ý
|
Preliminary
Information Statement
|
¨
|
Confidential,
Use of the Commission Only (as permitted by Rule 14c-5(d)
(2))
|
¨
|
Definitive
Information Statement
|
Level
8 Systems, Inc.
|
(Name
of Registrant as Specified in its Charter)
|
(Name
of Person(s) Filing Information Statement if other than the
Registrant)
|
ý
|
No
fee required.
|
¨
|
Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
|
1)
|
Title
of each class of securities to which transaction
applies:
|
2)
|
Aggregate
number of securities to which transaction
applies:
|
3)
|
Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is
calculated and state how it was
determined):
|
4)
|
Proposed
maximum aggregate value of
transaction:
|
5)
|
Total
fee paid:
|
¨
|
Fee
paid previously with preliminary
materials.
|
¨
|
Check
box if any part of the fee is offset as provided by Exchange Act
Rule
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.
|
1)
|
Amount
Previously Paid:
_______________________
|
2)
|
Form,
Schedule or Registration Statement No.:
_______________________
|
3)
|
Filing
Party:
____________________________________________
|
4)
|
Date
Filed:
___________________________________________
|
Series
of
Preferred
Stock
|
Current
Conversion
Price
|
Amended
Conversion
Price
|
|||||
Series
A-3
|
$
|
8.33
|
$
|
3.50
|
|||
Series
B-3
|
$
|
12.53
|
$
|
4.00
|
|||
Series
C
|
$
|
0.38
|
$
|
0.25
|
|||
Series
D
|
$
|
0.32
|
$
|
0.20
|
Existing
Series Preferred Stock
|
Number
of Shares of
Series
A-1 Preferred
Stock
|
|||
Series
A-3
|
0.0142857
|
|||
Series
B-3
|
0.125
|
|||
Series
C
|
0.20
|
|||
Series
D
|
0.25
|
·
|
the
automatic conversion of convertible bridge notes into shares of common
stock,
|
·
|
the
conversion of convertible promissory notes into shares of Series
A-1
preferred stock (subject to the election of the convertible promissory
noteholders, of which the holders of 95% have agreed to convert),
|
·
|
the
automatic exercise of existing warrants of the Company and the
issuance by
the Company and automatic exercise of additional warrants to investors
who
have recently lent funds to the Company, evidenced by senior
reorganization notes, and
|
·
|
to
a lesser extent, the reduction to be effected pursuant to the
Recapitalization to the conversion rates of the convertible promissory
notes and existing preferred stock of the Company.
|
BY
ORDER OF THE BOARD OF DIRECTORS
|
|
John
Broderick
|
|
Chief
Executive Officer
|
|
Dated:
__________, 2006
|
Q:
|
Why
are we proposing the Recapitalization?
|
A:
|
Our
board of directors believes that the Recapitalization would greatly
simplify our capital and governance structures which would benefit
all of
our stockholders. The board believes that the simplified capital
structure
should make the Company more understandable and hence more attractive
to
potential investors and highly skilled employees. The simplified
capital
structure of the Company following the Recapitalization should
also
improve the Company’s ability to access the capital markets to pursue
possible future equity and debt financings and acquisitions, and
would
provide a more transparent capital structure in which to value
the
Company. Finally, we believe that the Recapitalization will be
helpful in
retaining our attractiveness to our preferred stockholders and
convertible
promissory noteholders. See “THE RECAPITALIZATION—Reasons for the
Recapitalization.”
|
Q:
|
Does
Level 8’s board of directors recommend that I consent to the
Recapitalization resolution?
|
A:
|
Our
board of directors recommends that you consent to the Recapitalization.
You should read “THE RECAPITALIZATION—Reasons for the Recapitalization”
for a discussion of the factors that our board of directors considered
in
deciding to recommend your consent to the Recapitalization
|
Q:
|
How
would the Recapitalization be effected?
|
A:
|
The
Recapitalization would be effected by filing (i) a Certificate
of
Designations, Preferences and Rights of the Series A-1 Convertible
Preferred Stock of the Company, (ii) a Certificate of Amendment
to each of
the Series of preferred stock to amend the conversion price of
each series
of preferred and to provide for their conversion into the Series
A-1
preferred stock and (iii) the filing of the Amended and Restated
Certificate of Incorporation of the Company. Please see Annex A
for the
proposed Certificate of Designations, Preferences and Rights of
the Series
A-1 Preferred Stock, Annex B for the proposed Certificate of Amendment
to
each Series of preferred stock and Annex C for the Amended and
Restated
Certificate of Incorporation.
|
Q:
|
What
would happen to the shares of Common Stock in the
Recapitalization?
|
A:
|
Each
share of Common Stock outstanding at the effective time of the
Recapitalization would automatically be converted into 0.05 share
of
Common Stock, entitled to one vote per share.
|
Q:
|
What
would happen to the shares of various series of preferred stock
in the
Recapitalization?
|
A:
|
If
the Recapitalization is completed, each share of preferred stock
of the
Company would be converted into the following number of shares
of Series
A-1 preferred stock of the Company:
|
Existing
Series Preferred Stock
|
Number
of Shares of
Series
A-1 Preferred
Stock
|
|||
Series
A-3
|
0.0142857
|
|||
Series
B-3
|
0.125
|
|||
Series
C
|
0.20
|
|||
Series
D
|
0.25
|
Q:
|
What
would happen to the convertible promissory notes in the
Recapitalization?
|
A:
|
If
the Recapitalization is completed, the outstanding convertible
promissory
notes may, at the option of the holder thereof, be converted into
shares
of Series A-1 preferred stock of the Company at prices ranging
from $0.002
to $0.026.
|
Q:
|
What
would happen to the senior reorganization notes in the
Recapitalization?
|
A:
|
Upon
effectiveness of the Recapitalization, (i) holders of senior
reorganization notes would receive and have automatically exercised
additional warrants exercisable into shares of Common Stock, by
applying
the accrued interest on their senior reorganization notes and by
cashless
exercise to the extent of the balance of the exercise price, (ii)
holders
of existing warrants who advanced the exercise price of their warrants
to
Level 8 would have their existing warrants automatically exercised
and
(iii) those senior reorganization noteholders who loaned Level
8 the first
$1,000,000 in respect of the exercise price of their warrants would
receive early adopter warrants of Level 8 at a ratio of 2:1 for
shares
issuable upon exercise of each existing warrant exercised at the
special
exercise price of $0.10 per share.
|
Q:
|
What
would happen to the convertible bridge notes in the
Recapitalization?
|
A:
|
Upon
effectiveness of the Recapitalization, holders of convertible bridge
notes
would have their notes automatically converted into shares of Common
Stock
of the Company at a conversion price of $0.025 after the reverse
stock
split included as part of the Recapitalization (the equivalent
of $0.00125
for Level 8 stock prior to the reverse split).
|
Q:
|
If
the Recapitalization is completed, would our shares continue to
be
publicly traded?
|
A:
|
Yes.
If the Recapitalization is completed, the shares of Common Stock
would
continue to trade on the Over-the-Counter Bulletin Board. We intend
to
make application to change the symbol under which our shares trade
to the
symbol “CCRO”.
|
Q:
|
If
the Recapitalization is completed, would I still have the same
voting
rights as I do now?
|
A:
|
As
a result of the Recapitalization, holders of Common Stock will
have the
same voting rights. Each share of Common Stock will continue to
be
entitled to one vote. Holders of Series A-1 preferred stock will
be
entitled to a number of votes equal to the number of shares of
Common
Stock into which the preferred stock is convertible. Holders of
Series A-1
preferred stock will not be entitled to the same voting rights
on some
matters as holders of Series A-3, B-3, C or D preferred stock of the
Company. For an explanation of these differences, please see “THE
RECAPITALIZATION—Comparison of Preferred Stockholder Rights Before and
After the Recapitalization.” Further, as a result of the Recapitalization,
the current common stockholders of Level 8 would suffer substantial
dilution. On a fully diluted basis, the current common stockholders,
who
own 54.6% of Level 8, will own only 2.3% of the Company upon completion
of
the Recapitalization. The substantial dilution would result in
a change of
control to the extent that the current common stockholders of Level
8 will
no longer own more than fifty percent of the Common Stock of the
Company
after the Recapitalization.
|
Q:
|
What
protections for the minority stockholders of the Company would
be in place
if the Recapitalization is completed?
|
A:
|
Other
than those provided by law, the minority stockholders of the Company
would
receive no minority protections if the Recapitalization is
completed.
|
Q:
|
What
are the federal income tax consequences to me of the
Recapitalization?
|
A:
|
If
the Recapitalization is approved, you as the holder of shares of
the
common stock or as the holder of shares of preferred stock (or
both) would
not recognize any gain or loss for U.S. federal income tax purposes
as the
result of the Recapitalization, except for any gain or loss that
may
result from your receipt of cash instead of a
|
Q:
|
When
do we expect to complete the Recapitalization?
