Level 8 Systems Inc. (Nasdaq: LVEL), a developer of software called Cicero that lets computer users working in financial institutions and corporate call centers access data from their desktop PC that is stored in old mainframe computers, is set to announce its first quarter earnings this Wednesday, and the results are expected to be unfavorable.
The company’s annual report, which was compiled by independent auditors at the Raleigh offices of Deloitte & Touche and filed with the Securities and Exchange Commission in April, flat out states: “There is substantial doubt that the company can continue as a going concern.”
The SEC document further states: “If the Company is unable to increase cash flow, obtain financing or close a sale of non-strategic assets, 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.”
In a notice to shareholders on the company’s Web site, Level 8 officials claim the assertion that the company may be close to going belly up is inaccurate, even though it appears on its own report. That same qualification has appeared in past reports filed with the SEC.
John Broderick, chief financial officer of Level 8, says it is the Deloitte & Touche auditors who doubt the viability of the company, not Level 8 officials.
“You have to read further to see what management is doing to counteract that,” Broderick says. “We raised $3.6 million of new capital in January, we are doing a lot of what is called ‘proof of concepts’ on our product with a number of large corporations, which may or may not result in some significant revenue opportunities for us. But we believe by and large that they will.”
All hope aside, 2001 revenues crashed 73 percent to $22.7 million, and it cost the company $28.1 million just to generate that money. Net losses increased from $29.4 million in 2000 to $106.1 million last year, and the company sank $5 million into the hole with its working capital budget. Fourth quarter 2001 net revenues were just $1.6 million, the lowest of any quarter in company history.
Meanwhile, Level 8 executives continue to receive salaries in the six-digit range. According to SEC documents, Chief Executive Officer Anthony Pizi receives a base salary of $300,000 with a cash performance bonus of up to $150,000 based on undisclosed revenue goals set by the company’s board of directors.
President Paul Rample receives a base salary of $200,000 and the same cash bonus as Pizi, but Rample’s bonus is based upon “operating plan goals.” Broderick also earns $200,000 annually.
The salaries of those executives are nearly half of what the company generated in fourth quarter revenues last year.
How Level 8 reached this point
Level 8 acquired the exclusive rights to Cicero from Merrill Lynch — one of its affiliates, MLBC, Inc., is a majority stakeholder in the company with about 1.2 million shares, or about 6.5 percent of its outstanding shares — in 2000. In January, Level 8 went back and purchased ownership of Cicero, including its trademark, in a royalty agreement that calls for Level 8 to pay Merrill Lynch 3 percent of any future sales of Cicero up to $20 million.
In 2000, when Level 8 still was licensing Cicero, the company hired a consulting firm to look at its business model and direction. Broderick says the consultants looked at Cicero and two other Level 8 software packages and recommended that the company should pour all of its efforts into developing, marketing and selling Cicero.
“They said that’s the horse that’s going to carry us into the future and beyond,” Broderick says. “So that’s what we did.”
The changes were swift in 2001. Level 8 sold its application building software, known as AppBuilder, to Netherlands-based Blue Phoenix Solutions, a subsidiary of Israel-based Liraz Systems, which at the time was the majority stakeholder Level 8, for $20 million. Liraz since has unloaded more than 1 million shares of LEVL.
The company then slashed its employee roster from 320 to about 120, and changes its headquarters into a virtual office. There are about 20 employees left at Level 8’s Cary facility, including Broderick. CEO Pizi lives and works from Berkeley, CA, and Rample works from New Jersey.
Broderick says the decision to sell off AppBuilder is the reason Level 8’s losses appear so staggering. He also says that Cicero is attracting new customers, including the announcement that Nationwide Financial Services, a subsidiary of Nationwide Insurance, is licensing Cicero. Terms of that deal were not disclosed.
The long and winding road ahead
Level 8 now is facing what to outsiders appears as an insurmountable hill. Internet chat boards are filled with investor comments that doubt the company’s viability and many are urging individual shareholders to dump shares of the Level 8 stock.
Broderick admits Level 8 needs cash to fund itself through the end of the year, and acknowledges the public doubt that surrounds the company. But he continues to believe that Cicero, which faces no competition from similar products according to a report by Thomson Financial Data, will generate enough excitement among large financial institutions and corporate customer call centers — its target market — in the coming weeks to ramp up revenues.
And in what could be viewed as a sign of his belief in Level, CEO Pizi has purchased at least 36,370 shares for a total of $88,279 since May 14, 2001. Now, those shares are worth about $48,000.
“We’re also looking at the possibility of selling off some non-strategic assets or raising some additional capital with another stock offering,” Broderick says. “With all of those things working together we’re going to generate enough cash to continue, not just for the next 12 months but for the future and beyond.
Level 8 Web site: www.level8.com