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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] 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)
(650) 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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at July 14, 1999
---------------------------- -------------------------------
Common Stock, $.01 par value 4,949,187 Shares
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2
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998...................................... 3
Consolidated Statements of Operations and Comprehensive
Income for the three months and six months ended
June 30, 1999 and 1998..................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998............................... 5
Notes to Unaudited Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. ................................ 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........ 12
Item 6. Exhibits and Reports on Form 8-K........................... 12
Signatures................................................................ 14
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3
PART I. FINANCIAL INFORMATION
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Item 1. FINANCIAL STATEMENTS
TEKNOWLEDGE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,777,051 $ 2,378,390
------------- ------------
Receivables:
Customer - billed, net of allowance of $10,000 1,640,005 2,471,242
Customer - unbilled 759,666 62,541
------------- ------------
Total receivables 2,399,671 2,533,783
------------- ------------
Deferred tax asset, short-term 400,000 400,000
Deposits and prepaid expenses 110,066 116,255
------------- ------------
Total current assets 5,686,788 5,428,428
------------- ------------
Capitalized software development costs, net of accumulated
amortization of $58,024 and $11,562, respectively 273,587 267,206
------------- ------------
Fixed assets, at cost
Computer and other equipment 2,978,755 2,939,274
Furniture and fixtures 112,647 112,647
Leasehold improvements 838,398 838,398
------------- ------------
3,929,800 3,890,319
Less accumulated depreciation and amortization (3,525,572) (3,385,942)
------------- ------------
404,228 504,377
------------- ------------
Deferred tax asset, long-term 500,000 500,000
------------- ------------
Total assets $ 6,864,603 $ 6,700,011
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 649,165 $ 661,321
Payroll and related liabilities 588,798 678,514
Other accrued liabilities 91,265 267,863
------------- ------------
Total current liabilities 1,329,228 1,607,698
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized 2,500,000
shares, Series A, Convertible, none issued - -
Common stock, $.01 par value, authorized 25,000,000
shares, issued and outstanding 4,945,937 shares 49,882 49,550
Additional paid-in capital 1,798,545 1,553,980
Retained earnings since January 1, 1993
(following quasi-reorganization) 3,778,907 3,488,783
Treasury stock, 20,870 and 0 shares at June 30, 1999
and December 31, 1998, respectively (91,959) -
------------- ------------
Total stockholders' equity 5,535,375 5,092,313
------------- ------------
Total liabilities and stockholders' equity $ 6,864,603 $ 6,700,011
============= ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $ 2,776,623 $ 3,080,854 $ 5,567,267 $ 6,150,784
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Cost of revenues 1,661,290 1,982,868 * 3,316,397 3,950,618 *
General and administrative 656,158 559,685 1,285,977 1,165,350
Sales and marketing 136,819 284,606 * 267,496 396,067 *
Research and development 118,282 103,907 * 266,958 286,102 *
---------------- ---------------- ---------------- ----------------
Total costs and expenses 2,572,549 2,931,066 5,136,828 5,798,137
---------------- ---------------- ---------------- ----------------
Operating income 204,074 149,788 430,439 352,647
Interest income 26,891 21,341 53,100 45,489
---------------- ---------------- ---------------- ----------------
Income before tax 230,965 171,129 483,539 398,136
Provision (benefit) for income tax 92,385 (14,452) 193,415 (7,252)
---------------- ---------------- ---------------- ----------------
Net income $ 138,580 $ 185,581 $ 290,124 $ 405,388
================ ================ ================ ================
Net income per share:
- Basic $ 0.03 $ 0.04 $ 0.06 $ 0.08
================ ================ ================ ================
- Diluted $ 0.02 $ 0.03 $ 0.05 $ 0.07
================ ================ ================ ================
Shares used in computing
net income per share:
- Basic 4,975,963 4,869,514 4,968,566 4,846,706
================ ================ ================ ================
- Diluted 5,888,550 5,812,332 5,904,116 5,728,512
================ ================ ================ ================
* Amounts were reclassified to conform to current presentation.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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5
TEKNOWLEDGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
6 Months Ended June 30,
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $ 290,124 $ 405,388
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 186,092 150,913
Noncash portion of income tax provision 93,104 -
Changes in assets and liabilities:
Receivables 134,112 (433,795)
Deposits and prepaid expenses 6,189 (6,363)
Accounts payable (12,156) (136,561)
Accrued liabilities (266,315) (158,032)
---------- -----------
Net cash provided by (used for) operating activities 431,150 (178,450)
---------- -----------
Cash flows from investing activities:
Capitalization of software development costs (52,842) -
Purchase of fixed assets (39,481) (154,077)
---------- -----------
Net cash used for investing activities (92,323) (154,077)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 151,793 52,773
Repurchase of common stock (91,959) -
---------- -----------
Net cash provided by financing activities 59,835 52,773
---------- -----------
Net increase (decrease) in cash and cash equivalents 398,661 (279,754)
Cash and cash equivalents at beginning of period 2,378,390 2,172,235
---------- -----------
Cash and cash equivalents at end of period $ 2,777,051 $ 1,892,481
========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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TEKNOWLEDGE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. Interim Statements
The unaudited consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not
misleading. These interim statements should be read in conjunction with
the financial statements and the notes thereto included in the
Company's annual report on Form 10-KSB for the fiscal year ended
December 31, 1998. 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
presented herein are not necessarily indicative of results that may be
achieved for the entire fiscal year ended December 31, 1999.
2. Net Income Per Share
Net income per share is calculated in accordance with the
provision of Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings per Share," adopted by the Company in the fourth quarter of
1997. SFAS No. 128 requires companies to compute net income per share
under two different methods, basic and diluted. Basic earning per share
is calculated by dividing net income by the weighted average shares of
common stock outstanding during the period. Diluted earning per share
is calculated by dividing net income by the weighted average shares of
outstanding common stock and common stock equivalents during the
period. Common stock equivalents consist of dilutive shares issuable
upon the exercise of outstanding common stock options.
3. Reverse Stock Split
The Company has effected a one-for-five reverse stock split on
December 22, 1998. All share and per share data has been retroactively
restated to reflect the effect of the reverse stock split. Since there
was no change in per share par value, aggregate par value has also been
retroactively adjusted to reflect the reduction in the number of common
stock.
4. Repurchase of Common Stock
On December 16, 1998, the Company has adopted a program to
repurchase up to 300,000 shares of the Company's common stock in the
open market or in private during the twelve-month period ending
December 15, 1999 at prevailing prices. Repurchases will be made
periodically at management discretion using the Company's own cash
reserves. As of June 30, 1999, the Company has used $91,959 to
repurchase 20,870 shares of the Company's common stock at an average
price of $4.41 a share. Shares repurchased may be reissued to employees
pursuant to the Company's stock option plans, or for other corporate
purposes.
