UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2004.
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the
transition period from to
Commission
File Number: 0-26392
LEVEL
8 SYSTEMS, INC.
(Exact
name of registrant as specified in its character)
|
Delaware |
|
11-2920559 |
|
(State
of incorporation) |
|
(I.R.S.
Employer Identification No.) |
|
1433
State Highway 34, Building C, Farmingdale, New Jersey 07727
|
|
(Address
of principal executive offices, including Zip
Code) |
| |
|
(732)
919-3150 |
|
(Registrant’s
telephone number, including area code) |
_____________
|
Securities
registered pursuant to Section 12(b) of the Act: |
NONE |
|
Securities
registered pursuant to Section 12(g) of the Act: |
Common
Stock, $.001 par value |
_____________
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
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_X]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes [_] No [X]
Aggregate
market value of the outstanding voting stock held by non-affiliates of the
Registrant as of June 30, 2004 was approximately $5,695,050.
There
were 43,441,917 shares of Common Stock outstanding as of March 1, 2005.
LEVEL
8 SYSTEMS, INC.
Annual
Report on Form 10-K
For the
Fiscal Year Ended December 31, 2004
|
Item
Number |
|
Page
Number |
| |
PART
I |
|
|
1.
|
Business |
1 |
|
2. |
Properties |
12 |
|
3. |
Legal
Proceedings |
12 |
|
4. |
Submission
of Matters to a Vote of Security Holders |
12 |
| |
PART
II |
|
|
5. |
Market
for Level 8 Common Stock and Related Shareholder Matters |
13 |
|
6. |
Selected
Financial Data |
13 |
|
7. |
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
14 |
|
7A. |
Quantitative
and Qualitative Disclosures About Market Risk |
25 |
|
8. |
Financial
Statements and Supplementary Data |
26 |
|
9. |
Changes
in Accountants |
26 |
|
9A. |
Controls
and Procedures |
26 |
|
9B. |
Other
Information |
26 |
| |
PART
III |
|
|
10. |
Directors
and Executive Officers of Level 8 |
26 |
|
11.
|
Executive
Compensation |
29 |
|
12. |
Security
Ownership of Certain Beneficial Owners and Management |
31 |
|
13. |
Certain
Relationships and Related Transactions |
33 |
|
14. |
Principal
Accountant Fees and Services |
36 |
| |
PART
IV |
|
|
15. |
Index
Exhibits, Financial Statement Schedules, and Reports on Form
8-K |
37 |
| |
|
|
|
SIGNATURES |
43 |
|
INDEX
TO FINANCIAL STATEMENTS |
F-1 |
PART
I
Item
1.
Business
Overview
Level 8
Systems, Inc. (the “Company” or “Level 8”) provides next generation software
application integration products and services that are based on open technology
standards, and are licensed to a wide range of customers. Level 8 helps
organizations leverage their extensive system and business process technology
investments, increase operational efficiencies, reduce costs and strengthen
valued customer relationships by uniting disparate applications, systems,
information and business processes.
The
Company’s focus is on the growing desktop integration and business process
automation market with our Cicero® product.
Cicero is a business integration software product that maximizes end-user
productivity, streamlines business operations and integrates systems and
applications that would not otherwise work together. Cicero offers a proven,
innovative departure from traditional, costly and labor-intensive approaches to
application integration that enables clients to transform applications, business
processes and human expertise into a seamless, cost effective business solution
that provides a cohesive, task-oriented and role-centric interface that works
the way people think.
By using
Cicero, companies can decrease their customer management costs, increase their
customer service level and more efficiently cross-sell the full range of their
products and services resulting in an overall increase in return on their
information technology investments. In addition, Cicero enables organizations to
reduce the business risks inherent in replacement of mission-critical
applications and extend the productive life and functional reach of their
application portfolio.
Cicero is
engineered to harness diverse business applications and shape them to more
effectively serve the people who use them. Cicero provides an intuitive
development environment, which simplifies the integration of complex
multi-platform applications. Cicero provides a unique approach that allows
companies to organize components of their existing applications to better align
them with tasks and operational processes. Cicero streamlines all activities by
providing a single, seamless user interface for simple access to all systems
associated with a task. Cicero enables automatic information sharing among
line-of-business applications and tools. Cicero is ideal for deployment in
contact centers where its highly productive, task-oriented user interface
promotes user efficiency.
Until
October 2002, we also offered products under our Geneva brand name to provide
organizations with systems integration. Our systems integration products
included Geneva Enterprise Integrator and Geneva Business Process Automator.
These products were sold to EM Software Solutions Inc. in October
2002.
Level 8
Systems, Inc. was incorporated in New York in 1988, and re-incorporated in
Delaware in 1999. Our principal executive offices are located to 1433 State
Highway 34, Building C, Farmingdale, New Jersey 07727 and our telephone number
is (732) 919-3150. Our web site is located at www.level8.com.
In the
following narrative, all dollar amounts are in thousands.
Strategic
Realignment
Historically,
Level 8 Systems, Inc. has been a global provider of software solutions to help
companies integrate new and existing applications as well as extend those
applications to the Internet. This market segment is commonly known as
“Enterprise Application Integration” or “EAI.” Historically, EAI solutions work
directly at the server or back-office level allowing disparate applications to
communicate with each other.
Until
early 2001, we focused primarily on the development, sale and support of EAI
solutions through our Geneva product suite. After extensive strategic
consultation with outside advisors and an internal analysis of our products and
services, we recognized that a new market opportunity had emerged. This
opportunity was represented by the increasing need to integrate applications
that are physically resident on different hardware platforms, a typical
situation in larger companies. In most cases, companies with large customer
bases utilize numerous different, or "disparate," applications that were not
designed to effectively communicate and pass information. With Cicero, which
integrates the functionality of these disparate applications at the desktop, we
believe that we have found a novel solution to this disparate application
problem. We believe that our existing experience in and understanding of the EAI
marketplace coupled with the unique Cicero solution, which approaches
traditional EAI needs in a more effective manner, position us to be a
competitive provider of business integration solutions to the financial services
industry and other industries with large deployed call centers.
We
originally licensed the Cicero technology and related patents on a worldwide
basis from Merrill Lynch, Pierce, Fenner & Smith Incorporated in August of
2000 under a license agreement containing standard provisions and a two-year
exclusivity period. On January 3, 2002, the license agreement was amended to
extend our exclusive worldwide marketing, sales and development rights to Cicero
in perpetuity (subject to Merrill Lynch's rights to terminate in the event of
bankruptcy or a change in control of Level 8) and to grant ownership rights in
the Cicero trademark. Merrill Lynch indemnifies us with regard to the rights
granted to us by them. Consideration for the original Cicero license consisted
of 1,000,000 shares of our common stock. In exchange for the amendment, we
granted an additional 250,000 shares of common stock to MLBC, Inc., a Merrill
Lynch affiliate and entered into a royalty sharing agreement. Under the royalty
sharing agreement, we pay a royalty of 3% of the sales price for each sale of
Cicero or related maintenance services. The royalties over the life of the
agreement are not payable in excess of $20,000.
In
connection with executing our strategic realignment and focusing on Cicero, we
have restructured our business, reduced our number of employees and, in the
fourth quarter of 2002, sold the remaining assets associated with our Enterprise
Application Integration products. For the past three years, management made
operating decisions and assessed performance of the Company’s operations based
on the following reportable segments: (1) Desktop Integration (Cicero), (2)
System Integration (Geneva Enterprise Integrator and Geneva Business Process
Automator) and (3) Messaging and Application Engineering (Ensuredmail, Geneva
Integration Broker, Geneva Message Queuing, Geneva XIPC and Geneva AppBuilder).
We have sold most of the assets comprising the Messaging and Application
Engineering Products segment and all of the assets in the Systems Integration
segment. The Company has recognized the Systems Integration segment as a
discontinued business and, accordingly, has reclassified those assets and
liabilities and segregated the results of operations under gain or loss from a
discontinued business on the accompanying statement of operations. As such, the
Systems Integration segment has been eliminated. Ensuredmail and Geneva
Integration Broker are the current software products represented in the
Messaging and Application Engineering segment.
The
Company’s future revenues are entirely dependent on acceptance of a newly
developed and marketed product, Cicero, which has limited success in commercial
markets to date. The Company has experienced negative cash flows from operations
for the past three years. At December 31, 2004, the Company had a working
capital deficiency of approximately $10,255. Accordingly, there is substantial
doubt that the Company can continue as a going concern. In order to address
these issues and to obtain adequate financing for the Company’s operations for
the next twelve months, the Company is actively promoting and expanding its
product line and continues to negotiate with significant customers who have
demonstrated interest in the Cicero technology. The Company is experiencing
difficulty increasing sales revenue largely because of the inimitable nature of
the product as well as customer concerns about the Company’s financial
viability. The Company is attempting to solve the former problem by improving
the market’s knowledge and understanding of Cicero through increased marketing
and leveraging its limited number of reference accounts while enhancing its list
of resellers and system integrators to assist in the sales and marketing
process. Additionally, the Company is seeking additional equity capital or other
strategic transactions in the near term to provide additional liquidity. On
December 31, 2004, the Company completed a Note and Warrant Offering wherein it
has raised a total of approximately $1,615. Under the terms of the Offer,
warrant holders of Level 8’s common stock were offered a one-time conversion of
their existing warrants at a conversion price of $0.10 per share as part of a
recapitalization merger plan. Those warrant holders who elected to convert,
tendered their conversion price in cash and received a Note Payable in exchange.
Upon approval of the recapitalization merger at a Shareholders meeting in early
2005, these Notes would convert into common shares of Cicero, Inc., the
surviving corporation in the merger. These funds were used to finance the
operations of the Company.
The
Company has closed a strategic acquisition of an encryption technology asset in
January 2004 and a private placement of its common stock wherein it has raised
approximately $1,247. The Company expects that increased revenues will reduce
its operating losses in future periods; however, there can be no assurance that
management will be successful in executing as anticipated or in a timely manner.
If these strategies are unsuccessful, the Company may have to pursue other means
of financing that may not be on terms favorable to the Company or its
stockholders. If the Company is unable to increase cash flow or obtain
financing, it may not be able to generate enough capital to fund operations for
the next twelve months. The accompanying financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The financial
statements presented herein do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should Level 8 be unable to continue as a going concern.
Market
Opportunity
Desktop
Integration Segment Products - Cicero
Our
target markets for Cicero are the customer contact centers of large consumer
oriented businesses, such as in the financial services, insurance and
telecommunications industries. Large scale customer contact centers are
characterized by large numbers of customer service agents that process phone
calls, faxes, e-mails and other incoming customer inquiries and requests. Our
goal is to automate business processes and applications, which greatly increase
the efficiency of customer service agents in our target markets, thereby
lowering operating costs and increasing customer retention and satisfaction.
This increased efficiency is attained in a non-invasive manner, allowing
companies to continue using their existing applications in a more productive
manner.
Generally,
managers of customer contact centers are under pressure to provide increased
customer service at the lowest possible cost while dealing with high employee
turnover and training costs. Some of the primary challenges faced by customer
contact centers include:
| · |
Customer
Service.
Currently, most customer contact centers require multiple transfers to
different agents to deal with diverse customer service issues. A one call,
one contact system enhances customer service by streamlining business
processes and responsibilities, avoiding these multiple transfers.
Ideally, the customer service agent provides customers with multi-channel
customer interfaces with timely access to all required information to
provide service. Customer service is one of the primary metrics on which
contact centers are evaluated by management. Improving customer service
through simplified processes and having access to additional information
in an integrated environment also provides opportunities to cross-sell
other products. |
| · |
Contact
Center Staffing.
The contact center industry is characterized by high training costs,
operational complexity, continuous turnover and increasing costs per call.
These difficulties stem from increased competition, higher customer
expectations, the ever-increasing complexity and diversity of the business
applications used by customer service agents, and pressure to decrease
training time and increase the return on investment in customer service
agents. |
| · |
Industry
Consolidation.
Many industries in our target market, including the financial services
industry, are in a constant state of consolidation. When companies
consolidate, the customer contact centers are generally merged to lower
overall costs and to reduce redundancies. This consolidation generally
leads to re-training and the use of multiple applications handling similar
functions that can be quite difficult to integrate successfully.
|
Our
Solution
We were
previously a provider of software that integrates an enterprise’s applications
at the server level so that disparate applications can communicate with each
other. Based on our experience in the EAI industry, we determined that a
compelling product would be one that integrates disparate applications at a
visual level in addition to at the server level. As a result, we proceeded to
procure an exclusive license to develop and market Cicero. Cicero was developed
internally by Merrill Lynch to increase the efficiency of 30,000 employees that
have daily contact with Merrill Lynch customers. Since then, Cicero has been
completely re-implemented to provide increased functionality and much more
powerful integration capabilities. When coupled with our existing technologies
or with solutions from other EAI vendors, Cicero becomes a comprehensive
business solution and provides our customers with a front-to-back integrated
system that appears as a single application to the end-user.
Cicero is
a software product that allows companies to integrate their existing
applications and processes into a seamless integrated desktop. Cicero
subordinates and controls most Windows-based applications and provides a
seamless environment with a consistent look and feel. The end-user can navigate
any number of applications whether local, client-server, mainframe legacy or
web-browser in a consistent and intuitive way that is completely customizable by
their firm.
The
Cicero solution provides the following key features:
| · |
Integrated
End-User Environment.
The end-user can use all of the applications necessary for his or her job
function from a single environment with a consistent look and feel. Cicero
integrates the execution and functionality of a variety of custom or
packaged applications simplifying navigation and sharing of data between
those applications. If a software product is designed to provide output
into a Windows environment, Cicero can subordinate its presentation and
control it through the Cicero environment. In addition, Cicero can guide
the user by providing assistance in tasks consisting of multiple steps,
and make additional information accessible without any extra effort on the
user’s part. Furthermore, Cicero can enforce steps to be performed in a
particular order, so as to enforce conformance with regulations, such as
HIPAA, across multiple applications, or when an older, non-conformant
application needs to be used in such an
environment. |
| · |
Information
Center -
The Information Center is a customizable hub of critical information that
facilitates the effective execution of processes and minimizes the need to
enter frequently accessed information repeatedly. The Cicero Information
Center provides a configurable information hub to enable end users to
interact with selected applications on a continuous basis and access real
time information. The Information Center is frequently used to support
incoming message alerts, scrolling headlines, key operational statistics,
interaction with Integrated Voice Response systems, and real-time video.
Any information that is time-sensitive or actionable can be displayed
side-by-side with the currently selected application page and information
can be readily exchanged between the Information Center and other
applications. |
| · |
Context
Sharing
-
Cicero’s unique, patented architecture enables just the right information
in any workstation application to be shared with the other applications
that need it. Cicero’s context-sharing Application Bus largely eliminates
the need for re-keying customer data, simplifies customer information
updates, and reduces errors and re-work. It also allows one subordinated
application to perform processing based on a change in another
application, thus causing applications to work together without end-user
intervention. |
| · |
Advanced
Integration Architecture -
Cicero is a sophisticated application integration platform that
subordinates and controls and non-invasively integrates any applications
with a “footprint” in the Windows environment. Cicero’s
publish-and-subscribe bus architecture provides for efficient
inter-application communication. Its event management capabilities allow
applications to respond to events that occur within unrelated
applications, making the integration more responsive. Cicero extends the
usefulness and life span of legacy architectures and provides a common
architecture for events across all platforms. Applications are integrated
using Cicero Studio, a visual integration tool that allows applications to
be quickly integrated. Integrators are not required to understand the
details of the underlying technology when integrating an application.
Cicero also supports open platform architecture for communication and
interoperability, native scripting languages and XML. Both Cicero and
Cicero Studio are designed to be extensible, allowing extensions to new
environments by using well-defined plug-ins. Cicero can also present
components or elements of integration as Web Services and incoming Web
Services requests can initiate Cicero processes without requiring any
action by a user. |
| · |
Management
Tools.
Comprehensive tools are built into the system for version management,
automatic component updates and user preference configuration. Remote
control and diagnostic tools are integrated to provide off-site help desk
and troubleshooting personnel with access to assist them in their support
duties. In addition, built-in trace and history mechanisms allow user’s
management to obtain operational information that can detail users’
activities or point out operational
problems. |
Deployment
of the Cicero solution can provide our customers with the following key
benefits:
| · |
Lower
Average Cost Per Call and Average Call Time.
Cicero increases the efficiency of the customer service agent by placing
all productivity applications within a few mouse clicks and consolidating
all standard applications into a single integrated desktop. Cost per call
is lowered because the customer service agent is more productive in moving
between disparate applications and is able to handle different requests
without having to transfer the customer to another customer service
agent. |
| · |
Reduce Staff Cost.
Cicero reduces staff cost in two ways. First, by increasing the efficiency
of each customer service agent, a contact center can handle the same
volume of customer service requests with a smaller staff. Secondly,
because Cicero simplifies the use of all contact center applications,
training costs and time can be reduced, placing newly hired staff into
productive positions faster than other contract center applications.
|
| · |
Increase
Cross-Selling Efficiency.
The consolidation of all customer data and customer specific applications
can increase the efficiency of cross selling of products and services. For
instance, a Cicero enabled contact center might be configured to inform
the customer service agent that the customer, while a brokerage services
customer, does not use bill paying or other offered services. On the other
hand, Cicero can help prevent customer service agents from selling a
product that is inappropriate for that customer or a product or service
that the customer already has through the company. Increasing the
efficiency of cross selling can both increase revenues and avoid customer
dissatisfaction. |
| · |
Deliver
Best in Class Customer Service.
Increasing customer service is one of the primary methods by which a
company in highly competitive customer-focused industries such as
financial services can differentiate itself from its competition. By
increasing the efficiency and training level of its agents, decreasing
average time per call and increasing effective cross-selling, the Cicero
enabled contact center presents its customers with a more intimate and
satisfying customer service experience that can aid in both customer
retention and as a differentiator for customer
acquisition. |
| · |
Preserve
Existing Information Technology Investment.
Cicero integrates applications at the presentation level, which allows
better use of existing custom designed applications and divergent
computing platforms (e.g., midrange, client/server, LAN and Web), which
are not readily compatible with each other or with legacy mainframe
systems. Linking together the newer computing applications to existing
systems helps preserve and increase the return on the investments made by
organizations in their information technology
systems. |
Additionally,
by visually and structurally linking the flexibility and innovations available
on newer computing platforms and applications to the rich databases and
functions that are typically maintained on the larger mainframe computers,
organizations can utilize this information in new ways. The Cicero solution
helps organizations bridge the gap between legacy systems and newer platforms
and the result is the extension of existing capabilities to a modern streamlined
interface in which the underlying system architectures, such as the Web,
mainframe, mid-range or client-server, are transparent to the end-user customer
service agent, thereby preserving the existing information technology
investments and increasing efficiency between applications.
| · |
Support
a Broad Range of Applications, Platforms and Standards.
The IT departments of larger enterprises need solutions to integrate a
broad array of applications and platforms using a wide variety of industry
standards to provide required functionality. The Cicero solution provides
visual application integration solutions that support common industry
standards and can handle a wide array of disparate applications and data
types while operating on a Windows NT, Windows XP or Windows 2000
platform. The Cicero solution can be used to link custom or packaged
applications together regardless of the tools or programming language used
to create the application by integrating those applications at the
presentation level. |
| · |
Ease
of Implementation and Enhanced Information Technology
Productivity.
The Cicero solution allows customers to create comprehensive data
transformation and information exchange solutions without the need for
non-standard coding. Our products provide pre-built adapters for a wide
variety of different systems that are pre-programmed for transforming data
into the format required by that system and transporting it using the
appropriate transport mechanism. This greatly simplifies and speeds
implementation of new solutions into the deployed Cicero framework. For
instance, while in operation at Merrill Lynch, Cicero was updated to
include software for Siebel Systems over a period of only two days when
Merrill Lynch decided to implement the Siebel Systems solution. The Cicero
solution allows our target markets to rapidly integrate new and existing
applications with little or no customization
required. |
Our
Strategy
Our
short-term goal is to be the recognized global leader in providing complete
desktop level application integration to the financial services industry. The
following are the key elements of our strategy:
| · |
Leverage
Our Existing Customers and Experience in the Financial Services
Industry.
We have had success in the past with our Geneva products in the financial
services industry. We intend to utilize these long-term relationships and
our understanding of the business to create opportunities for sales of the
Cicero solution. |
| · |
Build
on Our Successes to Expand into New Markets.
Our short-term goal is to gain a significant presence in the financial
services industry with the Cicero solution. The financial services
industry is ideal for Cicero because each entity has a large base of
installed users that use the same general groups of applications. However,
Cicero can be used in any industry that needs to integrate applications
and processes such as telecommunications and insurance. Additionally, we
believe that state and local governments, first responders and defense
agencies are excellent target markets for integration of legacy
applications. |
| · |
Develop
Strategic Partnerships.
The critical success factor for customers implementing Customer
Relationship Management (CRM) solutions in their contact centers is to
have the right balance of technology and service provision. Similarly,
penetration into the government market requires alliances with proven
government system integrators and suppliers. We are implementing a tightly
focused strategic teaming approach with a selected group of well-known
consultancy and systems integration firms that specialize in financial
services, government and eCRM integrated solutions. Leveraging these
organizations, who will provide such integration services as architecture
planning, technology integration and business workflow improvement, allows
us to focus on core application system needs and how Cicero best addresses
them, while our partners will surround the technology with appropriate
industry and business knowledge. |
| · |
Leverage
our In-House Expertise in the Cicero Software.
Merrill Lynch originally developed Cicero internally for use by
approximately 30,000 professionals worldwide. To approach the market from
a position of strength, we have added members of the Merrill Lynch
development team to our Cicero development team. We recruited and hired
Anthony Pizi, First Vice President and Chief Technology Officer of Merrill
Lynch’s Private Technology’s Architecture and Service Quality Group, and
the Cicero project director as our Chairman, Chief Executive Officer and
Chief Technology Officer as well as several of the primary Cicero
engineers from Merrill Lynch to support our ongoing Cicero development
efforts. |
| · |
Utilize
Market Analyses to Demonstrate Tangible Return-On-Investment
results.
Most contact centers benchmark their operational and services levels
against established industry norms. Metrics such as average waiting time
in the call queue, call abandonment rates, after call service work and
percentage of one-call completion are typically measured against norms and
trends. We believe that use of Cicero will provide tangible, demonstrable
improvements to these metrics. In addition, Cicero can integrate
applications and processes more efficiently than other competing
solutions. This reduces costs to customers and provides a faster ROI than
competing products. |
| · |
Augment
our product line with complementary product offerings.
In this area, we use three strategies. The first is to acquire, when
possible, complementary products that can be sold on their own, and can
also complement the Cicero product offering. In this area, we have
acquired the Ensuredmail product, which has been licensed both on its own,
as well as in conjunction with Cicero. The second strategy is to develop
Cicero connectors that facilitate the integration of existing products
under Cicero. Some of these connectors may be delivered along with Cicero,
while others may be licensed under separate product codes. The third
strategy is to develop Cicero-powered solutions that address specific
business challenges. These solutions such as our CTI Integrator not only
address specific integration problems but also provide us with an
opportunity to cross sell Cicero for additional future
integration. |
Products
Desktop
Integration Segment Products - Cicero
Level 8’s
Cicero software runs on Windows NT, Windows XP, and Windows 2000 and organizes
applications in a flexible graphical configuration that keeps all the
application functionality that the user needs within easy reach. For instance,
selecting a “memo” tab might cause a Microsoft Word memo-template to be created
within the Cicero desktop. The end-user need not even know that Microsoft Word
has been invoked to create the memo. Moreover, a customer-tracking database can
be linked with a customer relationship management software package. Virtually
any application that is used can be integrated under Cicero and be used in
conjunction with other applications.
The
patented Cicero technology, as exclusively licensed from Merrill Lynch, consists
of several components: The Event Manager, a Component Object Model (COM)-based
messaging service; The Context Manager, which administers the "publish and
subscribe" protocols; a Graphical User Interface (GUI) manager which allows
applications to be presented to the user in one or more flexible formats
selected by the user organization, and Cicero Studio, which allows applications
to be integrated mostly using a point-and-click methods. Cicero incorporates an
Application Bus with underlying mechanisms to handle the inter-application
connections. There are additional tools that provide ancillary functions, such
as integrator tools and tools to view history and traces.
Cicero
provides non-intrusive integration of desktop and web applications, portals,
third-party business tools, and even legacy mainframe and client server
applications, which co-exist and seamlessly share their information. Cicero's
non-invasive technology means that clients don't risk modifying either fragile
source code or sensitive application program interfaces - and they can easily
integrate applications where they do not have access to the source code, such as
web services, off-the-shelf applications, and legacy systems.
Cicero
allows end-users to access applications in the most efficient way possible, by
only allowing them to use the relevant portions of that application. For
instance, a contact center customer service representative does not use 90% of
the functionality of Microsoft Word, but might need access to a memorandum and
other custom designed forms as well as basic editing functionality. Cicero can
be set to control access to only those templates and, in a sense, turn-off the
unused functionality by not allowing the end-user direct access to the
underlying application. Under the same Cicero implementation, however, a
different Cicero configuration could allow the employees in the Marketing
department full access to Word because they have need of the full functionality.
The functionality of the applications that Cicero integrates can be modulated by
the business goals of the ultimate client, the parent company. This ability to
limit user access to certain functions within applications enables companies to
reduce their training burden by limiting the portions of the applications on
which they are required to train their customer service
representatives.
Cicero is
an ideal product for large customer contact centers. We believe that Cicero, by
combining ease of use, a shorter learning curve and consistent presentation of
information will allow our clients to leverage their existing investments in
Customer Relationship Management or CRM applications and further increase
customer service, productivity, return on investment and decrease costs across
the contact center.
Cicero is
also the ideal product for many office workers who repetitively need to share
information between different applications. Cicero improves worker efficiency
and reduces the number of mistakes. It can also enforce rules for such workers,
ensuring they comply with business regulations, such as HIPAA.
Cicero
CTI Integrator
Cicero CTI Integrator
enables contact centers to easily and quickly integrate their existing CTI
applications with any application running on contact center desktops without
modification of the underlying source code. This innovative solution works with
existing applications including legacy systems and delivers real time
efficiencies in terms of reducing key-strokes and errors while enhancing
customer satisfaction.
Cicero CTI is targeted at
contact centers that do not have the ability to integrate their computer
telephony and customer relationship management software. The product offers
entry-level integration within the contact center and is capable of upgrading to
the complete Cicero solution.
Messaging
and Application Engineering Segment Products
Ensuredmail
Ensuredmail is an off-the-shelf
package that provides encrypted e-mail capabilities. It provides all the
advantages of encryption, such as security, proof-of-delivery and
non-repudiation of origination. The recipient of an Ensuredmail message does not
need to be an Ensuredmail licensee. When an Ensuredmail user sends a message to
another user, the recipient receives instead an e-mail message containing a link
to a web site. Clicking on the link starts on the recipient’s machine a process
downloads the encryption software, if needed, and the message. The recipient
must provide a password to decrypt and read the message. When both sender and
recipient are licensees, then the process is simpler and more automated.
Ensuredmail can work alongside generally available e-mail servers, such as
Microsoft Exchange, and augment them. The client components can work within
commonly available packages, such as Microsoft Outlook, or even AOL.
Organizations typically use a server-based Ensuredmail implementation, whereas
individuals can use a person to person variation.
Ensuredmail
is FIPS140-1 certified, and in use by agencies of the Federal Government, in
addition to private sector organizations.
Geneva
Integration Broker.
Geneva
Integration Broker is a transport independent message broker that enables an
organization to rapidly integrate diverse business systems regardless of
platform, transport, format or protocol. The key feature of Geneva Integration
Broker is its support for XML and other standards for open data exchange on the
Internet. The product provides a robust platform for building eBusiness
applications that integrate with existing back-office systems. Geneva
Integration Broker's support for open data exchange and secure Internet
transports make it an excellent platform for building Internet-based
business-to-business solutions. Geneva Integration Broker does not represent a
significant portion of the Company’s current business or prospects.
Services
We
provide a full spectrum of technical support, training and consulting services
across all of our operating segments as part of our commitment to providing our
customers industry-leading business integration solutions. Experts in the field
of systems integration with backgrounds in development, consulting, and business
process reengineering staff our services organization. In addition, our services
professionals have substantial industry specific backgrounds with extraordinary
depth in our focus marketplace of financial services.
Maintenance
and Support
We offer
customers varying levels of technical support tailored to their needs, including
periodic software upgrades, telephone support and twenty-four hour, seven days a
week access to support-related information via the Internet. Cicero is
frequently used in mission-critical business situations, and our maintenance and
support services are accustomed to the critical demands that must be met to
deliver world-class service to our clients. Many of the members of our staff
have expertise in lights-out mission critical environments and are ready to
deliver service commensurate with those unique client needs.
Training
Services
Our
training organization offers a full curriculum of courses and labs designed to
help customers become proficient in the use of our products and related
technology as well as enabling customers to take full advantage of our
field-tested best practices and methodologies. Our training organization seeks
to enable client organizations to gain the proficiency needed in our products
for full client self-sufficiency but retains the flexibility to tailor their
curriculum to meet specific needs of our clients.
Consulting
Services
We offer
consulting services around our product offerings in project management,
applications and platform integration, application design and development and
application renewal, along with expertise in a wide variety of development
environments and programming languages. We also have an active partner program
in which we recruit leading IT consulting and system integration firms to
provide services for the design, implementation and deployment of our solutions.
Our consulting organization supports third party consultants by providing
architectural and enabling services.
Customers
Approximately
30,000 Merrill Lynch personnel are currently using the Cicero technology. We
licensed the Cicero technology from Merrill Lynch during 2000 and have developed
it to initially sell to the contact center industry. Our significant customers
include Nationwide Financial Services, Arvato Services, a division of
Bertlesmann A.G., Bank of America, Convergys, Science Applications International
Corporation (SAIC) and IBM.
Bank of
America and Nationwide Financial Services individually accounted for more than
ten percent (10%) of our operating revenues in 2002. In 2003, Bank of America,
Nationwide Financial Services, and Gateway Electronic Medical Management Systems
(GEMMS) each accounted for more than ten percent (10%) of our operating
revenues. In 2004, Bank of America, Convergys, IBM, Nationwide Financial
Services and SAIC each accounted for more than ten percent (10%) of our
operating revenue.
Sales
and Marketing
Sales
An important element of
our sales strategy is to expand our relationships with third parties to increase
market awareness and acceptance of our business integration software solutions.
