<PAGE>
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, 2000.
[_] 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 11-292055
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(State or other jurisdiction of incorporation (I.R.S Employer Identification
Number) or organization)
8000 Regency Parkway, Cary, NC 275111
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(Address of principal executive offices) (ZipCode)
(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 15(d) 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.
14,998,444 common shares, $.001 par value, were outstanding as of November 8,
2000.
<PAGE>
Level 8 Systems, Inc.
Index
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
----------
<S> <C>
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated statements of operations (unaudited) for the three
and nine months ended September 30, 2000 and 1999 4
Consolidated statements of cash flows (unaudited) for nine months
ended September 30, 2000 and 1999 5
Consolidated statements of comprehensive income (unaudited) for
three and nine months ended September 30, 2000 and 1999 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. Other Information 20
SIGNATURES 22
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Level 8 Systems, Inc.
Consolidated Balance Sheets
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- --------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 15,995 $ 6,509
Accounts receivable, less allowance for doubtful accounts
of $1,574 and $1,150 at September 30, 2000 and
December 31, 1999, respectively 21,635 22,199
Notes receivable 1,757 500
Securities available for sale 4,000 --
Prepaid expenses and other current assets 3,873 5,134
------------- -------------
Total current assets 47,260 34,342
Property and equipment, net 5,219 5,845
Intangible assets, net 58,179 69,948
Software product technology, net 38,720 20,488
Other assets 2,128 2,958
------------- -------------
Total assets $ 151,506 $ 133,581
============= =============
Liabilities and stockholders' equity
Notes payable, due on demand $ -- $ 4,996
Current maturities of loan from related company -- 519
Current maturities of long-term debt 103 395
Accounts payable 3,102 2,194
Accrued expenses:
Salaries, wages and related items 4,608 4,172
Merger-related 427 4,075
Restructuring 246 630
Other 8,592 8,336
Due to related party 56 41
Deferred revenue 7,935 9,020
------------- -------------
Total current liabilities 25,069 34,378
Long-term debt, net of current maturities 10,048 22,202
Loan from related company, net of current maturities -- 4,000
Deferred revenue -- 780
Stockholders' equity
Preferred stock -- --
Common stock 15 12
Additional paid-in-capital 176,603 113,507
Accumulated other comprehensive loss (418) (159)
Accumulated deficit (59,811) (41,139)
------------- -------------
Total stockholders' equity 116,389 72,221
------------- -------------
Total liabilities and stockholders' equity $ 151,506 $ 133,581
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Level 8 Systems, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Software $ 14,422 $ 4,112 $ 34,324 $ 10,014
Maintenance 4,015 3,538 11,493 11,403
Services 3,881 5,153 17,246 17,599
------------ ------------ ------------ -----------
Total operating revenue 22,318 12,803 63,063 39,016
Cost of revenue:
Software 2,247 1,135 5,879 3,063
Maintenance 1,390 1,199 4,319 4,249
Services 3,443 4,291 14,745 15,378
------------ ------------ ------------ -----------
Total cost of revenue 7,080 6,625 24,943 22,690
Gross profit 15,238 6,178 38,120 16,326
Operating expenses:
Sales and marketing 9,655 2,832 25,374 8,206
Research and development 2,196 1,670 6,957 4,904
General and administrative 3,503 1,983 9,704 4,857
In-process research and development -- -- -- 744
Amortization of intangible assets 3,400 1,813 10,514 5,197
Loss on disposal of assets 41 -- 380 --
------------ ------------ ------------ -----------
Total operating expenses 18,795 8,298 52,929 23,908
------------ ------------ ------------ -----------
Loss from operations (3,557) (2,120) (14,809) (7,582)
Other income (expense)
Interest income 388 289 504 444
Interest expense (686) (563) (2,439) (2,168)
Net foreign currency gains/(losses) (174) 45 (290) (696)
Loss before provision for income taxes (4,029) (2,349) (17,034) (10,002)
Income tax provision 470 195 1,020 594
------------ ------------ ------------ -----------
Net loss $ (4,499) $ (2,544) $ (18,054) $ (10,596)
============ ============ ============ ===========
Net loss per share - basic and diluted $ (0.34) $ (0.31) $ (1.37) $ (1.24)
============ ============ ============ ===========
Weighted common shares outstanding - basic and diluted 14,298 8,778 13,646 8,729
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Level 8 Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,054) $(10,596)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 17,648 8,632
Deferred income taxes -- 2
Purchased research and development -- 744
Provision for doubtful accounts 421 484
Other 42 172
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Trade accounts receivable (635) 2,051
Prepaid expenses and other assets 877 696
Accounts payable and accrued expenses - excluding
merger-related and restructuring 1,278 (3,476)
Merger-related and restructuring (2,733) (3,403)
Deferred revenue (1,865) (2,612)
-------- --------
Net cash used in operating activities (3,021) (7,306)
Cash flows from investing activities:
Purchases of property and equipment (816) (173)
Net cash received (paid for) acquisitions 526 (2,767)
Investment held for resale 232 --
Purchase of securities (4,000) --
Advance on note receivable (757) --
