SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)
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Filed by a Party other than the Registrant [ ]
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[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
LEVEL 8 SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
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[X] No fee required.
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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[LEVEL 8 LOGO]
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
________, 2002
Dear Stockholder:
You are cordially invited to attend the 2002 Annual Meeting of
Stockholders of Level 8 Systems, Inc. (the "Company") to be held at the Carnegie
Center, Building 101, Princeton, New Jersey on December 20, 2002, at 10:00 a.m.,
local time. I sincerely hope that you will be able to attend the meeting, and I
look forward to seeing you.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. We also will report on the
operations of the Company during the past year, as well as on our plans for the
future.
We are including with this Proxy Statement a copy of the Company's Annual
Report on Form 10-K. It contains information on the Company's operations,
markets, products and services as well as the Company's audited financial
statements.
Please take this opportunity to become involved in the affairs of the
Company. Each of the issues covered by the Proxy Statement is important to
position the Company for growth. We hope you will take time to carefully
consider each matter.
Whether or not you expect to be present at the meeting, please complete,
date, sign and mail the enclosed proxy in the envelope provided. Returning the
proxy does NOT deprive you of your right to attend the meeting and vote your
shares in person. If you attend the meeting, you may withdraw your proxy and
vote your own shares.
Sincerely,
/s/ Anthony C. Pizi
Anthony C. Pizi
Chairman of the Board
LEVEL 8 SYSTEMS, INC.
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 20, 2002
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Notice is hereby given that the Annual Meeting of Stockholders of Level 8
Systems, Inc. (the "Company") will be held at the Carnegie Center, Building 101,
Princeton, New Jersey on December 20, 2002, 2002 at 10:00 a.m., local time, for
the following purposes:
1. To elect seven (7) directors to the Board of Directors to serve for
the ensuing year and until their successors are duly elected and
qualified;
2. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to effect a reverse stock split of our
common stock pursuant to which any whole number of outstanding
shares between and including four and twelve would be combined into
one share of our common stock, to decrease the number of authorized
shares of capital stock to 25 million, consisting of 5 million
shares of authorized preferred stock and 20 million shares of common
stock, and to authorize our Board of Directors to file one such
amendment as an alternative to Proposal 3;
3. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 40 million to 60 million and to
authorize our Board of Directors to file such amendment as an
alternative to Proposal 2;
4. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent accountants for the fiscal year ending December 31,
2002; and
5. To transact such other business as may properly come before the
meeting and any adjournment(s) thereof. The Board of Directors is
not aware of any other business to be presented to a vote of the
stockholders at the Annual Meeting.
The close of business on November 20, 2002 has been fixed as the record
date for determination of stockholders entitled to notice of and to vote at the
meeting.
By Order of the Board of Directors,
/s/ John P. Broderick
John P. Broderick
Chief Financial Officer and
Corporate Secretary
Cary, North Carolina
_______, 2002
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER THAT YOUR SHARES
MAY BE REPRESENTED AT THE MEETING. NO POSTAGE IS NEEDED IF MAILED IN THE UNITED
STATES.
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LEVEL 8 SYSTEMS, INC.
8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
PROXY STATEMENT
This Proxy Statement is furnished to stockholders in connection with the
solicitation by the Board of Directors of Level 8 Systems, Inc., a Delaware
corporation (the "Company"), of proxies in the accompanying form for use at the
Annual Meeting of Stockholders of the Company to be held at the Carnegie Center,
Building 101, Princeton, New Jersey at 10:00 a.m., local time, on December 20,
2002, and at any adjournment thereof (the "Annual Meeting"). This Proxy
Statement and the accompanying Notice of Annual Meeting and Form of Proxy are
being mailed to the Company's stockholders on or about November __, 2002.
VOTING
If a proxy in the accompanying form is duly executed and returned, the
shares represented thereby will be voted at the Annual Meeting and, where a
choice is specified, will be voted in accordance with the specification made.
Any stockholder who gives a proxy may revoke it at any time before it is
exercised by giving a later proxy, by attending the meeting and voting in person
or by giving notice of revocation to the Company's Secretary. Executed but
unmarked proxies will be voted "FOR" each of the director nominees and proposals
described in this Proxy Statement and in accordance with the best judgment of
the proxy holders on any other matter that may properly come before the meeting.
The close of business on November 20, 2002 has been fixed by the Board of
Directors as the record date for the determination of stockholders of the
Company entitled to vote at the Annual Meeting. As of November 20, 2002, the
Company had [19,127,467] shares of common stock which are each entitled to one
vote (the "Voting Common Stock"). Additionally the Company had 11,570 shares of
Series A3 Convertible Redeemable Preferred Stock, 30,000 shares of Series B3
Convertible Preferred Stock and 1,590 shares of Series C Convertible Redeemable
Preferred Stock outstanding, with each holder of such stock being generally
entitled to vote on an as-converted basis together with the holders of the
common stock, subject to certain conversion limitations. Taking into account the
relevant restrictions on conversion, the holders of Series C Preferred Stock are
entitled to vote a total of [4,184,196] shares on an as-converted basis, the
holders of Series B3 Preferred Stock are entitled to vote a total of [1,692,876]
shares on an as-converted basis and the holders of the Series A3 Preferred Stock
are entitled to vote [815,832] shares on an as-converted basis (collectively,
the "Preferred Voting Stock," and, together with the Common Voting Stock, the
"Voting Shares").
Collectively, for purposes of calculating the presence of a quorum and
whether a particular proposal has been approved, there are a total of
[25,820,371] Voting Shares.
The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares of capital stock entitled to vote at the Annual
Meeting is necessary to constitute a quorum at the Annual Meeting. Directors are
elected by a plurality of votes cast. In general, approval of any matter by our
stockholders requires the affirmative vote of the holders of a majority of the
shares of Voting Stock that are present in person or represented by proxy and
entitled to vote at the meeting. Accordingly, the approval of Proposal 4,
ratification of the appointment of independent accountants requires the
affirmative vote of the holders of a majority of the shares of Voting Stock that
are present in person or represented by proxy and entitled to vote at the
meeting. However, Proposals 2, the amendment to the Company's Certificate of
Incorporation to effect a reverse stock split and reduce the authorized shares
of capital stock, will require the affirmative vote of a majority of the issued
and outstanding shares of Voting Common Stock voting as a single class and the
affirmative vote of the majority of the issued and outstanding shares of the
Preferred Stock voting as a single class without regard to conversion
limitations. Proposal 3, the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock, will
require the affirmative vote of the majority of the issued and outstanding
shares of Voting Common Stock voting as a single class and the affirmative vote
of the majority of the Voting Stock. The Board of Directors is seeking approval
of both Proposals 2 and 3 because stockholder approval is required under
Delaware law but will only implement one (or neither) of the proposals if the
stockholders approve both such proposals
Abstentions and broker non-votes (which occur when a broker holding shares
for a beneficial owner does not
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vote on a particular proposal because the broker does not have discretionary
voting power with respect to that item and has not received voting instructions
from the beneficial owner) will be counted as shares present in the
determination of whether the shares of Voting Stock represented at the meeting
constitute a quorum. Directors are elected by plurality vote and therefore
abstentions and broker non-votes have no effect on the election of directors in
Proposal 1. Abstentions will count in the tabulation of votes cast on each of
the other proposals and will have the same effect as votes against these
proposals. Broker non-votes will count as present, but will not be deemed
entitled to vote on proposals for which brokers do not have discretionary
authority and, therefore, will have no effect on the proposal to ratify the
independent accountants, other than to reduce the affirmative votes needed to
approve such proposal. In the case of Proposals 2 and 3, however, broker
non-votes will have the same effect as votes against such proposals.
Stockholder votes will be tabulated by persons appointed by the Board of
Directors to act as inspectors of election for the Annual Meeting. All
stockholder meeting proxies, ballots and tabulations that identify individual
stockholders are kept secret, and no such document shall be available for
examination, nor shall the identity or the vote of any stockholder be disclosed
except as may be necessary to meet legal requirements under the laws of
Delaware, the Company's state of incorporation.
The expense of the solicitation of proxies will be borne by the Company.
Following the original mailing of the proxy material, solicitation of proxies
may be made by mail, telephone, telegraph, courier service or personal interview
by certain of the regular employees of the Company, who will receive no
additional compensation for their services. In addition, the Company has engaged
InvestorCom, Inc. a proxy solicitation firm, to aid in the solicitation of
proxies. The Company will pay $5,000 plus expenses for the services of
InvestorCom, Inc. In addition, the Company will reimburse brokers and other
nominees for their reasonable expenses incurred in forwarding soliciting
material to beneficial owners.
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BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth information as of November 1, 2002 with
respect to beneficial ownership of shares by (i) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding common
stock, (ii) each of the Company's directors, (iii) the executive officers of the
Company named in the Summary Compensation Table (the "Named Executives") and
(iv) all current directors and executive officers of the Company as a group.
Unless otherwise indicated, the address for each person listed is c/o Level 8
Systems, Inc., 8000 Regency Parkway, Cary, North Carolina 27511.
Stock ownership information has been furnished to the Company by the named
person. Beneficial ownership as reported in this section was determined in
accordance with Securities and Exchange Commission regulations and includes
shares as to which a person possesses sole or shared voting and/or investment
power and shares that may be acquired on or before December 31, 2002 upon the
exercise of stock options. Except as otherwise stated in the footnotes below,
the named persons have sole voting and investment power with regard to the
shares shown as beneficially owned by such persons.
COMMON STOCK
-------------------------------------
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENT OF CLASS
- ------------------------ ------------- ----------------
MLBC, Inc. (1)........................................................... 1,229,000 (2) 6.4%
Seneca Capital International, Ltd.(3).................................... 1,121,011 (4) 5.5%
Seneca Capital, L.P.(5).................................................. 841,759 (6) 4.2%
Dennis McKinnie(7)....................................................... -- --
Steven Dmiszewicki (8)................................................... 255,000(8) 1.3%
Arik Kilman(9)........................................................... -- --
Anthony C. Pizi.......................................................... 859,564(10) 4.3%
Paul Rampel.............................................................. 249,681(11) 1.3%
John P. Broderick........................................................ 55,299(12) *
Frank G. Artale.......................................................... -- --
Nicholas Hatalski........................................................ -- --
Kenneth W. Nielsen....................................................... -- --
Bruce W. Hasenyager...................................................... -- --
Jon Anton................................................................ -- --
Jay R. Kingley........................................................... -- --
All current directors and executive officers as a group (9 persons)...... 1,164,544(13) 5.8%
- ----------
* Represents less than one percent of the outstanding shares.
(1) The address of MLBC, Inc. is c/o Merrill Lynch & Co., Inc., Corporate Law
Department, 222 Broadway- 17th Floor, New York, New York 10038
(2) MLBC, Inc. is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. See "Certain Relationships and Related Transactions."
(3) The address of Seneca Capital International, Ltd. is 527 Madison Avenue,
11th Floor, New York, New York 10022.
(4) Includes 779,826 shares of common stock issuable upon conversion of Series
B3 Preferred Stock and 341,185 shares issuable upon exercise of warrants
at an exercise price of $0.40. Mr. Douglas Hirsch exercises sole voting or
dispositive power with respect to the shares held of record by Seneca
Capital International, Ltd.
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(5) The address of Seneca Capital L.P. is 527 Madison Avenue, 11th Floor, New
York, New York 10022.
(6) Includes 417,205 shares of common stock issuable upon conversion of Series
B3 Preferred Stock, 188,408 shares of common stock issuable upon
conversion of Series A3 Preferred Stock and 236,146 shares issuable upon
exercise of warrants at an exercise price of $0.40 per share. Mr. Douglas
Hirsch exercises sole voting or dispositive power with respect to the
shares held of record by Seneca Capital L.P.
(7) The address of Dennis McKinnie is 8000 Regency Parkway, Suite 515, Cary,
North Carolina 27511. Mr. McKinnie resigned as Senior Vice President,
Chief Legal and Administrative Officer and Corporate Secretary in June
2001.
(8) The address of Steven Dmiszewicki is 8000 Regency Parkway, Suite 515,
Cary, North Carolina 27511. Mr. Dmiszewicki resigned as Chief Executive
Officer of the Company in February 2001. All shares reported are options
exercisable within sixty (60) days.
(9) The address of Arik Kilman is Azrieli Center 3, Triangle Building, 42nd
Floor, Tel Aviv 67023 Israel. Mr. Kilman resigned as Chief Strategy
Officer of the Company in April 2001.
