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 September 30, 1999.
[ ] 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)
Delaware 11-2920559
----------------------- ----------
(State or other jurisdiction of I.R.S Employer
incorporation or organization) Identification Number)
8000 Regency Parkway, Cary, NC 27511
- ---------------------------------- ------
(Address of principal executive offices) (Zip Code)
(919) 380-5000
--------------
(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.
8,887,966 common shares, $.001 par value, were outstanding as of November 9,
1999.
1
<PAGE>
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
INDEX
<S> <C>
Page
PART I. Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number
------
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 1999 (unaudited)
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated statements of operations (unaudited) for the three and nine
months ended September 30, 1999 and 1998. . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows (unaudited) for nine months
ended September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of comprehensive income (unaudited) for
three and nine months ended September 30, 1999 and 1998 . . . . . . . . . 6
Notes to consolidated financial statements (unaudited). . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . 23
PART II. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURES 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
1999 1998
--------------- --------------
Assets
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 9,567 $ 6,078
Accounts receivable, less allowance for doubtful accounts
of $1,664 and $3,252 at September 30, 1999 and
December 31, 1998, respectively . . . . . . . . . . 14,217 16,992
Due from related company. . . . . . . . . . . . . . . . . - 271
Note receivable for sale of subsidiary. . . . . . . . . . 2,000 2,000
Prepaid expenses and other current assets . . . . . . . . 2,379 2,606
--------------- --------------
Total current assets . . . . . . . . . . . . . 28,163 27,947
Property and equipment, net . . . . . . . . . . . . . . . 1,777 2,682
Intangible assets, net. . . . . . . . . . . . . . . . . . 25,713 32,217
Software development costs, net . . . . . . . . . . . . . 8,972 6,753
Other assets. . . . . . . . . . . . . . . . . . . . . . . 974 1,171
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . $ 65,599 $ 70,770
=============== ==============
Liabilities and stockholders' equity
Notes payable, due on demand. . . . . . . . . . . . . . . $ 5,203 $ 12,275
Current maturities of loan from related company . . . . . 586 628
Current maturities of long-term debt. . . . . . . . . . . 775 799
Accounts payable. . . . . . . . . . . . . . . . . . . . . 2,212 3,773
Accrued expenses:
Compensation . . . . . . . . . . . . . . . . . . . . 1,610 1,339
Restructuring. . . . . . . . . . . . . . . . . . . . 376 973
Merger-related . . . . . . . . . . . . . . . . . . . 1,420 4,803
Other. . . . . . . . . . . . . . . . . . . . . . . . 7,473 8,275
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 9,293 13,075
Income taxes payable. . . . . . . . . . . . . . . . . . . 1,360 1,781
--------------- --------------
Total current liabilities. . . . . . . . . . . 30,308 47,721
Long-term debt, net of current maturities . . . . . . . . 11,528 1,541
Loan from related company, net of current maturities. . . 4,000 12,519
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 1,267 97
Stockholders' equity
Preferred stock, $0.001 par value. . . . . . . . . . -- --
Common stock, $0.001 par value . . . . . . . . . . . 9 87
Additional paid-in-capital . . . . . . . . . . . . . 54,562 34,045
Accumulated other comprehensive income . . . . . . . (240) --
Accumulated deficit. . . . . . . . . . . . . . . . . (35,835) (25,240)
--------------- --------------
Total stockholders' equity . . . . . . . . . . 18,496 8,892
--------------- --------------
Total liabilities and stockholders' equity . . $ 65,599 $ 70,770
=============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,112 $ 450 $ 10,014 $ 1,077
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,538 280 11,403 568
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,153 1,619 17,599 6,952
-------- -------- --------- --------
Total operating revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,803 2,349 39,016 8,597
Cost of revenue:
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,135 356 3,063 1,205
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,199 95 4,249 336
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,291 1,540 15,378 4,489
-------- -------- --------- --------
Total cost of revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,625 1,991 22,690 6,030
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,178 358 16,326 2,567
Operating expenses:
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,832 781 8,206 1,862
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,670 569 4,904 1,973
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,983 1,097 4,857 3,148
In-process research and development. . . . . . . . . . . . . . . . . . . . . . . . . -- -- 744 1,200
Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . 1,813 867 5,197 1,545
-------- -------- --------- --------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 8,298 3,314 23,908 9,728
-------- -------- --------- --------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,120) (2,956) (7,582) (7,161)
Other income (expense)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 72 444 225
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (563) (34) (2,168) (72)
Net foreign currency gains/(losses). . . . . . . . . . . . . . . . . . . . . . . . . 45 -- (696) --
-------- -------- --------- --------
Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . (2,349) (2,918) (10,002) (7,008)
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 -- 594 (558)
-------- -------- --------- --------
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,544) (2,918) (10,596) (6,450)
Discontinued operations:
Loss from discontinued operation, net of tax . . . . . . . . . . . . . . . . . . . . -- -- -- (135)
Loss on disposal, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (843)
-------- -------- --------- --------
Loss from discontinued operations. . . . . . . . . . . . . . . . . . . . . . -- -- -- (978)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,544) $(2,918) $(10,596) $(7,428)
======== ======== ========= ========
Loss per common share:
Loss from continuing operations - basic and diluted. . . . . . . . . . . . . . . . . $ (0.31) $ (0.38) $ (1.24) $ (0.86)
Loss from discontinued operations - basic and diluted. . . . . . . . . . . . . . . . -- -- -- (0.13)
-------- -------- ---------
Net loss per share - basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.38) $ (1.24) $ (0.99)
======== ======== ========= ========
Weighted common shares outstanding - basic and diluted . . . . . . . . . . . . . . . . 8,778 7,690 8,729 7,498
======== ======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,596) $(7,428)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 8,632 2,366
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 2 (934)
Loss from discontinued operations . . . . . . . . . . . . . . . -- 135
Loss on disposal of discontinued operations . . . . . . . . . . -- 843
Purchased research and development. . . . . . . . . . . . . . . 744 1,200
Write-off of capitalized software costs . . . . . . . . . . . . -- 294
Provision for doubtful accounts . . . . . . . . . . . . . . . . 484 652
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 (247)
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Trade accounts receivable. . . . . . . . . . . . . . . . . 2,051 (2,019)
Prepaid expenses and other assets. . . . . . . . . . . . . 696 (580)
Accounts payable, income taxes payable, and accrued
expenses (excluding merger-related and restructuring) (3,476) (594)
Merger-related and restructuring . . . . . . . . . . . . . (3,403) --
Deferred revenue . . . . . . . . . . . . . . . . . . . . . (2,612) 4,502
--------- --------
Net cash used in operating activities . . . . . . . . (7,306) (1,810)
Cash flows from investing activities:
Cash received from acquisition . . . . . . . . . . . . . . . . . . . -- 362
Purchases of property and equipment. . . . . . . . . . . . . . . . . (173) (1,274)
Payments for acquisitions. . . . . . . . . . . . . . . . . . . . . . (2,767) --
Capitalization of software development costs . . . . . . . . . . . . (1,167) (643)
--------- --------
Net cash used in investing activities . . . . . . . . (4,107) (1,555)
Cash flows from financing activities:
Issuance of common shares. . . . . . . . . . . . . . . . . . . . . . 1,328 59
Issuance of preferred shares, net of issuance costs. . . . . . . . . 19,245 --
Payments on borrowings from related company. . . . . . . . . . . . . (8,561) --
Payments on capital leases . . . . . . . . . . . . . . . . . . . . . (34) --
Net borrowings on line of credit . . . . . . . . . . . . . . . . . . 6,924 --
Payments on line of credit . . . . . . . . . . . . . . . . . . . . . (4,000) --
Payments on other long-term debt . . . . . . . . . . . . . . . . . . -- (219)
--------- --------
Net cash provided by (used in) financing activities . 14,902 (160)
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . -- --
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . 3,489 (3,525)
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 6,078 7,062
--------- --------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,567 $ 3,537
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------- ------------------- --------- --------
<S> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . $ (2,544) $ (2,918) $(10,596) $(7,428)
Other comprehensive income, net of tax
Foreign currency translation adjustment (145) -- (240) --
-------------------- ------------------- --------- --------
Comprehensive loss . . . . . . . . . . . . . $ (2,689) $ (2,918) $(10,836) $(7,428)
==================== =================== ========= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
<PAGE>
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations.