Costs related to purchased technology (150) --
Capitalization of software development costs (576) (1,167)
-------- --------
Net cash used in investing activities (5,541) (4,107)
Cash flows from financing activities:
Issuance of common shares, net 8,755 1,328
Issuance of preferred shares, net 29,840 19,245
Dividends on preferred shares (437) --
Payments on borrowings from related company (4,519) (8,561)
Payments on capital leases (69) (34)
Net borrowings on line of credit 5,175 6,924
Repayment of line of credit (20,645) (4,000)
-------- --------
Net cash provided by financing activities 18,100 14,902
Effect of exchange rate changes on cash (52) --
Net increase in cash and cash equivalents 9,486 3,489
Cash and cash equivalents:
Beginning of period 6,509 6,078
-------- --------
End of period $ 15,995 $ 9,567
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Level 8 Systems, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss $ (4,499) $ (2,544) $ (18,054) $ (10,596)
Other comprehensive loss, net of tax
Foreign currency translation adjustment (4) (145) (258) (240)
------------- ------------- ------------- -------------
Comprehensive loss $ (4,503) $ (2,689) $ (18,312) $ (10,836)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
Level 8 Systems, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except 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
("SEC"). 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 Level 8 Systems, Inc.'s (the "Company") Annual Report on Form 10-K for the
year ended December 31, 1999. 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 and recurring nature.
The year-end condensed balance sheet data was derived from audited financial
statements in accordance with the rules and regulations of the SEC, but does not
include all disclosures required for financial statements prepared in accordance
with generally accepted accounting principles.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. During the period ended September 30, 2000, all
of the Company's subsidiaries were wholly-owned. During the period ended
September 30, 1999, all of the Company's subsidiaries were 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, the Company 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 as for the periods ended September 30,
1999.
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the 2000 presentation. Such reclassifications had no
effect on previously reported net loss or stockholders' equity.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, further guidance related to
accounting for derivative instruments and hedging activities was provided when
the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133. This
standard, as amended, requires companies to record all derivatives on the
balance sheet as either assets or liabilities and measure those instruments at
fair value. The manner in which companies are to record gains or losses
resulting from changes in the values of those derivatives depends on the use of
the derivative and whether it qualifies for hedge accounting. As amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133, this standard is effective for
the Company's financial statements beginning January 1, 2001, with early
adoption permitted. These statements are effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. It is not anticipated that the
financial impact of these statements will have a material impact on the Company.
The Company utilizes forward sale and purchase contracts to hedge the value of
foreign currency receivables and payables. At September 30, 2000, purchase
contracts amounted to approximately $1,593. These contracts have a high
correlation to the rate movement of the foreign currency receivables being
hedged. Unrealized gains or losses on these contracts are reflected in the
balance sheet and statement of income.
7
<PAGE>
NOTE 3. EARNINGS (LOSS) PER SHARE
Basic loss per share is computed based upon the weighted average number of
common shares outstanding. Diluted 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 loss per share calculations. Potentially dilutive
securities outstanding during the period of nine months ended for fiscal years
1999 and 2000 include stock options, stock warrants and preferred stock.
Dividends of $117 and $320 were paid to the holders of Series A Preferred Stock
in the third quarter and year to date periods of 2000, respectively.
The following table sets forth the reconciliation of net loss to loss available
to common stockholders:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (4,499) $ (2,544) $ (18,054) $ (10,596)
Preferred stock dividends (352) (210) (617) (210)
------------ ----------- ------------ ------------
Loss available to common stockholders $ (4,851) $ (2,754) $ (18,671) $ (10,806)
============ =========== ============ ============
Net loss per share - basic and diluted $ (0.34) $ (0.31) $ (1.37) $ (1.24)
============ =========== ============ ============
Weighted common shares outstanding -
basic and diluted 14,298 8,778 13,646 8,729
============ =========== ============ ============
</TABLE>
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 in the nine months
ended of fiscal year 2000 or 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 of fiscal year 2000 and 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, 1999. Segment data includes a
charge allocating all general and administrative expenses 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 loss before interest, net foreign currency gains/(losses), loss on
disposal of assets, taxes and amortization of goodwill and other intangible
assets (EBITA).
