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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 JUNE 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 July 26, 1995
- ---------------------------- ----------------------------
Common Stock, $.01 par value 25,769,841 Shares
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TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 1995
and December 31, 1994 3
Consolidated Statements of Operations for the
three months and six months ended
June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
six months ended June 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 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
1995 1994
--------- -----------
Current assets:
Cash and cash equivalents $ 1,324,691 $ 809,169
Receivables:
Customer - billed, net of allowance of
$10,000 ($10,000 - December 31, 1994) 661,369 698,836
Customer - unbilled 51,147 190,634
Other 35,698 42,647
----------- -----------
Total receivables 748,214 932,117
Deposits and prepaid expenses 48,512 73,771
----------- -----------
Total current assets 2,121,417 1,815,057
----------- -----------
Capitalized software, net of accumulated
amortization of $834,331
($733,223 - December 31, 1994) 328,328 407,808
----------- -----------
Equipment and improvements, at cost
Computer and other equipment 2,096,793 2,997,062
Leasehold improvements 744,315 744,315
----------- -----------
2,841,108 3,741,377
Less accumulated depreciation and amortization (2,632,244) (3,535,109)
----------- -----------
Net equipment and improvements 208,864 206,268
----------- -----------
Total assets $ 2,658,609 $ 2,429,133
=========== ===========
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1995 1994
----------- -----------
Current liabilities:
Accounts payable $ 144,893 $ 195,704
Accrued liabilities:
Payroll and bonus 277,117 248,685
Provision for contract charges 50,418 52,914
Provision for discontinued operations 137,415 174,071
Deferred payments 675,000 675,000
Other 200,803 256,240
----------- -----------
Total accrued liabilities 1,340,753 1,406,910
----------- -----------
Total current liabilities 1,485,646 1,602,614
Long-Term Liabilities:
Provision for discontinued operations 88,704 110,096
Restructuring obligations 54,915 54,915
----------- -----------
Total liabilities 1,629,265 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 25,777,931 and 25,716,871
at June 30, 1995 and December 31, 1994, respectively 257,775 257,164
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) 1,947,763 1,947,397
Deferred compensation (240,346) (360,518)
Accumulated deficit since January 1, 1993
(following quasi-reorganization) (932,848) (1,179,535)
----------- -----------
1,032,344 664,508
Treasury stock, at cost, 24,000 shares (3,000) (3,000)
----------- -----------
Total stockholders' equity 1,029,344 661,508
----------- -----------
Total liabilities and stockholders' equity $ 2,658,609 $ 2,429,133
=========== ===========
See accompanying notes.
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1995 1994 1995 1994
---------- ----------- ----------- -----------
Revenues $ 1,180,627 $ 498,847 $ 2,497,653 $ 1,130,989
----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues 686,530 323,660 1,407,050 785,728
Selling and marketing 9,739 36,074 29,390 62,611
General and administrative 442,095 273,002 930,039 648,516
----------- ----------- ----------- -----------
Total costs and expenses 1,138,364 632,736 2,366,479 1,496,855
----------- ----------- ----------- -----------
Operating income (loss) 42,263 (133,889) 131,174 (365,866)
Interest income 11,159 2,821 16,338 8,005*
Interest expense (157) (636) (429) (1,377)
Other income, net 47,340 42,416 102,804 112,082*
----------- ----------- ----------- -----------
Income (loss) before tax 100,605 (89,288) 249,887 (247,156)
Provision for income tax 3,200 - 3,200 -
----------- ----------- ----------- -----------
Income (loss) $ 97,405 $ (89,288) $ 246,687 $ (247,156)
=========== =========== =========== ===========
Income (loss) per share $ 0.00 0.00 0.01 (0.01)
=========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding 30,142,882 24,566,035 29,885,386 23,793,253
=========== =========== =========== ===========
* Amounts were reclassified to conform to current presentation.
