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, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File Number 0-26392
LEVEL 8 SYSTEMS, INC.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2920559
- -----------------------------------------------------------------
(State or other jurisdiction (I.R.S Employer Identification
of incorporation or Number)
organization)
One Penn Plaza, Suite 3401, 10119
New York, New York
- -----------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
(212) 244-1234
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15d of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
Indicate the number of shares outstanding in each of the issuer's
classes of common stock, as of the latest practicable date.
7,625,698 common shares, $.01 par value, were outstanding as of
April 30, 1998.
LEVEL 8 SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page #
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of
Operations for the three months
ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1998 and 1997 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
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
---------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 7,879,733 $ 7,062,275
Accounts receivable, net 5,473,637 6,455,041
Income taxes receivable 648,025 405,525
Inventory 336,310 336,310
Prepaid expenses and other
assets 623,941 421,235
Net assets from discontinued
operation 2,445,990 3,577,292
Deferred income taxes 159,400 -
---------- ----------
TOTAL CURRENT ASSETS 17,567,036 18,257,678
---------- ----------
PROPERTY AND EQUIPMENT, NET 1,334,952 973,747
---------- ----------
---------- ----------
OTHER ASSETS
Excess of cost over net
assets acquired, net 2,794,380 1,793,375
Software development costs,
net 2,998,862 2,167,980
Deposits and deferred costs 136,211 289,907
---------- ----------
5,929,453 4,251,262
---------- ----------
$24,831,441 $23,482,687
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of loan
from related company $ 127,964 $ 127,964
Current maturities of
long-term debt 44,425 7,169
Accounts payable 1,681,584 1,935,792
Accrued expenses 521,613 224,246
Due to related company 1,500,000 -
Customer deposits 29,687 29,687
Deferred revenue 430,429 12,500
Deferred income taxes - 94,400
----------- ----------
TOTAL CURRENT LIABILITIES 4,335,702 2,431,758
----------- ------------
----------- ------------
OTHER LIABILITIES
Long term debt, net of
current maturities 88,244 15,518
Loan from related company,
net of current maturities 170,274 201,788
Deferred income taxes 353,200 462,000
----------- ----------
611,718 679,306
----------- ----------
SHAREHOLDERS' EQUITY
Preferred stock - -
Common stock 76,257 70,446
Additional paid-in-capital 28,708,344 20,603,498
Accumulated deficit (8,782,471) (184,212)
Unearned compensation (118,109) (118,109)
----------- -----------
19,884,021 20,371,623
----------- -----------
$24,831,441 $23,482,687
----------- -----------
----------- -----------
See notes to condensed consolidated financial statements.
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
---------- ------------
REVENUE
Consulting and service $ 2,731,396 $ 1,961,749
Software 289,484 891,112
Other 539,886 -
----------- ----------
3,560,766 2,852,861
----------- -----------
COST OF REVENUE
Consulting and service 1,588,271 856,109
Software 151,615 766,188
Other - 30,761
------------ -----------
1,739,886 1,653,058
------------ -----------
GROSS MARGIN 1,820,880 1,199,803
------------ -----------
OPERATING EXPENSES
Selling, general and
administrative 1,608,178 1,099,580
Purchased research and
development 6,510,000 -
Writeoff of capitalized
software costs 1,793,880 -
------------ -----------
9,912,058 1,099,580
------------ -----------
OPERATING INCOME (LOSS) (8,091,178) 100,223
OTHER INCOME (EXPENSES)
Interest income 74,565 115,039
Interest expense (4,290) (5,355)
70,275 109,684
------------ -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES (8,020,903) 209,907
INCOME TAX EXPENSE (BENEFIT) (605,100) 93,800
------------ -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (7,415,803) 116,107
DISCONTINUED OPERATION
Income (loss) from discontinued
operation, net of income
taxes (benefit) of ($90,000)
and $22,000 (135,457) 33,614
Loss on disposal, net of
income tax benefit of
$270,000 (1,047,000) -
------------ -----------
(1,182,457) 33,614
------------ -----------
NET INCOME (LOSS) ($8,598,260) $ 149,721
------------ -----------
------------ -----------
NET INCOME (LOSS) PER COMMON SHARE
Basic Earnings Per Share:
Income (loss) from
continuing operations ($ 1.04) $ .02
Income (loss) from
discontinued operation ( .17) -
----------- ---------
Net Income (Loss) ($ 1.21) $ .02
----------- ---------
----------- ---------
Diluted Earnings Per Share:
Income (loss) from
continuing operations ($ 1.04) $ .02
Income (loss) from
discontinued operation ( .17) -
----------- ---------
Net Income (Loss) ($ 1.21) $ .02
----------- ---------
----------- ---------
WEIGHTED AVERAGE SHARES USED IN PER SHARE CALCULATION
Basic 7,085,606 6,959,750
Diluted 7,085,606 7,471,797
See notes to condensed consolidated financial statements.