As part of these relationships, we will jointly sell and implement Cicero
solutions with strategic partners such as systems integrators and embed Cicero
along with other products through OEM relationships. Level 8 will provide
training and other support necessary to systems integrators and OEMs to aid in
the promotion of our products. To date we have signed partner agreements with
Science Applications International Corporation, (SAIC), ThinkCentric, Hewlett
Packard, House of Code, Titan Systems Corporation, Silent Systems, Inc., ADPI
LLC, Arvato Services, a division of Bertlesmann A.G, Gateway Electronic Medical
Management Systems (GEMMS), Genesis Technology Group, Inc., Global Monitoring
Systems LLC, Plan B Technologies, Inc. Pyxislink, Gini Corporation, and Centrix
Communications Services S.p.A.
Marketing
The target market for our
products and services are large companies providing financial services and or
customer relationship management to a large existing customer base. Increasing
competitiveness and consolidation is driving companies in such businesses to
increase the efficiency and quality of their customer contact centers. As a
result, customer contact centers are compelled by both economic necessity and
internal mandates to find ways to increase internal efficiency, increase
customer satisfaction, increase effective cross-selling, decrease staff turnover
cost and leverage their investment in current information
technology.
Our
marketing staff has an in-depth understanding of the financial services customer
contact center software marketplace and the needs of customers in that
marketplace, as well as experience in all of the key marketing disciplines. The
staff also has broad knowledge of our products and services and how they can
meet customer needs.
Our
marketing functions include product marketing, marketing communications and
strategic alliances. We utilize focused marketing programs that are intended to
attract potential customers in our target vertical industries and to promote
Level 8 and our brands. Our programs, while limited by financial resources, are
specifically directed at our target market such as , public relations campaigns,
focused trade shows and web site marketing, while devoting resources to
supporting the field sales team with quality sales tools and collateral. As
product acceptance grows and our target markets increase, we will shift to
broader marketing programs.
The
marketing department also produces collateral material for distribution to
prospects including demonstrations, presentation materials, white papers, case
studies, articles, brochures, and data sheets.
Research
and Product Development
In
connection with the narrowing of our strategic focus, and in light of the sale
of our Systems Integration products, we anticipate an overall reduction in
research and development costs. Since Cicero is a new product in a relatively
untapped market, it is imperative to constantly enhance the feature sets and
functionality of the product.
We
incurred research and development expense of approximately $1,100, $1,000, and
$1,900, in 2004, 2003, and 2002, respectively. The decrease in research and
development costs in 2003 as compared with 2002 is the result of the impact of
the closing of the Berkeley, California facility in June 2002. The Company had a
significant decrease in research and development costs in 2002 as a result of
the sale of the Geneva AppBuilder line of business in October 2001.
Approximately 100 employees, including the Geneva AppBuilder software
development group, were transferred to the purchaser at that time.
The
markets for our products are characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions and short
product life cycles. Our future success will depend to a substantial degree upon
our ability to enhance our existing products and to develop and introduce, on a
timely and cost-effective basis, new products and features that meet changing
customer requirements and emerging and evolving industry standards.
Our
budgets for research and development are based on planned product introductions
and enhancements. Actual expenditures, however, may significantly differ from
budgeted expenditures. Inherent in the product development process are a number
of risks. The development of new, technologically advanced software products is
a complex and uncertain process requiring high levels of innovation, as well as
the accurate anticipation of technological and market trends.
The
introduction of new or enhanced products also requires us to manage the
transition from older products in order to minimize disruption in customer
ordering patterns, as well as ensure that adequate supplies of new products can
be delivered to meet customer demand. There can be no assurance that we will
successfully develop, introduce or manage the transition to new
products.
We have
in the past, and may in the future, experience delays in the introduction of our
products, due to factors internal and external to our business. Any future
delays in the introduction or shipment of new or enhanced products, the
inability of such products to gain market acceptance or problems associated with
new product transitions could adversely affect our results of operations,
particularly on a quarterly basis.
Competition
The
provision of custom contact center integration software includes a large number
of participants in various segments, is subject to rapid changes, and is highly
competitive. These markets are highly fragmented and are served by numerous
firms, many of which address only specific contact center problems and
solutions. Clients may elect to use their internal information systems resources
to satisfy their needs, rather than using those offered by Level 8.
The rapid
growth and long-term potential of the market for business integration solutions
to the contact centers of the financial services industry make it an attractive
market for new competition. Many of our current and possible future competitors
have greater name recognition, a larger installed customer base and greater
financial, technical, marketing and other resources than we have.
Representative
Competitors for Cicero
| · |
Portal
software offers the ability to aggregate information at a single point,
but not the ability to integrate transactions from a myriad of information
systems on the desktop. Plumtree is a representative company in the Portal
market.
|
| · |
Middleware
software provides integration of applications through messages and data
exchange implemented typically in the middle tier of the application
architecture. This approach requires modification of the application
source code and substantial infrastructure investments and operational
expense. Reuters, TIBCO and IBM MQSeries are representative products in
the middleware market.
|
| · |
CRM
software offers application tools that allow developers to build product
specific interfaces and custom applications. This approach is not designed
to be product neutral and is often dependent on deep integration with the
company’s CRM technology. Siebel is a representative product in the CRM
software category. |
We
believe that our ability to compete depends in part on a number of competitive
factors outside our control, including the ability of our competitors to hire,
retain and motivate senior project managers, the ownership by competitors of
software used by potential clients, the development by others of software that
is competitive with our products and services, the price at which others offer
comparable services and the extent of our competitors' responsiveness to
customer needs.
Intellectual
Property
Our
success is dependent upon developing, protecting and maintaining our
intellectual property assets. We rely upon combinations of copyright, trademark
and trade secrecy protections, along with contractual provisions, to protect our
intellectual property rights in software, documentation, data models,
methodologies, data processing systems and related written materials in the
international marketplace. In addition, Merrill Lynch holds a patent with
respect to the Cicero technology. Copyright protection is generally available
under United States laws and international treaties for our software and printed
materials. The effectiveness of these various types of protection can be
limited, however, by variations in laws and enforcement procedures from country
to country. We use the registered trademarks “Level 8 Systems”, “Cicero”,
“Ensuredmail”, and the trademarks “Level 8”, “Level 8 Technologies”, and “Geneva
Integration Broker”.
All other
product and company names mentioned herein are for identification purposes only
and are the property of, and may be trademarks of, their respective
owners.
There can
be no assurance that the steps we have taken will prevent misappropriation of
our technology, and such protections do not preclude competitors from developing
products with functionality or features similar to our products. Furthermore,
there can be no assurance that third parties will not independently develop
competing technologies that are substantially equivalent or superior to our
technologies. Additionally, with respect to the Cicero line of products, there
can be no assurance that Merrill Lynch will protect its patents or that we will
have the resources to successfully pursue infringers.
Although
we do not believe that our products infringe the proprietary rights of any third
parties, there can be no assurance that infringement claims will not be asserted
against our customers or us in the future. In addition, we may be required to
indemnify our distribution partners and end users for similar claims made
against them. Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Litigation, either as a plaintiff or defendant, would
cause us to incur substantial costs and divert management resources from
productive tasks whether or not said litigation is resolved in our favor, which
could have a material adverse effect on our business operating results and
financial condition.
As the
number of software products in the industry increases and the functionality of
these products further overlaps, we believe that software developers and
licensors may become increasingly subject to infringement claims. Any such
claims, with or without merit, could be time consuming and expensive to defend
and could adversely affect our business, operating results and financial
condition.
Employees
As of
December 31, 2004, we employed 29 employees. Our employees are not represented
by a union or a collective bargaining agreement.
We
believe that to fully implement our business plan we will be required to enhance
our ability to work with the Microsoft Windows NT, Windows XP, and Windows 2000
operating systems as well as the Linux operating system by adding additional
development personnel as well as additional direct sales personnel to complement
our sales plan. Although we believe that we will be successful in attracting and
retaining qualified employees to fill these positions, no assurance can be given
that we will be successful in attracting and retaining these employees now or in
the future.
Available
Information
Our web
address is www.level8.com. We make available free of charge through our Web site
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
Securities Exchange Commission.
Forward
Looking and Cautionary Statements
Certain statements
contained in this Annual Report may constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
("Reform Act"). We 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, our
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 our filings with the Securities
and Exchange Commission and in materials incorporated therein by reference:
there may be a question as to our ability to operate as a going concern, our
future success depends on the market acceptance of the Cicero product and
successful execution of the new strategic direction; 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 our business because our expenses are largely fixed; our
quarterly operating results may vary significantly because we are not able to
accurately predict the amount and timing of individual sales and this may
adversely impact our stock price; trends in sales of our products and general
economic conditions may affect investors' expectations regarding our financial
performance and may adversely affect our stock price; our future results may
depend upon the continued growth and business use of the Internet; we may lose
market share and be required to reduce prices as a result of competition from
our existing competitors, other vendors and information systems departments of
customers; we may not have the ability to recruit, train and retain qualified
personnel; rapid technological change could render the Company's products
obsolete; loss of any one of our major customers could adversely affect our
business; our business is subject to a number of risks associated with doing
business abroad including the effect of foreign currency exchange fluctuations
on our results of operations; our products may contain undetected software
errors, which could adversely affect our business; because our technology is
complex, we may be exposed to liability claims; we may be unable to enforce or
defend its ownership and use of proprietary technology; because we are a
technology company, our common stock may be subject to erratic price
fluctuations; and we may not have sufficient liquidity and capital resources to
meet changing business conditions.
Market
Risk
The
Company was delisted from the NASDAQ SmallCap market effective January 23, 2003.
The Company’s common stock presently is quoted on the Over-the-Counter Bulletin
Board.
Item
2. Properties
Our
corporate headquarters is located in approximately 1,300 square feet in
Farmingdale, New Jersey under a lease expiring in August 2005. The United States
operations group and administrative functions are based in offices of
approximately 2,956 square feet in our Cary, North Carolina office pursuant to a
lease expiring in 2006. The research and development and customer support groups
are located in the Farmingdale, New Jersey and Cary, North Carolina
facilities.
Item
3. Legal
Proceedings
Various
lawsuits and claims have been brought against us in the normal course of our
business. In January 2003, an action was brought against us in the Circuit Court
of Loudon County, Virginia, for a breach of a real estate lease. The case was
settled in August 2003. Under the terms of the settlement agreement, we agreed
to assign a note receivable with recourse equal to the unpaid portion of the
note should the note obligor default on future payments. The unpaid balance of
the note was $545, of which the current unpaid principal portion is
approximately $370 and it matures in December 2007. We assessed the probability
of liability under the recourse provisions using a weighted probability cash
flow analysis and have recognized a long-term liability in the amount of $131.
In
October 2003, we were served with a summons and complaint in Superior Court of
North Carolina regarding unpaid invoices for services rendered by one of our
subcontractors. The amount in dispute was approximately $200 and is included in
accounts payable. Subsequent to March 31, 2004, we settled this litigation.
Under the terms of the settlement agreement, we agreed to pay a total of $189
plus interest over a 19-month period ending November 15, 2006.
In March
2004, we were served with a summons and complaint in Superior Court of North
Carolina regarding a security deposit for a sublease in Virginia. The amount in
dispute is approximately $247. In October 2004, we reached a settlement
agreement wherein we agreed to pay $160 over a 24-month period ending October
2006.
In August
2004, we were notified that we were in default under an existing lease agreement
for office facilities in Princeton, New Jersey. The amount of the default is
approximately $65. Under the terms of the lease agreement, we may be liable for
future rents should the space remain vacant. We have reached a settlement
agreement with the landlord which calls for a total payment of $200 over a
20-month period ending July 2006.
Under the
indemnification clause of the Company’s standard reseller agreements and
software license agreements, the Company agrees to defend the reseller/licensee
against third party claims asserting infringement by the Company’s products of
certain intellectual property rights, which may include patents, copyrights,
trademarks or trade secrets, and to pay any judgments entered on such claims
against the reseller/licensee.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market
For Registrant's Common Stock and Related Shareholder Matters.
Our common stock has been
traded on the Nasdaq National Market under the symbol ''LVEL” from 1996 until
December 23, 2002. From December 24, 2002, until January 23, 2003, our common
stock traded on the Nasdaq SmallCap Market. As of January 23, 2003, our common
stock was delisted from the Nasdaq SmallCap Market and is currently quoted on
the over-the-counter bulletin board. We have never declared or paid any cash
dividends on our common stock. We anticipate that all of our earnings will be
retained for the operation and expansion of our business and do not anticipate
paying any cash dividends for common stock in the foreseeable future. The chart
below sets forth the high and low stock prices for the quarters of the fiscal
years ended December 31, 2004 and 2003.
| |
2004 |
|
2003 |
|
Quarter |
High |
Low |
|
High |
Low |
|
First |
$
0.45 |
$
0.35 |
|
$
0.40 |
$
0.15 |
|
Second |
$
0.39 |
$
0.12 |
|
$
0.35 |
$
0.24 |
|
Third |
$
0.17 |
$
0.09 |
|
$
0.77 |
$
0.24 |
|
Fourth |
$
0.14 |
$
0.05 |
|
$
0.48 |
$
0.28 |
The closing price of the
common stock on December 31, 2004 was $0.13 per share. As of March 1, 2005 we
had 212 registered shareholders of record.
Recent
Sales of Unregistered Securities
In 2004, the Company
announced a Note and Warrant Offering in which warrant holders of Level 8’s
common stock were offered a one-time conversion of their existing warrants at a
conversion price of $0.10 per share as part of a recapitalization merger plan.
Under the terms of the Offer, which expired on December 31, 2004, warrant
holders who elect to convert, would tender their conversion price in cash and
receive a Note Payable in exchange. Upon approval of the recapitalization merger
at a Shareholders meeting in early 2005, these Notes would convert into common
shares of Cicero, Inc., the surviving corporation in the merger. In addition,
those warrant holders who elected to convert the first $1,000 of warrants would
receive additional replacement warrants at a ratio of 2:1 for each warrant
converted, with a strike price of $0.10 per share. In addition, upon approval of
the recapitalization merger, each warrant holder would be entitled to additional
warrants to purchase common stock in Cicero, Inc.
As of December 31, 2004,
the Company has raised a total of $1,548 from the Note and Warrant Offering. An
additional $67 was in transit to the Company on December 31, 2004 resulting in a
total raised of $1,615. If the merger proposal is not approved, the Notes will
immediately become due and payable.
Item
6. Selected
Financial Data.
The following selected
financial data is derived from the consolidated financial statements of the
Company. The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information included herein.
See Item 7 for a
discussion of the entities included in operations.
| |
|
Year
Ended December 31,
(in
thousands, except per share data) |
|
| |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
SELECTED
STATEMENT OF OPERATIONS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
83,729 |
|
$ |
17,357 |
|
$ |
3,101 |
|
$ |
530 |
|
$ |
775 |
|
|
Loss
from continuing operations |
|
$ |
(28,367 |
) |
$ |
(58,060 |
) |
$ |
(13,142 |
) |
$ |
(9,874 |
) |
$ |
(9,731 |
) |
|
Loss
from continuing operations per common share - basic and
diluted |
|
$ |
(2.10 |
) |
$ |
(3.70 |
) |
$ |
(0.75 |
) |
$ |
(0.54 |
) |
$ |
(0.28 |
) |
|
Weighted
average common and common equivalent shares outstanding- basic and
diluted |
|
|
14,019 |
|
|
15,958 |
|
|
18,877 |
|
|
21,463 |
|
|
35,982 |
|
| |
|
At
December 31, |
|
| |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
SELECTED
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficiency) |
|
$ |
28,311 |
|
$ |
(4,529 |
) |
$ |
(6,254 |
) |
$ |
(6,555 |
) |
$ |
(10,255 |
) |
|
Total
assets |
|
|
169,956 |
|
|
35,744 |
|
|
11,852
|
|
|
5,362
|
|
|
530 |
|
|
Long-term
debt, including current maturities |
|
|
27,133 |
|
|
4,845 |
|
|
2,893 |
|
|
2,756 |
|
|
5,444 |
|
|
Senior
convertible redeemable preferred stock |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
3,355 |
|
|
1,367 |
|
|
Stockholders'
equity (deficiency) |
|
|
117,730 |
|
|
13,893 |
|
|
1,653 |
|
|
(6,103 |
) |
|
(11,857 |
) |
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,
(dollars in thousands, except share and per share amounts).
General
Information
Level 8
Systems is a global provider of business integration software that enables
organizations to integrate new and existing information and processes at the
desktop with our Cicero software product. Business integration software
addresses the emerging need for a company's information systems to deliver
enterprise-wide views of the company's business information processes.
In
addition to software products, Level 8 also provides technical support, training
and consulting services as part of its commitment to providing its customers
industry-leading integration solutions. Level 8’s consulting team has in-depth
experience in developing successful enterprise-class solutions as well as
valuable insight into the business information needs of customers in the Global
5000. Level 8 offers services around its integration software products.
This
discussion contains forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities, liquidity and
capital resources and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause its actual results to differ materially from the anticipated
results or other expectations expressed in the Company's forward-looking
statements. See ''Item 1. Business—Forward Looking and Cautionary Statements.''
The
Company's results of operations include the operations of the Company and its
subsidiaries from the date of acquisition. During 2002, the Company identified
the assets of the Systems Integration segment as being held for sale and thus a
discontinued operation. Accordingly, the assets and liabilities have been
reclassified to assets held for sale and the results of operations of that
segment are now reclassified as loss from discontinued operations.
Due to
the Company’s acquisition and divestiture activities, year-to-year comparisons
of results of operations are not necessarily meaningful. Additionally, as a
result of the Company’s pursuit of a growth strategy focusing on its software
product sales and synergies gained as a result of eliminating duplicative
functions, the results of operations are significantly different than the result
of combining the previous operations of each acquired company into Level 8. Pro
forma comparisons are therefore not necessarily meaningful.
In 2002,
the Company continued to reorganize and concentrate on the emerging desktop
integration market and continued to dispose of non-strategic assets with the
sale of the Star SQL and CTRC products from the Messaging and Application
Engineering segment and the Geneva Enterprise Integrator and Business Process
Automator from what was formerly the Systems Integration segment.
Business
Strategy
For the past three years
management made operating decisions and assessed performance of the Company’s
operations based on the following reportable segments: (1) Desktop Integration,
(2) System Integration and (3) Messaging and Application Engineering. As noted
above, the assets comprising the System Integration segment were identified as
being held for resale and accordingly, the results of operations have been
reclassified to gain or loss from a discontinued business and no segment
information is presented.
The principal product in the
Desktop Integration segment is Cicero. Cicero is a business integration software
product that maximizes end-user productivity, streamlines business operations
and integrates disparate systems and applications, while renovating or
rejuvenating older legacy systems by making them usable in the business
processes.
The products that
comprise the Messaging and Application Engineering segment are Geneva
Integration Broker, and Ensuredmail. Geneva Integration Broker is a transport
independent message broker that enables an organization to rapidly integrate
diverse business systems regardless of platform, transport, format or protocol.
Ensuredmail is an encrypted email technology that can reside on either the
server or the desktop.
Results
of Operations
The following table sets
forth, for the years indicated, the Company's results of continuing operations
expressed as a percentage of revenue.
|
|
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
30.8
|
% |
|
19.3
|
% |
|
48.1
|
% |
|
Maintenance |
|
|
39.5
|
% |
|
59.6
|
% |
|
18.4
|
% |
|
Services |
|
|
29.7
|
% |
|
21.1
|
% |
|
33.5
|
% |
|
Total |
|
|
100.0
|
% |
|
100.0
|
% |
|
100.0
|
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue: |
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
577.8
|
% |
|
783.4
|
% |
|
238.5
|
% |
|
Maintenance |
|
|
49.3
|
% |
|
70.4
|
% |
|
5.8
|
% |
|
Services |
|
|
131.0
|
% |
|
171.3
|
% |
|
29.0
|
% |
|
Total |
|
|
758.1
|
% |
|
1,025.1
|
% |
|
273.3
|
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Gross
margin (loss) |
|
|
(658.1 |
)% |
|
(925.1 |
)% |
|
(173.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing |
|
|
140.4
|
% |
|
317.0
|
% |
|
90.6
|
% |
|
Research
and product development |
|
|
143.3
|
% |
|
191.9
|
% |
|
61.3
|
% |
|
General
and administrative |
|
|
196.4
|
% |
|
482.6
|
% |
|
126.9
|
% |
|
Impairment
of intangible assets |
|
|
75.7
|
% |
|
0.0
|
% |
|
0.0
|
% |
|
(Gain)/loss
on disposal of assets |
|
|
(0.6 |
)% |
|
78.3
|
% |
|
14.9 |
% |
|
Restructuring,
net |
|
|
0.0
|
% |
|
(157.4 |
)% |
|
41.9 |
% |
|
Total |
|
|
555.2
|
% |
|
912.4
|
% |
|
335.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations |
|
|
(1,213.3 |
)% |
|
(1,837.5 |
)% |
|
(508.9 |
)% |
|
Other
income (expense), net |
|
|
(42.3 |
)% |
|
(25.5 |
)% |
|
80.1 |
% |
|
Loss
before taxes |
|
|
(1,255.6 |
)% |
|
(1,863.0 |
)% |
|
(428.8 |
)% |
|
Income
tax provision (benefit) |
|
|
0.0
|
% |
|
0.0
|
% |
|
(5.0 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations |
|
|
(1,255.6 |
)% |
|
(1,863.0 |
)% |
|
(423.8 |
)% |
|
Loss
from discontinued operations |
|
|
(3.9 |
)% |
|
(24.9 |
)% |
|
(162.5 |
)% |
|
Net
loss |
|
|
(1,259.5 |
)% |
|
(1,887.9 |
)% |
|
(586.3 |
)% |
The
following table sets forth data for total revenue for continuing operations by
geographic origin as a percentage of total revenue for the periods
indicated:
| |
2004 |
|
2003 |
|
2002 |
|
United
States |
98
% |
|
90
% |
|
96
% |
|
Europe |
2
% |
|
9
% |
|
4
% |
|
Other |
-- |
|
1
% |
|
-- |
|
Total |
100
% |
|
100
% |
|
100
% |
The table
below present’s information about reported segments for the twelve months ended
December 31, 2004, 2003, and 2002:
| |
|
Desktop
Integration |
|
Messaging/Application
Engineering |
|
TOTAL |
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
707 |
|
$ |
68 |
|
$ |
775 |
|
|
Total
cost of revenue |
|
|
5,662 |
|
|
213 |
|
|
5,875 |
|
|
Gross
margin (loss) |
|
|
(4,955 |
) |
|
(145 |
) |
|
(5,100 |
) |
|
Total
operating expenses |
|
|
3,348 |
|
|
373 |
|
|
3,721 |
|
|
Segment
profitability (loss) |
|
$ |
(8,303 |
) |
$ |
(518 |
) |
$ |
(8,821 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
2003: |
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
466 |
|
$ |
64 |
|
$ |
530 |
|
|
Total
cost of revenue |
|
|
5,371 |
|
|
62 |
|
|
5,433 |
|
|
Gross
margin (loss) |
|
|
(4,905 |
) |
|
2 |
|
|
(4,903 |
) |
|
Total
operating expenses |
|
|
4,999 |
|
|
256 |
|
|
5,255 |
|
|
Segment
profitability (loss) |
|
$ |
(9,904 |
) |
$ |
(254 |
) |
$ |
(10,158 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
2002: |
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
2,148 |
|
$ |
953 |
|
$ |
3,101 |
|
|
Total
cost of revenue |
|
|
6,527 |
|
|
1,950 |
|
|
8,477 |
|
|
Gross
margin (loss) |
|
|
(4,379 |
) |
|
(997 |
) |
|
(5,376 |
) |
|
Total
operating expenses |
|
|
8,211 |
|
|
434 |
|
|
8,645 |
|
|
Segment
profitability (loss) |
|
$ |
(12,590 |
) |
$ |
(1,431 |
) |
$ |
(14,021 |
) |
A
reconciliation of segment operating expenses to total operating expense
follows:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Segment
operating expenses |
|
$ |
3,721 |
|
$ |
5,255 |
|
$ |
8,645 |
|
|
Write-off
of intangible assets |
|
|
587 |
|
|
-- |
|
|
-- |
|
|
(Gain)Loss
on disposal of assets |
|
|
(5 |
) |
|
415 |
|
|
461 |
|
|
Restructuring,
net |
|
|
-- |
|
|
(834 |
) |
|
1,300 |
|
|
Total
operating expenses |
|
$ |
4,303 |
|
$ |
4,836 |
|
$ |
10,406 |
|
A
reconciliation of total segment profitability to net loss for the fiscal years
ended December 31:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Total
segment profitability (loss) |
|
$ |
(8,821 |
) |
$ |
(10,158 |
) |
$ |
(14,021 |
) |
|
Write-off of
intangible assets |
|
|
(587 |
) |
|
-- |
|
|
-- |
|
|
Gain/(loss)
on disposal of assets |
|
|
5 |
|
|
(415 |
) |
|
(461 |
) |
|
Restructuring |
|
|
-- |
|
|
834 |
|
|
(1,300 |
) |
|
Interest
and other income/(expense), net |
|
|
(328 |
) |
|
(135 |
) |
|
2,485 |
|
|
Net
loss before provision for income taxes |
|
$ |
(9,731 |
) |
$ |
(9,874 |
) |
$ |
(13,297 |
) |
Years
Ended December 31, 2004, 2003, and 2002
Revenue and Gross
Margin. The
Company has three categories of revenue: software products, maintenance, and
services. Software products revenue is comprised primarily of fees from
licensing the Company's proprietary software products. Maintenance revenue is
comprised of fees for maintaining, supporting, and providing periodic upgrades
to the Company's software products. Services revenue is comprised of fees for
consulting and training services related to the Company's software products.
The Company's revenues
vary from quarter to quarter, due to market conditions, the budgeting and
purchasing cycles of customers and the effectiveness of the Company’s sales
force. The Company does not have any material backlog of unfilled software
orders and product revenue in any period 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 the recognition of revenue can cause significant
variations in operating results from period to period. Fluctuations in operating
results may result in volatility of the price of the Company's common stock.
Total revenues increased
46% from $530 in 2003 to $775 in 2004 and decreased 83% from $3,101 in 2002 to
$530 in 2003. During 2002, the Company executed software contracts with two
major companies that totaled more than $1,200 in license revenues as well as
significant integration services revenues. During 2003, no such contracts were
executed. In 2004, the Company was also unable to secure significant large scale
contracts but did secure several smaller pilot programs from several different
companies. The overall decline in revenues since 2002 may also be affected by
the Company’s financial condition as well as the overall economy as certain
prospective customers have deferred purchasing activity. Gross profit margin
(loss) was (658)%, (925)%, and (173)% for 2004, 2003 and 2002,
respectively.
The
Desktop Integration segment had a gross margin (loss) of (701)% for the year
ended December 31, 2004 and a gross margin (loss) of (1,053)% for the year ended
December 31, 2003. In July 2002, the Company reassessed the life of the Cicero
technology in light of the extension of the license and exclusivity provisions
in perpetuity. As a result, the Company changed the estimated useful life to be
5 years, which resulted in a reduction in 2002 amortization expense by $2,407.
At each balance sheet date, the Company reassesses the recoverability of the
Cicero technology in accordance with SFAS 86, “Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed”. This
assessment was completed due to the Company’s continued operating losses and the
limited software revenue generated by the Cicero technology over the past twelve
to eighteen months. The Company had been in negotiations with numerous customers
to purchase licenses, which would have a significant impact on the cash flows
from the Cicero technology and the Company. Since the negotiations have been in
process for several months and expected completion of the transactions has been
delayed, the Company reduced its cash flow projections. Historical cash flows
generated by the Cicero technology do not support the long-lived asset and
accordingly the Company impaired the excess of the unamortized book value
of the technology in excess of the expected net realizable value as of June 30,
2004, September 30, 2003 and at December 31, 2003. These charges, in the amount
of $2,844, $745 and $248 respectively, have been recorded as cost of software
revenue.
The
Messaging and Application Engineering segment gross margin (loss) for the year
ended December 31, 2004 was (213%) and was 3% for the year ended December 31,
2003. For the year ended December 31, 2002, the Messaging and Application
Engineering segment had a gross margin (loss) of (105%). In January 2004 the
Company acquired substantially all of the assets and certain liabilities of
Critical Mass Mail, Inc., d/b/a Ensuredmail, a federally certified encryption
software company. The total purchase price of the assets being acquired plus
certain liabilities assumed was $750. 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 Company assessed the net realizable value of
the Ensuredmail software technology acquired and determined the purchase price
exceeded the amounts allocated to the software technology acquired less
liabilities assumed by approximately $587. This excess of the purchase price
over the fair values of the assets acquired less liabilities assumed was
allocated to goodwill, and, because it was deemed impaired, charged
to the Statement of Operations for the period ended March 31, 2004. The Company
completed an assessment of the recoverability of the Ensuredmail product
technology, as of June 30, 2004 in accordance with SFAS 86, “Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed”. This
assessment was completed due to the Company’s revised cash flow projections from
software revenue. These revised cash flow projections did not support the
long-lived asset and accordingly the Company impaired the excess of the
unamortized book value of the technology in excess of the expected net
realizable value as of June 30, 2004. This charge, in the amount of $154, was
recorded as software amortization for the period ended June 30,
2004.
Software
Products.
Software product revenue increased approximately 134% in 2004 from those results
achieved in 2003 and decreased 93% in 2003 as compared to 2002. The increase in
software revenues in 2004 is attributed to the successful deployment of a few
small pilots engagements, which were non-existent in 2003. The decrease is
software product revenue from 2002 to 2003 is the result of the two substantial
deployments to both Bank America and Nationwide Financial Services in 2002 that
were not repeated in 2003.
The gross
margin on software products was (1,773)%, (3,971)%, and (396)% for the 2004,
2003 and 2002 years ended, respectively. Cost of software is composed primarily
of amortization of software product technology, amortization of capitalized
software costs for internally developed software, impairment of software product
technology, and royalties to third parties, and to a lesser extent, production
and distribution costs. All software costs have been fully amortized as of
December 31, 2004.
The
software product gross margin (loss) for the Desktop Integration segment was
(1,950)% in 2004, (3,971)% in 2003 and (309)% in 2002. The software product
gross margin (loss) on the Messaging and Application Engineering segment was
(587)% for 2004, 0 for 2003 and (1,162)% in 2002.
The
Company expects to see significant increases in software sales related to the
Desktop Integration segment coupled with improving margins on software products
as Cicero gains acceptance in the marketplace. The Company’s expectations are
based on its review of the sales cycle that has developed around the Cicero
product since being released by the Company, its review of the pipeline of
prospective customers and their anticipated capital expenditure commitments and
budgeting cycles, as well as the establishment of viable reference points in
terms of an installed customer base with Fortune 500 Companies. The Messaging
and Application Engineering segment revenue is expected to grow as a result of
the new Ensuredmail products acquired.
Maintenance.
