<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 March 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26392
LEVEL 8 SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2920559
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(State or other jurisdiction of incorporation (I.R.S Employer Identification
or organization) Number)
One Penn Plaza, Suite 3401, New York, New York 10119
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212)244-1234
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(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.
6,963,814 common shares, $.01 par value, were outstanding as of April 30, 1997.
- ---------
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LEVEL 8 SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page #
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
Part II. OTHER INFORMATION 9-12
</TABLE>
2
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LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,827,667 $ 3,531,102
Marketable securities 6,041,956 6,524,758
Accounts receivable, net 3,835,465 2,977,260
Income taxes receivable 656,850 591,004
Inventory 140,841 143,874
Prepaid expenses and other assets 818,377 261,182
Deferred income taxes 370,700 331,200
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Total current assets 14,691,856 14,360,380
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PROPERTY AND EQUIPMENT, NET 1,007,965 958,110
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OTHER ASSETS
Excess of cost over net assets acquired, net 2,109,855 2,215,347
Service contracts acquired, net 1,807,568 1,834,469
Software development costs, net 3,170,061 2,693,114
Deposits 70,806 51,033
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7,158,290 6,793,963
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$22,858,111 $ 22,112,453
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<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 8,593 $ 8,593
Current maturities of loan from related company 154,000 122,000
Accounts payable 1,744,843 1,120,070
Accrued expenses 499,907 549,172
Customer deposits 187,270 153,816
Deferred revenue 1,299,960 1,399,146
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Total current liabilities 3,894,573 3,352,797
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LONG TERM DEBT, NET OF CURRENT MATURITIES 20,996 23,297
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LOAN FROM RELATED COMPANY, NET OF CURRENT MATURITIES 298,706 330,706
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DEFERRED INCOME TAXES 301,800 105,500
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<CAPTION>
SHAREHOLDERS' EQUITY
<S> <C> <C>
Preferred stock - -
Common stock 69,638 69,543
Additional paid-in-capital 19,398,981 19,506,914
Retained earnings (deficit) (1,123,454) (1,273,175)
Unearned compensation (3,129) (3,129)
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18,342,036 18,300,153
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$22,858,111 $ 22,112,453
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</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
REVENUE
Consulting and service $2,930,911 $2,102,811
Software 1,084,315 289,798
Other 106,327 166,815
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4,121,553 2,559,424
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COST OF REVENUE
Consulting and service 1,235,922 1,055,085
Software 901,957 132,744
Other 114,101 132,620
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2,251,980 1,320,449
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GROSS MARGIN 1,869,573 1,238,975
OPERATING EXPENSES 1,713,673 1,570,942
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OPERATING INCOME (LOSS) 155,900 (331,967)
--------------- --------------
OTHER INCOME (EXPENSES)
Interest income 115,039 51,431
Interest expense (5,418) (7,835)
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109,621 43,596
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INCOME (LOSS) BEFORE INCOME TAXES 265,521 (288,371)
INCOME TAX EXPENSE (BENEFIT) 115,800 (21,400)
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NET INCOME (LOSS) $ 149,721 $ (266,971)
=============== ==============
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.05)
=============== ==============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,438,336 5,922,847
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 149,721 $ (266,971)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation 64,960 41,825
Amortization 222,714 253,191
Tax effect of utilizing deferred tax assets
that were reserved at date of acquisition -- 37,000
Deferred income taxes 156,800 12,800
Changes in operating assets and liabilities:
Accounts receivable (858,340) (318,484)
Inventory 3,033 17,272
Prepaid expenses and other assets (557,195) (13,088)
Income taxes receivable (68,781) (124,839)
Deposits (19,773) (3,090)
Accounts payable 627,843 193,659
Accrued expenses (49,265) (88,398)
Deferred revenue (99,186) (98,001)
Customer deposits 33,454 (6,436)
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Net cash used by operating activities (394,015) (363,560)
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INVESTING ACTIVITIES
Redemption of marketable securities 2,480,930 2,044,962
Purchases of marketable securities (1,998,128) --
Purchases of property and equipment (114,815) (211,562)
Software development costs (567,268) (499,036)
Employee repayments -- 7,409
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Net cash provided (used) by investing activities (199,281) 1,341,773
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FINANCING ACTIVITIES
Payments on long-term debt (2,301) (19,196)
Payments on loan from related company -- (29,094)
Proceeds from exercise of stock options 32,099 376
Additional public offering costs (139,937) --
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Net cash used by financing activities (110,139) (47,914)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 163
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (703,435) 930,462
CASH AND CASH EQUIVALENTS
Beginning of Period 3,531,102 3,147,509
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End of Period $ 2,827,667 $ 4,077,971
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<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 March 31, 1997 and December 31, 1996
and the results of operations and cash flows for the three months ended March
31, 1997 and 1996. The results of operations and cash flows for the three months
ended March 31, 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 March 31, 1997 condensed consolidated financial statements include the
accounts of Level 8 Systems, Inc. (Level 8), its 100% wholly-owned subsidiary
ProfitKey International, Inc. (ProfitKey), its 100% wholly-owned subsidiary,
Level 8 Technologies, Inc. (Level 8 Technologies) and its ASU consulting
division (ASU). The March 31, 1996 condensed consolidated financial statements
include the accounts of Level 8, ProfitKey, its 100% wholly-owned Canadian
subsidiary, 3077934 Canada, Inc. and its 100% wholly-owned subsidiary, Bizware
Computer Systems (Canada) Inc. (Bizware), Level 8 Technologies and ASU.
On July 26, 1996, the Company sold 246,800 shares of common stock to Candle
Corporation at $11.00 per share before cost of sale of $105,058.