8
<PAGE>
The table below presents information about reported segments for the quarters
ended September 30:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
Total Revenue Total EBITA Total Revenue Total EBITA
--------------------- -------------------- ------------------------- -------------------
<S> <C> <C> <C> <C>
Software $ 14,422 $ 248 $ 4,112 $ (562)
Maintenance 4,015 2,359 3,538 2,125
Services 3,881 (106) 5,153 98
Research and Development -- (2,616) -- (1,968)
------------ ------------ ------------ -------------
Total $ 22,318 $ (115) $ 12,803 $ (307)
============ ============ ============ =============
</TABLE>
The table below presents information about reported segments for the nine months
ended September 30:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
Total Revenue Total EBITA Total Revenue Total EBITA
--------------------- ------------------ ------------------------ ------------------
<S> <C> <C> <C> <C>
Software $ 34,324 $ (2,287) $ 10,014 $ (2,783)
Maintenance 11,493 6,433 11,403 6,576
Services 17,246 86 17,599 136
Research and Development -- (8,149) -- (5,570)
------------ ---------- --------- ----------
Total $ 63,063 $ (3,917) $ 39,016 $ (1,641)
============ ========== ========= ==========
</TABLE>
A reconciliation of total segment EBITA to total consolidated loss before taxes
for the three and nine months ended September 30 is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Total EBITA $ (115) $ (307) $ (3,917) $ (1,641)
Amortization of goodwill (3,400) (1,813) (10,514) (5,197)
In-process research and development -- -- -- (744)
Loss on disposal of asset (41) -- (380) --
Other expense, net (473) (229) (2,225) (2,420)
----------- ---------- ----------- ----------
Total loss before income taxes $ (4,029) $ (2,349) $ (17,034) $ (10,002)
=========== ============ ============== =============
</TABLE>
The following table presents a summary of revenue by geographic region for the
three and nine months period ended September 30:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Australia $ 209 $ 490 $ 904 $ 2,011
Czechoslovakia 626 -- 626 --
Denmark 737 1,331 3,256 5,244
France 331 -- 2,262 --
Germany 436 960 1,216 2,598
Greece 109 290 1,864 1,149
Italy 619 512 1,360 2,393
Israel 2,847 141 3,240 141
Norway 441 533 1,526 1,638
Switzerland 416 603 1,337 2,283
United Kingdom 1,389 1,518 8,172 4,044
USA 13,235 4,432 34,619 12,346
Other 923 1,993 2,681 5,169
----------- ---------- ----------- ----------
Total revenue $ 22,318 $ 12,803 $ 63,063 $ 39,016
=========== ========== =========== ==========
</TABLE>
Presentation of revenue by region is based on the country in which the customer
is domiciled.
9
<PAGE>
NOTE 7. LONG-TERM DEBT
In connection with the acquisition of Momentum Software Corporation
("Momentum"), on December 1, 1998, the Company issued notes to various Momentum
shareholders totaling $3,000 payable over three years and bearing an interest
rate of 10% per annum. As of December 31, 1999, the remaining three
installments on the notes totaled $2,250, plus interest. During the first
quarter of 2000, the Company offered to exchange the notes held by former
Momentum shareholders for shares of the Company's common stock at a per share
price based on the average market price for a set period prior to the date the
noteholder accepted the offer. The Company converted $1,904 of the Momentum
notes in exchange for approximately 55,000 shares of common stock in the first
quarter of 2000 as a result of this exchange offer. During the third quarter of
2000, the remaining balance was paid.
As of the date of this filing, the Company's $10,000 LIBOR-based term loan with
a commercial bank has been amended to provide the Company with an additional
$5,000 in borrowings. Additionally, the due date was extended from May 31, 2001
to November 30, 2001. Liraz has extended its guarantee of the amended loan
through November 30, 2001 in exchange for 110,000 shares of the Company's common
stock. The value of the shares issued will be capitalized and amortized over the
term of the loan as a component of interest expense. The interest rate as of
September 30, 2000 was 7.66%.
During July 2000, the Company paid the remaining $3,000 balance of the $12,000
loan from Liraz.
During August 2000, the Company paid its outstanding borrowings on its prime-
based credit facility with a commercial bank. Payments totaling $20,645 were
for a $10,000 term loan and $10,645 for receivables-based borrowings under the
credit facility. On September 25, 2000, the Company received notification from
the bank that this facility will be terminated effective December 1, 2000 due to
the liquidation of GreyRock Business Credit's loan portfolio.
NOTE 8. PREFERRED STOCK
During the first nine months of 2000, 7,375 shares of the Company's Series A
Preferred Stock were converted into 737,500 shares of the Company's common
stock.