Accordingly, these interim financial statements should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for other interim periods or
for the full fiscal year. In the opinion of management, the information
contained herein reflects all adjustments necessary for a fair statement of the
interim results of operations. All such adjustments are of a normal, recurring
nature, except for the acquisition of Seer, non-cash compensation, and the
issuance of preferred stock all occurring in the second quarter.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All of the Company's subsidiaries are
wholly-owned for the entire nine month period presented, except for Seer
Technologies, Inc. ("Seer"). The Company acquired a 69% interest in Seer on
December 31, 1998 and the remaining 31% interest on April 30, 1999. Prior to
the completion of the Seer acquisition, Level 8 assumed Seer's net liabilities.
The minority stockholders were deemed to have shared in the losses of Seer only
for their proportionate share of Seer's net assets until April 30, 1999.
Accordingly, there is no minority interest in the losses of the Seer subsidiary
reflected in the consolidated financial statements for the nine month period
ended September 30, 1999.
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 1999 presentation. Such reclassifications had no
effect on previously reported net income or stockholders' equity.
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") was
effective for the Company's fiscal year beginning January 1, 1999. SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is
vendor-specific objective evidence ("VSOE") of the fair values of all of the
undelivered elements that are not accounted for by means of long -term
contract accounting, (2) VSOE of fair value does not exist for one or more
of the delivered elements, and (3) all revenue recognition criteria of SOP 97
- -2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied.
NOTE 2. BUSINESS COMBINATION
As of April 30, 1999, the Company acquired the remaining minority interest in
Seer, for $0.35 in cash per share of the outstanding common stock of Seer. The
total purchase price for the remaining 31% of Seer was $1,697. As a result of
the completion of acquisition, Seer became a wholly-owned subsidiary of the
Company.
The purchase price was allocated to the assets acquired and liabilities assumed
based on the Company's estimates of fair value at the acquisition date. The
fair value assigned to intangible assets acquired was based on a valuation of
the purchased in-process research and development, developed technology,
installed customer base, and assembled workforce of Seer. The purchase price
was less than the amounts allocated to the tangible and intangible assets
acquired by approximately $1,307. The difference between the purchase price and
the fair values of the assets acquired less liabilities assumed was allocated to
goodwill.
7
<PAGE>
The cost of the acquisition was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
In-process research and development $ 744
Developed technology. . . . . . . . 3,410
Goodwill and other intangibles. . . (1,307)
Accrued liabilities . . . . . . . . (1,150)
Cost of net assets acquired . . . . $ 1,697
========
</TABLE>
Approximately $744 of the purchase price represents purchased in-process
research and development that had not yet reached technological feasibility and
had no alternative future use. Accordingly, this amount was immediately
expensed in the Consolidated Statement of Operations upon consummation of the
acquisition. The value assigned to in-process research and development, based
on a valuation was determined by identifying research projects in areas for
which technological feasibility had not been established, primarily the
application warehousing project. The value of the in-process projects was
adjusted to reflect the relative value and contributions of the required
research and development. In doing so, consideration was given to the stage of
completion, the complexity of the work completed to date, the difficulty of
completing the remaining development costs already incurred, and the projected
cost to complete the projects. The discount rate included a factor that takes
into account the uncertainty surrounding successful development of the purchased
research and development.
NOTE 3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based upon the weighted average number of common shares outstanding and
any potentially dilutive securities. Potentially dilutive securities are not
included in the diluted earnings per share calculations if their inclusion would
be anti-dilutive to the basic earnings (loss) per share calculations.
Potentially dilutive securities outstanding during the first quarter of fiscal
year 1999 included stock options and stock warrants. In the second and third
quarters of fiscal year 1999, potentially dilutive securities included stock
options, stock warrants, and preferred stock. Dividends of $210 were paid to
the holders of Series A Preferred Stock in the third quarter of 1999. The
following table sets forth a reconciliation to net income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ -------------- --------- --------
<S> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . $ (2,544) $ (2,918) $(10,596) $(7,428)
Preferred stock dividends. . . . (210) -- (210) --
------------ -------------- --------- --------
Loss available to common share holders $ (2,754) $ (2,918) $(10,806) $(7,428)
============ ============== ========= ========
Loss per common share:
Loss from continuing operations -
basic and diluted. . . . . . . . $ (0.31) $ (0.38) $ (1.24) $ (0.86)
Loss from discontinued operations -
basic and diluted. . . . . . . . -- -- -- (0.13)
------------ -------------- --------- --------
Net loss per share - basic and diluted $ (0.31) $ (0.38) $ (1.24) $ (0.99)
============ ============== ========= ========
Weighted common shares outstanding -
basic and diluted . . . . . . . . . . 8,778 7,690 8,729 7,498
============ ============== ========= ========
</TABLE>
8
<PAGE>
NOTE 4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company's
effective tax rate differs from the statutory rate primarily due to the fact
that no income tax benefit was recorded for the net loss for the first nine
months of fiscal year 1999. Because of the Company's inconsistent earnings
history, the deferred tax assets have been fully offset by a valuation
allowance.
The income tax provision for the first nine months of fiscal year 1999 is
primarily related to income taxes from profitable foreign operations and foreign
withholding taxes.
NOTE 5. USE OF ACCOUNTING 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 amounts could differ from these estimates.
NOTE 6. SEGMENT INFORMATION
Management of the Company makes operating decisions and assesses performance of
its operations based on the following reportable segments: (1) Software, (2)
Maintenance, (3) Services, and (4) Research and Development.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies," included in the Company's Annual
Report on Form 10-K for year ended December 31, 1998. Segment data includes a
charge allocating all corporate-headquarters costs to each of its operating
segments based on each segment's proportionate share of expenses. The Company
evaluates the performance of its segments and allocates resources to them based
on earnings (loss) before interest, taxes and amortization of goodwill (EBITA).
Comparative information is not available for the same period of 1998 because the
Company previously reviewed its operations as one reportable segment and did not
have international operations.
The table below presents information about reported segments for the nine months
period ending September 30, 1999:
<TABLE>
<CAPTION>
Research
And
Software Maintenance Services Development Total
---------- ------------ --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 10,014 $ 11,403 $ 17,599 $ -- $39,016
Total EBITA . $ (2,783) $ 6,576 $ 136 $ (5,570) $(1,641)
</TABLE>
A reconciliation of total segment EBITA to total consolidated income before
taxes for the nine months ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Total EBITA . . . . . . . . . . . . $ (1,641)
Amortization of goodwill. . . . . . (5,197)
In-process research and development (744)
Other income/(expense), net . . . . (2,420)
---------
Total loss before income taxes. . . $(10,002)
=========
</TABLE>
9
<PAGE>
The table below presents information about reported segments for the quarter
ending September 30, 1999:
<TABLE>
<CAPTION>
Research
And
Software Maintenance Services Development Total
---------- ------------ --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 4,112 $ 3,538 $ 5,153 $ -- $12,803
Total EBITA . $ (562) $ 2,125 $ 98 $ (1,968) $ (307)
</TABLE>
A reconciliation of total segment EBITA to total consolidated income before
taxes for the quarter ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Total EBITA . . . . . . . . . . . . $ (307)
Amortization of goodwill. . . . . . (1,813)
In-process research and development --
Other income/(expense), net . . . . (229)
--------
Total loss before income taxes. . . $(2,349)
========
</TABLE>
The following table presents a summary of revenue by geographic region for the
three and nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
<S> <C> <C>
Australia. . . $ 490 $ 2,011
Denmark. . . . 1,331 5,244
Germany. . . . 960 2,598
Greece . . . . 290 1,149
Italy. . . . . 512 2,393
Norway . . . . 533 1,638
Sweden . . . . 354 1,388
Switzerland. . 603 2,283
United Kingdom 1,518 4,044
USA. . . . . . 4,432 12,346
Other. . . . . 1,780 3,922
-------------- --------------
Total revenue. $ 12,803 $ 39,016
============== ==============
</TABLE>
Presentation of revenue by region is based on the country in which the customer
is domiciled.
NOTE 7. LONG-TERM DEBT AND CREDIT FACILITIES
On April 21, 1999, the Company's credit facility with a commercial bank was
amended to provide for borrowings up to the lesser of $25,000 or the sum of 80%
of eligible receivables and a $10,000 term loan payable on September 1, 2000.
The receivables-based borrowings under this credit facility are due on demand.
This credit facility bears interest at the prime rate plus 2% per annum and has
no financial covenant provisions. This credit facility terminates on December
31, 2001; however it is automatically renewed for successive terms of one year
each, unless terminated by either party. This credit facility is collateralized
by the Company's accounts receivable, equipment and intangibles, including
intellectual property.
10
<PAGE>
On September 24, 1999, the due date of the term loan was amended from September
1, 2000 to March 1, 2001.