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7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto.
Teknowledge Corporation (the "Company") is increasing its focus on the
expanding Internet software and services business. Virtually all of
Teknowledge's government and commercial projects involve processing application
knowledge and distributing customer solutions over the Internet. The Company is
implementing its strategy to move its primary customer base from defense R&D to
rapid-growth commercial applications. In 1998, the percentage of commercial
revenues was 1%. For the six months ended June 30, 1999, the percentage of
commercial business was 4%, and we expect that percentage to grow substantially.
Teknowledge has been investing in software product development and in training
its staff to deliver commercial 3rd party products. The Company is in the
process of converting the software technology and skills gained in the
government R&D business into commercial business. Teknowledge is investing
actively in methods to deploy its technology base directly, in web-based
services. Teknowledge's talented technical staff, its dual-purpose software
technology base, and the exploding E-Commerce marketmake this a viable strategy
with large potential.
Teknowledge's core competencies are in E-Commerce, web-based training,
information assurance, situation assessment, and distributed systems
engineering. These core competencies are complementary and inherently
"dual-use." They help Teknowledge integrate its own proprietary software and
third party products into a total system solution for customers in industry or
government. In the second quarter of 1999, Teknowledge began delivering a total
system solution to developing E-Commerce sites. The Teknowledge Information
Assurance security team in Washington provided the Check Point FireWall-1(TM)
security expertise. The Web-based Training team provided some of the recent
upgrades to Teknowledge's Sales Associate(TM) product. The E-Commerce team
supplied the IBM Net.Commerce(TM) E-commerce storefront expertise and the
component systems integration work. This type of web-enabled application system
supports the integration, processing, and systematic utilization of a customer's
knowledge assets to achieve its operational objectives. Teknowledge's business
now focuses on increasing its customer's quality, speed, and efficiency of
operations on the Internet.
The exponential increase in information flowing through the World Wide
Web has placed a premium on the ability to apply knowledge to enhance the value
of information. This trend leverages Teknowledge's expertise in knowledge
processing. Knowledge has become the key enabler to providing informed sales
advice on an E-Commerce web site as well as providing the individualized lessons
in Teknowledge's Courseware Factory project for Web-based training. This year
several staff members began dual assignments in Web-based training and
E-Commerce. These two groups began building a knowledge processing component
that can be used by web servers. Unlike the stand-alone expert system,
Internet-based knowledge systems enable new relationships between people and
computers in capturing, refining, distributing, and applying knowledge to solve
business application problems. Knowledge that was once held only by people can
now be processed consistently by a computer and distributed via a web server to
millions of customers 7 days a week, 24 hours a day. This type of "activated"
knowledge can also be used by Teknowledge's other groups, for example, to assess
situations rapidly in a crisis, defend web sites from attack, or ensure the
distribution of messages to the right people at the right time.
In the first half of 1999, Teknowledge continued to invest in its own
Sales Associate(TM) software that acts as an electronic sales agent for selling
products on Internet E-Commerce web sites. In order to facilitate the
opportunity to install Sales Associate(TM) on major web sites, Teknowledge has
also invested in the capability to provide total customer solutions for
E-Commerce web sites. This includes E-Commerce strategy, web design, storefront
server, firewall, and database delivery. Teknowledge has become a Premier
Provider for IBM's E-Commerce web-site storefront product called
Net.Commerce(TM), and a value-added reseller of Check Point's security
Firewall-1(TM) product. Teknowledge is now a Microsoft Certified Solution
Provider, which enables a closer coupling to the Microsoft NT platform for
component application solutions rather than being tied to Unix. Teknowledge's
customer base is expected to change significantly as E-Commerce related
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8
investment and customer solution capabilities increase over the coming years.
Teknowledge has sustained its business for eighteen years. It has
reported twenty consecutive profitable quarters. The Company maintains an
aggressive intellectual property program and is defending actively its eight key
U.S. software patents. Teknowledge provides a challenging and collaborative
technical environment with many employee rewards. These rewards include advanced
education and training, incentive stock options, performance bonuses,
competitive salary, and an attractive benefits program. Teknowledge is
headquartered in Palo Alto, California with offices in Fairfax, Orlando, and San
Diego. The Company's stock is traded on the NASDAQ SmallCap Market under the
symbol TEKC. Teknowledge was incorporated on July 8, 1981 under the laws of the
State of Delaware.
Results of Operations
Revenues
Revenues for the three months and six months ended June 30, 1999 were
$2,776,623 and $5,567,267, respectively, a decrease of 10% and 9% from
$3,080,854 and $6,150,784 for the comparable periods in 1998. Revenues in the
first six months of 1999 were affected by two factors that contributed to lower
than expected revenues: 1) the overall demand for some government services
declined as a result of government-initiated cutbacks in the latter part of
1998, and 2) the Company diverted some of its technical employees to non-revenue
producing functions, such as, Sales Associate(TM) software development and 3rd
party VAR product training, in anticipation of an increase in demand for
commercial services. Approximately 96% of the revenues earned in the first six
months of 1999 were attributed to contracts with agencies of the Federal
Government, and the remaining 4% of revenues were commercial. While commercial
revenues were relatively small, they have increased approximately four-fold
since 1998, when commercial revenues were approximately 1% of total revenues.
Costs and Expenses
Cost of revenues were $1,661,290 and $3,316,397 for the three months
and six months ended June 30, 1999, a 16% decrease from each of the comparable
periods in 1998. The cost of labor on government contracts declined in relation
to the reduced rate of production. This was partially offset by an 18% and 13%
increase in billable subcontractor and consultant costs. Subcontractor and
consultant costs were $686,714 and $1,311,086 for the three months and six
months ended June 30, 1999, compared to $582,928 and $1,163,341 in the same
periods last year. Cost of revenues as a percentage of total revenues
represented 60% each for the three months and six months ended June 30, 1999;
compared to 64% for each of the comparable periods in 1998.
General and administrative costs for the three months and six months
ended June 30, 1999 were $656,158 and $1,285,977, a 17% and 10% increase over
the same periods in 1998. The increase was mostly due to escalation of office
rents and insurance costs. General and administrative costs for the three months
and six months ended June 30, 1999 were 24% and 23% of total revenues, versus
18% and 19% for the same periods last year. Because general and administrative
costs are largely fixed in nature, they decline more slowly over time, thereby
accounting for a larger proportion of total costs during a period in which
overall revenues declined.
Sales and marketing costs for the three months and six months ended
June 30, 1999 decreased to $136,819 and $267,496, or 52% and 32% from the
comparable periods in 1998. Sales and marketing costs were 5% each of total
revenues for the three months and six months ended June 30, 1999; and 9% and 6%
for the comparable periods in 1998, respectively.