On December 17, 1996, the Company completed a secondary public offering of
705,000 shares (including 45,000 shares sold pursuant to the underwriter's
exercise of its over-allotment option) at a price of $11.00 per share before
1996 costs of $1,277,803 and 1997 costs of $139,937.
6
<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 months ended March 31, 1997 was approximately $4,122,000
as compared $2,559,000 for the three months ended March 31, 1996, an increase of
$1,563,000 or 61%. The increase is primarily related to an increase in revenue
at Level 8 Technologies of approximately $1,819,000, which includes an increases
of approximately $928,000 and $891,000 for consulting/services and software,
respectively. The increase was offset by a decrease in revenue at ProfitKey and
ASU of approximately $28,000 and $138,000 respectively. Additionally, in 1996
the Company had approximately $131,000 of revenue from Bizware which was sold on
September 9, 1996. The decrease in ProfitKey revenue is attributed to a
reduction of new software system installations and reduced hardware sales. ASU
revenue decreased as a result of a reduction in its AS400 consulting business.
Cost of revenue for the three months ended March 31, 1997 increased
approximately $932,000 or 71% from the three months ended March 31, 1996. The
increase was attributable primarily to the increase in the cost of revenue in
Level 8 Technologies of approximately $1,055,000 as a result of increased
revenue from 1996 to 1997. Approximately $728,000 of the increase in cost of
revenue at Level 8 Technologies was attributable to the cost of selling third
party software licenses and approximately $287,000 was attributable to the
increase in cost of consulting services. Approximately $9,000 of the increase
was related to increased cost of revenue at ProfitKey. These increases were
offset by decreases in cost of revenue of approximately $83,000 and $49,000 at
ASU and Bizware, respectively, from 1996 to 1997. As a percentage of revenue,
cost of revenue increased from 52% in 1996 to 55% in 1997.
Gross margin for the three months ended March 31, 1997 was 45.4% as compared to
48.4% for the three months ended March 31, 1996. The decrease is related to
reduced margins in software which is the direct result of Level 8 Technologies
selling third party software products with gross margins of approximately 10%.
Consulting and service gross margin increased from 49.8% in 1996 to 57.8% in
1997 due to the increase in Level 8 Technologies consulting and service gross
margin from 38.7% in 1996 to 56.9% in 1997 and an increase in consulting and
service gross margin in ASU from 45.9% in 1996 to 54.3% in 1997.
Operating expenses for the three months ended March 31, 1997 were approximately
$1,714,000 as compared to approximately $1,571,000 for the three months ended
March 31, 1996, an increase of approximately $143,000. The increase is the
result of increases in sales and marketing expenses of approximately $182,000 in
Level 8 Technologies from 1996 to 1997. Additional increases in operating
expenses of approximately $171,000 are directly related to additional staffing
requirements of Level 8 Technologies. These increases were offset by decreases
in operating expenses of approximately $37,000 and $30,000 in ASU and
amortization of goodwill and service contracts acquired. In addition, the
operating expenses of Bizware of approximately $157,000 were eliminated in 1997.
Interest income increased by approximately $64,000 from 1996 to 1997 as a result
of investing approximately $7,000,000 in three and six-month government
securities.
7
<PAGE>
Liquidity and Capital Resources
Operating and financing activities for the three months ended March 31, 1997
used net cash of approximately $394,000 and $110,000 respectively. At March 31,
1997, the Company had working capital of approximately $10,797,000 and a current
ratio of 3.77. The Company believes that the stock sale proceeds from Candle
Corporation and its second public offering will be adequate to fund its working
capital and capital expenditure requirements at least through the end of 1997.
The Company continued new product development at Level 8 Technologies and
ProfitKey. During the three months ended March 31, 1997, the Company spent
approximately $567,000 on software development.
8
<PAGE>
Part II
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
OTHER INFORMATION
<TABLE>
<S> <C>
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
None
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
</TABLE>
<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 May 13, 1997 LEVEL 8 SYSTEMS, INC.
----------------------------- ---------------------
(Registrant)
/s/ Arik Kilman
----------------------------------
Arik Kilman, Chief Executive Officer
/s/ Joseph J. Di Zazzo
----------------------------------
Joseph J. Di Zazzo, Controller and
Chief Accounting Officer
<PAGE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENTS
EXHIBIT 11.0
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
PRIMARY: 1997 1996
----------------------------------
<S> <C> <C>
WEIGHTED AVERAGE COMMON SHARES 6,959,750 5,922,847
COMMON STOCK EQUIVALENTS 478,586
COMMON STOCK EQUIVALENTS PURSUANT
TO SAB TOPIC 4D
----------------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,438,336 5,922,847
==================================
FULLY DILUTED:
WEIGHTED AVERAGE COMMON SHARES 6,959,750 5,922,847
COMMON STOCK EQUIVALENTS 478,586
COMMON STOCK EQUIVALENTS PURSUANT
TO SAB TOPIC 4D
----------------------------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,438,336 5,922,847
==================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,827,667
<SECURITIES> 6,041,956
<RECEIVABLES> 3,835,465
<ALLOWANCES> 0
<INVENTORY> 140,841
<CURRENT-ASSETS> 14,691,856
<PP&E> 1,007,965
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,858,111
<CURRENT-LIABILITIES> 3,894,573
<BONDS> 0
0
0
<COMMON> 69,638
<OTHER-SE> 18,272,398
<TOTAL-LIABILITY-AND-EQUITY> 22,858,111
<SALES> 4,121,553
<TOTAL-REVENUES> 4,121,553
<CGS> 2,251,980
<TOTAL-COSTS> 3,965,653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,418
<INCOME-PRETAX> 265,521
<INCOME-TAX> 115,800
<INCOME-CONTINUING> 265,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,721
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
