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FORM 10-Q/A
AMENDMENT NO. 1
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 September 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
Carnegie Group, Inc.
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 October 31, 1996
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Common Stock, $.01 par value 6,261,235
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FORM 10-Q/A
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 nine months ended September 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
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
----------------------- ----------------------
Revenue
Software services--Unrelated parties $5,317,571 $5,489,125 $18,396,585 $15,245,338
Software services--Related parties 793,347 537,165 $2,038,273 2,693,631
---------- ---------- ----------- -----------
Total software services 6,110,918 6,026,290 20,434,858 17,938,969
Software licenses 398,351 361,391 1,061,112 1,121,997
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Total revenue 6,509,269 6,387,681 21,495,970 19,060,966
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Costs and expenses:
Cost of revenue - Unrelated parties 3,454,845 3,303,375 12,064,410 9,869,843
Cost of revenue - Related parties 507,078 353,060 1,282,354 1,396,620
---------- ---------- ----------- -----------
Total cost of revenue 3,961,923 3,656,435 13,346,764 11,266,463
Research and development 346,868 146,590 814,158 471,779
Selling, general and administrative 1,671,435 1,908,493 5,822,321 5,262,094
---------- ---------- ----------- -----------
Total costs and expenses 5,980,226 5,711,518 19,983,243 17,000,336
---------- ---------- ----------- -----------
Income from operations 529,043 676,163 1,512,727 2,060,630
Other income (expense):
Interest income 153,011 2,086 451,701 8,922
Other income 7,931 7,099 20,729 17,547
Interest expense (4,262) (18,496) (13,683) (49,613)
---------- ---------- ----------- -----------
Total other income (expense) 156,680 (9,311) 458,747 (23,144)
---------- ---------- ----------- -----------
Income before income taxes 685,723 666,852 1,971,474 2,037,486
Income tax provision (276,215) (117,266) (757,958) (358,361)
---------- ---------- ----------- -----------
Net income $ 409,508 $ 549,586 $ 1,213,516 $ 1,679,125
---------- ---------- ----------- -----------
Earnings per share of common stock $ 0.06 $ 0.10 $ 0.17 $ 0.30
========== ========== =========== ===========
Weighted average number of common shares
outstanding 6,971,076 5,591,687 7,120,084 5,591,687
========== ========== =========== ===========
The accompanying note is an integral part of these financial statements.
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CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $14,195,872 $12,394,588
Accounts receivable 2,380,699 5,131,922
Accounts receivable from related parties 786,837 76,296
Accounts receivable--unbilled 3,268,229 2,048,609
Accounts receivable related parties--unbilled 370,269 87,690
Deferred income taxes 952,517 1,222,061
Other current assets 262,899 397,883
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Total current assets 22,217,322 21,359,049
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Property and equipment, net of accumulated depreciation
and amortization 2,054,367 1,812,894
Deferred income taxes 1,387,384 1,779,792
Other assets 27,731 36,900
----------- -----------
Total assets $25,686,804 $24,988,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 539,068 $ 1,107,592
Payables to related parties 929,901 967,673
Accrued compensation 918,669 1,130,479
Advance billings and deferred revenue 613,522 537,541
Accrued rent 573,398 626,253
Other accrued liabilities 692,144 801,544
Obligations under capital leases--current portion 47,452 48,691
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Total current liabilities 4,314,154 5,219,773
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Obligations under capital leases--noncurrent portion - 39,671
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Total liabilities 4,314,154 5,259,444
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized, 6,489,315 and
6,386,200 shares issued at September 30, 1996
and December 31, 1995 respectively 64,893 63,862
Capital in excess of par value 31,265,229 30,836,317
Accumulated deficit (9,482,472) (10,695,988)
Treasury stock, 190,000 shares at September 30, 1996 and
December 31, 1995 (at cost) (475,000) (475,000)
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Total stockholders' equity 21,372,650 19,729,191
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Total liabilities and stockholders' equity $25,686,804 $24,988,635
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The accompanying note is an integral part of these financial statements.