Research and development ("R&D") costs for the three months and six
months ended June 30, 1999 were $118,282 and $266,958, a 14% increase and 7%
decrease from the comparable periods in 1998. R&D costs were 4% of revenues for
the three months and 5% of revenues for six months ended June 30, 1999 and 3%
and 5% for the comparable periods in 1998. These figures are reported net of
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9
direct R&D expenditures conducted under the NIST ATP contract that were
reimbursed by the customer. In 1999, the Company received $362,394 from NIST
that the company used to offset R&D costs. There were no comparable offsets in
1998.
Interest income was $26,891 and $53,100 for the three months and six
months ended June 30, 1999; and $21,341 and $45,489 for the comparable periods
in 1998, respectively.
Income before taxes for the three months and six months ended June 30,
1999 were $230,965 and $483,539, respectively, which represented an 35% and 21%
increase from $171,129 and $398,136 for the comparable periods in 1998. Income
before taxes represented 8% and 9% of revenues for the three months and six
months ended June 30, 1999; and 6% each for the comparable periods in 1998,
respectively.
The Company has utilized essentially all tax losses generated
subsequent to the date of the quasi-reorganization, which were reflected as a
reduction to the effective tax rate and provision for income taxes, up to
December 31, 1998. Commencing 1999, realization of tax benefits existing at the
date of the quasi-reorganization is recorded as an adjustment to additional
paid-in-capital. Accordingly, the Company has increased its effective tax rate
and provision for income taxes since the first quarter of 1999. However, even
with the increase in its effective tax rate for book purposes, the Company will
continue to realize full cash savings from its extensive tax loss benefits
existing at the date of the quasi-reorganization. In short, the Company will
begin to report increased tax expenses, but will not actually pay such taxes,
and there will be no effect on the Company's cash resulting from the reported
increases.
Net income for the three months and six months ended June 30, 1999 were
$138,580 and $290,124, or $.02 and $.05 per diluted share, versus $185,581 and
$405,388, or $.03 and $.07 per diluted share, for the same periods in 1998. Net
income represented 5% of revenues, for the three months and six months ended
June 30, 1999; and 6% and 7% for the comparable periods in 1998, respectively.
Bookings and Backlog
At June 30, 1999, the expected multi-year contract commitments (order
backlog) from government customers were approximately $16 million, which
consisted of (i) new orders for which work has not yet begun and (ii) revenue
remaining to be recognized on work in progress. Approximately 73% of the backlog
consist of programs that are awarded but not yet authorized for funding. The
government normally funds a contract in incremental amounts for the tasks that
are currently in production. The Company's order backlog at December 31, 1998
was approximately $15 million.
Liquidity and Capital Resources
As of June 30, 1999, unused sources of liquidity consisted of
$2,777,051 in cash and cash equivalents, an increase of $398,661 from December
31, 1998. The increase consisted of $431,150 provided by operating activities
mostly in the form of receivable collections, $151,793 provided by issuance of
common stock related to employee option exercises, offset by $92,323 used for
investing in capital software development and fixed assets, and $91,959 used to
repurchase 20,870 shares of the Company's Common Stock at an average price of
$4.41 a share.
The Company believes that the present level of cash and cash
equivalents is adequate to service the liquidity needs of the Company in the
next twelve months. The Company relies principally on the collection of
receivables to generate internal cash reserves.
The Company has an unsecured line of credit from a financial
institution in the amount of $2,000,000. The Company may borrow up to the lower
of 60% of the receivable base or $2,000,000, at a rate of one percent over
prime. The line is subject to certain covenants and maintenance requirements and
expires in June 2000. The Company has not utilized the credit line through June
30, 1999.
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Management believes the Company will be able to operate in the next
twelve months without additional financing, whether in the form of borrowings or
equity capital. Future growth might require additional financing.
Year 2000
The Company is aware of and is addressing the issues associated with
the programming code in existing computer systems as the millennium ("year 2000"
or "Y2K") approaches. The key issue is whether computer systems will treat
date-sensitive information correctly when the year changes to 2000. The
consequences of this issue may include system failures and business process
interruption.
Although most of the hardware and software currently in use at the
Company is relatively new and expected to be Y2K compliant, the issue can affect
the Company's internal systems, including information technology (IT) and non-IT
systems. The Company has begun its assessment of the readiness of its systems
for handling Y2K, by inventorying and analyzing its centralized computer and
embedded systems to identify any potential issues. Although the assessment is
still underway, management believes that no significant remediation efforts and
compliance expenses inside the Company are necessary. The Company expects to
substantially complete the remaining assessment and remediation, if any, of its
internal systems, as well as to develop contingency plans for certain internal
systems, by September 1999. However, if implementation of remediation plans is
delayed, if significant new non-compliance issues are identified, or if
contingency plans fail, the Company's results of operations or financial
condition could be materially adversely affected.
Almost all of the Company's revenues are currently generated from
government R&D service contracts, the deliverable of which is sometimes a
software prototype. Under some of the contracts, the government requires from
the Company a Y2K warranty within the contracts, which generally guarantees all
software delivered under government contracts to be able to process
date-sensitive information beyond Y2K accurately, to the extent other third
party elements used in combination are Y2K compliant. In the case of
noncompliance discovered and communicated to the Company within a prescribed
timeframe, usually 90 days from acceptance of an item, remedies in the form of
repair or replacement will be made available. The Company is exposed only on
ongoing government contracts, and believes that software developed under them is
Y2K compliant.
The Company is currently addressing its exposure related to significant
third parties. Key suppliers and vendors are being identified and contacted to
determine if their operations and/or the products and services they provide to
the Company are Y2K compliant. The Company believes its financial reporting
systems are compliant. The Company plans to upgrade its internal security
system, if required, before year-end. The Department of Defense ("DoD") is
confident that payments to its contractors, among others, will continue
uninterrupted in January 2000. The majority of the Company's DoD payments are
made by electronic funds transfer. These systems were tested successfully with
the Federal Reserve System and several financial institutions in the June-July
1999 time period. The Company intends to continue working directly with other
material third parties to avoid any business interruptions in Y2K. Where
practicable, the Company will attempt to mitigate its risks with respect to the
failure of other key third parties to be Y2K ready, including developing
contingency plans. However, such failures, including failures of any contingency
plans, remain a possibility and could have a materially adverse impact on the
Company's results of operations or financial condition.
Risks and Uncertainties
Teknowledge's service revenue is currently derived primarily from
government R&D contracts, and the Company has historically been profitable in
that business. However, dependence on government contracts can be risky because
the contracts are subject to administrative, legislative, and political
interruptions, which may jeopardize the flow of funds. Another uncertainty in
providing services under government contracts is the Company's ability to
attract and retain sufficient technical staff to meet the demands of new orders.
