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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
(Amendment No. 2)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO 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
(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) (Zip Code)
Issuer's telephone number: (650)424-0500
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value per share
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $11,094,930
The aggregate market value of Common Stock, $.01 par value per share, held by
non-affiliates of the registrant was $18,018,715 on March 23, 1998 (based on the
average bid and ask price per share of Common Stock on that date as reported
over-the-counter by the National Quotation Bureau). Shares of Common Stock held
by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 23, 1998, there were 24,082,714 shares of Common Stock, $.01 par value
per share, of the registrant outstanding.
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Part III is replaced in its entirety as follows:
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PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 15(a) of the Exchange Act
Directors
The Board of Directors currently consists of six members: Dr. Frederick
Hayes-Roth, Neil A. Jacobstein, Dr. Larry E. Druffel, General Robert T. Marsh
(Ret.), William G. Roth, and James C. Workman. The Board of Directors is
comprised of three classes of directors, each class representing one-third of
the Board, with one class of the Board being elected each year. At each Annual
Meeting thereafter, any director of the class whose term is expiring would be
voted upon, and upon election, such director would serve a three-year term. At
the 1996 Annual Meeting, Neil Jacobstein and William G. Roth were elected as
Class II directors to serve a three-year term. At the 1997 Annual Meeting,
General Marsh (Ret.) and Dr. Hayes-Roth were elected as Class III directors to
serve a three-year term. At the 1998 Annual Meeting, Dr. Larry E. Druffel and
James C. Workman, as Class I directors, are proposed to be elected to hold
office for a three-year term until their successors are duly elected and
qualified.
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Positions Director
Name Age With the Company Since
Class I Directors nominated for election at the 1998 Annual Meeting
Dr. Larry E. Druffel 57 Director 1997
James C. Workman 55 Director 1993
Class II Directors whose terms expire at the 1999 Annual Meeting
Neil A. Jacobstein 43 President and 1993
Chief Operating Officer
William G. Roth 59 Director 1991
Class III Directors whose terms expire at the 2000 Annual Meeting
Dr. Frederick Hayes-Roth 50 Chairman of the Board and 1993
Chief Executive Officer
Gen. Robert T. Marsh 73 Director 1987
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Class I Nominees for a Term Expiring in 2001
The nominees for election have indicated a willingness to serve, but if
either should decline or be unable to serve as a Class I director, the proxy
holders will vote for the election of another substitute nominee as the Board of
Directors recommends.
Dr. Larry E. Druffel. Dr. Druffel, 57, was appointed to the Board of
Directors in May 1997. He is currently President and Director of the South
Carolina Research Authority (SCRA), a public non-profit organization since 1996.
He holds a doctorate degree in computer science from Vanderbilt University and a
master degree in computer science from the University of London, and was a
director of the Software Engineering Institute at Carnegie-Mellon University
from 1986 to 1996. He has also served as the Director of Computer Software and
Systems, Office of Deputy Undersecretary of Defense for Research and Advanced
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Technology, Washington, DC. Dr. Druffel was a former Vice President of Rational
Software from 1983 to 1986, and he has served on the faculty of the USAF
Academy. Dr. Druffel is the author of numerous books and papers on
high-technology issues.
James C. Workman. Mr. Workman, 55, was appointed Chairman of the Board,
Chief Executive Officer, and President of the Company on an interim basis
effective October 20, 1992. With the appointment of Dr. Hayes-Roth and Mr.
Jacobstein to executive positions on January 26, 1993, Mr. Workman resigned from
his interim executive officer position but retained a seat on the Board. Mr.
Workman has served as a self-employed attorney/consultant since leaving American
Standard Inc. in 1989 where he was Senior Vice President, Air Conditioning
Products.
Continuing Class II Directors for a Term Expiring in 1999
Neil A. Jacobstein. Mr. Jacobstein, 43, is President and Chief Operating
Officer of the Company. Mr. Jacobstein was elected to these positions and became
a director of the Company in January 1993. After joining Teknowledge, Inc. in
1984 as a Knowledge Engineer, Mr. Jacobstein was promoted to Senior Knowledge
Engineer and later to the position of Manager of the Research and Advanced
Development Group in 1985. He was promoted to Vice President and General Manager
of the Research and Advanced Systems Development Group in 1987 and became Vice
President and General Manager of the Knowledge Systems Division in 1989. Mr.
