UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............. to ................
Commission file number 0-26194
SEER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3556562
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Regency Parkway
Cary, North Carolina
27511
(Address of principal executive offices)
(Zip Code)
(919) 380-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ....X.... No ........
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at February 9, 1999
----------------------------- -------------------------------
Common Stock, $0.01 par value 11,980,633 shares
<PAGE>
SEER TECHNOLOGIES, INC.
Index
<TABLE>
<CAPTION>
PART I. Financial Information Page
Number
<S> <C>
Item 1. Financial Statements:
Consolidated balance sheets as of
December 31, 1998 (unaudited) and
September 30, 1998 3
Consolidated statements of operations
(unaudited) for the three months
ended December 31, 1998 and 1997 4
Consolidated statements of cash flows
(unaudited) for the three months ended
December 31, 1998 and 1997 5
Consolidated statements of comprehensive
income (unaudited) for the three months
ended December 31, 1998 and 1997 6
Notes to consolidated financial statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17
PART II. Other Information 18
SIGNATURES 20
</TABLE>
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<PAGE>
PART I. Financial Information
Item 1. Financial Statements
SEER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Dec. 31, Sept. 30,
1998 1998
<S> ------- -------
ASSETS <C> <C>
Cash and cash equivalents $ 479 $ 1,040
Trade accounts receivable, less allowance
for doubtful accounts of $2,153 and $2,124
at December 31, 1998 and September 30, 1998,
respectively 15,005 17,285
Prepaid expenses and other current assets 1,418 1,476
------- -------
Total current assets 16,902 19,801
Property and equipment, net 1,614 1,867
Capitalized software costs, net 451 1,140
Other assets 370 387
------- -------
Total assets $19,337 $23,195
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand $12,275 $38,148
Accounts payable 1,949 2,897
Accrued expenses:
Compensation 318 744
Commissions 1,021 1,156
Restructuring 3,335 4,064
Other 3,318 3,459
Deferred revenue 7,778 7,355
Income taxes payable 1,781 1,644
------- -------
Total current liabilities 31,775 59,467
Note Payable to majority shareholder 12,000 -
Deferred revenue 97 253
Stockholders' equity (deficiency):
Series A convertible preferred stock,
$.01 par value 21 21
Series B convertible preferred stock,
$.01 par value 18 18
Common stock, $0.01 par value 120 120
Additional paid-in-capital 92,948 76,023
Accumulated other comprehensive income (880) (847)
Accumulated deficit (116,762) (111,860)
--------- ---------
Total stockholders' equity (deficiency) (24,535) (36,525)
--------- ---------
Total liabilities and stockholders' equity $19,337 $23,195
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Software license $ 69 $ 2,698
Maintenance 3,056 3,449
Services 7,778 12,209
-------- --------
Total operating revenue 10,903 18,356
Cost of revenue:
Software products 765 507
Maintenance 1,227 2,183
Services 7,301 10,951
-------- --------
Total cost of revenue 9,293 13,641
Gross profit 1,610 4,715
Operating expenses:
Sales and marketing 1,887 6,893
Research and product
development 1,541 3,826
General and administrative 2,068 3,093
-------- --------
Total operating expenses 5,496 13,812
-------- --------
Loss from operations (3,886) (9,097)
Other income (expense):
Interest income 68 135
Interest expense (938) (785)
-------- --------
Other expense, net (870) (650)
-------- --------
Loss before provision
for income taxes (4,756) (9,747)
Income tax provision 146 159
-------- --------
Net loss $ (4,902) $(9,906)
======== ========
Basic and diluted loss
per share $ (0.41) $(0.83)
======== ========
Weighted average common shares
Outstanding-basic and diluted 11,981 11,888
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,902) $(9,906)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 467 1,198
Deferred income taxes - (3)
Provision for uncollectible accounts 123 226
Write-down of assets 476 -
Changes in assets and liabilities:
Trade accounts receivable 2,120 7,027
Prepaid expenses and other assets 74 208
Accounts payable, accrued expenses,
and income taxes payable (2,242) (2,548)
Deferred revenue 267 (586)
-------- --------
Net cash used in operating activities (3,617) (4,384)
Cash flows from investing activities:
Purchases of property and equipment - (126)
Capitalization of software development costs - (128)
-------- --------
Net cash used in investing activities - (254)
Cash flows from financing activities:
Note payable to majority shareholder 12,000 -
Capital contribution 16,925 -
Paydown of lines of credit (28,925) -
Net borrowings under line of credit 3,052 7,101
Issuance of common shares - 165
-------- --------
Net cash provided by financing activities 3,052 7,266
Effect of exchange rate changes on cash 4 (3)
-------- --------
Net increase (decrease) in cash and
cash equivalents (561) 2,625
Cash and cash equivalents:
Beginning of period 1,040 4,268
-------- --------
End of period $ 479 $ 6,893
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE>
SEER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
------ ------
<S> <C> <C>
Net loss $ (4,902) $ (9,906)
Other comprehensive income, net of tax
Foreign currency translation adjustment (33) 247
-------- --------
Comprehensive loss $ (4,935) $(9,659)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<PAGE>
SEER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except share and per share data)
Note 1. Interim Financial Statements
The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for fiscal year
1998. The Company's fiscal year ends September 30. The results of
operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for other interim
periods or for the full fiscal year. In the opinion of management, the
information contained herein reflects all adjustments necessary for a
fair statement of the interim results of operations. All such
adjustments are of a normal, recurring nature except for the transaction
discussed in Note 7 and the write-down of $476 of capitalized software
costs based on management's evaluation of the asset's net realizable
value.