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11
The Company's revenues, costs and earnings on government contracts are
determined based on estimated overhead rates derived from forecasted annual
costs. The Company's actual experience with fluctuations in the workforce,
billable efficiency, and costs may vary from original estimates and necessitate
periodic adjustments to the overhead rates until the actual costs have been
tabulated and year closed-out. Such adjustments are made on a cumulative basis
whereby the resulting revenue and income effects are recognized in the period of
the adjustment.
The typical cost-type government contract performed by the Company has
a regulated fixed fee limit, which inhibits the Company from improving profit
margins beyond what is permitted in the government regulations. In addition,
Federal Acquisition Regulations exclude from reimbursement some "unallowable"
expenses, which the Company considers a regular part of the business.
Furthermore, almost all the Company's contracts contain termination clauses,
which permit contract termination upon the Company's default or at the
contracting party's discretion.
The Company believes the Internet and intranet software market offers a
significant new opportunity for growth and Teknowledge is in a good position to
convert Internet-based software developed under its government R&D contracts
into new commercial products. However, if the Company's E-Commerce related sales
develop more slowly than expected, or the market becomes saturated with
competitors, or if the Company's products do not achieve market acceptance, the
Company's commercial business, financial condition, and results of operations
may eventually be adversely affected.
Forward-Looking Statements
Forward-looking statements made in this section relate to the
realizability of backlog, competition for government contracts, mix of revenues
between government and commercial, development of commercial products and VAR
services, the Internet, deferred tax assets, year 2000 issues, and future growth
and additional financing. All forward-looking statements involve risks and
uncertainties, and actual results could differ materially from those set forth
in the forward-looking statements contained herein as a result of competition,
agency funding limitations, other factors relating to government contracting,
ability to attract and retain technical and management personnel, commercial
opportunities, and other factors set forth under "Risks and Uncertainties" above
and the section entitled "Certain Factors Which May Affect Future Results of
Operations and/or Stock Price" in the Company's Form 10-KSB.
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12
PART II. OTHER INFORMATION
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on June 17, 1999.
A proposal to elect two directors of the Company to serve for a
three-year term was approved by stockholders. This proposal received the
following votes:
For Withheld
Neil A. Jacobstein 4,156,581 127,700
William G. Roth 4,136,413 147,868
The following directors continue:
Dr. Larry E. Druffel
Dr. Frederick Hayes-Roth
Gen. Robert T. Marsh (ret.)
James C. Workman
A second proposal to ratify Arthur Andersen LLP as the Company's
independent public accounts for the fiscal year ending December 31, 1999 was
approved by stockholders. This proposal received the following votes:
For Against Abstain
4,270,507 7,397 6,377
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Set forth below is a list of all exhibits filed herewith or incorporated by
reference as part of this Quarterly Report on Form 10-QSB.
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of
Teknowledge Corporation (4)
3.2 Amended and Restated Bylaws of Teknowledge Corporation (4)
3.3 Certificate of Designation, Preferences and Rights of the
Terms of the Series A Preferred Stock (2)
4.1 Rights Agreement dated January 29, 1996 between the Company
and Registrar and Transfer Company as Rights Agent (2)
10.1 Stock Option Agreement between the Company and Frederick
Hayes-Roth, dated November 29, 1993.
10.2 Stock Option Agreement between the Company and Neil
Jacobstein, dated November 29, 1993.
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13
Exhibit No. Description
10.3 Stock Option Agreement between the Company and Frederick
Hayes-Roth, dated April 1, 1994.
10.4 Stock Option Agreement between the Company and Neil
Jacobstein, dated April 1, 1994.
10.5 Change of Control Agreement, dated November 21, 1994, between
the Company and Frederick Hayes-Roth and Neil Jacobstein (1)
10.6 Stock Option Agreement between the Company and Frederick
Hayes-Roth, dated March 30, 1995.
10.7 Stock Option Agreement between the Company and Neil
Jacobstein, dated March 30, 1995.
10.8 Teknowledge Corporation 1998 Stock Option Plan (3)
27 Financial Data Schedule
References
(1) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB,
for the fiscal year ended December 31, 1994.
(2) Filed as an Exhibit to the Company's Current Report on Form 8-K
dated February 12, 1996, related to the adoption of a 12(g)
Shareholder Rights Agreement dated January 29, 1996.
(3) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB, for the quarter ended June 30, 1998.
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB,
for the fiscal year ended December 31, 1998.
(b) The registrant did not file a report on Form 8-K during the quarter ended
June 30, 1999.
<PAGE>
14
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TEKNOWLEDGE CORPORATION
(Registrant)
/s/ Frederick Hayes-Roth Chairman of the Board August 13, 1999
- ------------------------ of Directors and Chief
Frederick Hayes-Roth Executive Officer
(Principal Executive
Officer)
/s/ Neil A. Jacobstein President and Chief August 13, 1999
- ------------------------ Operating Officer
Neil A. Jacobstein
/s/ Dennis A. Bugbee Director of Finance, August 13, 1999
- ------------------------ Treasurer and Secretary
Dennis A. Bugbee (Principal Financial and
Accounting Officer)
CIMFLEX TEKNOWLEDGE November 29, 1993
TO: Frederick Hayes-Roth
Subject: Cimflex Teknowledge Stock Option Grants for Key Employees
In recognition of the major contribution that key employees can make to the
success of Cimflex Teknowledge, the Compensation/HR Committee of the Board of
Directors has approved the issuance of additional new options, in accordance
with the provisions of the 1989 Stock Option Plan, to key contributing employees
of the Company.
To enable us to share in the success of the Company and in view of your earnest
contributions and efforts, I am pleased to offer to you 1,031,317 shares Stock
Options at an exercise price of $0.02 per share. This represents 4% of the fully
diluted No. of shares outstanding or 25,782,928 shares. Options granted shall
become vested as of 12/31/93.
Congratulations, and I look forward to your continued dedicated efforts towards
the advancement and progress of Cimflex Teknowledge Corporation. Please sign
your name under "Optionee", and return the agreement to me. In turn, the form
will be signed by an Officer of the Company and returned to you.
Sincerely,
/s/ Dennis Bugbee
Dennis Bugbee Director of Finance & Treasurer
OPTIONEE: CIMFLEX TEKNOWLEDGE CORPORATION
/s/ Frederick Hayes-Roth By: /s/ Frederick Hayes-Roth
Title: Chairman & CEO
CIMFLEX TEKNOWLEDGE November 29, 1993
TO: Neil Jacobstein
Subject: Cimflex Teknowledge Stock Option Grants for Key Employees
In recognition of the major contribution that key employees can make to the
success of Cimflex Teknowledge, the Compensation/HR Committee of the Board of
Directors has approved the issuance of additional new options, in accordance
with the provisions of the 1989 Stock Option Plan, to key contributing employees
of the Company.
To enable us to share in the success of the Company and in view of your earnest
contributions and efforts, I am pleased to offer to you 1,031,317 shares Stock
Options at an exercise price of $0.02 per share. This represents 4% of the fully
diluted No. of shares outstanding or 25,782,928 shares. Options granted shall
become vested as of 12/31/93.