On May 31, 1999 the Company's $12 million loan from Liraz Systems, Ltd.
("Liraz") was amended. The amendment changed the due date from June 30, 2000 to
December 15, 2000 and provides for semiannual interest payments rather than
payment of interest at maturity. No other terms of the loan were amended.
During the quarter ended September 30, 1999, the Company used part of the
proceeds from the issuance of the Series A Preferred Stock to repay $8 million
of it's $12 million loan and reduce the balance to $4 million.
NOTE 8. ISSUANCE OF PREFERRED STOCK
On June 29, 1999, Level 8 Systems, Inc. completed its agreement to sell
21,000 shares of Series A 4% Convertible Redeemable Preferred Stock ("Series A
Preferred Stock"), for $21,000, convertible into an aggregate of 2.1 million
shares of common stock of Level 8. The proceeds, net of accrued issuance costs
of $19,150, will be used to pay down debt and for other general corporate
purposes. The sale of the Series A Preferred Stock was made in a private
transaction exempt from the registration requirements of the federal securities
laws.
Holders of the Series A Preferred Stock are entitled to receive 4% annual cash
dividends payable quarterly and will have one vote per share of Series A
Preferred Stock, voting together with the common stock and not as a separate
class except on certain matters adversely affecting the rights of holders of
the Series A Preferred Stock. The Series A Preferred Stock may be redeemed
at the option of Level 8 at a redemption price equal to the original purchase
price at any time after June 29, 2000 if the closing price of Level 8's common
stock over 20 consecutive trading days is greater than $20 per share. The
conversion price of the Series A Preferred Stock is subject to certain
anti-dilution provisions, including adjustments in the event of certain sales of
common stock at a price of less than $10 per share. In the event Level 8
breaches its obligations to pay dividends when due or issue common stock upon
conversion, or Level 8's common stock is delisted, the dividend rate on the
Series A Preferred Stock would increase to 18% per annum (partially payable in
shares of common stock at the option of Level 8 during the first 60 days of such
increased dividend rate). As part of the $21 million financing, Level 8 also
issued the investors warrants to purchase 2.1 million shares of common stock at
an exercise price of $10 per share. Level 8 has agreed to register the common
stock issuable upon conversion of the Series A Preferred Stock and exercise of
the warrants for resale under the Securities Act of 1933. Level 8 is required
to make certain payments in the event it is unable to meet its obligations in
connection with the Series A Preferred Stock and warrants, such as registration
under the Securities Act or issuance of shares of common stock upon conversion
or exercise. The aggregate amount of all such payments, together with dividends
on the Series A Preferred Stock, is limited to 19% of the liquidation value of
the Series A Preferred Stock. One of the investors in the Series A
Preferred Stock included Advanced Systems Europe B.V., which purchased $10
million of Series A Preferred Stock and warrants in the transaction, and is a
subsidiary of Liraz, Level 8's principal stockholder.
NOTE 9. REINCORPORATION AND COMMON STOCK
Effective June 23, 1999, the Company completed its re-incorporation under
Delaware law. As a result of the re-incorporation of the Company under Delaware
law, the rights of stockholders of the Company are now governed by the
Certificate of Incorporation and Bylaws of Level 8 Systems, Inc., a Delaware
corporation, and the General Corporation Law of the State of Delaware. In
conjunction with the re-incorporation, the Company changed the par value of its
common stock from $.01 to $.001.
11
<PAGE>
NOTE 10. CONTINGENCIES
LITIGATION. On April 6, 1998, the Company sold substantially all assets
and operations of its wholly owned subsidiary ProfitKey International,
Inc. ("ProfitKey"). According to the terms of the ProfitKey sale
agreement, the purchase price is subject to adjustment to reflect any
variance in working capital from a specified amount. The purchaser has notified
the Company that it believes there are adjustments totaling $1,466 which would
require a reduction in the purchase price. The Company has attempted to
negotiate a settlement with the purchaser and has, pursuant to the terms of
the settlement agreement, entered into arbitration proceedings to resolve this
matter. The Company has made a provision for its estimate of the purchase
price adjustment and the costs to resolve this matter. Management believes
at this time that any additional provision required to ultimately resolve
this matter will not have a material effect on the financial position, cash
flows, or results of operations of the Company.
In December 1997, Seer Technologies, Inc. ("Seer"),a now wholly-owned subsidiary
of the Company, instituted litigation in London, England against Saadi Abbas
("Abbas") and Cambridge Business Solutions (UK) Ltd. ("CBS") concerning a
dispute over a license agreement between Seer, CBS and Abbas. These entities
counterclaimed against Seer. The case has proceeded through discovery and
various other procedural events and all that remains of the litigation at this
point in time are various claims against Seer by Abbas and CBS. Most of those
claims have been struck out by the court in London as unarguable or otherwise
time barred. The Company intends to continue to vigorously defend against the
few remaining claims. The Company has made provisions for its estimated costs
to resolve this matter. Management does not believe at this point in the
litigation that any additional amounts required to ultimately resolve this
matter will have a material effect on the financial position, cash flows, or
results of operations of the company.
LIQUIDITY. During the first nine months of 1999, the Company incurred a net
loss of $10,596 and has negative working capital of $2,145 and an accumulated
deficit of $35,835 at September 30, 1999. The Company received $21,000 from the
issuance of preferred stock as discussed in Note 8 above and renegotiated the
repayment of certain long-term debt. Additionally, as a result of issuing more
than $7,500 in equity financing, the Company no longer has a commitment from
Liraz for $7,500 in working capital. The Company's ability to generate positive
future cash flow is dependent upon the Company meeting its operating plan. The
Company already implemented certain steps in the first half of 1999 to, among
other things, reduce headcount, restructure operations and eliminate various
costs from the business. The Company believes that existing cash on hand, cash
provided by future operations, additional borrowings under its current line of
credit, and additional new funding to be made available if the business purchase
transaction, as described in Note 12, is consummated, will be sufficient to
finance its operations and expected working capital and capital expenditure
requirements for at least the next twelve months so long as the Company
continues to perform to its operating plan. However, there can be no assurance
that the Company will be able to continue to meet its cash requirements
through operations or, if needed, obtain additional financing on acceptable
terms, and the failure to do so may have an adverse impact on the Company's
business and operations.
NOTE 11. FOREIGN CURRENCY EXCHANGE CONTRACTS
In the normal course of business, the Company employs established policies and
procedures to manage its exposure to fluctuations in foreign currency values.
Beginning in July of 1999, the Company entered into forward exchange contracts
primarily to hedge receivables denominated in foreign currencies against
fluctuations in exchange rates. The Company has not entered into forward
foreign exchange contracts for speculative or trading purposes. At September
30, 1999, the aggregate notional amount of foreign exchange contracts
outstanding was $2,208.
12
<PAGE>
NOTE 12. SUBSEQUENT EVENTS
On October 19, 1999, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Template Software, Inc. ("Template") and with
Level 8's wholly-owned subsidiary, TSAC, Inc. ("Subsidiary"). The Merger
Agreement provides for the Company's acquisition of Template by Template's
merger with and into the Subsidiary.
Under the Merger Agreement, each share of Template common stock will be
exchanged for $4.00 in cash plus $3.90 worth of Level 8 common stock. The
actual number of shares of Level 8 common stock to be exchanged for each
Template share will be based on the average trading price of Level 8 stock for
the ten trading days prior to the third trading day before stockholder approval,
but will not be less than 0.2838 Level 8 shares per Template share (if Level 8's
average trading price exceeds $13.74) or more than 0.3672 Level 8 shares per
Template share (if Level 8's average trading price is less than $10.62). The
merger is intended to qualify as a tax-free reorganization, which means that
Template stockholders would generally be permitted to defer taxes on the Level 8
stock portion of the purchase price.
In connection with the merger, the Company has received a commitment from a
commercial bank for additional financing in the form of a five year term loan
for $25 to $35 million. The financing will be guaranteed by Liraz Systems,
Ltd., the Company's principal stockholder, in return for between 150,000 and
250,000 shares of the Company's common stock to be determined by the independent
directors of the Company based on market conditions and the Company's financing
needs at closing. The additional financing is subject to the negotiation and
execution of a definitive agreement. The commitment provides for an interest
rate equal to the London InterBank Offered Rate plus 1.5% annually.
