-----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, RfgQotzbZ4DOjzDNTkY9Rb89VJfeQaDthBtGNaR3ByX+QrxyLxJ5B5iuSyy6yEkR 9++IzdzVXtOnObnL9zcJxA== 0000945384-01-500007.txt : 20010516 0000945384-01-500007.hdr.sgml : 20010516 ACCESSION NUMBER: 0000945384-01-500007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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-Q SEC ACT: SEC FILE NUMBER: 000-26392 FILM NUMBER: 1637802 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 EX-10.28 1 r10q-ex1028.txt SEPARATION AGREEMENT, DENNIS MCKINNIE EXHIBIT 10.28 SEPARATION AGREEMENT AND GENERAL RELEASE This Separation Agreement and General Release ("this Agreement") is made by and between Dennis McKinnie ("Employee") and Level 8 Systems, Inc. ("the Company"). The Company and Employee desire to effect a severance of Employee's employment with the Company on the terms and conditions set forth in this Agreement. The Company and Employee agree that it is in their best interests to settle any and all matters that might arise out of Employee's former employment with the Company. Therefore, in consideration of the mutual promises contained in this Agreement, the Company and Employee agree to the following: 1. SEVERANCE AND EFFECTIVE DATES. By executing this Agreement, Employee ------------------------------ acknowledges that Employee's Last Day Worked for the Company will be July 31, 2001 and Employee's termination date with the Company will be July 31, 2002, ("Termination Date). In addition, Employee acknowledges Effective Date of the Agreement is the eighth (8) day after Employee signs the Agreement ("Effective Date"). 2. SEVERANCE ARRANGEMENT. In full consideration and as material ----------------------- inducement for Employee to execute this Agreement, and in full and complete settlement of any and all claims (including any claim Employee may have for attorneys' fees, expenses and costs), the Company will: a. Continue Employee's regular salary of $4326.93 per week, less all legal deductions, for the equivalent of 52 weeks, on the first payday following the end of the Consulting Period set forth above. These monies shall be paid over twenty six (26) weeks with the first payment equal to 27 weeks of salary and the final 25 payments equal to Employees regular weekly salary. b. Continue Employee's medical, dental, vision, life insurance and long term disability benefits at employee rates and 401K participation, for 52 weeks, beginning on the day following the Last Day Worked. Employee contributions will be deducted with each paycheck. c. Reimburse Employee in accordance with the Company's expense reimbursement policies for all normal business expenses incurred by Employee prior to the last day of the Consulting Period. d. Allow Employee to retain his lap-top, as provided by the Company. e. Provide Employee with a cell phone through termination date. All expense associated with the use of this phone will be paid by the Company. f. The Company will pay for executive coaching/placement services from a firm of the Employees choosing for a period of six (6) months, which must conclude, by the end of the severance period. g. Pay Employee for 60 unused, accrued vacation days. This payment will be made on the first regular payday following the last day worked, along with payment for any wages earned. h. Immediately upon execution of this Agreement, vest all Employees' outstanding but currently unvested stock options held under the 1997 Level 8 Systems, Inc. Stock Option Plan. Employee shall have one (1) year from the Effective Date of this Agreement to exercise all his stock options. 3. GENERAL RELEASE. As a material inducement to the Company to enter ----------------- into this Agreement, Employee hereby irrevocably and unconditionally releases, acquits and forever discharges the Company and each of the Company's owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, parent companies, divisions, subsidiaries, affiliates (and agents, directors, officers, employees, representatives and attorneys of such parent companies, divisions, subsidiaries and affiliates) and all persons acting by, through, under or in concert with any of them (collectively "Releases"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, rights arising out of alleged violations or breaches of any contracts, express or implied, or any tort, or any legal restrictions on the Company's right to terminate employees, or any federal, state or other governmental statute, regulation or ordinance, including, without limitation: (1) Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, (race, color, religion, sex and national origin discrimination); (2) the Americans with Disabilities Act (disability discrimination); (3) 42 U.S.C. 1981 (discrimination); (4) the Age Discrimination in Employment Act (29 U.S.C. 621- 624); (5) 29 U.S.C. 206(d)(1) (equal pay); (6) Executive Order 11246 (race, color, religion, sex and national origin discrimination); (7) Executive Order 11141 (age discrimination); (8) Section 503 of the Rehabilitation Act of 1973 (disability discrimination); (9) Employee Retirement Income Security Act (ERISA); (10) intentional or negligent infliction of emotional distress or "outrage;" (11) defamation; (12) interference with employment or contractual relations; (13) wrongful discharge; and (14) invasion of privacy, ("Claim" or "Claims"), which Employee now has, owns or holds or claims to have, own or hold or which Employee at any time heretofore had, owned or held or claimed to have, owned or held against each or any of the Releases at any time up to and including the Effective Date of this Agreement. This release does not include those claims that cannot be waived under Federal or State law. Company hereby irrevocably and unconditionally releases, acquits and forever discharges Employee his heirs, representatives, and assigns (collectively "Employee Releases"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, rights arising out of alleged violations or breaches of any contracts, express or implied, or any tort, or any federal, state or other governmental statute, regulation or ordinance. 4. INDEMNIFICATION. As a further material inducement to the Company to ---------------- enter into this Agreement, Employee hereby agrees to indemnify and hold each and all of the Releases harmless from and against any and all loss, costs, damages or expenses including, without limitation, attorneys' fees incurred by Releases arising out of any breach of this Agreement by Employee or the fact that any representation made herein by Employee was false when made. Company hereby agrees to indemnify and hold each and all of the Employee Releases harmless from and against any and all loss, costs, damages or expenses including, without limitation, attorneys' fees incurred by Employee Releases arising out of any breach of this Agreement by Company. 5. LITIGATION. Employee represents that neither Employee nor any ----------- person or organization on Employee's behalf has filed or assigned to others the right to file any complaints, charges or lawsuits against the Company with any federal, state or local governmental agency or court. 6. CONFIDENTIALITY AND PROFESSIONALISM. Employee represents and agrees ------------------------------------ that Employee will keep the terms, amount, value and nature of consideration paid to Employee completely confidential and that Employee will not hereafter disclose any information concerning this Agreement to anyone other than Employee's immediate family and professional representatives, who will be informed of and bound by this confidentiality clause. The obligation of confidentiality and professionalism includes, without limitation, any discussion by Employee about the Company or any of the Company's employees, which shall be limited to respectful, non-derogatory and non-damaging references by Employee. Further Company agrees that it will not make any statement concerning Employee or his performance with the Company other than as set forth in Section 12 below without Employee's express written permission. 7. AGREEMENT NOT TO DISCLOSE TRADE SECRET AND CONFIDENTIAL INFORMATION. -------------------------------------------------------------------- Employee shall not, at any time, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information to any third party without the Company's prior written consent. "Confidential Information" shall mean that secret or proprietary information of any kind or nature disclosed to Employee or becoming known to Employee (whether or not invented, discovered or developed by Employee) at any time during Employee's employment by or acting as a consultant to the Company. Such secret or proprietary information shall include (unless such information is generally known in the industry through no action of Employee) information relating to the design, manufacture, application, know-how, research and development of the Company's present, past or prospective products, sources of supplies and materials, operating and other cost data, lists of present customers, customer proposals, price lists and data relating to pricing of the Company's products or services. Such secret or proprietary information shall specifically include, without limitation, all information contained in the Company's manuals, memoranda, formulae, plans, drawings and design specifications, supply sources, computer programs and records identified by the Company as confidential information. In addition, to constitute Confidential Information, the information must have value because it is not generally known to the public, and Level 8 must have taken reasonable means to protect the information. 8. PROPRIETARY RIGHTS OF THE COMPANY. Employee acknowledges and agrees --------------------------------- that all Inventions (or any modifications thereof) shall be the property of the Company free of any reserved or other rights of any kind on Employee's part. Employee shall, at the Company's expense, promptly execute formal applications for patents and also do all other acts and things (including, among others, executing and delivering instruments of further assignments, registrations, assurance or confirmation) deemed by the Company necessary or desirable at any time or times in order to effect the full assignment to the Company of Employee's rights, title and interest to such inventions and/or modifications, without payment therefore and without further compensation beyond that provided for in this Agreement. The absence of a request by the Company for information, or for the making of an oath or for the execution of any document, shall in no way be construed to constitute a waiver of the rights of the Company. For purposes of the Agreement, "inventions" shall mean those discoveries, developments and works of authorship, whether or not patentable, relating to the Company's present, past or prospective activities, services and products, which activities, services, and products became known to Employee at any time during Employee's employment, including any patents, models, trade secrets, trademarks, service marks, copyrightable subject matter and any copyrights therein, proprietary information, any design of a useful article (whether the design is ornamental or otherwise), computer programs and related documentation, and other writings, code, algorithms and information and related documentation and materials which the Employee has made, written or conceived during Employee's employment by the Company, either solely or jointly with others, and either on or off the Company's premises (i) while providing services to the Company, or (ii) with the use of time, materials or facilities of the Company, (iii) relating to any Company product, service or activity of which Employee has knowledge, or (iv) suggested by or resulting from any work performed by or for the Company. Such term shall not be limited to the meaning of "invention" under the United States patent laws. 9. NON-SOLICITATION. Employee shall not, directly or indirectly, on ---------------- Employee's behalf or on behalf of others (except on behalf of or with the prior consent of the Company) for a period of six (6) months following the execution of this Agreement: a. solicit or request any other employee of or consultant to the Company to leave the employment of or cease consulting for the Company or to join the employment of or begin consulting for any Competing Business; or b. hire any employee of the Company; or c. solicit or request any Competing Business to employ or retain as an employee or consultant any employee or consultant of the Company; or d. provide individual names or lists of names of Company employees to recruiters. For purposes of this Section 9, "Competing Business" means any business organization of whatever form directly engaged in any business or enterprise which is the same as or substantially the same as the business of designing, developing, manufacturing, marketing, selling and supporting software products and providing related services that enable customers of the Company to create, distribute and manage large-scale mission-critical information processing applications. Employee stipulates and agrees that the restrictive covenants contained in this section are reasonable in time, scope and territory covered and do not impose a greater restraint than necessary for the protection of the business interests of the Company. 