SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(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, 1994
[ ] 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 November 10, 1994
- ---------------------------- --------------------------------
Common Stock, $.01 par value 25,666,505 Shares
This Amendment No. 1 (the "Amendment No. 1") to the Quarterly Report on Form
10-QSB (the "Form 10-QSB") of Teknowledge Corporation (the "Company") for the
quarterly period ended September 30, 1994 amends Part I, Items 1 & 2 of the Form
10-QSB to read in their entirety as set forth herein. This Amendment No. 1
reflects an additional net charge to earnings of $60,000. The charge relates to
compensation expense associated with the grant of stock options to certain
executives of the Company that was not previously recognized in the quarter.
PART I. FINANCIAL INFORMATION
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Item 1. FINANCIAL STATEMENTS
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Unaudited Audited
Sept. 30, Dec. 31,
1994 1993
--------- --------
Current assets:
Cash and cash equivalents ....................... $ 632 $ 1,508
Receivables:
Customer - billed, net of allowance of
$15 ($44 - December 31, 1993) ............. 468 577
Customer - unbilled .......................... 27 24
Officers and employees ....................... 1 1
Others ....................................... 54 92
------- -------
Total receivables ........................ 550 694
Net assets of discontinued operation ............ 49 49
Deposits and prepaid expenses ................... 96 92
------- -------
Total current assets ..................... 1,327 2,343
------- -------
Capitalized software, net of accumulated
amortization of $3,274
($3,192 - December 31, 1993) .................... 434 151
Equipment and improvements
Computer and office equipment ................... 2,970 2,930
Leasehold improvements .......................... 744 743
------- -------
3,714 3,673
Less accumulated depreciation and
amortization ................................. (3,502) (3,406)
------- -------
Net equipment and improvements ............... 212 267
------- -------
Total assets ....................................... $ 1,973 $ 2,761
======= =======
See accompanying notes.
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Unaudited Audited
Sept. 30, Dec. 31,
1994 1993
--------- --------
Current liabilities:
Accounts payable ................................. $ 115 $ 224
Accrued liabilities:
Payroll, related taxes and benefits ........ 211 271
Provision for contract charges ............. 29 120
Provision for discontinued operations ...... 242 319
Royalties .................................. 675 675
Capital lease obligations .................. 21 19
Restructuring obligations .................. 18 18
Other ...................................... 235 672
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Total accrued liabilities .................. 1,431 2,094
------- -------
Total current liabilities ....................... 1,546 2,318
Long-Term Liabilities:
Capital lease obligations ....................... -- 16
Provision for discontinued operations ........... 110 123*
Restructuring obligations ....................... 73 73*
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Total liabilities .......................... 1,729 2,530
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Commitments
Stockholders' equity:
Common stock, $.01 par value, shares
authorized 50,000,000, issued 25,647,927 ..... 256 230
Additional paid-in capital (after (i) reduction
of $57,962 for elimination of accumulated
deficit at December 31, 1992, as a result of
quasi-reorganization; and (ii) increase of
$41 and $1,001 in 1994 and 1993 as a result of
reversal of portions of 1992 loss provisions) 1,882 1,330
Deferred compensation ........................... (420) --
Accumulated deficit since January 1, 1993
(following quasi-reorganization) ............. (1,471) (1,326)
------- -------
247 234
Treasury stock, at cost, 24,000 shares .......... (3) (3)
------- -------
Total stockholders' equity .................. 244 231
------- -------
Total liabilities and stockholders' equity ......... $ 1,973 $ 2,761
======= =======
*Amounts were reclassed to conform to current presentation.
See accompanying notes.
TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
Revenues ..................... $ 1,027 $ 729 $ 2,158 $ 3,651
Costs and expenses:
Cost of operating revenues . 524 309 1,223 1,679
Amortization of capitalized
software ................. 31 98 82 1,003
Depreciation ............... 32 58 98 185
Selling and marketing ...... 19 43 82 312
General and administrative . 375 459 993 1,722
------------ ------------ ------------ ------------
Total costs and expenses . 981 967 2,478 4,901
------------ ------------ ------------ ------------
Operating Income (loss) .. 46 (238) (320) (1,250)
Interest income .............. 4 11 29 35
Interest expense ............. (1) -- (2) (1)
Other income ................. 53 68 148 249
------------ ------------ ------------ ------------
Income (Loss) from continuing
operations ................. 102 (159) (145) (967)
Discontinued operations:
Income from operations ..... -- -- -- --
Provision for discontinuance -- -- -- (750)
------------ ------------ ------------ ------------
Net income (loss) ............ $ 102 $ (159) $ (145) $ (1,717)
============ ============ ============ ============
Net income (loss) per share
Continuing operations ...... $ 0.00 $ (0.01) $ (0.01) $ (0.04)
Discontinued operations .... -- -- -- (0.03)
------------ ------------ ------------ ------------
Net income (loss) per share .. $ 0.00 $ (0.01) $ (0.01) $ (0.07)
============ ============ ============ ============
Shares used in computing
net income (loss) per share 29,584,531* 23,020,471 24,312,960 22,916,841
========== ========== ========== ==========
*Common stock options which are common stock equivalents are included because
they are dilutive when the Company reports net income.
