LEVEL 8 SYSTEMS, INC. Corporate Headquarters
LEVEL
8 SYSTEMS, INC.
Corporate
Headquarters
0000
Xxxxxxx Xxxxxxx
Xxxx, XX
00000
C
O N F I D E N T I A L T E R M S H E E T
March
2, 2005
This
Term Sheet is an expression of intention only and, except as expressly set forth
below, is not to be construed as a binding agreement.
|
Extended
Note & Warrant Offering | |
|
Issuer: |
Level
8 Systems, Inc., a Delaware corporation (the “Company”) |
|
Investors: |
Existing
holders of outstanding warrants and participants in the initial Note and
Warrant offering to purchase shares of the Company’s capital stock (the
“Existing Warrants”)
Exhibit B
contains a list of Existing Warrants |
|
Investment
Amount: |
Up
to $1,000,000 |
|
Securities
Offered: |
$1,000,000
principal amount of Senior Secured Notes (the “Notes”) to be issued in
integral amounts of $1,000.
Each
holder of Existing Warrants that purchases Notes will receive a warrant to
acquire a number of shares of the Company’s common stock (the “Common
Stock”) as set forth on Exhibit B (the “Additional Warrants”), having an
exercise price, once exercisable, of $0.002 per share. The Additional
Warrants will be subject to the Registration Rights described below and
have a 7 year term. The Additional Warrants also will be subject to a
forced cashless exercise upon consummation of the Restructuring, as
described below. The Additional Warrants will not be exercisable unless
and until the Restructuring is consummated. |
|
Coupon: |
10%
per annum on the principal amount, payable in arrears in cash on the
maturity date. |
|
Maturity
Date: |
Consummation
of the Merger (as defined below), but no later than May
15, 2005.
At
maturity, the principal balance of the Notes, together with all accrued
and unpaid interest, will become due and payable, subject to the Mandatory
Exchange described below. |
|
Events
of Default: |
Standard
events of default for debt instruments will be included in the
Notes. |
|
Ranking: |
The
Notes would constitute senior secured obligations of the Company. While
the Notes are outstanding, the Company would not be permitted to incur
indebtedness ranking senior with the Notes, except for such senior
indebtedness of the Company, if any, as is outstanding on the initial
closing date of the sale of the Notes, including Notes from the initial
Note and Warrant offering in the amount of $1,614,939. |
|
Collateral: |
The
Notes would be secured by a first-priority security interest in all of the
Company’s tangible and intangible assets (the “Collateral”), subordinate
only to existing security interests at the closing date.
|
|
Administrative
Agent: |
The
security interest in the Collateral will be held by, and the
administration of the note provisions would be conducted by Xxxxx Xxxxxxx
Partners I (or one of its wholly-owned subsidiaries) as administrative
agent (“BSP”), the lead investor in this financing transaction. The
investors in the offering will appoint BSP to serve as administrative
agent for this purpose. |
|
Protective
Provisions: |
The
Notes would contain customary affirmative and negative covenants of the
Company. |
|
Allocation
and Closings: |
The
Notes would be offered to the Investors for purchase at one or more
closings. Each Investor would be offered the right to purchase its
allocated share of the Notes (the “Allocated Share”) based on the
proportion of the aggregate outstanding Existing Warrants (on an
as-exercised basis) that the Investor owns, with a right of
over-subscription for any un-subscribed Notes.
The
initial closing of the sale of the Notes would occur not earlier than 10
days after the commencement of the offering, and closings would continue
on a rolling basis.
Any
Notes not purchased at a closing could be re-offered to the Investors from
time to time by the Company until the Maturity Date. The over-subscription
rights and allocation rules described herein are subject to change by the
Company. |
|
Mandatory
Exchange: |
Upon
consummation of the Merger and simultaneously therewith, all of the Notes
held by each Investor would be automatically be exchanged for and in
consideration of (without the payment of additional consideration) the
shares issuable upon exercise of each such Investor’s Existing Warrants to
the extent of the principal and accrued but unpaid interest then due and
owing on the Notes. |
|
Use
of Proceeds: |
The
Company would use the proceeds from this offering to finance its
operations. The proceeds would not be
used to repay any short-term or long term debt
instruments. |
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C
O N F I D E N T I A L T E R M S H E E T
March
2, 2005
|
Merger
Proposal | |
|
Company: |
Xxxxx
0 Systems, Inc., a Delaware corporation (the “Company”) |
|
Overview
of Merger: |
The
Company will merge with a corporation owned by one or more of the
Investors (in either event, “Newco”), with Newco being the surviving
corporation (the “Merger”).