|
A:
|
If
the Recapitalization is consented to by Level 8’s stockholders, and
assuming the satisfaction of the other conditions to the Recapitalization,
it is anticipated that the Recapitalization will become effective
as soon
as practicable.
|
Q:
|
Who
is entitled to consent to the Recapitalization?
|
A:
|
Only
holders of record of Common Stock and preferred stock of Level
8 at the
close of business [ ], 2006 may consent to the Recapitalization.
|
Q:
|
What
stockholder consents are required to approve the
Recapitalization?
|
A:
|
The
Recapitalization will require the consent of (i) the holders of
a majority
of voting power of the issued and outstanding shares of Level 8
Common
Stock, Series A-3, B-3, C and D preferred stock (each voting on
an
as-converted basis) entitled to consent thereon, consenting together
as a
single class, (ii) the holders of at least two-thirds of the issued
and
outstanding shares of Series D preferred stock entitled to consent
thereon, consenting as a single class with respect to the conversion
into
shares of Series A-1 preferred stock at the reduced conversion
rates and
the entire Recapitalization, and (iii) holders of at least 85%
of the
issued and outstanding shares of Series A-3, B-3 and C preferred
stock
entitled to consent thereon, each consenting as a single class
with
respect to the conversion into shares of Series A-1 preferred shares
at
reduced conversion rates and together as a single class with respect
to
the entire Recapitalization.
|
Q:
|
Are
there any conditions that are required to be satisfied in order
to
consummate the
Recapitalization?
|
A:
|
Yes.
In addition to the receipt of the requisite consents, the Recapitalization
is conditioned upon the approval of amendments to the convertible
promissory notes, the senior reorganization notes, and the convertible
bridge notes.
|
Q:
|
What
is the status of the Registration Statement filed by Cicero
Inc.?
|
A:
|
During
the pendency of the filing of the Registration Statement, Level
8
continued to experience working capital needs in excess of cash
generated
from operations. To continue to meet its obligations, the Company
raised
funds through the sale of its convertible bridge notes. Because
of the
difficulty of raising funds while having a registration statement
on file,
even though not effective, on April 24, 2006, the Board of Directors
approved the withdrawal of the registration statement and the registration
statement was subsequently withdrawn from the SEC on May 18, 2006.
In lieu
of the recapitalization merger contemplated by the Registration
Statement,
the Board of Directors determined to effect a recapitalization
of the
Company pursuant to this Information
Statement.
|
Q:
|
What
do I need to do now?
|
A:
|
After
you have carefully read this Information Statement, if you intend
to
consent to the Recapitalization, mail in your consent no later
than
[______].
|
Q:
|
If
my shares are held in “street name” by my broker, will my broker consent
for my shares for me?
|
A:
|
Maybe.
Your broker will consent for your shares only if you provide instructions
on how to consent. You should follow the directions provided by
your
broker. Without instructions, your shares will not be consented
to the
Recapitalization.
|
Q:
|
If
my shares are held in an IRA, who votes those
shares?
|
A:
|
You
vote shares held by you in an IRA as though you held those shares
directly.
|
Q:
|
Can
I change my vote after I have mailed my signed
consent?
|
A:
|
A
shareholder who has executed and returned a Consent may revoke
it at any
time prior to the time that the Company has received enough Consents
to
approve the Recapitalization by filing with the Secretary of the
Company,
at the address first set forth above, a written notice of revocation
bearing a later date than the Consent being revoked. After enough
Consents
have been received in order to approve the Recapitalization, any
Consents
approving that Recapitalization shall thereafter be irrevocable.
The
failure to sign and return a Consent will have the same effect
as a vote
against the Recapitalization. All Consents must be received by
[______].
|
Q:
|
Should
I send in my stock certificate
now?
|
A:
|
No.
Shortly after the Recapitalization is completed, the Company will
send you
written instructions for exchanging your stock
certificates.
|
Q:
|
Am
I entitled to appraisal rights?
|
A:
|
No.
Stockholders of the Company will not be entitled to appraisal or
dissenters rights under the laws of the State of Delaware by virtue
of the
actions proposed pursuant to the
Recapitalization.
|
Q:
|
Who
should I call with questions or to obtain additional copies of
this
document?
|
A:
|
You
should call: Mr. John P. Broderick, Chief Executive Officer and
Chief
Financial Officer, 8000 Regency Pkwy., Ste 542, Cary, NC 27511,
(919)
380-5000.
|
•
|
declared
that the Recapitalization was advisable and in the best interests
of Level
8 and its preferred stockholders and common
stockholders;
|
•
|
approved
the adoption of an amended and restated certificate of incorporation
and
bylaws; and
|
•
|
directed
that the adoption of the Recapitalization be submitted to a consent
solicitation of the stockholders and recommended that the stockholders
consent to the Recapitalization.
|
·
|
Each
share of Common Stock will be converted into one-twentieth (0.05)
share of
Common Stock;
|
·
|
Each
share of Series A-3 preferred stock will be converted into 0.0142857
shares of Series A-1 preferred
stock;
|
·
|
Each
share of Series B-3 preferred stock will be converted into 0.0125
shares
of Series A-1 preferred stock;
|
·
|
Each
share of Series C preferred stock will be converted into 0.20 shares
of
Series A-1 preferred stock;
|
·
|
Each
share of Series D preferred stock will be converted into 0.25 shares
of
Series A-1 preferred stock;
|
·
|
Convertible
Promissory Notes may, at the option of the holder thereof (of which
holders of 95% have agreed to convert), be converted into shares
of Series
A-1 preferred stock at conversion prices ranging from $0.002 to
$0.026;
|
·
|
The
senior secured notes of Level 8 (“Senior
Reorganization Notes”)
issued in the aggregate principal amount of $2,559,000 to holders
of
warrants of Level 8 who loaned to Level 8 the exercise price of
their
warrants and other investors who lent funds to Level 8 (“Senior
Reorganization Noteholders”)
in exchange for Senior Reorganization Notes and additional warrants,
pursuant to note and warrant offerings in December 2004 ($1,615,000)
and
March 2005 ($944,000) (the “Note
and Warrant Offerings”),
will be cancelled and the existing warrants in respect of which
the
exercise price was loaned to Level 8, as evidenced by the Senior
Reorganization Notes, will be exercised. Such warrant holders were
offered
a special one-time exercise price of the lesser of $0.10 per share
and the
original exercise price as part of the recapitalization merger.
The
exercise price of the warrants at that time ranged from $0.07 to
$0.60;
|
·
|
The
warrants of Level 8 (“Additional
Warrants”)
agreed to be issued to Senior Reorganization Noteholders in connection
with their loans to Level 8, exercisable at $0.002 per share in
the event
of the consummation of the recapitalization merger, will automatically
be
deemed exercised, by applying the accrued interest on their Senior
Reorganization Notes and by cashless exercise to the extent of
the balance
of the exercise price;
|
·
|
Senior
Reorganization Noteholders who loaned Level 8 the first $1,000,000
in
respect of the exercise price of their warrants, pursuant to the
Note and
Warrant Offering in December 2004, will receive warrants of Level
8
(“Early
Adopter Warrants”)
at a ratio of 2:1 for shares issuable upon exercise of each existing
warrant exercised at the special exercise price (before adjustment
by the
reverse split exchange ratio) of $0.10 per
share;
|
·
|
The
convertible bridge notes (the “Convertible
Bridge Notes”)
held by convertible bridge noteholders (the “Convertible
Bridge Noteholders”)
who had loaned money to Level 8 as part of the September 2005 consortium
note offering (the “Consortium
Note Offering”)
will be automatically converted into shares of Common Stock at
a
conversion price of $0.025; and
|
·
|
Each
option, warrant, purchase right, unit or other security of Level
8,
including the Early Adopter Warrants, will remain outstanding with
the
number of shares of Common Stock issuable upon exercise of such
security
equal to one-twentieth (0.05) of the number of shares such security
was
exercisable for prior to the Recapitalization, and the exercise
price
increased to twenty times the exercise price prior to the
Recapitalization.