During the first quarter of fiscal year 1999, the company has
adopted Statement of Financial Accounting ("SFAS")No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires additional disclosures with
respect to certain changes in assets and liabilities that previously were
not required to be reported as results of operations for the period.
The American Institute of Certified Public Accountants has issued
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997, and provides guidance on applying
generally accepted accounting principles in recognizing revenue on
software transactions. The Company adopted SOP 97-2 at the beginning
October 1, 1998, and the Company does not expect the adoption of this
standard to have a material impact on the Company's financial position or
results of operations.
Note 2. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed based upon the weighted average number of common shares
outstanding and any potentially dilutive securities. Potentially
dilutive securities are not included in the diluted earnings per share
calculations if their inclusion would be anti-dilutive to the basic
earnings (loss) per share calculations. Potentially dilutive securities
outstanding during the first quarter of fiscal year 1999 include stock
options and convertible preferred stock.
Note 3. Income Taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The Company's effective tax rate differs from the statutory rate
primarily due to the fact that no income tax benefit was recorded for the
net loss for the first quarter of fiscal year 1999. Because of the
Company's inconsistent earnings history, the deferred tax assets have
been fully offset by a valuation allowance.
The income tax provision for the first quarter of fiscal year 1999
is primarily related to income taxes from profitable foreign operations
and foreign withholding taxes.
-7-
<PAGE>
Note 4. Use of Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from these
estimates.
Note 5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair market value. The
statement also requires that changes in the derivative's fair market
value be recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning June 15, 1999, with earlier adoption permitted. The Company is
currently assessing the impact of this new statement on its consolidated
financial position, liquidity, and results of operations.
Note 6. Segment Information
Management of the Company makes operating decisions and assesses
performance of its operations based on the following reportable segments:
(1) Software, (2) Maintenance, (3) Services, and (4) Research and
Development.
The accounting policies of the segments are the same as those
described in the "Summary of Significant Accounting Policies," included
in the Company's Annual Report on Form 10-K for fiscal year 1998.
Segment data includes a charge allocating all corporate-headquarters
costs to each of its operating segments based on each segment's
proportionate share of expenses. The Company evaluates the performance
of its segments and allocates resources to them based on earnings (loss)
before interest and taxes(EBIT).
The table below presents information about reported segments for the
quarters ending December 31:
<TABLE>
<CAPTION>
Q1 1999 Software Maintenance Services Research Total
(in 000's) And
Development
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total
Revenue $ 69 $ 3,056 $ 7,778 $ - $ 10,903
Total
EBIT $ (3,014) $ 1,630 $ (710) $ (1,792) $ (3,886)
<CAPTION>
Q1 1998 Software Maintenance Services Research Total
(in 000's) And
Development
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total
Revenue $ 2,698 $ 3,449 $ 12,209 $ - $ 18,356
Total
EBIT $ (5,642) $ 989 $ (132) $ (4,312) $ (9,097)
</TABLE>
A reconciliation of total segment revenue to total consolidated
revenues and of total segment EBIT to total consolidated income before
taxes, for the quarters ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Q1 1999 Q1 1998
- ----------------------------------------------------------
<S> <C> <C>
Total EBIT $ (3,886) $ (9,097)
Interest expense (870) (650)
- -----------------------------------------------------------
Total loss before income taxes $ (4,756) $ (9,747)
</TABLE>
-8-
<PAGE>
The following table presents a summary of revenue by geographic region
for the quarters ended December 31:
<TABLE>
<CAPTION>
Q1 1999 Q2 1999
<S> <C> <C>
Australia $ 678 $ 538
Denmark 1,249 1,112
Germany 541 624
Greece 327 168
Italy 854 2,026
Norway 508 876
South Africa 409 684
Sweden 464 350
Switzerland 792 892
United Kingdom 1,898 3,495
USA 2,182 5,478
Other 1,001 2,113
------- -------
Total Revenue $10,903 $18,356
======= =======
</TABLE>
Foreign revenue is based on the country in which the customer is
domiciled.