The merger is subject to certain conditions to closing, including stockholder
approval, regulatory approval, and necessary consents and filings. The Company
believes the merger will be completed in the fourth quarter of 1999 or the first
quarter of 2000.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- ---------------
GENERAL INFORMATION AND RECENT DEVELOPMENTS
- -----------------------------------------------
The Company is a global provider of rapid business integration solutions
for eBusiness and eCommerce. Business integration solutions address the
emerging need for a company's information systems to deliver enterprise-wide
views of the company's business information processes. As new computer
technologies have proliferated in enterprise computing environments, the
integration and management of the applications which rely on them has become
increasingly complex. Our products and services are designed to enable
organizations to address information systems integration and management problems
in a simple and cost effective way. We provide customers with solutions to meet
their enterprise application integration (EAI) and development needs. Our
products allow companies to link their critical business applications internally
across the enterprise and externally with strategic business partners. Our
products and services also enable organizations to engage in eCommerce. The
term "eCommerce" or electronic commerce refers to business conducted over the
Internet. Currently, our products and services are sold worldwide through a
network of regional sales offices. To date, our products and services have been
utilized by companies in a wide variety of industries, including banking and
financial services, insurance, retail, manufacturing, data processing, public
utilities and transportation.
On April 13, 1999, the Company announced the general release of its new
Geneva Integrator, formerly Geneva Integration Server ("Geneva"). Geneva is
an open, standards-based integration platform for connecting business
applications running on Windows with business systems running on other
platforms. Geneva functionally addresses the problem of linking custom, legacy,
E-commerce, Web-enabled, and Windows DNA-based application systems.
On April 30, 1999, the Company completed its acquisition of Seer
Technologies, Inc. ("Seer"). The Company purchased the remaining minority
interest in Seer, for $0.35 per share of the outstanding common stock in cash.
The total purchase price for the remaining 31% of Seer was $1,697. As a result
of the completion of acquisition, Seer became a wholly-owned subsidiary of the
Company.
On October 19, 1999, the Company signed an Agreement and Plan of Merger to
acquire Template Software, Inc. ("Template") for approximately $49 million in
cash and stock, subject to shareholder approval and other closing conditions.
Level 8's management team identified Template as a provider of technologies that
Level 8 believes would, if combined with the existing product line, enable Level
8 to be one of the first to market a comprehensive product portfolio
representing the next generation of EAI solutions for eBusiness and eCommerce.
The Company expects to close the Template merger in the fourth quarter of 1999
or the first quarter of 2000.
As part of the Template transaction, the Company has received a commitment
for additional financing in the form of a five year term loan for $25 to $35
million. The financing will be guaranteed by Liraz Systems, Ltd. ("Liraz"), the
Company's principal stockholder, in return for between 150,000 and 250,000
shares of the Company's common stock to be determined by the independent
directors of the Company based on market conditions and the Company's financing
needs at closing. The additional financing is subject to the negotiation and
execution of a definitive agreement. The commitment provides for an interest
rate equal to the London InterBank Offered Rate plus 1.5% annually.
RESULTS OF OPERATIONS
- -----------------------
In order to effect the Company's strategic shift to the EAI market, the
Company completed a series of dispositions and acquisitions during 1998. See
further descriptions of these transactions included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Operations for the
subsidiaries acquired during 1998 are included in the Company's results of
operations from the date of acquisition. Accordingly, the results of operations
for the first nine months of 1998 include the operations of Momentum Software
Corporation ("Momentum") since March 26, 1998. The results of operations for
the first nine months of 1998 do not reflect any of Seer's operations since the
Company did not acquire an interest in Seer until December 31, 1998. Except as
otherwise indicated, the discussion below relates to the actual results of
operations without giving pro forma effect to the acquisitions and dispositions
in 1998. Pro forma combined data assumes the acquisition of Momentum and Seer
had each occurred as of January 1, 1998 and does not purport to be indicative of
the results which would have actually been obtained had the transactions
taken place as of such date or of future results of operations. The
14
<PAGE>
acquisitions made in 1998 make it difficult to compare the actual results of
operations for the periods presented. A discussion of results of
operations on a pro forma combined basis has been included below where
considered meaningful for an understanding of the Company's results of
operations for the 1999 periods. However, pro forma combined results reflect
the operations of the three companies on a separate basis without
consideration for any synergies obtained through the integration of the
companies' operations.
The following table sets forth, for the periods indicated, the Company's
unaudited results of continuing operations expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------------- -------------- ------- -------
Revenue:
Software products . . . . . . . . . . . . 32.1% 19.2% 25.7% 12.5%
Maintenance . . . . . . . . . . . . . . . 27.6% 11.9% 29.2% 6.6%
Services. . . . . . . . . . . . . . . . . 40.3% 68.9% 45.1% 80.9%
-------------- -------------- ------- -------
Total
100.0% 100.0% 100.0% 100.0%
Cost of revenue:
Software products . . . . . . . . . . . . 8.9% 15.2% 7.9% 14.0%
Maintenance . . . . . . . . . . . . . . . 9.4% 4.0% 10.9% 3.9%
Services. . . . . . . . . . . . . . . . . 33.5% 65.6% 39.4% 52.2%
-------------- -------------- ------- -------
Total
51.8% 84.8% 58.2% 70.1%
Gross profit . . . . . . . . . . . . . . . . . 48.2% 15.2% 41.8% 29.9%
Operating expenses:
Sales and marketing . . . . . . . . . . . 22.1% 33.2% 21.0% 21.7%
Research and product development. . . . . 13.0% 24.2% 12.6% 22.9%
General and administrative. . . . . . . . 15.5% 46.7% 12.4% 36.6%
Amortization of goodwill and intangibles. 14.2% 36.9% 13.3% 18.0%
Purchased research and development ---- ---- 1.9% 14.0%
-------------- -------------- ------- -------
Total. . . . . . . . . . . . . . . . . . . . . 64.8% 141.0% 61.2% 113.2%
Loss from operations . . . . . . . . . . . . . (16.6%) (125.8%) (19.4%) (83.3%)
Other income (expense), net. . . . . . . . . . (1.8%) 1.6% (6.2)% 1.8%
-------------- -------------- ------- -------
Loss before taxes. . . . . . . . . . . . . . . (18.4%) (124.2%) (25.6%) (81.5%)
Income tax provision (benefit) . . . . . . . . 1.5% 0.0% 1.5% (6.5%)
-------------- -------------- ------- -------
Loss from continuing operations. . . . . . . . (19.9%) (124.2%) (27.1%) (75.0%)
============== ============== ======= =======
</TABLE>
The following table sets forth unaudited data for total revenue by
geographic origin as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
-------------- ------------- ----- -----
<S> <C> <C> <C> <C>
United States 35 % 99 % 32 % 99 %
Europe 55 % --- 59 % ---
Asia Pacific 5 % --- 7 % ---
Other . . . . 5 % 1 % 2 % 1 %
Total . . . . 100 % 100 % 100 % 100 %
============== ============= ===== =====
</TABLE>
15
<PAGE>
REVENUE AND GROSS MARGIN. The Company has three categories of revenue:
software products, maintenance, and services. Software products revenue is
comprised primarily of fees from licensing the Company's proprietary software
products. Maintenance revenue is comprised of fees for maintaining, supporting,
and providing periodic upgrades to the Company's software products. Services
revenue is comprised of fees for consulting and training services related to the
Company's software products.
The Company's revenues vary from quarter to quarter, with the largest
portion of revenue typically recognized in the last month of each quarter. The
Company believes that these patterns are partly attributable to the Company's
sales commission policies, which compensate sales personnel for meeting or
exceeding quarterly quotas, and to the budgeting and purchasing cycles of
customers. The Company typically does not have any material backlog of unfilled
software orders, and product revenue in any quarter is substantially dependent
upon orders received in that quarter. Because the Company's operating expenses
are based on anticipated revenue levels and are relatively fixed over the short
term, variations in the timing of recognition revenue can cause significant
variations in operating results from quarter to quarter. Fluctuations in
operating results may result in volatility in the price of the Company's common
stock.
Effective January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position
98-4 "Deferral of the Effective Date of Certain Provisions of SOP 97-2." SOP
97-2 requires each element of a software sale arrangement to be separately
identified and accounted for based on the relative fair value of such element.
Statement of Position 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition,' with Respect to Certain Transactions" ("SOP 98-9") was
effective for the Company's fiscal year beginning January 1, 1999. SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is
vendor-specific objective evidence ("VSOE") of the fair values of all of the
undelivered elements that are not accounted for by means of long -term
contract accounting, (2) VSOE of fair value does not exist for one or more
of the delivered elements, and (3) all revenue recognition criteria of SOP 97
- -2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied.
