SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
June 8, 1998 0-26392
Date of Report (Date of Earliest Commission File Number
Event Reported)
LEVEL 8 SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 11-2920559
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
1250 Broadway
35th Floor
New York, New York 10119
(Address of Principal Executive Offices) (Zip Code)
(212) 244-1234
(Registrant's telephone number, including area code)
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
The registrant submits this Form 8-K/A in order to supply
the financial statements and schedules required pursuant to Rule
3-05(b) of Regulation S-X with respect to the Registrant's
acquisition of Momentum Software Corporation (DE) ("Momentum"), a
provider of enterprise middleware used by companies to build
multi-platform, multi-tiered distributed applications using
message queuing technology, and to provide the audited financial
statements of Momentum required thereby. This information should
be read in conjunction with the Registrant's Form 8-K filed with
the Commission on April 10, 1998.
Financial Statements of Business Acquired
Exhibit 99.1 Consolidated balance sheet and consolidated
statements of operations, of changes in redeemable
preferred stock and stockholders' equity and of
cash flows of Momentum Software Corporation (DE)
and its subsidiaries as of and for years ended
December 31, 1996 and 1995.
Exhibit 99.2 Consolidated balance sheet and consolidated
statements of operations, of changes in
stockholders' deficit and of cash flows of
Momentum Software Corporation (DE) and its
subsidiaries as of and for years ended December
31, 1997 and 1996.
Exhibit 99.3 Pro Forma Condensed Consolidated Statements of
Operations for the twelve months ended December
31, 1997 and the three months ended March 31,
1998.
SIGNATURE
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 hereunto duly authorized.
LEVEL 8 SYSTEMS, INC.
(Registrant)
Dated: June 8, 1998 By: /s/ Robert Lord
Robert Lord
Executive Vice President
(Duly authorized officer)
Exhibit 99.1
Report of Independent Accountants
May 22, 1997
To the Board of Directors and Stockholders
of Momentum Software Corporation (DE)
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of changes in
redeemable preferred stock and stockholders' equity and of cash
flows present fairly, in all material respects, the financial
position of Momentum Software Corporation (DE) and its
subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. The
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Momentum Software Corporation (DE)
Consolidated Balance Sheet
- -----------------------------------------------------------------
December 31,
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents $ 511,939 $ 803,443
Short-term investment 497,167 -
Accounts receivable, net of
allowance for doubtful accounts
of $41,428 and $20,756 at
December 31, 1996 and 1995,
respectively 817,331 707,184
Receivable from sale of business - 55,096
Other current assets 26,972 45,063
---------- ---------
Total current assets 1,853,409 1,610,786
Property and equipment, net 104,357 200,836
Purchased software, net 87,273 17,557
Intangible assets, net - 6,250
Receivable from affiliate 179,852 145,673
Other assets 149,788 62,682
---------- ----------
$2,374,679 $2,043,784
========== ==========
Liabilities, Redeemable Preferred
Stock and Stockholders' Equity
Current liabilities:
Current portion of capital lease
obligations $ - $ 9,884
Accrued professional fees 144,209 81,365
Accrued payroll, commissions,
and related taxes 144,901 202,414
Deferred revenue 348,022 341,937
Accrued loss on sale of business - 180,000
Accounts payable and other
accrued expenses 449,951 411,056
---------- ----------
Total current liabilities 1,087,083 1,226,656
---------- ----------
Redeemable preferred stock and
stockholders' equity:
Series A redeemable convertible
preferred stock, 8% $.10 par
value; 1,000,000 shares
authorized, issued and out-
standing at December 31, 1996
and 1995 1,503,277 1,417,946
Series B redeemable convertible
preferred stock, 10% $.10 par
value; 2,558,139 shares
authorized, issued and out-
standing at December 31, 1996
and 1995 3,698,586 3,416,232
Series C redeemable convertible
preferred stock, 8% $.10 par
value; 2,620,690 shares
authorized, 2,437,933 shares
issued and outstanding at
December 31, 1996 and 1995 4,120,372 3,821,742
Series D redeemable convertible
preferred stock 8% $. 10 par
value; 1,034,500 shares
authorized, 947,692 shares issued
and outstanding at December 31,
1996 1,392,475
Common stock, $.01 par value;
17,500,000 and 14,500,000
authorized at December 31, 1996
and 1995, respectively; 2,210,762
and 2,106,465 shares issued and
outstanding at December 31, 1996
and 1995, respectively 22,108 21,917
Additional paid-in capital 301,061 298,928
Treasury stock (193,320 shares) (57,996) -
Accumulated deficit (9,692,287) (8,159,637)
---------- ----------
1,287,596 817,128
---------- ----------
Commitments and contingencies
(Notes 7, 10 and 11) $2,374,679 $2,043,784
========== ==========
The accompanying notes are an integral part of these financial
statements.
Momentum Software Corporation (DE)
Consolidated Statement of Operations
- -----------------------------------------------------------------
Year ended
December 31,
1996 1995
---- ----
Revenue
License fees $2,083,869 $2,704,199
Consulting 60,854 245,436
Maintenance and support 654,872 380,104
--------- --------
Total revenue 2,799,595 3,329,739
--------- ---------
Costs and Expenses
General and administrative 855,484 1,615,317
Sales and marketing 1,400,503 1,293,177
Research and development 1,392,421 1,962,315
--------- ---------
Total costs and expenses 3,648,408 4,870,809
--------- ---------
Loss from operations (848,813) (1,541,070)
Interest income 39,759 81,897
Other expense (38,806) (66,133)
---------- ----------
Net loss from continuing operations (847,860) (1,525,306)
Discontinued operations (Note 4)
Loss from operations of Visual
Flow, Inc. - (1,125,230)
Loss on disposal of Visual Flow
Inc., including provision for
losses during phase out period,
$180,000 and estimated loss on
sale of assets $118,966. - (298,966)
---------- ----------
Net loss $(847,860)$(2,949,502)
========== ==========
The accompanying notes are an integral part of these financial
statements.
Momentum Software Corporation (DE)
Statement of Changes in Redeemable Preferred Stock and
Stockholders' Equity (Deficit)
- -----------------------------------------------------------------
December 31,
1996 1995
---- ----
Preferred Stock
Balance at beginning of year $ 1,417,946 $1,332,644
Accretion of stock issuance costs
and accrued dividends 85,331 85,302
------------ -----------
Series A Convertible ending balance 1,503,277 1,417,946
------------ -----------
Balance at beginning of year 3,416,232 3,133,898
Accretion of stock issuance costs
and accrued dividends 282,354 282,334
------------ -----------
Series B Convertible ending balance 3,698,586 3,416,232
------------ -----------
Balance at beginning of year 3,821,742 3,523,185
Accretion of stock issuance costs
and accrued dividends 298,630 298,557
------------ -----------
Series C Convertible ending balance 4,120,372 3,821,742
------------ -----------
Issuance of Series D stock 1,374,146 -
Accrued dividends 18,329 -
------------ -----------
Series D Convertible ending balance 1,392,475 -
------------ -----------
Common Stock
Balance at beginning of year 21,917 20,665
Common shares issued on exercise
of options 191 400
Shares issued in connection with
acquisition of Highland Systems Corp.
(Note 4) - 752
Common stock issued for services rendered - 100
------------ -----------
Balance at end of year 22,108 21,917
Treasury Stock
Shares received on sale of business (57,996) -
------------ -----------
Balance at end of year (57,996) -
------------ -----------
Additional Paid-In Capital
Balance at beginning of year 298,928 258,878
Common shares issued on exercise of
options 2,133 3,850
Shares issued in connection with
acquisition of Highland Systems Corp.