Note 7. Acquisition by Level 8
On December 31, 1998, Level 8 Systems, Inc. ("Level 8"), as the
first step in its pending acquisition of the entire equity interest in
the Company, acquired approximately 69% of the outstanding common stock
of the Company held by Welsh, Carson, Anderson and Stowe VI L.P. and
certain other parties affiliated or associated with WCAS ("WCAS") in
exchange for 1,000,000 shares of Level 8 common stock and warrants to
purchase an additional 250,000 shares of Level 8 common stock at an
exercise price of $12.00 per share. Level 8 acquired 7,130,894 shares of
the Company's common stock, 2,094,143 shares of the Company's Series A
Convertible Preferred Stock, and 1,762,115 shares of the Company's Series
B Convertible Preferred Stock from WCAS representing approximately 69% of
the outstanding common stock of the Company and, as a consequence, may be
deemed to control the Company. As part of the agreement, Level 8 agreed
to commence a tender offer for the remaining outstanding common stock of
the Company as soon as reasonably practicable. See Note 9.
In connection with Level 8's purchase of Seer's capital stock from
the WCAS Parties, WCAS contributed approximately $17 million to Seer and
Level 8 provided a $12 million subordinated loan to enable Seer to reduce
Seer's bank debt. The funds used by Level 8 to make the subordinated
loan to Seer were obtained from Liraz Systems Ltd., a principal
stockholder of Level 8. In addition, Level 8 has agreed to fund the
Company's operations through January 15, 2000.
Note 8. Debt Agreements
During the first quarter of 1999, the Company maintained two credit
facilities-the Revolving Facility and the Guaranteed Facility.
On December 22, 1998, the Company's Revolving Facility was amended.
The Revolving Facility now bears interest at the prime rate and
terminates on December 31, 2001. The Revolving Facility is automatically
renewed for successive additional terms of one year each, unless
terminated by either party. Level 8 has agreed to guarantee any
borrowings under the Revolving Facility exceeding $20 million through
December 31, 1999, exceeding $10 million from January 1, 2000 through
December 31, 2000, and without limit thereafter.
-9-
<PAGE>
As of December 31, 1998, Level 8 made the Company a $12 million
subordinated loan to help pay down the Company's outstanding bank debt
and WCAS contributed approximately $17 million to the Company, which was
also used to reduce outstanding borrowings under the Guaranteed Facility
to $0. Additionally, the Guaranteed Facility and the line of credit
available for foreign exchange contracts were terminated on December 31,
1998. The principal amount of the note payable to Level 8 shall bear
interest, compounded quarterly, at a rate per annum equal to the weighted
average interest rate from time to time on the Company's other
indebtedness for borrowed money. Interest shall be payable upon maturity
in June, 2002.
Note 9. Subsequent Events
On February 1, 1999, Level 8 commenced a tender offer for all the
remaining outstanding shares of the common stock of the Company at $0.35
per share, net to the seller in cash, upon the terms and conditions set
forth in the offer to purchase and the of transmittal. The tender offer
is scheduled to expire on March 2, 1999.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General Information and Recent Developments
Seer Technologies, Inc. (the "Company" or "Seer") is one of the
software industry's earliest pioneers and a long-time leader in
component-based software application development. Historically, the
Company has been a distributor of application development tools and
related services. During the second and third quarters of fiscal year
1998, the Company developed a revised business plan, necessitated by a
decline in demand for the Company's application development tools. The
Company attributes the on-going slow-down in the global market for
application development tools primarily to the continued and pervasive
diversion of funds and resources into renovating applications for the
Year 2000. In response to this, Seer completed an in-depth market
assessment initiative to identify opportunities that might broaden its
market scope and decrease the negative impact of the Year 2000 drain on
its business. Based on this assessment, management is now in the process
of shifting the company from its traditional software tools orientation
to an updated solutions-focused approach that blends its consulting
services and enabling technologies into whole solutions that address
identified market opportunities. Some of these opportunities include
helping companies leverage the investment they are making in their Year
2000 renovation efforts by offering a variety of application renewal
solutions that include modernizing applications through internet and
electronic commerce enablement and functional integration with other new
and legacy applications.
