UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
T ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2008
£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from
to
Commission
File Number: 000-26392
CICERO
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
11-2920559
|
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
8000
Regency Parkway, Suite 542, Cary, NC 27518
(Address
of principal executive offices, including Zip Code)
(919)
380-5000
(Registrant’s telephone number,
including area code)
_____________
|
Securities
registered pursuant to Section 12(b) of the Act:
|
NONE
|
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
Common Stock, $.001 par
value
|
_____________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes £ No T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the above Act.
Yes £ No T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes T No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. T
Indicate
by check mark whether the registrant is a shell company. Yes £ No T
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 definition of “accelerated filer”,“large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer £
|
Accelerated
filer £
|
Non
- accelerated filer £
|
Smaller
reporting company T
|
Aggregate
market value of the outstanding shares of common stock held by non-affiliates of
the Registrant as of June 30, 2008 was approximately $7,804,910 based upon the
closing price quoted on the Over The Counter Bulletin Board.
There
were 46,642,396 shares of Common Stock outstanding as of March 12,
2009.
Documents
Incorporated by Reference: None
CICERO INC.
Annual
Report on Form 10-K
For the
Fiscal Year Ended December 31, 2008
|
Item
Number
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Page
Number
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PART
I
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1.
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1
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1A.
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9
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1B
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13
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2.
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13
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3.
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13
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4.
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13
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PART
II
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5.
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14
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6.
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14
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7.
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15
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7A.
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23
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8.
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23
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9.
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23
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9A
(T).
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24
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9B.
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25
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PART
III
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||
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10.
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26
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11.
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30
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12.
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35
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13.
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37
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14.
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38
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PART
IV
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15.
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39
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43
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F-1
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PART
I
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Item 1.
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Business
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Overview
Cicero
Inc, (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, 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 500 corporations worldwide (the “Global 500”).
The
Company’s 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, 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, 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 that have implemented or are implementing our Cicero® software
product include Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Nationwide Financial Services, Affiliated Computer Systems and Deutsche Bank AG.
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.
Strategic
Realignment
Historically,
the Company has 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. In consideration for the original
Cicero® license we issued to Merrill Lynch 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 capped at $20 million. We have
completely re-engineered the Cicero® software to provide increased functionality
and much more powerful integration capabilities.
Recent
Developments
In March
2009, the Company entered into several secured Promissory Notes with certain
investors in the aggregate amount of $750,000. The Notes bear interest at 15%
and mature on January 31, 2012. The Notes are secured by the amount due the
Company in February 2010 under its contract with Merrill Lynch. In addition,
each investor will be issued a warrant to purchase common stock of the Company.
Under the terms of the warrant, which expires in five years, each Note holder is
entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of
principal due under the Note. The exercise price on the warrant is $0.20 per
share. The shares of common stock underlying the warrants have registration
rights and a cashless exercise provision in the event no registration statement
is effective for resales, if required.
In
addition, the Company and Mr. John Steffens, its Chairman, agreed to amend an
existing Note payable that matured on October 31, 2009 to extend the maturity on
the Note until October 31, 2010.
Plan
of Recapitalization
In
December 2006, the Company completed its Plan of Recapitalization which was
approved by shareholders at a Special Shareholder Meeting held on November 16,
2006. The Plan provided the Company’s Board of Directors with discretionary
authority to affect 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 shareholders 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. Senior Reorganization Notes in the aggregate principal amount of
$2,309,000, were cancelled and converted into 3,438,473 shares of common
stock. Senior Reorganization Notes were issued pursuant to a Note and
Warrant Offering in 2004 wherein warrant holders of the Company’s common stock
were offered a one-time conversion of their existing warrants at a conversion
price of $0.10 per share. Those warrant holders who elected to convert, tendered
their conversion price in cash and received a Note Payable in exchange. In
addition, holders of Senior Reorganization Notes were granted additional
warrants to acquire the Company’s common stock. The Company also converted
$3,915,000 of Convertible Bridge Notes into 30,508,448 shares of common stock.
The Plan of Recapitalization also included an exchange of existing preferred
shares into a new Series A-1 preferred shares for Cicero Inc. As part of that
exchange and part of the plan of recapitalization, $992,000 of Convertible
Promissory Notes were converted into 1,591 Series A-1 preferred shares and
$1,061,000 of Series D preferred stock recorded as mezzanine financing was
converted into 53 shares of Series A-1 preferred shares.
Products
Desktop
Integration
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
don’t 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:
|
·
|
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.
|
|
·
|
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.
|
|
·
|
An insurance company -
uses our Cicero® solution to
integrate their customer information systems with over thirty software
applications including a CRM
application.
|
|
·
|
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.
|
Other
customers are systems integrators, which use our Cicero® product to develop
integration solutions for their customers.
Affiliated
Computer Services Inc. and Merrill Lynch each accounted for more than ten
percent (10%) of our operating revenues in 2008. In 2007, Merrill
Lynch accounted for more than 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.
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: Affiliated Computer Services, Inc., BluePhoenix Solutions and Hewlett
Packard. In addition, we have entered into strategic partnerships
with TrySynergy Consulting, Innovative Solutions Group, Piercetech, 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
We
incurred research and development expense of approximately $615,000, $569,000,
and $533,000 in 2008, 2007, and 2006, respectively. The increase in costs in
2008 as compared to 2007 reflects an increase in headcount partially offset by a
general decrease in overhead costs. 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.
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. 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:
|
·
|
Product
functionality and features;
|
|
·
|
Availability
and quality of support services;
|
|
·
|
Ease
of product implementation;
|
|
·
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Price;
|
|
·
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Product
reputation; and
|
|
·
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Our
financial stability.
|
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:
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
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 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 trademark “Cicero®”.
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 30 employees, of which 29 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.
Available
Information
Our web
address is www.ciceroinc.com. We make available free of charge
through our web site our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. Also, the public
may read and copy such material at the Security and Exchange Commission’s Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the Security and Exchange Commission at 1-800-SEC-0330. The
Security and Exchange Commission also maintains an internet site that contains
reports, proxy and information statements, and other information at
www.sec.gov.
Forward
Looking and Cautionary Statements
Certain
statements contained in this Annual Report may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("Reform Act"). We may also make forward looking statements in other
reports filed with the Securities and Exchange Commission, in materials
delivered to shareholders, in press releases and in other public statements. In
addition, our representatives may from time to time make oral forward-looking
statements. Forward looking statements provide current expectations of future
events based on certain assumptions and include any statement that does not
directly relate to any historical or current fact. Words such as "anticipates,"
"believes," "expects," "estimates," "intends," "plans," "projects," and similar
expressions, may identify such forward looking statements. In accordance with
the Reform Act, set forth below are cautionary statements that accompany those
forward looking statements. Readers should carefully review these cautionary
statements as they identify certain important factors that could cause actual
results to differ materially from those in the forward-looking statements and
from historical trends. The following cautionary statements are not exclusive
and are in addition to other factors discussed elsewhere in our filings with the
Securities and Exchange Commission and in materials incorporated therein by
reference: our future success depends on the market acceptance of the Cicero®
product and successful execution of the new strategic direction; general
economic or business conditions may be less favorable than expected, resulting
in, among other things, lower than expected revenues; an unexpected revenue
shortfall may adversely affect our business because our expenses are largely
fixed; our quarterly operating results may vary significantly because we are not
able to accurately predict the amount and timing of individual sales and this
may adversely impact our stock price; trends in sales of our products and
general economic conditions may affect investors' expectations regarding our
financial performance and may adversely affect our stock price; our future
results may depend upon the continued growth and business use of the Internet;
we may lose market share and be required to reduce prices as a result of
competition from our existing competitors, other vendors and information systems
departments of customers; we may not have the ability to recruit, train and
retain qualified personnel; rapid technological change could render the
Company's products obsolete; loss of any one of our major customers could
adversely affect our business; our products may contain undetected software
errors, which could adversely affect our business; because our technology is
complex, we may be exposed to liability claims; we may be unable to enforce or
defend our ownership and use of proprietary technology; because we are a
technology company, our common stock may be subject to erratic price
fluctuations; and we may not have sufficient liquidity and capital resources to
meet changing business conditions.
|
Item
1A.
|
Risk
Factors
|
We have a history
of losses and expect that we will continue to experience losses at least through
the first quarter of 2009.
We
experienced operating losses and net losses for each of the years from 1998
through 2008. We incurred a net loss of $3.0 million in 2006, $2.0 million for
2007 and $0.8 million in 2008. As of December 31, 2008, we had a
working capital deficit of $6.2 million and an accumulated deficit of $237
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 first 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. Although we have sufficient cash on hand to
cover our operating requirements through the calendar year end of December 31,
2009, 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, especially in light of the current economic
crisis.
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.
The
Company’s future revenues are entirely dependent on acceptance of Cicero®. The
Company has experienced negative cash flows from operations for the past three
years. At December 31, 2008, the Company had a working capital deficiency of
approximately $6,157,000. While the Company has demonstrated some increase in
the acceptance of its product the Company will need to attract more accounts in
the near future. The Company’s success to date has been through some strategic
relationships wherein it has been able to establish solutions specific to
certain industry verticals such as financial services, contact centers and
healthcare.
Our new
strategy is subject to the following specialized risks that may adversely affect
our long-term revenue and profitability prospects:
|
|
·
|
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;
|
|
|
·
|
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
|
|
|
·
|
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.
|
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 a weakening of the economy, may result in a decrease in our
revenue rates.
The
so-called “penny stock rule” could make it cumbersome for brokers and dealers 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.
The
Company’s 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:
|
|
·
|
make
a special suitability determination for purchasers of our
shares;
|
|
|
·
|
receive
the purchaser's written consent to the transaction prior to the purchase;
and
|
|
|
·
|
deliver
to a prospective purchaser of our stock, prior to the first transaction, a
risk disclosure document relating to the penny stock
market.
|
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 and short
product life cycles.
Our
future success will depend to a substantial degree upon our ability to enhance
our existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing customer
requirements and emerging and evolving industry standards.
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 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.
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, companies in the software industry have experienced
substantial litigation regarding intellectual property and third parties could
assert claims that we have infringed their intellectual property rights. In
addition, we may be required to indemnify our distribution partners and end-
users for similar claims made against them. Any claims against us would 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.
As the
number of software products in the industry increases and the functionality of
these products further overlaps, we believe that software developers and
licensors may become increasingly subject to infringement claims. Any such
claims, with or without merit, could be time consuming and expensive to defend
and could adversely affect our business, operating results and financial
condition.