10. TRANSITION SERVICES. Employee acknowledges that he may have been -------------------- working on matters that will need to be transitioned to another employee of the Company. Employee further acknowledges that these matters and their orderly transition are important to the Company's continuing business interests. Employee agrees to be available for reasonable consultation with the Company concerning the transition of those matters for a reasonable period of time and that Employee will assist the Company in the orderly transition of those matters to another employee of the Company. Employee covenants to use best efforts to carry out responsibilities under this Agreement, including these transition services. 11. RETURN OF COMPANY MATERIALS AND PROPERTY. Employee understands and ----------------------------------------- agrees that Employee will turn over to the Company on or before the Termination Date all files, memoranda, records, credit cards and other documents and all physical or personal property which Employee received from the Company and/or which Employee used in the course of Employee's employment with the Company and which are the property of the Company. Employee represents and acknowledges that as a result of Employee's employment with the Company, Employee has had in Employee's custody, possession and control proprietary documents, data, materials, files and other similar items concerning confidential information of the Company. Employee represents and agrees that Employee has returned all such items and any copies or extras thereof and any other property, files or documents obtained as a result of Employee's employment with the Company. Employee further represents that Employee has held such information in trust and in strict confidence and will continue to do. Notwithstanding the above, Employee shall be allowed to retain his laptop. Employee shall also retain his cellular phone, and Company agrees to pay all changes associated with Employee's cellular phone until July 2002. 12. REFERENCES. The Company agrees to provide Employee with a neutral ----------- reference giving only dates of employment and job title should Employee seek new employment. Reciprocally, Employee agrees that Employee will communicate nothing negative or adverse about the Company. 13. ACKNOWLEDGMENT. Employee represents that Employee has read all the --------------- terms of this Agreement and has had an opportunity to discuss it with individuals of Employee's own choice who are not associated with the Company. Employee understands that this Agreement releases forever the Company, its parent, subsidiaries and affiliated corporations and each of their respective stockholders, officers, directors, employees, agents, heirs, legal representatives, predecessors, successors, assigns and transferees from any legal action arising from Employee's employment relationship with and the termination of Employee's employment relationship by the Company. Employee signs this Agreement of Employee's own free will in exchange for the consideration to be given to Employee pursuant to Section 2 of this Agreement, which Employee acknowledges is adequate and satisfactory. Employee agrees that neither the Company nor its agents, representatives or employees have made any representations to Employee concerning the terms or effects of this Agreement other than those contained in this Agreement. 14. SEVERABILITY. The provisions of this Agreement can be severed, and ------------- if any part of this Agreement is found to be unenforceable, the remainder of this Agreement will continue to be valid and effective, and this Agreement shall be construed as if such unenforceable provision(s) had never been contained herein. It is the intent of the parties that this Agreement be enforced to the maximum extent permitted by law. 15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of ------------------ the parties hereto relating to the subject matter hereof and supersedes any and all prior agreements. No amendment or modification of this Agreement shall be valid or binding upon the parties unless made in writing and signed by the parties hereto. 16. BINDING EFFECT. As used in this Agreement, all references to "the ---------------- Company" will also be construed to refer to the Company's parent corporation, subsidiaries, affiliates and controlling parties. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors, transferees and assigns. 17. NON-ADMISSION OF LIABILITY. This Agreement shall in no way be ----------------------------- construed as an admission by the Company that it has acted wrongfully with respect to Employee or any other person or that Employee has any rights whatsoever against the Company. Dennis McKinnie: _______________________________ ________________________ Signature Date Level 8 Systems By: ____________________________ ________________________ Date Title: ___________________________ EX-10.28A 2 r10q-ex1028a.txt AMENDED SEPARATION AGREEMENT, DENNIS MCKINNIE EXHIBIT 10.28A May 5, 2001 VIA HAND DELIVERY Dennis McKinnie Dear Dennis: This letter shall constitute an amendment to the Separation Agreement and General Release (the "Agreement"). Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed to them in the Agreement. Section 1 of the Agreement is hereby amended to provide that the Termination Date shall be the date of the 2001 Annual Meeting of Shareholders of Level 8 Systems, Inc. Section 2a. of the Agreement is hereby amended to provide for the payment of Employee's severance in one lump sum to be paid on May 7, 2001 (the "Payment Date"). Section 2g. of the Agreement is hereby amended to provide that Employee shall also receive payment for Employee's earned vacation per the Agreement on the Payment Date. Employee's regular salary shall continue through the Termination Date. All other terms of the Agreement shall be unchanged. Sincerely, Paul Rampel President Agreed: _______________________ Dennis McKinnie Employee EX-10.29 3 r10q-ex1029.txt SEPARATION AGREEMENT, ARIK KILMAN EXHIBIT 10.29 7 SEPARATION AGREEMENT AND GENERAL RELEASE ---------------------------------------- This Separation Agreement and General Release (this "Agreement") is made by and between Arik Kilman ("Employee") and Level 8 Systems, Inc. (the "Company"). The Company and Employee desire to effect a severance of Employee's employment with the Company on the terms and conditions set forth in this Agreement. The Company and Employee agree that it is in their best interests to settle any and all matters that might arise out of Employee's former employment with the Company. Therefore, in consideration of the mutual promises contained in this Agreement, the Company and Employee agree to the following: 1. SEVERANCE. By executing this Agreement, Employee acknowledges that ---------- his employment relationship with the Company will terminate as of May 7, 2001 (the "Termination Date"). Employee shall also immediately resign his seat on the Board of Directors of Level 8 Systems, Inc. and will not seek re-election to that Board. 2. SEVERANCE ARRANGEMENT. In full consideration and as material ----------------------- inducement for Employee to execute this Agreement, and in full and complete settlement of any and all claims (including any claim Employee may have for attorneys' fees, expenses and costs), the Company will: a. Pay Employee a total of $750,000 (which amount includes payment in lieu of 60 days accrued vacation, accrued salary and amounts otherwise payable under section 4(b) of the Employment Agreement referred to below) in the following manner: $600,000 on the ninth day after the execution of this Agreement and $150,000 on the forty-fifth day after the ninth day. The parties acknowledge that Employee has been rendering service to the Company solely outside the United States under the March 21, 2001 Employment Agreement between Employee and Company (it being understood that Employee has spent time in the United States under the terms of that Employment Agreement to attend meetings of the Board of Directors in his role as a Director). Therefore, it is agreed that there shall be no withholding taxes from, or with respect to, any payment or issuance under section 2(a) or 2(c). Employee agrees that should the Company be required to pay any taxes or penalties or interest on this payment, he hereby indemnifies the Company against that payment and will promptly reimburse the Company for any such payment (it being agreed that (i) the Company shall not take any position inconsistent with, and Employee shall be entitled to prompt notice of any actual or threatened claim or challenge by any taxing authority with respect to, the position set forth in the third sentence of this section 2(a) (the "Position"), and (ii) Employee shall be entitled to participate in, and control the defense of any such proceeding with respect to the Position, and the Company shall cooperate with Employee in connection therewith). b. Reimburse Employee in accordance with the Company's expense reimbursement policies for all normal business expenses incurred by Employee prior to the Termination Date. c. On the ninth day after the execution of this Agreement, issue to Employee 250,000 shares of the Company's common stock. d. The Company acknowledges that the furniture in the Company apartment in New York with the exception of the "big bed" is the personal property of Employee. Employee shall have thirty (30) days from the date of this Agreement to remove the furniture from the apartment. At that time, Employee shall return the keys to the apartment to the Director of HR for the Company. If Employee does not revoke this Agreement and the Company fails to make any payment or effect any issuance in accordance with this section 2, Employee may, by notice given to the Company at any time after such failure and upon Company's failure to cure said non-payment or non-issuance within ten days after receipt of notice, revoke this Agreement in its entirety, and, immediately upon such revocation, this Agreement shall be deemed void ab initio. 3. GENERAL RELEASE. As a material inducement to the Company to enter ----------------- into this Agreement, Employee hereby irrevocably and unconditionally releases, acquits and forever discharges the Company and each of the Company's owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, parent companies, divisions, subsidiaries, affiliates (and agents, directors, officers, employees, representatives and attorneys of such parent companies, divisions, subsidiaries and affiliates) and all persons acting by, through, under or in concert with any of them (collectively "Releasees"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, rights arising out of alleged violations or breaches of any contracts, express or implied, or any tort, or any legal restrictions on the Company's right to terminate employees, or any federal, state or other governmental statute, regulation or ordinance, including, without limitation: (1) Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, (race, color, religion, sex and national origin discrimination); (2) the Americans with Disabilities Act (disability discrimination); (3) 42 U.S.C. 1981 (discrimination); (4) the Age Discrimination in Employment Act (29 U.S.C. 621- 624); (5) 29 U.S.C. 206(d)(1) (equal pay); (6) Executive Order 11246 (race, color, religion, sex and national origin discrimination); (7) Executive Order 11141 (age discrimination); (8) Section 503 of the Rehabilitation Act of 1973 (disability discrimination); (9) Employee Retirement Income Security Act (ERISA); (10) intentional or negligent infliction of emotional distress or "outrage;" (11) defamation; (12) interference with employment or contractual relations; (13) wrongful discharge; and (14) invasion of privacy, ("Claim" or "Claims"), which Employee now has, owns or holds or claims to have, own or hold or which Employee at any time heretofore had, owned or held or claimed to have, own or hold against each or any of the Releasees at any time up to and including the date of this Agreement. This release does not include those claims that cannot be waived under Federal or State law or any liabilities of Liraz Systems Ltd. to Employee. Company hereby irrevocably and unconditionally releases, acquits and forever discharges Employee his heirs, representatives, and assigns (collectively "Employee Releasees"), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, rights arising out of alleged violations or breaches of any contracts, express or implied, or any tort, or any federal, state or other governmental statute, regulation or ordinance. Nothing in this section 3 shall affect the rights of the parties hereunder or the rights of Employee to indemnification under the Company's by-laws, certificate of incorporation and Delaware law. 4. CONFIDENTIALITY AND PROFESSIONALISM. Employee shall not make any -------------------------------------- statements about the Company or its employees that reasonably could be construed as derogatory to any of them. Company agrees that it will not make any statement concerning Employee or his performance with the Company other than as set forth in this Agreement without Employee's express written permission. In addition, the Company will not make any statement(s) concerning the Company's performance during Employee's tenure as Chairman and CEO or CSO of the Company that could be construed as derogatory to Employee or which reflects negatively on Employee's performance of his duties while occupying those offices. 