Congratulations, and I look forward to your continued dedicated efforts towards
the advancement and progress of Cimflex Teknowledge Corporation. Please sign
your name under "Optionee", and return the agreement to me. In turn, the form
will be signed by an Officer of the Company and returned to you.
Sincerely,
/s/ Dennis Bugbee
Dennis Bugbee Director of Finance & Treasurer
OPTIONEE: CIMFLEX TEKNOWLEDGE CORPORATION
/s/ Neil Jacobstein By: /s/ Frederick Hayes-Roth
Title: Chairman & CEO
CIMFLEX TEKNOWLEDGE April 1, 1994
TO: Frederick Hayes-Roth
Subject: Cimflex Teknowledge Stock Option Grants for Executives
At the regular meeting of Board of Directors on November 30, 1993, you were
granted an option to purchase 2,252,880 shares of Cimflex Teknowledge Common
Stock under the company's Employee Stock Option Plan (ESOP). Only 250,000 of
these shares are available under the plan's pool presently. The 250,000 shares
available will vest immediately upon your signing this agreement. The remaining
2,002,880 of these shares will require that the shareholder's approve the
recommended increase in 5,250,000 shares which will be proposed in 1994
shareholder proxy statement. In the case that these additional shares are
approved, your remaining options will vest in three equal parts (approximately
668,000 each) on June 30, 1994, September 30, 1994, and December 31, 1994. In
the case that these additional shares are not approved by the shareholders, the
remainder of this option will be nullified. That is, you will not be entitled to
any additional options.
The options are priced at $.03 per share, the current market price.
Please sign your name under "Optionee", and return the agreement to me. In turn,
the form will be signed by an Officer of the Company and returned to you.
Sincerely,
/s/ Dennis Bugbee
Dennis Bugbee
Director of Finance & Treasurer
OPTIONEE: CIMFLEX TEKNOWLEDGE CORPORATION
/s/ Frederick Hayes-Roth By: /s/ Frederick Hayes-Roth
Title:Chairman & CEO
CIMFLEX TEKNOWLEDGE April 1, 1994
TO: Neil Jacobstein
Subject: Cimflex Teknowledge Stock Option Grants for Executives
At the regular meeting of Board of Directors on November 30, 1993, you were
granted an option to purchase 2,252,880 shares of Cimflex Teknowledge Common
Stock under the company's Employee Stock Option Plan (ESOP). Only 250,000 of
these shares are available under the plan's pool presently. The 250,000 shares
available will vest immediately upon your signing this agreement. The remaining
2,002,880 of these shares will require that the shareholder's approve the
recommended increase in 5,250,000 shares which will be proposed in 1994
shareholder proxy statement. In the case that these additional shares are
approved, your remaining options will vest in three equal parts (approximately
668,000 each) on June 30, 1994, September 30, 1994, and December 31, 1994. In
the case that these additional shares are not approved by the shareholders, the
remainder of this option will be nullified. That is, you will not be entitled to
any additional options.
The options are priced at $.03 per share, the current market price.
Please sign your name under "Optionee", and return the agreement to me. In turn,
the form will be signed by an Officer of the Company and returned to you.
Sincerely,
/s/ Dennis Bugbee
Dennis Bugbee
Director of Finance & Treasurer
OPTIONEE: CIMFLEX TEKNOWLEDGE CORPORATION
/s/ Neil Jacobstein By: /s/ Frederick Hayes-Roth
Title:Chairman & CEO
TEKNOWLEDGE CORPORATION
Stock Option Agreement
THIS AGREEMENT is made this 30th day of March, 1995, by and between
TEKNOWLEDGE CORPORATION, a Delaware corporation with its principal place of
business in Palo Alto, California and formerly known as Cimflex Teknowledge
Corporation (the "Company"), and Frederick Hayes-Roth, an employee of the
Company ("Optionee").
ARTICLE 1
Recitals
1.1 Optionee is an employee of the Company, and the Company desires to
have Optionee continue in its employ and to provide Optionee with an increased
incentive to put forth maximum effort for the success of the Company's business.
1.2 In order to provide such an increased incentive to its employees,
the Company has adopted the Cimflex Teknowledge Corporation 1989 Stock Option
Plan, as amended (the "Plan").
1.3 The Company desires to set forth herein the amended terms of
options previously granted to Optionee under the Plan on April 1, 1994 pursuant
to the letter agreement attached as Annex A hereto.
ARTICLE 2
Option Grant
2.1 The Company previously granted to Optionee the right and option to
purchase up to, but not exceeding in the aggregate 2,002,880 shares of the
Common Stock of the Company, par value $.01 per share (the "Common Stock"), on
April 1, 1994, for a term expiring on April 1, 2004 (the "Option Term"), at an
exercise price of $0.03 per share. Such price is equal to 100% of the Fair
Market Value, as such term is defined in the Plan, of a share of Common Stock on
April 1, 1994.
2.2 The options granted hereunder are intended to qualify as Incentive
Stock Options. To the extent any such options do not qualify as Incentive Stock
Options for any reason, such options which do not so qualify shall be considered
to be Nonqualified Stock Options, as defined in the Plan.
ARTICLE 3
Exercise and Withholding
3.1 Options granted Optionee vest and are exercisable according to the
following schedule:
September 30, 1994 250,360
December 31, 1994 250,360
March 31, 1995 250,360
June 30, 1995 250,360
September 30, 1995 250,360
December 31, 1995 250,360
March 30, 1996 250,360
June 30, 1996 250,360
<PAGE>
provided, however, that if at fiscal year end December 31, 1994 or December 31,
1995, after completion of the annual audit by the Company's independent public
accountants for such fiscal year, the Company realizes income in an amount equal
to or greater than $100,000 during that year from certain unusual and unbudgeted
transactions, such as income from the proceeds of a favorable settlement or
result obtained in a lawsuit, a significant product license sale, a sale of a
product line (such as the Delta Product line), a sale of obsolete furniture or
equipment, or any other unbudgeted or unplanned transaction of a similar nature,
then options to purchase that number of shares equal to 25% of the income from
the unusual transaction divided by $.12 will be accelerated and will vest on the
next scheduled quarterly vesting date set forth above and any quarterly
increments remaining in the two-year vesting schedule set forth above, beginning
with the June 30, 1996 increment, will be reduced in reverse chronological order
to reflect any such acceleration.
As options become exercisable, they may be exercised at any time and
from time to time during the Option Term.
3.2 Options shall be exercised by Optionee by delivering to the Company
a Notice in the form set forth as Annex B hereto, together with a check payable
to the order of the Company and/or shares of Common Stock, with a stock power
executed in blank, equal in value to the option price of the shares being
purchased. Shares of Common Stock surrendered in exercise of an option shall be
valued at their Fair Market Value, as defined in the Option Plan, on the date of
exercise.