(Note 4) - 21,800
Common stock issued for services
rendered - 14,400
------------ -----------
Balance at end of year 301,061 298,928
------------ -----------
Accumulated Deficit
Balance at beginning of year (8,159,637) (4,543,974)
Accretion of preferred stock to
redemption value and accrued
dividends (684,636) (666,193)
Foreign currency translation (154) 32
Net loss (847,860) (2,949,502)
------------ -----------
Balance at end of year (9,692,287) (8,159,637)
------------ -----------
Total Redeemable Preferred Stock
and Stockholders' Equity $1,287,596 $ 817,128
============ ===========
The accompanying notes are an integral part of these financial
statements.
Momentum Software Corporation (DE)
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
- -----------------------------------------------------------------
Year ended
December 31,
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(847,860) $(2,949,502)
Adjustments to reconcile net loss
to net cash used for operating
Loss on sale of business (180,000) 180,000
Depreciation and amortization 142,345 530,479
Compensation expense associated
with payment of contingent
consideration - 30,066
Expense associated with stock
issuance for services rendered - 14,500
Changes in assets and liabilities,
net of effects of business
acquisition:
Accounts receivable (110,147) 948,407
Other Current Assets 18,091 201,036
Receivable from affiliate (34,179) (27,606)
Other assets (87,106) (35,590)
Accrued professional fees 62,844 (85,237)
Accrued payroll, commissions,
and related taxes (57,513) (73,022)
Deferred revenue 6,085 4,468
Accounts payable and
other accrued expenses 34,851 91,617
----------- -----------
Net cash used for
operating activities (1,052,589) (1,170,384)
----------- -----------
Cash flows from investing activities:
Treasury Stock receivable - (55,096)
Sale of short-term investment - 1,779,183
Purchase of short-term investment (497,167) -
Capital expenditures (136,306) (188,089)
Proceeds from sale of fixed assets 27,726 -
Capitalized software development costs - 34,000
----------- -----------
Net cash (used for)/
provided by investing
activities (605,747) 1,569,998
----------- -----------
Cash flows from financing activities:
Capital lease payments (9,884) (16,749)
Proceeds from issuance of common stock 2,325 4,250
Proceeds from issuance of preferred
stock 1,374,146 -
Payments on notes payable to third
party - (5,386)
----------- -----------
Net cash used for/
provided by
financing
activities 1,366,587 (17,885)
----------- -----------
Effect of exchange rate changes to cash 245 32
----------- -----------
Net change in cash and cash equivalents (291,504) 381,761
Cash and cash equivalents at beginning
of year 803,443 421,682
----------- -----------
Cash and cash equivalents at end
of year $ 511,939 $ 803,443
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest $ - $ -
Supplemental schedule of noncash
investing and financing activities:
Momentum shares received on sale
of business $ 57,996 $ -
The accompanying notes are an integral part of these financial
statements.
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
1. Summary of Operations
The Company
Momentum Software Corporation (the "Company") was
incorporated on March 27, 1990 in the state of Delaware.
The Company devotes its efforts to designing, engineering,
enhancing, and marketing software products that facilitate
the development of portable and distributed applications in
heterogeneous computer environments.
2. Loss on U.K. Operations
The company's net loss for the years ended December 31, 1996
and 1995 include losses for Momentum Software's U.K.
subsidiary. This subsidiary was set up in Europe to expand
sales into a new market. Momentum U.K. losses for 1996 and
1995 were approximately $61,000 and $214,000, respectively.
The company is in the process of closing down operations in
the U.K. and expects minimal losses in 1997.
3. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts
of Momentum Software Corporation and its U.K. subsidiary.
All intercompany transactions have been eliminated.
Revenue Recognition
Revenue from licensing of the Company's software products is
recognized upon delivery to its customers. Revenue
associated with performance under contracts to provide
software or other related products requiring significant
production, modification, or customization is recognized
utilizing the percentage-of-completion method. Revenue from
training and other service agreements is recognized as the
related services are provided. Postcontract customer
support ("PCS") revenue bundled with initial licensing
agreements and extending one year or less is recognized
together with the initial licensing fee upon delivery of the
software. The costs of providing PCS bundled with initial
licensing agreements extending one year or less are not
significant. PCS revenue bundled with initial licensing
agreements and extending beyond one year, as well as revenue
from separately priced PCS arrangements, is recognized
ratably over the term of the arrangement.
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Expenditures for maintenance
and repairs which do not extend the useful life of the asset
are charged to operations when incurred. Depreciation of
property and equipment is provided using the straight-line
method over the estimated useful lives of the assets.
Effective January 1, 1995, the company revised its estimate
of the useful lives of its computer equipment, software
licenses, and furniture and fixtures. Previously all fixed
assets were depreciated over five years. All assets'
depreciable lives were changed to three years to better
reflect the estimated periods during which the assets will
remain in service. The effect of this change was to
increase 1995 depreciation expense and net loss by
approximately $82,000.
Preferred Stock and Cumulative Dividends
The carrying amount of the redeemable preferred stock issued
prior to 1996 has been determined by reducing the proceeds
from issuance by the related stock issue costs, and
increasing the value for cumulative dividends (which are in
arrears) and accretion of the stock issuance costs. The
carrying amount of the redeemable preferred stock issued in
1996 has been determined by increasing the proceeds from
issuance by the value for cumulative dividends (which are in
arrears). Issuance costs related to the 1996 preferred
stock have been expensed.
Dividends and accretion of the discount are being added to
the preferred stock values using the interest method by
charges to the accumulated deficit. At December 31, 1996
and 1995, the Company has accrued $2,160,862 and $1,504,740
in the aggregate, respectively, for dividends payable to its
preferred stockholders and $112,783 and $84,269 in the
aggregate, respectively, for accretion of stock issuance
costs.
Income Taxes
The Company provides for income taxes using the liability
method in accordance with Statement of Financial Accounting
Standards No. 109. Deferred tax assets and liabilities are
recognized based on the temporary differences between
financial statement and income tax basis of assets and
liabilities using presently enacted tax rates.
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
Cash Equivalents and Short-Term Investments
For purposes of reporting cash flows, the Company considers
its short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
The Company invests its excess cash in short-term U.S.
Government Securities. Accordingly, the investments are
subject to minimal credit and market risk.
As of January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Under
this standard, the Company is required to classify its cash
equivalents and investments into one or more of the
following categories: held-to-maturity, trading, or
available for sale.
Use of 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 results
could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments,
including cash, accounts receivable and unbilled
receivables, accounts payable and other accrued liabilities,
the carrying amounts approximate their fair value due to the
short-term nature of the assets and liabilities.
4. Acquisition and Discontinued Operations
In accordance with an Asset Acquisition Agreement dated
September 27, 1994, the Company acquired certain assets and
liabilities of Highland Systems Corporation, doing business
as Industrial Software Machines Corporation ("ISM"), in
exchange for $152,000 at closing, 325,000 shares of the
Company's common stock and additional shares of common
stock, up to a maximum of 550,000 shares, contingent on the
Company and the new ISM division achieving certain revenue
levels as specified in the agreement. Measurement dates
with respect to the earning of additional shares of common
stock were December 31, 1994, June 30, 1995, December 31,
1995 and March 27, 1996. Through December 31, 1995 ISM
shareholders earned an additional 75,172 shares.
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
The Company accounted for the ISM transaction under the
purchase method of accounting. Accordingly, the purchase
price was allocated based on the estimated fair value of
assets purchased and liabilities assumed upon acquisition.
Assets acquired included certain purchased software
technology valued at $244,457 which was included in
intangible assets at December 31, 1994 and has been fully
amortized at December 31, 1995.