5. AGREEMENT NOT TO DISCLOSE TRADE SECRET AND CONFIDENTIAL INFORMATION. -------------------------------------------------------------------- Employee shall not, at any time, directly or indirectly, use, publish, disseminate or otherwise disclose any Confidential Information to any third party without the Company's prior written consent. "Confidential Information" shall mean that secret or proprietary information of any kind or nature disclosed to Employee or becoming known to Employee (whether or not invented, discovered or developed by Employee) at any time during Employee's employment by or acting as a consultant to the Company. Such secret or proprietary information shall include (unless such information is generally known in the industry through no action of Employee) information relating to the design, manufacture, application, know-how, research and development of the Company's present, past or prospective products, sources of supplies and materials, operating and other cost data, lists of present customers, customer proposals, price lists and data relating to pricing of the Company's products or services. Such secret or proprietary information shall specifically include, without limitation, all information contained in the Company's manuals, memoranda, formulae, plans, drawings and design specifications, supply sources, computer programs and records identified by the Company as confidential information. In addition, to constitute Confidential Information, the information must have value because it is not generally known to the public, and the Company must have taken reasonable means to protect the information. 6. PROPRIETARY RIGHTS OF THE COMPANY. Employee acknowledges and agrees --------------------------------- that all Inventions (or any modifications thereof) shall be the property of the Company free of any reserved or other rights of any kind on Employee's part. Employee shall, at the Company's expense, promptly execute formal applications for patents and also do all other acts and things (including, among others, executing and delivering instruments of further assignments, registrations, assurance or confirmation) deemed by the Company necessary or desirable at any time or times in order to effect the full assignment to the Company of Employee's rights, title and interest to such inventions and/or modifications, without payment therefore and without further compensation beyond that provided for in this Agreement. The absence of a request by the Company for information, or for the making of an oath or for the execution of any document, shall in no way be construed to constitute a waiver of the rights of the Company. For purposes of the Agreement, "inventions" shall mean those discoveries, developments and works of authorship, whether or not patentable, relating to the Company's present, past or prospective activities, services and products, which activities, services, and products became known to Employee at any time during Employee's employment, including any patents, models, trade secrets, trademarks, service marks, copyrightable subject matter and any copyrights therein, proprietary information, any design of a useful article (whether the design is ornamental or otherwise), computer programs and related documentation, and other writings, code, algorithms and information and related documentation and materials which the Employee has made, written or conceived during Employee's employment by the Company, either solely or jointly with others, and either on or off the Company's premises (i) while providing services to the Company, or (ii) with the use of time, materials or facilities of the Company, (iii) relating to any Company product, service or activity of which Employee has knowledge, or (iv) suggested by or resulting from any work performed by or for the Company. Such term shall not be limited to the meaning of "invention" under the United States patent laws. 7. NON-SOLICITATION. Employee shall not, directly or indirectly, on ---------------- Employee's behalf or on behalf of others (except on behalf of or with the prior written consent of the Company) for a period of 375 days following the date of this Agreement: a. solicit or request any other employee of or consultant to the Company to leave the employment of or cease consulting for the Company in order to join the employment of or begin consulting for any Competing Business; or b. hire any employee of the Company or hire any previous employee of the Company within six (6) months of the date of that employee's exit from the Company, in each case for a Competing Business; or c. solicit or request any Competing Business to employ or retain as an employee or consultant any employee or consultant of the Company; or d. provide individual names or lists of names of Company employees to recruiters; or e. solicit, divert or appropriate to any Competing Business or attempt to solicit, divert or appropriate to a Competing Business any business from any customer or actively sought prospective customer of the Company with whom Employee has dealt, whose dealings with the Company have been supervised by Employee or about whom Employee acquired Confidential Information in the course of employment by the Company. For purposes of this Section, "Competing Business" means any business organization of whatever form engaged, either directly or indirectly, in any business or enterprise which is the same as or substantially the same as the business of designing, developing, manufacturing, marketing, selling and supporting software products and providing related services similar to those of Cicero. Employee stipulates and agrees that the restrictive covenants contained in this Section are reasonable in time, scope and territory covered and do not impose a greater restraint than necessary for the protection of the business interests of the Company. 8. RETURN OF COMPANY MATERIALS AND PROPERTY. Employee understands and ------------------------------------------ agrees that Employee will turn over to the Company on or before the Termination Date all files, memoranda, records, credit cards and other documents and all physical or personal property which Employee received from the Company and/or which Employee used in the course of Employee's employment with the Company and which are the property of the Company. Employee represents and acknowledges that as a result of Employee's employment with the Company, Employee has had in Employee's custody, possession and control proprietary documents, data, materials, files and other similar items concerning confidential information of the Company. Employee represents and agrees that Employee has returned all such items and any copies or extras thereof and any other property, files or documents obtained as a result of Employee's employment with the Company. Employee further represents that Employee has held such information in trust and in strict confidence and will continue to do so and that Employee has complied and will comply with the Confidentiality Agreement between Employee and the Company contained in his Employment Agreement. Notwithstanding the above, Employee shall be allowed to retain his laptop. Employee shall also retain his cellular phone, and Company agrees to pay all changes associated with Employee's cellular phone up to $200.00 per month for twelve (12) months from the date of this Agreement. 9. REFERENCES. The Company agrees to provide Employee with a neutral ----------- reference giving only dates of employment and job title should Employee seek new employment. 10. ACKNOWLEDGMENT. Employee represents that Employee has read all the --------------- terms of this Agreement and has had an opportunity to discuss it with individuals of Employee's own choice who are not associated with the Company. Employee understands that, except as otherwise expressly provided in this Agreement, this Agreement releases forever the Company, its parent, subsidiaries and affiliated corporations and each of their respective stockholders, officers, directors, employees, agents, heirs, legal representatives, predecessors, successors, assigns and transferees from any legal action arising from Employee's employment relationship with and the termination of Employee's employment relationship by the Company. Employee signs this Agreement of Employee's own free will in exchange for the consideration to be given to Employee pursuant to Section 2 of this Agreement, which Employee acknowledges is adequate and satisfactory. Employee agrees that neither the Company nor its agents, representatives or employees have made any representations to Employee concerning the terms or effects of this Agreement other than those contained in this Agreement. 11. AGE DISCRIMINATION IN EMPLOYMENT ACT. Employee hereby acknowledges ------------------------------------ and agrees that this Agreement and the termination of Employee's employment are in compliance with the Age Discrimination in Employment Act and the Older Workers' Benefit Protection Act and that the releases set forth in this Agreement shall be applicable, without limitation, to any claims brought under these Acts. Employee further acknowledges and agrees that: a. The release given by Employee in this Agreement is given solely in exchange for the consideration set forth in this Agreement and such consideration is in addition to anything of value which Employee was entitled to receive prior to entering into this Agreement; b. By entering into this Agreement, Employee does not waive rights or claims that may arise after the date this Agreement is executed; c. Employee has been advised to consult an attorney prior to entering into this Agreement, and this provision of this Agreement satisfies the requirement of the Older Workers' Benefit Protection Act that Employee be so advised in writing; d. Employee has been offered forty-five (45) days from receipt of this Agreement within which to consider this Agreement; and e. For a period of seven (7) days following execution of this Agreement, the Employee may revoke this Agreement, and this Agreement shall not become effective or enforceable against Employee until such seven (7)-day period has expired. 12. SEVERABILITY. The provisions of this Agreement can be severed, and ------------- if any part of this Agreement is found to be unenforceable, the remainder of this Agreement will continue to be valid and effective, and this Agreement shall be construed as if such unenforceable provision(s) had never been contained herein. It is the intent of the parties that this Agreement be enforced to the maximum extent permitted by law. 13. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of ------------------ the parties hereto relating to the subject matter hereof and supersedes any and all prior agreements. No amendment or modification of this Agreement shall be valid or binding upon the parties unless made in writing and signed by the parties hereto. 