1
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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _______ to ________
Commission File Number 0-26964
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Carnegie Group, Inc.
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Delaware 25-1435252
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(State or other Jurisdiction of (I.R.S Employer Identification Number)
Incorporation or Organization)
Five PPG Place, Pittsburgh, Pennsylvania 15222
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(Address of principal executive offices) (Zip Code)
(412) 642-6900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to files 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 Stock as of the latest practicable date:
Class Outstanding at July 31, 1996
----- ----------------------------
Common Stock, $.01 par value 6,197,823
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2
FORM 10-Q
CARNEGIE GROUP, INC.
TABLE OF CONTENTS
Page Number
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Carnegie Group, Inc. and Subsidiaries 3
Consolidated Statements of Operations for the
three months and six months ended June 30, 1996
and 1995
Carnegie Group, Inc. and Subsidiaries 4
Consolidated Balance Sheets
Carnegie Group, Inc. and Subsidiaries 5
Consolidated Statements of Cash Flows
Note to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7-10
Financial Condition and Results of Operations
PART 2 OTHER INFORMATION 11
Signatures 12
Exhibit Index 13
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenue
Software services--Unrelated parties $5,636,264 $5,186,344 $13,079,014 $ 9,756,213
Software services--Related parties 494,277 768,211 1,244,926 2,156,466
---------- ---------- ----------- -----------
Total software services 6,130,541 5,954,555 14,323,940 11,912,679
Software licenses 532,820 667,053 662,761 760,606
---------- ---------- ----------- -----------
Total revenue 6,663,361 6,621,608 14,986,701 12,673,285
---------- ---------- ----------- -----------
Costs and expenses:
Cost of revenue - Unrelated parties 3,907,883 3,453,880 8,609,565 6,566,468
Cost of revenue - Related parties 412,765 379,933 775,276 1,043,560
---------- ---------- ----------- -----------
Total cost of revenue 4,320,648 3,833,813 9,384,841 7,610,028
Research and development 288,276 171,341 467,290 325,189
Selling, general and administrative 2,014,917 1,803,478 4,150,886 3,353,601
---------- ---------- ----------- -----------
Total costs and expenses 6,623,841 5,808,632 14,003,017 11,288,818
---------- ---------- ----------- -----------
Income from operations 39,520 812,976 983,684 1,384,467
Other income (expense):
Interest income 151,524 908 298,690 6,836
Other income 6,699 4,349 12,798 10,448
Interest expense (4,564) (28,148) (9,421) (31,117)
---------- ---------- ----------- -----------
Total other income (expense) 153,659 (22,891) 302,067 (13,833)
---------- ---------- ----------- -----------
Income before income taxes 193,179 790,085 1,285,751 1,370,634
Income tax provision (72,356) (138,978) (481,743) (241,095)
---------- ---------- ----------- -----------
Net income $ 120,823 $ 651,107 $ 804,008 $ 1,129,539
---------- ---------- ----------- -----------
Earnings per share of common stock $ 0.02 $ 0.12 $ .11 $ $.20
========== ========== =========== ===========
Weighted average number of common shares
outstanding 7,207,965 5,591,484 7,207,965 5,591,484
========== ========== =========== ===========
The accompanying note is an integral part of these financial statements.
