1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ________ to ________
Commission File Number 0-14793
TEKNOWLEDGE CORPORATION
(Exact Name of small business issuer as specified in its charter)
Delaware 94-2760916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1810 Embarcadero Road, Palo Alto, California 94303
(Address of principal executive offices)
(415) 424-0500
Issuer's telephone number
State whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at October 20, 1995
---------------------------- -------------------------------
Common Stock, $.01 par value 25,887,174 Shares
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TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1995
and December 31, 1994 3
Consolidated Statements of Operations for the
three months and nine months ended
September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1995 and 1994 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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PART I. FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
Item 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
------
September 30, December 31,
1995 1994
-------------- ---------------
Current assets:
Cash and cash equivalents $ 1,049,759 $ 809,169
Receivables:
Customer - billed, net of allowance of $10,000 959,469 698,836
Customer - unbilled 40,633 190,634
Other 35,067 42,647
-------------- ---------------
Total receivables 1,035,169 932,117
Deposits and prepaid expenses 56,450 73,771
-------------- ---------------
Total current assets 2,141,378 1,815,057
-------------- ---------------
Capitalized software, net of accumulated
amortization of $964,335
($733,223 - December 31, 1994) 240,096 407,808
-------------- ---------------
Equipment and improvements, at cost
Computer and other equipment 2,154,238 2,997,062
Leasehold improvements 744,314 744,315
-------------- ---------------
2,898,552 3,741,377
Less accumulated depreciation and amortization (2,662,715) (3,535,109)
-------------- ---------------
Net equipment and improvements 235,837 206,268
-------------- ---------------
Total assets $ 2,617,311 $ 2,429,133
============== ===============
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1995 1994
-------------- ---------------
Current liabilities:
Accounts payable $ 165,046 $ 195,704
Accrued liabilities:
Payroll and bonus 373,897 248,685
Provision for discontinued operations 135,615 174,071
Technology purchase 150,000 675,000
Other 416,519 309,154
-------------- ---------------
Total accrued liabilities 1,076,031 1,406,910
-------------- ---------------
Total current liabilities 1,241,077 1,602,614
Long-term liabilities:
Provision for discontinued operations 88,704 110,096
Restructuring obligations 54,915 54,915
-------------- ---------------
Total liabilities 1,384,696 1,767,625
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, shares authorized 2,500,000 - -
Common stock, $.01 par value, shares authorized
50,000,000, issued 25,894,639 and 25,716,871
at September 30, 1995 and December 31, 1994, respectively 258,942 257,164
Additional paid-in capital (after (i) reduction of
$57,962,379 for elimination of accumulated
deficit at December 31, 1992, as a result of
quasi-reorganization; and (ii) increase of
$105,706 and $1,001,310 in 1994 and 1993,
respectively, as a result of reversal of portions
of 1992 loss provisions) 1,948,264 1,947,397
Deferred compensation (180,259) (360,518)
Accumulated deficit since January 1, 1993
(following quasi-reorganization) (791,332) (1,179,535)
-------------- ---------------
1,235,615 664,508
Treasury stock, at cost, 24,000 shares (3,000) (3,000)
-------------- ---------------
Total stockholders' equity 1,232,615 661,508
-------------- ---------------
Total liabilities and stockholders' equity $ 2,617,311 $ 2,429,133
============== ===============
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
3 Months Ended September 30, 9 Months Ended September 30,
---------------------------- ----------------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues $ 1,479,998 $ 1,026,534 $ 3,977,651 $ 2,157,523
-------------- --------------- -------------- ----------------
Costs and expenses:
Cost of revenues 988,636 571,443 2,395,686 1,357,171
Selling and marketing 13,389 18,841 42,779 81,452
General and administrative 397,614 390,907 1,327,653 1,039,423
-------------- --------------- -------------- ----------------
Total costs and expenses 1,399,639 981,191 3,766,118 2,478,046
-------------- --------------- -------------- ----------------
Operating income (loss) 80,359 45,343 211,533 (320,523)
Interest income 13,558 3,599 29,896 11,604 *
Interest expense (39) (530) (468) (1,907)
Other income, net 47,638 53,249 150,442 165,331 *
-------------- --------------- -------------- ----------------
Income (loss) before tax 141,516 101,661 391,403 (145,495)
Provision for income tax - - 3,200 -
-------------- --------------- -------------- ----------------
Income (loss) $ 141,516 $ 101,661 $ 388,203 $ (145,495)
============== =============== ============== ================
Income (loss) per share $ 0.00 $ 0.00 $ 0.01 $ (0.01)
============== =============== ============== ================
Weighted average common
and common equivalent
shares outstanding 30,005,274 29,584,531 29,901,262 24,312,960
============== =============== ============== ================
* Amounts were reclassified to conform to current presentation.
