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 September 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________to ___________________
Commission File Number 0-26392
LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2920559
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
382 Main Street, Salem, New Hampshire 03079
(Address of principal executive offices) (Zip Code)
(603)898-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15d of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
6,236,297 common shares, $.01 par value, were outstanding as of November 10,
1996.
<PAGE>
LEVEL 8 SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page #
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1996 and 1995 4-5
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 1996 and 1995 6-7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Part II. OTHER INFORMATION 9-11
</TABLE>
2
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,600,756 $ 3,147,509
Marketable securities 2,497,493 2,044,962
Accounts receivable, net 2,351,592 1,423,603
Income taxes receivable 597,473 --
Inventory 166,471 125,334
Prepaid expenses and other assets 265,488 157,054
Deferred income taxes 86,500 268,000
------------ ------------
Total current assets 8,565,773 7,166,462
------------ ------------
Property and equipment, net 969,933 586,881
------------ ------------
Other assets
Excess of cost over net assets acquired, net 2,320,839 3,717,393
Service contracts acquired, net 1,861,371 2,016,850
Software development costs, net 2,242,969 1,505,169
Deferred income taxes -- 26,400
Deposits 60,038 40,043
------------ ------------
6,485,217 7,305,855
------------ ------------
$ 16,020,923 $ 15,059,198
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 8,593 $ 36,131
Current maturities of loans from related company 122,000 117,000
Accounts payable 1,452,720 514,249
Accrued expenses 618,707 444,841
Income taxes payable -- 88,412
Customer deposits 204,606 213,221
Deferred revenue 1,542,982 1,648,987
------------ ------------
Total current liabilities 3,949,608 3,062,841
------------ ------------
Long term debt, net of current maturities 26,009 43,975
------------ ------------
Loans from related company 360,685 453,847
------------ ------------
Deferred income taxes 8,300 --
------------ ------------
Shareholders' equity
Preferred stock -- --
Common stock 62,303 59,224
Additional paid-in-capital 13,020,141 10,371,302
Retained earnings (deficit) (1,400,421) 1,096,222
Unearned compensation (5,702) (33,323)
Foreign currency translation adjustments -- 5,110
------------ ------------
11,676,321 11,498,535
------------ ------------
$ 16,020,923 $ 15,059,198
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue
Consulting and service $ 2,478,017 $ 1,789,607
Software 1,581,785 218,061
Other 210,127 201,553
----------- -----------
4,269,929 2,209,221
----------- -----------
Cost of revenue
Consulting and service 1,136,893 869,850
Software 1,354,862 46,213
Other 139,332 137,251
----------- -----------
2,631,087 1,053,314
----------- -----------
Gross margin 1,638,842 1,155,907
Operating expenses 1,871,616 1,196,258
----------- -----------
Operating income (loss) before loss on sale of subsidiary (232,774) (40,351)
Loss on sale of subsidiary 1,484,061 --
----------- -----------
Operating income (loss) (1,716,835) (40,351)
----------- -----------
Other income (expense)
Interest income 36,203 51,440
Interest expense (12,955) (12,153)
----------- -----------
23,248 39,287
----------- -----------
Income (loss) before income taxes (1,693,587) (1,064)
Income tax expense (benefit) (21,900) 41,000
----------- -----------
Net income (loss) $(1,671,687) $ (42,064)
=========== ===========
Net income (loss) per common share $ (0.27) $ (0.01)
=========== ===========
Weighted average common and common equivalent shares 6,107,959 5,510,355
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue
Consulting and service $ 6,981,241 $ 5,367,495
Software 2,243,431 1,700,999
Other 561,046 577,011
----------- -----------
9,785,718 7,645,505
----------- -----------
Cost of revenue
Consulting and service 3,462,191 2,559,995
Software 1,688,561 248,567
Other 412,146 429,011
----------- -----------
5,562,898 3,237,573
----------- -----------
Gross margin 4,222,820 4,407,932
Operating expenses 5,349,467 3,333,057
----------- -----------
Operating income (loss) before loss on sale of subsidiary (1,126,647) 1,074,875
Loss on sale of subsidiary 1,484,061 --
----------- -----------
Operating income (loss) (2,610,708) 1,074,875
----------- -----------
Other income (expenses)
Interest income 117,014 53,602
Interest expense (28,049) (45,724)
----------- -----------
88,965 7,878
----------- -----------
Income (loss) before income taxes and minority interest (2,521,743) 1,082,753
Income tax expense(benefit) (25,100) 360,000
----------- -----------
Income (loss) before minority interest (2,496,643) 722,753
Minority interest in income of consolidated subsidiary -- 15,291
----------- -----------
Net income (loss) $(2,496,643) $ 707,462