3
4
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $12,782,848 $12,394,588
Accounts receivable 2,999,666 5,131,922
Accounts receivable from related parties 902,787 76,296
Accounts receivable--unbilled 4,208,619 2,048,609
Accounts receivable related parties--unbilled 248,630 87,690
Deferred income taxes 1,050,735 1,222,061
Other current assets 321,750 397,883
----------- -----------
Total current assets 22,515,035 21,359,049
----------- -----------
Property and equipment, net of accumulated depreciation
and amortization 2,065,961 1,812,894
Deferred income taxes 1,530,374 1,779,792
Other assets 32,038 36,900
----------- -----------
Total assets $26,143,408 $24,988,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 804,677 $ 1,107,592
Payables to related parties 877,112 967,673
Accrued compensation 1,046,035 1,130,479
Advance billings and deferred revenue 525,333 537,541
Accrued rent 596,888 626,253
Other accrued liabilities 1,512,154 801,544
Obligations under capital leases--current portion 48,691 48,691
----------- -----------
Total current liabilities 5,410,890 5,219,773
----------- -----------
Obligations under capital leases--noncurrent portion 12,688 39,671
----------- -----------
Total liabilities 5,423,578 5,259,444
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized,
6,385,037 and 6,386,200 shares issued at June 30, 1996
and December 31, 1995 respectively 64,497 63,862
Capital in excess of par value 31,022,313 30,836,317
Accumulated deficit (9,891,980) (10,695,988)
Treasury stock, 190,000 shares at June 30, 1996 and
December 31, 1995 (at cost) (475,000) (475,000)
----------- -----------
Total stockholders' equity 20,719,830 19,729,191
----------- -----------
Total liabilities and stockholders' equity $26,143,408 $24,988,635
=========== ===========
The accompanying note is an integral part of these financial statements.
4
5
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
-------------------------------
June 30, June 30,
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 804,008 $ 1,129,539
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 469,124 324,610
Deferred income taxes 420,744 154,931
Changes in working capital component:
Accounts receivable (27,754) (3,978,972)
Accounts receivable - Related parties (987,431) 224,407
Other assets 80,995 (137,300)
Trade accounts payable (302,915) 153,475
Payables to related parties (90,561) 844,684
Accrued compensation (84,444) (143,003)
Accrued rent (29,365) (97,971)
Other accrued liabilities 791,437 304,969
Advance billings and deferred revenue (12,208) (2,199)
------------ -----------
Net cash (used in) provided by operating
activities 1,031,630 (1,222,830)
Cash flows from investing activities:
Proceeds from the sale of fixed assets, net -- --
Capital expenditures (722,192) (628,496)
------------ -----------
Net cash used in investing activities (722,192) (628,496)
Cash flows from financing activities:
Borrowings on line of credit -- 1,800,271
Repayments on line of credit -- (800,000)
Principal payments under capital lease obligations (26,982) (24,710)
Proceeds from sales of common stock, net 105,804 5,634
------------ -----------
Net cash (used in) provided by financing
activities 78,822 981,195
------------ -----------
Net change in cash and cash equivalents 388,260 (870,131)
Cash and cash equivalents:
Beginning of period 12,394,588 915,237
End of period $ 12,782,848 $ 45,106
============ ===========
The accompanying note is an integral part of these financial statements.
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NOTE TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In the opinion of the management of Carnegie Group, Inc. (the
"Company"), these unaudited interim consolidated financial statements include
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of operating results for the three month and
six month periods ended June 30, 1996. Results for the interim periods are not
necessarily indicative of results for the full year. The accompanying
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission and therefore do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. Accordingly, the information
contained in this Form 10-Q should be read in conjunction with the financial
statements and notes thereto contained in the Company's Form 10-K for the year
ended December 31, 1995 as filed with the Securities and Exchange Commission.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
Carnegie Group, Inc. ("Carnegie Group" or the "Company") provides
client/server software development services that integrate advanced software
technologies with clients' existing computing infrastructures to automate and
enhance complex business processes. The Company focuses on performing software
development, systems integration and technical consulting services to create
knowledge-intensive software solutions that improve its clients' productivity
and competitive market position in three business areas: customer contact;
customer service; and logistics, planning and scheduling. Carnegie Group
targets its services to clients in the telecommunications, financial services,
manufacturing, defense and healthcare industries.
The Company's expertise encompasses a wide range of advanced software
technologies, including knowledge-based systems, object-oriented technology,
advanced graphical user interfaces, constraint-directed search and distributed
computing. The Company captures certain aspects of its business area experience
and advanced technology expertise in a portfolio of reusable software templates
that can be used as building blocks to create software solutions quickly and
effectively. In addition, Carnegie Group employs an iterative or "spiral"
approach to software design that begins with the construction of a prototype
and continues through testing of successive versions of the software against
project requirements. This iterative design facilitates rapid software
development, encourages client feedback and leads to greater congruence with
client needs and expectations.