Total revenues increased significantly for the third quarter and
year-to-date periods of 1999 as compared to the same periods of 1998 primarily
due to the acquisitions of Momentum and Seer during 1998 and increased sales of
software products. The gross margin for the third quarter of 1999 increased
significantly to 48% from 15% for the same period of 1998 and improved to 42% in
1999 for the year-to-date period as compared to 30% for the same period of 1998
due to the increases in software products revenues.
On a pro forma combined basis, total revenues for the year-to-date period
of 1998 were $54.2 million. The $15.1 million decline in revenue on a pro
forma combined basis is primarily due to a decline in consulting resources
employed by Seer for the first nine months of 1998 compared to the same period
of 1999. The gross margin for the year-to-date period on a pro forma combined
basis was approximately 26%.
SOFTWARE PRODUCTS. Software products revenue increased significantly
for the third quarter and year-to-date periods of 1999 as compared to the same
periods of 1998 primarily due to the sales of products acquired from Seer during
1998 coupled with sales of the Company's new Geneva Integrator product. In the
first nine months of 1998, the Company's software sales were primarily resales
of IBM's MQ Series licenses and sales of FalconMQ and XIPC messaging products,
now known as Geneva Message Queuing. Through its acquisitions in 1998, the
Company acquired Momentum's XIPC messaging product and Seer's HPS products, now
known as Geneva AppBuilder, which are used for application development.
Additionally, as discussed above, the Company began selling Geneva Integrator,
an EAI solution, during the second quarter of 1999. For purposes of comparative
discussions, Seer*HPS will be referred to as Geneva AppBuilder.
Software products revenue has continued to grow as a percentage of total
revenue, reflecting the Company's emphasis on expanding product sales.
Management believes software products revenue will continue to grow as a
percentage of total revenue over the next several quarters.
Gross margins on software products increased significantly from 21% for the
third quarter and a negative margin in the year-to-date periods of 1998 to 72%
for the third quarter and 69% for the year-to-date periods of 1999, primarily
due to the increase in the Company's software products revenue. The increase in
gross margin was offset somewhat by an increase in the cost of software of $.8
million and $1.9 million for the third quarter and year-to-date period. Cost of
software is composed of production and distribution costs, amortization of
16
<PAGE>
capitalized software and royalties to third parties. The increase in cost of
software was primarily due to amortization of capitalized software from
Momentum's and Seer's developed technology, which was valued as part of the
purchase accounting for these business combinations, and royalties for
technology acquired in 1998 from Liraz, the Company's majority shareholder.
MAINTENANCE Maintenance revenue increased significantly in the third
quarter and year-to-date periods of 1999 in comparison to the same periods of
1998 primarily due to the addition of Geneva AppBuilder to the Company's
products, which has historically had a significant revenue stream from
maintenance. Maintenance revenue on a pro forma combined basis for the
year-to-date period of 1998 was $10.7 million.
Cost of maintenance is comprised of personnel costs and related overhead
and the cost of third-party contracts for the maintenance and support of the
Company's software products. Gross margins on maintenance increased to 63% for
the year-to-date period of 1999 from 41% for the comparable period of 1998,
while it was consistent at 66% for the third quarter of both 1999 and 1998. The
increase in gross margins is primarily due to the addition of Seer*HPS and XIPC
to the Company's products.
SERVICES. Services revenue increased significantly from the third
quarter and year-to-date periods of 1998 to the same periods of 1999 primarily
due to the acquisition of Seer, which for the 1999 year-to-date period, added an
average of approximately 125 consultants to the Company's consulting staff.
Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins increased from 5% to 17% for
the third quarter, while decreasing from 35% to 13% for the year-to-date period
of 1998 as compared to the same periods of 1999. As a result of changes in the
composition of the Company's services revenue have caused margins to
decline in 1999, since the Seer*HPS-related services have historically
generated lower margins than the Company's other service offerings. The
Company is seeking to improve its consulting margins through better
utilization of its consultants and by retraining the Seer*HPS consulting
resources to provide higher margin services for the Company's Geneva
Integrator and Geneva Message Queuing products. As a result of these efforts,
the Company has created a positive trend in 1999, increasing gross margin from
9% in the first quarter to 17% in the third quarter. Management is continuing
to focus on increasing its services margins.
SALES AND MARKETING. Sales and marketing expenses primarily include
personnel costs for salespeople, travel, and related overhead, as well as
trade show participation and other promotional expenses. Sales and
marketing expenses increased significantly from the third quarter and
year-to-date period of 1998 to the same periods of 1999 due to an increase in
the size of the Company's sales force, both through acquisition and recruiting.
The increases in the size of the number of sales and marketing personnel were
necessitated by the reorganization of the Company's sales and promotional
activities to correspond with its new product strategy as well as the Company's
expansion into the global marketplace with the acquisition of Seer. The
Company intends to continue to increase its spending in the sales and
marketing area in an effort to increase software products revenue through
heightened market awareness and improved acceptance of its products and
expanding its indirect distribution network.
RESEARCH AND DEVELOPMENT. Research and development expenses primarily
include personnel costs for product authors, product developers and product
documentation personnel and related overhead. Research and development expense
increased significantly from the third quarter and year-to-date periods of 1998
to the same periods of 1999 due to the addition of an average of approximately
eighty developers in the year-to-date period from Momentum and Seer. The
Company intends to continue making a significant investment in research and
development while also improving efficiencies in this area.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of personnel costs for the legal, financial, human resources, and administrative
staff and related overhead and all non-allocable corporate costs of operating
the Company. General and administrative expenses increased 81% and 54% in the
third quarter and year-to-date periods of 1999 as compared to the same periods
of 1998. The increases are primarily related to the additional infrastructure
necessary to support the Company after the acquisitions of Momentum and Seer.
As a percentage of revenue, general and administrative expense has declined from
37% in the first nine months of 1998 to 12% in the first nine months of 1999 due
to synergies obtained through the Company's 1998 acquisitions.
17
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets,
primarily goodwill, was $1.8 million in the third quarter and $5.2 million in
the year-to-date period of 1999 as compared to $.9 million and $1.6 million in
the respective periods of 1998. The amortization of goodwill in the first three
quarters of 1998 was related to the purchase of Level 8 Technologies in April of
1995 and beginning in the second quarter included amortization related to the
purchase of Momentum in March, 1998. In the third quarter and year-to-date
period of 1999, the amortization of goodwill and other intangible assets related
to the purchase of Seer, Momentum and Level 8 Technologies. The Company will
continue to assess the recoverability of its intangible assets on a quarterly
basis based on the net present value of the expected future cash flows.
PURCHASED RESEARCH AND DEVELOPMENT. Based on the results of a
third-party appraisal, the Company recorded a charge in the first quarter of
1998 of $1.2 million to expense purchased in-process research and development
costs related to the acquisition of Momentum. As a result of completing the
acquisition of the remaining 31% of Seer, the Company recorded a charge of $.7
million for in-process research and development costs in the second quarter of
1999.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate
for continuing operations differs from the statutory rate primarily because
an income tax benefit was not recorded for the net loss incurred in the
third quarter or the year-to-date period of 1999. Because of the Company's
inconsistent earnings history, the deferred tax assets have been fully offset by
a valuation allowance. The income tax provision for the third quarter and the
year-to-date periods of fiscal year 1999 is primarily related to income taxes
from profitable foreign operations and foreign withholding taxes.
DISCONTINUED OPERATIONS. During 1998, the Company disposed of one of
its wholly-owned subsidiaries, ProfitKey International, Inc. The disposal
was accounted for as a discontinued operation. Accordingly, the results of
operations for the year-to-date period of 1998 reflect a $1.0 million loss from
discontinued operations.
IMPACT OF INFLATION. Inflation has not had a significant effect on
the Company's operating results during the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
Net cash used in operations during the first three quarters of 1999 was
$7.3 million. Payments of approximately $3.4 million for merger and
restructuring costs related to the acquisition of Seer were two of the primary
components of the net cash outflow in addition to the Company's normal,
recurring operating expenses. Also, both the Company and Seer had lower than
anticipated billings in the fourth calendar quarter of 1998 which contributed to
a reduction in cash received from customers early in 1999. The Company believes
this trend was caused primarily by internal distractions within both companies
in the fourth calendar quarter of 1998 due to the November announcement of the
Seer transaction which was consummated on December 31, 1998.