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
---------- --------------
OPERATING ACTIVITIES
Net income (loss) ($8,598,260) $ 149,721
Adjustments to reconcile net
income (loss) to net cash used
by operating activities:
Loss (income) from
discontinued operation 135,457 (33,614)
Loss on disposal of
discontinued operation 1,047,000 -
Depreciation 85,280 42,273
Amortization 230,433 106,968
Purchased research and
development costs 6,510,000 -
Deferred income taxes (65,000) 156,800
Changes in operating assets
and liabilities:
Accounts receivable 1,184,111 (962,447)
Income taxes receivable (242,500) (53,303)
Prepaid expenses and other
assets (150,769) (531,202)
Deposits and deferred
costs 153,696 (19,773)
Accounts payable (471,724) 602,220
Accrued expenses 8,252 (57,337)
Customer deposits - 10,209
Deferred revenue 33,712 -
---------- -----------
Net cash used by
operating activities ( 140,312) (589,485)
---------- -----------
NET CHANGE IN ASSETS OF
DISCONTINUED OPERATION 1,131,302 29,751
---------- -----------
INVESTING ACTIVITIES
Redemption of marketable
securities - 2,480,930
Purchases of marketable
securities - (1,998,128)
Purchases of property and
equipment (272,355) (64,145)
Software development costs (149,702) (370,081)
Net cash received from
acquisitions 362,263 -
---------- ----------
Net cash provided (used)
by investing activities (59,794) 48,576
---------- ----------
FINANCING ACTIVITIES
Payments on long-term debt (33,281) (2,301)
Deferred income taxes (108,800) -
Proceeds from exercise of
stock options 28,343 32,099
Additional public offering
costs - (139,937)
---------- ----------
Net cash used by financing
activities (113,738) (110,139)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 817,458 (621,297)
CASH AND CASH EQUIVALENTS
Beginning of Period 7,062,275 3,318,292
---------- ----------
End of Period $7,879,733 $2,696,995
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
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, 1998 and
December 31, 1997 and the results of operations and cash
flows for the three months ended March 31, 1998 and 1997.
The results of operations and cash flows for the three
months ended March 31, 1998 are not necessarily indicative
of the results to be expected for the year ending
December 31, 1998, 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, 1997.
2. Principles of Consolidation -
The March 31, 1998 condensed consolidated financial
statements include the accounts of Level 8 Systems, Inc.
("Level 8") and its wholly-owned subsidiaries, Level 8
Technologies, Inc. ("Level 8 Technologies") and ProfitKey
International, Inc. ("ProfitKey") and its new wholly-owned
subsidiary, Momentum Software Corporation, from the date of
acquisition of March 26, 1998. The March 31, 1997 condensed
consolidated financial statements include the accounts of
Level 8, Level 8 Technologies, ProfitKey, and its ASU
consulting division.
3. Acquisition -
On March 26, 1998, the Company acquired Momentum Software
Corporation ("Momentum"). Under the agreement, Level 8
issued 575,000 shares of common stock and warrants to
purchase 200,000 common shares, subject to increased amounts
based on the market value of the Company's stock at a later
date. The total cost of the acquisition was approximately
$8.6 million and is treated as a purchase. As a result of
the acquisition of Momentum, the Company incurred a one time
charge to earnings of an estimate of approximately $6.5
million related to the purchase of in-process research and
development costs. The remaining amount was allocated to
goodwill and software development costs. The results of
operations of Momentum are included in the financial
statements since the date of acquisition.
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of Momentum is as follows:
Fair value of assets acquired $ 9,633,361
Additional direct costs (473,389)
Liabilities assumed (1,002,597)
Stock and warrants (8,082,375)
-------------
75,000
Cash acquired (437,263)
-------------
Net cash received from acquisition ($ 362,263)
-------------
-------------
4. Write Off of Capitalized Software Costs -
In connection with the acquisition of the middleware
software of Momentum, the Company wrote off approximately
$1.8 million of capitalized software costs that will not
continue to be developed due to the new software.