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 dividends on our common stock and it is likely that no
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.
|
Item
1B.
|
Unresolved
Staff Comments
|
Not
Applicable
|
Item
2.
|
Properties
|
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. We
believe that our existing lease will be renegotiated as it expires or that
alternative properties can be leased on acceptable terms. We also believe that
our present facilities are suitable for continuing our existing and planned
operations.
|
Item
3.
|
Legal
Proceedings
|
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 payments and has a remaining
liability of approximately $88,000.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
None
PART
II
|
Item 5.
|
Market
For Registrant's Common Stock, Related Shareholder Matters and Issuer
Purchases of Equity Securities.
|
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 and 2007 as
retroactively adjusted for the 100:1 reverse stock split.
|
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 | ||||||||
The
closing price of the common stock on March 11, 2009 was $0.13 per
share.
Dividends
and Record Stockholders
We have
never declared or paid any cash dividends on our common stock. We anticipate
that all of our earnings will be retained for the operation and expansion of our
business and do not anticipate paying any cash dividends on our common stock in
the foreseeable future As of March 11, 2009, we had 219
registered stockholders of record.
Recent
Sales of Unregistered Securities
In July
2008, the Company issued 60,000 shares of common stock to BluePhoenix Solutions
due to a filing deadline penalty.
These
securities were issued in reliance upon an exemption from registration provided
by Section 4(2) of the Securities Act of 1933 as amended.
Equity
Compensation Plan Information
The
following table sets forth certain information as of December 31, 2008, about
shares of Common Stock outstanding and available for issuance under the
Company’s existing equity compensation plans: the 2007 Cicero Stock Option Plan,
the Level 8 Systems, Inc. 1997 Stock Option Incentive Plan, the 1995
Non-Qualified Option Plan and the Outside Director Stock Option
Plan.
|
Plan Category
|
Number
of Securities to be issued upon exercise ofoutstanding options
|
Weighted-average
exercise price ofoutstanding
options
|
Number
of securities remaining available under equity compensation plans
(excluding securities reflectedin the first
column)
|
|||||||||
|
Equity
compensation plans approved by stockholders
|
26,120 | $ | 79.41 | 1,200 | ||||||||
|
Equity
compensation plans not approved by stockholders
|
2,685,759 | $ | 0.46 | 1,814,241 | ||||||||
|
Total
|
2,711,879 | $ | 1.22 | 1,815,441 | ||||||||
|
Item 6.
|
Selected
Financial Data.
|
Not
Applicable
|
Item
7.
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations
|
General
Information
Cicero
Inc. 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, the Company also provides technical support,
training and consulting services as part of its commitment to providing its
customers 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 Global 5000. Cicero offers
services around our integration software products.
This
discussion contains forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities, liquidity and
capital resources and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause its actual results to differ materially from the anticipated
results or other expectations expressed in the Company's forward-looking
statements. See ''Item 1. Business—Forward Looking and Cautionary
Statements.''
Business
Strategy
Based
upon the current business environment in which the Company operates, the
economic characteristics of its operating segment and managements 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.
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. In November 2008, the Company ceased any further sales and support of
Ensuredmail.
Results
of Operations
The
following table sets forth, for the years indicated, the Company's results of
continuing operations expressed as a percentage of revenue and presents
information for the three categories of revenue.
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Software
|
42.5 | % | 27.7 | % | 21.4 | % | ||||||
|
Maintenance
|
25.3 | % | 16.6 | % | 12.3 | % | ||||||
|
Services
|
32.2 | % | 55.7 | % | 66.3 | % | ||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of revenue:
|
||||||||||||
|
Software
|
1.5 | % | 1.0 | % | 0.9 | % | ||||||
|
Maintenance
|
7.5 | % | 14.6 | % | 21.8 | % | ||||||
|
Services
|
27.3 | % | 36.2 | % | 56.2 | % | ||||||
|
Total
|
36.2 | % | 51.8 | % | 78.9 | % | ||||||
|
Gross
margin
|
63.8 | % | 48.2 | % | 21.1 | % | ||||||
|
Operating
expenses:
|
||||||||||||
|
Sales
and marketing
|
27.6 | % | 43.5 | % | 35.6 | % | ||||||
|
Research
and product development
|
17.8 | % | 31.5 | % | 54.8 | % | ||||||
|
General
and administrative
|
37.7 | % | 75.0 | % | 124.1 | % | ||||||
|
(Gain)
on disposal of assets
|
0.0 | % | 0.0 | % | (2.5 | )% | ||||||
|
Total
|
83.1 | % | 150.0 | % | 212.0 | % | ||||||
|
Loss
from operations
|
(19.3 | )% | (101.8 | )% | (190.9 | )% | ||||||
|
Other (expense),
net
|
(4.5 | )% | (7.5 | )% | (117.5 | )% | ||||||
|
Loss
before taxes
|
(23.8 | )% | (109.3 | )% | (308.4 | )% | ||||||
|
Income
tax provision (benefit)
|
0.0 | % | 0.0 | % | 0.0 | % | ||||||
|
Net
loss
|
(23.8 | )% | (109.3 | )% | (308.4 | )% | ||||||
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:
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
100 | % | 100 | % | 100 | % | ||||||
The table
below presents information about reported segments for the years ended December
31, 2008, 2007, and 2006 (in thousands):
|
For
the year ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
revenue
|
$ | 3,452 | $ | 1,808 | $ | 972 | ||||||
|
Total
cost of revenue
|
1,251 | 937 | 767 | |||||||||
|
Gross
margin
|
2,201 | 871 | 205 | |||||||||
|
Total
operating expenses
|
2,868 | 2,711 | 2,085 | |||||||||
|
Segment
loss
|
$ | (667 | ) | $ | (1,840 | ) | $ | (1,880 | ) | |||
A
reconciliation of segment operating expenses to total operating expense follows
(in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Segment
operating expenses
|
$ | 2,868 | $ | 2,711 | $ | 2,085 | ||||||
|
(Gain)
on disposal of assets
|
-- | -- | (24 | ) | ||||||||
|
Total
operating expenses
|
$ | 2,868 | $ | 2,711 | $ | 2,061 | ||||||
A
reconciliation of total segment profitability to net loss follows for the fiscal
years ended December 31 (in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Total
segment loss
|
$ | (667 | ) | $ | (1,840 | ) | $ | (1,880 | ) | |||
|
Gain
on disposal of assets
|
-- | -- | 24 | |||||||||
|
Interest
and other income/(expense), net
|
(156 | ) | (135 | ) | (1,141 | ) | ||||||
|
Net
loss
|
$ | (823 | ) | $ | (1,975 | ) | $ | (2,997 | ) | |||
Years
Ended December 31, 2008, 2007, and 2006
Revenue and Gross
Margin. The Company has three categories of revenue:
software products, maintenance, and services. Software products revenue is
comprised primarily of fees from licensing the Company's proprietary software
products. Maintenance revenue is comprised of fees for maintaining, supporting,
and providing periodic upgrades to the Company's software products. Services
revenue is comprised of fees for consulting and training services related to the
Company's software products.
The
Company's revenues vary from quarter to quarter, due to market conditions, the
budgeting and purchasing cycles of customers and the effectiveness of the
Company’s sales force. The Company does not have any material backlog
of unfilled software orders and product revenue in any period is substantially
dependent upon orders received in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and are relatively fixed over
the short term, variations in the timing of the recognition of revenue can cause
significant variations in operating results from period to period. Fluctuations
in operating results may result in volatility of the price of the Company's
common stock.
Revenues
increased 91% from $1,808,000 in 2007 to $3,452,000 in 2008. Total
revenues increased 86% from $972,000 in 2006 to $1,808,000 in 2007. The increase
in revenues in 2008 is primarily driven by increased software sales to new
customers and corresponding maintenance revenue on new software sales in
addition to maintenance revenue from the contract with Merrill
Lynch. The increase in revenues in 2007 is primarily due to increased
labor billings from integration contracts with the Company’s professional
services staff (approximately $366,000) and software license revenue generated
under an OEM contract with Merrill Lynch in December 2007
($500,000). Gross profit margin was 64%, 48%, and 21% for 2008, 2007,
and 2006, respectively. Under the terms of the OEM agreement with
Merrill Lynch, the Company 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. The Company may or may not incur additional
license revenues under this OEM agreement.
Software Products. Software
product revenue increased 193% in 2008 from $501,000 in 2007 to $1,467,000 in
2008. Software product revenue increased from $208,000 in 2006 to
$501,000 in 2007 or approximately 141%. The increase in software
revenue in 2008 is partially attributable to contracts signed with a
reseller/partner and sales to one of its customers. The increase in
software revenues in 2007 is attributed to the Company entering into an OEM
agreement with Merrill Lynch in December 2007.
The gross
margin loss on software products was 97% for the year ended December 31, 2008,
and 96% for the years ended December 31, 2007 and 2006. 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 was licensed by the Company 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 the Company’s 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. The Company is
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, the Company issued an additional 2,500 shares of common stock to
MLBC, Inc., a Merrill Lynch affiliate and entered into a royalty sharing
agreement pursuant to which, the Company pays 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 capped at $20,000,000.
The
Company expects to see significant increases in software sales coupled with
improving margins on software products as Cicero® gains acceptance in the
marketplace. The Company’s expectations are based on its review of the sales
cycle that has developed around the Cicero® product since being released by the
Company, its review of the pipeline of prospective customers and their
anticipated capital expenditure commitments and budgeting cycles, as well as the
status of in-process proof of concepts or beta sites with select
corporations.
Maintenance. Maintenance
revenues for the year ended December 31, 2008 increased 191% or $573,000 from
2007. Maintenance revenues for the year ended December 31, 2007
increased by approximately 150% or $180,000 from 2006. The increase in
maintenance revenues for 2008 is primarily attributed to the increase in new
software sales and the OEM contract with Merrill Lynch. The increase
in maintenance revenues for 2007 is primarily attributed to one significant new
maintenance customer during the year.
Cost of
maintenance is comprised of personnel costs and related overhead and the cost of
third-party contracts for the maintenance and support of the Company’s software
products. The Company experienced a gross margin on maintenance products of 70%
and 12% for 2008 and 2007, respectively. Gross margin loss on maintenance
products for 2006 was (76%).