14. BINDING EFFECT. As used in this Agreement, all references to "the ---------------- Company" will also be construed to refer to the Company's parent corporation, subsidiaries, affiliates and controlling parties. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors, transferees and assigns. 15. NON-ADMISSION OF LIABILITY. This Agreement shall in no way be ----------------------------- construed as an admission by the Company that it has acted wrongfully with respect to Employee or any other person or that Employee has any rights whatsoever against the Company. 16. AUTHORIZATION. This Agreement has been duly authorized, validly -------------- executed and delivered by one or more authorized officers of the Company and constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its terms. Arik Kilman _______________________________ ________________________ Signature Date Level 8 Systems, Inc. By: ____________________________ ________________________ Date Title: Chairman and CEO By: ____________________________ ________________________ Date Title: President EX-10.30 4 r10q-ex1030.txt AMENDED PROMISSORY NOTE WITH BANK HAPOALIM EXHIBIT 10.30 PROMISSORY NOTE U.S. $15,000,000.00 March 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 Fifteen 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 ____________, 19__. (C) In consecutive installments, of which each but the last shall be $____________ and the last of which shall be equal to the then unpaid principal balance of this Note. The first such installment shall be due on __________, 19__. Each subsequent installment shall be due on the corresponding day of each monthly/ quarter/ other________ thereafter (or if there is no such corresponding day, on the last day of such period). The remaining principal balance shall be due on ______, 19__. (D) X In accordance with the attached Rider, but in any event no later than January 30, 2002. 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/ quarter/ 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 CONDITIONS: 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 OAF 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/ Anthony Pizi ------------------ Print name: Anthony Pizi ------------- Title or capacity: CEO --- (if signing on behalf of Borrower) (Signature) By: /s/ Paul Rampel ----------------- Print name: Paul Rampel ------------ Title or capacity: President --------- (if signing on behalf of Borrower) TERMS AND CONDITIONS -------------------- Definitions are set forth in paragraph M. A. CALCULATION AND ACCRUAL OF INTEREST: (1) GENERALLY, 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 or 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 owned 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 the 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 Principal, 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 OWNING UNDER THIS PARAGRAPH SHALL BE PRIMA FACIE 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 _______ out 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 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 of 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 of 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 ACT, 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 not such charge creates an overdraft. (2) APPLICATION. Any payment received by the Bank (including a deemed payment under paragraph A, as 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 Days 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 computation of interest. (5) EXTENSION AT BANK'S OPTION. The Bank shall have the option, which may be exercised 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 this Note. The obligations under this Note shall continue in force and shall apply notwithstanding any change in the membership f 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 not 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 acquired 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 ACQUIRED 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 nonauthorization, without invalidating the remaining provisions of this 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, VENUE, 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 MAY BE MADE ON BORROWER BY PERSONAL DELIVERY AT, OR BY MAIL ADDRESS 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 A COURT, FROM ANY LEGAL PROCESS, FROM ATTACHMENT PRIOR TO JUDGEMENT, FROM ATTACHMENT IN AID OF EXECUTION, FROM EXECUTION OR OTHERWISE. L. NOTICE. Any notice in connection with any of the Liabilities shall be in writing and may be delivered personally or by cable, telex, telecopy or other electronic means of communication, or by certified mail, return receipt requested addressed (a) to Borrower as set forth herein or to any other address that the Bank believes to be Borrower's address, and (b) to the Bank at Bank Hapoalim B.M., 1177 Avenue of the Americas, New York, New York 10036, Attention: Legal Department. Any such notice 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 or requirement of prepayment of any Debt, or any Debt's becoming due and payable prior to state 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 r not denominated 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 attorney's 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 __________ 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_______ 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) now or hereafter existing, or (e) due 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 an 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 Rage 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 Rage 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 of any Agreement evidencing-, or any _______ surety, accommodating 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 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, unincorporated 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 Branches' stated Prime Rate as reflected in its 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 expenses of complying with any Law, including but not limited to with respects (a) any reserves or special deposits maintained for or with-, or pledges to-, assessments, insurance premiums or special charges paid to-, 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. (3) 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 1. (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 Multiple-Loan Rider to Promissory Note (Libor-Based Rate) This Rider is referred to in paragraph 2(c) of, and constitutes a part of, a note of Borrower to the Note dated March 28, 2001. Specific Terms - --------------- (a) Margin 1.00% per year ---- (b) Interest Period: [ ] ______ days [x] 1, 2 or 3 months and [x] as agreed --------- from time to time (c) Minimum Draw Amount: U.S. $______________________ [ ] None (d) Minimum Multiple Amount: U.S. $______________________ [ ] None Borrower agrees to the above Specific Terms and to all of the Terms and --------------- --------- Conditions set forth below. -- Print Borrower's Name: Level 8 Systems, Inc. (Signature) By: /s/ Anthony Pizi (Signature) By: /s/ Paul ----------------- -------- Rampel ----- Print Name and Title: Anthony Pizi, CEO Print Name and Title: ------------------ Paul Rampel, President --------------------- Terms and Conditions - ---------------------- Certain capitalized terms are defined in paragraph 4. 1. Advances: Borrower may receive a Loan in any principal amount upon -------- Borrower's request to the Bank and the Bank's agreement thereto, subject to all of the following conditions: (a) Agreement of the Bank and Borrower. Subject to subparagraphs 1(b), ------------------------------------- 1(c) and 2(b), the Bank and Borrower shall have agreed, not later than the Determination Time, with respect to the Loan's (i) principal amount, (ii) LIBOR-Based Rate and (iii) Interest Period; provided, however, that if the Bank -------- ------- determines that by such Determination Time borrower has failed or declined to agree on the LIBOR-Based Rate and/or Interest Period with respect to such Outstanding Principal Amount, then interest on such Outstanding Principal Amount shall accrue at the LIBOR-Based Rate without the agreement of Borrower, and the Interest Period shall be of the same duration as the Interest Period just ended with respect to such Outstanding Principal Amount or, if there was no such prior Interest Period, one month. (b) Applicable limitations. (i) The applicable payment Date shall not be ----------------------- later than the Due Date; (ii) the total of the Outstanding Principal Amount of all Loans shall not exceed the principal amount set forth in the Note; (iii) the principal amount of any single Loan request shall be not less than any Minimum Draw Amount set forth under Specific Terms; and (iv) the principal amount of any -------------- single Loan request shall be an integral multiple of any Minimum Multiple Amount set forth under Specific Terms. --------------- (c) Borrower' request and agreement. Borrower's request for a Loan and ---------------------------------- Borrower's agreement to the terms thereof shall be communicated to the Bank in any form that is acceptable in each instance to the Bank in its sole discretion, which may include telephone, telex, telecopy or a writing executed by Borrower. Borrower shall have provided the Bank with documentation, satisfactory in form and substance to the Bank in its sole discretion, confirming the authority of the person(s) agreeing to such terms on behalf of Borrower. 2. Payment of Principal and Interest. Subject to the other provisions of ------------------------------------ the Note: (a) Obligation and Time of Repayment. Each Outstanding Principal Amount shall be due and payable at the applicable Payment Date. (b) Loan Rate. Interest on any Outstanding Principal Amount shall accrue ---------- at the LIBOR-Based Rate; provided, however, that if the Bank determines (i) that -------- ------- by the Determination Time (A) by reason of circumstances affecting the London Interbank Market generally, adequate and fair means do not exist for ascertaining an applicable LIBOR rate or it is impractical for the Bank to fund or continue to fund the Outstanding Principal Amount during the applicable Interest Period, or (B) quotes for funds in United States Dollars in sufficient amounts comparable to the relevant Outstanding Principal Amount and for the duration of the applicable Interest Period would not be available to the Bank in the London Interbank Market, or (C) quotes for funds in United States Dollars in the London Interbank Market will not accurately reflect the cost to the Bank of making a Loan or of funding the relevant Outstanding Principal Amount during the applicable Interest Period, or (ii) that at any time the making or funding of loans, or charging of interest at rates, based on LIBOR shall be unlawful or unenforceable for any reason, then as long as such circumstance(s) shall continue, interest on the relevant Outstanding Principal Amount shall accrue at the Alternate Rate. (c) Payment and Calculation of Interest. Interest shall be payable (i) at ----------------------------------- each Payment Date or (whenever the Applicable Rate is a Variable prime-Based Rate) monthly, (ii) at the Due date and (iii) at any time that any Outstanding Principal Amount or part thereof is paid. Interest shall be calculated as set forth in the Note. 3. Bank's Conclusive Determinations and Schedule. The Bank's determination ---------------------------------------------- with respect to any matter hereunder shall be conclusive, final and binding on Borrower, absent manifest error. The Bank shall from time to time record the date and amount of each Loan, the Applicable Rate, each date on which any part of principal, interest or any other amount shall be due and payable, and the amount and date of each payment of principal, interest or any other amount, on a schedule, which in the Bank's discretion may be computer-generated, and which is incorporated in, and is a part of, the Note and this Rider (the "Schedule"). The Schedule shall be conclusive, final and binding upon Borrower, absent manifest error; provided, however, that the failure of the Bank to record any of -------- ------- the foregoing shall not limit or otherwise affect the obligation of Borrower to pay all amounts owed to the Bank under the Note. Without limiting the foregoing, Borrower acknowledges that the Interest Period and the Applicable Rate with respect to any Outstanding Principal Amount are subject to the Bank's consent ordinarily negotiated between Borrower and the Bank by Telephone, and Borrower agrees that in the event of any dispute as to any of the terms of any Loan, the determination of the Bank and its respective entry with respect thereto on its books and records and/or on the Schedule shall be conclusive, final and binding on Borrower, absent manifest error. 