As a result of the initial acquisition, assets purchased and
liabilities assumed were as follows:
Gross assets acquired $ 315,812
Consideration paid, including
transaction costs of $40,000 (289,500)
-----------
Liabilities assumed $ 26,312
===========
Effective December 11, 1995, the Company transferred ISM net
assets into a separate, wholly-owned subsidiary and renamed
the subsidiary Visual Flow. On June 19, 1996, the Company
sold Visual Flow assets and liabilities to Envision IT
Software and certain Visual Flow management in consideration
for Momentum shares owned by certain management of Visual
Flow. The sale resulted in a net loss of approximately
$119,000. Although the sale did not occur until 1996,
Visual Flow has been reported as a discontinued operation in
the 1995 results of operations.
Summary results of Visual Flow's operations were:
Year ended
December 31,
1995
----
Net sales $ 82,205
============
Net loss $ 1,125,230
============
5. Property and Equipment and Purchased Software
Property and equipment consist of the following and
purchased software:
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
1996 1995
Furniture and fixtures $ 30,637 $ 51,663
Computer hardware 438,237 407,110
-------- --------
468,874 458,773
======== ========
Less: Accumulated depreciation 364,517 257,937
-------- --------
$ 104,357 $ 200,836
======== ========
From time to time the company purchases software to support
its ongoing business. This purchased software has been
capitalized and depreciated over a three-year period.
1996 1995
Computer software $ 135,614 $ 39,220
Less: Accumulated depreciation 48,341 21,663
-------- -------
$ 87,273 $ 17,557
======== =======
Total depreciation expense for Property, Plant and Equipment
and Purchased Software was approximately $135,000 and
$141,000 for 1996 and 1995, respectively
6. Related Party Transactions
875,000 shares (9.13% voting interest) of the outstanding
common stock of the Company is held by a company.
Approximately 72% of the outstanding common stock of this
company is held by three individuals. Two of these
individuals are also officers of Momentum.
7. Redeemable Preferred Stock and Stockholders' Equity
On June 11, 1990, the Company issued 1,000,000 shares of
Series A redeemable preferred stock ("Series A Preferred")
for $1,000,000 under the Series A Preferred Stock Purchase
Agreement. On June 14, 1993, the Company issued 2,558,139
shares of Series B redeemable preferred stock ("Series B
Preferred") for $2,750,000 under the Series B Preferred
Stock Purchase Agreement. On September 20, 1994, the
Company issued 2,437,933 shares of Series C redeemable
preferred stock ("Series C Preferred") for $3,535,003 under
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
the Series C Preferred Stock Purchase Agreement.
During October 1996, the Company offered to the holders of
Series A, Series B, and Series C Preferred stock (the
"Offering") the right to acquire shares of convertible
series D redeemable preferred stock ("Series D Preferred")
and warrants to purchase the Company's common stock on the
basis of 1.75 warrants for each share of Series D Preferred
purchased.
On October 30, 1996, the Company issued 947,687 shares of
Series D Preferred stock and warrants to purchase up to
1,658,461 shares of the Company at an exercise price of $.30
a share for $1,374,146. Since one of the Series B investors
elected not to purchase their pro rata share of the
Offering, 424,364 shares of their Series B Preferred and
78,654 shares of Series C Preferred were converted into a
like number of Series B-1 and Series C-1 pursuant to the
terms of the Certificate of Amendment of the Restated and
Amended Certificate of Incorporation of the Company dated
September 20, 1994. Series B-1 Preferred and Series C-1
Preferred differ from Series B Preferred and Series C
Preferred in that the holders in Series B-1 Preferred and
Series C-1 Preferred are not entitled to dilution protection
upon conversion.
Under the terms of the Series C Preferred Stock Agreement,
and Certificate of Amendment of the Restated and Amended
Certificate of Incorporation of the Company dated September
20, 1994, the preferences, rights, and restrictions of the
Series A and B Preferred were amended to conform to those of
the Series C Preferred. The terms of the Series D Preferred
as reflected in the Series D Preferred and Warrant
subscription agreements and the Certificate of Amendment of
the Restated and Amended Certificate of Incorporation of the
Company dated October 30, 1996 (the "Agreements") were
substantially similar to the term of the Series C Preferred
Stock. The Agreement contains covenants requiring the
Company in specific instances to obtain approval of 60% of
the voting power of the preferred stockholders. Included in
these covenants are restrictions on the authorization and
issuance of additional classes or shares of capital stock,
except pursuant to stock option or other agreements existing
on September 30, 1996, the reclassification or
recapitalization of any common stock, the declaration or
distribution of cash dividends to holders of the Company's
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
common stock, the declaration or distribution of stock
dividends or any other subdivision of shares of common
stock, except as approved by the preferred stockholders'
representatives serving on the Board of Directors, the
disposal of the Company's assets (other than in the ordinary
course of business), any corporate merger or acquisition,
any increase in the authorized number of directors
constituting the Board of Directors of the Company. The
Agreement also prohibits the Company from repurchasing or
redeeming shares of any class of capital stock other than
pursuant to the Stockholders' agreement incorporated
therein.
The agreement specifies that the holders of the preferred
stock will earn an annual dividend as follows: $.08 per
share for Series A Preferred, $.1075 per share of Series B
and B-1 Preferred, $.1160 per share for Series C, C-1 and D
Preferred. Such dividends are cumulative and accrue without
formal declaration by the Company. These dividends are
payable at the earlier of the redemption of the Series A,
Series B, Series B-1, Series C, Series C-1 and Series D
Preferred, the liquidation sale or merger of the Company, or
the date of a public offering of the Company's common stock.
Upon the occurrence of any of the aforementioned events, the
Series B, Series B-1, Series C, Series C-1, and Series D
stockholders may elect to receive up to three years of
accrued dividends in the form of additional shares of common
stock at the respective conversion prices then in effect,
provided however with respect to the Series D Preferred the
conversion price is $.72 per share. Subject to the
foregoing, in the event of a public offering of the
Company's common stock, dividends on the Series A, Series B,
Series B-1, Series C, Series C-1 and Series D Preferred may
be paid, at the Company's election, in additional shares of
common stock at the initial public offering price. In the
event the cumulative cash dividends exceed the amount the
Company has legally available for distribution, the amount
of the cash distribution will be paid to the preferred
stockholders on a pro rata basis based upon the amount of
accrued dividends owing to each preferred stockholder.
On August 30, 2001 and each anniversary thereafter, the
Company shall redeem, subject to receipt of the written
consent of 60% of the outstanding shares of the Preferred
shareholders, all shares of Series A, Series B, Series B-1,
Series C, Series C-1 and Series D Preferred tendered in
three equal annual installments. The redemption price of
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
Series A, Series B, Series B-1, Series C, Series C-1 and
Series D Preferred is $1.00, $1.075, $1.075, $1.45, $1.45
and $1.45 per share, respectively (adjusted for stock
splits, stock dividends, recapitalization, reclassification
and other events), plus an amount equal to all accrued but
unpaid dividends thereon.
A holder of Preferred Stock may convert their shares in
whole or in part at any time into shares of the Company's
common stock. The conversion price is determine by dividing
the initial conversion price of the respective Series by the
respective conversion prices at the date of determination.
After taking into account the dilution resulting from the
issuance of the Series D Preferred and the Series D
Warrants, the conversion price for the Series A, Series B,
Series B-1, Series C, Series C-1 Preferred immediately after
such issuance was $.9307, $.9873, $1.075, $1.2702 and $1.45,
respectively. Both the initial and conversion price for
Series D is $1.45 per share.
Preferred shares are subject to automatic conversion to
common stock upon the closing of a public offering of the
Company's common stock which results in net proceeds to the
Company of at least $10,000,000 at a per share price of at
least $2.90, subject to certain adjustments.
The Company's Series A, Series B, Series B-1, Series C,
Series C-1 and Series D Preferred carry liquidation rights
equal to the greater of $1.00, $1.075, $1.075, $1.45, $1.45
and $1.45 per share, respectively, plus all accrued but
unpaid dividends or such amount as would have been payable
to each holder of preferred stock had such preferred stock
been converted to common stock immediately prior to any
liquidation. After such distribution, any remaining assets
of the Company are distributed to the holders of Series B,
Series B-1, Series C, Series C-1, and Series D, Preferred
stock in an amount necessary to provide a 15% simple return
to the Series B, Series B-1, Series C, Series C-1 and Series
D Preferred stockholders, with the balance to common
stockholders on a pro rata basis.