See accompanying notes
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-------------------------
1995 1994
---- ----
Cash flows from operating activities:
Net income (loss) $ 246,687 $ (247,156)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Amortization of capitalized software 101,108 50,976
Depreciation 66,759 66,470
Stock compensation expense 120,172 --
(Gain) Loss on sale of fixed assets (4,559) 775
Changes in assets and liabilities:
Receivables 183,903 246,325
Deposits and prepaid expenses 25,259 31,738
Accounts payable (50,811) (49,801)
Accrued liabilities (77,180) (706,928)
---------- ----------
Net cash provided by (used for) operating
activities 611,338 (607,601)
---------- ----------
Cash flows from investing activities:
Capitalization of software costs (21,628) (328,116)
Purchase of fixed assets (69,355) ( 19,414)
Proceeds from sale of fixed assets 4,559 2,909
---------- ----------
Net cash used for investing activities (86,424) (344,621)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 977 56,407
Repayments of capital lease obligations (10,369) (9,421)
---------- ----------
Net cash provided by (used for)
financing activities (9,392) 46,986
---------- ----------
Net increase (decrease) in cash and
cash equivalents 515,522 (905,236)
Cash and cash equivalents at beginning
of period 809,169 1,507,882
---------- ----------
Cash and cash equivalents at end of period $1,324,691 $ 602,646
========== ==========
See accompanying notes.
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TEKNOWLEDGE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June 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 six months ended June 30, 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 three months and six months ended
June 30, 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
Teknowledge continues to develop proprietary software products that can be
operated on individual computers and integrated into customer networks. The
Company is maintaining an active intellectual property program, and currently
holds eight U.S. software patents. The application software actively developed
by the Company includes knowledge-based expert systems for configuration and
sales support, a system to manage webs of distributed, network-based
information, and a customer requirements management package.
The Company develops architectures that integrate conventional software and
knowledge systems in distributed, heterogeneous network applications. These
architectures are embodied in products and services to support open, distributed
systems integration and applications. Teknowledge's products and services are
designed to maximize software integration flexibility and the ability to process
and distribute application knowledge. Much of Teknowledge's current and future
product focus is on providing network associate systems that make access to
knowledge easier and network accelerators that make knowledge access over
computer networks faster and more cost effective. Teknowledge's products and
services are primarily marketed to the U.S. Government (90%) and Fortune 500
companies, although the Company has several international customers. In spite of
heavy dependence on government contracts, Teknowledge has begun to diversify its
ARPA-sponsored business. In addition, the Company has increased its strategic
emphasis on commercial software development and marketing projects.
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 has recruited a number of
new technical employees and is continuously seeking talented employees with
specialized technical skills and experience.
RESULTS OF OPERATIONS
Overview
The Company's revenues are 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 six months of
1995 and 1994, approximately 92% and 81%, 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.
Revenues
Revenues for the three months and six months ended June 30, 1995 were $1,180,627
and $2,497,653, respectively. These were more than double the amounts reported
in the first three months and six months of 1994 of $498,847 and $1,130,989,
respectively. Revenues from government contracts were $1,055,695 and $2,294,173,
respectively, in the three months and six months ended June 30, 1995, as
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compared to $433,207 and $921,377 in the comparable periods in 1994. Commercial
product and service revenues were $124,932 and $203,480 in the three months and
six months ended June 30, 1995, respectively, as compared to $65,640 and
$209,612 in the comparable periods in 1994. As the Company continued to staff
the new government contracts that were awarded in 1994 and 1995, more billable
work was generated which resulted in the growth in revenues. 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 build on the technology it is now developing
with government funding and expand its commercial applications and commercial
software products.
Costs and Expenses
Costs of revenues were $686,530 and $1,407,050 for the three months and six
months ended June 30, 1995, and were $323,660 and $785,728 in the comparable
periods in 1994, respectively. Costs and expenses rose significantly over the
previous year due to the increase in the technical workforce and related
expenses.
Combined selling and marketing costs and general and administrative costs were
$451,834 and $959,429 for the three months and six months ended June 30, 1995,
and $309,076 and $711,127 in the comparable periods in 1994, respectively. The
increase was largely a result of additional expenses in the areas of legal fees,
employee bonuses, and executive stock compensation.
The Company has capitalized software development costs from the point at which
technological feasibility was determined through general availability of the
product. For the three months and six months ended June 30, 1995, capitalized
software development costs were $13,294 and $21,628, respectively, as compared
to $211,670 and $328,116 in the comparable periods in 1994.