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, 2008 increased by approximately 10% or
$105,000 over the same period in 2007. Services revenue for the year
ended December 31, 2007 increased by approximately 56% or $363,000 over the same
period in 2006. 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 was 15%, 35%, and 15%, for the years ended
2008, 2007, and 2006, 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 21% or approximately $166,000 in 2008 and 127%
or approximately $440,000 in 2007. The increase in sales and marketing in 2008
is primarily driven by increased participation in trade shows. 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.
Sales and
marketing expenses are expected to increase as the Company adds additional
direct sales personnel and supports 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 8% or $46,000 in 2008 as compared to 2007 and 7% or $36,000 in 2007
as compared to 2006. The increase in costs in 2008 is primarily
driven by an increase in headcount partially offset by overall decrease in
overhead expenses. 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
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, 2008 decreased by 4% or $55,000 over the prior year. The
decrease in general administrative costs is primarily due to a reduction in
stock compensation expense partially offset by higher general overhead
costs. General and administrative expenses for the year ended
December 31, 2007 increased by 12% or $150,000 over 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.
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 2008, 2007, and 2006. 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
Operating
and Investing Activities
The
Company utilized $187,000 of cash for the year ended December 31,
2008. The Company incurred a net loss of approximately $823,000 for
the year ended December 31, 2008 in addition to net losses of approximately
$4,972,000 for the previous two fiscal years. The Company has experienced
negative cash flows from operations for the past three years. At December 31,
2008, the Company had a working capital deficiency of approximately $6,157,000.
In March 2009, the Company entered into several secured promissory notes in the
aggregate amount of $750,000.
Operating
activities utilized approximately $52,000 in cash, which was primarily comprised
of the loss from operations of $823,000, offset by non-cash charges for
depreciation and amortization of approximately $17,000, and stock compensation
expense of $453,000 and expense from a stock issuance of $15,000. In addition,
the Company had an increase in accounts receivable of $67,000, and prepaid
expenses and other assets of $47,000. The Company generated approximately
$178,000 in cash through an increase in the amount owing its creditors and
$240,000 from an increase in its deferred revenue.
The
Company utilized approximately $41,000 in cash in the purchase of updating the
Company’s network equipment and furniture.
The
Company utilized approximately $105,000 of cash during the year from financing
activities from net repayments of notes payable.
The
Company 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, stock compensation
expense of $720,000, and a provision for doubtful accounts of $50,000. In
addition, the Company had an increase in accounts receivable of $622,000, and
prepaid expenses and other assets of $136,000. The Company generated
approximately $478,000 in cash through an increase in the amount owing its
creditors and $70,000 from deferred revenue.
The
Company utilized approximately $17,000 in cash in the purchase of updating the
Company’s network equipment.
The
Company 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.
Financing
Activities
The
Company funded its cash needs during the year ended December 31, 2008 with cash
on hand from December 31, 2007, as well as through the use of proceeds from
short term borrowings.
The
Company funded its 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 its common stock and from short term borrowings.
In March
2009, the Company entered into several secured Promissory Notes with certain
investors in the aggregate amount of $750,000. The Notes bear interest at 15%
and mature on January 31, 2012. The Notes are secured by the amount due the
Company in February 2010 under its contract with Merrill Lynch. In addition,
each investor will be issued a warrant to purchase common stock of the Company.
Under the terms of the warrant, which expires in five years, each Note holder is
entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of
principal due under the Note. The exercise price on the warrant is $0.20 per
share. The shares of common stock underlying the warrants have registration
rights and a cashless exercise provision in the event no registration statement
is effective for resales, if required.
In
addition, the Company and Mr. John Steffens, its Chairman, agreed to amend an
existing Note payable that matured on October 31, 2009 to extend the maturity on
the Note until October 31, 2010.
During
2008, the Company entered into a Revolving Note Agreement with an Investor in
which the Company may from time to time borrow up to $500,000. The borrowings
are secured by any outstanding receivables at the time of the loans. The loans
bear interest at 36% per annum. At December 31, 2008, $400,600 was due and
outstanding under the Revolving Note agreement.
The
Company 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, the Company agreed to
restructure the Note payable to Bank Hapoalim and guaranty by BluePhoenix
Solutions (formerly Liraz Systems Ltd.). 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 March 2008, the Company and
BluePhoenix agreed to accelerate the principal reduction payment of $350,000 due
on January 31, 2009 and $200,000 was paid in March 2008. BluePhoenix
agreed to convert $50,000 of the repayment into 195,848 shares of the Company’s
common stock.
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. 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 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 3,723,007 shares of its 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.
In
October 2007, the Company 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
transactions, the Company also issued 188,285 warrants to purchase the Company’s
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. The Company used the proceeds from that loan to pay down the debt to Bank
Hapoalim as noted above. In March 2009, the Company and
Mr. Steffens agreed to extend the maturity on the above Note to October
2010.
The
Company believes that its financing activities and capitalization structure will
have a positive impact on the future operations of the Company and its ability
to raise additional capital, however, there can be no assurance that management
will be successful in executing as anticipated or in a timely manner, especially
in light of the current global economic crisis. If these strategies
are unsuccessful, the Company may have to pursue other means of financing that
may not be on terms favorable to the Company or its stockholders. We
believe that we currently have sufficient cash on hand to finance operations
through December 31, 2009.
Off Balance Sheet
Arrangements
The
Company does not have any off balance sheet arrangements. We have no
subsidiaries or other unconsolidated limited purpose entities, and we have not
guaranteed or otherwise supported the obligations of any other
entity.
Significant Accounting
Policies and Estimates
The
policies discussed below are considered by us to be critical to an understanding
of our financial statements because they require us to apply the most judgment
and make estimates regarding matters that are inherently
uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. With respect to the policies
discussed below, we note that because of the uncertainties inherent in
forecasting, the estimates frequently require adjustment.
Our
financial statements and related disclosures, which are prepared to conform to
accounting principles generally accepted in the United States of America,
require us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and accounts receivable and expenses during the
period reported. We are also required to disclose amounts of
contingent assets and liabilities at the date of the financial
statements. Our actual results in future periods could differ from
those estimates. Estimates and assumptions are reviewed periodically,
and the effects of revisions are reflected in the Consolidated Financial
Statements in the period they are determined to be necessary.
We
consider the most significant accounting policies and estimates in our financial
statements to be those surrounding: (1) revenue recognition; (2) allowance for
doubtful trade accounts receivable; (3) capitalization and valuation of software
product technology; and (4) valuation of deferred tax assets. These
accounting policies, the basis for any estimates and potential impact to our
Consolidated Financial Statements, should any of the estimates change, are
further described as follows:
Revenue
Recognition. Our revenues are derived principally from three
sources: (i) license fees for the use of our software products; (ii)
fees for consulting services and training; and (iii) fees for maintenance and
technical support. We generally recognize revenue from software
license fees when a license agreement has been signed by both parties, the fee
is fixed or determinable, collection of the fee is probable, delivery of our
products has occurred and no other significant obligations
remain. For multiple-element arrangements, we apply the “residual
method”. According to the residual method, revenue allocated to the
undelivered elements is allocated based on vendor specific objective evidence
(“VSOE”) of fair value of those elements. VSOE is determined by
reference to the price the customer would be required to pay when the element is
sold separately. Revenue applicable to the delivered elements is
deemed equal to the remainder of the contract price. The revenue
recognition rules pertaining to software arrangements are complicated and
certain assumptions are made in determining whether the fee is fixed and
determinable and whether collectability is probable. For instance, in
our license arrangements with resellers, estimates are made regarding the
reseller’s ability and intent to pay the license fee. Our estimates
may prove incorrect if, for instance, subsequent sales by the reseller do not
materialize. Should our actual experience with respect to collections
differ from our initial assessment, there could be adjustments to future
results.
Revenues
from services include fees for consulting services and
training. Revenues from services are recognized on either a time and
materials or percentage of completion basis as the services are performed and
amounts due from customers are deemed collectible and
non-refundable. Revenues from fixed price service agreements are
recognized on a percentage of completion basis in direct proportion to the
services provided. To the extent the actual time to complete such
services varies from the estimates made at any reporting date, our revenue and
the related gross margins may be impacted in the following period.
Allowance for Doubtful Trade Accounts
Receivable. In addition to assessing the probability of
collection in conjunction with revenue arrangements, we continually assess the
collectability of outstanding invoices. Assumptions are made
regarding the customer’s ability and intent to pay and are based on historical
trends, general economic conditions, and current customer
data. Should our actual experience with respect to collections differ
from our initial assessment, there could be adjustments to bad debt
expense.
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,
2008 and 2007 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, 2008, we had a
valuation allowance of $98,379,000 against $98,379,000 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, 2008, the Company has net operating loss carryforwards of
approximately $233,040,000, which may be applied against future taxable income.
These carryforwards will expire at various times between 2009 and 2028. A
substantial portion of these carryforwards is limited 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 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, (as amended).” 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.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Not
applicable
|
Item
8.
|
Financial
Statements and Supplementary Data
|
The
information required by this item appears beginning on page F-1 of this
report.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not
applicable
|
Item
9A(T).
|
Controls
and Procedures
|
(a)
Evaluation of Disclosure Controls
Our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2008. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files and submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based on the evaluation of our disclosure controls and procedures as
of December 31, 2008, our Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were
effective.
The Audit
Committee of the Board of Directors, which is composed solely of independent
directors, meets regularly with our independent registered public accounting
firm, Margolis & Company P.C., and representatives of management to review
accounting, financial reporting, internal control and audit matters, as well as
the nature and extent of the audit effort. The Audit Committee is responsible
for the engagement of the independent auditors. The independent auditors have
free access to the Audit Committee.
(b)
Management’s Responsibility for Financial Statements
Our
management is responsible for the integrity and objectivity of all information
presented in this report. The consolidated financial statements were prepared in
conformity with accounting principles generally accepted in the United States of
America and include amounts based on management’s best estimates and judgments.
Management believes the consolidated financial statements fairly reflect the
form and substance of transactions and that the financial statements fairly
represent the Company’s condensed consolidated financial position and results of
operations for the periods and as of the dates stated therein.
(c)
Management’s Assessment of Internal Control over Financial
Reporting
The
management of Cicero Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting as defined by Rules 13a–15(f)
and 15(d)-15(f) under the Securities Exchange Act of 1934. This
system is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principals generally accepted in the
United States of America.
Our
internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can only provide reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may vary over
time.
