SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) December 27, 1999
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Level 8 Systems, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 0-26392 11-2920559
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(State or Other (Commission File Number) (I.R.S. Employer
Jurisdiction of Incorporation) Identification No.)
8000 Regency Parkway
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Cary, NC 27511
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (919) 380-5000
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N/A
---
(Former Name or Former Address, if Changed Since Last Report)
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2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
Item 7. Financial Statements, Pro Forma Financial Information, and
Exhibits set forth in Level 8 Systems, Inc.'s Form 8-K dated December 27, 1999
and filed on January 11, 2000, is hereby amended to read in its entirety as
follows:
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The financial statements required to be filed were previously reported in
Template Software, Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and are incorporated herein by reference.
(b) PRO FORMA FINANCIAL INFORMATION
On December 27, 1999, Level 8 Systems, Inc. ("Level 8" or the "Company")
completed its acquisition of Template Software, Inc. ("Template"). Under the
terms of the merger agreement, each share of Template common stock was exchanged
for $4.00 in cash plus .2838 of a share worth of Level 8 common stock. As of
December 24, 1999, there were 5,394,959 shares of Template common stock
outstanding. Template stockholders received a total of approximately
$21,579,000 in cash and 1,531,089 shares of Level 8 common stock in connection
with the acquisition. The total cost of the acquisition was approximately
$63,972,000 and has been accounted for by the purchase method of accounting.
Additionally, options for approximately 1,124,023 shares of Level 8 common stock
were issued in exchange for Template stock options outstanding at the
acquisition date.
In connection with the acquisition, Level 8 obtained a $10 million term
loan from a commercial lender. The loan bears interest at the London Interbank
Offered Rate plus one percent, payable quarterly, and matures on May 31, 2001.
The loan is guaranteed by Liraz Systems, Ltd. ("Liraz"), Level 8's controlling
stockholder, in exchange for 60,000 shares of Level 8 common stock. The value
of these shares was approximately $1,207,500.
The following unaudited pro forma combined statement of operations presents
the pro forma effect of the acquisition of Template by Level 8 and the debt
financing obtained by Level 8 in connection with the acquisition of Template.
The pro forma combined statement of operations assumes that the Template
business combination took place as of the beginning of the period presented.
The unaudited statement of operations for the year ended December 31, 1999
combines Template's unaudited consolidated statement of operations for the
period ended December 26, 1999 and Level 8's unaudited consolidated statement of
operations for the year ended December 31, 1999. Template's results of
operations are included in the historical Level 8 consolidated statement of
operations for the year ended December 31, 1999 from the date of acquisition.
On December 31, 1998, Level 8, as the first step in its acquisition of the
entire equity interest in Seer Technologies, Inc., acquired beneficial ownership
of approximately 69% of the outstanding voting stock of Seer. On April 15,
1999, the Company completed its cash tender offer for all the outstanding shares
of common stock of Seer and acquired the remaining minority interest in Seer on
April 30, 1999 by merger. The acquisition of Seer had a material impact on
Level 8's business. The pro forma statement of operations includes the effect
of the acquisition of the remaining 31% interest in Seer.
The objective of the combined pro forma financial information is to provide
investors with information about the continuing impact of particular completed
or probable transactions by indicating how the transactions might have affected
historical financial statements had they occurred at an earlier date. The pro
forma combined statement of operations is presented for illustrative purposes
only and is not necessarily indicative of the results of operations for future
periods or the results that actually would have been realized had Level 8 and
Template been a combined company during the specified periods.
Level 8's unaudited balance sheet as of December 31, 1999, reflects the
assets and liabilities acquired in the Template acquisition on December 27,
1999.
Prior to completing the acquisition, Level 8 had determined not to continue
with certain non-strategic operations of Template in Germany and Austria. At
the time of merger, the Company had entered into an agreement in principle to
sell the assets of these operations, principally its consulting workforce and
certain lease agreements. Accordingly, these operations have been excluded from
the historical operations of Template for the period ended December 26, 1999 for
purposes of the pro forma combined statement of operations. As a percentage of
revenue, these operations accounted for 40% and 38% of revenue in 1999 and 1998,
respectively. Level 8 has recorded the estimated fair value of these operations
at the acquisition date based on its estimate of the net future cash flows from
the transactions and associated operations through the wind up period. The fair
value of the German and Austrian operating liability was estimated at $25,000
and is included in accrued expenses in the balance sheet as of December 31,
1999.