5. Discontinued Operation -
On April 6, 1998, the Company sold its wholly owned
subsidiary, ProfitKey International, Inc. The Company
received $463,615 at the closing and a $2,000,000 note from
the buyer. The note will be adjusted for changes in working
capital through the closing date. In connection with the
sale, the Company recorded a loss from the discontinued
operation of approximately $1.3 million, before a tax
benefit of $270,000.
LEVEL 8 SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Level 8 Systems, Inc.("Level 8") develops and sells proprietary
vertical application software packages and provides software
consulting and support services to customers located primarily in
the United States and Canada. Level 8 Technologies, Inc. ("Level
8 Technologies") is a wholly-owned subsidiary specializing in
transactional messaging middleware and distributed object
technology.
On March 26, 1998, Level 8 acquired all the stock of Momentum
Software Corporation ("Momentum") for 575,000 shares of Level 8
common stock and 200,000 warrants. The number of shares will be
adjusted based upon the future Level 8 common stock price. The
results of Momentum are included in the financial statements
since the date of acquisition.
On April 6, 1998, Level 8 sold its wholly-owned subsidiary,
ProfitKey International, Inc. ("ProfitKey"). The sale resulted
in a loss of approximately $1,000,000. Level 8 recorded the loss
in the first quarter of 1998 for the disposal of the business and
the anticipated operating losses until disposal. The loss from
operations is recorded as a loss from discontinued operations.
Accordingly, ProfitKey is reported as a discontinued operation
for 1998 and 1997. Level 8's operating results for prior periods
were restated to reflect continuing operations.
Level 8 purchased $1,500,000 of software development costs from
Liraz Systems, Ltd., a significant shareholder. This amount will
be payable in installments beginning the second quarter of 1998.
Results of Operations
Revenue for the three months ended March 31, 1998 was
approximately $3,561,000 as compared to $2,853,000 for the three
months ended March 31, 1997, an increase of $708,000 or 25%. The
increase is primarily related to increased software, consulting
and service revenue from Level 8 Technologies of approximately
$713,000 and Momentum Software, which was acquired in the first
quarter, of approximately $260,000. These increases were offset
by the sale of the ASU division in the fourth quarter of 1997
which reduced revenue in the first quarter of 1998 by
approximately $265,000.
Cost of revenue for the three months ended March 31, 1998 was
approximately $1,740,000 as compared to $1,653,000 for the three
months ended March 31, 1997, an increase of $87,000 or 5%. The
increase was due to Level 8 Technologies increased costs of
approximately $291,000 offset by the sale of the ASU division in
the fourth quarter of 1997 which reduced cost of revenue by
$219,000.
The gross margin for the three months ended March 31, 1998 was
51.1% as compared to 42.1% for the three months ended March 31,
1997. The increase was due to an increase in Level 8
Technologies margin from 41.1% to 45.2% and the Momentum software
revenue and certain revenue, totaling approximately $540,000,
having minimal associated costs.
Selling, general, and administrative expenses for the three
months ended March 31, 1998 were approximately $1,608,000 as
compared to approximately $1,100,000 for the three months ended
March 31, 1997, an increase of approximately $508,000. The
increase is a result of additional development expense of
approximately $308,000 and other overall increases primarily at
Level 8, offset by a reduction in the allowance for doubtful
accounts of approximately $138,000.
In connection with the acquisition of Momentum, the Company
incurred a $6,510,000 charge related to purchased research and
development costs. Also, in connection with the acquisition of
the middleware software from Momentum, Level 8 wrote off
approximately $1,800,000 of capitalized software costs that will
not continue to be developed due to the new software.
Other income decreased by approximately $40,000 primarily due to
decreased interest income from funds invested.
Income taxes represent a benefit of 7.5% of the loss from
continuing operations before income taxes. The rate is below the
expected tax rate primarily due to the nondeductibility of the
purchased research and development costs of $6,510,000.
The loss on the disposal of ProfitKey of approximately $1,300,000
before a tax benefit of $270,000 is reflected in discontinued
operations.