|
Security
|
Amount
Invested
|
Current
Conversion
Price
|
Common
Equivalents
|
Amended
Conversion
Price
|
Common
Equivalents
|
|||||||||||
$
|
150,000
|
$
|
0.37
|
405,405
|
$
|
0.026
|
3,323,077
|
|||||||||
$
|
185,000
|
$
|
0.32
|
578,125
|
$
|
0.023
|
8,093,750
|
|||||||||
$
|
125,000
|
$
|
0.28
|
446,429
|
$
|
0.02
|
6,250,006
|
|||||||||
|
$
|
112,000
|
$
|
0.20
|
560,000
|
$
|
0.014
|
7,840,000
|
||||||||
Convertible | ||||||||||||||||
Promissory
Notes
|
$
|
15,320
|
$
|
0.17
|
90,118
|
$
|
0.012
|
1,261,647
|
||||||||
$
|
125,000
|
$
|
0.16
|
781,250
|
$
|
0.011
|
11,363,636
|
|||||||||
$
|
100,000
|
$
|
0.10
|
1,000,000
|
$
|
0.0025
|
40,000,000
|
|||||||||
$
|
150,000
|
$
|
0.08
|
1,875,000
|
$
|
0.002
|
75,000,000
|
|||||||||
$
|
30,000
|
$
|
0.07
|
428,571
|
$
|
0.005
|
6,000,000
|
|||||||||
Series
A-3 preferred stock
|
$
|
1,571,000
|
$
|
8.33
|
188,528
|
$
|
3.50
|
448,857
|
||||||||
Series
B-3 preferred
stock
|
$
|
30,000,000
|
$
|
12.53
|
2,394,063
|
$
|
4.00
|
7,500,000
|
||||||||
Series
C preferred
stock
|
$
|
991,000
|
$
|
0.38
|
2,607,895
|
$
|
0.25
|
3,964,000
|
||||||||
Series
D preferred
stock
|
$
|
1,060,520
|
$
|
0.32
|
3,314,125
|
$
|
0.20
|
5,302,600
|
||||||||
|
Ownership
of Each Class
of
Security of Level 8
Using
Current
Conversion
Rates
|
Ownership
of Each Class of
Security
Using Amended
Conversion
Rates and
Giving
Effect to
Recapitalization
and Related
Issuances,
Exercises and
Conversions
|
Ownership
of Each Class
of
Security Giving Effect
to
Recapitalization
|
||||||||||||||||
|
%
Held(1)
|
Number
of
Shares
Held
|
%
Held(1)
|
Number
of
Shares
Held
|
%
Held(1)
|
Number
of
Shares
Held
|
|||||||||||||
Common
Stock
|
54.6
|
%
|
48,039,947
|
7.4
|
%
|
48,039,947
|
2.3
|
%
|
2,806,497
|
||||||||||
Series
A-1 Preferred
Stock (1)
|
0.7
|
%
|
860,773
|
||||||||||||||||
Series
A-3 Preferred
Stock
|
0.2
|
%
|
188,528
|
0.1
|
%
|
448,857
|
|||||||||||||
Series
B-3 Preferred
Stock
|
2.7
|
%
|
2,394,063
|
1.2
|
%
|
7,500,000
|
|||||||||||||
Series
C Preferred
Stock
|
3.0
|
%
|
2,607,895
|
0.6
|
%
|
3,964,000
|
|||||||||||||
Series
D Preferred
Stock
|
3.8
|
%
|
3,314,125
|
0.8
|
%
|
5,302,600
|
|||||||||||||
Senior
Reorganization Notes
(2)
|
13.2
|
%
|
11,640,203
|
60.2
|
%
|
390,028,235
|
16.4
|
%
|
19,942,969
|
||||||||||
Early
Adopter Warrants(2)
|
3.1
|
%
|
20,111,236
|
0.8
|
%
|
1,005,562
|
|||||||||||||
Non-lenders
Warrants (3)
|
8.8
|
%
|
7,735,872
|
1.2
|
%
|
7,735,872
|
0.4
|
%
|
527,258
|
||||||||||
Stock
Options (4)
|
6.7
|
%
|
5,900,897
|
0.9
|
%
|
5,900,897
|
0.5
|
%
|
551,000
|
||||||||||
Convertible
Bridge Notes
(5)
|
72.4
|
%
|
88,135,079
|
||||||||||||||||
Convertible
Promissory Notes
|
7.0
|
%
|
6,164,898
|
24.6
|
%
|
159,132,116
|
6.5
|
%
|
7,956,606
|
||||||||||
Total
|
100
|
%
|
87,986,428
|
648,163,760
|
100
|
%
|
121,785,744
|
||||||||||||
Landis,
Mark & Carolyn
|
11.3
|
%
|
9,904,575
|
28.2
|
%
|
182,611,994
|
20.6
|
%
|
23,825,085
|
||||||||||
Pizi,
Anthony
|
4.8
|
%
|
4,207,497
|
11.1
|
%
|
71,851,678
|
5.8
|
%
|
7,016,334
|
||||||||||
Brown
Simpson Partners I, Ltd.
|
6.7
|
%
|
5,936,921
|
6.1
|
%
|
39,717,241
|
5.0
|
%
|
6,143,363
|
||||||||||
Liraz
Systems, Ltd.
|
7.3
|
%
|
6,426,869
|
1.8
|
%
|
11,739,819
|
0.6
|
%
|
715,789
|
Series
A-3, B-3, C and D preferred stock
|
Series
A-1 preferred stock
|
|
Voting
Rights
|
Voting
Rights
|
|
The
holders of Common Stock and holder of each of the series of preferred
stock are entitled to vote together jointly on all matters. Holders
of
preferred stock are entitled to a number of votes equal to the
number of
shares of Company Common Stock into which the preferred stock is
convertible.
So
long as any shares of the preferred stock are outstanding, the
approval of
the holders of at least two-thirds (85% in the case of the Series
A-3, B-3
and C preferred stock) and two-third (66% in the case of the Series
D) of
the outstanding shares of every series of preferred stock voting
together
as an individual class (and with respect to the altering of rights
of a
particular series of preferred stock, such series shall only vote
if that
particular series is affected) will be required in order for the
Company
to:
|
The
holders of Common Stock and holders of the Series A-1 preferred
stock are
entitled to vote together jointly on all matters except as provided
in the
following paragraphs.
Each
of the holders of preferred stock is entitled to a number of votes
equal
to the number of shares of Common Stock into which the preferred
stock is
convertible.
Until
the closing by the Company of an additional $5,000,000 equity financing
from institutional investors, approval of the holders of at least
two-thirds of the outstanding shares of the Series A-1 preferred
stock
voting together separately as a class will be required
for:
|
|
a) alter
or change the rights, preferences or privileges of any series of
the
preferred stock;
b) alter
or change the rights, preferences or privileges of any capital
stock of
the Company so as to affect adversely any series of the preferred
stock;
c)
create
any securities that are superior in rank to any series of preferred
stock;
d)
create
any securities that are pari passu in rank to any series of preferred
stock;
e) increase
the authorized number of shares of any series of preferred
stock;
f)
issue
any shares of securities that are superior or pari
passu
in
rank to any series of preferred stock;
g)
issue
any shares of preferred stock other than pursuant to the stock
purchase
agreement
|
a) a
merger, sale of all, or substantially all of the assets or intellectual
property, recapitalization, or reorganization of the Company;
b)
the
authorization or issuance of any equity security having any right,
preference or priority superior to or on parity with the Series
A-1
preferred stock. (excluding debt not convertible into any such
senior or
pari passu equity security);
c)
the
redemption, repurchase or acquisition, directly or indirectly,
through
subsidiaries or otherwise, of any equity securities (other than
the
repurchase of equity securities of the Company at cost upon termination
of
employment or service pursuant to vesting agreements or stockholder
agreements or a repurchase of the Series A-1 preferred stock) or
the
payment of dividends or other distributions on equity securities
by the
Company (other than on the Series A-1 preferred
stock);
|
applicable
to any particular series of preferred
stock;
h)
redeem,
or declare or pay any cash dividend or distribution on any securities
that
are junior in rank to any series of preferred stock;
i)
increase
the par value of the Common Stock;
j)
issue
any debt securities that would have any preference over any series
of
preferred stock upon the liquidation of the Company;
k)
cause
the Company to issue securities such that it would exceed the issuance
cap
set forth in the certificate of Designations for each of the Series
A-3
and B-3 preferred stock; or
l)
issue,
grant or sell, or be deemed to have issued, granted or sold, any
shares of
Common Stock, or options, rights or warrants to purchase Common
Stock at a
price per share less than the conversion price then applicable
to such
series of preferred stock.
|
d) any
amendment or repeal of any provision of the Company’s certificate of
incorporation or by-laws that would adversely affect the rights,
preferences or privileges of the Series A-1 preferred stock;
e) a
significant change in the principal business of the Company as
conducted
by the Company at the time of the consummation of the closing of
the
Recapitalization;
f)
the
making of any loan or advance to any entity other than in the ordinary
course of business unless it is wholly owned by the Company;
g)
the
making of any loan or advance to any person, including, without
limitation, any employee or director of the Company or any subsidiary,
except advances and similar expenditures in the ordinary course
of
business or under the terms of an employee stock or option plan
approved
by the board of directors; or
h)
the
guarantee, directly or indirectly, of any indebtedness or obligations,
except for trade accounts of any subsidiary arising in the ordinary
course
of business.
|
|
The
holders of a majority of the outstanding shares of the Series A-1
preferred stock shall be entitled to appoint two board observers
who shall
be entitled to receive all information received by the board of
directors
and to attend and participate without vote at meetings of the board
of
directors and its committees. At the option of the holders of a
majority
of the outstanding shares of the Series A-1 preferred stock, the
holders
of the Series A-1 preferred stock may temporarily or permanently
exchange
their board observer rights for two seats on the board of directors,
each
having one vote.
|
||
Board
of Directors
|
Board
of Directors
|
|
The
holders of Common Stock and the holders of each of the series of
preferred
stock are entitled to vote together jointly to elect directors.