4. Definitions. Each capitalized term not defined herein shall have the ----------- meaning ascribed thereto in the Note. The following definitions apply in this Rider and in the Note, and shall prevail over any different definitions in the Note. (a) Alternate Rate: an annual Variable Prime-Based Rate equal to the --------------- Prime Rate plus the Margin. (b) Applicable Rate: Whichever of the Loan Rate or Increased Rate is the ---------------- applicable interest rate at any time with respect to any Outstanding Principal Amount. (c) Determination Time: 12:00 noon (or any later time determined by the Bank ------------------- in its sole discretion), New York City time, of a Working Day that is three Working Days prior to the date of the loan. (d) Due Date: the date set forth in paragraph 1(b) of the Note or, if the -------- Bank has extended such date pursuant to paragraph G(5) of the Note or by an agreement with Borrower, such extended date. (e) Interest Period: any term of 1 day, 1 week, 1 to 6, 9 or 12 months, ---------------- or such other term as may be acceptable to the Bank in its discretion, as set forth above under Specific Terms or, if not so set forth, as selected or agreed -------------- to by the Bank in its discretion. A term shall not be considered in "Interest Period" during any period that the Applicable Rate is a Variable Prime-Based Rate. Each Interest Rate shall commence immediately at the end of the preceding Interest Period, if any; if there had been no immediately preceding Interest Period with respect to any Outstanding Principal Amount, the Interest Period shall commence on the first Business Day on which (i) such amount shall be outstanding and (ii) the Applicable Rate is not a Variable Prime-Based Rate. If any Interest Period would otherwise come to an end on a day which is not a Working Day, its termination shall be postponed to the next day that is a Working Day unless it would thereby terminate in the next calendar month. In such case, such Interest Period shall terminate on the immediately preceding Working Day. (f) LIBOR: the rate or rates established by the New York Branch of the ----- Bank two Working Days prior to the date of the Loan, by applying the following: (i) the British Bankers Association ("BBA") Interest Settlement Rates for U.S. Dollars, as defined in the BBA official definitions and reflected on the Telerate BBA pages, for the applicable amounts and interest periods, which rates reflect the offered rates at which deposits are being quoted to prime banks in the London Interbank Market at 11:00 A.M. London Time calculated as set forth in said BBA official definition; or (ii) such other recognized source of London Eurodollar deposit rates as the Bank may determine from time-to-time. In the event the applicable BBA page or pages shall be replaced by another Telerate page or other Telerate pages for quoting London Eurocurrency rates, then rates quoted on said replacement page or pages shall be applied. If the Bank determines that London Eurocurrency rates are no longer being quoted (temporarily or permanently) on any Telerate pages or that Telerate is no longer functioning (temporarily or permanently) in substantially the same manner as on the date hereof, then the Bank shall notify the Borrower of a substitute, publicly available reference for the determination of LIBOR. If the Bank determines in its sole discretion that LIBOR cannot be determined or does not represent its effective cost of maintaining Loans under this Note, then interest shall accrue at the effective cost to the Bank to maintain the Loans (as determined by the Bank in its sole discretion). (g) LIBOR-Based Rate: an annual rate equal to LIBO plus the Margin, as ----------------- determined by the Bank. (h) Loan: (i) any loan advanced by the Bank to the Borrower under the ---- Note, (ii) any rollover by the Bank of any such loan that is otherwise due and payable or (iii) any conversion of the Applicable Rate for any Outstanding Principal Amount from a rate that is a Variable Prime-Based Rate to one that is not, or vice versa. (i) Loan Rate: the interest rate determined under subparagraph 1(a) ---------- and/or 2(b). (j) Margin: as set forth under Specific Terms or, if not so set forth, 2% ------ per year. (k) Note: the note of which this Rider is a part (including any and all ---- riders and amendments to the Note). (l) Outstanding Principal Amount: the outstanding principal amount of ------------------------------ each Loan. (m) Payment Date: the last Business Day of the applicable Interest Period ------------- or, if the applicable Loan Rate is a Variable Prime-Based Rate, the Due Date. (n) Working Day: a Business Day on which banks are regularly open for ------------ business in London. EX-10.30A 5 r10q-ex1030a.txt LETTER IN CONNECTION WITH EXTENSION OF PROM NOTE EXHIBIT 10.30A BANK HAPOALIM NEW YORK BRANCHES ----------------- May 8, 2001 Ms. Renee Fulk Chief Financial Officer Level 8 Systems, Inc. 8000 Regency Parkway Cary, North Carolina 27511 RE: $15,000,000 LINE OF CREDIT FROM BANK HAPOALIM B.M. (THE "BANK") TO LEVEL 8 SYSTEMS, INC. (THE "COMPANY"). Dear Ms. Fulk: This will confirm that an application for extension of he maturity date for the above referenced loan is being processed by the Bank. We will extend the loan to April 15, 2002 and anticipated delivering amended documents to the Company for execution shortly. Very truly yours, Bank Hapoalim B.M. By: Title: Name: By: Title: Name: 1177 Avenue of the Americas New York, NY 10038-2790 Tel: (212) 782-2000 Fax: (212) 782-2222 TELEX: 620158 SWIFT: POALUS33 Bank Hapoalim B.M. 50 Rotthschild Blvd. P.O. Box 27, Tel-Aviv 61000, Israel Tel: (972-3) 5673333 TELEX: 342342 33612 SWIFT: POALILIT Fax: (972-3) 5607028 CABLE: Bankpoalim 10-Q 6 r10q-331.txt BODY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------- ---------- Commission File Number 0-26392 LEVEL 8 SYSTEMS, INC. --------------------- (Exact name of registrant as specified in its charter) Delaware 11-2920559 (State or other jurisdiction (I.R.S Employer of incorporation or organization) Identification Number) 8000 Regency Parkway, Cary, NC 27511 ---------------------------------- ------ (Address of principal executive offices) (Zip Code) (919) 380-5000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15d of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES _ NO X -- -- Indicate the number of shares outstanding in each of the issuer's classes of common stock, as of the latest practicable date. 15,894,842 common shares, $.001 par value, were outstanding as of May 14, 2001. Page 1
LEVEL 8 SYSTEMS, INC. INDEX Page PART I. Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . Number ------ Item 1. Financial Statements Consolidated balance sheets as of March 31, 2001 (unaudited) and December 31, 2000. . . . . . . . . . . . . . . . . . . . 3 Consolidated statements of operations for the three months ended March 31, 2001 and 2000 (unaudited). . . . . . . . . . 4 Consolidated statements of cash flows for the three months ended March 31, 2001 and 2000 (unaudited). . . . . . . . . . 5 Consolidated statements of comprehensive loss for the three months ended March 31, 2001 and 2000 (unaudited) . . . . . . 6 Notes to consolidated financial statements (unaudited) . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . 22 PART II. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Page 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
LEVEL 8 SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) March 31, December 31, 2001 2000 ----------- -------------- Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 19,508 $ 23,856 Available-for-sale securities . . . . . . . . . . . . . . . . 526 588 Accounts receivable, less allowance for doubtful accounts of $4,770 and $1,735 at March 31, 2001 and December 31, 2000, respectively. . . . . . . . . . . . . . . . . . . 7,875 20,760 Due from related party. . . . . . . . . . . . . . . . . . . . 279 306 Notes receivable. . . . . . . . . . . . . . . . . . . . . . . 1,656 1,700 Notes receivable, related parties . . . . . . . . . . . . . . 186 104 Assets held for resale. . . . . . . . . . . . . . . . . . . . -- 2,236 Prepaid expenses and other current assets . . . . . . . . . . 4,723 5,987 ----------- -------------- Total current assets . . . . . . . . . . . . . . . 34,753 55,537 Property and equipment, net . . . . . . . . . . . . . . . . . 3,080 3,309 Intangible assets, net. . . . . . . . . . . . . . . . . . . . 39,333 65,422 Software product technology, net. . . . . . . . . . . . . . . 38,309 41,743 Note receivable . . . . . . . . . . . . . . . . . . . . . . . 500 1,000 Notes receivable from related parties . . . . . . . . . . . . 297 396 Investment in Access International. . . . . . . . . . . . . . 1,600 1,600 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 774 949 ----------- -------------- Total assets . . . . . . . . . . . . . . . . . . . $ 118,646 $ 169,956 =========== ============== Liabilities and stockholders' equity Current maturities of long-term debt. . . . . . . . . . . . . 19 2,133 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 3,374 2,210 Accrued expenses: Salaries, wages and related items. . . . . . . . . . . . 2,307 4,175 Merger-related . . . . . . . . . . . . . . . . . . . . . 127 311 Restructuring. . . . . . . . . . . . . . . . . . . . . . 4,557 210 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 7,606 9,093 Due to related party. . . . . . . . . . . . . . . . . . . . . 69 59 Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . 7,453 9,035 ----------- -------------- Total current liabilities. . . . . . . . . . . . . 25,512 27,226 Long-term debt, net of current maturities . . . . . . . . . . 25,000 25,000 Stockholders' equity Preferred stock. . . . . . . . . . . . . . . . . . . . . -- -- Common stock . . . . . . . . . . . . . . . . . . . . . . 16 16 Additional paid-in-capital . . . . . . . . . . . . . . . 196,944 196,944 Accumulated other comprehensive income . . . . . . . . . (4,177) (3,903) Accumulated deficit. . . . . . . . . . . . . . . . . . . (124,649) (75,327) ----------- -------------- Total stockholders' equity . . . . . . . . . . . . 68,134 117,730 ----------- -------------- Total liabilities and stockholders' equity . . . . $ 118,646 $ 169,956 =========== ============== The accompanying notes are an integral part of the consolidated financial statements.
Page 3
LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months Ended March 31, 2001 2000 --------- -------- Revenue: Software . . . . . . . . . . . . . . . . . . . $ 1,084 $ 8,233 Maintenance. . . . . . . . . . . . . . . . . . 3,754 3,674 Services . . . . . . . . . . . . . . . . . . . 3,100 7,755 --------- -------- Total operating revenue. . . . . . . . 7,938 19,662 Cost of revenue: Software . . . . . . . . . . . . . . . . . . . 3,750 1,930 Maintenance. . . . . . . . . . . . . . . . . . 1,321 1,384 Services . . . . . . . . . . . . . . . . . . . 2,904 6,814 --------- -------- Total cost of revenue. . . . . . . . . 7,975 10,128 Gross profit . . . . . . . . . . . . . . . . . . (37) 9,534 Operating expenses: Sales and marketing. . . . . . . . . . . . . . 6,311 7,119 Research and development . . . . . . . . . . . 2,973 2,211 General and administrative . . . . . . . . . . 6,464 3,548 Amortization of intangible assets. . . . . . . 4,065 3,526 Restructuring. . . . . . . . . . . . . . . . . 6,650 -- Impairment of intangible assets. . . . . . . . 21,824 -- Gain on disposal of assets . . . . . . . . . . (160) -- --------- -------- Total operating expenses . . . . . . . 48,127 16,404 Loss from operations . . . . . . . . . . . . . . (48,164) (6,870) Other income (expense) Interest income. . . . . . . . . . . . . . . . 344 39 Other income . . . . . . . . . . . . . . . . . 350 -- Interest expense . . . . . . . . . . . . . . . (1,496) (909) Net foreign currency gains/(losses). . . . . . 197 (38) --------- -------- Loss before tax provision. . . . . . . . . . . . (48,769) (7,778) Income tax provision . . . . . . . . . . . . . . 142 250 --------- -------- Net loss . . . . . . . . . . . . . . . . . . . . $(48,911) $(8,028) ========= ======== Net loss per share - basic and diluted . . . . . $ (3.12) $ (0.64) ========= ======== Weighted shares outstanding - basic and diluted. 15,786 12,778 ========= ======== The accompanying notes are an integral part of the consolidated financial statements.