=========== ===========
Net income (loss) per common share $ (0.42) $ 0.16
=========== ===========
Weighted average common and common equivalent shares 5,985,265 4,396,229
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Operating activities
Net income (loss) $(2,496,643) $ 707,462
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 138,241 84,861
Amortization 798,269 418,602
Loss on sale of subsidiary 1,484,061 --
Tax effect of utilizing deferred tax assets
that were fully reserved at date of acquisition 49,600 355,500
Deferred income taxes 166,600 (430,300)
Minority interest in income of consolidated subsidiary -- 15,291
Changes in operating assets and liabilities:
Accounts receivable (819,696) 712,808
Income taxes receivable (596,299) --
Inventory (41,137) (45,478)
Prepaid expenses and other assets (129,667) (92,994)
Deposits and deferred costs (24,820) --
Accounts payable and accrued expenses 1,061,578 (572,719)
Income taxes payable (115,417) (72,219)
Deferred revenue and customer deposits (114,295) 3,617
----------- -----------
Net cash provided (used) by operating activities (639,625) 1,084,431
----------- -----------
Investing activities
Purchases of marketable securities (2,497,493) (1,999,772)
Redemption of marketable securities 2,044,962 --
Purchases of property and equipment (600,170) (167,569)
Software development costs (1,509,331) (384,870)
Employee (advances) repayments 21,225 1,747
Advances to former shareholders of acquired subsidiary -- (294,622)
Payments to former shareholders of acquired subsidiary -- (445,056)
Payments received on advances to former
shareholders of acquired subsidiary -- 225,940
Proceeds from sale of subsidiary 120,000
Cash acquired in acquisition -- 5,669
Cost of acquisition -- (2,118,217)
----------- -----------
Net cash (used) by investing activities (2,420,807) (5,176,750)
----------- -----------
Financing activities
Payments on long-term debt (45,504) (60,860)
Proceeds from issuance of long-term debt -- 31,912
Loans from related companies -- 1,513,007
Payments on loans from related companies (88,162) (878,519)
Proceeds from issuance of common stock 2,609,742 6,673,498
Proceeds from exercise of stock options 889
42,176
Repurchase of common stock -- (3,400)
----------- -----------
Net cash provided by financing activities 2,518,252 7,276,527
----------- -----------
</TABLE>
(continued)
See notes to condensed consolidated financial statements.
6
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Effect of exchange rate changes on cash $ (4,573) $ 16,843
----------- -----------
Net increase (decrease) in cash and cash equivalents (546,753) 3,201,051
Cash and cash equivalents
Beginning of period 3,147,509 691,305
----------- -----------
End of period $ 2,600,756 $ 3,892,356
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of the Company, these unaudited condensed consolidated financial
statements contain all normal recurring adjustments necessary to present fairly
the financial position of the Company as of September 30, 1996 and December 31,
1995 and the results of operations for the three and nine months ended September
30, 1996 and 1995. The results of operations for the three and nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the year ending December 31, 1996, or any other period. For further
information, refer to the consolidated financial statements and notes included
in the Company's annual report on Form 10-K for the year ended December 31,
1995.
2. Principles of Consolidation
The condensed consolidated financial statements include the accounts of Level 8
Systems, Inc., (Level 8), its 100% wholly-owned U.S. subsidiaries ProfitKey
International, Inc. (ProfitKey) and Level 8 Technologies, Inc., its 100%
wholly-owned Canadian subsidiary, 3077934 Canada, Inc. and its 100% wholly-owned
subsidiary, Bizware Computer Systems (Canada) Inc. (Bizware), and its ASU
consulting division (ASU). All financial information of subsidiaries is included
from the date of acquisition. All intercompany accounts and transactions are
eliminated in consolidation. On September 9, 1996 the Company sold substantially
all of the assets of Bizware for $230,000.
3. Reclassification
Certain items in the 1995 financial statements have been reclassified in order
to conform to the 1996 presentation.
8
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Level 8 Systems, Inc., through its wholly-owned subsidiaries ProfitKey, Bizware,
and Level 8 Technologies and its ASU consulting division, develops and markets
business software and provides consulting and ancillary services. The Company's
products and services include: transactional messaging middleware and
distributed object technology, which facilitate communication among applications
that reside on distributed and often incompatible hardware and software;
industry specific ("vertical") software applications the Company has developed
for manufacturers and for the petroleum and convenience store industry; and
consulting services for enterprise messaging and for the manufacturing and
financial services industries.