Each
outstanding share of the Company’s common stock shall be converted into
.05 shares of the surviving corporation’ common stock (the “Common Stock”)
upon the closing of the Merger. The Company’s existing outstanding
convertible notes and shares of convertible preferred stock
(“collectively, the “Securities”) would be converted upon the closing of
the Merger into shares of a newly created series of the surviving
company’s preferred stock to be designated the Series A-1 Convertible
Preferred Stock (the “Series A-1 Preferred”). Each of the Securities would
be converted into the number of shares of Series A-1 Preferred that would
convert into the same number of shares of Company common stock underlying
the Securities being exchanged based on the Amended Conversion Price set
forth below:
Security Current
Con. Price Amended
Con. Price
$0.28 $0.02 Convertible
Notes $0.37 $0.026
$0.20 $0.014
$0.17 $0.012
$0.16 $0.011
$0.10 $0.0025
$0.08 $0.002
Series
D Convertible $0.32 $0.20
Preferred
Stock
Series
C Convertible $0.38 $0.25
Preferred
Stock
Series
B3 Convertible $12.50 $4.00
Preferred
Stock
Series
A3 Convertible $8.33 $3.50
Preferred
Stock |
|
Upon
consummation of the Merger, the Notes shall be exchanged for and in
consideration of (without the payment of additional consideration) of the
shares issuable upon exercise of the Existing Warrants to the extent of
the principal and accrued but unpaid interest then due and owing on the
Notes. | |
|
Special
Shareholders Meeting: |
The
Company shall convene a special shareholders meeting to approve the Merger
at the earliest possible date, but in no event later than May
15, 2005. |
|
Fractional
Shares |
The
Company will issue cash in lieu of fractional shares. |
|
Terms
of the Series A-1 Preferred: |
|
|
Liquidation
preference: |
In
the event of any liquidation or winding up of the Company, the holders of
the Series A-1 Preferred would be entitled to receive in preference to the
holders of the Common Stock, an amount equal to $500 per share plus any
accrued but unpaid dividends. After payment of such liquidation
preference, holders of Common Stock would be entitled to receive, pro
rata, the remaining assets of the Company available for distribution to
its stockholders. A merger or consolidation to which the Company is a
party, or a sale or exclusive license of all or substantially all of the
assets or intellectual property of the Company, would be deemed to be a
liquidation event unless the holders of a majority of the shares of Series
A-1 Preferred then outstanding elect not to treat such event as a
liquidation event. |
|
Dividends: |
Holders
of the Series A-1 Preferred would be entitled to receive an equivalent
dividend (on an as-converted basis) whenever the Company declares a
dividend on the Common Stock, other than dividends payable in shares of
Common Stock. |
|
Anti-dilution
Protection: |
The
conversion price of the Series A-1 Preferred would be subject to customary
adjustment in the event of any stock splits, stock dividends and the like
undertaken by the Company. |
|
Optional
Conversion: |
The
holders of Series A-1 Preferred would have the right to convert the Series
A-1 Preferred, at the option of the holder, at any time, into shares of
Common Stock. Each share of Series A-1 Preferred will initially be
convertible on a one for one thousand (1:1,000) basis . |
|
Mandatory
Conversion: |
The
Series A-1 Preferred shall automatically be converted into Common Stock at
the then applicable conversion rate upon the occurrence of one of the
following:
a) The
closing of an additional $5,000,000 equity financing from institutional or
strategic investors; and/or
b) The
Company having 4 consecutive quarters of positive cash flow as reflected
on the Company’s financial statements prepared in accordance with
generally accepted accounting principles (“GAAP”) and filed with the
Securities and Exchange Commission (the “SEC”). |
|
Redemption: |
The
Series A-1 Preferred is not redeemable. |
|
Board
of Directors: |
The
holders of a majority of the outstanding shares of the Series A-1
Preferred 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, the holders of the
Series A-1 Preferred may temporarily or permanently exchange their board
observer rights for two seats on the Board of Directors, each having one
vote. |
|
Company
Milestone: |
If
the Company does 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 prepared in accordance with GAAP and filed with
the SEC, the holders of the Series A-1 Preferred shall have the right, but
not the obligation, to elect a majority of the voting members of the Board
of Directors. |
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C
O N F I D E N T I A L T E R M S H E E T
March
2, 2005
|
Voting
Rights: |
Each
share of Series A-1 Preferred shall represent that number of votes equal
to the number of shares of Common Stock issuable upon conversion of a
share of Series A-1 Preferred. The Series A-1 Preferred and the Common
Stock shall vote together as a class except (i) regarding the election of
the Board of Directors as set forth above, (ii) as required by law,
and (iii) as set forth below under “Protective
Provisions.” |
|
Protective
Provisions:
|
Until
the closing by the Company of an additional $5,000,000 equity financing
from institutional investors, approval of the holders of at least 2/3 of
the outstanding shares of the Series A-1 Preferred voting together
separately as a class will be required for:
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 (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) or the payment of
dividends or other distributions on equity securities by the Company
(other than on the Series A-1 Preferred);
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;
e) a
significant change in the principal business of the Company as conducted
at the time of the consummation of the closing of the Merger;
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 and Investor; 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.