Maintenance
revenues for the year ended December 31, 2004 decreased
by approximately 3% or $10 from 2003. The decline in maintenance revenues in
2004 as compared to 2003 is the result of one small maintenance contract not
being renewed. Maintenance revenues declined by approximately $255 or 45% in
2003 as compared to 2002. The decline in maintenance revenue is the result of
the sale of the CTRC and Star SQL products in June, 2002.
The
Desktop Integration segment accounted for approximately 93% of total maintenance
revenue and the Messaging and Application Engineering segment accounted for
approximately 7% of total maintenance revenues in 2004.
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. The Company experienced a gross margin (loss) on maintenance products
of (25)% for 2004. Gross margins on maintenance products for 2003 and 2002 were
(18)% and 68% respectively
Maintenance
revenues are expected to increase, primarily in the Desktop Integration segment.
The Messaging and Application Engineering segment is now composed of the new
Ensuredmail encryption technology and maintenance revenues should increase as
the product achieves market acceptance. The cost of maintenance should increase
slightly for the Desktop Integration segment
Services.
Services
revenue for the year ended December 31, 2004 increased by approximately 105% or
$118 over the same period in 2003. Services revenue for the year ended December
31, 2003 decreased by approximately 89% or $927 from 2002. The increase in
service revenues in 2004 as compared to 2003 is attributable to the pilot
engagements that were incurred during the year. The decline in service revenues
in 2003 as compared to 2002 is directly attributed to the lack of software
license revenues in 2003.
Cost of
services primarily includes personnel and travel costs related to the delivery
of services. Services gross margin (loss) was (341)%, (711)% and 13% for the
years ended 2004, 2003 and 2002, respectively.
Services
revenues are expected to increase for the Desktop Integration segment as the
Cicero product gains acceptance. The Messaging and Application Engineering
segment service revenues will continue to be deminimus as the new products that
comprise that segment do not require substantial service oriented work.
Sales
and Marketing. Sales and
marketing expenses primarily include personnel costs for salespeople, marketing
personnel, travel and related overhead, as well as trade show participation and
promotional expenses. Sales and marketing expenses decreased by 35% or
approximately $592 in 2004 due to a continued reduction in the Company’s sales
and marketing workforce, decreased promotional activities and a reduction in the
sales compensation structure. Sales and marketing expenses decreased by 40% or
approximately $1,128 in 2003 as a result of the Company’s restructuring
activities.
Sales and
marketing expenses are expected to increase slightly as the Company adds
additional direct sales personnel and supports the sales function with
collateral marketing materials. The Company's emphasis for the sales and
marketing groups will be the Desktop Integration segment.
Research
and Development. Research
and development expenses primarily include personnel costs for product authors,
product developers and product documentation and related overhead. Research and
development expense increased by 9% or $94 in 2004 as compared to 2003. The
increase in research and development spending is attributable to an allocation
of certain costs primarily from General and Administrative costs. Research and
development expenses decreased by 47% or $885 in 2003 over the same period in
2002 which is primarily attributed to operational restructurings and reduction
in workforce.
The
Company intends to continue to make a significant investment in research and
development while enhancing efficiencies in this area.
General
and Administrative. General
and administrative expenses consist of personnel costs for the executive, legal,
financial, human resources, IT and administrative staff, related overhead, and
all non-allocable corporate costs of operating the Company. General and
administrative expenses for the year ended December 31, 2004 decreased by 41% or
$1,036 over the prior year. In fiscal 2003, general and administrative expenses
decreased by 35% or $1,377 as compared to 2002. The sharp decline in general and
administrative costs in 2004 and 2003 reflects the general downsizing conducted
by the Company in both years. Specifically, the Company was able to reduce legal
costs by approximately $354 in 2004 and insurances, audit and other professional
services by approximately $335. The reduction in costs in 2003 as compared to
2002 is primarily related to restructuring costs both domestically and abroad.
General
and administrative expenses are expected to slightly increase going forward as
the Company’s revenues increase.
Write-Off of
Goodwill and Other Intangible Assets. Write-off
of goodwill was $587 for 2004 and $0 for 2003 and 2002. During 2004, the Company
acquired substantially all of the assets and certain liabilities of Critical
Mass Mail, Inc., d/b/a Ensuredmail, a federally certified encryption software
company. The total purchase price of the assets being acquired plus certain
liabilities assumed was $750. 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 Company assessed the net realizable value of the
Ensuredmail software technology acquired and determined the purchase price
exceeded the amounts allocated to the software technology acquired less
liabilities assumed by approximately $587. This excess of the purchase price
over the fair values of the assets acquired less liabilities assumed was
allocated to goodwill, and, because it was deemed impaired, charged to
the Statement of Operations for the period ended March 31, 2004. At December 31,
2004, 2003 and 2002, there was no remaining goodwill on the Company’s balance
sheet.
Restructuring. As part
of the Company’s plan to focus on the emerging desktop integration marketplace
with its new Cicero product, the Company has completed substantial
restructurings in 2002 and 2001. As of December 31, 2002, the Company’s accrual
for restructuring was $772, which was primarily comprised of excess facility
costs. As more fully discussed in Note 21 Contingencies, in 2003 the Company
settled litigation relating to these excess facilities. Accordingly, the Company
has reversed the restructuring balance. Under the terms of the settlement
agreement, the Company agreed to assign the note receivable from the sale of
Geneva to EM Software Solutions, Inc., (see Note 3 Dispositions), with recourse
equal to the unpaid portion of the note receivable should the note obligor, EM
Software Solutions, Inc., default on future payments. The current unpaid
principal portion of the note receivable assigned is approximately $370 and
matures December 2007. The Company assessed the probability of liability under
the recourse provisions using a probability weighted cash flow analysis and has
recognized a long-term liability in the amount of $131.
During
the second quarter of 2002, the Company announced an additional round of
restructurings to further reduce its operating costs and streamline its
operations. The Company recorded a restructuring charge in the amount of $1,300,
which encompassed the cost associated with the closure of the Company’s
Berkeley, California facility as well as a significant reduction in the
Company’s European personnel.
Warrants
Liability. The
Company has issued warrants to Series A3 and Series B3 preferred stockholders
which contain provisions that allow the warrant holders to force a cash
redemption for events outside the control of the Company. The fair value of the
warrants is accounted for as a liability and is re-measured at each balance
sheet date. As of December 31, 2004, the warrant liability had a fair value of
$0 and the Company had recorded the change in the fair value of the warrant
liability of $198 for the year ended December 31, 2004 in the consolidated
statements of operations.
Provision
for 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 2004, 2003 or 2002. Because of the Company’s inconsistent
earnings history, the deferred tax assets have been fully offset by a valuation
allowance. The income tax provision (credit) for the year ended December 31,
2002 is primarily related to income taxes associated with 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.
Liquidity
and Capital Resources
Operating
and Investing Activities
The
Company generated cash of $88 for the year ended December 31, 2004.
Operating
activities utilized approximately $3,400 in cash, which was primarily comprised
of the loss from operations of $9,800, offset by non-cash charges for
depreciation and amortization of approximately $4,300, an impairment of
intangible assets of $600, stock compensation expense of $600, offset by a
non-cash decrease in the fair value of its warrant liability of $200. In
addition, the Company utilized cash through an increase in accounts receivable
of $100 as well as through a reduction of prepaid expenses and other assets of
$200 and generated approximately $900 in cash through an increase in its amount
owing its creditors, and an increase in assets and liabilities of discontinued
operations of $100.
The
Company generated approximately $3,500 of cash during the year from financing
activities as a result of proceeds from a private placement of common stock and
warrants in the amount of $1,200 and cash proceeds from warrant exercises of
$100. In addition, the Company generated approximately $1,500 as a result of its
Note and Warrant Offering which expired on December 31, 2004. In addition, the
Company incurred gross borrowings of $1,100 and repaid $400 against those
borrowings.
By
comparison, the Company utilized cash of $180 for the year ended December 31,
2003.
Operating
activities utilized approximately $4,800 in cash, which was primarily comprised
of the loss from operations of $10,000, offset by non-cash charges for
depreciation and amortization of approximately $3,100, an impairment of software
technology of $1,000 and a non-cash decrease in the fair value of its warrant
liability of $100. In addition, the Company had a reduction in accounts
receivable of $1,400, a reduction in assets and liabilities of discontinued
operations of $100 and a reduction of prepaid expenses and other assets of $400.
The
Company generated approximately $800 in cash from investing activities, which
was primarily the result of the collection of various notes receivable.
The
Company generated approximately $3,800 of cash during the year from financing
activities as a result of proceeds from a private placement of common stock and
warrants in the amount of $800, cash proceeds from warrant exercises of $400 and
cash proceeds from the sale of Series D Preferred Stock of approximately $3,500
offset by cash held in escrow of $776. In addition, the Company incurred gross
borrowings of $1,000 and repaid $1,200 against those borrowings.
Financing
Activities
The
Company funded its cash needs during the year ended December 31, 2004 with cash
on hand from December 31, 2003, through the use of proceeds from a private
placement of common stock and warrants, exercises of outstanding warrants,
proceeds from borrowings under convertible debt agreements as well as the
proceeds from a Note and Warrant Offering.
The
Company has a $1,971 term loan bearing interest at LIBOR plus 1% (approximately
3.21% at December 31, 2004), which is payable quarterly. There are no financial
covenants and the term loan is guaranteed by Liraz Systems, Ltd., the Company’s
former principal shareholder. During 2000, the loan and guaranty were amended to
extend the due date from May 31, 2001 to November 30, 2003 and to provide the
Company with additional borrowings. In exchange for the initial and amended
guarantees, the Company issued Liraz a total of 170,000 shares of the Company’s
common stock. Based upon fair market value at the time of issuance, the Company
recorded total deferred costs of $4,013 related to the guaranty. These costs
were amortized in the statement of operations as a component of interest expense
over the term of the guaranty. In November 2003, the Company and Liraz Systems
Ltd. agreed to extend its guaranty on the Company’s term loan and with Bank
Hapoalim, the note holder, to extend the maturity date on the loan to November
8, 2004. Under the terms of the agreement with Liraz, the Company agreed to
issue 300,000 shares of its common stock. In September 2004, The Company and
Liraz Systems Ltd. agreed to extend its guaranty on the term loan and with Bank
Hapoalim, to extend the maturity date on the loan to November 3, 2005. Under the
terms of the agreement with Liraz, the Company agreed to issue 3,942,000 shares
of its common stock. Based upon fair market value at the time of issuance, the
Company recognized $394 as loan amortization costs in the Statement of
Operations for the year ended December 31, 2004.
In
January 2004, the Company completed a common stock financing round wherein it
raised $1,247 of capital from several new investors as well as certain investors
of Critical Mass Mail, Inc. The Company sold 3,369,192 shares of common stock at
a price of $0.37 per share. As part of the financing, the Company has also
issued warrants to purchase 3,369,192 shares of the Company’s common stock at an
exercise price of $0.37. The warrants expire three years from the date of grant.
On March
19, 2003, the Company completed a $3,500 private placement of Series D
Convertible Redeemable Preferred Stock (“Series D Preferred Stock”), convertible
at a conversion ratio of $0.32 per share of common stock into an aggregate of
11,031,250 shares of common stock. As part of the financing, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share (“Series D-1 Warrants”). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise (“Series D-2 Warrants”). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company’s capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in the allocation of $2,890 to the Series D Preferred Stock and $640
to the detachable warrants. Based upon the allocation of the proceeds, the
Company determined that the effective conversion price of the Series D Preferred
Stock was less than the fair value of the Company’s common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because the Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.
As part
of the financing, the Company and the lead investors have agreed to form a joint
venture to exploit the Cicero technology in the Asian market. The terms of the
agreement required that the Company deposit $1,000 of the gross proceeds from
the financing into escrow to fund the joint venture. The escrow agreement allows
for the immediate release of funds to cover organizational costs of the joint
venture. During the quarter ended March 31, 2003, $225 of escrowed funds was
released. Since the joint venture was not formed and operational on or by July
17, 2003, the lead investors have the right, but not the obligation, to require
the Company to purchase $1,000 in liquidation value of the Series D Preferred
Stock at a 5% per annum premium, less their pro-rata share of expenses. On
October 21, 2004, the Company received notification from the lead investors of
their intent to redeem the escrow balance and surrender the equivalent amount of
Series D preferred shares. This redemption was completed in November 2004.
Another
condition of the financing required the Company to place an additional $1,000 of
the gross proceeds into escrow, pending the execution of a definitive agreement
with Merrill Lynch providing for the sale of all right, title and interest to
the Cicero technology. Since a transaction with Merrill Lynch for the sale of
Cicero was not consummated by May 18, 2003, the lead investors have the right,
but not the obligation, to require the Company to purchase $1,000 in liquidation
value of the Series D Preferred Stock at a 5% per annum premium. During the
second quarter, $390 of escrowed funds was released. In addition, the Company
and the lead investor agreed to extend the escrow release provisions until the
end of July 2003 when all remaining escrow monies were released to the Company.
In
connection with the sale of Series D Preferred Stock, the holders of the
Company’s Series A3 Preferred Stock and Series B3 Preferred Stock (collectively,
the “Existing Preferred Stockholders”), entered into an agreement whereby the
Existing Preferred Stockholders have agreed to waive certain applicable price
protection anti-dilution provisions. Under the terms of the waiver agreement,
the Company is also permitted to issue equity securities representing aggregate
proceeds of up to an additional $4,900 following the sale of the Series D
Preferred Stock. Additionally, the Existing Preferred Stockholders have also
agreed to a limited lock-up restricting their ability to sell common stock
issuable upon conversion of their preferred stock and warrants and to waive the
accrual of any dividends that may otherwise be payable as a result of the
Company’s delisting from Nasdaq. As consideration for the waiver agreement, the
Company has agreed to issue on a pro rata basis up to 1,000,000 warrants to all
the Existing Preferred Stockholders on a pro rata basis at such time and from
time to time as the Company closes financing transactions that represent
proceeds in excess of $2,900, excluding the proceeds from the Series D Preferred
Stock transaction and any investments made by a strategic investor in the
software business. Such warrants will have an exercise price that is the greater
of $0.40 or the same exercise price as the exercise price of the warrant, or
equity security, that the Company issues in connection with the Company’s
financing or loan transaction that exceeds the $2,900 threshold.
In
October 2003, the Company completed a common stock financing round wherein it
raised $853 of capital. The offering closed on October 15, 2003. The Company
sold 1,894,444 shares of common stock at a price of $0.45 per share for a total
of $853 in proceeds and issued warrants to purchase 473,611 shares of the
Company’s common stock at an exercise price of $0.45. The warrants expire three
years from the date of grant. As part of an agreement with Liraz Systems Ltd,
the guarantor of the Company’s term loan, the Company used $200 of the proceeds
to reduce the principal outstanding on the term loan to $1,971.
The
Company incurred a loss of approximately $9,800 for the year ended December 31,
2004 in addition to losses of approximately $31,000 for the previous two fiscal
years. The Company has experienced negative cash flows from operations for the
past three years. At December 31, 2004, the Company had a working capital
deficiency of approximately $10,255. The Company’s future revenues are entirely
dependent on acceptance of Cicero, which has limited success in commercial
markets to date. Accordingly, there is substantial doubt that the Company can
continue as a going concern. In order to address these issues and to obtain
adequate financing for the Company’s operations for the next twelve months, the
Company is actively promoting and expanding its product line and continues to
negotiate with significant customers that have begun or finalized the “proof of
concept” stage with the Cicero technology. The Company is experiencing
difficulty increasing sales revenue largely because of the inimitable nature of
the product as well as customer concerns about the financial viability of the
Company. The Company is attempting to solve the former problem by improving the
market’s knowledge and understanding of Cicero through increased marketing and
leveraging its limited number of reference accounts. Additionally, the Company
is seeking additional equity capital or other strategic transactions in the near
term to provide additional liquidity.
On
December 31, 2004, the Company completed a Note and Warrant Offering wherein it
has raised a total of approximately $1,615. Under the terms of the Offer,
warrant holders of Level 8’s common stock were offered a one-time conversion of
their existing warrants at a conversion price of $0.10 per share as part of a
recapitalization merger plan. Those warrant holders who elected to convert,
tendered their conversion price in cash and received a Note Payable in exchange.
Upon approval of the recapitalization merger at a Shareholders meeting in early
2005, these Notes would convert into common shares of Cicero, Inc., the
surviving corporation in the merger. The Company believes that the
recapitalization merger will have a positive impact on the future operations of
the Company and its ability to raise additional capital that it will need to
continue operations, however, there can be no assurance that management will be
successful in executing as anticipated or in a timely enough manner. If these
strategies are unsuccessful, the Company may have to pursue other means of
financing that may not be on terms favorable to the Company or its stockholders.
If the Company is unable to increase cash flow or obtain financing, it may not
be able to generate enough capital to fund operations for the next twelve
months. The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The financial statements
presented herein do not include any adjustments relating to the recoverability
of assets and classification of liabilities that might be necessary should Level
8 be unable to continue as a going concern.
Contractual
Obligations
Future
minimum payments for all contractual obligations for years subsequent to
December 31, 2004 are as follows:
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
Total |
|
|
Short
and long-term debt, including interest payments |
|
$ |
5,349 |
|
$ |
120 |
|
$ |
131 |
|
$ |
-- |
|
$ |
5,600 |
|
|
Service
purchase commitments |
|
|
400 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
400 |
|
|
Operating
leases |
|
|
99 |
|
|
56 |
|
|
-- |
|
|
-- |
|
|
155 |
|
|
Total |
|
$ |
5,848 |
|
$ |
176 |
|
$ |
131 |
|
$ |
-- |
|
$ |
6,155 |
|
Short and
long-term debt, including interest payments includes approximately $962 of
convertible notes and $1,548 of short term debt related to the Note and Warrant
Offering. Upon approval of the recapitalization merger, these amounts will
convert into equity in the surviving company.
At
December 31, 2004, the Company had $1,367 of Series D Convertible Redeemable
Preferred Stock outstanding. Under the terms of the agreement, a redemption
event may occur if any one person, entity or group shall control more than 35%
of the voting power of the Company’s capital stock. The holders of the Series D
Convertible Redeemable Preferred Stock have agreed in principal to support the
recapitalization merger, which if passed would automatically convert these
shares into Series A-1 Preferred Stock of Cicero, Inc., the surviving
corporation and eliminate the redemption clause of the Series D offering.
Under the
employment agreement between the Company and Mr. Pizi effective January 1, 2005,
the Company is to pay Mr. Pizi an annual base salary of $200, and a performance
bonus in cash of up to $400 per annum based upon certain revenue goals, as
determined by the Compensation Committee of the Board of Directors of the
Company, in its discretion. Upon termination of Mr. Pizi's employment by the
Company without cause, the Company has agreed to pay Mr. Pizi (a) a lump sum
payment of one year of Mr. Pizi's then base salary within thirty (30) days of
termination, (b) all then outstanding but unvested stock options shall vest one
hundred percent (100%), and (c) two hundred thousand (200,000) shares of the
Company's common stock.
Under the
employment agreement between the Company and Mr. Broderick effective January 1,
2005, the Company pays Mr. Broderick a base salary of $200, and a performance
bonus of cash up to 50% of Mr. Broderick’s base salary. Upon termination of Mr.
Broderick's employment by the Company without cause, the Company has agreed to
provide Mr. Broderick with salary continuation of six months of Mr. Broderick's
then base salary beginning on the first payday after the date of
termination.
Off
Balance Sheet Arrangements
The
Company does not have any off balance sheet arrangements. We have no
subsidiaries or other unconsolidated limited purpose entities, and we have not
guaranteed or otherwise supported the obligations of any other entity.
Significant
Accounting Policies and Estimates
The
policies discussed below are considered by us to be critical to an understanding
of our financial statements because they require us to apply the most judgment
and make estimates regarding matters that are inherently uncertain. Specific
risks for these critical accounting policies are described in the following
paragraphs. With respect to the policies discussed below, we note that because
of the uncertainties inherent in forecasting, the estimates frequently require
adjustment.
Our
financial statements and related disclosures, which are prepared to conform to
accounting principles generally accepted in the United States of America,
require us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and accounts receivable and expenses during the
period reported. We are also required to disclose amounts of contingent assets
and liabilities at the date of the financial statements. Our actual results in
future periods could differ from those estimates. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the
Consolidated Financial Statements in the period they are determined to be
necessary.
We
consider the most significant accounting policies and estimates in our financial
statements to be those surrounding: (1) revenue recognition; (2) allowance for
doubtful trade accounts receivable; (3) valuation of notes receivable; and (4)
valuation of deferred tax assets. These accounting policies, the basis for any
estimates and potential impact to our Consolidated Financial Statements, should
any of the estimates change, are further described as follows:
Revenue
Recognition. Our
revenues are derived principally from three sources: (i) license fees for the
use of our software products; (ii) fees for consulting services and training;
and (iii) fees for maintenance and technical support. We generally recognize
revenue from software license fees when a license agreement has been signed by
both parties, the fee is fixed or determinable, collection of the fee is
probable, delivery of our products has occurred and no other significant
obligations remain. For multiple-element arrangements, we apply the “residual
method”. According to the residual method, revenue allocated to the undelivered
elements is allocated based on vendor specific objective evidence (“VSOE”) of
fair value of those elements. VSOE is determined by reference to the price the
customer would be required to pay when the element is sold separately. Revenue
applicable to the delivered elements is deemed equal to the remainder of the
contract price. The revenue recognition rules pertaining to software
arrangements are complicated and certain assumptions are made in determining
whether the fee is fixed and determinable and whether collectability is
probable. For instance, in our license arrangements with resellers, estimates
are made regarding the reseller’s ability and intent to pay the license fee. Our
estimates may prove incorrect if, for instance, subsequent sales by the reseller
do not materialize. Should our actual experience with respect to collections
differ from our initial assessment, there could be adjustments to future
results.
Revenues
from services include fees for consulting services and training. Revenues from
services are recognized on either a time and materials or percentage of
completion basis as the services are performed and amounts due from customers
are deemed collectible and non-refundable. Revenues from fixed price service
agreements are recognized on a percentage of completion basis in direct
proportion to the services provided. To the extent the actual time to complete
such services varies from the estimates made at any reporting date, our revenue
and the related gross margins may be impacted in the following
period.
Allowance for Doubtful
Trade Accounts Receivable. In addition to assessing the
probability of collection in conjunction with revenue arrangements, we
continually assess the collectability of outstanding invoices. Assumptions are
made regarding the customer’s ability and intent to pay and are based on
historical trends, general economic conditions, and current customer data.
Should our actual experience with respect to collections differ from our initial
assessment, there could be adjustments to bad debt expense.
Valuation of Notes
Receivable. We continually assess the
collectability of outstanding notes receivable. Assumptions are made regarding
the counter party’s ability and intent to pay and are based on historical trends
and general economic conditions, and current financial data. As of December 31,
2004 the Company had no notes receivable.
Capitalization
and Valuation of Software Product Technology. Our policy on capitalized
software costs determines the timing of our recognition of certain development
costs. In addition, this policy determines whether the cost is classified as
development expense or cost of software revenue. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. Additionally, we review software
product technology assets for net realizable value at each balance sheet date.
Should we experience reductions in revenues because our business or market
conditions vary from our current expectations, we may not be able to realize the
carrying value of these assets and will record a write down at that time. For
the year ended December 31, 2004, the Company recorded a write down of software
product technology totaling $3,585 and as of December 31, 2004 the Company had
$0 in capitalized software product technology.
Valuation
of Deferred Tax Assets. Income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards.
Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established to the extent that it is more likely than not, that we will be
unable to utilize deferred income tax assets in the future. At December 31,
2004, we had a valuation allowance of $84,370 against $84,370 of gross deferred
tax assets. We considered all of the available evidence to arrive at our
position on the net deferred tax asset; however, should circumstances change and
alter our judgment in this regard, it may have an impact on future operating
results.
At
December 31, 2004, the Company has net operating loss carryforwards of
approximately $190,571, which may be applied against future taxable income.
These carryforwards will expire at various times between 2005 and 2023. A
substantial portion of these carryforwards is restricted to future taxable
income of certain of the Company’s subsidiaries or limited by Internal Revenue
Code Section 382. Thus, the utilization of these carryforwards cannot be
assured.
Restructuring
Reserves. At December 31, 2002, the
Company’s restructuring liabilities totaled $772, which represented estimated
excess facilities costs. In August 2003, the Company settled litigation relating
to these excess facilities. Accordingly, the Company has reversed the
restructuring balance. Under the terms of the settlement agreement, the Company
agreed to assign the note receivable from the sale of Geneva to EM Software
Solutions, Inc., (see Note 3 Dispositions), with recourse equal to the unpaid
portion of the note receivable should the note obligor, EM Software Solutions,
Inc., default on future payments. The current unpaid principal portion of the
note receivable at assignment is approximately $370 and matures December 2007.
The Company assessed the probability of liability under the recourse provisions
using a probability weighted cash flow analysis and has recognized a long-term
liability in the amount of $131.
Recent
Accounting Pronouncements:
In December 2004,
the FASB issued SFAS 123 (revised 2004), Share-Based Payment, (SFAS 123R).
SFAS 123R addresses the accounting for share-based payments to employees,
including grants of employee stock options. Under the new standard,
companies will no longer be able to account for share-based compensation
transactions using the intrinsic method in accordance with APB Opinion No. 25,
“Accounting For Stock Issued To Employees”. Instead, companies will be
required to account for such transactions using a fair-value method and
recognize the expense in the consolidated statement of income. SFAS 123R
will be effective for periods beginning after June 15, 2005 and allows, but
does not require, companies to restate the full fiscal year of 2005 to reflect
the impact of expensing share-based payments under SFAS 123R. The Company
has not yet determined which fair-value method and transitional provision it
will follow. However, the Company expects that the adoption of SFAS 123R
will have a significant impact on its results of operations. The Company
does not expect the adoption of SFAS 123R will impact its overall financial
position. See Stock-Based Compensation in Note 1 for the pro forma impact
on net income and net income per share from calculating stock-based compensation
costs under the fair value alternative of SFAS 123. However, the
calculation of compensation cost for share-based payment transactions after the
effective date of SFAS 123R may be different from the calculation of
compensation cost under SFAS 123, but such differences have not yet been
quantified.
In January 2003, the FASB
issued Interpretation No. 46 or FIN 46 “Consolidation of Variable Interest
Entities”, an interpretation of Accounting Research Bulletin No. 51,
“Consolidated Financial Statements”. In
October 2003, the FASB issued FASB Staff Position FIN 46-6, “Effective Date of
FASB Interpretation No. 46, Consolidation of Variable Interest Entities”
deferring the effective date for applying the provisions of FIN 46 for public
entities’ interests in variable interest entities or
potential variable interest entities created before February 1, 2003 for
financial statements of interim or annual periods that end after December 15,
2003. FIN 46
establishes accounting guidance for consolidation of variable interest entities
that function to support the activities of the primary beneficiary. In
December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of
Variable Interest Entities.” This revised interpretation is effective for all
entities no later than the end of the first reporting period that ends after
March 15, 2004. The
Company has no investment in or contractual relationship or other business
relationship with a variable interest entity and therefore the adoption of this
interpretation did not have any impact on its consolidated financial position or
results of operations. However, if the Company enters into any such arrangement
with a variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company’s consolidated financial position or results of
operations might be materially impacted.
In May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, “Elements of Financial Statements”. The adoption of this
statement did not have a material impact on the Company’s results of operations
and financial condition.
Item
7a. Quantitative
and Qualitative Disclosures about Market Risk
As the
Company has sold most of its European based business and has closed several
European sales offices, the majority of revenues are generated from US sources.
The Company expects that trend to continue for the next year. As such, there is
minimal foreign currency risk at present. Should the Company continue to develop
a reseller presence in Europe and Asia, that risk will be increased.
Item
8. Financial
Statements and Supplementary Data
The
information required by this item appears beginning on page F-1 of this report.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
On
November 24, 2003, Deloitte & Touche LLP resigned as the Company’s
independent public accountants. During the two most recent fiscal years
preceding such resignation, neither of Deloitte & Touche’s reports on our
financial statements contained an adverse opinion or a disclaimer of opinion,
however, both reports contained qualifications as to uncertainty. During this
same period, there were no qualifications as to audit scope or accounting
principles, nor were there disagreements between the Company and Deloitte &
Touche on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Deloitte & Touche, would have caused them to make a
reference to the subject matter of the disagreements in connection with their
reports on the financial statements for such years. There were no reportable
events as described in Item 304(a)(1)(v) of Regulation S-K. The Company has
provided Deloitte & Touche with a copy of the foregoing disclosures and
Deloitte & Touche has furnished the Company with a letter addressed to the
SEC previously filed as an exhibit.
On
February 2, 2004, Level 8 Systems appointed Margolis & Company P.C. as the
Company’s new independent public accountants.
Item
9A. Controls
and Procedures
The
Company, under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer, President and Chief
Operating Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (the “Evaluation”) as of the end of the period covered by this
Report. Based upon the Evaluation, the Company’s Chief Executive Officer,
President and Chief Operating Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission is recorded, processed, summarized and
reported as and when required. In addition, they concluded that there were no
significant deficiencies or material weaknesses in the design or operation of
internal controls which could significantly affect the Company’s ability to
record, process, summarize and report financial information. It should be noted
that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system
will be met. In addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events. Because of these and
other inherent limitations of control systems, there is only reasonable
assurance that the Company’s controls will succeed in achieving their stated
goals under all potential future conditions.
In
addition, the management of the Company, with the participation of the Company's
Chief Executive Officer and the Chief Financial Officer, has evaluated whether
any change in the Company's internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred
during the Company's fourth fiscal quarter. Based on that evaluation, the
Company's Chief Executive Officer and Acting Chief Financial Officer
have concluded that there has been no change in the Company's internal control
over financial reporting during the fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item
9B. Other
Information
The following disclosure
has been filed on Form 8-K under the heading “Item 5.02. Departure of Directors
or Principal Officers, Election of Directors, Appointment of Principal
Officers”:
On March 7, 2005, Mr.
Ralph Martino was elected Chairman of the Board of Directors replacing Mr.
Anthony Pizi who remains as a director. Mr. Pizi
will also continue as Chief Executive Officer and Chief Technology Officer of
the Company.
Item
10. Directors and Executive Officers of the Registrant
As of
December 31, 2004, the Board of Directors of the Company consisted of Anthony
Pizi, Bruce Hasenyager, Nicholas Hatalski, Kenneth Nielsen and Jay Kingley. All
Directors were elected at the 2003 Annual Meeting of Stockholders and will serve
until the election and qualification of their successors or until their earlier
death, resignation or removal. Mr. Frank Artale resigned from the Board in
January 2004. Mr. Artale’s resignation was not the result of a disagreement with
the Company or its management. On March
7, 2005, Ralph Martino was elected to the Board of Directors by vote of existing
Directors. Set forth below with respect to each director is his
name, age, principal occupation and business experience for the past five years
and length of service as a director of the Company.