On July 20, 2000, the Company completed a $30 million private placement of
30,000 shares of Series B 4% Convertible Redeemable Preferred Stock ("Series B
Preferred Stock"), convertible into an aggregate of 1,197,007 shares of the
Company's common stock. Holders of the Series B Preferred Stock are entitled to
receive 4% annual cash dividends payable quarterly and will have one vote per
share of Series B 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 B Preferred Stock. The Series B Preferred Stock may be
redeemed at the option of the Company at a redemption price equal to the
original purchase price at any time after July 20, 2001 if the closing price of
the Company's common stock over 20 consecutive trading days is greater than
$50.125 per share. The conversion price of the Series B 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 $25.0625 per share. In
the event the Company breaches its obligations to pay dividends when due or
issue common stock upon conversion, or the Company's common stock is delisted,
the dividend rate on the Series B Preferred Stock would increase to 18% per
annum (partially payable in shares of common stock at the option of the Company
during the first 60 days of such increased dividend rate). As part of the $30
million financing, the Company also issued the investors warrants to purchase
1,047,382 shares of common stock at an exercise price of $25.0625 per share. The
Company has registered the common stock issuable upon conversion of the Series B
Preferred Stock and exercise of the warrants for resale under the Securities Act
of 1933, as amended (the "Securities Act"). The Company is required to make
certain payments in the event it is unable to meet its obligations in connection
with the Series B 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 B Preferred Stock, is limited to 19% of the liquidation value of the
Series B Preferred Stock. Investors in the Series B Preferred Stock and warrants
include investment funds affiliated with Brown Simpson Asset Management and
Seneca Capital Management.
NOTE 9. PURCHASED TECHNOLOGIES
On August 23, 2000, the Company acquired the rights to a comprehensive
integrated desktop computer environment from Merrill, Lynch, Pierce, Fenner &
Smith, Incorporated ("Merrill Lynch"), in exchange for one million shares of its
common stock. The purchased technology was valued at $22,750 based upon the five
day average closing share price of two days prior through two days post the
announcement date of the deal and certain costs associated with its acquisition.
The cost of the technology acquired will be capitalized and amortized over three
year periods.
10
<PAGE>
Subsequent to September 30, 2000, the Company announced that it had reached a
definitive agreement to acquire StarQuest Software, Inc., ("StarQuest"). Under
the terms of the acquisition agreement, the Company will acquire the assets of
StarQuest for 500,000 shares of the Company common stock and 250,000 warrants to
purchase the Company's common stock, plus the assumption of certain debt. The
warrants will have an exercise price of $30 per share. The acquisition is
subject to customary closing conditions and approvals and is projected to close
in the fourth quarter of 2000. In conjunction with the pending acquisition, the
Company has extended an unsecured note payable to StarQuest in the amount of
$1,000 to finance StarQuest's working capital until the transaction closes. As
of the date of this filing, the total amount borrowed by StarQuest under the
note totaled $725.
NOTE 10. EQUITY INVESTMENTS
On September 29, 2000, the Company purchased 500,000 shares of common stock of a
publicly traded e-business service provider at $8.00 per share representing
approximately seven percent of the common stock outstanding. In addition, the
Company received warrants for the purchase of 500,000 shares of common stock
with an exercise price of $13.00 per share. The fair value of the common stock
was recorded at $6.50 per share and the fair value of the warrants was recorded
at $1.50 per share.
NOTE 11. RELATED PARTY TRANSACTIONS
Subsequent to September 30, 2000, the Company loaned $495 to a director and
officer of the Company under an unsecured note which bears an interest rate of
6.5%. The note is payable over a period of five years in equal annual
installments.
NOTE 12. CONTINGENCIES
On April 6, 1998, the Company sold substantially all the assets and operations
of its wholly owned subsidiary ProfitKey International, Inc. ("ProfitKey").
According to the terms of the ProfitKey sale agreement, the purchase price was
subject to adjustment to reflect any variance in working capital from a
specified amount. The purchaser notified the Company that it believes there were
substantial adjustments which would require a reduction in the purchase price.
The Company and the purchaser, pursuant to the terms of the settlement
agreement, entered into arbitration proceedings to resolve this matter and a
decision from the arbitrator, substantially in favor of the Company, was
rendered in the third quarter of 2000. Accordingly, this judgement did not have
a material impact on the financial position, cash flows, or results of
operations of the Company.
In December 1997, Seer filed a lawsuit in London, England against Saadi Abbas
("Abbas") and Cambridge Business Solutions (UK) Limited ("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. In July 1999, most of
those claims were struck out by the court as unarguable or otherwise time
barred, subsequently confirmed on appeal. The Company intends to continue to
vigorously defend against the few remaining claims. Abbas has tried to re-
institute some of those claims and add further claims, but was refused and is
now seeking permission to appeal. The Company has made provision for the
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.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations.
-------------
General Information and Recent Developments
--------------------------------------------
The Company specializes in delivering software solutions that help
companies integrate new and existing computer applications and extend these
applications to the Internet to support eBusiness and eCommerce. This
specialization is called enterprise application integration or "EAI." The
Company's products and services are designed to enable organizations to address
business process automation and application integration in a simple and cost
effective way. The Company provides customers with software to link their
critical business applications internally across the enterprise and externally
with strategic business-to-business partners and business-to-business consumers
via the Internet.