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1995 1994
---- ----
Cash flows from operating activities:
Net income (loss) $ 388,203 $ (145,495)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Amortization and writedown of capitalized software 231,111 81,669
Depreciation 96,339 98,417
Stock compensation expense 180,259 60,086
(Gain) Loss on sale of fixed assets (4,559) 775
Changes in assets and liabilities:
Receivables (103,052) 144,585
Deposits and prepaid expenses 17,321 (4,319)
Accounts payable (30,658) (109,480)
Accrued liabilities (341,902) (635,512)
------------- -------------
Net cash provided by (used for) operating activities 433,062 (509,274)
------------- -------------
Cash flows from investing activities:
Capitalization of software costs (63,399) (364,921)
Purchase of fixed assets (125,907) (47,247)
Proceeds from sale of fixed assets 4,559 2,909
------------- -------------
Net cash used for investing activities (184,747) (409,259)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,644 56,863
Repayments of capital lease obligations (10,369) (14,290)
------------- -------------
Net cash provided by (used for) financing activities (7,725) 42,573
------------- -------------
Net increase (decrease) in cash and cash equivalents 240,590 (875,960)
Cash and cash equivalents at beginning of period 809,169 1,507,882
------------- -------------
Cash and cash equivalents at end of period $ 1,049,759 $ 631,922
============= =============
See accompanying notes.
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TEKNOWLEDGE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. Interim Statements
The interim statements are unaudited and should be read in conjunction
with the statements and notes thereto contained in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994. In
the opinion of management, these interim statements include all
adjustments, consisting of normal, recurring adjustments, which are
necessary for a fair presentation of results for such periods. The
results of operations for any interim period are not necessarily
indicative of results which may be achieved for the entire fiscal year
ending December 31, 1995.
2. Net Income (Loss) Per share
The number of shares of Common Stock used in the computation of
earnings per share for the three months and nine months ended September
30, 1995 and 1994, respectively, is the weighted average number of
shares of Common Stock outstanding during the applicable period. Common
Stock options which are Common Stock equivalents are included for the
three months and nine months ended September 30, 1995, and the three
months ended September 30, 1994 because they are dilutive. The
difference between primary and fully diluted earnings per share is
immaterial, therefore only primary earnings per share is presented in
the financial statements. For the nine months ended September 30, 1994,
Common Stock equivalents have been excluded because they are
anti-dilutive.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995 and 1994
- - ----------------------------------------------
REVENUES. The Company reported third quarter revenues of $1,479,998, which was a
44% increase over the third quarter in 1994. The increase was a direct result of
a 59% growth in government service revenues to $1,451,004. Revenue growth is
attributed to growth in the billable workforce during the period. The Company
expects to hire a number of new employees in the near term as work escalates
from contracts already in the backlog. Although the Company's current revenue
mix is predominately governmental contracts, it is actively pursuing commercial
opportunities to diversify its business. The Company believes it will be able to
leverage the technology that was developed in partnership with the federal
government into new commercial applications and products.
The Company recently expanded its business base geographically by opening two
branch offices in San Diego and Washington D.C. This growth in the technical
staff is expected to contribute to the support of existing contracts and open
new opportunities in areas where the Company already has an established customer
base. The Company believes that revenues in the fourth quarter of 1995 will be
positively impacted by the addition of these satellite offices.