On December 31, 1998, Level 8 Systems, Inc. ("Level 8"), as the
first step in its pending acquisition of the entire equity interest in
the Company, acquired approximately 69% of the outstanding common stock
of the Company held by Welsh, Carson, Anderson and Stowe VI L.P. and
certain other parties affiliated or associated with WCAS ("WCAS") in
exchange for 1,000,000 shares of Level 8 common stock and warrants to
purchase an additional 250,000 shares of Level 8 common stock at an
exercise price of $12.00 per share. Level 8 acquired 7,130,894 shares of
the Company's common stock, 2,094,143 shares of the Company's Series A
Convertible Preferred Stock, and 1,762,115 shares of the Company's Series
B Convertible Preferred Stock from WCAS representing approximately 69% of
the outstanding common stock of the Company and, as a consequence, may be
deemed to control the Company. As part of the agreement, Level 8 agreed
to commence a tender offer for the remaining outstanding common stock of
the Company as soon as reasonably practicable.
In connection with the Level 8's purchase of Seer's capital stock
from the WCAS Parties, WCAS contributed approximately $17 million to Seer
and Level 8 provided a $12 million subordinated loan to enable Seer to
reduce Seer's bank debt. The funds used by Level 8 to make the
subordinated loan to Seer were obtained from Liraz Systems Ltd., a
principal stockholder of Level 8. In addition, Level 8 has agreed to
fund the Company's operations through January 15, 2000.
On February 1, 1999, Level 8 commenced a tender offer for all the
outstanding shares of the common stock of the Company at $0.35 per share,
net to the seller in cash, upon the terms and conditions set forth in the
offer to purchase and the related transmittal letter mailed to
stockholders and filed as exhibits to Level 8's Schedule 14D-1 on file
with the Securities and Exchange Commission. The tender offer is
scheduled to expire on March 2, 1999.
Due to the transaction outlined above, the information within this
report is not necessarily indicative of future operating results once
Seer and Level 8 have been combined. Unless otherwise specifically
indicated, the information in this report does not give effect to the
transaction with Level 8.
This report contains forward-looking statements relating to such
matters as anticipated financial performance, business prospects,
technological developments, new products, research and development
activities, the completion of the transaction with Level 8, Year 2000
issues and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause its actual results to differ materially
from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The Company's performance,
development and results of operations may be affected by the risks
presented by: (i) market acceptance of the Company's new strategic
direction; (ii) continued market acceptance of the Company's existing
technology; (iii) fluctuations in quarterly operating results and
volatility of the price of the Company's common stock; (iv) competition;
(v) the Company's reliance on its relationship with IBM; (vi) customer
concentration; (vii) the potential failure to meet product delivery
dates; (viii) matters relating to international operations; (ix)
intellectual property and proprietary rights; (x) the inability to
-11-
<PAGE>
attract and retain consultants and development professionals; (xi) the
Company's ability to attract, retain and train qualified sales
professionals and the ability of those sales professionals to perform to
quota; and (xii) the sufficiency of the Company's liquidity and capital
resources. See the Company's Registration Statement on Form S-1
(Registration N. 33-92050) for a more detailed description of certain
risks presented by the Company's operations.
Year 2000
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (Year 2000)
approaches. The "Year 2000 Problem" is pervasive and complex as
virtually every computer operation will be affected in some way by the
rollover of the two-digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
Software Sold to Consumers. The Company believes that it has
substantially identified potential Year 2000 Problems with the software
products that it develops and markets. See "Item 1. Business - Products -
Year 2000 Issues." Accordingly, the Company believes that it has
fulfilled its obligations to its customers with respect to Year 2000
functionality. However, the law in this area is still evolving and
lawsuits are being filed against software companies on an ongoing basis,
many of them asserting novel theories of damage and liability.
Accordingly, no assurance can be given that claims will not be made
against the Company relating to date-processing issues or that the effect
of such claims on the Company will not be material. Expenses related to
Year 2000 compliance of the Company's products are not separately
identified but are included as part of the Company's research and
development operating budget.