Jacobstein also serves as the Chairman of the Board of Directors of the
Institute for Molecular Manufacturing, a nonprofit organization.
William G. Roth. Mr. Roth, 59, was elected as a director of the Company in
January 1991. Mr. Roth retired as Chairman of the Board of Directors of Dravo
Corporation in 1994 after holding that position since 1989. Since his retirement
in 1994, Mr. Roth continues to serve as a member of the Board of Dravo
Corporation and the Company. Mr. Roth is also a director of Amcast Industrial
Corporation and Service Experts Incorporated, and Chairman of the Company's
Human Resources Committee.
Continuing Class III Directors for a Term Expiring in 2000
Dr. Frederick Hayes-Roth. Dr. Hayes-Roth, 50, is Chairman of the Board and
Chief Executive Officer of the Company. Dr. Hayes-Roth was elected Chairman and
Chief Executive Officer of the Company in January 1993. Dr. Hayes-Roth joined
Teknowledge, Inc. in November 1981 as Executive Vice President and served as
Chief Scientist and Vice President of the Research and Advanced Development
Group from April 1985 to June 1986; as Vice President, Research and New Product
Development, from June 1986 to January 1987; as Executive Vice President,
Research and Advanced Systems Development from January 1987 to May 1988; and as
Executive Vice President and Chief Scientist from May 1988 to January 1993.
General Robert T. Marsh. General Marsh (Retired), 73, was elected a
director of American Cimflex Corporation (a predecessor to the Company) in 1987.
He retired as Chairman of the Board of Thiokol Corporation in 1991. Since 1995
he has served as Executive Director of the Air Force Aid Society, a non-profit
charitable organization serving the Air Force community, and he is the former
Chairman of the President's Commission on Critical Infrastructure Protection.
General Marsh is Director and Chairman of the Board of CAE Electronics, Inc. and
Comverse Government Systems, Inc. He is also a member of the Board of Trustees
of MITRE Corporation. General Marsh is Chairman of the Company's Finance and
Audit Committee.
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Executive Officers
Following is certain information regarding the Company's other executive
officer who is not a member of the Board of Directors.
Dennis A. Bugbee, 51, is Director of Finance, Treasurer, and Secretary for
the Company. Mr. Bugbee joined the Company in 1990 as the Division Controller
for the Knowledge Systems Division in Palo Alto, California. He was promoted to
Director of Finance March 1, 1993 and shortly thereafter to the positions of
Treasurer and Corporate Secretary. Prior to joining the Company, Mr. Bugbee held
the position of Accounting Manager with TRW's Space and Defense sector.
Item 10. Executive Compensation
The following table sets forth the cash compensation paid to the Chief
Executive Officer and to each of the two most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 for all
services to the Company in the years ended December 31, 1997, 1996, and 1995.
SUMMARY COMPENSATION TABLE
Annual
Compensation (3)
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Name and Principal Position Year Salary Bonus
$(1) $(2)
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Frederick Hayes-Roth, Chair, CEO 1997 208,084 96,769
Frederick Hayes-Roth, Chair, CEO 1996 196,388 128,639
Frederick Hayes-Roth, Chair, CEO 1995 181,352 68,403
Neil Jacobstein, Pres, COO 1997 134,692 63,664
Neil Jacobstein, Pres, COO 1996 128,468 84,330
Neil Jacobstein, Pres, COO 1995 118,000 44,842
Dennis Bugbee, Dir. of Finance 1997 98,635 7,500
Dennis Bugbee, Dir. of Finance 1996 93,842 5,000
Dennis Bugbee, Dir. of Finance 1995 90,700 5,000
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(1) Includes 401(k) deferred compensation and Company matching provision.
(2) The bonuses set forth in this column are generally paid after the conclusion
of the annual audit following the year to which they relate.
(3) No options were granted to executive officers in 1997, 1996, or 1995.