Ralph
F. Martino
Director
since March 2005. Age: 55
Mr. Martino has
been a director since March 7, 2005 and serves as Chairman of the Board of
Directors. Mr. Martino was the former Vice President of Strategy and Marketing
for IBM Global Services and has worked in various management capacities at IBM
his entire working career until his retirement in 2003. Since that time, Mr.
Martino has served as a sales and marketing consultant to various entities. Mr.
Martino earned his BS in Pre-Med from the University of Notre Dame and his MBA
in Marketing from the Goizueta Business School of Emory University.
Anthony
C. Pizi
Director since August
2000. Age:
45
Mr. Pizi has served as
Chairman of the Board of Directors from December 1, 2000 until March 7,
2005 and as Chief Technology Officer since December 1, 2000. He has served
as Chief Executive Officer since February 1, 2001. Mr. Pizi has been a director
since August 2000. Until December 2000, he was First Vice President and Chief
Technology Officer of Merrill Lynch’s Private Client Technology Architecture and
Service Quality Group. Mr. Pizi’s 16 years with Merrill Lynch included
assignments in Corporate MIS, Investment Banking and Private Client. Mr. Pizi
earned his BS in Engineering from West Virginia University.
Nicholas
Hatalski
Director since September
2002. Age:
42
Mr. Hatalski has been a
director of Level 8 since September 2002. Prior to his retirement in September
2004, and since January 2004, Mr. Hatalski served as the Vice President of
Business Development and Product Strategy at MedSeek, Inc., a company dedicated
to providing web-based solutions to the healthcare sector. Since December 2000,
he was the Senior Vice President of the iServices Group of Park City Solutions,
Inc. Prior to joining Park City Solutions, he was the Practice Manager for
Technology Consulting at Siemens Health Services. His tenure at Siemens (and
their acquisition Shared Medical Systems) was 1984-2000.
Bruce
W. Hasenyager
Director since October 2002.
Age:
62
Mr. Hasenyager has been a
director of Level 8 since October 2002. Mr. Hasenyager is presently a principal
at Bergen & Webster Executive Communications, a consulting organization.
From April 2002 until November 2002, Mr. Hasenyager served as Director of
Business and Technology Development at the Hart eCenter at Southern Methodist
University and also acted as the Chief Operation Officer of the Guildhall at
SMU. Prior to that, Mr. Hasenyager served as Senior Vice President and CTO of
Technology and Operations at MobilStar Network Corporation since April
1996.
Kenneth
W. Nielsen
Director since October
2002. Age:
45
Mr. Nielsen has been a
director of Level 8 since October 2002. Since December 1998, Mr. Nielsen has
served as President and CEO of Nielsen Personnel Services, Inc., a personal
staffing firm. Prior to that, Mr. Nielsen was District Operations Manager for
Outsource International, Inc.
Jay
R. Kingley
Director since November
2002. Age:
44
Mr. Kingley has been a
director of Level 8 since November 2002. Mr. Kingley is currently the CEO of
Kingley Institute LLC, a medical wellness company. From 2001 until 2004, Mr.
Kingley served as CEO of Warren Partners, LLC, a software development and
consultancy company. Mr. Kingley was Managing Director of a business development
function of Zurich Financial Services Group from 1999-2001. Prior to joining
Zurich Financial Services Group, Mr. Kingley was Vice President of Diamond
Technology Partners, Inc., a management-consulting firm.
Compensation
Committee Interlocks and Insider Participation
The Compensation
Committee is currently comprised of Messrs. Hatalski, Kingley and Nielsen.
Mr. Artale also served on the Committee until his resignation from the Board in
January 2004. None of the current members of the Compensation Committee has
served as an executive officer of the Company, and no executive officer of the
Company has served as a member of the Compensation Committee of any other entity
of which Messrs. Hatalski, Kingley and Nielsen have served as executive
officers. There were no interlocking relationships between the Company and other
entities that might affect the determination of the compensation of the
directors and executive officers of the Company.
Director
Compensation
In May 1999, stockholders
of the Company approved the Outside Director Stock Incentive Plan of the
Company. Under this plan, the outside directors may be granted an option to
purchase 12,000 shares of common stock at a price equal to the fair market value
of the common stock as of the grant date. In January 2002, the Board of
Directors approved an amendment to the Outside Director Stock Incentive Plan to
provide an increase in the number of options to be granted to outside directors
to 24,000. These options vest over a three-year period in equal increments upon
the eligible Director’s election to the Board, with the initial increment
vesting on the date of grant. The Outside Director Stock Incentive Plan also
permits eligible directors to receive partial payment of director fees in common
shares in lieu of cash, subject to approval by the Board of Directors. In
addition, the plan permits the Board of Directors to grant discretionary awards
to eligible directors under the plan.
In October 2002, the Board
of Directors approved an amendment to the stock incentive plan for all
non-management directors. Under the amendment, each non-management director will
receive 100,000 options to purchase common stock of the Company at the fair
market value of the common stock on the date of grant. These shares will vest in
three equal increments with the initial increment vesting on the date of grant.
The option grant contains an acceleration of vesting provision should the
Company incur a change in control. A change in control is defined as a merger or
consolidation of the Company with or into another unaffiliated entity, or the
merger of an unaffiliated entity into the Company or another subsidiary thereof
with the effect that immediately after such transaction the stockholders of the
Company immediately prior to the transaction hold less than fifty percent (50%)
of the total voting power of all securities generally entitled to vote in the
election of directors, managers or trustees of the entity surviving such merger
or consolidation. Under the amendment, there will be no additional compensation
awarded for committee participation. The shares allocated to the Board of
Directors were issued out of the Level 8 Systems, Inc. 1997 Employee Stock
Plan.
During
2004 and prior to his appointment to the Board of Directors, the Company entered
into a series of consulting agreements with Ralph Martino. Under the terms of
the agreements, the Company paid Mr. Martino a total of 466,668 shares of
company common stock valued at $47 as compensation for sales and marketing
services. The agreements terminated on September 30, 2004.
Executive
Officers
The Company’s current
executive officers are listed below, together with their age, position with the
Company and business experience for the past five years.
Anthony
C. Pizi Age:
45
Mr. Pizi
currently serves as the Chairman of the Board, Chief Executive Officer and Chief
Technology Officer of the Company since February 1, 2001. Prior to joining the
Company, Mr. Pizi was
First Vice President and Chief Technology Officer of Merrill Lynch’s Private
Client Technology Architecture and Service Quality Group. Mr. Pizi’s 16 years
with Merrill Lynch included assignments in Corporate MIS, Investment Banking and
Private Client. Mr. Pizi earned his BS in Engineering from West Virginia
University.
John
P. Broderick Age:
55
Mr.
Broderick has served as the Chief Operating Officer of the Company since June
2002, as the Chief Financial Officer of the Company since April 2001, and as
Corporate Secretary since August 2001. Prior to joining the Company, Mr.
Broderick was Executive Vice President of Swell Inc., a sports media e-commerce
company where he oversaw the development of all commerce operations and served
as the organization's interim CFO. Previously, Mr. Broderick served as chief
financial officer for Programmer's Paradise, a publicly held (NASDAQ: PROG)
international software marketer. Mr. Broderick received his B.S. in accounting
from Villanova University.
Audit
Committee
The Board
of Directors has determined that the members of the Audit Committee are
independent as defined in Rule 4200(a)(15) of the National Association of
Securities Dealers’ listing standards. Until his resignation in January 2004,
Mr. Frank Artale was designated the “audit committee financial expert” as
defined in Item 401(h) of Regulation S-K. To date, the Company has not named
anyone to the position.
Code
of Ethics and Conduct
Our Board
of Directors has adopted a code of ethics and a code of conduct that applies to
all of our directors, Chief Executive Officer, Chief Financial Officer, and
employees. We will provide copies of our code of conduct and code of ethics
without charge upon request. To obtain a copy of the code of ethics or code of
conduct, please send your written request to Level 8 Systems, Suite 542, 8000
Regency Pkwy, Cary, North Carolina 27511, Attn:
Corporate Secretary. The code of ethics is also available on the Company’s
website at www.level8.com.
Compliance with
Section
16(a)
of the Exchange
Act
Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires the Company’s officers,
directors and persons who own more than ten percent of the Company’s Common
Stock (collectively, “Reporting Persons”) to file reports of ownership and
changes in ownership with the SEC and Nasdaq. Reporting Persons are required by
SEC regulations to furnish the Company with copies of all Section 16(a) reports
they file. Based solely on its review of the copies of such reports received by
it and written representations all Section 16(a) reports were filed in a timely
manner.
Item
11. Executive Compensation.
The following summary
compensation table sets forth the compensation earned by all persons serving as
the Company’s executive officers during fiscal year 2004, serving
or having served at the end of fiscal 2002 whose salary and bonus exceeded
$100,000 for services rendered to the Company during fiscal 2004 and one other
former executive officer who would be included but for the fact that he no
longer served as executive officer at the end of fiscal 2002. The table reflects
compensation earned for each of the last three years or for such shorter period
of service as an executive officer as is reflected below. For the principal
terms of the options granted during fiscal 2004, see “Option Grants in Fiscal
2003.”
Summary
Compensation Table
|
Name
and
Principal
Position |
|
Fiscal
Year |
|
Salary |
|
Bonus |
|
Securities
Underlying
Options |
|
All
Other
Annual
Compensation |
|
|
Anthony
C. Pizi
Chief
Executive Officer, Chief
Technology
Officer and Chairman (1)
|
|
|
2004
2003
2002
|
|
$
$
$ |
200,000(1
200,000(2
337,500(3 |
)
)
) |
$
$
$ |
---
100,000
-- |
|
|
500,000
500,000
500,000
|
|
$
$
$ |
--
--
-- |
|
|
John
P. Broderick
Chief
Operating and Financial Officer, Corporate Secretary |
|
|
2004
2003
2002
|
|
$
$
$ |
200,000(4)
200,000(5)
200,000
|
|
$
$
$ |
---
60,000
40,000 |
|
|
500,000
500,000
100,000
|
|
$
$
$ |
--
--
-- |
|
|
Paul
Rampel
Former
President (6) |
|
|
2002 |
|
$ |
133,333
|
|
$ |
-- |
|
|
404,300 |
|
$ |
76,400(7 |
) |
|
(1) |
Mr.
Pizi’s base salary for fiscal 2004 was $200,000. Mr. Pizi had voluntarily
elected to defer $50,000 of salary from 2004. In December 2004, Mr. Pizi
received approximately $55,000 of deferred salary from 2004 and 2003 and
used those proceeds to participate in the Note and Warrant Offering. At
December 31, 2004, Mr. Pizi is still owed approximately $26,250 of
deferred salary from 2004. |
|
(2)
|
Mr.
Pizi’s base salary for fiscal 2003 was $200,000. Mr. Pizi had voluntarily
elected to defer $31,250 of salary from 2003 and all of his 2003 earned
bonus. |
|
(3)
|
Mr.
Pizi’s base salary for fiscal 2002 was $300,000. Mr. Pizi had voluntarily
elected to defer $75,000 of salary from 2001, which was paid in 2002, and
to defer $37,500 of 2002 salary. |
|
(4) |
Mr.
Broderick’s base salary for 2004 was $200,000. Mr. Broderick voluntarily
elected to defer $50,000 of salary from 2004 and all of his earned bonus
($60,000) from 2003. |
|
(5) |
Mr.
Broderick’s base salary for 2003 was $200,000. Mr. Broderick voluntarily
elected to defer $31,250 of salary from
2003. |
|
(6)
|
Mr.
Rampel resigned his position as President in June
2002. |
|
(7) |
Represents
the fair market value of stock issued to Mr. Rampel as part of his
separation from the Company as well as a forgiveness of debt to the
Company in the amount of $32,500. |
The
following table sets forth information regarding each grant of stock options to
each of the Named Executives during fiscal 2004. The Company is required to
withhold from the shares issued upon exercise a number of shares sufficient to
satisfy applicable withholding tax obligations. The Company did not award any
stock appreciation rights (“SARs”) during fiscal 2004.
|
Option
Grants in Fiscal 2004
Individual
Grants |
|
Name
|
|
Number
of Securities Underlying Options
Granted
|
|
Percent
of
Total
Options
Granted
to
Employees
in
Fiscal
Year
|
|
Exercise
Price
($/share)
|
|
Expiration
Date
|
|
Potential
Realizable Value
at
Assumed Annual Rates
of
Appreciation for
Option
Term
5%
($) 10%
($)
|
|
|
Anthony
C. Pizi
|
|
|
500,000
|
|
|
19.08
|
%
|
$
|
0.31
|
|
|
02/18/14
|
|
|
97,479
|
|
|
247,030
|
|
|
John
P. Broderick
|
|
|
500,000
|
|
|
19.08
|
%
|
$
|
0.31
|
|
|
02/18/14
|
|
|
97,479
|
|
|
247,030
|
|
The
following table sets forth information concerning the options exercised during
fiscal 2004 and held at December 31, 2004 by the Named Executives.
Fiscal
2004 Year-End Option Holdings and Values
| |
|
|
|
|
|
Number
of Securities
Underlying
Unexercised
Options
at December 31, 2004 |
|
Value
of Unexercised In-the-Money
Options
at December 31, 2004(1) |
|
|
Name |
|
Shares
Acquired on
Exercise |
|
Value
Realized |
|
Exercisable |
|
Unexercisable |
|
Exercisable
|
|
Unexercisable |
|
|
Anthony
C. Pizi
|
|
|
|
|
|
|
|
|
1,333,271 |
|
|
666,729 |
|
|
-0- |
|
|
-0- |
|
|
John
P. Broderick
|
|
|
|
|
|
|
|
|
732,510 |
|
|
533,390 |
|
|
-0- |
|
|
-0- |
|
(1)
Based on
$0.13 per share, the December 31, 2004, closing price as quoted on the OTC
Bulletin Board.
Employment
Agreements, Termination of Employment and Change-In-Control
Arrangements
Under the
employment agreement between the Company and Mr. Pizi effective January 1, 2005,
the Company is to pay Mr. Pizi an annual base salary of $200, and a performance
bonus in cash of up to $400 per annum based upon certain revenue goals, as
determined by the Compensation Committee of the Board of Directors of the
Company, in its discretion. Upon termination of Mr. Pizi's employment by the
Company without cause, the Company has agreed to pay Mr. Pizi (a) a lump sum
payment of one year of Mr. Pizi's then base salary within thirty (30) days of
termination and (b) two hundred thousand (200,000) shares of the Company's
common stock. In the event there occurs a substantial change in Mr. Pizi's job
duties, there is a decrease in or failure to provide the compensation or vested
benefits under the employment agreement or there is a change in control of the
Company, the Company has agreed to grant Mr. Pizi five hundred thousand
(500,000) shares of the Company's common stock. If Mr. Pizi's employment is
terminated for any reason, Mr. Pizi has agreed that, for one (1) year after such
termination, he will not directly or indirectly solicit or divert business from
the Company or assist any business in attempting to do so or solicit or hire any
person who was an employee of the Company during the term of his employment
agreement or assist any business in attempting to do so.
Under the
employment agreement between the Company and Mr. Broderick effective January 1,
2005, the Company pays Mr. Broderick a base salary of $200, and a performance
bonus of cash up to $100 per annum based upon certain revenue goals, as
determined by the Compensation Committee of the Board of Directors of the
Company, in its discretion. Upon termination of Mr. Broderick's employment by
the Company without cause, the Company has agreed to provide Mr. Broderick with
salary continuation of six months of Mr. Broderick's then base salary beginning
on the first payday after the date of termination. In the event there occurs a
substantial change in Mr. Broderick's job duties, there is a decrease in or
failure to provide the compensation or vested benefits under the employment
agreement or there is a change in control of the Company, the Company has agreed
to pay Mr. Broderick (a) a lump sum payment of one year of Mr. Broderick’s then
base salary within thirty (30) days of termination and (b) two hundred fifty
thousand (250,000) shares of the Company's common stock and immediately vest all
unvested stock options held by Mr. Broderick. Mr. Broderick will have thirty
(30) days from the date written notice is given about either a change in his
duties or the announcement and closing of a transaction resulting in a change in
control of the Company to resign and execute his rights under this agreement. If
Mr. Broderick's employment is terminated for any reason, Mr. Broderick has
agreed that, for one (1) year after such termination, he will not directly or
indirectly solicit or divert business from the Company or assist any business in
attempting to do so or solicit or hire any person who was an employee of the
Company during the term of his employment agreement or assist any business in
attempting to do so.
Under the
separation agreement between the Company and Mr. Rampel dated June 18, 2002, the
Company has agreed, among other things, to provide to Mr. Rampel: (a)
forgiveness of a $33 debt owed to the Company by Mr. Rampel; (b) immediate
vesting of all unvested stock options and the extension of the period for
exercise of these options to 12 months from the date of separation; and (c) a
grant of 100,000 shares of common stock of the Company. All the payments above
were subject to applicable withholding. In return for this compensation, Mr.
Rampel executed a release of employment related claims and agreed to forfeit
310,000 vested stock options with exercise prices between $5.87 and
$6.10.
Item
12. Security
Ownership of Certain Beneficial Owners and Management.
The following table
sets forth information as of December 31, 2004 with respect to beneficial
ownership of shares by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding common stock, (ii) each
of the Company’s directors, (iii) the executive officers of the Company
named in the Summary Compensation Table (the “Named Executives”) and
(iv) all current directors and executive officers of the Company as a
group. Unless otherwise indicated, the address for each person listed is c/o
Level 8 Systems, Inc., 1433 State Highway 34, Farmingdale, New Jersey 07727.
The named person has
furnished stock ownership information to the Company. Beneficial ownership as
reported in this section was determined in accordance with Securities and
Exchange Commission regulations and includes shares as to which a person
possesses sole or shared voting and/or investment power and shares that may be
acquired on or before December 31, 2004 upon the exercise of stock options as
well as exercise of warrants. The chart is based on 43,327,631 common shares
outstanding as of December 31, 2004. Except as otherwise stated in the footnotes
below, the named persons have sole voting and investment power with regard to
the shares shown as beneficially owned by such persons.
| |
|
Common
Stock |
|
|
Name
of Beneficial Owner |
|
No.
of Shares |
|
Percent
of Class |
|
| |
|
|
|
|
|
|
|
|
Brown
Simpson Partners I, Ltd. (1) |
|
|
5,936,921(2 |
) |
|
13.7 |
% |
|
Mark
and Carolyn P. Landis (3) |
|
|
10,404,575(4 |
) |
|
24.0 |
% |
|
Liraz
Systems, Ltd.(5) |
|
|
4,026,869(6 |
) |
|
9.3 |
% |
|
Frederick
H. Mack and Trust(s) (7) |
|
|
2,324,431(8 |
) |
|
5.4 |
% |
|
Anthony
C. Pizi |
|
|
3,707,468(9 |
) |
|
5.5 |
% |
|
John
P. Broderick |
|
|
732,510(10 |
) |
|
1.7 |
% |
|
Nicholas
Hatalski |
|
|
256,250(11 |
) |
|
* |
|
|
Kenneth
W. Nielsen |
|
|
100,000(12 |
) |
|
* |
|
|
Bruce
W. Hasenyager |
|
|
100,000(12 |
) |
|
* |
|
|
Jay
R. Kingley |
|
|
100,000(12 |
) |
|
* |
|
| Ralph
Martino |
|
|
466,668
(13 |
) |
|
* |
|
|
All
current directors and executive officers as a group (7
persons) |
|
|
5,462,896(14 |
) |
|
12.6 |
% |
| · |
Represents
less than one percent of the outstanding
shares. |
| (1) |
The
address of Brown Simpson Partners I, is c/o Xmark Asset Mgmt. LLC, 152
West 57th
St., 1st
Floor, New York, New York 10019. |
| (2) |
Includes
1,197,032 shares of common stock issuable upon conversion of Series B-3
Preferred Stock, 460,526 shares of common stock issuable upon conversion
of Series C Preferred Stock, Also owns 4,009,093 shares issuable upon the
exercise of warrants. The exercise price of 115,132 warrants is $0.38 per
share of common stock. The exercise price of 270,270 warrants is $0.37 per
share of common stock. The exercise price of 3,623,691 warrants is $0.40
per share of common stock. Also includes 270,270 shares of common stock.
Brown Simpson Partners I, Ltd. is not currently the beneficial owner of
all of such shares of common stock. |
| (3) |
The
address of Mark and Carolyn P. Landis is 251 Crandon Blvd., Key Biscayne,
Fl. 33149 |
| (4) |
Includes
263,158 shares of common stock issuable upon the conversion of Series C
Preferred Stock. Also owns 5,220,273 shares of common stock issuable upon
the exercise of warrants. The exercise price of 1,875,000 shares is $0.08
per share of common stock, 2,000,000 shares is $0.10 per share of common
stock, 781,250 shares is $0.16 per share of common stock, 446,429 shares
is $0.28 per share of common stock, and 117,594 shares exercisable at
$0.37 per share of common stock. Also owns 446,429 shares of common stock
issuable upon conversion of $125,000 principal amount of convertible
promissory note, issued on February 1, 2004 at a conversion price of
$0.28, 781,250 shares of common stock issuable upon conversion of $125,000
principal amount of convertible promissory note, issued on June 30, 2004
at a conversion price of $0.16, 1,000,000 shares of common stock issuable
upon conversion of $100,000 principal amount of convertible promissory
note, issued October 12, 2004, and 1,875,000 shares of common stock
issuable upon conversion of $150,000 principal amount of convertible
promissory note, issued November 11, 2004. Also includes 818,465 shares of
common stock. Currently not the beneficial owner of all such shares of
common stock. |
| (5) |
The
address of Liraz Systems, Ltd. is 5 Hazoref St., Holon 58856,
Israel. |
| (6) |
Includes
2,632 shares of common stock issuable upon the conversion of Series C
Preferred Stock. Also owns 82,237 shares of common issuable upon the
exercise of warrants at an exercise price of $0.38 per share of common
stock. Also owns 3,942,000 shares of common stock subject to
registration. |
| (7) |
The
address of Frederick H. Mack is 2115 Linwood Avenue, Fort Lee, New Jersey
07024. Frederick
H. Mack, trustee of 4-30-92 Trust, Fred Mack Trust - Hailey Mack, and Fred
Mack Trust - Jason Mack, exercises sole or shared voting or dispositive
power with respect to the securities held by 4-30-92 Trust, Fred Mack
Trust - Hailey Mack, and Fred Mack Trust -
Jason Mack. |
| (8) |
Includes
394,737 shares of common stock issuable upon conversion of Series C
Preferred Stock and 632,883 shares of common stock issuable upon the
exercise of warrants. The exercise price of 390,625 shares is $0.32 per
share of common stock and the exercise price of 202,703 shares is $0.37
per share of common stock. 22,222 shares issuable upon the exercise of
warrants at an exercise price of $0.45 per share of common stock and
17,333 shares of common stock issuable upon exercise of warrants at an
exercise price of $0.60 per share. Also owns and may offer from time to
time under this prospectus 390,625 shares of common stock issuable upon
conversion of $125,000 principal amount of convertible promissory note,
issued on May 10, 2004 at a conversion price of $0.32. Includes 476,942
shares of common stock. Also includes in the trust of Frederick
Mack 4-30-92 Trust, 203,125
shares of common stock issuable upon conversion of Series D Preferred
Stock, 30,672 shares of common stock issuable upon exercise of Series D-2
Warrants at an exercise price the lower of $0.20 or the trading price of
Level 8’s common stock at the time of exercise and 9,334 shares of common
stock issuable upon exercise of warrants at an exercise price of $0.60 per
share. Also includes 144,445 shares of common stock. Also includes in the
trust for Hailey Mack and the trust for Jason Mack, 4,167
each shares of common stock issuable upon exercise of warrants at an
exercise price of $0.45 per share, and 16,667 shares each of common
stock. |
| (9) |
Includes
1,333,271 shares subject to stock options exercisable within sixty (60)
days,
394,737 shares of common stock issuable upon conversion of Series C
Preferred Stock. Also
owns 835,742 shares of common stock issuable upon the exercise of
warrants. The exercise price of 90,118 shares is $0.17 per share of common
stock, the exercise price of 560,000 shares is $0.20 per share of common
stock, and the exercise price of 185,624 shares is $0.32 per share of
common stock.
Also
owns 270,270 shares of common stock issuable upon conversion of $100,000
principal amount of convertible promissory note, issued on April 12, 2004
at a conversion price of $0.37, 560,000 shares of common stock issuable
upon conversion of $112,000 principal amount of convertible promissory
note, issued on June 11, 2004 at a conversion price of $0.20, and 90,118
shares of common stock issuable upon conversion of $15,320 principal
amount of convertible promissory note, issued on June 14, 2004 at a
conversion price of $0.17. Also
includes 223,330 shares of common stock. Currently
not the beneficial owner of all such shares of common
stock. |
| (10) |
Consists
of 732,510 shares subject to stock options exercisable within sixty (60)
days. |
| (11) |
Includes
78,125 shares of common stock issuable upon exercise of warrants at an
exercise price of $0.32 per share and 78,125
shares of common stock issuable upon conversion of $25,000 principal
amount of convertible promissory note, issued on May 6, 2004 at a
conversion price of $0.32. Also includes 100,000 shares subject to stock
options exercisable within sixty (60) days. |
| (12) |
Consists
of 100,000 shares subject to stock options exercisable within sixty (60)
days. |
| (13) |
Includes
466,668 shares of common stock. |
| (14) |
Includes
shares issuable upon exercise of options and warrants exercisable within
sixty (60) days as described in Notes 9-13. |
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth certain information as of December 31, 2004, about
shares of Common Stock outstanding and available for issuance under the
Company’s existing equity compensation plans: the Level 8 Systems, Inc. 1997
Stock Option Incentive Plan, the 1995 Non-Qualified Option Plan and the Outside
Director Stock Option Plan. All of the Company’s Equity Compensation Plans were
approved by the Company’s stockholders.
|
Plan
Category |
|
Number
of Securities to
be
issued upon exercise of outstanding
options |
|
Weighted-average
exercise
price of outstanding
options |
|
Number
of securities
remaining
available under
equity
compensation plans
(excluding
securities reflected in
the first column) |
|
|
Equity
compensation plans approved by stockholders |
|
|
7,488,639 |
|
$ |
1.11 |
|
|
1,729,072 |
|
|
Equity
compensation plans not approved by stockholders (1) |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Total |
|
|
7,488,639 |
|
$ |
1.11 |
|
|
1,729,072 |
|
(1) The
Company does not have any Equity Compensation Plans that were not approved by
stockholders.
Item
13. Certain
Relationships and Related Transactions.
Loan
from Related Parties
During
2004, the Company entered into short term notes payable
with Anthony Pizi, the Company’s Chairman and Chief Executive Officer for
various working capital needs. The Notes bear interest at 1% per month and are
unsecured. At December 31, 2004, the Company was indebted to Mr. Pizi in the
amount of $69.
In June
2004, the Company entered into a convertible promissory note with Anthony Pizi,
the Company’s Chairman and Chief Executive Officer. The Note,
in the face amount of $112, bears interest at 1% per month and is convertible
into 560,000 shares of the Company’s common stock and warrants to purchase
560,000 shares of our common stock at $0.20 per share. Also in June 2004, Mr.
Pizi entered into a second convertible promissory note in the face amount of $15
which is convertible into 90,118 shares of the Company’s common stock and
warrants to purchase 90,118 shares of the Company’s common stock at $0.17 per
share. These warrants expire three years from the date of grant.
On April
12, 2004, the Company entered into a convertible promissory note with Anthony
Pizi, the Company’s Chairman and Chief Executive Officer. The Note, in the face
amount of $100, bears interest at 1% per month and is convertible into common
stock of the Company at a conversion rate of $0.37 per share. In addition, Mr.
Pizi was granted 270,270 warrants to purchase the Company’s common stock at
$0.37 per share. These warrants expire three years from the date of
grant.
In March
2004, the Company entered into a convertible loan agreement with Mark and
Carolyn Landis, who are related by marriage to Anthony Pizi, the Company’s
Chairman and Chief Executive Officer, in the amount of $125. Under the terms of
the agreement, the loan bears interest at 1% per month, and is convertible into
446,429 shares of our common stock and warrants to purchase 446,429 shares of
the Company’s common stock exercisable at $0.28. The warrants expire in three
years.
Also in
June 2004, the Company entered into a convertible loan agreement with Mark and
Carolyn Landis, who are related by marriage to Anthony Pizi, the Company’s
Chairman and Chief Executive Officer, in the amount of $125. Under the terms of
the agreement, the loan bears interest at 1% per month and is convertible into
781,250 shares of our common stock and warrants to purchase 781,250 shares of
the Company’s common stock exercisable at $0.16. The warrants expire in three
years.
In
October 2004, the Company entered into a convertible loan agreement with Mark
and Carolyn Landis in the amount of $100. Under the terms of the agreement, the
loan bears interest at 1% per month and is convertible into 1,000,000 shares of
our common stock and warrants to purchase 2,000,000 shares of the Company’s
common stock exercisable at $0.10. The warrants expire in three
years.
In
November 2004, the Company entered into a convertible loan agreement with Mark
and Carolyn Landis in the amount of $150. Under the terms of the agreement, the
loan bears interest at 1% per month and is convertible into 1,875,000 shares of
our common stock and warrants to purchase 1,875,000 shares of the Company’s
common stock exercisable at $0.08. The warrants expire in three
years.
From time
to time during 2003, the Company entered into short term notes payable
with Anthony Pizi, the Company’s Chairman and Chief Executive Officer for
various working capital needs. The Notes bear interest at 1% per month and are
unsecured. At December 31, 2003, the Company was indebted to Mr. Pizi in the
amount of $85. In January 2004, the Company repaid Mr. Pizi $75.
In
December 2001, the Company entered into an agreement with Messrs. Rampel and
Pizi, which provided for borrowings from them for up to $250 and are secured by
notes and accounts receivable. The borrowings bear interest at 10% and are
payable quarterly. In connection with Mr. Rampel’s resignation from the Company
on June 18, 2002 and the sale of the StarQuest assets to an entity affiliated
with Mr. Rampel as described above, the Company repaid $150 of the borrowings to
Mr. Rampel. In August 2002, Mr. Pizi elected to convert approximately $150 of
his indebtedness from the Company into equity and participated in the Series C
Convertible Redeemable Preferred Stock Offering on the same terms as the other
investors and as a result this agreement has been terminated.
Assignment
of Note Receivable from Profit Key
In
October 2002, the Company assigned its interest in a Note Receivable from Profit
Key Acquisition LLC to a group of investors including Nicholas Hatalski and Paul
Rampel, who at the time were members of our Board of Directors, and Anthony C.
Pizi, the Chief Executive Officer of the Company. Pursuant to the terms of the
agreement, Level 8 assigned its interest in a Note Receivable in the principal
amount of $500, due March 31, 2003 with interest at 9% per annum in return for
$400 cash. The Company solicited a competitive bid before finalizing the
transaction.