COST OF REVENUES. Costs of revenues for the third quarter of 1995 increased 73%
to $988,636 when compared to the third quarter of the previous year. This
increase is primarily due to the increase in the technical workforce and related
expenses. Approximately 14% of the increase is attributed to the accelerated
amortization of the previously capitalized software development costs for
ProductTrack. The recent addition of the San Diego and Washington offices is not
expected to add a significant cost burden to the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's third quarter general and
administrative expenses grew 2% over that for the same quarter last year to
$397,614. Generally, the Company has been able to keep the rate of growth in
general and administrative expenses down by maintaining a streamlined
administrative cost structure.
INTEREST AND OTHER INCOME. Third quarter interest income was $13,558 as compared
to $3,599 for the same quarter in the previous fiscal year. Other income for the
third quarter was $47,638 and $53,249 for this year and last year, respectively.
The majority of this other income was from the previous sale of a product line.
The product line was sold in exchange for a note agreement in 1990. Because of
the uncertainty surrounding the eventual collection of the note, the Company has
elected to recognize the proceeds as other income only when cash is received.
The note is scheduled for quarterly repayments until March 31, 1998.
QUARTERLY RESULTS. Net income for the quarter was $141,516 or $.00 per share, as
compared to $101,661 or $.00 per share for the same quarter last year, an
increase of 39%. This increase is directly proportional to the growth in
revenues of 44%. Results of the quarter were not necessarily indicative of
results for the entire fiscal year.
Nine Months Ended September 30, 1995 and 1994
- - ---------------------------------------------
REVENUES. The Company's revenues for the nine months ended September 30, 1995
were $3,977,651, an increase of 84% over the same period in 1994. Government
service revenues, which accounts for 94% of total revenues for the nine months
ended September 30, 1995, grew 104% from the same period last year. Most of the
revenue increase was tied to contracts that began in 1994 and 1995, which are
expected to run for a number of years. A substantial portion of future revenues
will be derived from these contracts.
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COST OF REVENUES. Costs of revenues for the nine months ended September 30, 1995
were $2,395,686, an increase of 77% over the same period in fiscal 1994. Costs
and expenses rose significantly over the previous year primarily due to the
increase in the technical workforce and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative
expenses for the nine months ended September 30, 1995 of $1,327,653, grew 28%
over that for the nine months ended September 30, 1994. The Company was able to
capitalize on efficiencies in the administrative area to keep general and
administrative expenses low. General and administrative expenses are generally
not expected to grow at the same rate as revenues in the near term. Included in
general administrative expenses for the nine months ending September 30, 1995
was a charge for stock compensation expense of $180,259.
INTEREST AND OTHER INCOME. Interest income for the nine months ended September
30, 1995 was $29,896 as compared to $11,604 for the nine months ended September
30, 1994. Other income for the nine months ended September 30, 1995 was
$150,442, almost unchanged from $165,331 for the nine months ended September 30,
1994. The majority of this other income was from the quarterly note payment
related to a previous sale of a product line.
BOOKINGS AND BACKLOG
At September 30, 1995, the expected order backlog was approximately $11,259,420,
which consisted of (i) new orders for which work has not yet begun and (ii)
revenue remaining to be recognized on work in progress. 100% of the backlog was
from government customers. Approximately 51% of the backlog consists of
government-sponsored programs that are awarded but not yet authorized for
funding. The government normally funds a contract in incremental amounts for the
tasks that are currently in production. The Company's order backlog at December
31, 1994 was approximately $11,164,000. A typical government contract runs three
to five years and revenues are recognized as work is performed.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995, unused sources of liquidity of the Company consisted
of $1,049,759 of cash and cash equivalents, an increase of $240,590 from that of
December 31, 1994. Significant changes to cash and cash equivalents resulted
from cash generated from operations of $433,062, which was net of a one-time
$400,000 deferred payment to Trilogy (see Part II Item 1 Legal Proceedings),
offset by cash used to purchase computer and other equipment of $125,907.
