any data or information of the Company, other than trade secrets, which is valuable to the Company and not generally known to competitors of the Company. The provisions of this Section 6 will apply to Trade Secrets for so long as such information remains a trade secret and to Confidential Information during Employee's 5 employment with the Company and for a period of two (2) years following any termination of Employee's employment with the Company for whatever reason. 11. Non-Solicitation Covenants. Employee agrees that during Employee's -------------------------- employment by the Company and for a period of one (1) year following the termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of or on behalf of any other individual or entity, divert, solicit or attempt to divert or solicit any individual or entity (i) who is a client of the Company at any time during the six (6)-month period prior to Employee's termination of employment with the Company ("Client"), or was actively sought by the Company as a prospective client, and (ii) with whom Employee had material contact while employed by the Company to provide similar services or products as such provided by Employee for the Company to such Clients or prospects. Employee further agrees and represents that during Employee's employment by the Company and for a period of one (1) year following any termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of, or on behalf of any other individual or entity, divert, solicit or hire away, or attempt to divert, solicit or hire away, to or for any individual or entity which is engaged in providing similar services or products to that provided by the Company, any person employed by the Company for whom Employee had supervisory responsibility or with whom Employee had material contact while employed by the Company, whether or not such employee is a full-time employee or temporary employee of the Company, whether or not such employee is employed pursuant to written agreement and whether or not such employee is employed for a determined period or at-will. For purposes of this Agreement, "material contact" exists between Employee and a Client or potential Client when (1) Employee established and/or nurtured the Client or potential Client; (2) the Client or potential Client and Employee interacted to further a business relationship or contract with the Company; (3) Employee had access to confidential information and/or marketing strategies or programs regarding the Client or potential Client; and/or (4) Employee learned of the Client or potential Client through the efforts of the Company providing Employee with confidential Client information, including but not limited to the Client's identify, for purposes of furthering a business relationship. 12. Existing Restrictive Covenants. Except as provided in Exhibit B, ------------------------------ Employee has not entered into any agreement with any employer or former employer (a) to keep in confidence any confidential information or (b) to not compete with any former employer. Employee represents and warrants that Employee's employment with the Company does not and will not breach any agreement which Employee has with any former employer to keep in confidence confidential information or not to compete with any such former employer. Employee will not disclose to the Company or use on its behalf any confidential information of any other party required to be kept confidential by Employee. 13. Return of Proprietary Information. Employee acknowledges that as --------------------------------- a result of Employee's employment with the Company, Employee may come into the possession and control of Proprietary Information, such as proprietary documents, drawings, specifications, manuals, notes, computer programs, or other proprietary material. Employee 6 acknowledges, warrants and agrees that Employee will return to the Company all such items and any copies or excerpts thereof, and any other properties, files or documents obtained as a result of Employee's employment with the Company, immediately upon the termination of Employee's employment with the Company. 14. Proprietary Rights. During the course of Employee's employment with ------------------ the Company, Employee may make, develop or conceive of useful processes, machines, compositions of matter, computer software, algorithms, works of authorship expressing such algorithm, or any other discovery, idea, concept, document or improvement which relates to or is useful to the Company's Business (the "Inventions"), whether or not subject to copyright or patent protection, and which may or may not be considered Proprietary Information. Employee acknowledges that all such Inventions will be "works made for hire" under United States copyright law and will remain the sole and exclusive property of the Company. Employee also hereby assigns and agrees to assign to the Company, in perpetuity, all right, title and interest Employee may have in and to such Inventions, including without limitation, all copyrights, and the right to apply for any form of patent, utility model, industrial design or similar proprietary right recognized by any state, country or jurisdiction. Employee further agrees, at the Company's request and expense, to do all things and sign all documents or instruments necessary, in the opinion of the Company, to eliminate any ambiguity as to the ownership of, and rights