<PAGE>
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 June 30, 1997.
[_] 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 incorporation (I.R.S Employer
or organization) Identification Number)
One Penn Plaza, Suite 3401, New York, New York 10119
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212)244-1234
- --------------------------------------------------------------------------------
(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.
7,011,320 common shares, $.01 par value, were outstanding as of July 31, 1997.
- ---------
<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 June 30, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1996 4-5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
Part II. OTHER INFORMATION 10
</TABLE>
2
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,927,251 $ 3,531,102
Marketable securities 2,025,613 6,524,758
Accounts receivable, net 4,635,033 2,977,260
Income taxes receivable 317,347 591,004
Inventory 132,792 143,874
Prepaid expenses and other assets 903,119 261,182
Deferred income taxes 297,400 331,200
----------- -----------
TOTAL CURRENT ASSETS 14,238,555 14,360,380
----------- -----------
PROPERTY AND EQUIPMENT, NET 1,044,836 958,110
----------- -----------
OTHER ASSETS
Excess of cost over net assets 2,004,363 2,215,347
acquired, net
Service contracts acquired, net 1,746,570 1,834,469
Software development costs, net 3,420,302 2,693,114
Deposits 72,456 51,033
----------- -----------
7,243,691 6,793,963
----------- -----------
$22,527,082 $22,112,453
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of $ 8,237 $ 8,593
long-term debt
Current maturities of loan 123,720 122,000
from related company
Accounts payable 1,133,095 1,120,070
Accrued expenses 427,049 549,172
Customer deposits 113,075 153,816
Deferred revenue 1,488,481 1,399,146
----------- -----------
TOTAL CURRENT LIABILITIES 3,293,657 3,352,797
----------- -----------
LONG TERM DEBT, net of current maturities 19,052 23,297
----------- -----------
LOAN FROM RELATED COMPANY, net of current maturities 268,122 330,706
----------- -----------
DEFERRED INCOME TAXES 249,900 105,500
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 69,687 69,543
Additional paid-in-capital 19,427,093 19,506,914
Retained earnings (deficit) (800,429) (1,273,175)
Unearned compensation - (3,129)
----------- ----------
18,696,351 18,300,153
----------- -----------
$22,527,082 $22,112,453
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C> <C>
REVENUE
Consulting and service $2,997,761 $2,400,413
Software 1,061,423 371,848
Other 174,168 184,104
---------- ----------
4,233,352 2,956,365
---------- ----------
COST OF REVENUE
Consulting and service 1,381,379 1,270,213
Software 407,593 200,955
Other 122,293 140,194
---------- ----------
1,911,265 1,611,362
---------- ----------
GROSS MARGIN 2,322,087 1,345,003
OPERATING EXPENSES 1,861,636 1,906,909
---------- ----------
OPERATING INCOME (LOSS) 460,451 (561,906)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 94,107 29,380
Interest expense (5,733) (7,259)
---------- ----------
88,374 22,121
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 548,825 (539,785)
INCOME TAX EXPENSE 225,800 18,200
---------- ----------
NET INCOME (LOSS) $ 323,025 $ (557,985)
========== ==========
NET INCOME (LOSS) PER COMMON SHARE $0.04 $(0.09)
========== ==========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,482,681 5,922,956
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUE
Consulting and service $5,928,672 $4,503,224
Software 2,145,738 661,646
Other 280,495 350,919
---------- ----------
8,354,905 5,515,789
---------- ----------
COST OF REVENUE
Consulting and service 2,617,301 2,325,298
Software 1,309,550 333,699
Other 236,394 272,814
---------- ----------
4,163,245 2,931,811
---------- ----------
GROSS MARGIN 4,191,660 2,583,978
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,575,309 3,477,851
---------- ----------
OPERATING INCOME(LOSS) 616,351 (893,873)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 209,146 80,811
Interest expense (11,151) (15,094)
---------- ----------
197,995 65,717
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 814,346 (828,156)
INCOME TAX EXPENSE (BENEFIT) 341,600 (3,200)
---------- ----------
NET INCOME (LOSS) $ 472,746 ($824,956)
========== ==========
NET INCOME (LOSS) PER COMMON SHARE $0.06 ($0.14)
========== ==========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,505,613 5,922,902
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 472,746 $ (824,956)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation 136,481 87,811
Amortization 488,051 538,954
Tax effect of utilizing deferred tax assets
reserved at date of acquisition 35,300 49,600
Deferred income taxes 178,200 39,600
Changes in operating assets and liabilities:
Accounts receivable (1,657,946) (773,702)
Income taxes 271,465 (283,061)
Inventory 11,082 (43,328)
Prepaid expenses and other assets (641,937) 24,075
Deposits (21,423) (20,456)
Accounts payable and accrued expenses (109,306) (58,167)
Deferred revenue and customer deposits 48,594 127,097
----------- ----------
Net cash used by operating activities (788,693) (1,136,533)
----------- ----------
INVESTING ACTIVITIES
Redemptions of marketable securities 6,497,273 2,044,962