3.3 Optionee shall deliver to the Company at the time an option is
exercised any additional evidence as the Company may deem necessary to establish
that such exercise is in compliance with all applicable securities laws.
3.4 The Company shall notify Optionee of the amount of withholding tax,
if any, which must be paid under federal and, where applicable, state and local
law upon exercise of an option. The Company may deduct such amount from the
Optionee's regular salary payments. If the full amount of the withholding tax
cannot be recovered in this manner, Optionee shall, forthwith upon the receipt
of such notice, remit the deficiency to the Company.
ARTICLE 4
Termination of Employment
4.1 If Optionee's employment by the Company shall terminate for any
reason other than total and permanent disability as defined in Section 422(c)(6)
of the Code ("disability"), retirement as described in the Plan, death, or
involuntary termination of the Optionee's employment, except where such
involuntary termination is for "cause" (for purposes of this Agreement, "cause"
is defined as any malfeasance, criminal misconduct or dereliction of duty by the
Optionee in the performance of his duties to the Company), all options which are
unexercised on the date of termination of employment shall expire and cease to
be exercisable thirty days following such date.
<PAGE>
4.2 If Optionee's employment shall be involuntarily terminated by the
Company, except where such involuntary termination is for cause, the options
granted pursuant to this Agreement shall vest and become exercisable in full
without regard to Section 3.1 of this Agreement, and Optionee shall have the
right within three months after the date of such involuntary termination, but
not after the expiration of the Option Term, to exercise in whole or from time
to time in part any of the options prior to the expiration of such three month
period.
4.3 If Optionee shall retire with the consent of the Company after
having reached the age of sixty-five, Optionee may, within three months after
the date of such retirement, but not after the expiration of the option Term,
exercise in whole or from time to time in part any options which are or become
exercisable prior to the expiration of such three-month period.
4.4 If Optionee shall die while in the employ of the Company, the
options granted pursuant to this Agreement shall vest and become exercisable in
full without regard to Section 3.1 of this Agreement, and Optionee's executors,
administrators, or any person or persons to whom his options have been
transferred by will or by the laws of descent and distribution shall have the
right within one year after the date of his death, but not after the expiration
of the Option Term, to exercise in whole or from time to time in part any of the
options prior to the expiration of such one-year period.
4.5 If Optionee shall cease to be employed by the Company by reason of
disability, the options granted pursuant to this Agreement shall vest and become
exercisable in full without regard to Section 3.1 of this Agreement, and
Optionee shall have the right within one year after the date such disability is
first determined, but not after the expiration of the Option Term, to exercise
in whole or from time to time in part any of the options prior to the expiration
of such one-year period.
ARTICLE 5
Certain Events: Accelerated Vesting
5.1 The options pursuant to this Agreement shall vest in full and
become exercisable until the expiration of the option Term without regard to
Section 3.1 of this Agreement upon a "change in control" of the Company. A
"change in control" is defined as (i) a tender offer by any person or group for
15% or greater of the Company's voting securities, (ii) the acquisition by any
person or group of beneficial ownership of 15% or greater of the Company's
voting securities unless such acquisition has been approved by the Board of
Directors of the Company, (iii) any election of persons to the Board of
Directors that causes a majority of the Board to consist of persons other than
persons who were members of the Board on the date of the Agreement or persons
other than persons who were nominated by persons who were members of the Board
on the date of the Agreements, or (iv) approval by the stockholders of the
Company of a reorganization, merger, consolidation, sale of all or substantially
all of the Company's assets, liquidation or dissolution.
<PAGE>
ARTICLE 6
Miscellaneous
6.1 In the event of any subdivision or combination of the outstanding
shares of Common Stock, stock dividend, recapitalization, reclassification of
shares, sale, lease or transfer of all or a material portion of the assets of
the Company, substantial distributions to stockholders or other corporate
transactions which would result in a substantial dilution or enlargement of the
rights or economic benefits inuring to Optionee, the Company shall make such
equitable adjustments as it may deem appropriate in the Plan and the options
granted hereunder. Any such adjustment shall be final and binding on Optionee.
6.2 In the event of: (i) a dissolution or liquidation of the Company;
(ii) a merger or consolidation in which the Company is not the surviving
corporation; or (iii) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, then to the extent permitted by
applicable law (a) any surviving corporation shall assume options granted
hereunder or shall substitute similar options for such options, or (b) such
options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such options, or to substitute similar
options, then, providing Optionee is an employee of the Company immediately
prior to such event, the time during which such options may be exercised shall
be accelerated and the options terminated if not exercised prior to such event.
6.3 Nothing contained in this Agreement or in the Plan shall be deemed
to confer upon Optionee any right to prevent or to approve or vote upon any of
the corporate actions described in this Article 6. The existence of the options
granted hereunder shall not affect in any way the right or the power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stocks ahead of or
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
6.4 Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
options may be transferred by will or by the laws of descent and distribution,
the word "Optionee" shall be deemed to include such person or persons.
6.5 The options granted hereunder are not transferable by Optionee
otherwise than by will or the laws of descent and distribution and are
exercisable during Optionee's lifetime only by him. No assignment or transfer of
the options granted hereunder, or of the rights represented thereby, whether
voluntary or involuntary, by the operation of law or otherwise (except by will
or the laws of descent and distribution), shall vest in the assignee or
transferee any interest or right herein whatsoever, but immediately upon any
<PAGE>
such assignment or transfer, the options shall terminate and become of no
further effect.
6.6 Optionee shall not be deemed for any purpose to be a stockholder of
the Company in respect of any shares as to which options shall not have been
exercised as herein provided, and until such shares have been issued to Optionee
by the Company hereunder.
6.7 Nothing in this Agreement or the Plan shall confer upon Optionee
any right to continue in the employ of the Company or shall affect the right of
the Company to terminate the employment of Optionee with or without cause.
6.8 Notwithstanding any other provision hereof, Optionee hereby agrees
that he will not exercise the options granted hereunder, and that the Company
will not be obligated to issue any shares to Optionee hereunder, if the exercise
thereof or the issuance of such shares shall constitute a violation by Optionee
or the Company of any provision of any law or regulation of any governmental
authority. Any determination in this connection by the Company shall be final
and binding. The Company shall in no event be obligated to register any
securities pursuant to the Securities Act of 1933 (as the same shall be in
effect from time to time) or to take any other affirmative action in order to
cause the exercise of the Option or the issuance of shares pursuant thereto to
comply with any law or regulation of governmental authority.
6.9 Throughout the Option Term, the Company shall make available to
Optionee, not later than one hundred twenty (120) days after the close of each
of the Company's fiscal years during the option Term, such financial and other
information regarding the Company as comprises the annual report to the
stockholders of the Company provided for in the bylaws of the Company.