of the Company to, such Inventions, including filing copyright and patent registrations and defending and enforcing in litigation or otherwise all such rights. Employee will not be obligated to assign to the Company any Invention made by Employee while in the Company's employ which does not relate to any business or activity in which the Company is or may reasonably be expected to become engaged, except that Employee is so obligated if the same relates to or is based on Proprietary Information to which Employee will have had access during and by virtue of Employee's employment or which arises out of work assigned to Employee by the Company. Employee will not be obligated to assign any Invention which may be wholly conceived by Employee after Employee leaves the employ of the Company, except that Employee is so obligated if such Invention involves the utilization of Proprietary Information obtained while in the employ of the Company. Employee is not obligated to assign any Invention that relates to or would be useful in any business or activities in which the Company is engaged if such Invention was conceived and reduced to practice by Employee prior to Employee's employment with the Company. Employee agrees that any such Invention is set forth on Exhibit "A" to this Agreement. The provisions of this Section 14 will be construed in accordance will be construed in accordance with the provisions of Section 2870 of the California Labor Code. Section 2870(a) of the California Labor Code provides that: (a) any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that 7 either (1) relate at the time of the conception and reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) result from any work performed by the employee for the employer. 15. Remedies. Employee agrees and acknowledges that the violation of any of -------- the covenants or agreements contained in Sections 10, 11 and 14 of this Agreement would cause irreparable injury to the Company, that the remedy at law for any such violation or threatened violation thereof would be inadequate, and that the Company will be entitled, in addition to any other remedy, to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages or posting a bond. 16. Severability. In case one or more of the provisions contained in this ------------ Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, the parties agree that it is their intent that the same will not affect any other provision in this Agreement, and this Agreement will be construed as if such invalid or illegal or unenforceable provision had never been contained herein. It is the intent of the parties that this Agreement be enforced to the maximum extent permitted by law. 17. Entire Agreement. This Agreement embodies the entire agreement of the ---------------- parties relating to the subject matter of this Agreement and supersedes all prior agreements, oral or written, regarding the subject matter hereof, except for any earned but unpaid bonuses that remain from calendar year 2001 for which the parties agree as being due and payable. Specifically, both parties agree that Employee has earned and is due a minimum of $60,000 for calendar year 2001. No amendment or modification of this Agreement will be valid or binding upon the parties unless made in writing and signed by the parties. 18. Governing Law. This Agreement is entered into and will be ------------- interpreted and enforced pursuant to the laws of the State of California. The parties hereto hereby agree that the appropriate forum and venue for any disputes between any of the parties hereto arising out of this Agreement shall be any federal court in the state where the Employee has his principal place of residence and each of the parties hereto hereby submits to the personal jurisdiction of any such court. The foregoing shall not limit the rights of any party to obtain execution of judgment in any other jurisdiction. The parties further agree, to the extent permitted by law, that a final and unappealable judgment against either of them in any action or proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified exemplified copy of which shall be conclusive evidence of the fact and amount of such judgment. 19. Surviving Terms. Sections 4, 10, 11, 14, 15 and 18 of this Agreement --------------- shall survive termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. 8 COMPANY: EMPLOYEE: LEVEL 8 SYSTEMS, INC. By: ----------------------------------- --------------------------------- Name: Paul Rampel ---------------------------------- Title: -------------------------------- 9 EXHIBIT A INVENTIONS ----------- Employee represents that there are no Inventions. ------------------------------ Employee Initials 10 EXHIBIT B EXISTING RESTRICTIVE COVENANTS ------------------------------ 11 EX-10.14A 8 dex1014a.txt AMEND 5 TO 1997 STOCK OPTION PLAN EXHIBIT 10.14A FIFTH AMENDMENT TO THE LEVEL 8 SYSTEMS, INC. STOCK OPTION PLAN THIS FIFTH AMENDMENT is made as of the 22nd day of June 2001, by Level 8 Systems, Inc., a corporation organized and existing under the laws of the State of New York (hereinafter called the "Company"). W I T N E S S E T H: WHEREAS, the Company maintains the Level 8 Systems, Inc. 1997 Stock Option Plan (the "Plan"). WHEREAS, the Company wishes to amend the Plan to increase the number of shares reserved for issuance under the Plan. WHEREAS, the Company wishes to amend the Plan to increase the number of shares that each participant of the Plan may receive during the course of a fiscal year. WHEREAS, the Company now authorizes the Committee to issue at its discretion an award comprised of Company stock. NOW, THEREFORE, the Company does hereby amend the Plan, effective as of the 22nd day of June, 2001, as follows: 1. By deleting the third full sentence in Section 2.5 in its entirety and by substituting therefor the following: "Notwithstanding the foregoing, with respect to grants of Options or Awards to non-employee directors and any action hereunder relating to Options or Awards held by non-employee directors, the Committee shall mean the Board." 