Page 4
LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Three Months Ended March 31, 2001 2000 --------- -------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(48,911) $(8,028) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization . . . . . . . . . . . . . . 9,008 5,414 Impairment of intangible assets . . . . . . . . . . . . . 21,824 -- Write-down of note receivable . . . . . . . . . . . . . . 500 -- Allowance for doubtful accounts . . . . . . . . . . . . . 3,680 273 Changes in assets and liabilities, net of assets acquired and liabilities assumed: Trade accounts receivable. . . . . . . . . . . . . . 9,128 (618) Prepaid expenses and other assets. . . . . . . . . . 343 196 Accounts payable and accrued expenses. . . . . . . . (2,053) (222) Merger-related and restructuring . . . . . . . . . . 4,219 (1,217) Deferred revenue . . . . . . . . . . . . . . . . . . (1,581) (113) --------- -------- Net cash used in operating activities . . . . . (3,843) (4,315) Cash flows from investing activities: Purchases of property and equipment. . . . . . . . . . . . . . (67) (304) Payments for acquisitions, net . . . . . . . . . . . . . . . . (56) (466) Cash payments secured through notes receivable . . . . . . . . 44 -- Investment held for resale . . . . . . . . . . . . . . . . . . 2,215 759 Capitalization of software development costs . . . . . . . . . -- (300) --------- -------- Net cash used in investing activities . . . . . 2,136 (311) Cash flows from financing activities: Issuance of common shares. . . . . . . . . . . . . . . . . . . -- 5,505 Dividends on preferred shares. . . . . . . . . . . . . . . . . (419) (209) Net borrowings on line of credit . . . . . . . . . . . . . . . -- 1,975 Payments on borrowings from related company. . . . . . . . . . -- (1,000) Payments on capital leases . . . . . . . . . . . . . . . . . . (114) (16) Payments on debt . . . . . . . . . . . . . . . . . . . . . . . (2,000) (115) --------- -------- Net cash provided by in financing activities. . (2,533) 6,140 Effect of exchange rate changes on cash . . . . . . . . . . . . . . (108) (30) Net increase (decrease) in cash and cash equivalents. . . . . . . . (4,348) 1,484 Cash and cash equivalents: Beginning of period. . . . . . . . . . . . . . . . . . . . . . 23,856 6,509 --------- -------- End of period. . . . . . . . . . . . . . . . . . . . . . . . . $ 19,508 $ 7,993 ========= ======== The accompanying notes are an integral part of the consolidated financial statements.
Page 5 LEVEL 8 SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, 2001 2000 ---------- -------- Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (48,911) $(8,028) Other comprehensive income, net of tax Foreign currency translation adjustment. . . . . (211) (74) Unrealized loss on available-for-sale securities (63) -- ---------- -------- Comprehensive loss. . . . . . . . . . . . . . . . . . $ (49,185) $(8,102) ========== ======== The accompanying notes are an integral part of the consolidated financial statements.
Page 6 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 1. INTERIM FINANCIAL STATEMENTS The accompanying financial statements are unaudited, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles of the United States of America have been condensed or omitted pursuant to those rules and regulations. Accordingly, these interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Level 8 Systems, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for other interim periods or for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary for a fair statement of the interim results of operations. All such adjustments are of a normal, recurring nature, except for the impairment charge as discussed in Note 5 and the restructuring charge as discussed in Note 6. The year-end condensed balance sheet data was derived from audited financial statements in accordance with the rules and regulations of the SEC, but does not include all disclosures required for financial statements prepared in accordance with generally accepted accounting principles of the United States of America. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All of the Company's subsidiaries are wholly owned for the periods presented. On December 28, 2000, the Company entered into a purchase agreement to acquire Level 8 Systems, Ltd. from Liraz Systems, Ltd., ("Liraz") the Company's principal stockholder, in exchange for shares of the Company's common stock. As of the date of this filing, the transaction has not yet been completed. The closing is subject to final approval by a vote of the Company's shareholders. Accordingly, the accompanying financial statements do not reflect the acquisition of Level 8 Systems, Ltd. 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 loss or stockholders' equity. NOTE 2. USE OF ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles of 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. NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000, further guidance related to accounting for derivative instruments and hedging activities was provided when the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment of FASB Statement No. 133. This standard, as amended, requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. As amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, this standard is effective for the Company's financial statements beginning January 1, 2001, with early adoption permitted. These statements are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The financial impact of these statements had no material impact on the Company. Page 7 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) In November of 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 100, "Restructuring and Impairment Charges." SAB 100 provides guidance on the accounting for and disclosure of certain expenses and liabilities often reported in connection with exit activities and business combinations (restructuring activities), and the recognition and disclosure of asset impairment charges. The Company's accounting treatment for similar items, as discussed in Notes 6 and 7 to the consolidated financial statements, are consistent with the requirements of SAB 100. In September 2000, the EITF reached a consensus in EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" which provides specific guidance on the treatment of derivatives of a company's stock. The Company has applied the provisions of EITF 00-19 for the year ended December 31, 2000 and there is no financial statement impact. Upon implementation of additional provisions of EITF 00-19 as of June 30, 2001, the Company expects to reclassify the original fair value of the warrants issued with the Series A and Series B Preferred Stock of $4,785 from stockholders' equity to liabilities and record a change in accounting to adjust the warrants to fair value which will be reflected in the Consolidated Statement of Operations. NOTE 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS 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 recorded and allowance for doubtful accounts of $3,680 which was charged to general and administrative expenses in the consolidated statements of operations. NOTE 5. IMPAIRMENT OF LONG-LIVED ASSETS Management has decided to conduct business and assess the performance of operations under a line-of-business approach. As such, the Company developed a business plan and forecast based on the line-of-business approach, including revenues, expenses, and profitability. The Company performed an assessment of the recoverability of its long-lived assets in accordance with SAB 100 and Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of ("SFAS 121"). The results of the Company's analysis indicated that an impairment had occurred with regard to intangible assets related to the acquired Template Software, Inc. business, which is part of the Systems Integration segment. See Note 12 regarding discussions on the Company's segment disclosure. As a result, 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 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. NOTE 6. RESTRUCTURING CHARGES 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 anticipates additional charges during the quarter ending 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 administrative functions. The Company anticipates that each component of the restructuring plan will be completed by June 30, 2001. Page 8 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) For the three months ended March 31, 2001, the charges associated with the Company's restructuring were as follows:
Employee severance and benefits $3,319 Excess office facilities. . . . 2,110 Marketing obligations . . . . . 288 Other . . . . . . . . . . . . . 933 ------ $6,650 ======
As of March 31, 2001, the restructuring plan included the termination of 150 employees. The plan includes a reduction of 65 personnel in the European operations and 95 personnel in the US operations. Employee termination costs are 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 relate 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. At March 31, 2001, the accrued liability associated with the restructuring charges and cash paid was $4,328 and $1,763, respectively. Non-cash restructuring items totaled $559 for the quarter ended March 31, 2001. The following table sets forth a reconciliation to accrued expenses and cash paid as of March 31, 2001:
Accrued Cash Paid -------- ---------- Employee termination. . . . . . . . . . $ 2,136 $ 1,183 Premises. . . . . . . . . . . . . . . . 1,681 274 Marketing obligations . . . . . . . . . 53 235 Other miscellaneous restructuring costs 458 71 -------- ---------- $ 4,328 $ 1,763 ======== ==========
As of March 31, 2001, the remaining accrued liability for restructuring charges from previous years for excess facilities was $230, representing the remaining cash obligations net of anticipated third-party sub-lease amounts. NOTE 7. NOTES PAYABLE During the first quarter of 2001, the Company paid in full a $2,000 note payable assumed in the acquisition of StarQuest Software, Inc., in 2000. Subsequent to March 31, 2001, the Company's $15,000 term loan with a commercial bank was amended to extend the due date to April 15, 2002. Page 9 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 8. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company's effective tax rate differs from the statutory rate primarily due to the fact that no income tax benefit was recorded for the net loss for the first quarter of fiscal year 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 first quarter of fiscal year 2001 and 2000 is primarily related to income taxes from profitable foreign operations and foreign withholding taxes. NOTE 9. OTHER DISPOSITIONS 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. The sale of the government operations was not accounted for as a discontinued operation. During the first quarter of 2001, the Company renegotiated the note to $850 and collected this amount as well as giving up the ownership interest. Asset Held for Resale 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 $2,350. NOTE 10. 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. Potentially dilutive securities outstanding during the periods presented include stock options, warrants and preferred stock. Dividends of $419 and $209 were paid to the holders of the Company's preferred stock in the first quarter of 2001 and 2000, respectively. The following table sets forth the reconciliation of net loss to loss available to common stockholders:
Three Months Ended March 31, 2001 2000 --------- -------- Net loss . . . . . . . . . . . . . . . . . . . . . . . $(48,911) $(8,028) Preferred stock dividends. . . . . . . . . . . . (410) (148) --------- -------- Loss available to common stockholders. . . . . . . . . $(49,321) $(8,176) ========= ======== Loss per common share: Net loss per share - basic and diluted . . . . . . . . $ (3.12) $ (0.64) ========= ======== Weighted common shares outstanding - basic and diluted 15,786 12,778 ========= ========
Page 10 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The following table sets forth the potential shares that are not included in the diluted net loss per share calculation because to do would be anti-dilutive for the periods presented:
March 31, 2001 2000 ------- ----- Stock options, common share equivalent . 4,626 4,008 Warrants, common share equivalent. . . . 2,662 1,361 Preferred stock, common share equivalent 2,354 1,172 ------- ----- 9,642 6,541 ======= =====