Sale
of StarQuest Assets
On June
18, 2002, the Company and its subsidiary Level 8 Technologies, Inc. entered into
an Asset Purchase Agreement with Starquest Ventures, Inc., a California
corporation and an affiliate of Paul Rampel, a former member of the Board of
Directors of Level 8 and a former executive officer. Pursuant to the terms and
conditions of the Asset Purchase Agreement, Level 8 sold its Star/SQL and CTRC
software products to Starquest Ventures for $365 and the assumption of certain
maintenance liabilities. $150 of the proceeds of the sale transaction was used
to repay borrowings from Mr. Rampel. The Company solicited and received a
fairness opinion on the transaction.
Transactions
with Merrill Lynch
On
January 3, 2002, the Company entered into a Purchase Agreement with MLBC, Inc.,
an affiliate of Merrill Lynch. Pursuant to the Purchase Agreement, the Company
issued 250,000 shares of its common stock to MLBC and entered into a royalty
sharing agreement for sales of Cicero. Under the royalty sharing agreement, the
Company is obligated to pay a royalty of 3% of the sales price for each sale of
Cicero or related maintenance services. The royalties are not payable in excess
of $20,000. As consideration for the issuance of the shares and the royalty
payments, Merrill Lynch has entered into an amendment to the Cicero license
agreement, which extends our exclusive worldwide marketing, sales, and
development rights to Cicero and granted us certain ownership rights in the
Cicero trademark. Pursuant to the Purchase Agreement, the Company also entered
into a Registration Rights Agreement granting MLBC certain rights to have the
shares of common stock it received under the Purchase Agreement registered under
the Securities Act.
Preferred
Stock and Warrant Exchange
On March
19, 2003, Level 8 Systems, Inc. completed a $3,500 private placement of Series D
Convertible Preferred Stock (“Series D Preferred Stock”), convertible at a
conversion ratio of $0.32 per share of common stock into an aggregate of
11,031,250 shares of common stock. As part of the financing, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share (“Series D-1 Warrants”). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise (“Series D-2 Warrants”). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine-month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company’s capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in an allocation of $2,890 to the Series D Preferred Stock and $640 to
the detachable warrants. Based upon the allocation of the proceeds, the Company
determined that the effective conversion price of the Series D Preferred Stock
was less than the fair value of the Company’s common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.
On
October 25, 2002, we effected an exchange of all of our outstanding shares of
Series A2 Convertible Redeemable Preferred Stock (“Series A2 Preferred Stock”)
and Series B2 Convertible Redeemable Preferred Stock (“Series B2 Preferred
Stock”) and related warrants for an equal number of shares of newly created
Series A3 Convertible Redeemable Preferred Stock (“Series A3 Preferred Stock”)
and Series B3 Convertible Redeemable Preferred Stock (“Series B3 Preferred
Stock”) and related warrants. This exchange was made to correct a deficiency in
potential conversion price adjustments from the prior exchange of Series A1 and
B1 Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants on August 29, 2002. The conversion price for the Series A3
Preferred Stock and the conversion price for the Series B3 Preferred Stock
remain the same as the previously issued Series A1 and A2 Preferred Stock and
Series B1 and B2 Preferred Stock, at $8.333 and $12.531, respectively. The
exercise price for the aggregate 753,640 warrants relating to the Series A3
Preferred Stock was increased from $0.38 to $0.40 per share which is a reduction
from the $1.77 exercise price of the warrants relating to the Series A1
Preferred Stock. The exercise price for the aggregate 1,047,382 warrants
relating to the Series B3 Preferred Stock was increased from $0.38 to $0.40 per
share which is a reduction from the $1.77 exercise price of the warrants
relating to the Series B1 Preferred Stock. The adjusted exercise price was based
on the closing price of the Company’s Series C Convertible Redeemable Preferred
Stock and warrants on August 14, 2002, plus $0.02, to reflect accurate current
market value according to relevant Nasdaq rules. This adjustment was made as
part of the agreement under which the holders of the Company’s Preferred Stock
agreed to waive their price-protection anti-dilution protections to allow the
Company to issue the Series C Preferred Stock and warrants without triggering
the price-protection anti-dilution provisions and excessively diluting its
Common Stock.
Under the
terms of the agreement, we are authorized to issue equity securities in a single
or series of financing transactions representing aggregate gross proceeds to the
Company of approximately $5,000, or up to an aggregate 17,500 shares of common
stock, whichever occurs first, without triggering the price-protection
anti-dilution provisions in the Series A3 Preferred Stock and B3 Preferred Stock
and related warrants. In exchange for the waiver of these price-protection
anti-dilution provisions, we repriced the warrants as described above and have
agreed to issue on a pro rata basis up to 4,600 warrants to the holders of
Series A3 Preferred Stock and Series B3 Preferred Stock at such time and from
time to time as the Company closes subsequent financing transactions up to the
$5,000 issuance cap or the 17,500 share issuance cap. As a result of the Series
C Preferred Stock financing which represented approximately $1,600 of the
Company’s $5,000 in allowable equity issuances, the Company is obligated to
issue an aggregate of 1,462,801 warrants at an exercise price of $0.40 per share
to the existing Preferred Stockholders. Additionally, the Company has agreed to
issue a warrant to purchase common stock to the existing Preferred Stockholders
on a pro rata basis for each warrant to purchase common stock that the Company
issues to a third-party lender in connection with the closing of a qualified
loan transaction. The above referenced warrants will have the same exercise
price as the exercise price of the warrant, or equity security, that the Company
issues in connection with the Company’s subsequent financing or loan transaction
or $0.40 per share (adjusted for recapitalizations, stock splits and the like),
whichever is greater.
As a result of the Series
D preferred Stock financing which represented approximately $3,500 against the
allowable equity issuances, the Company was obligated to issue an aggregate of
3,048,782 warrants at an exercise price of $0.40 per share to the existing
Series A3 and Series B3 Preferred shareholders. The warrants were issued on
October 8, 2003 and had a fair value of $1,062, which was recorded as a deemed
dividend to preferred stockholders. Additionally, the Company has agreed to
issue a warrant to purchase common stock to the existing Preferred Stockholders
on a pro rata basis for each warrant to purchase common stock that the Company
issues to a third-party lender in connection with the closing of a qualified
loan transaction. The above referenced warrants will have the same exercise
price as the exercise price of the warrant, or equity security, that the Company
issues in connection with the Company’s subsequent financing or loan transaction
or $0.40, whichever is greater. These warrants are not classified as a liability
under EITF 00-19.
Previously, on October
16, 2001, the Company effected an exchange of all of its outstanding shares of
Series A 4% Convertible Redeemable Preferred Stock and Series B 4% Convertible
Redeemable Preferred Stock and related warrants for an equal number of shares of
our newly created Series A1 Convertible Redeemable Preferred Stock (“Series A1
Preferred Stock”) and Series B1 Convertible Redeemable Preferred Stock (“Series
B1 Preferred Stock”) and related warrants. Advanced Systems Europe, B.V.
(“ASE”), a wholly owned subsidiary of Level 8's principal stockholder at the
time, exchanged 10,000 shares of Series A Preferred Stock for the newly created
Series A1 Preferred Stock. The effect of the exchange with respect to ASE is as
follows: The conversion price for the Series A1 Preferred Stock was reduced from
$10.00 to $8.333 per share, and the total number of shares of common stock into
which such shares may be converted increased from 1,000,000 to 1,200,048. No
dividends are payable on the Series A1 Preferred Stock. Liraz and ASE may no
longer be considered related parties because of their divestments of capital
stock of the Company.
Loans
to Related Parties
On January 27, 2001, the Company
extended a loan to Paul Rampel, the then President and a director of the
Company, in the amount of $75. The loan carried an interest rate of 10% per
annum on the principal balance and the loan was due and payable in full on
January 27, 2002. The loan was secured by 15,000 shares of common stock of the
Company held by Mr. Rampel under a Stock Pledge agreement between the Company
and Mr. Rampel. In March of 2002, Mr. Rampel, as part of his new employment
agreement with the Company, gave back the 15,000 shares of stock as partial
payment on the Note and agreed to pay the rest of the Note off monthly during
2002. The remainder of the balance was settled in connection with Mr. Rampel’s
separation agreement entered into in June 2002.
Borrowings
and Commitments from Liraz
Liraz Systems Ltd.
guarantees certain debt obligations of the Company. In September 2004, the
Company and Liraz agreed to extend the guarantee and with the approval of the
lender, agreed to extend the maturity of the debt obligation until November 3,
2005. The Company issued 3,942,000 shares of common stock to Liraz in exchange
for this debt extension. In 2003, the Company and Liraz also agreed to extend
the guarantee and maturity of the debt obligation until November 2004. The
Company agreed to issue Liraz 300,000 shares of stock for that extension.
Item
14. Principal
Accountant Fees and Services
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Margolis & Company
P.C. audited our financial statements for each of the years ended December 31,
2004 and 2003. Deloitte & Touche LLP audited our financial statements for
the year ended December 31, 2002.
AUDIT
FEES
Audit fees include fees
for the audit of the Company’s annual financial statements, fees for the review
of the Company’s interim financial statements, and fees for services that are
normally provided by the Independent Registered Public Accounting Firm in
connection with statutory and regulatory filings or engagements. The aggregate
fees billed by Margolis & Company P.C. for professional services rendered to
our company for the audit of the Company's annual financial statements for
fiscal years 2004 (and reviews of quarterly financial statements on form
10-Q), and 2003 was $36 and $39, respectively. The aggregate fees billed by
Deloitte & Touche LLP for the review of the financial statements included in
the Company’s Forms 10-Q for fiscal year 2003 was $73.
AUDIT
RELATED FEES
Audit-related fees
include fees for assurance and related services that are reasonably related to
the performance of the audit or review of the Company’s financial statements.
There were no audit-related fees paid to Margolis & Company P.C. for fiscal
years 2004 and 2003. The aggregate audit-related fees and expenses billed by
Deloitte & Touche LLP for 2003 was $11. These fees primarily relate to the
Company’s regulatory filings.
TAX
FEES
Tax fees include fees for
tax compliance, tax advice and tax planning. There were no fees billed by either
Margolis & Company P.C. or Deloitte & Touche LLP for these services in
2004 and 2003.
OTHER
FEES
All other fees include
fees for all services except those described above. The aggregate other fees
billed by Deloitte & Touche in 2004 and 2003 amounted to $15 and $16,
respectively. These fees relate to review of the Company’s S-1 filing during
2004 and the audits of the Company’s 401K plan, and a review of a Stock Purchase
Agreement during 2003. In addition, in 2004, other fees include $4 to Margolis
& Company P.C. for review of the Company’s S-1 filing.
DETERMINATION
OF AUDITOR INDEPENDENCE
The Audit Committee
considered the provision of non-audit services by Margolis & Company P.C.
and determined that the provision of such services was consistent with
maintaining the independence of Margolis & Company P.C. Deloitte &
Touche LLP has performed non-audit services for the Company.
AUDIT
COMMITTEE'S PRE-APPROVAL POLICIES
The Audit Committee has
adopted a policy that all audit, audit-related, tax and any other non-audit
service to be performed by the Company’s Independent Registered Public
Accounting Firm must be preapproved by the Audit Committee. It is the Company’s
policy that all such services be preapproved prior to commencement of the
engagement. The Audit Committee is also required to preapprove the estimated
fees for such services, as well as any subsequent changes to the terms of the
engagement.
PART
IV
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(A) 1.
FINANCIAL STATEMENTS
The
following financial statements of the Company and the related reports of
Independent Registered Public Accounting Firms thereon are set forth immediately
following the Index of Financial Statements which appears on page F-1 of this
report:
Independent
Registered Public Accounting Firms' Reports
Consolidated
Balance Sheets as of December 31, 2004 and 2003
Consolidated
Statements of Operations for the years ended December 31, 2004, 2003 and
2002
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2004, 2003
and 2002
Consolidated
Statements of Comprehensive Loss for the years ended December 31, 2004, 2003 and
2002
Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2003 and
2002
Notes to
Consolidated Financial Statements
2.
FINANCIAL
STATEMENT SCHEDULES
All other
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
3.
EXHIBITS
The
exhibits listed under Item 15(c) hereof are filed as part of this Annual Report
on Form 10-K.
On March
7, 2005, Level 8 Systems filed a Form 8-K reporting the election of Mr. Ralph
Martino as Chairman of the Board of Directors replacing Mr. Anthony Pizi who
remains as a director.
On
February 6, 2004, Level 8 Systems filed a Form 8-K reporting the appointment of
Margolis & Company P.C. as the Company’s new Independent Registered Public
Accounting Firm.
On
November 26, 2003, Level 8 Systems filed a Form 8 K reporting the resignation of
Deloitte & Touche LLP as the Company’s Independent Registered Public
Accounting Firm.
(C)
EXHIBITS
|
Exhibit
Number |
Description |
|
2.1 |
Asset
Purchase Agreement, dated as of January 9, 2004, by and among Level 8
Systems, Inc. and Critical Mass Mail, Inc. (incorporated by reference to
exhibit 2.1 to Level 8’s Form 8-K filed January 23, 2004).
|
|
2.2 |
Asset
Purchase Agreement, dated as of December 13, 2002, by and among Level 8
Systems, Inc., Level 8 Technologies, Inc. and EMSoftware Solutions, Inc.
(exhibits and schedules omitted but will be furnished supplementally to
the Securities and Exchange Commission upon request) (incorporated by
reference to exhibit 2.2 to Level 8’s Form 8-K filed December 30, 2002).
|
|
3.1 |
Certificate
of Incorporation of Level 8 Systems, Inc., a Delaware corporation, as
amended August 4, 2003 (incorporated by reference to exhibit 3.1 to Level
8’s Form 10-K filed March 31, 2004).
|
|
3.2 |
Bylaws
of Level 8 Systems, Inc., a Delaware corporation (incorporated by
reference to exhibit 3.2 to Level 8’s Form 10-K filed April 2,
2002).
|
|
3.3 |
Certificate
of Designations, Preferences and Rights dated March 19, 2003 relating to
Series D Convertible Redeemable Preferred Stock (incorporated by reference
to exhibit 3.1 to Level 8's Form 8-K, filed March 31, 2003).
|
|
3.4 |
Certificate
of Designation relating to Series A3 Convertible Redeemable Preferred
Stock (incorporated by reference to exhibit 3.1 to Level 8’s Form 10-Q
filed November 15, 2002).
|
|
3.5 |
Certificate
of Designation relating to Series B3 Convertible Redeemable Preferred
Stock (incorporated by reference to exhibit 3.1 to Level 8’s Form 10-Q
filed November 15, 2002).
|
|
3.6 |
Certificate
of designation relating to Series C Convertible Redeemable Preferred Stock
(incorporated by reference to exhibit 3.1 to Level 8’d Form 8-K filed
August 27, 2002).
|
|
4.1 |
Registration
Rights Agreement, dated January 2004, by and among Level 8 Systems, Inc.
and the Purchasers in the January 2004 Private Placement listed on
Schedule I thereto relating to the Security Purchasers Agreement (filed
herewith).
|
|
4.2 |
Registration
Rights Agreement dated as of March 19, 2003 by and among Level 8 Systems,
Inc. and the Purchasers listed on Schedule I thereto relating to the
Series D Convertible Redeemable Preferred Stock (incorporated by reference
to exhibit 4.1 to Level 8’s Form 8-K, filed March 31,
2003). |
|
4.3 |
Registration
Rights Agreement dated as of October 15, 2003 by and among Level 8
Systems, Inc. and the Purchasers in the October Private Placement listed
on schedule I thereto (incorporated by reference to exhibit 4.2 to Level
8’s Form 10-K, filed March 31, 2004).
|
|
4.4 |
Registration
Rights Agreement, dated as of January 16, 2002, by and among Level 8
Systems, Inc. and the Purchasers in the January Private Placement listed
on Schedule I thereto (incorporated by reference to exhibit 4.1 to Level
8's Report on Form 8-K, filed January 25, 2002).
|
|
4.5 |
Registration
Rights Agreement, dated as of January 3, 2002, between Level 8 Systems,
Inc. and MLBC, Inc. (incorporated by reference to exhibit 4.1 to Level 8's
Report on Form 8-K, filed January 11, 2002).
|
|
4.6 |
Registration
Rights Agreement, dated as of August 29, 2002, entered into by and between
Level 8 Systems, Inc. and the holders of Series A2/A3 Preferred Stock and
Series B2/B3 Preferred Stock (incorporated by reference to exhibit 10.4 to
Level 8’s Form 8-K filed August 30, 2002).
|
|
4.6A |
First
Amendment to Registration Rights Agreement, dated as of October 25, 2002,
entered into by and between Level 8 Systems, Inc. and the holders of
Series A2/A3 Preferred Stock and Series B2/B3 Preferred Stock
(incorporated by reference to exhibit 10.4 to Level 8’s Form 10-Q filed
November 15, 2002).
|
|
4.7 |
Registration
Rights Agreement, dated as of June 13, 1995, between Level 8 Systems, Inc.
and Liraz Systems Ltd. (incorporated by reference to exhibit 10.24 to
Across Data Systems, Inc.'s (Level 8's predecessor) Registration Statement
on Form S-1, filed May 12, 1995, File No. 33-92230).
|
|
4.7A |
First
Amendment to Registration Rights Agreement, dated as of August 8, 2001, to
the Registration Rights Agreement dated as of June 13, 1995, by and
between Across Data Systems, Inc. (Level 8's predecessor) and Liraz
Systems Ltd. (incorporated by reference to exhibit 4.1 to Level 8's Report
on Form 8-K, filed August 14, 2001).
|
|
4.8 |
Registration
Rights Agreement, dated as of August 14, 2002, entered into by and between
Level 8 Systems, Inc. and the investors in Series C Preferred Stock
(incorporated by reference to exhibit 4.1 to Level 8’s Form 8-K filed
August 27, 2002).
|
|
4.9 |
Form
of Registration Rights Agreement, dated January 2004, by and among Level 8
Systems, Inc. and the Purchasers of Convertible Promissory Note
(incorporated by reference to exhibit 4.2 to Level 8's Report on Form
10-Q, filed May 12, 2004).
|
|
4.10 |
Form
of Stock Purchase Warrant issued to Purchasers in the January 2004 Private
Placement (incorporated by reference to exhibit 4.3 to Level 8's Report on
Form 10-Q, filed May 12, 2004).
|
|
4.11 |
Form
of Stock Purchase Warrant issued to Purchasers of Convertible Promissory
Note (incorporated by reference to exhibit 4.3 to Level 8's Report on Form
10-Q, filed May 12, 2004).
|
|
4.12 |
Form
of Warrant issued to the Purchasers in the Series D Preferred Stock
transaction dated as of March 19, 2003 (incorporated by reference to
exhibit 4.2 to Level 8's Form 8-K, filed March 31, 2003).
|
|
4.12A |
Form
of Warrant issued to the Purchasers in the Series D Preferred Stock
transaction dated as of March 19, 2003 (incorporated by reference to
exhibit 4.2 to Level 8's Form 8-K, filed March 31, 2003).
|
|
4.13 |
Form
of Stock Purchase Warrant issued to Purchasers in the October 2003 Private
Placement (incorporated by reference to exhibit 4.9 to Level 8’s Form
10-K, filed March31, 2004).
|
|
4.14 |
Form
of Stock Purchase Warrant issued to the Purchasers in the January Private
Placement (incorporated by reference to exhibit 10.2 to Level 8's Report
on Form 8-K, filed January 25, 2002).
|
|
4.15 |
Form
of Series A3 Stock Purchase Warrant (incorporated by reference to exhibit
10.2 of Level 8’s Form 10-Q filed November 15,
2002). |
|
4.16 |
Form
of Series B3 Stock Purchase Warrant (incorporated by reference to exhibit
10.3 of Level 8’s Form 10-Q filed November 15, 2002).
|
|
4.17 |
Form
of Series C Stock Purchase Warrant (incorporated by reference to exhibit
10.2 to Level 8’s Form 8-K filed August 27, 2002).
|
|
10.1 |
Securities
Purchase Agreement dated January 2004 by and among Level 8 Systems, Inc.
and the Purchasers in the January 2004 Private Placement (filed
herewith).
|
|
10.2 |
Securities
Purchase Agreement dated March 2004 by and among Level 8 Systems, Inc. and
the Purchasers of Convertible Promissory Note (incorporated by reference
to exhibit 10.2 to Level 8's Form 10-Q, filed May 12, 2004).
|
|
10.3 |
Form
of Convertible Promissory Note dated March 2004 by and among Level 8
Systems, Inc. and the Purchasers of Convertible Promissory Note
(incorporated by reference to exhibit 10.3 to Level 8's Form 10-Q, filed
May 12, 2004).
|
|
10.4 |
Securities
Purchase Agreement dated as of March 19, 2003 by and among Level 8
Systems, Inc. and the Purchasers (incorporated by reference to exhibit
10.1 to Level 8's Form 8-K, filed March 31, 2003).
|
|
10.5 |
Securities
Purchase Agreement dated as of October 15, 2003 by and among Level 8
Systems, Inc. and the Purchasers in the October Private Placement
(incorporated by reference to exhibit 10.2 to Level 8’s Form 10-K, filed
March 31, 2004).
|
|
10.6 |
Securities
Purchase Agreement, dated as of January 16, 2002, by and among Level 8
Systems, Inc. and the Purchasers in the January Private Placement
(incorporated by reference to exhibit 10.1 to Level 8's Report on Form
8-K, filed January 25, 2002).
|
|
10.7 |
Purchase
Agreement, dated as of January 3, 2002, between Level 8 Systems, Inc. and
MLBC, Inc. (incorporated by reference to exhibit 10.1 to Level 8's Report
on Form 8-K, filed January 11, 2002).
|
|
10.7A |
Purchase
Agreement, dated as of July 31, 2000, between Level 8 Systems, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by
reference to Exhibit 10.1 to Level 8's Report on Form 8-K, filed August
11, 2000).
|
|
10.8 |
Securities
Purchase Agreement, dated as of August 14, 2002, by and among Level 8
Systems, Inc. and the purchasers of the Series C Preferred Stock
(incorporated by reference to exhibit 10.1 to Level 8’s Form 8-K filed
August 27, 2002).
|
|
10.9 |
Agreement
by and among Level 8 Systems, Inc. and the holders of Series A1/A2/A3 and
B1/B2/B3 Preferred Stock, dated as of August 14, 2002 (incorporated by
reference to exhibit 10.3 to Level 8’s Form 8-K filed August 27,
2002).
|
|
10.10 |
Exchange
Agreement among Level 8 Systems, Inc., and the various stockholders
identified and listed on Schedule I, dated as of August 29, 2002
(incorporated by reference to exhibit 10.1 to Level 8’s Form 8-K filed
August 30, 2002).
|
|
10.11A |
First
Amendment to Exchange Agreement, dated as of October 25, 2002, among Level
8 Systems, Inc., and the various stockholders identified and listed on
Schedule I to that certain Exchange Agreement, dated as of August 29, 2002
(incorporated by reference to exhibit 10.1 to Level 8’s Form 10-Q filed
November 15, 2002).
|
|
10.11B |
Securities
Purchase Agreement, dated as of June 29, 1999, among Level 8 Systems, Inc.
and the investors named on the signature pages thereof for the purchase of
Series A Preferred Stock (incorporated by reference to exhibit 10.1 to
Level 8's Form 8-K filed July 23,
1999). |
|
10.11C |
Securities
Purchase Agreement, dated as of July 20, 2000, among Level 8 Systems, Inc.
and the investors named on the signature pages thereof for the purchase of
Series B Preferred Stock (incorporated by reference to Exhibit 10.1 to
Level 8's Report on Form 8-K filed July 31, 2000).
|
|
10.12 |
Amended
PCA Shell License Agreement, dated as of January 3, 2002, between Level 8
Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
(incorporated by reference to exhibit 10.2 to Level 8's Form 8-K, filed
January 11, 2002). |
| |
|
|
10.12A |
PCA
Shell License Agreement between Level 8 Systems, Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (incorporated by reference to
exhibit 10.2 to Level 8’s Report on Form 8-K, filed September 11,
2000).
|
|
10.13 |
Asset
Purchase Agreement by and among Level 8 Systems, Inc., Level 8
Technologies, Inc. and Starquest Ventures, Inc., dated as of May 31, 2002
(incorporated by reference to exhibit 10.2 to Level 8’s Form 8-K filed
June 25, 2002).
|
|
10.14 |
Promissory
Note of Level 8 Systems, Inc., dated as of September 28, 2001, among Level
8 Systems, Inc. and Bank Hapoalim (incorporated by reference to exhibit
10.2 to Level 8’s Form 10-K filed April 2, 2002).
|
|
10.14
A |
Amendment
No. 1 to Promissory Note of Level 8 Systems, Inc., dated as of November 8,
2004 and letter dated November 8, 2004 among Level 8 Systems, Inc. and
Bank Hapoalim (filed herewith).
|
|
10.14
B |
Amendment
to Promissory Note of Level 8 Systems, Inc., dated as of November 15, 2003
among Level 8 Systems, Inc. and Bank Hapoalim (incorporated by reference
to exhibit 10.10 A to Level 8’s Form 10-K, filed March 31,
2004).
|
|
10.15 |
Employment
Agreement between Anthony Pizi and the Company effective January 1, 2004
(filed herewith).*
|
|
10.16 |
Employment
Agreement between John P. Broderick and the Company effective January 1,
2004 (filed herewith).*
|
|
10.17 |
Separation
Agreement and Mutual Limited Release between Level 8 Systems, Inc. and
Paul Rampel (incorporated by reference to exhibit 10.1 of Level 8’s Form
8-K filed June 25, 2002).*
|
|
10.18 |
Level
8 Systems Inc. 1997 Stock Option Plan, as Amended and Restated
(incorporated by reference to exhibit 10.2 to Level 8’s Registration
Statement of Form S-1/A, filed September 22, 2000, File No.
333-44588).*
|
|
10.18A |
Fifth
Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (incorporated by
reference to exhibit 10.9A to Level 8’s Form 10-K filed April 2,
2002).*
|
|
10.18B |
Seventh
Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (incorporated by
reference to exhibit 10.14 B to Level 8’s Form 10-K, filed March 31,
2004).*
|
|
10.19 |
Level
8's February 2, 1995 Non-Qualified Option Plan (incorporated by reference
to exhibit 10.1 to Across Data Systems, Inc.'s (Level 8's predecessor)
Registration Statement on Form S-1, filed May 12, 1995, File No.
33-92230).*
|
|
10.20 |
Lease
Agreement for Cary, N.C. offices, dated March 31, 1997, between Seer
Technologies, Inc. and Regency Park Corporation (incorporated by reference
to exhibit 10.47 to Seer Technologies, Inc.'s Quarterly Report on Form
10-Q for the period ended March 31, 1997, File No.
000-26194).
|
|
10.16A |
Addendum
#1 to the Lease Agreement for Cary, N.C. offices, dated July 6, 1998
(incorporated by reference to exhibit 10.58 to Seer Technology Inc.'s
Quarterly Report on Form 10-Q for the period ended June 30, 1998, File No.
000-26194). |
|
10.16B |
Amendment
to Lease Agreement for Cary, N.C. offices, dated January 21, 1999
(incorporated by reference to exhibit 10.21A to Level 8's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).
|
|
10.17 |
Lease
Agreement for Cary, N.C. offices, dated November 7, 2003, between Level 8
Systems, Inc. and Regency Park Corporation (incorporated by reference to
exhibit 10.17 to Level 8’s Form 10-K, filed March 31,
2004). |
|
10.18 |
Office
Lease Agreement, dated April 25, 1996, between Template Software, Inc. and
Vintage Park Two Limited Partnership (incorporated by reference to an
exhibit to Template Software, Inc.'s Registration Statement on Form S-1,
File No. 333-17063).
|
|
10.18A |
Amendment
to Office Lease Agreement, dated August 18, 1997, between Template
Software, Inc. and Vintage Park Two Limited Partnership (incorporated by
reference to an exhibit to Template Software, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1997, File No.
000-21921).
|
|
10.19 |
Lease
Agreement, dated February 23, 2001, between Level 8 Systems, Inc. and
Carnegie 214 Associates Limited Partnership (incorporated by reference to
exhibit 10.15 to Level 8's Annual Report on Form 10-K, filed March 29,
2001).
|
|
14.1 |
Code
of Ethics (incorporated by reference to exhibit 14.1 to Level 8’s Form
10-K/A, filed March 31, 2004).
|
|
16.1 |
Letter
from Margolis & Company PC regarding change of accountant
(incorporated by reference to Exhibit 16.1 to Level 8’s Current Report on
Form 8-K, filed February 6, 2004).
|
|
21.1 |
List
of subsidiaries of the Company (filed herewith).
|
|
23.1 |
Consent
of Margolis & Company LLP (filed herewith).
|
|
23.2 |
Consent
of Deloitte & Touche LLP (filed herewith).
|
|
31.1 |
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) (filed
herewith).
|
|
31.2 |
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) (filed
herewith).
|
|
32.1 |
Certification
of Anthony C. Pizi and John P. Broderick pursuant to 18 USC § 1350, as
adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed
herewith). |
*
Management contract or compensatory agreement.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
By:
/s/
Anthony C. Pizi
Anthony
C. Pizi
Chief Executive
Officer
Date:
March 17, 2005
Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated have signed this Report below.
Signature |
Title |
Date |
|
/s/
Ralph Martino
Ralph Martino
|
Chairman
of the Board |
March
17, 2005 |
|
/s/
Anthony C. Pizi
Anthony
C. Pizi
|
Chief
Executive Officer
(Principal
Executive Officer) |
March
17, 2005 |
|
/s/
John P. Broderick
John
P. Broderick
|
Chief
Financial and Operating Officer
(Principal
Chief Accounting Officer) |
March
17, 2005 |
|
/s/
Nicholas Hatalski
Nicholas
Hatalski
|
Director |
March
17, 2005 |
|
/s/
Bruce Hasenyager
Bruce
Hasenyager
|
Director |
March
17, 2005 |
|
/s/
Kenneth Nielsen
Kenneth
Nielsen
|
Director |
March
17, 2005 |
|
/s/
Jay Kingley
Jay
Kingley |
Director |
March
17, 2005 |
INDEX
TO FINANCIAL STATEMENTS
|
Reports
of Independent Registered Public Accounting Firms |
F-2
& F3 |
| |
|
| Financial
Statements: |
|
| |
|
| Consolidated
Balance Sheets |
F-4 |
| |
|
| Consolidated
Statements of Operations |
F-5 |
| |
|
| Cosolidated
Statements of Stockholders' Equity (Deficit) |
F-6 |
| |
|
| Consolidated
Statements of Comprehensice Loss |
F-7 |
| |
|
| Consolidated
Statements of Cash Flows |
F-8 |
| |
|
| Notes
to Consolidated Financial Statements |
F-11 |
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Level 8
Systems, Inc.