2. By deleting Section 2.7 in its entirety and by substituting therefor the following: "2.7 `Consultant' means any advisor or consultant to the Company or its Subsidiaries who is eligible pursuant to Article V to be granted Options or Awards under this Plan. The term `Consultant' shall also include any former advisor or consultant to the Company." 3. By deleting Section 2.10 in its entirety and by substituting therefor the following: "2.10 `Eligible Employee' shall mean the employees of the Company and its Subsidiaries who are eligible pursuant to Article V to be granted Options or Awards under this Plan." 4. By deleting Section 2.16 in its entirety and by substituting therefor the following: "2.16 `Participant' shall mean the following persons to whom an Option or Award has been granted pursuant to this Plan: Eligible Employees and Consultants of the Company or its Subsidiaries and non-employee directors of the Company." 5. By adding the following new Section 2.19A: "2.19A `Stock Award' or `Award' shall mean a stock award described in Article VIA." 6. By adding the following new Section 2.19B: "2.19B `Stock Award Agreement' shall mean an agreement between the Company and a Participant or other documentation evidencing a Stock Award." 7. By adding the following new Section 2.19C: "2.19C `Stock Award Program' shall mean a written program established by the Committee, pursuant to which Stock Awards are awarded under the Plan under uniform terms, conditions, and restrictions set forth in such written program." 8. By deleting Section 3.2 in its entirety and by substituting therefor the following: "3.2 Grants. The Committee shall have full authority to grant Stock Options or Stock Awards, pursuant to the terms of this Plan. In particular, the Committee shall have the authority: (a) to select the Eligible Employees, Consultants, and non-employee directors to whom Stock Options or Stock Awards may from time to time be granted hereunder; (b) to determine whether and to what extent Stock Options or Stock Awards are to be granted hereunder to one or more Eligible Employees, Consultants or non-employee directors; (c) to determine, in accordance with the terms of this Plan, the number of shares of Common Stock to be covered by each Stock Option or Stock Award granted to an Eligible Employee, Consultant or non-employee director; (d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Stock Option or Stock Award granted hereunder to an Eligible Employee, Consultant or non-employee director (including, but not limited to, the share price, any restriction or limitation, any vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof, and the shares of Common Stock relating thereto, based on such factors, if any, as the Committee shall determine, in its sole discretion); (e) to determine whether and under what circumstances a Stock Option may be settled in cash and/or Common Stock under Subsection 6.3(d); 2 (f) to determine whether, to what extent and under what circumstances to provide loans (which shall be on a recourse basis and shall bear a reasonable rate of interest) to Eligible Employees, Consultants or non-employee directors in order to exercise Options under the Plan; and (g) to determine whether to require Eligible Employees, Consultants or non-employee directors, as a condition of the granting of any Option or Award, to not sell or otherwise dispose of shares acquired pursuant to the exercise of an Option or Award for a period of time as determined by the Committee, in its sole discretion, following the date of the acquisition of such Option or Award." 9. By deleting Section 3.3 of the Plan in its entirety and by substituting therefor the following: "3.3 Guidelines. Subject to Article IX hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan and perform all acts, include the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of this Plan and any Option or Award granted under this Plan (and any agreements relating thereto); and to otherwise supervise the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to carry this Plan into effect, but only to the extent any such action would be permitted under the applicable provisions of Rule 16b-3b (if any) and the applicable provisions of Section 162(m) of the Code (if any). The Committee may adopt special guidelines and provisions for persons who are residing in, or subject to, the taxes of, countries other than the United States to comply with applicable tax and securities laws. If and solely to the extent applicable, this Plan is intended to comply with Rule 16b-3 and, only for purposes of any Option granted hereunder, Section 162m of the Code and shall be limited, construed and interpreted in a manner so as to comply therewith." 