Under the
direction of Chief Executive Officer and Chief Financial Officer, management
completed an evaluation of the effectiveness of the system of internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework, published by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and has determined that the Company’s system of
internal control over financial reporting was effective as of December 31,
2008.
(d)
Report of Independent Registered Public Accounting Firm
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
(e)
Changes in Internal Control over Financial Reporting
In
October 2008, we established a time table for annual testing of the
effectiveness of our internal control over financial reporting with the direct
reporting of the results to the Audit Committee to ensure proper compliance with
SEC rules and regulations.
|
Item
9B.
|
Other
Information
|
None
PART
III
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
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
|
67
|
Director
|
|
Jay
R. Kingley
|
48
|
Director
|
|
Charles
B. Porciello
|
73
|
Director
|
|
Bruce
D. Miller
|
58
|
Director
|
|
Bruce
A. Percelay
|
53
|
Director
|
|
John
W. Atherton
|
66
|
Director
|
|
Don
Peppers
|
58
|
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, 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 is currently the Chief Executive Officer and Chief Financial Officer
of the Company and is also a director. Mr. Broderick has served as the Chief
Operating Officer of the Company since June 2002, as the Chief Financial Officer
of the Company since April 2001, and as Corporate Secretary since August 2001.
Prior to joining 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
is presently the CIO of the Asset Management Platform Services Group of Deutsche
Bank AG. Mr. Pizi was the Company’s Chief Information Officer 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
is the Senior Managing Member of the Security Growth Fund, a newly established
private equity firm focused on the electronic security industry. Prior to
joining the Security Growth Fund and since 2003, Mr. Landis was the
Executive in Residence of The Jordan Company, a private equity firm based in New
York. 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. Prior to that, 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 is currently the Chief Executive Officer of Kingley Institute LLC, a
medical wellness company. Prior to that, 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 1999-2001. 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 is 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.
Board
Meetings
The Board
met two (2) times during the year ended December 31, 2008. 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 2008, not all of the incumbent
directors attended the total number of meetings held by the Board. Messrs.
Steffens, Broderick, Landis, Kingley, Porciello, Miller and Atherton attended
all the meetings. Messrs, Hasenyager, Pizi, and Peppers were absent for one
meeting each and Mr. Percelay did not attend either meeting.
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, were each 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 2008.
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 four times during our
fiscal year ended December 31, 2008. 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 4350(d) of the National Association of Securities Dealers’ listing
standards. Mr. John W. Atherton was designated the “audit committee financial
expert” as defined in Item 407(d)(5) of Regulation S.
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.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
officers, directors and persons who own more than ten percent of the Company’s
Common Stock (collectively, “Reporting Persons”) to file reports of ownership
and changes in ownership with the SEC and Nasdaq. Reporting Persons
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely on its review of the copies of
such reports received by it and written representations all Section 16(a)
reports were filed in a timely manner.
|
Item
11.
|
Executive
Compensation.
|
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.
|
(QQ) 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
recognized no revenue with Pilar Services Inc. during 2008. We have
recognized approximately $1,000 in revenues with Pilar Services Inc. during
2007. 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.
General
Compensation Philosophy
As a
technology company, we operate in an extremely competitive and rapidly changing
industry. We believe that the skill, talent, judgment and dedication of our
executive officers are critical factors affecting the long term value of our
company. The Compensation Committee’s philosophy and objectives in setting
compensation policies for executive officers are to align pay with performance,
while at the same time providing fair, reasonable and competitive compensation
that will allow us to retain and attract superior executive talent. The
Compensation Committee strongly believes that executive compensation should
align executives’ interests with those of shareholders by rewarding achievement
of specific annual, long-term and strategic goals by the Company, with an
ultimate objective of providing long-term stockholder value. The specific goals
that our current executive compensation program rewards are focused primarily on
revenue growth and profitability. To that end, the Compensation Committee
believes executive compensation packages provided by the Company to its
executive officers should include a mix of both cash and equity based
compensation that reward performance as measured against established goals. As a
result, the principal elements of our executive compensation are base salary,
non-equity incentive plan compensation, long-term equity incentives generally in
the form of stock options and/or restricted stock and post-termination severance
and acceleration of stock option vesting upon termination and/or a change in
control.
Our goal
is to maintain an executive compensation program that will fairly compensate our
executives, attract and retain qualified executives who are able to contribute
to our long-term success, induce performance consistent with clearly defined
corporate goals and align our executives long-term interests with those of our
shareholders. The decision on the total compensation for our executive officers
is based primarily on an assessment of each individual’s performance and the
potential to enhance long-term stockholder value. Often, judgment is utilized in
lieu of total reliance upon rigid guidelines or formulas in determining the
amount and mix of compensation for each executive officer. Factors affecting
such judgment include performance compared to strategic goals established for
the individual and the Company at the beginning of the year, the nature and
scope of the executive’s responsibilities and effectiveness in leading
initiatives to achieve corporate goals.
Role
of Chief Executive Officer in Compensation Decisions
The
Compensation Committee of our Board of Directors determines the base salary (and
any bonus and equity-based compensation) for each executive officer annually.
John Broderick, our Chief Executive Officer, confers with members of the
Compensation Committee, and makes recommendations, regarding the compensation of
all executive officers other than himself. He does not participate in the
Compensation Committee's deliberations regarding his own compensation. In
determining the compensation of our executive officers, the Compensation
Committee does not engage in any benchmarking of total compensation or any
material element of compensation.
Components
of Executive Compensation
The
compensation program for our Named Executive Officers consists of:
|
·
|
Base
salary;
|
|
·
|
Non-equity
incentive plan compensation;
|
|
·
|
Long-term
incentive compensation; and
|
|
·
|
Other
benefits
|
Base
Salary
The
Company provides our executive officer and other employees with base salary to
compensate them for services rendered during the fiscal year. The Compensation
Committee considered the scope and accountability associated with each executive
officer’s position and such factors as the performance and experience of each
executive officer, individual leadership and level of responsibility when
approving the base salary levels for fiscal year 2009.
Non-Equity
Incentive Plan Compensation
Non-equity
incentive plan compensation for our executive officers is designed to reward
performance against key corporate goals and for certain of our executives for
performance against individual business development goals. Our chief executive
officer’s incentive targets are designed to motivate management to exceed
specific goals related to profitability objectives. We believe that these
metrics closely correlate to stockholder value. We believe that these metrics
also correlate to stockholder value and individual performance. Our Chief
Executive Officer achieved a non-equity bonus of $25,000 in fiscal
2008. No executive achieved a non-equity incentive bonus in fiscal
2007.
Our Chief
Executive Officer, Mr. Broderick, is eligible for non-equity incentive plan
compensation with a target bonus of $325,000 for achieving targeted pre tax
income for fiscal 2009. In addition, Mr. Broderick is eligible for additional
deferred compensation should targeted operating income as determined by the
Compensation Committee be achieved in 2009 and 2010.
Long-Term
Equity Incentive Awards
The
Company presently has one equity-based compensation plan, entitled Cicero Inc.
2007 Employee Stock Option Plan, which will require stockholder approval. The
Plan provides for the grant of incentive and non-qualified stock options to
employees, and the grant of non-qualified options to consultants and to
directors and advisory board members. In addition, various other types of
stock-based awards, such a stock appreciation rights, may be granted under the
Plan. The Plan is administered by the Compensation Committee of our Board of
Directors, which determines the individuals eligible to receive options or other
awards under the Plan, the terms and conditions of those awards, the applicable
vesting schedule, the option price and term for any granted options, and all
other terms and conditions governing the option grants and other awards made
under the Plan. Under the 2007 Plan, 4,500,000 shares of our common stock were
reserved for issuance pursuant to options or restricted stock awards; at
December 31, 2008, 1,814,241 shares were available for future option grants and
awards. The Company’s previous equity-based compensation plan, entitled Level 8
Systems 1997 Employee Stock Option Plan, expired during fiscal 2007. There are
26,120 options outstanding under that plan.
To date,
awards have been solely in the form of non-qualified stock options granted under
the Plans. The Compensation Committee grant these stock-based incentive awards
from time to time for the purpose of attracting and retaining key executives,
motivating them to attain the Company's long-range financial objectives, and
closely aligning their financial interests with long-term stockholder interests
and share value.
In August 2007, the Board of
Directors approved a stock option grant to Mr. Broderick, our CEO, for 549,360
shares of common stock at the fair market value on the date of grant. The
Company has also agreed to grant Mr. Pizi a stock option grant of 122,080 shares
of the Company at the fair market value on the date of grant. Vesting of Mr.
Broderick’s grant will be over 2 years with one third being vested immediately
upon the date of grant and one third on each of the next two anniversaries of
the date of grant. Mr. Pizi’s grant was vested immediately however, he failed to
exercise his options within 90 days of his separation from the Company and those
shares were forfeited.
Coincidental
with the grant of stock options to our named executives, the Company granted a
restricted stock award to Mr. Broderick. Mr. Broderick will receive a restricted
stock award equal to 1.35% of the fully diluted shares of the Company. The
restricted stock award will vest upon the termination or resignation of the
named executive or upon a change in control of the Company.
The
grants to our named executives during fiscal 2007 reflect the absence of any
grants since 2004. Our focus as a Company and for our Chief Executive Officer
was to complete the Plan of Recapitalization that was approved by shareholders
in November 2006 and effective with our filing our Amended and Restated
Certificate with the State of Delaware in January 2007. The 2007 grant is
intended to satisfy three fiscal years of equity incentive awards and to bring
our named executive ownership in the Company up to competitive
levels.
Grants to
other employees are typically made upon initial employment and then periodically
as the Compensation Committee so determines. During 2007, the Compensation
Committee approved grants totaling 2,084,733 shares to employees and directors
of the Company. These were the first grants made in the past two
years. The Compensation Committee has empowered our Chief Executive
Officer to issue grants of up to 75,000 options to new employees at the fair
market value of the stock on the date of employment. Any proposed option grants
in excess of that amount require Compensation Committee approval. Our stock
options typically vest over two years with one third being immediately vested
upon the date of grant and one third vesting on each of the next two
anniversaries of the date of grant. During fiscal 2008, the Company
granted 475,000 shares to employees.
