forms1a.htm
AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10,
2009
REGISTRATION
NO. 333-151893
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 3 TO
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
_____________________________
CICERO
INC.
(Exact
Name of Registrant as Specified in Its Charter)
DELAWARE
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11-2920559
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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7372
Services, Prepackaged Software
_____________________________
(Primary
Standard Industrial Classification Code)
8000
Regency Parkway
Suite
542
Cary,
NC 27518
(919)
380-5000
(Address,
Including Zip Code, and Telephone Number, Including
Area
Code, of Registrant’s Principal Executive Offices)
_____________________________
John
P. Broderick
Chief
Financial Officer
Cicero
Inc.
8000
Regency Parkway
Suite
542
Cary,
NC 27518
(919)
380-5000
_____________________________
(Name,
Address, Including Zip Code, and Telephone Number,
Including
Area Code, of Agent for Service)
Copies
to:
Lawrence
M. Bell, Esq.
Golenbock
Eiseman Assor Bell & Peskoe LLP
437
Madison Ave
New
York, NY 10022
(212)
907-7300
_____________________________
Approximate Date of Commencement of
Proposed Sale to the Public: From time to time or at one time
after the effective date of this registration statement as determined by the
selling stockholders.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. T
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. £
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. £
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One):
Large
accelerated filer £
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Accelerated
filer £
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Non-accelerated
filer £
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Smaller
reporting company T
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CALCULATION
OF REGISTRATION FEE
TITLE
OF EACH CLASS OF SECURITIES TO
BE REGISTERED
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AMOUNT
TO BE
REGISTERED
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PROPOSED
MAXIMUM
OFFERING
PRICE
PER SHARE(1)
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PROPOSED
MAXIMUM
AGGREGATE
OFFERING
PRICE
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AMOUNT
OF
REGISTRATION
FEE
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Common
Stock, par value $.001 per share
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7,492,348 |
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$ |
0.17 |
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$ |
1,273,699.16 |
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$ |
51.39 |
(3) |
Common
Stock, par value $.001 per share
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188,285 |
(2)
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$ |
0.18 |
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$ |
33,891.30 |
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(1)
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Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(c ) under the Securities Act of 1933 and based upon the
average high and low prices of the registrant’s common stock on the Over
the Counter Bulletin Board on June 5,
2008.
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(2)
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Represents
shares of common stock issuable upon exercise of warrants held by a
selling stockholder.
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The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED FEBRUARY 10, 2009
PROSPECTUS
7,680,633
Shares of Common Stock
CICERO
INC.
This
prospectus relates to the resale of up to 7,680,633 shares of our common stock,
$.001 par value, which are being offered for resale from time to time by the
stockholders named in the section entitled “Selling Stockholders” on page 10.
The number of shares the selling stockholders may offer and sell under this
prospectus includes shares of common stock:
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the
selling stockholders currently hold;
and
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issuable
to them upon the exercise of warrants previously
issued.
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We are
registering these shares to satisfy registration rights of the selling
stockholders.
We are
not offering or selling any shares under this prospectus and we will not receive
any of the proceeds from any resales by the selling stockholders. We may,
however, receive the proceeds from the exercise of the warrants issued to the
selling stockholders. The selling stockholders may sell the shares of common
stock from time to time in various types of transactions, including on the
Over-the-Counter Bulletin Board and in privately negotiated transactions. For
additional information on methods of sale, you should refer to the section
entitled “Plan of Distribution” on page 14.
On
February 3, 2009, the last sales price of the common stock quoted on the
Over-the-Counter Bulletin Board was $0.12 per share. Our common stock is quoted
on the Over-the-Counter Bulletin Board under the symbol
“CICN.”
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 3.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date
of this Prospectus is ____________
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F-1
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_____________________________
You
should read this prospectus and any accompanying prospectus supplement, as well
as any post-effective amendments to the registration statement of which this
prospectus is a part, together with the additional information described under
“Available Information” before you make any investment decision.
The terms
“Cicero,” “we,” “our” and “us” refer to Cicero Inc. and its consolidated
subsidiaries unless the context suggests otherwise. The term “you”
refers to a prospective purchaser of our common stock.
You
should not rely on any information other than contained in this prospectus or
any accompanying prospectus supplement. We have not authorized anyone
to provide you with information different from that contained in this prospectus
or any accompanying prospectus supplement. These securities are being
offered for sale and offers to buy these securities are only being solicited in
jurisdictions where offers and sales are permitted. The information
contained in this prospectus and any accompanying prospectus supplement is
accurate only as of the date on their respective covers, regardless of the time
of delivery of this prospectus or any accompanying prospectus supplement or any
sale of the securities.
This
summary highlights selected information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including “Risk Factors” and the financial statements, before making an
investment decision. References to “we,” “our,” “Cicero” and the “Company”
generally refer to Cicero Inc., a Delaware corporation.
We
provide business integration software, which enables organizations to integrate
new and existing information and processes at the desktop. Our business
integration software addresses the emerging need for companies’ information
systems to deliver enterprise-wide views of their business information
processes. In
addition to software products, the Company also provides technical support,
training and consulting services as part of its commitment to providing its
customers with industry-leading integration solutions. The Company’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 largest 5000 corporations worldwide (the
“Global 5000”).
Our focus
is on the growing desktop integration and business process automation market
with our Cicero® product. Cicero® is a business application integration platform
that enhances end-user productivity, streamlines business operations and
integrates systems and applications that would not otherwise work
together. Cicero® software offers a proven, innovative departure from
traditional, costly and labor-intensive enterprise application integration,
which occurs at the server level. Cicero® provides non-invasive
application integration at the desktop level. Desktop level
integration provides the user with a single environment with a consistent look
and feel for diverse applications across multiple operating environments,
reduces enterprise integration implementation cost and time, and supports a
Service-Oriented Architecture (SOA).
By using
Cicero® software, we believe companies can decrease their customer management
costs, improve their customer service 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, we believe
Cicero® software enables organizations to reduce the business risks inherent in
replacement or re-engineering of mission-critical applications and extend the
productive life and functional reach of their application
portfolio.
Cicero®
software is engineered to integrate diverse business applications and shape them
to more effectively serve the people who use them. Cicero® provides
an intuitive integration and development environment, which simplifies the
integration of complex multi-platform applications. Cicero® can streamline
end-user tasks by providing a single, seamless user interface for simple access
to multiple systems or be configured to display one or more composite
applications to enhance productivity. Our software enables automatic
information sharing among line-of-business applications and tools.
Cicero® software is ideal for
deployment in contact centers where its highly productive, task-oriented user
interface promotes user efficiency. By integrating diverse
applications across multiple operating systems, Cicero® software is also ideal for the
financial services, for which Cicero® was initially developed, insurance,
telecommunications, intelligence, security, law enforcement, governmental and
other industries requiring a cost-effective, proven application integration
solution.
Recent
Developments
In March
2008, the Company was notified that a group of investors including two members
of the Board of Directors acquired a short term promissory note due SDS Merchant
Fund in the principal amount of $250,000. The note is unsecured and bears
interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. The total principal and interest amounted to $361,827 and was converted
into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s
Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our
Board of Directors, acquired 472,374 shares.
In
October 2007, we agreed to restructure a promissory note payable to Bank
Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with
BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the
amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank
Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix
entered into a new promissory note (which we refer to as the Note) in the amount
of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31,
2011. In addition, BluePhoenix acquired 2,546,149 shares of our common stock in
exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. In March 2008, we
amended the terms of the Note with BluePhoenix Solutions. Under the terms of the
original Note, the Company was to make a principal reduction payment in the
amount of $350,000 on January 30, 2009. The Company and BluePhoenix agreed to
accelerate that principal payment to March and April 2008 in return for a
conversion of $50,000 into 195,848 shares of the Company’s common stock. In
March, the Company paid $200,000 plus accrued interest.
In
October 2007, we completed a private sale of shares of our common stock to
a group of investors, four of which are members of our Board of Directors. Under
the terms of that agreement, we sold 2,169,311 shares of our common stock for
$0.2457 per share for a total of $533,000. Participating in this consortium were
Mr. John L. (Launny) Steffens, the Company’s Chairman, and Messrs. Bruce Miller,
Don Peppers, and Bruce Percelay, members of the Board. Mr. Steffens
converted the principal amount of his short term notes with the Company of
$250,000 for 1,017,501 shares of common stock. Mr. Miller invested
$20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares
for a $25,000 investment and Mr. Bruce Percelay acquired 40,700 shares for a
$10,000 investment.
The
Offering
Common
stock offered by selling stockholders: 7,680,633 shares.
Use of
proceeds: The selling stockholders will receive all net proceeds from
sale of our common stock covered by this prospectus. We will not
receive any proceeds from this offering other than from the exercise of warrants
to purchase shares of common stock.
Risk
Factors: See “Risk Factors” beginning on page 3 and other information
included in this prospectus for a discussion of factors you should carefully
consider before deciding to invest in the shares.
________________________________
We were
incorporated as Level 8 Systems, Inc. in New York in 1988 and re-incorporated in
Delaware in 1999. In November 2006, our stockholders approved the change of our
name to Cicero Inc. Our principal executive offices are located at 8000 Regency
Parkway, Suite 542, Cary, North Carolina 27518. Our telephone number
is (919) 380-5000 and our web site is www.ciceroinc.com. Information contained
on our web site is not a part of this prospectus.
An
investment in our common stock involves a high degree of risk. You should
carefully consider the specific risk factors listed below together with the
other information included in this prospectus before you decide whether to
purchase shares of our common stock. Additional risks and uncertainties not
presently known to us, including those that are not yet identified or that we
currently think are immaterial, may also adversely affect our business, results
of operations and financial condition. The market price of our common stock
could decline due to any of these risks, and you could lose all or part of your
investment.
There is
substantial doubt as to whether we can continue as a going
concern.
Because
we incurred net operating losses of approximately $2.0 million for the year
ended December 31, 2007 and $609,000 for the nine months ended September 30,
2008, and losses from continuing operations of approximately $6.7 million for
the previous two fiscal years we experienced negative cash flows from
operations, had significant working capital deficiencies at September 30, 2008,
and because we are relying on acceptance of a newly developed and marketed
product, there is substantial doubt that we can continue to operate as a going
concern. While we have attracted some additional capital to continue to fund
operations, there can be no assurance that we can obtain additional financing
and if we do obtain financing that it will be on terms that are favorable to us
or our stockholders.
We have a history
of losses and expect that we will continue to experience losses at least through
second
quarter of
2009.
We
experienced operating losses and net losses for each of the years from 1998
through 2007. We incurred a net loss of $3.68 million in 2005, $3.0 million in
2006, $2.0 million for 2007 and $609,000 for the nine months ended September 30,
2008. As of September 30, 2008, we had a working capital deficit of
$6.0 million and an accumulated deficit of $236.9 million. Our ability to
generate positive cash flow is dependent upon sustaining certain cost reductions
and generating sufficient revenues.
Therefore,
due to these and other factors, we expect that we will continue to experience
net losses through the second quarter of 2009. We have not generated sufficient
revenues to pay for all of our operating costs or other expenses and have relied
on financing transactions over the last several fiscal years to pay our
operating costs and other expenses. We cannot predict with accuracy our future
results of operations and believe that any period-to-period comparisons of our
results of operations are not meaningful. Furthermore, there can be
no assurance that if we are unable to generate sufficient revenue from
operations that we will be able to continue to access the capital markets to
fund our operations, or that if we are able to do so that it will be on
satisfactory terms.
We
develop new and unproven technology and products.
To date,
our products have not been widely accepted in the market place and therefore may
be considered unproven. 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 market and 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.
We
depend on an unproven strategy for ongoing revenue.
Our
future revenues are entirely dependent on acceptance of Cicero® which had
limited success in commercial markets to date. We have experienced negative cash
flows from operations for the past three years. At September 30, 2008, we had a
working capital deficiency of approximately $6.0
million. Accordingly, there is substantial doubt that we can continue
as a going concern, and the independent auditor’s report accompanying our
financial statements raises doubt about our ability to continue as a going
concern. In order to address these issues and to obtain adequate
financing for our operations for the next twelve months, we are actively
promoting and expanding our product line and continue to negotiate with
significant customers who have demonstrated interest in the Cicero® technology.
We are experiencing difficulty increasing sales revenue largely because of the
inimitable nature of the product as well as customer concerns about our
financial viability. Cicero® software is a new “category defining” product in
that most Enterprise Application Integration or EAI projects are performed at
the server level and Cicero®’s integration occurs at the desktop level without
the need to open and modify the underlying code for those applications being
integrated. Many companies are not aware of this new technology or tend to look
toward more traditional and accepted approaches although emerging competition
has increased the public awareness of this new form of technology. We are
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, we are
seeking additional equity capital or other strategic transactions in the near
term to provide additional liquidity, however, there is no assurance that we
will be able to obtain any additional funding.
Our new
strategy is subject to the following specialized risks that may adversely affect
our long-term revenue and profitability prospects:
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Cicero®
was originally developed internally by Merrill Lynch and has no track
record of successful sales to organizations within the financial services
industry and may not gain market
acceptance;
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We
are approaching a different segment of the financial services industry,
the customer contact center, compared to our sales and marketing efforts
in the past and there can be no assurance that we can successfully sell
and market into this industry; and
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We
have had very limited success because the financial condition of the
Company has caused concern for enterprise customers that would be
dependent on Cicero® for their long-term
needs.
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Economic
conditions could adversely affect our revenue growth and cause us not to achieve
desired revenue.
Our
ability to generate revenue depends on the overall demand for desktop
integration software and services. Our business depends on overall economic
conditions, the economic and business conditions in our target markets and the
spending environment for information technology projects, and specifically for
desktop integration in those markets. A weakening of the economy in one or more
of our geographic regions, unanticipated major events and economic uncertainties
may make more challenging the spending environment for our software and
services, reduce capital spending on information technology projects by our
customers and prospective customers, result in longer sales cycles for our
software and services or cause customers or prospective customers to be more
cautious in undertaking larger transactions. Those situations may cause a
decrease in our revenue. A decrease in demand for our software and services
caused, in part, by an actual or anticipated weakening of the economy, may
result in a decrease in our revenue rates.
The
“penny stock” rule will limit brokers and dealers ability to trade in our common
stock, making the market for our common stock less liquid which could cause the
price of our stock to decline.
Our
common stock is quoted on the Over-the-Counter Bulletin Board.
Trading
of our common stock on the OTCBB may be subject to certain provisions of the
Securities Exchange Act of 1934, as amended, commonly referred to as the "penny
stock" rule. A penny stock is generally defined to be any equity security that
has a market price less than $5.00 per share, subject to certain exceptions. If
our stock is deemed to be a penny stock, trading in our stock will be subject to
additional sales practice requirements on broker-
dealers.
These may require a broker-dealer to:
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make
a special suitability determination for purchasers of our
shares;
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receive
the purchaser's written consent to the transaction prior to the purchase;
and
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deliver
to a prospective purchaser of our stock, prior to the first transaction, a
risk disclosure document relating to the penny stock
market.
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Consequently,
penny stock rules may restrict the ability of broker-dealers to trade and/or
maintain a market in our common stock. Also, prospective investors may not want
to get involved with the additional administrative requirements, which may have
a material adverse effect on the trading of our shares.
Because we cannot
accurately predict the amount and timing of individual sales, our quarterly
operating results may vary significantly, which could adversely impact our stock
price.
Our
quarterly operating results have varied significantly in the past, and we expect
they will continue to do so in the future. We have derived, and expect to
continue to derive in the near term, a significant portion of our revenue from
relatively large customer contracts or arrangements. The timing of revenue
recognition from those contracts and arrangements has caused and may continue to
cause fluctuations in our operating results, particularly on a quarterly basis.
Our quarterly revenues and operating results typically depend upon the volume
and timing of customer contracts received during a given quarter and the
percentage of each contract, which we are able to recognize as revenue during
the quarter. Each of these factors is difficult to forecast. As is common in the
software industry, the largest portion of software license revenues are
typically recognized in the last month of each fiscal quarter and the third and
fourth quarters of each fiscal year. We believe these patterns are partly
attributable to budgeting and purchasing cycles of our customers and our sales
commission policies, which compensate sales personnel for meeting or exceeding
periodic quotas.
Furthermore,
individual Cicero® sales are large and each sale can or will account for a large
percentage of our revenue and a single sale may have a significant impact on the
results of a quarter. The sales of both our historical products and Cicero® can
be classified as generally large in size to a small discrete number of
customers. In addition, the substantial commitment of executive time and
financial resources that have historically been required in connection with a
customer’s decision to purchase Cicero® and our historical products increases
the risk of quarter-to-quarter fluctuations. Cicero® sales require a significant
commitment of time and financial resources because it is an enterprise product.
Typically, the purchase of our products involves a significant technical
evaluation by the customer and the delays frequently associated with customers’
internal procedures to approve large capital expenditures and to test, implement
and accept new technologies that affect key operations. This evaluation process
frequently results in a lengthy sales process of several months. It also
subjects the sales cycle for our products to a number of significant risks,
including our customers’ budgetary constraints and internal acceptance reviews.
The length of our sales cycle may vary substantially from customer to
customer.
Our
product revenue may fluctuate from quarter to quarter due to the completion or
commencement of significant assignments, the number of working days in a quarter
and the utilization rate of services personnel. As a result of these factors, we
believe that a period-to-period comparison of our historical results of
operations is not necessarily meaningful and should not be relied upon as
indications of future performance. In particular, our revenues in the third and
fourth quarters of our fiscal years may not be indicative of the revenues for
the first and second quarters. Moreover, if our quarterly results do not meet
the expectations of our securities analysts and investors, the trading price of
our common stock would likely decline.
Loss of key
personnel associated with Cicero® development
could adversely affect our business.
Loss of
key executive personnel or the software engineers we have hired with specialized
knowledge of the Cicero® technology could have a significant impact on our
execution of our new strategy given that they have specialized knowledge
developed over a long period of time with respect to the Cicero®
technology. Furthermore, because of our restructuring and reduction
in the number of employees, we may find it difficult to recruit new employees in
the future.
Different
competitive approaches or internally developed solutions to the same business
problem could delay or prevent adoption of Cicero®.
Cicero®
is designed to address in a novel way the problems that large companies face
integrating the functionality of different software applications by integrating
these applications at the desktop. To effectively penetrate the market for
solutions to this disparate application problem, Cicero® will compete with
traditional Enterprise Application Integration, or EAI, solutions that attempt
to solve this business problem at the server or back-office level. Server level
EAI solutions are currently sold and marketed by companies such as NEON,
Mercator, Vitria, and BEA. There can be no assurance that our potential
customers will determine that Cicero®’s desktop integration methodology is
superior to traditional middleware EAI solutions provided by the competitors
described above in addressing this business problem. Moreover, the information
systems departments of our target customers, large financial institutions, are
large and may elect to attempt to internally develop an internal solution to
this business problem rather than to purchase the Cicero® product. Cicero®
itself was originally developed internally by Merrill Lynch to solve these
integration needs.
Accordingly,
we may not be able to provide products and services that compare favorably with
the products and services of our competitors or the internally developed
solutions of our customers. These competitive pressures could delay or prevent
adoption of Cicero® or require us to reduce the price of our products, either of
which could have a material adverse effect on our business, operating results
and financial condition.
Our
ability to compete may be subject to factors outside our control.
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.
The
markets for our products are characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions.
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.
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.
We
may face damage to the reputation of our software and/or a loss of revenue if
our software products fail to perform as intended or contain significant
defects.
Our
software products are complex, and significant defects may be found following
introduction of new software or enhancements to existing software or in product
implementations in varied information technology environments. Internal quality
assurance testing and customer testing may reveal product performance issues or
desirable feature enhancements that could lead us to reallocate product
development resources or postpone the release of new versions of our software.
The reallocation of resources or any postponement could cause delays in the
development and release of future enhancements to our currently available
software, require significant additional professional services work to address
operational issues, damage the reputation of our software in the marketplace and
result in potential loss of revenue. Although we attempt to resolve all errors
that we believe would be considered serious by our partners and customers, our
software is not error-free. Undetected errors or performance problems may be
discovered in the future, and known errors that we consider minor may be
considered serious by our partners and customers. This could result in lost
revenue, delays in customer deployment or legal claims and would be detrimental
to our reputation. If our software experiences performance problems or ceases to
demonstrate technology leadership, we may have to increase our product
development costs and divert our product development resources to address the
problems.
We may be unable
to enforce or defend our ownership and use of proprietary and licensed
technology.
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 the Company) 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 10,000 shares of our common stock. In exchange for
the amendment, we granted an additional 2,500 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 million. We have
completely re-engineered the Cicero® software to provide increased functionality
and much more powerful integration capabilities.
Our
success depends to a significant degree upon our proprietary and licensed
technology. We rely on a combination of patent, trademark, trade secret and
copyright law, contractual restrictions and passwords to protect our proprietary
technology. However, these measures provide only limited protection, and there
is no guarantee that our protection of our proprietary rights will be adequate.
Furthermore, the laws of some jurisdictions outside the United States do not
protect proprietary rights as fully as in the United States. In addition, our
competitors may independently develop similar technology; duplicate our products
or design around our patents or our other intellectual property rights. We may
not be able to detect or police the unauthorized use of our products or
technology, and litigation may be required in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of our proprietary rights. 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. Any litigation to enforce our intellectual property rights would be
expensive and time-consuming, would divert management resources and may not be
adequate to protect our business.
We do not
believe that any of our products infringe the proprietary rights of third
parties. However, 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. In addition, we may be required to indemnify our
distribution partners and end-users for similar claims made against them. Any
claims against us, with or without merit, would be time consuming, divert
management resources, and could require us to spend significant time and money
in litigation, pay damages, develop new intellectual property or acquire
licenses to intellectual property that is the subject of the infringement
claims. These licenses, if required, may not be available on acceptable terms.
As a result, intellectual property claims against us could have a material
adverse effect on our business, operating results and financial
condition.
Our
business may be adversely impacted if we do not provide professional services to
implement our solutions.
Customers
that license our software typically engage our professional services staff or
third-party consultants to assist with product implementation, training and
other professional consulting services. We believe that many of our software
sales depend, in part, on our ability to provide our customers with these
services and to attract and educate third-party consultants to provide similar
services. New professional services personnel and service providers require
training and education and take time and significant resources to reach full
productivity. Competition for qualified personnel and service providers is
intense within our industry. Our business may be harmed if we are unable to
provide professional services to our customers to effectively implement our
solutions of if we are unable to establish and maintain relationships with
third-party implementation providers.
Because
our software could interfere with the operations of customers, we may be subject
to potential product liability and warranty claims by these
customers.
Our
software enables customers’ software applications to
integrate and is often used for mission critical functions or
applications. Errors, defects or other performance problems in our software or
failure to provide technical support could result in financial or other damages
to our customers. Customers could seek damages for losses from us. In addition,
the failure of our software and solutions to perform to customers’ expectations
could give rise to warranty claims. The integration of our software
with our customer’s applications, increase the risk that a customer may bring a
lawsuit us. Even if our software is not at fault, a product liability claim
brought against us, even if not successful, could be time consuming and costly
to defend and could harm our reputation.
We
have not paid any cash dividends on our common stock and it is likely that no
cash dividends will be paid in the future.
We have
never declared or paid cash dividends on our common stock and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.
Provisions of our
Charter and Bylaws could deter takeover attempts.
Our
certificate of incorporation authorizes the issuance, without stockholder
approval, of preferred stock, with such designations, rights and preferences as
the board of directors may determine preferences as from time to time. Such
designations, rights and preferences established by the board may adversely
affect our stockholders. In the event of issuance, the preferred stock could be
used, under certain circumstances, as a means of discouraging, delaying or
preventing a change of control of the Company. Although we have no present
intention to issue any shares of preferred stock in addition to the currently
outstanding preferred stock, we may issue preferred stock in the
future.
Some
of the rights granted to the holders of our Series A-1 Preferred Stock could
prevent a potential acquirer from buying our company.
Holders
of our Series A-1 Preferred Stock have the right to block the company from
consummating a merger, sale of all or substantially all of its assets or
recapitalization. Accordingly, the holder of our Series A-1 Preferred
Stock could prevent the consummation of a transaction in which our stockholders
could receive a substantial premium over the current market price for their
shares.
We will
not receive any proceeds from the sale of shares by the selling stockholders in
this offering but may receive proceeds from the exercise of warrants held by
certain of the selling stockholders. We expect to use any proceeds we
receive for working capital and for other general corporate purposes, including
research and product development.
PRICE RANGE OF OUR COMMON STOCK
Our
common is currently quoted on the Over-The-Counter Bulletin Board. In January
2007 we formally changed our name to Cicero Inc. and now trade under the ticker
CICN. The chart below sets forth the high and low stock prices for
the quarters of the fiscal years ended December 31, 2008, 2007, and the first
quarter of 2009 (through February 3, 2009) as retroactively adjusted for the
100:1 reverse stock split. As of December 31, 2008, we had 220
registered stockholders of record.
|
|
2008
|
|
|
2007
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First
|
|
$ |
0.25 |
|
|
$ |
0.14 |
|
|
$ |
2.60 |
|
|
$ |
1.02 |
|
Second
|
|
$ |
0.19 |
|
|
$ |
0.14 |
|
|
$ |
1.13 |
|
|
$ |
0.16 |
|
Third
|
|
$ |
0.27 |
|
|
$ |
0.17 |
|
|
$ |
0.75 |
|
|
$ |
0.24 |
|
Fourth
|
|
$ |
0.20 |
|
|
$ |
0.09 |
|
|
$ |
0.29 |
|
|
$ |
0.15 |
|
|
|
2009
|
|
Quarter
|
|
High
|
|
|
Low
|
|
First
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
The
closing price of the common stock on February 3, 2009, was $0.12 per
share.
Our
common stock is designated as “penny stock” and thus may be illiquid. The
SEC has adopted rules (Rules 15g-2 through l5g-6 of the Exchange Act), which
regulate broker-dealer practices in connection with transactions in “penny
stocks.” Penny stocks generally are any non-NASDAQ or non-exchange equity
securities with a price of less than $5.00, subject to certain exceptions.
The penny stock rules require a broker-dealer to deliver a
standardized risk disclosure document to provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, monthly account statements showing the
market value of each penny stock held in the customers account, to make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a stock that is subject to
the penny stock rules. Since our common stock is subject to the penny
stock rules, persons holding or receiving such stock may find it more difficult
to sell their shares. The market liquidity for the stock could be severely
and adversely affected by limiting the ability of broker-dealers to sell the
shares and the ability of stockholders to sell their stock in any secondary
market.
The
trading volume in our common stock has been and is extremely limited. The
limited nature of the trading market can create the potential for significant
changes in the trading price for the common stock as a result of relatively
minor changes in the supply and demand for our common stock and perhaps without
regard to our business activities.
The
market price of our common stock may be subject to significant fluctuations in
response to numerous factors, including: variations in our annual or quarterly
financial results or those of our competitors; conditions in the economy in
general; announcements of key developments by competitors; loss of key
personnel; unfavorable publicity affecting our industry or us; adverse legal
events affecting us; and sales of our common stock by existing
stockholders.
We have
never declared or paid any cash dividends on our common
stock. The payment of cash dividends on our common stock in the
future will depend on our earnings, capital requirements, and operating and
financial condition and on such other factors as our board of directors may
consider appropriate. We currently expect to use all available funds
to finance the future development and expansion of our business and for working
capital and do not anticipate paying dividends on our common stock in the
foreseeable future
Our
shares of common stock to which this prospectus relates are being registered for
resale by the selling stockholders. The following shows the name and number of
shares of our common stock owned by the selling stockholders who may sell shares
covered by this prospectus.
In March
2008, the Company was notified that a group of investors including two members
of the Board of Directors acquired a short term promissory note due SDS Merchant
Fund in the principal amount of $250,000. The note is unsecured and bears
interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. The total principal and interest amounted to $363,167 and was converted
into 1,425,137 shares of common stock. We refer to this issuance as the SDS Loan
refinancing. Mr. John Steffens, the Company’s Chairman, acquired
475,141 shares and Mr. Bruce Miller, also a member of our Board of Directors,
acquired 474,998 shares.
In
October 2007, we agreed to restructure a promissory note (which we refer to as
the Note) payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. In
connection with the restructuring, we entered into a long term loan with Mr.
John Steffens, the Company’s Chairman, for $300,000 at an interest rate of 3.0 %
and issued 188,285 warrants at $0.18 per share. Under a new agreement
with BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the
amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank
Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix
entered into a new Note in the amount of $1,021,000, bearing interest at LIBOR
plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired
2,546,149 shares of our common stock in exchange for $650,000 paid to Bank
Hapoalim to retire that indebtedness. In
March 2008, we amended the terms of the Note with BluePhoenix Solutions. Under
the terms of the original Note, the Company was to make a principal reduction
payment in the amount of $350,000 on January 30, 2009. The Company and
BluePhoenix agreed to accelerate that principal payment to March and July 2008
in return for a conversion of $50,000 into 195,848 shares of the Company’s
common stock. In March, the Company paid $200,000 plus accrued interest and in
July the Company paid $100,000 plus accrued interest. Simultaneously
in July 2008, we converted $100,000 of promissory notes payable to Mr. John
Steffens, the Company’s Chairman, into 391,696 shares of the Company’s common
stock. Per the securities agreement between the Company and
BluePhoenix, an additional 60,000 shares were issued due to delays in filing a
registration statement covering the shares held by BluePhoenix. We
refer to these issuances as the BluePhoenix Loan conversion.
In
October 2007, we completed a private sale of shares of our common stock to a
group of investors, four of which are members of our Board of Directors. Under
the terms of that agreement, we sold 2,169,311 shares of our common stock for
$0.2457 per share for a total of $533,000. We refer to this private placement as
our August 2007 offering. Participating in this consortium were Mr.
John L. (Launny) Steffens, the Company’s Chairman, and Messrs. Bruce Miller, Don
Peppers, and Bruce Percelay, members of the Board. Mr. Steffens
converted the principal amount of his short term notes with the Company of
$250,000 for 1,017,501 shares of common stock. Mr. Miller invested
$20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares
for a $25,000 investment and Mr. Bruce Percelay acquired 40,700 shares for a
$10,000 investment.
The
selling stockholders may resell all, a portion or none of such shares of common
stock from time to time. The table below sets forth, as of the date of this
prospectus, with respect to each selling stockholder, based upon information
made available to us by each selling stockholder, the number of shares of common
stock beneficially owned, the number of shares of common stock registered by
this prospectus and the number and percent of outstanding common stock that will
be owned after the sale of the registered shares of common stock assuming the
sale of all of the registered shares of common stock under this
prospectus.