Farmingdale,
New Jersey
We have
audited the accompanying consolidated balance sheet of Level 8 Systems, Inc. and
its subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity (deficit),
cash flows, and comprehensive loss for the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Level 8 Systems, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and working capital deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Margolis &
Company P.C.
Certified
Public Accountants
Bala
Cynwyd, PA
February 25,
2005, except for Note 23, as to which the date is March 7, 2005.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Level 8
Systems, Inc.
Farmingdale,
New Jersey
We have
audited the accompanying consolidated statements of operations, stockholders'
equity (deficit), cash flows, and comprehensive loss of Level 8 Systems, Inc.
and subsidiaries for the year ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the results of the operations and the cash flows of Level 8 Systems,
Inc. and subsidiaries for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and working capital deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Deloitte &
Touche LLP
Raleigh, North Carolina
March 28, 2003
LEVEL
8 SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
| |
|
December
31, 2004 |
|
December
31, 2003 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
107 |
|
$ |
19 |
|
|
Cash
held in escrow |
|
|
-- |
|
|
776 |
|
|
Assets
of operations to be abandoned |
|
|
148 |
|
|
149 |
|
|
Trade
accounts receivable, net |
|
|
152 |
|
|
12 |
|
|
Prepaid
expenses and other current assets |
|
|
108 |
|
|
270 |
|
|
Total
current assets |
|
|
515 |
|
|
1,226 |
|
|
Property
and equipment, net |
|
|
15 |
|
|
26 |
|
|
Software
product technology, net |
|
|
-- |
|
|
4,063 |
|
|
Other
assets |
|
|
-- |
|
|
47 |
|
|
Total
assets |
|
$ |
530 |
|
$ |
5,362 |
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Senior
reorganization debt |
|
$ |
1,548 |
|
$ |
-- |
|
|
Short-term
debt |
|
|
3,646 |
|
|
2,625 |
|
|
Accounts
payable |
|
|
2,351 |
|
|
2,545 |
|
|
Accrued
expenses: |
|
|
|
|
|
|
|
|
Salaries,
wages, and related items |
|
|
879 |
|
|
508 |
|
|
Other |
|
|
1,725 |
|
|
1,613 |
|
|
Liabilities
of operations to be abandoned |
|
|
536 |
|
|
451 |
|
|
Deferred
revenue |
|
|
85 |
|
|
39 |
|
|
Total
current liabilities |
|
|
10,770 |
|
|
7,781 |
|
|
Long-term
debt |
|
|
250 |
|
|
131 |
|
|
Warrant
liability |
|
|
-- |
|
|
198 |
|
|
Senior
convertible redeemable preferred stock |
|
|
1,367 |
|
|
3,355 |
|
| Total
liabilites |
|
|
12,387 |
|
|
11,465 |
|
|
Commitments
and contingencies (Notes 20 and 21) |
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit): |
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value, 10,000,000 shares
authorized.
Series
A3 - 10,070 shares issued and 1,571 and 4,070 shares outstanding at
December 31, 2004 and 2003, respectively, $1,000 per share
liquidation preference (aggregate liquidation value of
$1,571)
Series
B3 - 30,000 shares issued and outstanding, $1,000 per share liquidation
preference (aggregate liquidation value of $30,000)
Series
C - 1,590 shares issued and 1,141 and 1,340 outstanding at December 31,
2004 and 2003, respectively, $1,000 per share liquidation preference
(aggregate liquidation value of $1,141) |
|
|
--
--
-- |
|
|
--
--
-- |
|
|
Common
stock, $0.001 par value, 85,000,000 shares authorized at December
31, 2004 and 2003; 43,304,022 and 26,645,062 issued and outstanding at
December 31, 2004 and 2003, respectively |
|
|
43 |
|
|
27 |
|
|
Additional
paid-in-capital |
|
|
210,142 |
|
|
206,149 |
|
|
Accumulated
other comprehensive loss |
|
|
(8 |
) |
|
(6 |
) |
|
Accumulated
deficit |
|
|
(222,034 |
) |
|
(212,273 |
) |
|
Total
stockholders' (deficit) |
|
|
(11,857 |
) |
|
(6,103 |
) |
|
Total
liabilities and stockholders' deficit |
|
$ |
530 |
|
$ |
5,362 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
LEVEL
8 SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
| |
|
Years
Ended December 31, |
|
| |
|
2004 |
|
2003
|
|
2002 |
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
239 |
|
$ |
102 |
|
$ |
1,491 |
|
|
Maintenance |
|
|
306 |
|
|
316 |
|
|
571 |
|
|
Services |
|
|
230 |
|
|
112 |
|
|
1,039 |
|
|
Total
operating revenue |
|
|
775 |
|
|
530 |
|
|
3,101 |
|
|
Cost
of revenue: |
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
4,478 |
|
|
4,152 |
|
|
7,396 |
|
|
Maintenance |
|
|
382 |
|
|
373 |
|
|
181 |
|
|
Services |
|
|
1,015 |
|
|
908 |
|
|
900 |
|
|
Total
cost of revenue |
|
|
5,875 |
|
|
5,433 |
|
|
8,477 |
|
|
Gross
margin (loss) |
|
|
(5,100 |
) |
|
(4,903 |
) |
|
(5,376 |
) |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing |
|
|
1,088 |
|
|
1,680 |
|
|
2,808 |
|
|
Research
and product development |
|
|
1,111 |
|
|
1,017 |
|
|
1,902 |
|
|
General
and administrative |
|
|
1,522 |
|
|
2,558 |
|
|
3,935 |
|
|
Write-off
of intangible assets |
|
|
587 |
|
|
- |
|
|
- |
|
|
(Gain)/loss
on disposal of assets |
|
|
(5 |
) |
|
415 |
|
|
461 |
|
|
Restructuring,
net |
|
|
- |
|
|
(834 |
) |
|
1,300 |
|
|
Total
operating expenses |
|
|
4,303 |
|
|
4,836 |
|
|
10,406 |
|
|
Loss
from operations |
|
|
(9,403 |
) |
|
(9,739 |
) |
|
(15,782 |
) |
|
Other
income (charges): |
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
- |
|
|
33 |
|
|
180 |
|
|
Interest
expense |
|
|
(264 |
) |
|
(119 |
) |
|
(471 |
) |
|
Change
in fair value of warrant liability |
|
|
198 |
|
|
133 |
|
|
2,947 |
|
|
Other
expense |
|
|
(262 |
) |
|
(18 |
) |
|
(171 |
) |
| |
|
|
(328 |
) |
|
(135 |
) |
|
2,485 |
|
|
Loss
before (benefit) for income taxes |
|
|
(9,731 |
) |
|
(9,874 |
) |
|
(13,297 |
) |
|
Income
tax (benefit) - foreign |
|
|
- |
|
|
- |
|
|
(155 |
) |
|
Loss
from continuing operations |
|
|
(9,731 |
) |
|
(9,874 |
) |
|
(13,142 |
) |
|
Loss
from discontinued operations |
|
|
(30 |
) |
|
(132 |
) |
|
(5,040 |
) |
|
Net
loss |
|
|
($9,761 |
) |
|
($10,006 |
) |
|
($18,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock and deemed dividends |
|
|
- |
|
|
1,702 |
|
|
995 |
|
|
Net
loss applicable to common stockholders |
|
|
($9,761 |
) |
|
($11,708 |
) |
|
($19,177 |
) |
|
Loss
per share: |
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations - basic and diluted |
|
|
($0.28 |
) |
|
($0.54 |
) |
|
($0.75 |
) |
|
Loss
from discontinued operations - basic and diluted |
|
|
- |
|
|
- |
|
|
(0.27 |
) |
|
Net
loss applicable to common stockholders - basic and diluted |
|
|
($0.28 |
) |
|
($0.54 |
) |
|
($1.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted |
|
|
35,982 |
|
|
21,463 |
|
|
18,877 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
LEVEL
8 SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in
thousands)
|
|
Common
Stock
Shares
Amount |
|
Preferred
Stock
Shares Amount |
|
Additional
Paid-in
Capital |
|
Accumulated
(Deficit) |
|
Accumulated
Other
Comprehensive
Income
(Loss) |
|
Total |
|
|
Balance
at December 31, 2001 |
|
16,155 |
|
$ |
16 |
|
|
42 |
|
$ |
--
|
|
$ |
196,043 |
|
$ |
(181,388 |
) |
$ |
(778 |
) |
$ |
13,893 |
|
|
Shares
issued as compensation |
|
108 |
|
|
-- |
|
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
139 |
|
|
Shares
issued in private placement of common stock |
|
2,382 |
|
|
3 |
|
|
|
|
|
|
|
|
3,571 |
|
|
|
|
|
|
|
|
3,574 |
|
|
Shares
issued for litigation settlement |
|
142 |
|
|
-- |
|
|
|
|
|
|
|
|
270 |
|
|
|
|
|
|
|
|
270 |
|
|
Shares
issued for Cicero license agreement |
|
250 |
|
|
-- |
|
|
|
|
|
|
|
|
622 |
|
|
|
|
|
|
|
|
622 |
|
|
Shares
forfeited for repayment of notes receivable |
|
(15 |
) |
|
-- |
|
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
(21 |
) |
|
Shares
issued in private placement of series C preferred |
|
|
|
|
-- |
|
|
2 |
|
|
|
|
|
1,590 |
|
|
|
|
|
|
|
|
1,590 |
|
|
Conversion
of preferred shares to common |
|
181 |
|
|
-- |
|
|
(2 |
) |
|
|
|
|
-- |
|
|
|
|
|
|
|
|
-- |
|
|
Warrants
issued for financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
373 |
|
|
(373 |
) |
|
|
|
|
-- |
|
|
Accretion
of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
329 |
|
|
(329 |
) |
|
|
|
|
-- |
|
|
Deemed
dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293 |
) |
|
|
|
|
(293 |
) |
|
Foreign
currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
61 |
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,182 |
) |
|
|
|
|
(18,182 |
) |
|
Balance
at December 31, 2002 |
|
19,203 |
|
$ |
19 |
|
|
42 |
|
$ |
-- |
|
$ |
202,916 |
|
$ |
(200,565 |
) |
$ |
(717 |
) |
$ |
1,653 |
|
|
Conversion
of preferred shares to common |
|
1,378 |
|
|
1 |
|
|
(6 |
) |
|
|
|
|
-- |
|
|
|
|
|
|
|
|
1 |
|
|
Shares
issued as compensation |
|
95 |
|
|
-- |
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
48 |
|
|
Shares
issued for bank guarantee |
|
150 |
|
|
-- |
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
51 |
|
|
Exercises
of stock options |
|
27 |
|
|
-- |
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
6 |
|
|
Conversion
of warrants |
|
3,352 |
|
|
4 |
|
|
|
|
|
|
|
|
402 |
|
|
|
|
|
|
|
|
406 |
|
|
Conversion
of senior convertible redeemable preferred stock |
|
546 |
|
|
1 |
|
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
175 |
|
|
Accretion
of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
640 |
|
|
(640 |
) |
|
|
|
|
-- |
|
|
Shares
issued in private placement of common stock |
|
1,894 |
|
|
2 |
|
|
|
|
|
|
|
|
850 |
|
|
|
|
|
|
|
|
852 |
|
|
Deemed
dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,062 |
|
|
(1,062 |
) |
|
|
|
|
-- |
|
|
Foreign
currency translation adjustment. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
(6 |
) |
|
Reclassification
of unrealized loss included in income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
717 |
|
|
717 |
|
| Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,006 |
) |
|
|
|
|
(10,006 |
) |
|
Balance
at December 31, 2003 |
|
26,645 |
|
$ |
27 |
|
|
36 |
|
$ |
-- |
|
$ |
206,149 |
|
$ |
(212,273 |
) |
$ |
(6 |
) |
$ |
(6,103 |
) |
|
Conversion
of preferred shares to common |
|
824 |
|
|
1 |
|
|
(3 |
) |
|
|
|
|
-- |
|
|
|
|
|
|
|
|
1 |
|
|
Shares
issued as compensation |
|
1,068 |
|
|
1 |
|
|
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
|
189 |
|
| Shares
issued for conversion of warrants |
|
1,352 |
|
|
1 |
|
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
|
|
112 |
|
| Shares issued for
conversion of convertible notes |
|
135 |
|
|
-- |
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
50 |
|
|
Shares
issued for bank guarantee |
|
4,092 |
|
|
4 |
|
|
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
|
446 |
|
|
Conversion
of senior convertible redeemable preferred stock |
|
3,792 |
|
|
4 |
|
|
|
|
|
|
|
|
1,210 |
|
|
|
|
|
|
|
|
1,214 |
|
|
Shares
issued in private placement of common stock |
|
3,369 |
|
|
3 |
|
|
|
|
|
|
|
|
1,244 |
|
|
|
|
|
|
|
|
1,247 |
|
|
Issuance
of common stock from acquisition |
|
2,027 |
|
|
2 |
|
|
|
|
|
|
|
|
748 |
|
|
|
|
|
|
|
|
750 |
|
|
Foreign
currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
(2 |
) |
| Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,761 |
) |
|
|
|
|
( 9,761 |
) |
|
Balance
at December 31, 2004 |
|
43,304 |
|
$ |
43 |
|
|
33 |
|
$ |
-- |
|
$ |
210,142 |
|
$ |
(222,034 |
) |
$ |
(8 |
) |
$ |
(11,857 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
LEVEL
8 SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(in
thousands)
| |
Years
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
($9,761 |
) |
|
($
10,006 |
) |
|
($
18,182 |
) |
|
Other
comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
(2 |
) |
|
(6 |
) |
|
(199 |
) |
|
Reclassification
of accumulated foreign currency translation adjustments for dissolved
subsidiaries |
|
- |
|
|
- |
|
|
260 |
|
|
Reclassification
of unrealized loss included in income - other than temporary
decline |
|
- |
|
|
717 |
|
|
- |
|
|
Comprehensive
loss |
|
($9,763 |
) |
|
($
9,295 |
) |
|
($
18,121 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
LEVEL
8 SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
| |
|
Years
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(9,761 |
) |
$ |
(10,006 |
) |
$ |
(18,182 |
) |
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
4,287 |
|
|
3,116 |
|
|
8,042 |
|
|
Change
in fair value of warrant liability |
|
|
(198 |
) |
|
(133 |
) |
|
(2,947 |
) |
|
Stock
compensation expense |
|
|
635 |
|
|
48 |
|
|
139 |
|
|
Impairment
of intangible assets and software product technology |
|
|
587 |
|
|
993 |
|
|
- |
|
|
Provision
for doubtful accounts |
|
|
(4 |
) |
|
(52 |
) |
|
(477 |
) |
|
(Gain)
loss on disposal of assets |
|
|
-- |
|
|
(23 |
) |
|
461 |
|
|
Other |
|
|
--
|
|
|
--
|
|
|
98 |
|
|
Changes
in assets and liabilities, net of assets acquired and liabilities
assumed: |
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable and related party receivables |
|
|
(143 |
) |
|
1,404 |
|
|
352 |
|
|
Assets
and liabilities held for sale - systems integration |
|
|
-- |
|
|
-- |
|
|
6,409 |
|
|
Assets
and liabilities of operations to be abandoned |
|
|
86 |
|
|
101 |
|
|
473 |
|
|
Due
from Liraz |
|
|
-- |
|
|
-- |
|
|
(56 |
) |
|
Prepaid
expenses and other assets |
|
|
216 |
|
|
420 |
|
|
803 |
|
|
Accounts
payable and accrued expenses |
|
|
884 |
|
|
(351 |
) |
|
(2,181 |
) |
|
Deferred
revenue |
|
|
46 |
|
|
(273 |
) |
|
(122 |
) |
|
Net
cash (used in) operating activities |
|
|
(3,365 |
) |
|
(4,756 |
) |
|
(7,188 |
) |
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of available for sale securities |
|
|
-- |
|
|
-- |
|
|
175 |
|
|
Purchases
of property and equipment |
|
|
-- |
|
|
(36 |
) |
|
(11 |
) |
|
Repayment
of note receivable |
|
|
-- |
|
|
867 |
|
|
2,460 |
|
|
Cash
received from sale of line of business assets |
|
|
-- |
|
|
-- |
|
|
1,300 |
|
Net
cash provided by investing activities |
|
|
-- |
|
|
831 |
|
|
3,924 |
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common shares, net of issuance costs |
|
|
1,250 |
|
|
859 |
|
|
1,974 |
|
|
Proceeds
from issuance of preferred shares, net of issuance costs |
|
|
-- |
|
|
-- |
|
|
1,380 |
|
|
Proceeds
from issuance of convertible redeemable stock, less escrow of
$776 |
|
|
-- |
|
|
2,754 |
|
|
-- |
|
|
Proceeds
from exercise of warrants |
|
|
112 |
|
|
406 |
|
|
-- |
|
|
Borrowings
under credit facility, term loans and notes payable |
|
|
2,540 |
|
|
980 |
|
|
381 |
|
|
Repayments
of term loans, credit facility and notes payable |
|
|
(447 |
) |
|
(1,248 |
) |
|
(583 |
) |
|
Net
cash provided by financing activities |
|
|
3,455 |
|
|
3,751 |
|
|
3,152 |
|
|
Effect
of exchange rate changes on cash |
|
|
( 2 |
) |
|
( 6 |
) |
|
(199 |
) |
|
Net
increase (decrease) in cash and cash equivalents |
|
|
88 |
|
|
( 180 |
) |
|
(311 |
) |
|
Cash
and cash equivalents at beginning of year |
|
|
19 |
|
|
199 |
|
|
510 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
107 |
|
$ |
19 |
|
$ |
199 |
|
| |
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
Cash
paid (refunds) during the year for: |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
$ |
2 |
|
$ |
(18 |
) |
$ |
117 |
|
|
Interest |
|
$ |
749 |
|
$ |
218 |
|
$ |
274 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
LEVEL
8 SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
(dollar
amounts in thousands, except share and per share amounts)
Non-Cash
Investing and Financing Activities
2004
During
2004, the Company issued 600,948 shares of common stock to vendors for
outstanding liabilities valued at $92. The Company also issued 466,668 shares of
common stock to contractors for compensation valued at $47.
In
January 2004, the Company acquired substantially all assets and certain
liabilities of a federally certified encryption software company. The
Company issued 2,027,027 shares of common stock valued at $750.
During
2004, the Company issued 4,092,000 shares of common stock to a designated
subsidiary of Liraz Systems Ltd. as compensation for extension of a bank debt
guarantee valued at $447.
In
October 2004, 750 shares of Series D Convertible Redeemable Preferred Stock were
redeemed in return
for $775 as a condition of escrow in the event that a joint venture for the
Asian market was not formed or operational by July 17, 2003. Such redemption was
concluded in November 2004 and the escrowed proceeds, including $4 of interest,
were distributed back to the holders of Series D Preferred Stock. During
2004, the Company issued 3,791,999 shares of Level 8 Systems common stock upon
conversion of 1,213 shares of Series D Convertible Redeemable Preferred Stock.
During
2004, 179 shares of Series C Convertible Redeemable Preferred Stock were
converted into 523,684 shares of Level 8 Systems common stock.
In May
2004, the Company issued 135,135 shares of common stock on conversion of a $50
convertible note.
2003
During
2003, the Company issued 161,438 shares of common stock to vendors for
outstanding liabilities valued at $73. Of this total, 66,667 shares or $25, were
issued as part of the 1,894,444 shares issued in the October 2003 private
placement.
In
November 2003, the Company issued 150,000 shares of common stock to a designated
subsidiary of Liraz Systems Ltd. as compensation for extension of a bank debt
guarantee valued at $51.
During
2003, the Company issued 546,875 shares of Level 8 Systems common stock upon
conversion of 175 shares of Series D Convertible Redeemable Preferred
Stock.
In
October 2003, the Company issued 3,048,782 warrants to holders of the Series A3
Convertible Redeemable Preferred Stock and Series B3 Convertible Redeemable
Preferred Stock under an existing agreement and in consideration for the waiver
of certain price protection anti-dilution provisions of the Series A3 Preferred
Stock and Series B3 Preferred Stock agreements. The warrants have a strike price
of $0.40 valued at $1,062. (See Note 12.)
In April
2003, the Company agreed to exchange the warrants issued in the January 2002
private placement priced at $2.50 each for new warrants priced at $0.60 each and
has extended the expiration date to until March 2007. This exchange was made as
a result of a waiver by such warrant holders of certain terms and conditions
that would trigger payments by the Company if the Company did not keep such
shares registered under the Securities Act of 1933, as amended.
2002
During
2002, the Company issued 109,672 shares of common stock to employees for
retention bonuses and severance. The bonus was valued at $92. (See Note
12.)
In
January 2002, the Company extended the exclusive, perpetual license to develop
and sell the Cicero application integration software and obtain ownership of the
registered trademark from Merrill Lynch in exchange for 250,000 shares of common
stock. Total consideration was valued at $622.
In June
2002, the Company issued 141,658 shares of common stock to a former reseller of
the Company as part of a settlement agreement. The settlement agreement was
valued at $270.
In August
2002, as part of the Series C Convertible Redeemable Preferred Stock offering,
(“Series C Preferred Stock”) the Company exchanged approximately $150 of
indebtedness to Anthony Pizi, the Chairman of the Company, for Series C
Preferred Stock.
In August
2002, the Company completed an exchange of 11,570 shares of Series A1
Convertible Redeemable Preferred Stock (“Series A1 Preferred Stock”) and 30,000
shares of Series B1 Convertible Redeemable Preferred Stock ("Series B1 Preferred
Stock") for 11,570 shares of Series A2 Convertible Preferred Stock (“Series A2
Preferred Stock”) and 30,000 shares of Series B2 Convertible Preferred Stock
(“Series B2 Preferred Stock”), respectively. (See Note 12.)
In
October 2002, the Company completed an exchange of all of the outstanding shares
of Series A2 Convertible Redeemable Preferred Stock (“Series A2 Preferred
Stock”) and Series B2 Convertible Redeemable Preferred Stock (“Series B2
Preferred Stock”) and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock (“Series A3 Preferred
Stock”) and Series B3 Convertible Redeemable Preferred Stock (“Series B3
Preferred Stock”) and related warrants. This exchange was affected to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants. (See Note 12.)
In
December 2002, the Company issued 1,462,801 warrants to holders of the Series A3
Convertible Redeemable Preferred Stock and Series B3 Convertible Redeemable
Preferred Stock under an existing agreement and in consideration for the waiver
of certain price protection anti-dilution provisions of the Series A3 Preferred
Stock and Series B3 Preferred Stock agreements. The warrants have a strike price
of $0.40. (See Note 12.)
In
December 2002, the Company received $744 and $617 in notes receivable related to
the sale of assets related to Systems Integration segment products. (See Note
3.)
LEVEL
8 SYSTEMS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands, except share and per share data)
NOTE 1. SUMMARY OF OPERATIONS,
SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Level 8
Systems, Inc. (''Level 8'' or the ''Company'') is a global provider of business
integration software that enables organizations to integrate new and existing
information and processes at the desktop. Business integration software
addresses the emerging need for a company's information systems to deliver
enterprise-wide views of the company's business information processes.
Going
Concern:
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred a loss of $9,761 for
the year ended December 31, 2004 and has experienced negative cash flows from
operations for each of the years ended December 31, 2004, 2003 and 2002. At
December 31, 2004, the Company had a working capital deficiency of approximately
$10,255. The Company’s future revenues are entirely dependent on acceptance of a
newly developed and marketed product, Cicero, which has had limited success in
commercial markets to date. These factors among others raise substantial doubt
about the Company’s ability to continue as a going concern for a reasonable
period of time.
The
financial statements presented herein do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should Level 8 be unable to continue as a going concern. In order to
address these issues and to obtain adequate financing for the Company’s
operations for the next twelve months, the Company is actively promoting and
expanding its Cicero-related product line and continues to negotiate with
significant customers that have begun or finalized the “proof of concept” stage
with the Cicero technology. The Company is experiencing difficulty increasing
sales revenue largely because of the inimitable nature of the product as well as
customer concerns about the financial viability of the Company. The Company is
attempting to address the financial concerns of potential customers by pursuing
strategic partnerships with companies that have significant financial resources,
although the Company has not experienced significant success to date with this
approach. Additionally, the Company is seeking additional equity capital or
other strategic transactions in the near term to provide additional liquidity.
In 2004, the Company announced a Note and Warrant Offering in which warrant
holders of Level 8’s common stock were offered a one-time conversion of their
existing warrants at a conversion price of $0.10 per share as part of a
recapitalization merger plan. Under the terms of the Offer, which expired on
December 31, 2004, warrant holders who elect to convert, would tender their
conversion price in cash and receive a Note Payable in exchange. Upon approval
of the recapitalization merger at a Shareholders meeting in early 2005, these
Notes would convert into common shares of Cicero, Inc., the surviving
corporation in the merger. As of December 31, 2004, the Company has raised a
total of $1,548 from the Note and Warrant Offering. An additional $67 was in
transit to the Company on December 31, 2004 resulting in a total raise of
$1,615. Management expects that it will be able to raise additional capital,
post merger, and to continue to fund operations and also expects that increased
revenues will reduce its operating losses in future periods, however, there can
be no assurance that management’s plan will be executed as
anticipated.
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All of the Company's subsidiaries are wholly-owned
for the periods presented.
All
significant inter-company accounts and transactions are eliminated in
consolidation.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principals
generally accepted in the United States of America 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.
Financial
Instruments:
The
carrying amount of the Company’s financial instruments, representing accounts
receivable, notes receivable, accounts payable and debt approximate their fair
value.
Foreign
Currency Translation:
The
assets and liabilities of foreign subsidiaries are translated to U.S. dollars at
the current exchange rate as of the balance sheet date. The resulting
translation adjustment is recorded in other comprehensive income as a component
of stockholders' equity. Statements of operations items are translated at
average rates of exchange during each reporting period.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
Cash
and Cash Equivalents:
Cash and
cash equivalents include all cash balances and highly liquid investments with
maturity of three months or less from the date of purchase. For these
instruments, the carrying amount is considered to be a reasonable estimate of
fair value. The Company places substantially all cash and cash equivalents with
various financial institutions in both the United States and several foreign
countries. At times, such cash and cash equivalents in the United States may be
in excess of FDIC insurance limits.
Trade
Accounts Receivable:
Trade
accounts receivable are stated in the amount management expects to collect from
outstanding balances. Management provides for probable uncollectible amounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual accounts. Balances that are still
outstanding after management has used reasonable collection efforts are written
off through a charge to the valuation allowance and a credit to trade accounts
receivable. Changes in the valuation allowance have not been material to the
financial statements.
Property
and Equipment:
Property
and equipment purchased in the normal course of business is stated at cost, and
property and equipment acquired in business combinations is stated at its fair
market value at the acquisition date. All property and equipment is depreciated
using the straight-line method over estimated useful lives.
Expenditures
for repairs and maintenance are charged to expense as incurred. The cost and
related accumulated depreciation of property and equipment are removed from the
accounts upon retirement or other disposition and any resulting gain or loss is
reflected in the Consolidated Statements of Operations.
Software
Development Costs:
The
Company capitalizes certain software costs after technological feasibility of
the product has been established. Generally, an original estimated economic life
of three years is assigned to capitalized software costs, once the product is
available for general release to customers. Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expense.
Additionally,
the Company has recorded software development costs for its purchases of
developed technology through acquisitions. (See Note 2.)
Capitalized
software costs are amortized over related sales on a product-by-product basis
using the straight-line method over the remaining estimated economic life of the
product. (See Note 7.)
The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technologies.
Long-Lived
Assets:
The
Company reviews the recoverability of long-lived intangible assets when
circumstances indicate that the carrying amount of assets may not be
recoverable. This evaluation is based on various analyses including undiscounted
cash flow projections. In the event undiscounted cash flow projections indicate
impairment, the Company would record an impairment based on the fair value of
the assets at the date of the impairment. Effective January 1, 2002, the Company
accounts for impairments under the Financial Accounting Standards Board ("FSAB")
Statement of Financial Accounting Standards ("SFAS") No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”. During 2004 and 2003,
the Company recorded impairments associated with its Cicero technology and for
its Ensuredmail technology acquired in 2004. During 2002, the Company recorded
impairments associated with the sale of the Geneva and Star SQL and CTRC
operations.
Revenue
Recognition:
The
Company recognizes license revenue from end-users and third party resellers in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, “Software Revenue Recognition”, as amended
by SOP 98-9, ''Modification of SOP 97-2, 'Software Revenue Recognition,' with
Respect to Certain Transactions''. The Company reviews each contract to identify
elements included in the software arrangement. SOP 97-2 and SOP 98-9 require
that an entity recognize revenue for multiple element arrangements by means of
the ''residual method'' when (1) there is vendor-specific objective evidence
(''VSOE'') of the fair values of all of the undelivered elements that are not
accounted for by means of long-term contract accounting, (2) VSOE of fair value
does not exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 (other than the requirement for VSOE of the
fair value of each delivered element) are satisfied. VSOE of the fair value of
undelivered elements is established on the price charged for that element when
sold separately. Software customers are given no rights of return and a
short-term warranty that the products will comply with the written
documentation. The Company has not experienced any product warranty
returns.
Revenue
from recurring maintenance contracts is recognized ratably over the maintenance
contract period, which is typically twelve months. Maintenance revenue that is
not yet earned is included in deferred revenue. Any unearned receipts from
service contracts result in deferred revenue.
Revenue
from consulting and training services is recognized as services are performed.
Any unearned receipts from service contracts result in deferred revenue.
Cost
of Revenue:
The
primary components of the Company's cost of revenue for its software products
are software amortization on internally developed and acquired technology,
royalties on certain products, and packaging and distribution costs. The primary
component of the Company's cost of revenue for maintenance and services is
compensation expense.
Advertising
Expenses:
The
Company expenses advertising costs as incurred. Advertising expenses were
approximately $7, $9, and $53 for the years ended December 31, 2004, 2003 and
2002, respectively.
Research
and Product Development:
Research
and product development costs are expensed as incurred.
Income
Taxes:
The
Company uses SFAS No. 109, ''Accounting for Income Taxes'', to account for
income taxes. This statement requires an asset and liability approach that
recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all expected
future events, other than enactments of changes in the tax law or rates, are
generally considered. A valuation allowance is recorded when it is ''more likely
than not'' that recorded deferred tax assets will not be realized. (See Note
10.)
Discontinued
Operations:
During
the third quarter of 2002, the Company made a decision to dispose of the Systems
Integration segment and entered into negotiations with potential buyers. The
Systems Integration segment qualified for treatment as a discontinued operation
in accordance with SFAS 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, and the Company reclassified the results of operations for
the Systems Integration segment in 2002 to "loss from discontinued operations"
in the Consolidated Statements of Operations. The sale of the Systems
Integration segment was completed in December 2002. (See Note 3.)