10. By amending Section 3.7(b) of the Plan by replacing the phrase "Stock Option" with the phrase "Stock Option or Stock Award" and by replacing the phrase "Stock Options" with the phrase "Stock Options or Stock Awards." 11. By deleting the first full sentence in Section 4.1(a) of the Plan and by substituting therefor the following: "The aggregate number of shares of Common Stock which may be issued under this Plan with respect to which Stock Options and Stock Awards may be granted shall not exceed 6,500,000 shares (subject to any increase or decrease pursuant to Section 4.2) which may be either authorized or unissued Common Stock or Common Stock held in or acquired for the treasury of the Company." 12. By deleting the first full sentence in Section 4.1(b) of the Plan and by substituting therefor the following: "The maximum number of shares of Common Stock subject to any Option which may be granted under this Plan to each Participant shall not exceed 500,000 shares (subject to any increase or decrease pursuant to Section 4.2) during each fiscal year of the Company." 3 13. By amending Section 4.2(a) by replacing the phrase "Options" with the phrase "Options or Awards." 14. By amending Article V of the Plan by replacing the phrase "Stock Options" with the phrase "Stock Options or Stock Awards." 15. By adding the following new Article VIA: "ARTICLE VIA STOCK AWARDS 6A.1 Terms and Conditions. (a) The number of shares of Common Stock as to which a Stock Award may be granted will be determined by the Committee in its sole discretion, subject to the provisions of Section 4.1 as to the total number of shares available for grants under the Plan. The Committee may require a payment from the Participant in an amount less than, equal to or greater than the aggregate Fair Market Value of the shares of Common Stock awarded determined at the date of grant in exchange for the grant of a Stock Award or may grant a Stock Award without the requirement of payment. (b) Each Stock Award will be evidenced by a Stock Award Agreement or Stock Award Program in such form and containing such terms, conditions and restrictions as the Committee may determine to be appropriate, including, without limitation, performance goals that must be achieved as a condition to vesting and other restrictions as the Committee may determine to be appropriate. Each Stock Award Agreement or Stock Award Program is subject to the terms of the Plan and any provisions contained in the Stock Award Agreement or Stock Award Program that are inconsistent with the Plan are null and void. The certificate representing shares of Common Stock subject to a Stock Award will bear evidence of any restrictions or conditions established by the Committee. (c) The date a Stock Award is granted will be the date on which the Committee has approved the terms and conditions of the Stock Award and has determined the recipient of the Stock Award and the number of shares covered by the Stock Award, and has taken all such other actions necessary to complete the grant of the Stock Award. (d) The terms of any Stock Award Agreement or Stock Award Program awarded to a Participant under the Plan may be modified with the consent of the Committee and the Participant. (e) Subsequent to the date of the grant of the Stock Award, the Committee has the power to permit, in its discretion, an acceleration of the expiration of an applicable restriction period with respect to any part of all of the shares awarded to a Participant. 4 6A.2 Termination of Employment. Any Award under this Plan to a Participant who has experienced a Termination of Relationship or Termination of Directorship may be cancelled, accelerated, paid or continued, as provided in the applicable Stock Award Agreement or the Stock Award Program, in the absence of such provision, as determined by the Committee." 16. By adding the following new Article VIB: "ARTICLE VIB RESTRICTIONS ON STOCK 6B.1 Escrow of Shares. Any certificates representing the shares of Common Stock issued under the Plan will be issued in the Participant's name, but, if the applicable Stock Award Agreement or Stock Award Program so provides, the shares of Common Stock will be held by a custodian designated by the Committee (the "Custodian"). Each applicable Stock Award Agreement or Stock Award Program so providing for transfer of shares of Common Stock to the Custodian must appoint the Custodian as the attorney-in-fact for the Participant for the term specified in the applicable Stock Award Agreement or Stock Award Program, with full power and authority in the Participant's name, place and stead to transfer, assign and convey to the Company any shares of Common Stock held by the Custodian for such Participant, if the Participant forfeits the shares under the terms of the applicable Stock Award Agreement or Stock Award Program. During the period that the Custodian holds the shares subject to this Section 6B.1, the Participant is entitled to all rights, except as provided in the applicable Stock Award Agreement or Stock Award Program, applicable to shares of Stock not so held. Any dividends declares on shares of Common Stock held by the Custodian must provide in the applicable Stock Award Agreement or Stock Award Program, to be paid directly to the Participant or, in the alternative, be retained by the Custodian or by the Company until the expiration of the term specified in the applicable Stock Award Agreement or Stock Award Program and shall then be delivered, together with any proceeds, with the shares of Common Stock to the Participant or to the Company, as applicable. 