(10) Includes 266,643 shares subject to stock options exercisable within sixty
(60) days, 394,737 shares of common stock issuable upon the conversion of
Series C Preferred Stock and 98,684 shares of common stock issuable upon
the exercise of warrants at an exercise price of $0.38 per share of common
stock subject to adjustment.
(11) Includes 24,462 shares of common stock and 20,919 shares issuable upon the
exercise of warrants at an exercise price of $30.00 per share. Also
includes 204,300 shares subject to stock options exercisable within sixty
(60) days.
(12) Consists of 55,299 shares subject to stock options exercisable within
sixty (60) days.
(13) Includes shares issuable upon exercise of options and warrants exercisable
within sixty (60) days as described in Notes 10-12.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than ten percent of
the Company's Common Stock (collectively, "Reporting Persons") to file reports
of ownership and changes in ownership with the SEC and Nasdaq. Reporting Persons
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such reports received or
written representations from certain Reporting Persons, the Company believes
that during fiscal 2001, all Reporting Persons complied with all applicable
filing requirements.
6
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors has nominated Anthony Pizi, Paul Rampel, Frank
Artale, Nicholas Hatalski, Bruce Hasenyager, Kenneth Nielsen and Jay Kingley for
election as directors at the 2002 Annual Meeting of Stockholders. All nominees
currently are members of the Board of Directors. All nominees have consented to
serve as directors if elected. Each of the directors elected at the 2002 Annual
Meeting of Stockholders will serve until the 2003 Annual Meeting of Stockholders
and until the election and qualification of his successor or until his earlier
death, resignation or removal.
The affirmative vote of a plurality of the votes cast by the holders of
Voting Stock, voting together as a single class, will be required to elect each
of the nominees as a director of the Company for the ensuing year.
VOTE TO ELECT DIRECTORS
Directors are elected by a plurality of the votes cast. It is the
intention of the persons named as proxies to vote the proxies "FOR" the election
to the Board of Directors of the seven nominees named above, unless a
stockholder directs otherwise. In the event that a vacancy (which is not
anticipated) arises among the nominees prior to the Annual Meeting, the proxy
will be voted for the remaining nominees and may be voted for a substitute
nominee designated by the Board of Directors.
THE BOARD OF DIRECTORS OF THE COMPANY, BY UNANIMOUS ACTION OF THE DIRECTORS,
RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES NAMED IN THIS PROPOSAL.
ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS AND DIRECTOR NOMINEES
Set forth below with respect to each nominee is his name, age, principal
occupation and business experience for the past five years and length of service
as a director of the Company, when applicable.
ANTHONY C. PIZI
Director since August 2000. Age: 43
Mr. Pizi has served as Chairman of the Board of Directors and as Chief
Technology Officer since December 1, 2000. He has served as Chief Executive
Officer since February 1, 2001. Mr. Pizi has been a director since August 2000.
Until December 2000, he was First Vice President and Chief Technology Officer of
Merrill Lynch's Private Client Technology Architecture and Service Quality
Group. Mr. Pizi's 16 years with Merrill Lynch included assignments in Corporate
MIS, Investment Banking and Private Client. Mr. Pizi earned his BS in
Engineering from West Virginia University.
PAUL RAMPEL
Director since February 2001. Age: 49
Mr. Rampel has served as a director since February 1, 2001. He previously served
as President until June 2002. Mr. Rampel previously served as Senior Vice
President of Research and Development from November 2000 when he joined the
Company following the acquisition of StarQuest Software, Inc. ("StarQuest").
Previously, as chief executive officer, president and a founder of StarQuest,
Mr. Rampel directed the day-to-day management operations of StarQuest. In
addition, he was the design architect of StarQuest's software products and a
recognized expert on IBM connectivity with 25 years of industry experience.
Prior to StarQuest, Mr. Rampel was the founder and CEO of Orion Networking
Systems, which was acquired by Apple Computer, Inc. in 1988. Prior to that, he
was manager of data processing for McKesson and held other management positions
with Alfa Laval and Communications Solutions, Inc.
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FRANK G. ARTALE
Director since June 2001. Age: 37
Mr. Artale has been a director of Level 8 since June 2001. Since March 2002, Mr.
Artale has served as CEO of Consera Software. Prior to that and since July 2000,
Mr. Artale served as the Vice President and General Manager of the Windows
Platform Division at Veritas Software Corporation (NASDAQ: VRTS) where his group
is responsible for overall product strategy for Windows targeted software
products. Prior to joining Veritas, Mr. Artale spent nine years at Microsoft
Corporation where he held various positions including General Manager for
systems management during the Windows 2000 project and Director of Program
Management for Windows NT 4.0.
NICHOLAS HATALSKI
Director since September 2002. Age: 40
Mr. Hatalski has been a director of Level 8 since September 2002. Since December
2000, Mr. Hatalski has served as a Senior Vice President of the iServices Group
of Park City Solutions, Inc. Previously, he was a Practice Manager at Siemens
Health Services.
BRUCE W. HASENYAGER
Director since October 2002. Age: 60
Mr. Hasenyager has been a director of Level 8 since October 2002. Since April
2002, Mr. Hasenyager has served as Director of Business and Technology
Development at the Hart eCenter at Southern Methodist University. Prior to that,
Mr. Hasenyager served as Senior Vice President and CTO of Technology and
Operations at MobilStar Network Corporation since April 1996.
KENNETH W. NIELSEN
Director since October 2002. Age: 43
Mr. Nielsen has been a director of Level 8 since October 2002. Since December
1998, Mr. Nielsen has served as President and CEO of Nielsen Personnel Services,
inc., a personal staffing firm. Prior to that, Mr. Nielsen was District
Operations Manager for Outsource International, Inc.
JAY R. KINGLEY
Director since November 2002. Age: 41
Mr. Kingley has been a director of Level 8 since November 2002. Since 2001, Mr.
Kingley has served as CEO of Warren Partners, LLC, a software development and
consultancy company. Prior to that, Mr. Kingley was Managing Director of a
business development function of Zurich Financial Services Group from 1999-2001.
Prior to joining Zurich Financial Services Group, Mr. Kingley was Vice President
of Diamond Technology Partners, Inc., a management consulting firm.
CHANGES IN THE COMPOSITION OF THE BOARD OF DIRECTORS
At the 2001 Annual Meeting of Stockholders, the stockholders elected
Anthony Pizi, Paul Rampel, Lenny Recanati, Samuel Somech, Theodore Fine, Michel
Berty, John W. Cummings, Talmor Margalit, Frank Artale, Richard Daly and Burton
Grad to the Board of Directors of Level 8. Mr. Somech resigned from the Board of
Directors in July 2001 to pursue other interests. In connection with a change in
control of Liraz Systems, Ltd. ("Liraz") and the sale of the majority of their
holdings of Level 8 securities, the three directors affiliated with Liraz,
Messrs. Margalit, Recanati and Grad, resigned from the Board of Directors in
November 2001. Pursuant to the terms of a certain stockholders' agreement with
Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch"), Merrill Lynch replaced
Mr. Cummings as Merrill Lynch's representative on the Board of Directors with
Byron C. Vielehr in January 2002. Subsequently, in July 2002, Merrill Lynch
terminated the stockholders' agreement and Mr. Vielehr resigned from the Board.
Mr. Daly
8
resigned from the Board in July 2002, Dr. Berty resigned from the Board in
August 2002 and Mr. Fine resigned in September 2002. John Barbano was appointed
to the Board of Directors in January 2002 and subsequently resigned in August
2002. None of the resignations were the result of a disagreement with the
Company or its management.
Pursuant to the authority granted to the Board of Directors under the
Company's Certificate of Incorporation and bylaws, the Company's Board of
Directors appointed the following people to fill vacancies left by the departing
Board members. Dr. Jon Anton was appointed to the Board in April 2002 but has
elected not to stand for reelection at this Annual Meeting of Stockholders. Mr.
Hatalski was appointed to the Board of Directors in September 2002. Messrs.
Hasenyager and Nielsen were appointed to the Board of Directors in October 2002.
Mr. Kingley was appointed to the Board in November 2002.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors is responsible for the overall affairs of the
Company. The Board of Directors held twelve meetings in 2001. Each director
attended over 75% of the meetings of the Board and any committees on which he
served in fiscal 2001. To assist the Board of Directors in carrying out their
responsibility, the Board has delegated certain authority to several committees.
Information concerning these committees follows.
Messrs. Artale, Rampel and Hatalski presently serve on the Compensation
Committee of the Board of Directors. During 2001, the Compensation Committee
consisted primarily of Messrs. Daly, Artale and Recanati until Mr. Recanati's
resignation in November 2001. Prior to the Annual Stockholders Meeting in June
2001, the Compensation Committee consisted of Messrs. Fine, Kilman and Recanati.
The Compensation Committee has (i) full power and authority to interpret the
provisions of and supervise the administration of the Level 8 1997 Stock Option
Plan and the Outside Director Stock Incentive Plan, and (ii) the authority to
review all compensation matters relating to the Company. The Compensation
Committee met seven times during fiscal 2001.
Messrs. Artale, Nielsen and Hasenyager presently serve on the Audit
Committee of the Board of Directors. During most of 2001, the Audit Committee
consisted of Messrs. Daly, Artale, Fine and Dr. Berty. The Audit Committee
recommends to the Board of Directors the independent public accountants to be
selected to audit the Company's annual financial statements and approves any
special assignments given to such accountants. The Audit Committee also reviews
the planned scope of the annual audit, any changes in accounting principles and
the effectiveness and efficiency of the Company's internal accounting staff. The
Audit Committee met four times during fiscal 2001. During a portion of fiscal
year 2001, Mr. Recanati and Dr. Robert Brill were members of the Audit
Committee.
The Board of Directors formed a Nominating Committee consisting of Mr.
Fine and Dr. Berty at a meeting on May 17, 2001. Messrs. Hasenyager and Rampel
presently serve on the Nominating Committee of the Board of Directors. The
Nominating Committee is responsible for proposing nominees to fill vacancies on
the Board of Directors. The Nominating Committee does not consider stockholder
recommendations for directors.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently comprised of Messrs. Artale,
Rampel and Hatalski. None of the current members of the Compensation Committee
has served as an executive officer of the Company, except for Mr. Rampel, who
was an executive officer until June 2002, and no executive officer of the
Company has served as a member of the Compensation Committee of any other entity
of which Messrs. Artale, Rampel and Hatalski have served as executive officers.
There were no interlocking relationships between the Company and other entities
that might affect the determination of the compensation of the directors and
executive officers of the Company.
DIRECTOR COMPENSATION
In May 1999, stockholders of the Company approved the Outside Director
Stock Incentive Plan of the Company. Under this plan, the outside directors may
be granted an option to purchase 12,000 shares of common stock at a price equal
to the fair market value of the common stock as of the grant date. In January
2002, the Board of
9
Directors approved an amendment to the Outside Director Stock Incentive Plan to
provide an increase in the number of options to be granted to outside directors
to 24,000. These options vest over a three year period in equal increments upon
the eligible Director's election to the Board, with the initial increment
vesting on the date of grant. The Outside Director Stock Incentive Plan also
permits eligible directors to receive partial payment of director fees in common
shares in lieu of cash, subject to approval by the Board of Directors. In
addition, the plan permits the Board of Directors to grant discretionary awards
to eligible directors under the plan. None of the Company's Directors received
additional monetary compensation for serving on the Board of Directors of the
Company in 2001, other than reimbursement of reasonable expenses incurred in
attending meetings.
In October 2002, the Board of Directors approved an amendment to the stock
incentive plan for all non-management directors. Under the amendment, each
non-management director will receive 100,000 options to purchase common stock of
the Company at the fair market value of the common stock on the date of grant.
These shares will vest in three equal increments with the initial increment
vesting on the date of grant. The option grant contains an acceleration of
vesting provision should the Company incur a change in control. A change in
control is defined as a merger or consolidation of the Company with or into
another unaffiliated entity, or the merger of an unaffiliated entity into the
Company or another subsidiary thereof with the effect that immediately after
such transaction the stockholders of the Company immediately prior to the
transaction hold less than fifty percent (50%) of the total voting power of all
securities generally entitled to vote in the election of directors, managers or
trustees of the entity surviving such merger or consolidation. Under the
amendment, there will be no additional compensation awarded for committee
participation. The shares allocated to the Board of Directors are being issued
out of the Level 8 Systems, Inc. 1997 Employee Stock Plan.
ADDITIONAL INFORMATION
For additional information that should be considered with regard to the
election of directors, see "Executive Compensation," "Stock Performance Graph"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
EXECUTIVE OFFICERS
The Company's current executive officers are listed below, together with
their age, position with the Company and business experience for the past five
years.