NOTE 11. RELATED PARTY TRANSACTIONS During the first quarter of 2001, the Company loaned an officer and director of the Company $75 which is due in full on January 31, 2002. The interest rate is ten percent (10%) per annum and the note is secured by shares of common stock owned by the officer and director. NOTE 12. SEGMENT 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. 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 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 Windows-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. For a more detailed discussion regarding these products, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Restatement of information prior to the first quarter of 2001 in the newly adopted format was not practicable as the Company did not differentiate on a product line basis. The 2001 information has been stated in the newly adopted format as well as the previous format in order to provide a comparative basis. Page 11 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Prior to the first quarter of 2001, management of the Company made operating decisions and assessed performance of its operations based on the following reportable segments: (1) Software, (2) Maintenance, (3) Services, and (4) Research and Development. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies," included in the Company's Annual Report on Form 10-K for year ended December 31, 2000. Segment data includes a charge allocating all general and administrative expenses to each of its operating segments based on each segment's proportionate share of expenses. The Company evaluates the performance of its segments and allocates resources to them based on loss before interest, net foreign currency gains/(losses), taxes and amortization of goodwill and other intangible assets (EBITA). The table below presents information about reported segments for the quarter ended March 31, 2001:
Messaging/ Desktop Systems Application Integration Integration Engineering Total ------------- ------------- ------------- --------- Total revenue . . . . . . $ 79 $ 2,106 $ 5,753 $ 7,938 Total cost of revenue . . 2,798 2,153 3,024 7,975 ------------- ------------- ------------- --------- Gross profit/(loss) . . . (2,719) (47) 2,729 (37) Total operating expenses. 10,264 3,187 2,297 15,748 ------------- ------------- ------------- --------- EBITA . . . . . . . . . . $ (12,983) $ (3,234) $ 432 $(15,785) ============= ============= ============= =========
A reconciliation of total segment EBITA to loss before provision for income taxes for the quarter ended March 31, 2001:
2001 --------- Total EBITA. . . . . . . . . . . . . . . . . . . . . . $(15,785) Amortization of goodwill . . . . . . . . . . . . . . . (4,065) Restructuring and impairment charges . . . . . . . . . (28,474) Gain on disposal of assets . . . . . . . . . . . . . . 160 Interest and other income/(expense), net . . . . . . . (605) --------- Total loss before income taxes. . . . . . . . . . $(48,769) =========
The table below presents information about reported segments for the quarter ended March 31:
2001 2000 ------------------- ------------------- Total Total Total Total Revenue EBITA Revenue EBITA --------- --------- --------- -------- Software $1,084 $(12,746) $ 8,233 $(2,467) Maintenance 3,754 1,939 3,674 2,037 Services 3,100 (892) 7,755 (301) Research and Development -- (4,086) -- (2,613) --------- --------- --------- -------- Total $7,938 $(15,785) $19,662 $(3,344) ========= ========= ========= ========
Page 12 LEVEL 8 SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) A reconciliation of total segment EBITA to loss before provision for income taxes for the quarter ended March 31:
2001 2000 --------- -------- Total EBITA. . . . . . . . . . . . . . . $(15,785) $(3,344) Amortization of goodwill . . . . . . . . (4,065) (3,526) Restructuring and impairment charges . . (28,474) -- Gain on disposal of assets . . . . . . . 160 -- Interest and other income/(expense), net (605) (908) --------- -------- Total loss before income taxes. . . $(48,769) $(7,778) ========= ========
The following table presents a summary of revenue by geographic region for the quarters ended March 31:
Three months ended March 31, 2001 2000 ------- ------- Denmark. . . . $ 709 $ 958 France . . . . 217 1,625 Germany. . . . 283 391 Greece . . . . 93 1,606 Israel . . . . 482 48 Italy. . . . . 544 386 Norway . . . . 202 635 Switzerland. . 368 458 United Kingdom 1,473 1,053 USA. . . . . . 2,810 11,225 Other. . . . . 757 1,277 ------ ------- Total revenue. $7,938 $19,662 ====== =======
Presentation of revenue by region is based on the country in which the customer is domiciled. NOTE 13. CONTINGENCIES Litigation. Various lawsuits and claims have been brought against the Company in the normal course of business. Management is of the opinion that the liability, if any, resulting from these claims would not have a material effect on the financial position or results of operations of the Company. Page 13 ITEM 2. 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 Geneva Integration Suite of 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--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 2001 and 2000 are included from the date of acquisition. Accordingly, the 2000 results of operations presented do not include the operations of StarQuest Software, Inc. ("StarQuest") as it was acquired November 28, 2000. All subsidiaries are wholly owned for the periods presented. 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 is shifting its primary focus from selling multiple Enterprise Application Integration ("EAI") products to a seller of Cicero, a desktop integration package to the financial services industry with a decreased focus on services. BUSINESS STRATEGY - ------------------ 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) The Messaging and Application Engineering Products. 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 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 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. Page 14 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 Windows-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. For a more detailed discussion regarding these products, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. RESULTS OF OPERATIONS - ----------------------- The following table sets forth, for the periods indicated, the Company's unaudited results of operations expressed as a percentage of revenue:
Three months ended March 31, 2001 2000 -------- ------- Revenue: Software products. . . . . . . . . . . . 13.7% 41.9% Maintenance. . . . . . . . . . . . . . . 47.2% 18.7% Services . . . . . . . . . . . . . . . . 39.1% 39.4% -------- ------- Total . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% Cost of revenue: Software products. . . . . . . . . . . . 47.2% 9.8% Maintenance. . . . . . . . . . . . . . . 16.6% 7.0% Services . . . . . . . . . . . . . . . . 36.7% 34.7% -------- ------- Total . . . . . . . . . . . . . . . . . . . . 100.5% 51.5% Gross profit. . . . . . . . . . . . . . . . . (0.5%) 48.5% Operating expenses: Sales and marketing. . . . . . . . . . . 79.5% 36.2% Research and product development . . . . 37.5% 11.2% General and administrative . . . . . . . 81.4% 18.0% Amortization of goodwill and intangibles 51.2% 17.9% Restructuring charges. . . . . . . . . . 83.8% -- Impairment of intangible assets. . . . . 274.9% -- Gain on disposal of asset. . . . . . . . (2.0%) -- -------- ------- Total . . . . . . . . . . . . . . . . . . . . 606.3% 83.3% Loss from operations. . . . . . . . . . . . . (606.8%) (34.8%) Other income (expense), net . . . . . . . . . (7.6%) (4.6%) -------- ------- Loss before taxes . . . . . . . . . . . . . . (614.4%) (39.4%) Income tax provision. . . . . . . . . . . . . 1.8% 1.3% -------- ------- Net loss. . . . . . . . . . . . . . . . . . . (616.2%) (40.7%) ======== =======
Page 15 The following table sets forth unaudited data for total revenue by geographic origin as a percentage of total revenue for the periods indicated:
Three months ended March 31, 2001 2000 ------- ----- United States 35 % 57 % Europe. . . . 57 % 38 % Asia Pacific. 2 % 2 % Other . . . . 6 % 3 % ------- ----- Total . . . . 100 % 100 %
REVENUE AND GROSS MARGIN. The Company has three categories of revenue: software products, maintenance and services. Software products revenue is comprised primarily of fees from licensing the Company's proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting and providing periodic upgrades to the Company's software products. Services revenue is comprised of fees for consulting and training services related to the Company's software products. The Company's revenues may vary from quarter to quarter due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of its sales force. The Company typically does not have any material backlog of unfilled software orders, and product revenue in any quarter is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and are relatively fixed over the short term, variations in the timing of recognition revenue can cause significant variations in operating results from quarter to quarter. Fluctuations in operating results may result in volatility in the price of the Company's common stock. Total revenues decreased significantly for the first quarter of 2001 as compared to the same period of 2000 due to a general slowing of the economy and a new focus on the Company's Cicero product. The Company's gross margins decreased to (1 %) for the quarter ended March 31, 2001 from 49% for the comparable period of 2000. SOFTWARE PRODUCTS. For the quarter ended March 31, 2001, the Systems Integration segment accounted for approximately 52% of the software revenue while the Messaging and Application Engineering segment accounted for approximately 48% of software revenue. In the Desktop Integration segment, the formal launch date of Cicero is anticipated to be late in the second quarter of 2001, so there was no revenue associated with this segment. Gross margins on software products decreased from a margin of 77% for the first quarter of 2000 to (246%) for the first quarter of 2001 primarily due to an increase in software technology amortization and the decrease in the Company's software product revenue. Cost of software is composed primarily of amortization of purchased technology, amortization of capitalized software costs for internally developed software and royalties to third parties for the Company's Geneva Message Queuing product and to a lesser extent production and distribution costs. The increase in cost of software was primarily due to amortization of capitalized software from the acquisition of StarQuest and the Cicero developed technology purchased in 2000. The software product gross margin for the Systems Integration segment and the Messaging and Application Engineering segment were approximately 4% and (147%), respectively. These costs were primarily attributable to the royalties and the 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 will be formally launched in the second quarter of 2001. The Systems Integration segment revenue is anticipated to increase slightly with the gross margin remaining relatively consistent. The Messaging and Application Engineering segment revenue is expected to show a modest increase while the cost of revenue remains constant. Page 16 MAINTENANCE. Maintenance revenue during the first quarter of 2001 increased slightly over the first quarter of 2000 which can be attributed to maintenance from former StarQuest customers and the residual of higher software sales from fiscal year 2000. The Desktop Integration segment accounted for approximately 2% of total maintenance revenue which is attributable to a software product transaction completed in the fourth quarter of 2001. The Systems Integration segment and the Messaging and Application Engineering segment accounted for approximately 17% and 81% of total maintenance revenue, respectively. Cost of maintenance is comprised of personnel costs and related overhead and the cost of third-party contracts for the maintenance and support of the Company's software products. Gross margins on maintenance increased from 62% for the first quarter of 2000 to 65% for the first quarter of 2001 as a result of the Company realizing certain economies of scale. The Desktop Integration segment had a gross margin on maintenance of approximately (89%), primarily attributable to low maintenance revenues because the Cicero product has yet to be formally launched. The Systems Integration segment had a gross margin on maintenance of approximately 56% while the Messaging and Application Engineering segment had a gross margin on maintenance of approximately 71%, both of which are attributable to the increases in installed customer base and the Company realizing economies of scale. Maintenance revenues are expected to increase, primarily in the Desktop Integration segment and the System Integration segment. The Messaging and Application Engineering segment revenues are expected to remain relatively constant Cost of maintenance is expected to increase slightly for the Desktop Integration segment, while remaining constant for the System Integration and the Messaging and Application Engineering segments. SERVICES. Services revenue for the first quarter of 2001 decreased (60%) over the same period last year, primarily due to the overall decline in software sales and, the general slowing of the economy. In addition, revenues in the first quarter of last year reflect revenues from the now ceased government services group. For the quarter ended March 31, 2001, the Systems Integration segment comprised of approximately 29% of the services revenue while the Messaging and Application Engineering segment accounted for approximately 71% of services revenue. Cost of services primarily includes personnel and travel costs related to the delivery of services. Services