<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) July 10, 2000
-------------------------------
Level 8 Systems, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-26392 11-2920559
------------------------------- ------------------------ -------------------
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation) Identification No.)
8000 Regency Parkway
Cary, North Carolina 27511
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (919) 380-5000
-----------------------------
N/A
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
a. Previous independent accountants
i. On July 10, 2000, Level 8 Systems, Inc. (the
"Company") dismissed PricewaterhouseCoopers LLP as
its independent accountants.
ii. The reports of PricewaterhouseCoopers LLP on the
financial statements for the past two fiscal years
contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
iii. The Company's Audit Committee participated in and
approved the decision to change the Company's
independent accountants.
iv. In connection with its audits for the two most recent
fiscal years and any subsequent interim period, there
have been no disagreements with
PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
v. In planning and performing the audit of the financial
statements of the Company for the year ended December
31, 1998, PricewaterhouseCoopers LLP noted certain
internal control deficiencies at the Company's New
York/New Jersey facilities that it considered to be
reportable conditions under standards established by
the American Institute of Certified Public
Accountants. Reportable conditions involve matters
relating to significant deficiencies in the design or
operation of internal controls that could adversely
affect the organization's ability to record, process,
summarize, and report financial data consistent with
the assertions of management in the financial
statements.
On or about March 31, 1999, PricewaterhouseCoopers
LLP provided the Company with a letter regarding such
reportable conditions. A detailed description of the
deficiencies are listed below in this report.
Many of the deficiencies noted by
PricewaterhouseCoopers LLP were also noted by the
Company's prior auditors. While the Company did make
improvements during 1998, many of these deficiencies
and accounting adjustments related to these
deficiencies were not addressed until subsequent to
December 31,1998 in conjunction with the finalization
of the Company's 1998 annual report and, therefore,
were required to be communicated by
PricewaterhouseCoopers LLP under applicable AICPA
guidelines.
2
<PAGE> 3
In early 1999, the Company itself conducted an extensive
internal review of the Company's 1998 accounting and made
numerous adjustments in conjunction with the finalization of
the Company's 1998 annual report. Additionally, on January 1,
1999, the Company ceased all accounting functions at its New
York/New Jersey facilities and relocated all accounting,
financial reporting and internal control responsibility to the
Company's Cary, North Carolina finance operations.
PricewaterhouseCoopers LLP acknowledged these changes in its
March 31, 1999 letter but could not comment on their
effectiveness on the Company's internal control structure at
that time. On February 11, 2000, PricewaterhouseCoopers LLP
issued its report to the Company on the results of the audit
for the year ended December 31, 1999. This report contained no
matters that PricewaterhouseCoopers LLP considered to be
reportable conditions under standards established by the
AICPA.
Reportable conditions identified in PricewaterhouseCoopers LLP's March
31, 1999 letter for the year ended December 31, 1998 were as follows:
Adequate Accounting Personnel
The Company lacked sufficient personnel in 1998 to
maintain accurate books and records. In addition, it
appeared that accounting supervisors lacked adequate
knowledge of specific industry accounting or did not
conduct sufficient reviews to ensure entries were
booked properly.
Documentation
During 1998, the Company failed to maintain adequate
documentation to support revenue and other
transactions. In addition, certain documentation,
while available, was not stored in a manner to
facilitate access. In some circumstances, key
accounting documentation had to be obtained from
employees outside of the accounting and finance
organization or from other alternative sources.
3
<PAGE> 4
Billing and Collections
During 1998, the Company was forced to write off or
reserve significant amounts of receivables due to
inadequate documentation or timely follow-up.
Revenue Recognition and Cutoff
During 1998, the Company recognized the revenue from
several contracts prior to the point in time when the
applicable requirements of Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2") had been
met. This resulted in several adjustments at year
end.
Software Development Costs
During 1998, the Company's accounting department
failed to collect and maintain adequate documentation
for the composition of development costs capitalized
under Statement of Financial Accounting Standards No.
86 "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" ("SFAS 86") or
for adjustments made to the carrying value of this
software due to declines in the related product net
realizable value. While adequate documentation for
these decisions was eventually obtained from
alternative sources, the Company's accounting
department had to make considerable efforts to locate
such documentation.
Related Party Transactions
During 1998, the Company failed to maintain adequate
documentation for certain transactions with Liraz
Systems Ltd., a significant shareholder of the
Company. While adequate documentation was eventually
located, due to the subjective nature of related
party transactions, PricewaterhouseCoopers LLP
recommended that the Company should ensure that all
transactions with related parties are documented
thoroughly and that the Company can support the
valuation of any transactions.
vi. The Company has requested that PricewaterhouseCoopers
LLP furnish it with a letter addressed to the SEC
stating whether or not it agrees with the above
statements.
4
<PAGE> 5
b. New independent accountants
The Company has engaged Deloitte & Touche LLP as its new
independent accountants as of July 11, 2000. Prior to the
engagement of Deloitte & Touche LLP, the Company did not
consult with such firm regarding the application of accounting
principles to a specific completed or contemplated
transaction, or any matter that was either the subject of a
disagreement or a reportable event. The Company also did not
consult with Deloitte & Touche LLP regarding the type of audit
opinion which might be rendered on the Company's financial
statements and no oral or written report was provided by
Deloitte & Touche LLP.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
c. Exhibits
16. Letter from PricewaterhouseCoopers LLP regarding change in
certifying accountant, dated July __,2000.
5
<PAGE> 6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LEVEL 8 SYSTEMS, INC.
Date: July 17, 2000 By: /s/ Renee Fulk
-----------------------------------------
Renee Fulk,
Chief Financial Officer
6
<PAGE> 7
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
Exhibit 16 Letter from PricewaterhouseCoopers LLP dated July __, 2000.*
-------------
* To be filed by amendment
