Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period fromto
Commission File Number 0-26392
LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-2920559
(I.R.S Employer Identification Number)
214 Carnegie Center, Suite 303, Princeton, New Jersey
(Address of principal executive offices)
085401
(Zip Code)
(609) 987-9001
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15d of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES _ NO X
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
19,854,403 common shares, $.001 par value, were outstanding as of May 2, 2003.
LEVEL 8 SYSTEMS, INC.
INDEX
PART I. Financial Information Page
Number
Item 1. Financial Statements
Consolidated balance sheets as of March 31, 2003 (unaudited)
and December 31, 2002 3
Consolidated statements of operations for the three months
ended March 31, 2003 and 2002 (unaudited) 4
Consolidated statements of cash flows for the three months
ended March 31, 2003 and 2002 (unaudited) 5
Consolidated statements of comprehensive loss for the three
months ended March 31, 2003 and 2002 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II. Other Information 21
SIGNATURES 23
CERTIFICATIONS 24
PART I.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents............................... $ 662 $ 199
Cash held in escrow..................................... 1,775 --
Assets of operations to be abandoned.................... 196 453
Trade accounts receivable, net.......................... 62 1,291
Receivable from related party........................... 14 73
Notes receivable........................................ 178 867
Prepaid expenses and other current assets............... 743 731
------------ ------------
Total current assets.......................... 3,630 3,614
Property and equipment, net............................. 122 162
Software product technology, net........................ 7,221 7,996
Other assets............................................ 81 80
------------ ------------
Total assets.................................. $ 11,054 $ 11,852
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short term debt......................................... $ 2,497 $ 2,893
Accounts payable........................................ 2,905 3,537
Accrued expenses:
Salaries, wages, and related items.................... 147 107
Restructuring......................................... 633 772
Other................................................. 1,095 1,332
Liabilities of operations to be abandoned............... 548 916
Deferred revenue........................................ 226 311
------------ ------------
Total current liabilities..................... 8,051 9,868
Warrant liability....................................... 183 331
Senior convertible redeemable preferred stock........... 3,530 --
Stockholders' equity (deficit):
Preferred Stock...................................... -- --
Common Stock......................................... 19 19
Additional paid-in-capital........................... 203,566 202,916
Accumulated other comprehensive loss................. (70) (717)
Accumulated deficit.................................. (204,225) (200,565)
------------ ------------
Total stockholders' equity (deficit)............ (710) 1,653
------------ ------------
Total liabilities and stockholders'
equity (deficit)............................... $ 11,054 $ 11,852
============ ============
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)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
Revenue:
Software............................................... $ 36 $ 6
Maintenance............................................ 83 287
Services............................................... 24 153
------------ ------------
Total operating revenue.......................... 143 446
Cost of revenue:
Software............................................... 837 3,850
Maintenance............................................ 92 97
Services............................................... 251 48
------------ ------------
Total cost of revenue............................ 1,180 3,995
Gross margin............................................ (1,037) (3,549)
Operating expenses:
Sales and marketing.................................... 551 836
Research and product development....................... 253 690
General and administrative............................. 784 1,869
(Gain)/loss on disposal of assets...................... (12) 165
------------ ------------
Total operating expenses.......................... 1,576 3,560
------------ ------------
Loss from operations.................................... (2,613) (7,109)
Other income (expense):
Interest income........................................ 18 34
Interest expense....................................... (47) (104)
Change in fair value of warrant liability.............. 148 1,718
Gain/(loss) on closure of subsidiaries................. (499) --
Other expenses......................................... 19 (71)
------------ ------------
Loss before provision for income taxes.................. (2,974) (5,532)
Income tax provision................................... -- (123)
------------ ------------
Loss from continuing operations......................... (2,974) (5,409)
Loss from discontinued operations....................... (46) (676)
------------ ------------
Net loss................................................ $ (3,020) $ (6,085)
============ ============
Loss per share continuing operations-basic and diluted.. (0.19) (0.29)
Loss per share discontinued operations-basic and diluted (0.00) (0.04)
------------ ------------
Net loss per share applicable to
common shareholders-basic $ (0.19) $ (0.33)
============ ============
Weighted average common shares
outstanding -- basic and diluted...................... 19,233 18,613
The accompanying notes are an integral part of the consolidated financial
statements.