Name
|
|
Number
of Shares of Common Stock Beneficially Owned Prior to Offering
(1)
|
|
|
Number
of Shares of Common Stock Offered
|
|
|
Shares
Owned After Offering
|
|
|
Percent
of Common Stock Beneficially Owned After Offering
|
|
Steffens,
John L. +
|
|
|
5,382,668 |
(2) |
|
|
2,072,623 |
(3) |
|
|
3,310,045 |
|
|
|
7.2 |
% |
Ahab
International, Ltd.(a)
|
|
|
4,813,698 |
(4) |
|
|
323,661 |
(5) |
|
|
4,490,037 |
|
|
|
9.8 |
% |
Ahab
Partners, LP (a)
|
|
|
4,101,688 |
(6) |
|
|
354,837 |
(7) |
|
|
3,746,851 |
|
|
|
8.2 |
% |
BluePhoenix
Solutions, Ltd. (b)
|
|
|
2,801,997 |
|
|
|
2,801,997 |
(8) |
|
|
- |
|
|
|
- |
|
Miller,
Bruce +
|
|
|
1,982,244 |
(9) |
|
|
556,398 |
(10) |
|
|
1,425,846 |
|
|
|
3.1 |
% |
Paneyko,
Steve
|
|
|
1,638,559 |
|
|
|
81,400 |
(11) |
|
|
1,557,159 |
|
|
|
3.4 |
% |
Percelay,
Bruce +
|
|
|
1,073,486 |
|
|
|
40,700 |
(12) |
|
|
1,032,786 |
|
|
|
2.3 |
% |
Lucas,
Scott
|
|
|
979,734 |
|
|
|
40,700 |
(13) |
|
|
939,034 |
|
|
|
2.1 |
% |
Casey,
Kenneth
|
|
|
819,164 |
|
|
|
40,700 |
(14) |
|
|
778,464 |
|
|
|
1.7 |
% |
Lustgarten,
Scott
|
|
|
722,893 |
(15) |
|
|
40,700 |
(16) |
|
|
682,193 |
|
|
|
1.5 |
% |
Haines
Family Assoc LP (c)
|
|
|
716,315 |
(17) |
|
|
623,214 |
(18) |
|
|
93,101 |
|
|
|
- |
|
Keates,
Richard M.D.
|
|
|
672,925 |
(19) |
|
|
122,100 |
(20) |
|
|
550,825 |
|
|
|
1.2 |
% |
Stevens,
Jim
|
|
|
497,399 |
(21) |
|
|
40,700 |
(22) |
|
|
456,699 |
|
|
|
- |
|
Weitzman,
Hervey
|
|
|
270,283 |
(23) |
|
|
20,350 |
(24) |
|
|
249,933 |
|
|
|
- |
|
Wittenbach,
Roger
|
|
|
180,593 |
|
|
|
20,350 |
(25) |
|
|
160,243 |
|
|
|
- |
|
Howard,
Joan
|
|
|
165,130 |
|
|
|
28,490 |
(26) |
|
|
136,640 |
|
|
|
- |
|
Corwin,
Leonard
|
|
|
130,450 |
(27) |
|
|
10,175 |
(28) |
|
|
120,275 |
|
|
|
- |
|
Robinson,
Jonathon
|
|
|
125,732 |
|
|
|
20,350 |
(29) |
|
|
105,382 |
|
|
|
- |
|
Grodko,
Steven
|
|
|
124,385 |
(30) |
|
|
124,135 |
(31) |
|
|
250 |
|
|
|
- |
|
Blanck,
Richard
|
|
|
107,461 |
|
|
|
12,210 |
(32) |
|
|
95,251 |
|
|
|
- |
|
Peppers,
Don +
|
|
|
101,750 |
|
|
|
101,750 |
(33) |
|
|
- |
|
|
|
- |
|
Whalen,
Chris
|
|
|
80,993 |
|
|
|
80,993 |
(34) |
|
|
- |
|
|
|
- |
|
Grodko,
Sandra
|
|
|
43,700 |
(35) |
|
|
40,700 |
(36) |
|
|
3,000 |
|
|
|
- |
|
Sweet,
Christine
|
|
|
40,700 |
|
|
|
40,700 |
(37) |
|
|
- |
|
|
|
- |
|
Sutro,
Peter
|
|
|
40,192 |
|
|
|
12,210 |
(38) |
|
|
27,982 |
|
|
|
- |
|
Miller,
Douglas & Anita E.
|
|
|
28,490 |
|
|
|
28,490 |
(39) |
|
|
- |
|
|
|
- |
|
Total
|
|
|
27,642,629 |
|
|
|
7,680,633 |
|
|
|
19,961,996 |
|
|
|
|
|
+
|
Member
of the Board of Directors of the
Company
|
_______________________________
(a)
|
Jonathan
Gallen is an investment adviser for, and exercises sole voting and
investment authority with respect to the securities held by, each of (i)
Ahab Partners, L.P., (ii) Ahab
International, Ltd.
|
(b)
|
Yael
Peretz, representative of BluePhoenix Solutions, Ltd., exercises sole
voting and dispositive power with respect to the securities held by
BluePhoenix Solutions Ltd.
|
(c)
|
John
Haines, representative of Haines Family Associates, LP,
exercises sole voting and dispositive power with respect to the
securities held by Haines Family Associates,
LP.
|
(1)
|
The
number of shares of common stock owned by each selling stockholder
includes the aggregate number of shares of common stock which may be
obtained by each stockholder upon conversion of all of the Series A1
Preferred Stock owned by the stockholder. It also includes the aggregate
number of shares of common stock that may be obtained upon exercise of
warrants to purchase common stock owned by such stockholder. The
informtation in this table assumes that all shares offered are
sold.
|
(2)
|
Includes
14,832 shares of common stock issuable upon conversion of Series A-1
Preferred Stock, and 207,529 shares of common stock issuable upon exercise
of warrants. The exercise price of 4,912 warrants at $40 per
share, the exercise price of 14,332 warrants at $10 per share, and the
exercise price of 188,285 warrants at $0.18 per share. Also
includes 5,160,307 shares of common stock. Mr. Steffens is a
member of the Company’s Board of
Directors.
|
(3)
|
Includes
1,017,501 shares of common stock issued in connection with the August 2007
offering; 475,141 shares of common stock issued in connection with the SDS
Loan refinancing and 391,696 shares of common stock and 188,285 shares of
common stock issuable upon exercise of warrants at $0.18 per
share issued in connection with the BluePhoenix Loan
conversion.
|
(4)
|
Owns
4,801,186 shares of common stock and 12,512 shares issuable upon the
exercise of warrants. The exercise prices of the warrants are
as follows: 3,194 at $40.00 per share, and 9,318 at $10.00 per
share.
|
(5)
|
Includes
109,890 shares of common stock issued in connection with the August 2007
offering and 213,771 shares of common stock in connection with the SDS
Loan refinancing.
|
(6)
|
Owns
4,094,950 shares of common stock and 6,738 shares issuable upon the
exercise of warrants. The exercise prices of the warrants are
as follows: 1,720 at $40.00 per share, and 5,018 at $10.00 per
share.
|
(7)
|
Includes
93,610 shares of common stock issued in connection with the August 2007
offering and 261,227 shares of common stock in connection with the SDS
Loan refinancing.
|
(8)
|
Includes
2,801,997 shares of common stock issued in connection with the BluePhoenix
Loan conversion.
|
(9)
|
Owns
19,166 shares of common stock issuable upon exercise of
warrants. The exercise price of 2,457 warrants at $40 per
share, and the exercise price of 16,709 warrants at $10 per
share. Also includes 1,963,078 shares of common
stock. Mr. Miller is a member of the Company’s Board of
Directors.
|
(10)
|
Includes
81,400 shares of common stock issued in connection with the August 2007
offering and 474,998 shares of common stock in connection with the SDS
Loan refinancing.
|
(11)
|
Includes
81,400 shares of common stock issued in connection with the August 2007
offering.
|
(12)
|
Includes
40,700 shares of common stock issued in connection with the August
2007 offering.
|
(13)
|
Includes
40,700 shares of common stock issued in connection with the August 2007
offering.
|
(14)
|
Includes
40,700 shares of common stock issued in connection with the August 2007
offering.
|
(15)
|
Owns
1,000 shares of common stock issuable upon conversion of Series A-1
Preferred Stock. Also owns 329 shares of common stock issuable
upon exercise of warrants exercisable at $10 per share. Also
includes 721,564 shares of common
stock.
|
(16)
|
Includes
40,700 shares of common stock issued in connection with the August 2007
offering.
|
(17)
|
Owns
2,000 shares of common stock issuable upon conversion of Series A-1
preferred stock. Also owns 2,858 shares of common stock
issuable upon exercise of warrants exercisable at $10 per
share. Also includes 711,457 shares of common
stock.
|
(18)
|
In
April 2008, the Company issued 623,214 shares of the Company’s common
stock to Haines Family Trust to satisfy the obligation of $159,106 for
rent payable.
|
(19)
|
Owns
18,778 shares of common stock issuable upon exercise of
warrants. The exercise price of 1,982 warrants is $20 per
share, and the exercise price of 16,796 warrants is $10 per
share. Also includes 654,147 shares of common
stock.
|
(20)
|
Includes
122,100 shares of common stock issued in connection with the August
2007 offering.
|
(21)
|
Owns
6,031 shares of common stock issuable upon exercise of warrants
exercisable at $10 per share. Also owns 491,368 shares of
common stock.
|
(22)
|
Includes
40,700 shares of common stock issued in connection with the August
2007 offering.
|
(23)
|
Owns
278 shares of common stock issuable upon exercise of warrants exercisable
at $10 per share. Also includes 270,005 shares of common
stock.
|
(24)
|
Includes
20,350 shares of common stock issued in connection with the August
2007 offering.
|
(25)
|
Includes
20,350 shares of common stock issued in connection with the August 2007
offering.
|
(26)
|
Includes
28,490 shares of common stock issued in connection with the August
2007 offering.
|
(27)
|
Owns
222 shares of common stock issuable upon exercise of warrants exercisable
at $10 per share. Also includes 130,228 shares of common
stock.
|
(28)
|
Includes
10,175 shares of common stock issued in connection with the August 2007
offering.
|
(29)
|
Includes
20,350 shares of common stock issued in connection with the August 2007
offering.
|
(30)
|
Owns
250 shares of common stock issuable upon exercise of warrants exercisable
at $10 per share. Also includes 124,135 shares of common
stock.
|
(31)
|
Includes
124,135 shares of common stock issued in connection with the August
2007 offering.
|
(32)
|
Includes
12,210 shares of common stock issued in connection with the August
2007 offering.
|
(33)
|
Includes
101,750 shares of common stock issued in connection with the August 2007
offering.
|
(34)
|
In
June 2008, the Company entered into an agreement to issue 80,993 shares of
the Company’s common stock to Chris Whelan to satisfy the obligation of
$20,678 for consulting fees payable. These shares were issued
in July 2008.
|
(35)
|
Owns
3,000 shares of common stock issuable upon exercise of warrants
exercisable at $10 per share. Also includes 40,700 shares of
common stock.
|
(36)
|
Includes
40,700 shares of common stock issued in connection with the August
2007 offering.
|
(37)
|
Includes
40,700 shares of common stock issued in connection with the August
2007 offering.
|
(38)
|
Includes
12,210 shares of common stock issued in connection with the August
2007 offering.
|
(39)
|
Includes
28,490 shares of common stock issued in connection with the August
2007 offering.
|
We are
registering the shares of common stock on behalf of the selling stockholders.
All costs, expenses and fees in connection with the registration of the shares
offered by this prospectus will be borne by us, other than brokerage commissions
and similar selling expenses, if any, attributable to the sale of shares which
will be borne by the selling stockholders. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act. Sales of shares may
be effected by selling stockholders in one or more types of transactions (which
may include block transactions), in the over-the-counter market, any exchange or
quotation system, in negotiated transactions, through put or call options
transactions relating to the shares, through short sales of shares, or a
combination of any such methods of sale, and any other method permitted pursuant
to applicable law, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or
dealers.
The
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of the
shares or of securities convertible into or exchangeable for the shares in the
course of hedging positions they assume with selling stockholders. The selling
stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as amended or supplemented to reflect such
transaction). The selling stockholders may pledge and/or loan these shares to
broker-dealers who may borrow the shares against their hedging short position
and in turn sell these shares under the prospectus to cover such short
position.
The
selling stockholders may make these transactions by selling shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer is not expected to be in excess of customary
commissions).
The
selling stockholders and any broker-dealers that act in connection with the sale
of shares may be deemed to be “underwriters” within the meaning of Section 2(11)
of the Securities Act, and any commissions received by such broker-dealers or
any profit on the resale of the shares sold by them while acting as principals
might be deemed to be underwriting discounts or commissions under the Securities
Act. The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
Because
selling stockholders may be deemed “underwriters” within the meaning of Section
2(11) of the Securities Act, the selling stockholders may be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
selling stockholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the
market.
Selling
stockholders also may resell all or a portion of the shares in open market
transactions in reliance upon Rule 144 under the Securities Act provided they
meet the criteria and conform to the requirements of Rule 144.
Upon our
being notified by a selling stockholder that any material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, a supplement to this prospectus will be filed, if
required, pursuant to Rule 424(b) under the Securities Act,
disclosing:
|
·
|
the
name of each such selling stockholder and of the participating
broker-dealer(s);
|
|
·
|
the
number of shares involved;
|
|
·
|
the
initial price at which such shares were
sold;
|
|
·
|
the
commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
|
|
·
|
that
such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus;
and
|
|
·
|
other
facts material to the transactions.
|
In
addition, upon our being notified by a selling stockholder that a donee or
pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed. The selling stockholder may from time to time pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
SELECTED CONSOLIDATED 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.
|
|
Year Ended December 31,
(in thousands, except per share
data)
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
SELECTED
STATEMENT OF OPERATIONS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
530 |
|
|
$ |
775 |
|
|
$ |
785 |
|
|
$ |
972 |
|
|
$ |
1,808 |
|
|
$ |
935 |
|
|
$ |
2,475 |
|
Loss
from continuing operations
|
|
$ |
(9,874 |
) |
|
$ |
(9,731 |
) |
|
$ |
(3,681 |
) |
|
$ |
(2,997 |
) |
|
$ |
(1,975 |
) |
|
$ |
(1,809 |
) |
|
$ |
(463 |
) |
Loss
from continuing operations per common share – basic and
diluted
|
|
$ |
(54.00 |
) |
|
$ |
(27.05 |
) |
|
$ |
(8.27 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.01 |
) |
Weighted
average common and common equivalent shares outstanding– basic and
diluted
|
|
|
215 |
|
|
|
360 |
|
|
|
445 |
|
|
|
35,182 |
|
|
|
36,771 |
|
|
|
34,785 |
|
|
|
45,682 |
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
SELECTED
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficiency)
|
|
$ |
(6,555 |
) |
|
$ |
(10,255 |
) |
|
$ |
(13,894 |
) |
|
$ |
(7,894 |
) |
|
$ |
(6,132 |
) |
|
$ |
(6,252 |
) |
|
$ |
(6,039 |
) |
Total
assets
|
|
|
5,362 |
|
|
|
530 |
|
|
|
241 |
|
|
|
597 |
|
|
|
1,251 |
|
|
|
448 |
|
|
|
871 |
|
Long-term
debt, including current maturities
|
|
|
2,756 |
|
|
|
5,444 |
|
|
|
7,931 |
|
|
|
2,932 |
|
|
|
2,558 |
|
|
|
1,323 |
|
|
|
971 |
|
Senior
convertible redeemable preferred stock
|
|
|
3,355 |
|
|
|
1,367 |
|
|
|
1,061 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Stockholders'
deficiency
|
|
|
(6,103 |
) |
|
|
(11,857 |
) |
|
|
(15,076 |
) |
|
|
(7,912 |
) |
|
|
(7,433 |
) |
|
|
(8,203 |
) |
|
|
(6,962 |
) |
Overview
Cicero
Inc, formerly known as Level 8 Systems, Inc. (“we”, “us” or the
“Company”) is
a provider
of business integration software, which enables organizations to integrate new
and existing information and processes at the desktop. Our business integration
software addresses the emerging need for companies’ information systems to
deliver enterprise-wide views of their business information processes. In
addition to software products, we also provide technical support, training and
consulting services as part of our commitment to providing our customers with
industry-leading integration solutions. Our 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
largest 500 corporations worldwide (the “Global
500”).
Our focus
is on the desktop integration and business process automation market with our
Cicero® product.
Cicero® is a business application integration platform that enhances end-user
productivity, streamlines business operations and integrates systems and
applications that would not otherwise work together. Cicero® software
offers a proven, innovative departure from traditional, costly and
labor-intensive enterprise application integration, which occurs at the server
level. Cicero® provides non-invasive application integration at the
desktop level. Desktop level integration provides the user with a
single environment with a consistent look and feel for diverse applications
across multiple operating environments, reduces enterprise integration
implementation cost and time, and supports a Service-Oriented Architecture
(“SOA”). Cicero®’s desktop level integration also 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® software, we believe companies can decrease their customer management
costs, improve their customer service 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, we believe
Cicero® software enables organizations to reduce the business risks inherent in
replacement or re-engineering of mission-critical applications and extend the
productive life and functional reach of their application
portfolio.
Cicero®
software is engineered to integrate diverse business applications and shape them
to more effectively serve the people who use them. Cicero® provides
an intuitive integration and 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. In addition, Cicero® can streamline end-user tasks by
providing a single, seamless user interface for simple access to multiple
systems or be configured to display one or more composite applications to
enhance productivity. Cicero® software enables automatic information
sharing among line-of-business applications and tools. It is ideal for
deployment in contact centers where its highly productive, task-oriented user
interface promotes user efficiency. Finally, Cicero® software, by
integrating diverse applications across multiple operating systems, is ideal for
the financial services, for which Cicero® was initially developed, insurance,
telecommunications, intelligence, security, law enforcement, governmental and
other industries requiring a cost-effective, proven application integration
solution. Cicero® is also an integration solution for merger and
acquisition events where the sharing of data and combining of systems is
imperative.
Some of
the companies and other users that have implemented or are implementing our
Cicero® software product include Merrill Lynch Pierce Fenner & Smith
Incorporated, Nationwide Financial Services, IBM and N.E.W. Customer Service
Companies. We have also sold to intelligence, security, law enforcement and
other government users.
Cicero
Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc. and
re-incorporated in Delaware in 1999. Our principal executive offices are located
at 8000 Regency Parkway, Suite 542, Cary, NC 27518 and our telephone number is
(919) 380-5000. Our web site is www.ciceroinc.com. Information
contained on our website is not part of this prospectus.
Strategic
Realignment
Historically,
we have been a global provider of software solutions designed 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 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. In addition, traditional EAI is often times too costly
and time-consuming to implement. It also requires a group of
programmers with the necessary skills and ongoing invasive changes to
application software code throughout the enterprise. With Cicero® software,
which non-invasively integrates the functionality of these disparate
applications at the desktop, we believe that we have found a unique solution to
this disparate application problem. We believe that our existing experience in
and understanding of the EAI marketplace coupled with the unique Cicero®
software 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 and other industries with large deployed
contact centers, as well as our other target markets.
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 the Company) 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 we issued to Merrill Lynch consisted of 10,000 shares of our
common stock. In consideration for the amendment, we issued an additional 2,500
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 million. We have completely re-engineered the Cicero® software to provide
increased functionality and much more powerful integration
capabilities.
Our
future revenues are entirely dependent on acceptance of Cicero® which has had
limited success in commercial markets to date. We have experienced negative cash
flows from operations for the past three years. As of December 31, 2007, we had
a working capital deficiency of approximately
$6,132,000. Accordingly, there is substantial doubt that we can
continue as a going concern, as is expressed in the independent auditor’s report
accompanying our financial statements. In order to address these
issues and to obtain adequate financing for our operations for the next twelve
months, we are actively promoting and expanding our product line and continue to
negotiate with significant customers who have demonstrated interest in the
Cicero® technology. We are experiencing difficulty increasing sales revenue
largely because of the inimitable nature of the product as well as customer
concerns about our financial viability. Cicero® software is a new “category
defining” product in that most EAI projects are performed at the server level
and Cicero®’s integration occurs at the desktop level without the need to open
and modify the underlying code for those applications being integrated. Many
companies are not aware of this new technology or tend to look toward more
traditional and accepted approaches. We are 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. In addition, emerging competition in the
marketplace has aided in the awareness of this new technology. Additionally, we
are seeking additional equity capital or other strategic transactions in the
near term to provide additional liquidity.
We expect
that increased revenues will reduce our operating losses in future periods;
however, there can be no assurance that we will be successful in executing as
anticipated or in a timely manner. If these strategies are
unsuccessful, we may have to pursue other means of financing that may not be on
terms favorable to the Company or its stockholders. If we are unable
to increase cash flow or obtain financing, we may not be able to generate enough
capital to fund operations for the next twelve months. At our current
rates of expense and assuming we will be able to generate revenues in the next
twelve months at an annualized rate of revenue generated in the first nine
months of 2008, we will be able to fund planned operations with existing capital
resources for a minimum of four months and experience negative cash flow of
approximately $1,000,000 during the next twelve months to maintain planned
operations. 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 the
Company be unable to continue as a going concern.
Market
Opportunity
Contact
Centers Market
Our
target markets for Cicero®
software include 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, emails
and other incoming customer inquiries and requests. In today’s highly
competitive markets, companies increasingly focus on the provision of customer
service as a means of increasing customer satisfaction, customer retention rates
and cross-selling opportunities. For most companies, the key
organization involved in this effort is the company’s customer contact center,
or call center, whose personnel are directly customer-facing.
To
provide quality customer service, customer service representatives (“CSR”) must
be able to answer a customer’s questions quickly, handle any request the
customer may have, and do so in an efficient and pleasant manner. One
of the significant challenges in the provision of quality customer service is
the complexity of the CSR desktop. This is due to the number of
software applications on the CSR’s computer desktop, to the complexity of the
applications used on the desktop, and changes in business processed within the
organization. Most CSRs must manage three or more applications on
their desktop, including billing, inventory, delivery tracking, call tracking
and customer relationship management software. In many instances, CSRs have six,
eight, or ten or more applications they must learn and manage in order to
provide service.
The
number of applications on the typical CSR desktop is increasing due to the
broader range of services that organizations are demanding of contact centers,
the desire for CSRs to resolve calls during the first contact with the customer,
and the need to sell additional products. These applications are
often a combination of Windows, web and host centric applications that are not
integrated, requiring the CSR to learn and master them to perform their
jobs.
Our goal
is to greatly increase the efficiency of CSRs in our target markets. 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 addressing high employee
turnover and training costs. Some of the primary challenges faced by customer
contact centers include:
|
·
|
Long Average Call
Handling Time. Currently, most customer contact centers use several
applications requiring the CSR to ask customers for account and telephone
information, navigate between applications, and to retype customer
information in several screens. This increases the overall call
handling time and decreases customer satisfaction. In addition,
many contact centers require multiple transfers to different agents to
deal with diverse customer service issues. A one-call,
one-contact system reduces average call handling time and enhances
customer service by avoiding these multiple transfers. Ideally, the
customer service representative provides the call-in customer with
multi-channel customer interfaces with timely access to all information
that the customer needs. Reducing average call handling time and
increasing customer service and customer intimacy are some 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.
|
|
·
|
Training and Turnover
of Contact Center Staff. The contact center industry is
characterized by high training costs, operational complexity, continuous
turnover and increasing costs per call. These difficulties stem
from increased customer expectations, the ever-increasing complexity and
diversity of the business applications used by customer service
representatives, and pressure to decrease training time and increase the
return on investment in customer service
representatives.
|
|
·
|
Industry
Consolidation. Many industries in our target market, including the
financial services industry, are in a constant state of consolidation.
When companies consolidate through mergers and acquisitions, 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
Cicero®
is a software product that allows companies to integrate their existing
applications into a seamless integrated desktop. The Cicero® software solution
provides the following key features:
|
·
|
Integrated
End-User Environment. The end-user can navigate any number of
applications, whether local, client-server, mainframe legacy or
web-browser, from a single environment with a consistent look and feel.
Cicero® software integrates the execution and functionality of a variety
of custom or packaged Windows-based 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. Cicero® software 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.
|
|
·
|
Information
Center. The optional 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 Information Center is a composite application
and a subset of the Cicero Graphical User Interface Manager, and 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 optional Information
Center and other applications.
|
|
·
|
Context
Sharing. Cicero® software’s unique, patented technology enables the
right information in any workstation application to be shared with the
other applications that need it. Cicero® software’s
Context-Sharing Manager within the Cicero 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® software is a sophisticated
application integration platform that subordinates and controls and
non-invasively integrates any applications with a light “footprint” in the
Windows environment. The Cicero® software’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® software
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 within the
Cicero® software product which allows applications to be quickly
integrated. Integrators are not required to understand the details of the
underlying technology when integrating an application. Cicero® software
also supports open platform architecture for communication and
interoperability, native scripting languages and XML. Cicero® software is
designed to be extendible, allowing extensions to new environments by
using well-defined plug-ins or connectors. Cicero® software can also
present components or elements of integration as web services and incoming
web services requests can initiate Cicero® software 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. Furthermore, Cicero® software can enforce steps to be
performed in a particular order, if needed, 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.
|
We
believe that deployment of the Cicero® software solution can provide our
customers with the following key benefits:
|
·
|
Lower
Average Cost Per Call and Average Call Time. Because
Cicero® presents users with a single interface through which applications
are accessed, it eliminates the need to navigate through and between
applications. Therefore, it eliminates redundant data entry,
cuts keystrokes and streamlines or even eliminates process steps,
including time consuming call wrap-up processes, thereby generating
greater efficiency. This enables increased first call
resolution and significant reduction in average call times. Cost per call
is lowered because the customer service representative is more
productive.
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Reduce
Staff Cost. Cicero® software can reduce staff cost in two ways.
First, by increasing the efficiency of each customer service
representative, a contact center can handle the same volume of customer
service requests with a smaller staff. Secondly, training costs and time
can be reduced, placing newly hired staff into productive positions faster
than other contract center
applications.
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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
representatives that the customer does not use bill paying or other
offered services. On the other hand, Cicero® software can help prevent
customer service representatives from selling a product that is
inappropriate for that customer or a product or service that the customer
already has. Increasing the efficiency of cross-selling can both increase
revenues and avoid customer
dissatisfaction.
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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 of its customer service
representatives, 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. The access to multiple platforms through one
user-friendly interface also improves the experience of the customer
service representative, leading to improved customer service
representative morale and
productivity.
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Preserve
Existing Information Technology Investment. Cicero® software
integrates applications at the desktop 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.
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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® software
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.
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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 such as BPEL and Service-Oriented Architecture. The
Cicero® software 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 platforms. The Cicero® software
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 desktop
level.
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Ease
of Implementation and Enhanced Information Technology Productivity.
The Cicero® software solution allows customers to create comprehensive
data transformation and information exchange solutions without the need
for custom coding. Our products provide pre-built adapters for a wide
variety of 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® software solution
allows users to rapidly integrate new and existing applications with
little or no customization
required.
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Our
Strategy
Our goal
is to be a recognized leader in providing complete desktop level application
integration to our target markets. Key elements of our strategy
include the following:
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Expand
into Our Target Markets. Our short-term goal is to gain
a presence in contact centers, such as in the financial services industry
with the Cicero® software solution. We believe 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® software can be used in any industry that needs to integrate
applications and processes, such as the telecommunications and insurance
industries. Additionally, we believe that state and local governments,
first responders, intelligence and defense agencies are excellent target
markets for integration of legacy applications. Since the
beginning of 2005, we entered into an agreement to install Cicero software
throughout N.E.W. Customer Service Companies, a contact center outsourcing
company, to shorten call times, improve agent efficiency and improve
customer satisfaction. We have recently deployed our software
to Merrill Lynch’s International Wealth Management brokers. In addition,
we have licensed Cicero software to the U.S. Department of Agriculture and
the West Windsor Township, New Jersey Police Department. The
latter agency is deploying Cicero in their Public Safety Answering
Point. In this environment, Cicero® software will allow for
fast and accurate retrieval of National Crime Information Center (NCIC)
wanted person and related information, Interstate Identification Index,
and National Law Enforcement Telecommunications systems, as well as
various state criminal history and warrant data bases, motor vehicle
records, and local arrest records.
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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. To supplement our direct sales efforts, 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. Since announcing the general availability of Cicero® 6.0 in May
2004, we have entered into strategic partnerships with the following
system integrators/resellers, for integrated business solutions:
ThinkCentric, Hewlett Packard and House of Code. In addition,
we have entered into strategic partnerships with Silent Systems, Inc. (a
consultancy and reselling organization), ADPI LLC (a consultancy and
reseller organization), and Pilar Services, Inc. (a government focused
integrator and reseller). The Company has no material
dependency on any of these organizations, but rather looks to build upon
these relationships as additional outlets for its products. 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.
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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, who now serves as one of our directors, as well as
several of the primary Cicero® engineers from Merrill Lynch to support our
ongoing Cicero® development
efforts.
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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® technology can
integrate applications and processes more efficiently than other competing
solutions. This reduces costs to customers and provides a faster return on
investment than competing products.
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Products
Desktop
Integration Segment
Cicero®.
Cicero® software integrates disparate applications regardless of the platform,
enables rapid development of effective, simple-to-maintain composite
applications, accelerates time to value and deploys cost-effective,
"best-of-breed" business solutions by leveraging existing IT
investments. Cicero® software helps the architect maintain consistent
integration project design and implementation by providing extensible,
standardized software methods for interacting with Windows applications, COM
objects, web pages, commercial software packages, legacy applications, and Java
applications among others. Cicero® software can integrate applications running
on the server or desktop, giving the architect complete flexibility in
determining where, when, and how application integration occurs. Cicero®
software can also be used to capture and aggregate data from many different
applications, apply business rules as needed, such as data transformation rules,
and share that data bi-directionally via a composite view. An event in one
application can cause processing in another unrelated application, even if these
were implemented using differing technologies, such as Windows and
Java.
The
patented Cicero® software technology, as exclusively licensed from Merrill
Lynch, consists of several components, including the following: The Resource
Manager, which manages the starting, stopping, and status of applications; the
Event Manager, a Component Object Model (COM)-based messaging service; the
Context Manager which administers the “publish and subscribe” protocols; and 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. In 2004, we released a version of the Cicero® product
which included our newly developed Cicero® Studio integration tool, to allow
applications to be integrated using point-and-click methods. Cicero® software
incorporates an Application Bus with code modules to handle the
inter-application connections. There are additional tools that provide ancillary
functions for the integrator including toolset to debug, view history and trace
logs.
Cicero®
Studio provides a nontraditional approach to application integration. By
providing a high level of object-oriented integration, Cicero® Studio eliminates
the need for source code modification. It includes high-level integration
objects called genes (which translate disparate application interface protocols
to one common interface used by Cicero® software), an event processor, a context
manager and a publish-subscribe information bus that enables applications to
share data. It also includes a set of integration wizards that greatly simplify
the task of application integration.
Cicero®
Studio is a powerful integration tool that eliminates most of the technical
complexity associated with application integration. Integrators avoid the high
cost and complexity of invasive code modifications and extend the scope of their
integration capabilities into new and legacy environments. Cicero® Studio
provides an open architecture that can be extended to incorporate new behaviors
by adding genes and communicating with COM objects. This enables Cicero®
software to be extended to accommodate new platforms and interface requirements
as needed and provides a rich paradigm for evolving integration behaviors over
time. It also means that Cicero® software can be implemented in both the desktop
and n-tier server of a service-oriented architecture.
Cicero®
software runs on Vista, Windows XP, and Windows 2000 to organize applications in
a flexible graphical configuration that keeps all the application functionality
that the user needs within easy reach. For instance, selecting the “memo” tab
might cause a Microsoft Word memo-template to be created within the Cicero®
desktop. The end-user need not even know that they are using Microsoft
Word. Moreover, a customer-tracking database can be linked with a
customer relationship management software package.
Cicero®
technology provides non-intrusive integration of desktop and web applications,
portals, third-party business tools, and even legacy mainframe and client server
applications, so all co-exist and share their information
seamlessly. Cicero®’s non-invasive technology means that clients do
not risk modifying either fragile source code or sensitive application program
interfaces - and they can easily integrate off-the-shelf products and emerging
technologies.
Cicero®
software 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 may
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.
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, and telephone support. 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 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
Our
customers include both end-users to whom we sell our products and services
directly and distributors and other intermediaries who either resell our
products to end-users or incorporate our products into their own product
offerings. Typical end-users of our products and services are large businesses
with sophisticated technology requirements for contact centers, in the financial
services, insurance and telecommunications industries, and intelligence,
security, law enforcement and other governmental organizations.