ANTHONY C. PIZI Age: 43
Mr. Pizi currently serves as the Chairman of the Board, Chief Executive Officer
and Chief Technology Officer of the Company. Please refer to the section of this
Proxy Statement entitled "Additional Information Concerning the Board of
Directors and Director Nominees" for additional information regarding Mr. Pizi's
experience.
JOHN P. BRODERICK Age: 53
Mr. Broderick has served as the Chief Operating Officer of the Company since
June 2002, as the Chief Financial Officer of the Company since April 2001, and
as Corporate Secretary since August 2001. Prior to joining the Company, Mr.
Broderick was Executive Vice President of Swell Inc., a sports media e-commerce
company where he oversaw the development of all commerce operations and served
as the organization's interim CFO. Previously, Mr. Broderick served as chief
financial officer for Programmer's Paradise, a publicly held (NASDAQ: PROG)
international software marketer. Mr. Broderick received his B.A. in accounting
from Villanova University.
10
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation
earned by all persons serving as the Company's during fiscal year 2001, the
executive officers serving or having served at the end of fiscal 2001 whose
salary and bonus exceeded $100,000 for services rendered to the Company during
fiscal 2001 and two other former executive officers who would be included but
for the fact that they no longer served as executive officers at the end of
fiscal 2001. The table reflects compensation earned for each of the last three
years or for such shorter period of service as an executive officer as is
reflected below. For the principal terms of the options granted during fiscal
2001, see "Option Grants in Fiscal 2001."
SUMMARY COMPENSATION TABLE
NAME AND SECURITIES ALL OTHER
PRINCIPAL FISCAL UNDERLYING ANNUAL
POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
-------- ---- ------ ----- ------- ------------
Anthony C. Pizi 2001 $ 527,038 $ -- 500,000 $ --
Chief Executive Officer, Chief
Technology Officer and Chairman (1)
Paul Rampel 2001 $ 231,310 $ 60,000 404,300 $ --
Former President (2) 2000 $ 15,000 $ -- --
John P. Broderick 2001 $ 146,788 $ 40,000 165,900 $ --
Chief Operating and Financial
Officer, Corporate Secretary
Steven Dmiszewicki 2001 $ 16,668 $ -- -- $ 592,309(4)
Former Chief Executive Officer (3) 2000 $ 235,416 $ 200,000(5) 120,000(6) $ --
1999 $ 200,000 $ -- 35,000 $ --
Arie Kilman 2001 $ 166,667 $ -- -- $1,795,000(8)
Former Chief Strategy Officer (7) 2000 $ 234,374 $ 100,000 50,000(9) $ --
1999 $ 120,000 $ 90,000 200,000(9) $ --
Dennis McKinnie 2001 $ 112,501 $ -- -- $ 276,922(11)
Former Senior Vice President, 2000 $ 182,292 $ 83,000 -- $ --
Chief Legal and Administrative 1999 $ 172,917 $ 50,000 -- $ --
Officer, Corporate Secretary (10)
- ----------
(1) Mr. Pizi began his service as Chief Executive Officer of the Company in
February 2001.
(2) Mr. Rampel resigned his position as President in June 2002.
(3) Mr. Dmiszewicki resigned his position as Chief Executive Officer in
February 2001.
(4) Includes a single lump sum payment of $500,000 and an additional $92,309
for accrued vacation paid in connection with Mr. Dmiszewicki's separation
from the Company. Please see "Employment Agreements, Termination of
Employment and Change-In-Control Arrangements" for a complete description
of the severance arrangement.
11
(5) Includes a $100,000 performance based bonus and a bonus of $100,000 for
the successful completion of the Template acquisition.
(6) In December 2000, Mr. Dmiszewicki voluntarily forfeited 100,000 options
with an exercise price of $37.875.
(7) Mr. Kilman resigned his position as Chief Strategy Officer in April 2001.
(8) Includes a single lump sum payment of $750,000 paid in connection with Mr.
Kilman's separation from the Company and $1,045,000, which represents the
fair market value of 250,000 shares of common stock that were issued to
Mr. Kilman in connection with his separation from the Company. Please see
"Employment Agreements, Termination of Employment and Change-In-Control
Arrangements" for a complete description of the severance arrangement.
(9) In December 2000, Mr. Kilman voluntarily forfeited all of his 250,000
options.
(10) Mr. McKinnie resigned all his positions with the Company on June 30, 2001.
(11) Includes a single lump sum payment of $225,000 and an additional $51,922
for accrued vacation paid in connection with Mr. McKinnie's separation
from the Company. Please see "Employment Agreements, Termination of
Employment and Change-In-Control Arrangements" for a complete description
of the severance arrangement.
The following table sets forth information regarding each grant of stock
options to each of the Named Executives during fiscal 2001. The Company is
required to withhold from the shares issued upon exercise a number of shares
sufficient to satisfy applicable withholding tax obligations. The Company did
not award any stock appreciation rights ("SARs") during fiscal 2001.
OPTION GRANTS IN FISCAL 2001
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- -------------- ---------- ------------ ---------- ---------- ------------- -----------
Anthony C. Pizi 300,000 9.88% $ 6.125 01/02/11 $1,155,594 $2,928,502
100,000 3.29% $ 5.81 03/06/11 365,388 925,964
100,000 3.29% $ 1.74 12/03/11 109,428 272,311
Paul Rampel
200,000 6.58% $ 5.81 03/06/11 730,776 1,851,929
204,300 6.73% $ 1.74 12/03/11 223,561 566,547
John P.Broderick
50,000 1.65% $ 4.04 05/07/11 127,037 321,936
25,000 0.82% $ 1.75 09/25/11 27,514 69,726
90,900 2.99% $ 1.74 12/03/11 99,470 252,076
12
The following table sets forth information concerning the options
exercised during fiscal 2001 and held at December 31, 2001 by the Named
Executives.
FISCAL 2001 YEAR - END OPTION HOLDINGS AND VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 2001 OPTIONS AT DECEMBER 31, 2001(1)
---------------------------- -------------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE (2) UNEXERCISABLE
- ---------------- ----------- -------- ----------- ------------- --------------- -------------
Anthony C. Pizi -- -- 133,333 530,600 -- $101,000
Paul Rampel -- -- 99,999 414,301 -- $206,343
John P. Broderick -- -- -- 165,900 -- $116,809
Steven Dmiszewicki -- -- 255,000(3) -- -- --
Dennis McKinnie -- -- 120,000(4) -- -- --
(1) Based on $2.75 per share, the December 31, 2001, closing price as quoted
on the Nasdaq National Market.
(2) The exercisable stock options held by these executives were not
in-the-money at December 31, 2001.
(3) Mr. Dmiszewicki holds 255,000 shares subject to stock options. As part of
the separation agreement, dated January 31, 2001 between the Company and
Mr. Dmiszewicki, all of Mr. Dmiszewicki's option holdings immediately
vested and the period in which those options may be exercised was extended
to 36 months from the date of termination. Please see "Employment
Agreements, Termination of Employment and Change-In-Control Arrangements"
for a complete description of the severance arrangement.
(4) Mr. McKinnie holds 120,000 shares subject to stock options. As part of the
separation agreement, dated February
13
1, 2001, as amended May 5, 2001, between the Company and Mr. McKinnie, all
of Mr. McKinnie's option holdings immediately vested and the period in
which those options may be exercised was extended to one year from the
date of termination which was in June of 2001. Accordingly, these options
expired in June 2002. Please see "Employment Agreements, Termination of
Employment and Change-In-Control Arrangements" for a complete description
of the severance arrangement.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Under the employment agreement between the Company and Mr. Pizi effective
January 1, 2002, the Company pays Mr. Pizi an annual base salary of $300,000,
and a performance bonus in cash of up to $150,000 per annum payable quarterly
based upon certain revenue goals, as determined by the Compensation Committee of
the Board of Directors of the Company, in its discretion. Upon termination of
Mr. Pizi's employment by the Company without cause, the Company has agreed to
pay Mr. Pizi (a) a lump sum payment of one year of Mr. Pizi's then base salary
within thirty (30) days of termination and (b) two hundred thousand (200,000)
shares of the Company's common stock. In the event there occurs a substantial
change in Mr. Pizi's job duties, there is a decrease in or failure to provide
the compensation or vested benefits under the employment agreement or there is a
change in control of the Company, the Company has agreed to grant Mr. Pizi two
hundred thousand (200,000) shares of the Company's common stock. If Mr. Pizi's
employment is terminated for any reason, Mr. Pizi has agreed that, for one (1)
year after such termination, he will not directly or indirectly solicit or
divert business from the Company or assist any business in attempting to do so
or solicit or hire any person who was an employee of the Company during the term
of his employment agreement or assist any business in attempting to do so.
Under the employment agreement between the Company and Mr. Broderick
effective January 1, 2002, the Company pays Mr. Broderick a base salary of
$200,000 and a performance bonus of cash up to 20% of Mr. Broderick's base
salary. Upon termination of Mr. Broderick's employment by the Company without
cause, the Company has agreed to provide Mr. Broderick with salary continuation
of six months of Mr. Broderick's then base salary beginning on the first payday
after the date of termination. In the event there occurs a substantial change in
Mr. Broderick's job duties, there is a decrease in or failure to provide the
compensation or vested benefits under the employment agreement or there is a
change in control of the Company, the Company has agreed to grant Mr. Broderick
fifty thousand (50,000) shares of the Company's common stock, a salary
continuation amounting to six months of Mr. Broderick's then base salary and
immediately vest all unvested stock options held by Mr. Broderick. Mr. Broderick
will have thirty (30) days from the date written notice is given about either a
change in his duties or the announcement and closing of a transaction resulting
in a change in control of the Company to resign and execute his rights under
this agreement. If Mr. Broderick's employment is terminated for any reason, Mr.
Broderick has agreed that, for one (1) year after such termination, he will not
directly or indirectly solicit or divert business from the Company or assist any
business in attempting to do so or solicit or hire any person who was an
employee of the Company during the term of his employment agreement or assist
any business in attempting to do so.
Under the separation agreement between the Company and Mr. Rampel dated
June 18, 2002, the Company has agreed, among other things, to provide to Mr.
Rampel: (a) forgiveness of a $32,500 debt owed to the Company by Mr. Rampel; (b)
immediate vesting of all unvested stock options and the extension of the period
for exercise of these options to 12 months from the date of separation; and (c)
a grant of 100,000 shares of common stock of the Company. All the payments above
were subject to applicable withholding. In return for this compensation, Mr.
Rampel executed a release of employment related claims and agreed to forfeit
310,000 vested stock options with exercise prices between $5.87 and $6.10.
Under the separation agreement between the Company and Mr. Kilman dated
April 25, 2001, the Company has agreed to provide Mr. Kilman with the following
items: (a) $600,000 payable in one lump sum and $150,000 on the forty-fifth day
following the effective date of the agreement and (b) two hundred fifty thousand
(250,000) shares of Company common stock. In return for this compensation, Mr.
Kilman has agreed to not (i) solicit or request any employee or consultant to
leave employment of the Company, (ii) hire any employee of the Company, (iii)
solicit or request any competing business to employ an employee of the Company
or (iv) provide lists of employee names to recruiters.
Under the separation agreement between the Company and Mr. McKinnie dated
February 1, 2001, as amended by letter dated May 5, 2001, and in exchange for
Mr. McKinnie's continued service until the 2001 Annual Meeting of Stockholders,
the Company has agreed to provide Mr. McKinnie the following items: (a) his
annual salary payable in
14
one lump sum on May 7, 2001, (b) continued salary until the 2001 Annual Meeting
of Stockholders, (c) medical, dental, vision, life insurance and long-term
disability insurance at employer rates and 401(k) participation benefits for a
period of 52 weeks from the date of the 2001 Annual Meeting of Stockholders, (d)
compensation for executive coaching/placement services for 6 months, (e) a lump
sum payment on May 7, 2001 for his unused vacation days which equal 60 days and
(f) the immediate vesting of all unvested options and the extension of the
period for exercise of these options to one year from the date of the execution
of the agreement. In return for this compensation, Mr. McKinnie has agreed to
not (i) solicit or request any employee or consultant to leave employment of the
Company, (ii) hire any employee of the Company, (iii) solicit or request any
competing business to employ an employee of the Company or (iv) provide lists of
employee names to recruiters.