A
plurality of the votes of the shares present in person or represented
by
proxy at a meeting and entitled to vote for directors is required
in order
to elect a director.
|
The
holders of Common Stock and the holders of the Series A-1 preferred
stock
are entitled to vote together jointly to elect directors. A plurality
of
the votes of the shares present in person or represented by proxy
at a
meeting and entitled to vote for directors is required in order
to elect a
director.
|
|
The
holders of the Series A-1 preferred stock shall be entitled, upon
their
election to do so, to elect two directors of the board of directors
by a
plurality of the votes of the shares present in person or represented
by
proxy at a meeting and entitled to vote for directors, voting separately
as a class.
|
||
Because
the Company did not have aggregate consolidated revenues of more
than
$1,500,000 as reflected on its financial statements for the six
months
ended December 31, 2004, the holders of the Series A-1 preferred
stock
would have had the right, but not
the
|
obligation,
to elect a majority of the voting members of the board
of directors. However, upon approval of the Recapitalization, such
right
of holders of the Series A-1 preferred stock to elect the majority
of the
board shall terminate as part of the Recapitalization.
|
||
Dividends
|
Dividends
|
|
The
holders of Series C and D preferred stock are entitled to receive
equivalent dividends on an as-converted basis whenever the Company
declares a dividend on its Common Stock, other than dividends payable
in
shares of Common Stock.
|
The
holders of Series A-1 preferred stock are entitled to receive equivalent
dividends on an as-converted basis whenever the Company declares
a
dividend on its Common Stock, other than dividends payable in shares
of
Common Stock.
|
|
The
holders of Series A-3 and B-3 preferred stock are not entitled
to
dividends unless declared by the board of directors.
|
||
Redemption
|
Redemption
|
|
Series
A-3, B-3 and C preferred stock is redeemable at the option of the
Company
at a redemption price of the original per share issuance price
plus
declared and unpaid dividends, if the following conditions are
met: (i)
less than 5% of the originally issued shares of that particular
series are
outstanding, and (ii) the price per share of the Company’s Common Stock is
greater than $5.00 for Series C, $16.00 for Series A-3, and $25.06
for
Series B-3 for at least 20 trading days.
|
The
Series A-1 preferred stock is not redeemable.
|
|
Series
D preferred stock is redeemable at the option of the holder under
certain
circumstances such as bankruptcy, merger or change of control at
a
redemption price calculated pursuant to a formula set forth in
the
Certificate of Designations for the Series D preferred
stock.
|
||
Conversion
|
Conversion
|
|
Series
A-3, B-3, C and D preferred stock are each convertible at any time
at the
option of the holder. The initial conversion prices for each series
are:
Series A-3 $3.50 previously reduced from $8.333 per share; Series
B-3
$4.00 previously reduced from $12.531 per share; Series C $.25
previously
reduced from $0.38 per share; and Series D $.20 previously reduced
from
$0.32 per share.
|
The
Series A-1 preferred stock is convertible at any time at the option
of the
holder into an initial conversion ratio of 1,000 shares of Common
Stock of
the Company for each share of Series A-1 preferred stock. The initial
conversion ratio shall be adjusted in the event of any stock splits,
stock
dividends and other recapitalizations of the Company.
|
|
The
Series A-1 preferred stock is also convertible on a automatic basis
in the
event that (i) the Company closes on an additional $5,000,000 equity
financing from strategic or institutional investors, or (ii) the
Company
has four consecutive quarters of positive cash flow as reflected
on the
Company’s financial statements prepared in accordance with generally
accepted accounting principals (“GAAP”) and filed with the Commission.
|
Anti-Dilution
Protection
|
Anti-Dilution
Protection
|
|
The
Series C preferred stock conversion price shall be adjusted upon
any
dividends, stock splits, reverse stock splits, and the issuance
by the
Company to all common stockholders of rights to purchase Common
Stock at a
lower price than the conversion price, or the issuance to all common
stockholders of any indebtedness or assets or rights to purchase
any
securities.
|
The
initial conversion ratio shall be adjusted in the event of any
stock
splits, stock dividends and other recapitalizations of the Company.
|
|
The
Series A-3 and B-3 preferred stock conversion price shall be adjusted
upon
any dividends, stock splits, reverse stock splits, and the issuance
by the
Company to all common stockholders of rights to purchase Common
Stock at a
lower price than the conversion price, or the issuance to all common
stockholders of any indebtedness or assets or rights to purchase
any
securities. In addition, the conversion price shall be adjusted
in the
event that any Common Stock is sold at a lower price than the conversion
price.
|
||
The
Series D preferred stock conversion price shall be adjusted upon
any
dividends, stock splits, reverse stock splits, merger, consolidation
or
other corporate changes, and the issuance by the Company to all
common
stockholders of distributions or spin-offs, or the issuance to
all common
stockholders of any rights to purchase the Company’s Common
Stock.
|
||
Liquidation
Preference
|
Liquidation
Preference
|
|
The
holders of each series of preferred stock are entitled to a liquidation
preference of $1,000 per share of preferred stock upon the liquidation
of
Level 8.
|
The
holders of the Series A-1 preferred stock are entitled to a liquidation
preference of $500 per share of Series A-1 preferred stock upon
the
liquidation of the Company.
|
|
Other
Rights
|
Other
Rights
|
|
The
holders of Series A-3 and B-3 preferred stock are also entitled
to receive
warrants to purchase Common Stock upon either a subsequent financing
or a
loan from an unaffiliated lender. In addition, the occurrence of
certain
events will trigger a 14% per annum dividend that will accrue until
such
events are cured.
|
The
holders of the Series A-1 preferred stock are not entitled to any
additional rights except as may be set forth in the Certificate
of
Designations.
|
|
Until
the second anniversary of the issuance date of the Series D preferred
stock, the holders of the Series D preferred stock have rights
to
participate on a pro rata basis in any subsequent issuances of
securities
by the Company, including common and preferred stock.
|
·
|
Anthony
Pizi, Chief Information Officer of Level 8, owns, as of April 10,
2006,
1,833,300 shares subject to stock options exercisable within sixty
(60)
days and 394,737 shares of Common Stock issuable upon conversion
of Series
C preferred stock. The exercise prices of the warrants before reduction
to
$0.10 are as follows: (i) 90,118 shares exercisable at $0.17 per
share of
Common Stock; (ii) 560,000 shares exercisable at $0.20 per share
of Common
Stock; and (iii) 185,624 shares exercisable at $0.32 per share
of Common
Stock. Mr. Pizi owns 223,330 shares of Level 8 Common Stock. Mr.
Pizi
holds convertible promissory notes amounting to $227,320 and convertible,
at the option of the holder (as to which he has agreed to convert
such
notes), into 920,388 shares of Level 8 Common Stock, and 835,742
shares of
Common Stock issuable upon the exercise of warrants issued in connection
with such convertible promissory notes, prior to the Recapitalization.
In
addition, Mr. Pizi is separately owed $423,333 by Level 8, evidenced
by a
Senior Reorganization Note, which may be converted into warrants
to
purchase an additional 57,165,993 shares of Common Stock of Level
8 at an
exercise price of $0.002 per share. These warrants are only issuable
upon
approval of the Recapitalization, and are to be automatically exercised
in
connection with the consummation of the Recapitalization. Mr. Pizi
also
holds, in connection with the Senior Reorganization Notes, 1,166,666
Early
Adopter Warrants which, upon consummation of the Recapitalization,
convert
into 58,333 warrants at an exercise price of $2.00 per share of
Common
Stock. As part of the Senior Reorganization Notes Mr. Pizi advanced
the
adjusted exercise price of 450,000 warrants. Upon the consummation
of the
Recapitalization, Mr. Pizi will receive 23,750 shares of Common
Stock
representing the underlying shares supporting the warrant exercise.
Mr.