Our
customers are using our solutions to rapidly deploy applications. Some examples
of customers' uses of our products include:
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Business Process
Outsourcers - use our Cicero® solution in
contact centers to provide real time integration among existing
back-office systems, eliminate redundant data entry, shorten call times,
provide real-time data access and enhance customer service and service
levels.
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A financial institution
- uses our Cicero® solution to
provide real-time integration among market data, customer account
information, existing back-office systems and other legacy applications,
eliminate redundant data entry, provide real-time data access and
processing, and enhance customer service and service
levels.
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An insurance company -
uses our Cicero® solution to
integrate their customer information systems with over thirty software
applications including a CRM
application.
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A law enforcement
organization - uses our Cicero® solution to
streamline and automate support for arrests and investigations while
merging federal, state and local systems within a unified
process.
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Other
customers are systems integrators, which use our Cicero® product to develop
integration solutions for their customers.
In 2007,
Merrill Lynch accounted for more then ten percent (10%) of our operating
revenues. Merrill Lynch, N.E.W. Customer Service Companies, IBM, and
Pilar Services, Inc. each accounted for more than ten percent (10%) of our
operating revenues in 2006. In 2005, N.E.W. Customer Service Companies and
Innovative System Solutions Corporation accounted for more than ten percent
(10%) of our operating revenue.
Sales
and Marketing
Sales
An
important element of our sales strategy is to supplement our direct sales force
by expanding our relationships with third parties to increase market awareness
and acceptance of our business integration software solutions. As part of these
relationships, we continue to jointly sell and implement Cicero® software
solutions with strategic partners such as systems integrators and embed Cicero®
along with other products through reseller relationships. We provide
training and other support necessary to systems integrators and resellers to aid
in the promotion of our products. To date we have entered into
strategic partnerships with the following resellers, for integrated business
solutions: BluePhoenix Solutions, ThinkCentric, Hewlett Packard and House of
Code. In addition, we have entered into strategic partnerships with
TrySynergy Consulting, Innovative Solutions Group, Piercetech, Silent Systems,
Inc., ADPI LLC, and Pilar Services, Inc. These organizations have
relationships with existing customers or have access to organizations requiring
top secret or classified access. In addition, several of these
partners can bundle Cicero® with other software to provide a comprehensive
solution to customers. We are not materially dependent on any of
these organizations. Generally, our agreements with such partners provide for
price discounts based on their sales volume, with no minimum required
volume.
Marketing
The
target market for our products and services are large companies operating
contact centers in the financial services, insurance and telecommunications
industries, as well as users in the intelligence, security and law enforcement
communities and other governmental organizations. 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 customer contact center
software marketplace and the needs of these customers, as well as experience in
all of the key marketing disciplines. They also have knowledge of the
financial services industry and government organizations that have focused on
application integration solutions to address needs in mergers and acquisitions
and homeland security.
Core
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 our company and our brands. Our marketing programs are specifically
directed at our target markets, and include speaking engagements, public
relations campaigns, focused trade shows and web site marketing, while devoting
substantial resources to supporting the field sales team with high quality sales
tools and ancillary material. As product acceptance grows and our
target markets increase, we will shift to broader marketing
programs.
The
marketing department also produces ancillary material for presentation or
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, we have experienced 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 $474,000 for the nine
months ended September
30, 2008 and approximately $569,000, $533,000, and $891,000 in 2007, 2006, and
2005, respectively. The increase in costs in 2007 as compared to 2006 reflects a
charge for stock compensation expense of approximately $103,000 offset by
general decreases in overhead costs and employee benefits. The decrease in costs
in 2006 as compared to 2005 reflects the reduction in the number of employees by
two plus associated overheads in 2006.
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.
Competition
The
markets in which we compete are highly competitive and subject to rapid change.
These markets are highly fragmented and served by numerous firms. We believe
that the competitive factors affecting the markets for our products and services
include:
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Product
functionality and features;
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Availability
and quality of support services;
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Ease
of product implementation;
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Product
reputation; and
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Our
financial stability.
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The
relative importance of each of these factors depends upon the specific customer
environment. Although we believe that our products and services can compete
favorably, we may not be able to increase our competitive position against
current and potential competitors. In addition, many companies choose to deploy
their own information technology personnel or utilize system integrators to
write new code or rewrite existing applications in an effort to develop
integration solutions. As a result, prospective customers may decide against
purchasing and implementing externally developed and produced solutions such as
ours.
We
compete with companies that utilize varying approaches to modernize, web-enable
and integrate existing software applications:
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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 market.
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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
competitors in the middleware
market.
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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 our technology. Siebel is a representative
product in the CRM software
category.
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Recently,
there have been several companies that offer capabilities similar to our
Cicero® software in that these companies advertise that they integrate
applications without modifying the underlying code for those applications.
OpenSpan is one company who advertises that they can non-invasively
integrate at the point of contact or on the
desktop.
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Other
competitors include Above All Software, Attachmate Corporation, Seagull Software
Ltd. and Oracle. Our Cicero® product competes directly with other contact center
solutions offered by Microsoft, Corizon and Jacada. We expect additional
competition from other established and emerging companies. Furthermore, our
competitors may combine with each other, or other companies may enter our
markets by acquiring or entering into strategic relationships with our
competitors. 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.
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 “Cicero®”
and “Ensuredmail”
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.
Employees
As of
December 31, 2008 we employed 28 employees, of which 27 are full time
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 Vista, 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.
Our
corporate headquarters and United States operations group and administrative
functions are based in offices of approximately 5,038 square feet in our Cary,
North Carolina office pursuant to a lease expiring in 2010.
Various
lawsuits and claims have been brought against us in the normal course of our
business. In October 2003, we were served with a summons and complaint in the
Superior Court of North Carolina regarding unpaid invoices for services rendered
by one of our subcontractors. The amount in dispute was approximately
$200,000 and is recorded as part of our 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 $189,000 plus interest over a
19-month period ending November 15, 2005. We are in the process of negotiating a
series of payments for the remaining liability of approximately
$80,000.
Under the
indemnification clause of the our standard reseller agreements and software
license agreements, we agree to defend the reseller/licensee against third party
claims asserting infringement by our 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
This
prospectus contains certain forward-looking statements, that address our future
results, including certain projections and business trends. Assumptions relating
to forward-looking statements involve judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. When used in this prospectus, the words
“estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are
intended to identify forward- looking statements. Although we believe that
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate, and we may not realize the results
contemplated by the forward-looking statement. Management decisions are
subjective in many respects and susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause us to alter our business strategy or capital expenditure plans
that may, in turn, affect our results of operations. In light of the significant
uncertainties inherent in the forward-looking information included in this
prospectus, you should not regard the inclusion of such information as our
representation that we will achieve any strategy, objective or other plans, and
are cautioned not to place undue reliance on these forward looking statements.
The forward-looking statements contained in this prospectus speak only as of the
date of this prospectus as stated on the front cover, and we have no obligation
to update publicly or revise any of these forward-looking statements. These and
other statements, which are not historical facts are based largely on
management’s current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplate by such forward-looking statements. These risk and
uncertainties include, among others, the risks and uncertainties described in
“Risk Factors” and the following:
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There
is substantial doubt as to whether we can continue as a going
concern;
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We
have a history of losses and expect that we will continue to experience
losses at least through the second quarter of
2009;
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We
develop new and unproven technology and
products;
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We
depend on an unproven strategy for ongoing
revenue;
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Economic
conditions could adversely affect our revenue growth and cause us not to
achieve desired revenue;
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The
“penny stock” rule will limit brokers and dealers trading in
our common stock, making the market for our common stock less liquid which
could cause the price of our stock to
decline;
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Because
we cannot accurately predict the amount and timing of individual sales,
our quarterly operating results may vary significantly, which could
adversely impact our stock price;
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Loss
of key personnel associated with Cicero® development could adversely
affect our business;
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Different
competitive approaches or internally developed solutions to the same
business problem could delay or prevent adoption of
Cicero®;
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Our
ability to compete may be subject to factors outside our
control;
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The
markets for our products are characterized by rapidly changing
technologies, evolving industry standards, and frequent new product
introductions;
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We
may face damage to the reputation of our software and a loss of revenue if
our software products fail to perform as intended or contain significant
defects;
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We
may be unable to enforce or defend our ownership and use of proprietary
and licensed technology;
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Our
business may be adversely impacted if we do not provide professional
services to implement our
solutions;
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Because
our software could interfere with the operations of customers, we may be
subject to potential product liability and warranty claims by these
customers;
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We
have not paid any cash dividends on our common stock and it is likely that
no cash dividends will be paid in the future;
and
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Provisions
of our charter and bylaws could deter takeover attempts.
General
Information
Cicero 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, we also provide technical support, training and
consulting services as part of our commitment to providing our customers
industry-leading integration solutions. Our 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. We offer services around our integration and
encryption 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, we note that a variety of factors
could cause its actual results to differ materially from the anticipated results
or other expectations expressed in our forward-looking statements
Business
Strategy
Based
upon the current business environment in which we operate, the economic
characteristics of its operating segment and management’s view of the business,
a revision in terms of aggregation of its segments was appropriate. Therefore
the segment discussion outlined below clarifies the adjusted segment structure
as determined by management under SFAS No. 131. All prior year amounts have been
restated to conform to the new reporting segment structure.
Management
makes operating decisions and assesses performance of our operations based on
one reportable segment, the Software product segment. Prior to this
change we had two separate segments: Desktop Integration and Messaging. The
Messaging business has always been an immaterial part of our overall business
and generally all its sales efforts are focused on the Cicero product. As such,
we have elected to combine the two products into one reportable
segment.
The
Software product segment is comprised of the Cicero® product. 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.
Results
of Operations
The
following table sets forth, for the years indicated, our results of continuing
operations expressed as a percentage of revenue and presents information for the
three categories of revenue.
|
|
Three
Months ended,
September 30,
|
|
|
Nine
Months ended,
September 30,
|
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
12.5 |
% |
|
|
0.3 |
% |
|
|
48.6 |
% |
|
|
0.1 |
% |
|
|
27.7 |
% |
|
|
21.4 |
% |
|
|
51.9 |
% |
Maintenance
|
|
|
43.1 |
% |
|
|
21.7 |
% |
|
|
24.1 |
% |
|
|
21.6 |
% |
|
|
16.6 |
% |
|
|
12.3 |
% |
|
|
18.7 |
% |
Services
|
|
|
44.4 |
% |
|
|
78.0 |
% |
|
|
27.3 |
% |
|
|
78.3 |
% |
|
|
55.7 |
% |
|
|
66.3 |
% |
|
|
29.4 |
% |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
0.7 |
% |
|
|
0.0 |
% |
|
|
1.6 |
% |
|
|
0.0 |
% |
|
|
1.0 |
% |
|
|
0.9 |
% |
|
|
2.0 |
% |
Maintenance
|
|
|
9.5 |
% |
|
|
24.3 |
% |
|
|
7.4 |
% |
|
|
21.5 |
% |
|
|
14.6 |
% |
|
|
21.8 |
% |
|
|
44.6 |
% |
Services
|
|
|
44.1 |
% |
|
|
54.5 |
% |
|
|
24.4 |
% |
|
|
45.7 |
% |
|
|
36.2 |
% |
|
|
56.2 |
% |
|
|
104.7 |
% |
Total
|
|
|
54.3 |
% |
|
|
78.8 |
% |
|
|
33.4 |
% |
|
|
67.2 |
% |
|
|
51.8 |
% |
|
|
78.9 |
% |
|
|
151.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin (loss)
|
|
|
45.7 |
% |
|
|
21.2 |
% |
|
|
66.6 |
% |
|
|
32.8 |
% |
|
|
48.2 |
% |
|
|
21.1 |
% |
|
|
(51.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
40.3 |
% |
|
|
62.3 |
% |
|
|
27.4 |
% |
|
|
61.2 |
% |
|
|
43.5 |
% |
|
|
35.6 |
% |
|
|
79.9 |
% |
Research
and product development
|
|
|
27.7 |
% |
|
|
56.1 |
% |
|
|
19.2 |
% |
|
|
50.8 |
% |
|
|
31.5 |
% |
|
|
54.8 |
% |
|
|
113.5 |
% |
General
and administrative
|
|
|
58.5 |
% |
|
|
141.1 |
% |
|
|
38.8 |
% |
|
|
114.3 |
% |
|
|
75.0 |
% |
|
|
124.1 |
% |
|
|
144.8 |
% |
(Gain)
on disposal of assets
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(2.5 |
)% |
|
|
0.0 |
% |
Total
|
|
|
126.5 |
% |
|
|
259.4 |
% |
|
|
85.3 |
% |
|
|
226.3 |
% |
|
|
150.0 |
% |
|
|
212.0 |
% |
|
|
338.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income\(loss)
from operations
|
|
|
(80.8 |
)% |
|
|
(238.2 |
)% |
|
|
(18.7 |
)% |
|
|
(193.5 |
)% |
|
|
(101.8 |
)% |
|
|
(190.9 |
)% |
|
|
(389.5 |
)% |
Other (expense),
net
|
|
|
(14.9 |
)% |
|
|
(11.1 |
)% |
|
|
(5.9 |
)% |
|
|
6.6 |
% |
|
|
(7.5 |
)% |
|
|
(117.5 |
)% |
|
|
(79.4 |
)% |
Income\(loss)
before taxes
|
|
|
(95.7 |
)% |
|
|
(249.4 |
)% |
|
|
(24.6 |
)% |
|
|
(208.1 |
)% |
|
|
(109.3 |
)% |
|
|
(308.4 |
)% |
|
|
(468.9 |
)% |
Income
tax provision (benefit)
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income\(loss)
|
|
|
(95.7 |
)% |
|
|
(249.4 |
)% |
|
|
(24.6 |
)% |
|
|
(208.1 |
)% |
|
|
(109.3 |
)% |
|
|
(308.4 |
)% |
|
|
(468.9 |
)% |
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:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
United
States
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The table
below presents information about reported segments for the years indicated (in
thousands):
|
|
Three
Months ended,
September 30,
|
|
|
Nine
Months ended,
September 30,
|
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
revenue
|
|
$ |
578 |
|
|
$ |
387 |
|
|
$ |
2,475 |
|
|
$ |
935 |
|
|
$ |
1,808 |
|
|
$ |
972 |
|
|
$ |
785 |
|
Total
cost of revenue
|
|
|
314 |
|
|
|
305 |
|
|
|
827 |
|
|
|
628 |
|
|
|
937 |
|
|
|
767 |
|
|
|
1,188 |
|
Gross
margin (loss)
|
|
|
264 |
|
|
|
82 |
|
|
|
1,648 |
|
|
|
307 |
|
|
|
871 |
|
|
|
205 |
|
|
|
(403 |
) |
Total
operating expenses
|
|
|
731 |
|
|
|
1,004 |
|
|
|
2,111 |
|
|
|
2,116 |
|
|
|
2,711 |
|
|
|
2,085 |
|
|
|
2,655 |
|
Segment
income\(loss)
|
|
$ |
(467 |
) |
|
$ |
(922 |
) |
|
$ |
(463 |
) |
|
$ |
(1,809 |
) |
|
$ |
(1,840 |
) |
|
$ |
(1,880 |
) |
|
$ |
(3,058 |
) |
A
reconciliation of segment operating expenses to total operating expense follows
(in thousands):
|
|
Three
Months ended,
September 30,
|
|
|
Nine
Months ended,
September 30,
|
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Segment
operating expenses
|
|
$ |
731 |
|
|
$ |
1,004 |
|
|
$ |
2,111 |
|
|
$ |
2,116 |
|
|
$ |
2,711 |
|
|
$ |
2,085 |
|
|
$ |
2,655 |
|
(Gain)
on disposal of assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
Total
operating expenses
|
|
$ |
731 |
|
|
$ |
1,004 |
|
|
$ |
2,111 |
|
|
$ |
2,116 |
|
|
$ |
2,711 |
|
|
$ |
2,061 |
|
|
$ |
2,655 |
|
A
reconciliation of total segment profitability to net loss follows for the years
indicated (in thousands):
|
|
Three
Months ended,
September 30,
|
|
|
Nine
Months ended,
September 30,
|
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
segment income\(loss)
|
|
|
(467 |
) |
|
$ |
(922 |
) |
|
|
(463 |
) |
|
$ |
(1,809 |
) |
|
$ |
(1,840 |
) |
|
$ |
(1,880 |
) |
|
$ |
(3,058 |
) |
Gain
on disposal of assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
- |
|
Interest
and other income\(expense), net
|
|
|
(86 |
) |
|
|
(43 |
) |
|
|
(146 |
) |
|
|
(137 |
) |
|
|
(135 |
) |
|
|
(1,141 |
) |
|
|
(623 |
) |
Net
income\(loss)
|
|
$ |
(553 |
) |
|
$ |
(965 |
) |
|
$ |
(609 |
) |
|
$ |
(1,946 |
) |
|
$ |
(1,975 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,681 |
) |
THREE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER
30, 2007.
Total
Revenues. Total revenues increased $191,000, or 49%, from
$387,000 to $578,000, for the three months ended September 30, 2008 as compared
with the three months ended September 30, 2007. This increase is primarily due
to an increase in additional software license revenue and the amortized
maintenance revenue from the addition of a large customer during the second
quarter of 2008.
Total Cost of
Revenue. Total cost of revenue increased $9,000, or 3%, from
$305,000 to $314,000, for the three months ended September 30, 2008 as compared
with the three months ended September 30, 2007. The increase is
primarily attributable to increased professional service headcount and travel
resulting from consulting engagements partially offset by a decrease in employee
stock option expense that was recorded in the third quarter of
2007.
Total Gross
Margin. Gross margin was $264,000, or 45.7%, for the three
months ended September 30, 2008 as compared to the gross margin of $82,000, or
21.2% for the three months ended September 30, 2007. The increase in gross
margin is due to the increase of software license and maintenance revenue for
the quarter ended September 30, 2008.
Total Operating
Expenses. Total operating expenses decreased $273,000, or 27%
from $1,004,000 to $731,000 for the three months ended September 30, 2008, as
compared with the three months ended September 30, 2007. The decrease
in total operating expenses is primarily attributable to a reduction in stock
option expense for 2008 of approximately $238,000.
Revenue. 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 revenue levels that 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.
We
generally recognize revenue from software license fees when our obligations to
the customer are fulfilled, which is typically upon delivery or
installation. Revenue related to software maintenance contracts is
recognized ratably over the terms of the contracts. Revenues from
services are recognized on a time and materials basis as the services are
performed and amounts due from customers are deemed collectible and
non-refundable. 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. Should our actual experience with respect to collections
differ from our initial assessment, there could be adjustments to future
results.
Software
Products.
Software Product
Revenue. Software product revenue for the three months ended
September 30, 2008 increased by approximately $71,000 from $1,000 to $72,000 as
compared to the three months ended September 30, 2007 primarily due to
additional revenues from a large customer added in second quarter
2008.
Software Product Gross
Margins. Gross margin on software products for the three
months ended September 30, 2008 was 94.4% compared with 100% for the three
months ended September 30, 2007. It reflects the accrual of
royalty payments offset by revenues. Cost of software is composed of
royalties to third parties, and to a lesser extent, production and distribution
costs.
Maintenance.
Maintenance
Revenue. Maintenance revenue for the three months ended
September 30, 2008 increased by approximately $165,000, or 196%, from $84,000 to
$249,000 as compared to the three months ended September 30, 2007 primarily due
to a new renewal contract that initiated in first quarter 2008.
Maintenance Gross
Margin. Gross margin on maintenance products for the three
months ended September 30, 2008 was 77.9% compared with a gross margin loss of
11.9% for the three months ended September 30, 2007. Cost of
maintenance is comprised of personnel costs and related overhead for the
maintenance and support of the Company’s software products. The
increase of gross margin is due to the increase in maintenance revenue and a
reduction in stock compensation expense for 2008.
Services.
Services
Revenue. Services revenue decreased $45,000, or 15%, from
$302,000 to $257,000 for the three months ended September 30, 2008 as compared
with the three months ended September 30, 2007. The decrease in services
revenues is due to the timing of certain consulting services
engagements.
Services Gross
Margin. Services gross margin was 0.8% for the three months
ended September 30, 2008 compared with gross margin of 30.1% for the three
months ended September 30, 2007. The decrease in gross margin was
primarily attributable to the decrease in revenues compounded by an increase in
headcount.
Operating
Expenses:
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 for the three months ended September 30, 2008 decreased
by approximately $8,000, or 3%, from $241,000 to $233,000 as compared with the
three months ended September 30, 2007. The decrease is primarily
attributable to the reduction in stock option expense for quarter ended
September 30, 2008 compared with the same quarter in 2007.
Research and
Development. Research and product development expenses
primarily include personnel costs for product authors, product developers and
product documentation and related overhead. Research and development expense
decreased by approximately $57,000, or 26%, from $217,000 to $160,000 for the
three months ended September 30, 2008 as compared to the three months ended
September 30, 2007. The decrease in costs for the quarter is primarily due to
the reduction in stock option expense for the quarter ended September 30, 2008
compared with the same quarter in 2007.
General and Administrative.
General and administrative expenses consist of personnel costs for the
legal, financial, human resources, and administrative staff, related overhead,
and all non-allocable corporate costs of operating the Company. Our office is
located in Cary, North Carolina. General and administrative expenses
for the three months ended September 30, 2008 decreased by approximately
$208,000, or 38%, from $546,000 to $338,000 over the same period in the prior
year. The decrease is primarily attributable to a reduction of
$246,000 in stock option expense for the quarter ended September 30, 2008
compared with the same quarter in 2007.
Provision for Taxes. The
Company’s effective income tax rate for continuing operations differs from the
statutory rate primarily because an income tax expense/benefit was not recorded
for the income/loss incurred in the third quarter of 2008 or 2007. Because of
the Company’s recurring losses, the deferred tax assets have been fully offset
by a valuation allowance.
Impact of
Inflation. Inflation has not had a significant effect on the
Company’s operating results during the periods presented.
NINE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER
30, 2007.
Total
Revenues. Total revenues increased $1,540,000, or 165%, from
$935,000 to $2,475,000, for the nine months ended September 30, 2008 as compared
with the nine months ended September 30, 2007. This increase is due to an
increase in software license revenue from a large customer added in the second
quarter 2008 and associated maintenance revenue for the first nine months of
2008 offset by a slight decrease in consulting revenue for the same
period.
Total Cost of
Revenue. Total cost of revenue increased $199,000, or 32%,
from $628,000 to $827,000, for the nine months ended September 30, 2008 as
compared with the nine months ended September 30, 2007. The increase
is primarily attributable to increased headcount and travel resulting from
consulting engagements.
Total Gross
Margin. Gross margin was $1,648,000, or 66.6%, for the nine
months ended September 30, 2008 as compared to the gross margin of $307,000, or
32.8% for the nine months ended September 30, 2007. The increase in gross margin
is due to the increase of software license revenue and associated maintenance
revenue for the nine months ended September 30, 2008.
Total Operating
Expenses. Total operating expenses decreased $5,000, or 0.2%
from $2,116,000 to $2,111,000 for the nine months ended September 30, 2008, as
compared with the nine months ended September 30, 2007. The decrease
in total operating expenses is primarily attributable to a reduction in employee
stock option expense partially offset by additional sales and marketing costs
due to increased headcount and participation at trade shows.
Software
Products.
Software Product
Revenue. Software product revenue for the nine months ended
September 30, 2008 increased by approximately $1,203,000 from $1,000 to
$1,204,000 as compared to the nine months ended September 30, 2007 primarily due
to additional revenues from a large customer added in second quarter
2008.
Software Product Gross
Margins. Gross margin on software products for the nine months
ended September 30, 2008 was 96.7% compared with 100% for the nine months ended
September 30, 2007. Cost of software is composed of royalties
to third parties, and to a lesser extent, production and distribution
costs.
Maintenance.
Maintenance
Revenue. Maintenance revenue for the nine months ended
September 30, 2008 increased by approximately $394,000, or 195%, from $202,000
to $596,000 as compared to the nine months ended
September
30, 2007 primarily due to deferred revenue being recognized from a customer
added in first quarter 2008.
Maintenance Gross
Margin. Gross margin on maintenance products for the nine
months ended September 30, 2008 was 69.5% compared with 0.5% for the nine months
ended September 30, 2007. The increase of gross margin is due to the
increase in maintenance revenue.
Services.
Services
Revenue. Services revenue decreased $57,000, or 8%, from
$732,000 to $675,000 for the nine months ended September 30, 2008 as compared
with the nine months ended September 30, 2007. The decrease in services revenues
is due to the timing of integration projects.
Services Gross
Margin. Services gross margin was 10.4% for the nine months
ended September 30, 2008 compared with gross margin of 41.7% for the nine months
ended September 30, 2007. The decrease in gross margin was primarily
attributable to the decrease in service billings noted above and an increase in
headcount and commissions.
Operating
Expenses:
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 for the nine months ended September 30, 2008 increased by
approximately $106,000, or 19%, from $572,000 to $678,000 as compared with the
nine months ended September 30, 2007. The increase is primarily
attributable to an increase in headcount, increased travel, and greater trade
show participation, offset by a reduction in stock compensation
expense.
Research and
Development. Research and product development expenses
primarily include personnel costs for product authors, product developers and
product documentation and related overhead. Research and development expense
decreased by approximately $1,000, or 0.2%, from $475,000 to $474,000 for the
nine months ended September 30, 2008 as compared to the nine months ended
September 30, 2007.
General and Administrative.
General and administrative expenses consist of personnel costs for the
legal, financial, human resources, and administrative staff, related overhead,
and all non-allocable corporate costs of operating the Company. Our office is
located in Cary, North Carolina. General and administrative expenses
for the nine months ended September 30, 2008 decreased by approximately
$110,000, or 10%, from $1,069,000 to $959,000 over the same period in the prior
year. The decrease is primarily attributable to a decrease in
employee stock option expense.
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
loss incurred for the nine months ended September 30, 2008 or September 30,
2007. Because of the Company’s recurring losses, the deferred tax assets have
been fully offset by a valuation allowance.
Impact of
Inflation. Inflation has not had a significant effect on the
Company’s operating results during the periods presented.
Years
Ended December 31, 2007, 2006, and 2005
Total
revenues increased 86% from $972,000 in 2006 to $1,808,000 in 2007. Revenues
increased 24% from $785,000 in 2005 to $972,000 in 2006. The
increase in revenues in 2007 is primarily due to increased labor billings from
integration contracts with our professional services staff (approximately
$366,000) and software license revenue generated under an OEM contract with
Merrill Lynch in December 2007 ($500,000). The increase in revenues in 2006 over
2005 reflects a change in the mix of revenues, wherein license revenues
decreased and professional service revenues from consulting contracts increased.
Gross profit margin (loss) was 48%, 21% and (51%) for 2007, 2006, and 2005,
respectively. Under the terms of the OEM agreement with Merrill
Lynch, we will recognize two components of software revenue. The first component
will be runtime licenses, and once those licenses are deployed by Merrill Lynch;
the second component will be a monthly subscription fee for each license
deployed. We may or may not incur additional license revenues under this OEM
agreement.
Software Products. Software
product revenue increased from $208,000 in 2006 to $501,000 in 2007 or
approximately 141%. Software product revenue decreased approximately 49% in 2006
from those results achieved in 2005. The increase in software revenues in 2007
was attributed to us entering into an OEM agreement with Merrill Lynch in
December 2007. In 2005, we were able to successfully deploy its
software to several smaller integration engagements.
The gross
margin on software products was 96% for each of the years ended December 31,
2007, 2006 and 2005. Cost of software is composed primarily of
royalties to third parties, and to a lesser extent, production and distribution
costs. The Cicero® software technology and related patents were licensed by us
on a worldwide basis from Merrill Lynch 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 the Company) and to grant ownership rights in the Cicero®
trademark. We are indemnified by Merrill Lynch with regard to the rights granted
to Cicero® by them. In consideration for the original Cicero® license we issued
to Merrill Lynch 10,000 shares of the Company’s common stock. In consideration
for the amendment, we issued an additional 250,000 shares of common stock to
MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing
agreement pursuant to which, we pay a royalty of 3% of the sales price for each
sale of Cicero® software or related maintenance services. The royalties over the
life of the agreement are not payable in excess of $20,000,000.
We expect
to see significant increases in software sales coupled with improving margins on
software products as Cicero® gains acceptance in the marketplace. Our
expectations are based on management’s review of the sales cycle that has
developed around the Cicero® product since being released by us, their 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.
Maintenance. Maintenance
revenues for the year ended December 31, 2007 increased by approximately 150% or
$180,000 from 2006. Maintenance revenues for the year ended December 31,
2006 decreased by
approximately 18% or $27,000 from 2005. The increase in maintenance revenues for
2007 is primarily attributed to one significant new maintenance customer during
the year. The decline in maintenance revenues in 2006 reflects the non-renewal
of one maintenance contract for the Cicero® product.
Cost of
maintenance is comprised of personnel costs and related overhead and the cost of
third-party contracts for the maintenance and support of our software products.
We experienced a gross margin on maintenance products of 12% for 2007. Gross
margin (loss) on maintenance products for 2006 and 2005 were (76%) and (138%),
respectively.
Maintenance
revenues are expected to increase as a result of our expected increase in sales
of the Cicero® product. The cost of maintenance should increase
slightly.
Services. Services
revenue for the year ended December 31, 2007 increased by approximately 56% or
$363,000 over the same period in 2006. Services revenue for the year ended
December 31, 2006 increased by approximately 178% or $413,000 over the same
period in 2005. The increase in service revenues in each of the past
two years are attributable to consulting engagements that were earned during the
past two years.
Cost of
services primarily includes personnel and travel costs related to the delivery
of services. Services gross margin (loss) was 35%, 15%, and (256%)
for the years ended 2007, 2006, and 2005 respectively.
Services
revenues are expected to increase as the Cicero® product gains
acceptance.
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 increased 127% or approximately $440,000 to $786,000 in
2007 as compared to $346,000 in 2006 and decreased by 45% or approximately
$281,000 in 2006 as compared to $627,000 in 2005. The increase in sales and
marketing expenses in 2007 is attributable to the establishment of a sales team
and several marketing campaigns as well as a charge for stock compensation
expense of approximately $97,000. In 2006, we had reduced its sales and
marketing workforce, decreased promotional activities
and changed the sales compensation structure.
Specifically, we changed the compensation structure to lower fixed costs and
increase variable success-based costs.
Sales and
marketing expenses are expected to increase as we add additional direct sales
personnel and support the sales function with collateral marketing materials and
marketing events. .
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 7% or $36,000 to $569,000 in 2007 as compared to $533,000 in 2006
and decreased by 40% or $358,000 in 2006 as compared to $891,000 in 2005. The
increase in costs in 2007 as compared to 2006 reflects a charge for stock
compensation expense of approximately $103,000 offset by general decreases in
overhead costs and employee benefits. The decrease in costs in 2006 as compared
to 2005 reflects the reduction in the number of employees by two plus associated
overheads in 2006.
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, investor relations 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, 2007 increased by 12% or $150,000 to $1,356,000 from $1,206,000 in
the prior year. The increase in general administrative costs reflects a charge
for stock based compensation of approximately $363,000, net of reductions in
general overheads and salary from its former Chief Information Officer who left
the company in July 2007. In fiscal 2006, general and administrative expenses
increased by 6% or $69,000 as compared to $1,137,000 in 2005. The increase in
general administrative costs is primarily due to costs associated with the
Company’s recapitalization plan in 2006.