The Agreement provides voting rights to the preferred
stockholders equal to those of the common stockholders.
Each share of common and preferred stock bears an equal
voting right.
Warrants
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
The Company, in conjunction with the issuance of the Series
D Preferred, issued Series D Warrants to purchase up to
1,658,461 shares of common stock at an exercise price of
$.30 per share to the Series D Preferred stockholders. The
Series D Warrants expire on October 30, 2006. The Company,
in conjunction with the issuance of the Series B Preferred,
issued Series B Warrants to purchase up to 767,442 shares of
common stock at an exercise price of $1.075 per share to the
Series B Preferred stockholders. The Series B Warrants
expire on June 14, 2003.
Under the terms of the warrant agreements, the exercise
price and the number of shares purchasable with each warrant
are adjusted whenever common stock or securities exercisable
or convertible into common stock are issued at a price, or
have an exercise or conversion price, less than the current
market value, provided however the respective warrant
holders participate in the subsequent Offering. The Series
D Offering resulted in triggering an adjustment of the
number of B warrants outstanding and the exercise price.
All but one of the Series B warrant holders participated in
the Series D Offering. As such, subsequent to the Series D
offering the Series B warrant holders could purchase up to
830,645 shares of the Company's common stock at $.9932 and
the partially participating Series B warrant holder could
retain 151,761 Series B-1 warrants at an exercise price of
$1.075 per share.
The Company has reserved 2,536,465 shares of its common
stock to be issued to employees, consultants, directors, and
officers pursuant to its Employee Stock Option Plan (Note
8). In addition, the Company has reserved 10,030,959 shares
of its common stock for issuance upon conversion of Series
A, Series B, Series C, and Series D redeemable preferred
stock.
8. Stock Option Plan
During 1993, the Board of Directors approved the 1993
Employee Stock Option Plan (the "Plan") which allows the
Company to grant incentive stock options and nonqualified
stock options to employees, directors, independent
contractors and consultants. All options expire no later
than ten years from their date of grant. The Plan is
administered by the Board of Directors. Incentive stock
options granted under the Plan to date have provided for
vesting periods ranging from less than one year to seven
years.
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
Activity under the Plan is summarized as follows:
Shares Option Price
Outstanding at December 31, 1994 2,293,015 $.002-$.30
Granted 179,500 $.30
Exercised (40,000) $.10-$.20
Canceled (397,277) $.20-$.30
----------
Outstanding at December 31, 1995 2,035,238 $.01-$.30
Granted 550,001 $.30
Exercised (19,125) $.10-$.20
Canceled (1,038,987) $.15-$.30
----------
Outstanding at December 31, 1996 1,527,127 $.01-$.30
==========
Exercisable at December 31, 1996 901,380
==========
Available for future grant at
December 31, 1996 950,213
===========
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for the Plan, accordingly, no
compensation expense has been recognized. Had compensation
cost for the Plan been determined based upon the fair value
at the grant date of the awards, consistent with the
methodology prescribed under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", the Company's net loss would have
been increased by approximately $71,100 and $14,000 for 1996
and 1995, respectively. The fair value of the options
granted during 1996 and 1995 represents the minimum value of
the awards, as defined in SFAS 123, using the following
assumptions: zero volatility, risk-free interest rate of 6%
and an expected life of ten years.
9. Income Taxes
Net deferred tax assets are comprised of the following:
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
December 31,
1996 1995
Net operating loss
carryforwards $ 2,887,000 $ 2,392,000
R&D credit carryforwards 99,000 99,000
Other 59,000 56,000
---------- -----------
Net deferred tax deferred 3,045,000 2,547,000
Net deferred tax assets
valuation allowance 3,045,000 (2,547,000)
---------- -----------
$ - $ -
========== ===========
The Company has provided a full valuation allowance for the
net deferred tax assets since the realization of the future
benefits cannot be sufficiently assured as of December 31,
1996 and 1995.
As of December 31, 1996, the Company has net operating loss
carryforwards and research and development credits which may
be used to offset future federal and state taxable income
and tax liabilities as follows:
Research
Net and
Operating Development
Year of Expiration Loss Credit
2005 $ 392,000 $ 13,000
2006 704,000 29,000
2007 170,000 29,000
2008 1,370,000 8,000
2009 870,000 11,000
2010 2,474,000 9,000
2011 1,237,000 -
----------- ----------
$ 7,217,000 $ 99,000
=========== ==========
Ownership changes, as defined in Section 382 of the Internal
Revenue Code, resulting from the Company's issuance of
common stock and convertible preferred stock may limit the
amount of net operating loss and tax credit carryforwards
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
that can be utilized annually to offset future taxable
income. The amount of the annual limitation is determined
based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in
ownership could further affect the limitation in future
years.
10. Commitment and Contingencies
Operating Leases
The Company leases operating facilities and certain of its
computer hardware and office equipment under noncancelable
operating leases. The Company has also entered into
subleases for certain of the operating facilities which they
no longer occupy. Future minimum payments under
noncancelable lease commitments, net of sublease income, are
as follows:
1997 (sublease income - $128,285) $ 203,300
1998 (sublease income - $49,063) 190,119
1999 (sublease income - $20,946) 187,105
2000 176,118
2001 176,118
------------
$ 932,760
============
Rent expense was $195,949 and $201,450 for 1996 and 1995,
respectively.
Collateral for Executive Loan
The Company has a certificate of deposit to collateralize a
loan for an executive of the company. The certificate of
deposit expired on March 24, 1997 and paid monthly interest
at 4%.
11. Subsequent Events
The Company has suffered recurring losses from operations.
In order to fund operations, the Company must rely on the
last round of financing completed on October 30, 1996,
improvement to operations and growing sales.
Although management expects these improvements to be
sufficient, the Board of Directors have decided to entertain
offers from third parties concerning the acquisition of the
Momentum Software Corporation (DE)
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------
company. This action will insure the Company's viability
with global prospects and provide the necessary resources to
grow the business. The Company has hired an investment
banker to evaluate and help finalize such offers.