Stock Option Grants and Exercises
The following tables set forth information regarding the value of options
held by the Chief Executive Officer and the other highly paid executive officers
named in the Summary Compensation Table at December 31, 1997. Dr. Hayes-Roth,
Mr. Jacobstein, and Mr. Bugbee were not granted options in 1997. Dr. Hayes-Roth
and Mr. Bugbee exercised options in 1997 for a total of 106,400 and 45,228
shares, respectively. Dr. Hayes-Roth and Mr. Jacobstein were each granted
options to purchase 2,252,880 shares of Common Stock in 1994, 2,002,880 of which
vested in equal quarterly increments of 250,360 shares over a two-year period
commencing September 30, 1994 and ending June 30, 1996.
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AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
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Value of
Number of Unexercised
Securities In-the-Money
Shares Underlying Options
Acquired Value Unexercised at FYE
Name on Realized Options at FYE (Exercisable/
Exercise (1) (Exercisable/ Unexercisable)
(#) Unexercisable) (2)
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Frederick Hayes-Roth, 106,400 $53,200 1,731,480/- $785,481/-
Chair, CEO
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Neil Jacobstein, Pres, COO - - 2,032,880/- $928,525/-
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Dennis Bugbee, Dir. of 45,228 $16,889 25,000/6,250 $11,500/$2,875
Finance
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(1) The value realized upon exercise is the difference between the exercise
price and the bid price at the close of business on the date the stock is
exercised.
(2) The value of unexercised in-the-money options is determined by multiplying
the number of shares under the option by the difference between the
December 31, 1997 bid price of $.49 and the grant price. Of the options
granted to executives since the inception of the Plan, only the options
granted in 1990 or later were in the money for a total of 3,795,610
shares. Dr. Hayes-Roth has 112,119 shares and Mr. Jacobstein has 38,192
shares that are exercisable but not-in-the-money at exercise prices from
$2.45 to $3.53 per share.
Directors Compensation
Directors Fees. Each non-employee member of the Board of Directors
receives cash compensation totaling $10,000, which is paid in quarterly
increments. While working on the President's Commission, Gen. Marsh did not
receive compensation. In addition to their regular compensation, directors are
entitled to be reimbursed for related travel, lodging and other expenses in
attending board and committee meetings.
Directors Option Plan. The Company maintains a stock option plan for
non-employee directors. The Directors Option Plan, as amended at the 1995 Annual
Meeting of Stockholders, provides that each Eligible Director shall be granted,
on the date such director becomes an Eligible Director, an initial option to
purchase 15,000 shares of Common Stock, and on the date of each annual meeting
thereafter, each continuing Eligible Director shall be granted an additional
option to purchase 15,000 shares of Common Stock. Options to purchase 190,000
shares of Common Stock have been granted since the inception of the Directors
Option Plan and 60,000 shares remain to be granted. An amendment to increase the
number of shares authorized under the Plan from 250,000 to 500,000 shares will
be considered and voted upon at the 1998 Annual Meeting of the Stockholders as
presented herein.
Employment Arrangements
Frederick Hayes-Roth, Chief Scientist, Chairman of the Board, and Chief
Executive Officer, and Neil Jacobstein, President and Chief Operating Officer,
each has an employment agreement with the Company that provides for annual base
salaries of $222,000 and $146,000, respectively. Each executive is also eligible
for severance benefits for a one-year period. The 1998 Agreement, dated December
17, 1997, includes an incentive compensation plan with target objectives
established in the five strategic categories of cash flow, profitability,
bookings, E-Commerce business products and services, and stock appreciation,
which were determined and assessed by the Board of Directors to a maximum of
100% of base salary.
The Company entered into a change of control agreement with Dr. Hayes-Roth
and Mr. Jacobstein on November 21, 1994. The agreement provides that in the
event of a change of control, which is defined in the agreement as any
consolidation or merger of the Company in which the Company is not the
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continuing or surviving corporation, Dr. Hayes-Roth and Mr. Jacobstein will be
entitled to receive severance benefits which include: (i) full accrued salaries
and vacation pay, (ii) accrued incentive compensation awarded or determined to
be awarded by the Board of Directors, (iii) insurance coverage, (iv) retirement
benefits, and (v) a lump sum severance payment equal to two times of their most
recent respective annual salary.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the
beneficial ownership of Common Stock as of April 27, 1998 by persons known to
the Company to own beneficially more than 5% of the Common Stock, by each of the
directors of the Company, by each of the executive officers named in the Summary
Compensation Table, and by all directors and executive officers of the Company
as a group.