Interest income was $11,159 and $16,338, respectively, for the three months and
six months ended June 30, 1995 as compared to $2,821 and $8,005 in the
comparable periods in 1994, respectively. Other income was $47,340 and $102,804,
respectively, for the three months and six months ended June 30, 1995 as
compared to $42,416 and $112,082 in the comparable periods in 1994,
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 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 three months and six months ended June 30, 1995 were $97,405
and $246,687, or $.00 and $.01 per share, respectively, compared to net loss of
$89,288 and $247,156, or $.00 and $.01 per share, for the three months and six
months ended June 30, 1994 respectively.
BOOKINGS AND BACKLOG
The Company was notified during the first quarter that it has been selected for
three additional government contracts totaling approximately $4,110,000. These
government contracts have started in the second quarter of 1995. At June 30,
1995, the expected order backlog was approximately $12,342,000, 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 72% 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.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, unused sources of liquidity of the Company consisted of
$1,324,691 of cash and cash equivalents, an increase of $515,522 from December
31, 1994. Included in the increase was $611,338 provided by operating
activities, $86,424 used for investing activities, and $9,392 used for financing
activities. Net income for the six months ended June 30, 1995 of $246,687, after
adjustments for non-cash items such as depreciation, amortization and stock
compensation expense, provided $534,726 in cash to the Company. The collection
of receivables provided another $183,903. Part of these proceeds were in turn
used to reduce accounts payable by $50,811, and purchase computer and other
equipment of $69,355.
The Company believes that the present level of cash and cash equivalents is
adequate to service the liquidity needs of the Company through 1995. The Company
relies principally on the collection of receivables to generate internal cash
reserves. In the last six months, the Company's cash reserves have increased as
a consequence of increased revenues and receivables collected during that
period. 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.
The Company has obtained an unsecured line of credit of $400,000 from a bank in
the second quarter of 1995. The line may not exceed $400,000 or 50% of eligible
receivables, whichever is less. The line bears a rate between 1.5% to 2.25%
above prime and has a one-year maturity. The Company is required to observe
certain loan covenants such as minimum deposit balance, tangible net worth, net
profit and backlog. The Company has not utilized this line of credit to date.
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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. Management of the Company
believes the above suit is without merit and intends to defend
itself vigorously. Management believes the ultimate resolution of
the above matter will not have an adverse impact on the Company's
financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 24, 1995.
A proposal to elect one director of the Company, James C. Workman,
to serve for a three-year term was approved by stockholders. This
proposal received the following votes:
For Against Withheld Abstain
--- ------- -------- -------
18,758,562 1,049,401 - -
Stockholders also approved a proposal to amend the Company's Stock Option Plan
for Non-Employee Directors. This proposal received the following votes:
For Against Withheld Abstain
--- ------- -------- -------
15,679,265 1,477,696 125,374 2,525,628
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONT'D)
In addition, stockholders ratified selection of Arthur Andersen
LLP as the Company's independent public accountants for the fiscal
year ending December 31, 1995. This proposal received the
following votes:
For Against Withheld Abstain
--- ------- -------- -------
19,492,928 70,990 244,045 -
ITEM 5. OTHER INFORMATION
Trilogy has informed the Company that it has acquired the 728,571
shares of Teknowledge Common Stock formerly held by BMW of North
America, Inc. ("BMW") in a private transaction for $273,214, or
$.375 a share. This purchase increases Trilogy's total ownership
of Teknowledge stock to 2,853,422 shares or 11.1% of the Company.
In addition to the aforementioned shares, Trilogy also acquired
BMW's interest in a technology purchase agreement relating to the
1987 sale of technology to the Company of a machine vision
inspection system, valued at $276,786. Although this agreement is
not scheduled to expire until December 1996, the Company charged
all future payments against earnings in 1990 when the vision
systems product line was disposed. Prior to the write-off, the
Company had paid BMW $325,000. As stated in the Legal Proceedings
section of this 10-QSB, Trilogy is involved with Teknowledge in a
lawsuit over Teknowledge's patent No. 4,591,983 for configuration
systems.
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 June 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 August 3, 1995
- -------------------------- of Directors and
Frederick Hayes-Roth Chief Executive Officer
(Principal Executive
Officer)
/s/ Dennis A. Bugbee Director of Finance, August 3, 1995
- -------------------------- Treasurer and Secretary
Dennis A. Bugbee (Principal Financial and
Accounting Officer)
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