Exhibit 99.2
Report of Independent Accountants
March 17, 1998
To the Board of Directors and Stockholders of
Momentum Software Corporation (DE)
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of changes in
stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Momentum Software
Corporation (DE) and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted
accounting principles. The financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As explained in Note 12, on February 27, 1998 Momentum Software
Corporation (DE) signed an agreement and plan of reorganization
(the "Merger Agreement") with Level 8 Systems, Inc. The
stockholders are expected to vote on the merger agreement on
March 23, 1998.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Momentum Software Corporation (DE)
Consolidated Balance Sheet
- ----------------------------------------------------------------
December 31,
Assets 1997 1996
Current assets:
Cash and cash equivalents $1,169,665 $ 511,939
Short-term investments -- 497,167
Accounts receivable, net of
allowance for doubtful
accounts of $119,289 and $41,428
in 1997 and 1996, respectively 1,697,915 817,331
Other current assets 16,967 26,972
---------- ----------
Total current assets 2,884,547 1,853,409
Property and equipment, net 182,337 104,357
Purchased software, net 14,411 87,273
Receivable from affiliate -- 179,852
Other assets 39,153 149,788
---------- ----------
Total assets $3,120,448 $2,374,679
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Current portion of notes payable $ 37,256 $ --
Accrued professional fees 130,000 144,209
Accrued payroll, commissions,
and related taxes 537,185 144,901
Deferred revenue 554,795 348,022
Accounts payable and other accrued
expenses 480,190 449,951
---------- ----------
Total current liabilities 1,739,426 1,087,083
Notes payable, less current portion 84,571 --
---------- ----------
Total liabilities 1,823,997 1,087,083
---------- ----------
Redeemable preferred stock
Series A redeemable convertible
preferred stock, 8% $.10 par value;
1,000,000 shares authorized,
issued and outstanding
at December 31, 1997 and 1996 1,588,633 1,503,277
Series B redeemable convertible
preferred stock, 10% $.10 par value;
2,558,139 shares authorized,
issued and outstanding at
December 31, 1997 and 1996 3,980,958 3,698,586
Series C redeemable convertible
preferred stock, 8% $.10 par value;
2,620,690 shares authorized and
2,516,587 issued and outstanding
at December 31, 1997 and 1996 4,419,061 4,120,372
Series D redeemable convertible
preferred stock, 8% $.10 par value;
1,034,500 shares authorized and
947,692 issued and outstanding
at December 31, 1997 and 1996 1,502,409 1,392,475
---------- ----------
Total redeemable preferred stock 11,491,061 10,714,710
---------- ----------
Stockholders' equity
Common stock, $.01 par value;
17,500,000 shares authorized and
2,225,386 and 2,210,762 shares
issued and outstanding at
December 31, 1997 and 1996,
respectively 22,254 22,108
Additional paid-in capital 303,427 301,061
Treasury stock (193,320 shares) (57,996) (57,996)
Accumulated deficit (10,462,295) (9,692,287)
---------- ----------
Stockholders' deficit (10,194,610) (9,427,114)
---------- ----------
Commitments and contingencies
(Notes 8, 11 and 12) $3,120,448 $2,374,679
========== ==========
The accompanying notes are an integral part of these financial
statements.
Momentum Software Corporation (DE)
Consolidated Statement of Operations
- ----------------------------------------------------------------
For the year ended
December 31,
1997 1996
Revenue
License fees $3,640,383 $2,083,869
Consulting 345,172 60,854
Maintenance and support 1,096,528 654,872
---------- ----------
Total revenue 5,082,083 2,799,595
---------- ----------
Costs and expenses
General and administrative 1,191,848 855,484
Sales and marketing 1,947,847 1,400,503
Research and development 1,543,782 1,392,421
---------- ----------
Total costs and expenses 4,683,477 3,648,408
---------- ----------
Income/(loss) from operations 398,606 (848,813)
Interest income 17,072 39,759
Other expenses 407,835 38,806
---------- ----------
Net income/(loss) $ 7,843 $(847,860)
========== ==========
The accompanying notes are an integral part of these financial
statements.<PAGE>
Momentum Software Corporation (DE)
Statement of Changes in
Stockholders' Deficit
- ----------------------------------------------------------------
December 31,
1997 1996
Common stock
Balance at beginning of year $ 22,108 $21,917
Common shares issued on
exercise options 146 191
--------- ----------
Balance at end of year 22,254 22,108
--------- ----------
Treasury stock
Balance at beginning of year (57,996) --
Shares received on sale of business -- (57,996)
---------- ----------
Balance at end of year (57,996) (57,996)
---------- ----------
Additional paid-in capital
Balance at beginning of year 301,061 298,928
Common shares issued on exercise
of options 2,366 2,133
---------- ---------
Balance at end of year 303,427 301,061
---------- ---------
Accumulated deficit
Balance at beginning of year (9,692,287) (8,159,637)
Accretion of preferred stock to
redemption value and
accrued dividends (776,351) (684,636)
Foreign currency translation (1,500) (154)
Net income/(loss) 7,843 (847,860)
----------- ---------
Balance at end of year (10,462,295) (9,692,287)
----------- ----------
Total stockholders' deficit $(10,194,610) $(9,427,114)
=========== ==========
The accompanying notes are an integral part of these financial
statements.<PAGE>
Momentum Software Corporation (DE)
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
- ----------------------------------------------------------------
Year ended,
December 31,
1997 1996
Cash flows from operating activities:
Net loss $ 7,843 $(847,860)
Adjustments to reconcile net loss
to net cash used for operating
Loss on sale of business -- (180,000)
Depreciation and amortization 134,628 142,345
Write off of receivable from
Momentum NY 216,722 --
Changes in assets and liabilities
Accounts receivable (880,584) (110,147)
Other current assets 10,006 18,091
Receivables from affiliate -- (34,179)
Other assets 110,635 (87,106)
Accrued professional fees (14,210) 62,844
Accrued payroll, commissions,
and related taxes 392,283 (57,513)
Deferred revenue 206,773 6,085
Accounts payable and
other accrued expenses 37,325 34,851
-------- ---------
Net cash provided by/(used for)
operating activities 221,421 (1,052,589)
-------- ---------
Cash flows from investing activities:
Sale of short-term investment 500,000 --
Purchase of short-term investment -- (497,167)
Capital expenditures (186,413) (136,306)
Proceeds from sale of fixed assets -- 27,726
-------- ---------
Net cash provided by/(used for)
provided by investing activities 313,587 (605,747)
-------- ---------
Cash flows from financing activities:
Proceeds from notes 141,882 --
Note payments (20,054) (9,884)
Proceeds from issuance of
common stock 2,512 2,325
Proceeds from issuance of
preferred stock -- 1,374,146
-------- ---------
Net cash provided by financing
activities 124,340 1,366,587
-------- ---------
Effect of exchange rate changes
to cash (1,622) 245
-------- ---------
Net change in cash and cash
equivalents 657,726 (291,504)
Cash and cash equivalents
at beginning of year 511,939 803,443
-------- ---------
Cash and cash equivalents at
end of year $1,169,665 $511,939
========== =========
Supplemental disclosure of cash
flow information:
Cash paid during the year
for interest $ 7,060 $ --
========== =========
Supplemental schedule of noncash
investing and financing activities:
Momentum shares received on
sale of business $ -- $ 57,996
========== =========
The accompanying notes are an integral part of these financial
statements.<PAGE>
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
1. Summary of Operations
The Company
Momentum Software Corporation (the "Company") was
incorporated on March 27, 1990 in the state of Delaware.
The Company devotes its efforts to designing, engineering,
enhancing, and marketing software products that facilitate
the development of portable and distributed applications in
heterogeneous computer environments.
2. Loss on U.K. Operations
The company's results of operations for the years ended
December 31, 1997 and 1996 include losses for Momentum
Software's U.K. subsidiary. This subsidiary was set up in
Europe to expand sales into a new market. Momentum U.K.
losses for 1997 and 1996 were approximately $14,000 and
$61,000, respectively. The company is in the process of
closing down operations in the U.K. and expects minimal
losses in 1998.
3. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts
of Momentum Software Corporation and its U.K. subsidiary.
All intercompany transactions have been eliminated.
Revenue Recognition
Revenue from licensing of the Company's software products is
recognized upon delivery to its customers. Revenue from
training and other service agreements is recognized as the
related services are provided. Postcontract customer
support ("PCS") revenue bundled with initial licensing
agreements and extending one year or less is recognized
together with the initial licensing fee upon delivery of the
software. The costs of providing PCS bundled with initial
licensing agreements extending one year or less are not
significant. PCS revenue bundled with initial licensing
agreements and extending beyond one year, as well as revenue
from separately priced PCS arrangements, is recognized
ratably over the term of the arrangement.
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs
which do not extend the useful life of the asset are charged
to operations when incurred. Depreciation of property and
equipment is provided using the straight-line method over
the estimated useful lives of the assets which is estimated
to be three years.
Preferred Stock and Cumulative Dividends
The carrying amount of the redeemable preferred stock issued
prior to 1996 has been determined by reducing the proceeds
from issuance by the related stock issue costs, and
increasing the value for cumulative dividends (which are in
arrears) and accretion of the stock issuance costs. The
carrying amount of the redeemable preferred stock issued in
1996 has been determined by increasing the proceeds from
issuance by the value for cumulative dividends (which are in
arrears). Issuance costs related to the 1996 preferred
stock have been expensed.