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss.............................................. $ (3,020) $ (6,085)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................... 815 2,502
Change in fair value of warrant liability........... (148) (1,718)
Stock compensation expense.......................... 10 48
Impairment of intangible assets and software
product technology................................. -- 1,564
Provision for doubtful accounts..................... 39 41
(Gain)/loss on disposal of assets................... -- (185)
Other............................................... -- 25
Changes in assets and liabilities, net of assets
acquired and liabilities assumed:
Trade accounts receivable and related party
receivables...................................... 1,249 1,039
Assets & liabilities - held for sale............. 649
Assets & liabilities - discontinued operations... 606 82
Due from Liraz................................... -- 2
Prepaid expenses and other assets................ (13) 214
Accounts payable and accrued expenses............ (968) (1,444)
Merger-related and restructuring................. -- (499)
Deferred revenue................................. (85) 22
------------ ------------
Net cash used in operating activities......... (1,515) (3,743)
Cash flows from investing activities:
Proceed from sale of asset............................ -- 1,000
Repayment of note receivable.......................... 764 1,449
Investment held for resale............................ 175
Cash held in escrow................................... (1,775) --
------------ ------------
Net cash (used in) investing activities....... (1,011) 2,624
Cash flows from financing activities:
Proceeds from issuance of common shares, net of
issuance costs....................................... 1,973
Proceeds from issuance of preferred shares............ 3,455 --
Repayments of term loans, credit facility
and notes payable.................................... (396) (350)
------------ ------------
Net cash provided by financing activities..... 3,059 1,623
Effect of exchange rate changes on cash................ (70) (57)
Net increase in cash and cash equivalents.............. 463 447
Cash and cash equivalents:
Beginning of period................................... 199 510
------------ ------------
End of period......................................... $662 $957
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
LEVEL 8 SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
Net loss............................................. $(3,020) $(6,085)
Other comprehensive income, net of tax:
Foreign currency translation adjustment............ (70) (57)
------------ ------------
Comprehensive loss................................... $(3,090) $(6,142)
The accompanying notes are an integral part of the consolidated financial
statements.
LEVEL 8 SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements are unaudited, and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles of the United States of America have been condensed or omitted
pursuant to those rules and regulations. Accordingly, these interim financial
statements should be read in conjunction with the audited financial statements
and notes thereto contained in the Level 8 Systems, Inc.'s (the "Company")
Annual Report on Form 10-K for the year ended December 31, 2002. The results
of operations for the interim periods shown in this report are not necessarily
indicative of results to be expected for other interim periods or for the full
fiscal year. In the opinion of management, the information contained herein
reflects all adjustments necessary for a fair statement of the interim results
of operations. All such adjustments are of a normal, recurring nature. Certain
reclassifications have been made to the prior year amounts to conform to the
current year presentation.
The year-end condensed balance sheet data was derived from audited financial
statements in accordance with the rules and regulations of the SEC, but does
not include all disclosures required for financial statements prepared in
accordance with generally accepted accounting principles of the United States
of America.
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.
LIQUIDITY
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 $18 million and 105 million in the past two years and has experienced
negative cash flows from operations for each of the past three years. For the
quarter ended March 31, 2003, the Company incurred a loss of $3 million and had
a working capital deficiency of approximately $4.4 million. The Company's
future revenues are largely dependent on acceptance of a newly developed and
marketed product - Cicero. These factors among others may indicate the Company
will be unable 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. To
address these issues, the Company is actively promoting and expanding its
product line and has entered into preliminary sales negotiations with several
significant new customers. Additionally, in March 2003 the Company successfully
completed a private financing round wherein it raised approximately $3.5
million of new funds from several investors, of which approximately $1.5
million was immediately available to the Company. Management expects to be able
to raise additional capital 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.
USE OF ACCOUNTING 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.
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 the SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" and the Company has reclassified
the results of operations for Systems Integration segment in 2002 to Loss on
discontinued operations in the Consolidated Statements of Operations. The sale
of the Systems Integration segment was completed in December 2002. See Note 3.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS 123 and has applied
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method required by
SFAS No. 123, the Company's net income and diluted net income per common share
would have been the pro forma amounts indicated below.
