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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 MARCH 31, 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
Check 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 April 18, 1995
- ---------------------------------- -----------------------------
Common Stock, $.01 par value 25,731,131 Shares
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TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of March 31, 1995
and December 31, 1994 3
Consolidated Statements of Operations for the
three months ended March 31, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 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 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
March 31, December 31,
1995 1994
-------------- ---------------
Current assets:
Cash and cash equivalents $ 1,004,701 $ 809,169
Receivables:
Customer - billed, net of allowance of
$10,000 ($10,000 - December 31, 1994) 889,669 698,836
Customer - unbilled 76,824 190,634
Others 36,289 42,647
------------- ---------------
Total receivables 1,002,782 932,117
Net assets of discontinued operations 15,000 15,000
Deposits and prepaid expenses 34,828 58,771
------------- ---------------
Total current assets 2,057,311 1,815,057
------------- ---------------
Capitalized software, net of accumulated
amortization of $783,798
($733,223 - December 31, 1994) 365,567 407,808
------------- ---------------
Equipment and improvements, at cost
Machinery and equipment 2,072,017 2,997,062
Leasehold improvements 744,315 744,315
------------- ---------------
2,816,332 3,741,377
Less accumulated depreciation and amortization (2,600,690) (3,535,109)
------------- ---------------
Net equipment and improvements 215,642 206,268
------------- ---------------
Total assets $ 2,638,520 $ 2,429,133
============= ===============
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT'D)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, December 31,
1995 1994
-------------- ---------------
Current liabilities:
Accounts payable $ 134,083 $ 195,704
Accrued liabilities:
Payroll and bonus 372,307 248,685
Provision for contract charges 51,666 52,914
Provision for discontinued operations 162,779 174,071
Royalties 675,000 675,000
Other 227,719 256,240
------------- ---------------
Total accrued liabilities 1,489,471 1,406,910
------------- ---------------
Total current liabilities 1,623,554 1,602,614
Long-Term Liabilities:
Provision for discontinued operations 88,704 110,096
Restructuring obligations 54,915 54,915
------------- ---------------
Total liabilities 1,767,173 1,767,625
------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, shares authorized
2,500,000, Series A, convertible, none issued - -
Common stock, $.01 par value, shares authorized
50,000,000, issued 25,745,661 and 25,716,871
at March 31, 1995 and December 31, 1994,
respectively 257,452 257,164
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) 1,947,580 1,947,397
Deferred compensation (300,432) (360,518)
Accumulated deficit since January 1, 1993
(following quasi-reorganization) (1,030,253) (1,179,535)
------------- ---------------
874,347 664,508
Treasury stock, at cost, 24,000 shares (3,000) (3,000)
------------- ---------------
Total stockholders' equity 871,347 661,508
------------- ---------------
Total liabilities and stockholders' equity $ 2,638,520 $ 2,429,133
============= ===============
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
Revenues $ 1,317,026 $ 632,142
-------------- -------------
Costs and expenses:
Cost of revenues 720,520 462,068
Selling and marketing 19,651 26,537
General and administrative 487,944 375,514
-------------- -------------
Total costs and expenses 1,228,115 864,119
-------------- -------------
Operating income (loss) 88,911 (231,977)
Interest income 5,179 5,184 *
Interest expense (272) (741)
Other income, net 55,464 69,666 *
-------------- -------------
Net income (loss) $ 149,282 $ (157,868)
============== =============
Net income (loss) per share $ 0.01 $ (0.01)
============== =============
Weighted average common and
common equivalent shares outstanding 27,734,736 23,020,471
============== =============
* Amounts were reclassified to conform to current presentation.
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
Cash flows from operating activities:
Net income (loss) $ 149,282 $ (157,868)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Amortization of capitalized software 50,575 20,304
Depreciation 34,313 33,952
Stock compensation expense 60,086 -
Gain on sale of fixed assets (4,459) -
Changes in assets and liabilities:
Receivables (70,665) 113,645
Deposits and prepaid expenses 23,943 70,304
Accounts payable (61,621) 18,882
Accrued liabilities 66,296 (489,410)
--------------- ---------------
Net cash provided by (used for) operating
activities 247,750 (390,191)
--------------- ---------------
Cash flows from investing activities:
Capitalization of software costs (8,334) (116,446)
Purchase of fixed assets (43,687) (16,192)
Proceeds from sale of fixed assets 4,459 -
--------------- ---------------
Net cash used for investing activities (47,562) (132,638)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 471 -
Repayments of capital lease obligations (5,127) (4,658)
--------------- ---------------
Net cash provided by financing activities (4,656) (4,658)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 195,532 (527,487)
Cash and cash equivalents at beginning of period 809,169 1,507,882
--------------- ---------------
Cash and cash equivalents at end of period $ 1,004,701 $ 980,395
=============== ===============
See accompanying notes.