gross margins decreased from 12% to 6% from the first quarter of 2000 to the first quarter of 2001 primarily due to lower revenues and under-utilization of personnel. Services revenues are expected to increase for the Desktop Integration segment after its formal launch in the second quarter of 2001. The Messaging and Application Engineering segment revenues are expected to remain constant along with its gross margin. The revenues for the Systems Integration segment are expected to remain constant while its gross margin increases from more efficient utilization of personnel SALES AND MARKETING. Sales and marketing expenses primarily include personnel costs for salespeople, travel, and related overhead, as well as trade show participation and the Messaging and Application Engineering promotional expenses. Sales and marketing expenses decreased significantly from the first quarter of 2000 to the first quarter of 2001 due to a decrease in the size of the Company's sales and marketing workforce, and through decreased promotional activities. Sales and marketing expenses are expected to decrease along all product lines, primarily due to the restructuring implemented in the first quarter of 2001. The sales and marketing emphasis going forward will be on 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 increased 35% over the first quarter of 2000 due to the addition of an average of twenty developers from the StarQuest acquisition. The Company intends to continue making a significant investment in research and development while also improving efficiencies in this area. Page 17 GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of personnel costs for the executive, legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses increased by approximately $2.9 million over the first quarter of 2000. The increase was primarily the result of a provision for bad debt of approximately $3.7 million from a significant customer who filed for Chapter 11 Bankruptcy. General and administrative expenses are expected to decrease going forward primarily due to the restructuring plan implemented in the first quarter of 2001. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of goodwill and other intangible assets was $4.1 million in the first quarter of 2001 and $3.5 million in the first quarter of 2000. The amortization of goodwill in the first quarter of 2000 was related to the purchases of Template Software, Inc, Seer Technologies, Inc., Momentum Software Corporation ("Momentum"), and Level 8 Technologies. During the first quarter of 2001, amortization of goodwill and other intangibles also included the amortization of intangible assets related to the acquisition of StarQuest. The Company will continue to assess the recoverability of its intangible assets on a quarterly basis based on the net present value of the expected future cash flows. 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 anticipates additional charges during the quarter ending 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 administrative functions as well as the closing of excess facilities and the termination of certain commitments. The Company anticipates that each component of the restructuring plan will be completed by June 30, 2001. For the three months ended March 31, 2001, the charges associated with the Company's restructuring were as follows:
Employee severance and benefits $3,319 Excess office facilities. . . . 2,110 Marketing obligations . . . . . 288 Other . . . . . . . . . . . . . 933 ------ $6,650 ======
As of March 31, 2001, the restructuring plan included the termination of 150 employees. The plan includes a reduction of 65 personnel in the European operations and 95 personnel in the US operations. Employee termination costs are 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 relate 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. Page 18 At March 31, 2001, the accrued liability associated with the restructuring charges and cash paid was $4,328 and $1,763, respectively. Non-cash restructuring items totaled $559 for the quarter ended March 31, 2001. The following table sets forth a reconciliation to accrued expenses and cash paid as of March 31, 2001:
Accrued Cash Paid -------- ---------- Employee termination. . . . . . . . . . $ 2,136 $ 1,183 Premises. . . . . . . . . . . . . . . . 1,681 274 Marketing obligations . . . . . . . . . 53 235 Other miscellaneous restructuring costs 458 71 -------- ---------- $ 4,328 $ 1,763 ======== ==========
As of March 31, 2001, the remaining accrued liability for restructuring charges from previous years for excess facilities was $230, representing the remaining cash obligations net of anticipated third-party sub-lease amounts. IMPAIRMENT OF INTANGIBLE ASSETS. In the first quarter of 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. 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 indicated that an impairment had occurred with regard to intangible assets acquired from Template Software, Inc. 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 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. PROVISION FOR INCOME TAXES. The Company's effective income tax rate for continuing operations differs from the statutory rate primarily because an income tax benefit was not recorded for the net loss incurred in the first quarter of 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 first quarter of fiscal year 2001 is primarily related to income taxes from profitable foreign operations and foreign withholding taxes. IMPACT OF INFLATION. Inflation has not had a significant effect on the Company's operating results during the periods presented. LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------- Operating and Investing Activities Net cash used in operations and investing activities during the first quarter of 2001 was $1.7 million. Net payments of approximately $1.9 million for restructuring, payments for acquisitions and purchases of property and equipment were primary components of the net cash outflow offset by approximately $2.2 million received for the sale of the Company's building located in Windsor, England. 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 recorded and allowance for doubtful accounts of $3,680 which was charged to general and administrative expenses in the consolidated statements of operations. As of March 31, 2001, the Company did not have any material commitments for capital expenditures. Page 19 Financing Activities The Company funded its cash needs during the first three months of 2001 with cash on hand at December 31, 2000 and through operations. At March 31, 2001, the Company has an outstanding term loan with a commercial bank for $15,000. This loan bears interest at LIBOR plus 1% (approximately 5.9% at March 31, 2001), which is payable quarterly. There are no financial covenants. This loan is guaranteed by Liraz, the Company's principal shareholder. The original loan amount of $10,000 was used to partially fund the purchase of Template Software, IncDuring 2000, the loan and guarantee were amended to extend the due date from May 31, 2001 to November 30, 2001 and to provide the Company with an additional $5,000 in 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 stock issued, 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. Subsequent to March 31, 2001, the loan was amended to extend the due date to April 15, 2002. On December 15, 2000, the Company entered into a credit facility with a commercial bank to provide for borrowings up to the lesser of $10,000 or the sum of 50% of eligible receivables plus cash pledged with this commercial bank. Advances under the facility bear interest at LIBOR plus 1.5% (approximately 7.1% at March 31, 2001), which is payable quarterly. The facility also requires an annual fee of .5% of the commitment amount and expires on December 31, 2002. Total borrowings under this facility were $10,000 at March 31, 2001 and were based upon a $10,000 pledge of cash deposited in the bank. Borrowings under this facility are subject to the Company meeting certain financial covenants, which include stockholders' equity exceeding 23% of total assets and the current ratio exceeding .85. This facility is collateralized by the Company's accounts receivable, equipment and intangibles including intellectual property. The Company is currently in compliance with all financial covenants. During the first quarter of 2001, the Company paid a $2.0 million note payable it assumed from the acquisition of StarQuest to one of its strategic partners. For the quarter ended March 31, 2001, the Company incurred a net loss of $48.9 million and has working capital of $9.2 million and an accumulated deficit of $124.6 million. The Company believes that existing cash on hand and cash provided by future operations will be sufficient to finance its operations and expected working capital and capital expenditure requirements for at least the next twelve months so long as the Company continues to perform according to its operating plan and cost reduction program. The Company's future capital needs will depend on the Company's ability to meet its current operating forecast, the ability to successfully bring Cicero to market and market demand for the Company's products. There can be no assurance that the Company will continue to be able to meet its cash requirements through operations or, if needed, obtain additional financing on acceptable terms, and the failure to do so may have an additional adverse impact on the Company's business and operations. The Company may explore additional debt or equity financing to expand its operations and take advantage of market opportunities. Euro Conversion Several European countries adopted a Single European Currency (the "Euro") as of January 1, 1999 with a transition period continuing through January 1, 2002. The Company is reviewing the anticipated impact the Euro may have on its internal systems and on its competitive environment. The Company believes its internal systems will be Euro capable without material modification cost. Further, the Company does not presently expect the introduction of the Euro currency to have material adverse impact on the Company's financial condition, cash flows, or results of operations. Page 20 FORWARD LOOKING AND CAUTIONARY STATEMENTS - --------------------------------------------- Forward Looking and Cautionary Statements Certain statements contained in this Quarterly 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: 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; our future results may depend upon the successful integration of future acquisitions; we may not have the resources to successfully manage additional growth; 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; our license to market and sell the Cicero technology may become non-exclusive in August 2002; 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. Page 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------- Approximately 65% of the Company's 2001 revenues were generated by sales outside the United States. The Company is exposed to significant risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and 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. In an effort to reduce its exposure to currency fluctuations on its foreign currency receivables, the Company began hedging these receivables by purchasing forward contracts during 1999. However, as a matter of procedure, the Company will not invest in speculative financial instruments as a means of hedging against such risk. Gains and losses on forward foreign exchange contracts are marked to market and are included in the consolidated statement of operations for each period. In addition, since the Company enters into forward contracts only as a hedge, any change in currency rates would not result in any material net gain or loss, as any gain or loss on the underlying foreign currency denominated balance would be offset by the gain or loss on the forward contract. Page 22 PART II. OTHER INFORMATION ITEM 1. 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 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.28 Separation Agreement and General Release between Dennis McKinnie and the Company dated February 1, 2001 (filed herewith).* 10.28A Amendment dated May 5, 2001 to the Separation Agreement and General Release between Dennis McKinnie and the Company (filed herewith).* 10.29 Separation Agreement and General Release between Arik Kilman and the Company dated May 9, 2001 (filed herewith).* 10.30 Promissory Note of Level 8 Systems, Inc. dated March 21, 2001 between Level 8 Systems, Inc. and Bank Hapoalim (filed herewith). 10.30A Letter dated May 8, 2001 from Bank Hapoalim to Level 8 Systems, Inc. in connection with extension of the Promissory Note (filed herewith). ________________ *Management contract or compensatory agreement (b) Reports on Form 8-K None Page 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Level 8 Systems, Inc. /s/ Paul Rampel Date: May 15, 2001 ----------------------------- Paul Rampel President /s/ John Broderick Date: May 15, 2001 ----------------------------- John Broderick Chief Financial Officer Page 24 -----END PRIVACY-ENHANCED MESSAGE-----