6.10 No amounts of income received by Optionee pursuant to this
Agreement shall be considered compensation for purposes of any pension or
retirement plan, insurance plan or any other employee benefit plan of the
Company.
6.11 Every notice or other communication relating to this Agreement
shall be in writing and shall be mailed to or delivered to the party for whom it
is intended at such address as may from time to time be designated by it in a
notice mailed or delivered to the other party as herein provided; provided,
however, that unless and until some other address be so designated, all notices
or communications by Optionee to the Company shall be mailed or delivered to the
Company at its office at 1810 Embarcadero Road, Palo Alto, California 94303, and
all notices or communications by the Company to Optionee may be given to
Optionee personally or may be mailed to him.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
OPTIONEE: TEKNOWLEDGE CORPORATION
/s/ Frederick Hayes-Roth By: /s/ Dennis Bugbee
Title: Director of Finance
Date: March 30, 1995
<PAGE>
ANNEX B
Exercise of Stock Option
Pursuant to the provisions of the Amended Stock Option Agreement
entered into as of between Teknowledge Corporation (the "Company") and Optionee
(the "Agreement"), I hereby exercise the stock option granted under the terms of
the Agreement to the extent of shares of the Common Stock of the Company (the
"Shares"). I deliver to you herewith the sum of $
in payment for the Shares.
Date:
Optionee:
Address:
Social Security Number:
TEKNOWLEDGE CORPORATION
Stock Option Agreement
THIS AGREEMENT is made this 30th day of March, 1995, by and between
TEKNOWLEDGE CORPORATION, a Delaware corporation with its principal place of
business in Palo Alto, California and formerly known as Cimflex Teknowledge
Corporation (the "Company"), and Neil Jacobstein, an employee of the Company
("Optionee").
ARTICLE 1
Recitals
1.1 Optionee is an employee of the Company, and the Company desires to
have Optionee continue in its employ and to provide Optionee with an increased
incentive to put forth maximum effort for the success of the Company's business.
1.2 In order to provide such an increased incentive to its employees,
the Company has adopted the Cimflex Teknowledge Corporation 1989 Stock Option
Plan, as amended (the "Plan").
1.3 The Company desires to set forth herein the amended terms of
options previously granted to Optionee under the Plan on April 1, 1994 pursuant
to the letter agreement attached as Annex A hereto.
ARTICLE 2
Option Grant
2.1 The Company previously granted to Optionee the right and option to
purchase up to, but not exceeding in the aggregate 2,002,880 shares of the
Common Stock of the Company, par value $.01 per share (the "Common Stock"), on
April 1, 1994, for a term expiring on April 1, 2004 (the "Option Term"), at an
exercise price of $0.03 per share. Such price is equal to 100% of the Fair
Market Value, as such term is defined in the Plan, of a share of Common Stock on
April 1, 1994.
2.2 The options granted hereunder are intended to qualify as Incentive
Stock Options. To the extent any such options do not qualify as Incentive Stock
Options for any reason, such options which do not so qualify shall be considered
to be Nonqualified Stock Options, as defined in the Plan.
ARTICLE 3
Exercise and Withholding
3.1 Options granted Optionee vest and are exercisable according to the
following schedule:
September 30, 1994 250,360
December 31, 1994 250,360
March 31, 1995 250,360
June 30, 1995 250,360
September 30, 1995 250,360
December 31, 1995 250,360
March 30, 1996 250,360
June 30, 1996 250,360
<PAGE>
provided, however, that if at fiscal year end December 31, 1994 or December 31,
1995, after completion of the annual audit by the Company's independent public
accountants for such fiscal year, the Company realizes income in an amount equal
to or greater than $100,000 during that year from certain unusual and unbudgeted
transactions, such as income from the proceeds of a favorable settlement or
result obtained in a lawsuit, a significant product license sale, a sale of a
product line (such as the Delta Product line), a sale of obsolete furniture or
equipment, or any other unbudgeted or unplanned transaction of a similar nature,
then options to purchase that number of shares equal to 25% of the income from
the unusual transaction divided by $.12 will be accelerated and will vest on the
next scheduled quarterly vesting date set forth above and any quarterly
increments remaining in the two-year vesting schedule set forth above, beginning
with the June 30, 1996 increment, will be reduced in reverse chronological order
to reflect any such acceleration.
As options become exercisable, they may be exercised at any time and
from time to time during the Option Term.
3.2 Options shall be exercised by Optionee by delivering to the Company
a Notice in the form set forth as Annex B hereto, together with a check payable
to the order of the Company and/or shares of Common Stock, with a stock power
executed in blank, equal in value to the option price of the shares being
purchased. Shares of Common Stock surrendered in exercise of an option shall be
valued at their Fair Market Value, as defined in the Option Plan, on the date of
exercise.
3.3 Optionee shall deliver to the Company at the time an option is
exercised any additional evidence as the Company may deem necessary to establish
that such exercise is in compliance with all applicable securities laws.
3.4 The Company shall notify Optionee of the amount of withholding tax,
if any, which must be paid under federal and, where applicable, state and local
law upon exercise of an option. The Company may deduct such amount from the
Optionee's regular salary payments. If the full amount of the withholding tax
cannot be recovered in this manner, Optionee shall, forthwith upon the receipt
of such notice, remit the deficiency to the Company.
ARTICLE 4
Termination of Employment
4.1 If Optionee's employment by the Company shall terminate for any
reason other than total and permanent disability as defined in Section 422(c)(6)
of the Code ("disability"), retirement as described in the Plan, death, or
involuntary termination of the Optionee's employment, except where such
involuntary termination is for "cause" (for purposes of this Agreement, "cause"
is defined as any malfeasance, criminal misconduct or dereliction of duty by the
Optionee in the performance of his duties to the Company), all options which are
unexercised on the date of termination of employment shall expire and cease to
be exercisable thirty days following such date.
<PAGE>
4.2 If Optionee's employment shall be involuntarily terminated by the
Company, except where such involuntary termination is for cause, the options
granted pursuant to this Agreement shall vest and become exercisable in full
without regard to Section 3.1 of this Agreement, and Optionee shall have the
right within three months after the date of such involuntary termination, but
not after the expiration of the Option Term, to exercise in whole or from time
to time in part any of the options prior to the expiration of such three month
period.
4.3 If Optionee shall retire with the consent of the Company after
having reached the age of sixty-five, Optionee may, within three months after
the date of such retirement, but not after the expiration of the option Term,
exercise in whole or from time to time in part any options which are or become
exercisable prior to the expiration of such three-month period.
4.4 If Optionee shall die while in the employ of the Company, the
options granted pursuant to this Agreement shall vest and become exercisable in
full without regard to Section 3.1 of this Agreement, and Optionee's executors,
administrators, or any person or persons to whom his options have been
transferred by will or by the laws of descent and distribution shall have the
right within one year after the date of his death, but not after the expiration
of the Option Term, to exercise in whole or from time to time in part any of the
options prior to the expiration of such one-year period.