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. During 2004, 2003, and 2002, potentially dilutive securities
included stock options, warrants to purchase common stock, and preferred stock.
The
following table sets forth the potential shares that are not included in the
diluted net loss per share calculation because to do so would be anti-dilutive
for the periods presented:
| |
2004 |
|
2003 |
|
2002 |
|
Stock
options |
7,488,639 |
|
5,625,878 |
|
3,834,379 |
|
Warrants |
19,953,406 |
|
10,926,706 |
|
5,315,939 |
|
Preferred
stock |
9,855,723 |
|
16,893,174
|
|
7,812,464
|
| |
37,297,768 |
|
33,445,758 |
|
16,962,782 |
In 2004,
2003 and 2002, no dividends were declared on preferred stock.
Stock-Based
Compensation:
The
Company has adopted the disclosure provisions of SFAS 123, “Accounting for
Stock-Based Compensation”, and has applied Accounting Principles Board ("APB")
Opinion No. 25, “Accounting for Stock Issued to Employees”, and related
Interpretations in accounting for its stock-based compensation plans. Had
compensation cost for the Company’s stock option plans been determined based on
the fair value at the grant dates for awards under the plans, consistent with
the method required by SFAS No. 123, the Company’s net loss and diluted net loss
per common share would have been the pro forma amounts indicated
below.
| |
|
Years
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Net
loss applicable to common stockholders, as reported |
|
|
($9,761 |
) |
|
($11,708 |
) |
|
($19,177 |
) |
|
Less:
Total stock-based employee compensation expense under
fair
value based method for all awards, net of related tax
effects |
|
|
(777 |
) |
|
(1,016 |
) |
|
(3,387 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Pro
forma loss applicable to common stockholders |
|
|
($10,538 |
) |
|
($12,724 |
) |
|
($22,564 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
per share: |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted, as reported |
|
$ |
(0.28 |
) |
$ |
(0.54 |
) |
$ |
(1.02 |
) |
|
Basic
and diluted, pro forma |
|
$ |
(0.29 |
) |
$ |
(0.59 |
) |
$ |
(1.20 |
) |
The fair
value of the Company's stock-based awards to employees was estimated as of the
date of the grant using the Black-Scholes option-pricing model, using the
following weighted-average assumptions:
| |
2004 |
2003 |
2002 |
| |
|
|
|
|
Expected
life (in years) |
4.19
years |
8.33
years |
10
years |
|
Expected
volatility |
138% |
126% |
96% |
|
Risk
free interest rate |
4.75% |
4.00% |
4.25% |
|
Expected
dividend yield |
0% |
0% |
0% |
Warrants
Liability:
The
Company has issued warrants to Series A3 and Series B3 preferred stockholders
which contain provisions that allow the warrant holders to force a cash
redemption for events outside the control of the Company. The fair value of the
warrants are accounted for as a liability and are re-measured through the
Consolidated Statements of Operations at each balance sheet date.
Reclassifications:
Certain
prior year amounts in the accompanying financial statements have been
reclassified to conform to the 2004 presentation. Such reclassifications had no
effect on previously reported net income or stockholders' equity.
Recent
Accounting Pronouncements:
In
December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based
Payment, ("SFAS 123R"). SFAS 123R addresses the accounting for share-based
payments to employees, including grants of employee stock options. Under
the new standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB
Opinion No. 25, “Accounting for Stock Issued to Employees”. Instead,
companies will be required to account for such transactions using a fair-value
method and recognize the expense in the consolidated statements of
operations. SFAS 123R will be effective for periods beginning after
June 15, 2005 and allows, but does not require, companies to restate the
full fiscal year of 2005 to reflect the impact of expensing share-based payments
under SFAS 123R. The Company has not yet determined which fair-value
method and transitional provision it will follow. However, the Company
expects that the adoption of SFAS 123R will have a significant impact on its
results of operations. The Company does not expect the adoption of SFAS
123R will impact its overall financial position. See Stock-Based
Compensation above for the pro forma impact on net loss and net loss
per share from calculating stock-based compensation costs under the fair value
alternative of SFAS 123. However, the calculation of compensation cost for
share-based payment transactions after the effective date of SFAS 123R may be
different from the calculation of compensation cost under SFAS 123, but such
differences have not yet been quantified.
In
January 2003, the FASB issued Interpretation No. 46 or FIN 46,“Consolidation of
Variable Interest Entities”, an interpretation of Accounting Research Bulletin
No. 51, “Consolidated Financial Statements”. In
October 2003, the FASB issued FASB Staff Position FIN 46-6, “Effective Date of
FASB Interpretation No. 46, Consolidation of Variable Interest Entities”
deferring the effective date for applying the provisions of FIN 46 for public
entities’ interests in variable interest entities or
potential variable interest entities created before February 1, 2003 for
financial statements of interim or annual periods that end after December 15,
2003. FIN 46
establishes accounting guidance for consolidation of variable interest entities
that function to support the activities of the primary beneficiary. In
December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of
Variable Interest Entities.” This revised interpretation is effective for all
entities no later than the end of the first reporting period that ends after
March 15, 2004. The
Company has no investment in or contractual relationship or other business
relationship with a variable interest entity and therefore the adoption of this
interpretation did not have any impact on its consolidated financial position or
results of operations. However, if the Company enters into any such arrangement
with a variable interest entity in the future or an entity with which we have a
relationship is reconsidered based on guidance in FIN 46 to be a variable
interest entity, the Company’s consolidated financial position or results of
operations might be materially impacted.
In May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, “Elements of Financial Statements”. The adoption of this
statement did not have a material impact on the Company’s results of operations
and financial condition.
NOTE
2. ACQUISITIONS
In
January 2004, the Company acquired substantially all of the assets and certain
liabilities of Critical Mass Mail, Inc., d/b/a Ensuredmail, a federally
certified encryption software company. Under the terms of the purchase
agreement, the Company issued 2,027,027 shares of common stock at a price of
$0.37. The total purchase price of the assets being acquired plus certain
liabilities assumed was $750, and has been accounted for by the purchase method
of accounting. The Company agreed to register the common stock for resale under
the Securities Act of 1933, as amended.
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
Company assessed the net realizable value of the Ensuredmail software technology
acquired and determined the purchase price exceeded the amounts allocated to the
software technology acquired less liabilities assumed by approximately $587.
This excess of the purchase price over the fair values of the assets acquired
less liabilities assumed was allocated to goodwill, and, because it was deemed
impaired, charged to the Statements of Operations for the year ended
December 31, 2004. (See Note 7.)
NOTE
3. DISPOSITIONS
Sale
of Geneva:
Effective
October 1, 2002, the Company sold its Systems Integration software business to
EM Software Solutions, Inc. Under the terms of the agreement, EM Solutions
acquired all rights, title and interest to the Geneva Enterprise Integrator and
Geneva Business Process Automator products along with certain receivables,
deferred revenue, maintenance contracts, fixed assets and certain liabilities.
The Company had identified these assets as being held for sale during the third
quarter of 2002 and, as such, reclassified the results of operations to
“income/loss from discontinued operations”. The Company received total proceeds
of $1,637; $276 in cash, a short-term note in the amount of $744 and a five-year
note payable monthly in the aggregate amount of $617. The short-term note was
due by February 13, 2003 and was repaid subsequent to December 31, 2002.
The five-year note was recorded net of an allowance of $494. The carrying value
of the assets sold was approximately $374 resulting in a loss on the disposal of
discontinued operations of $769. Revenues for the Systems Integration segment
were $3,700 in 2002. (See Note 6.)
Sale
of Star SQL and CTRC:
In June
2002, the Company entered into an Asset Purchase Agreement with StarQuest
Ventures, Inc., a California company and an affiliate of Paul Rampel, a former
member of the Board of Directors of Level 8 Systems and a former executive
officer. Under the terms of the Asset Purchase Agreement, Level 8 sold its Star
SQL and CTRC products and certain fixed assets to StarQuest Ventures for $365
and the assumption of certain maintenance liabilities. The Company received $300
in cash and a note receivable of $65. The loss on sale of the assets was $74.
The Company used $150 from the proceeds to repay borrowings from Mr.
Rampel.
Assets
and Liabilities to be Abandoned:
At
December 31, 2002, the Company had made the decision to close its remaining
foreign subsidiaries.
In
December 2002, the Company received notification of the finalization of the
bankruptcy proceeding in France and recorded a gain on the closure of the
subsidiary of $332 in gain (loss) on disposal of assets.
In March
2003, the Company received notification of the finalization of the bankruptcy
proceeding in the United Kingdom and recorded a gain on the closure of the
subsidiary of $216 in gain (loss) on disposal of assets.
In
December 2003, the Company received notification of the liquidation of the
Denmark subsidiary and the Company recorded a gain on the closure of the
subsidiary of $62 in gain (loss) on disposal of assets.
NOTE
4. ACCOUNTS
RECEIVABLE
Trade
accounts receivable was composed of the following at December 31:
| |
|
2004 |
|
2003 |
|
|
Current
trade accounts receivable |
|
$ |
164 |
|
$ |
20 |
|
|
Less:
allowance for doubtful accounts |
|
|
(12 |
) |
|
(8 |
) |
| |
|
$ |
152 |
|
$ |
12 |
|
The
(credit) provision for uncollectible amounts was ($4), ($52), and ($477) for the
years ended December 31, 2004, 2003, and 2002, respectively. Write-offs
(net of recoveries) of accounts receivable were ($0), ($488), and ($437) for the
years ended December 31, 2004, 2003, and 2002, respectively.
NOTE
5. PROPERTY
AND EQUIPMENT
Property
and equipment was composed of the following at December 31:
| |
|
2004 |
|
2003 |
|
|
Computer
equipment |
|
$ |
242 |
|
$ |
242 |
|
|
Furniture
and fixtures |
|
|
8 |
|
|
8 |
|
|
Office
equipment |
|
|
138 |
|
|
138 |
|
| |
|
|
388 |
|
|
388 |
|
|
Less:
accumulated depreciation and amortization |
|
|
(373 |
) |
|
(362 |
) |
| |
|
|
|
|
|
|
|
| |
|
$ |
15 |
|
$ |
26 |
|
Depreciation
and amortization expense of property and equipment was $11, $167, and $402 for
the years ended December 31, 2004, 2003, and 2002, respectively.
NOTE
6. NOTES
RECEIVABLE
As
discussed in Note 3, in 2002 the Company disposed of the remaining assets of the
Systems Integration segment through a sale to EM Software Solutions, Inc. As
part of the proceeds, the Company received two notes receivable from the
purchaser. The first note was due on February 13, 2003 in the amount of $744 and
bore interest at prime plus 2.25%. This note was repaid in February 2003. The
second note was in the principal amount of $617 and bears interest at prime plus
1%. Principal and interest is payable monthly and the note matures in 2007. Due
to the uncertainty of the collection of the note at the time, the Company
recorded the note net of an allowance of $494.
As more
fully discussed in Note 21, the Company had been party to litigation for breach
of a real estate lease. That case was settled in August 2003. Under the terms of
the settlement agreement, the Company agreed to assign the note receivable due
from EM Software Solutions, with recourse equal to the unpaid portion of the
Note should the Note obligor default on future payments. The principal balance
outstanding on the Note at the time of assignment was $545. The Company assessed
the probability of liability under the recourse provisions using a weighted
probability cash flow analysis and has recognized a long-term liability in the
amount of $131. In addition, the Company wrote off the unreserved portion of the
Note, or $51.
In
conjunction with the sale of Profit Key on April 6, 1998, the Company received a
note receivable from the purchaser for $2,000. The remaining balance on the note
totaled $1,000 and was due in equal annual installments beginning on March 31,
2001. The note bore interest at 9% per annum. In 2002, the Company sold its
remaining interest in the note to a group of investors including Nicholas
Hatalski and Paul Rampel, both members of the Company's Board of Directors at
the time, and Anthony Pizi, the Company's Chairman for $400, and recorded a loss
on the sale of $100.
NOTE
7. SOFTWARE
PRODUCT TECHNOLOGY
In
accordance with SFAS 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed",
the
Company periodically completed an assessment of the recoverability of the Cicero
product technology. This assessment was performed during 2004, due to the
Company’s continued operating losses and the limited software revenue generated
by the Cicero technology over the previous twelve to eighteen months. The
Company was in negotiations with customers to purchase licenses, which would
have a significant impact on the cash flows from the Cicero technology and the
Company. Since the negotiations had been in process for several months and
expected completion of the transactions had been delayed, the Company had
reduced its cash flow projections. Historical cash flows generated by the Cicero
technology do not support the long-lived asset and accordingly the Company
impaired the excess of the unamortized book value of the technology in excess of
the expected net realizable value for the year ended December 31, 2004. This
charge, in the amount of $2,844, was recorded as software amortization for
the year ended December 31, 2004. As of December 31, 2004, the Company has
no capitalized costs for the Cicero technology.
Also in
accordance with SFAS 86, the
Company completed an assessment of the recoverability of the Ensuredmail product
technology. This assessment was also completed during 2004, due to the
Company’s revised cash flow projections from software revenue. These revised
cash flow projections do not support the long-lived asset and accordingly the
Company has impaired the excess of the unamortized book value of the technology
in excess of the expected net realizable value. This charge, in the amount of
$154, was recorded as software amortization for the year
ended December 31, 2004. As of December 31, 2004, the Company has no
capitalized costs for the Ensuredmail software technology.
Effective
July 2002, the Company determined that the estimated asset life of the Cicero
technology has been extended as a result of the January 2002 amended license
agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill
Lynch”) wherein the exclusive right to modify, commercialize, and distribute the
technology was extended in perpetuity. Accordingly, the Company reassessed the
estimated life of the technology and extended it from three years to five years.
The effect of the change in the estimated life resulted in a reduction of $4,608
and $2,407 of amortization expense for the years ended December 31, 2003
and 2002, respectively. The impact on the net loss applicable to common
stockholders - basic and diluted was $(0.21) per share for December 31, 2003 and
$(0.13) per share for December 31, 2002.
During
the years ended December 31, 2004, 2003 and 2002, the Company recognized $4,276
of which $3,585 is an impairment charge, $3,933, of which $993 is an impairment
charge, and $7,375, respectively, of expense related to the amortization of
these costs, which is recorded as cost of software revenue in the consolidated
statements of operations. Accumulated amortization of capitalized software costs
was $24,712 and $20,436 at December 31, 2004 and 2003,
respectively.
NOTE
8. SENIOR
REORGANIZATION DEBT
In 2004,
the Company announced a Note and Warrant Offering in which warrant holders of
Level 8’s common stock were offered a one-time conversion of their existing
warrants at a conversion price of $0.10 per share as part of a recapitalization
merger plan. Under the terms of the Offer, which expired on December 31, 2004,
warrant holders who elect to convert, would tender their conversion price in
cash and receive a Note Payable in exchange. Upon approval of the
recapitalization merger at a Shareholders' meeting in early 2005, these Notes
would convert into common shares of Cicero, Inc., the surviving corporation in
the merger. In addition, those warrant holders who elected to convert the first
$1,000 of warrants would receive additional replacement warrants at a ratio of
2:1 for each warrant converted, with a strike price of $0.10 per share. In
addition, upon approval of the recapitalization merger, each warrant holder
would be entitled to additional warrants to purchase common stock in Cicero,
Inc.
As of
December 31, 2004, the Company has raised a total of $1,548 from the Note and
Warrant Offering. An additional $67 was in transit to the Company on December
31, 2004 resulting in a total raise of $1,615. If the merger proposal is not
approved, the Notes will immediately become due and payable.
NOTE
9. SHORT
TERM DEBT AND CONVERTIBLE NOTES
Notes
payable, long-term debt, and notes payable to related party consist of the
following at December 31:
| |
2004 |
|
2003 |
|
Term
loan (a) |
$
1,971 |
|
$
1,971 |
|
Note
payable; related party (b) |
69 |
|
85 |
|
Notes
payable (c) |
644 |
|
444 |
|
Short
term convertible note (d) |
235 |
|
125 |
|
Short
term convertible note, related party (e) |
727 |
|
-- |
| |
$
3,646 |
|
$
2,625 |
| (a) |
The
Company has a $1,971 term loan bearing interest at LIBOR plus 1%
(approximately 3.21% at December 31, 2004). Interest is payable quarterly.
There are no financial covenants and the term loan is guaranteed by Liraz
Systems Ltd., the Company’s former principal shareholder. The loan matures
on November 3, 2005. (See Note 17.) |
| (b) |
From
time to time during the year the Company entered into promissory notes
with the Company's Chairman. The notes bear interest at 12% per
annum. |
| (c) |
The
Company does not have a revolving credit facility and from time to time
has issued a series of short term promissory notes with private lenders,
which provide for short term borrowings both secured and unsecured by
accounts receivable. In addition, the Company has settled certain
litigation and agreed to a series of promissory notes to support the
obligations. The notes bear interest between 10% and 12% per annum.
|
| (d) |
The
Company entered into convertible notes with private lenders. The notes
bear interest between 12% and 24% per annum and allows for the conversion
of the principal amount due into common stock of the Company.
|
| (e) |
The
Company entered into convertible promissory notes with Anthony Pizi, and
Mark and Carolyn Landis, who are related by marriage to Anthony Pizi, the
Company’s Chairman and Chief Executive Officer. The notes bear interest at
12% per annum and allows for the conversion of the principal amount due
into common stock of the Company. |
NOTE
10. INCOME
TAXES
Income
tax expense was composed of the following for the years ended December
31:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Federal
- current |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
|
State
and local - current |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
-- |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Foreign
taxes (benefit) and withholdings |
|
|
-- |
|
|
-- |
|
|
(155 |
) |
|
Current
taxes |
|
|
-- |
|
|
-- |
|
|
(155 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Federal
- deferred |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
State
and local - deferred |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Deferred
taxes |
|
|
-- |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
income tax provision (benefit) |
|
$ |
-- |
|
$ |
-- |
|
$ |
(155 |
) |
A
reconciliation of expected income tax at the statutory federal rate with the
actual income tax provision is as follows for the years ended December
31:
| |
|
2004
|
|
2003
|
|
2002
|
|
|
Expected
income tax benefit at statutory rate (34%) |
|
$ |
(3,319 |
) |
$ |
(3,402 |
) |
$ |
(6,235 |
) |
|
State
taxes, net of federal tax benefit. |
|
|
(219 |
) |
|
(405 |
) |
|
(358 |
) |
|
Effect
of foreign operations including withholding taxes |
|
|
12 |
|
|
(31 |
) |
|
(68 |
) |
|
Effect
of change in valuation allowance |
|
|
3,357 |
|
|
3,769
|
|
|
6,362
|
|
|
Amortization
and write-off of non-deductible goodwill |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Non-deductible
expenses |
|
|
169 |
|
|
69
|
|
|
144
|
|
|
Total |
|
$ |
-- |
|
$ |
-- |
|
$ |
(155 |
) |
Significant
components of the net deferred tax asset (liability) at December 31 were as
follows:
| |
|
2004 |
|
2003 |
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
|
$ |
4 |
|
$ |
85 |
|
|
Accrued
expenses, non-tax deductible |
|
|
522 |
|
|
200 |
|
|
Deferred
revenue |
|
|
34 |
|
|
-- |
|
|
Noncurrent
assets: |
|
|
|
|
|
|
|
|
Loss
carryforwards |
|
|
76,229 |
|
|
74,517 |
|
|
Depreciation
and amortization |
|
|
7,581 |
|
|
5,709 |
|
| |
|
|
84,370 |
|
|
80,511 |
|
| |
|
|
|
|
|
|
|
|
Less:
valuation allowance |
|
|
(84,370 |
) |
|
(
80,511 |
) |
| |
|
|
|
|
|
|
|
|
|
|
$ |
-- |
|
$ |
-- |
|
At
December 31, 2004, the Company had net operating loss carryforwards of
approximately $190,571, which may be applied against future taxable income.
These carryforwards will expire at various times between 2005 and 2024. A
substantial portion of these carryforwards is restricted to future taxable
income of certain of the Company's subsidiaries or limited by Internal Revenue
Code Section 382. Thus, the utilization of these carryforwards cannot be
assured. Net operating loss carryforwards include tax deductions for the
disqualifying dispositions of incentive stock options. When the Company utilizes
the net operating loss related to these deductions, the tax benefit will be
reflected in additional paid-in capital and not as a reduction of tax expense.
The total amount of these deductions included in the net operating loss
carryforwards is $21,177.
The
undistributed earnings of certain foreign subsidiaries are not subject to
additional foreign income taxes nor considered to be subject to U.S. income
taxes unless remitted as dividends. The Company intends to reinvest such
undistributed earnings indefinitely; accordingly, no provision has been made for
U.S. taxes on those earnings. The determination of the amount of the
unrecognized deferred tax liability related to the undistributed earnings is not
practicable.
The
Company provided a full valuation allowance on the total amount of its deferred
tax assets at December 31, 2004 since management does not believe that it
is more likely than not that these assets will be realized.
NOTE
11. SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
On March
19, 2003, the Company completed a $3,500 private placement of Series D
Convertible Preferred Stock (“Series D Preferred Stock”), convertible at a
conversion ratio of $0.32 per share of common stock into an aggregate of
11,031,250 shares of common stock. As part of the financing, the Company has
also issued warrants to purchase an aggregate of 4,158,780 shares of common
stock at an exercise price of $0.07 per share (“Series D-1 Warrants”). On
October 10, 2003, the Company, consistent with its obligations, also issued
warrants to purchase an aggregate of 1,665,720 shares of common stock at an
exercise price the lesser of $0.20 per share or market price at the time of
exercise (“Series D-2 Warrants”). The Series D-2 Warrants became exercisable on
November 1, 2003, because the Company failed to report $6,000 in gross revenues
for the nine month period ended September 30, 2003. Both existing and new
investors participated in the financing. The Company also agreed to register the
common stock issuable upon conversion of the Series D Preferred Stock and
exercise of the warrants for resale under the Securities Act of 1933, as
amended. Under the terms of the financing agreement, a redemption event may
occur if any one person, entity or group shall control more than 35% of the
voting power of the Company’s capital stock. The Company allocated the proceeds
received from the sale of the Series D Preferred Stock and warrants to the
preferred stock and detachable warrants on a relative fair value basis,
resulting in an allocation of $2,890 to the Series D Preferred Stock and $640 to
the detachable warrants. Based upon the allocation of the proceeds, the Company
determined that the effective conversion price of the Series D Preferred Stock
was less than the fair value of the Company’s common stock on the date of
issuance. The beneficial conversion feature was recorded as a discount on the
value of the Series D Preferred Stock and an increase in additional paid-in
capital. Because Series D Preferred Stock was convertible immediately upon
issuance, the Company fully amortized such beneficial conversion feature on the
date of issuance.
As part
of the financing, the Company and the lead investors have agreed to form a joint
venture to exploit the Cicero technology in the Asian market. The terms of the
agreement require that the Company place $1,000 of the gross proceeds from the
financing into escrow to fund the joint venture. The escrow agreement allows for
the immediate release of funds to cover organizational costs of the joint
venture. During the quarter ended March 31, 2003, $225 of escrowed funds was
released. Since the joint venture was not formed and operational on or by July
17, 2003, the lead investors have the right, but not the obligation, to require
the Company to purchase $1,000 in liquidation value of the Series D Preferred
Stock at a 5% per annum premium, less their pro-rata share of expenses. On
October 21, 2004, the Company received notification from the lead investors of
their intent to redeem the escrow balance and surrender the equivalent amount of
Series D preferred shares. This redemption was completed in November 2004.
Another
condition of the financing requires the Company to place an additional $1,000 of
the gross proceeds into escrow, pending the execution of a definitive agreement
with Merrill Lynch, providing for the sale of all right, title and interest to
the Cicero technology. Since a transaction with Merrill Lynch for the sale of
Cicero was not consummated by May 18, 2003, the lead investors have the right,
but not the obligation, to require the Company to purchase $1,000 in liquidation
value of the Series D Preferred Stock at a 5% per annum premium. During the
second quarter of 2003, $390 of escrowed funds was released. In addition, the
Company and the lead investor agreed to extend the escrow release provisions
until the end of July 2003 when all remaining escrow monies were released to the
Company.
NOTE
12. STOCKHOLDERS’
EQUITY
Common
Stock:
In
January 2004, the Company completed a common stock financing round wherein it
raised $1,247 of capital from several new investors as well as certain investors
of Critical Mass Mail, Inc. The Company sold 3,369,192 shares of common stock at
a price of $0.37 per share. As part of the financing, the Company has also
issued warrants to purchase 3,369,192 shares of the Company’s common stock at an
exercise price of $0.37. The warrants expire three years from the date of grant.
These shares were issued in reliance upon the exemption from registration under
Rule 506 of Regulation D and on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.
In
October 2003, the Company entered into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell 1,894,444 shares of its
common stock and issue 473,611 warrants to purchase the Company’s common stock
at a price of $0.45 per share for a total of $853 in proceeds. This offering
closed on October 15, 2003. The warrants expire in three years from the date of
grant. These shares were issued in reliance upon the exemption from registration
under Rule 506 of Regulation D and on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not
involving a public offering.
In
January 2002, the Company entered into a Securities Purchase Agreement with
several investors wherein the Company agreed to sell up to 3,000,000 shares of
its common stock and warrants. The common stock was valued at $1.50 per share
and warrants to purchase additional shares were issued with an exercise price of
$2.75 per share. This offering closed on January 16, 2002. Of the 3,000,000
shares, the Company sold 2,381,952 shares of common stock for a total of $3,574
and granted 476,396 warrants to purchase the Company’s common stock at an
exercise price of $2.75 per share. The warrants expire in three years from the
date of grant and have a call feature that forces exercise if the Company’s
common stock exceeds $5.50 per share. These shares were issued in reliance upon
the exemption from registration under Rule 506 of Regulation D and on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 for transactions by an issuer not involving a public offering. Under this
Private Placement, the Company had agreed to certain terms and conditions that
would trigger payments by the Company if the Company did not keep such shares
registered under the Securities Act of 1933, as amended. In April 2003, in
exchange for a waiver of such provisions the Company agreed to exchange the
warrants from the January 2002 Private Placement priced at $2.50 for new
warrants priced at $0.60 and has extended the expiration date until March 2007.
Each participant is required to execute a waiver prior to receiving the repriced
warrants.
Stock
Grants:
During
2004 and 2003, no stock awards were made to employees. During 2002, the Company
issued 109,672 shares of common stock to employees for retention bonuses and
severance. The grants were valued and recorded based on the fair market value of
the stock on the date of grant, which totaled $92.
Stock
Options:
The
Company maintains two stock option plans, the 1995 and 1997 Stock Incentive
Plans, which permit the issuance of incentive and nonstatutory stock options,
stock appreciation rights, performance shares, and restricted and unrestricted
stock to employees, officers, directors, consultants, and advisors. In July
2003, stockholders approved a proposal to increase the number of shares reserved
within these plans to a combined total of 10,900,000 shares of common stock for
issuance upon the exercise of awards and provide that the term of each award be
determined by the Board of Directors. The Company also has a stock incentive
plan for outside directors and the Company has set aside 120,000 shares of
common stock for issuance under this plan.
Under the
terms of the Plans, the exercise price of the incentive stock options may not be
less than the fair market value of the stock on the date of the award and the
options are exercisable for a period not to exceed ten years from date of grant.
Stock appreciation rights entitle the recipients to receive the excess of the
fair market value of the Company's stock on the exercise date, as determined by
the Board of Directors, over the fair market value on the date of grant.
Performance shares entitle recipients to acquire Company stock upon the
attainment of specific performance goals set by the Board of Directors.
Restricted stock entitles recipients to acquire Company stock subject to the
right of the Company to repurchase the shares in the event conditions specified
by the Board are not satisfied prior to the end of the restriction period. The
Board may also grant unrestricted stock to participants at a cost not less than
85% of fair market value on the date of sale. Options granted vest at varying
periods up to five years and expire in ten years.
Activity
for stock options issued under these plans for the fiscal years ending December
31, 2004, 2003 and 2002 was as follows:
|
|
Plan
Activity |
|
Option
Price Per Share |
|
Weighted
Average Exercise Price |
|
|
Balance
at December 31, 2001 |
|
|
4,366,153 |
|
|
1.37
- 39.31 |
|
$ |
6.92 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,942,242 |
|
|
0.34
- 1.70 |
|
|
0.58 |
|
|
Forfeited |
|
|
(2,474,016 |
) |
|
0.39-39.31 |
|
|
6.76 |
|
|
Balance
at December 31, 2002 |
|
|
3,834,379 |
|
|
0.34-39.31 |
|
|
3.81 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,566,126 |
|
|
0.22
- 0.57 |
|
|
0.24 |
|
|
Exercised |
|
|
(121,434 |
) |
|
0.22
- 0.22 |
|
|
0.22 |
|
|
Forfeited |
|
|
(653,193 |
) |
|
0.22-
39.31 |
|
|
2.60 |
|
|
Balance
at December 31, 2003 |
|
|
5,625,878 |
|
|
0.20-39.31 |
|
|
2.43 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,139,232 |
|
|
0.12
- 0.39 |
|
|
0.26 |
|
|
Exercised |
|
|
(519,232 |
) |
|
0.08
- 0.37 |
|
|
0.17 |
|
|
Forfeited |
|
|
(757,239 |
) |
|
0.22-37.88 |
|
|
8.12 |
|
|
Balance
at December 31, 2004 |
|
|
7,488,639 |
|
|
0.12-39.31 |
|
$ |
1.11 |
|
The
weighted average grant date fair value of options issued during the years ended
December 31, 2004, 2003, and 2002 was equal to $0.26, $0.24, and $0.58 per
share, respectively. There were no option grants issued below fair market value
during 2004, 2003 or 2002.