Under the separation agreement between the Company and Mr. Dmiszewicki,
the Company has agreed to provide to Mr. Dmiszewicki with the following items:
(a) his weekly salary at the time of termination for the period of 52 weeks
following the date of termination, (b) medical, dental, vision, life insurance
and long-term disability insurance at employer rates and 401(k) participation
benefits for a period of 9 months from the date of termination, (c) compensation
for executive coaching/placement services for 6 months, (d) his unused vacation
days which equal 60 days and (e) the immediate vesting of all unvested options
and the extension of the period for exercise of these options to 36 months from
the date of termination. In return for this compensation, Mr. Dmiszewicki
executed a release of claims and has agreed, for a period of 12 months from the
execution of the agreement, not to (a) solicit or request any employee or
consultant to leave employment of the Company, (b) hire any employee of the
Company, (c) solicit or request any competing business to employ an employee of
the Company or (d) provide lists of employee names to recruiters.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report by the Compensation Committee of the Board of Directors
discusses the Committee's compensation objectives and policies applicable to the
Company's executive officers. The report reviews the Committee's policy
generally with respect to the compensation of all executive officers as a group
for fiscal 2001 and specifically reviews the compensation established for the
Company's Chief Executive Officer as reported in the Summary Compensation Table.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Compensation Committee of the Board of Directors approves all policies
under which compensation is paid or awarded to the Company's executive officers.
The Committee is currently comprised of Messrs. Artale, Rampel and Hatalski. Mr.
Rampel was President of the Company until June 2002. Mr. Arik Kilman, who served
on the Compensation Committee during fiscal year 2000 and the first quarter of
2001, was the Chief Strategy Officer and a director of the Company. Messrs.
Artale and Hatalski are not employees of the Company.
COMPENSATION PHILOSOPHY
The Company's executive compensation program has three objectives: (1) to
align the interests of the executive officers with the interests of the
Company's stockholders by basing a significant portion of an executive's
compensation on the Company's performance, (2) to attract and retain highly
talented and productive executives, and (3) to provide incentives for superior
performance by the Company's executives. To achieve these objectives, the
Committee has crafted a program that consists of base salary, short-term
incentive compensation in the form of a bonus and long-term incentive
compensation in the form of stock options. These compensation elements are in
addition to the general benefit programs that are offered to all of the
Company's employees.
Each year, the Committee reviews the Company's executive compensation
program. In its review, the Committee studies the compensation packages for
executives of a peer group of the Company's most direct publicly held
competitors for executive talent, assesses the competitiveness of the Company's
executive compensation program and reviews the Company's financial performance
for the previous fiscal year. The Committee also gauges the success of the
compensation program in achieving its objectives in the previous year and
considers the Company's overall performance objectives.
Each element of the Company's executive compensation program is discussed
below.
15
BASE SALARIES
The Committee annually reviews the base salaries of the Company's
executive officers. The base salaries for the Company's executive officers for
fiscal 2001 are reflected in the Summary Compensation Table and were established
by the Committee at the beginning of that fiscal year. In addition to
considering the factors listed in the foregoing section that support the
Company's executive compensation program generally, the Committee reviews the
responsibilities of the specific executive position and the experience and
knowledge of the individual in that position. The Committee also measures
individual performance based upon a number of factors, including a measurement
of the Company's historic and recent financial performance and the individual's
contribution to that performance, the individual's performance on non-financial
goals and other contributions of the individual to the Company's success, and
gives each of these factors relatively equal weight without confining its
analysis to a rigorous formula. As is typical of most corporations, the actual
payment of base salary is not conditioned upon the achievement of any
predetermined performance targets.
INCENTIVE COMPENSATION
Bonuses established for executive officers are intended to motivate the
individual to work hard to achieve the Company's financial and operational
performance goals or to otherwise motivate the individual to aim for a high
level of achievement on behalf of the Company in the coming year. The Committee
does not have a formula for determining bonus payments, but establishes general
target bonus levels for executive officers at the beginning of the fiscal year
based on relatively equal measures upon the Committee's subjective assessment of
the Company's projected revenues and other operational and individual
performance factors and may adjust these targets during the year. Bonuses for
2001 were determined by evaluations of individual performance and by the success
of the Company.
LONG-TERM INCENTIVE COMPENSATION
The Company provides its executive officers with long-term incentive
compensation through grants of stock options under the Company's stock option
plans. The Committee believes that placing a portion of executives' total
compensation in the form of stock options achieves three objectives. It aligns
the interest of the Company's executives directly with those of the Company's
stockholders, gives executives a significant long-term interest in the Company's
success and helps the Company retain key executives. In determining the number
and terms of options to grant an executive, the Committee primarily considers
subjectively the executive's past performance and the degree to which an
incentive for long-term performance would benefit the Company. The size of
option grants is comparable to grants by other corporations within the Company's
industry that are comparable in size to the Company.
BENEFITS
The Committee believes the Company must offer a competitive benefits
program to attract and retain key executives. The Company provides the same
medical and other benefits to its executive officers that are generally
available to its other employees.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Dmiszewicki served as Chief Executive Officer of the Company from
December 1, 2000 until January 31, 2001 and was compensated in accordance with
the terms of his employment agreement with the Company. Mr. Pizi has served as
Chief Executive Officer of the Company since February 1, 2000 and was
compensated in accordance with the terms of his employment agreement with the
Company. See "Executive Compensation-Employment Agreements, Termination of
Employment and Change-In-Control Arrangements."
16
Submitted by: THE COMPENSATION COMMITTEE
Frank Artale
Paul Rampel
Nicholas Hatalski
SECTION 162(M) OF THE INTERNAL REVENUE CODE
It is the responsibility of the Compensation Committee to address the
issues raised by Section 162(m) of the Internal Revenue Code, as amended (the
"Code"). The revisions to this Code section made certain non-performance based
compensation in excess of $1,000,000 to executives of public companies
non-deductible to the companies beginning in 1994. The Committee has reviewed
these issues and has determined that no portion of compensation payable to any
executive officer for fiscal 2001 is non-deductible. The Company's 1995 Stock
Incentive Plan and 1997 Stock Option Plan limit to 200,000 and 500,000,
respectively, the number of options or shares that may be awarded to any
individual in a single year under these plans.
AUDIT COMMITTEE REPORT
The Audit Committee assists the Board of Directors in its oversight of the
Company's accounting, reporting practices and financial reports. The Audit
Committee's responsibilities are more fully described in its charter, a copy of
which was filed as Exhibit A to the proxy statement for the 2001 Annual Meeting.
Management has the primary responsibility for the preparation and integrity of
the Company's financial statements, accounting and financial reporting
principles and internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations. The Company's
independent auditors, Deloitte & Touche LLP, are responsible for performing an
independent audit of the consolidated financial statements and expressing an
opinion on the conformity of those financial statements with generally accepted
accounting principles.
The Audit Committee reports as follows with respect to the audit of the
Company's 2001 audited financial statements:
The Committee reviewed and discussed the Company's 2001 audited financial
statements with its management,
- The Committee discussed with the independent auditors, Deloitte &
Touche LLP, the matters required to be discussed by SAS 61, which
include, among other items, matters related to the conduct of the
audit of the Company's financial statements,
- The Committee received written disclosures and the letter from the
independent auditors required by ISB Standard No. 1 (which relates
to the auditors' independence from the Company and its related
entities) and discussed with the auditors their independence from
the Company, and
- Based on review and discussions of the Company's 2001 audited
financial statements with management and discussions with the
independent auditors, the Audit Committee recommended to the Board
of Directors that the Company's 2001 audited financial statements be
included in its Annual Report on Form 10-K.
Submitted by: THE AUDIT COMMITTEE*
Michel Berty
John Barbano
Richard Daly
* Represents the composition of the Audit Committee as of March 20, 2002
when the audited financial statements were recommended for inclusion in
the Company's Annual Report on Form 10-K.
17
AUDIT COMMITTEE CHARTER
The Board of Directors has adopted a written charter for the Audit
Committee, a copy of which is attached as Appendix A to the Proxy Statement for
the 2001 Annual Meeting of Stockholders. The Board of Directors reviews and
approves changes to the Audit Committee Charter annually. The Audit Committee
Charter was not amended in 2001.
INDEPENDENCE OF AUDIT COMMITTEE MEMBERS
The Company's current Audit Committee of Messrs. Artale, Nielsen and
Hasenyager meets the requirements of independence as defined in the applicable
Nasdaq standards. Prior to the appointment of Messrs. Artale, Nielsen and
Hasenyager, the Audit Committee for the majority of 2002 was comprised of
Messrs. Daly, Barbano and Dr. Berty. Subsequent to the 2001 Annual Stockholders
meeting, Messrs. Artale, Daly, Fine and Dr. Berty comprised the Audit Committee.
Prior to the 2001 Annual Stockholders Meeting, Dr. Brill, Mr. Recanati and Mr.
Fine were the members of the Audit Committee. All members of the Audit Committee
met the requirements of independence as defined by the applicable Nasdaq
standards during their respective tenures except for Messrs. Fine and Recanati.
Mr. Fine was employed by the Company in 1998 and Mr. Recanati was affiliated
with our former principal stockholder, Liraz Systems Ltd.
18
STOCK PERFORMANCE GRAPH
The following graph indicates the Company's cumulative total return to
stockholders from December 31, 1996 through December 31, 2001, as compared to
cumulative total returns for the Nasdaq Stock Market (U.S.) Index and the Media
General Business Software and Services Index.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG LEVEL 8 SYSTEMS, INC.,
NASDAQ MARKET INDEX AND MG GROUP INDEX
[LINE CHART]
ASSUMES $100 INVESTED ON DEC. 31, 1996
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2001
12/31/96 12/31/97 12/31/98 12/31/99 12/29/00 12/31/01
-------- -------- -------- -------- -------- --------
LEVEL 8 SYSTEMS, INC 100.00 87.90 62.50 222.98 39.32 17.68
------ ------ ------ ------ ------ ------
MG GROUP INDEX 100.00 111.30 132.84 200.48 142.20 107.48
------ ------ ------ ------ ------ ------
NASDAQ MARKET INDEX 100.00 122.32 172.52 304.29 191.25 152.46
19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ASSIGNMENT OF NOTE RECEIVABLE FROM PROFIT KEY
In October 2002, the Company assigned its interest in a Note Receivable
from Profit Key Acquisition LLC to a group of investors including Nicholas
Hatalski and Paul Rampel, members of our Board of Directors, and Anthony C.
Pizi, the Chief Executive Officer of the Company. Pursuant to the terms of the
agreement, Level 8 assigned its interest in a Note Receivable in the principal
amount of $500,000, due March 31, 2003 with interest at 9% per annum in return
for $400,000 cash. The Company solicited several competitive bids before
finalizing the transaction.
SALE OF STARQUEST ASSETS
On June 18, 2002, the Company and its subsidiary Level 8 Technologies,
Inc. entered into an Asset Purchase Agreement with Starquest Ventures, Inc., a
California corporation and an affiliate of Paul Rampel, a member of the Board of
Directors of Level 8 and a former executive officer. Pursuant to the terms and
conditions of the Asset Purchase Agreement, Level 8 sold its Star/SQL and CTRC
software products to Starquest Ventures for $365,000 and the assumption of
certain maintenance liabilities. $150,000 of the proceeds of the sale
transaction was used to repay borrowings from Mr. Rampel.
LOAN FROM RELATED PARTIES
In December 2001, the Company entered into an agreement with Messrs.
Rampel and Pizi which provided for borrowings from them for up to $250,000 and
is secured by notes and accounts receivable. The borrowings bear interest at 10%
and are payable quarterly. In connection with Mr. Rampel's resignation from the
Company in June 18, 2002 and the sale of the StarQuest assets to an entity
affiliated with Mr. Rampel as described above, the Company repaid $150,000 of
the borrowings to Mr. Rampel. In August 2002, Mr. Pizi elected to convert
approximately $150,000 of his indebtedness from the Company into equity and
participated in the Series C Convertible Redeemable Preferred Stock Offering on
the same terms as the other investors. This agreement has been terminated.
TRANSACTIONS WITH MERRILL LYNCH
On January 3, 2002, the Company entered into a Purchase Agreement with
MLBC, Inc., an affiliate of Merrill Lynch. Pursuant to the Purchase Agreement,
the Company issued 250,000 shares of its common stock to MLBC and entered into a
royalty sharing agreement for sales of Cicero. Under the royalty sharing
agreement, the Company is obligated to pay a royalty of 3% of the sales price
for each sale of Cicero or related maintenance services. The royalties are not
payable in excess of $20,000,000. As consideration for the issuance of the
shares and the royalty payments, Merrill Lynch has entered into an amendment to
the Cicero license agreement, which extends our exclusive worldwide marketing,
sales, and development rights to Cicero and granted us certain ownership rights
in the Cicero trademark. Pursuant to the Purchase Agreement, the Company also
entered into a Registration Rights Agreement granting MLBC certain rights to
have the shares of common stock it received under the Purchase Agreement
registered under the Securities Act.