Internal Infrastructure. The Company believes that it has
identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption to its business. The Company has
commenced the process of modifying, upgrading, and replacing major
systems that have been identified as adversely affected, and expects to
complete this process by the middle of 1999.
In addition to computers and related systems, the operation of
office and facilities equipment, such as fax machines, photocopiers,
telephone switches, security systems, elevators, and other common devices
may be affected by the Year 2000 Problem. The Company is currently
assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
The Company does not believe the total cost to the Company of
completing any required modifications, upgrades, or replacements of these
internal systems will not have a material adverse effect on the
Company's financial condition, cash flows, or results of operations.
Expenses related to Year 2000 compliance of the Company's internal
infrastructure are not separately identified but are included as part of
the Company's general and administrative operating budget.
Suppliers. The Company has initiated communications with third
party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the
extent possible, to resolve issues involving the Year 2000 Problem.
However, the Company has limited or no control over the actions of these
third party suppliers. Thus, while the Company expects that it will be
able to resolve any significant Year 2000 Problems with these systems,
there can be no assurance that these suppliers will resolve any or all
Year 2000 Problems with these systems before the occurrence of a material
disruption to the business of the Company or any of its customers. Any
failure of these third parties to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse effect on the
Company's business, financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects
to identify and resolve all Year 2000 Problems that could materially
adversely affect its business operations. However, management believes
that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company have been identified or
corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition,
one cannot accurately predict how many Year 2000 Problem-related failures
will occur or the severity, duration, or financial consequences of these
perhaps inevitable failures. As a result, management expects that the
Company could likely suffer the following consequences:
-12-
<PAGE>
1. a significant number of operational inconveniences and
inefficiencies for the Company and its clients that may divert
management's time and attention and financial and human resources
from its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its clients to prevent or
alleviate material business disruptions.
Contingency Plans. The Company is currently developing contingency
plans to be implemented as part of its efforts to identify and correct
Year 2000 Problems affecting its internal systems. The Company expects
to complete its contingency plans by the middle of 1999. Depending on
the systems affected, these plans could include accelerated replacement
of affected equipment or software, short to medium-term use of backup
equipment and software, increased work hours for Company personnel or use
of contract personnel to correct on an accelerated schedule any Year 2000
Problems that arise or to provide manual workarounds for information
systems, and similar approaches. If the Company is required to implement
any of these contingency plans, it could have a material adverse effect
on the Company's financial condition and results of operations.
Based on the activities described above, the Company does not
believe that the Year 2000 Problem will have a material adverse effect
on the Company's business or results of operations.
Disclaimer. The discussion of the Company's efforts, and
management's expectations, relating to Year 2000 compliance are forward-
looking statements. The Company's ability to achieve Year 2000
compliance and the level of incremental costs associated therewith, could
be adversely impacted by, among other things, the availability and cost
of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the
ongoing compliance review.
Euro Conversion
Several European countries will adopt a Single European Currency
(the "Euro") as of January 1, 1999 with a transition period continuing
through January 1, 2002. The Company is reviewing the anticipated impact
the Euro may have on its internal systems and on its competitive
environment. The Company believes its internal systems will be Euro
capable without material modification cost. Further, the Company does
not presently expect the introduction of the Euro currency to have an
adverse material impact on the Company's financial condition, cash flows,
or results of operations.
Revenue Recognition
The Company has three categories of revenue: software products,
maintenance and services. Software products revenue is comprised
primarily of fees from licensing the Company's proprietary software
products and, to a lesser extent, from product development contracts.
Maintenance revenue is comprised of fees for maintaining, supporting and
providing periodic upgrades of the Company's software products. Services
revenue is comprised primarily of fees for consulting and training
services.
During the first quarter of fiscal year 1999, the Company adopted
Statement of Position 97-2, "Software Revenue Recognition," issued by the
American Institute of Certified Public Accountants. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after
December 15, 1997 and provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions.
The Company does not expect the application of the SOP to have a material
impact on the Company's financial condition or results of operations.
The Company's revenues vary from quarter to quarter, with the
largest portion of revenue typically recognized in the last month of each
fiscal quarter and the third and fourth quarters of each fiscal year.