We
account for equity compensation paid to all of our employees under the rules of
SFAS No. 123(R), which requires us to estimate and record compensation expense
over the service period of the award. All equity awards to our employees,
including executive officers, and to our directors have been granted and
reflected in our consolidated financial statements, based upon the applicable
accounting guidance, at fair market value on the date of grant. Generally, the
granting of a non-qualified stock option to our executive officers is not a
taxable event to those employees, provided, however, that the exercise of such
stock would result in taxable income to the optionee equal to the difference
between the fair market value of the stock on the exercise date and the exercise
price paid for such stock. Similarly, a restricted stock award subject to a
vesting requirement is also not taxable to our executive officers unless such
individual makes an election under section 83(b) of the Internal Revenue Code of
1986, as amended. In the absence of a section 83(b) election, the value of the
restricted stock award becomes taxable to the recipient as the restriction
lapses.
Other
Benefits
Our
executive officers participate in benefit programs that are substantially the
same as all other eligible employees of the Company.
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 | |||||||||||||||
|
(1)
|
In
August 2007, the Company 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. The Company used the Black-Scholes
method to value these shares and assumed a life of 10
years.
|
|
(2)
|
The
Company issued 549,360 options to Mr. Broderick in August 2007. The fair
market on the date of grant was $0.51 each. The options vested one-third
immediately and the balance on each of the next two anniversaries of the
date of grant.
|
|
(3)
|
Non-equity
incentive plan compensation includes a bonus for certain revenue
transactions for named executive earned during fiscal year ended December
31, 2008.
|
|
(4)
|
Other
compensation includes the Company’s portion of major medical insurance
premiums and long term disability premiums for named executives during
fiscal year ended December 31,
2008.
|
Grants
of Plan Based Awards
The
Company did not award any stock options to the named executive during fiscal
2008. The Company awarded 549,360 stock options to the named
executive during fiscal 2007. The Company did not award any stock
appreciation rights (“SARs”) during fiscal 2008 and 2007.
The
following table presents the number and values of exercisable options as of
December 31, 2008 by the named executive.
Outstanding
Equity Awards at December 31, 2008
|
Option
Awards
|
Stock
Awards
|
||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options # Exercisable (Vested)
|
Number
of Securities Underlying Unexercised Unearned Options# Unexercisable (Unvested)
|
Option Exercise price ($)
|
Option Expiration date
|
Number of Shares of Stock That Have Not Vested
(8)
|
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
|
||||||||||||||
| 366,240 | (7) | 183,120 | (7) | $ | 0.51 |
08/17/2017
|
|||||||||||||
|
549,630
|
$ |
85,445
|
|||||||||||||||||
|
(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,
2009, we agreed to pay Mr. Broderick an annual base salary of $175,000 and
performance bonuses in cash of up to $325,000 per annum based upon certain
revenue goals and operating metrics, as determined by the Compensation
Committee, in its discretion. In addition, Mr. Broderick is eligible
for additional deferred compensation should targeted operating income as
determined by the Compensation Committee be achieved in 2009 and
2010. 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.
Estimated
Payments and Benefits Upon Termination
The
amount of compensation and benefits payable to named executive has been
estimated in the table below. Since all options held by the executive are
out-of-the-money, we have not estimated any value for option acceleration.
Deferred compensation reflects amounts voluntarily deferred from salaries during
fiscal 2004 and 2005 plus accrued but unpaid bonuses from 2003.
|
Base Salary
|
Restricted Shares Award
|
Deferred Compensation
|
Total Compensation and
Benefits
|
|||||||||||||
|
John
P. Broderick
|
||||||||||||||||
|
Death
|
$ | -- | $ | 85,445 | $ | 175,000 | $ | 260,445 | ||||||||
|
Disability
|
-- | 85,445 | 175,000 | 260,445 | ||||||||||||
|
Involuntary
termination without cause
|
175,000 | 85,445 | 175,000 | 435,445 | ||||||||||||
|
Change
in Control
|
175,000 | 85,445 | 175,000 | 435,445 | ||||||||||||
The
amounts shown in the table above do not include payments and benefits to the
extent they are provided on a non-discriminatory basis to salaried employees
generally upon termination, such as unreimbursed business expenses
payable.
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
|
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 | ||||||||||
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and
Management.
|
The
following table sets forth information as of February 28, 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 February 28, 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 February 28, 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)
|
9,010,472 | (2) | 19.1 | % | ||||
|
John
L. Steffens (3)
|
5,574,041 | (4) | 11.9 | % | ||||
|
Mark
and Carolyn P. Landis (5)
|
5,109,863 | (6) | 11.0 | % | ||||
|
BluePhoenix
Solutions (7)
|
2,801,997 | (8) | 6.0 | % | ||||
|
Anthony
C. Pizi
|
1,402,634 | (9) | 3.0 | % | ||||
|
Bruce
Miller
|
2,249,364 | (10) | 4.8 | % | ||||
|
Bruce
Percelay
|
1,078,486 | (11) | 2.3 | % | ||||
|
John
P. Broderick
|
931,457 | (12) | 2.0 | % | ||||
|
John
W. Atherton
|
156,784 | (13) | * | |||||
|
Bruce
W. Hasenyager
|
41,652 | (14) | * | |||||
|
Don
Peppers
|
309,050 | (15) | * | |||||
|
Charles
Porciello
|
88,286 | (16) | * | |||||
|
Jay
R. Kingley
|
10,000 | (17) | * | |||||
|
All
current directors and executive officers as a group (11
persons)
|
16,749,317 | (18) | 35.9 | % | ||||
|
*
|
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 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 9,010,472 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
5,574,041 shares of common stock, 14,832 shares of the Series A-1
Convertible Preferred Stock and 202,617 shares issuable upon the exercise
of warrants and 8,000 shares subject to stock options exercisable within
sixty (60) days. The exercise prices of the warrants are as follows:
14,332 at $10.00 per share and 188,285 at $0.18 per share. The
exercise price of the stock options is $0.51 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, 30,572 shares of common stock issuable upon
the exercise of warrants and 5,000 shares subject to stock options
exercisable within sixty (60) days. The exercise prices of the warrants
and stock options are at $10.00 and $0.51 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
2,801,997 shares of common stock
|
|
9.
|
Includes
1,274,951 shares of common stock, 111,016 shares of the Series A-1
Convertible Preferred Stock, 11,667 shares of common stock issuable upon
the exercise of warrants and 5,000 shares subject to stock options
exercisable within sixty (60) days. The exercise prices of
warrants and stock options are $10.00 and $0.51 per share of common stock,
respectively.
|
|
10.
|
Consists
of 1,715,388 shares of common stock, 13,195 shares of common stock
issuable upon the exercise of warrants and 8,000 shares subject to stock
options exercisable within sixty (60) days. The exercise prices
of the warrants and stock options are $10.00 and $0.51 per share of common
stock, respectively. Mr. Miller has sole or shared voting or
dispositive power with respect to the securities held by Delphi Partners,
Ltd., which holds 509,267 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 and 5,000 shares subject to stock
options exercisable within sixty (60) days. The exercise price of stock
options is $0.51 per share of common
stock.
|
|
12.
|
Includes
3,248 shares of common stock. 378,849 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. The exercise prices of stock options range
from $0.51 to $404 per share of common
stock.
|
|
13.
|
Includes
148,784 shares of common stock, and 100 shares of common stock held in a
self-directed IRA and 8,000 shares subject to stock options exercisable
within sixty (60) days. The exercise price of stock options is
$0.51 per share of common stock.
|
|
14.
|
Consists
of 32,652 shares of common stock and 9,000 shares subject to stock options
exercisable within sixty (60) days. The exercise prices of
stock options are as follows: 1,000 at $35.00 per share and 8,000 at $0.51
per share of common stock. Disclaims beneficial ownership of
1,000 shares of common stock because they are
anti-dilutive.
|
|
15.
|
Includes
304,050 shares of common stock and 5,000 shares subject to stock options
exercisable within sixty (60) days. The exercise price of stock options is
$0.51 per share of common stock.
|
|
16.
|
Consists
of 80,286 shares of common stock and 8,000 shares subject to stock options
exercisable within sixty (60) days. The exercise price of stock options is
$0.51 per share of common stock.
|
|
17.
|
Consists
of 1,000 shares of common stock and 9,000 shares subject to
stock options exercisable within sixty (60) days. The exercise prices of
stock options are as follows: 1,000 at $34.00 per share and 8,000 at $0.51
per share of common stock.
|
|
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.
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Issuance
of Common Stock
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 $363,838 and was converted
into 1,425,137 shares of common stock. 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 July
2008, the Company converted $100,000 of principal of short term notes with
John L. (Launny) Steffens, the Chairman of the Board of Directors, into
391,696 shares of the Company’s common stock.
Loans
from Related Parties
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. The Company
made a principal payment of $55,000 during fiscal 2008. At December
31, 2008, the Company was indebted to Mr. Steffens in the amount of
$45,000.
In
October 2007, the Company entered into a long-term promissory 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. The Company also granted Mr.
Steffens 188,285 warrants to purchase common stock at $0.18 each. The Company
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
December 31, 2008, the Company was indebted to Mr. Steffens in the amount of
$300,000. In March 2009, the Company and Mr. Steffens agreed to
extend the maturity on the above note to October 31, 2010.
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, 2008, the Company was indebted to Mr. Steffens in the amount of
$40,000.
During
2005, the Company 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
December 31, 2008, the Company was indebted to Mr. Pizi in the amount of
$9,000.
Borrowings
and Commitments from BluePhoenix Solutions
BluePhoenix
Solutions 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 March 2008, the amended the terms if
its Notes Payable with BluePhoenix Solutions. The Company and
BluePhoenix agreed to accelerate that principal originally due on January 31,
2009 to March and April 2008 in return for a conversion of $50,000 of debt into
195,848 shares of the Company’s common stock. In March 2008, the
Company paid $200,000 plus accrued interest and subsequently paid $100,000 plus
accrued interest.
Transactions
with Board Members
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, 2008, the receivable which had been reserved for as a doubtful
account was written off.
Director
Independence
Our board
of directors currently consists of eleven members. They are John L.
Steffens, John P. Broderick, Mark Landis, Anthony C. Pizi, Bruce Hasenyager, Jay
Kingley, Bruce D. Miller, Charles Porciello, Bruce Percelay, John W. Atherton,
and Don Peppers. Mr. Steffens is the Company’s Chairman of the Board
and Mr. Broderick is the Chief Executive Officer and Chief Financial
Officer. The Company’s stock is quoted on the Over The Counter
Bulletin Board, which does not have director independence requirements. Under
Item 407(a) of Regulation S-K, the Company has chosen to measure the
independence of its directors under the definition of independence used by the
American Stock Exchange, which can be found in the AMEX Company Guide,
§121(A)(2) (2007). Under such definition, Messrs. Steffens, Landis,
Pizi, Hasenyager, Kingley, Miller, Porciello, Percelay, Atherton and Peppers are
independent directors.
|
Item
14.
|
Principal
Accountant Fees and Services
|
Independent
Registered Public Accounting Firm
Margolis
& Company P.C. audited our financial statements for each of the years ended
December 31, 2008 and 2007.