At
December 31, 2004, 2003, and 2002, options to purchase approximately 4,775,040,
2,770,126, and 1,409,461 shares of common stock were exercisable, respectively,
pursuant to the plans at prices ranging from $0.12 to $39.32. The following
table summarizes information about stock options outstanding at December 31,
2004:
|
EXERCISE
PRICE |
NUMBER
OUTSTANDING |
REMAINING
CONTRACTUAL
LIFE
FOR OPTIONS
OUTSTANDING |
NUMBER
EXERCISABLE |
WEIGHTED
AVERAGE
EXERCISE
PRICE |
| |
|
|
|
|
|
$
0.12 - 3.93 |
6,737,039 |
8.2 |
4,023,440 |
$
0.52 |
|
3.94
-7.86 |
646,250 |
6.1 |
646,250 |
5.81 |
|
7.87-11.79 |
72,650 |
4.4 |
72,650 |
8.97 |
|
11.80-15.72 |
5,000 |
2.7 |
5,000 |
14.73 |
|
15.73-19.66 |
7,500 |
5.6 |
7,500 |
18.81 |
|
19.67-23.59 |
3,000 |
5.5 |
3,000 |
20.00 |
|
23.60-27.52 |
0 |
0.0 |
0 |
0.00 |
|
27.53-31.45 |
3,000 |
5.0 |
3,000 |
30.25 |
|
31.46-35.38 |
0 |
0.0 |
0 |
0.00 |
|
35.39-39.32 |
14,200 |
5.2 |
14,200 |
39.16 |
| |
|
|
|
|
| |
7,488,639 |
8.0 |
4,775,040 |
$
1.56 |
Preferred
Stock:
In
connection with the sale of Series D Preferred Stock, the holders of the
Company’s Series A3 Preferred Stock and Series B3 Preferred Stock (collectively,
the “Existing Preferred Stockholders”), entered into an agreement whereby the
Existing Preferred Stockholders have agreed to waive certain applicable price
protection anti-dilution provisions. Under the terms of the waiver agreement,
the Company is also permitted to issue equity securities representing aggregate
proceeds of up to an additional $4,900 following the sale of the Series D
Preferred Stock. Additionally, the Existing Preferred Stockholders have also
agreed to a limited lock-up restricting their ability to sell common stock
issuable upon conversion of their preferred stock and warrants and to waive the
accrual of any dividends that may otherwise be payable as a result of the
Company’s delisting from Nasdaq. As consideration for the waiver agreement, the
Company has agreed to issue on a pro rata basis up to 1,000 warrants to all the
Existing Preferred Stockholders on a pro rata basis at such time and from time
to time as the Company closes financing transactions that represent proceeds in
excess of $2,900, excluding the proceeds from the Series D Preferred Stock
transaction. Such warrants will have an exercise price that is the greater of
$0.40 or the same exercise price as the exercise price of the warrant, or equity
security, that the Company issues in connection with the Company’s financing or
loan transaction that exceeds the $2,900 threshold.
On August
14, 2002, the Company completed a $1,600 private placement of Series C
Convertible Preferred Stock (“Series C Preferred Stock”), convertible at a
conversion ratio of $0.38 per share of common stock into an aggregate of
4,184,211 shares of common stock. As part of the financing, the Company has also
issued warrants to purchase an aggregate of 1,046,053 shares of common stock at
an exercise price of $0.38 per share. As consideration for the $1,600 private
placement, the Company received approximately $1,400 in cash and allowed certain
debt holders to convert approximately $150 of debt and $50 accounts payable to
equity. The Chairman and CEO of the Company, Anthony Pizi, converted $150 of
debt owed to him into shares of Series C Preferred Stock and warrants. Both
existing and new investors participated in the financing. The Company also
agreed to register the common stock issuable upon conversion of the Series C
Preferred Stock and exercise of the warrants for resale under the Securities Act
of 1933, as amended. The Company allocated the proceeds received from the sale
of the Series C Preferred Stock and warrants to the preferred stock and the
detachable warrants on a relative fair value basis, resulting in the allocation
$1,271 to the Series C Preferred Stock and $329 to the detachable warrants.
Based on the allocation of the proceeds, the Company determined that the
effective conversion price of the Series C Preferred Stock was less than the
fair value of the Company’s common stock on the date of issuance. As a result,
the Company recorded a beneficial conversion feature in the amount of $329 based
on the difference between the fair market value of the Company’s common stock on
the closing date of the transaction and the effective conversion price of the
Series C Preferred Stock. The beneficial conversion feature was recorded as a
discount on the value of the Series C Preferred Stock and an increase in
additional paid-in capital. Because the Series C Preferred Stock was convertible
immediately upon issuance, the Company fully amortized such beneficial
conversion feature on the date of issuance.
In
connection with the sale of Series C Preferred Stock, the Company agreed with
the existing holders of its Series A1 Convertible Preferred Stock (the “Series
A1 Preferred Stock”) and the Series B1 Convertible Preferred Stock (the “Series
B1 Preferred Stock”), in exchange for their waiver of certain anti-dilution
provisions, to reprice an aggregate of 1,801,022 warrants to purchase common
stock from an exercise price of $1.77 to $0.38. The Company entered into an
Exchange Agreement with such holders providing for the issuance of 11,570 shares
of Series A2 Convertible Preferred Stock (“Series A2 Preferred Stock”) and
30,000 Series B2 Convertible Preferred Stock (“Series B2 Preferred Stock”),
respectively. Series A2 Preferred Stock and Series B2 Preferred Stock are
convertible into an aggregate of 1,388,456 and 2,394,063 shares of the Company’s
common stock at $8.33 and $12.53 per share, respectively. The exchange is being
undertaken in consideration of the temporary release of the anti-dilution
provisions of the Series A1 Preferred Stockholders and Series B1 Preferred
Stockholders. Based on a valuation performed by an independent valuation firm,
the Company recorded a deemed dividend of $293, to reflect the increase in the
fair value of the preferred stock and warrants as a result of the exchange. (See
“Stock Warrants” for fair value assumptions.) The dividend increased the fair
value of the warrant liability. As of December 31, 2004, no warrants had been
exercised.
On
October 25, 2002, the Company effected an exchange of all of our outstanding
shares of Series A2 Convertible Redeemable Preferred Stock (“Series A2 Preferred
Stock”) and Series B2 Convertible Redeemable Preferred Stock (“Series B2
Preferred Stock”) and related warrants for an equal number of shares of newly
created Series A3 Convertible Redeemable Preferred Stock (“Series A3 Preferred
Stock”) and Series B3 Convertible Redeemable Preferred Stock (“Series B3
Preferred Stock”) and related warrants. This exchange was made to correct a
deficiency in the conversion price from the prior exchange of Series A1 and B1
Preferred Stock and related warrants for Series A2 and B2 Preferred Stock and
related warrants on August 29, 2002. The conversion price for the Series A3
Preferred Stock and the conversion price for the Series B3 Preferred Stock
remain the same as the previously issued Series A1 and A2 Preferred Stock and
Series B1 and B2 Preferred Stock, at $8.33 and $12.53, respectively. The
exercise price for the aggregate 753,640 warrants relating to the Series A3
Preferred Stock (“Series A3 Warrants”) was increased from $0.38 to $0.40 per
share which is a reduction from the $1.77 exercise price of the warrants
relating to the Series A1 Preferred Stock. The exercise price for the aggregate
1,047,382 warrants relating to the Series B3 Preferred Stock (“Series B3
Warrants”) was increased from $0.38 to $0.40 per share which is a reduction from
the $1.77 exercise price of the warrants relating to the Series B1 Preferred
Stock. The adjusted exercise price was based on the closing price of the
Company’s Series C Convertible Redeemable Preferred Stock and warrants on August
14, 2002, plus $0.02, to reflect accurate current market value according to
relevant Nasdaq rules. This adjustment was made as part of the agreement under
which the holders of the Company’s Preferred Stock agreed to waive their
price-protection anti-dilution protections to allow the Company to issue the
Series C Preferred Stock and warrants without triggering the price-protection
anti-dilution provisions and excessively diluting its common stock. The Company
may cause the redemption of the Series A3 Preferred Stock warrants and the
Series B3 Preferred Stock warrants for $.0001 at any time if the closing price
of the Company’s common stock over 20 consecutive trading days is greater than
$5.00 and $7.50 per share, respectively. The holders of the Series A3 and Series
B3 Warrants may cause the warrants to be redeemed for cash at the difference
between the exercise price and the fair market value immediately preceding a
redemption event as defined in the contract. As such, the fair value of the
warrants at issuance has been classified as a warrant liability in accordance
with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in a Company’s Own Stock”. As of December 31, 2004, no
warrants have been exercised and the fair value of the liability is
$0.
Under the
terms of the agreement, the Company is authorized to issue equity securities in
a single or series of financing transactions representing aggregate gross
proceeds to the Company of approximately $5,000, or up to an aggregate 17,500
shares of common stock, without triggering the price-protection anti-dilution
provisions in the Series A3 Preferred Stock and B3 Preferred Stock and related
warrants. In exchange for the waiver of these price-protection anti-dilution
provisions, the Company repriced the warrants as described above and have agreed
to issue on a pro rata basis up to 4,600 warrants to the holders of Series A3
Preferred Stock and Series B3 Preferred Stock at such time and from time to time
as the Company closes subsequent financing transactions up to the $5,000
issuance cap or the 17,500 share issuance cap. As a result of the Series C
Preferred Stock financing, which represented approximately $1,600 of the
Company’s $5,000 in allowable equity issuances, the Company is obligated to
issue an aggregate of 1,462,801 warrants at an exercise price of $0.40 per share
to the existing preferred stockholders. The warrants were issued on December 31,
2002 and had a fair value of $373, which was recorded as a dividend to,
Preferred stockholders. As a result of the Series D preferred Stock financing
which represented approximately $3,500 against the allowable equity issuances,
the Company was obligated to issue an aggregate of 3,048,782 warrants at an
exercise price of $0.40 per share to the existing Series A3 and Series B3
preferred shareholders. The warrants were issued on October 8, 2003 and had a
fair value of $1,062, which was recorded as a deemed dividend to preferred
stockholders. Additionally, the Company has agreed to issue a warrant to
purchase common stock to the existing preferred stockholders on a pro rata basis
for each warrant to purchase common stock that the Company issues to a
third-party lender in connection with the closing of a qualified loan
transaction. The above referenced warrants will have the same exercise price as
the exercise price of the warrant, or equity security, that the Company issues
in connection with the Company’s subsequent financing or loan transaction or
$0.40, whichever is greater. These warrants are not classified as a liability
under EITF 00-19.
During
2004 and 2003 there were 4,686 shares of preferred stock converted into
7,037,451 shares of the Company's common stock and 6,250 shares of preferred
stock converted into 1,377,921 shares of the Company’s common stock,
respectively. There were 1,571 shares of the Series A3 Preferred Stock and
30,000 shares of Series B3 Preferred Stock, 1,141 shares of Series C Preferred
Stock, and 1,367 shares of Series D Preferred Stock outstanding at December 31,
2004.
Stock
Warrants:
The
Company values warrants based on the Black-Scholes pricing model. Warrants
granted in 2004, 2003, and 2002 were valued using the following
assumptions:
| |
Expected
Life in Years |
Expected
Volatility |
Risk
Free Interest Rate |
Expected
Dividend |
Fair
Value of Common Stock |
| |
|
|
|
|
|
|
Preferred
Series A3 and B3 Warrants |
4 |
107.5% |
4% |
None |
$1.89 |
|
2002-2003
Financing Warrants |
5 |
97% |
2% |
None |
$0.40 |
|
Preferred
Series C Warrants |
5 |
117% |
3% |
None |
$0.38 |
|
Preferred
Series D-1 Warrants |
5 |
117% |
3% |
None |
$0.07 |
|
Preferred
Series D-2 Warrants |
5 |
102% |
3% |
None |
$0.20 |
|
Private
Placement - October 2003 |
3 |
102% |
3% |
None |
$0.45 |
|
Private
Placement - January 2004 |
3 |
101% |
3% |
None |
$0.36 |
During
December 2000, the Company issued a commercial lender rights to purchase up to
172,751 shares of the Company's common stock at an exercise price of $4.34 in
connection with a new credit facility. The warrants were valued at $775 or $4.49
per share and were exercisable until December 28, 2004. As of the date of
expiration, no warrants were exercised.
Increase
in Capital Stock:
In July
2003, the stockholders approved a proposal to amend the Amended and Restated
Certificate of Incorporation to increase the aggregate number of shares of
Common Stock that the Company is authorized to issue from 60,000,000 to
85,000,000.
NOTE
13. EMPLOYEE
BENEFIT PLANS
The
Company sponsors one defined contribution plan for its U.S. employees - the
Level 8 Systems 401(k). Under the terms of the Plan, the Company provides a 50%
matching contribution up to 6% of an employee’s salary. Participants must be
eligible Level 8 plan participants and employed at December 31 of each calendar
year to be eligible for employer matching contributions. Matching contributions
to the Plan included in the Consolidated Statement of Operations totaled $54,
$14, and $7 for the years ended December 31, 2004, 2003, and 2002,
respectively.
The
Company also had employee benefit plans for each of its foreign subsidiaries, as
mandated by each country's laws and regulations. There was $0, $0, and $12 in
expense recognized under these plans for the years ended December 31, 2004,
2003, and 2002, respectively. The Company no longer maintains foreign
subsidiaries.
NOTE
14. SIGNIFICANT
CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 2004,
five customers accounted for 24.6%, 22.4%, 13.5%, 11.8% and 11.4% of operating
revenues. In 2003, three customers accounted for 42.1%, 19.5% and 12.7% of
operating revenues. In 2002,
two customers accounted for 38.7% and 26.7% of operating revenues.
NOTE
15. FOREIGN
CURRENCIES
As of
December 31, 2004, the Company had $0 of U.S. dollar equivalent cash and trade
receivable balances denominated in foreign currencies. As of December 31, 2003,
the Company had $0 and $8 of U.S. dollar equivalent cash and trade receivable
balances, respectively, denominated in foreign currencies.
The
Company’s net foreign currency transaction losses were $13, $31, and $171 for
the years ended 2004, 2003, and 2002, respectively.
The more
significant trade accounts receivable denominated in foreign currencies as a
percentage of total trade accounts receivable were as follows:
| |
2004 |
|
2003 |
|
Euro |
- |
|
41.2% |
|
Pound
Sterling |
- |
|
- |
NOTE
16. SEGMENT
INFORMATION AND GEOGRAPHIC INFORMATION
The
Company makes operating decisions and assesses performance of the Company’s
operations based on the following reportable segments: (1) Desktop Integration
segment, and (2) Messaging and Application Engineering segment. The Company
previously had three reportable segments but the Company has reported the
Systems Integration segment as discontinued operations.
The
principal product in the Desktop Integration segment is Cicero. Cicero is a
business integration software product that maximizes end-user productivity,
streamlines business operations and integrates disparate systems and
applications.
The
products that comprise the Messaging and Application Engineering segment are
Ensuredmail, Geneva Integration Broker, CTRC and Star/SQL. During 2002, the
Company sold its CTRC and Star/SQL products.
Segment
data includes a charge allocating all corporate headquarters costs to each of
its operating segments based on each segment's proportionate share of expenses.
During 2002, the Company reported the operations of its Systems Integration
segment as discontinued operations and has reallocated the corporate overhead
for the Systems Integration segment in 2002. The Company evaluates the
performance of its segments and allocates resources to them based on earnings
(loss) before interest and other income/(expense), taxes, in-process research
and development, and restructuring.
The table
below presents information about reported segments for the twelve months ended
December 31, 2004, 2003 and 2002:
| |
|
Desktop
Integration |
|
Messaging/Application
Engineering |
|
TOTAL |
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
707 |
|
$ |
68 |
|
$ |
775 |
|
|
Total
cost of revenue |
|
|
5,662 |
|
|
213 |
|
|
5,875 |
|
|
Gross
margin (loss) |
|
|
(4,955 |
) |
|
(145 |
) |
|
(5,100 |
) |
|
Total
operating expenses |
|
|
3,348 |
|
|
373 |
|
|
3,721 |
|
|
Segment
profitability (loss) |
|
$ |
(8,303 |
) |
$ |
(518 |
) |
$ |
(8,821 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
2003: |
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
466 |
|
$ |
64 |
|
$ |
530 |
|
|
Total
cost of revenue |
|
|
5,371 |
|
|
62 |
|
|
5,433 |
|
|
Gross
margin (loss) |
|
|
(4,905 |
) |
|
2 |
|
|
(4,903 |
) |
|
Total
operating expenses |
|
|
4,999 |
|
|
256 |
|
|
5,255 |
|
|
Segment
profitability (loss) |
|
$ |
(9,904 |
) |
$ |
(254 |
) |
$ |
(10,158 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
2002: |
|
|
|
|
|
|
|
|
|
|
|
Total
revenue |
|
$ |
2,148 |
|
$ |
953 |
|
$ |
3,101 |
|
|
Total
cost of revenue |
|
|
6,527 |
|
|
1,950 |
|
|
8,477 |
|
|
Gross
margin (loss) |
|
|
(4,379 |
) |
|
(997 |
) |
|
(5,376 |
) |
|
Total
operating expenses |
|
|
8,211 |
|
|
434 |
|
|
8,645 |
|
|
Segment
profitability (loss) |
|
$ |
(12,590 |
) |
$ |
(1,431 |
) |
$ |
(14,021 |
) |
A
reconciliation of segment operating expenses to total operating expense
follows:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Segment
operating expenses |
|
$ |
3,721 |
|
$ |
5,255 |
|
$ |
8,645 |
|
|
Write-off
of intangible assets |
|
|
587 |
|
|
-- |
|
|
-- |
|
|
(Gain)Loss
on disposal of assets |
|
|
(5 |
) |
|
415 |
|
|
461 |
|
|
Restructuring,
net |
|
|
-- |
|
|
(834 |
) |
|
1,300 |
|
|
Total
operating expenses |
|
$ |
4,303 |
|
$ |
4,836 |
|
$ |
10,406 |
|
A
reconciliation of total segment profitability to loss before income
taxes for the fiscal years ended December 31:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Total
segment profitability (loss) |
|
$ |
(8,821 |
) |
$ |
(10,158 |
) |
$ |
(14,021 |
) |
|
Impairment
of intangible assets |
|
|
(587 |
) |
|
-- |
|
|
-- |
|
|
Gain/(loss)
on disposal of assets |
|
|
5 |
|
|
(415 |
) |
|
(461 |
) |
|
Restructuring |
|
|
-- |
|
|
834 |
|
|
(1,300 |
) |
|
Interest
and other income/(expense), net |
|
|
(328 |
) |
|
(135 |
) |
|
2,485 |
|
|
Net
loss before provision for income taxes |
|
$ |
(9,731 |
) |
$ |
(9,874 |
) |
$ |
(13,297 |
) |
The
following table presents a summary of long-lived assets by segment as of
December 31:
| |
|
2004 |
|
2003 |
|
|
Desktop
Integration |
|
$ |
15 |
|
$ |
4,089 |
|
|
Messaging/Application
Engineering |
|
|
- |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
15 |
|
$ |
4,089 |
|
The
following table presents a summary of revenue by geographic region for the years
ended December 31:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Denmark |
|
$ |
7 |
|
$ |
32 |
|
$ |
20 |
|
|
France |
|
|
- |
|
|
- |
|
|
7 |
|
|
Germany |
|
|
- |
|
|
- |
|
|
35 |
|
|
Israel |
|
|
- |
|
|
- |
|
|
4 |
|
|
Italy |
|
|
4 |
|
|
18 |
|
|
32 |
|
|
Norway |
|
|
- |
|
|
- |
|
|
1 |
|
|
United
Kingdom |
|
|
1 |
|
|
- |
|
|
13 |
|
|
USA |
|
|
762 |
|
|
476 |
|
|
2,989 |
|
|
Other |
|
|
1
|
|
|
4 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
775 |
|
$ |
530 |
|
$ |
3,101 |
|
Presentation
of revenue by region is based on the country in which the customer is domiciled.
As of December 31, 2004, 2003 and 2002, all of the long-lived assets of the
Company are located in the United States. The Company reimburses the Company’s
foreign subsidiaries for their costs plus an appropriate mark-up for profit.
Intercompany profits and losses are eliminated in consolidation.
NOTE
17. RELATED
PARTY INFORMATION
Liraz
Systems Ltd. guarantees certain debt obligations of the Company. In September
2004, the Company and Liraz agreed to extend the guarantee and with the approval
of the lender, agreed to extend the maturity of the debt obligation until
November 3, 2005. The Company issued 3,942,000 shares of common stock to Liraz
in exchange for this debt extension. In 2003, the Company and Liraz also agreed
to extend the guarantee and maturity of the debt obligation until November 2004.
The Company agreed to issue Liraz 300,000 shares of stock for that extension.
(See Note 9.)
From time
to time during 2004 and 2003, the Company entered into short term notes payable
with Anthony Pizi, the Company’s Chairman and Chief Executive Officer. The Notes
bear interest at 1% per month and are unsecured. At December 31, 2004, the
Company was indebted to Mr. Pizi in the amount of $69.
In February
2004, the Company entered into a convertible loan agreement with Mark and
Carolyn Landis, who are related by marriage to Anthony Pizi, the Company’s
Chairman and Chief Executive Officer, in the amount of $125. Under the terms of
the agreement, the loan bears interest at 1% per month and is convertible into
446,429 shares of our common stock and warrants to purchase 446,429 shares of
our common stock exercisable at $0.28. The warrants expire in three years. The
Company also entered into convertible loan agreements with two other individual
investors, each in the face amount of $50. Under the terms of the agreement,
each loan is convertible into 135,135 shares of common stock and warrants to
purchase 135,135 shares of common stock at $0.37 per share. The warrants expire
in three years. In May 2004, one of the note holders elected to convert their
note into common stock of the Company.
On April
12, 2004, the Company entered into a convertible promissory note with Anthony
Pizi, the Company’s Chairman and Chief Executive Officer. The Note, in the face
amount of $100, bears interest at 1% per month and is convertible into common
stock of the Company at a conversion rate of $0.37 per share. In addition, Mr.
Pizi was granted 270,270 warrants to purchase the Company’s common stock at
$0.37 per share. These warrants expire three years from the date of
grant.
In June
2004, the Company entered into a convertible promissory note with Anthony Pizi,
the Company’s Chairman and Chief Executive Officer. The Note,
in the face amount of $112, bears interest at 1% per month and is convertible
into 560,000 shares of the Company’s common stock and warrants to purchase
560,000 shares of our common stock at $0.20 per share. Also in June 2004, Mr.
Pizi entered into a second convertible promissory note in the face amount of $15
which is convertible into 90,118 shares of the Company’s common stock and
warrants to purchase 90,118 shares of the Company’s common stock at $0.17 per
share. These warrants expire three years from the date of grant.
In June
2004, the Company entered into a convertible loan agreement with Mark and
Carolyn Landis, who are related by marriage to Anthony Pizi, the Company’s
Chairman and Chief Executive Officer, in the amount of $125. Under the terms of
the agreement, the loan bears interest at 1% per month and is convertible into
781,250 shares of our common stock and warrants to purchase 781,250 shares of
our common stock exercisable at $0.16. The warrants expire in three
years.
On
October 12, 2004, the Company entered into a convertible loan agreement with
Mark and Carolyn Landis, in the amount of $100. Under the terms of the
agreement, the loan bears interest at 1% per month and is convertible into
1,000,000 shares of our common stock and warrants to purchase 2,000,000 shares
of the Company’s common stock exercisable at $0.10. The warrants expire in three
years.
On
November 12, 2004, the Company entered into another convertible loan agreement
with Mark and Carolyn Landis, in the amount of $150. Under the terms of the
agreement, the loan bears interest at 1% per month and is convertible into
1,875,000 shares of our common stock and warrants to purchase 1,875,000 shares
of the Company’s common stock exercisable at $0.08. The warrants expire in three
years.
NOTE
18. RESTRUCTURING
CHARGES
As part
of the Company’s plan to focus on the emerging desktop integration marketplace
with its new Cicero product, the Company completed substantial restructurings in
2002. At December 31, 2002, the Company’s accrual for restructuring was $772,
which was primarily comprised of excess facility costs. As more fully discussed
in Note 21 Contingencies, subsequent to September 30, 2003, the Company settled
litigation relating to these excess facilities. Accordingly, the Company has
reversed the restructuring balance, as of September 30, 2003. Under the terms of
the settlement agreement, the Company agreed to assign the note receivable from
the sale of Geneva to EM Software Solutions, Inc., (see Note 3 Dispositions),
with recourse equal to the unpaid portion of the note receivable should the note
obligor, EM Software Solutions, Inc., default on future payments. The current
unpaid principal portion of the note receivable assigned is approximately $370
and matures December 2007. The Company assessed the probability of liability
under the recourse provisions using a probability weighted cash flow analysis
and has recognized a long-term liability in the amount of $131.
During
the second quarter of 2002, the Company announced an additional round of
restructurings to further reduce its operating costs and streamline its
operations. The Company recorded a restructuring charge in the amount of $1,300,
which encompassed the cost associated with the closure of the Company’s
Berkeley, California facility as well as a significant reduction in the
Company’s European personnel.
The
overall restructuring plan included the termination of 236 employees. The plan
included a reduction of 107 personnel in the European operations and 129
personnel in the US operations. Employee termination costs were comprised of
severance-related payments for all employees terminated in connection with the
operational restructuring. Termination benefits did not include any amounts for
employment-related services prior to termination.
NOTE
19. FUNDED
RESEARCH AND DEVELOPMENT
In May
2002, the Company and Amdocs Ltd. agreed to terminate the funded development
agreement and enter into a non-exclusive license to develop and sell its Geneva
J2EE technology. Under the terms of the agreement to terminate the funded
research and development program, Amdocs Ltd. assumed full responsibility for
the development team of professionals located in the Company’s Dulles, Virginia
facility. The Geneva products comprised the Systems Integration segment and were
subsequently identified as being held for sale. Accordingly, the Company
reclassified the Systems Integration segment to discontinued operations. The
business was eventually sold to EM Software Solutions, Inc., in December
2002.
NOTE
20. LEASE
COMMITMENTS
The
Company leases certain facilities and equipment under various operating leases.
Future minimum lease commitments on operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of December 31,
2004 were as follows:
| |
Lease
Commitments |
|
2005 |
$
99 |
|
2006 |
56 |
| |
$
155 |
Rent
expense for the years ended December 31, 2004, 2003 and 2002 was $197, $586, and
$2,980, respectively. Sublease income was $0, $241, and $2,487 for the fiscal
years ended December 31, 2004, 2003 and 2002, respectively. As of
December 31, 2004, the Company had no sublease arrangements.
NOTE
21. CONTINGENCIES
Various
lawsuits and claims have been brought against us in the normal course of our
business. In January 2003, an action was brought against us in the Circuit Court
of Loudon County, Virginia, for a breach of a real estate lease. The case was
settled in August 2003. Under the terms of the settlement agreement, we agreed
to assign a note receivable with recourse equal to the unpaid portion of the
note should the note obligor default on future payments. The unpaid balance of
the note was $545 and it matures in December 2007. We assessed the probability
of liability under the recourse provisions using a weighted probability cash
flow analysis and have recognized a long-term liability in the amount of $131.
In
October 2003, we were served with a summons and complaint in Superior Court of
North Carolina regarding unpaid invoices for services rendered by one of our
subcontractors. The amount in dispute was approximately $200 and is included in
accounts payable. Subsequent to March 31, 2004, we settled this litigation.
Under the terms of the settlement agreement, we agreed to pay a total of $189
plus interest over a 19-month period ending November 15, 2005.
In March
2004, we were served with a summons and complaint in Superior Court of North
Carolina regarding a security deposit for a sublease in Virginia. The amount in
dispute is approximately $247. In October 2004, we reached a settlement
agreement wherein we agreed to pay $160 over a 24-month period ending October
2006.
In August
2004, we were notified that we were in default under an existing lease agreement
for office facilities in Princeton, New Jersey. The amount of the default is
approximately $65. Under the terms of the lease agreement, we may be liable for
future rents should the space remain vacant. We have reached a settlement
agreement with the landlord which calls for a total payment of $200 over a
20-month period ending July 2006.
Under the
indemnification clause of the Company’s standard reseller agreements and
software license agreements, the Company agrees to defend the reseller/licensee
against third party claims asserting infringement by the Company’s products of
certain intellectual property rights, which may include patents, copyrights,
trademarks or trade secrets, and to pay any judgments entered on such claims
against the reseller/licensee.
NOTE
22. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
First
Quarter |
|
Second
Quarter |
|
Third
Quarter |
|
Fourth
Quarter |
|
| |
|
(in
thousands, except per share data) |
|
| 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
$ |
83 |
|
$ |
250 |
|
$ |
173 |
|
$ |
269 |
|
|
Gross
margin/(loss) |
|
|
(1,020 |
) |
|
(3,819 |
) |
|
(217 |
) |
|
(44 |
) |
|
Net
loss from continuing operations |
|
|
(2,627 |
) |
|
(4,787 |
) |
|
(1,204 |
) |
|
(1,113 |
) |
|
Net
loss discontinued operations |
|
|
(9 |
) |
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
Net
loss . |
|
|
(2,636 |
) |
|
(4,794 |
) |
|
(1,211 |
) |
|
(1,120 |
) |
|
Net
loss/share continued operations - basic and diluted |
|
$ |
(0.09 |
) |
$ |
(0.14 |
) |
$ |
(0.03 |
) |
$ |
(0.02 |
) |
|
Net
loss/share discontinued operations -- basic and diluted |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Net
loss/share -basic and diluted |
|
$ |
(0.09 |
) |
$ |
(0.14 |
) |
$ |
(0.03 |
) |
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
$ |
143 |
|
$ |
177 |
|
$ |
113 |
|
$ |
97 |
|
|
Gross
margin/(loss) |
|
|
(1,037 |
) |
|
(968 |
) |
|
(1,734 |
) |
|
(1,164 |
) |
|
Net
loss from continuing operations |
|
|
(2,974 |
) |
|
(2,424 |
) |
|
(2,468 |
) |
|
(2,008 |
) |
|
Net
loss discontinued operations |
|
|
(46 |
) |
|
(20 |
) |
|
(58 |
) |
|
(8 |
) |
|
Net
loss . |
|
|
(3,020 |
) |
|
(2,444 |
) |
|
(2,526 |
) |
|
(2,016 |
) |
|
Net
loss/share continued operations - basic and diluted |
|
$ |
(0.19 |
) |
$ |
(0.12 |
) |
$ |
(0.12 |
) |
$ |
(0.11 |
) |
|
Net
loss/share discontinued operations -- basic and diluted |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Net
loss/share -basic and diluted |
|
$ |
(0.19 |
) |
$ |
(0.12 |
) |
$ |
(0.12 |
) |
$ |
(0.11 |
) |
NOTE
23. SUBSEQUENT
EVENTS
As of
December 31, 2004, the Company has raised a total of $1,548 from the Note and
Warrant Offering. An additional $67 was in transit to the Company on December
31, 2004 resulting in a total raised of $1,615. If the merger proposal is not
approved, the Notes will immediately become due and payable. The Company filed
its preliminary Form S-4 with the Securities and Exchange Commission on February
15, 2005 and will schedule its Shareholder meeting to vote on the
recapitalization merger once SEC approval of the document is
obtained.
On March
7, 2005, the Company announced an extension to the Note and Warrant
Offering. Under the terms of the extension, participants in the initial offer
may opt to enter into additional promissory notes with the Company up to a
maximum of $900, in return for additional warrants to purchase common stock of
Cicero, Inc. The additional warrants are subject to shareholder approval of the
recapitalization merger. The Company will amend its Form S-4 filing with the
Securities and Exchange Commission to reflect this extension of the Note and
Warrant Offering.