General
and administrative expenses are expected to slightly increase going forward as
the Company’s revenues increase.
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 2007, 2006, or 2005. Because of the Company’s inconsistent
earnings history, the deferred tax assets have been fully offset by a valuation
allowance.
Impact of
Inflation. Inflation has not had a significant effect on the
Company’s operating results during the periods presented.
Liquidity and Capital Resources for the Nine Months
Ended September 30, 2008
Operating
and Investing Activities
Cash and
cash equivalents decreased to $228,000 at September 30, 2008 from $250,000 at
December 31, 2007. The Company used $22,000 of cash for the nine
months ended September 30, 2008.
Cash
provided by operations for the nine months ended September 30, 2008 was $475,000
compared with $1,398,000 used by operations for the nine months ended September
30, 2007. Cash provided by operations for the nine months ended
September 30, 2008 was primarily driven by non-cash charges for stock
compensation of approximately $344,000; the decrease of approximately $359,000
in accounts receivable; and the increase of deferred revenues from maintenance
contracts of $394,000. These cash inflows were offset by the loss
from operations of approximately $609,000.
The
Company bought $38,000 worth of equipment for the nine months ended September
30, 2008.
Financing
Activities
Net cash
used by financing activities for the nine months ended September 30, 2008 was
approximately $485,000 as compared with approximately $1,118,000 of net cash
provided by financing activities for the nine months ended September 30,
2007. Cash used by financing activities for the nine months ended
September 30, 2008 was comprised primarily of repayment of short and long term
debt.
Liquidity and Capital
Resources for the Years 2007 and 2006
Operating
and Investing Activities
We
utilized $60,000 of cash for the year ended December 31, 2007
Operating
activities utilized approximately $1,384,000 in cash, which was primarily
comprised of the loss from operations of $1,975,000, offset by non-cash charges
for depreciation and amortization of approximately $10,000, and stock
compensation expense of $720,000 and a provision for doubtful accounts of
$50,000. In addition, we had an increase in accounts receivable of $622,000, and
prepaid expenses and other assets of $136,000. We generated approximately
$478,000 in cash through an increase in the amount owing its
creditors.
We
utilized approximately $17,000 in cash in the purchase of updating our network
equipment.
We
generated approximately $1,347,000 of cash during the year from financing
activities from increases in issuance of common stock in private placement of
$1,040,000 and from approximately $307,000 resulting from net borrowings of
notes payable.
We
generated $281,000 of cash for the year ended December 31, 2006.
Operating
activities utilized approximately $2,224,000 in cash, which was primarily
comprised of the loss from operations of $2,997,000, offset by non-cash charges
for depreciation and amortization of approximately $12,000, and stock
compensation expense of $614,000 and a provision for doubtful accounts of
$60,000. In addition, we had an increase in accounts receivable of $212,000,
offset by a reduction of prepaid expenses and other assets of $31,000. We
generated approximately $311,000 in cash through an increase in the amount owing
its creditors.
We
utilized approximately $17,000 in cash in the purchase of updating our network
equipment.
We
generated approximately $2,528,000 of cash during the year from financing
activities from increases in Convertible Bridge notes of $2,148,000 and from
approximately $380,000 resulting from the issuance of common stock.
Financing
Activities
We funded
our cash needs during the year ended December 31, 2007 with cash on hand from
December 31, 2006, as well as through the use of proceeds from the private sale
of common stock and from short term borrowings.
In
February 2007, we completed a private sale of shares of common stock to a group
of investors, three of which are members of our Board of
Directors. Under the terms of that agreement, we sold 3,723,007
shares of our common stock for $0.1343 per share for a total of
$500,000. Participating in this offering were Mr. Mark Landis, who
was the Company’s Chairman at that time and Mr. Bruce Miller, who is a Board
member. Mr. Landis acquired 74,460 shares for a $10,000 investment
and Mr. Miller acquired 148,920 shares for a $20,000 investment. In
May 2007, Mr. John L. (Launny) Steffens was elected Chairman of the Board of
Directors. Prior to his election, Mr. Steffens had participated in
the private purchase of shares acquiring 1,006,379 shares for an investment of
$135,157.
We had a
term loan in the principal amount of $1,971,000 from Bank Hapoalim bearing
interest at LIBOR plus 1.5%). In October 2007, we agreed to restructure the note
payable to Bank Hapoalim and guaranty by BluePhoenix Solutions (formerly Liraz
Systems Ltd.). Under a new agreement with BluePhoenix, we made a principal
reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously,
BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that
indebtedness. The Company and BluePhoenix entered into a new note in the amount
of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31,
2011. In addition, BluePhoenix acquired 2,546,149 shares of our common stock in
exchange for $650,000 paid to Bank Hapoalim to retire that
indebtedness. Of the new note payable to BluePhoenix, approximately
$350,000 is due on January 31, 2009 and the balance is due on December 31,
2011.
In
October 2007, we completed a private sale of shares of our common stock to a
group of investors, four of which are members of our Board of Directors. Under
the terms of that agreement, we sold 2,169,311 shares of our common stock for
$0.2457 per share for a total of $533,000. Participating in this consortium were
Mr. John L. (Launny) Steffens, the Company’s Chairman, and Messrs. Bruce Miller,
Don Peppers, and Bruce Percelay, members of the Board. Mr. Steffens
converted the principal amount of his short term notes with the Company of
$250,000 for 1,017,501 shares of common stock. Mr. Miller invested
$20,000 for 81,400 shares of common stock, Mr. Peppers acquired 101,750 shares
for a $25,000 investment and Mr. Bruce Percelay acquired 40,700 shares for a
$10,000 investment.
In
October 2007, we entered into a Long Term Promissory Note in the amount of
$300,000 with Mr. John L Steffens, our chairman. The note bears interest at 3%
per annum and matures on October 30, 2009. In order to bring the interest rate
on the note in compliance with arm’s length regulations, we also issued 188,285
warrants to purchase our common stock at $0.18 each. The warrants were valued
using the Black Scholes method and a fair value of $34,230 was charged to stock
compensation expense in the fourth quarter of 2007. The warrants expire in 10
years. We used the proceeds from that loan to pay down the debt to Bank Hapoalim
as noted above.
We
incurred a net loss of approximately $1,975,000 for the year ended December 31,
2007 in addition to net losses of approximately $6,678,000 for the previous two
fiscal years and a net loss of $609,000 for the nine months ended September 30,
2008. We have experienced negative cash flows from operations for the
past three years. At September 30, 2008, we had a working capital deficiency of
approximately $6.0 million. Our future revenues are entirely
dependent on acceptance of Cicero®, which has had limited success in commercial
markets to date. Accordingly, there is substantial doubt that we can continue as
a going concern and the independent auditor’s report accompanying our financial
statements raises doubts about our ability to continue as a going concern. In
order to address these issues and to obtain adequate financing for our
operations for the next twelve months, we are actively promoting and expanding
its product line and continues to negotiate with significant customers that have
expressed interest in the Cicero® technology. We are 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.
Cicero® software is a new “category defining” product in that most Enterprise
Application Integration (EAI) projects are performed at the server level and
Cicero®’s integration occurs at the desktop level without the need to open and
modify the underlying code for those applications being integrated. Many
companies are not aware of this new technology or tend to look toward more
traditional and accepted approaches. We are attempting to solve the former
problem by improving the market’s knowledge and understanding of Cicero®
software through increased marketing and leveraging our limited number of
reference accounts, while enhancing our list of resellers and systems
integrators to assist in the sales and marketing process. The emergence of
competing technologies has also increased the awareness of this new technology.
Additionally, we must seek additional equity capital or other strategic
transactions in the near term to provide additional
liquidity.
We do not believe that we currently have sufficient cash
on hand to finance our operations for the
next twelve months. If we are unable to
increase cash flow, we will need to obtain
financing, which may not be on terms
favorable to us or our
stockholders. At our current rates of
expense and assuming the Company will
generate revenues in the next twelve months
at the annualized rate of revenue generated
in the first nine months of 2008, we
will be able to fund planned operations with existing capital resources for a
minimum of four months and experience negative cash flow of
approximately $1,000,000 during the next twelve months to maintain planned
operations. 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 we be
unable to continue as a going concern.
Contractual
Obligations
Future
minimum payments for all contractual obligations for years subsequent to
December 31, 2007 are as follows (in thousands):
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Total
|
|
Short
and long-term debt, including interest payments
|
|
$ |
1,647 |
|
|
$ |
699 |
|
|
$ |
40 |
|
|
$ |
711 |
|
|
$ |
3,097 |
|
Service
purchase commitments
|
|
|
175 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
175 |
|
Operating
leases
|
|
|
103 |
|
|
|
97 |
|
|
|
101 |
|
|
|
-- |
|
|
|
301 |
|
Capital
leases
|
|
|
2 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
2 |
|
Total
|
|
$ |
1,927 |
|
|
$ |
796 |
|
|
$ |
141 |
|
|
$ |
711 |
|
|
$ |
3,575 |
|
Short and
long-term debt, including interest payments, includes an outstanding
indebtedness of approximately $1,021,000 term loan with BluePhoenix Solutions, a
long term promissory note of $300,000 with the Company’s Chairman, Mr. John L.
Steffens, and a $250,000 short-term note with SDS Merchant Fund.
Under the
employment agreement between the Company and Mr. Broderick effective January 1,
2008, we will pay Mr. Broderick a base salary of $175,000 and performance
bonuses in cash of up to $100,000 per annum based upon certain revenue goals and
operating metrics as determined by the Compensation Committee of the Board of
Directors of the Company. In addition, Mr. Broderick is eligible for additional
bonuses should the targeted pre tax income be exceeded by 150%. Upon termination
of Mr. Broderick's employment by us without cause, we have agreed to provide Mr.
Broderick with a lump sum payment of one year of Mr. Broderick’s then current
base salary and payment of all deferred salaries and bonuses within thirty (30)
days of termination. In addition, all then outstanding but unvested stock
options shall vest one hundred percent (100%).
Off Balance Sheet
Arrangements
We do 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; and (3) 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.
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. As of December 31,
2007 and 2006 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, 2007, we had a
valuation allowance of $98,053,000 against $98,053,000 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, 2007, the Company has net operating loss carryforwards of
approximately $230,847,000, which may be applied against future taxable income.
These carryforwards will expire at various times between 2008 and 2027. 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.
Recent
Accounting Pronouncements:
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (Revised 2007),
“Business Combinations” (“SFAS 141R”). SFAS 141R will significantly
change the accounting for business combinations in a number of areas, including
the treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition,
under SFAS 141R, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income taxes. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The adoption of the provisions of
SFAS 141R is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, An Amendment of Accounting Research Bulletin
(“ARB”) No. 51.” SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB 51’s
consolidation procedures for consistency with the requirements of SFAS
141R. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008. The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially
adopted. The adoption of the provisions of SFAS 160 is not expected
to have a material effect on the Company’s financial position, results of
operations, or cash flows.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – an amendment of FASB Statement
115.” The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
provisions. Most of the provisions of this statement apply only to
entities that elect the fair value option; however, the amendment to FASB
Statement 115, “Accounting for Certain Investment in Debt and Equity Services,”
applies to all entities with available-for-sale and trading
securities. We do not believe adoption of this statement will have a
material impact on the Company’s financial statements.
In July
2006, the FASB issued Interpretation No. (“FIN”) 48, “Accounting for Uncertainty
in Income Taxes – An Interpretation of SFAS No. 109.” FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN No. 48 also prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. In
addition, FIN No. 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN No. 48 are to be applied to all tax
positions upon initial adoption of this standard. Only tax positions
that meet the more-likely-than-not recognition threshold at the effective date
may be recognized or continue to be recognized as an adjustment to the opening
balance of accumulated deficit (or other appropriate components of equity) for
that fiscal year. The provisions of FIN No. 48 are effective for
fiscal years beginning after December 15, 2006. The adoption of this
new standard did not have a material impact on our financial position, results
of operations, or cash flows.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) 108, to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that a company
quantify misstatements based on their impact on each of its financial statements
and related disclosures. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company has adopted SAB 108 effective as
of December 31, 2006. The adoption of SAB 108 did not have a material
impact on our financial position, results of operations, or cash
flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. It also responds to investors’
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS
No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of
2008. We are currently evaluating the effect that the adoption of
SFAS No. 157 will have on our financial position, results of operations, or cash
flows.
Disclosures
about Market Risk
As we
have disposed of or closed most of our European offices and operations, the
majority of revenues are generated from within the United States. We expect that
trend to continue for the next year. As such, there is minimal foreign currency
risk at present. Should we continue to develop a reseller presence in
Europe and Asia, that risk will be increased.
MANAGEMENT
The
following table sets forth certain information about our directors and executive
officers:
Name
|
|
Age
|
|
Position(s)
|
John
L Steffens
|
|
67
|
|
Director
and Chairman
|
John
Broderick
|
|
59
|
|
Director
and Chief Executive Officer/Chief Financial Officer
|
Anthony
C. Pizi
|
|
49
|
|
Director
|
Mark
Landis
|
|
67
|
|
Director
|
Bruce
W. Hasenyager
|
|
66
|
|
Director
|
Jay
R. Kingley
|
|
47
|
|
Director
|
Charles
B. Porciello
|
|
73
|
|
Director
|
Bruce
D. Miller
|
|
58
|
|
Director
|
Bruce
A. Percelay
|
|
53
|
|
Director
|
John
W. Atherton
|
|
66
|
|
Director
|
Don
Peppers
|
|
57
|
|
Director
|
John
L. Steffens
Director
since May, 2007.
Mr.
Steffens was appointed to our Board of Directors on May 16, 2007 and is the
Founder and Managing Director of Spring Mountain Capital, L. P. Prior
to establishing Spring Mountain Capital in July 2001, Mr. Steffens spent 38
years at Merrill Lynch & Co., where he held numerous senior management
positions, including President of Merrill Lynch Consumer Markets, which was
later named the Private Client Group, from July 1985 until April 1997, and both
Vice Chairman of Merrill Lynch & Co., Inc. (the parent company) and Chairman
of its U.S. Private Client Group from April 1997 until July 2001. Mr. Steffens
was elected a member of the Board of Directors of Merrill Lynch & Co., Inc.
in April 1986 and served on the board until July 2001. Mr. Steffens was Chairman
of the Securities Industry Association during 1994 and 1995, and is currently a
Trustee of the Committee for Economic Development. He is the National Chairman
Emeritus of the Alliance for Aging Research and serves on the Board of Aozora
Bank in Japan. Mr. Steffens graduated from Dartmouth University
in 1963 with a B.A. degree in Economics. He also attended the
Advanced Management Program of the Harvard Business School in
1979.
John
P. Broderick
Director
since July 2005.
Mr.
Broderick was appointed to our Board of Directors in July 2005 and has served as
our Chief Executive Officer since July 2005 and as our Chief
Financial Officer since April 2001. Mr. Broderick has served as the Chief
Operating Officer of the Company from June 2002 until present, and as Corporate
Secretary from August 2001 to present. Prior to joining our 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 Chief Financial Officer. Previously, Mr. Broderick
served as Chief Financial Officer and Senior Vice President of North American
Operations for Programmer's Paradise, a publicly held (NASDAQ: PROG)
international software marketer. Mr. Broderick received his B.S. in
accounting from Villanova University.
Anthony
C. Pizi
Director
since August 2000.
Mr. Pizi
has been the Chief Information Officer of the Asset Management
Platform Services Group of Deutsche Bank AG since August 2007. Mr. Pizi was the
Company’s Chief Information Officer from August 2005 until August 2007 and
served as Chief Executive Officer and Chief Technology Officer from February
2001 to July 2005. Mr. Pizi also served as Chairman of the Board of Directors
from December 1, 2000 until March 7, 2005 and from June 1, 2005 until July 22,
2005. 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 B.S. in Engineering from West
Virginia University.
Mark
Landis
Director
since July 2005.
Mr. Mark
Landis has been the Senior Managing Member of the Security Growth Fund, a newly
established private equity firm focused on the electronic security industry
since May 2005. Prior to joining the Security Growth Fund, Mr. Landis was the
Executive in Residence of The Jordan Company, a private equity firm based in New
York from August 2003 until December 2004. Mr. Landis retired from being
President of the North American Security Division of Siemens Building
Technologies, Inc. in July of 2003, having joined that company in
1988. Mr. Landis earned his B.A. from Cornell University and his
Juris Doctorate from the University of Pennsylvania. Mr. Landis
received his CPCU - Chartered Property and Casualty Underwriter from the
American Institute for Property and Liability Underwriters.
Bruce
W. Hasenyager
Director
since October 2002.
Mr.
Hasenyager has been a director of the Company since October
2002. Since November 2004, Mr. Hasenyager has served as Principal of
Bergen & Webster Executive Communications. From April 2002 until
December 2004, he served as Director of Business and Technology Development at
the Hart eCenter at Southern Methodist University (SMU) and Chief Operating
Officer of the Guildhall at SMU. From April 1996 to April 2002, Mr. Hasenyager
was a founder and served as Senior Vice President of Technology and Operations
and Chief Technology Officer at MobilStar Network Corporation. Prior to April
1996, Mr. Hasenyager held executive and senior management positions in
information technology at Chemical Bank, Merrill Lynch, Kidder Peabody, and
Citibank.
Jay
R. Kingley
Director
since November 2002.
Mr.
Kingley has been a director of the Company since November 2002. Mr.
Kingley has been the Chief Executive Officer of Kingley Institute LLC, a medical
wellness company, since January 2003. From January 2002 until July
2003, Mr. Kingley has 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 until
2001. Prior to joining Zurich Financial Services Group, Mr. Kingley
was Vice President of Diamond Technology Partners, Inc., a management-consulting
firm.
Charles
B. Porciello
Director
since June 2005.
Mr.
Porciello has been a director since June 6, 2005. Since 2003, Mr.
Porciello has been the Chief Executive Officer of Pilar Services, Inc. From 2001
until 2003, he served as Chief Operating Officer of Enterprise Integration
Corporation, a minority-owned IT services company. Prior to that Mr.
Porciello worked for various IT companies, developing and facilitating in their
growth. Mr. Porciello retired from the U.S. Air Force in 1982
after serving his country for twenty five years. Mr. Porciello graduated from
the U.S. Military Academy with a B.S. in Engineering and received his Masters
Degree in Management from the University of Nebraska.
Bruce
D. Miller
Director
since July 2005.
Mr. Bruce
D. Miller has been a General Partner of Delphi Partners, Ltd. a privately-owned
investment partnership since 1989. He is the treasurer and a director
of American Season Corporation. Mr. Miller is a board member of Cape
Air/Nantucket Airlines, Inc. Mr. Miller is a trustee of the Egan
Maritime Foundation and is involved in other non-profit
activities. Mr. Miller received his B.S. in Finance from
Lehigh University and subsequently earned an M.B.A. from
Lehigh.
Bruce
A. Percelay
Director
since January 2006.
Mr.
Percelay has been a director since January 10, 2006. Mr. Percelay is
the Founder and Chairman of the Mount Vernon Company, a real estate investment
company specializing in the acquisition and renovation of multi-family and
commercial properties in Greater Boston communities. Since 2000, Mr. Percelay
has been President of the Board of Habitat for Humanity in Greater
Boston. Mr. Percelay is currently Chairman of the Board of
Make-A-Wish Foundation of Greater Boston and Eastern
Massachusetts. Since 2002, Mr. Percelay has been a Board Member of
the Nantucket Historic Association. Mr. Percelay received his B.S. from Boston
University School of Management, and a B.A. in Business and Economics from City
of London Polytechnic, Special Studies in Economics.
John
W. Atherton
Director
since May 2006.
Mr.
Atherton has been a director since May 12, 2006. Since 2005, Mr. Atherton has
been the Vice President and Chief Financial Officer of CityFed Financial, a
publicly held financial holding company, based in Nantucket, Massachusetts. He
served as Chairman of CityFed Financial from 1991 until 2005. Mr. Atherton
received his B.A. degree from Wesleyan University (Middletown, Connecticut) and
an M.B.A. with Distinction from Babson College (Wellesley,
Massachusetts).
Don
Peppers
Director
since June 2007.
Mr.
Peppers has been a director since June 20, 2007. Mr. Peppers formed
Marketing 1:1, Inc. in January 1992 which became Peppers & Rogers Group, a
customer-centered management consulting firm with offices located in the United
States, Europe, Latin America and South Africa. In August 2003,
Peppers & Rogers Group joined Carlson Marketing. From October 1990 to
January 1992, Mr. Peppers was the Chief Executive Officer of Perkins/Butler
Direct Marketing, a top-20 U.S.-direct-marketing agency. Prior to
marketing and advertising, he worked as an economist in the oil business and as
the director of accounting for a regional airline. Mr. Peppers holds a
Bachelor's Degree in astronautical engineering from the U.S. Air Force Academy,
and a Master's Degree in public affairs from Princeton University's
Woodrow Wilson School.
Director
Independence
We
undertook a review of the independence of our directors and, using the
definitions and independence standards for directors provided in the rules of
The Nasdaq Stock Market, considered whether any director has a material
relationship with us that could interfere with his ability to exercise
independent judgment in carrying out his responsibilities. As a result of this
review, we determined that John L. Steffens, Mark Landis, Bruce W. Hasenyager,
Jay R. Kingley, Charles B. Porciello, Bruce D. Miller, Bruce A. Percelay, John
W. Atherton and Don Peppers are “independent directors” as defined under the
rules of The Nasdaq Stock Market.
Board
Meetings
The Board
met eight (8) times during the year ended December 31, 2007. The
standing committees of the Board include the Compensation Committee, the Audit
Committee and the Nominating Committee. Stockholders are encouraged to
communicate with Board members via our investor relations department, and such
communications are either responded to immediately or referred to our Chief
Executive Officer for a response. During fiscal 2007, each of the incumbent
directors, during his period of service, attended at least 75% of the total
number of meetings held by the Board.
Corporate
Governance Guidelines
Our Board
has long believed that good corporate governance is important to ensure that we
are managed for the long-term benefit of our stockholders. Our common stock is
currently quoted on the OTC Bulletin Board. The OTC Bulletin Board currently
does not have any corporate governance rules similar to the NASDAQ Stock Market,
Inc. or any other national securities exchange or national securities
association. However, our Board believes that the corporate governance rules of
NASDAQ represent good governance standards and, accordingly, during the past
year, our Board has continued to review our governance practices in light of the
Sarbanes-Oxley Act of 2002, the new rules and regulations of the Securities and
Exchange Commission and the new listing standards of NASDAQ and it has
implemented certain of the foregoing rules and listing standards during this
past fiscal year.
Director
Compensation
In 2007,
the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which
permits the issuance of incentive and nonqualified stock options, stock
appreciation rights, performance shares, and restricted and unrestricted stock
to employees, officers, directors, consultants, and advisors. The aggregate
number of shares of common stock which may be issued under this Plan shall not
exceed 4,500,000 shares upon the exercise of awards and provide that the term of
each award be determined by the Board of Directors. In August 2007, outside
directors were each granted an option to purchase 5,000 shares of common stock
at a price equal to the fair market value on the date of grant. The value of
these awards was $2,609. These options vest on the one year
anniversary of the date of grant provided that the director is still an active
member of the Board of Directors. In addition, each outside director who serves
on either the Audit Committee, the Compensation Committee or as the Chairman of
the Board, was granted an additional option to purchase 3,000 shares of common
stock at a price equal to the fair value on the date of grant. The value of
these awards was $1,565. These options also vest on the one year
anniversary of the date of grant and carry the same service
requirements.
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 120 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 240. 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 stock 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. None
of the Company’s directors received additional monetary compensation for serving
on the Board of Directors of the Company in 2007.
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 1,000 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.
Audit
Committee
The Audit
Committee is composed of Mr. Bruce Miller, Mr. Bruce Hasenyager and Mr. John W.
Atherton. The responsibilities of the Audit Committee include the appointment
of, retention, replacement, compensation and overseeing the work of the
Company’s independent accountants and tax professionals. The Audit Committee
reviews with the independent accountants the results of the audit engagement,
approves professional services provided by the accountants including the scope
of non-audit services, if any, and reviews the adequacy of our internal
accounting controls. The Audit Committee met formally six times during our
fiscal year ended December 31, 2007. Each member attended every meeting while
they were appointed to the 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. Mr. John W. Atherton was designated the “audit committee financial
expert” as defined in Item 401(h) of Regulation S-K.
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 Cicero Inc., Suite 542,
8000 Regency Pkwy, Cary, North Carolina 27518, Attn: Corporate
Secretary. The code of ethics is also available on the Company’s
website at www.ciceroinc.com.
Compensation Committee Membership and
Organization
The
Compensation Committee of the Board of Directors has responsibility for
establishing, implementing and monitoring adherence with the Company’s
compensation philosophy. Its duties include:
· Setting
the total compensation of our Chief Executive Officer and evaluating his
performance based on corporate goals and objectives;
· Reviewing
and approving the Chief executives Officer’s decisions relevant to the total
compensation of the Company’s other executive officer;
· Making
recommendations to the Board of Directors with respect to equity-based plans in
order to allow us to attract and retain qualified personnel;
and
· Reviewing
director compensation levels and practices, and recommending, from time to time,
changes in such compensation levels and practices of the Board of
Directors.
The
members of the Compensation Committee are Messrs. Kingley and Porciello. 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.
Kingley and Porciello have served as executive officers. Mr. Porciello is the
Chief Executive Office of Pilar Services Inc., a reseller partner. We
have recognized approximately $1,000 and $100,000 in revenues with Pilar
Services Inc. during 2007 and 2006, respectively. There were no
interlocking relationships between us and other entities that might affect the
determination of the compensation of the directors and executive officers of the
Company. The Compensation Committee meets on an as necessary basis during the
year.
The
following summary compensation table sets forth the compensation earned by all
persons serving as the Company’s executive officers during fiscal year 2007 and
2008.
Summary
Compensation Table
Name
and
Principal
Position
|
|
Fiscal
Year
|
|
Salary
|
|
|
Stock
Awards (1)
|
|
|
Option
Awards (2)
|
|
|
Non-
Equity
Incentive
Plan
Compensation (3)
|
|
|
All
Other
Compensation
(4)
|
|
|
Total
|
|
John
P. Broderick
Chief
Executive Officer Chief /Financial Officer, Corporate
Secretary
|
|
2008
|
|
$ |
175,000
|
|
|
$ |
36,136
|
|
|
$ |
91,659
|
|
|
$ |
25,000
|
|
|
$ |
6,780
|
|
|
$ |
334,575
|
|
|
|
2007
|
|
$ |
175,000
|
|
|
$ |
37,396
|
|
|
$ |
125,838
|
|
|
|
--
|
|
|
$ |
6,862
|
|
|
$ |
345,096
|
|
Anthony
C. Pizi
Chief
Information Officer (5)
|
|
2008
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2007
|
|
$ |
78,840
|
|
|
|
--
|
|
|
$ |
63,543
|
|
|
$ |
15,289
|
|
|
$ |
504
|
|
|
$ |
158,176
|
|
(1)
|
In
August 2007, we issued Mr. Broderick a restricted stock award in the
amount of 549,360 shares which will vest to him upon his resignation or
termination or a change of control. We used the Black-Scholes method to
value these shares and assumed a life of 10
years.
|
(2)
|
We
issued 549,360 options to Mr. Broderick in August 2007. The fair market on
the date of grant was $0.51 each. The options vested one-third immediately
and the balance on each of the next two anniversaries of the date of
grant. The Company issued 122,080 options to Mr. Pizi in August 2007. The
fair market value on the date of grant was $0.51 each. Mr. Pizi’s options
vested immediately however he failed to exercise these options within 90
days of separation from the Company and therefore they were cancelled on
November 30, 2007.
|
(3)
|
Non-equity
incentive plan compensation includes a bonus for certain revenue
transactions to Mr. Broderick earned during fiscal year ended December 31,
2008 and commission on revenue for Mr. Pizi earned during fiscal year
ended December 31, 2007.
|
(4)
|
Other
compensation includes the Company’s portion of major medical insurance
premiums and long term disability premiums for named
executives.
|
(5)
|
Mr.
Pizi resigned as the Company’s Chief Information Officer effective July
31, 2007.
|
Grants
of Plan Based Awards
We did
not award any stock options to the named executives during fiscal
2008. We awarded 549,360 stock options to the named executive during
fiscal 2007. We did not award any stock appreciation rights (“SARs”)
during fiscal 2008 and 2007.
The
following table presents the number and values of exercisable options as of
December 31, 2008 by the named executive.
Outstanding
Equity Awards at December 31, 2008
|
|
Option
Awards
|
|
Stock
Awards
|
Name
|
|
Number
of Securities Underlying Unexercised Options # Exercisable (Vested)
|
|
|
Number
of Securities Underlying Unexercised Unearned Options# Unexercisable (Unvested)
|
|
|
Option Exercise price
($)
|
|
Option Expiration
date
|
|
Number of Shares of Stock That Have Not
Vested
|
|
Market Value of Shares of Stock That Have Not
Vested
|
John
P. Broderick
|
|
|
500 |
(1) |
|
|
-- |
|
|
$ |
400.00 |
|
05/17/2011
|
|
|
|
|
|
|
|
250 |
(2) |
|
|
-- |
|
|
$ |
175.00 |
|
09/25/2011
|
|
|
|
|
|
|
|
909 |
(3) |
|
|
-- |
|
|
$ |
174.00 |
|
12/03/2011
|
|
|
|
|
|
|
|
1,000 |
(4) |
|
|
-- |
|
|
$ |
39.00 |
|
07/08/2012
|
|
|
|
|
|
|
|
4,950 |
(5) |
|
|
-- |
|
|
$ |
26.00 |
|
04/24/2013
|
|
|
|
|
|
|
|
5,000 |
(6) |
|
|
-- |
|
|
$ |
31.00 |
|
02/18/2014
|
|
|
|
|
|
|
|
366,2400 |
(7) |
|
|
183,120 |
(7) |
|
$ |
0.51 |
|
08/17/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549,630
(8)
|
|
$ 126,415
|
|
(1)
|
These
options were granted on May 17, 2001. This stock option vested and became
exercisable in four equal installments with the first installment vesting
on May 17, 2002.
|
|
(2)
|
These
options were granted on September 25, 2001. This stock option vested and
became exercisable in four equal annual installments with the first
installment vesting on September 25,
2002.
|
|
(3)
|
These
options were granted on December 3, 2001. This stock option vested and
became exercisable in three equal annual installments with the first
installment vesting on December 3,
2001.
|
|
(4)
|
These
options were granted on July 8, 2002. This stock option vested
and became exercisable in three equal annual installments with the first
installment vesting on July 8,
2002.
|
|
(5)
|
These
options were granted on April 24, 2003. This stock option vested and
became exercisable in three equal annual installments with the first
installment vesting on April 24,
2003.
|
|
(6)
|
These
options were granted on February 18, 2004. This stock option vested and
became exercisable in three equal annual installments with the first
installment vesting on February 18,
2004.
|
|
(7)
|
These
options were granted on August 17, 2007. This stock option vests in three
equal installments with the first installment vesting on August 17,
2007.
|
|
(8)
|
These
are restricted stock granted on August 17, 2007. The shares
will vest to him upon his resignation or termination or a change of
control.
|
Options
Exercised and Stock Vested
The
named executive did not exercise any options during the year ended December 31,
2008. All of Mr. Broderick’s outstanding options are fully vested except for
those identified in the table above.