Since inception, Carnegie Group has emphasized relationships with leading
corporations in its targeted industries. These relationships have provided the
Company with opportunities for growth through the provision of additional
services to existing clients and through references to other companies within
the Company's targeted industries. Carnegie Group's clients include U S WEST
Communications, Inc., the United States Transportation Command, Caterpillar
Inc., the U.S. Army, BellSouth Telecommunications, Inc., First USA Bank, Ford
Motor Company and Blue Cross of Western Pennsylvania.
Backlog at June 30, 1996 grew to $15.1 million compared to $14.1 million at
March 31, 1996 and $9.6 million at June 30, 1995. The Company only includes in
backlog signed contracts that either have milestones yet to be attained or for
which the Company can make a reasonable estimate of work yet to be performed. As
most of the contracts in backlog are terminable by the Company or the client
upon short notice, there can be no assurance that contracts reflected in backlog
are a reliable measure of future revenue.
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COMPARISON OF QUARTER AND SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995.
Revenue. Total revenue for the quarter ended June 30, 1996 was $6.7
million compared to $6.6 million for the quarter ended June 30, 1995, an
increase of $.1 million or 0.6%. For the six months ended June 30, 1996 revenue
was $15.0 million compared to $12.7 million for the six months ended June 30,
1995, an increase of $2.3 million or 18.3%. This growth resulted principally
from volume increases in sales of software services.
Total software services revenue for the quarter ended June 30, 1996 was
$6.1 million compared to $6.0 million for the quarter ended June 30, 1995, an
increase of $.1 million or 3.0%. Software services revenue was $14.3 million
for the six months ended June 30, 1996 compared to $11.9 million for the six
months ended June 30, 1995, an increase of $2.4 million or 20.2%. These
increases were primarily due to an extension of a logistics, planning and
scheduling engagement for a defense industry client. This engagement was the
primary reason that revenue from software services-unrelated parties was $13.1
million for the six months ended June 30, 1996 compared to $9.8 million for the
six months ended June 30, 1995. Revenue from software services-related parties
was $1.2 million for the six months ended June 30, 1996 compared to $2.1
million for the six months ended June 30, 1995, a decrease of $.9 million or
42.3%. This decrease was primarily due to the completion of customer contact
engagements for a telecommunications industry client. Also, results for the
second quarter and the first six months of 1996 were affected by the
renegotiation of a fixed-price contract, which resulted in engineers related to
that contract being underutilized.
Revenue from software licenses was $533,000 for the three month period
ended June 30, 1996, compared to $667,000 for the same three month period in
1995, an increase of $134,000 or 20.1%. Revenue from software licenses was
$663,000 for the six months ended June 30, 1996 compared to $761,000 for the
six months ended June 30, 1995, a decrease of $98,000 or 12.9%. These decreases
were due to the fact that sales of reusable software templates to a
telecommunications industry client in the first six months of 1995 did not
reoccur in the first six months of 1996.
Cost of Revenue. Cost of revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and expenses. For the second quarter of 1996, total cost of
revenue was $4.3 million compared to $3.8 million for the second quarter of
1995, an increase of $.5 million or 12.7%. For the six months ended June 30,
1996, total cost of revenue was $9.4 million compared to $7.6 million for the
six months ended June 30, 1995, an increase of $1.8 million or 23.3%. These
increases were primarily attributable to the additional hiring of professional
staff to perform the increased volume of software services. Cost of
revenue-related parties was $.8 million for the six months ended June 30, 1996
compared to $1.1 million for the six months ended June 30, 1995, a decrease of
$.3 million or 25.7%. Cost of revenue-unrelated parties during the same period
was $8.6 million compared to $6.6 million for the six month period ended June
30, 1995, an increase of $2.0 million or 31.1%. The increase was primarily
attributable to the reallocation of professional staff to provide additional
software services to unrelated parties following the completion of customer
contact engagements for a telecommunications industry client.