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
Net loss applicable to common stockholders $ (3,020) $ 6,085
Less: Total stock-based employee compensation expense
under fair value based method for all awards,
net of related tax effects............................ (202) (727)
------------ ------------
Pro forma loss applicable to common stockholders....... $ (3,222) $ (6,812)
============ ============
Earnings per share:
Basic and diluted as reported.......................... $ (0.17) $ (0.37)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
No. 146".) This statement requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The adoption of this statement did not have a material impact on our results of
operations and financial conditions.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement requires that companies having a year-end after December 15, 2002
follow the prescribed format and provide the additional disclosures in their
annual reports. The adoption of this statement did not have a material effect
on the Company's financial statements.
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 amount of $617. The short-term note
was repaid by February 13, 2003. The five-year note has been 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 $702 in first quarter 2002.
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 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 which was subsequently paid. The loss
on sale of the assets was $74. The Company used $150 from the proceeds to repay
borrowings from Mr. Rampel.
NOTE 4. SOFTWARE PRODUCT TECHNOLOGY
Effective July 2002, the Company determined that the estimated asset life of
the Cicero technology has been extended as a result of the amended license
agreement with 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 in the first quarter 2003 amortization
expense by $1.2 million and a reduction in the net loss applicable to common
stockholders - basic and diluted by $(0.06) per share.
NOTE 5. RESTRUCTURING CHARGES
As discussed in the Form 10K for the year ended December 31, 2002, the Company
has completed restructurings in 2001 and 2002.The following table sets forth a
summary by category of accrued expenses and cash paid for the three months
ended March 31, 2003:
ACCRUED AT ACCRUED AT
DECEMBER 31, MARCH 31,
2002 CASH PAID 2003
--------- --------- ---------
Employee termination......................... $ 182 $ (19) $ 163
Excess office facilities..................... 590 (120) 470
--------- --------- ---------
Total........................................ $ 772 $ (139) $ 633
========= ========= =========
The Company believes the accrued restructuring cost of $633 at March 31, 2003
represents its remaining cash obligations for the restructuring changes
included above.
NOTE 6. SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
On March 19, 2003, the Company completed a $3.5 million 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"). The
Company is also obligated to issue warrants to purchase an aggregate of
1,665,720 shares of common stock at an exercise price the greater of $0.20 per
share or market price at the time of issuance on or before September 1, 2003
("Series D-2 Warrants"). The Series D-2 Warrants will become exercisable on
November 1, 2003, but only if the Company fails to report $6 million 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 require that the Company place $1,000,000 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 current quarter, $225 of escrowed funds
were released. If the joint venture is not formed and operational on or by July
17, 2003, the lead investors will have the right, but not the obligation, to
require the Company to purchase $1,000,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium, less their pro-rata share of
expenses.
Another condition of the financing requires the Company to place an additional
$1,000,000 of the gross proceeds into escrow, pending the execution of a
definitive agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") providing for the sale of all right, title and interest to
the Cicero technology. If a transaction with Merrill Lynch for the sale of
Cicero is not consummated by May 18, 2003, the lead investors will have the
right, but not the obligation, to require the Company to purchase $1,000,000 in
liquidation value of the Series D Preferred Stock at a 5% per annum premium.
NOTE 7. STOCKHOLDERS EQUITY
In connection with the March 2003 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 $4.9 million
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 million 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 $2.9 million, 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 $2.9 million threshold
NOTE 8. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company's
effective tax rate differs from the statutory rate primarily due to the fact
that no income tax benefit was recorded for the net loss for the first quarter
of fiscal year 2003 or 2002. Because of the Company's recurring losses, the
deferred tax assets have been fully offset by a valuation allowance.
NOTE 9. LOSS PER SHARE
Basic loss per share is computed based upon the weighted average number of
common shares outstanding. Diluted earnings/(loss) per share is computed based
upon the weighted average number of common shares outstanding and any
potentially dilutive securities. Potentially dilutive securities outstanding
during the periods presented include stock options, warrants and preferred
stock.