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TEKNOWLEDGE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 per
share earnings for the quarters ended March 31, 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 quarter ended March
31, 1995 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 quarter ended March 31, 1994, Common Stock equivalents have
been excluded because they are anti-dilutive.
3. Quasi-Reorganization
On December 11, 1992, the Company's Board of Directors approved the
elimination of the Company's accumulated deficit through an accounting
reorganization of its stockholders' equity account (a
quasi-reorganization), effective December 31, 1992. The effective
date of the quasi-reorganization reflects the end of the year in which
the Company discontinued all nonsoftware related businesses and
incurred costs to restructure the Company. The accumulated deficit
was eliminated by a transfer from additional paid-in-capital in an
amount equal to the accumulated deficit.
4. Revenue Recognition
(a) Government contracts
The Company's revenues are primarily generated from U.S. Government
contracts where the Company may be either the prime contractor or a
subcontractor. The company principally uses the
percentage-of-completion method of accounting for contract revenues.
The percentage-of-completion method is based on total costs incurred
to date compared with estimated total costs upon completion of
contracts. The Company charges all losses on contracts to operations
in the period when the loss is known.
(b) Commercial contracts
The Company accounts for software revenues in accordance with the
American Institute of Certified Public Accountants' SOP 91-1,
"Software Revenue Recognition." Revenues earned under software
agreements with end users are generally recognized when the software
has been shipped and there are no significant obligations remaining.
Revenue from post-contract customer support is recognized ratably over
the period the customer support services are provided and software
services revenue is recognized as services are performed.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto.
GENERAL
Contract Awards and Governmental Funding Limitations
Teknowledge Corporation (the "Company") provides consulting services and
software products for commercial and defense applications. The Company has a
number of competitors for its government business, and this number continues to
increase as many of the defense contractors look for new opportunities. In
recent years, the portion of the Company's revenues attributed to government
business has risen steadily to approximately 90%. Government contracts are
judged to be more risky than commercial contracts because they are subject to
agency funding limitations, congressional appropriation, and the political
agenda of the then current administration in Washington. As a result, no
assurances can be given that the Company will continue to obtain U.S.
Government contracts or record revenues from such contracts at the same levels
as in prior periods. In addition, the typical cost-type government contract
performed by the Company has a negotiated fee limit which further restrains the
amount of profit that the Company can realize.
Human Resources
The Company believes that its future results of operations may be affected by
the Company's ability to recruit qualified personnel. As the Company grows, a
corresponding expansion of the technical workforce is necessary to keep pace
with the requirements of new contracts. The Company is seeking candidates with
very specialized skills and experience in disciplines that are often in short
supply or priced prohibitively due to market competition. Delays in staffing
technical positions have the immediate effect of lowering revenues in the
short-term. Near-term revenue shortfalls will be recouped in later periods as
the workforce is increased, however such losses have interim negative effects
on revenues, income, and liquidity. The Company recognizes that the continued
success of the business depends almost entirely on the contributions of two key
executives. In order to reduce this exposure, the Company is actively seeking
high quality technical support personnel to fill a number of subordinate
leadership positions.
RESULTS OF OPERATIONS
Overview
The Company's revenues in 1994 were primarily generated from sales to agencies
of the United States Government, principally the Advanced Research Projects
Agency. A smaller percentage of the Company's revenues were generated from
product and service sales to commercial customers. In the first quarter of
1995 and 1994, approximately 94% and 88%, respectively of the Company's
revenues were from sales to the government. Most of the contracts that the
Company negotiates are cost-plus-fixed-fee (CPFF) contracts and as such are
subject to Federal Acquisition Regulations which regulate the amount and type
of costs that can be passed on to the government in the form of approved
overhead rates. The fee earned on most government contracts is determined
prior to the commencement of the contract and limited by regulation.
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Revenues
Revenues for the quarter ended March 31, 1995 increased to $1,317,026, more
than double the amount reported in the first quarter of 1994 of $632,142.
Revenues from government contracts were $1,238,478 in the first quarter of 1995
as compared to $488,170 in the comparable period in 1994. Commercial product
and service revenues were $78,548 in the first quarter of 1995 as compared to
$143,972 in the comparable period in 1994. In response to three new
government contracts that were awarded in 1994, the Company continues to expand
its technical workforce. The services performed by the additional employees
has the immediate effect of increasing short-term revenues as the Company
produces more billable work. In addition, the Company had an unusually high
level of technical personnel utilization. The reduction in commercial revenues
as compared to the first quarter of 1994 was due to the drop in service work
performed for automotive and electronics customers. The Company expects the
mix of revenues between government contractors and commercial products and
services to remain the same in 1995, unless new commercial opportunities are
realized.
