SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
(AMENDMENT NO. 2)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) December 31, 1998
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Level 8 Systems, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 0-26392 11-2920559
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(State or Other Jurisdiction (Commission File Number) (I.R.S.Employer
of Incorporation) Identification No.)
8000 Regency Parkway
Cary, NC 27511
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code (919) 380-5000
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1250 Broadway, 35th Floor, New York, New York 10001
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(Former Name or Former Address, if Changed Since Last Report)
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DISCLAIMER
This Form 8-K/A amends the Form 8-K/A filed on March 17, 1999, which
included pro forma financial information relating to Level 8's acquisition of
69% of the outstanding voting stock of Seer Technologies, Inc. On April 22,
1999, Level 8 filed a Form 10-Q/A to reflect a restatement of Level 8's
consolidated financial statements for the quarter ended September 30, 1998, upon
which the pro forma financial information included in the March 17 Form 8-K/A
was based. This Form 8-K/A amends the March 17 Form 8-K/A to include revised
pro forma financial information based on Level 8's restated consolidated
financial statements for the quarter ended September 30, 1998.
As of April 30, 1999, Level 8 acquired the remaining equity interest in
Seer Technologies, Inc. See Level 8's Form 8-K/A filed June 29, 1999 for pro
forma information relating to the acquisition of the remaining equity interest
in Seer.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
Item 7 (b). Pro Forma Financial Information set forth in Level 8
Systems, Inc.'s Form 8-K dated December 31, 1998 and filed January 15, 1999, is
hereby amended to read in its entirety as follows:
(b) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements are
presented for illustrative purposes only and are not necessarily indicative
of the combined financial position or results of operations for future periods
or the results that actually would have been realized had Level 8 Systems, Inc.
("Level 8") and Seer Technologies, Inc. ("Seer") been a combined company
during the specified periods. The pro forma combined financial statements,
including the notes thereto, are qualified in their entirety by reference to,
and should be read in conjunction with, the historical consolidated financial
statements of Level 8 and Seer, including the notes thereto.
The following pro forma combined financial statements give effect to the
acquisition of 69% of the outstanding voting stock of Seer using the purchase
method of accounting. The pro forma combined financial statements are based on
the respective historical audited and unaudited consolidated financial
statements and the notes thereto of Level 8 and Seer, which were previously
filed.
The pro forma combined balance sheet assumes that the acquisition took
place on September 30, 1998 and combined Level 8's unaudited September
30, 1998 consolidated balance sheet and Seer's September 30, 1998
consolidated balance sheet.
The pro forma combined statements of income assume the business combination
took place as of the beginning of the periods presented. The income statement
for the year ended December 31, 1997 combines Seer's unaudited consolidated
statement of income for the twelve month period ended December 31, 1997 and
Level 8's consolidated statement of income for the year ended December 31,
1997. The income statement with the period ending in September combines
Seer's and Level 8's unaudited consolidated statements of income for the nine
month period ended September 30, 1998. Seer's 1997 and 1998 fiscal year's
ended on September 30. Seer's twelve month and nine month periods were
derived by combining the unaudited results for the quarters ended March 31,
June 30, September 30, and December 31, 1997 and the quarters ended March 31,
June 30, and September 30, 1998, respectively.
For purposes of the accompanying unaudited pro forma combined condensed
balance sheet, the aggregate purchase price has been allocated to the net assets
acquired, with the remainder recorded as excess cost over net assets acquired on
the basis of preliminary estimates of fair values. These preliminary estimates
fair value were determined by the Company's management based primarily on
information furnished by management of Seer and an independent valuation of
acquired software and research and development. The final allocation of the
purchase price will be based on a complete valuation of the assets and
liabilities of Seer. Management does not expect the finalization of these
matters to have a material effect on the purchase price allocation. Further,
management expects the valuation of the acquisition to be finalized prior to the
filing of Level 8's Annual Report on Form 10-K for fiscal year 1998.