On July 31, 2000, the Company entered into a Purchase Agreement with
Merrill Lynch concerning technology owned by Merrill Lynch. On August 23, 2000,
pursuant to the Purchase Agreement, Merrill Lynch granted the Company exclusive
worldwide marketing, sales and public development rights for a period of two
years to Cicero(R), a comprehensive integrated desktop computer environment
developed by Merrill Lynch and used by more than 30,000 Merrill Lynch
professionals worldwide, subject to Merrill Lynch's retained right to use and
develop Cicero for its own use and the use of affiliates and the possible loss
of exclusivity if the Company's share price does not meet certain targets. As
consideration for this license, the Company issued 1,000,000 shares of Company
common stock to Merrill Lynch.
In connection with the Purchase Agreement, the Company and Merrill Lynch
entered into a Registration Rights Agreement, dated as of August 23, 2000,
granting Merrill Lynch certain rights to have the shares issued to Merrill Lynch
registered under the Securities Act of 1933, as amended. In addition, the
Company, Merrill Lynch and certain stockholders of the Company, including Liraz
Systems Ltd. and certain of its affiliates, and Welsh, Carson, Anderson & Stowe
VI, L.P. and certain of its affiliates, entered into a Stockholders Agreement,
dated as of August 23, 2000, agreeing to vote their shares in favor of the
designee of Merrill Lynch to the Company's Board of Directors.
20
In September of 2000, Merrill Lynch purchased software and services from
Level 8 at an aggregate purchase price of approximately $6 million. This
purchase was made pursuant to a master software license entered into between
Merrill Lynch and Seer in 1996 and was made under the Company's standard terms
and conditions with respect to a purchase of this size.
Prior to the Company's acquisition of StarQuest and before Merrill Lynch
was a related party, StarQuest retained Merrill Lynch to provide investment
banking services on its behalf. Following the acquisition of StarQuest, the
Company paid Merrill Lynch approximately $800,000 in fees.
SALE OF GENEVA APPBUILDER ASSETS
On October 1, 2001, the Company sold all of its assets relating to the
Geneva AppBuilder software to BluePhoenix Solutions BV, a subsidiary of Liraz
Systems Ltd. ("Liraz"), which was then a significant stockholder of Level 8 and
an affiliate of Messrs. Margalit, Recanati and Grad, who were then serving on
the Board of Directors, in exchange for approximately $20.0 million, subject to
certain net asset adjustment. Of the proceeds, $12.0 million has been used to
pay a portion of a $15.0 million term loan and the remainder will be used as
general working capital. The transaction was approved by a majority of the
Company's disinterested directors.
PREFERRED STOCK AND WARRANT EXCHANGE
On October 25, 2002, we effected an exchange of all of our outstanding
shares of Series A2 Convertible Redeemable Preferred Stock ("Series A2 Preferred
Stock") and Series B2 Convertible Redeemable Preferred Stock ("Series B2
Preferred Stock") and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock ("Series A3 Preferred
Stock") and Series B3 Convertible Redeemable Preferred Stock ("Series B3
Preferred Stock") and related warrants. This exchange was made to correct a
deficiency in potential conversion price adjustments from the prior exchange of
Series A1 and B1 Preferred Stock and related warrants for Series A2 and B2
Preferred Stock and related warrants on August 29, 2002. The conversion price
for the Series A3 Preferred Stock and the conversion price for the Series B3
Preferred Stock remain the same as the previously issued Series A1 and A2
Preferred Stock and Series B1 and B2 Preferred Stock, at $8.333 and $12.531,
respectively. The exercise price for the aggregate 753,640 warrants relating to
the Series A3 Preferred Stock was increased from $0.38 to $0.40 per share which
is a reduction from the $1.77 exercise price of the warrants relating to the
Series A1 Preferred Stock. The exercise price for the aggregate 1,047,382
warrants relating to the Series B3 Preferred Stock was increased from $0.38 to
$0.40 per share which is a reduction from the $1.77 exercise price of the
warrants relating to the Series B1 Preferred Stock. The adjusted exercise price
was based on the closing price of the Company's Series C Convertible Redeemable
Preferred Stock and warrants on August 14, 2002, plus $0.02, to reflect accurate
current market value according to relevant Nasdaq rules. This adjustment was
made as part of the agreement under which the holders of the Company's Preferred
Stock agreed to waive their price-protection anti-dilution protections to allow
the Company to issue the Series C Preferred Stock and warrants without
triggering the price-protection anti-dilution provisions and excessively
diluting its Common Stock.
Under the terms of the agreement, we are authorized to issue equity
securities in a single or series of financing transactions representing
aggregate gross proceeds to the Company of approximately $5.0 million, or up to
an aggregate 17.5 million shares of common stock, whichever occurs first,
without triggering the price-protection anti-dilution provisions in the Series
A3 Preferred Stock and B3 Preferred Stock and related warrants. In exchange for
the waiver of these price-protection anti-dilution provisions, we repriced the
warrants as described above and have agreed to issue on a pro rata basis up to
4.6 million warrants to the holders of Series A3 Preferred Stock and Series B3
Preferred Stock at such time and from time to time as the Company closes
subsequent financing transactions up to the $5.0 million issuance cap or the
17.5 million share issuance cap. As a result of the Series C Preferred Stock
financing which represented approximately $1.6 million of the Company's $5.0
million in allowable equity issuances, the Company is obligated to issue an
aggregate of 1,451,352 warrants at an exercise price of $0.40 per share to the
existing Preferred Stockholders. Additionally, the Company has agreed to issue a
warrant to purchase common stock to the existing Preferred Stockholders on a pro
rata basis for each warrant to purchase common stock that the Company issues to
a third-party lender in connection with the closing of a qualified loan
transaction. The above referenced warrants will have the same exercise price as
the exercise price of the warrant, or equity security, that the Company issues
in connection with the Company's subsequent financing or loan transaction or
$0.40 per share (adjusted for recapitalizations, stock splits and the like),
whichever is greater.
21
Previously, on October 16, 2001, the Company effected an exchange of all
of its outstanding shares of Series A 4% Convertible Redeemable Preferred Stock
and Series B 4% Convertible Redeemable Preferred Stock and related warrants for
an equal number of shares of our newly created Series A1 Convertible Redeemable
Preferred Stock ("Series A1 Preferred Stock") and Series B1 Convertible
Redeemable Preferred Stock ("Series B1 Preferred Stock") and related warrants.
Advanced Systems Europe, B.V. ("ASE"), a wholly owned subsidiary of Level 8's
principal stockholder at the time, exchanged 10,000 shares of Series A Preferred
Stock for the newly created Series A1 Preferred Stock. The effect of the
exchange with respect to ASE is as follows: The conversion price for the Series
A1 Preferred Stock was reduced from $10.00 to $8.333 per share, and the total
number of shares of common stock into which such shares may be converted
increased from 1,000,000 to 1,200,048. No dividends are payable on the Series A1
Preferred Stock. Liraz and ASE may no longer be considered related parties
because of their divestments of capital stock of the Company.
LOANS TO RELATED PARTIES
On January 27, 2001, the Company extended a loan to Paul Rampel, the then
President and a director of the Company, in the amount of $75,000. The loan
carried an interest rate of 10% per annum on the principal balance and the loan
was due and payable in full on January 27, 2002. The loan was secured by 15,000
shares of common stock of the Company held by Mr. Rampel under a Stock Pledge
agreement between the Company and Mr. Rampel. In March of 2002, Mr. Rampel, as
part of his new employment agreement with the Company, gave back the 15,000
shares of stock as partial payment on the Note and agreed to pay the rest of the
Note off monthly during 2002. The remainder of the balance was settled in
connection with Mr. Rampel's separation agreement entered into in June 2002.
On October 25, 2000, the Company extended a loan to Samuel Somech,
Chairman Emeritus and a director of the Company, in the amount of $495,000. The
loan carries an interest rate of 6.5% per annum on the unpaid balance. The loan
is payable in five equal annual installments of principal and interest starting
on March 1, 2001. The first installment was not paid to the Company. In
September 2001, the Company and Mr. Somech agreed that in exchange for the
forgiveness of the Promissory Note, Mr. Somech will forgo retirement benefits
under the amendment to Mr. Somech's employment agreement
BORROWINGS AND COMMITMENTS FROM LIRAZ
As part of the acquisition of Template software, the Company obtained $10
million in financing in the form of a 17 month term loan. The financing was
guaranteed by Liraz, the Company's principal stockholder, in return for 60,000
shares of the Company's common stock. The number of shares of common stock
provided in exchange for the guarantee, was determined by the independent
directors of the Company in consultation with an outside appraisal firm and
based upon market conditions and the Company's anticipated financing needs at
closing. In the third quarter of 2000, this term loan was amended to provide the
Company with an additional $5 million in borrowings and to extend the due date
from May 31, 2001 to November 30, 2001. Liraz subsequently extended its
guarantee of the amended loan through November 30, 2001 in exchange for 110,000
shares of the Company's common stock. The value of the shares issued will be
capitalized and amortized over the term of the loan as a component of interest
expense. In May of 2001, Liraz extended its guarantee until April 30, 2002. The
commitment provides for an interest rate equal to the London Interbank Offered
Rate plus 1% annually. As of June 30, 2002 the interest rate was approximately
3.03%. As part of the sale of the Geneva AppBuilder Product to a subsidiary of
Liraz in October 2001, the company utilized the proceeds from the transaction
and other assets to liquidate approximately $12 million of the outstanding debt.
At the same time, Liraz extended its guarantee and the maturity date on the
balance of the Note until November 2003.
Under an agreement between Liraz and the Company dated December 31, 1998
(the "Liraz Agreement"), Liraz made a $12 million loan to the Company, which
bears simple interest at a rate of 12% a year and was to mature on June 30,
2000. On May 31, 1999, the Liraz Agreement was amended to change the maturity
date from June 30, 2000 to December 15, 2000, and to provide for semiannual
interest payments rather than payment of interest at maturity. No other terms of
the loan were amended. The Company used part of the proceeds from the issuance
of the Series A 4% Convertible Redeemable Preferred Stock to make an $8 million
payment to Liraz to pay down the balance of the loan. Liraz had previously
committed to provide the Company with up to $7.5 million of working capital
payable upon the earlier of March 31, 2001 or the successful completion of an
earlier financing providing more than $7.5 million in proceeds to the Company.
As a result of raising more than $7.5 million from the issuance of preferred
stock and
22
warrants in June 1999, the Liraz commitment terminated. The Company paid Liraz
in full in the third quarter of fiscal year 2000.
JOINT DEVELOPMENT ARRANGEMENT WITH LIRAZ
The Company and Liraz previously had an agreement for the joint
development of certain software for a Microsoft contract. Under the agreement,
Liraz and the Company were each to pay 50% of the total project development
costs. In exchange for providing 50% of such costs, Liraz was previously
entitled to receive royalties of 30% of the first $2 million in contract
revenue, 20% of the next $1 million, and 8% thereafter. On April 1, 1998, the
agreement was amended to provide that the Company would reimburse Liraz's costs
of development of $1.5 million and would pay Liraz royalties of 3% of program
revenues generated from January 1, 1998 until December 31, 2000. The $1.5
million reimbursement is being amortized over the term of the revised royalty
agreement and was paid to Liraz by the delivery of an 8% note payable in three
installments in 1998, 1999 and 2000. Additional royalties of $.13 million were
paid to Liraz in 1999 for 1998 sales.
23
PROPOSAL 2: AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT
AND TO REDUCE THE NUMBER OF AUTHORIZED SHARES
BACKGROUND
Our Board of Directors has unanimously adopted a resolution approving, and
recommending to stockholders for approval, a proposal to amend our Amended and
Restated Certificate of Incorporation to effect a reverse stock split of the
shares of our common stock issued and outstanding at any whole number ratio
between 1-for-4 through 1-for-12. As part of the resolution and regardless of
the reverse split ratio selected, the Board has approved, and recommends that
the stockholders approve, reducing the number of shares of authorized capital
stock from 50 million to 25 million, to be comprised of 5 million shares of
authorized preferred stock and 20 million shares of authorized common stock.
Assuming stockholder approval, the Board will have the sole discretion pursuant
to Section 242(c) of the Delaware General Corporation Law to elect, as it
determines to be in the best interests of the Company and its stockholders,
whether or not to effect a reverse stock split, and if so, the number of shares
of our common stock between and including four and twelve which will be combined
into one share of our common stock, at any time before the first anniversary of
this Annual Meeting of Stockholders. If the Board determines to proceed with the
reverse split, the shares of authorized capital stock will be reduced by the
same amount, irrespective of the ratio for the reverse split selected. This
proposal is intended as an alternative to Proposal 3, which seeks approval of an
increase in the authorized shares of Common Stock.