Costs and Expenses
Costs of revenues were $720,520 and $462,068 for the quarters ended March 31,
1995 and 1994, respectively. Costs and expenses rose significantly over the
previous year due to the increase in the technical workforce and related
expenses. Cost of revenues as a percentage of revenues was 55% and 73%,
respectively, for the quarters ended March 31, 1995 and 1994. The decrease in
this percentage was due to a higher utilization and labor efficiency rate of
the technical workforce in billable services.
Combined selling and marketing costs and general and administrative costs for
the quarter ended March 31, 1995 were $507,595 as compared to $402,051 for the
same period in 1994. The increase was largely a result of additional expenses
in the areas of legal fees, employee bonuses, and executive stock compensation.
The Company believes it will be able to commercialize a substantial portion of
the technology it is now developing with government research and development
funding. At this time, the Company is not performing any significant
internally funded research and development and has allocated most of its
anticipated expenditures for research and development in 1995 to the litigation
matter as discussed in Part II Item 1, Legal Proceedings.
The Company has capitalized software development costs from the point at which
technological feasibility was determined through general availability of the
product. For the quarter ended March 31, 1995, capitalized software
development costs were $8,334 as compared to $116,446 in the same period last
year. The Company has reallocated personnel from development activities to
work on government projects during the quarter ended March 31, 1995.
Interest income was $5,179 and $5,183, respectively, for quarters ended March
31, 1995 and 1994. Other income was $55,463 and $69,666, respectively, for the
quarters ended March 31, 1995 and 1994. The majority of this other income in
both quarters was from the previous sale of a product line. The product line
was sold in exchange for a note and a royalty 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.
Net income for the quarter ended March 31, 1995 was $149,282, or $.01 per
share, compared to a net loss of $157,868, or $.01 per share, for the quarter
ended March 31, 1994.
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BOOKINGS AND BACKLOG
The Company was notified during the first quarter that it has been selected for
three additional awards totalling approximately $4,110,000. All these awards
are expected to start in the second quarter of 1995. At March 31, 1995, the
expected order backlog was approximately $14,025,000, 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 79% 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1995, unused sources of liquidity of the Company consisted of
$1,004,701 of cash and cash equivalents, an increase of $195,532 from December
31, 1994. Included in the increase was $242,623 provided by operating
activities, $47,562 used for investing activities, and $471 provided by
financing activities. Net income for the quarter ended March 31, 1995 of
$149,282, after adjustments for non-cash items such as depreciation,
amortization and stock compensation expense, provided $289,796 in cash to the
Company. A portion of these proceeds were in turn used to finance the growth
in receivables of $70,665, reduce accounts payable by $61,621, and purchase
machinery and equipment of $43,687.
The Company believes that the present level of cash and cash equivalents is
adequate to service the liquidity needs of the Company in 1995. The Company
relies principally on the collection of receivables to generate internal cash
reserves. In the last three months, the Company's cash reserves have increased
as a consequence of increased revenues and receivables collected during that
period. The Company intends to pay executive bonuses of $121,908 in April
1995. The Company believes that its cash balance should continue to rise in
relation to the anticipated revenue growth; however, there can be no assurance
that the Company's business outlook will continue to improve. A judgment
adverse to the Company in either 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 1995 without
additional financing, whether in the form of borrowings or equity capital.
Successful operations in the long term will require growth in revenues and
profitability which may require additional financing.
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PART II. OTHER INFORMATION
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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. A decision against the Company for
the full amount claimed would have an adverse effect on the
Company's short-term liquidity.
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 systems 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.
Due to the early stage of the litigation and the nature of
Trilogy's claims, an evaluation cannot presently be made of the
likelihood of an unfavorable or favorable outcome. The Company
cannot estimate the amount or range of potential loss or gain.
An unfavorable outcome could have a substantial negative impact on
the financial condition of the Company. The Company is
represented in this suit by its long-standing patent counsel,
Arnold White & Durkee of Houston and Palo Alto. The Company is
paying a fixed monthly fee of $20,000 to cover direct costs, while
Arnold White & Durkee is bearing all legal costs under a
contingency-fee agreement.
Management of the Company believes the above suits are without
merit and intends to defend itself vigorously. Management
believes the ultimate resolution of the above matters will not
have an adverse impact on the Company's financial position and
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Index to Exhibits - none.
b) The registrant did not file a report on Form 8-K during the quarter
ended March 31, 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 April 18, 1995
- ------------------------ of Directors and
Frederick Hayes-Roth Chief Executive Officer
(Principal Executive
Officer)
/s/ Dennis A. Bugbee Director of Finance, April 18, 1995
- ------------------------ Treasurer and Secretary
Dennis A. Bugbee (Principal Financial and
Accounting Officer)
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