Audit
Fees
Audit
fees include fees for the audit of the Company’s annual financial statements,
fees for the review of the Company’s interim financial statements, and fees for
services that are normally provided by the Independent Registered Public
Accounting Firm in connection with statutory and regulatory filings or
engagements. The aggregate fees billed by Margolis & Company P.C. for
professional services rendered to our company for the audit of the Company's
annual financial statements for fiscal years 2008 and 2007 (and reviews of
quarterly financial statements on form 10-Q) were $48,000 and $44,000,
respectively.
Audit-Related
Fees
Audit-related
fees include fees for assurance and related services that are reasonably related
to the performance of the audit or review of the Company’s financial statements.
There were no audit-related fees paid to Margolis & Company P.C. for fiscal
years 2008 and 2007.
Tax
Fees
Tax fees
include fees for tax compliance, tax advice and tax planning. There were no fees
billed by Margolis & Company P.C. for these services in 2008 and
2007.
Other
Fees
All other
fees include fees for all services except those described above. There were no
other fees paid to Margolis & Company P.C. for fiscal year
2008.
Determination
of Auditor Independence
The Audit
Committee considered the provision of non-audit services by Margolis &
Company P.C. and determined that the provision of such services was consistent
with maintaining the independence of Margolis & Company P.C.
Audit
Committee’s Pre-Approval Policies
The Audit
Committee has adopted a policy that all audit, audit-related, tax and any other
non-audit service to be performed by the Company’s Independent Registered Public
Accounting Firm must be pre-approved by the Audit Committee. It is the Company’s
policy that all such services be pre-approved prior to commencement of the
engagement. The Audit Committee is also required to pre-approve the estimated
fees for such services, as well as any subsequent changes to the terms of the
engagement.
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
|
(A)
|
Financial
Statements
|
The
following financial statements of the Company and the related reports of
Independent Registered Public Accounting Firms thereon are set forth immediately
following the Index of Financial Statements which appears on page F-1 of this
report:
Independent
Registered Public Accounting Firm Report
Consolidated
Balance Sheets as of December 31, 2008 and 2007
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2008, 2007
and 2006
Consolidated
Statements of Comprehensive Loss for the years ended December 31, 2008, 2007 and
2006
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
Notes to
Consolidated Financial Statements
|
(B)
|
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.
|
(C)
|
Exhibits
|
The
exhibits listed under the Exhibit Index are filed as part of this Annual Report
on Form 10-K.
Exhibit
Index
Exhibit
|
Number
|
Description
|
|
3.1
|
Certificate
of Incorporation of Level 8 Systems, Inc., a Delaware corporation, 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 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).
|
|
3.4
|
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).
|
|
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 Cicero Inc.’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 Report on 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
Report on 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 Report
on 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 Report on Form
10-Q, filed May 12, 2004).
|
|
4.11
|
Form
of Warrant issued to the Purchasers in the Series D Preferred Stock
transaction dated as of March 19, 2003 (incorporated by reference to
exhibit 4.2 to Level 8's Form 8-K, filed March 31,
2003).
|
|
4.11A
|
Form
of Warrant issued to the Purchasers in the Series D Preferred Stock
transaction dated as of March 19, 2003 (incorporated by reference to
exhibit 4.2 to Level 8's Form 8-K, filed March 31,
2003).
|
|
4.12
|
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).
|
|
4.13
|
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).
|
|
4.14
|
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).
|
|
4.15
|
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)
|
|
4.16
|
Form
of Long term Promissory Note Stock Purchase Warrant (incorporated by
reference to exhibit 4.19 to Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
Form
of Long term Promissory Note Stock Purchase Warrant (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
|
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).
|
|
10.3A
|
PCA
Shell License Agreement between Level 8 Systems, Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (incorporated by reference to
exhibit 10.2 to Level 8’s Report on Form 8-K, filed September 11,
2000).
|
|
10.3B
|
OEM
License Agreement between Cicero Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated (incorporated by reference to exhibit 10.12A to
Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
10.3C
|
Software
Support and Maintenance Schedule between Cicero Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (incorporated by reference to
exhibit 10.12A to Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
Employment
Agreement between John P. Broderick and the Company effective January 1,
2008 (filed herewith).*
|
|
10.5
|
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).
|
|
10.6
|
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).*
|
|
10.7A
|
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).*
|
|
10.8B
|
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).*
|
|
10.9
|
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 Cicero Inc.’s Form 10-K
filed March 31, 2008).
|
|
10.10
|
Cicero
Inc. 2007 Employee Stock Option Plan (incorporated by reference to exhibit
10.22 to Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
10.11
|
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 Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
10.12
|
Promissory
Note of Cicero Inc., dated October 29, 2007 among Cicero Inc. and John L.
Steffens (incorporated by reference to exhibit 10.24 to Cicero Inc.’s Form
10-K filed March 31, 2008).
|
|
10.13
|
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 Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
10.14
|
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 Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
Revolving
Loan Agreement dated November 3, 2008 among Cicero Inc. and Barbara Sivan
(filed herewith).
|
|
Employment
Agreement between John P. Broderick and the Company effective January 1,
2009 (filed herewith).*
|
|
Form
of Long Term Promissory Note dated March 31, 2009 (filed
herewith).
|
|
14.1
|
Code
of Ethics (incorporated by reference to exhibit 14.1 to Level 8’s Form
10-K/A, filed March 31, 2004).
|
|
List
of subsidiaries of the Company (filed
herewith).
|
|
Consent
of Margolis & Company P.C. (filed
herewith).
|
|
Certification
of Chief Executive pursuant to Rule 13a-14(a) (filed
herewith).
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) (filed
herewith).
|
|
Certification
of John P. Broderick pursuant to 18 USC § 1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
*
|
Management
contract or compensatory agreement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
CICERO
INC.
|
|
|
By:
/s/ John P.
Broderick
|
|
|
John
P. Broderick
|
|
|
Chief
Executive Officer
|
|
|
Date:
March 31, 2009
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated have signed this Report below.
|
Signature
|
Title
|
Date
|
|
/s/ John
L. Steffens
John
L. Steffens
|
Chairman
of the Board
|
March
31, 2009
|
|
/s/ John
P. Broderick
John
P. Broderick
|
Chief
Executive Officer/Chief Financial Officer
(Principal
Executive Officer)
|
March
31, 2009
|
|
/s/ Mark
Landis
Mark
Landis
|
Director
|
March
31, 2009
|
|
/s/ Anthony
C. Pizi
Anthony
C. Pizi
|
Director
|
March
31, 2009
|
|
/s/ Bruce
Hasenyager
Bruce
Hasenyager
|
Director
|
March
31, 2009
|
|
/s/ Jay
Kingley
Jay
Kingley
|
Director
|
March
31, 2009
|
|
/s/ Bruce D.
Miller
Bruce
D. Miller
|
Director
|
March
31, 2009
|
|
/s/ Charles
Porciello
Charles
Porciello
|
Director
|
March
31, 2009
|
|
/s/ Bruce
Percelay
Bruce
Percelay
|
Director
|
March
31, 2009
|
|
/s/ John W.
Atherton
John
W. Atherton
|
Director
|
March
31, 2009
|
|
/s/ Don
Peppers
Don
Peppers
|
Director
|
March
31,
2009
|
INDEX TO
FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Financial
Statements:
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Stockholders' Equity (Deficit)
|
F-5
|
|
Consolidated
Statements of Comprehensive Loss
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
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 sheet of Cicero Inc. and
subsidiaries (the "Company") as of December 31, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.
|
/s/
Margolis & Company P.C.