Research and Development. Research and development expenses for the
quarter ended June 30, 1996 were $288,000 compared to $171,000 for the second
quarter of 1995, an increase of $117,000 or 68.2%. For the six months ended
June 30, 1996 research and development expenses were $467,000 compared to
$325,000 for the six months ended June 30, 1995, an increase of $142,000 or
43.7%. These increases were primarily due to product development related to the
TestBench template.
8
9
Selling, General and Administrative. Selling, general and administrative
expenses include costs of proposal development and proposal writing, marketing
communications and advertising, sales and management staff, and corporate
services functions including accounting, human resources and legal services,
along with corporate executive staff. For the second quarter of 1996, selling,
general and administrative expenses were $2.0 million compared to $1.8 million
for the second quarter of 1995, an increase of $.2 million or 11.7%. Selling,
general and administrative expenses for the six months ended June 30, 1996 were
$4.2 million compared to $3.4 million for the six months ended June 30, 1995, an
increase of $.8 million or 23.8%. These increases resulted primarily from
increased sales and marketing expenses needed to support the Company's total
revenue growth along with increased insurance and professional services expenses
related to being a newly public company. As a percentage of total revenue, these
expenses increased slightly from 26.5% for the six months ended June 30, 1995 to
27.7% in 1996.
Other Income (Expense). Total other income for the second quarter of
1996 was $154,000 compared to total other expense of $22,000 in 1995, an
increase of $176,000 or 671.3%. For the six months ended June 30, 1996, total
other income was $302,000 compared to total other expense of $13,000 in 1995 an
increase of $315,000 or 2,183.7%. These increases were due primarily to
interest income earned on the net proceeds received in December, 1995 from the
Company's initial public offering, which were invested in an interest-bearing
account.
Income Tax Provision. An income tax provision of $73,000 was recorded
for the second quarter of 1996 and $482,000 for the six months ended June 30,
1996. The effective tax rates for 1996 are higher than the effective rates for
the comparable periods of 1995 as a result of the Company's current estimate of
the deferred tax asset believed more likely than not to be realized.
SFAS No. 109, "Accounting for Income Taxes," requires a valuation
allowance when it is "more likely than not that some portion or all of the
deferred tax assets will not be realized." It further states that "forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years." The ultimate
realization of its deferred income tax asset depends on the Company's ability
to generate sufficient taxable income in the future. The Company has weighed
the negative objective evidence of recent results and dependence upon limited
number of customers, as well as other risk factors on the one hand, and the
positive subjective evidence of future expectations, on the other hand, and has
concluded that retaining a portion of the valuation allowance is appropriate.
In estimating the amount of its realizable deferred tax asset, the
Company gives substantial weight to recent historical results. Significant
changes in circumstances or in enacted tax laws which affect the valuation
allowance are recorded when they occur. The Company's annual strategic business
planning process takes place in the fourth quarter of the year, and the
valuation allowance is adjusted for future years' income expectations resulting
from that process. When preparing subsequent interim and annual financial
statements, the Company reevaluates whether there has been any significant
change in the assumptions underlying its plan and adjusts the valuation
allowance as necessary.
Liquidity and Capital Resources
The Company has funded its operations in recent years primarily through
cash generated from operations and the use of cash reserves. In 1995 the
Company also funded its operations in part through borrowing under available
lines of credit and through the net proceeds of the initial public offering of
its Common Stock consummated in December 1995.
During the first six months of 1996 the Company had a net cash increase
of $388,000 on increases in cash from operating activities.
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10
The Company experienced growth in revenue earned but not yet billed, and
consequently an increase in the number of days' revenue in accounts receivable
for the quarter ended June 30, 1996. Invoicing of amounts to clients generally
occurs within 45 days of time and materials cost incurrence, unless a specific
schedule is agreed upon, and payment follows invoicing in accordance with
customary terms. The Company has not experienced any significant write-downs of
receivables, nor does the Company expect that payments are doubtful;
accordingly, the Company has not made any allowance for doubtful accounts.