The following table sets forth the reconciliation of net loss to loss available
to common stockholders:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------------ ------------
Net loss, as reported.................................. $ (3,020) $ (6,085)
Accretion of preferred stock........................... 640 --
------------ ------------
Loss applicable to common stockholders, as adjusted.... $ (3,660) $ (6,085)
============ ============
Basic and diluted loss per share:
Loss per share continuing operations................. $ (0.19) $ (0.29)
Loss per share discontinued operations............... -- (0.04)
------------ ------------
Net loss per share applicable to common shareholders. $ (0.19) $ (0.33)
============ ============
============ ============
weighted common shares outstanding - basic and diluted. 19,233 18,613
============ ============
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:
MARCH 31,
2003 2002
------------ ------------
Stock options, common share equivalent 4,982 3,897
Warrants, common share equivalent 9,958 3,045
Preferred stock, common share equivalent 18,695 3,782
------------ ------------
33,635 10,724
============ ============
Accretion of the preferred stock arises as a result of the beneficial
conversion feature realized in the sale of preferred stock.
NOTE 10. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
Management makes operating decisions and assesses performance of the Company's
operations based on the following reportable segments: Desktop Integration
segment and Messaging and Application Engineering segment.
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 is
Geneva Integration Broker. 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.
While segment profitability should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with accounting
principles generally accepted in the United States of America, it is included
herein to provide additional information with respect to our ability to meet
our future debt service, capital expenditure and working capital requirements.
Segment profitability is not necessarily a measure of our ability to fund our
cash needs. The non-GAAP measures presented may not be comparable to similarly
titled measures reported by other companies
The table below presents information about reported segments for the three
months ended March 31, 2003 and 2002:
MESSAGING AND
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
------------- -------------- -------------
2003:
Total revenue............. $ 119 $ 24 $ 143
Total cost of revenue..... 1,138 42 1,180
Gross margin.............. (1,019) (18) (1,037)
Total operating expenses.. 1,500 88 1,588
Segment profitability..... $ (2,519) $ (106) $ (2,625)
2002:
Total revenue............. $ 76 $ 370 $ 446
Total cost of revenue..... 2,191 1,804 3,995
Gross margin.............. (2,115) (1,434) (3,549)
Total operating expenses.. 3,091 304 3,395
Segment profitability..... $ (5,206) $ (1,738) $ (6,944)
A reconciliation of total segment operating expenses to total operating
expenses for the quarters ended March 31:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------------ ------------
Total segment operating expenses................... $ 1,588 $ 3,395
(Gain)/loss on disposal of assets.................. (12) 165
------------ ------------
Total operating expenses........................... $ 1,576 $ 3,560
============ ============
A reconciliation of total segment profitability to loss before provision for
income taxes for the quarters ended March 31:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------------ ------------
Total segment profitability....................... $ (2,625) $ (6,944)
Change in fair value of derivative................ 148 1,718
Gain/(loss) on disposal of assets................. 12 (165)
Gain/(loss) on closure of subsidiaries............ (499) --
Interest and other income/(expense), net.......... (10) (141)
------------ ------------
Total loss before income taxes.................... $ (2,974) $ (5,532)
============ ============
The following table presents a summary of assets by segment:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------------ ------------
Desktop Integration............................... $ 7,312 $ 12,013
Messaging and Application Engineering............. 31 842
------------ ------------
Total assets............................................ $ 7,343 $ 12,855
============ ============
NOTE 11. CONTINGENCIES
Litigation. Various lawsuits and claims have been brought against the Company
in the normal course of business. As of March 31, 2003, an action was pending
against the Company in the United States District Court for the District of
Colorado by Access International Financial Services, Inc. claiming the Company
had breached a contract. This case was settled in February 2003 for $200, which
was accrued at December 31, 2002 and all parties executed mutual releases. In
January 2003 an action was brought against the Company in the Circuit Court of
Loudon County Virginia for a breach of a real estate lease. The plaintiff seeks
damages of approximately $1,000 for rent in arrears, penalties and interest.
The Company will vigorously defend against this action. Should the plaintiff be
successful, this claim could have a material effect on the financial position
or results of operations of the Company.
NOTE 12. SUBSEQUENT EVENTS
In its January 2002 Private Placement of common stock and warrants, 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 exchange for a waiver of such provisions the
Company has 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 Cicero. 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 worldwide
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 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Forward Looking and Cautionary
Statements.''
The Company's results of operations include the operations of the Company and
its subsidiaries. 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
gain or loss from a discontinued business. Unless otherwise indicated, all
information is presented in thousands (`000s).