The Company believes that these patterns are partly attributable to the
Company's sales commission policies, which compensate sales personnel for
meeting or exceeding quarterly and annual quotas, and to the budgeting
and purchasing cycles of customers. Furthermore, as the size of
individual sales is generally large, a single customer may have a
significant impact on a quarter. In addition, the substantial commitment
of executive time and financial resources historically required of a
potential customer to make a decision to purchase the Company's products
increases the risk of quarter-to-quarter fluctuations. The Company
typically does not have any material backlog of unfilled software orders,
and product revenue in any quarter is substantially dependent upon orders
received in that quarter. Because the Company's operating expenses are
-13-
<PAGE>
based on anticipated revenue levels and are relatively fixed over the
short term, variations in the timing of recognition revenue can cause
significant variations in operating results from quarter to quarter.
Fluctuations in operating results may result in volatility in the price
of the Company's common stock.
Results of Operations
The following table sets forth, for the periods indicated, the
Company's unaudited results of operations expressed as a percentage of
revenue:
<TABLE>
<CAPTION>
Three months ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Software products 0.6 % 14.7 %
Maintenance 28.0 % 18.8 %
Services 71.4 % 66.5 %
-------- --------
Total 100.0 % 100.0 %
Cost of revenue:
Software products 7.0 % 2.8 %
Maintenance 6.6 % 11.9 %
Services 67.0 % 59.7 %
-------- --------
Total 80.6 % 74.4 %
Gross profit 19.4 % 25.6 %
Operating expenses:
Sales and marketing 17.3 % 37.6 %
Research and product development 18.7 % 20.8 %
General and administrative 19.0 % 16.9 %
-------- --------
Total 55.0 % 75.3 %
Other income (expense), net (7.9)% (3.5)%
-------- --------
Income (loss) before taxes ( 43.5)% (53.2)%
Income tax provision (benefit) 4.3 % 0.9 %
-------- --------
Net income(loss) (44.8)% (54.1)%
======== ========
</TABLE>
-14-
<PAGE>
The following table sets forth unaudited data for total revenue by
geographic origin as a percentage of total revenue for the periods
indicated:
<TABLE>
<CAPTION>
Three months ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
United States 20.0% 29.8%
Mexico/Canada 1.1% 2.3%
South America 1.0% 1.6%
Europe 66.8% 58.2%
Middle East/Africa 3.7% 3.7%
Asia Pacific 7.4% 4.4%
-------- --------
100.0% 100.0%
======== ========
</TABLE>
Revenue and Gross Profit. The Company's total revenue decreased 41%
and gross profit decreased 45% in the first quarter of fiscal year 1999
compared to the first quarter of fiscal year 1998. These decreases were
primarily attributable to a decrease in software products and services
revenues.
Software products. For the first quarter of fiscal year 1999,
software product revenue decreased 97% from the same period of fiscal
year 1998 while software gross margin decreased by 132% from the period a
year ago. The principal reason for the decrease in software sales was
the announcement of the pending acquisition of Seer by Level 8 on
November 24, 1998. Management believes that the acquisition announcement
disrupted many of the software sales that might have closed during the
quarter by creating uncertainty as to the completion of the transaction
and the future product strategy of the Company. Additionally, the
transaction diverted significant internal management resources during the
negotiation of the acquisition away from their normal efforts toward
furthering current operations.
Software gross margin decreased in the first quarter of fiscal year
1999 in comparison to the same period a year ago due to the decline in
software revenue. Cost of software actually increased in the first
quarter of fiscal year 1999 in comparison to the first quarter of fiscal
year 1998 due to a write-down of $476 of capitalized software cost based
on management's evaluation of the asset's net realizable value.
Maintenance. Maintenance revenue decreased 11% for the first
quarter of fiscal year 1999 as compared to the same quarter of fiscal
year 1998. The trend of decreasing maintenance revenues is primarily a
result of attrition within the installed customer base and also a lack of
new customers in fiscal year 1998. Maintenance gross margins increased
44%, in the first quarter of fiscal year 1999 over the same period of
fiscal year 1998. This increase in gross margin is due to efficiencies
in the maintenance process gained through the reorganization of the
technical operations area in the second quarter of fiscal year 1998 and a
reduction in commissions paid to IBM for certain levels of services
supplied to European customers.
Services. Services revenue for the first quarter of fiscal year
1999 decreased 36% compared to the first quarter of fiscal year 1998, and
service gross margins declined from 10% in the first quarter of fiscal
year 1998 to 6% in the first quarter of fiscal year 1999. This
unfavorable trend was caused by lower software sales, which drive demand
for related services, in fiscal year 1998 than in previous fiscal years
and losses of consultants through attrition.