Dividends and accretion of the discount are being added to
the preferred stock values using the interest method by
charges to the accumulated deficit. At December 31, 1997
and 1996, the Company has accrued $3,049,996 and $2,273,645
in the aggregate, respectively, for dividends payable to its
preferred stockholders and accretion of stock issuance
costs.
Income Taxes
The Company provides for income taxes using the liability
method. Deferred tax assets and liabilities are recognized
based on the temporary differences between financial
statement and income tax basis of assets and liabilities
using presently enacted tax rates. A valuation allowance is
established against deferred tax assets that more likely
than not (a likelihood of slightly more than 50 percent)
will not be realized.
Cash Equivalents and Short-Term Investments
For purposes of reporting cash flows, the Company considers
its short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
The Company invests its excess cash in short-term U.S.
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
Government Securities. Accordingly, the investments are
subject to minimal credit and market risk.
Use of 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 results
could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments,
including cash, accounts receivable and accounts payable and
other accrued liabilities, the carrying amounts approximate
their fair value due to the short-term nature of the assets
and liabilities.
4. Property and Equipment and Purchased Software
Property and equipment and purchased software consist of the
following:
1997 1996
Furniture and fixtures $161,007 $ 30,637
Computer hardware 471,031 438,237
Leasehold improvements 8,474 --
---------- --------
640,512 468,874
Less - Accumulated depreciation 458,175 364,517
---------- --------
$182,337 $104,357
========== ========
From time to time the company purchases software to support
its ongoing business. This purchased software has been
capitalized and depreciated over a three-year period.
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
1997 1996
Computer software $57,490 $135,614
Less - Accumulated depreciation 43,079 48,341
--------- --------
$14,411 $87,273
========= =======
Total depreciation expense for Property, Plant and Equipment
and Purchased Software was approximately $135,000 for both
1997 and 1996.
5. Notes Payable
In June 1997, the Company established two notes payable with
Phoenix Leasing Company in the amounts of $125,412 and
$16,470, respectively. The notes require monthly principal
payments of $3,603 and $473 with an effective interest rate
of 11.44%. The notes are collateralized by office furniture
and fixtures purchased with the proceeds of the notes.
Total future payments including interest amount to $144,088.
At December 31, 1997, notes payable were as follows:
1997
Notes payable in monthly installments
of principal and interest, with various
maturity dates through March 1, 2001 $144,088
Less - Current maturities 49,296
--------
Total $ 94,792
========
Minimum future payments under these notes at December 31,
1997 are as follows:
1998 $49,296
1999 48,545
2000 45,302
2001 945
--------
144,088
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
Less - Amount representing interest 22,261
-------
$121,827
========
6. Other Expenses
Other expenses consist of the following:
1997 1996
Write off Momentum NY
receivable $216,772 $ --
Abandonment of asset 34,158 --
Bad debt expense 75,023 20,687
Other Taxes 36,450 --
Board of directors expenses 24,863 16,739
Miscellaneous 20,569 1,380
-------- -------
$407,835 $38,806
======== =======
7. Related Party Transactions
875,000 shares (9.74% voting interest) of the outstanding
common stock of the Company is held by a company.
Approximately 68% of the outstanding common stock of this
company is held by three individuals. Two of these
individuals are also officers of Momentum.
8. Redeemable Preferred Stock and Warrants
On June 11, 1990, the Company issued 1,000,000 shares of
Series A redeemable preferred stock ("Series A Preferred")
for $1,000,000 under the Series A Preferred Stock Purchase
Agreement. On June 14, 1993, the Company issued 2,558,139
shares of Series B redeemable preferred stock ("Series B
Preferred") for $2,750,000 under the Series B Preferred
Stock Purchase Agreement. On September 20, 1994, the
Company issued 2,437,933 shares of Series C redeemable
preferred stock ("Series C Preferred") for $3,535,003 under
the Series C Preferred Stock Purchase Agreement.
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
During October 1996, the Company offered to the holders of
Series A, Series B, and Series C Preferred stock (the
"Offering") the right to acquire shares of convertible
series D redeemable preferred stock ("Series D Preferred")
and warrants to purchase the Company's common stock on the
basis of 1.75 warrants for each share of Series D Preferred
purchased.
On October 30, 1996, the Company issued 947,692 shares of
Series D Preferred stock and warrants to purchase up to
1,658,472 shares of the Company at an exercise price of $.30
a share for $1,374,153. Since one of the Series B investors
elected not to purchase their pro rata share of the
Offering, 424,364 shares of their Series B Preferred and
78,654 shares of Series C Preferred were converted into a
like number of Series B-1 and Series C-1 pursuant to the
terms of the Certificate of Amendment of the Restated and
Amended Certificate of Incorporation of the Company dated
September 20, 1994. Series B-1 Preferred and Series C-1
Preferred differ from Series B Preferred and Series C
Preferred in that the holders in Series B-1 Preferred and
Series C-1 Preferred are not entitled to dilution protection
upon conversion.
Under the terms of the Series C Preferred Stock Agreement,
and Certificate of Amendment of the Restated and Amended
Certificate of Incorporation of the Company dated September
20, 1994, the preferences, rights, and restrictions of the
Series A and B Preferred were amended to conform to those of
the Series C Preferred. The terms of the Series D Preferred
as reflected in the Series D Preferred and Warrant
subscription agreements and the Certificate of Amendment of
the Restated and Amended Certificate of Incorporation of the
Company dated October 30, 1996 (the "Agreements") were
substantially similar to the term of the Series C Preferred
Stock. The Agreement contains covenants requiring the
Company in specific instances to obtain approval of 60% of
the voting power of the preferred stockholders. Included in
these covenants are restrictions on the authorization and
issuance of additional classes or shares of capital stock,
except pursuant to stock option or other agreements existing
on September 30, 1996, the reclassification or
recapitalization of any common stock, the declaration or
distribution of cash dividends to holders of the Company's
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
common stock, the declaration or distribution of stock
dividends or any other subdivision of shares of common
stock, except as approved by the preferred stockholders'
representatives serving on the Board of Directors, the
disposal of the Company's assets (other than in the ordinary
course of business), any corporate merger or acquisition,
any increase in the authorized number of directors
constituting the Board of Directors of the Company. The
Agreement also prohibits the Company from repurchasing or
redeeming shares of any class of capital stock other than
pursuant to the Stockholders' agreement incorporated
therein.
The agreement specifies that the holders of the preferred
stock will earn an annual dividend as follows: $.08 per
share for Series A Preferred, $.1075 per share of Series B
and B-1 Preferred, $.1160 per share for Series C, C-1 and D
Preferred. Such dividends are cumulative and accrue without
formal declaration by the Company. These dividends are
payable at the earlier of the redemption of the Series A,
Series B, Series B-1, Series C, Series C-1 and Series D
Preferred, the liquidation sale or merger of the Company, or
the date of a public offering of the Company's common stock.
Upon the occurrence of any of the aforementioned events, the
Series B, Series B-1, Series C, Series C-1, and Series D
stockholders may elect to receive up to three years of
accrued dividends in the form of additional shares of common
stock at the respective conversion prices then in effect,
provided, however, with respect to the Series D Preferred,
the conversion price is $.72 per share. Subject to the
foregoing, in the event of a public offering of the
Company's common stock, dividends on the Series A, Series B,
Series B-1, Series C, Series C-1 and Series D Preferred may
be paid, at the Company's election, in additional shares of
common stock at the initial public offering price. In the
event the cumulative cash dividends exceed the amount the
Company has legally available for distribution, the amount
of the cash distribution will be paid to the preferred
stockholders on a pro rata basis based upon the amount of
accrued dividends owing to each preferred stockholder.