The Company offers a suite of products for eBusiness and eCommerce under
the Geneva brand name. The Geneva Integration Suite has six core components
which the Company believes, together, provide the most complete suite of
integration software products available for eBusiness integration. These
components include Geneva Enterprise Integrator, Geneva Business Process
Automator, Geneva Integration Broker, Geneva Message Queuing, Geneva AppBuilder,
and Geneva XIPC. In addition to these products, the Company also provides
technical support, training and consulting services as part of its commitment to
providing its customers industry-leading enterprise application integration
solutions.
On August 23, 2000, the Company acquired the exclusive worldwide marketing,
sales and development rights to Cicero(TM), a comprehensive integrated desktop
computer environment developed by Merrill, Lynch, Pierce, Fenner & Smith
Incorporated in exchange for 1,000,000 shares of the Company's common stock.
Under the terms of the agreement, the Company will market Cicero(TM) as part of
the Geneva eBusiness integration product line. Further plans include extending
the Cicero(TM) technology to a multi-platform environment that works with the
Company's existing eBusiness integration products.
Subsequent to September 30, 2000, the Company announced that it had reached
a definitive agreement to acquire StarQuest Software, Inc., ("StarQuest"). Under
terms of the acquisition, the Company will acquire the assets of StarQuest for
500,000 shares of the Company common stock and 250,000 warrants to purchase the
Company's common stock, plus the assumption of certain debt. The warrants will
have an exercise price of $30 per share. The acquisition is subject to customary
closing conditions and approvals and is projected to close in the fourth quarter
of 2000.
RESULTS OF OPERATIONS
---------------------
The Company's results of operations include the operations of the Company
and its subsidiaries. During the period ended September 30, 1999, all of the
Company's subsidiaries are wholly-owned for the entire nine month period
presented, except for 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, the Company 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 results of operations for the periods ended September 30, 1999.
Operations for the subsidiaries acquired during 1999 are included from the date
of acquisition. Accordingly, the results of operations for the first nine months
of 1999 do not include the operations of the Company's subsidiary, TSAC, Inc.
(which acquired Template Software, Inc. ("Template")) as the date of acquisition
was December 27, 1999.
12
<PAGE>
The following table sets forth, for the periods indicated, the Company's
unaudited results of operations expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software products 64.6% 32.1% 54.4% 25.7%
Maintenance 18.0% 27.6% 18.2% 29.2%
Services 17.4% 40.3% 27.4% 45.1%
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
Cost of revenue:
Software products 10.1% 8.9% 9.3% 7.9%
Maintenance 6.2% 9.4% 6.8% 10.9%
Services 15.4% 33.5% 23.4% 39.4%
----- ----- ----- -----
Total 31.7% 51.8% 39.5% 58.2%
Gross profit 68.3% 48.2% 60.5% 41.8%
Operating expenses:
Sales and marketing 43.3% 21.1% 40.3% 21.0%
Research and product development 9.8% 13.0% 11.0% 12.6%
General and administrative 15.7% 15.5% 15.4% 12.4%
Amortization of goodwill and intangibles 15.2% 14.2% 16.7% 13.3%
Loss on disposal of assets 0.2% -- 0.6% --
Purchased research and development -- -- -- 1.9%
----- ----- ----- -----
Total 84.2% 64.8% 84.0% 61.2%
Loss from operations (15.9%) (16.6%) (23.5%) (19.4%)
Other income (expense), net (2.1%) (1.8%) (3.5)% (6.2)%
---- ----- ----- -----
Loss before taxes (18.0%) (18.4%) (27.0%) (25.6%)
Income tax provision 2.1% 1.5% 1.6% 1.5%
----- ----- ----- -----
Net loss (20.1%) (19.9%) (28.6%) (27.1%)
===== ===== ===== =====
</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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States 59% 35% 55% 32%
Europe 26% 55% 38% 59%
Asia Pacific 2% 5% 2% 7%
Middle East 13% 1% 4% --
Other -- 4% 1% 2%
--------------------------- -------------------------
Total 100% 100% 100% 100%
=========================== =========================
</TABLE>
13
<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 may vary from quarter to quarter due to market
conditions, the budgeting and purchasing cycles of customers, and the
effectiveness of its sales force. 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 revenue
recognition 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.
Total revenues increased significantly for the third quarter and year-to-
date periods of 2000 as compared to the same periods of 1999 due to growth in
the sales of the Company's software products and the maintenance revenue
associated with the new software product sales. The Company's gross margins
improved to 67% and 60% for the quarter and year to date period ended September
30, 2000 from 48% and 42% for the comparable periods of 1999.
SOFTWARE PRODUCTS. Software products revenue increased significantly for
the third quarter and year-to-date periods of 2000 as compared to the same
periods of 1999. Software product sales increased due to the Company's increased
focus on sales and marketing, which resulted in improved sales of its products,
including significant revenues related to products acquired from Template.