Purchase of marketable securities (1,998,128) -
Purchases of property and equipment (223,207) (385,980)
Software development costs (945,954) (1,079,253)
Employee repayments - 10,664
----------- ----------
Net cash provided by investing activities 3,329,984 590,393
----------- ----------
FINANCING ACTIVITIES
Payments on long-term debt (4,601) (27,810)
Payments on loan from related company (60,864) (29,094)
Proceeds from exercise of stock options 57,688 376
Additional public offering costs (137,365) -
----------- ----------
Net cash used by financing activities (145,142) (56,528)
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 2,159
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,396,149 (600,509)
CASH AND CASH EQUIVALENTS
Beginning of period 3,531,102 3,147,509
----------- ----------
End of period $ 5,927,251 $ 2,547,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
6
<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 June 30, 1997 and December 31, 1996,
the results of operations for the three and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 1997 and
1996. The results of operations for the three and six months ended June 30,
1997 are not necessarily indicative of the results to be expected for the year
ending December 31, 1997, 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, 1996.
2. Principles of Consolidation
The condensed consolidated financial statements include the accounts of Level 8
Systems, Inc. (Level 8), its U.S. subsidiaries ProfitKey International, Inc.
(ProfitKey) and Level 8 Technologies, Inc. (Level 8 Technologies), and its
Canadian subsidiary, Bizware Computer Systems (Canada) Inc. (Bizware) (for 1996
only), collectively referred to as the Company. On September 9, 1996 the
Company sold Bizware. All intercompany accounts and transactions are eliminated
in consolidation.
7
<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 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 consulting services for enterprise messaging and for the manufacturing and
financial services industries.
Results of Operations
Revenue for the three and six months ended June 30, 1997 was approximately
$4,233,000 and $8,355,000 respectively, compared to revenue for the three and
six months ended June 30, 1996 of approximately $2,956,000 and $5,516,000,
respectively. Revenue for the three and six months ended June 30, 1996 includes
revenue of Bizware of approximately $156,000 and $287,000, respectively.
Substantially all of the assets of Bizware were sold on September 9, 1996. The
increase in revenue for the three months ended June 30, 1997 of $1,277,000 is
the result of increases in Level 8 Technologies and ProfitKey of approximately
$1,327,000 and $167,000, respectively. These increases were offset by a
decrease in revenue at ASU of $61,000 and the Bizware revenue of $156,000 in
1996. The increase at Level 8 Technologies is related to increases in software
sales and consulting services. Software sales increased from $12,000 for the
three months ended June 30, 1996 to $700,000 for the three months ended June 30,
1997, while consulting services increased from $1,011,000 for the three months
ended June 30, 1996 to $1,650,000 for the three months ended June 30, 1997. The
increase at ProfitKey is related to increases in software sales and consulting
services offset by a decrease in hardware sales. Software sales increased from
$269,000 for the three months ended June 30,1996 to $361,000 for the three
months ended June 30, 1997, consulting services increased from $871,000 for the
three months ended June 30, 1996 to $976,000 for the three months ended June 30,
1997, while hardware sales decreased from $159,000 for the three months ended
June 30, 1996 to $129,000 for the three months ended June 30, 1997. The
decrease in revenue of ASU consulting is primarily related to a decrease in the
consulting services provided to the AS400 customer base. The increase for the
six months ended June 30, 1997 of $2,839,000 is related to increases at Level 8
Technologies and ProfitKey of $3,146,000 and $139,000, respectively. These
increases were offset by a decrease in revenue at ASU of $159,000 and the
Bizware revenue of $287,000. The increase in Level 8 Technologies revenue is
related to increases in software sales and consulting services. Software sales
increased from $12,000 for the six months ended June 30, 1996 to $1,591,000 for
the six months ended June 30, 1997, while consulting services increased from
$1,629,000 for the six months ended June 30, 1996 to $3,196,000 for the six
months ended June 30, 1997. The increase at ProfitKey is related to increases
in software sales and consulting services offset by a decrease in hardware
sales. Software sales increased from $507,000 for the six months ended June
30,1996 to $555,000 for the six months ended June 30, 1997, consulting services
increased from $1,778,000 for the six months ended June 30, 1996 to $1,945,000
for the six months ended June 30, 1997, while hardware sales decreased from
$310,000 for the six months ended June 30, 1996 to $234,000 for the six months
ended June 30, 1997. The decrease in revenue of ASU consulting is primarily
related to a decrease in the consulting services provided to the AS400 customer
base.