The Company believes that the present level of cash and cash equivalents is
adequate to service its short-term anticipated cash requirements. The Company
relies principally on the collection of receivables to generate cash reserves.
In the last nine months, the Company's cash reserves have increased as a
consequence of increased revenues and receivables collected during that period.
A judgment adverse to the Company in any of the legal proceedings described in
Part II Item 1 could have a negative material impact on the Company's liquidity.
Management believes the Company will be able to operate in the short-term
without additional financing. Longer term cash requirements, other than normal
operating expenses, are anticipated for commercialization of the Company's
technology, development of new software products and enhancement of existing
products, financing anticipated growth, and the possible acquisition of
businesses or technologies complementary to the Company's business. Successful
operations in the long term may require additional financing in the form of
borrowings or equity capital.
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PART II. OTHER INFORMATION
- - --------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
On or about August 2, 1994, Daniel R. Robusto, a former executive
of the Company, filed a suit in the Court of Common Pleas of
Allegheny County, Pennsylvania, pursuant to Pennsylvania Wage
Payment and Collection Law, alleging breach by the Company of an
employment settlement agreement and the nonpayment of severance
wages of $107,307 plus liquidated damages of $26,827, attorney
fees and other court costs. The Company believes that it has
defenses to the suit and intends to defend itself vigorously. The
Company has responded to the initial complaint and the litigation
is now in the discovery stage.
On December 8, 1994, a lawsuit was filed in the United States
District Court for the Northern District of California by Trilogy
Development Group ("Trilogy") against the Company. This lawsuit
concerns a configuration system patent owned by the Company
(Bennett et al. U.S. Patent 4,591,983) and a sales configuration
product of Trilogy. Trilogy is seeking a declaration of
non-infringement of the Bennett et al. patent, and damages for
unfair competition under the Lanham Act and common law for alleged
false representation that Trilogy infringes the Bennett et al.
patent. The Company is vigorously contesting these matters, and
has counterclaimed for patent infringement and for unfair
competition under the Lanham Act and common law for alleged false
and misleading statements disparaging the Bennett et al. patent.
To date, two settlement hearings ordered by the Court have been
held between the parties. The hearings did not result in a
settlement. The litigation process is continuing.
On September 19, 1995, Trilogy filed a suit in the Delaware
Superior Court, alleging breach of contract by the Company in
relation to $125,000 in deferred payments under a 1987 agreement
between BMW Vision Associates Limited Partnership ("BMW") and
American Cimflex Corporation ("ACC"), a predecessor to the
Company. The agreement provided for the sale of technology by BMW
to ACC for a consideration including certain deferred payments. In
July 1995, Trilogy acquired by assignment for $276,786 BMW's right
to the remaining deferred payments and then demanded payment of
$525,000 from the Company. In September 1995, the Company paid
Trilogy $400,000 in full satisfaction of the $525,000, disclaiming
the obligation to pay the balance of $125,000 which the Company
believes to be barred by statute of limitations. Trilogy filed a
suit seeking the $125,000, subsequent deferred payments, interest
and attorney fees. The Company believes that it has defenses to
the suit and intends to defend itself vigorously.
Item 5. OTHER INFORMATION
Trilogy announced in a Schedule 13D filing dated October 13, 1995
that it had increased its ownership in the Company to 11.3%, or
2,913,422 shares, by purchasing an additional 60,000 shares in
open market transactions during the month of October.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. 27 - Financial Data Schedule
b) The registrant did not file a report on Form 8-K during the
quarter ended September 30, 1995.
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TEKNOWLEDGE CORPORATION
-----------------------
(Registrant)
/s/ Frederick Hayes-Roth Chairman of the Board November 2, 1995
- - ------------------------ of Directors and Chief
Frederick Hayes-Roth Executive Officer
(Principal Executive
Officer)
/s/ Neil A. Jacobstein President and Chief November 2, 1995
- - ------------------------ Operating Officer
Neil A. Jacobstein
/s/ Dennis A. Bugbee Director of Finance, November 2, 1995
- - ------------------------ Treasurer and Secretary
Dennis A. Bugbee (Principal Financial and
Accounting Officer)