|
|
|
Certified
Public Accountants
|
Bala
Cynwyd, PA
March 31,
2009
CICERO
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
December 31, 2008
|
December 31, 2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 63 | $ | 250 | ||||
|
Assets
of operations to be abandoned
|
71 | 79 | ||||||
|
Trade
accounts receivable, net
|
759 | 692 | ||||||
|
Prepaid
expenses and other current assets
|
255 | 208 | ||||||
|
Total
current assets
|
1,148 | 1,229 | ||||||
|
Property
and equipment, net
|
46 | 22 | ||||||
|
Total
assets
|
$ | 1,194 | $ | 1,251 | ||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Short-term
debt (Note
5)
|
$ | 1,192 | $ | 1,235 | ||||
|
Accounts
payable
|
2,258 | 2,489 | ||||||
|
Accrued
expenses:
|
||||||||
|
Salaries,
wages, and related items
|
1,051 | 1,002 | ||||||
|
Other
|
2,027 | 2,072 | ||||||
|
Liabilities
of operations to be abandoned
|
429 | 455 | ||||||
|
Deferred
revenue
|
348 | 108 | ||||||
|
Total
current liabilities
|
7,305 | 7,361 | ||||||
|
Long-term
debt (Note
6)
|
971 | 1,323 | ||||||
|
Total
liabilities
|
8,276 | 8,684 | ||||||
|
Commitments
and contingencies (Notes 14 and 15)
|
||||||||
|
Stockholders'
deficit:
|
||||||||
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized
|
||||||||
|
Series
A-1 – 1,543.6 shares issued and outstanding at December 31, 2008, $500 per
share liquidation preference (aggregate liquidation value of $772) and
1,603.6 shares issued and outstanding at December 31, 2007, $500 per share
liquidation preference (aggregate liquidation value of
$802)
|
-- | -- | ||||||
|
Common
stock, $0.001 par value, 215,000,000 shares authorized at December 31,
2008 and 2007, respectively; 46,642,396 and 43,805,508 issued and
outstanding at December 31, 2008 and 2007, respectively (Note
2)
|
47 | 44 | ||||||
|
Additional
paid-in-capital
|
230,018 | 228,858 | ||||||
|
Accumulated
deficit
|
(237,143 | ) | (236,320 | ) | ||||
|
Accumulated
other comprehensive loss
|
(4 | ) | (15 | ) | ||||
|
Total
stockholders' deficit
|
(7,082 | ) | (7,433 | ) | ||||
|
Total
liabilities and stockholders' deficit
|
$ | 1,194 | $ | 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)
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Software
|
$ | 1,467 | $ | 501 | $ | 208 | ||||||
|
Maintenance
|
873 | 300 | 120 | |||||||||
|
Services
|
1,112 | 1,007 | 644 | |||||||||
|
Total
operating revenue
|
3,452 | 1,808 | 972 | |||||||||
|
Cost
of revenue:
|
||||||||||||
|
Software
|
50 | 19 | 9 | |||||||||
|
Maintenance
|
260 | 264 | 212 | |||||||||
|
Services
|
941 | 654 | 546 | |||||||||
|
Total
cost of revenue
|
1,251 | 937 | 767 | |||||||||
|
Gross
margin
|
2,201 | 871 | 205 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Sales
and marketing
|
952 | 786 | 346 | |||||||||
|
Research
and product development
|
615 | 569 | 533 | |||||||||
|
General
and administrative
|
1,301 | 1,356 | 1,206 | |||||||||
|
(Gain)
on disposal of assets
|
- | - | (24 | ) | ||||||||
|
Total
operating expenses
|
2,868 | 2,711 | 2,061 | |||||||||
|
Loss
from operations
|
(667 | ) | (1,840 | ) | (1,856 | ) | ||||||
|
Other
income (charges):
|
||||||||||||
|
Interest
expense
|
(223 | ) | (257 | ) | (853 | ) | ||||||
|
Other
|
67 | 122 | (288 | ) | ||||||||
| (156 | ) | (135 | ) | (1,141 | ) | |||||||
|
Net
loss
|
$ | (823 | ) | $ | (1,975 | ) | $ | (2,997 | ) | |||
|
Accretion
of preferred stock and deemed dividends
|
- | - | 5,633 | |||||||||
|
Net
loss applicable to common stockholders
|
$ | (823 | ) | $ | (1,975 | ) | $ | (8,630 | ) | |||
|
Loss
per share:
|
||||||||||||
|
Basic
loss per share
|
$ | (0.02 | ) | $ | (0.05 | ) | $ | (0.25 | ) | |||
|
Diluted
loss per share
|
$ | (0.02 | ) | $ | (0.05 | ) | $ | (0.25 | ) | |||
|
Average
shares outstanding:
|
||||||||||||
|
Basic
|
46,642 | 36,771 | 35,182 | |||||||||
|
Potential
dilutive common shares
|
12 | -- | -- | |||||||||
|
Diluted
|
46,654 | 36,771 | 35,182 | |||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
(in
thousands)
|
Common
Stock
|
Preferred
Stock
|
Additional Paid-in
|
Accumulated
|
Accumulated Other
Comprehensive
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Income (Loss)
|
Total
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
48,017 | $ | 48 | 33 | $ | -- | $ | 210,594 | $ | (225,715 | ) | $ | (3 | ) | $ | (15,076 | ) | |||||||||||||||
|
Reverse
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 | ) | |||||||||||||||||||||
|
Shares
issued for loan refinancing
|
1,425 | 1 | 362 | 363 | ||||||||||||||||||||||||||||
|
Conversion
of preferred shares to common
|
60 | -- | ||||||||||||||||||||||||||||||
|
Shares
issued for account payable refinancing
|
623 | 1 | 159 | 160 | ||||||||||||||||||||||||||||
|
Shares
issued for loan conversion
|
392 | 1 | 100 | 101 | ||||||||||||||||||||||||||||
|
Shares
issued for loan conversion and S1 delay
|
256 | 65 | 65 | |||||||||||||||||||||||||||||
|
Shares
issued for account payable conversion
|
81 | 21 | 21 | |||||||||||||||||||||||||||||
|
Options
issued as compensation
|
417 | 417 | ||||||||||||||||||||||||||||||
|
Restricted
shares issued as compensation
|
36 | 36 | ||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
11 | 11 | ||||||||||||||||||||||||||||||
|
Net
loss
|
(823 | ) | (823 | ) | ||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
46,642 | $ | 47 | 2 | $ | -- | $ | 230,018 | $ | (237,143 | ) | $ | (4 | ) | $ | (7,082 | ) | |||||||||||||||
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
loss
|
$ | (823 | ) | $ | (1,975 | ) | $ | (2,997 | ) | |||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||||
|
Foreign
currency translation adjustment
|
11 | (6 | ) | (6 | ) | |||||||
|
Comprehensive
loss
|
$ | (812 | ) | $ | (1,981 | ) | $ | (3,003 | ) | |||
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (823 | ) | $ | (1,975 | ) | $ | (2,997 | ) | |||
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
17 | 10 | 12 | |||||||||
|
Stock
compensation expense
|
453 | 720 | 614 | |||||||||
|
Issuance
of stock
|
15 | -- | -- | |||||||||
|
Provision
(credit) for doubtful accounts
|
(100 | ) | 50 | 60 | ||||||||
|
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
|
33 | (622 | ) | (212 | ) | |||||||
|
Assets
and liabilities of operations to be abandoned
|
(18 | ) | 21 | (27 | ) | |||||||
|
Prepaid
expenses and other assets
|
(47 | ) | (136 | ) | 31 | |||||||
|
Accounts
payable and accrued expenses
|
178 | 478 | 311 | |||||||||
|
Deferred
revenue
|
240 | 70 | (40 | ) | ||||||||
|
Net
cash (used in) operating activities
|
(52 | ) | (1,384 | ) | (2,224 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(41 | ) | (17 | ) | (17 | ) | ||||||
|
Net
cash (used in) investing activities
|
(41 | ) | (17 | ) | (17 | ) | ||||||
|
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
|
1,395 | 984 | 2,148 | |||||||||
|
Repayments
of term loans, credit facility and notes payable
|
(1,500 | ) | (677 | ) | -- | |||||||
|
Net
cash provided by (used in) financing activities
|
(105 | ) | 1,347 | 2,528 | ||||||||
|
Effect
of exchange rate changes on cash
|
11 | (6 | ) | (6 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(187 | ) | (60 | ) | 281 | |||||||
|
Cash
and cash equivalents at beginning of year
|
250 | 310 | 29 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 63 | $ | 250 | $ | 310 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Income
taxes
|
$ | 1 | $ | 5 | $ | 20 | ||||||
|
Interest
|
$ | 227 | $ | 264 | $ | 865 | ||||||
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
2008
During
2008, the Company issued 1,425,137 of common stock 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.
During
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.
During
July 2008, the Company issued 391,696 shares of common stock to Mr. John L.
Steffens, the Chairman of the Board of Directors, in exchange for a $100,000
principal payment on a promissory note.
During
July 2008, the Company issued 195,848 shares of common stock to BluePhoenix
(formerly Liraz Systems Ltd.) 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.
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.
CICERO
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1.
|
SUMMARY
OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
|
Cicero
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 $823,000 for the year ended December
31, 2008 and has experienced negative cash flows from operations for each of the
years ended December 31, 2008, 2007, and 2006. At December 31, 2008,
the Company had a working capital deficiency of approximately
$6,157,000. However, the Company has shown that its product is
gaining acceptance in the marketplace as evidenced by its growth in revenues
over the past two years. Further, the Company obtained funding in the
amount of $750,000 in March 2009 (Note 17) and expects to have positive cash
flows and an operating profit for fiscal 2009. Management believes with the
additional funding that the Company will be able to fund its operations through
the year ending December 31, 2009.
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 principles
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 $242,000, $104,000, and $88,000 for the years ended December
31, 2008, 2007 and 2006, 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 2008, 2007, and 2006, 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:
|
2008
|
2007
|
2006
|
||||||||||
|
Stock
options
|
2,711,879 | 2,529,025 | 45,315 | |||||||||
|
Warrants
|
390,400 | 445,387 | 323,623 | |||||||||
|
Preferred
stock
|
1,543,618 | 1,603,618 | 1,763,478 | |||||||||
| 4,645,897 | 4,578,030 | 2,132,416 | ||||||||||
In 2008,
2007 and 2006, 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 475,000 options in fiscal 2008 at exercise prices between $.10
and $0.25 per share and recognized $417,000 of stock-based
compensation. 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 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
|
2007
|
2006
|
||||||||||
|
Expected
life (in years)
|
10.0
years
|
10.0
years
|
3.6
years
|
|||||||||
|
Expected
volatility
|
106%-151 | % | 166 | % | 140 | % | ||||||
|
Risk
free interest rate
|
0.15%-4.24 | % | 5.25 | % | 4.93 | % | ||||||
|
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 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 (as amended).” 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
2.
|
RECAPITALIZATION
|
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):
|
2008
|
2007
|
|||||||
|
Current
trade accounts receivable
|
$ | 759 | $ | 792 | ||||
|
Less:
allowance for doubtful accounts
|
-- | 100 | ||||||
| $ | 759 | $ | 692 | |||||
The
(credit) provision for uncollectible amounts was $0, $50,000, and $60,000, for
the years ended December 31, 2008, 2007, and 2006,
respectively. Write-offs (net of recoveries) of accounts receivable
were $100,000 for the year ended December 31, 2008 and $0 for the years ended
December 31, 2007 and 2006.
|
NOTE
4.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment was composed of the following at December 31 (in
thousands):
|
2008
|
2007
|
|||||||
|
Computer
equipment
|
$ | 283 | $ | 263 | ||||
|
Furniture
and fixtures
|
19 | 8 | ||||||
|
Office
equipment
|
164 | 154 | ||||||
| 466 | 425 | |||||||
|
Less:
accumulated depreciation and amortization
|
(420 | ) | (403 | ) | ||||
| $ | 46 | $ | 22 | |||||
Depreciation
and amortization expense of property and equipment was $17,000, $10,000, and
$12,000, for the years ended December 31, 2008, 2007, and 2006,
respectively.
|
NOTE
5.
|
SHORT-TERM
DEBT
|
Term
loan, notes payable, and notes payable to related party consist of the following
at December 31 (in thousands):
|
2008
|
2007
|
|||||||
|
Term
loan (a)
|
$ | 100 | $ | -- | ||||
|
Note
payable related party (b)
|
94 | 49 | ||||||
|
Notes
payable (c)
|
998 | 1,186 | ||||||
| $ | 1,192 | $ | 1,235 | |||||
|
(a)
|
At
December 31, 2008, the Company was indebted to BluePhoenix Solutions for
the current portion of the related long term debt of $100,000. (See Note
6)
|
|
(b)
|
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 December 31, 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 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, 2008, 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, 2008 and 2007, 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.