See accompanying notes.
TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
------- ------- ------- -------
Cash flows from operating activities:
Net income (loss) .................................... $ 102 $ (159) $ (145) $(1,717)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Amortization of capitalized software ............... 31 98 82 1,003
Depreciation ....................................... 32 58 98 185
Compensation expense for stock options granted ..... 60 -- 60 --
Net change in assets of discontinued operations .... -- 211 -- 326
Other non-cash items ............................... -- (1) 1 1
Changes in assets and liabilities:
Receivables ...................................... (102) 88 145 626
Deposits and prepaid expenses .................... (36) (15) (4) 84
Accounts payable ................................. (60) (6) (110) 125
Accrued liabilities .............................. 72 (379) (637) (1,793)
------- ------- ------- -------
Total adjustments .................................... (3) 54 (365) 557
------- ------- ------- -------
Net cash provided by (used for) operating activities 99 (105) (510) (1,160)
------- ------- ------- -------
Cash flows from investing activities:
Capitalization of software costs ..................... (37) (48) (365) (355)
Purchase of equipment and improvements ............... (28) (32) (47) (45)
Miscellaneous proceeds ............................... -- -- 3 --
------- ------- ------- -------
Net cash provided by (used for) investing activities (65) (80) (409) (400)
------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock ............... -- -- 57 23
Repayments of capital lease obligations .............. (5) (11) (14) (200)
------- ------- ------- -------
Net cash provided by (used for) financing activities (5) (11) 43 (177)
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents ... 29 (196) (876) (1,737)
Cash and cash equivalents at beginning of period ....... 603 1,051 1,508 2,592
------- ------- ------- -------
Cash and cash equivalents at end of period ............. $ 632 $ 855 $ 632 $ 855
======= ======= ======= =======
See accompanying notes.
TEKNOWLEDGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1993. 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, 1994.
2. Change in Method of Accounting for Certain Investments
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in
accounting principle. The cumulative effect as of January 1, 1994 of
adopting Statement 115 was immaterial.
3. Per share Earnings
The number of shares of common stock used in the computation of per share
earnings for each period is the weighted average number of shares of common
stock outstanding during the applicable periods. Common stock options which
are common stock equivalents are included in the current quarter 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.
4. Quasi-Reorganization
On December 11, 1992, the 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.
5. Operations Discontinued in 1992
During December 1992, the Company adopted a formal plan to discontinue the
business segment involved in the manufacture of flexible light assembly and
packaging systems known as the Automated Factories Division (AFD). At
December 31, 1992, the reserve for discontinued operations was established
at $1,358,000. As a result of a favorable settlement with a landlord and a
favorable judgment in litigation with a former customer, $605,818 of the
1992 provision was reversed in 1993 through an increase in paid-in-capital.
At December 31, 1993, $178,760 remained in accrued liability for the
discontinuance of AFD. As of September 30, 1994, such liability was
$172,400; of which $122,888 was for future landlord payments, and $49,512
was for anticipated expenses.
6. Restructuring of Operations in 1992
In 1992, the Company restructured its remaining software business and
relocated its Factory Management and Control Systems Division (FMCS) and
its corporate headquarters from Pennsylvania to California. The
restructuring provision was $1,000,443 at December 31, 1992. Favorable
settlement with a landlord and other adjustments gave rise to a $395,492
reversal of the 1992 provision in 1993, which was applied to increase
paid-in-capital since the settlement occurred after the
quasi-reorganization.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
GENERAL
The Company's primary business is conducted by the Knowledge Systems Division
(KSD) located in Palo Alto, California. KSD provides software architecture and
knowledge processing solutions to the federal government for defense
applications and to commercial customers for integrated design, manufacturing
and sales applications. A substantial portion of KSD's government business
represents advanced development projects funded by the Advanced Research
Projects Agency.
The Factory Management and Control Systems (FMCS) Division DELTA product sales
and support base was relocated from Pittsburgh, Pennsylvania, to Palo Alto,
California in 1993.
RESULTS OF OPERATIONS
Revenue
Total revenue was $1,027,000 for the quarter ended September 30, 1994, an
increase of $298,000 from the same period a year ago. During the quarter, the
Company successfully expanded its technical staff to meet the service
requirements generated from new contract awards in 1994. This translated into an
immediate increase in revenue for the quarter. Total revenue was $2,158,000 for
the nine months ended September 30, 1994, a decrease of $1,493,000 from the same
period a year ago, primarily due to the precipitous decline in FMCS revenues in
1994.