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 2001, the Company began to shift its primary focus from selling
multiple Enterprise Application Integration ("EAI") products to selling Cicero,
a desktop integration package, to the financial services industry with a
decreased focus on services. During the last two fiscal quarters of 2001, the
Company sold most of the products that comprised its Messaging and Application
Engineering segment.
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.
RESULTS OF OPERATIONS
The table below presents information about reported segments for the three
months ended March 31, 2003 and 2002:
MESSAGING AND
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
------------- -------------- -------------
2003:
Total revenue............... $ 119 $ 24 $ 143
Total cost of revenue....... 1,138 42 1,180
Gross margin................ (1,019) (18) (1,037)
Total operating expenses.... 1,500 88 1,588
Segment Profitability....... $ (2,519) $ (106) $ (2,625)
MESSAGING AND
DESKTOP APPLICATION
INTEGRATION ENGINEERING TOTAL
------------- -------------- -------------
2002:
Total revenue............... $ 76 $ 370 $ 446
Total cost of revenue....... 2,191 1,804 3,995
Gross margin................ (2,115) (1,434) (3,549)
Total operating expenses.... 3,091 304 3,395
Segment Profitability....... $ (5,206) $ (1,738) $ (6,944)
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 typically does not have any material
backlog of unfilled software orders and product revenue in any quarter is
substantially dependent upon orders received in that quarter. Because the
Company's operating expenses are based on anticipated revenue levels and are
relatively fixed over the short term, variations in the timing of the
recognition of revenue can cause significant variations in operating results
from quarter to quarter. Fluctuations in operating results may result in
volatility of the price of the Company's common stock.
Total revenues decreased 68% for the quarter ended March 31, 2003 from the same
period in 2002. The decrease in revenues is primarily the result of two
factors: a reduction in maintenance revenues resulting from the sale of the
Star SQL and CTRC products in June 2002 and a reduction in billable service
revenues in the current quarter. Service revenues for the quarter ended March
31, 2002 amounted to approximately $153 which was primarily the result of a
services agreement entered into with BluePhoenix Solutions for support services
post asset sale. Gross profit margins were (725)% for the quarter ended March
31, 2003 and (796)% for the quarter ended March 31, 2002.
SOFTWARE PRODUCTS. Software product revenue increased approximately 500% in
2003 from those results achieved in 2002, however, the absolute dollar change
was immaterial.
The gross margin on software products was (2,225)% for the quarter ended March
31, 2003 and reflects the amortization of acquired software not offset by
revenues. Conversely, in the similar quarter in 2002, gross margin on software
products was (64,067)%. Cost of software is composed primarily of amortization
of software product technology, amortization of capitalized software costs for
internally developed software and royalties to third parties, and to a lesser
extent, production and distribution costs. The decrease in cost of software was
primarily due to a change in the amortization of capitalized software from the
acquisition of the Cicero technology, which was purchased in the third quarter
of 2000.
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 status of in-process proof of
concepts or beta sites with select corporations. The Messaging and Application
Engineering segment revenue is expected to decrease significantly along with
related expenses as the majority of the products comprising this segment have
been sold.
MAINTENANCE. Maintenance revenue for the quarter ended March 31, 2003
decreased by approximately 71% or $204 as compared to the similar quarter for
2002. The decline in overall maintenance revenues is primarily due to the sale
of the Star SQL and CTRC products in June 2002.
The Desktop Integration segment accounted for approximately 73.5% of total
maintenance revenue for the quarter. The Messaging and Application Engineering
segment accounted for approximately 26.5% of total maintenance revenues. The
increase in the Desktop Integration maintenance as a percentage of the total is
primarily due to amortization of deferred maintenance revenues that resulted
from Q42002 license sales.
Cost of maintenance is comprised of personnel costs and related overhead and
the cost of third-party contracts for the maintenance and support of the
Company's software products. Gross margins on maintenance products decreased
significantly for the quarter ended March 31, 2003 to (10.8)%, down from 66.2%
from one year ago.
The Desktop Integration segment had a negative gross margin for the quarter
ended March 31, 2003 as future sales of the Cicero product are subject to
favorable proofs-of-concepts at several large installations. The Messaging and
Application Engineering segment had a gross margin of approximately 47.4% for
the quarter.