On August 30, 2001 and each anniversary thereafter, the
Company shall redeem, subject to receipt of the written
consent of 60% of the outstanding shares of the Preferred
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
shareholders, all shares of Series A, Series B, Series B-1,
Series C, Series C-1 and Series D Preferred tendered in
three equal annual installments. The redemption price of
Series A, Series B, Series B-1, Series C, Series C-1 and
Series D Preferred is $1.00, $1.075, $1.075, $1.45, $1.45
and $1.45 per share, respectively (adjusted for stock
splits, stock dividends, recapitalization, reclassification
and other events), plus an amount equal to all accrued but
unpaid dividends thereon.
A holder of Preferred Stock may convert their shares in
whole or in part at any time into shares of the Company's
common stock. The conversion price is determine by dividing
the initial conversion price of the respective Series by the
respective conversion prices at the date of determination.
After taking into account the dilution resulting from the
issuance of the Series D Preferred and the Series D
Warrants, the conversion price for the Series A, Series B,
Series B-1, Series C, Series C-1 Preferred immediately after
such issuance was $.9307, $.9873, $1.075, $1.2702 and $1.45,
respectively. Both the initial and conversion price for
Series D is $1.45 per share.
Preferred shares are subject to automatic conversion to
common stock upon the closing of a public offering of the
Company's common stock which results in net proceeds to the
Company of at least $10,000,000 at a per share price of at
least $2.90, subject to certain adjustments.
The Company's Series A, Series B, Series B-1, Series C,
Series C-1 and Series D Preferred carry liquidation rights
equal to the greater of $1.00, $1.075, $1.075, $1.45, $1.45
and $1.45 per share, respectively, plus all accrued but
unpaid dividends or such amount as would have been payable
to each holder of preferred stock had such preferred stock
been converted to common stock immediately prior to any
liquidation. After such distribution, any remaining assets
of the Company are distributed to the holders of Series B,
Series B-1, Series C, Series C-1, and Series D, Preferred
stock in an amount necessary to provide a 15% simple return
to the Series B, Series B-1, Series C, Series C-1 and Series
D Preferred stockholders, with the balance to common
stockholders on a pro rata basis.
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
The Agreement provides voting rights to the preferred
stockholders equal to those of the common stockholders.
Each share of common and preferred stock bears an equal
voting right.
Warrants
The Company, in conjunction with the issuance of the Series
D Preferred, issued Series D Warrants to purchase up to
1,658,472 shares of common stock at an exercise price of
$.30 per share to the Series D Preferred stockholders. The
Series D Warrants expire on October 30, 2006. The Company,
in conjunction with the issuance of the Series B Preferred,
issued Series B Warrants to purchase up to 767,442 shares of
common stock at an exercise price of $1.075 per share to the
Series B Preferred stockholders. The Series B Warrants
expire on June 14, 2003.
Under the terms of the warrant agreements, the exercise
price and the number of shares purchasable with each warrant
are adjusted whenever common stock or securities exercisable
or convertible into common stock are issued at a price, or
have an exercise or conversion price, less than the current
market value, provided however the respective warrant
holders participate in the subsequent Offering. The Series
D Offering resulted in triggering an adjustment of the
number of B warrants outstanding and the exercise price.
All but one of the Series B warrant holders participated in
the Series D Offering. As such, subsequent to the Series D
offering the Series B warrant holders could purchase up to
830,645 shares of the Company's common stock at $.9932 and
the partially participating Series B warrant holder could
retain 151,761 Series B-1 warrants at an exercise price of
$1.075 per share.
9. Stock Option Plan
During 1993, the Board of Directors approved the 1993
Employee Stock Option Plan (the "Plan") which allows the
Company to grant incentive stock options and nonqualified
stock options to employees, directors, independent
contractors and consultants. All options expire no later
than ten years from their date of grant. The Plan is
administered by the Board of Directors. Incentive stock
options granted under the Plan to date have provided for
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
vesting periods ranging from less than one year to seven
years.
The Company has reserved 2,536,465 shares of its common
stock to be issued to employees, consultants, directors, and
officers pursuant to its Employee Stock Option Plan. In
addition, the Company has reserved 10,327,784 shares of its
common stock for issuance upon conversion of Series A,
Series B, Series C, and Series D redeemable preferred stock.
Activity under the Plan is summarized as follows:
Shares Option Price
Outstanding at
December 31, 1995 2,035,238 $.01-$.30
Granted 550,001 $.30
Exercised (19,125) $.10-$.20
Canceled (1,038,987) $.15-$.30
---------- ---------
Outstanding at
December 31, 1996 1,527,127 $.01-$.30
Granted 569,500 $.35
Exercised (14,625) $.10-$.20
Canceled (63,391) $.10-$.35
--------
Outstanding at
December 31, 1997 2,018,611 $.01-$.35
=========
Exercisable at
December 31, 1997 1,090,706
=========
Available for future grant
at December 31, 1997 444,104
=========
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for the Plan, accordingly, no
compensation expense has been recognized. Had compensation
cost for the Plan been determined based upon the fair value
at the grant date of the awards, consistent with the
methodology prescribed under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," the Company's net loss would have
been increased by approximately $102,900 and $71,100 for
1997 and 1996, respectively. The fair value of the options
granted during 1997 and 1996 represents the minimum value of
the awards, as defined in SFAS 123, using the following
assumptions: zero volatility, risk-free interest rate of 6%
and an expected life of ten years.
10. Income Taxes
Net deferred tax assets are comprised of the following:
December 31,
1997 1996
Net operating loss carryforwards $2,391,000 $2,887,000
R&D credit carryforwards 99,000 99,000
Other 301,000 59,000
---------- ----------
Net deferred tax asset 2,791,000 3,045,000
Net deferred tax asset
valuation allowance 2,791,000 3,045,000
---------- -----------
$ - $ -
========== ===========
The Company has provided a full valuation allowance for the
net deferred tax assets since management has made the
decision that it is more likely than not that some or all of
the deferred tax assets will not be realized as of December
31, 1997 and 1996.
As of December 31, 1997, the Company has net operating loss
carryforwards and research and development credits which may
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
be used to offset future federal and state taxable income
and tax liabilities as follows:
Net Research and
operating development
loss credit
Year of expiration
2005 $ 164,000 $ 13,000
2006 704,000 29,000
2007 170,000 29,000
2008 1,370,000 8,000
2009 831,000 11,000
2010 1,999,000 9,000
2011 740,000 -
----------- ----------
$ 5,978,000 $ 99,000
=========== ==========
Ownership changes, as defined in Section 382 of the Internal
Revenue Code, resulting from the Company's issuance of
common stock and convertible preferred stock may limit the
amount of net operating loss and tax credit carryforwards
that can be utilized annually to offset future taxable
income. The amount of the annual limitation is determined
based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in
ownership could further affect the limitation in future
years.
11. Commitments and Contingencies
The Company leases operating facilities and certain of its
computer hardware and office equipment under noncancelable
leases. The Company has also entered into subleases for
certain of the operating facilities which they no longer
occupy. Future minimum payments under noncancelable lease
commitments, net of sublease income ($49,063 in 1998 and
$20,946 in 1999), as of December 31, 1997 are as follows:
Operating
Leases
----------
1998 $ 231,077
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
1999 230,062
2000 191,907
2001 183,547
2002 26,962
---------
$ 863,555
=========
Rent expense was $175,754 and $195,949 for 1997 and 1996,
respectively.
12. Subsequent Events
On February 27, 1998 the Company signed an Agreement and
Plan of Reorganization (the "Merger Agreement") pursuant to
which the Company will Merge (the "Merger") into a
subsidiary of Level 8 Systems, Inc. A special meeting of
the stockholders of the Company has been called for Monday,
March 23, 1998 to among, other things, approve the Merger.