Gross margins on software products increased from a margin of 72% and 69%
for the third quarter and year-to-date periods of 1999 to 84% and 83% for the
same periods of 2000 primarily due to the increase in the Company's software
products revenue. The increase in revenue in the first nine months of 2000, was
offset by a $2.8 million increase in cost of software. Cost of software is
composed primarily of amortization of purchased technology, capitalized software
costs for internally developed software, and royalties to third parties for the
Company's Geneva Message Queuing product and, to a lesser extent, production and
distribution costs. The increase in cost of software was primarily due to
amortization of capitalized software from Template and Seer's developed
technology valued in the purchase transactions and the purchase of Cicero (TM).
MAINTENANCE. Maintenance revenue increased 13% for the third quarter of
2000 over the same period of 1999. This increase was due primarily to new
software sales in the fourth quarter of 1999 and the first two quarters of 2000.
Maintenance revenue for the year to date period of 2000 was relatively flat
compared to the same period for 1999 as a result of a slight decline in the
number of customers purchasing maintenance for Geneva AppBuilder and Geneva
XIPC, which was partly offset by new maintenance revenue from Template's
customers and new software sales. Historically, maintenance was not a
significant part of Template's revenue. The Company plans to focus on increasing
maintenance for the historical Template products in future sales.
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 were constant at
approximately 66% and 62% in the third quarter and year-to-date periods of both
2000 and 1999.
SERVICES. Services revenue decreased 25% from the third quarter of 1999 and
decreased 2% from the year-to-date period of 1999 as compared to the same
periods of 2000. The decreases in the quarter and year-to-date period of 2000 is
primarily due to the Company's emphasis on software sales and the decline in
services related to its Geneva AppBuilder product.
Cost of services primarily includes personnel and travel costs related to
the delivery of services. Services gross margins decreased from 17% in the third
quarter of 1999 to 11% in the third quarter of 2000 due primarily to the
decrease in services revenue associated with the Company's strategic shift to
software sales. Gross margins for the year to date periods of 2000 and 1999
remained consistent at approximately 13%.
14
<PAGE>
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 1999
to the same periods of 2000 due to an increase in the size of the Company's
sales and marketing workforce, both through acquisition and recruiting, and
through increased promotional activities. Sales and marketing expenses have also
increased as a percentage of revenue from 21% in the quarter and year-to-date
periods of 1999 to 42% and 40% in the comparable periods of 2000. These
increases were necessitated by the Company's increased sales and promotional
activities corresponding with its emphasis on increasing software product
revenue. The Company intends to continue this level of spending in the marketing
area to continue to increase market awareness and acceptance of its products and
to further establish 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 31% and 42% from the third quarter and year-to-date periods of 1999 to
the comparable periods of 2000 primarily due to the addition of approximately
thirty-five developers from Template. 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 executive, legal, financial, human resources, and
administrative staff, related overhead, and all non-allocable corporate costs of
operating the Company. General and administrative expenses increased
significantly from the third quarter and year-to-date period of 1999 to the same
periods of 2000. The increases were primarily the result of professional fees
and personnel costs to support increased levels of business activities and the
Company's growing global organization.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets was $3.4 million in the third quarter and
$10.5 million in the year-to-date period of 2000 compared to and $1.8 million
and $5.2 million in the comparable periods of 1999. The amortization of goodwill
in the year to date period of 1999 was related to the purchases of Seer,
Momentum, and Level 8 Technologies, Inc. During the year to date period of 2000,
amortization of goodwill and other intangibles also included the amortization of
intangible assets acquired with Template. 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.
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 and year-to-date periods of 2000 and 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 year-to-date period of
fiscal year 2000 is primarily related to income taxes from profitable foreign
operations and foreign withholding taxes.
IMPACT OF INFLATION. Inflation has not had a significant effect on the
Company's operating results during the periods presented.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
Operating and Investing Activities
Net cash used in operations and investing activities during the first
three quarters of 2000 was $8.6 million. Net payments of approximately $2.2
million for merger and restructuring costs primarily related to the acquisition
of Template were a primary component of the net cash outflow in addition to the
Company's planned spending to support its sales and marketing efforts.
The Company also made an $4.0 million equity investment in a publicly
traded e-business service provider during the third quarter of 2000 by
purchasing 500,000 shares of common stock at $8.00 per share, representing
approximately seven percent of the common stock outstanding. In addition, the
Company received warrants for the purchase of 500,000 shares of common stock
with an exercise price of $13.00 per share. The fair value of the common stock
was recorded at $6.50 per share and the fair value of the warrants was recorded
at $1.50 per share.
As of September 30, 2000, the Company did not have any material
commitments for capital expenditures.