Maintenance revenues are expected to increase, primarily in the Desktop
Integration segment. The majority of the products comprising the Messaging and
Application Engineering segment have been sold and thus future revenues will be
significantly lower. The cost of maintenance should remain constant for the
Desktop Integration segment and the Messaging and Application Engineering
segment.
SERVICES. Services revenue for the quarter ended March 31, 2003 decreased
approximately 84%. The overall decline in service revenues reflects the
termination of a services agreement with BluePhoenix Solutions. As part of the
asset sale to BluePhoenix Solutions, the Company agreed to provide certain
services for a fee. That agreement terminated during 2002.
The Desktop Integration segment accounted for approximately 94.3% of the total
services revenue while the Messaging and Application Engineering segment
accounted for approximately 5.7% of service revenue.
Cost of services primarily includes personnel and travel costs related to the
delivery of services. Services gross margins were (955.2)%, for the quarter
ended March 31, 2003 as compared to 68% for the same period in 2002.
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 should be insignificant as the majority of
the relevant products have been sold.
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 32% or approximately $285 due to a reduction in the
Company's sales and marketing workforce specifically as it relates to the Star
SQL and CTRC products that were sold in June 2002.
Sales and marketing expenses are expected to remain fairly constant now that
the Company's restructuring efforts are complete. 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 decreased
by 63.3% or approximately $437 in the period ending March 31, 2003 as compared
to the same period in 2002. The decrease in costs in 2003 reflects the
restructuring efforts associated with the closure of the Berkeley California
facility and the associated development staff.
The Company intends to continue to make a significant investment in research
and development on its Cicero product 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 quarter
ended March 31, 2003 decreased by 58.1% or $1,085 over the same period in the
prior year. The primary reason for the decrease in costs is the elimination of
two executive positions along with support personnel and related severance
payments.
General and administrative expenses are expected to decrease slightly going
forward as the Company continues to create certain efficiencies and
consolidations.
RESTRUCTURING. As discussed in the Form 10K for the year ended December 31,
2002, the Company has completed restructurings in 2001 and 2002.
The following table sets forth a summary by category of accrued expenses and
cash paid for the three months ended March 31, 2003:
1117:
1118:
DECEMBER 31, MARCH 31,
2002 CASH PAID 2003
--------- --------- ---------
Employee termination......................... $ 182 $ (19) $ 163
Excess office facilities..................... 590 (120) 470
--------- --------- ---------
Total........................................ $ 772 $ (139) $ 633
========= ========= =========
1130:
The Company believes the accrued restructuring cost of $633 at March 31, 2003
represents its remaining cash obligations for the restructuring charges
included above.
CHANGE IN FAIR VALUE OF WARRANT LIABILITY. The Company has recorded a warrant
liability for derivatives in accordance with EITF 00-19 for its common stock
warrants with redemption features outside the control of the Company. The fair
value of the warrants as of March 31, 2003 has been determined using valuation
techniques consistent with the valuation performed as of December 31, 2002 and
recorded as a warrant liability. As a result of the valuation, the Company has
recorded a change in the fair value of the warrant liability of $148.
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 the first quarter of 2003
or 2002. Because of the Company's recurring losses, the deferred tax assets
have been fully offset by a valuation allowance. The income tax provision for
the first quarter of 2002 is primarily related to income taxes and benefit from
foreign operations and foreign withholding taxes.
SEGMENT PROFITABILITY. Segment profitability represents loss before income
taxes, interest and other income (expense), amortization of goodwill,
restructuring charges, gain (loss) on sale of assets, and impairment charges.
Segment profitability for the three months ended March 31, 2003 was ($2.6)
million as compared to ($6.9) million for the same period of the previous year.
The decrease in the loss before income taxes, interest and other income and
expense, amortization of goodwill, restructuring charges, gain or loss on sale
of assets and impairment charges is primarily attributable to the reduced
operations of the Company as a result of the significant restructuring of
operations.
Segment profitability is not a measure of performance under accounting
principles generally accepted in the United States of America, and should not
be considered as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in accordance
with accounting principles generally accepted in the United States of America,
or as a measure of profitability or liquidity. We have included information
concerning segment profitability as one measure of our cash flow and historical
ability to service debt and because we believe investors find this information
useful. Segment profitability as defined herein may not be comparable to
similarly titled measures reported by other companies.
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 $463 of cash for the three months ended March 31, 2003.