Employment
Agreements, Termination of Employment and Change-In-Control
Arrangements
Under the
employment agreement between the Company and Mr. Broderick effective January 1,
2008, we agreed to pay Mr. Broderick an annual base salary of $175,000 and
performance bonuses in cash of up to $300,000 per annum based upon certain
revenue goals and operating metrics, as determined by the Compensation
Committee, in its discretion. Upon termination of Mr. Broderick’s
employment by the Company without cause, we agreed to pay Mr. Broderick a lump
sum payment of one year of Mr. Broderick’s then current base salary within 30
days of termination and any unpaid deferred salaries and bonuses. 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, we agreed
to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then
current base salary within thirty (30) days of termination. 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 us or assist any business
in attempting to do so or solicit or hire any person who was our employee during
the term of his employment agreement or assist any business in attempting to do
so.
Director
Compensation
The
following table sets forth the total compensation paid, accrued or expensed
during Fiscal 2008 by us to each of our non-employee directors who served during
Fiscal 2008, rounded to the nearest whole-dollar amount:
Name
|
|
Fees
Earned or Paid in Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan Compensation
|
|
|
All
Other Compensation
|
|
|
Total
|
|
John
L. Steffens
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
Anthony
Pizi
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
Mark
Landis
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
Bruce
W. Hasenyager
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
Jay
R. Kingley
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
Charles
B. Porciello
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
Bruce
D. Miller
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
Bruce
A. Percelay
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
John
W. Atherton
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
|
--
|
|
|
--
|
|
|
$ |
2,503 |
|
Don
Peppers
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
|
--
|
|
|
--
|
|
|
$ |
1,564 |
|
Total
|
|
--
|
|
|
--
|
|
|
$ |
21,274 |
|
|
--
|
|
|
--
|
|
|
$ |
21,274 |
|
The
following table sets forth information as of January 31, 2009 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
Cicero Inc., 8000 Regency Parkway, Suite 542, Cary, North Carolina
27518.
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 January 31, 2009 upon the exercise of
stock options as well as exercise of warrants. The chart is based on 46,642,396
common shares outstanding as of January 31, 2009. 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
|
|
Jonathan
Gallen (1)
|
|
|
9,015,386 |
(2) |
|
|
19.6 |
% |
John
L. Steffens (3)
|
|
|
5,382,668 |
(4) |
|
|
11.7 |
% |
Mark
and Carolyn P. Landis (5)
|
|
|
5,104,863 |
(6) |
|
|
11.1 |
% |
BluePhoenix
Solutions (7)
|
|
|
2,801,997 |
(8) |
|
|
6.1 |
% |
Anthony
C. Pizi
|
|
|
1,397,634 |
(9) |
|
|
3.0 |
% |
Bruce
Miller
|
|
|
1,979,787 |
(10) |
|
|
4.3 |
% |
Bruce
Percelay
|
|
|
1,073,486 |
(11) |
|
|
2.3 |
% |
John
P. Broderick
|
|
|
748,337 |
(12) |
|
|
1.6 |
% |
John
W. Atherton
|
|
|
148,884 |
(13) |
|
|
* |
|
Bruce
W. Hasenyager
|
|
|
33,652 |
(14) |
|
|
* |
|
Don
Peppers
|
|
|
101,750 |
(15) |
|
|
* |
|
Charles
Porciello
|
|
|
80,286 |
(16) |
|
|
* |
|
Jay
R. Kingley
|
|
|
1,000 |
(17) |
|
|
* |
|
All
current directors and executive officers as a group (11
persons)
|
|
|
16,052,247 |
(18) |
|
|
35.0 |
% |
*
|
Represents
less than one percent of the outstanding
shares.
|
1.
|
The
address of Mr. Gallen is 299 Park Avenue New York, New York
10171.
|
2.
|
As
of April 24, 2008, Ahab Partner, L.P. (“Partners”), Ahab International,
Ltd. (“International”), Queequeg Partners, L.P. (“Queequeg”) and Queequeg,
Ltd. (“Limited,” and collectively with Partners, International, and
Queequeg, , the “Funds”) held in aggregate (i) 8,896,136 shares of common
stock, (ii) warrants to acquire 4,914 shares of common stock, which
warrants expire on October 8, 2008 and (iii) warrants to acquire 14,336
shares of common stock, which warrants expire on January 4,
2011. Jonathan Gallen possesses the sole power to vote and the
sole power to direct the disposition of all securities of the Company held
by the Funds. In addition, as of April 4, 2008, Jonathan Gallen
held the power to direct the disposition of 100,000 shares of common stock
held in private investment account. Accordingly, for the
purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, Mr. Gallen may be deemed to beneficially own 9,015,386 shares of
common stock of the Company. This information is based on a
Form 4 filed by Mr. Gallen on May 21,
2008.
|
3.
|
The
address of John L. Steffens is 65 East 55th
Street, New York, N.Y. 10022.
|
4.
|
Includes
5,160,307 shares of common stock, 14,832 shares of the Series A-1
Convertible Preferred Stock and 207,529 shares issuable upon the exercise
of warrants. The exercise prices of the warrants are as follows: 4,912 at
$40.00 per share, 14,332 at $10.00 per share and 188,285 at $0.18 per
share.
|
5.
|
The
address of Mark and Carolyn P. Landis is 503 Lake Drive, Princeton, New
Jersey 08540.
|
6.
|
Includes
3,748,155 shares of common stock, 1,326,136 shares of the Series A-1
Convertible Preferred Stock, and 30,572 shares of common stock issuable
upon the exercise of warrants. The exercise prices of the stock options
and warrants are at $0.51 and $10.00 per share
respectively. Disclaims beneficial ownership of 35,572 shares
because they are anti-dilutive.
|
7.
|
The
address of BluePhoenix Solutions is 8 Maskit Street, PO Box 2062, Herzlia,
Israel 46120.
|
8.
|
Includes
2,741,997 shares of common stock
|
9.
|
Includes
1,274,951 shares of common stock, 111.016 shares of the Series A-1
Convertible Preferred Stock, and 11,667 shares of common stock issuable
upon the exercise of warrants. The exercise price of warrants
is $10.00 per share of common
stock.
|
10.
|
Consists
of 1,963,078 shares of common stock and 19,166 shares of common stock
issuable upon the exercise of warrants. The exercise prices of
the warrants are as follows: 13,195 at $10.00 per
share. Mr. Miller has sole or shared voting or dispositive power
with respect to the securities held by Delphi Partners, Ltd., which holds
491,267 shares of common stock and 3,514 shares of common stock issuable
upon the exercise of warrants with an exercise price at $10.00 per
share.
|
11.
|
Consists
of 1,073,486 shares of common
stock.
|
12.
|
Includes
3,248 shares of common stock. 195,729 shares subject to stock
options exercisable within sixty (60) days and 549,360 shares of
restricted stock that is awarded upon resignation or termination and
change of control.
|
13.
|
Includes
148,784 shares of common stock, and 100 shares of common stock held in a
self-directed IRA.
|
14.
|
Consists
of 32,652 shares of common stock and 1,000 shares subject to stock options
exercisable within sixty (60) days. Disclaims beneficial
ownership of 1,000 shares of common stock because they are
anti-dilutive.
|
15.
|
Includes
101,750 shares of common stock
|
16.
|
Consists
of 80,286 shares of common stock.
|
17.
|
Consists
of 1,000 shares subject to stock options exercisable within sixty (60)
days.
|
18.
|
Includes
shares issuable upon exercise of options and warrants exercisable within
sixty (60) days as described in Notes 7-14 to our financial
statements.
|
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Loans
from Related Parties
In June
2008, the Company entered into a short term notes payable with John L. (Launny)
Steffens, the Chairman of the Board of Directors, for various working capital
needs. The note bears interest at 10% per year and is unsecured. At
September 30, 2008, the Company was indebted to Mr. Steffens in the amount of
$45,000.
In
October 2007, we entered into a long-term promissory note with John L. (Launny)
Steffens as part of the restructuring of the Note payable to Bank
Hapoalim. The Note bears interest of 3% and matures in October 2009.
We also granted Mr. Steffens 188,285 warrants to purchase common stock at $0.18
per share. We used the Black Scholes method to value the warrants and recorded a
stock compensation charge and additional paid-in capital in the amount of
$34,230. At September 30, 2008, we were indebted to Mr. Steffens in the amount
of $300,000.
In
November 2007, we entered into a short term note payable with John L. (Launny)
Steffens, the Chairman of the Board of Directors, for various working capital
needs. The Note bears interest at 6% per year and is unsecured. At September
30, 2008, we were indebted to Mr. Steffens in the amount of
$40,000.
During
2005, we entered into short term notes payable with Anthony Pizi, the Company’s
former Chief Information Officer, for various working capital needs. The Notes
bear interest at 1% per month and are unsecured. At September 30, 2008, we were
indebted to Mr. Pizi in the amount of $9,000.
Convertible
Promissory Notes. Our Directors and executive officers made
several loans to us in exchange for convertible promissory notes. As part of the
Plan of Recapitalization, which was approved by our shareholders in November
2006, we offered to adjust the conversion rates and terms on these notes. As a
result of the Plan of Recapitalization, these notes were automatically converted
into shares of the preferred stock designated as Series A-1 Preferred stock.
Each share of Series A-1 Preferred Stock is convertible into 1,000 shares of the
Company’s common stock. Because the conversion rates were adjusted, we
calculated the amount of the beneficial conversion resulting from the adjusted
conversion rate and recorded that amount as a deemed dividend and additional
paid in capital.
In June,
2004, we entered into a convertible promissory note with Mr. Pizi in the face
amount of $100,000, bearing interest at 1% per month which was converted into 14
shares of the Company’s Series A-1 Preferred Stock. In addition, Mr. Pizi was
granted 270,270 warrants to purchase our common stock at $0.37 per share. As
part of the Note and Warrant Offering, Mr. Pizi elected to convert these
warrants by loaning the Company the reduced exercise price.
In
July 2004, we entered into a convertible promissory note with Mr. Pizi in the
face amount of $112,000, bearing interest at 1% per month which was converted
into 78.4 shares of the Company’s Series A-1 Preferred Stock upon approval of
the Plan of Recapitalization. In addition, at the time of the loan Mr. Pizi was
granted warrants to purchase 560,000 shares of our common stock at $0.20 per
share. As part of the Note and Warrant Offering, Mr. Pizi elected to
convert 289,376 of these warrants by loaning the Company the reduced exercise
price. Mr. Pizi elected not to exercise 270,624 warrants which after the reverse
stock split now total 2,706 warrants with an exercise price of $20 per share.
Also in July 2004, Mr. Pizi entered into a second convertible promissory note in
the face amount of $15,000 which was converted into 12.62 shares of the
Company’s Series A-1 Preferred Stock. In addition, at the time of the loan, Mr.
Pizi was granted warrants to purchase 90,118 shares of our common stock at $0.17
per share. Mr. Pizi has not elected to exercise these warrants, which after the
reverse stock split now total 901 warrants with an exercise price of
$17.
In March
2004, we entered into a convertible promissory note with Mr. and Mrs. Landis in
the amount of $125,000. The note bore interest at 1% per month, and was
converted into 62.5 shares of Series A-1 Preferred stock. In addition, Mr. and
Mrs. Landis were granted warrants to purchase 446,429 shares of the Company’s
common stock exercisable at $0.28 per share. As part of the Note and Warrant
Offering, Mr. and Mrs. Landis elected to convert these warrants by loaning the
Company the reduced exercise price.
In June
2004, we entered into a convertible promissory note with Mr. and Mrs. Landis in
the amount of $125,000. The note bore interest at 1% per month and was converted
into 113.64 shares of Series A-1 Preferred stock. In addition, Mr. and Mrs.
Landis were granted warrants to purchase 781,250 shares of the Company’s common
stock exercisable at $0.16 per share. As part of the Note and Warrant Offering,
Mr. and Mrs. Landis elected to convert these warrants by loaning the Company the
reduced exercise price.
In
October 2004, we entered into a convertible promissory note with Mr. and Mrs.
Landis in the amount of $100,000. The note bore interest at 1% per month and was
converted into 400 shares of Series A-1 Preferred stock. In addition, Mr. and
Mrs. Landis were granted 2,000,000 warrants to purchase our common stock
exercisable at $0.10 per share. Mr. and Mrs. Landis elected not to exercise
these warrants as part of the Note and Warrant Offering and after the reverse
stock split ratio these warrants total 20,000 with an exercise price of
$10.00.
In
November 2004, we entered into a convertible promissory note with Mr. and Mrs.
Landis in the amount of $150,000. The note bore interest at 1% per month and was
converted into 18,750 shares of common stock after the reverse stock split
ratio. In addition, Mr. and Mrs. Landis were granted 1,875,000 warrants to
purchase our common stock exercisable at $0.08 per share. Mr. and
Mrs. Landis elected not to exercise these warrants as part of the Note and
Warrant Offering and after the reverse stock split ratio these warrants total
18,750 with an exercise price of $8.00.
In June
2004, we entered into a convertible promissory note with Fredric Mack, a former
director of the Company, in the amount of $125,000. The note bore interest at 1%
per month, and was converted into 54.69 shares of Series A-1 Preferred stock. In
addition, Mr. Mack was granted warrants to purchase 390,625 shares of our common
stock exercisable at $0.32 per share. As part of the Note and Warrant
Offering, Mr. Mack elected to convert these warrants by loaning the Company the
reduced exercise price.
In April
2005, we entered into a convertible promissory note with Bruce Miller, a
director of the Company, in the amount of $30,000. The note bore interest at 1%
per month and was converted into 60 shares of Series A-1 Preferred
stock.
In July
2004, we entered into a convertible promissory note with Nicholas Hatalski, who
until July 22, 2005 was a director of the Company, in the amount of $25,000. The
note bore interest at 1% per month and was converted into 10.94 shares of Series
A-1 Preferred stock. In addition, Mr. Hatalski was granted warrants to purchase
78,125 shares of our common stock exercisable at $0.32 per share. Mr. Hatalski
elected not to exercise these warrants as part of the Note and Warrant Offering
and after the reverse stock split ratio these warrants total 781 with an
exercise price of $32.
All of
such warrants expire three years from date of grant.
Senior Reorganization
Notes. From March 2004 to April 2005, directors and executive
officers made the following loans to the Company evidenced by Senior
Reorganization Notes that were converted in November 2006:
Mr. Pizi
held $423,333 of Senior Reorganization Notes, which were converted into warrants
to purchase 571,659 shares of common stock at a purchase price of $0.20 per
share.
Mr.
Landis held $327,860 of Senior Reorganization Notes, which were converted into
warrants to purchase 442,345 shares of common stock at an exercise
price of $0.20 per share.
Mr. Mack
held, together with his affiliates, $88,122 of Senior Reorganization Notes,
which were converted into warrants to purchase 112,205 shares of common stock at
a purchase price of $0.20 per share.
Mr.
Miller held, together with his affiliates, $77,706 of Senior Reorganization
Notes, which were converted into warrants to purchase 114,597 shares of common
stock at a purchase price of $0.20.
Mr.
Atherton held $20,000 of Senior Reorganization Notes which were converted into
warrants to purchase 289,856 shares of common stock at a purchase price of
$0.20.
Mr.
Broderick, Chief Executive Officer and Chief Financial Officer of the Company,
held $2,300 of Senior Reorganization Notes, which were converted into warrants
to purchase 3,222 shares of common stock at a purchase price of $0.20 per share,
and options to purchase 12,609 shares of common stock under the Company’s stock
option plan.
Convertible Bridge
Notes. From July 2005 to November 2006, directors and
executive officers made the following loans to us for Convertible Bridge
Notes:
Mr. Pizi
held $85,000 of Convertible Bridge Notes which bore interest at 10% and matured
on September 15, 2005. These notes automatically converted into
680,000 shares of Cicero common stock upon approval of the recapitalization plan
by stockholders.
Mr.
Landis held $395,000 of Convertible Bridge Notes which bore interest at 10% and
matured on various dates in 2005 and 2006. These notes automatically
converted into 3,160,000 shares of Cicero common stock upon approval of the
recapitalization plan by stockholders.
Mr. Mack
held, together with his affiliates, $114,000 of Convertible Bridge Notes which
bore interest at 10% and matured on various dates in 2005 and
2006. These notes automatically converted into 897,564 shares of
Cicero common stock upon approval of the recapitalization plan by
stockholders.
Mr.
Miller held, together with his affiliates, $120,000 of Convertible Bridge Notes
which bore interest at 10% and matured on various dates in 2005 and
2006. These notes automatically converted into 947,273 shares of
Cicero common stock upon approval of the recapitalization plan by
stockholders.
Mr.
Hasenyager, a member of our Board of Directors, held $4,061 of Convertible
Bridge Notes which bore interest at 10% and matured on September 15, 2005. These
notes automatically converted into 32,485 shares of Cicero common stock upon
approval of the recapitalization plan by stockholders.
Mr.
Percelay, a member of our Board of Directors, held $130,000 of Convertible
Bridge Notes which bore interest at 10% and matured on various dates in 2005 and
2006. These notes automatically converted into 1,027,273 shares of Cicero common
stock upon approval of the recapitalization plan by stockholders.
Mr.
Atherton, a member of our Board of Directors, held $15,000 of convertible Bridge
Notes which bore interest at 10% and matured during 2006. These notes
automatically converted into 120,000 shares of Cicero common stock upon approval
of the recapitalization plan by stockholders.
Mr.
Porciello, a member of our Board of Directors, held $10,000 of Convertible
Bridge Notes which bore interest at 10% and matured during 2006. These notes
automatically converted into 80,000 shares of Cicero common stock upon approval
of the recapitalization plan by stockholders.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During
the two most recent fiscal years there were no changes in or disagreements with
the our company’s independent public accountants.
DESCRIPTION OF CAPITAL STOCK
The
following descriptions of certain provisions of our certificate of incorporation
and bylaws are necessarily general and do not purport to be complete and are
qualified in their entirety by reference to our certificate of incorporation and
bylaws which have been incorporated by reference herein.
Common Stock
Our
authorized capital stock consists of 225 million shares, of which 215 million
shares have been designated common stock, par value $.001 per share. As of
January 31, 2009, there were 46,642,396 shares of common stock issued and
outstanding, held by 220 holders of record. The holders of common
stock are entitled to one vote for each share on all matters submitted to a vote
of stockholders. Holders of common stock are entitled to such
dividends as may be declared from time to time by the board of directors out of
funds legally available therefore, subject to the dividend and liquidation
rights of any preferred stock (as described below) that may be issued, and
subject to the dividend restrictions in certain credit facilities and various
other agreements. In the event of the liquidation, dissolution or winding-up of
our company, the holders of common stock are entitled to share equally and
ratably in our assets, if any, remaining after provision for payment of all
debts and liabilities of the Company and satisfaction of the liquidation
preference of any shares of preferred stock that may be outstanding. The holders
of common stock have no preemptive, subscription, redemptive or conversion
rights. The outstanding shares of common stock are fully paid and
nonassessable.
Preferred
Stock
Our
company is authorized to issue 10 million shares of preferred stock, par value
$.001 per share. The board of directors of our company has authority, without
stockholder approval, to issue shares of preferred stock in one or more series
and to determine the number of shares, designations, dividend rights, conversion
rights, voting power, redemption rights, liquidation preferences and other terms
of any such series. The issuance of preferred stock, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting power of the holders of common stock
and the likelihood that such holders will receive dividend payments and payments
upon liquidation and could have the effect of delaying, deferring, or preventing
a change in control of our company.
At the
date of this prospectus, there were 1,763.5 shares of Series A-1 preferred stock
designated and 1,544 issued and outstanding. The Series A-1 preferred
stock is convertible at any time at the option of the holder into an initial
conversion ratio of 1,000 shares of Common Stock for each share of Series A-1
preferred stock. The initial conversion ratio shall be adjusted in the event of
any stock splits, stock dividends and other recapitalizations. The Series A-1
preferred stock is also convertible on an automatic basis in the event that (i)
the Company closes on an additional $5,000,000 equity financing from strategic
or institutional investors, or (ii) the Company has four consecutive quarters of
positive cash flow as reflected on the Company’s financial statements prepared
in accordance with generally accepted accounting principals (“GAAP”) and filed
with the Securities and Exchange Commission. The holders of Series A-1 preferred
stock are entitled to receive equivalent dividends on an as-converted basis
whenever the Company declares a dividend on its Common Stock, other than
dividends payable in shares of Common Stock. The holders of the Series A-1
preferred stock are entitled to a liquidation preference of $500 per share of
Series A-1 preferred stock upon the liquidation of the Company. The Series A-1
preferred stock is not redeemable.
The
holders of Series A-1 preferred stock also possess the following voting rights:
each share of Series A-1 preferred stock shall represent that number of votes
equal to the number of shares of Common Stock issuable upon conversion of a
share of Series A-1 preferred stock. The holders of Series A-1 preferred stock
and the holders of Common Stock shall vote together as a class on all matters
except: (i) regarding the election of the board of directors of the Company
(as set forth below); (ii) as required by law; or (iii) regarding certain
corporate actions to be taken by the Company (as set forth below).
The
approval of at least two-thirds of the holders of Series A-1 preferred stock
voting together as a class, shall be required in order for the Company to: (i)
merge or sell all or substantially all of its assets or to recapitalize or
reorganize; (ii) authorize the issuance of any equity security having any right,
preference or priority superior to or on parity with the Series A-1 preferred
stock; (iii) redeem, repurchase or acquire indirectly or directly any of its
equity securities, or to pay any dividends on the Company’s equity securities;
(iv) amend or repeal any provisions of its certificate of incorporation or
bylaws that would adversely affect the rights, preferences or privileges of the
Series A-1 preferred stock; (v) effectuate a significant change in the principal
business of the Company as conducted at the effective time of the
Recapitalization; (vi) make any loan or advance to any entity other than in the
ordinary course of business unless such entity is wholly owned by the Company;
(vii) make any loan or advance to any person, including any employees or
directors of the Company or any subsidiary, except in the ordinary course of
business or pursuant to an approved employee stock or option plan; and (viii)
guarantee, directly or indirectly any indebtedness or obligations, except for
trade accounts of any subsidiary arising in the ordinary course of business. In
addition, the unanimous vote of the board of directors is required for any
liquidation, dissolution, recapitalization or reorganization of the Company. The
voting rights of the holders of Series A-1 preferred stock set forth in this
paragraph shall be terminated immediately upon the closing by the Company of at
least an additional $5,000,000 equity financing from strategic or institutional
investors.
In
addition to the voting rights described above, the holders of a majority of the
shares of Series A-1 preferred stock are entitled to appoint two observers to
the Company’s board of directors who shall be entitled to receive all
information received by members of the board of directors, and shall attend and
participate without a vote at all meetings of the Company’s board of directors
and any committees thereof. At the option of a majority of the holders of Series
A-1 preferred stock, such holders may elect to temporarily or permanently
exchange their board observer rights for two seats on the Company’s board of
directors, each having all voting and other rights attendant to any member of
the Company’s board of directors.
Warrants
As of the
date of the prospectus, 390,400 shares have been designated as shares held for
the conversion of warrants. 188,285 warrants are exercisable at $0.18 per share,
201,115 warrants are exercisable at $10 per share, and 1,000 warrants are
exercisable at $38 per share. The warrants expire in 3 years from the date of
grant.
COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended (the “Act”), may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other then the payment by the
registrant of expense incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Certain
legal matters in connection with the shares of common stock offered by this
prospectus have been passed on for us by Golenbock Eiseman Assor Bell &
Peskoe LLP, New York, New York.
The
financial statements for the years ended December 31, 2007 and 2006 have been
audited by Margolis & Company P.C., independent auditors, as stated in their
reports appearing herein (which reports express an unqualified opinion and
include an explanatory paragraph referring to the Company’s ability to continue
as a going concern), and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
We file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission. You can receive copies of such
reports, proxy and information statements, and other information, at prescribed
rates, from the Securities and Exchange Commission by addressing written
requests to the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Securities and Exchange Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants such as Cicero Inc. that file electronically
with the Securities and Exchange Commission. The address of the Securities and
Exchange Commission Web site is http://www.sec.gov. We have filed with the
Securities and Exchange Commission a Registration Statement on Form S-1 to
register the shares that we will issue in this offering. This prospectus is a
part of the Registration Statement. This prospectus does not include all of the
information contained in the Registration Statement. For further information
about us and the securities offered in this prospectus, you should review the
Registration Statement. You can inspect or copy the Registration Statement, at
prescribed rates, at the Securities and Exchange Commission’s public reference
facilities at the addresses listed above.
INDEX TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Financial Statements (audited):
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
F-3
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006, and
2005
|
|
F-4
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended December
31, 2007, 2006, and 2005
|
|
F-5
|
Consolidated
Statements of Comprehensive Loss for the years ended December 31, 2007,
2006, and 2005
|
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006, and
2005
|
|
F-7
|
Notes
to Consolidated Financial Statements
|
|
F-9
|
|
|
|
|
|
|
Consolidated
Financial Statements (unaudited):
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2008 and December 31,
2007
|
|
F-27
|
Consolidated
Statements of Operations for the three and nine months
ended September 30, 2008 and 2007
|
|
F-28
|
Consolidated
Statements of Cash Flows for the nine months ended September 30,
2008 and 2007
|
|
F-29
|
Consolidated
Statements of Comprehensive Loss for the three and nine months
ended September 30, 2008 and 2007
|
|
F-30
|
Notes
to Consolidated Financial Statements
|
|
F-31
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Cicero
Inc.
Cary,
North Carolina
We have
audited the accompanying consolidated balance sheets of Cicero Inc. and
subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity (deficit),
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 2007. Cicero Inc.’s management is responsible for
these financial statements. 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cicero Inc. and subsidiaries
as of December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2007, 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
March 10,
2008
CICERO
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
250 |
|
|
$ |
310 |
|
Assets
of operations to be abandoned
|
|
|
79 |
|
|
|
80 |
|
Trade
accounts receivable, net
|
|
|
692 |
|
|
|
170 |
|
Prepaid
expenses and other current assets
|
|
|
208 |
|
|
|
22 |
|
Total
current assets
|
|
|
1,229 |
|
|
|
582 |
|
Property
and equipment, net
|
|
|
22 |
|
|
|
15 |
|
Total
assets
|
|
$ |
1,251 |
|
|
$ |
597 |
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
debt (Note
5)
|
|
$ |
1,235 |
|
|
$ |
2,899 |
|
Accounts
payable
|
|
|
2,489 |
|
|
|
2,360 |
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related items
|
|
|
1,002 |
|
|
|
1,012 |
|
Other
|
|
|
2,072 |
|
|
|
1,732 |
|
Liabilities
of operations to be abandoned
|
|
|
455 |
|
|
|
435 |
|
Deferred
revenue
|
|
|
108 |
|
|
|
38 |
|
Total
current liabilities
|
|
|
7,361 |
|
|
|
8,476 |
|
Long-term
debt (Note
6)
|
|
|
1,323 |
|
|
|
33 |
|
Total
liabilities
|
|
|
8,684 |
|
|
|
8,509 |
|
Commitments
and contingencies (Notes 14 and 15)
|
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares authorized
Series
A-1 – 1,603.6 shares issued and outstanding at December 31, 2007, $500 per
share liquidation preference (aggregate liquidation value of $802) and
1,763.5 shares issued and outstanding at December 31, 2006, $500 per share
liquidation preference (aggregate liquidation value of
$880)
|
|
|
--
|
|
|
|
--
|
|
Common
stock, $0.001 par value, 215,000,000 shares authorized at December 31,
2007 and 2006, respectively; 43,805,508 and 35,182,406 issued and
outstanding at December 31, 2007 and 2006, respectively (Note
2)
|
|
|
44 |
|
|
|
35 |
|
Additional
paid-in-capital
|
|
|
228,858 |
|
|
|
226,407 |
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
(236,320 |
) |
|
|
(234,345 |
) |
Accumulated
other comprehensive loss
|
|
|
(15 |
) |
|
|
(9 |
) |
Total
stockholders' deficit
|
|
|
(7,433 |
) |
|
|
(7,912 |
) |
Total
liabilities and stockholders' deficit
|
|
$ |
1,251 |
|
|
$ |
597 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Software
|
|
$ |
501 |
|
|
$ |
208 |
|
|
$ |
407 |
|
Maintenance
|
|
|
300 |
|
|
|
120 |
|
|
|
147 |
|
Services
|
|
|
1,007 |
|
|
|
644 |
|
|
|
231 |
|
Total
operating revenue
|
|
|
1,808 |
|
|
|
972 |
|
|
|
785 |
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
19 |
|
|
|
9 |
|
|
|
16 |
|
Maintenance
|
|
|
264 |
|
|
|
212 |
|
|
|
350 |
|
Services
|
|
|
654 |
|
|
|
546 |
|
|
|
822 |
|
Total
cost of revenue
|
|
|
937 |
|
|
|
767 |
|
|
|
1,188 |
|
Gross
margin (loss)
|
|
|
871 |
|
|
|
205 |
|
|
|
(403 |
) |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
786 |
|
|
|
346 |
|
|
|
627 |
|
Research
and product development
|
|
|
569 |
|
|
|
533 |
|
|
|
891 |
|
General
and administrative
|
|
|
1,356 |
|
|
|
1,206 |
|
|
|
1,137 |
|
(Gain)
on disposal of assets
|
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
Total
operating expenses
|
|
|
2,711 |
|
|
|
2,061 |
|
|
|
2,655 |
|
Loss
from operations
|
|
|
(1,840 |
) |
|
|
(1,856 |
) |
|
|
(3,058 |
) |
Other
income (charges):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(257 |
) |
|
|
(853 |
) |
|
|
(593 |
) |
Other
|
|
|
122 |
|
|
|
(288 |
) |
|
|
(30 |
) |
|
|
|
(135 |
) |
|
|
(1,141 |
) |
|
|
(623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,975 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock and deemed dividends
|
|
|
- |
|
|
|
5,633 |
|
|
|
- |
|
Net
loss applicable to common stockholders
|
|
$ |
(1,975 |
) |
|
$ |
(8,630 |
) |
|
$ |
(3,681 |
) |
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders - basic and diluted
|
|
$ |
(0.05 |
) |
|
$ |
(0.25 |
) |
|
$ |
(8.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
36,771 |
|
|
|
35,182 |
|
|
|
445 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in
thousands)
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
43,304 |
|
|
$ |
43 |
|
|
|
33 |
|
|
|
-- |
|
|
$ |
210,142 |
|
|
$ |
(222,034 |
) |
|
$ |
(8 |
) |
|
$ |
(11,857 |
) |
Conversion
of preferred shares to common
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
-- |
|
Shares
issued as compensation
|
|
|
961 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
103 |
|
Shares
issued for bank guarantee
|
|
|
2,400 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
47 |
|
Conversion
of senior convertible redeemable preferred stock
|
|
|
957 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_
|
|
|
|
(3,681 |
) |
|
|
|
|
|
|
(3,681 |
) |
Balance
at December 31, 2005
|
|
|
48,017 |
|
|
|
48 |
|
|
|
33 |
|
|
|
-- |
|
|
|
210,594 |
|
|
|
(225,715 |
) |
|
|
(3 |
) |
|
|
(15,076 |
) |
Reversed
stock split 100:1
|
|
|
(47,536 |
) |
|
|
(48 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
-- |
|
Balance
at December 31, 2005 as adjusted for stock split
|
|
|
481 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
210,642 |
|
|
|
(225,715 |
) |
|
|
(3 |
) |
|
|
(15,076 |
) |
Shares
issued from conversion of senior reorganization debt
|
|
|
3,438 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,705 |
|
|
|
|
|
|
|
|
|
|
|
1,708 |
|
Shares
issued from conversion of convertible bridge notes
|
|
|
30,508 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
3,877 |
|
|
|
|
|
|
|
|
|
|
|
3,909 |
|
Shares
issued for bank guarantee
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
312 |
|
Shares
issued from short term debt conversion
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
190 |
|
Shares
issued from conversion of convertible promissory notes
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
992 |
|
Conversion
of senior convertible redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,061 |
|
|
|
|
|
|
|
|
|
|
|
1,061 |
|
Conversion
of warrants
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,086 |
|
|
|
|
|
|
|
|
|
|
|
1,086 |
|
Shares
issued for interest conversion
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
629 |
|
|
|
|
|
|
|
|
|
|
|
629 |
|
Shares
issued as compensation
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
280 |
|
Accretion
of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529 |
|
|
|
(529 |
) |
|
|
|
|
|
|
-- |
|
Deemed
dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,104 |
|
|
|
(5,104 |
) |
|
|
|
|
|
|
-- |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,997 |
) |
|
|
|
|
|
|
(2,997 |
) |
Balance
at December 31, 2006
|
|
|
35,182 |
|
|
|
35 |
|
|
|
2 |
|
|
|
-- |
|
|
|
226,407 |
|
|
|
(234,345 |
) |
|
|
(9 |
) |
|
|
(7,912 |
) |
Shares
issued for private placement
|
|
|
5,892 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
1,040 |
|
Shares
issued for litigation settlement
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Conversion
of preferred shares to common
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
Options
issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
650 |
|
Restricted
shares issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
Warrant
issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
34 |
|
Shares
issued with refinancing of debt
|
|
|
2,546 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
647 |
|
|
|
|
|
|
|
|
|
|
|
650 |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,975 |
) |
|
|
|
|
|
|
(1,975 |
) |
Balance
at December 31, 2007
|
|
|
43,805 |
|
|
$ |
44 |
|
|
|
2 |
|
|
|
-- |
|
|
$ |
228,858 |
|
|
$ |
(236,320 |
) |
|
$ |
(15 |
) |
|
$ |
(7,433 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,975 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,681 |
) |
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
5 |
|
Comprehensive
loss
|
|
$ |
(1,981 |
) |
|
$ |
(3,003 |
) |
|
$ |
(3,676 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,975 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,681 |
) |
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
10 |
|
|
|
12 |
|
|
|
11 |
|
Stock
compensation expense
|
|
|
720 |
|
|
|
614 |
|
|
|
149 |
|
Provision
(credit) for doubtful accounts
|
|
|
50 |
|
|
|
60 |
|
|
|
(12 |
) |
Gain on
disposal of assets
|
|
|
-- |
|
|
|
24 |
|
|
|
-- |
|
Changes
in assets and liabilities, net of assets acquired and liabilities
assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable and related party receivables
|
|
|
(622 |
) |
|
|
(212 |
) |
|
|
146 |
|
Assets
and liabilities of operations to be abandoned
|
|
|
21 |
|
|
|
(27 |
) |
|
|
(29 |
) |
Prepaid
expenses and other assets
|
|
|
(136 |
) |
|
|
31 |
|
|
|
55 |
|
Accounts
payable and accrued expenses
|
|
|
478 |
|
|
|
311 |
|
|
|
804 |
|
Deferred
revenue
|
|
|
70 |
|
|
|
(40 |
) |
|
|
(7 |
) |
Net
cash (used in) operating activities
|
|
|
(1,384 |
) |
|
|
(2,224 |
) |
|
|
(2,564 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
(6 |
) |
Net
cash (used in) investing activities
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
(6 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common shares, net of issuance costs
|
|
|
1,040 |
|
|
|
380 |
|
|
|
-- |
|
Borrowings
under credit facility, term loans and notes payable
|
|
|
984 |
|
|
|
2,148 |
|
|
|
2,542 |
|
Repayments
of term loans, credit facility and notes payable
|
|
|
(677 |
) |
|
|
-- |
|
|
|
(55 |
) |
Net
cash provided by financing activities
|
|
|
1,347 |
|
|
|
2,528 |
|
|
|
2,487 |
|
Effect
of exchange rate changes on cash
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
5 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(60 |
) |
|
|
281 |
|
|
|
(78 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
310 |
|
|
|
29 |
|
|
|
107 |
|
Cash
and cash equivalents at end of year
|
|
$ |
250 |
|
|
$ |
310 |
|
|
$ |
29 |
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
5 |
|
|
$ |
20 |
|
|
$ |
1 |
|
Interest
|
|
$ |
264 |
|
|
$ |
865 |
|
|
$ |
645 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
Non-Cash
Investing and Financing Activities
2007
During
2007, the Company issued 24,793 shares of common stock to Critical Mass Mail as
part of a litigation settlement valued at $50,000.