4.5 If Optionee shall cease to be employed by the Company by reason of
disability, the options granted pursuant to this Agreement shall vest and become
exercisable in full without regard to Section 3.1 of this Agreement, and
Optionee shall have the right within one year after the date such disability is
first determined, but not after the expiration of the Option Term, to exercise
in whole or from time to time in part any of the options prior to the expiration
of such one-year period.
ARTICLE 5
Certain Events: Accelerated Vesting
5.1 The options pursuant to this Agreement shall vest in full and
become exercisable until the expiration of the option Term without regard to
Section 3.1 of this Agreement upon a "change in control" of the Company. A
"change in control" is defined as (i) a tender offer by any person or group for
15% or greater of the Company's voting securities, (ii) the acquisition by any
person or group of beneficial ownership of 15% or greater of the Company's
voting securities unless such acquisition has been approved by the Board of
Directors of the Company, (iii) any election of persons to the Board of
Directors that causes a majority of the Board to consist of persons other than
persons who were members of the Board on the date of the Agreement or persons
other than persons who were nominated by persons who were members of the Board
on the date of the Agreements, or (iv) approval by the stockholders of the
Company of a reorganization, merger, consolidation, sale of all or substantially
all of the Company's assets, liquidation or dissolution.
<PAGE>
ARTICLE 6
Miscellaneous
6.1 In the event of any subdivision or combination of the outstanding
shares of Common Stock, stock dividend, recapitalization, reclassification of
shares, sale, lease or transfer of all or a material portion of the assets of
the Company, substantial distributions to stockholders or other corporate
transactions which would result in a substantial dilution or enlargement of the
rights or economic benefits inuring to Optionee, the Company shall make such
equitable adjustments as it may deem appropriate in the Plan and the options
granted hereunder. Any such adjustment shall be final and binding on Optionee.
6.2 In the event of: (i) a dissolution or liquidation of the Company;
(ii) a merger or consolidation in which the Company is not the surviving
corporation; or (iii) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, then to the extent permitted by
applicable law (a) any surviving corporation shall assume options granted
hereunder or shall substitute similar options for such options, or (b) such
options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such options, or to substitute similar
options, then, providing Optionee is an employee of the Company immediately
prior to such event, the time during which such options may be exercised shall
be accelerated and the options terminated if not exercised prior to such event.
6.3 Nothing contained in this Agreement or in the Plan shall be deemed
to confer upon Optionee any right to prevent or to approve or vote upon any of
the corporate actions described in this Article 6. The existence of the options
granted hereunder shall not affect in any way the right or the power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stocks ahead of or
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
6.4 Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
options may be transferred by will or by the laws of descent and distribution,
the word "Optionee" shall be deemed to include such person or persons.
6.5 The options granted hereunder are not transferable by Optionee
otherwise than by will or the laws of descent and distribution and are
exercisable during Optionee's lifetime only by him. No assignment or transfer of
the options granted hereunder, or of the rights represented thereby, whether
voluntary or involuntary, by the operation of law or otherwise (except by will
or the laws of descent and distribution), shall vest in the assignee or
transferee any interest or right herein whatsoever, but immediately upon any
<PAGE>
such assignment or transfer, the options shall terminate and become of no
further effect.
6.6 Optionee shall not be deemed for any purpose to be a stockholder of
the Company in respect of any shares as to which options shall not have been
exercised as herein provided, and until such shares have been issued to Optionee
by the Company hereunder.
6.7 Nothing in this Agreement or the Plan shall confer upon Optionee
any right to continue in the employ of the Company or shall affect the right of
the Company to terminate the employment of Optionee with or without cause.
6.8 Notwithstanding any other provision hereof, Optionee hereby agrees
that he will not exercise the options granted hereunder, and that the Company
will not be obligated to issue any shares to Optionee hereunder, if the exercise
thereof or the issuance of such shares shall constitute a violation by Optionee
or the Company of any provision of any law or regulation of any governmental
authority. Any determination in this connection by the Company shall be final
and binding. The Company shall in no event be obligated to register any
securities pursuant to the Securities Act of 1933 (as the same shall be in
effect from time to time) or to take any other affirmative action in order to
cause the exercise of the Option or the issuance of shares pursuant thereto to
comply with any law or regulation of governmental authority.
6.9 Throughout the Option Term, the Company shall make available to
Optionee, not later than one hundred twenty (120) days after the close of each
of the Company's fiscal years during the option Term, such financial and other
information regarding the Company as comprises the annual report to the
stockholders of the Company provided for in the bylaws of the Company.
6.10 No amounts of income received by Optionee pursuant to this
Agreement shall be considered compensation for purposes of any pension or
retirement plan, insurance plan or any other employee benefit plan of the
Company.
6.11 Every notice or other communication relating to this Agreement
shall be in writing and shall be mailed to or delivered to the party for whom it
is intended at such address as may from time to time be designated by it in a
notice mailed or delivered to the other party as herein provided; provided,
however, that unless and until some other address be so designated, all notices
or communications by Optionee to the Company shall be mailed or delivered to the
Company at its office at 1810 Embarcadero Road, Palo Alto, California 94303, and
all notices or communications by the Company to Optionee may be given to
Optionee personally or may be mailed to him.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
OPTIONEE: TEKNOWLEDGE CORPORATION
/s/ Neil Jacobstein By: /s/ Dennis Bugbee
Title: Director of Finance
Date: March 30, 1995
<PAGE>
ANNEX B
Exercise of Stock Option
Pursuant to the provisions of the Amended Stock Option Agreement
entered into as of between Teknowledge Corporation (the "Company") and Optionee
(the "Agreement"), I hereby exercise the stock option granted under the terms of
the Agreement to the extent of shares of the Common Stock of the Company (the
"Shares"). I deliver to you herewith the sum of $
in payment for the Shares.
Date:
Optionee:
Address:
Social Security Number:
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 2,777,051
<SECURITIES> 0
<RECEIVABLES> 2,409,671
<ALLOWANCES> 10,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,686,788
<PP&E> 3,929,800
<DEPRECIATION> 3,525,572
<TOTAL-ASSETS> 6,864,603
<CURRENT-LIABILITIES> 1,329,228
<BONDS> 0
0
0
<COMMON> 49,882
<OTHER-SE> 5,485,493
<TOTAL-LIABILITY-AND-EQUITY> 6,864,603
<SALES> 0
<TOTAL-REVENUES> 5,567,267
<CGS> 0
<TOTAL-COSTS> 3,316,397
<OTHER-EXPENSES> 1,820,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 483,539
<INCOME-TAX> 193,415
<INCOME-CONTINUING> 290,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290,124
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.05
</TABLE>