|
|
NOTE
6.
|
LONG-TERM
DEBT
|
Long-term
loan and notes payable to related party consist of the following at December
31(in thousands):
|
2008
|
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
Blue Phoenix Solutions in the principal amount of $1,021,000 with interest
at Libor plus 1% (approximately 4.17% at December 31, 2008) maturing in
December 2011. Interest is payable quarterly. At December 31, 2008, the
Company was indebted to BluePhoenix Solutions in the amount of $771,000 of
which $100,000 is classified as short term
debt.
|
|
(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, 2008, the Company was indebted to Mr. Steffens in the amount of
$300,000. In March 2009, the Company and Mr. Steffens agreed to
extend the maturity on the above Note until October
2010.
|
Scheduled
maturities of the above debt are as follows:
|
Year
|
||||
|
2010
|
$ | 300 | ||
|
2011
|
$ | 671 | ||
|
NOTE
7.
|
INCOME
TAXES
|
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):
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
income tax benefit at statutory rate (34%)
|
$ | (280 | ) | $ | (672 | ) | $ | (1,019 | ) | |||
|
State
taxes, net of federal tax benefit.
|
(49 | ) | (118 | ) | (180 | ) | ||||||
|
Effect
of change in valuation allowance
|
326 | 788 | 1,073 | |||||||||
|
Non-deductible
expenses
|
3 | 2 | 126 | |||||||||
|
Total
|
$ | -- | $ | -- | $ | -- | ||||||
Significant
components of the net deferred tax asset (liability) at December 31 were as
follows:
|
2008
|
2007
|
|||||||
|
Current
assets:
|
||||||||
|
Allowance
for doubtful accounts
|
$ | -- | $ | 44 | ||||
|
Accrued
expenses, non-tax deductible
|
371 | 222 | ||||||
|
Deferred
revenue
|
139 | 44 | ||||||
|
Noncurrent
assets:
|
||||||||
|
Stock
compensation expense
|
296 | 287 | ||||||
|
Loss
carryforwards
|
93,217 | 92,337 | ||||||
|
Depreciation
and amortization
|
4,356 | 5,119 | ||||||
| 98,379 | 98,053 | |||||||
|
Less:
valuation allowance
|
(98,379 | ) | (98,053 | ) | ||||
| $ | -- | $ | -- | |||||
At
December 31, 2008, the Company had net operating loss carryforwards of
approximately $233,040,000, which may be applied against future taxable income.
These carryforwards will expire at various times between 2009 and 2028. 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, 2008 and 2007 since management does not believe that
it is more likely than not that these assets will be realized.
|
NOTE
8.
|
STOCKHOLDERS’
EQUITY
|
Common Stock:
In July
2008, the Company issued 80,993 shares of common stock to a vendor for the
settlement of an account 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 July
2008, the Company converted $100,000 of principal of short term notes with
John L. (Launny) Steffens, the Chairman of the Board of Directors into
391,696 shares of the Company’s common stock.
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. 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 $363,838 and was converted
into 1,425,137 shares of common stock. 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.
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 2008 and 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, 2008, 2007 and 2006 was as follows:
|
Plan
Activity
|
Option Price
Per Share
|
Weighted Average
Exercise Price
|
||||||||||
|
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 | |||||||||
|
Granted
|
475,000 | 0.10-0.25 | 0.19 | |||||||||
|
Forfeited
|
(292,146 | ) | 0.17-1,881.25 | 0.74 | ||||||||
|
Balance
at December 31, 2008
|
2,711,879 | 0.10-3,931.25 | 1.22 | |||||||||
There
were 475,000 and 2,756,173 options granted during 2008 and 2007, respectively,
and none during 2006. The weighted average grant date fair value of options
issued during the years ended December 31, 2008 and 2007 was equal to $0.19 and
$0.51 per share, respectively. There were no option grants issued below fair
market value during 2008 and 2007.
At
December 31, 2008, 2007, and 2006, options to purchase 1,688,187, 888,634, and
45,315 shares of common stock were exercisable, respectively, pursuant to the
plans at prices ranging from $0.10 to $3,931.25. The following table summarizes
information about stock options outstanding at December 31, 2008:
|
EXERCISE PRICE
|
NUMBER
OUTSTANDING
|
REMAINING
CONTRACTUAL LIFE FOR OPTIONS OUTSTANDING
|
NUMBER
EXERCISABLE
|
WEIGHTED
AVERAGE EXERCISE PRICE
|
||||||||||||
|
$ 0.10-0.50
|
451,666 | 9.4 | 149,999 | $ | 0.20 | |||||||||||
|
0.51-0.51
|
2,234,093 | 8.6 | 1,512,068 | 0.51 | ||||||||||||
|
0.52-393.12
|
24,545 | 4.4 | 24,545 | 41.77 | ||||||||||||
|
393.13-786.25
|
1,350 | 2.2 | 1,350 | 532.20 | ||||||||||||
|
786.26-3,931.25
|
225 | 1.1 | 225 | 1,467.57 | ||||||||||||
| 2,711,879 | 8.7 | 1,688,187 | $ | 1.70 | ||||||||||||
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.
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. The Company opted not to make any matching
contributions for either 2008, 2007, or 2006.
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 2008,
two customers accounted for 51.2% and 34.1% of operating revenues and
represented 57.4%and 32.3% of accounts receivable at December 31,
2008. 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.
|
NOTE
11.
|
FOREIGN
CURRENCIES
|
The
Company’s net foreign currency transaction losses/ (gains) were $(6,000),
$15,000, and $14,000, for the years ended 2008, 2007, and 2006,
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.
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. In November 2008, the Company ceased all sales and support
for Ensuredmail.
The table
below presents information about reported segments for the year ended December
31, 2008, 2007 and 2006 (in thousands):
|
For
the year ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
revenue
|
$ | 3,452 | $ | 1,808 | $ | 972 | ||||||
|
Total
cost of revenue
|
1,251 | 937 | 767 | |||||||||
|
Gross
margin
|
2,201 | 871 | 205 | |||||||||
|
Total
operating expenses
|
2,868 | 2,711 | 2,085 | |||||||||
|
Segment
loss
|
$ | (667 | ) | $ | (1,840 | ) | $ | (1,880 | ) | |||
A
reconciliation of segment operating expenses to total operating expense follows
(numbers are in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Segment
operating expenses
|
$ | 2,868 | $ | 2,711 | $ | 2,085 | ||||||
|
(Gain)
on disposal of assets
|
-- | -- | (24 | ) | ||||||||
|
Total
operating expenses
|
$ | 2,868 | $ | 2,711 | $ | 2,061 | ||||||
A
reconciliation of total segment profitability to net loss for the fiscal years
ended December 31(in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Total
segment profitability (loss)
|
$ | (667 | ) | $ | (1,840 | ) | $ | (1,880 | ) | |||
|
Gain
on disposal of assets
|
-- | -- | 24 | |||||||||
|
Interest
and other income/(expense), net
|
(156 | ) | (135 | ) | (1,141 | ) | ||||||
|
Net
loss
|
$ | (823 | ) | $ | (1,975 | ) | $ | (2,997 | ) | |||
The
following table presents a summary of revenue by geographic region for the years
ended December 31(in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
USA
|
$ | 3,452 | $ | 1,808 | $ | 972 | ||||||
Presentation
of revenue by region is based on the country in which the customer is domiciled.
As of December 31, 2008, 2007 and 2006, all of the long-lived assets of the
Company are located in the United States.
|
NOTE
13.
|
RELATED
PARTY INFORMATION
|
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 December 31,
2008, the Company was indebted to Mr. Steffens in the amount of
$45,000.
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, 2008, the Company was
indebted to Mr. Steffens in the amount of $300,000. In March 2009,
the Company and Mr. Steffens agreed to extend the maturity on the Note until
October 2010.
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, 2008, 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. During
fiscal 2008, the Company wrote off the receivable which had been reserved 100%
of the balance as doubtful.
|
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, 2008 consisted of only one lease as follows (in
thousands):
|
Lease
Commitments
|
||||
|
2009
|
$ | 106 | ||
|
2010
|
101 | |||
| $ | 207 | |||
Rent
expense for the years ended December 31, 2008, 2007, and 2006 was $93,000,
$74,000, and $60,000, respectively. As of December 31, 2008, 2007,
and 2006, the Company had no sublease arrangements.
|
NOTE
15.
|
CONTINGENCIES
|
Various
lawsuits and claims have been brought against us in the normal course of our
business.
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)
|
||||||||||||||||
|
2008:
|
||||||||||||||||
|
Net
revenues
|
$ | 470 | $ | 1,427 | $ | 578 | $ | 977 | ||||||||
|
Gross
margin
|
230 | 1,153 | 264 | 554 | ||||||||||||
|
Net
income/(loss)
|
(485 | ) | 430 | (553 | ) | (215 | ) | |||||||||
|
Net
income/(loss) share –basic and diluted attributed to common
stockholders
|
$ | (0.01 | ) | $ | 0.01 | $ | (0.01 | ) | -- | |||||||
|
2007:
|
||||||||||||||||
|
Net
revenues
|
$ | 232 | $ | 316 | $ | 387 | $ | 873 | ||||||||
|
Gross
margin
|
65 | 160 | 82 | 564 | ||||||||||||
|
Net
loss
|
(529 | ) | (452 | ) | (966 | ) | (28 | ) | ||||||||
|
Net
loss/share –basic and diluted attributed to common
stockholders
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | -- | ||||||
|
NOTE
17.
|
SUBSEQUENT
EVENTS
|
In March
2009, the Company entered into several secured Promissory Notes with certain
investors in the aggregate amount of $750,000. The Notes bear interest at 15%
and mature on January 31, 2012. The Notes are secured by the amount due the
Company in February 2010 under its contract with Merrill Lynch. In addition,
each investor will be issued a warrant to purchase common stock of the Company.
Under the terms of the warrant, which expires in five years, each Note holder is
entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of
principal due under the Note. The exercise price on the warrant is $0.20 per
share. The shares of common stock underlying the warrants have registration
rights and a cashless exercise provision in the event no registration statement
is effective for resales, if required.
In
addition, the Company and Mr. John Steffens, its Chairman, agreed to amend an
existing Note payable that matured on October 31, 2009 to extend the maturity on
the Note until October 31, 2010.
F-
24