The Board believes that granting the Board this discretion, rather than
approval of a specified exchange ratio, provides the Board with maximum
flexibility to react to then-current market conditions and, therefore, is in the
best interests of Level 8 and its stockholders. Furthermore, granting the Board
the discretion to elect whether to effect the reverse stock split for the
reasons set forth herein or, alternatively, to just increase the authorized
shares of Common Stock as described in Proposal 3, is in the best interests of
Level 8 and its stockholders because the Board will have the flexibility to
determine, based on certain factors, including whether the Company is then
listed on a Nasdaq Market, which proposal to implement.
The form of the proposed amendment is attached to this proxy statement as
Exhibit A. By approving this Proposal 2, stockholders will approve a set of
potential of amendments to our Certificate of Incorporation pursuant to which
any whole number of outstanding shares between and including four and twelve
would be combined into one share of our common stock, and authorize the Board to
file only one such amendment, as determined by the Board in the manner described
herein, and to abandon each amendment not selected by the Board. Each of the
amendments approved by the stockholders would also reduce the number of
authorized shares of capital stock to 25 million. The Board may also elect not
to do any reverse split, in which case the Board will either implement Proposal
3 and the authorized shares of Common Stock will be increased or abandon both
proposals, in which case the authorized shares of capital stock will remain the
same.
After stockholder approval and after the Board determines that the reverse
stock split remains in the best interests of Level 8 and its stockholders, the
reverse stock split will be effected by filing one of the set of potential
amendments approved by the stockholders with the Secretary of State of Delaware.
The amendment filed will effect the reverse stock split at the ratio selected by
the Board within the parameters set forth in this proposal. The Board of
Directors would abandon the other amendments authorized by the stockholders
pursuant to Section 242(c) of the Delaware General Corporation Law.
REASONS FOR THE REVERSE STOCK SPLIT
24
Our Common Stock is currently listed on the Nasdaq National Market. The
continued listing criteria of the Nasdaq National Market require, among other
things, that our Common Stock maintain a closing bid price in excess of $1.00
per share. On July 16, 2002, Nasdaq notified us that the bid price of our Common
Stock had closed at less than $1.00 per share for the previous 30 consecutive
trading days. During the 90 day grace period, or until October 14, 2002, to
regain compliance with the minimum bid price requirement, we were additionally
notified that the Company did not comply with the minimum stockholders' equity
requirement for continued listing on the Nasdaq National Market. Since the
minimum stockholders' equity requirement for listing on the Nasdaq SmallCap
Market of $2,500,000 was more likely to be achieved by the Company in the short
term, and to get the benefit of the SmallCap Market's additional 90 day grace
period for complying with the $1.00 minimum bid price requirement, on September
4, 2002, we applied for transfer to the Nasdaq SmallCap Market. On October 4,
2002, Nasdaq notified the Company that it was denying the Company's application
to transfer to the SmallCap Market and was commencing delisting procedures from
the Nasdaq National Market. The Company has appealed the Nasdaq Staff
Determination and needs to show, as part of its definitive plan of compliance, a
definitive plan to get the trading price of our Common Stock over $1.00 to show
compliance with the minimum bid price requirements of both the Nasdaq National
Market and the Nasdaq SmallCap Market. Our appeal has stayed the delisting
process, and our hearing before a Nasdaq Review Panel was held on November 14,
2002. The Company will not know the results of its appeal until the end of
November at the earliest. The Nasdaq Review Panel may elect to immediately
delist the Company's Common Stock, approve the Company's transfer to the Nasdaq
SmallCap Market or give the Company additional time to show a definitive plan of
compliance with the Nasdaq Marketplace Rules. If the Nasdaq Review Panel
determines to proceed with the delisting of the Company's Common Stock and to
deny the Company's application to transfer to the Nasdaq SmallCap Market, the
Board of Directors may abandon the reverse stock split and implement Proposal 3,
assuming the stockholders approve such proposal.
The Board of Directors has determined that the continued listing of the
Company's Common Stock on either the Nasdaq National Market or transferring to
the Nasdaq SmallCap Market is in the best interests of the Company and its
stockholders. Additionally, the Board of Directors believes that if our Common
Stock trades above $1.00 it may generate additional investor interest in our
Common Stock and increase the liquidity of the Common Stock. If the Company's
Common Stock were delisted from the Nasdaq National Market and not eligible to
transfer to the Nasdaq SmallCap Market, the Board of Directors believes that the
liquidity in the trading market for the Company's Common Stock would be
significantly decreased, which would likely reduce the trading price and
increase the transaction costs of trading shares of our Common Stock.
Accordingly, the primary purpose of the reverse stock split is to increase
the trading price of the Company's Common Stock on the Nasdaq National Market,
or, if the Company's transfer is approved, on the Nasdaq SmallCap Market. If
stockholders approve the reverse stock split amendment at the Annual Meeting,
the Board of Directors intends to effect the reverse stock split, unless it
determines at any time that the reverse stock split is no longer in the best
interests of the Company and its stockholders. If the Company does effect the
reverse stock split, the Company's Common Stock may not trade at a price that is
the number of times the pre-split price based on the ratio selected by the Board
and may not even remain above $1.00. Therefore, the Company's Common Stock may
still be delisted from the Nasdaq National or SmallCap Market for that reason,
or it may be delisted for other reasons including the Company's inability to
show a definitive plan of compliance with the stockholders' equity requirements.
Even if the Company is delisted by Nasdaq prior to the Annual Meeting, the
reverse stock split will still be considered to for the purpose of increasing
the availability of shares for issuance as described below or the Board may
instead implement Proposal 3 and just increase the shares of Common Stock
authorized for issuance. No further action on your part will be required to
either effect or abandon the reverse stock split, as the Board of Directors will
have the discretion to make that decision.
The Company will need to raise additional equity capital to support its
operating plan. Prior to the effectiveness of the reverse stock split and based
on the trading price of the Company's Common Stock, the Company would not have
sufficient authorized shares to raise any significant amount of equity capital.
Accordingly, a secondary purpose of the reverse stock split is to effectively
increase the number of shares that the Company is able to issue by selecting a
reverse stock split ratio that is larger than the ratio of the reduction in
authorized capital stock. Furthermore, as part of the Company's agreement with
the holders of its Series A3 Preferred Stock and Series B3 Preferred Stock, the
Company has agreed to issue warrants in connection with any future financings.
To satisfy the Company's obligations under these agreements, additional
authorized shares will be necessary.
25
BOARD DISCRETION TO IMPLEMENT THE REVERSE STOCK SPLIT AND THE DECREASE IN
AUTHORIZED CAPITAL STOCK
If the reverse stock split and the decrease in authorized capital stock is
approved by our stockholders, it will be effected, if at all, only upon a
determination by the Board that a reverse stock split (with an exchange ratio
determined by the Board as described above) is in the best interests of Level 8
and its stockholders. Such determination shall be based upon certain factors,
including meeting the listing requirements for the Nasdaq National or SmallCap
Markets, the necessity and advisability of issuing additional shares of Common
Stock, existing and expected marketability and liquidity of our common stock,
prevailing market conditions and the likely effect on the market price of our
Common Stock. The Company has an appeal before a Nasdaq Review Panel on November
14, 2002 regarding its listing status and, accordingly, could potentially be
delisted from the Nasdaq National Market prior to stockholder approval of this
proposal. If the Company is not listed on a Nasdaq Market, the Board may
consider abandoning the reverse stock split and, instead, increase the number of
authorized shares of Common Stock as described in Proposal 3.
Finally, notwithstanding approval of the reverse stock split and the
decrease in the authorized capital stock by the stockholders, the Board may, in
its sole discretion, abandon all of the proposed amendments and determine prior
to the effectiveness of any filing with the Secretary of State of Delaware not
to effect the reverse stock split and the decrease in authorized capital stock,
as permitted under Section 242(c) of the Delaware General Corporation Law.
EFFECTS OF THE REVERSE SPLIT AND THE REDUCTION IN AUTHORIZED CAPITAL STOCK
After the effective date of the proposed reverse stock split, each
stockholder will own a reduced number of shares of our Common Stock. However,
the proposed reverse stock split will affect all of our stockholders uniformly
and will not affect any stockholder's percentage ownership interests in us,
except to the extent that the reverse split results in any of our stockholders
owning a fractional share as described below. Proportionate voting rights and
other rights and preferences of the holders of our Common Stock will not be
affected by the proposed reverse stock split (other than as a result of the
payment of cash in lieu of fractional shares). The number of stockholders of
record will not be affected by the proposed reverse stock split (except to the
extent that any stockholder holds only a fractional share interest and receives
cash for such interest after the proposed reverse stock split).
Although the proposed reverse stock split will not affect the rights of
stockholders or any stockholder's proportionate equity interest in Level 8
(subject to the treatment of fractional shares), the number of authorized shares
of Common Stock will not be reduced proportionately. Although the proposal
includes a reduction in the authorized capital stock, such a reduction, with
respect to the authorized Common Stock and Preferred Stock is only at a
one-for-two ratio. Accordingly, the Board will have the ability to issue a
greater percentage of authorized and unissued shares without further stockholder
action than it was able to issue before the reverse stock split. The issuance in
the future of such additional authorized shares may have the effect of diluting
the earnings per share and book value per share, as well as the stock ownership
and voting rights, of the currently outstanding shares of Common Stock. The
effective increase in the number of authorized but unissued shares of Common
Stock may be construed as having an anti-takeover effect by permitting the
issuance of shares to purchasers who might oppose a hostile takeover bid or
oppose any efforts to amend or repeal certain provisions of our Certificate of
Incorporation or bylaws.
The proposed reverse stock split will reduce the number of shares of
Common Stock available for issuance under the Level 8 1997 Stock Option Plan,
the 1995 Stock Option Plan and the Outside Director Stock Incentive Plan in
proportion to the exchange ratio selected by the Board within the limits set
forth in this proposal. We also have certain outstanding stock options and
warrants to purchase shares of our Common Stock. Under the terms of the
outstanding stock options and warrants, the proposed reverse stock split will
effect a reduction in the number of shares of Common Stock issuable upon
exercise of such stock options and warrants in proportion to the exchange ratio
of the reverse stock split and will effect a proportionate increase in the
exercise price of such outstanding stock options and warrants. In connection
with the proposed reverse stock split, the number of shares of Common Stock
issuable upon exercise or conversion of outstanding stock options and warrants
will be rounded to the nearest whole share and no cash payment will be made in
respect of such rounding.
We also have shares of Series A3 Preferred Stock, Series B3 Preferred
Stock and Series C Preferred Stock outstanding. Each series of Preferred Stock
is convertible into Common Stock at a certain ratio. The conversion ratio for
each series of Preferred Stock will also be adjusted proportionately, reducing
the number of shares upon conversion
26
of such Preferred Stock in proportion to the reverse split ratio selected by the
Board within the parameters set forth in this proposal.
If the proposed reverse stock split is implemented, it will increase the
number of stockholders of Level 8 who own "odd lots" of less than 100 shares of
our Common Stock. Brokerage commissions and other costs of transactions in odd
lots are generally higher than the costs of transactions involving more than 100
shares of Common Stock.
Our Common Stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and we are subject to the periodic
reporting and other requirements of the Exchange Act. The proposed reverse stock
split will not affect the registration of the common stock under the Exchange
Act. If the Company is still listed by the Nasdaq National Market or has
transferred to the Nasdaq SmallCap Market and the proposed reverse stock split
is implemented, our Common Stock will continue to be reported on the relevant
Nasdaq Market under the symbol "LVEL" (although Nasdaq would likely add the
letter "D" to the end of the trading symbol for a period of 20 trading days to
indicate that the reverse stock split has occurred).
The proposed reverse stock split will not affect the par value of our
Common Stock. As a result, on the effective date of the reverse stock split, the
stated capital on our balance sheet attributable to the Common Stock will be
reduced in proportion to the exchange ratio selected by the Board in the manner
described above, and the additional paid-in capital account shall be credited
with the amount by which the stated capital is reduced. The per share net income
or loss and net book value of our Common Stock will be increased because there
will be fewer shares of our Common Stock outstanding.
Although the reverse stock split will not, by itself, impact the Company's
assets or prospects, the reverse stock split could result in a decrease in the
aggregate market value of our Common Stock. The Board of Directors believes that
this risk is outweighed by the benefits of the continued listing of the
Company's Common Stock on the Nasdaq National Market or the benefits of
transferring to the Nasdaq SmallCap Market and the necessity of having
additional shares available to consummate future equity financings.