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
UNAUDITED PRO-FORMA COMBINED AND CONDENSED BALANCE SHEET
(IN THOUSANDS)
Seer Level 8 Pro-Forma
September 30, September 30, Adjustment
1998 1998 Note 3 Note Pro-Forma
--------------- --------------- ------------ ----- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and Cash equivalents $ 1,040 $ 3,537 $ -- -- $ 4,577
Trade accounts receivable, net 17,285 8,598 -- -- 25,883
Prepaid expenses and other current assets 1,476 1,889 -- -- 3,365
Net assets from discontinued operations -- 1,770 -- -- 1,770
Deferred income taxes -- 1,325 -- -- 1,325
--------------- --------------- -----------
Total current assets 19,801 17,119 36,920
Goodwill and other intangible assets -- 6,156 26,642 (a) 32,798
Property and equipment, net 1,867 1,609 -- -- 3,476
Capitalized software costs, net 1,140 3,347 -- -- 4,487
Deposits and deferred costs -- 733 -- -- 733
Other assets 387 -- -- -- 387
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TOTAL ASSETS $ 23,195 $ 28,964 $ 78,801
=============== =============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand $ 38,148 $ -- $ (28,900) (b) $ 9,248
Current maturities of loan from related party -- 1,048 12,000 (b) 13,048
Current maturities of long-term debt -- 48 -- -- 48
Accounts payable 2,897 1,425 -- -- 4,322
Due to related party -- 197 -- -- 197
Accrued expenses:
Compensation 744 -- -- -- 744
Commissions 1,156 -- -- -- 1,156
Restructuring 4,064 -- -- -- 4,064
Other 3,459 315 5,330 (a) 9,104
Deferred revenue 7,355 4,853 -- -- 12,208
Income taxes payable 1,644 -- -- -- 1,644
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Total current liabilities 59,467 7,886 55,783
Other Liabilities
Deferred revenue 253 -- -- -- 253
Long-term debt, net of current maturities -- 59 -- -- 59
Loan from related company, net of current -- 552 -- -- 552
Deferred income taxes -- 353 -- -- 353
Stockholders' equity (deficiency):
Preferred stock 39 -- (39) (d) --
Common stock 120 77 (110) (a,d) 87
Additional paid-in-capital 76,023 27,650 (69,654) (a,d) 34,019
Accumulated other comprehensive income (847) -- 847 (d) --
Accumulated deficit (111,860) (7,613) 107,168 (a,d) (12,305)
Total stockholders' equity (deficiency) (36,525) 20,114 21,801
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,195 $ 28,964 $ 78,801
=============== =============== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
UNAUDITED PRO-FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Seer Level 8 Pro-Forma
September 30, September 30, Adjustment
1998 1998 Note 3 Note Total
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<S> <C> <C> <C> <C> <C>
Revenue:
Consulting and services $ 41,319 $ 6,877 $ -- -- $ 48,196
Software 4,288 1,077 -- -- 5,365
Other -- 643 -- -- 643
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Total operating revenue 45,607 8,597 -- -- 54,204
Cost of revenue 31,459 5,330 -- -- 36,789
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Gross profit 14,148 3,267 -- -- 17,415
Operating expenses:
Selling, general and administrative 44,268 9,227 4,807 (a) 58,302
Purchased research and development -- 1,200 -- -- 1,200
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Total operating expenses 44,268 10,427 4,807 -- 59,502
Operating loss (30,120) (7,160) (4,807) -- (42,087)
Other income (expense)
Interest income 343 225 -- -- 568
Interest expense (2,703) (73) 1,120 (b) (1,656)
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Other income (expense), net (2,360) 152 1,120 -- (1,088)
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Loss from continuing operations before provision
for income taxes (32,480) (7,008) (3,687) -- (43,175)
Income tax expense (benefit) 20,052 (558) -- -- 19,494
Minority interest -- -- (3,518) (c) (3,518)
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NET LOSS FROM CONTINUING OPERATIONS $ (52,532) $ (6,450) $ (169) -- $(59,151)
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Loss per share from continuing operations -
basic and diluted $ (7.00)
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Weighted average shares outstanding -
basic and diluted 8,448
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The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
UNAUDITED PRO-FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Seer Level 8 Pro-Forma
December 31, December 31, Adjustment
1997 1997 Note 3 Note Total
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<S> <C> <C> <C> <C> <C>
Revenue:
Consulting and services $ 67,588 $ 10,171 $ -- -- $ 77,759
Software 30,796 4,354 -- -- 35,150
Other -- 155 -- -- 155
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Total operating revenue 98,384 14,680 -- -- 113,064
Cost of revenue