Financing Activities
The Company funded its cash needs during the first nine months 2000 with
cash on hand at December 31, 1999; through operations; through a total of $38.6
million in proceeds from the issuance of stock including 8.8 million as a result
of the exercise of stock options, warrants, and a $30 million private placement
of preferred stock; and through $5 million in additional borrowings under its
line of credit.
On July 20, 2000, the Company Stock ("Series B Preferred Stock"),
convertible into an aggregate of 1,197,007 shares of the Company's common stock.
Holders of the Series B Preferred Stock are entitled to receive 4% annual cash
dividends payable quarterly and will have one vote per share of Series B
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 B Preferred Stock. The Series B Preferred Stock may be redeemed at the
option of the Company at a redemption price equal to the original purchase price
at any time after July 20, 2001 if the closing price of the Company's common
stock over 20 consecutive trading days is greater than $50.125 per share. The
conversion price of the Series B 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 $25.0625 per share. In the event the
Company breaches its obligations to pay dividends when due or issue common stock
upon conversion, or the Company's common stock is delisted, the dividend rate on
the Series B Preferred Stock would increase to 18% per annum (partially payable
in shares of common stock at the option of the Company during the first 60 days
of such increased dividend rate). As part of the $30 million financing, the
Company also issued the investors warrants to purchase 1,047,382 shares of
common stock at an exercise price of $25.0625 per share. The Company has
registered the common stock issuable upon conversion of the Series B Preferred
Stock and exercise of the warrants for resale under the Securities Act. The
Company is required to make certain payments in the event it is unable to meet
its obligations in connection with the Series B 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 B Preferred Stock, is limited to 19% of
the liquidation value of the Series B Preferred Stock. Investors in the Series B
Preferred Stock and warrants include investment funds affiliated with Brown
Simpson Asset Management and Seneca Capital Management.
At December 31, 1999, the Company's debt consisted of $15 million in
borrowings under a prime-based credit facility with a commercial bank, $4.5
million in borrowings from its principal shareholder, Liraz, $10 million in
borrowings under a LIBOR-based term loan, and $2.25 million in borrowings under
term debt incurred from the purchase of Momentum Software Corporation
("Momentum").
During the first quarter of 2000, the Company offered to exchange the
notes held by former Momentum shareholders for shares of the Company's common
stock at a per share price based on the average market price for a set period
prior to the date the noteholder accepted the offer. The Company converted $1.9
million of the Momentum notes in exchange for approximately 55,000 shares of
common stock in the first quarter of 2000 as a result of this exchange offer.
The company paid off the remainder of these notes during the third quarter of
2000.
16
<PAGE>
During the second and third quarters of 2000, the Company paid off the $4.5
million in borrowings from Liraz.
During the third quarter of 2000, the Company paid approximately $20.6
million to pay off its outstanding obligations under the prime-based credit
facility. On September 25, 2000, the Company received notification from the bank
that the credit facility will be terminated effective December 1, 2000 due to
the liquidation of GreyRock Business Credit's loan portfolio.
As of the date of this filing, the Company's $10 million LIBOR-based term
loan with a commercial bank has been amended to provide the Company with an
additional $5 million in borrowings and to extend the due date from May 31, 2001
to November 30, 2001. Liraz has extended its guarantee of the amended loan
through November 30, 2001 in exchange for 110,000 shares of the Company's common
stock. The value of the shares issued will be capitalized and amortized over the
term of the loan as a component of interest expense. The interest rate as of
September 30, 2000 was 7.66%.
During the first three quarters of 2000, the Company incurred a net loss of
$18.1 million and has working capital of $22.2 million and an accumulated
deficit of $59.8 million at September 30, 2000. The Company believes that
existing cash on hand, cash provided by future operations and additional
borrowings under the commercial term loan 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
according 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. The Company may also explore additional debt or equity financing to
expand its operations and take advantage of market opportunities.
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 a material adverse impact on the Company's financial condition,
cash flows, or results of operations.
17
<PAGE>
FORWARD LOOKING AND CAUTIONARY STATEMENTS
---------------------------------------------
Certain statements contained in this Quarterly Report may constitute
"forward looking statements" within the meaning of the Private Securities
Litigation 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: general
economic or business conditions may be less favorable than expected, resulting
in, among other things, lower than expected revenues; 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 is not able to 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; 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 may not have the ability to recruit, train and retain qualified
personnel; the Company's future results may depend upon the successful
integration of future acquisitions; the Company may not have the resources to
successfully manage additional growth; rapid technological change could render
the Company's products obsolete; 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; 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; the Company does not pay dividends on its
common stock and does not anticipate doing so in the future; the Company's
principal stockholder, may significantly influence issues presented to the
stockholders; some of the Company's directors have conflicts of interest
involving Liraz; provisions of Delaware law could deter takeover attempts; the
Company's stockholders may be diluted by the exercise of options and warrants or
by the conversion of preferred stock; sales of the Company's stock by certain
stockholders may adversely affect the market price of the Company's stock; the
Company is obligated to issue additional equity securities if it fails to
fulfill its obligations to the holders of preferred stock and warrants; and the
Company may not have sufficient liquidity and capital resources to meet changing
business conditions.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
Approximately 41% and 45% of the Company's revenues for three and nine
months ended September 30, 2000, respectively, were generated by sales outside
the 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.