Operating activities utilized approximately $1.5 million of cash, which is
primarily comprised of the loss from operations of $3.0 million, offset by non-
cash charges for depreciation and amortization of approximately $800. In
addition, the Company had a reduction in accounts receivable of $1.2 million
and used approximately $1.0 million in fulfillment of its obligations to its
creditors through its accounts payable and other accrued liabilities. The
significant reduction in accounts receivable is the result of the reduction in
overall revenues resulting from the sale of substantially all of the Messaging
and Application Engineering products.
The Company utilized approximately $1.0 million in cash from investing
activities, which is comprised of approximately $1.8 million of cash placed in
escrow from the proceeds of the sale of Senior Convertible Redeemable Preferred
Shares offset by the collection of approximately $800 in Notes Receivable.
The Company generated approximately $3.1 million in cash during the quarter
from financing activities from the proceeds of the sale of senior convertible
redeemable shares of approximately $3.5 million offset by a reduction in the
Company's short-term debt in the amount of $400.
By comparison, in 2002, the Company generated approximately $446 million in
cash during the quarter.
Net cash used in operations during the first quarter of 2002 was approximately
$3.7 million, which is primarily comprised of the net loss for the period of
$6.1 million, offset by non-cash charges for depreciation and amortization of
approximately $2.5 million and a reduction in the fair value of the warrant
liability of $1.7 million and an impairment in the value of certain assets of
$1.6 million. In addition, the Company had a reduction in accounts receivable
of $1.0 million and used $1.5 million for fulfillment of vendor obligations.
Net cash generated from investing activities during 2002 was $2.6 million,
which consisted of approximately $1.0 million in final proceeds from the sales
of the Geneva AppBuilder assets, approximately $1.0 million from the collection
of Notes Receivable and approximately $145 from the sale of marketable
securities.
The Company generated approximately $1.6 million of cash during the quarter for
financing activities from the proceeds of an additional round of investment
from several new investors (approximately $3.5 million) offset by approximately
$1.6 million that was received prior to the end of the year from the same
investor group. In addition, the Company issued approximately $623 of its
common stock as part of the compensation to Merrill Lynch for extension of its
exclusive license on Cicero in perpetuity and also issued approximately $270 of
stock in settlement of a dispute. As part of its agreement with Liraz as the
guarantor on the outstanding bank loan, the Company used approximately 10% of
the proceeds ($350) from its financing to pay down the principal on the loan.
FINANCING ACTIVITIES
The Company funded its cash needs during the quarter ended March 31, 2003 with
cash on hand from December 31, 2002, with cash from operations and with the
cash realized from the sale of the Series D Preferred Stock offering which
closed in March 2003.
The Company has a $2,271 term loan bearing interest at LIBOR plus 1%
(approximately 2.97% at March 31, 2003), interest on which is payable
quarterly. There are no financial covenants and the term loan is guaranteed by
Liraz, the Company's principal shareholder. The loan matures on November 15,
2003.
On March 19, 2003, the Company completed a $3.5 million 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"). The
Company is also obligated to issue warrants to purchase an aggregate of
1,665,720 shares of common stock at an exercise price the greater of $0.20 per
share or market price at the time of issuance on or before September 1, 2003
("Series D-2 Warrants"). The Series D-2 Warrants will become exercisable on
November 1, 2003, but only if the Company fails to report $6 million 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 require that the Company place $1,000,000 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 current quarter, $225 of escrowed funds
were released. If the joint venture is not formed and operational on or by July
17, 2003, the lead investors will have the right, but not the obligation, to
require the Company to purchase $1,000,000 in liquidation value of the Series D
Preferred Stock at a 5% per annum premium, less their pro-rata share of
expenses.
Another condition of the financing requires the Company to place an additional
$1,000,000 of the gross proceeds into escrow, pending the execution of a
definitive agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") providing for the sale of all right, title and interest to
the Cicero technology. If a transaction with Merrill Lynch for the sale of
Cicero is not consummated by May 18, 2003, the lead investors will have the
right, but not the obligation, to require the Company to purchase $1,000,000 in
liquidation value of the Series D Preferred Stock at a 5% per annum premium.