In July 1996, the Company decided to focus on the middleware activities of Level
8 Technologies. As part of that strategy, on September 9, 1996, the Company sold
substantially all of the assets of Bizware, its wholly owned subsidiary, for
$230,000, and in connection therewith, the Company recognized a loss of
$1,484,061.
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Revenue for the nine month period ended September 30, 1996 increased by
approximately $2,100,000 or 28% over the nine months September 30, 1995. The
increase was attributable primarily to an approximately $3,000,000 or 294%
increase in the revenue of Level 8 Technologies. Approximately $618,000 of the
increase of revenue of Level 8 Technologies was attributable to the inclusion of
revenue for the entire 1996 period compared to only six months of 1995 following
the acquisition of Level 8 Technologies on April 1, 1995, and approximately
$2,400,000 or 233% was attributable to an increase in revenue of Level 8
Technologies during the comparable six months periods. The increase in revenue
of Level 8 Technologies was offset by a decrease of the Bizware revenue of
approximately $842,000.
Cost of revenue for the nine month period ended September 30, 1996 increased by
approximately $2,300,000 or 72% over the nine months ended September 30, 1995.
The increase was attributable primarily to an approximately $2,000,000 or 263%
increase in the cost of revenue of Level 8 Technologies. Approximately $379,000
of the increase of the cost of revenue of Level 8 Technologies was attributable
to the inclusion of cost of revenue for the entire 1996 period compared to only
the six months of 1995 following the acquisition of Level 8 Technologies on
April 1, 1995, and approximately $1,576,000 or 212% was attributable to an
increase in cost of revenue of Level 8 Technologies during the comparable six
month period in 1995. As a percent of revenue, cost of revenue increased from
42% for the nine months ended September 30, 1995 to 57% for the comparable 1996
period. This increase was attributable primarily to an 86% cost of revenue for
sales in 1996 of approximately $1,100,000 of third-party software licenses.
Operating expense for the nine month period ended September 30, 1996 increased
by approximately $2,000,000 or 60% over operating expense for the nine months
ended September 30, 1995. The increase was attributable primarily to Level 8
Technologies opening a new office and staffing expenses related thereto and
additional three months of operations in 1996 for Level 8 Technologies totaling
approximately $1,200,000. The balance of the increase was due to increased sales
and marketing expense at ProfitKey and increased general corporate overhead. As
a percentage of revenue, operating expense increased from 44% for the nine
months ended September 30, 1995 to 55% for the nine months ended September 30,
1996 (excluding the loss associated with the sale of Bizware).
Other income (expense) for the nine month period ended September 30, 1996
increased to approximately $89,000 from approximately $8,000 during the
comparable nine month period in 1995 primarily due to interest earned from
investment of cash remaining from the Company's July 1995 initial public
offering.
9
<PAGE>
Income tax expense (benefit) was 1% and 33% of income before taxes and minority
interest for the nine months ended September 30, 1996 and September 30, 1995,
respectively. The effective tax rate differed from the federal statutory tax
rate (i.e. 34%) in 1996 primarily due to the non-deductibility of the loss on
the sale of a subsidiary and the change in the deferred tax valuation allowance.
Minority interest in income of consolidated subsidiary was eliminated starting
April 3, 1995, when the Company acquired the minority interest in ProfitKey.
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenue for the three months ended September 30, 1996 increased approximately
$2,100,000 or 93% over the three months ended September 30, 1995. The increase
was attributable primarily to the increase in revenue of Level 8 Technologies of
approximately $2,000,000. This increase is primarily related to an increase in
service revenue of approximately $770,000 and an increase in software revenue of
approximately $1,200,000.
Cost of revenue for the three months ended September 30, 1996 increased by
approximately $1,578,000 or 150% over the three months ended September 30, 1995.
The increase was attributable primarily to an increase in cost of revenue of
Level 8 Technologies of approximately $1,400,000 and an increase in cost of
revenue of ProfitKey of approximately $130,000. The increase in cost of revenue
of Level 8 Technologies is related to an increase in service costs of
approximately $300,000 and the cost of software of approximately $1,100,000. The
increase in cost of revenue of ProfitKey is primarily related to the increase in
software amortization cost of approximately $90,000. As a percentage of revenue,
cost of revenue increased from 48% for the three month period in 1995 to 62% for
the comparable 1996 period. This increase was attributable primarily to an 86%
cost of revenue for sales in 1996 of approximately $1,100,000 of third-party
software licenses.