The following table reflects the approximate number of shares of Common
Stock issued and outstanding individually and together with the shares of Common
Stock issuable upon the exercise of issued warrants, stock options and
convertible preferred stock as of October 31, 2002 and that would be, after the
reverse stock split and reduction in the authorized capital stock (at each of
the possible ratios), (1) authorized, (2) issued and outstanding, (3)
outstanding or reserved for issuance, and (4) authorized but unissued.
Shares of Authorized but
Authorized Shares of Common Stock Unissued Shares
Shares Common Stock Outstanding or of Common Stock
of Common Issued and Reserved for Available for
Stock Outstanding Issuance Issuance
----- ----------- -------- --------
Before reverse stock split 140,000,000 19,127,467 38,479,948 1,520,052
After Reverse Split at:
1-for-4 .................. 20,000,000 4,781,867 9,619,987 10,380,013
1-for-5 .................. 20,000,000 3,825,493 7,695,990 13,586,675
1-for-6 .................. 20,000,000 3,187,911 6,431,325 13,586,675
1-for-7 .................. 20,000,000 2,732,495 5,497,135 14,502,865
1-for-8 .................. 20,000,000 2,390,933 4,809,994 15,190,007
1-for-9 .................. 20,000,000 2,125,274 4,275,550 15,724,450
1-for-10 ................. 20,000,000 1,912,747 3,847,995 16,152,005
1-for-11 ................. 20,000,000 1,738,861 3,498,177 16,501,823
1-for-12 ................. 20,000,000 1,593,956 3,206,662 16,793,338
FRACTIONAL SHARES
27
Following the effectiveness of the reverse stock split, the Company will
not issue fractional shares of Common Stock. Stockholders who otherwise would be
entitled to receive fractional shares because they hold a number of pre-split
shares not evenly divisible by the exchange ratio selected by the Board within
the limits of this proposal, will, upon surrender to the exchange agent of such
certificates representing such fractional shares, receive cash at the market
price. The market price will be determined using the closing price of the
Company's Common Stock on the Nasdaq National Market or the Nasdaq SmallCap
Market, as applicable, on the effective date. If the Company is not listed on a
Nasdaq Market at the effective date, the Board of Directors will determine fair
value for the fractional shares.
RIGHTS AND PREFERENCES OF THE COMPANY'S CAPITAL STOCK; RECORD HOLDERS
As described above, with the exception of the number of shares issued and
outstanding, the rights and preferences of the shares of the Company's Common
Stock and Preferred Stock before and after the reverse stock split will remain
the same. It is not anticipated that the percentage ownership of management, the
number of stockholders, or any aspect of the Company's business, financial
condition or operating results would materially change as a result of the
reverse stock split, except that the Company's per share loss or income will be
increased because there would be fewer shares outstanding.
As of November 19, 2002, the Company had 174 record holders of its Common
Stock. If the maximum reverse stock split ratio of one-for-twelve is selected by
the Board, it is anticipated that approximately 8 stockholders of record
(currently holding 11 or less shares of Common Stock) would be eliminated and
the Company would have approximately 166 record holders. If the minimum reverse
stock split ratio of one-for-four is selected by the Board, it is anticipated
that approximately 2 stockholders of record (currently holding 3 or less shares
of Common Stock) would be eliminated and the Company would have approximately
172 record holders. Accordingly, there may be some small variations in the
number of record holders of the Company's Common Stock following the
effectiveness of the reverse stock split depending on the ratio selected by
the Board for implementation.
EFFECTIVENESS OF THE REVERSE STOCK SPLIT AND DECREASE IN AUTHORIZED CAPITAL
STOCK
The reverse stock split and the decrease in authorized capital stock, if
approved by the Company's stockholders, will become effective upon the filing
with the Delaware Secretary of State of a certificate of amendment to the
Company's Amended and Restated Certificate of Incorporation, in substantially
the form attached to this proxy statement as Exhibit A. This filing will likely
take place on or shortly after the date of the Annual Meeting, assuming that the
stockholders approve this Proposal 2. However, the Board of Directors will
determine the exact timing of the filing of the certificate of amendment based
upon its evaluation as to when this action will be most advantageous to the
Company and its stockholders, and the Board reserves the right, notwithstanding
stockholder approval and without further action by the stockholders, to elect
not to proceed with the reverse stock split and the reduction in authorized
capital stock if, at any time before filing the reverse stock split amendment,
the Board of Directors, in its sole discretion, determines that the reverse
stock split and the reduction in authorized capital stock is no longer in the
best interests of the Company and its stockholders. If the Board makes a
determination that the reverse split and reduction in authorized shares of
capital stock is not in the best interests of the Company and its stockholders,
it may instead determine to implement Proposal 3, assuming that stockholders
have approved such proposal, and increase the shares of Common Stock authorized
for issuance.
Beginning on the effective date of the reverse stock split, each
certificate representing shares of Common Stock will be deemed for all corporate
purposes to evidence ownership of the reduced number of shares of Common Stock
resulting from the reverse stock split. Following the effective date,
stockholders will be notified by a press release of the effectiveness of the
reverse stock split and will be sent instructions as to how and when to
surrender their certificates representing shares of Common Stock in exchange for
certificates or other evidence representing the reduced number of shares of
Common Stock resulting from the reverse stock split. The Company intends to use
its transfer agent, American Stock Transfer & Trust Company, as exchange agent
to effect the exchange of certificates following the reverse stock split. No
service charges will be payable by you in connection with the exchange of
certificates. All of these expenses will be borne by the Company.
YOU SHOULD NOT DESTROY ANY STOCK CERTIFICATES AND YOU SHOULD NOT SUBMIT ANY
CERTIFICATES TO THE COMPANY OR ITS EXCHANGE AGENT UNTIL YOU ARE REQUESTED TO DO
SO.
28
CERTAIN FEDERAL INCOME TAX CONSIDERATION
The following is a summary of certain material United States federal
income tax consequences of the reverse stock split. It does not purport to be a
complete discussion of all of the possible United States federal income tax
consequences of the reverse stock split and is included for general information
only. Further, it does not address any state, local or foreign income or other
tax consequences. This discussion does not address the tax consequences to
holders that are subject to special tax rules, such as banks, insurance
companies, regulated investment companies, personal holding companies, foreign
entities, nonresident alien individuals, broker-dealers and tax-exempt entities.
It also assumes that the shares of Common Stock held by the stockholders before
the reverse stock split were, and the shares of Common Stock held after the
reverse stock split will be, held as "capital assets," as defined in the
Internal Revenue Code of 1986 (that is, generally, property held for
investment). The tax treatment to a stockholder may vary depending upon the
particular facts and circumstances of that stockholder. Furthermore, this
discussion is based on the provisions of the United States federal income tax
law in effect on the date of this Proxy Statement, which are subject to change
retroactively as well as prospectively, and is not binding on the Internal
Revenue Service or the courts.
Other than the cash payments, if any, received by a stockholder in lieu of
fractional shares as discussed below, no gain or loss should be recognized by a
stockholder upon such stockholder's exchange of shares held before the reverse
stock split for shares after the reverse stock split. The aggregate tax basis of
the shares of Common Stock received in the reverse stock split (including any
fraction of a share deemed to have been received) will be the same as the
stockholder's aggregate tax basis in the shares of Common Stock exchanged for
those shares. Stockholders who receive cash in lieu of fractional share
interests will be treated as having received the fractional shares and then
having exchanged the fractional shares for cash in a redemption by the Company,
and will generally recognize gain or loss equal to the difference between the
amount of cash received in lieu of a fractional share and their adjusted basis
allocable to the fractional share interests redeemed. Such gain or loss will be
long term capital gain or loss if the applicable shares of Common Stock were
held for more than one year. The federal income tax liabilities generated by the
receipt of cash in lieu of a fractional interest should not be material in
amount in view of the low value of the fractional interest. A stockholder's
holding period for the shares of Common Stock held after the reverse stock split
will include the period during which the stockholder held the shares of Common
Stock surrendered in the reverse stock split. The Company will not recognize any
gain or loss as a result of the reverse stock split.
WE HAVE INCLUDED THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE FOR
YOUR GENERAL INFORMATION ONLY, AND IT MAY NOT BE APPLICABLE DEPENDING UPON YOUR
PARTICULAR SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES TO YOU OF THE REVERSE STOCK SPLIT, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ACCOUNTING EFFECTS OF THE REVERSE STOCK SPLIT
Following the reverse stock split, the par value of the Company's Common
Stock will remain the same. The stockholders' equity of the Company will remain
unchanged. The Company's per share loss or income for all periods reported will
be increased because there will be fewer shares of Common Stock outstanding.
NO APPRAISAL RIGHTS
No appraisal rights are available under Delaware law or under the Amended
and Restated Certificate of Incorporation or bylaws, if you dissent from or vote
against the proposal to approve the reverse stock split amendment.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding shares of
Voting Common Stock voting together as a single class and the affirmative vote
of a majority of the outstanding shares of Preferred Stock voting together as a
single class without regard to conversion limitations are required to approve
the proposal to amend the Company's Amended and Restated Certificate of
Incorporation to effect the reverse stock split and the reduction in the
authorized capital stock.
29
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK
SPLIT AND TO REDUCE THE AUTHORIZED SHARES OF CAPITAL STOCK.
30
PROPOSAL 3: AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES
OF AUTHORIZED COMMON STOCK
BACKGROUND
Our Board of Directors has unanimously adopted a resolution approving, and
recommending to stockholders for approval, a proposal to amend our Amended and
Restated Certificate of Incorporation to increase the aggregate number of shares
of Common Stock that the Company is authorized to issue from 40,000,000 to
60,000,000. This proposal, if approved by the stockholders will allow the Board
to determine in its sole discretion pursuant to Section 242(c) of the Delaware
General Corporation Law to elect, as it determines to be in the best interests
of the Company and its stockholders, whether or not to effect an increase in the
Company's authorized shares of Common Stock. This proposal is intended as an
alternative to the reverse stock split and reduction in authorized capital stock
proposal described in Proposal 2.
Furthermore, granting the Board the discretion to elect whether to effect
the reverse stock split for the reasons set forth in Proposal 2 or,
alternatively, to just increase the authorized shares of Common Stock as
described in this Proposal 3, is in the best interests of Level 8 and its
stockholders because the Board will have the flexibility to determine, based on
certain factors, including whether the Company is then listed on a Nasdaq
Market, which proposal, if any, to implement.
The form of the proposed amendment is attached to this proxy as Exhibit B.
By approving this Proposal 3, the stockholders are giving the Board of Directors
the authority to determine whether to effect the reverse stock split, assuming
the stockholders also approve Proposal 2 or to increase the authorized shares of
Common Stock as described in this Proposal 3. If the Board of Directors elects
to effect the reverse stock split and the reduction in authorized capital stock,
the amendment described in this Proposal 3 will be abandoned by the Board of
Directors pursuant to Section 242(c) of the Delaware General Corporation Law and
the number of authorized shares of capital stock will be reduced pursuant to the
terms of Proposal 2. If this Proposal 3 is approved by the stockholders and the
Board elects to increase the authorized shares of Common Stock, the amendment
will become effective upon the filing of a Certificate of Amendment with the
Delaware Secretary of State and the amendment described in Proposal 2 will be
abandoned.
REASONS FOR THE INCREASE IN AUTHORIZED COMMON STOCK
The Company will need to raise additional equity capital to support its
operating plan. Prior to the effectiveness of the reverse stock split and based
on the trading price of the Company's Common Stock, the Company would not have
sufficient authorized shares to raise any significant amount of equity capital.
As of November 10, 2002, the Company had approximately 19,127,426 shares of
Common Stock outstanding and an additional 19,352,481 shares of Common Stock
reserved for issuance upon the exercise of stock options, warrants and upon the
conversion of Preferred Stock. Accordingly, the Company only has 1,520,052
shares of Common Stock remaining for issuance for other purposes which will be
insufficient to satisfy the Company's obligations to issue warrants to the
holders of its Preferred Stock and to close an equity financing that would raise
sufficient capital to fund the Company's operating plan.
The Board of Directors believes that it is in the Company's best interests
to increase the number of authorized but unissued shares of Common Stock in
order to provide the Company with the flexibility to issue Common Stock for a
variety of corporate purposes the Board may deem advisable without further
action by the Company's stockholders, unless required by law, regulation or
stock exchange rule. These purposes could include, among other things, the sale
of stock to obtain additional capital funds, the reservation of shares of Common
Stock for issuance upon the conversion of Preferred Stock or the exercise of
warrants and other bona fide purposes.