Level 8 8-K/A, Page 2
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The pro forma combined statement of operations and the balance sheet
presented herein, including the notes thereto, are qualified in their entirety
by reference to, and should be read in conjunction with, the historical
consolidated financial statements of Level 8 and Template, including the notes
thereto.
<TABLE>
<CAPTION>
(c) EXHIBITS
<C> <S>
2.1 Agreement and Plan of Merger, dated October 19, 1999, by and among Level 8 Systems, Inc., TSAC, Inc.
and Template Software, Inc (incorporated by reference to Level 8's Form 8-K filed November 5, 1999)
10.1 Promissory Note of Level 8 Systems, Inc., dated December 20, 1999. (incorporated by reference to Level 8's
Form 8-K filed January 11, 2000)
23.1 Consent of PricewaterhouseCoopers LLP to the incorporation by reference of their report on Template's
audited financial statements into Level 8's registration statements.
</TABLE>
Level 8 8-K/A, Page 3
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LEVEL 8 SYSTEMS, INC.
Dated March 13, 2000 By: /s/ Renee D. Fulk
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Renee D. Fulk
Chief Financial Officer
Level 8 8-K/A, Page 4
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
1999
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ASSETS
<S> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 6,509
Accounts receivable, less allowance for doubtful accounts
of $1,150 at December 31, 1999. . . . . . . . . . . 22,199
Due from related company. . . . . . . . . . . . . . . . . -
Notes receivable. . . . . . . . . . . . . . . . . . . . . 2,000
Prepaid expenses and other current assets . . . . . . . . 5,134
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Total current assets . . . . . . . . . . . . . 35,842
Property and equipment, net . . . . . . . . . . . . . . . 5,845
Intangible assets, net. . . . . . . . . . . . . . . . . . 69,948
Software development costs, net . . . . . . . . . . . . . 20,488
Other assets. . . . . . . . . . . . . . . . . . . . . . . 1,458
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Total assets . . . . . . . . . . . . . . . . . $ 133,581
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, due on demand. . . . . . . . . . . . . . . $ 4,996
Current maturities of loan from related company . . . . . 560
Current maturities of long-term debt. . . . . . . . . . . 395
Accounts payable. . . . . . . . . . . . . . . . . . . . . 2,153
Accrued expenses:
Compensation . . . . . . . . . . . . . . . . . . . . 3,379
Restructuring. . . . . . . . . . . . . . . . . . . . 630
Merger-related . . . . . . . . . . . . . . . . . . . 4,075
Other. . . . . . . . . . . . . . . . . . . . . . . . 9,129
Due to related party. . . . . . . . . . . . . . . . . . . 41
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 9,020
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Total current liabilities. . . . . . . . . . . 34,378
Long-term debt, net of current maturities . . . . . . . . 22,202
Loan from related company, net of current maturities. . . 4,000
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 780
Stockholders' equity
Preferred stock, $0.001 par value. . . . . . . . . . --
Common stock, $0.001 par value . . . . . . . . . . . 12
Additional paid-in-capital . . . . . . . . . . . . . 113,507
Accumulated other comprehensive income . . . . . . . (159)
Accumulated deficit. . . . . . . . . . . . . . . . . (41,139)
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Total stockholders' equity . . . . . . . . . . 72,221
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Total liabilities and stockholders' equity . . $ 133,581
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</TABLE>
The accompanying notes are an integral part of the financial statements.
Level 8 8-K/A, Page 5
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<TABLE>
<CAPTION>
LEVEL 8 SYSTEMS, INC.