Gross margin for the three and six months ended June 30, 1997 was 54.9% and
50.2%, respectively, compared to gross margin for the three and six months ended
June 30, 1996 of 45.5% and 46.8%, respectively. The increase for the three
months ended June 30, 1997 is related to increased margins in all areas of the
business. Consulting services, software and other gross margins were 53.9%,
61.6% and 29.8%, respectively, for the three months ended June 30, 1997,
compared to 48.4%, 46.0% and 23.9%, respectively for the three months ended June
30, 1996. The increase in consulting services gross margin is primarily related
to increasing rates for consulting services of Level 8 Technologies and
ProfitKey while controlling direct costs to deliver those services. The
increase in software gross margin is related to an increase in the sale of the
Company's own software products. Level 8 Technologies product
8
<PAGE>
sales increased from $0 for the three months ended June 30, 1996 to $468,000 for
the three months ended June 30, 1997. The sales are related to release of the
Level 8 Technologies DOT/XM product and pre-release sales of the FalconMQ
(Falcon Gateway) product. Sales of ProfitKey software also increased from
$222,000 for the three months ended June 30, 1996 to $325,000 for the three
months ended June 30, 1997. The increase in gross margin of other revenue is
related to the mix of ProfitKey hardware sales. Consulting services, software
and other gross margins were 55.9%, 39.0% and 15.7%, respectively, for the six
months ended June 30, 1997, compared to 48.4%, 49.6% and 22.3%, respectively for
the six months ended June 30, 1996. The increase in consulting services gross
margin is primarily related to increasing rates for consulting services of Level
8 Technologies and ProfitKey while controlling direct costs to deliver those
services. The decrease in software gross margin for the six months ended June
30, 1997 is the result of higher sales of third party software products (MQ
licenses) at Level 8 Technologies in the first quarter, which yield margins of
approximately 15%. The decrease in other revenue gross margin is primarily
related to a decrease in hardware sales of ProfitKey for the six months ended
June 30, 1997 of approximately $75,000 and an increase in the cost to deliver
hardware products.
Operating expenses for the three and six months ended June 30, 1997 were
approximately $1,862,000 and $3,575,000, respectively, compared to operating
expenses for the three and six months ended June 30, 1996 of approximately
$1,907,000 and $3,478,000, respectively. The decrease for the three months
ended June 30, 1997 is the result of decreases in operating expenses at Level 8
and ASU of $10,000 and $8,000, respectively, a decrease in non-cash amortization
charges related to goodwill and service contracts acquired of $57,000, and the
reduction of the Bizware operating expenses of $225,000. The decreases were
offset by increases in operating expenses at Level 8 Technologies and ProfitKey
of $207,000 and $48,000, respectively. The increase in Level 8 Technologies
operating expenses for the three months ended June 30, 1997 is primarily related
to increased sales and marketing expenses of $135,000, an increase in research
and development costs of $56,000 and an increase in general overhead costs of
$16,000 related to building support staff. The increase in ProfitKey operating
expenses for the three months ended June 30, 1997 is primarily related to an
increase in sales and marketing of $16,000 and an increase in general overhead
costs of $30,000 related to building and training support staff in anticipation
of new product release. The increase in operating expenses for the six months
ended June 30, 1997 is related to increased operating expenses at Level 8
Technologies and ProfitKey of $566,000 and $53,000, respectively. The increases
were offset by decreases at Level 8 and ASU of $8,000 and $46,000, respectively,
a decrease in non-cash amortization of goodwill and service contracts acquired
of $87,000 and the Bizware operating expenses of $381,000. The increase in
operating expenses at Level 8 Technologies for the six months ended June 30,
1997 is related to an increase in sales and marketing expense of $317,000, an
increase in research and development of $141,000 and increases related to the
Florida office of $121,000 offset by a reduction in overhead expenses of $13,000
as a result of controlling costs. The Florida office was opened in March of 1996
and therefore operating expenses for 1996 do not include a full six months. The
increase in operating expenses at ProfitKey for the six months ended June 30,
1997 is related to increased staffing and training costs in preparation of
releasing the new ProfitKey product. The decreases in non-cash amortization of
goodwill are directly related to the sale of Bizware.