In
October 2007, the Company issued 2,546,149 shares of common stock to BluePhoenix
(formerly Liraz Systems Ltd.) in exchange for $650,000 paid to Bank Hapoalim to
retire a portion of that indebtedness.
2006
During
2006, the Company issued 111,000 shares of common stock to vendors for
outstanding liabilities valued at $237,000.
In
November 2006, the Company issued 60,000 shares of common stock to Liraz Systems
Ltd. as compensation for extension of a bank debt guaranty valued at
$240,000.
In
December 2006, the Company issued 224,000 shares of common stock to Liraz
Systems Ltd. for its short term debt and interest of $191,000.
In
December 2006, the Company issued 50,000 shares of common stock to Brown Simpson
Partners I, Ltd. as compensation for assisting in its
recapitalization.
2005
During
2005, the Company issued 9,613 shares of common stock to vendors for outstanding
liabilities valued at $103,000.
In
November 2005, the Company issued 24,000 shares of common stock to a designated
subsidiary of Liraz Systems Ltd. as compensation for extension of a bank debt
guarantee valued at $48,000.
During
2005, the Company issued 9,564 shares of Level 8 Systems common stock upon
conversion of 1,367 shares of Series D Convertible Redeemable Preferred
Stock.
During
2005, 150 shares of Series C Convertible Redeemable Preferred Stock were
converted into 3,947 shares of Level 8 Systems common stock.
CICERO
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1.
|
SUMMARY
OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
|
Cicero
Inc., formerly Level 8 Systems, Inc. (''Cicero'' or the ''Company''), is a
provider of business integration software which 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 an
operating loss of approximately $1,975,000 for the year ended
December 31, 2007 and has experienced negative cash flows from operations for
each of the years ended December 31, 2007, 2006 and 2005. At December
31, 2007, the Company had a working capital deficiency of approximately
$6,132,000. 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 the Company 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 who have expressed interest in
the Cicero® software 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.
Cicero® software is a new “category defining” product in that most Enterprise
Application Integration (EAI) projects are performed at the server level and
Cicero®’s integration occurs at the desktop without the need to open and modify
the underlying code for those applications being integrated. Many companies are
not aware of this new technology or tend to look toward more traditional and
accepted approaches. The Company is attempting to solve the former problem by
improving the market’s knowledge and understanding of Cicero® software 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. Management expects that it will be able to
raise additional capital 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. At times, such cash and cash equivalents 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 product
development expense.
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 5.)
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. The Company accounts for impairments
under the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”.
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.
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 $104,000, $88,000, and $16,000 for the years ended December
31, 2007, 2006 and 2005, 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 8.)
Stock
Split:
As
discussed in Note 2, the Company’s stockholders approved a 100 to 1 reverse
stock split in November 2006. The Company retained the current par
value of $.001 per share for all common shares. All references in the
financial statements and notes to the number of shares outstanding, per share
amounts, and stock option data of the Company’s common shares have been restated
to reflect the effect of the reverse stock split for the periods
presented.
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 2007, 2006, and 2005, 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. The amounts have been restated in accordance with SAB
Topic 4 (c ) to reflect the adjustment to the Company’s capitalization as a
result of the 100:1 reverse stock split which was approved by the Company in
November 2006:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Stock
options
|
|
|
2,529,025 |
|
|
|
45,315 |
|
|
|
59,009 |
|
Warrants
|
|
|
445,387 |
|
|
|
323,623 |
|
|
|
193,761 |
|
Preferred
stock
|
|
|
1,603,618 |
|
|
|
1,763,478 |
|
|
|
85,046 |
|
|
|
|
4,578,030 |
|
|
|
2,132,416 |
|
|
|
337,816 |
|
In 2007,
2006 and 2005, no dividends were declared on preferred stock.
Stock-Based
Compensation:
During
2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No. 123R”),
“Share-Based Payment”, which addresses the accounting for stock-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise’s equity instruments or that may be settled by
the issuance of such equity instruments. In January 2005, the SEC
issued SAB No. 107, which provides supplemental implementation guidance for SFAS
No. 123R. SFAS No. 123R eliminates the ability to account for
stock-based compensation transactions using the intrinsic value method under
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees”, and instead generally requires that such transactions be
accounted for using a fair-value-based method. The Company uses the
Black-Scholes option-pricing model to determine the fair-value of stock-based
awards under SFAS No. 123R, consistent with that used for pro forma disclosures
under SFAS No. 123, “Accounting for Stock-Based Compensation”. The
Company has elected to use the modified prospective transition method as
permitted by SFAS No. 123R and, accordingly, prior periods have not been
restated to reflect the impact of SFAS No. 123R. The modified
prospective transition method requires that stock-based compensation expense be
recorded for all new and unvested stock options that are ultimately expected to
vest as the requisite service is rendered beginning on the first day of the
Company’s year ended December 31, 2006. Stock-based compensation
expense for awards granted prior to 2006 is based on the grant-date fair-value
as determined under the pro forma provisions of SFAS No. 123. The
Company granted 2,756,173 options in August 2007 at an exercise price of $0.51
per share. The Company recognized $650,000 of stock-based
compensation. The Company did not grant options during 2006.
Prior to
the adoption of SFAS No. 123R, the Company measured compensation expense for its
employee stock-based compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25. The Company applied the disclosure
provisions of SFAS No. 123 as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure”, as if the
fair-value-based method had been applied in measuring compensation
expense. Under APB Opinion No. 25, when the exercise price of the
Company’s employee stock options was equal to the market price of the underlying
stock on the date of the grant, no compensation expense was
recognized.
The
following table illustrates the effect on net loss and net loss per common share
as if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based compensation during 2005 (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
Net
loss applicable to common stockholders, as reported
|
|
$ |
(3,681 |
) |
Less: Total
stock-based employee compensation expense underfair value based method for
all awards, net of related tax effects
|
|
|
(180 |
) |
|
|
|
|
|
Pro
forma loss applicable to common stockholders
|
|
$ |
(3,861 |
) |
|
|
|
|
|
Loss
per share:
|
|
|
|
|
Basic
and diluted, as reported
|
|
$ |
(8.27 |
) |
Basic
and diluted, pro forma
|
|
$ |
(8.68 |
) |
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:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life (in years)
|
|
10.0
years
|
|
|
3.6
years
|
|
|
6.0
years
|
|
Expected
volatility
|
|
|
166 |
% |
|
|
140 |
% |
|
|
149 |
% |
Risk
free interest rate
|
|
|
5.25 |
% |
|
|
4.93 |
% |
|
|
4.48 |
% |
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Reclassifications:
Certain
prior year amounts in the accompanying financial statements have been
reclassified to conform to the 2007 presentation. Such reclassifications had no
effect on previously reported net loss or stockholders’ deficit.
Recent
Accounting Pronouncements:
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – an amendment of FASB Statement
115”. The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
provisions. Most of the provisions of this statement apply only to
entities that elect the fair value option; however , the amendment to FASB
Statement 115, “Accounting for Certain Investment in Debt and Equity Services,”
applies to all entities with available-for-sale and trading
securities. The Company does not believe adoption of this statement
will have a material impact on the Company’s financial statements.
In July
2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes –
An Interpretation of SFAS No. 109”. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes.” FIN No. 48 also prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. In
addition, FIN No. 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN No. 48 are to be applied to all tax
positions upon initial adoption of this standard. Only tax positions
that meet the more-likely-than-not recognition threshold at the effective date
may be recognized or continue to be recognized as an adjustment to the opening
balance of accumulated deficit (or other appropriate components of equity) for
that fiscal year. The provisions of FIN No. 48 are effective for
fiscal years beginning after December 15, 2006. The adoption of this
new standard did not have a material impact on our financial position, results
of operations, or cash flows.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulleting (“SAB”) 108, to address diversity in practice in
quantifying financial statement misstatements. SAB 108 requires that
the Company quantify misstatements based on their impact on each of its
financial statements and related disclosures. SAB 108 is effective
for fiscal years ending after November 15, 2006. The Company has
adopted SAB 108 effective as of December 31, 2006. The adoption of
this bulletin did not have a material impact on our financial position, results
of operations, or cash flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. It also responds to investors’
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS
No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of
2008. The Company is currently evaluating the effect that the
adoption of SFAS No. 157 will have on our financial position, results of
operations, or cash flows.
In
November 2006, the Company’s stockholders approved an amendment to the
Certificate of Incorporation to provide the Company’s Board of Directors with
discretionary authority to effect a reverse stock split ratio from 20:1 to 100:1
and on November 20, 2006, the Board of Directors set that reverse stock ratio to
be 100:1. In addition, the Company’s stockholders approved an amendment to
change the name of the Company from Level 8 Systems, Inc. to Cicero Inc., to
increase the authorized common stock of the Company from 85 million shares to
215 million shares and to convert existing preferred shares into a new Series
A-1 preferred stock of Cicero Inc. The proposals at the Special
Meeting of Stockholders of Level 8 comprised a proposed recapitalization of
Level 8 which was also subject to the receipt of amendments to outstanding
convertible promissory notes, senior reorganization notes and the convertible
bridge notes.
As part
of the plan of recapitalization, Senior Reorganization Notes in the aggregate
principal amount of $2,559,000 to Senior Reorganization Noteholders who had
loaned funds to the Company in exchange for Senior Reorganization Notes and
Additional Warrants at a special one-time exercise price of $0.10 per share, (i)
will receive and have automatically exercised Additional Warrants exercisable
into shares of Common Stock, by applying the accrued interest on their Senior
Reorganization Notes and by cashless exercise to the extent of the balance of
the exercise price, (ii) if a holder of existing warrants who advanced the
exercise price of their warrants to the Company, will have their existing
warrants automatically exercised and (iii) those Senior Reorganization
Noteholders who loaned the Company the first $1,000,000 in respect of the
exercise price of their existing warrants will receive Early Adopter Warrants of
the Company at a ratio of 2:1 for shares issuable upon exercise of each existing
warrant exercised at the special exercise price of $10.00 per share. At the time
of issuance of the Senior Reorganization Notes, the trigger for conversion into
exercisable warrants was an anticipated recapitalization merger. Since the
recapitalization plan was amended, the Company solicited Senior Noteholders for
their consent to convert upon approval of the plan of recapitalization by
stockholders. Approximately $2,309,000 of the Senior Reorganization
Noteholders have consented to the change in the “trigger” and have cancelled
their notes and converted into 3,438,473 shares of the Company’s common
stock.
In
accordance with EITF 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”,
the Company has allocated the proceeds received from the Note and Warrant
Offering between the warrants exercised and the future warrants granted and has
employed the Black-Scholes valuation method to determine the fair value of the
warrants exercised and the additional warrants issued. The Senior Reorganization
Noteholders who have consented to convert their debt amounted to approximately
$2,309,000. Of that amount, approximately $979,000 represents the exercise price
of existing warrants that was loaned to the Company for which the warrant
holders will receive both additional warrants and early adopter warrants. Using
the Black-Scholes formula, the Company has determined that the fair value of the
warrants granted to this tranche is approximately $440,000. The difference
between the fair value of the additional warrants and the total invested in this
tranche, or $539,000, is treated as a beneficial conversion and fully
amortizable. The second tranche of investment that consisted of those warrant
holders who loaned the exercise price of their existing warrants, and will
receive additional warrants but no early adopter warrants, amounted to
approximately $107,000. Using Black-Scholes, the Company has determined that the
fair value of the warrants granted to this tranche is approximately $32,000 and
the beneficial conversion amount is $75,000. The third tranche consisted of
investors who had no existing warrants and will only receive additional warrants
upon consummation of the Recapitalization. The total investment in this tranche
is $1,223,000. Using Black-Scholes, the Company has determined that the fair
value of the warrants granted to this tranche is approximately $570,000 and the
beneficial conversion amount is $653,000. Since this beneficial conversion
feature is immediately convertible upon issuance, the Company has fully
amortized this beneficial conversion feature in the Statement of Operations for
the year ended December 31, 2006.
Also as
part of the recapitalization plan, Convertible Bridge Notes in the principal
amount of $3,915,000 are automatically cancelled and converted into 30,508,448
shares of the Company’s common stock. Also in accordance with EITF 98-5, using
the Black-Scholes formula, the Company has calculated the fair value of the
common stock resulting from conversion of the Convertible Bridge Notes. Based
upon that calculation, the fair value of the stock received was $195,000. The
difference between the total of the Convertible Bridge Notes and the fair value
of the stock ($3,720,000) is treated as a beneficial conversion. Since this
beneficial conversion feature is immediately convertible upon issuance, the
Company has fully amortized this beneficial conversion feature in the Statement
of Operations for the year ended December 31, 2006.
The
Company had issued $992,000 aggregate principal amount of Convertible Promissory
Notes. As part of the recapitalization plan, these Noteholders were
offered reduced conversion prices to convert their notes into shares of the
Company’s new series A-1 preferred stock. All Noteholders have agreed to convert
their notes into shares of Series A-1 preferred stock. The Company has cancelled
these notes and issued 1,591 shares of its Series A-1 preferred stock. In
accordance with EITF 98-5 and specifically paragraph 8, the Company has utilized
the Black-Scholes formula to determine the fair value of the stock received. The
Company has calculated the fair value of the stock received to be $484,000
resulting in a beneficial conversion of $508,000. Since this beneficial
conversion is immediately recognizable by the holders, the Company has fully
amortized this conversion and recorded an accretion to preferred stock in the
Statement of Operations for the year ended December 31, 2006.
Holders
of the Company’s Series A-3, B-3, C and D preferred stock were offered reduced
conversion rates on their existing preferred stock in exchange for shares in a
new Series A-1 preferred stock for Cicero Inc. as part of the recapitalization
plan. As a result of stockholder approval, the Company affected an exchange of
existing preferred shares into 172.15 Series A-1 preferred shares. In exchange
for the reduced conversion prices, holders of the series A-3, B-3 and D shares
forfeited their anti-dilution protection along with certain other rights, ranks
and privileges. The Company’s Series D preferred stock contained a redemption
feature which required that the Company account for same as a liability. The
Company’s Series A-1 preferred stock contains no redemption features and
accordingly, upon exchange, the fair value of these shares were converted to
equity. The Company employed the Black-Scholes formula to value the shares
exchanged and have determined that the reduced conversion prices and exchange
has created a beneficial conversion of $21,000. As the new Series A-1 preferred
shares are immediately convertible, the Company has recorded this beneficial
conversion as a deemed dividend in the Statement of Operations for the year
ended December 31, 2006.
NOTE
3.
|
ACCOUNTS
RECEIVABLE
|
Trade
accounts receivable was composed of the following at December 31 (in
thousands):
|
|
2007
|
|
|
2006
|
|
Current
trade accounts receivable
|
|
$ |
792 |
|
|
$ |
230 |
|
Less:
allowance for doubtful accounts
|
|
|
100 |
|
|
|
60 |
|
|
|
$ |
692 |
|
|
$ |
170 |
|
The
(credit) provision for uncollectible amounts was $50,000, $60,000, and
($12,000), for the years ended December 31, 2007, 2006, and 2005,
respectively. Write-offs (net of recoveries) of accounts receivable
were ($0) for the years ended December 31, 2007, 2006 and 2005.
NOTE
4.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment was composed of the following at December 31 (in
thousands):
|
|
2007
|
|
|
2006
|
|
Computer
equipment
|
|
$ |
263 |
|
|
$ |
252 |
|
Furniture
and fixtures
|
|
|
8 |
|
|
|
8 |
|
Office
equipment
|
|
|
154 |
|
|
|
149 |
|
|
|
|
425 |
|
|
|
409 |
|
Less:
accumulated depreciation and amortization
|
|
|
(403 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
22 |
|
|
$ |
15 |
|
Depreciation
and amortization expense of property and equipment was $10,000, $12,000, and
$11,000, for the years ended December 31, 2007, 2006, and 2005,
respectively.
Term
loan, notes payable, and notes payable to related party consist of the following
at December 31(in thousands):
|
|
2007
|
|
|
2006
|
|
Term
loan (a)
|
|
$ |
-- |
|
|
$ |
1,971 |
|
Note
payable related party (b)
|
|
|
49 |
|
|
|
9 |
|
Notes
payable (c)
|
|
|
1,186 |
|
|
|
919 |
|
|
|
$ |
1,235 |
|
|
$ |
2,899 |
|
(a)
|
The
Company had a $1,971 term loan bearing interest at LIBOR plus
1.5%. Interest was payable quarterly. There are no
financial covenants and the term loan was guaranteed by Liraz Systems Ltd.
(now known as BluePhoenix Solutions), the Company’s former principal
stockholder. The loan matured on October 31,
2007. In October 2007, the Company, in conjunction with Blue
Phoenix Solutions, retired the term loan. (See Note
14.)
|
(b)
|
In
November 2007, the Company entered into a short term note payable with
John L. (Launny) Steffens, the Chairman of the Board of Directors, for
various working capital needs. The Note bears interest at 6% per year and
is unsecured. At December 31, 2007, the Company was indebted to Mr.
Steffens in the amount of $40,000.
|
From time
to time the Company entered into promissory notes with one of the Company’s
directors and the former Chief Information Officer, Anthony Pizi. The
notes bear interest at 12% per annum. As of December 31, 2007 and 2006, the
Company was indebted to Anthony Pizi in the amount of $9,000.
(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 by accounts
receivable and unsecured. In addition, the Company has settled
certain litigation and agreed to issue a series of promissory notes to
support its obligations in the aggregate principal amount of
$88,000. The notes bear interest between 10% and 36% per
annum.
|
Long-term
loan and notes payable to related party consist of the following at December
31(in thousands):
|
|
2007
|
|
|
2006
|
|
Term
loan (a)
|
|
$ |
1,021 |
|
|
$ |
-- |
|
Note
payable; related party (b)
|
|
|
300 |
|
|
|
-- |
|
Other
long-term debt
|
|
|
2 |
|
|
|
33 |
|
|
|
$ |
1,323 |
|
|
$ |
33 |
|
(a)
|
In
October 2007, the Company, in conjunction with Blue Phoenix Solutions,
retired the note payable to Bank Hapoalim and entered into a new note with
Blue Phoenix Solutions in the principal amount of $1,021,000 with interest
at Libor plus 1% (approximately 5.86% at December 31, 2007) maturing in
December 2011. Interest is payable
quarterly.
|
(b)
|
In
October 2007, the Company entered into a long-term note with John L.
(Launny) Steffens, the Chairman on the Board of Directors, as part of the
restructuring of the Note payable to Bank Hapoalim. The Note
bears interest of 3% and matures in October 2009. At December
31, 2007, the Company was indebted to Mr. Steffens in the amount of
$300,000.
|
Scheduled
maturities of the above debt are as follows:
Year
|
|
|
|
2008
|
|
$ |
2 |
|
2009
|
|
$ |
300 |
|
2011
|
|
$ |
1,021 |
|
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 (in
thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Expected
income tax benefit at statutory rate (34%)
|
|
$ |
(672 |
) |
|
$ |
(1,019 |
) |
|
$ |
(1,251 |
) |
State
taxes, net of federal tax benefit.
|
|
|
(118 |
) |
|
|
(180 |
) |
|
|
(308 |
) |
Effect
of change in valuation allowance
|
|
|
788 |
|
|
|
1,073 |
|
|
|
1,537 |
|
Non-deductible
expenses
|
|
|
2 |
|
|
|
126 |
|
|
|
22 |
|
Total
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Significant
components of the net deferred tax asset (liability) at December 31 were as
follows:
|
|
2007
|
|
|
2006
|
|
Current
assets:
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
44 |
|
|
$ |
24 |
|
Accrued
expenses, non-tax deductible
|
|
|
222 |
|
|
|
279 |
|
Deferred
revenue
|
|
|
44 |
|
|
|
15 |
|
Noncurrent
assets:
|
|
|
|
|
|
|
|
|
Stock
Compensation Expense
|
|
|
287 |
|
|
|
-- |
|
Loss
carryforwards
|
|
|
92,337 |
|
|
|
91,016 |
|
Depreciation
and amortization
|
|
|
5,119 |
|
|
|
5,931 |
|
|
|
|
98,053 |
|
|
|
97,265 |
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(98,053 |
) |
|
|
(97,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
-- |
|
|
$ |
-- |
|
At
December 31, 2007, the Company had net operating loss carryforwards of
approximately $230,847,000, which may be applied against future taxable income.
These carryforwards will expire at various times between 2008 and 2027. A
substantial portion of these carryforwards are 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 $21,177,000.
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, 2007 and 2006 since management does not believe
that it is more likely than not that these assets will be realized.
NOTE
8.
|
STOCKHOLDERS’
EQUITY
|
Common Stock:
During
2007, the Company completed two common stock financing rounds wherein it raised
a total of $1,033,000 of capital from several new investors as well as certain
members of its Board of Directors. In February 2007, the Company sold 3,723,007
shares of its common stock for $0.1343 per share for a total of
$500,000. In October 2007, the Company completed a private sale of
shares of its common stock to a group of investors, four of which are members of
our Board of Directors. Under the terms of that agreement, the Company sold
2,169,311 shares of its common stock for $0.2457 per share for a total of
$533,000. 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.
As part
of the recapitalization plan described in Note 2, the Company converted
outstanding convertible promissory notes, senior reorganization notes and
convertible bridge notes. Senior reorganization debt amounting to $2,309,000 was
cancelled and converted into 3,438,473 shares of the Company’s common stock. The
Company also converted $3,915,000 of Convertible Bridge Notes into 30,508,448
shares of Cicero common stock. 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.
Stock Grants:
In August
2007, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a
restricted stock award in the amount of 549,360 shares which will vest to him
upon his resignation or termination. The Company used the
Black-Scholes method to value these shares and assumed a life of 10
years. The Company recorded compensation expense of approximately
$36,000 for fiscal 2007.
Stock Options:
In 2007,
the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which
permits the issuance of incentive and nonqualified stock options, stock
appreciation rights, performance shares, and restricted and unrestricted stock
to employees, officers, directors, consultants, and advisors. The aggregate
number of shares of common stock which may be issued under this Plan shall not
exceed 4,500,000 shares 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
1,200 shares of common stock for issuance under this plan. The Company's 1997
Employee Stock Option Plan expired during 2007.
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, 2007, 2006 and 2005 was as follows:
|
|
Plan Activity
|
|
|
Option Price
Per Share
|
|
|
Weighted Average
Exercise Price
|
|
Balance
at December 31, 2004
|
|
|
74,887 |
|
|
|
12.00-3,931.00 |
|
|
|
111.00 |
|
Granted
|
|
|
2,529 |
|
|
|
7.00
– 12.00 |
|
|
|
9.00 |
|
Exercised
|
|
|
(2,529 |
) |
|
|
7.00
– 12.00 |
|
|
|
9.00 |
|
Forfeited
|
|
|
(15,877 |
) |
|
|
22.00-3,931.00 |
|
|
|
75.00 |
|
Balance
at December 31, 2005
|
|
|
59,010 |
|
|
|
12.00-3,931.00 |
|
|
|
124.00 |
|
Forfeited
|
|
|
(13,695 |
) |
|
|
22.00-3,931.00 |
|
|
|
137.14 |
|
Balance
at December 31, 2006
|
|
|
45,315 |
|
|
|
12.00-3,931.00 |
|
|
|
120.61 |
|
Granted
|
|
|
2,756,173 |
|
|
|
0.51 |
|
|
|
0.51 |
|
Forfeited
|
|
|
(270,413 |
) |
|
|
0.51-612.50 |
|
|
|
12.21 |
|
Expired
|
|
|
(2,050 |
) |
|
|
1,473.00 |
|
|
|
1,473.00 |
|
Balance
at December 31, 2007
|
|
|
2,529,025 |
|
|
|
0.51-3,931.00 |
|
|
|
1.35 |
|
There
were 2,756,173 options granted during 2007 and none during 2006. The weighted
average grant date fair value of options issued during the years ended December
31, 2007 and 2005 was equal to $0.51 and $9.00 per share, respectively. There
were no option grants issued below fair market value during 2007 and
2005.
At
December 31, 2007, 2006, and 2005, options to purchase 888,634, 45,315, and
5,237 shares of common stock were exercisable, respectively, pursuant to the
plans at prices ranging from $0.51 to $3,931.25. The following table summarizes
information about stock options outstanding at December 31, 2007:
EXERCISE PRICE
|
|
|
NUMBER
OUTSTANDING
|
|
|
REMAINING
CONTRACTUAL
LIFE
FOR OPTIONS
OUTSTANDING
|
|
|
NUMBER
EXERCISABLE
|
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.51-0.51 |
|
|
|
2,500,760 |
|
|
|
9.6 |
|
|
|
860,369 |
|
|
$ |
0.51 |
|
|
0.52-393.12 |
|
|
|
26,680 |
|
|
|
5.5 |
|
|
|
26,680 |
|
|
|
40.60 |
|
|
393.13-786.25 |
|
|
|
1,350 |
|
|
|
3.2 |
|
|
|
1,350 |
|
|
|
532.20 |
|
|
786.26-1,179.37 |
|
|
|
165 |
|
|
|
2.0 |
|
|
|
165 |
|
|
|
944.41 |
|
|
1,179.38-3,538.12 |
|
|
|
40 |
|
|
|
2.6 |
|
|
|
40 |
|
|
|
1,881.25 |
|
|
3,538.13-3,931.25 |
|
|
|
30 |
|
|
|
2.2 |
|
|
|
30 |
|
|
|
3,931.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,529,025 |
|
|
|
9.6 |
|
|
|
888,634 |
|
|
$ |
2.91 |
|
Preferred Stock:
As part
of the recapitalization plan approved by shareholders in November 2006, the
Company offered to exchange its existing Series A-3, B-3, C and D preferred
shares at reduced conversion rates in exchange for shares of a new Series A-1
preferred stock in Cicero Inc. This proposal also required approval by existing
preferred shareholders as a class. The new conversion prices with respect to the
Series A-3, B-3 and D preferred stock were negotiated with the holders of each
series based upon such factors as the current conversion price in relation to
the market, the dollar amount represented by such series and, waiver of
anti-dilution, liquidation preferences, seniority and other senior
rights. The conversion price for the Series C preferred stock was
determined in relation to the conversion price for the Series D preferred
stock. The Board of Directors determined the new conversion price of
each series of Level 8 preferred stock after discussion and review of those
rights, ranks and privileges that were being waived by the present holders of
preferred stock. Among those rights being waived are anti-dilution
protection, liquidation preferences and seniority.
The
holders of the Series A-1 preferred stock shall have the rights and preferences
set forth in the Certificate of Designations filed with the Secretary of State
of the State of Delaware upon the approval of the
Recapitalization. The rights and interests of the Series A-1
preferred stock of the Company will be substantially similar to the rights
interests of each of the series of the former Level 8 preferred stock
other than for (i) anti-dilution protections that have been permanently waived
and (ii) certain voting, redemption and other rights that holders of Series A-1
preferred stock will not be entitled to. All shares of Series A-1
preferred stock will have a liquidation preference pari passu with all other
Series A-1 preferred stock.