6B.2 Restrictions on Transfer. The Participant does not have the right to make or permit to exist any disposition of the shares of Common Stock issued pursuant to the Plan except as provided in the Plan or the applicable Stock Award Agreement or Stock Award Program. Any disposition of the shares of Common Stock issued under the Plan by the Participant not made in accordance with the Plan or the applicable Stock Award Agreement or Stock Award Program will be void. The Company will not recognize, or have the duty to recognize, any disposition not made in accordance with the Plan and the applicable Stock Award Agreement or Stock Award Program, and the shares so transferred will continue to be bound by the Plan and the applicable Stock Award Agreement or Stock Award Program." 17. By deleting Article VII in its entirety and by substituting therefore the following: "No Stock Option or Stock Award, to the extent such Stock Award is not vested, shall be Transferable by the Participant otherwise than by will or by the laws of descent and distribution. All Stock Options shall be exercisable, during the Participant's lifetime, only by the Participant. No Stock Option or Stock Award, to the extent such Stock Award is not vested, shall, except as otherwise specifically provided by law or herein, be Transferable in any manner, and any attempt to Transfer any such Option or such Award shall be void, and 5 no such Option or such Award shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such Option or such Award, nor shall it be subject to attachment or legal process for or against such person." 18. By adding the following new Section 8.1(c): "(c) In the event of a Change in Control of the Company (as defined below), except as otherwise provided by the Committee upon the grant of an Award, all Awards shall be and become fully vested." 19. By amending Section 9.1, Article XI, Article XII, and Article XIII by replacing the phrase "Option" with the phrase "Option or Award", by replacing the phrase "Options" with the phrase "Options or Awards, by replacing the phrase "Stock Options" with the phrase "Stock Options or Stock Awards", and by replacing the phrase "Alternative Option" with the phrase "Alternative Option or Alternative Award." IN WITNESS WHEREOF, the Company has caused this Fifth Amendment to be executed as of the day and year first above written. LEVEL 8 SYSTEMS, INC. By: /s/ John P. Broderick ---------------------------- Title: Corporate Secretary ------------------------- 6 EX-21.1 9 dex211.txt LIST OF SUBSIDIARIES Exhibit 21.1 LEVEL 8 SYSTEMS, INC. LIST OF SUBSIDIARIES BY JURISDICTION OF INCORPORATION All Companies are 100% owned unless otherwise noted. Australia: Level 8 Systems Australia Pty Limited (This subsidiary is in the process of being closed.) Barbados: Level 8 FSC, Inc. Benelux: Level 8 Benelux B.V. Canada: Level 8 Canada, Inc. Domestic Province: Ontario 3020126 Canada Inc. Domestic Province: Canada Denmark: Level 8 Denmark ApS (This subsidiary is in the process of being dissolved). France: Level 8 France S.A.R.L. Template Software S.A. Germany: Level 8 Europe (Deutschland) GmbH Template Software GmbH (This subsidiary is in the process of being dissolved). Template Software Holding GmbH (This subsidiary is in the process of being dissolved). Template Software Geschaftsfuhrungs GmbH (This subsidiary is in the process of being dissolved). Ireland: Level 8 Ireland Limited Italy: Level 8 Italia S.r.L. Mexico: Template Software de Mexico, S.A. de C.V. (This office is in the process of being closed.) Korea: Seer Korea Co., Limited (This office is in the process of being closed.) Sweden: Level 8 Systems Nordic AB ((This office is in the process of being closed.) Switzerland: Milestone Software AG (20% owned) United Kingdom: Level 8 Systems (U.K.) Limited Template Software, UK Limited United States: Parent Company: Level 8 Systems, Inc. State of Incorporation: Delaware Subsidiary: Level 8 Technologies, Inc. State of Incorporation: New York StarQuest Software, Inc. State of Incorporation: California Level 8 Worldwide Holdings Limited State of Incorporation: Delaware Cicero Technologies, Inc. State of Incorporation: Delaware Template Technologies, Inc. State of Incorporation: Delaware EX-23.1 10 dex231.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders Level 8 Systems, Inc.: Cary, North Carolina We consent to the incorporation by reference in the Level 8 Systems, Inc. Registration Statement Numbers 333-61494, 333-64858, 333-70596 and 333-64858 on Form S-3 and Registration Numbers 333-44598, 333-64637, 333-33122 and 333-86303 on Form S-8 of our report dated March 25, 2002 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern), appearing in this Annual Report on Form 10-K of Level 8 Systems, Inc. for the year ended December 31, 2001. /s/ Deloitte & Touche, LLP Raleigh, North Carolina April 1, 2002 EX-23.2 11 dex232.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-61494 and 333-64858) and Form S-8 (Nos. 333-33122, 333-44598, 333-64637 and 333-86303) of Level 8 Systems, Inc. of our report dated February 18, 2000 relating to the financial statements for the year ended December 31, 1999, which appears in this Form 10-K. PricewaterhouseCoopers LLP McLean, Virginia March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----