Pizi also holds $85,000 of Convertible Bridge Notes which bear
interest at
10% and matured on September 15, 2005. Upon consummation of the
Recapitalization, these notes will automatically convert into 3,400,000
shares of Common Stock. Mr. Pizi is a son-in-law of Mark and Carolyn
Landis.
|
Ownership
of the Company
|
|
||||||||||||||||||
|
Before
the
Recapitalization
|
After
the
Recapitalization
|
Ownership
of the
Company
|
||||||||||||||||
|
Share
Ownership
|
Percentage
|
Share
Ownership
|
Amount
Invested
|
Share
Ownership
|
Percentage
(1)
|
|||||||||||||
Series
C preferred stock
|
394,737
|
0.4
|
%
|
600,000
|
$
|
150,000
|
|||||||||||||
Series
A-1 preferred stock(4)
|
555,082
|
0.5
|
%
|
||||||||||||||||
Common
Stock
(2)(3)
|
223,330
|
0.3
|
%
|
223,330
|
$
|
18,333
|
6,293,217
|
5.2
|
%
|
||||||||||
Warrants(5)
|
835,742
|
0.9
|
%
|
360,742
|
18,037
|
||||||||||||||
Stock
Options
|
1,833,300
|
2.1
|
%
|
1,833,300
|
91,665
|
0.1
|
%
|
||||||||||||
Convertible
Promissory Notes
|
920,388
|
1.0
|
%
|
10,501,647
|
$
|
227,320
|
|||||||||||||
Convertible
Bridge Notes
|
68,000,000
|
$
|
85,000
|
||||||||||||||||
Senior
Reorganization Notes
|
58,332,659
|
$
|
423,333
|
58,333
|
|||||||||||||||
Total
|
4,207,497
|
4.7
|
%
|
139,851,678
|
$
|
903,986
|
7,016,334
|
5.8
|
%
|
* |
Represents
less than 0.1%.
|
(1)
|
Includes
all issued and outstanding shares of Common Stock, shares issuable
upon
conversion of preferred stock, shares issuable upon the exercise
of
options and warrants, shares issuable upon conversion of convertible
promissory notes and shares issuable upon conversion of Convertible
Bridge
Notes. Does not include shares issuable upon exercise of options
and
warrants having exercise prices in excess of the fair market value
of
Level 8 Common Stock as of April 10,
2006.
|
(2)
|
The
number of shares includes shares issued upon the exercise of warrants
and
shares purchased from Level 8. The amount invested does not include
amounts paid to third parties in private or market transaction,
if
any.
|
(3)
|
Common
Stock includes the conversion of $85,000 of Convertible Bridge
Notes and
$423,333 of Senior Reorganization
Notes.
|
(4)
|
Series
A-1 preferred stock includes the conversion of Level 8 Series C
preferred
stock and $227,320 of convertible promissory
notes.
|
(5)
|
Mr.
Pizi advanced the exercise price on 475,000 warrants which upon
consummation of the Recapitalization will convert into 23,750 shares
of
Common Stock. The remaining warrants will be adjusted via the exchange
ratio.
|
·
|
Mark
Landis, Chairman of the Board of Level 8, and his spouse, Carolyn
Landis,
who are parents-in-law to Mr. Pizi, own, as of April 10, 2006,
117,594
shares of Common Stock issuable upon the exercise of warrants exercisable
at $0.37 per share of Common Stock. Mr. and Mrs. Landis own 581,623
shares
of Level 8 Common Stock, and hold convertible promissory notes
amounting
to $500,000 and convertible at the option of the holder (as to
which he
has agreed to convert such notes), into 4,102,679 shares of Level
8 Common
Stock, and 5,102,679 shares of Common Stock issuable upon the exercise
of
warrants issued in connection with such convertible promissory
notes,
prior to the Recapitalization. The exercise prices of the warrants
before
reduction to $0.10 are as follows: (i) 1,875,000 exercisable at $0.08
per share of Common Stock; (ii) 2,000,000 shares exercisable at
$0.10 per
share of Common Stock; (iii) 781,250 shares exercisable at $0.16
per share
of Common Stock; and (iv) 446,429 shares exercisable at $0.28 per
share of Common Stock. In addition, the Landis’ are separately owed
$327,860 by Level 8, evidenced by Senior Reorganization Notes,
which may
be converted into warrants to purchase an additional 44,234,523
shares of
Common Stock of Level 8 at an exercise price of $0.002 per share.
These
warrants are only issuable upon approval of the Recapitalization,
and are
to be automatically exercised in connection with the
|
|
Ownership
of the Company
|
|
|||||||||||||||||
|
Before
the
Recapitalization
|
After
the
Recapitalization
|
Ownership
of the
Company
|
||||||||||||||||
|
Share
Ownership
|
Percentage
|
Share
Ownership
|
Amount
Invested
|
Share
Ownership
|
Percentage
(1)
|
|||||||||||||
Series
C preferred stock
|
$
|
100,000
|
|||||||||||||||||
Series
A-1 preferred stock(4)
|
6,630,682
|
5.4
|
%
|
||||||||||||||||
Common
Stock
(2)(3)
|
581,623
|
0.7
|
%
|
581,623
|
$
|
818,333
|
18,195,571
|
14.0
|
%
|
||||||||||
Warrants(5)
|
5,220,273
|
5.9
|
%
|
2,125,000
|
106,250
|
0.1
|
%
|
||||||||||||
Convertible
Promissory Notes
|
4,102,679
|
4.7
|
%
|
132,613,642
|
$
|
500,000
|
|||||||||||||
Convertible
Bridge Notes (3)
|
292,000,000
|
$
|
345,000
|
||||||||||||||||
Senior
Reorganization Notes (3)
|
47,291,729
|
$
|
327,860
|
152,860
|
|||||||||||||||
Total
|
9,904,575
|
11.3
|
%
|
474,611,994
|
$
|
2,091,193
|
25,085,363
|
20.6
|
%
|
* |
Represents
less than 0.1%.
|
(1)
|
Includes
all issued and outstanding shares of Common Stock, shares issuable
upon
conversion of preferred stock, shares issuable upon the exercise
of
options and warrants, shares issuable upon conversion of convertible
promissory notes and shares issuable upon conversion of Convertible
Bridge
Notes. Does not include shares issuable upon exercise of options
and
warrants having exercise prices in excess of the fair market value
of
Level 8 Common Stock as of April 10,
2006.
|
(2)
|
The
number of shares includes shares issued upon the exercise of warrants
and
shares purchased in market transactions. The amount invested does
not
include amounts paid to third parties in private or market transaction,
if
any.
|
(3)
|
Common
Stock includes the conversion of $365,000 of Convertible Bridge
Notes and
$327,860 of Senior Reorganization
Notes.
|
(4)
|
Series
A-1 preferred stock includes the conversion of $500,000 of convertible
promissory notes.
|
(5)
|
Mr.
Landis advanced the exercise price on 3,095,273 warrants which
upon
consummation of the Recapitalization will convert into 154,764
shares of
Common Stock. The remaining warrants will be adjusted via the exchange
ratio.
|
·
|
Bruce
Miller, a director of Level 8, owns, as of April 10, 2006, convertible
promissory notes amounting to $30,000, convertible at the option
of the
holder (as to which he has agreed to convert such notes) into 428,571
shares of Level 8 Common Stock. In addition, Mr. Miller is separately
owed
$77,706 by Level 8, evidenced by Senior Reorganization Notes, which
may be
converted into warrants to purchase an additional 11,456,727 shares
of
Common Stock of Level 8 at a purchase price of $0.002 per share.
These
warrants are
|
Ownership
of the Company
|
|
|
|||||||||||||||||
|
Before
the
Recapitalization
|
After
the
Recapitalization
|
Ownership
of the
Company
|
||||||||||||||||
|
Share
Ownership
|
Percentage
|
Share
Ownership
|
Amount
Invested
|
Share
Ownership
|
Percentage(1)
|
|||||||||||||
Series
A-1 preferred stock (4)
|
300,000
|
0.2
|
%
|
||||||||||||||||
Common
Stock
(2)(3)
|
4,125,132
|
3.4
|
%
|
||||||||||||||||
Warrants
(5)
|
277,058
|
0.3
|
%
|
||||||||||||||||
Convertible
Promissory Notes
|
428,571
|
0.5
|
%
|
6,000,000
|
$
|
30,000
|
|||||||||||||
Convertible
Bridge Notes
|
72,000,000
|
$
|
90,000
|
||||||||||||||||
Senior
Reorganization Notes
|
11,179,669
|
$
|
77,706
|
47,706
|
|||||||||||||||
Total
|
705,629
|
0.8
|
%
|
89,179,669
|
$
|
197,706
|
4,472,838
|
3.6
|
%
|
* |
Represents
less than 0.1%.
|
(1)
|
Includes
all issued and outstanding shares of Common Stock, shares issuable
upon
conversion of preferred stock, shares issuable upon the exercise
of
options and warrants, shares issuable upon conversion of convertible
promissory notes and shares issuable upon conversion of Convertible
Bridge
Notes. Does not include shares issuable upon exercise of options
and
warrants having exercise prices in excess of the fair market value
of
Level 8 Common Stock as of April 10,
2006.
|
(2)
|
The
number of shares includes shares issued upon the exercise of warrants
and
shares purchased in market transactions. The amount invested includes
only
amounts paid upon the conversion of
warrants.
|
(3)
|
Common
Stock includes the conversion of $90,000 of Convertible Bridge
Notes and
$77,706 of Senior Reorganization
Notes.
|
(4)
|
Series
A-1 preferred stock includes the conversion of $30,000 of convertible
promissory notes.
|
(5)
|
Mr.