Liquidity and Capital Resources
Continuing operating activities for the three months ended March
31, 1998, used net cash of approximately $140,000. At March 31,
1998, Level 8 had working capital of approximately $8,757,000 and
a current ratio of 2.19. Level 8 believes that the existing
working capital and anticipated funds generated from operations
will be sufficient to fund its working capital and capital
expenditure requirements at least through the end of 1998.
Level 8 spent approximately $150,000 on software development and
$270,000 on property and equipment during the three months ended
March 31, 1998.
Part II
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On March 26, 1998, Level 8 Systems, Inc.("Level 8")
acquired Momentum Software Corporation (the "Momentum"), a
Delaware corporation. Under the acquisition agreement, Momentum
shareholders received 575,000 common shares of Level 8 and
warrants to purchase 200,000 common shares of Level 8 for $13.108
per share, subject to adjustment ("Contingent Consideration") to
take into account certain fluctuations in the value of the Level
8 common shares. If the average price per common share during
the 30 days prior to the Calculation Date (as defined) (the
"Average Price") is $21.00 or more, there is no Contingent
Consideration; if the Average Price is between $15.00 and $21.00,
the Contingent Consideration is a number of additional common
shares equal to the product of (a) 416.666 and (b) the number of
cents by which $21.00 exceeds the Average Price; and if the
Average Price is below $15.00, the Contingent Consideration is
250,000 common shares or an installment promissory note payable
in four annual installments and bearing interest at the rate of
10% a year, as determined by the Momentum Liquidating Trust (the
"Trust").
The 575,000 common shares and 200,000 warrants are
being held by the Trust, the trustees of which are Dr. Robert
Brill, Hubert Vandervoort and Bruns Grayson. The Trust will
distribute the shares and warrants to the Momentum shareholders
on December 1, 1998 (or earlier, in certain circumstance).
In connection with this transaction, the Trust has
agreed, among its trustees, to vote its common shares in Level 8
in accordance with the instructions of Liraz Sytems Ltd.
No underwriter was involved in this transaction, and no
commissions were paid with respect thereto. The persons to whom
Level 8 has issued such securities have represented to Level 8
the intention to acquire such securities not with any view to the
resale or distribution thereof in violation of the Securities Act
of 1933 (the "Act"). Evidence of the securities so issued has
been appropriately legended to such effect. Upon any exercise of
any warrants referred to above, unless a registration statement
with respect thereto is in effect, the person to whom the
warrants have been issued will be required to renew such
representation, and certificates for the shares so issued will be
appropriately legended. Accordingly, Level 8 relies upon the
exemption provided under section 4(2) of the Act with respect to
the issuance of such securities.
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
(a) Exhibits:
11.0 Statement regarding computation of earnings per
share
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
On January 30, 1998, the Company filed an 8-K regarding
Level 8 Systems, Inc. replacing Lurie, Besikof, Lapidus
& Co, LLP as its independent auditors with Grant
Thornton LLP.
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 15, 1998 LEVEL 8 SYSTEMS, INC.
-------------------- ------------------------------
(Registrant)
/s/ Arie Kilman
------------------------------
Arie Kilman
Chief Executive Officer
Acting Chief Accounting Officer
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENTS
EXHIBIT 11.0
Three Months Ended
March 31, March 31,
BASIC 1998 1997
--------- ---------
WEIGHTED AVERAGE COMMON SHARES 7,085,606 6,959,750
--------- ---------
--------- ---------
DILUTED
WEIGHTED AVERAGE COMMON SHARES 7,085,606 6,959,750
COMMON STOCK EQUIVALENTS -(1) 512,047
--------- ---------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,085,606 7,471,797
---------- ---------
---------- ---------
(1) Antidilutive
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
EXHIBIT 27
article type 5
period type 3-mos
fiscal-year end Dec-31-1998
period end Mar-31-1998
cash 7,879,733
securities -
receivables 5,473,637
allowances
inventory 336,310
current assets 17,567,036
pp&e 1,334,952
depreciation
total assets 24,831,441
current liabilities 4,335,702
bonds
preferred-mandatory
preferred
common 76,257
other-se 19,807,764
total-liability- and - equity 24,831,441
sales 3,560,766
total revenues 3,560,766
cgs 1,739,886
total costs 9,912,058
other expenses
loss provision
interest expense 4,290
income pre-tax (8,020,903)
income tax 605,100
income continuing (7,415,803)
discontinued (1,182,457)
extraordinary
changes
net income (8,598,260)
eps primary (1.21)
eps diluted (1.21)