Advance billings and deferred revenue remain relatively unchanged at
June 30, 1996 when compared to December 31, 1995. Advanced billings and
deferred revenue balances normally will change from period to period. Any
increase would reflect billings in advance of revenue earned, but which were
billed in accordance with established or agreed billings schedules. These
amounts are recorded as deferred revenue until earned. The timing and magnitude
of such advance billings vary from contract to contract and from client to
client.
The Company had a committed line of credit agreement in the amount of
$3.0 million in place with PNC Bank, N.A. (the "Bank"), and a discretionary
line of credit agreement in the amount of $500,000 in place with the Bank, both
of which were scheduled to expire on June 30, 1996. No borrowings were
outstanding against the committed line of credit or the discretionary line of
credit at June 30, 1996 and December 31, 1995. Effective July 1, 1996, the
agreement was amended by extending the expiration date from June 30, 1996 to
June 29, 1997 and increasing the committed line to $3.5 million while
eliminating the $500,000 discretionary amount. Borrowings under this agreement
are collateralized by accounts receivable. This line of credit bears interest
at the Bank's prime interest rate and the Bank charges a 0.15% fee per annum on
the unused portion of that line of credit. The Bank's prime interest rate at
June 30, 1996 was 8 1/4% compared to 8 1/2% at December 31, 1995.
The Company believes that the net proceeds from the sale of Common Stock
in the Company's initial public offering, together with cash balances, cash
generated from operations and borrowing available under its line of credit,
will satisfy the Company's working capital and capital expenditure requirements
during fiscal year 1996 and the foreseeable period thereafter. In the longer
term, the Company may require additional sources of liquidity to fund future
growth. Such sources of liquidity may include additional equity offerings or
debt financings. Capital expenditures are typically made for computing
equipment, software, physical plant, and furniture and fixtures in order to
seek enhancements in the productivity of the Company's employees and to support
growth.
In the normal course of business, the Company evaluates acquisitions of
businesses, products and technologies that complement the Company's business.
The Company has no present plans, intentions, understandings, commitments or
agreements, nor is it currently engaged in any negotiations, with respect to
any such transaction. However, the Company may acquire businesses, products or
technologies in the future.
To the extent that any written or oral statement made by the Company,
including statements made herein, are deemed to be forward looking statements,
reference is made to the factors beginning on page 27 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, as filed with the
Securities and Exchange Commission, as important factors that could cause
actual results to differ materially from those in any such forward looking
statements.
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PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 14, 1996, the Company held its 1996 Annual Meeting of Stockholders.
(b) Not applicable
(c) The following matters were voted upon at the Annual Meeting, with the
results indicated:
1. Election of Class I Directors
Authority Broker
Votes For Withheld Non-Votes
--------- --------- ---------
Dennis Yablonsky 4,812,939 5,850 0
Raj Reddy 4,812,939 5,850 0
Glen Chatfield 4,812,939 5,850 0
2. Proposal to ratify the selection of Price Waterhouse LLP,
independent accountants, to audit the books and accounts of
the Company for the year ending December 31, 1996.
Votes for: 4,809,014 Votes against: 4,300
Abstentions: 5,475 Broker Non-Votes 0
(d) Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits Description
3.1 Restated Certificate of Incorporation (incorporated by reference to
exhibit 3.01 of the Company's Registration Statement on Form S-1, file
No. 33-97118).
3.2 Amended and Restated By Laws (incorporated by reference to exhibit
3.02 of the Company's Registration Statement on Form S-1, File No.
33-97111).
27 Financial Data Schedule
Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 14, 1996 CARNEGIE GROUP, INC.
/s/ DENNIS YABLONSKY
------------------------
Dennis Yablonsky
President, and
Chief Executive Officer
/s/ JOHN W. MANZETTI
------------------------
John W. Manzetti
Executive Vice President,
Chief Financial Officer
and Treasurer
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EXHIBIT INDEX
Sequential
Exhibit No. Description page number
27 Financial Data Schedule
13