The
Series A-1 preferred stock is convertible at any time at the option of the
holder into an initial conversion ratio of 1,000 shares of Common Stock for each
share of Series A-1 preferred stock. The initial conversion ratio
shall be adjusted in the event of any stock splits, stock dividends and other
recapitalizations. The Series A-1 preferred stock is also convertible
on an automatic basis in the event that (i) the Company closes on an additional
$5,000,000 equity financing from strategic or institutional investors, or (ii)
the Company has four consecutive quarters of positive cash flow as reflected on
the Company’s financial statements prepared in accordance with generally
accepted accounting principals (“GAAP”) and filed with the
Commission. The holders of Series A-1 preferred stock are entitled to
receive equivalent dividends on an as-converted basis whenever the Company
declares a dividend on its Common Stock, other than dividends payable in shares
of Common Stock. The holders of the Series A-1 preferred stock are
entitled to a liquidation preference of $500 per share of Series A-1 preferred
stock upon the liquidation of the Company. The Series A-1 preferred
stock is not redeemable.
The
holders of Series A-1 preferred stock also possess the following voting
rights. Each share of Series A-1 preferred stock shall represent that
number of votes equal to the number of shares of Common Stock issuable upon
conversion of a share of Series A-1 preferred stock. The holders of
Series A-1 preferred stock and the holders of Common Stock shall vote together
as a class on all matters except: (i) regarding the election of the Board
of Directors of the Company (as set forth below); (ii) as required by law; or
(iii) regarding certain corporate actions to be taken by the Company (as
set forth below).
The
approval of at least two-thirds of the holders of Series A-1 preferred stock
voting together as a class, shall be required in order for the Company to: (i)
merge or sell all or substantially all of its assets or to recapitalize or
reorganize; (ii) authorize the issuance of any equity security having any right,
preference or priority superior to or on parity with the Series A-1 preferred
stock; (iii) redeem, repurchase or acquire indirectly or directly any of its
equity securities, or to pay any dividends on the Company’s equity securities;
(iv) amend or repeal any provisions of its certificate of incorporation or
bylaws that would adversely affect the rights, preferences or privileges of the
Series A-1 preferred stock; (v) effectuate a significant change in the principal
business of the Company as conducted at the effective time of the
Recapitalization; (vi) make any loan or advance to any entity other than in the
ordinary course of business unless such entity is wholly owned by the Company;
(vii) make any loan or advance to any person, including any employees or
directors of the Company or any subsidiary, except in the ordinary course of
business or pursuant to an approved employee stock or option plan; and (viii)
guarantee, directly or indirectly any indebtedness or obligations, except for
trade accounts of any subsidiary arising in the ordinary course of
business. In addition, the unanimous vote of the Board of
Directors is required for any liquidation, dissolution, recapitalization or
reorganization of the Company. The voting rights of the holders
of Series A-1 preferred stock set forth in this paragraph shall be terminated
immediately upon the closing by the Company of at least an additional $5,000,000
equity financing from strategic or institutional investors.
In
addition to the voting rights described above, the holders of a majority of the
shares of Series A-1 preferred stock are entitled to appoint two observers to
the Company’s Board of Directors who shall be entitled to receive all
information received by members of the Board of Directors, and shall attend and
participate without a vote at all meetings of the Company’s Board of Directors
and any committees thereof. At the option of a majority of the
holders of Series A-1 preferred stock, such holders may elect to temporarily or
permanently exchange their board observer rights for two seats on the Company’s
Board of Directors, each having all voting and other rights attendant to any
member of the Company’s Board of Directors. As part of the
Recapitalization, the right of the holders of Series A-1 preferred stock to
elect a majority of the voting members of the Company’s Board of Directors shall
be terminated.
As a
result of the reduced conversion prices the Company exchanged all of the Series
A-3, B-3, C and D preferred stock into 172 shares of Series A-1 preferred stock
and using Black-Scholes, we calculated a beneficial conversion in the exchange
of the Series A-3, B-3, C and D shares for Series A-1 preferred stock. The
beneficial conversion of $21,000 is treated as a deemed dividend in the
Statement of Operations for the year ended December 31, 2006.
As part
of the recapitalization plan, Noteholders of $992,000 of Convertible Promissory
Notes were offered reduced conversion prices to convert their notes into shares
of the Company’s new series A-1 preferred stock. All Noteholders have agreed to
convert their notes into shares of Series A-1 preferred stock. The Company has
cancelled these notes and issued 1,591 shares of its Series A-1 preferred stock.
In accordance with EITF 98-5 and specifically paragraph 8, the Company has
utilized the Black-Scholes formula to determine the fair value of the stock
received. The Company has calculated the fair value of the stock received to be
$484,000 resulting in a beneficial conversion of $508,000. Since this beneficial
conversion is immediately recognizable by the holders, the Company has fully
amortized this conversion and recorded an accretion to preferred stock in the
Statement of Operations for the year ended December 31, 2006.
During
2005 and 2004, there were 456 shares of preferred stock converted into 13,511
shares of the Company's common stock and 4,686 shares of preferred stock
converted into 70,375 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, 991 shares of Series C
Preferred Stock, and 1,061 shares of Series D Preferred Stock
outstanding at December 31, 2005.
Stock
Warrants:
The
Company values warrants based on the Black-Scholes pricing
model. Warrants granted in 2007, 2006 and 2005 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 D-1 Warrants
|
|
|
5 |
|
|
|
117 |
% |
|
|
3 |
% |
None
|
|
$ |
7.00 |
|
Preferred
Series D-2 Warrants
|
|
|
5 |
|
|
|
102 |
% |
|
|
3 |
% |
None
|
|
$ |
20.00 |
|
Early
Adopter Warrants
|
|
|
4 |
|
|
|
104 |
% |
|
|
4 |
% |
None
|
|
$ |
1.50 |
|
Long
Term Promissory Note Warrants
|
|
|
10 |
|
|
|
168 |
% |
|
|
5.25 |
% |
None
|
|
$ |
0.18 |
|
Increase
in Capital Stock:
In
November 2006, 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 85,000,000 to
215,000,000.
NOTE
9.
|
EMPLOYEE
BENEFIT PLANS
|
The
Company sponsors one defined contribution plan for its U.S. employees - the
Cicero Inc 401(K) Plan. Under the terms of the Plan, the Company, at
its discretion, provides a 50% matching contribution up to 6% of an employee’s
salary. Participants must be eligible company 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 Statements of Operations totaled $0, $0 and $30,000, for the years
ended December 31, 2007, 2006, and 2005, respectively. On December 1, 2005,
the Company suspended further contributions to the defined contribution
plan.
The
Company also had employee benefit plans for each of its foreign subsidiaries, as
mandated by each country's laws and regulations. The Company’s
foreign subsidiaries are no longer active.
NOTE
10.
|
SIGNIFICANT
CUSTOMERS AND CONCENTRATION OF CREDIT
RISK
|
In 2007,
one customer accounted for 87.2% of operating revenues and represented 100% of
accounts receivable at December 31, 2007. In 2006, four customers
accounted for 50.0%, 18.7%, 13.3% and 10.0% of operating revenue. In 2005, two
customers accounted for 52.4% and 13.0% of operating revenues.
NOTE
11.
|
FOREIGN
CURRENCIES
|
The
Company’s net foreign currency transaction losses/ (gains) were $15,000,
$14,000, and $(23,000), for the years ended 2007, 2006, and 2005,
respectively.
NOTE
12.
|
SEGMENT
INFORMATION AND GEOGRAPHIC
INFORMATION
|
Based
upon the current business environment in which the Company operates, the
economic characteristics of its operating segments and management’s view of the
business, a revision in terms of aggregation of its segments was appropriate.
Therefore the segment discussion outlined below clarifies the adjusted segment
structure as determined by management under SFAS No. 131. All prior year amounts
have been restated to conform to the new reporting segment
structure.
Management
makes operating decisions and assesses performance of the Company’s operations
based on one reportable segment, it’s the Software product
segment. Prior to this change the Company had segregated into two
separate segments: Desktop Integration and Messaging. The Messaging business has
always been an immaterial part of the Company’s overall business and generally
all its sales efforts are focused on the Cicero product. As such, the Company
has elected to combine the two products into one reportable
segment.
The
Software product segment is comprised of the Cicero® product and the Ensuredmail
product. 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.Ensuredmail is an
encrypted email technology that can reside on either the server or the
desktop.
The table
below presents information about reported segments for the year ended December
31, 2007, 2006 and 2005 (in thousands):
|
|
For
the year ended December 31, |
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
revenue
|
|
$ |
1,808 |
|
|
$ |
972 |
|
|
$ |
785 |
|
Total
cost of revenue
|
|
|
937 |
|
|
|
767 |
|
|
|
1,188 |
|
Gross
margin (loss)
|
|
|
871 |
|
|
|
205 |
|
|
|
(403 |
) |
Total
operating expenses
|
|
|
2,711 |
|
|
|
2,085 |
|
|
|
2,655 |
|
Segment
loss
|
|
$ |
(1,840 |
) |
|
$ |
(1,880 |
) |
|
$ |
(3,058 |
) |
A
reconciliation of segment operating expenses to total operating expense follows
(numbers are in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Segment
operating expenses
|
|
$ |
2,711 |
|
|
$ |
2,085 |
|
|
$ |
2,655 |
|
(Gain)
on disposal of assets
|
|
|
-- |
|
|
|
(24 |
) |
|
|
-- |
|
Total
operating expenses
|
|
$ |
2,711 |
|
|
$ |
2,061 |
|
|
$ |
2,655 |
|
A
reconciliation of total segment profitability to net loss for the fiscal years
ended December 31(in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
segment profitability (loss)
|
|
$ |
(1,840 |
) |
|
$ |
(1,880 |
) |
|
$ |
(3,058 |
) |
Gain
on disposal of assets
|
|
|
-- |
|
|
|
24 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income/(expense), net
|
|
|
(135 |
) |
|
|
(1,141 |
) |
|
|
(623 |
) |
Net
loss
|
|
$ |
(1,975 |
) |
|
$ |
(2,997 |
) |
|
$ |
(3,681 |
) |
The
following table presents a summary of revenue by geographic region for the years
ended December 31(in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
|
1,808 |
|
|
|
972 |
|
|
|
783 |
|
Italy
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,808 |
|
|
$ |
972 |
|
|
$ |
785 |
|
Presentation
of revenue by region is based on the country in which the customer is domiciled.
As of December 31, 2007, 2006 and 2005, all of the long-lived assets of the
Company are located in the United States.
NOTE
13.
|
RELATED
PARTY INFORMATION
|
BluePhoenix
Solutions, formerly Liraz Systems Ltd., the Company’s former principal
stockholder, guaranteed certain debt obligations of the Company. In October
2007, the Company agreed to restructure the note payable to Bank Hapoalim and
guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, the
Company made a principal reduction payment to Bank Hapoalim in the amount of
$300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby
discharging that indebtedness. The Company and BluePhoenix entered into a new
Note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and
maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149
shares of the Company’s common stock in exchange for $650,000 paid to Bank
Hapoalim to retire that indebtedness. Of the new note payable to
BluePhoenix, approximately $350,000 is due on January 31, 2009 and the balance
is due on December 31, 2011. In November 2006, the Company and Liraz
agreed to extend the guaranty and with the approval of the lender, agreed to
extend the maturity of the debt obligation until October 31, 2007. The Company
issued 60,000 shares of common stock to Liraz in exchange for this debt
extension.
In
October 2007, the Company entered into a long-term note with John L. (Launny)
Steffens, the Chairman on the Board of Directors, as part of the restructuring
of the Note payable to Bank Hapoalim. The Note bears interest of 3%
and matures in October 2009. At December 31, 2007, the Company was
indebted to Mr. Steffens in the amount of $300,000.
In
November 2007, the Company entered into a short term note payable with John L.
(Launny) Steffens, the Chairman of the Board of Directors, for various working
capital needs. The Note bears interest at 6% per year and is unsecured. At
December 31, 2007, the Company was indebted to Mr. Steffens in the amount of
$40,000.
During
2006, under an existing reseller agreement, the Company recognized $100,000 of
software revenue with Pilar Services, Inc. Pilar Services is presently owned and
managed by Charles Porciello who is a member of our Board of Directors. As of
December 31, 2007, the receivable was still outstanding and the Company has
reserved 100% of the balance as doubtful.
From time
to time during 2005 and 2004, the Company entered into short term notes payable
with Anthony Pizi, the Company’s former Chief Information Officer. The Notes
bear interest at 1% per month and are unsecured. At December 31, 2007, the
Company was indebted to Mr. Pizi in the amount of $9,000.
Convertible Promissory Notes:
Directors and executive officers made the following loans to the Company for
convertible promissory notes: In June 2004, the Company entered into
a convertible loan agreement with Mr. Pizi in the amount of $100,000. Under the
terms of the agreement, the loan bears interest at 1% per month and is
convertible upon the option of the Note holder into 270,270 shares of our common
stock and warrants to purchase 270,270 shares of our common stock exercisable at
$0.37. The warrants expire in three years from the date of grant. As part of the
recapitalization plan, the Company has offered to lower that conversion rate and
exchange the Note for 14 shares of Series A-1 preferred stock. In November 2006, the
Noteholder consented to the amended conversion rate and the Note has been
cancelled.
In July
2004, the Company entered into a convertible promissory note with Mr. Pizi in
the face amount of $112,000. Under the terms of the agreement, the
loan bears interest at 1% per month and is convertible upon the option of the
Note holder into 560,000 shares of our common stock and warrants to purchase
560,000 shares of our common stock at $0.20 per share. As part of the
recapitalization plan, the Company has offered to lower that conversion rate and
exchange the Note for 78.4 shares of Series A-1 preferred stock. In November 2006, the
Noteholder consented to the amended conversion rate and the Note has been
cancelled. Also in July 2004, Mr. Pizi entered into a second convertible
promissory note in the face amount of $15,000 which bears interest at 1% per
month and is convertible into 90,118 shares of our common stock and warrants to
purchase 90,118 shares of our common stock at $0.17 per share. All
such warrants expire three years from the date of grant. As part of the
recapitalization plan, the Company has offered to lower that conversion rate and
exchange the note for 12.62 shares of Series A-1 preferred stock. In November 2006, the
Noteholder consented to the amended conversion rate and the Note has been
cancelled.
In March
2004, the Company entered into a convertible promissory note with Mr. and Mrs.
Mark Landis in the amount of $125,000. Mr. Landis is a director and
the Company’s former Chairman of the Board and Mr. and Mrs. Landis are
parents-in-law to Mr. Pizi, the Company’s former Chief Information Officer. Under the terms of the
agreement, the loan bears interest at 1% per month and is convertible upon the
option of the note holder 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 from the date of grant. As part of the
recapitalization plan, the Company has offered to lower that conversion rate and
exchange the note for 62.5 shares of Series A-1 preferred stock. In November 2006, the
Noteholder consented to the amended conversion rate and the Note has been
cancelled.
In June
2004, the Company entered into a convertible promissory note with Mr. and Mrs.
Landis in the amount of $125,000. Under the terms of the note, the loan bears
interest at 1% per month and is convertible into 781,250 shares of the Company’s
common stock and warrants to purchase 781,250 shares of Level 8 common stock
exercisable at $0.16 per share. The warrants expire in three years from the date
of grant. As part of the recapitalization plan, the Company has offered to lower
that conversion rate and exchange the note for 113.64 shares of Series A-1
preferred stock. In November 2006, the Noteholder consented to the amended
conversion rate and the Note has been cancelled.
In
October 2004, the Company entered into a convertible promissory note with Mr.
and Mrs. Landis in the amount of $100,000. 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 per share. The warrants expire in three
years. As part of the recapitalization plan, the Company has offered
to lower that conversion rate and exchange the note for 400 shares of Series A-1
preferred stock. In November 2006,
the Noteholder consented to the amended conversion rate and the Note has been
cancelled.
In
November 2004, the Company entered into a convertible promissory note with Mr.
and Mrs. Landis, in the amount of $150,000. 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 per share. All such warrants expire three
years from the date of grant. As part of the recapitalization plan, the Company
has offered to lower that conversion rate and exchange the note for 750 shares
of Series A-1 preferred stock. In November 2006, the Noteholder
consented to the amended conversion rate and the Note has been
cancelled.
In June
2004, the Company entered into a convertible promissory note with Fredric Mack,
a former director of the Company, in the amount of $125,000. Under the terms of
the note, the loan bears interest at 1% per month, and is convertible into
390,625 shares of the Company’s common stock and warrants to purchase 390,625
shares of the Company’s common stock exercisable at $0.32 per
share. As part of the recapitalization plan, the Company has offered
to lower that conversion rate and exchange the note for 54.69 shares of Series
A-1 preferred stock. In November 2006, the Noteholder consented
to the amended conversion rate and the Note has been cancelled.
In April
2005, the Company entered into a convertible promissory note with Bruce Miller,
a director of the Company, in the amount of $30,000. Under the terms of the
note, the loan bears interest at 1% per month and is convertible into 428,571
shares of the Company’s common stock. As part of the recapitalization plan, the
Company has offered to lower that conversion rate and exchange the note for 60
shares of Series A-1 preferred stock. In November 2006, the
Noteholder consented to the amended conversion rate and the Note has been
cancelled.
In July
2004, the Company entered into a convertible promissory note with Nicholas
Hatalski, who until July 22, 2005 (during the period when the terms of the
recapitalization merger were being negotiated and at the time of approval of the
recapitalization merger by our board of directors), was a director of the
Company, in the amount of $25,000. Under the terms of the note, the loan bears
interest at 1% per month and is convertible into 78,125 shares of the Company’s
common stock and warrants to purchase 78,125 shares of the Company’s common
stock exercisable at $0.32 per share. As part of the recapitalization plan, the
Company has offered to lower that conversion rate and exchange the note for
10.94 shares of Series A-1 preferred stock. In November 2006, the
Noteholder consented to the amended conversion rate and the Note has been
cancelled.
All of
such warrants expire three years from date of grant.
Senior Reorganization
Notes. From March 2004 to April 2005, directors and executive
officers made the following loans to us for Senior Reorganization
Notes: Mr. Pizi held $423,333 of Senior Reorganization Notes, which
were converted into warrants to purchase an additional 5,716 shares of Cicero
common stock at a purchase price of $0.20 per share.
Mr.
Landis held $327,860 of Senior Reorganization Notes, which were converted into
warrants to purchase an additional 4,423 shares of Cicero common stock at an
exercise price of $0.20 per share.
Mr. Mack
held, together with his affiliates, $88,122 of Senior Reorganization Notes,
which were converted into warrants to purchase an additional 1,122 shares of
Cicero common stock at a purchase price of $0.20 per share.
Mr.
Miller held, together with his affiliates, $77,706 of Senior Reorganization
Notes, which were converted into warrants to purchase an additional 1,145 shares
of Cicero common stock at a purchase price of $0.20.
Mr.
Atherton held, together with his affiliates, $20,000 of Senior Reorganization
Notes which were converted into warrants to purchase an additional 2,898 shares
of Cicero common stock at a purchase price of $0.20.
Mr.
Broderick, Chief Executive Officer and Chief Financial Officer of the Company,
held $2,300 of Senior Reorganization Notes, which were converted into warrants
to purchase 3,222 shares of the Cicero Inc. common stock at a purchase price of
$0.20 per share, and options to purchase 12,609 shares of common stock under the
Company’s stock option plan that will convert into options to purchase Cicero
common stock.
Such
warrants are only issuable upon approval of the recapitalization merger, and
were automatically exercised in connection with the consummation of the
recapitalization plan.
Convertible Bridge
Notes. From July 2005 to December 2006, directors and
executive officers made the following loans to the Company for Convertible
Bridge Notes:
Mr. Pizi
held $85,000 of Convertible Bridge Notes which bore interest at 10% and matured
on September 15, 2005. These notes automatically converted into
680,000 shares of Cicero common stock upon approval of the recapitalization plan
by stockholders.
Mr.
Landis held $395,000 of Convertible Bridge Notes which bore interest at 10% and
matured on various dates in 2005 and 2006. These notes automatically
converted into 3,160,000 shares of Cicero common stock upon approval of the
recapitalization plan by stockholders.
Mr. Mack
held, together with his affiliates, $114,000 of Convertible Bridge Notes which
bear interest at 10% and matured on various dates in 2005 and
2006. These notes automatically converted into 897,564 shares of
Cicero common stock upon approval of the recapitalization plan by
stockholders.
Mr.
Miller held, together with his affiliates, $120,000 of Convertible Bridge Notes
which bear interest at 10% and matured on various dates in 2005 and
2006. These notes automatically converted into 947,273 shares of
Cicero common stock upon approval of the recapitalization plan by
stockholders.
Mr. Bruce
Hasenyager, a member of our Board of Directors, held $4,061 of Convertible
Bridge Notes which bear interest at 10% and matured on September 15, 2005. These
notes automatically converted into 32,485 shares of Cicero common stock upon
approval of the recapitalization plan by stockholders.
Mr. Bruce
Percelay, a member of our Board of Directors, held $130,000 of Convertible
Bridge Notes which bear interest at 10% and matured on various dates in 2005 and
2006. These notes automatically converted into 1,027,273 shares of Cicero common
stock upon approval of the recapitalization plan by stockholders.
Mr. John
W. Atherton, a member of our Board of Directors, held $15,000 of convertible
Bridge Notes which bear interest at 10% and matured during 2006. These notes
automatically converted into 120,000 shares of Cicero common stock upon approval
of the recapitalization plan by stockholders.
Mr.
Charles Porciello, a member of our Board of Directors, held $10,000 of
Convertible Bridge Notes which bear interest at 10% and matured during 2006.
These notes automatically converted into 80,000 shares of Cicero common stock
upon approval of the recapitalization plan by stockholders.
NOTE
14.
|
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, 2007 consisted of only one lease as follows (in
thousands):
|
|
Lease
Commitments
|
|
|
|
|
|
2008
|
|
$ |
103 |
|
2009
|
|
|
97 |
|
2010
|
|
|
101 |
|
|
|
$ |
301 |
|
Rent
expense for the years ended December 31, 2007, 2006, and 2005 was $74,000,
$60,000, and $122,000, respectively. As of December 31, 2007,
2006, and 2005, the Company had no sublease arrangements.
Various
lawsuits and claims have been brought against us in the normal course of our
business.
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 $200,000 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 $189,000 plus interest over a 19-month period ending November 15,
2005. The Company is in the process of negotiating a series of payments for the
remaining liability of approximately $80,000.
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
16.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(In
thousands, except per share data)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
232 |
|
|
$ |
316 |
|
|
$ |
387 |
|
|
$ |
873 |
|
Gross
margin
|
|
|
65 |
|
|
|
160 |
|
|
|
82 |
|
|
|
564 |
|
Net
income/(loss)
|
|
|
(529 |
) |
|
|
(452 |
) |
|
|
(966 |
) |
|
|
(29 |
) |
Net
loss/share –basic and diluted attributedto common
stockholders
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
281 |
|
|
$ |
320 |
|
|
$ |
248 |
|
|
$ |
123 |
|
Gross
margin/(loss)
|
|
|
75 |
|
|
|
114 |
|
|
|
60 |
|
|
|
(44 |
) |
Net
loss
|
|
|
(576 |
) |
|
|
(515 |
) |
|
|
(647 |
) |
|
|
(1,259 |
) |
Net
loss/share –basic and diluted attributed to
common stockholders
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.22 |
) |
NOTE 17.
|
SUBSEQUENT
EVENTS
|
In March
2008, the Company was notified that a group of investors including two members
of the Board of Directors acquired a short term promissory note due SDS Merchant
Fund in the principal amount of $250,000. The note is unsecured and bears
interest at 10% per annum. Also in March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. The total principal and interest amounted to $361,827 and is being
converted into 1,417,264 shares of common stock. Mr. John Steffens, the
Company’s Chairman, will acquire 472,516 shares and Mr. Bruce Miller, also a
member of our Board of Directors, will acquire 472,374 shares.
In March
2008, the Company amended the terms of its Note Payable with BluePhoenix
Solutions. Under the terms of the original Note, the Company was to make a
principal reduction payment in the amount of $350,000 on January 30, 2009. The
Company and BluePhoenix agreed to accelerate that principal payment to March and
April 2008 in return for a conversion of $50,000 into 195,848 shares of the
Company’s common stock. In March, the Company paid $200,000 plus accrued
interest and in April, the Company will pay $100,000 plus accrued
interest.
CICERO
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
228 |
|
|
$ |
250 |
|
Assets
of discontinued operations
|
|
|
76 |
|
|
|
79 |
|
Trade
accounts receivable, net
|
|
|
333 |
|
|
|
692 |
|
Prepaid
expenses and other current assets
|
|
|
186 |
|
|
|
208 |
|
Total
current assets
|
|
|
823 |
|
|
|
1,229 |
|
Property
and equipment, net
|
|
|
48 |
|
|
|
22 |
|
Total
assets
|
|
$ |
871 |
|
|
$ |
1,251 |
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
702 |
|
|
$ |
1,235 |
|
Accounts
payable
|
|
|
2,127 |
|
|
|
2,489 |
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related items
|
|
|
1,048 |
|
|
|
1,002 |
|
Other
|
|
|
2,037 |
|
|
|
2,072 |
|
Liabilities
of discontinued operations
|
|
|
446 |
|
|
|
455 |
|
Deferred
revenue
|
|
|
502 |
|
|
|
108 |
|
Total
current liabilities
|
|
|
6,862 |
|
|
|
7,361 |
|
Long-term
debt
|
|
|
971 |
|
|
|
1,323 |
|
Total
liabilities
|
|
|
7,833 |
|
|
|
8,684 |
|
Stockholders' (deficit):
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-- |
|
|
|
-- |
|
Common
stock
|
|
|
47 |
|
|
|
44 |
|
Additional
paid-in capital
|
|
|
229,909 |
|
|
|
228,858 |
|
Accumulated
deficit
|
|
|
(236,929 |
) |
|
|
(236,320 |
) |
Accumulated
other comprehensive income/(loss)
|
|
|
11 |
|
|
|
(15 |
) |
Net
stockholders' (deficit)
|
|
|
(6,962 |
) |
|
|
(7,433 |
) |
Total
liabilities and stockholders' (deficit)
|
|
$ |
871 |
|
|
$ |
1,251 |
|
The
accompanying notes are an integral part of the consolidated financial
statements
CICERO
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$ |
72 |
|
|
$ |
1 |
|
|
$ |
1,204 |
|
|
$ |
1 |
|
Maintenance
|
|
|
249 |
|
|
|
84 |
|
|
|
596 |
|
|
|
202 |
|
Services
|
|
|
257 |
|
|
|
302 |
|
|
|
675 |
|
|
|
732 |
|
Total
operating revenue
|
|
|
578 |
|
|
|
387 |
|
|
|
2,475 |
|
|
|
935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
4 |
|
|
|
-- |
|
|
|
40 |
|
|
|
-- |
|
Maintenance
|
|
|
55 |
|
|
|
94 |
|
|
|
182 |
|
|
|
201 |
|
Services
|
|
|
255 |
|
|
|
211 |
|
|
|
605 |
|
|
|
427 |
|
Total
cost of revenue
|
|
|
314 |
|
|
|
305 |
|
|
|
827 |
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
264 |
|
|
|
82 |
|
|
|
1,648 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
233 |
|
|
|
241 |
|
|
|
678 |
|
|
|
572 |
|
Research
and product development
|
|
|
160 |
|
|
|
217 |
|
|
|
474 |
|
|
|
475 |
|
General
and administrative
|
|
|
338 |
|
|
|
546 |
|
|
|
959 |
|
|
|
1,069 |
|
Total
operating expenses
|
|
|
731 |
|
|
|
1,004 |
|
|
|
2,111 |
|
|
|
2,116 |
|
Loss
from operations
|
|
|
(467 |
) |
|
|
(922 |
) |
|
|
(463 |
) |
|
|
(1,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(64 |
) |
|
|
(64 |
) |
|
|
(187 |
) |
|
|
(186 |
) |
Other
income/(expense)
|
|
|
(22 |
) |
|
|
21 |
|
|
|
41 |
|
|
|
49 |
|
Loss
before provision for income taxes
|
|
|
(553 |
) |
|
|
(965 |
) |
|
|
(609 |
) |
|
|
(1,946 |
) |
Income
tax provision
|
|
|
-- |
|
|
|
1 |
|
|
|
-- |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(553 |
) |
|
$ |
(966 |
) |
|
$ |
(609 |
) |
|
$ |
(1,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
Diluted
loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,404 |
|
|
|
39,020 |
|
|
|
45,682 |
|
|
|
34,785 |
|
Potential
dilutive common shares
|
|
|
52 |
|
|
|
-- |
|
|
|
24 |
|
|
|
-- |
|
Diluted
|
|
|
46,456 |
|
|
|
39,020 |
|
|
|
45,706 |
|
|
|
34,785 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
Nine
Months Ended
September
30
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(609 |
) |
|
$ |
(1,947 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12 |
|
|
|
2 |
|
Stock
compensation expense
|
|
|
344 |
|
|
|
582 |
|
Stock
issuance
|
|
|
15 |
|
|
|
-- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
359 |
|
|
|
(99 |
) |
Assets
and liabilities – discontinued operations
|
|
|
(6 |
) |
|
|
18 |
|
Prepaid
expenses and other assets
|
|
|
22 |
|
|
|
(42 |
) |
Accounts
payable and accrued expenses
|
|
|
(56 |
) |
|
|
(21 |
) |
Deferred
revenue
|
|
|
394 |
|
|
|
109 |
|
Net
cash provided by (used in) operating activities
|
|
|
475 |
|
|
|
(1,398 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(38 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
-- |
|
|
|
1,023 |
|
Borrowings
under credit facility, term loans and notes payable
|
|
|
935 |
|
|
|
156 |
|
Repayments
of term loans, credit facility and notes payable
|
|
|
(1,420 |
) |
|
|
(61 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(485 |
) |
|
|
1,118 |
|
Effect
of exchange rate changes on cash
|
|
|
26 |
|
|
|
(6 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(22 |
) |
|
|
(293 |
) |
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
250 |
|
|
|
310 |
|
End
of period
|
|
$ |
228 |
|
|
$ |
17 |
|
Non-Cash Investing and
Financing Activities:
During
July 2008, the Company issued 391,696 shares of common stock in exchange for a
$100,000 principal payment on a promissory note.
During
July 2008, the Company issued 195,848 shares of common stock in exchange for a
$50,000 principal payment on a promissory note.
During
July 2008, the Company issued 80,993 shares of common stock to a vendor in
exchange for the settlement of an accounts payable balance of
$20,678.
During
April 2008, the Company issued 623,214 shares of common stock to a vendor in
exchange for the settlement of an accounts payable balance of
$159,106.
During
March, April and July 2008, the Company issued 1,425,137 shares of common stock
in exchange for the conversion of debt and interest of $363,000 to a group of
investors who had acquired the short term promissory note due to SDS Merchant
Fund.
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(in
thousands)
(unaudited)
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
loss
|
|
$ |
(553 |
) |
|
$ |
(966 |
) |
|
$ |
(609 |
) |
|
$ |
(1,947 |
) |
Other
comprehensive income/(loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
32 |
|
|
|
(6 |
) |
|
|
26 |
|
|
|
(6 |
) |
Comprehensive
loss
|
|
$ |
(521 |
) |
|
$ |
(967 |
) |
|
$ |
(583 |
) |
|
$ |
(1,953 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1. INTERIM FINANCIAL STATEMENTS
The
accompanying financial statements for the three and nine months ended September
30, 2008 and 2007 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 Cicero Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2007,
filed with the SEC on March 31, 2008. 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 losses of
$1,975,000 and $2,997,000 in 2007 and 2006, respectively, and has experienced
negative cash flows from operations for each of the past three years. For the
nine months ended September
30, 2008, the Company incurred a loss of $609,000 and had a working capital
deficiency of $6,039,000. The Company’s future revenues are entirely dependent
on acceptance of Cicero® software, 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 the Company 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 who have expressed interest in
the Cicero® software 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.