-15-
<PAGE>
Operating Expenses. Total operating expenses decreased 57% between
the first quarter of fiscal year 1999 and the first quarter of fiscal
year 1998. In comparison to the first quarter of fiscal year 1998, sales
and marketing, research and development, and general and administrative
expenses all decreased significantly due to restructuring in each area.
Sales and marketing expenses decreased 73% in first quarter of
fiscal year 1999 as compared to the first quarter of fiscal year 1998.
This decrease was related directly to decreases in personnel as the
Company better aligned the size of its sales and marketing groups with
management's current perceived demand for its products given the effect
of Year 2000 on the application development tools marketplace.
In the first quarter of fiscal year 1999, research and development
expenses decreased by 60% in comparison to the first quarter of fiscal
year 1998. This decrease was primarily related to decreases in spending
for personnel in response to the current demand for the Company's
software and efficiencies gained through the reorganization of the
technical operations area in the second quarter of fiscal year 1998.
General and administrative expenses decreased by 33% in the first
quarter of fiscal year 1999 in relation to the same period a year ago.
The trend of decreasing general and administrative expenses was a direct
result of the reduction in the number of personnel needed to provide
infrastructure for the Company as the level of business has declined.
Income Taxes. Income taxes decreased from a provision of $.2
million for the first quarter of fiscal year 1998 to $.1 million for the
same period of fiscal year 1999 due to a decrease in foreign tax expense.
The Company's effective tax rate differs from the statutory rate
primarily due to the fact that no income tax benefit was recorded for the
net loss for the first quarter of fiscal year 1999. As a result of the
Company's inconsistent earnings history, the deferred tax assets have
been fully offset by a valuation allowance.
Liquidity and Capital Resources
During the first quarter of fiscal year 1999, net cash flow used by
operations and investing activities was $3.6 million, while in the first
quarter of fiscal year 1998 there was a net cash usage of $4.6. The
decrease in cash flow used in operations and investing activities is
primarily due to the decrease in operating expenses offset to some extent
by the decreases in collections and revenues. As of December 31, 1998,
the Company did not have any material commitments for capital
expenditures.
The Company financed its net cash outflow in the first quarter of
fiscal year 1999 up to December 31 through two credit facilities with
commercial banks. On December 31, 1998 the Company paid down
approximately $29 million of the balances outstanding for its credit
facilities as discussed in the "General Information and Recent
Developments" section above. As a result of this transaction, on
December 31, 1998 the Company maintained one credit facility ("Credit
Facility") with a commercial bank and a $12 million note payable to Level
8, its majority shareholder. The Credit Facility provides for
borrowings of up to $25 million, bears interest at Prime Rate for working
capital purposes based on the Company's eligible accounts receivable, as
defined in the loan agreement. Additionally, Level 8 has agreed to serve
as the guarantor on the Credit Facility for all borrowings in excess of
$20 million. There are no other financial covenants. This facility is
due on demand and will terminate on December 31, 2001; however, it is
automatically renewed for successive additional terms of one year each,
unless terminated by either party. The $12 million note to Level 8 bears
interest at the same rate as the Company's other borrowings with the
interest compounded quarterly. Level 8's rights to payment on the note
are subordinated to those of the holder of the Credit Facility. The note
to Level 8 is payable with interest at June 30, 2002. There are no
financial covenants or restrictions in the Level 8 note.
As of December 31, 1998, the Company had outstanding borrowings of
$12.3 million under the Credit Facility at an interest rate of 7.75%.
-16-
<PAGE>
The Company believes that existing cash on hand, cash provided by
future operations, together with additional borrowings under its lines of
credit will be sufficient to finance its operations and expected working
capital requirements for the near term, so long as the Company performs
according to its revised operating plan. However, in the event the
merger of the Company and Level 8 is not completed, the Company may need
to seek additional financing from Level 8 or other sources. Level 8 has
committed to fund the Company's operations through January 15, 2000, if
necessary.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair market value. The statement also
requires that changes in the derivative's fair market value be recognized
currently in earnings unless specific hedge accounting criteria are met.
SFAS No. 133 is effective for fiscal years beginning June 15, 1999, with
earlier adoption permitted. The Company is currently assessing the
impact of this new statement on its consolidated financial position,
liquidity, and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of risks, including foreign
currency fluctuation. In the normal course of business, the Company
employs established policies and procedures to manage its exposure to
fluctuations in foreign currency values.
During the first quarter of 1999, the Company entered into forward
exchange contracts primarily to hedge receivables and payables
denominated in foreign currencies against fluctuations in exchange rates.