Miller advanced the exercise price on 227,058 warrants which upon
consummation of the Recapitalization will convert into 13,853 shares
of
Common Stock.
|
·
|
Until
July 22, 2005, but during the period when the terms of the
Recapitalization were being negotiated, Nicholas Hatalski was a
director
of Level 8, and owned $25,000 of convertible promissory notes,
convertible, at the option of the holder (as to which he has agreed
to
convert such notes), into 78,125 shares of Common Stock issuable
upon the
exercise of warrants issued in connection with such convertible
promissory
notes;
|
·
|
John
Broderick, Chief Executive Officer and Chief Financial Offer of
Level 8,
owns $2,300 of Senior Reorganization Notes which may be converted
into
warrants to purchase 333,333 shares of Level 8
|
·
|
Bruce
Hasenyager, a member of Level 8’s board of directors, holds $4,061 of
Convertible Bridge Notes which bear interest at 10% and matured
on
September 15, 2005. Upon consummation of the Recapitalization,
this note
will automatically convert into 162,425 shares of Common
Stock;
|
·
|
Charles
Porciello, a member of Level 8’s board of directors, holds $10,000 of
Convertible Bridge Notes which bear interest at 10% and matured
on March
31, 2006. Upon consummation of the Recapitalization, this note
will
automatically convert into 400,000 shares of Common
Stock;
|
·
|
Bruce
Percelay, a member of Level 8’s board of directors, holds $100,000 of
Convertible Bridge Notes which bear interest at 10% and matured
on
December 31, 2005. Upon consummation of the Recapitalization, this
note
will automatically convert into 4,000,000 shares of Common
Stock;
|
·
|
Rick
Atherton, a member of Level 8’s board of directors, holds $15,000 of
Convertible Bridge Notes which bear interest at 10% and matured
on March
31, 2006. Upon consummation of the Recapitalization, this note
will
automatically convert into 600,000 shares of Common Stock. Mr.
Atherton
also holds $20,000 of Senior Reorganization Notes which upon consummation
of the Recapitalization will convert into 144,928 shares of Common
Stock.
|
·
|
Following
the Recapitalization, the current members of Level 8’s board of directors
will remain directors.
|
·
|
44,502,378
weighted average common shares outstanding of the Company as of
December
31, 2005, will convert into 2,225,119 shares of the Company under
the
reverse split ratio within the recapitalization. See footnote (a)
to the
pro forma financial statements.
|
·
|
$2,559,000
of Senior Reorganization Notes as of December 31, 2005 will be
cancelled,
upon approval of the Recapitalization and existing warrants to
purchase
11,640,203 shares of Common Stock in respect of which the exercise
price
was loaned to the Company will be automatically exercised at $0.10
per
share and converted into 582,010 shares of Common Stock. Additionally,
the
Senior Reorganization Noteholders will be granted Additional Warrants
to
purchase 19,360,959 shares of Common Stock (less the number of
shares to
be applied to the cashless exercise) at an exercise price of $0.04
per
share ($0.002 per share before the Recapitalization) and will be
deemed
issued and exercised. See footnote (b) to the accompanying pro
forma
financial statements.
|
·
|
As
of December 31, 2005, the Company had entered into $1,760,000 of
Convertible Bridge Notes. These Notes will automatically convert
into
shares of Common Stock upon effectiveness of the Recapitalization
at a
conversion rate of $0.025 resulting in 70,402,928 shares of Common
Stock
being issued. See footnote (c) to the accompanying pro forma financial
statements.
|
·
|
$992,320
of convertible promissory notes will convert into 7,957 shares
of Series
A-1 preferred stock. At October 7, 2005, holders of $942,320 principal
amount have agreed to convert upon effectiveness of the Recapitalization.
This assumes that the remaining convertible promissory noteholders,
having
$50,000 principal amount of convertible promissory notes, elect
to convert
in the Recapitalization. See footnote (d) to the accompanying pro
forma
financial statements.
|
·
|
The
Company has verbally agreed with one of its vendors that part of
its legal
fees incurred and directly attributable to the Recapitalization
would be
paid in Common Stock after the Recapitalization is effective.
Specifically, under the terms of the agreement, the Company has
agreed to
issue 50,000 shares of Common Stock upon effectiveness of the
Recapitalization. Accordingly, this transaction has been shown
as a pro
forma adjustment to accrued expenses and paid in capital on the
accompanying pro forma balance sheet. See footnote (e) on the accompanying
pro forma financial statements.
|
·
|
The
Company has accrued $271,000 of interest on Senior Reorganization
Notes
which will be applied to the exercise price of the Additional Warrants
that are granted upon consummation of the Recapitalization. See
footnote
(f) to the pro forma financial
statements.
|
·
|
The
Company has agreed to issue 125,400 shares of Common Stock, and
180,000
warrants at $.04 per share, to the guarantor of our bank debt,
pursuant to
an existing agreement which requires that the Company pay down
the
outstanding bank debt by an amount equal to ten percent (10%) of
equity
raised, arising from the equity raised in connection with the conversion
of the Senior Reorganization Notes. The Company has estimated the
compensation expense for this transaction to be $50,000. See footnote
(j)
to the pro forma financial
statements.
|
·
|
The
Company has agreed as part of the Recapitalization to award Brown
Simpson
Partners I, Ltd. the sum of 50,000 shares of Common Stock as their
compensation for assisting on the Recapitalization.
These
|
·
|
$45,000
of accrued interest on Convertible Bridge notes recognized during
2005
will be converted to equity on the pro forma balance sheet. See
footnote
(f) to the pro forma financial
statements.
|
·
|
1,571
shares of Level 8 Series A-3 preferred stock will convert into
22 shares
of Series A-1 preferred stock. See footnote (h) to the pro forma
financial
statements
|
·
|
30,000
shares of Level 8 Series B-3 preferred stock will convert into
375 shares
of Series A-1 preferred stock. See footnote (h) to the pro forma
financial
statements.
|
·
|
991
shares of Level 8 Series C preferred stock will convert into 198
shares of
Series A-1 preferred stock. See footnote (h) to the pro forma
financial statements.
|
·
|
1,060
shares of Level 8 Series D preferred stock will convert into 265
shares of
Series A-1 preferred stock. See footnote (g) to the pro forma financial
statements.
|
Historical
|
Pro
forma
adjustments
|
Pro
forma
consolidated
|
|||||||||||
Assets
|
|||||||||||||
Cash
and cash equivalents
|
29
|
29
|
|||||||||||
Assets
of operations to be abandoned
|
131
|
131
|
|||||||||||
Trade
accounts receivable, net
|
18
|
18
|
|||||||||||
Prepaid
expenses and other assets
|
53
|
53
|
|||||||||||
Total
current assets
|
231
|
231
|
|||||||||||
0
|
|||||||||||||
Property
and equipment, net
|
10
|
10
|
|||||||||||
Total
assets
|
241
|
241
|
|||||||||||
Liabilities
and Stockholders' (Deficit)
|
|||||||||||||
Senior
reorganization debt
|
2,559
|
(2,559
|
)
|
(b)
|
|
0
|
|||||||
Convertible
bridge notes
|
1,760
|
(1,760
|
)
|
(c)
|
|
0
|
|||||||
Short-term
debt
|
3,481
|
(992
|
)
|
(d)
|
|
2,489
|
|||||||
Accounts
payable
|
2,528
|
(20
|
)
|
(e)
|
|
2,508
|
|||||||
Accrued
expenses:
|
|
0
|
|||||||||||
Salaries,
wages, and related items
|
1,036
|
|
1,036
|
||||||||||
Other
|
2,194
|
(316
|
)
|
(f)
|
|
1,878
|
|||||||
Liabilities
of operations to be abandoned
|
490
|
|
490
|
||||||||||
Deferred
revenue
|
78
|
|
78
|
||||||||||
Total
current liabilities
|
14,126
|
(5,647
|
)
|
|
8,479
|
||||||||
|
|||||||||||||
Long-term
debt
|
130
|
|
130
|
||||||||||
Senior
converible preferred stock (Series D)
|
1,061
|
(1,061
|
)
|
(g)
|
|
0
|
|||||||
Total
current liabilities
|
15,317
|
(6,708
|
)
|
|
8,609
|
||||||||
Stockholders'
deficit
|
|
0
|
|||||||||||
Preferred
stock - A1
|
0
|
9
|
(g)
|
|
9
|
||||||||
Common
stock
|
48
|
45
|
(a)
|
|
93
|
||||||||
Accumulated
paid-in capital:
|
|
||||||||||||
2,559
|
(b)
|