Cicero® software is a new “category defining” product in that most Enterprise
Application Integration (EAI) projects are performed at the server level and
Cicero®’s integration occurs at the desktop without the need to open and modify
the underlying code for those applications being integrated. Many companies are
not aware of this new technology or tend to look toward more traditional and
accepted approaches. The Company is attempting to solve the former problem by
improving the market’s knowledge and understanding of Cicero® software 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 will seek to
raise additional capital or to enter into other strategic transactions 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.
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.
Stock-Based
Compensation
During
2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment”, which addresses
the accounting for stock-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments. The Company uses the Black-Scholes option-pricing
model to determine the fair-value of stock-based awards under SFAS No.
123R.
The
Company issued 275,000 options in the first six months of 2008 of which 83,333
were vested immediately. The Company recognized stock-based
compensation expense of $110,000 and $317,000, respectively, for the three and
nine months ended September 30, 2008. The Company also recognized
stock-based compensation expense of $9,000 and $27,000, respectively, for the
three and nine months ended September 30, 2008, for the 549,360 restricted
shares of stock reserved for Mr. John Broderick, the Company’s CEO, in
accordance with his 2007 employment agreement.
The
following table sets forth certain information as of September 30, 2008 about
shares of the Company’s common stock, par value $.001 (the “Common Stock”),
outstanding and available for issuance under the Company’s existing equity
compensation plans: the Cicero Inc. 2007 Employee Stock Option Plan, the Cicero
Inc. (formerly Level 8 Systems, Inc.) 1997 Stock Option Incentive Plan and the
Outside Director Stock Option Plan. The Company’s stockholders
approved all of the Company’s stock-based compensation plans.
|
|
Shares
|
|
Outstanding
on January 1, 2008
|
|
|
2,529,025 |
|
Granted
|
|
|
400,000 |
|
Exercised
|
|
|
-- |
|
Forfeited
|
|
|
(268,812 |
) |
Outstanding
on September 30, 2008
|
|
|
2,660,213 |
|
|
|
|
|
|
Weighted
average exercise price of outstanding options
|
|
$ |
1.73 |
|
Shares
available for future grants on September 30, 2008
|
|
|
1,867,107 |
|
Options
to purchase shares
of common stock are excluded from the
calculation of diluted earnings per share when
their inclusion would have an anti-dilutive effect on the
calculation. No options were included for the three and nine-month
periods ended September 30, 2008 and 2007, respectively. Basic earnings per
common share are computed by dividing net income by the weighted average number
of shares of common stock outstanding during the respective
period. Diluted earnings per common share are computed by dividing
net income by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the respective period. The weighted
average number of common shares is increased by the number of dilutive potential
common shares issuable on the exercise of options less the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period. The average price of Cicero common stock during the three
months ended September 30, 2008 and 2007 was $0.24 and $0.42,
respectively. The average price of Cicero common stock during the
nine months ended September 30, 2008 and 2007 was $0.20 and $0.72,
respectively.
NOTE
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This Statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). This
Statement shall be effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The Company believes that the adoption of SFAS No. 162
will not have an effect on the Company’s financial position, results of
operations and cash flows.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133”. This statement requires additional disclosures about the
objectives of the derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and
related hedged items on our financial position, results of operations and cash
flows. SFAS No. 161 is effective for the Company beginning January 1,
2009. The Company is currently assessing the potential impact that
adoption of SFAS No. 161 may have on its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition,
under SFAS 141R, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income taxes. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The adoption of the provisions of
SFAS 141R is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, An Amendment of ARB No. 51,” SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51’s consolidation
procedures for consistency with the requirements of SFAS 141R. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The statement shall
be applied prospectively as of the beginning of the fiscal year in which the
statement is initially adopted. The adoption of the provisions of
SFAS 160 is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – an amendment of FASB Statement 115.”
The statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. Most of the
provisions of this statement apply only to entities that elect the fair value
option; however, the amendment to FASB Statement 115, “Accounting for Certain Investments
in Debt and Equity Securities,” applies to all entities with
available-for-sale and trading securities. The Company does not believe adoption
of this statement will have a material impact on its financial
statements.
NOTE
3. SHORT TERM DEBT
Notes
payable, short-term debt, and notes payable to related party consist of the
following (in thousands):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
Note
payable, related party (a)
|
|
$ |
94 |
|
|
$ |
49 |
|
Notes
payable (b)
|
|
|
608 |
|
|
|
1,186 |
|
|
|
$ |
702 |
|
|
$ |
1,235 |
|
(a)
|
In
June 2008, the Company entered into a short term note payable with John L.
(Launny) Steffens, the Chairman of the Board of Directors, for various
working capital needs. The Note bears interest at 10% per year and is
unsecured. At September 30, 2008, the Company was indebted to Mr. Steffens
in the amount of $45,000.
|
|
In
November 2007, the Company entered into a short term note payable with Mr.
Steffens for various working capital needs. The Note bears interest at 6%
per year and is unsecured. At September 30, 2008, the Company was indebted
to Mr. Steffens in the amount of
$40,000.
|
In
2004, the Company entered into promissory notes with one of the Company’s
directors and the former Chief Information Officer, Anthony Pizi. The
notes bear interest at 12% per annum. At September 30, 2008, the Company was
indebted to Mr. Pizi in the amount of $9,000.
(b)
|
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 by accounts
receivable and unsecured. In addition, in 2004 the Company
settled certain litigation and agreed to issue a series of promissory
notes to support its obligations in the aggregate principal amount of
$88,000. The notes bear interest between 10% and 36% per
annum.
|
NOTE
4. LONG-TERM DEBT
Long-term
loan and notes payable to related party consist of the following (in
thousands):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
Term
loan (a)
|
|
$ |
671 |
|
|
$ |
1,021 |
|
Note
payable; related party (b)
|
|
|
300 |
|
|
|
300 |
|
Other
long-term debt
|
|
|
-- |
|
|
|
2 |
|
|
|
$ |
971 |
|
|
$ |
1,323 |
|
(a)
|
In
October 2007, the Company, in conjunction with BluePhoenix Solutions,
retired the note payable to Bank Hapoalim and entered into a new note with
BluePhoenix Solutions in the principal amount of $1,021,000 with interest
at LIBOR plus 1% (4.25% at September 30, 2008 and 5.86% at December 31,
2007) maturing in December 2011. Interest is payable
quarterly. Under the terms of the original note, the Company
was to make a principal reduction payment in the amount of $350,000 on
January 30, 2009. The Company and BluePhoenix agreed to accelerate that
principal payment to March and May 2008 in return for a conversion of
$50,000 of principal into 195,848 shares of the Company’s common
stock. In March 2008, the Company paid $200,000 plus accrued
interest. In July 2008, $50,000 of debt was converted into
195,848 shares of the Company’s common stock. The remaining
payment of $100,000 is due January 30,
2009.
|
(b)
|
In
october 2007, the company entered into a long-term note with John L.
(Launny) Steffens, the chairman of the board of directors, as part of the
restructuring of the note payable to Bank Hapoalim. The note
bears interest of 3% and matures in October 2009. At September
30, 2008, the company was indebted to Mr. Steffens in the amount of
$300,000.
|
NOTE
5. STOCKHOLDER’S EQUITY
In July
2008, the Company issued 80,993 shares of common stock to a vendor for the
settlement of an accounts payable balance of $20,678.
In July
2008, the Company issued 195,848 shares of common stock to BluePhoenix Solutions
in lieu of repayment of $50,000 of debt. An additional 60,000 shares
of common stock were issued to BluePhoenix due to a filing deadline
penalty.
In April
2008, the Company issued 623,214 shares of common stock to a vendor for the
settlement of an accounts payable balance of $159,106.
In March
2008, the Company was notified that a group of investors, including two members
of the Board of Directors, acquired a short term promissory note due SDS
Merchant Fund in the principal amount of $250,000. The note is unsecured and
bears interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. In March, April and July 2008, the total principal and interest
amounted to $363,167 and was converted into 1,425,137 shares of common stock, of
which Mr. John Steffens, the Company’s Chairman, acquired 475,141 shares and Mr.
Bruce Miller, also a member of our Board of Directors, acquired 474,998
shares.
In
October 2007, the Company completed a private sale of shares of its common stock
to a group of investors, four of which are members of our Board of Directors.
Under the terms of that agreement, the Company sold 2,169,312 shares of its
common stock for $0.2457 per share for a total of $533,000, receiving cash
proceeds of $383,000 and converting a note in the principal amount of $150,000.
Participating in this consortium were Mr. John L. (Launny) Steffens,
the Company’s Chairman, and Messrs. Bruce Miller, Don Peppers,
and Bruce Percelay, members of the Board. Mr. Steffens
converted the principal amount of his short term notes with the Company of
$250,000 for 1,017,501 shares of common stock. Mr. Miller
invested $20,000 for 81,400 shares of common stock, Mr. Peppers acquired
101,750 shares for a $25,000 investment and Mr. Bruce Percelay
acquired 40,700 shares for a $10,000 investment.
In August
2007, the Company issued 2,756,173 options and recognized $650,000 in
stock-based compensation expense for fiscal 2007. The Company also
recognized $36,000 in stock-based compensation expense for the 549,360
restricted shares of stock reserved for Mr. John Broderick, the Company’s CEO,
in accordance with his 2007 employment agreement.
In
February 2007, the Company completed a private sale of shares of its common
stock to a group of investors, three of which are members of our Board of
Directors. Under the terms of that agreement, the Company sold 3,723,008 shares
of its common stock for $0.1343 per share for a total of $500,000. Participating
in this consortium were Mr. Mark Landis, the Company’s former
Chairman, and Mr. Bruce Miller, who is a Board member. Mr. Landis
acquired 74,460 shares for a $10,000 investment and Mr. Miller acquired
148,920 shares for a $20,000 investment. In May 2007,
Mr. John L. (Launny) Steffens was elected Chairman of the Board of
Directors. Prior to his election, Mr. Steffens had participated
in the private sale of shares acquiring 1,006,379 shares for an investment of
$135,157.
In
December 2006, the Company completed its Plan of Recapitalization, approved by
its stockholders at a Special Stockholders Meeting held on November 16, 2006.
Results of the Plan included a reverse stock split at a ratio of 100:1; change
of the Company’s name from Level 8 Systems, Inc. to Cicero Inc.; increased the
authorized common stock of the Company from 85 million shares to 215 million
shares; converted existing preferred shares into a new Series A-1
Preferred Stock; converted and cancelled senior reorganization debt in the
aggregate principal amount of $2.3 million into 3,438,473 shares of common
stock; converted the aggregate principal amount of $3.9 million of convertible
bridge notes into 30,508,448 shares of common stock; converted each share of
Series A3 Preferred Stock into 4.489 shares of Series A-1 Preferred Stock;
converted each share of Series B3 Preferred Stock into 75 shares of Series A-1
Preferred Stock; converted each share of Series C Preferred Stock into 39.64
shares of Series A-1 Preferred Stock; converted an aggregate principal amount of
$1.1 million of Series D Preferred Stock, recorded as mezzanine financing, into
53 shares of Series A-1 Preferred Stock; and converted an aggregate principal
amount of $1 million of convertible promissory notes into 1,591 shares of Series
A-1 Preferred Stock. As of September 30, 2008 the Company had 1,544
shares of Series A-1 Preferred Stock outstanding.
NOTE
6. 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 nine months of fiscal year 2008 or 2007. Because
of the Company's recurring losses, the deferred tax assets have been fully
offset by a valuation allowance.
NOTE
7. 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 reconciles the weighted average shares used for the basic earnings per
share computation to the shares used for the diluted earnings per share
computation (in thousands):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
shares
|
|
|
46,404 |
|
|
|
39,020 |
|
|
|
45,682 |
|
|
|
34,785 |
|
Effect
of dilution
|
|
|
52 |
|
|
|
-- |
|
|
|
24 |
|
|
|
-- |
|
Diluted
shares
|
|
|
46,456 |
|
|
|
39,020 |
|
|
|
45,706 |
|
|
|
34,785 |
|
The
following table sets forth the potential shares that are not included in the
diluted loss per share calculation because to do so would be anti-dilutive for
the periods presented (in thousands):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Stock
options where the exercise price is greater then the average market price
of common shares
|
|
|
2,608 |
|
|
|
2,801 |
|
|
|
2,636 |
|
|
|
2,801 |
|
Warrants
where the exercise price is greater than the average market price of
common shares
|
|
|
422 |
|
|
|
300 |
|
|
|
422 |
|
|
|
300 |
|
Preferred
stock, common share equivalent
|
|
|
1,544 |
|
|
|
1,604 |
|
|
|
1,544 |
|
|
|
1,604 |
|
NOTE
8. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
Based
upon the current business environment in which the Company operates, the
economic characteristics of its operating segments and management’s view of the
business, a revision in terms of aggregation of its segments was appropriate.
Therefore the segment discussion outlined below clarifies the adjusted segment
structure as determined by management under SFAS No. 131. All prior year amounts
have been restated to conform to the new reporting segment
structure.
Management
makes operating decisions and assesses performance of the Company’s operations
based on one reportable segment, the Software product segment. Prior
to this change the Company had segregated into two separate segments: Desktop
Integration and Messaging. The Messaging business has always been an immaterial
part of the Company’s overall business and generally all its sales efforts are
focused on the Cicero product. As such, the Company has elected to combine the
two products into one reportable segment.
The
Software product segment is comprised of the Cicero® product and the Ensuredmail
product. 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. Ensuredmail is an encrypted email technology that can
reside on either the server or the desktop.
The table
below presents information about the reported segment for the three and nine
months ended September 30, 2008 and 2007 (in thousands):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Total
revenue
|
|
$ |
578 |
|
|
$ |
387 |
|
|
$ |
2,475 |
|
|
$ |
935 |
|
Total
cost of revenue
|
|
|
314 |
|
|
|
305 |
|
|
|
827 |
|
|
|
628 |
|
Gross
margin
|
|
|
264 |
|
|
|
82 |
|
|
|
1,648 |
|
|
|
307 |
|
Total
operating expenses
|
|
|
731 |
|
|
|
1,004 |
|
|
|
2,111 |
|
|
|
2,116 |
|
Segment
loss
|
|
$ |
(467 |
) |
|
$ |
(922 |
) |
|
$ |
(463 |
) |
|
$ |
(1,809 |
) |
A
reconciliation of total segment loss to loss before provision for income taxes
for the three and nine months ended September 30, 2008 and 2007 (in
thousands):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Total
segment income/(loss)
|
|
$ |
(467 |
) |
|
$ |
(922 |
) |
|
$ |
(463 |
) |
|
$ |
(1,809 |
) |
Interest
and other income/(expense), net
|
|
|
(86 |
) |
|
|
(43 |
) |
|
|
(146 |
) |
|
|
(137 |
) |
Total
income/(loss) before income taxes
|
|
$ |
(553 |
) |
|
$ |
(965 |
) |
|
$ |
(609 |
) |
|
$ |
(1,946 |
) |
NOTE
9. CONTINGENCIES
Various
lawsuits and claims have been brought against us in the normal course of our
business.
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 $200,000 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 $189,000 plus interest over a 19-month period ending November 15,
2005. The Company has not made any additional payment and has a remaining
liability of approximately $88,000.
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.
PART
II INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13:
|
Other
Expenses of Issuance and
Distribution
|
The
following table sets forth the costs and expenses to be paid in connection with
the common stock being registered, all of which will be paid by Cicero Inc. (on
behalf of itself and the selling stockholders) in connection with this
offering. All amounts are estimates except for the registration
fee.
SEC
Registration Fee(as paid)
|
|
$ |
50 |
|
Accounting
Fees and Expenses
|
|
|
5,000 |
|
Legal
Fees and Expenses
|
|
|
30,000 |
|
Miscellaneous
|
|
|
1,500 |
|
Total
|
|
$ |
36,550 |
|
Item
14:
|
Indemnification
of Directors and Officers
|
Section
145 of the Delaware General Corporation Law permits indemnification of
directors, officers, employees and agents of corporations for liabilities
arising under the Securities Act of 1933, as amended.
The
registrant’s certificate of incorporation and bylaws provide for indemnification
of the registrant’s directors and officers to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law. Statutory Provisions
Section 102(b)(7) of the Delaware General Corporation Law enables a corporation
in its certificate of incorporation to eliminate or limit the personal liability
of members of its board of directors to the corporation or its stockholders for
monetary damages for violations of a director’s fiduciary duty of care. The
provision would have no effect on the availability of equitable remedies, such
as an injunction or rescission, for breach of fiduciary duty. In addition, no
provision may eliminate or limit the liability of a director for breaching his
duty of loyalty, failing to act in good faith, engaging in intentional
misconduct or knowingly violating a law, paying an unlawful dividend or
approving an illegal stock repurchase, or obtaining an improper personal
benefit.
Section
145 of the Delaware General Corporation Law empowers a corporation to indemnify
any person who was or is a party to or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, against expenses
(including attorney’s fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. No indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for expenses which the
court shall deem proper. Additionally, a corporation is required to indemnify
its directors and officers against expenses to the extent that the directors or
officers have been successful on the merits or otherwise in any action, suit or
proceeding or in defense of any claim, issue or matter.
An
indemnification can be made by the corporation only upon a determination that
indemnification is proper in the circumstances because the party seeking
indemnification has met the applicable standard of conduct as set forth in the
Delaware General Corporation Law. The indemnification provided by the Delaware
General Corporation Law shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. A corporation
also has the power to purchase and maintain insurance on behalf of any person,
whether or not the corporation would have the power to indemnify him against
such liability. The indemnification provided by the Delaware General Corporation
Law shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of the person.
The registrant’s certificate of incorporation limits a director’s liability for
monetary damages to the registrant and its stockholders for breaches of
fiduciary duty except under the circumstances outlined in the Delaware General
Corporation Law as described above.
The
registrant’s certificate of incorporation extends indemnification rights to the
fullest extent authorized by the Delaware General Corporation Law to directors
and officers involved in any action, suit or proceeding where the basis of the
involvement is the person’s alleged action in an official capacity or in any
other capacity while serving as a director or officer of the
registrant.
Item
15:
|
Recent
Sales of Unregistered Securities
|
In July
2008, the Company issued 391,696 shares of common stock for a $100,000 principal
payment on a promissory note; the Company issued 195,848 shares of common stock
for a $50,000 principal payment on a promissory note; and the Company issued
80,993 shares of common stock to a vendor for the settlement of an accounts
payable balance of $20,678. These shares were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933.
In July
2008, the Company issued 2,625 shares of common stock to the Company’s Chairman,
Mr. John L. Steffens, for the conversion of interest of $670 as part of the
acquisition of the short term promissory note due to SDS Merchant
Fund. These shares were issued in reliance upon the exemption from
registration provided by Section 3(a)(9) of the Securities Act of
1933.
In April
2008, the Company issued 623,214 shares of common stock to a vendor for the
settlement of an accounts payable balance of $159,106. The issuance
of shares of common stock in the transaction was exempt from the registration of
the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2)
thereof.
In March
2008, the Company was notified that a group of investors including two members
of the Board of Directors acquired a short term promissory note due SDS Merchant
Fund in the principal amount of $250,000. The note is unsecured and bears
interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. The total principal and interest amounted to $361,827 and was converted
into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s
Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our
Board of Directors, acquired 472,374 shares. The issuance of shares
of common stock in the transaction was exempt from the registration of the
Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2)
thereof.
In
October 2007, we agreed to restructure a promissory note payable to Bank
Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with
BluePhoenix, we made a principal reduction payment to Bank Hapoalim in the
amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank
Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix
entered into a new promissory note in the amount of $1,021,000, bearing interest
at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix
acquired 2,546,149 shares of our common stock in exchange for $650,000 paid to
Bank Hapoalim to retire that indebtedness. In March 2008, we
amended the terms of its Note Payable with BluePhoenix Solutions. Under the
terms of the original note, the Company was to make a principal reduction
payment in the amount of $350,000 on January 30, 2009. The Company and
BluePhoenix agreed to accelerate that principal payment to March and April 2008
in return for a conversion of $50,000 into 195,848 shares of the Company’s
common stock. In March, the Company paid $200,000 plus accrued interest and in
April, the Company paid $100,000 plus accrued interest. The issuance
of shares of common stock in the transaction was exempt from the registration of
the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2)
thereof.
In
October 2007, we completed a private sale of shares of its common stock to a
group of investors, four of which are members of our Board of Directors. Under
the terms of that agreement, we sold 2,169,311 shares of our common stock for
$0.2457 per share for a total of $533,000. The issuance of shares of
common stock in the transaction was exempt from the registration of the
Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) thereof
and Regulation D promulgated there under, based upon the fact that each investor
was an “accredited investor” as suck term definied in Rule 501(a) of Regulation
D.
In
October 2007, we entered into a Long Term Promissory Note in the amount of
$300,000 with Mr. John L. Steffens, our chairman. The note bears
interest at 3% per annum and matures on October 30, 2009. In order to
bring the interest rate on the note in compliance with arm’s length regulations,
we also issued 188,285 warrants to purchase our common stock at $0.18
each. The warrants expire in 10 years. The issuance of the
warrants in this transaction was exempt from the registration of the Securities
Act of 1933, as amended (the “Act”), pursuant to Section 4(2)
thereof.
In February 2007, we
completed a private sale of shares of common stock to a group of investors,
three of which are member of our Board of Directors. Under the terms of
that agreement, we sold 3,723,007 shares of our common stock for $0.1343 per
share for a total of $500,000. The issuance of shares of common stock in
this transaction was exempt from the registration requirements of the Act
pursuant to Section 4(2) thereof and Regulation D promulgated there under, based
upon the fact that each investor was an “accredited investor” as such term is
defined in Rule 501(a) of Regulation D.
From July
through December 2006, we issued several Convertible Bridge Notes with a
consortium of investors, including certain members of our Board of
Directors. We raised a total of $3,915,000. The issuance
of the Convertible Bridge Notes in this transaction was exempt from the
registration requirements of the Act pursuant to Section 4(2)
thereof. Under the terms of the Convertible Bridge Notes, the holders
converted their notes into a total of 30,508,448 shares of our common stock upon
the effectiveness of the Plan of Reorganization approved by our stockholders in
November 2006. The issuance of share of common stock in this
transaction was exempt from the registration requirements of the Act pursuant to
Section 3(9) thereof.
Item
16:
|
Exhibits
and Financial Statement Schedule
|
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.
EXHIBITS
The
exhibits listed under here below are filed as part of this Form
S-1:
Exhibit Number
|
|
Description
|
|
|
|
3.1
|
|
Certificate
of Incorporation of Level 8 Systems, Inc., a Delaware corporation (“Level
8”), as amended and restated December 29, 2006 (incorporated by
reference to exhibit 3.1 to Level 8’s Form 8-K filed January 17,
2007).
|
|
|
|
3.2
|
|
Certificate
of Designation relating to Series A1 Convertible Redeemable Preferred
Stock (incorporated by reference to exhibit 3.2 to Level 8’s Form 8-K
filed January 17, 2007).
|
|
|
|
3.3
|
|
Certificate
of Designation relating to Series A3 Convertible Redeemable Preferred
Stock, as amended December 29, 2006 (incorporated by reference to exhibit
3.3 to Level 8’s Form 8-K filed January 17, 2007).
|
|
|
|
3.4
|
|
Certificate
of Designation relating to Series B3 Convertible Redeemable Preferred as
amended December 29, 2006 (incorporated by reference to exhibit 3.4 to
Level 8’s Form 8-K filed January 17, 2007).
|
|
|
|
3.5
|
|
Certificate
of Designation relating to Series C Convertible Redeemable Preferred Stock
as amended December 29, 2006 (incorporated by reference to exhibit 3.5 to
Level 8’s Form 8-K filed January 17, 2007).
|
|
|
|
3.6
|
|
Certificate
of Designation relating to Series C Convertible Redeemable Preferred Stock
as amended December 29, 2006 (incorporated by reference to exhibit 3.5 to
Level 8’s Form 8-K filed January 17, 2007).
|
|
|
|
3.7
|
|
Certificate
of Designation relating to Series D Convertible Redeemable Preferred Stock
as amended December 29, 2006 (incorporated by reference to exhibit 3.5 to
Level 8’s Form 8-K filed January 17, 2007).
|
|
|
|
3.8
|
|
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).
|
|
|
|
3.9
|
|
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).
|
|
|
|
3.10
|
|
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).
|
|
|
|
3.11
|
|
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).
|
|
|
|
3.12
|
|
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).
|
3.13
|
|
Certificate
of Designation relating to Series C Convertible Redeemable Preferred Stock
(incorporated by reference to exhibit 3.1 to Level 8’s Form 8-K filed
August 27, 2002).
|
|
|
|
4.1
|
|
Registration
Rights Agreement dated July 2006, by and among Level 8 Systems, Inc. and
the Purchasers in the Senior Placement listed on Schedule I
thereto relating to the Security Purchasers
Agreement (incorporated by reference to exhibit 4.1 to the
Company’s Form 10-K, filed March 31, 2008).
|
|
|
|
4.2
|
|
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 (incorporated by reference to exhibit 4.1 to Level
8’s Form 10-K/A filed April 21, 2004).
|
|
|
|
4.3
|
|
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).
|
|
|
|
4.4
|
|
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).
|
|
|
|
4.5
|
|
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 Form 8-K, filed January 25, 2002).
|
|
|
|
4.6
|
|
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
Form 8-K, filed January 11, 2002).
|
|
|
|
4.7
|
|
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).
|
|
|
|
4.7A
|
|
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).
|
|
|
|
4.8
|
|
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).
|
|
|
|
4.8A
|
|
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 Form
8-K, filed August 14, 2001).
|
|
|
|
4.9
|
|
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).
|
|
|
|
4.10
|
|
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 Form 10-Q, filed
May 12, 2004).
|
|
|
|
4.13
|
|
Form
of Warrant issued to the Purchasers of Series D Preferred Stock dated as
of March 19, 2003 (incorporated by reference to exhibit 4.2 to Level 8's
Form 8-K, filed March 31, 2003).
|
4.14
|
|
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).
|
|
|
|
4.16
|
|
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).
|
|
|
|
4.17
|
|
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).
|
|
|
|
4.18
|
|
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)
|
|
|
|
4.19
|
|
Form
of Long term Promissory Note Stock Purchase Warrant (incorporated by
reference to exhibit 4.19 to the Company’s Form 10-K, filed March 31,
2008).
|
|
|
|
|
|
Legal
Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP (filed
herewith).
|
|
|
|
10.1
|
|
Securities
Purchase Agreement for Consortium IV (incorporated by reference to exhibit
10.1 to Cicero Inc.’s Form 10-K/A filed July 11, 2007).
|
|
|
|
10.2
|
|
Securities
Purchase Agreement dated January 2004, by and among Level 8 Systems, Inc.
and the Purchasers in the January 2004 Private Placement (incorporated by
reference to exhibit 10.1 to Level 8’s Form 10-K/A filed April 21,
2004).
|
|
|
|
10.3
|
|
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 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 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 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,
dated as of August 14, 2002, by and among Level 8 Systems, Inc. and the
holders of Series A1/A2/A3 and B1/B2/B3 Preferred Stock, (incorporated by
reference to exhibit 10.3 to Level 8’s Form 8-K filed August 27,
2002).
|
10.10
|
|
Exchange
Agreement, dated as of August 20, 2002, among Level 8 Systems,
Inc., and the various stockholders identified and listed on Schedule I,
thereto (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 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 Form 8-K, filed September 11,
2000).
|
|
|
|
10.12A
|
|
OEM
License Agreement between Cicero Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated (incorporated by reference to exhibit 10.12A to
the Company’s Form 10-K, filed March 31,
2008).
|
|
|
|
10.12A
|
|
Software
Support and Maintenance Schedule between Cicero Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (incorporated by reference to
exhibit 10.12A to the Company’s Form 10-K, filed March 31,
2008).
|
|
|
|
10.15
|
|
Employment
Agreement between Anthony Pizi and the Company effective January 1, 2007
(incorporated by reference to exhibit 10.15 to the Company’s Form 10-K,
filed March 31, 2008).*
|
|
|
|
10.16
|
|
Employment
Agreement between John P. Broderick and the Company effective January 1,
2007 (incorporated by reference to exhibit 10.16 to the Company’s Form
10-K, filed March 31, 2008).*
|
|
|
|
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
|
|
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).*
|
|
|
|
10.20
|
|
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).
|
10.20A
|
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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).
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10.20B
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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).
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10.21
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Lease
Agreement for Cary, N.C. offices, dated August 16 2007, between Cicero
Inc. and Regency Park Corporation (incorporated by reference to exhibit
10.21 to the Company’s Form 10-K, filed March 31,
2008).
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10.22
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Cicero
Inc. 2007 Employee Stock Option Plan (incorporated by reference to exhibit
10.22 to the Company’s Form 10-K, filed March 31,
2008).
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10.23
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Agreement
and Promissory Note of Cicero Inc., dated October 30, 2007, among Cicero
Inc. and BluePhoenix Solutions Ltd. ( incorporated by reference to exhibit
10.23 to the Company’s Form 10-K, filed March 31,
2008).
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10.24
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Promissory
Note of Cicero Inc., dated October 29, 2007 among Cicero Inc. and John L.
Steffens (incorporated by reference to exhibit 10.24 to the Company’s Form
10-K, filed March 31, 2008).
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10.25
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Securities
Purchase Agreement, dated as of February 26, 2007, by and among Cicero
Inc. and the Purchasers in the February Private Placement (incorporated by
reference to exhibit 10.25 to the Company’s Form 10-K, filed March 31,
2008).
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10.26
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Securities
Purchase Agreement, dated as of August 15, 2007, by and among Cicero Inc.
and the Purchasers in the August Private Placement (incorporated by
reference to exhibit 10.26 to the Company’s Form 10-K, filed March 31,
2008).
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21.1
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List
of subsidiaries of the Company (incorporated by reference to exhibit 21.1
to the Company’s Form 10-K, filed March 31,
2008).
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Consent
of Margolis & Company P.C. (filed herewith).
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23.2
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Consent
of Golenbock Eiseman Assor Bell & Peskoe LLP (included in Exhibit
5.1).
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* Management
contract or compensatory agreement.
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any Prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the Prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated maximum
offering price may be reflected in the form of Prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to
such information in this registration statement.
(2) That
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered that remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(5) Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the “Act”), may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other then the payment by the registrant of expense
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Cary, State of
North Carolina, on February 10, 2009.
CICERO
INC.
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By: /s/John
P. Broderick
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John
P. Broderick
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Chief
Executive Officer
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Principal
Accounting Officer
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Pursuant
to the requirements of the Securities Act of 1933, this amendment to the
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
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Title
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Date
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/s/ John
L. Steffens
John
L. Steffens
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Chairman
of the Board
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/s/ John
P. Broderick
John
P. Broderick
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Chief
Executive Officer/Chief Financial Officer
(Principal
Executive Officer)
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/s/ Mark
Landis
Mark
Landis
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Director
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/s/ Anthony
C. Pizi
Anthony
C. Pizi
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Director
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/s/
Bruce Hasenyager
Bruce
Hasenyager
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Director
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/s/
Jay Kingley
Jay
Kingley
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Director
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/s/
Bruce D. Miller
Bruce
D. Miller
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Director
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/s/
Charles Porciello
Charles
Porciello
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Director
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/s/
Bruce Percelay
Bruce
Percelay
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Director
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/s/
John W. Atherton
John
W. Atherton
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Director
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/s/
Don Peppers
Don
Peppers
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Director
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* /s/ John
P/ Broderick
John P.
Broderick
Attorney-in-fact