Net cash used in investing activities for the first nine months of 1999 was
$4.1 million. As of April 30, 1999, the Company acquired the remaining 31%
minority interest in Seer, 3,375,833 shares of common stock, for $0.35 per share
in cash, through a tender offer and merger in April, 1999 for approximately $1.7
million. There were also $1.1 million for other direct costs of the Seer
acquisition paid in the 1999 year-to-date period. As a result of the completion
of the Tender Offer and merger, Seer became a wholly owned subsidiary of the
Company. Additionally, the Company capitalized software development costs of
$1.2 million, primarily related to the Geneva Integrator and Geneva Message
Queuing products.
Net cash provided by financing activities for the first nine months of 1999
was $14.9 million. During the second quarter of 1999, the Company issued 21,000
shares of its Series A 4% Convertible Redeemable Preferred Stock ("Series A
Preferred Stock") for $21 million and paid down its line of credit by $4
million. During the third quarter of 1999, the Company paid $8 million on its
outstanding debt obligations with its majority shareholder Liraz, adding to the
$.5 million paid in the first quarter.
The Company funded its cash needs during the first nine months of 1999 with
cash on hand at December 31, 1998, through operations, through the issuance of
the Series A Preferred Stock and through $6.9 million in net additional
borrowings under its line of credit.
18
<PAGE>
As of September 30, 1999, the Company had outstanding borrowings of $15.2
million under a credit facility with a commercial bank shared between the
Company and it's wholly-owned subsidiary, Seer, (the "Credit Facility") at an
interest rate of 10.25%. During the third quarter, the Credit Facility was
amended and currently provides for borrowings up to the lesser of $25 million or
the sum of 80% of eligible receivables and a $10 million term loan payable on
March 1, 2001. The receivables-based borrowings under the Credit Facility are
due on demand. The Credit Facility bears interest at the prime rate plus 2% per
annum and has no financial covenant provisions. The receivables based borrowing
instrument terminates on September 1, 2000; however, it is automatically renewed
for successive additional terms of one year each, unless terminated by either
party. The Credit Facility is collateralized by the Company's accounts
receivable, equipment and intangibles, including intellectual property.
In addition to the Credit Facility, the Company has other outstanding
borrowings at September 30, 1999 including (i) $90,000 under a note payable to
Liraz which bears interest at 4% per year and is payable in equal quarterly
installments of $35,000, including interest, (ii) $.5 million under a note
payable to Liraz which bears interest at 8% per year and is payable in annual
installments, (iii) $2.3 million of $3 million in notes issued to the sellers
of Momentum which bear interest at 10% per year and are payable in annual
installments, and (iv) $4 million under a loan from Liraz which bears interest
at 12% and is payable on December 15, 2000. All debt payable to Liraz is
subordinate in right of payment to the Credit Facility.
Future maturities on the Company's outstanding debt at September 30, 1999
include $6 million in 1999, $5.3 million in 2000, and $10.8 million in 2001. Of
such amounts, $4.6 million in 2000 is due to Liraz.
On June 29, 1999, Level 8 Systems, Inc. completed the Series A Preferred
Stock agreement to sell 21,000 shares of Series A 4% Convertible Redeemable
Preferred Stock, for $21 million, convertible into an aggregate of 2,100,000
shares of common stock of Level 8. The net proceeds will be used to pay down
debt and other general corporate purposes. During the second quarter, the
Company used $4 million to pay down the Credit Facility. During the third
quarter, the Company paid down $8 million of the $12 million loan from Liraz.
The sale of the Series A Preferred Stock was made in a private transaction
exempt from the registration requirements of the federal securities laws.
Holders of the Series A Preferred Stock are entitled to receive 4% annual
cash dividends payable quarterly and will have one vote per share of Series A
Preferred Stock, voting together with the common stock and not as a separate
class except on certain matters adversely affecting the rights of holders of
the Series A Preferred Stock. The Series A Preferred Stock may be redeemed
at the option of Level 8 at a redemption price equal to the original purchase
price at any time after June 29, 2000 if the closing price of Level 8's common
stock over 20 consecutive trading days is greater than $20 per share. The
conversion price of the Series A Preferred Stock is subject to certain
anti-dilution provisions, including adjustments in the event of certain sales of
common stock at a price of less than $10 per share. In the event Level 8
breaches its obligations to pay dividends when due or issue common stock upon
conversion, or Level 8's common stock is delisted, the dividend rate on the
Series A Preferred Stock would increase to 18% per annum (partially payable in
shares of common stock at the option of Level 8 during the first 60 days of such
increased dividend rate). As part of the $21 million financing, Level 8 also
issued the investors warrants to purchase 2.1 million shares of common stock at
an exercise price of $10 per share. Level 8 has agreed to register the common
stock issuable upon conversion of the Series A Preferred Stock and exercise of
the warrants for resale under the Securities Act of 1933. Level 8 is required
to make certain payments in the event it is unable to meet its obligations in
connection with the Series A Preferred Stock and warrants, such as registration
under the Securities Act or issuance of shares of common stock upon conversion
or exercise. The aggregate amount of all such payments, together with dividends
on the Series A Preferred Stock, is limited to 19% of the liquidation value of
the Series A Preferred Stock. Investors in the Series A Preferred Stock and
warrants include Advanced Systems Europe B.V., which purchased $10 million of
Series A Preferred Stock and warrants in the transaction, and is a
subsidiary of Liraz Systems, Ltd., Level 8's principal stockholder.
As a result of issuing more than $7.5 million in new equity instruments,
the Company no longer has a commitment from Liraz for $7.5 million in working
capital.
As of September 30, 1999, the Company did not have any material commitments
for capital expenditures.
During the first nine months of 1999, the Company incurred a net loss of
$10.6 million and has a working capital deficit of $2.1 million and an
accumulated deficit of $35.8 million at September 30, 1999. The Company's
ability to generate positive cash flow is dependent upon the Company meeting its
operating plan. The Company already implemented certain steps to, among other
things, reduce headcount, restructure operations and eliminate various costs
from the business in order to better position itself for future growth. The
19
<PAGE>
Company believes that existing cash on hand, cash provided by future operations
and additional borrowings under the Credit Facility will be sufficient to
finance its operations and expected working capital and capital expenditure
requirements for at least the next twelve months so long as the Company
continues to perform to its operating plan. However, there are future risks due
to the pending Template acquisition, including the completion of the financing
of the transaction and the successful integration and management of the combined
companies. There can be no assurance that the Company will be able to continue
to meet its cash requirements through operations or, if needed, obtain
additional financing on acceptable terms, and the failure to do so may have an
adverse impact on the Company's business and operations.
YEAR 2000
- ----------
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000 Problem" is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
Software Sold to Consumers. The Company believes that it has substantially
identified potential Year 2000 Problems with the software products that it
develops and markets. See "Item 1. Business - Products and Services," of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 for a
further discussion of the Company's products. The Company's Geneva Message
Queuing products and Geneva Integrator are capable of accurately processing,
providing, and/or receiving date data from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000, including leap year
calculations. The Company's Geneva AppBuilder toolset products, formerly
Seer*HPS, are designed to allow developers to develop applications that are Year
2000 compliant, through the use of four-digit year fields which can accept and
accurately represent dates both before and after the Year 2000. Once a
four-digit year is properly input, applications built with the Geneva AppBuilder
toolset can properly process the dates.
Dates may be input into these applications either by entering a four-digit
year or, as a shortcut, by entering the last two digits of the year. In the
latter case, the application assigns a century to the date and "feeds
back" a four-digit year to the user by displaying it on the screen. For all
versions of Geneva AppBuilder above 5.2.3K, the century is assigned according to
a moving 100-year window. The Company has made available documentation to its
customers that explains how this moving 100-year window can be adjusted,
both on the workstation platform and on the host. For version 5.2.3K,
the century is assigned a default value of "19". In either case, the user can
either accept the proposed four-digit date or correct it, if the
application has assigned the wrong century in a particular case.
The foregoing description related to Geneva AppBuilder versions 5.2.4S
and higher (for the workstation) and 5.2.3K and higher (for the host), which
were released in December 1995. The Company believes that if operated
properly, applications constructed with these versions in accordance with
the product documentation should not manifest Year 2000-related errors
traceable to the Geneva AppBuilder product. The Company does not believe any of
its customers are using earlier versions of the software.
The Company cannot, however, eliminate the possibility of input errors,
where input is in the form of two-digit years. Among other potential errors, it
is possible to introduce incorrect dates into applications using the shortcut
mentioned above if the operator is inattentive to the feedback, or if the
operator or batch data inputs dates represented as two-digit years, without any
way for the operator to determine which century a given year falls in. The
Company has attempted to identify the possible errors by making documentation
available to its customers.