The Company has not entered into forward foreign exchange contracts for
speculative or trading purposes. The Company's accounting policies for
these contracts are based on the Company's designation of the contracts
as hedging transactions. The criteria the Company uses for designating a
contract as a hedge include the contract's effectiveness in risk
reduction and one-to-one matching of derivative instruments to underlying
transactions. Gains and losses on forward foreign exchange contracts are
recognized in income in the same period as gains and losses on the
underlying transactions. If an underlying hedged transaction is
terminated earlier than initially anticipated, the offsetting gain or
loss on the related forward exchange contract would be recognized in
income in the same period. In addition, since the Company enters into
forward contracts only as a hedge, any change in currency rates would not
result in any material net gain or loss, as any gain or loss on the
underlying foreign currency denominated balance would be offset by the
gain or loss on the forward contract. The Company operates in certain
countries in Latin America, where there are limited forward currency
exchange markets, and thus, the Company has unhedged transaction
exposures in these currencies.
In order to implement its hedging policy, the Company had a line of
credit of $.5 million available to enter foreign exchange contracts. On
December 31, 1998 the line of credit available for foreign exchange was
terminated as part of the transaction with Level 8. Accordingly, none of
foreign currency denominated receivables and payables were hedged at
December 31, 1998.
-17-
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
In December 1997, the Company filed a lawsuit against Saadi Abbas
and Cambridge Business Solutions (UK) Limited ("CBS") alleging that Mr.
Abbas and CBS had injured the Company by interfering with the Company's
ability to market and sublicense the LightSpeed Financial Model. The
Company obtained a preliminary injunction against Mr. Abbas and CBS
halting their actions. Mr. Abbas and CBS filed counterclaims against the
Company claiming wrongful dismissal of Abbas and breach of the license
agreement. Due to the erosion of the market for the LightSpeed Financial
Model, the Company voluntarily dismissed its claims against Mr. Abbas and
CBS in the summer of 1998. Mr. Abbas and CBS are continuing to pursue
their claims against the Company. At the present point in the
litigation, it is impossible to calculate the chances of success in this
litigation. However, the Company intends to continue to vigorously
defend against the counterclaim. The Company has made provisions for its
estimated costs to resolve this matter. Management does not believe at
this point in the litigation that any additional amounts required to
ultimately resolve this matter will have a material effect on the
financial position, cash flows, or results of operations of the Company.
From time to time, the Company is a party to routine litigation
incidental to its business. As of the date of this Report, the Company
was not engaged in any legal proceedings that are expected, individually
or in the aggregate, to have a material adverse effect on the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
-18-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Level 8 Guaranty Agreement dated December 31, 1998
(previously filed on the Company's Form 8-K dated January
15, 1999).
10.2 Registrant Promissory Note dated December 31, 1998 in favor
of Level 8 in the principle amount of $12,000,000
(previously filed on the Company's Form 8-K dated January
15, 1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On January 15, 1999, the Company filed a report on Form
8-K reporting a change in control of the registrant from
Welsh, Carson, Anderson and Stowe VI L.P. and certain
affiliates to Level 8 Systems, Inc.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEER TECHNOLOGIES, INC.
/s/ Steven Dmiszewicki
Date: February 16, 1999 -------------------------------------
Steven Dmiszewicki
President and Chief Financial Officer
-20-
<PAGE>
Exhibit 27.1
[ARTICLE] 5
[CAPTION]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] SEP-30-1999
[PERIOD-START] OCT-01-1998
[PERIOD-END] DEC-31-1998
[CASH] 479
[SECURITIES] 0
[RECEIVABLES] 17,158
[ALLOWANCES] 2,153
[INVENTORY] 0
[CURRENT-ASSETS] 16,902
[PP&E] 8,220
[DEPRECIATION] 6,606
[TOTAL-ASSETS] 19,337
[CURRENT-LIABILITIES] 31,775
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 39
[COMMON] 120
[OTHER-SE] (24,694)
[TOTAL-LIABILITY-AND-EQUITY] 19,337
[SALES] 0
[TOTAL-REVENUES] 10,903
[CGS] 0
[TOTAL-COSTS] 9,293
[OTHER-EXPENSES] 5,373
[LOSS-PROVISION] 123
[INTEREST-EXPENSE] 938
[INCOME-PRETAX] (4,756)
[INCOME-TAX] 146
[INCOME-CONTINUING] (4,902)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<INCOME> (4,902)
[EPS-PRIMARY] (0.41)
[EPS-DILUTED] (0.41)
</TABLE>