The Board believes that the proposed increase in authorized Common Stock
will make sufficient shares available for use pursuant to the purposes described
herein. Other than as specified above and as permitted or required under the
Company's employee benefit plans and under outstanding options, warrants and
other securities convertible into Common Stock (including the obligation to
issue certain warrants to the holders of its Preferred Stock), the Company's
management has no present arrangements, agreements or understandings for the use
of the additional shares proposed to be authorized. No additional action or
authorization by the Company's stockholders would be necessary prior to the
issuance of any additional shares, unless required by applicable law or the
rules of any stock exchange or
31
quotation system on which the Common Stock is then listed or quoted. The Company
reserves the right to seek a further increase in authorized shares from time to
time in the future as considered appropriate by the Board.
The additional shares of Common Stock authorized by the proposed amendment
would have the same privileges as the shares of Common Stock currently
authorized and issued. In addition, if the Board elects to issue additional
shares of Common Stock, such issuance could have a dilutive effect on the
earnings per share, voting power and percentage ownership of current
stockholders. Except for certain transactions requiring stockholder approval
under the Delaware General Corporation Law or the Nasdaq Stock Market, the Board
may approve the issuance of authorized shares of Common Stock at such times, to
such persons and for such consideration as it determines without prior approval
of or ratification by the stockholders.
POTENTIAL ANTI-TAKEOVER EFFECT
The proposed amendment to increase the number of authorized shares of
Common Stock could, under certain circumstances, have an anti-takeover effect.
For example, in the event of a hostile attempt to take over control of the
Company, it may be possible for us to endeavor to impede the attempt by issuing
shares of Common Stock, thereby diluting or impairing the voting power of the
other outstanding shares of Common Stock and increasing the potential costs to
acquire control of the Company. The amendment therefore may have the effect of
discouraging unsolicited takeover attempts, thereby potentially limiting the
opportunity for our stockholders to dispose of their shares at the higher price
generally available in takeover attempts or that may be available under a merger
proposal. We may use the additional shares to resist or frustrate a third-party
transaction providing for an above-market premium even if such third-party
transaction is favored by a majority of the independent stockholders. The
proposed amendment may have the effect of permitting our current management,
including the current Board of Directors, to retain its position, and place it
in a better position to resist changes that stockholders may wish to make if
they are dissatisfied with the conduct of our business. This proposal to
increase the authorized Common Stock has been prompted by business and financial
considerations.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding shares of
Voting Common Stock voting together as a single class and the affirmative vote
of a majority of the outstanding shares of Voting Stock voting together as a
single class are required to approve the proposal to amend the Company's Amended
and Restated Certificate of Incorporation to increase the authorized shares of
Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED
SHARES OF COMMON STOCK.
32
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Stockholders will be asked to vote for a proposal to ratify the
appointment of Deloitte & Touche LLP as the Company's independent accountants
for the fiscal year ending December 31, 2002. If the stockholders, by
affirmative vote of the holders of a majority of the votes cast, do not ratify
this appointment, the Audit Committee of the Board of Directors will reconsider
its action and select other independent public accountants without further
stockholder action. Abstentions and broker non-votes will have no effect on
Proposal 4.
The Company appointed Deloitte & Touche LLP as its independent auditors on
July 11, 2000. Previously, on July 10, 2000, the Company dismissed
PricewaterhouseCoopers LLP as its independent accountants. The decision to
change independent accountants was recommended by the Audit Committee of the
Board of Directors and approved by the Board of Directors. During the two most
recent fiscal years, none of the reports on the Company's financial statements
contained an adverse opinion or a disclaimer of opinion or was qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with its audits for the two most recent fiscal years and any subsequent interim
period, there have been no disagreements with the Company's independent
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
A representative of Deloitte & Touche LLP is expected to be present at the
Annual Meeting to respond to appropriate questions and will be given the
opportunity to make a statement if such representative desires to do so.
AUDIT FEES. In connection with services rendered for the audit of the
Company's annual financial statements and the review of the Company's interim
financial statements for the first, second and third quarters of 2001, total
audit fees for fiscal year 2001 were $290,729. This includes fees for services
that were billed to the Company in fiscal year 2002 in connection with the 2001
fiscal year audit.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. The Company
did not retain its principal accountant to perform Financial Information Systems
Design or Implementation services in fiscal year 2001.
OTHER FEES. During fiscal year 2001, the Company was billed approximately
$179,723 by its principal accountants for services not described above,
including audit related services of $97,902 and non-audit services of $81,821.
Audit related services included fees for registration statement consents, review
of securities filings and for audits of the Company's employee benefit plans.
Non-audit services consisted primarily of tax consulting work.
The Audit Committee has considered the provision of non-audit services by
our principal accountants and has determined that the provision of such services
were consistent with maintaining the independence of the Company's principal
accountants.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT ACCOUNTANTS OF THE
COMPANY.
33
STOCKHOLDER PROPOSALS FOR THE 2003 ANNUAL MEETING
Stockholders wishing to submit a proposal for action at the Company's 2003
Annual Meeting of Stockholders and desiring the proposal to be considered for
inclusion in the Company's proxy materials relating thereto must provide a
written copy of the proposal to the Secretary of the Company at its principal
executive offices a reasonable time before the Company begins to print and mail
its proxy materials and must otherwise comply with the rules of the Securities
and Exchange Commission relating to stockholder proposals. The Company has the
right to request documentary support (as provided in Rule 14a-8 promulgated by
the Commission pursuant to the Exchange Act) of the proponent's ownership claim
within 14 calendar days after receipt of the proposal, and the proponent shall
furnish appropriate documentation within twenty-one (21) days after receiving
such request. Stockholders who submit proposals must, in all other respects,
comply with Rule 14a-8 under the Exchange Act. If a proponent fails to notify
the Company at least forty-five (45) days prior to the month and day of the
prior year's proxy statement, then the management proxies would be allowed their
discretionary voting authority when the proposal is presented at the Annual
Meeting, without any discussion of the matter in the proxy statement.
ANNUAL REPORT
A copy of Level 8's combined Annual Report to Stockholders and Annual
Report on Form 10-K/A for the year ended December 31, 2001 accompanies this
Proxy Statement.
OTHER MATTERS
Management is not aware of any other matters to be considered at the
Annual Meeting other than as set forth in this Proxy Statement. However, if any
other matters properly come before the Annual Meeting, it is the intention of
the persons named in the accompanying form of proxy in their discretion to vote
the proxies in accordance with their judgment of such matters.
THE COMPANY WILL UPON THE WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT
CHARGE A COPY OF ITS ANNUAL REPORT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. REQUESTS FOR
COPIES SHOULD BE DIRECTED TO INVESTOR RELATIONS, LEVEL 8 SYSTEMS, INC., 8000
REGENCY PARKWAY, CARY, NORTH CAROLINA 27511.
__________, 2002
34
EXHIBIT A
AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The text of Article Six of the Company's Amended and Restated
Certificate of Incorporation prior to the start of subsection 6.A.
PREFERRED STOCK will be deleted and replaced in its entirety with the
following:
"6. The total number of shares of capital stock which the
Corporation is authorized to issue is twenty-five million (25,000,000)
shares, consisting of:
(i) twenty million (20,000,000) shares of
common stock, par value $.001 per share ("Common Stock);
(ii) five million (5,000,000) shares of
preferred stock, par value $.001 per share ("Preferred
Stock); and
(iii) Effective at 6:00 p.m. Wilmington, Delaware time on the
date of filing of the Certificate of Amendment reflecting this amendment
with the Delaware Secretary of State, every [*] outstanding shares of
Common Stock of the Corporation will be combined into and automatically
become one (1) outstanding share of Common Stock of the Corporation, par
value $.001 per share. The Corporation shall not issue fractional shares
on account of the foregoing reverse stock split; all shares that are
held by a stockholder as of the effective date hereof shall be
aggregated and each fractional share resulting from the reverse stock
split after giving effect to such aggregation shall be cancelled. In
lieu of any interest in a fractional share to which a stockholder would
otherwise be entitled as a result of such reverse split, such
stockholder shall be entitled to receive a cash amount equal to the fair
value of such fractional share.
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or
restrictions thereof in respect of each class of capital stock of the
Corporation."
* By approving these resolutions you are giving approval to the combination
of any whole number of shares of Common Stock, between and including four
(4) and twelve (12), into one (1) share of Common Stock. The actual
amendment to the Certificate of Incorporation shall combine into each one
share the number of shares determined by the Board of Directors to be in
the best interest of the Company and its stockholders.
EXHIBIT B
AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The text of Article Six of the Company's Amended and Restated
Certificate of Incorporation prior to the start of subsection 6.A.
PREFERRED STOCK will be deleted and replaced in its entirety with the
following:
"6. The total number of shares of capital stock which the
Corporation is authorized to issue is seventy million (70,000,000)
shares, consisting of:
(i) sixty million (60,000,000) shares of
common stock, par value $.001 per share ("Common Stock);
(ii) ten million (10,000,000) shares of
preferred stock, par value $.001 per share ("Preferred
Stock); and
The following is a statement of the designations and the
powers, privileges and rights, and the qualifications, limitations or
restrictions thereof in respect of each class of capital stock of the
Corporation."
PROXY - COMMON STOCK AND PREFERRED STOCK
LEVEL 8 SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING
OF STOCKHOLDERS -- DECEMBER 20, 2002
The undersigned hereby appoints JOHN P. BRODERICK and ANTHONY C.
PIZI as Proxies, or either of them, with full power of substitution, and
hereby authorizes them to vote, as designated below, all shares (unless a
lesser number is specified on the other side) of Common Stock, par value
$.001 per share of Level 8 Systems, Inc. (the "Company") and all shares of
Preferred Stock of the Company that the undersigned would be entitled to
vote at the Annual Meeting of Stockholders of the Company to be held on
December 20, 2002 or any adjournments thereof, with all powers the
undersigned would possess if personally present, for (i) the election of
directors, (ii) the approval of the proposal to amend the Company's
Amended and Restated Certificate of Incorporation to provide for a reverse
stock split and to reduce the number of authorized shares of capital
stock, (iii) the approval of the proposal to amend the Company's Amended
and Restated Certificate of Incorporation to increase the shares of Common
Stock authorized for issuance, and (iv) the ratification of the
appointment of the independent accountants, and in their discretion with
respect to matters incident to the conduct of the meeting and matters as
to which the Board of Directors does not know, as of a reasonable time
before the solicitation of this proxy, are to be presented at the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE
VOTED "FOR" THE NOMINEES LISTED IN PROPOSAL 1, "FOR" EACH OF PROPOSALS 2
THROUGH 4 AND IN THE DISCRETION OF THE PROXY HOLDER(S) WITH RESPECT TO
OTHER MATTERS PROPERLY BROUGHT BEFORE THE MEETING, INCLUDING ANY
ADJOURNMENTS THEREOF.
(Continued and to be SIGNED on the Next Page)
No. 1 Proposal to elect Anthony Pizi, Paul Rampel, Frank Artale, Nicholas
Hatalski, Bruce Hasenyager, Kenneth Nielsen and Jay Kingley as directors
of the Company.
/ / FOR / / WITHHELD
(INSTRUCTION: To withhold authority to vote for any individual
nominee, write that nominee's name in the space provided
below.)
________________________________________________________
No. 2 Proposal to approve each of a set of potential amendments to Company's
Amended and Restated Certificate of Incorporation to effect a reverse
stock split and to decrease the number of authorized shares of capital
stock of the Company and to authorize the Board to effect one of such
amendments.
/ / FOR / / WITHHELD / / ABSTAIN
No. 3 Proposal to amend the Company's Amended and Restated Certificate of
Incorporation to increase the shares of Common Stock authorized for
issuance and to authorize the Board to effect such amendment.
/ / FOR / / WITHHELD / / ABSTAIN
No. 4 Proposal to ratify and approve the appointment of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending December
31, 2002.
/ / FOR / / WITHHELD / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF PROPOSALS 1 THROUGH 4.
PLEASE MARK AND DATE THE PROXY AND
SIGN YOUR NAME AS IT APPEARS HEREON.
IF EXECUTED BY A CORPORATION, A DULY
AUTHORIZED OFFICER MUST SIGN BY NAME
AND TITLE. EXECUTORS, ADMINISTRATORS
AND TRUSTEES MUST SO INDICATE WHEN
SIGNING. IF SHARES ARE HELD JOINTLY,
EACH HOLDER MUST SIGN.
Dated _________________________, 2002
_____________________________________
_____________________________________
Signature(s) of Stockholder(s)