|
|||||||||||
1,760
|
(c)
|
|
|||||||||||
992
|
(d)
|
|
|||||||||||
20
|
(e)
|
|
|||||||||||
271
|
(f)
|
|
|||||||||||
45
|
(f)
|
|
|||||||||||
20
|
(i)
|
|
|||||||||||
50
|
(j)
|
|
|||||||||||
3,389
|
(b,c,d)
|
|
|||||||||||
1,061
|
(g)
|
|
|||||||||||
(45
|
)
|
(a)
|
|
||||||||||
Additional
paid-in capital
|
210,594
|
10,122
|
|
220,716
|
|||||||||
Accumulated
other comprehensive loss
|
(3
|
)
|
|
(3
|
)
|
||||||||
Accumulated
deficit
|
(225,715
|
)
|
(3,459
|
)
|
(229,174
|
)
|
|||||||
Stockholders'
deficit
|
(15,076
|
)
|
16,830
|
(8,368
|
)
|
||||||||
Total
liabilities and stockholders' equity (deficit)
|
241
|
10,122
|
241
|
|
Historical
|
Pro
forma
adjustments
|
Pro
forma
consolidated
|
|||||||||||||
Revenue: | ||||||||||||||||
Software
|
$
|
407
|
$
|
407
|
||||||||||||
Maintenance
|
147
|
147
|
||||||||||||||
Services
|
231
|
|
231
|
|||||||||||||
Total
operating revenue
|
785
|
-
|
785
|
|||||||||||||
Cost
of revenue:
|
||||||||||||||||
Software
|
16
|
16
|
||||||||||||||
Maintenance
|
350
|
350
|
||||||||||||||
Services
|
822
|
|
822
|
|||||||||||||
Total
cost of revenue
|
1,188
|
-
|
1,188
|
|||||||||||||
Gross
margin (loss)
|
(403
|
)
|
-
|
(403
|
)
|
|||||||||||
Operating
expenses:
|
||||||||||||||||
Sales
and marketing
|
627
|
627
|
||||||||||||||
Research
and product development
|
891
|
891
|
||||||||||||||
General
and administrative
|
1,137
|
20
|
(i)
|
|
1,157
|
|||||||||||
Total
operating expenses
|
2,655
|
20
|
|
2,675
|
||||||||||||
|
||||||||||||||||
Loss
from operations
|
(3,058
|
)
|
(20
|
)
|
|
(3,078
|
)
|
|||||||||
Other
income (charges):
|
|
|||||||||||||||
Interest
expense
|
(593
|
)
|
(593
|
)
|
||||||||||||
Other
expense
|
(30
|
)
|
(50
|
)
|
(j)
|
|
(80
|
)
|
||||||||
(623
|
)
|
(50
|
)
|
|
(673
|
)
|
||||||||||
Loss
before (benefit) for income taxes
|
(3,681
|
)
|
(70
|
)
|
|
(3,751
|
)
|
|||||||||
Income
tax (benefit) - foreign
|
-
|
|
-
|
|||||||||||||
Net
loss
|
$
|
(3,681
|
)
|
$
|
(70
|
)
|
|
$
|
(3,751
|
)
|
||||||
|
||||||||||||||||
Accretion
of deemed dividends
|
-
|
3,389
|
(b,c,d)
|
|
3,389
|
|||||||||||
Net
loss applicable to common stockholders
|
$
|
(3,681
|
)
|
$
|
(3,459
|
)
|
|
$
|
(7,140
|
)
|
||||||
Net
loss applicable to common stockholders
|
|
|||||||||||||||
-
basic and diluted
|
(0.09
|
)
|
|
(0.08
|
)
|
|||||||||||
Weighted
average common shares outstanding
|
|
|||||||||||||||
-
basic and diluted
|
44,502
|
|
92,976
|
(k)
|
|
(a)
|
As
of December 31, 2005, the Company had 44,502,378 weighted average
common
shares, which under the terms of the Recapitalization, will be
exchanged
at a ratio of 2:1 for 2,225,119 shares of Common Stock. Those warrant
holders who loaned the Company the first $1,000,000 of the exercise
price
on their loans will receive Early Adopter warrants at a ratio of
2:1
shares for 582,010 shares of Common Stock. The Company has verbally
agreed
with one of its vendors that part of its legal fees incurred and
directly
attributable to the Recapitalization would be issued 50,000 shares
of
Common Stock upon effectiveness of
|
(b)
|
$2,559,000
of Senior Reorganization Notes, which represents loans to the Company
of
the exercise price of 11,640,203 existing warrants, plus other
loans, will
be deemed cancelled upon approval of the Recapitalization and the
underlying warrants will be exercised and exchanged for 582,010
shares of
Common Stock. Further, loan holders will receive additional warrants
to
purchase 19,360,959 shares of Common Stock (less the number of
shares to
be applied to the cashless exercise of these additional warrants)
at an
exercise price of $0.04 per share will be deemed exercised. Additionally,
those warrant holders who loaned the Company up to the first $1,000,000
of
the exercise price on their loans will receive Early Adopter warrants
at a
ratio of 2:1 for shares
issuable upon exercise of each existing warrant exercised at the
special
exercise price (before adjustment by the exchange ratio) of $0.10
per
share. The Company has viewed the Note and Warrant Offering as
three
separate tranches for purposes of valuing the warrants issued.
The initial
tranche of approximately $979,0000 includes those warrant holders
who
exercised their existing warrants through a loan to the Company,
are
entitled to receive early adopter warrants and are also entitled
to
receive additional warrants. Using the Black Scholes formula, the
Company
has determined that the fair value of the warrants granted to this
tranche
is approximately $359,000. The difference between the fair value
of the
additional warrants and the total invested in this tranche or
approximately $620,000 is treated as a beneficial conversion and
fully
amortizable. The second tranche of investment that consisted of
those
warrant holders who loaned the exercise price of their existing
warrants,
and will receive additional warrants but no early adopter warrants,
amounted to approximately $107,000. Using Black Scholes, the Company
has
determined that the fair value of the warrants granted to this
tranche is
approximately $33,000 and the beneficial conversion amount is $74,000.
The
third tranche consisted of investors who had no existing warrants
and will
only receive additional warrants upon effectiveness of the
Recapitalization. The total investment in this tranche is approximately
$1,473,000. Using Black Scholes, the Company has determined that
the fair
value of the warrants granted to this tranche is approximately
$665,000
and the beneficial conversion amount is $808,000. The Company’s pro forma
entries are as follows:
|
Senior
Reorganization Notes
|
$
|
2,559,000
|
|||||
Paid-in
Capital
|
$
|
2,559,000
|
|||||
Accumulated
deficit
|
$
|
620,000
|
|||||
Paid-in
Capital (beneficial conversion)
|
$
|
620,000
|
|||||
Accumulated
deficit
|
$
|
74,000
|
|||||
Paid-in
Capital (beneficial conversion)
|
$
|
74,000
|
|||||
Accumulated
deficit
|
$
|
808,000
|
|||||
Paid-in
Capital (beneficial conversion)
|
$
|
808,000
|
(c) |
Convertible
Bridge Notes, principal only, in the amount of $1,760,000, will
automatically be cancelled and converted into 70,402,928 shares
of Common
Stock upon effectiveness of the Recapitalization. Using the Black Scholes
formula, the Company has determined that the fair value of the
stock
resulting from the conversion of the Convertible Bridge Notes is
approximately $462,000. The difference between the total of the
Convertible Bridge Notes and the fair value of the stock received
($1,298,000), is treated as a beneficial conversion and immediately
amortizable as the shares are immediately marketable. The Company’s pro
forma entries are as follows:
|
Convertible
Bridge Notes
|
$
|
1,760,000
|
|||||
Paid-in
Capital
|
$
|
1,760,000
|
|||||
Accumulated
deficit
|
$
|
1,298,000
|
|||||
Paid-in
Capital (beneficial conversion)
|
$
|
1,298,000
|
(d)
|
Convertible
Promissory Notes in the amount of $992,000 convert into 7,957 shares
of
Series A-1 preferred stock upon effectiveness of the Recapitalization.
Holders of all but $50,000 principal amount of secured promissory
notes
have agreed to convert. The consent of the other holders will be
sought
after the date hereof. Utilizing the Black Scholes formula, the
Company
has determined that the fair value of the preferred stock amounts
to
$403,000. The difference between the fair value of the stock and
the total
of the Convertible Promissory Notes ($589,000) is treated as accretion
of
preferred stock and immediately amortizable as these shares are
immediately marketable. The Company’s pro forma entries are as
follows:
|
Convertible
Promissory Notes
|
$
|
992,000
|
|||||
Series
A-1 preferred stock
|
$
|
8,000
|
|||||
Paid
in Capital
|
$
|
984,000
|
|||||
Accumulated
deficit
|
$
|
589,000
|
|||||
Paid
in Capital (accretion of preferred stock)
|
$
|
589,000
|
(e)
|
Represents
conversion of accounts payable into 50,000 shares of Common Stock
as
payment for legal fees incurred and directly attributable to the
Recapitalization. This pro forma adjustment assumes that the
Recapitalization was effective on December 31, 2004 and as such,
the
Company would value the shares being issued at fair value on that
date.