With respect to the Company's Geneva AppBuilder development environment
itself, the Company is not aware of any Year 2000 issues except the
following. The tools store certain information with respect to objects created
using the tools (such as the dates the object was created or last
modified) as two-digit dates. Because of the way the tools use these dates, the
Company does not believe this will cause any Year 2000-related problems
except in the limited instance of migrations spanning the century boundary. The
Company has made available to its customers documentation calling their
attention to this issue and a workaround.
20
<PAGE>
Accordingly, the Company believes that it has fulfilled its obligations to
its customers with respect to Year 2000 functionality. However, the law in this
area is still evolving and lawsuits are being filed against software companies
on an ongoing basis, many of them asserting novel theories of damage and
liability. Accordingly, no assurance can be given that claims will not be made
against the Company relating to date-processing issues or that the effect of
such claims on the Company will not be material.
Internal Infrastructure. The Company has identified all of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be modified, upgraded, or replaced to minimize
the possibility of a material disruption to its business. The process of
modifying, upgrading, and replacing major systems that have been identified as
adversely affected has been completed. Although the costs of these steps have
not been separately tracked, management believes the costs specifically incurred
to obtain Year 2000 compliance were not material.
Systems Other Than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 Problem.
The Company is continuing to assess the potential effect of, the Year 2000
Problem on its office and facilities equipment, but believes it has taken
steps to ensure all critical systems have been made ready.
Although the Company does not separately track these costs, the Company
does not believe the additional total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
have a material adverse effect on the Company's financial condition, cash flows,
or results of operations.
Suppliers. The Company has reviewed information from third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 Problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, there can be no
assurance that these suppliers will resolve any or all Year 2000 Problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers. Any failure of these third parties to
resolve Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
Most Likely Consequences of Year 2000 Problems. The Company does not
believe that the Year 2000 Problem will have a material adverse effect on the
Company's business or results of operations. However, management believes that
it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, one cannot accurately predict how many Year
2000 Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies for
the Company and its clients that may divert management's time and attention and
financial and human resources from its ordinary business activities;
2. a lesser number of serious system failures that may require significant
efforts by the Company or its clients to prevent or alleviate material business
disruptions.
and
3. Customers and their IT professionals who are focused on addressing their
own Year 2000 problems may defer orders of the Company's products, thereby,
having a short-term impact on software products revenue.
Contingency Plans. The Company has developed contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. Depending on the system, these plans include
accelerated replacement of affected equipment or software, short to medium-term
use of backup equipment and software, increased work hours for Company
personnel and/or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds
for information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
21
<PAGE>
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
EURO CONVERSION
- ----------------
Several European countries adopted a Single European Currency (the "Euro")
as of January 1, 1999 with a transition period continuing through January 1,
2002. The Company is reviewing the anticipated impact the Euro may have on its
internal systems and on its competitive environment. The Company believes its
internal systems will be Euro capable without material modification cost.
Further, the Company does not presently expect the introduction of the
Euro currency to have an adverse material impact on the Company's
financial condition, cash flows, or results of operations.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
- ---------------------------------------------
This report contains forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities, the pending
transaction with Template, liquidity and capital resources, Year 2000 issues
and similar matters within the meaning of the Private Securities Reform Act of
1995 ("Reform Act"). The Company may also make forward looking statements in
other reports filed with the Securities and Exchange Commission, in
materials delivered to shareholders, in press releases and in other public
statements. In addition, the Company's representatives may from time to time
make oral forward looking statements. Forward looking statements provide
current expectations of future events based on certain assumptions and include
any statement that does not directly relate to any historical or current
fact. Words such as "anticipates," "believes," "expects," "estimates,"
"intends," "plans," "projects," and similar expressions, may identify
such forward looking statements. In accordance with the Reform Act, set
forth below are cautionary statements that accompany those forward looking
statements. Readers should carefully review these cautionary statements as they
identify certain important factors that could cause actual results to differ
materially from those in the forward looking statements and from historical
trends. The following cautionary statements are not exclusive and are in
addition to other factors discussed elsewhere in the Company's filings with
the Securities and Exchange Commission and in materials incorporated therein by
reference: the Company's future success depends on the market acceptance of
the new Geneva Integrator; an unexpected revenue shortfall may adversely affect
the Company's business because its expenses are largely fixed; the Company's
quarterly operating results may vary significantly because the Company cannot
accurately predict the amount and timing of individual sales and this may
adversely impact the Company's stock price; trends in sales of the Company's
products and general economic conditions may affect investors' expectations
regarding the Company's financial performance and may adversely affect the
Company's stock price; because a substantial amount of the Company's revenues
have historically been derived from Geneva AppBuilder, decreased demand for
services relating to this product could adversely affect the Company's
business; the Company's future results may depend upon the continued
growth and business use of the Internet; the Company may lose market share and
be required to reduce prices as a result of competition from its existing
competitors, other vendors and information systems departments of
customers; the Company's future results may depend upon the successful
integration of acquisitions; the Company may not have the resources to
successfully manage additional growth; rapid technological change could render
the Company's products obsolete; if the Company's relationship with Microsoft
weakens, it could adversely affect the Company's business; the loss of any one
of the Company's major customers could adversely affect the Company's business;
the Company's business is subject to a number of risks associated with doing
business abroad including the effect of foreign currency exchange fluctuations
on the Company's results of operations; the Company's products may contain
undetected software errors, which could adversely affect its business; because
the Company's technology is complex, the Company may be exposed to liability
claims; year 2000 issues may cause problems with the Company's systems,
expose the Company to liability, and cause customers to delay orders until
after January, 2000; the failure of the Company to meet product delivery dates
could adversely affect its business; the Company may be unable to enforce or
defend its ownership and use of proprietary technology; because the Company is
a technology company, its Common Stock may be subject to erratic price
fluctuations; and the Company may not have sufficient liquidity and
capital resources to meet changing business conditions. See the Company's Form
10-K filed on April 1, 1999 for a more detailed description of certain risks
presented by the Company's operations.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
Approximately 65% of the Company's 1999 revenues for the first nine months
were generated by sales outside th United States. The Company is exposed
to significant risks of foreign currency fluctuation primarily from receivables
denominated in foreign currency and are subject to transaction gains and
losses, which are recorded as a component in determining net income.
Additionally, the assets and liabilities of the Company's non-U. S. operations
are translated into U.S. dollars at exchange rates in effect as of the
applicable balance sheet dates, and revenue and expense accounts of these
operations are translated at average exchange rates during the month the
transactions occur. Unrealized translation gains and losses will be included
as an adjustment to shareholders' equity. Based upon the foregoing, the
Company began hedging its foreign currency receivables in the third quarter
of 1999 in an effort to reduce its exposure to currency exchange rates.
However, as a matter of procedure, the Company will not invest in speculative
financial instruments as a means of hedging against such risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1997, Seer Technologies, Inc. ("Seer"), a wholly-owned
subsidiary of the Company, instituted litigation in London, England against
Saadi Abbas ("Abbas") and Cambridge Business Solutions (UK) Ltd. ("CBS")
concerning a dispute over a license agreement between Seer, CBS and Abbas.
These entities counterclaimed against Seer. The case has proceeded through
discovery and various other procedural events and all that remains of the
litigation at this point in time are various claims against Seer by Abbas and
CBS. In July, most of those claims were struck out by the court in London as
unarguable or otherwise time barred. The Company intends to continue to
vigorously defend against the few remaining claims. The Company has made
provision for its estimated costs to resolve this matter. Management does not
believe at this point in the litigation that any additional amounts required to
ultimately resolve this matter will have a material effect on the financial
position, cash flows, or results of operations of the company.
On April 6, 1998, the Company sold substantially all assets and
operations of its wholly owned subsidiary ProfitKey International, Inc.
("ProfitKey"). According to the terms of the ProfitKey sale agreement, the
purchase price is subject to adjustment to reflect any variance in working
capital from a specified amount. The purchaser has notified the Company that it
believes there are adjustments totaling $1,466 which would require a reduction
in the purchase price. The Company has attempted to negotiate a
settlement with the purchaser and has, pursuant to the terms of the
settlement agreement, entered arbitration proceedings to resolve this matter.
The Company has made a provision for its estimate of the purchase price
adjustment and the costs to resolve this matter. Management believes at
this time that any additional provision required to ultimately resolve this
matter will not have a material effect on the financial position, cash flows,
or results of operations of the Company.