Consulting and services 44,660 4,995 -- -- 49,655
Software 1,589 2,554 -- -- 4,143
Other -- 40 -- -- 40
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Total cost of revenue 46,249 7,589 -- -- 53,838
Gross profit 52,135 7,091 -- -- 59,226
Operating expenses:
Selling, general and administrative 47,786 5,892 6,409 (a) 60,087
Research and product development 12,913 -- -- -- 12,913
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Total operating expenses 60,699 5,892 6,409 -- 73,000
Operating loss (8,564) 1,199 (6,409) -- (13,774)
Other income (expense)
Interest income 495 410 -- -- 905
Interest expense (2,555) (20) 1,793 (b) (782)
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Other income (expense), net (2,060) 390 1,793 -- 123
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Loss from continuing operations before provision
for income taxes (10,624) 1,589 (4,616) -- (13,651)
Income tax expense 978 553 -- -- 1,531
Minority interest -- -- (3,597) (c) (3,597)
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NET LOSS FROM CONTINUING OPERATIONS $ (11,602) $ 1,036 $ (1,019) -- $(11,585)
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Loss per share from continuing operations -
basic and diluted $ (1.45)
=========
Weighted average shares outstanding -
basic and diluted 7,992
=========
The accompanying notes are an integral part of the financial statements.
</TABLE>
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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The pro forma combined balance sheet assumes that the acquisition of 69% of
Seer's voting stock took place on September 30, 1998 and combined Level 8's
unaudited September 30, 1998 consolidated balance sheet and Seer's September 30,
1998 consolidated balance sheet. As of January 1, 1997, the shareholders of the
remaining 31% of the outstanding voting stock were deemed to have shared in the
losses of Seer up to their remaining interest in Seer's net assets.
The pro forma combined statements of income assume the business combination
took place as of January 1, 1997. The income statement with the period ending
in December combines Seer's unaudited consolidated statement of income for the
twelve month period ended December 31, 1997 and Level 8's consolidated statement
of income for the year ended December 31, 1997. The income statement with the
period ending in September combines Seer's and Level 8's unaudited consolidated
statements of income for the nine month period ended September 30, 1998. Seer's
1997 and 1998 fiscal year's ended on September 30. Seer's twelve month and nine
month periods were derived by combining the unaudited results for the relevant
quarters ended March 31, June 30, September 30, and December 31, 1997 and the
quarters ended March 31, June 30, and September 30, 1998, respectively.
On a combined basis there were no material transactions between Seer and
Level 8 during the period presented.
The American Institute of Certified Public Accountants has issued
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997, and provides guidance on applying
generally accepted accounting principles in recognizing revenue on
software transactions. Level 8 adopted SOP 97-2 on January 1, 1998 and
Seer adopted SOP 97-2 on October 1, 1998 based on the beginning of their
respective fiscal year and in accordance with the effective dates of the
statements. There are no other material differences between the accounting
policies of Seer and Level 8.
As Level 8 acquired only 69% of Seer's voting stock, the pro forma
combined provision for income taxes does not represent the amounts that
would have resulted had Seer and Level 8 filed a consolidated income tax return
during the period presented.
Certain historical amounts in the accompanying financial statements have
been reclassified to create a uniform pro-forma presentation. Such
reclassifications had no effect on net income/(loss) or stockholders' equity for
the periods presented.
NOTE 2. GENERAL
The acquisition will be accounted for as a purchase business combination by
Level 8. The accompanying unaudited pro forma combined condensed financial
statements reflect an aggregate purchase price for 69% of Seer of $56.6
million, consisting of the following: stock issued to Seer stockholders and
direct costs of the acquisition valued at $7.8 million, other indirect costs
related to the acquisition of $4 million, a 69% share of Seer's net liabilities
of $19.6 million(giving effect for the investment of Welsh, Carson, Anderson and
Stowe VI L.P. and certain affiliated parties("WCAS") as discussed in Note 3.b.
below) or $13.5 million, $4.7 million of in-process research and development,
and $26.6 million of Other Intangible Assets and Goodwill.