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Name and Address of Common Stock Owned
Beneficial Owner Beneficially Percent of Class
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Mark J. Hanna 1,338,039(2) 5.6%
327 Plaza Real, Suite 319
Boca Raton, FL 33432
Dennis A. Bugbee(1) 230,912(3) *
Larry E. Druffel(1) 15,000(4) *
Frederick Hayes-Roth(1) 3,446,381(5) 13.2%
Neil A. Jacobstein(1) 3,352,516(6) 12.9%
Robert T. Marsh(1) 71,000(7) *
William G. Roth(1) 110,000(8) *
James C. Workman(1) 65,000(9) *
All Directors and Executive 7,290,809(10) 25.9%
Officers of the Company as a
Group (7 Persons)
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* constitutes less than 1%
(1) The address of all directors and executive officers is the Company's
Executive Offices located at 1810 Embarcadero Road, Palo Alto, California
94303.
(2) The information concerning the Common Stock owned beneficially by Mark J.
Hanna was obtained from a Schedule 13D filed with the Securities and
Exchange Commission on August 29, 1997.
(3) Includes 31,250 shares which may be purchased upon the exercise of
employee stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998.
(4) Includes 15,000 shares which may be purchased upon the exercise of
director stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998.
(5) Includes 1,843,599 shares which may be purchased upon the exercise of
employee stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998.
(6) Includes 2,071,072 shares which may be purchased upon the exercise of
employee stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998.
(7) Includes 71,000 shares which may be purchased upon the exercise of
director stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998.
(8) Includes 40,000 shares which may be purchased upon the exercise of
director stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998.
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(9) Includes 45,000 shares which may be purchased upon the exercise of
director stock options that are currently exercisable or will become
exercisable within 60 days of April 27, 1998. Mr. Workman's spouse owns
20,000 shares beneficially.
(10) Includes options for 4,116,921 shares which are currently exercisable or
will become exercisable within 60 days of April 27, 1998.
Item 12. Certain Relationships and Related Transactions
On May 15, 1997, the Company and Trilogy Development Group, Inc.
("Trilogy") agreed to a settlement of all outstanding lawsuits and debts between
the companies. Prior to the settlement, Trilogy owned 3,223,453 shares of Common
stock or 12.3% of the Company. Pursuant to the Settlement Agreement, License
Agreement, and Mutual Release, the Company immediately granted to Trilogy a
non-exclusive, royalty-free license to the Company's United States Patent
4,591,983 in exchange for 2,338,969 shares of Company stock owned by Trilogy,
which the Company valued at $1,005,000, and $400,000 in cash. The Agreement also
provided for the transfer of certain proxy rights to the Company and other
consideration, including the orderly disposal of Trilogy's remaining stock
ownership of approximately 900,000 shares in open market transactions through
May 14, 1998.
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Teknowledge Corporation
Date: May 6, 1998 By: /s/ Frederick Hayes-Roth
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Frederick Hayes-Roth
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Capacity Date
/s/ Frederick Hayes-Roth Chairman of the Board May 6, 1998
- --------------------------- of Directors and
Frederick Hayes-Roth Chief Executive Officer
(Principal Executive
Officer)
/s/ Neil A. Jacobstein President, Chief Operating May 6, 1998
- --------------------------- Officer and Director
Neil A. Jacobstein
/s/ Dennis A. Bugbee Director of Finance, May 6, 1998
- --------------------------- Treasurer and Secretary
Dennis A. Bugbee (Principal Financial and
Accounting Officer)
/s/ Lawrence Druffel Director May 6, 1998
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Lawrence Druffel
/s/ General Robert T. Marsh Director May 6, 1998
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General Robert T. Marsh
/s/ William G. Roth Director May 6, 1998
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William G. Roth
/s/ James C. Workman Director May 6, 1998
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James C. Workman