The Company hedges its foreign currency receivables 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. The Company's accounting policies for these contracts
are based on the Company's designation of the contracts as hedging transactions.
The criteria the Company uses for designating a contract as a hedge include the
contract's effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on forward foreign
exchange contracts are recognized in income in the same period as gains and
losses on the underlying transactions. If an underlying hedged transaction is
terminated earlier than initially anticipated, the offsetting gain or loss on
the related forward exchange contract would be recognized in income in the same
period. In addition, since the Company enters into forward contracts only as a
hedge, any change in currency rates would not result in any material net gain or
loss, as any gain or loss on the underlying foreign currency denominated balance
would be offset by the gain or loss on the forward contract.
19
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
On April 6, 1998, the Company sold substantially all the assets and
operations of its wholly owned subsidiary ProfitKey International, Inc.
("ProfitKey"). According to the terms of the ProfitKey sale agreement, the
purchase price was subject to adjustment to reflect any variance in working
capital from a specified amount. The purchaser notified the Company that it
believes there were substantial adjustments which would require a reduction in
the purchase price. The Company and the purchaser, pursuant to the terms of the
settlement agreement, entered into arbitration proceedings to resolve this
matter and a decision from the arbitrator, substantially in favor of the
Company, was rendered in the third quarter of 2000. Accordingly, this judgement
did not have a material impact on the financial position, cash flows, or results
of operations of the Company.
In December 1997, Seer filed a lawsuit in London, England against Saadi
Abbas ("Abbas") and Cambridge Business Solutions (UK) Limited ("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. In July 1999, most of
those claims were struck out by the court as unarguable or otherwise time
barred, subsequently confirmed on appeal. The Company intends to continue to
vigorously defend against the few remaining claims. Abbas has tried to re-
institute some of those claims and add further claims, but was refused and is
now seeking permission to appeal. The Company has made provision for the
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.
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.
Item 2. Changes in Securities
On August 23, 2000, the Company acquired the rights to a comprehensive
integrated desktop computer environment from Merrill, Lynch, Pierce, Fenner, &
Smith ("Merrill Lynch") in exchange for 1,000,000 shares of the Company's
common stock. The shares of the Company's common stock were issued in reliance
upon the exemption from the registration requirements of the Securities Act
provided in Section 4(2) for transactions not involving a public offering. The
Company's transaction with Merrill Lynch is fully described in the Company's
Report on Form 8-K, filed September 11, 2000.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.39 Merger Agreement dated October 2, 2000 by and among Level 8
Systems, Inc., Level 8 Technologies (filed herewith).
Acquisition Corp. and StarQuest Software, Inc.,
10.40 Stock Purchase Agreement dated September 29, 2000 among
Level 8 Systems, Inc. and The A Consulting Team in
connection with the purchase of 500,000shares of common
stock (filed herewith).
10.41 Warrant for 500,000 shares issued to Level 8 Systems, Inc.,
September 29, 2000 in connection with the purchase of
500,000 shares of The A Consulting Teams common stock (filed
herewith).
10.42 Amendment dated October 11, 2000, to the Promissory Note,
among Level 8 Systems, Inc. and Bank Hapolim dated December
20, 1999(filed herewith).
27.1 Financial Data Schedule for the Company (filed herewith).
(b) Reports on Form 8-K
On July 17, 2000 Level 8 filed a Form 8-K reporting its July
10, 2000 dismissal of PriceWaterhouseCoopers LLP and
engagement of Deloitte & Touche LLP as its independent
accountants. This form 8-K was amended on August 2, 2000.
On July 31, 2000, the Company filed a Form 8-K reporting the
July 20, 2000 issuance of 30,000 shares of its Series B 4%
Convertible Redeemable Preferred Stock and Warrants to
purchase 1,047,382 shares of common stock at an exercise
price of $25.0625 per share.
On August 11, 2000 Level 8 filed a Form 8-K reporting its
July 31, 2000 Purchase Agreement with Merrill, Lynch,
Pierce, Fenner & Smith, Incorporated, for the acquisition of
certain technologies in exchange for shares of common stock.
This form 8-K was amended on September 11, 2000.
21
<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 14, 2000 /s/ Steven Dmiszewicki
----------------------
Steven Dmiszewicki
President
Date: November 14, 2000 /s/ Renee D. Fulk
-----------------
Renee D. Fulk
Chief Financial Officer
22