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CARNEGIE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
---------------------------------------
September 30, September 30,
1996 1995
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Cash flows from operating activities:
Net income $ 1,213,516 $ 1,679,125
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 698,989 501,539
Deferred income taxes 661,952 229,731
Changes in working capital component:
Accounts receivable 1,531,603 (4,554,426)
Accounts receivable - Related parties (993,120) 1,193,549
Other assets 144,153 (257,352)
Trade accounts payable (568,524) (223,881)
Payables to related parties (37,772) 509,244
Accrued compensation (211,810) (1,609)
Accrued rent (52,855) (132,525)
Other accrued liabilities 68,927 375,507
Advance billings and deferred revenue 75,981 (499,466)
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Net cash (used in) provided by operating
activities 2,531,040 (1,180,564)
Cash flows from investing activities:
Proceeds from the sale of fixed assets, net -- --
Capital expenditures (940,464) (857,423)
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Net cash used in investing activities (940,464) (857,423)
Cash flows from financing activities:
Borrowings on line of credit -- 2,750,271
Repayments on line of credit -- (1,795,917)
Principal payments under capital lease obligations (40,909) (37,418)
Proceeds from sales of common stock, net 251,617 231,647
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Net cash provided by financing
activities 210,708 1,148,583
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Net change in cash and cash equivalents 1,801,284 (889,404)
Cash and cash equivalents:
Beginning of period 12,394,588 915,237
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End of period $14,195,872 $ 25,833
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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
nine month periods ended September 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/A 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
user-centered software solutions in two business areas: customer interaction
and logistics, planning, and scheduling. The Company's client/server systems
integrate advanced software technologies with clients' existing computing
infrastructures to automate and enhance complex business processes. The Company
targets its services to clients in the telecommunications, financial services,
manufacturing, government 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 September 30, 1996 decreased to $11.6 million, compared to
$15.1 million at June 30, 1996 and $10.3 million at September 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER
30, 1995.
Revenue. Total revenue for the quarter ended September 30, 1996 was
$6.5 million compared to $6.4 million for the quarter ended September 30, 1995,
an increase of $.1 million or 1.9%. For the nine months ended September 30,
1996 revenue was $21.5 million compared to $19.1 million for the nine months
ended September 30, 1995, an increase of $2.4 million or 12.8%. This growth
resulted principally from volume increases in sales of software services.
Total software services revenue for the quarter ended September 30,
1996 was $6.1 million compared to $6.0 million for the quarter ended September
30, 1995, an increase of $.1 million or 1.4%. Software services revenue was
$20.4 million for the nine months ended September 30, 1996 compared to $17.9
million for the nine months ended September 30, 1995, an increase of $2.5
million or 13.9% 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 $18.4 million for the nine months ended
September 30, 1996 compared to $15.2 million for the nine months ended
September 30, 1995. Revenue from software services-related parties was $2.0
million for the nine months ended September 30, 1996 compared to $2.7 million
for the nine months ended September 30, 1995, a decrease of $.7 million or
24.3%. This decrease was primarily due to the completion of customer contact
engagements for a telecommunications industry client. Also, results for the
third quarter and the first nine 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 $398,000 for the three month period
ended September 30, 1996, compared to $361,000 for the same three month period
in 1995, an increase of $37,000 or 10.2%. Revenue from software licenses was
$1,061,000 for the nine months ended September 30, 1996 compared to $1,122,000
for the nine months ended September 30, 1995, a decrease of $61,000 or 5.4%.
The decrease was due to the fact that the sales of reusable software templates
to a telecommunications industry client in 1995 did not reoccur in the first
nine 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 third quarter of 1996, total cost of
revenue was $4.0 million compared to $3.7 million for the third quarter of
1995, an increase of $.3 million or 8.4%. For the nine months ended September
30, 1996, total cost of revenue was $13.4 million compared to $11.3 million for
the nine months ended September 30, 1995, an increase of $2.1 million or 18.5%.
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 $1.3 million for the nine months ended September
30, 1996 compared to $1.4 million for the nine months ended September 30, 1995,
a decrease of $.1 million or 8.2%. Cost of revenue-unrelated parties during the
same nine month period was $12.1 million compared to $9.9 million for the nine
month period ended September 30, 1995, an increase of $2.2 million or 22.2%.