Any
liquidation, dissolution, recapitalization or reorganization of the
Company would require a unanimous
vote of the Board |
|
Other
Terms | |
|
Transaction
Costs: |
Legal
fees associated with the Note offering and the Merger will be paid out of
proceeds from the Note Offering. |
|
Board
Approval: |
This
Term Sheet has been negotiated in good faith between the Investors and the
Company's management and has been approved by the Company’s Board of
Directors
_________________.. |
|
Indemnification |
Whether
or not the Note Offering or the Merger is consummated, the Company agrees
to indemnify and hold harmless BSP, and its directors, partners, members,
managers, officers, employees and agents (collectively, the “Indemnified
Parties”) from and against any and all losses, claims, damages, expenses
or liabilities to which any of them may become subject, insofar as such
losses, claims, damages, expenses or liabilities (or actions, suits or
proceedings, including any inquiry or investigation or claim in respect
thereof) arise out of, in any way relate to, or result from any claim by a
third party in respect of this Term Sheet or the transactions proposed
herein (whether or not any Indemnified Party is a party to any action or
proceeding out of which any such losses, claims, damages, expenses or
liabilities arise), and to reimburse the Indemnified Parties, upon demand,
for any reasonable expenses (legal or otherwise) incurred by any of them
in connection therewith (including any costs incurred in investigating,
preparing to defend, defending or otherwise participating in any such
claim, action or proceeding related to any such loss, claim, damage or
liability). |
|
Miscellaneous |
This
Term Sheet may be signed in counterparts, each of which shall be deemed an
original, but all such counterparts shall constitute one and the same
agreement. Any party which is not in breach of the binding provisions of
this Term Sheet, may terminate this Term Sheet by delivery of written
notice to the other party, and in the event of such termination, the
parties hereto shall be relieved of all liability hereunder, except for
breaches of such provisions prior to their termination and except that the
provisions captioned “Transaction Costs,” “Indemnification,”
“Miscellaneous” and “Governing Law” shall survive any such
termination. |
|
Governing
Law: |
The
binding provisions of this Term Sheet and all duties, obligations and
rights arising herefrom shall be governed by, and construed in accordance
with, the laws of the State of New York |
|
Memorandum
of Terms: |
This
Term Sheet does not set forth all of the terms and conditions of the
transactions proposed hereby. Rather it is only an outline, in summary
format, of the major points of understanding, which will form the basis of
the final documentation. Except as provided in this paragraph and under
“Transaction Costs,” “Indemnification” “Miscellaneous” and “Governing
Law,” which are binding, this Term Sheet does not constitute a legally
binding obligation of any of the parties hereto, BSP may terminate
discussions with the Company at any time with respect to the matters
proposed herein. |
[Signatures
on Next Page]
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C
O N F I D E N T I A L T E R M S H E E T
March
2, 2005
AGREED TO
AND ACCEPTED THIS _________ DAY OF MARCH 2005.
LEVEL
8 SYSTEMS, INC.
By:
Name Xxxx
Xxxxxxxxx
Title Chief
Financial Officer
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