Interest income for the three and six months ended June 30, 1997 increased by
approximately $65,000 and $128,000, respectively. The increase is the result of
investing approximately $6,500,000 in three and six month U.S. Government agency
bonds.
Liquidity and Capital Resources
Operating and financing activities for the six months ended June 30, 1997 used
net cash of approximately $789,000 and $145,000 respectively. At June 30, 1997,
the Company had working capital of approximately $10,945,000 and a current ratio
of 4.3. The Company believes that cash from operations and the proceeds from
its second public offering will be adequate to fund its working capital and
capital expenditure requirements at least through the short term.
The Company continued new product development at ProfitKey, and Level 8
Technologies. During the six months ended June 30, 1997, the Company spent
approximately $946,000 on software development. In addition to software
development, the Company used cash to purchase approximately $223,000 of
property and equipment for the six months ended June 30, 1997.
9
<PAGE>
Part II
LEVEL 8 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) The annual meeting of shareholders of Level 8 Systems, Inc.
was held on May 6, 1997.
(b) A vote was proposed to (1) elect the Board of Directors to serve
for the ensuing year, and (2) to approve the Company's 1997
Employee Stock Option Plan.
The shareholders voting results are as follows:
<TABLE>
<CAPTION>
Votes
For Against Withheld Abstained
<S> <C> <C> <C> <C> <C>
(1) Robert R. MacDonald 5,484,378 N/A 6,740 N/A
Arik Kilman 5,484,378 N/A 6,740 N/A
Samuel Somech 5,484,378 N/A 6,740 N/A
Theodore Fine 5,484,378 N/A 6,740 N/A
Lenny Recanati 5,484,378 N/A 6,740 N/A
Frank Klein 5,484,378 N/A 6,740 N/A
(2) Employee Stock Option Plan 4,246,985 117,637 7,000
</TABLE>
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:
None
10
<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 August 8, 1997 LEVEL 8 SYSTEMS, INC.
----------------------- ---------------------
(Registrant)
/s/ Arik Kilman
----------------------
Arik Kilman, Chief Executive Officer
/s/ Joseph J. Di Zazzo
------------------------
Joseph J. Di Zazzo
Chief Financial Officer
11
<PAGE>
ACROSS DATA SYSTEMS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENTS
EXHIBIT 11.0
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
PRIMARY: 1997 1996 1997 1996
--------------------------- ---------------------------
WEIGHTED AVERAGE COMMON SHARES 6,966,707 5,922,956 6,963,247 5,922,902
COMMON STOCK EQUIVALENTS 515,974 542,366
-------------------------- ---------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,482,681 5,922,956 7,505,613 5,922,902
========================== ===========================
FULLY DILUTED:
WEIGHTED AVERAGE COMMON SHARES 6,966,707 5,922,956 6,963,247 5,922,902
COMMON STOCK EQUIVALENTS 590,734 628,470
-------------------------- ---------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,557,441 5,922,956 7,591,717 5,922,902
========================== ===========================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 5,927,251
<SECURITIES> 2,025,613
<RECEIVABLES> 4,635,033
<ALLOWANCES> 0
<INVENTORY> 132,792
<CURRENT-ASSETS> 14,238,555
<PP&E> 1,044,836
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,527,082
<CURRENT-LIABILITIES> 3,293,657
<BONDS> 0
0
0
<COMMON> 69,687
<OTHER-SE> 19,427,093
<TOTAL-LIABILITY-AND-EQUITY> 22,527,082
<SALES> 8,354,905
<TOTAL-REVENUES> 8,354,905
<CGS> 4,163,245
<TOTAL-COSTS> 7,738,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,151
<INCOME-PRETAX> 814,346
<INCOME-TAX> 341,600
<INCOME-CONTINUING> 472,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472,746
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