Costs and Expenses
Costs of operating revenue increased to $524,000 for the quarter ended September
30, 1994 from $309,000 for the same period last year, mainly due to growth of
the technical workforce, and a corresponding increase in other direct contract
charges. Costs of operating revenue decreased to $1,223,000 for the nine months
ended September 30, 1994 from $1,679,000 for the same period last year, mostly
due to reductions in the workforce at the FMCS Division.
Combined selling and marketing costs and general and administrative costs were
$394,000 and $502,000 for the quarters; and $1,075,000 and $2,034,000 for the
nine months ended September 30, 1994 and 1993, respectively. These costs
decreased as services and other expenditures required to operate the Company's
former Pittsburgh headquarters and FMCS division were no longer required after
relocation to California in 1993.
During the quarter ended September 30, 1994, cash expenditures on capitalized
software development was $37,000. Amortization of capitalized software decreased
from $98,000 for the quarter ended September 30, 1993 to $31,000 for the quarter
ended September 30, 1994. The reduction was $921,000 from $1,003,000 for the
nine months ended September 30, 1993 to $82,000 for the nine months ended
September 30, 1994, due to the accelerated write down of the FMCS division DELTA
product line.
Depreciation expense was $32,000 for the quarter ended September 30, 1994, as
compared to $58,000 for the same period in 1993. Depreciation expense decreased
from $185,000 for the nine months ended September 30, 1993 to $98,000 for the
nine months ended September 30, 1994. Depreciation expenses decreased because of
asset retirements and a general maturation of the depreciable asset base.
Net Income
Net income during the quarter ended September 30, 1994 was $102,000, or $.00 per
share, compared to net loss of $159,000, or $.01 per share, for the same period
in 1993. Net loss for the nine months ended September 30, 1994 was $145,000, or
$.01 per share, compared to net loss of $1,717,000, or $.07 per share, for the
same period in 1993.
FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATIONS
Contract Awards and Governmental Funding Limitations
The Company has received two new government contracts in 1994. The base amount
of the contracts is approximately $10.5 million, however, if the government
chooses to exercise all of their options, the final contract value could be much
higher. The income and revenue from contract awards are spread over the duration
of the contract, typically from one to five years. Awards are subject to
governmental funding limitations and congressional appropriation which may
result in a reduction of the expected revenue to the Company. Future contract
awards may also be subject to similar funding limitations which may restrict
revenue growth.
Human Resources
The Company believes that in the future its 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. Delay in
staffing technical positions has 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, such losses have interim negative effects on
revenues, income, and liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that the present level of cash and cash equivalents is
adequate to meet the short-term liquidity needs of the Company. This assessment
assumes that the Company will continue to profit from the favorable financial
impact of the new contracts, which first began to show during the third quarter
of this year. The Company's continuing financial health is dependent on its
ability to solicit new business, recruit new employees, maintain profitability,
and generate adequate funds to service operational and non-operational
requirements.
The Company's working capital was $25,000 at December 31, 1993 and a negative
$143,000 at September 30, 1994. For the nine months ended September 30, 1994,
cash reserves dropped by $876,000 to $632,000. This was largely a consequence of
several large disbursements carried over from 1993 business totaling $544,000.
Included in the $544,000 disbursement was $357,500 in legal fees, incurred in
connection with the 1993 settlement of the Sensus lawsuit, and $186,500 in
management performance bonuses, $97,500 of which was deferred compensation from
1993. In addition to the 1993 items, $365,000 in cash was used to fund internal
software development projects during the nine months ended September 30, 1994.
The Company's long-term cash position is expected to be maintained or improved
assuming no disruption in its gradually improving stream of revenue and
collection. However, a pending lawsuit (see PART II Item 1: Legal Proceedings)
may cause the Company's liquidity to deteriorate in the near term.
The Company obtained a minimum line of credit from a financial services company
which is secured by receivables in the amount of $100,000 that may be used to
satisfy short-term operating requirements. The Company does not anticipate its
short-term growth to be restricted by its inability to secure a larger credit
line at this time, although no assurances can be made that the current line of
credit will be adequate to satisfy the Company's liquidity needs.
The Company is primarily reliant on internally generated funds for short-term
growth and believes that the present cash and credit resources are adequate to
maintain growth. However, if growth accelerates beyond a level sustainable by
internal resources, the Company may seek additional equity or debt financing to
meet these demands. The Company believes that there will be gradual improvements
in its long-term liquidity as it enlarges its revenue base and employee base.
However, there can be no guarantee that this will materialize.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this amendment to report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TEKNOWLEDGE CORPORATION
(Registrant)
Date: March 27, 1995 By: /s/ Frederick Hayes-Roth
------------------------
Frederick Hayes-Roth
Chairman of the Board
of Directors and
Chief Executive Officer
(Principal Executive Officer)