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1999
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pro Forma Pro Forma
Adjustments Level 8 Adjustments
Level 8 (Note 3) Adjusted Template (Note 3) Combined
--------- ------------- ---------- ---------- ------------- -----------
Revenue
Products . . . . . . . . . . . . . . $ 16,030 $ -- $ 16,030 $ 3,050 $ -- $ 19,080
Services . . . . . . . . . . . . . . 36,890 -- 36,890 19,007 -- 55,897
--------- ------------- ---------- ---------- ------------- -----------
Total revenue . . . . . . . . . . . 52,920 -- 52,920 22,057 -- 74,977
Cost of revenue
Products . . . . . . . . . . . . . . 4,245 426 (d) 4,671 1,052 2,033 (a) 7,756
Services . . . . . . . . . . . . . . 24,661 -- 24,661 15,148 -- 39,809
--------- ------------- ---------- ---------- ------------- -----------
Total cost of revenue . . . . . . . 28,906 426 29,332 16,200 2,033 47,565
Gross profit. . . . . . . . . . . . . 24,014 (426) 23,588 5,857 (2,033) 27,412
Operating expenses
Research and product development . . 6,796 -- 6,796 2,157 -- 8,953
Purchased research and development . 2,944 -- 2,944 -- (2,200) (f) 744
Selling, general and administrative. 18,831 -- 18,831 17,876 -- 36,707
Amortization of goodwill . . . . . . 6,959 (17)(d) 6,942 -- 7,312 (a) 14,254
Restructuring charges. . . . . . . . 383 -- 383 -- (383) (f) --
--------- ------------- ---------- ---------- ------------- -----------
Total operating expenses. . . . . . 35,913 (17) 35,896 20,033 4,729 60,658
Loss from operations. . . . . . . . . (11,899) (409) (12,308) (14,176) (6,762) (33,246)
Interest income . . . . . . . . . . . 579 -- 579 1 -- 580
Interest and other expense. . . . . . (2,742) -- (2,742) (1,068) (1,572) (b,(c) (5,382)
Net foreign currency gains/(losses) . (695) -- (695) -- -- (695)
--------- ------------- ---------- ---------- ------------- -----------
(2,858) -- (2,858) (1,067) (1,572) (5,497)
Netloss before taxes. . . . . . . . . (14,757) (409) (15,166) (15,243) (8,334) (38,743)
Income tax provision/(benefit). . . . 720 -- 720 (1,347) 1,347 (e) 720
--------- ------------- ---------- ---------- ------------- -----------
Pro forma net loss from continuing
Operations. . . . . . . . . . . . . . $(15,477) $ (409) $ (15,886) $ (13,896) $ (9,681) $ (39,463)
========= ============= ========== ========== ============= ===========
Pro forma loss per share,
Basic and diluted . . . . . . . . . . $ (3.78)
===========
Pro forma weighted average shares
Outstanding, basic and diluted. . . . 10,553
===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
Level 8 8-K/A, Page 6
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LEVEL 8 SYSTEMS, INC.
Notes to Unaudited Pro Forma Financial Statements
(in thousands, except per share amounts)
NOTE 1. BASIS OF PRESENTATION
The unaudited balance sheet reflects the financial position of Level 8 and
Template after the recording of the acquisition of Template and closing of the
related financing which took place on December 27, 1999 and December 20, 1999,
respectively.
The pro forma combined statement of operations assumes the business
combination took place as of the beginning of the period presented. The
statement of operations for the year ended December 31, 1999 combines Template's
consolidated statement of operations for the period ended December 26, 1999 and
Level 8's consolidated statement of operations for the year ended December 31,
1999. Template's results of operations are included in the unaudited historical
Level 8 consolidated statement of operations for the year ended December 31,
1999 from the date of acquisition.
Level 8 pro forma adjustments in 1999 are to record the increase in
amortization of goodwill and purchased software based on the assumption that the
purchase of the remaining 31% of Seer's outstanding voting stock occurred before
January 1, 1999.
On a combined basis there were no material transactions between Template
and Level 8 during the periods presented.
There are no material differences between the accounting policies of
Template and Level 8.
NOTE 2. GENERAL
On December 27, 1999, the Company acquired Template Software, Inc.
("Template"). Under the terms of the agreement, Level 8 purchased 5,394,959
shares of Template common stock for $21,579 in cash and 1,531,089 shares of
Level 8 common stock. Additionally, Level 8 also issued stock options
exercisable for 1,124,023 shares of the Company's common stock to assume all of
the outstanding Template stock options. The total cost of the acquisition was
$63,972 and has been accounted for by the purchase method of accounting. The
operations of Template are included in the Company's consolidated results of
operations from the date of acquisition.
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
prepared by an independent third-party appraisal company of the purchased
in-process research and development, developed technology, and assembled
workforce of Template. The purchase price exceeded the amounts allocated to
tangible and intangible assets acquired less liabilities assumed by
approximately $44,371. This excess of the purchase price over the fair values
of assets acquired less liabilities assumed was allocated to goodwill.