The Company has incurred losses of $18 million and $105 million in the past two
years and has experienced negative cash flows from operations for each of the
past three years. For the quarter ended March 31, 2003, the Company incurred an
additional loss of $3.0 million and has a working capital deficiency of
approximately $4.4 million. The Company's future revenues are largely dependent
on acceptance of a newly developed and marketed product - Cicero. 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 has entered into preliminary sales
negotiations with significant customers that have begun the "proof of concept"
stage. Additionally, the Company successfully completed a private financing
round wherein it raised approximately $3.5 million of new funds from several
investors and is seeking additional equity capital in the near term. There can
be no assurance that management will be successful in executing these
strategies as anticipated or in a timely manner or that increased revenues will
reduce further operating losses. 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 and may be required to pursue other means
of financing that may not be on terms favorable to the Company or its
stockholders. The accompanying consolidated 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.
ITEM 3. 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 4. CONTROLS AND PROCEDURES
During the 90-day period prior to filing this report, management, including the
Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon, and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective, in all material respects, to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and,
therefore, no corrective actions were taken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims have been brought against the Company in the
normal course of business. As of December 31, 2002, an action was pending
against the Company in the United States District Court for the District
of Colorado by Access International Financial Services, Inc. claiming the
Company had breached a contract. This case was settled in February 2003
for $200, which was accrued at December 31, 2002 and all parties executed
mutual releases. In January 2003 an action was brought against the
Company in the Circuit Court of Loudon County Virginia for a breach of a
real estate lease. The plaintiff seeks damages of approximately $1,000
for rent in arrears, penalties and interest. The Company will vigorously
defend against this action. Should the plaintiff be successful, this
claim could have a material effect on the financial position or results
of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
On March 19, 2003, the Company completed a $3.5 million 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"). The Company is also obligated to issue
warrants to purchase an aggregate of 1,665,720 shares of common stock at
an exercise price the greater of $0.20 per share or market price at the
time of issuance on or before September 1, 2003 ("Series D-2 Warrants").
The Series D-2 Warrants will become exercisable on November 1, 2003, but
only if the Company fails to report $6 million in gross revenues for the
nine month period ended September 30, 2003. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO.
DESCRIPTION
3.1 Certificate of Designations, Preferences and Rights dated March 19,
2003 (incorporated by reference to exhibit 3.1 to Level 8's Form
8-K, filed March 31, 2003).
4.1 Registration Rights Agreement dated as of March 19, 2003 by and
among Level 8 Systems, Inc. and the Purchasers listed on Schedule
I thereto (incorporated by reference to exhibit 4.1 to Level 8's
Form 8-K, filed March 31, 2003).
4.2 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)
4.3 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)
10.1 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).
10.2 Form of Waiver Agreement by and among Level 8 Systems, Inc and
the holders listed on the signature pages dated March 19,2003.
(incorporated by reference to exhibit 10.2 to Level 8's Form 8-K,
filed March 31, 2003).
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
-Oxley Act of 2002 (filed herewith)
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
-Oxley Act of 2002 (filed herewith)
(b) Reports on Form 8-K
On March 31, 2003, Level 8 Systems filed a Form 8 K reporting the completion of
a $3.5 million offering of Series D Convertible Redeemable Preferred Shares and
warrants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Level 8 Systems, Inc.
/s/ Anthony Pizi
Date: May 15, 2003
...............................................
Anthony Pizi
Chief Executive Officer
/s/ John Broderick
Date: May 15, 2003
...............................................
John Broderick
Chief Financial Officer/Chief Operating Officer
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony C. Pizi, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Level 8
Systems, Inc. (the Registrant");
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
3. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a)designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b)evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
4. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ ANTHONY C. PIZI
--------------------------
Anthony C. Pizi
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John P. Broderick, Chief Operating and Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Level 8
Systems, Inc. (the Registrant");
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
3. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a)designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b)evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
4. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a)all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
(b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the
Registrant's internal controls; and
5. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ JOHN P. BRODERICK
-----------------------------------
John P. Broderick
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Level 8 Systems, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Anthony C. Pizi, Chief Executive Officer, certify pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
/s/ Anthony C. Pizi
- ------------------------------
Anthony C. Pizi
Chief Executive Officer
(Principal Executive Officer)
May 15, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Level 8 Systems, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John
P. Broderick, Chief Operating and Financial Officer, certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
/s/ John P. Broderick
- ----------------------------------------------
John P. Broderick
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)
May 15, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request