Operating expense for the three months ended September 30, 1996 increased
approximately $675,000 or 56% over the three months ended September 30, 1995.
The increase in operating expense is primarily attributable to increased
staffing at Level 8 Technologies and ProfitKey and increased general corporate
overhead. As a percentage of revenue, operating expense decreased from 54% for
the three months ended September 30, 1995 to 44% for the three months ended
September 30, 1996 (excluding the loss associated with the sale of Bizware).
Other income (expense) for the three months ended September 30, 1996 decreased
to approximately $23,000 from approximately $39,000 during the comparable three
month period in 1995 primarily due to a reduction in the amount of cash
available for investment in interest bearing funds.
Income tax expense (benefit) differed from the federal statutory tax rate (i.e.
34%) in 1996 primarily due to the non-deductibility of the loss on the sale of a
subsidiary and goodwill; and in 1995 primarily due to the non-deductibility of
goodwill.
Liquidity and Capital Resources
In 1996, the Company funded its operations with cash remaining from its initial
public offering. For the nine months ended September 30, 1996, the Company used
net cash of approximately $640,000 for operations, expended approximately
$1,500,000 for capitalized software development, and expended approximately
$600,000 on equipment. In July 1996, Candle acquired 246,800 shares of Common
Stock at a price of $11.00 per share, or $2,714,800 before cost of issuance. The
funds were invested primarily in short-term, interest-bearing securities. At
September 30, 1996, the Company had working capital of approximately $4,600,000
and a current ratio of 2.17.
The Company filed a registration statement on November 4, 1996 and expects to
raise approximately $6,000,000 from the sale 600,000 shares of the Company's
Common Stock.
10
<PAGE>
Part II
ACROSS DATA SYSTEMS, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
(a) A special meeting of shareholders was held on September 25, 1996
to consider and act upon a proposal to amend the Corporation's
certificate of incorporation to change the Corporation's name to
Level 8 Systems, Inc.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
(11) Statement regarding computation of earnings per share
(27) Financial Data Schedule
Reports on Form 8-K:
Agreement of sale of assets effective September 9, 1996 between
Bizware Computer Systems (Canada) Inc. and 3203174 Canada Inc.
previously filed on September 25, 1996.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 13, 1996 LEVEL 8 SYSTEMS, INC.
----------------- ---------------------
(Registrant)
/s/ Arik Kilman
---------------------------
Arik Kilman, President
/s/ Joseph J. Di Zazzo
---------------------------
Joseph J. Di Zazzo, Controller and
Chief Accounting Officer
ACROSS DATA SYSTEMS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENTS
EXHIBIT 11.0
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
PRIMARY: 1996 1995 1996 1995
-------------------------- --------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE COMMON SHARES 6,107,959 5,510,355 5,985,265 3,896,557
COMMON STOCK EQUIVALENTS
COMMON STOCK EQUIVALENTS PURSUANT
TO SAB TOPIC 4D 499,672
-------------------------- --------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 6,107,959 5,510,355 5,985,265 4,396,229
========================== ==========================
FULLY DILUTED:
WEIGHTED AVERAGE COMMON SHARES 6,107,959 5,510,355 5,985,265 4,396,229
COMMON STOCK EQUIVALENTS
COMMON STOCK EQUIVALENTS PURSUANT
TO SAB TOPIC 4D
-------------------------- --------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 6,107,959 5,510,355 5,985,265 4,396,229
========================== ==========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,600,756
<SECURITIES> 2,497,493
<RECEIVABLES> 2,351,592
<ALLOWANCES> 0
<INVENTORY> 166,471
<CURRENT-ASSETS> 8,565,773
<PP&E> 969,933
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,020,923
<CURRENT-LIABILITIES> 3,949,608
<BONDS> 0
0
0
<COMMON> 62,303
<OTHER-SE> 11,614,018
<TOTAL-LIABILITY-AND-EQUITY> 16,020,923
<SALES> 9,785,718
<TOTAL-REVENUES> 9,785,718
<CGS> 5,562,898
<TOTAL-COSTS> 10,912,365
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,049
<INCOME-PRETAX> (2,521,743)
<INCOME-TAX> (25,100)
<INCOME-CONTINUING> (2,496,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,496,643)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