Prior to completing the acquisition, the Company had determined not to
continue with certain non-strategic operations of Template in Germany and
Austria. At the time of merger, the Company had entered into an agreement in
principle to sell the assets of these operations, principally its consulting
workforce and certain lease agreements. Accordingly, the Company has recorded
the estimated fair value of these operations at the acquisition date based on
its estimate of the net future cash flows from the transactions and associated
operations through the wind up period. The fair value of the German and
Austrian operating liability was estimated at $25 and will be adjusted
prospectively as this estimate changes.
Level 8 8-K/A, Page 7
<PAGE>
The cost of the acquisition was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash. . . . . . . . . . . . . . . . . . . . . $ 160
Accounts receivable . . . . . . . . . . . . . 6,123
Prepaid expenses and other current assets . . 597
Property and equipment. . . . . . . . . . . . 4,183
Capitalized software and developed technology 12,200
In-process research and development . . . . . 2,200
Goodwill and other intangibles. . . . . . . . 47,291
Other assets. . . . . . . . . . . . . . . . . 431
Assets held for resale. . . . . . . . . . . . (25)
Accounts payable. . . . . . . . . . . . . . . (668)
Accrued expenses and other liabilities. . . . (6,445)
Deferred revenue. . . . . . . . . . . . . . . (439)
Deferred tax liability. . . . . . . . . . . . (1,476)
Long-term debt. . . . . . . . . . . . . . . . (160)
--------
Cost of net assets acquired . . . . . . . . . $63,972
========
</TABLE>
Approximately $2,200 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 prepared by an independent third-party appraisal company, was
determined by identifying research projects in areas for which technological
feasibility had not been established. The efforts considered included projects
related to Template's Enterprise Integration Template("EIT") product ($1,298),
and projects related to new versions of Template's Business Process Template
("BPT") product ($902). 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 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 in-process research and development.
NOTE 3. PRO FORMA ADJUSTMENTS
<TABLE>
<CAPTION>
<S> <C>
(a) Adjustments are to record annual amortization of intangible assets resulting from the allocation of purchase
price, as discussed in Note 2. The estimated useful life of the intangible assets is considered to range from
three to seven years. The estimated annual amortization charge to income related to developed technology
resulting from the purchase described above approximates $2,033. The estimated annual amortization charge to
income related to goodwill and other intangible assets resulting from the purchase described above approximates
$7,312. These charges are reflected in the pro forma combined statements of income.
(b) Adjustments are to record interest expense incurred by Level 8 on the 10 million loan obtained in connection
with the acquisition. The amount of interest expense incurred by Level 8 is computed assuming the funds were
received on January 1, 1999 and utilizing the current LIBOR rate plus one percent.
(c) Adjustments are to record the amortization of the loan guaranty cost for the 60,000 shares issued to Liraz
Systems, Ltd. in exchange for their guarantee of the loan to finance the acquisition. The cost of the guarantee
is being amortized over the term of the loan, which matures on May 31, 2001.
(d) Adjustments are to record the increase in amortization of goodwill and purchased software based on the
assumption that the purchase of the remaining 31% of Seer's outstanding voting stock occurred before January 1,
1999.
Level 8 8-K/A, Page 8
<PAGE>
(e) Adjustments are to eliminate the income tax benefit previously recorded by Template during 1999.
(f) Adjustments are to remove non-recurring items that are directly attributable to the transaction as per SEC
guidelines.
</TABLE>
NOTE 4. PRO FORMA EARNINGS PER COMMON SHARE
The unaudited pro forma combined basic earnings per share data is computed
by providing pro forma combined income per share by the weighted average number
of common shares outstanding and the issuance of 1,531,089 shares of common
stock to Template stockholders and 60,000 shares of common stock to Liraz in
exchange for guarantee on the financing. Diluted earnings (loss) per share is
not presented as the inclusion of options and other common stock equivalents
outstanding would be anti-dilutive. Potentially dilutive securities outstanding
during the period presented for 1999 include preferred stock, stock options, and
stock warrants.
Level 8 8-K/A, Page 9
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into Level 8 Systems,
Inc. Registration Statements on Form S-3 and S-8 (File numbers 333-12247,
333-22979, 333-86305, 333-86307, 333-86309) of our report on Template Software,
Inc. dated March 17, 1999, which appears in Template Software's Annual Report
on Form 10-K for the year ended December 31, 1998 which is incorporated by
reference in this Current Report on Form 8-K/A.
/s/ PricewaterhouseCoopers LLP
McLean, VA
March 13, 2000
Level 8 8K/A Exhibit 23.1, Page 1
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