It is anticipated that the Merger will be consummated on or
within a few days after the necessary shareholder approval
is obtained.
Upon consummation of the Merger, the stockholders of the
Company shall receive, in exchange for all of the issued and
outstanding equity securities of the Company, a beneficial
interest in the Momentum Liquidating Trust (the "Trust"),
and the Trust shall receive, on behalf of the stockholders
of the Company, Merger consideration as detailed in the
merger agreement.
In the event the total consideration received at the
Calculation Date does not exceed the Company's Preferred
Shareholders minimum return as defined in Note 9, the
Company's common shareholders will not be entitled to any
portion of the Merger consideration.
Prior to the consummation of the Merger, the Company will
amend its Certificate of Incorporation to create a new class
of Series E Preferred Stock. This Series will be payable to
certain key personnel of the Company instrumental in
structuring and consummating the Merger and providing the
necessary transition services. The Series E shareholders
will be entitled up to an aggregate of the lesser of (i)
Momemtum Software Corporation (DE)
Notes to Consolidated Financial Statement
- ----------------------------------------------------------------
36,000 shares of Level 8 common stock and (ii) the number of
shares of Level 8 common stock equal to $600,000 divided by
the Calculation Date Value, as defined in the Merger
Agreement.
Exhibit 99.3
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated
Statements of Operations
The following unaudited pro forma condensed consolidated
statements of operations for the twelve months ended December 31,
1997 and for the three months ended March 31, 1998 give effect to
the acquisition of Momentum Software Corporation (DE)
("Momentum") by Level 8 Systems, Inc. ("Level 8") as if the
acquisition had occurred on January 1, 1997, exclusive of
nonrecurring charges for purchased research and development in
the amount of $6,500,000 and capitalized software cost in the
amount of $1,800,000. The unaudited pro forma condensed
consolidated statements of operations have been prepared for
informational purposes only and do not purport to present the
financial position or the results of operations of Level 8 had
the acquisition assumed therein occurred on the dates indicated,
nor are they necessarily indicative of the results of operations
which may be achieved in the future.
The unaudited pro forma condensed consolidated financial
statements include the historical operations of Level 8 and the
historical operations of the acquired business and should be read
in conjunction with the notes to the unaudited pro forma
condensed consolidated financial statements.
<TABLE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the twelve months ended December 31, 1997
Historical Pro Forma
------------------------- ----------------------
Momentum
Software
Level 8 Corp.
Systems, Inc. (DE) Adjustments Adjusted
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Consulting and service $13,924,256 $ 345,172 $14,269,428
Software 5,567,860 3,640,383 9,208,243
Other 733,164 1,096,528 1,829,692
----------- --------- ----------
Total revenue 20,225,280 5,082,083 25,307,363
COST OF REVENUE:
Consulting and service 6,533,409 -- 192,711(a) 6,726,120
Software 3,346,825 -- 1,299,136(a) 5,402,619
756,658(b)
Other 543,504 -- 51,935(a) 595,439
----------- --------- ------------ ----------
Total cost of
revenue 10,423,738 -- 2,300,440 12,724,178
GROSS MARGIN 9,801,542 5,082,083 (2,300,440) 12,583,185
----------- --------- ------------ ----------
OPERATING EXPENSES:
Selling, general, and
administrative 7,938,318 4,683,477 (1,543,782)(a) 11,078,013
Amortization of goodwill
and service contracts
acquired 531,210 -- 315,214(b) 846,424
----------- --------- ------------ ----------
8,469,528 4,683,477 (1,228,568) 11,924,437
Operating income
before gain
on sale of
businesses 1,332,014 398,606 (1,071,872) 658,748
Gain on sale of
businesses 60,278 -- -- 60,278
----------- --------- ------------- ----------
OPERATING INCOME 1,392,292 398,606 (1,071,872) 719,026
OTHER INCOME (EXPENSE)
Interest Income 409,792 17,072 426,864
Interest Expense (22,221) -- (22,221)
Other Expenses -- (407,835) (407,835)
----------- --------- ----------
387,571 (390,763) (3,192)
INCOME BEFORE
INCOME TAXES 1,779,863 7,843 (1,071,872) 715,834
INCOME TAX EXPENSE 690,900 -- -- 690,900
----------- --------- ------------ ----------
NET INCOME $ 1,088,963 $ 7,843 (1,071,872) $ 24,934
=========== ========= ========== ==========
Net income per common
share - Basic $ 0.16 $ --
------------ ==========
Net income per common
share - Diluted $ 0.14 $ --
------------ ==========
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENT
SHARES USED IN PER SHARE
CALCULATION (d)
- Basic 6,992,398 7,567,398
- Diluted 7,561,084 8,166,029
</TABLE>
<TABLE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Operations
For the three months ended March 31, 1998
Historical Pro Forma
------------------------- ----------------------
Momentum
Software
Level 8 Corp.
Systems, Inc. (DE) Adjustments Adjusted
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Consulting and service 2,731,396 10,506 2,741,902
Software 289,484 8,000 297,484
Other 539,886 259,555 799,441
---------- --------- ----------
Total revenue 3,560,766 278,061 3,838,827
COST OF REVENUE:
Consulting and service 1,588,271 -- 1,588,271
Software 151,615 -- 324,616(a) 665,395
189,164(b)
Other -- -- 13,291(a) 13,291
---------- --------- ----------- ----------
Total cost of revenue 1,739,886 -- 527,071 2,266,957
GROSS MARGIN 1,820,880 278,061 (527,071) 1,571,870
---------- --------- ----------- ----------
OPERATING EXPENSES:
Selling, general, and
administrative 1,507,165 1,632,186 (337,907)(a) 2,801,444
Purchased research
and development 6,510,000 -- (6,510,000)(c) --
Write off of capitalized
software costs 1,793,880 -- (1,793,880)(c) --
Amortization of goodwill 101,013 -- 78,803(b) 179,816
---------- --------- ----------- ----------
9,912,058 1,632,186 (8,562,984) 2,981,260
OPERATING LOSS (8,091,178) (1,354,125) 8,035,913 (1,409,390)
OTHER INCOME (EXPENSE)
Interest income 74,565 6,993 81,558
Interest expense (4,290) -- (4,290)
Other expenses -- (35,053) (35,053)
---------- --------- ----------
70,275 (28,060) 42,215
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES (8,020,903) (1,382,185) 8,035,913 (1,367,175)
INCOME TAX
BENEFIT 605,100 -- -- 605,100
----------- --------- ---------- ----------
NET LOSS FROM
CONTINUING OPERATIONS (7,415,803) (1,382,185) 8,035,913 (762,075)
=========== ========= ========== ==========
Net loss per common share
from Continuing
Operations - Basic $ (1.04) $ (0.10)
------------ ==========
Net loss per common share
from Continuing
Operations - Diluted $ (1.04) $ (0.10)
------------ ==========
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
USED IN PER SHARE
CALCULATION (d)
- Basic 7,085,066 7,622,272
- Diluted 7,085,066 7,622,272
</TABLE>
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Consolidated
Statements of Operations
(a) In order to have the historical condensed consolidated
statements of operations conform with the classification adopted
by Level 8, pro forma adjustments for the twelve months ended
December 31, 1997 and the three months ended March 31, 1998 have
been made to reflect a reclassification of $1,543,782 and
$337,907 respectively, of research and development costs from
selling, general, and administrative expenses to cost of revenue.
(b) To record amortization of capitalized software development
costs and the excess of the purchase price over the net book
value of the assets acquired in the acquisition of Momentum.
(c) To record the elimination of certain nonrecurring charges
which resulted directly from the acquisition of Momentum.
(d) The pro forma common shares outstanding includes the 575,000
common shares of Level 8 and warrants to purchase 200,000 common
shares of Level 8 issued to the shareholders of Momentum in
connection with the acquisition of Momentum.