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. Also, as mentioned earlier, the increased revenue from
software services-unrelated parties for the extension of a logistics planning
and scheduling engagement for a defense industry client required an increase in
associated costs.
Research and Development. Research and development expenses for the
quarter ended September 30, 1996 were $347,000 compared to $147,000 for the
third quarter of 1995, an increase of $200,000 or 136.6%. For the nine months
ended September 30, 1996 research and development expenses were $814,000
compared to $472,000 for the nine months ended September 30, 1995, an increase
of $342,000 or 72.6%. These increases were primarily due to development of
various templates for the services areas of the business.
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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 third quarter of
1996, selling, general and administrative expenses were $1.6 million compared
to $1.9 million for the third quarter of 1995, a decrease of $.3 million or
12.4%. This decrease was primarily due to lower expense accruals for
performance-based incentive compensation. Selling, general and administrative
expenses for the nine months ended September 30, 1996 were $5.8 million
compared to $5.3 million for the nine months ended September 30, 1995, an
increase of $.5 million or 10.7%. 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 decreased slightly from 27.6% for the nine months ended
September 30, 1995 to 27.1% in 1996.
Other Income (Expense). Total other income for the third quarter of
1996 was $157,000 compared to total other expense of $10,000 in 1995, an
increase of $167,000 or 1,682.7%. For the nine months ended September 30, 1996,
total other income was $459,000 compared to total other expense of $23,000 in
1995 an increase of $482,000 or 1,982.2%. 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 $276,000 was recorded
for the third quarter of 1996 and $758,000 for the nine months ended September
30, 1996 compared to $118,000 and $359,000 respectively for the quarter and
nine months ended September 30, 1995. The effective tax rates for 1996 are
higher than the effective rates for the comparable periods of 1995, due
principally to changes in estimates of the realization of deferred tax assets
related to the Company's net operating loss carryforwards in accordance with
Accounting Standard No. 109.
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
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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 nine months of 1996 the Company had a net cash
increase of $1,801,000 on increases in cash from operating activities.
The Company experienced growth in revenue earned but not yet billed for
the quarter ended September 30, 1996. Due to strong collection efforts,
receivables billed and collected have decreased. The net change of all accounts
receivable was a decrease of $538,000 for the quarter. 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 at September 30, 1996 increased
$76,000 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 has a committed line of credit agreement in the amount of
$3.5 million in place with PNC Bank, N.A. (the "Bank"). No borrowings were
outstanding against the committed line of credit at September 30, 1996 and
December 31, 1995. 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 September 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 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed below are filed or incorporated by reference as part of
this quarterly report on Form 10-Q:
3.1 Restricted Certificate of Incorporation of Carnegie Group, Inc.
(Incorporated by reference to Exhibit 3.01 to the Company's
Registration Statement on Form S-1, File No. 33-97118).
3.2 Amended and restated By-Laws of Carnegie Group, Inc.
(Incorporated by reference to Exhibit 3.02 to the Company's
Registration Statement on Form S-1, File No. 33-97118).
10.1 Development Agreement, dated as of July 1, 1996, by and between
US WEST Business Resources, Inc., US WEST Communications, Inc.
and Carnegie Group, Inc. Confidential treatment with respect to
certified information in this Exhibit has been requested of the
Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
11.1 Statement regarding computation of Per Share Earnings.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 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 Amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 18, 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
- ----------- ----------- -----------
3.1 Restricted Certificate of Incorporation of Carnegie Group, Inc.
(Incorporated by reference to Exhibit 3.01 to the Company's
Registration Statement on Form S-1, File No. 33-97118).
3.2 Amended and restated By-Laws of Carnegie Group, Inc.
(Incorporated by reference to Exhibit 3.02 to the Company's
Registration Statement on Form S-1, File No. 33-97118).
10.1 Development Agreement, dated as of July 1, 1996, by and between
US WEST Business Resources, Inc., US WEST Communications, Inc.
and Carnegie Group, Inc. Confidential treatment with respect to
certified information in this Exhibit has been requested of the
Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
11.1 Statement regarding computation of Per Share Earnings.
27.1 Financial Data Schedule