For purposes of the accompanying unaudited pro forma combined condensed
balance sheet, the aggregate purchase price has been allocated to the intangible
assets and net liabilities acquired as of September 30, 1998, with the remainder
recorded as excess cost over net assets acquired on the basis of preliminary
estimates of fair value. These preliminary estimates of fair value were
determined by Level 8's management based primarily on information furnished by
management of Seer and an independent valuation of acquired software and
research and development. The final allocation of the purchase price will be
based on a complete evaluation of the assets and liabilities of Seer and will be
based on Seer's net liabilities at December 31, 1998. Accordingly, the
pro-forma information presented herein as of September 30, 1998 will differ from
the final purchase price allocation calculated as of December 31, 1998.
Level 8 also expects to incur costs of approximately $1.5 million primarily
related to the reorganization of Level 8's operations in connection with the
acquisition, primarily for the closure of certain facilities and severance costs
for employees.
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NOTE 3. PRO FORMA ADJUSTMENTS
(a) Adjustments are to record the estimated valuation of
tangible and intangible assets, excluding purchased in-process research and
development, resulting from the preliminary allocation of the purchase price, as
discussed in Note 2. Valuation of the intangible assets acquired was
conducted by an independent third-party valuation expert and consists of
purchased in-process technology, proven research and development, the
installed customer base, trademarks, and acquired workforce with the
excess of the purchase price allocated to goodwill.
Intangible assets and goodwill of $26.6 million are comprised of proven
research and development of $3.2 million, installed customer base of $4.8
million, acquired workforce of $4.3 million, trademarks of $.6 million, and
goodwill of $13.7 million, which have estimated useful lives ranging from 3
to 5 years.
The estimated annual amortization charge to income related to intangible
assets acquired and goodwill resulting from the purchase described above
approximates $6.4 million. This charge is reflected in the pro forma combined
statements of income.
Management estimates that approximately $4.7 million of the purchase
price represents purchased in-process research and development that has not
reached technological feasibility and has no alternative future use. This
amount will be expensed as a non-recurring charge upon consummation of the
acquisition. This amount has been reflected as a reduction to stockholder's
equity and has not been included in the pro forma combined statement of income
due to its non-recurring nature.
The value assigned to purchased in-process research and development
was determined by identifying projects in areas for which technological
feasibility had not been established. The value was determined by estimating
the percentage completed and the discounted expected net cash flows from these
projects. The resulting net cash flows from such projects are based on
Seer management's estimates of revenues, cost of sales, research and
development costs, selling, general and administrative costs, and income
taxes from such projects.
(b) Adjustments are to record the $12 million loan to Level 8 from
Liraz and the $16.9 million investment made by the WCAS parties in conjunction
with Level 8's purchase of Seer's capital stock from the WCAS parties, which
were received on December 31, 1998. Upon receiving the loan from Liraz,
Level 8 made a subordinated loan to Seer in the amount of $12 million. On
December 31, 1998, Seer utilized the $28.9 million to pay down its
outstanding balances with its commercial creditors. For additional discussion
of these transactions, see Level 8's Form 8-K filed on January 15,
1999.
The amount of interest expense saved by Seer was computed assuming the
funds were received on January 1, 1997 and utilizing the respective
quarterly weighted-average interest rates for the periods presented.
(c) Adjustments are to record a share of the net loss attributable to
the minority interest of Seer.
(d) Adjustments are to eliminate Seer's historical equity balances.
NOTE 4. PRO FORMA EARNINGS PER COMMON SHARE
The unaudited pro forma combined basic earnings per share data is computed
by providing pro forma combined income per share by the weighted average number
of common shares outstanding and the issuance of one million shares of common
stock to WCAS assumed to be issued on January 1, 1997. Diluted earnings (loss)
per share is not presented as its inclusion would be anti-dilutive. Potentially
dilutive securities outstanding during the periods presented include stock
options and stock warrants.
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SIGNATURES
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.
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Dated: July 12, 1999 By: /s/ Steven Dmiszewicki
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Steven Dmiszewicki
President
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