The fair market value of Common Stock on December 31, 2005 was
$0.02 and
extrapolating for the fair value of Common Stock, using the exchange
ratio
of twenty shares for one share, the Company has estimated the fair
value
of stock on that date to be $0.40. The Company’s pro forma entry is as
follows:
|
Accounts
Payable
|
$
|
20,000
|
|||||
Paid-in
Capital
|
$
|
20,000
|
(f)
|
The
Company had accrued $271,000 of interest expense relating to Senior
Reorganization Notes which upon effectiveness of the Recapitalization,
will be applied to the exercise price of the Additional Warrants.
$45,000
of accrued interest relating to Convertible Bridge Notes will be
converted
to equity. The Company’s pro forma entries are as
follows:
|
Accrued
Interest Expense
|
$
|
271,000
|
|||||
$
|
45,000
|
||||||
Paid-in
Capital
|
$
|
271,000
|
|||||
$
|
45,000
|
(g)
|
Represents
conversion of remaining shares of Series D preferred stock into
265 shares
of Series A-1 preferred stock. Under the terms of the Recapitalization,
each share of Level 8 Series D preferred stock will convert into
0.25
shares of Series A-1 preferred stock. The Company utilized the
Black
Scholes formula to determine if an accretion of preferred stock
was
created as a result of the exchange. Based upon that analysis,
no
accretion of preferred stock arose as a result of this exchange.
The
Company’s pro forma entry is as
follows:
|
Senior
Convertible preferred stock
|
$
|
1,061,000
|
|||||
Paid-in
Capital
|
$
|
1,061,000
|
(h)
|
Represents
the conversion of 1,571 shares of Series A-3 preferred stock into
22
shares of Series A-1 preferred stock, 30,000 shares of Series B-3
preferred stock into 375 shares of Series A-1 preferred stock,
and 991
shares of Series C preferred stock into 198 shares of Series A-1
preferred
stock. Under the terms of the Recapitalization, each share of Series
A-3
preferred stock will convert into 0.0142857 shares of Series A-1
preferred
stock and each share of Series B-3 preferred stock will convert
into
0.0125 shares of Series A-1 preferred stock and, each share of
Series C
preferred stock will convert into 0.20 shares of Series A-1 preferred
stock. The Company utilized the Black Scholes formula to determine
if an
accretion of preferred stock was created as a result of the exchange.
Based upon that analysis, no accretion of preferred stock arose
as a
result of this exchange.
|
(i)
|
Represents
the issuance of 50,000 shares of Common Stock as payment to Brown
Simpson
Partners I, Ltd. in accordance with the terms of the Recapitalization.
These shares are contingent upon effectiveness of the Recapitalization
and
represents fees earned associated with the Recapitalization. This
pro
forma adjustment assumes that the Recapitalization was effective
on
December 31, 2004 and as such, the Company would value the shares
being
issued at fair value on that date. The fair market value of Common
Stock
on December 31, 2005 was $0.02 and extrapolating for the fair value
of
Common Stock, using the exchange ratio of one Level 8 share for
0.05
share, the Company has estimated the fair value of Common Stock
on that
date to be $0.40. The Company’s pro forma entry is as
follows:
|
General
and Administrative Expense
|
$
|
20,000
|
|||||
Paid
in Capital
|
$
|
20,000
|
(j)
|
Represents
the issuance of 124,500 shares of Common Stock for a third-party
waiver of
a payment obligation. Pursuant to an existing agreement with the
guarantor
of our bank debt, the Company is obligated to pay down the bank
debt by an
amount equal to ten percent (10%) of equity raised, arising from
the
equity raised in connection with the conversion of the Senior
Reorganization Notes. The third party guarantor has agreed to waive
this
payment in return for the compensation. These shares are contingent
upon
approval of the Recapitalization and represents fees earned associated
with the Recapitalization. This pro forma adjustment assumes that
the
Recapitalization was effective on December 31, 2005 and as such,
the
Company would value the shares being issued at fair value on that
date.
The fair market value of Common Stock on December 31, 2005 was
$0.02 and
extrapolating for the fair value of common stock, using the exchange
ratio
of 20:1, the Company has estimated the fair value of stock on that
date to
be $0.40. The Company’s pro forma entry is as
follows:
|
Other
Expense
|
$
|
50,000
|
|||||
Paid-in
Capital
|
$
|
50,000
|
(k)
|
Basic
weighted average Common Stock outstanding excludes any potentially
anti-dilutive securities such as warrants and options to purchase
Common
Stock and preferred stock. The following table reconciles the weighted
average common shares outstanding:
|
Level
8
Systems
|
Issuances
|
.
|
|||||||||||
Weighted
average shares outstanding at December 31, 2005
|
44,502,378
|
1,799,084
|
(1)
|
|
|||||||||
Shares
issued as part of Recapitalization
|
224,500
|
224,500
|
(2)
|
|
|||||||||
Automatic
exercise of warrants whose exercise price was loaned to Level
8
|
11,640,200
|
582,010
|
(1)(3)
|
|
|||||||||
Issuance
of Additional Warrants
|
19,360,959
|
19,360,959
|
(4)
|
|
|||||||||
Conversion
of Convertible Bridge Notes
|
70,402,928
|
70,402,928
|
(5)
|
|
|||||||||
44,502,378
|
92,975,516
|
|
(1)
|
Per
the terms of the Recapitalization, the exchange ratio is 1 share
of Level
8 Common Stock for 0.05 share of Common
Stock.
|
(2)
|
Represents
the issuance of a total of 224,500 shares of Common Stock as compensation
directly related to the Recapitalization. See footnotes (e), (i)
and (j)
above.
|
(3)
|
Warrant
holders who elected to lend the reduced exercise price of their
warrants,
will be deemed exercised upon effectiveness of the
Recapitalization.
|
(4)
|
As
part of the Company’s Note and Warrant Offering, those warrant holders who
elected to loan the exercise price of their existing warrants as
well as
other investors, will receive additional warrants upon effectiveness
of
the Recapitalization.
|
(5)
|
The
Company has issued $1,760,000 of Convertible Bridge Notes that
convert
into Common Stock upon effectiveness of the Recapitalization. The
conversion ratio is $0.025.
|
LEVEL
8 SYSTEMS, INC.
|
|||
By:
|
|||
Name:
|
|||
Title:
|
Date
of Conversion:
|
|
|||
Applicable
Conversion Ratio:
|
||||
Signature:
|
||||
Name: | ||||
Address:
|
||||
|
Level
8 Systems, Inc.
|
By:
|
|
Name:
John P. Broderick
|
|
Title:
Chief Executive Officer and Chief Financial
Officer
|
|
Level
8 Systems, Inc.
|
By:
|
|
Name:
John P. Broderick
|
|
Title:
Chief Executive Officer and Chief Financial
Office
|
|
Level
8 Systems, Inc.
|
By:
|
|
Name:
John P. Broderick
|
|
Title:
Chief Executive Officer and Chief Financial
Office
|
|
Level
8 Systems, Inc.
|
By:
|
|
Name:
John P. Broderick
|
|
Title:
Chief Executive Officer and Chief Financial
Office
|
A.
|
PREFERRED
STOCK.
|
B.
|
COMMON
STOCK
|
(1)
|
GENERAL.
The voting, dividend and liquidation rights of the holders of the
Common
Stock are subject to and qualified by the rights of the holders
of the
preferred stock, if any.
|
(2)
|
VOTING.
The holders of the Common Stock are entitled to one vote for each
share
held at all meetings of stockholders (and written actions in lieu
of
meetings). There shall be no cumulative
voting.
|
(3)
|
DIVIDENDS.
Dividends may be declared and paid on the Common Stock from funds
lawfully
available therefor as and when determined by the Board of
Directors.
|
(4)
|
LIQUIDATION.
Upon the dissolution or liquidation of the Corporation, whether
voluntary
or involuntary, and subject to the rights of the holders of preferred
stock, if any, holders of Common Stock will be entitled to receive
all
assets of the Corporation available for distribution to its
stockholders.
|
|
By:
|
|
Name:
John P. Broderick
|
|
Title:
Chief Executive Officer and Chief Financial
Officer
|
1.
|
RESOLVED,
that the Board of Directors be authorized, without further approval
of the
shareholders, to:
|
Series
of
Preferred
Stock
|
Current
Conversion
Price
|
Amended
Conversion
Price
|
|||||
Series
A-3
|
$
|
8.33
|
$
|
3.50
|
|||
Series
B-3
|
$
|
12.53
|
$
|
4.00
|
|||
Series
C
|
$
|
0.38
|
$
|
0.25
|
|||
|
|||||||
Series D |
$
|
0.32
|
$
|
0.20
|
Existing
Series Preferred Stock
|
Number
of Shares of Series
A-1Preferred
Stock
|
|||
Series
A-3
|
0.0142857
|
|||
Series
B-3
|
0.125
|
|||
Series
C
|
0.20
|
|||
Series
D
|
0.25
|
o
|
CONSENT
|
o
|
CONSENT
WITHHELD
|
o
|
ABSTAIN
|
DATED:
|
, 2006 | |||
Signature
|
Signature
if held jointly
|