John B. Stockton, a stockholder of Seer at the time of its merger with a
subsidiary of Level 8, has informed the Company that he has filed a petition in
the Delaware Court of Chancery asserting that Seer stockholders perfecting
appraisal rights are entitled to receive the fair value of their Seer shares as
determined in an appraisal proceeding under Section 262 of the Delaware General
Corporation Law. The Company has not yet been served a copy of the complaint.
The Company believes that less than 20,000 shares of Seer common stock have
validly perfected appraisal rights under Delaware law, and that the fair value
of such shares at the time of the merger does not exceed $.35 per share of Seer.
Management does not believe at this time that any amounts required to ultimately
resolve this matter will have a material effect on the financial position, cash
flows, or results of operations of the company.
From time to time, the Company is a party to routine litigation incidental
to its business. As of the date of this Report, the Company was not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on the Company.
23
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS 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
10.34 Amendment dated September 24, 1999, to the Loan and
Security Agreement among Seer, the Company and
Greyrock Capital, a division of Banc of America
Commercial Finance Corporation, dated March 31, 1999
(filed herewith).
27.1 Financial Data Schedule for the Company(filed herewith).
(b) Reports on Form 8-K
On November 5, 1999, the Company filed a Form 8-K announcing the signing of an
Agreement and Plan of Merger with Template Software, Inc.
24
<PAGE>
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 thereunto duly authorized.
Level 8 Systems, Inc.
Date: November 10, 1999 /s/Steven Dmiszewicki
--------------------------
Steven Dmiszewicki
President
Date: November 10, 1999 /s/Renee Fulk
--------------------------
Renee Fulk
Vice President of Finance
(Principal Financial and
Accounting Officer)
25
<PAGE>
EXHIBIT 10.34
[GREYROCK LOGO]
AMENDMENT TO LOAN DOCUMENTS
BORROWERS: SEER TECHNOLOGIES, INC. AND LEVEL 8 SYSTEMS, INC.
ADDRESS: 8000 REGENCY PARKWAY
CARY, NORTH CAROLINA 27511
DATE: SEPTEMBER 24, 1999
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between GREYROCK CAPITAL,
a Division of Banc of America Commercial Finance Corporation ("Greyrock"), whose
address is 10880 Wilshire Blvd., Suite 1850, Los Angeles, CA 90024 and the
borrower named above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated March 31, 1999 (as amended from time to time, the "Loan Agreement"), as
follows, effective on the date hereof. (Capitalized terms used but not defined
in this Amendment, shall have the meanings set forth in the Loan Agreement.)
1. TERM.
(a) Sections 6.1 and 6.2 of the Loan Agreement are hereby deleted and
replaced with the following: "See Section 4 of the Schedule".
(b) Section 1(c)(1) of the Schedule, which currently reads as follows:
"(1) The Replacement Term Loan shall be due and payable, in full, on the earlier
of (A) SEPTEMBER 1, 2000, or (B) any termination of this Agreement",
is hereby amended in its entirety to read as follows:
"(1) The Replacement Term Loan shall be due and payable, in full, on the earlier
of (A) MARCH 1, 2001, or (B) any termination of this Agreement".
(c) In Section 1 of the Schedule, the subsection entitled "Letter of Credit
Sublimit" is hereby amended in its entirety to read as follows:
"LETTER OF CREDIT SUBLIMIT Greyrock, in its reasonable business discretion,
will from time to time during the term of this Agreement issue letters of credit
for the account of the Borrower ("Letters of Credit"), in accordance with a
Letter of Credit Agreement of even date, in an aggregate amount at any one time
outstanding not to exceed $500,000, upon the request of the Borrower, provided
that, on the date the Letters of Credit are to be issued, Borrower has available
EXHIBIT 10.34 -, PAGE 1
<PAGE>
to it Receivable Loans in an amount equal to or greater than the face amount of
the Letters of Credit to be issued, and provided that no further LCs will be
issued after the Receivable Loan Maturity Date (defined below). Each Letter of
Credit shall have an expiry date no later than the Receivable Loan Maturity
Date, provided that a Letter of Credit may have an expiry date later than the
Receivable Loan Maturity Date if and only if Borrower's reimbursement obligation
with respect to such Letter of Credit is secured by cash on terms acceptable to
Greyrock in its sole discretion. Fees for the Letters of Credit shall be as
provided in said Letter of Credit Agreement.
The Credit Limit set forth above and the Loans available under this
Agreement at any time shall be reduced by the face amount of Letters of Credit
from time to time outstanding."
(d) Section 4 of the Schedule is hereby amended in its entirety to read as
follows:
"4. MATURITY DATE
(Section 6.1):
(a) Term of Receivable Loan Facility. The period
-----------------------------------
during which Receivable Loans will be made (the 'Receivable Loan Period') shall
be from the date of this Agreement to SEPTEMBER 1, 2000 (the 'Receivable Loan
Maturity Date'), unless sooner terminated in accordance with the terms of this
Agreement, provided that the Receivable Loan Maturity Date shall automatically
be extended for successive addi-tional terms of one year each, unless one party
gives written notice to the other, not less than sixty days prior to the next
Receivable Loan Maturity Date, that such party elects to terminate the
Receivable Loan Period effective on the next Receivable Loan Maturity Date. On
the Receivable Loan Maturity Date or on any earlier termination of this
Agreement, no further Receivable Loans will be made, and Borrower shall pay in
full all outstanding Receivable Loans.
(b) Early Termination of Receivable Loan Facility at Borrower's Option. The
---------------------------------------------------------------------
Receivable Loan Period may be termi-nated prior to the Receivable Loan Maturity
Date by Borrower, effective three business days after written notice of
termination is given by Borrower to Greyrock.
(c) Term of Agreement. The term of this Agreement shall be from the date of
-------------------
this Agreement to the later of the following (the 'Maturity Date'): (i) the
EXHIBIT 10.34 -, PAGE 2
<PAGE>
termination of the Receivable Loan Period, or (ii) the date the last installment
of principal on the Replacement Term Loan is due. On the Maturity Date or on
any earlier termination of this Agreement, Borrower shall pay in full all
Obligations, and notwithstanding any termination of this Agreement all of
Greyrock's security interests and all of Greyrock's other rights and remedies
shall continue in full force and effect until payment and performance in full of
all Obligations.
(d) Early Termination of Agreement. This Agreement may be terminated prior to
-------------------------------
the Maturity Date as follows: (i) by Borrower, effective three business days
after written notice of termination is given to Greyrock; or (ii) by Greyrock at
any time after the occurrence of an Event of Default, without notice, effective
immediately.
(e) Payment of Obligations. Notwithstanding anything herein to the contrary,
------------------------
Borrower shall have no right to terminate this Agreement at any time that any
principal of, or interest on any of the Loans or any other mone-tary Obligations
are outstanding, except upon prepayment of all Obligations and the satisfaction
of all other conditions set forth in the Loan Documents."
2. REPRESENTATIONS TRUE. Borrower represents and warrants to Greyrock
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other
Loan Documents set forth in full all of the representations and agreements of
the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and under-standings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
BORROWER: BORROWER:
SEER TECHNOLOGIES, INC. LEVEL 8 SYSTEMS, INC.
By /s/ Steven Dmiszewicki By /s/ Steven Dmiszewicki
------------------------- -------------------------
President or Vice President President or Vice President
By /s/ Dennis McKinnie By /s/ Dennis McKinnie
---------------------- ----------------------
Secretary or Ass't Secretary Secretary or Ass't Secretary
EXHIBIT 10.34 -, PAGE 3
<PAGE>
GREYROCK:
GREYROCK CAPITAL,
A DIVISION OF BANC OF AMERICA COMMERCIAL FINANCE CORPORATION
By /s/Lisa Nagano
----------------
Title Sr. Vice President
--------------------
EXHIBIT 10.34 -, PAGE 4
<PAGE>
<TABLE> <S> <C>
<CAPTION>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FIELD AS PART OF
THE ANNYUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,567
<SECURITIES> 0
<RECEIVABLES> 15,881
<ALLOWANCES> 1,664
<INVENTORY> 0
<CURRENT-ASSETS> 28,163
<PP&E> 3,627
<DEPRECIATION> 1,850
<TOTAL-ASSETS> 65,599
<CURRENT-LIABILITIES> 30,308
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 18,487
<TOTAL-LIABILITY-AND-EQUITY> 65,599
<SALES> 0
<TOTAL-REVENUES> 39,016
<CGS> 0
<TOTAL-COSTS> 22,690
<OTHER-EXPENSES> 24,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,724
<INCOME-PRETAX> (10,002)
<INCOME-TAX> 594
<INCOME-CONTINUING> (10,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,596)
<EPS-BASIC> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
